SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
POINTE COMMUNICATIONS CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-----------------------------------------------------------------
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
_________________
(2) Aggregate number of securities to which transaction applies:
_________________
(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):
_________________________________________
(4) Proposed maximum aggregate value of transaction: ______________________
(5) Total fee paid): Total fee paid by Telscape International, Inc.
[ ] Fee paid previously with preliminary materials.
[X] 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: $78,902.94
(2) Form, Schedule or Registration Statement No.: 333-36882
(3) Filing Party: Telscape International, Inc.
(4) Date Filed: 5/12/2000
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS
YOUR VOTE ON OUR PROPOSED MERGER IS VERY IMPORTANT!
To the Shareholders of Pointe Communications Corporation and Telscape
International, Inc.:
Pointe and Telscape have agreed to combine in a merger. We believe that
this merger will create a stronger competitor in the rapidly changing
telecommunications industry. Accordingly, we believe that this merger will
benefit the shareholders of both companies, and we ask for your support in
voting for the merger proposals at our meetings.
When the merger is completed, Telscape will issue approximately 12.0
million shares of its common stock to Pointe shareholders based on the number of
outstanding shares of Pointe common stock on May 8, 2000, at an exchange ratio
of 0.223514 of a share of Telscape common stock for every share of Pointe common
stock. Also, for each share of Pointe convertible preferred stock outstanding,
Telscape will issue one share of Telscape convertible preferred stock (with
rights and preferences substantially the same as the Pointe convertible
preferred stock). The shares of common stock and preferred stock issued in the
merger will represent, upon conversion, assuming no Pointe warrants or stock
options are exercised in connection with the merger, approximately 60% of the
outstanding voting power of Telscape. After the merger, Telscape shares held by
pre-merger Telscape shareholders will represent approximately 40% of the
outstanding voting power of Telscape assuming no Telscape warrants or stock
options are exercised in connection with the merger. Telscape common stock is
listed on the Nasdaq National Market under the symbol "TSCP." Pointe common
stock is traded on the over-the-counter bulletin board under the symbol
"PCOM.OB."
Information about the merger and the other items to be voted on at your
company's meeting is contained in this joint proxy statement/prospectus and in
the agreement and plan of merger attached as Annex A.
The boards of directors of both Telscape and Pointe believe the merger is
advisable, fair and in the best interests of their respective shareholders, have
approved the merger and recommend that their respective shareholders vote FOR
proposals relating to the merger as described in the attached materials. We
cannot complete the merger unless the shareholders of both companies approve the
respective proposals relating to the merger.
Your vote is important, regardless of the number of shares you own. Please
vote as soon as possible to make sure that your shares are represented at your
company's meeting. To grant your proxy to vote your shares, complete and return
the enclosed proxy card. You may also cast your vote in person at the meeting.
Very truly yours,
/s/ E. SCOTT CRIST /s/ STEPHEN E. RAVILLE
E. SCOTT CRIST STEPHEN E. RAVILLE
CHIEF EXECUTIVE OFFICER OF CHAIRMAN OF THE BOARD AND
TELSCAPE INTERNATIONAL, INC. CHIEF EXECUTIVE OFFICER OF
POINT COMMUNICATIONS CORPORATION
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 13 FOR A DISCUSSION
OF POTENTIAL RISKS INVOLVED IN THE MERGER AND FOR THE COMBINED COMPANY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This joint proxy statement/prospectus is dated May 12, 2000, and is first
being mailed to shareholders on or about May 12, 2000.
<PAGE>
TELSCAPE INTERNATIONAL, INC.
2700 POST OAK BOULEVARD
SUITE 1000
HOUSTON, TEXAS 77056
-----------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 2, 2000
-----------------------------
We will hold an annual meeting of shareholders of Telscape International,
Inc., a Texas corporation, at 9:30 a.m., local time, on June 2, 2000, at the
University Club of Houston, 5051 Westheimer, Post Oak Tower, Suite 355, Houston,
Texas 77056:
1. To consider and vote upon a proposal to approve the issuance of shares
of Telscape's common stock, par value $.001 per share, Class D Convertible
Senior Preferred Stock, par value $.001 per share, and Class E Convertible
Senior Preferred Stock, par value $.001 per share pursuant to a merger agreement
among Telscape, Pointe Communications Corporation and Pointe Acquisition Corp.,
a wholly owned subsidiary of Telscape, under which Pointe will become a wholly
owned subsidiary of Telscape;
2. To elect seven directors of Telscape;
3. To consider and vote upon a proposal to amend Telscape's Articles of
Incorporation to increase the number of authorized shares of common stock, par
value $.001 per share, of Telscape from 25,000,000 to 100,000,000, and the
number of authorized shares of preferred stock, par value $.001 per share, of
Telscape from 5,000,000 to 10,000,000 and to allow the Telscape board to
authorize preemptive rights to shareholders;
To consider and vote upon separate proposals to approve the following stock
option plans which are substantially identical to the stock option plans
currently in effect for Pointe:
4. Telscape International, Inc. 2000 Pay for Performance Stock Option
Plan;
5. Telscape International, Inc. 2000 Executive Market Value Appreciation
Stock Option Plan;
6. Telscape International, Inc. 2000 Incentive Stock Option Plan;
7. Telscape International, Inc. 2000 Executive Long-Term Plan; and
8. Telscape International, Inc. 2000 Non-Employee Director Stock Option
Plan;
9. To consider and vote upon a proposal to approve the Telscape
International, Inc. 2000 Pay for Performance Stock Option Plan in the event the
merger with Pointe is not completed;
10. To consider and vote upon a proposal to approve the issuance of shares
of Telscape's Class C preferred stock, par value $.001 per share, and warrants
to purchase Telscape common stock in connection with a loan from Pointe in the
principal amount of $10,000,000;
11. To consider and vote upon a proposal to approve the issuance of shares
of Telscape's Class F preferred stock, par value $.001 per share, and warrants
to purchase Telscape's common stock in connection with a private placement to
certain accredited investors; and
12. To transact such other business as may properly come before the annual
meeting or any adjournment or postponement.
Only Telscape shareholders of record at the close of business on April 17,
2000, are entitled to notice of and to vote at the annual meeting or any
adjournment or postponement.
<PAGE>
For more information about the merger, the merger agreement or related
matters and the other matters to be considered at the meeting, please review the
accompanying joint proxy statement/prospectus.
By Order of the Board of Directors
/s/ TODD M. BINET
TODD M. BINET
SECRETARY
Houston, Texas
May 12, 2000
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. TO ASSURE
THAT YOUR SHARES ARE REPRESENTED AT THE ANNUAL MEETING, WE URGE YOU TO COMPLETE,
DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE POSTAGE-PAID
ENVELOPE PROVIDED WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN
PERSON. YOU MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS AT ANY TIME BEFORE IT HAS BEEN VOTED AT THE ANNUAL MEETING.
YOU MAY VOTE IN PERSON AT THE ANNUAL MEETING EVEN IF YOU HAVE RETURNED A PROXY.
<PAGE>
POINTE COMMUNICATIONS CORPORATION
1325 NORTHMEADOW PARKWAY
ROSWELL, GEORGIA 30076
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 2, 2000
We will hold the annual meeting of shareholders of Pointe Communications
Corporation, a Nevada corporation, at 1:00 p.m., local time, on June 2, 2000 at
the J.W. Marriott Hotel Lenox, 3300 Lenox Road, Atlanta, Georgia 30326:
1. To consider and vote upon a proposal to approve the merger agreement
among Pointe, Telscape International, Inc., a Texas corporation, and Pointe
Acquisition Corp., a wholly owned subsidiary of Telscape, under which Pointe
will become a wholly owned subsidiary of Telscape;
2. To elect six directors of Pointe;
3. To consider and vote upon a proposal to amend Pointe's Articles of
Incorporation to increase the number of authorized shares of Pointe common
stock, par value $.00001 per share, from 100,000,000 shares to 200,000,000
shares;
4. To consider and vote upon a proposal to approve the 1999 Pointe
Communications Corporation Pay for Performance Stock Option Plan;
5. To consider and vote upon a proposal to approve the 1999 Pointe
Communications Corporation Executive Market Value Appreciation Stock Option
Plan; and
6. To transact any other business as may properly come before the annual
meeting or any adjournment or postponement.
Only Pointe shareholders of record at the close of business on April 17,
2000 are entitled to notice of and to vote at the meeting or any adjournment or
postponement. A list of shareholders entitled to vote at the meeting is
available at Pointe's corporate office located at 1325 Northmeadow Parkway,
Roswell, Georgia 30076. Any Pointe shareholder may inspect the list for meeting
purposes during the ten days before the meeting.
For more information about the merger, the merger agreement or related
matters and the other matters to be considered at the meeting, please review the
accompanying joint proxy statement/prospectus.
By Order of the Board of Directors
/s/ CHARLES M. CUSHING
CHARLES M. CUSHING
SECRETARY
Roswell, Georgia
May 12, 2000
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. TO ASSURE
THAT YOUR SHARES ARE REPRESENTED AT THE ANNUAL MEETING, WE URGE YOU TO MARK,
SIGN, DATE AND RETURN THE ENCLOSED PROXY AS SOON AS POSSIBLE IN THE POSTAGE PAID
ENVELOPE PROVIDED WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN
PERSON. YOU MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS AT ANY TIME BEFORE IT HAS BEEN VOTED AT THE ANNUAL MEETING.
YOU MAY VOTE IN PERSON AT THE ANNUAL MEETING EVEN IF YOU HAVE RETURNED A PROXY.
<PAGE>
TABLE OF CONTENTS
PAGE
-----
I. PROPOSALS
Questions and Answers About the Merger
Questions and Answers About the Other Proposals
Question and Answer About Annual Reports
Summary ................................................................ 1
Risk Factors ........................................................... 13
The Telscape Annual Meeting ............................................ 24
The Pointe Annual Meeting .............................................. 27
PROPOSAL 1 -- The Merger ............................................... 30
Background of the Merger ............................................... 30
Telscape's Reasons for the Merger; Recommendation
of the Telscape Board of Directors ............................... 33
Pointe's Reasons for the Merger;
Recommendation of the Pointe Board of Directors .................. 34
Opinion of Financial Advisor to Telscape ............................... 35
Material Federal Income Tax Consequences of the Merger ................. 41
Accounting Treatment ................................................... 44
Interests of Officers and Directors in the Merger ...................... 46
Telscape ............................................................... 46
Pointe ................................................................. 46
Indemnification; Directors' and Officers' Insurance .................... 47
The Merger Agreement ................................................... 48
The Merger ............................................................. 48
Timing of Closing ...................................................... 48
Conversion of Pointe Common Stock ...................................... 48
Conversion of Pointe Options, Warrants and Other Rights ................ 48
Representation on Telscape Board ....................................... 48
Representations and Warranties ......................................... 49
Certain Covenants ...................................................... 50
Conditions to Completion of the Merger ................................. 55
Termination of the Merger Agreement .................................... 56
Termination Fee and Special Remedies ................................... 57
Dividend Policies ...................................................... 58
TELSCAPE PROPOSALS ..................................................... 59
PROPOSAL 2 -- Election of Telscape Directors .......................... 59
PROPOSAL 3 -- Amendment of Telscape Articles of Incorporation ......... 60
PROPOSAL 4 -- Telscape 2000 Pay for Performance Stock Option Plan ..... 62
PROPOSAL 5 -- Telscape 2000 Executive Market Value
Appreciation Stock Option Plan .......................... 65
PROPOSAL 6 -- Telscape 2000 Incentive Stock Option Plan ............... 68
PROPOSAL 7 -- Telscape 2000 Executive Long-Term Plan .................. 71
PROPOSAL 8 -- Telscape 2000 Non-Employee Director Stock Option Plan ... 73
PROPOSAL 9 -- Telscape 2000 Pay for Performance Stock Option Plan ..... 75
PROPOSAL 10 -- Approval of Issuance of Telscape Class C
Preferred Stock .................................................. 78
PROPOSAL 11 -- Approval of Issuance of Telscape Class F
Preferred Stock .................................................. 80
POINTE PROPOSALS ....................................................... 82
PROPOSAL 2 -- Election of Pointe Directors ............................. 82
PROPOSAL 3 -- Amendment of Pointe Articles of Incorporation ............ 83
PROPOSAL 4 -- Pointe 1999 Pay for Performance Stock Option Plan ........ 84
PROPOSAL 5 -- Pointe 1999 Executive Market Value Appreciation
Stock Option Plan ................................................ 88
i
<PAGE>
PAGE
-----
II. FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Consolidated Financial Statements ....... 92
Telscape Selected Consolidated Financial Data ......................... 98
Telscape Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................. 99
Pointe Selected Consolidated Financial Data ........................... 113
Pointe Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................. 122
Telscape Business ..................................................... 133
Telscape's Management ................................................. 154
Pointe Business ....................................................... 165
Pointe Management ..................................................... 186
III. CERTAIN LEGAL INFORMATION
Comparison of Telscape and Pointe Shareholder Rights .................. 197
Description of Telscape Capital Stock ................................. 202
Description of Pointe Capital Stock ................................... 205
IV. ADDITIONAL INFORMATION FOR
SHAREHOLDERS
Future Shareholder Proposals .......................................... 208
Telscape .............................................................. 208
Pointe ................................................................ 208
Experts ............................................................... 208
Legal Matters ......................................................... 208
Where You Can Find More Information ................................... 209
Index to Financial Statements ......................................... F-1
Annexes
Annex A -- Amended and Restated Agreement and Plan of Merger .......... A-1
Annex B -- Fairness Opinion of Kaufman Bros., L.P. .................... B-1
Annex C -- Nevada Dissenters' Rights .................................. C-1
ii
<PAGE>
I. PROPOSALS
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY ARE THE COMPANIES PROPOSING THE MERGER?
A: Telscape and Pointe are merging to create a stronger telecommunications
company targeted at the U.S. Hispanic and Latin American markets. By
combining Telscape's fiber optic network which has been constructed in
Mexico and related services with Pointe's U.S. Hispanic competitive local
exchange carrier strategy and presence in Central and South America, we
expect that the combined company will be able to create a stronger company
that will be one of the few telecommunications companies operating in both
the U.S. and parts of Latin America.
Q: WHAT WILL POINTE COMMON SHAREHOLDERS RECEIVE IN THE MERGER?
A: If the merger is completed, Pointe common shareholders will receive 0.223514
of a share of Telscape common stock for each share of Pointe common stock
they own. Telscape will not issue fractional shares of common stock. Instead
of a fractional share, Pointe common shareholders will receive cash based on
the market price of Telscape common stock.
Q: WHAT WILL POINTE PREFERRED SHAREHOLDERS RECEIVE IN THE MERGER?
A: If the merger is completed, Pointe preferred shareholders will receive one
share of Telscape preferred stock for each share of Pointe preferred stock
they own. The rights and preferences of the Telscape preferred stock will be
substantially identical to that of the Pointe preferred stock.
Q: WHEN DO WE EXPECT TO COMPLETE THE MERGER?
A: We are working to complete the merger in the spring of 2000. Because the
merger is subject to governmental and other regulatory approvals, however,
we cannot predict the exact timing.
Q: SHOULD POINTE SHAREHOLDERS SEND IN THEIR STOCK CERTIFICATES NOW?
A: No. After we complete the merger, Telscape will send instructions to Pointe
shareholders explaining how to exchange their shares of Pointe capital stock
for the appropriate number of shares of Telscape capital stock.
Q: SHOULD TELSCAPE SHAREHOLDERS SEND IN THEIR STOCK CERTIFICATES?
A: No. Telscape shareholders will continue to own their shares of Telscape
capital stock after the merger and should continue to hold their stock
certificates.
Q: HOW DO I VOTE?
A: Mail your signed proxy card in the enclosed return envelope as soon as
possible so that your shares may be represented at the appropriate
shareholders' meeting. You may also attend the meeting in person instead of
submitting a proxy. If your shares are held in "street name" by your
broker, your broker will vote your shares only if you provide instructions
on how to vote. You should follow the directions provided by your broker
regarding how to instruct your broker to vote your shares.
Q: CAN I CHANGE MY VOTE AFTER MAILING MY PROXY?
A: Yes. You may change your vote by delivering a signed notice of revocation or
a later-dated, signed proxy card to the corporate secretary of Telscape or
Pointe, as appropriate, before the appropriate shareholder meeting, or by
attending the shareholder meeting and voting in person.
Q: ARE THERE RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR THE
MERGER?
A: Yes. We have set out under the heading "Risk Factors" beginning on page 13
of this joint proxy statement/prospectus a number of risk factors that you
should consider.
<PAGE>
Q: WHOM CAN I CALL WITH QUESTIONS ABOUT THE MERGER?
A: If you are a Pointe shareholder with questions about the merger, please call
Pointe's Chief Financial Officer, Richard P. Halevy at (770) 432-6800.
If you are a Telscape shareholder with questions about the merger, please
call Telscape's Chief Accounting Officer, Paul D. Freudenthaler, at (713)
968-0968.
QUESTIONS AND ANSWERS ABOUT THE OTHER PROPOSALS
Q: WHY ARE THE TELSCAPE SHAREHOLDERS BEING ASKED TO INCREASE THE AUTHORIZED
SHARES OF TELSCAPE?
A: The Telscape shareholders are being asked to approve an increase in
Telscape's authorized shares of common stock and preferred stock because
after the merger, Telscape may be required to issue more shares than it
currently is authorized to issue if all option holders, warrant holders,
convertible preferred stock holders or holders of other convertible
instruments elect to convert. In addition, Telscape's board of directors
believes that it is in Telscape's best interest to authorize sufficient
additional shares for future use.
Q: WHY ARE THE POINTE SHAREHOLDERS BEING ASKED TO INCREASE THE AUTHORIZED
SHARES OF POINTE?
A: The Pointe shareholders are being asked to approve an increase in Pointe's
authorized shares of common stock because if all of Pointe's option holders,
warrant holders, preferred stock holders or holders of other convertible
instruments elect to convert, Pointe will not have enough authorized shares
to accommodate all requests. Therefore, if the merger is not completed,
Pointe needs additional authorized shares to continue its operations. In
addition, Pointe's board of directors believes that it is in Pointe's best
interest to authorize sufficient additional shares for future use.
Q: WHY ARE THE TELSCAPE SHAREHOLDERS BEING ASKED TO APPROVE THE TELSCAPE STOCK
OPTION PLANS?
A: The Telscape shareholders are being asked to approve the Telscape stock
option plans to provide an incentive to officers, directors and employees of
Telscape to work to have an opportunity to earn ownership in Telscape. Also,
the Telscape shareholders are being asked to adopt these plans because they
are similar to the plans currently in effect for Pointe, and Telscape, after
the merger is completed, will honor options granted under Pointe's plans by
issuing options for Telscape common stock with terms substantially the same
as the options under Pointe's plans. Also, the IRS requires that certain
types of stock option plans be approved by shareholders.
The Telscape shareholders also are being asked to adopt a separate stock
option plan which will be Telscape's primary stock option plan to attract
and retain key officers and employees in the event the merger with Pointe is
not completed.
Q: WHY ARE THE POINTE SHAREHOLDERS BEING ASKED TO APPROVE THE POINTE STOCK
OPTION PLANS?
A: The Pointe shareholders are being asked to approve the Pointe stock option
plans because the IRS requires that these types of stock option plans be
approved by shareholders. If the merger is not completed, Pointe wants to
continue to have the ability to attract and retain key officers, directors
and employees by offering those individuals opportunities to earn ownership
in Pointe.
Q: WHY ARE THE POINTE SHAREHOLDERS BEING ASKED TO ELECT DIRECTORS OF POINTE?
A: The Pointe shareholders are being asked to elect six directors of Pointe to
serve with the three directors designated by holders of Pointe preferred
stock. If the merger is not completed, the directors that the Pointe
shareholders elect will continue to serve as Pointe's directors.
Q: WHY ARE THE TELSCAPE SHAREHOLDERS BEING ASKED TO ELECT DIRECTORS OF
TELSCAPE?
A: The Telscape shareholders are being asked to elect directors of Telscape to
serve until the earlier of the next annual meeting of Telscape's
shareholders or until the merger is completed. If the merger is not
completed, the directors that the Telscape shareholders elect will continue
to serve as Telscape's directors.
<PAGE>
Q: WHY ARE THE TELSCAPE SHAREHOLDERS BEING ASKED TO APPROVE THE ISSUANCE OF
TELSCAPE'S NEWLY DESIGNATED CLASS C PREFERRED STOCK?
A: The Telscape shareholders are being asked to approve the issuance of
Telscape's Class C preferred stock because, if the merger is not completed,
the Class C preferred stock and warrants to purchase Telscape common stock
will be issued upon the conversion of a $10,000,000 loan from Pointe to
Telscape. The number of shares of common stock into which the preferred
stock and warrants are convertible will exceed 20% of Telscape's common
stock. The Nasdaq National Market, on which Telscape's common stock is
listed, requires shareholders to approve an issuance of more than 20% of a
company's outstanding common stock.
Q: WHY ARE THE TELSCAPE SHAREHOLDERS BEING ASKED TO APPROVE THE ISSUANCE OF
TELSCAPE'S NEWLY DESIGNATED CLASS F PREFERRED STOCK?
A: The Telscape shareholders are being asked to approve the issuance of
Telscape's Class F preferred stock because, prior to completing the merger,
the Class F preferred stock and warrants to purchase common stock will be
convertible or exercisable into more than 20% of Telscape's outstanding
shares of common stock. The Nasdaq National Market rules require shareholder
approval.
QUESTION AND ANSWER ABOUT ANNUAL REPORTS
Q: WHY IS THIS JOINT PROXY STATEMENT/PROSPECTUS NOT ACCOMPANIED BY AN ANNUAL
REPORT FOR EITHER TELSCAPE OR POINTE?
A: The Companies did not include a separate annual report because the relevant
information in an annual report is included in this joint proxy
statement/prospectus. If any shareholder desires to obtain a copy of either
Telscape's or Pointe's annual report on Form 10-K, the shareholder can copy
the report at the SEC's public reference rooms in Washington, D.C., New
York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms. Additionally, the
filing can be obtained at the web site maintained by the SEC at:
"http://www.sec.gov." A copy of the report also can be obtained by
contacting:
Paul Freudenthaler, Richard P. Halevy,
Chief Accounting Officer, Chief Financial Officer
Telscape International, Inc. Pointe Communications Corporation
2700 Post Oak Boulevard, Suite 1000 1325 Northmeadow Parkway
Houston, Texas 77056 Roswell, Georgia 30076
(713) 968-0968 (770) 432-6800
<PAGE>
SUMMARY
This summary highlights selected information from this joint proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand the merger fully and for a more complete
description of the legal terms of the merger, you should read this document
carefully as well as the appendices and other documents to which we refer you.
See "Where You Can Find More Information" on page 209. We have indicated page
references parenthetically to direct you to a more complete description of the
topics in this summary.
THE COMPANIES
TELSCAPE INTERNATIONAL, INC.
2700 Post Oak Boulevard, Suite 1000
Houston, Texas 77056
(713) 968-0968
Telscape is a U.S. based, fully integrated communications company. Telscape
supplies voice, video, data and Internet services principally to and from Latin
America. Telereunion, S.A. de C.V., one of its subsidiaries, has built a
state-of-the-art fiber optic network in Mexico that will have the capabilities
to reach a large part of the Mexican population. Telscape also owns and operates
a satellite teleport facility in Silicon Valley, CA, which delivers an array of
telecommunications services to customers throughout North, Central and South
America. In addition, Telscape provides a full range of network solutions
services and products in Mexico to major public and private sector customers.
Telscape believes that it is well positioned to capitalize on the opportunities
presented by the large and growing telecommunications services market. Over the
next 12 months, it intends to expand significantly its telecommunications
operations that use its own equipment and transmission lines. Telscape also
intends to broaden its service offerings in markets where it has established, or
expects to establish, a significant presence.
POINTE COMMUNICATIONS CORPORATION
1325 Northmeadow Parkway
Roswell, Georgia 30076
(770) 432-6800
Pointe is an international facilities based communications company serving
residential and commercial customers in the U.S., Central and South America.
Pointe and its subsidiaries provide enhanced telecommunications products and
services, including local, long distance, Internet, international private line,
carrier services, prepaid calling card and telecommuting services, with a focus
on the Hispanic community both domestically and internationally. Pointe is also
a competitive local exchange carrier (CLEC), which provides local and long
distance telephone and data services in selected markets. Pointe believes that
its ethnically focused strategy and its state-of-the-art network combine to
create a unique approach to the telecommunications market.
THE MERGER (SEE PAGE 30)
Pointe and Telscape have entered into a merger agreement that provides for
the merger of Pointe and a newly formed subsidiary of Telscape, which will
result in Pointe becoming a wholly owned subsidiary of Telscape. Shareholders of
Pointe will become shareholders of Telscape following the merger, and each share
of Pointe common stock will be exchanged for 0.223514 of a share of Telscape
common stock. Additionally, each share of Pointe's preferred stock will be
exchanged for one share of Telscape's preferred stock with rights and
preferences substantially identical to the Pointe preferred stock. We urge you
to read the merger agreement, which is attached as Annex A to this joint proxy
statement/prospectus, carefully and in its entirety.
1
<PAGE>
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER (SEE PAGE 41)
Pointe and Telscape intend that the merger will qualify as a reorganization
within the meaning of the Internal Revenue Code. If the merger qualifies as a
reorganization, Pointe shareholders generally will not recognize gain or loss
for United States federal income tax purposes upon the receipt of Telscape
capital stock in the merger, although Pointe shareholders will recognize gain or
loss upon the receipt of any cash instead of a fractional share of Telscape
common stock. It is a condition to completion of the merger that Pointe receive
a tax opinion that the merger should constitute a reorganization within the
meaning of the Internal Revenue Code.
TAX MATTERS ARE VERY COMPLICATED AND THE TAX CONSEQUENCES OF THE MERGER TO
YOU WILL DEPEND UPON THE FACTS OF YOUR SITUATION. YOU SHOULD CONSULT YOUR OWN
TAX ADVISORS FOR A FULL UNDERSTANDING OF THE TAX CONSEQUENCES OF THE MERGER TO
YOU.
ABILITY TO SELL TELSCAPE STOCK AFTER THE MERGER
All shares of Telscape common stock that holders of Pointe's common stock
receive in connection with the merger will be registered on Telscape's Form S-4,
filed in connection with the merger, and will be freely transferable unless the
holder is considered an "affiliate" of either Telscape or Pointe for purposes
of the Securities Act. Shares of Telscape common stock held by these affiliates
may be sold only under a registration statement or exemption under the
Securities Act.
Preferred shareholders of Pointe, along with any holders of convertible or
exercisable securities of Pointe, who convert or exercise their preferred stock
or other convertible or exercisable securities prior to the merger will become
holders of Pointe's common stock and will receive shares of Telscape common
stock registered on Telscape's Form S-4. If the preferred shareholders or
holders of convertible or exercisable securities convert or exercise their
shares after the merger, such shareholders will receive "restricted" stock, as
the term is defined under the Securities Act, which can be resold only under a
registration statement or exemption under the Securities Act.
DISSENTERS' AND APPRAISAL RIGHTS (SEE PAGE 43)
Shareholders of Pointe who do not vote in favor of the merger agreement and
the merger and who otherwise comply with the requirements of the Nevada General
Corporation Law relating to dissenters' and appraisal rights will be entitled to
receive an amount in cash equal to the fair market value of their Pointe capital
stock. The fair market value of shares of Pointe common stock may be more or
less than the value of Telscape common stock to be paid to the other Pointe
shareholders in the merger. Dissenting Pointe shareholders must precisely follow
specific procedures to exercise this right, or the right may be lost. These
procedures are described in this joint proxy statement/prospectus, and the
relevant provisions of Nevada law are attached as Annex C to this joint proxy
statement/prospectus. Shareholders of Telscape will not be entitled to any
dissenters' or appraisal rights.
OPINION OF TELSCAPE'S FINANCIAL ADVISOR (SEE PAGE 35)
In deciding to approve the merger, Telscape's board of directors considered
the opinion issued by its financial advisor, Kaufman Bros., L.P., who have
issued their opinion that the share exchange ratio is fair from a financial
point of view to Telscape and its shareholders. The full text of the written
opinion of Kaufman Bros., L.P., dated December 31, 1999, and as restated on
April 17, 2000, is attached as Annex B to this joint proxy statement/prospectus.
You should read this opinion in its entirety.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS REGARDING THE MERGER (SEE PAGE 32)
The Pointe and Telscape boards of directors each have determined that the
terms and conditions of the merger are fair to, and in the best interests of,
its company's shareholders. The Pointe board unanimously recommends that Pointe
shareholders vote FOR approval of the merger agreement and
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the merger, and the Telscape board unanimously recommends that Telscape
shareholders vote FOR issuing the shares of Telscape capital stock required to
be issued in the merger.
INTERESTS OF OFFICERS AND DIRECTORS IN THE MERGER (SEE PAGE 46)
When considering the recommendations of the Pointe and Telscape boards,
shareholders should be aware that directors and officers of Pointe and Telscape
have the following interests in the merger that may be different from, or in
addition to, those of other shareholders:
o As a result of the merger, previously unvested options to purchase
shares of Telscape common stock will automatically vest for Todd M.
Binet, Telscape's President, Chief Financial Officer and a director, for
Paul Freudenthaler, Telscape's Chief Accounting Officer, and for Jesse
Morris, Telscape's Vice President of Strategic Planning.
o Telscape has agreed to honor for a period of six years without
modification any rights to indemnification or exculpation from
liabilities for acts or omissions occurring at or prior to the
consummation of the merger as they existed at the time the merger
agreement was signed in favor of officers and directors of Pointe and
its subsidiaries as provided in their respective charters or bylaws.
o The merger agreement provides that, upon completion of the merger, the
board of directors of Telscape shall consist of six designees of Pointe
and three designees of Telscape. The directors designated by Pointe are:
o Stephen E. Raville
o Gerald F. Schmidt
o David C. Lee
o Darryl B. Thompson
o Rafic A. Bizri
o William P. O'Reilly
The directors designated by Telscape are:
o E. Scott Crist
o Jack M. Fields, Jr.
o Manuel Landa
o Certain officers and directors of Pointe hold convertible debentures
evidencing obligations owed by Pointe to the debentures holders, and
these debentures will be exchanged for Telscape convertible debentures
with substantially identical terms.
o One director of Pointe has an interest in a debt obligation owed by
Telscape which is independent of and not conditioned on the merger.
As a result, Pointe's and Telscape's directors and officers may be more
likely to vote to approve the merger proposals than shareholders generally.
CONDITIONS TO COMPLETION OF THE MERGER (SEE PAGE 55)
We will complete the merger only if we satisfy or agree to waive several
conditions, some of which are:
o the merger agreement and the merger must be approved by Pointe's
shareholders, and the issuance of Telscape capital stock in the merger
and the increase in authorized shares of Telscape capital stock must be
approved by Telscape's shareholders;
o all necessary consents, approvals and authorizations from governmental
entities must be obtained, except where a failure to obtain the consent,
approval or authorization could not be reasonably expected to have a
material adverse effect on Telscape or Pointe;
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o no court of competent jurisdiction or governmental entity will have
issued or entered any order, writ, injunction or decree making the
merger illegal or otherwise preventing its completion;
o we must receive an opinion from Arthur Andersen LLP stating that the
merger should qualify as a tax-free reorganization;
o all necessary consents and approvals must be obtained from significant
Telscape creditors, except where a failure to obtain the consent,
approval or authorization could not be reasonably expected to have a
material adverse effect on Telscape or Pointe; and
o the representations and warranties in the merger agreement must be true
and correct except where failures to be true and correct could not
reasonably be expected to have a material adverse effect on either
party.
If either Telscape or Pointe waives any conditions, we will consider the
facts and circumstances at that time and determine whether completion of the
merger requires a resolicitation of proxies.
RESTRICTIONS ON SOLICITATION (SEE PAGE 51)
The merger agreement prohibits each of us from soliciting or participating
in discussions with third parties about transactions alternative to the merger.
However, we are not prohibited from taking a position regarding certain
unsolicited tender offers, exchange offers or takeover proposals in accordance
with fiduciary duties.
POINTE NOTE (SEE PAGE 52)
Pointe has committed to loan Telscape $10,000,000 pursuant to a note that
will be convertible into Class C Convertible Senior Preferred Stock and warrants
to purchase Telscape common stock in certain circumstances including, at the
election of Pointe, should the merger not be consummated. As of April 13, 2000,
Telscape has drawn down approximately $7,950,000 on the Pointe Note.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 56)
We may mutually agree to terminate the merger agreement at any time before
the merger is completed. The merger agreement may also be terminated by Telscape
or Pointe for several other reasons, some of which are:
o if the merger is not completed, without the fault of the terminating
party, by June 30, 2000;
o if the conditions to completion of the merger would not be satisfied
because of either a breach of a representation or warranty or covenant
in the merger agreement by the other party, if the breaching party does
not cure the breach within 10 business days after receiving notice of
the breach from the other party;
o if the Telscape shareholders do not approve the issuance of Telscape
capital stock or the increase in the authorized shares of Telscape
common stock at the Telscape annual meeting; or
o if the Pointe shareholders do not approve the merger agreement, the
merger and the related transactions at the Pointe annual meeting.
The merger agreement may be terminated by Telscape if the following occurs:
o Pointe's board withdraws or modifies in a manner adverse to Telscape its
recommendation that its shareholders approve the merger agreement and
the merger; or
o Pointe fails to comply with the nonsolicitation provisions of the merger
agreement.
The merger agreement may be terminated by Pointe if the following occurs:
o Telscape's board withdraws or modifies in a manner adverse to Pointe its
recommendation as to the issuance of the Telscape capital stock in the
merger; or
o Telscape fails to comply with the nonsolicitation provisions of the
merger agreement.
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TERMINATION FEE AND SPECIAL REMEDIES (SEE PAGE 57)
In the event the merger agreement is terminated for certain reasons, we
have acknowledged that the damages would be difficult to determine and have
agreed to certain remedies, including a termination fee of $5,000,000 payable to
the nondefaulting party. Upon termination of the merger agreement for certain
reasons, the Pointe Note and termination fee will be convertible into shares of
Telscape Class C preferred stock that will be convertible into shares of
Telscape common stock at a rate of $8.20 per share. Also, the Pointe Note will
be accelerated and payable within 30 days of demand in the event the merger
agreement is terminated for certain reasons. If Telscape defaults in the payment
of the Pointe Note, the Pointe Note will be convertible into Telscape Class C
preferred stock that will be convertible into Telscape common stock at a rate of
$5.00 per share.
EXPENSES (SEE PAGE 51)
Telscape and Pointe will pay their own costs and expenses in connection
with the merger, whether or not the merger is consummated. However, Telscape and
Pointe will each pay fifty percent of the costs and expenses relating to the
preparation of this joint proxy statement/prospectus and the pre-merger
notification filing under the Hart-Scott-Rodino Act if the merger is not
consummated. Also, Telscape will reimburse Pointe for all costs related to the
preparation of the Pointe Note and any conversion of the Pointe Note.
ANTICIPATED ACCOUNTING TREATMENT OF THE MERGER (SEE PAGE 44)
It is anticipated that the merger will be accounted for as a purchase
business combination with Pointe treated as the acquiror. The assets and
liabilities of Telscape will be recorded at fair value with the excess of the
purchase price over the fair value of assets and liabilities acquired recorded
as goodwill. The allocation of the purchase price in the merger is expected to
result in approximately $211.3 million of goodwill and other intangibles.
Pointe and Telscape will be treated as separate entities for periods prior
to the closing, and thereafter, the consolidated financial statements will
include the accounts of both Pointe and Telscape.
ADDITIONAL PROPOSALS
TELSCAPE
Telscape is asking its shareholders to approve an amendment to its articles
of incorporation which will increase the number of shares of common stock and
preferred stock that Telscape is authorized to issue and to allow the Telscape
board to authorize preemptive rights to shareholders. The purpose of the
amendment is to allow Telscape enough shares to complete the merger and to
provide for conversion or exercise of convertible instruments held after the
merger. If all of the convertible instruments were converted immediately after
the merger, Telscape would need to have available approximately 49.1 million
shares of its common stock.
Telscape also is asking its shareholders to consider and separately approve
the adoption of five new stock option plans which are substantially identical to
the stock option plans currently in place for Pointe. The current option holders
under the Pointe plans will be able to exercise their options for Telscape
common stock, adjusted by the conversion ratio in the merger of 0.223514 of a
share of Telscape common stock for every one share of Pointe common stock. After
the merger, Telscape will use the option plans to attract and retain key
officers, directors and employees. If the merger is not completed, Telscape will
put in place only the Pay for Performance Stock Option Plan.
Telscape has executed a promissory note to Pointe in the principal amount
of $10,000,000 in connection with the merger. If the merger is not completed,
the note will convert into 100,000 shares of Class C preferred stock and
warrants to purchase 500,000 shares of Telscape's common stock at $7.00 per
share. The Class C preferred stock and warrants have mandatory dividend
requirements and anti-dilution provisions which allow the holders to maintain
their voting power. Telscape shareholders
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are being asked to approve the issuance of the Class F preferred stock to comply
with the rules of the Nasdaq National Market.
In connection with a $29,575,000 private placement and exchange of an
additional $2,000,000 of debt to equity, Telscape has authorized the issuance of
315,750 shares of newly designated Class F Convertible Senior Preferred Stock
that has a stated value of $100.00 per share. The Class F preferred stock has
mandatory dividend requirements and anti-dilution provisions which allow the
holders to maintain their voting power. Telscape also authorized the issuance of
warrants to purchase 1,925,306 shares of its common stock in connection with
this private placement. The warrants terminate on the fifth anniversary of the
date of issuance. The exercise price of the warrants is $10.00 per share,
subject to adjustment in the same manner as the Class F preferred stock.
Telscape shareholders are being asked to approve the issuance of the Class F
preferred stock to comply with the rules of the Nasdaq National Market.
Telscape is asking its shareholders to elect seven directors to serve on
the board of directors until the next annual meeting; however, if the merger is
completed, Telscape's board of directors will be increased to nine members, of
which Telscape will designate three and Pointe will designate six. If the merger
is not completed, Telscape's seven elected directors will continue to serve
Telscape as its directors.
POINTE
Pointe is asking its shareholders to approve an amendment to its articles
of incorporation which will increase the number of shares of common stock that
Pointe is authorized to issue. The purpose of the amendment is to authorize
enough shares to allow Pointe to fulfill requests by option holders, warrant
holders, preferred stock holders or holders of other convertible securities to
convert their instruments into Pointe common stock. If all of the convertible
instruments were converted immediately, Pointe would need to have available
approximately 123 million shares of its common stock. If the merger is not
completed, Pointe will need the increase in its authorized shares to be able to
meet its potential obligations to issue shares and to issue shares in the future
for appropriate corporate purposes.
Pointe also is asking its shareholders to consider and separately approve
the adoption of two new stock option plans that are required by the IRS to be
approved by shareholders. Also, if the merger is not completed, Pointe plans to
use the option plans to attract and retain key officers, directors and
employees.
Pointe is asking its shareholders to elect six directors to fill the
remaining positions on its nine member board of directors. Pointe's Class A and
Class B preferred shareholders have designated directors for the other three
positions. The directors will serve Pointe until the next meeting of its
shareholders if the merger with Telscape is not completed.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS REGARDING THE OTHER PROPOSALS
The Pointe and Telscape boards of directors each have determined the
additional proposals are fair to, and in the best interests of, its company's
shareholders. The Pointe and Telscape boards separately recommend that their
shareholders vote FOR the additional proposals, including voting to elect the
nominees for directors to serve each company if the merger is not completed.
SHAREHOLDER APPROVALS
POINTE SHAREHOLDERS (SEE PAGE 27)
The holders of a majority of the outstanding shares of Pointe common stock
and preferred stock, voting as one class, must approve the merger agreement and
the merger and the amendment to Pointe's articles of incorporation to increase
its authorized shares of common stock. Also, the holders of a majority of the
shares of Pointe common stock and preferred stock, voting as one class, entitled
to vote and voting, in person or by proxy, at the Pointe meeting must approve
the adoption of the
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stock option plans. Additionally, a plurality of the shares of Pointe common
stock and preferred stock entitled to vote and voting, in person or by proxy, at
the Pointe meeting, voting as a single class, will elect each director. In
addition, the Class A preferred shareholders have designated two board members,
and the Class B preferred shareholders have designated one board member. Pointe
shareholders are entitled to cast one vote per share of Pointe common stock
owned or which the preferred stock is convertible into at the close of business
on April 17, 2000.
TELSCAPE SHAREHOLDERS (SEE PAGE 24)
The holders of a majority of the shares of Telscape common stock entitled
to vote and that are present or represented by proxy at the Telscape meeting
must approve the issuance of Telscape capital stock in the merger, the issuance
of Telscape capital stock upon the conversion of the $10,000,000 Pointe Note,
the issuance of Telscape capital stock in the private placement, and the
adoption of each of the stock option plans. Also, the holders of at least a
majority of the outstanding shares of Telscape common stock must approve the
amendment of Telscape's articles of incorporation for the purpose of increasing
its authorized shares of common and preferred stock. Telscape shareholders are
entitled to cast one vote per share of Telscape common stock owned at the close
of business on the record date.
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
Telscape common stock is listed on the Nasdaq National Market under the
symbol "TSCP." Pointe's common stock is traded on the over-the-counter
bulletin board under the symbol "PCOM.OB." The following table shows, for the
calendar quarters indicated, based on published financial sources (1) the high
and low last reported closing prices per share of Telscape common stock as
reported on Nasdaq Composite Tape and (2) the high and low bid prices reported
for Pointe by the National Quotations Bureau, L.L.C. Telscape and Pointe have
not paid any cash dividends on their common stock to date. The payment of
dividends, if any, in the future is within the discretion of the Telscape and
Pointe boards and will depend on each company's earnings, capital requirements
and financial condition, and may be restricted by credit arrangements entered
into by either company. It is the present intentions of the Telscape board to
retain all earnings, if any, for use in business operations and accordingly, the
Telscape board does not expect to declare or pay any dividends in the
foreseeable future.
TELSCAPE POINTE
COMMON STOCK COMMON STOCK
-------------------- --------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
1998
First Quarter................... 17.625 8.250 1.421 .797
Second Quarter.................. 23.188 14.125 1.687 .875
Third Quarter................... 16.375 7.000 1.687 .781
Fourth Quarter.................. 10.250 6.688 1.156 .594
1999
First Quarter................... 9.375 6.563 1.437 .781
Second Quarter.................. 8.250 5.938 1.969 1.125
Third Quarter................... 8.938 6.438 2.563 1.750
Fourth Quarter.................. 12.875 6.000 2.500 1.875
2000
First Quarter................... 21.000 11.250 2.750 2.094
Second Quarter (through May 11,
2000)......................... 19.875 10.625 3.687 2.062
--------- --------- --------- ---------
On November 30, 1999, the last full trading day prior to the public
announcement by Telscape and Pointe of their intention to merge, the last
reported closing prices per share of Telscape common stock and Pointe common
stock were $9.4375 and $2.00, respectively. On January 3, 2000, the last
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full trading day prior to the announcement of the signing of the merger
agreement, the last reported closing prices per share of Telscape and Pointe
stock were $12.6875 and $2.0938, respectively. On May 11, 2000 the most recent
practicable date prior to the mailing of this joint proxy statement/prospectus,
the last reported closing prices per share of Telscape and Pointe stock were
$10.625 and $2.468, respectively. Shareholders are urged to obtain current
market quotations prior to making any decision with respect to the merger.
SELECTED HISTORICAL AND UNAUDITED
PRO FORMA FINANCIAL DATA
We are providing the following information to aid you in your analysis of
the financial aspects of the merger and the related transactions. This
information is only a summary, and you should read it in conjunction with our
historical and unaudited pro forma financial statements and related notes that
are included in this joint proxy statement/prospectus. See "Unaudited Pro Forma
Condensed Consolidated Financial Statements."
SELECTED HISTORICAL FINANCIAL DATA OF TELSCAPE
The following table sets forth selected financial data for Telscape for
each of the fiscal years ended December 31, 1998 and 1999 and the three months
ended March 31, 1999 and 2000 (in thousands, except per share data):
AS OF OR FOR THE AS OF OR FOR THE
YEAR THREE MONTHS
ENDED DECEMBER 31, ENDED MARCH 31,
-------------------- --------------------
1998 1999 1999 2000
--------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Total revenues................... $ 132,179 $ 106,833 26,564 23,224
Operating income (loss) from
continuing operations............ 2,171 (17,968) (2,571) (5,038)
Net loss......................... (1,030) (19,475) (2,864) (7,799)
Basic loss per share from
continuing operations.......... (0.20) (2.92) (0.46) (0.77)
Basic loss per share............. (0.20) (2.92) (0.47) (0.97)
Weighted average common shares
outstanding.................... 5,052 6,670 6,065 8,010
Diluted loss per share from
continuing operations.......... (0.20) (2.92) (0.46) (0.77)
Diluted loss per share........... (0.20) (2.92) (0.47) (0.97)
Diluted weighted average common
shares outstanding............. 5,052 6,670 6,065 8,010
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments......... 9,631 5,419 2,848
Current assets................... 32,746 29,997 25,892
Property and equipment, net...... 14,576 58,468 63,330
Goodwill and other intangibles,
net............................ 31,416 32,342 31,737
Total assets..................... 80,331 127,140 129,565
Notes payable and capital lease
obligations.................... 13,133 38,761 44,291
Stockholders' equity............. 34,926 27,044 21,032
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SELECTED HISTORICAL FINANCIAL DATA OF POINTE
The following table sets forth financial data for Pointe for each of the
fiscal years ended December 31, 1998 and 1999 and the three months ended March
31, 1999 and 2000 (in thousands, except per share data):
<TABLE>
<CAPTION>
AS OF OR FOR THE THREE
AS OF OR FOR THE YEAR MONTHS
ENDED DECEMBER 31, ENDED MARCH 31,
--------------------- -----------------------
1998 1999 1999 2000
--------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues..................... $ 27,260 $ 51,295 $ 11,553 $ 14,233
Operating loss..................... (9,011) (21,957) (2,573) (6,233)
Net loss available to common
stockholders.................... (9,147) (62,797) (3,659) (7,919)
Basic and diluted net loss per
share........................... (0.22) (1.36) (0.08) (0.15)
Weighted average common shares
outstanding..................... 42,144 46,204 45,343 51,841
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments.......... 1,255 21,220 2,873 5,772
Current assets..................... 6,257 30,045 8,496 23,278
Property and equipment, net........ 14,488 24,317 15,945 31,335
Goodwill and other intangibles,
net............................. 20,404 19,851 20,060 19,512
Total assets....................... 42,222 76,890 45,903 76,606
Notes payable and capital lease
obligations..................... 16,295 18,172 23,482 13,481
Stockholders' equity............... 12,385 42,822 9,448 41,305
</TABLE>
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SELECTED PRO FORMA DATA
The following unaudited pro forma condensed consolidated financial data is
presented assuming the merger will be accounted for as a purchase with Pointe
considered the acquiror. The pro forma condensed consolidated balance sheets
have been prepared as if the merger, the issuance of Class F preferred stock for
which firm commitments have been received, the conversion of Telecommute
Solutions, Inc., a Pointe partially owned subsidiary (TCS), Class A preferred
stock into common stock, the issuance by TCS of its Class B preferred stock, the
conversion of various debt instruments of Telscape into equity, and the funding
of $16.1 million of additional debt under the Lucent facility. The pro forma
condensed consolidated statements of operations data have been prepared as if
the transactions had been consummated at January 1, 1999 with the exception of
the $16.1 million funding which is assumed to take place on December 31, 1999.
The following financial statements do not reflect any anticipated cost savings
which may be realized by the combined company after the merger. The pro forma
information does not purport to represent what the combined company's results of
operations actually would have been if the transactions had occurred on the
dates or for the periods presented.
The pro forma condensed consolidated financial data should be read in
conjunction with the historical financial statements of Pointe and the
historical financial statements of Telscape as well as the Unaudited Pro Forma
Condensed Consolidated Financial Statements appearing elsewhere in this joint
proxy statement/prospectus.
AS OF OR FOR THE
AS OF OR FOR THE THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1999 MARCH 31, 2000
------------------ ---------------
STATEMENT OF OPERATIONS DATA:
Total revenues........................ $ 157,088 $ 37,457
Operating loss........................ (47,999) (14,263)
Net loss available to common
stockholders........................ (123,166) (18,165)
Basic and diluted net loss per
share............................... (6.74) (0.92)
Weighted average common shares
outstanding......................... 18,261 19,686
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments.............. 56,165 36,695
Current assets........................ 87,603 69,526
Property and equipment, net........... 78,361 94,665
Goodwill and other intangibles,
net................................. 222,595 230,768
Total assets.......................... 397,529 406,046
Notes payable and capital lease
obligations......................... 64,774 64,110
Stockholders' equity.................. 274,525 271,931
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COMPARATIVE PER SHARE DATA
The following table sets forth certain comparative per share data relating
to net loss and book value (deficit) on (1) an historical basis for Telscape and
Pointe, (2) a pro forma basis per share of common stock, giving effect to the
following transactions as if they had occurred on January 1, 1999 for loss per
share data and on the date presented for book value (deficit) per share data:
o issuance of $31.6 million of Telscape Class F preferred stock for which
firm commitments have been received by Telscape, including the
conversion of Telscape promissory notes into Class F preferred stock
such issuance and receipt of proceeds is contingent on completion of the
merger;
o the implicit beneficial conversion feature of $29.3 million related to
the $31.6 million of Class F preferred stock resulting from the issuance
of the Class F preferred stock with an implied conversion ratio which
was less than fair value;
o the dividends on the Class F preferred stock which accrue at the rate of
12% per annum, compounded quarterly;
o the conversion by holders of $2 million of preferred stock of TCS into
common stock of TCS, such conversion is recorded as an increase in
Pointe's additional paid in capital;
o the issuance by TCS of its Series B preferred stock which reduced
Pointe's voting interest in TCS below 50% resulting in the application
of equity method accounting;
o the conversion of $500,000 of outstanding promissory notes of Telscape
into 47,617 shares of Telscape common stock; and
o the merger of Telscape and Pointe, with Pointe as the acquiror, and
accordingly, the assets and liabilities of Telscape have been recorded
at fair value with the excess of the purchase price over the fair value
of assets and liabilities acquired recorded as goodwill and other
intangibles.
o funding of an additional $16.1 million under the Lucent credit
agreement.
and (3) an equivalent pro forma basis per share of Telscape and Pointe common
stock estimated to be outstanding immediately prior to the merger.
The historical loss per common share amounts of Telscape and Pointe were
calculated by dividing loss available to common shareholders by the weighted
average number of shares of common stock outstanding during the period. These
share amounts are based on the number of Telscape and Pointe shares outstanding
during the periods presented. The book value per share amounts of Telscape and
Pointe were calculated by dividing stockholders' equity less the liquidation
value of outstanding preferred stock, if applicable, by the number of common
shares outstanding at the end of the period. The common stock outstanding used
in calculating pro forma combined book value per share are 8,079,167 shares of
Telscape common stock outstanding plus 11,794,126 shares representing the
estimated number of common shares to be issued in the merger.
The pro forma information gives effect to the merger anticipating the use
of purchase accounting with Pointe as the acquiror and is for illustrative
purposes only and is not necessarily indicative of the results of operations or
combined financial position that would have resulted had the merger and the
other transactions been consummated at the dates or during the periods
indicated, nor is it necessarily indicative of future results of operations or
combined financial position.
The average common shares outstanding used in calculating pro forma loss
per common share are calculated assuming that the estimated number of shares of
Telscape common stock to be issued in the merger were outstanding from the
beginning of the periods presented. Options and warrants to purchase shares of
common stock and the effects of convertible preferred stock and notes payable
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were excluded in computing pro forma diluted loss per common share because their
effect is antidilutive.
The information shown below should be read in conjunction with, and is
qualified by its entirety by, the historical financial statements of Pointe and
Telscape, including the respective notes thereto, and the unaudited pro forma
financial information included herein. See "Pointe Selected Consolidated
Financial Data," "Telscape Selected Consolidated Financial Data," and
"Unaudited Pro Forma Condensed Consolidated Financial Statements."
Telscape pro forma equivalent amounts are calculated by multiplying the
respective pro forma combined per share amounts by the ratio of one to one.
Pointe pro forma equivalent amounts are calculated by multiplying the respective
pro forma combined per share amounts by the exchange ratio of 0.223514 to one.
Neither Telscape nor Pointe declared or paid common stock dividends during
the periods presented.
HISTORICAL DATA TELSCAPE POINTE
- ------------------------------------------ --------- -------
Basic and diluted loss per common
share:
For the year ended December 31,
1999................................ $ (2.92) $ (1.36)
For the three months ended March
31, 2000............................ $ (0.77) $ (0.15)
Book value (deficit) per common share
at March 31, 2000....................... $ 2.60 $ (0.25)
PRO FORMA AND PRO FORMA EQUIVALENT
PER SHARE DATA
- -------------------------------------
Basic and diluted loss per common
share:
For the year ended December 31,
1999................................ $ (6.74) $ (1.51)
For the three months ended March
31, 2000............................ $ (0.92) $ (0.21)
Book value per common share at March
31, 2000: $ 9.45 $ 2.11
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RISK FACTORS
SHAREHOLDERS OF TELSCAPE AND POINTE SHOULD CAREFULLY CONSIDER THE FOLLOWING
RISKS, WHICH ARE NOT LISTED IN ORDER OF PRIORITY, IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
By voting in favor of the merger, Pointe shareholders will be choosing to
invest in Telscape common stock, and Telscape shareholders will be voting to
approve the issuance of significant numbers of Telscape's voting securities to
Pointe shareholders. An investment in Telscape common stock involves a high
degree of risk. In addition to the other information contained in this joint
proxy statement/prospectus, shareholders should carefully consider the following
risk factors. If any of the following risks actually occur, the business and
prospects of Pointe or Telscape may be seriously harmed. In this case, the
trading price of Telscape common stock may decline, and you may lose all or part
of your investment.
RISKS RELATED TO THE MERGER
THE MERGER AGREEMENT BETWEEN POINTE AND TELSCAPE PROVIDES FOR THE ISSUANCE OF A
FIXED NUMBER OF SHARES OF TELSCAPE COMMON STOCK AND AS A RESULT, THE PERFORMANCE
OF TELSCAPE AND POINTE PRIOR TO THE MERGER WILL NOT BE REFLECTED IN THE FIXED
EXCHANGE RATIO.
Upon the merger's completion, each share of Pointe common stock will be
exchanged for 0.223514 of a share of Telscape common stock and each share of
Pointe preferred stock will be exchanged for a substantially similar new issue
of Telscape preferred stock on a one-for-one basis. There will be no adjustment
in the exchange ratio for changes in the market price of the common stock of
Telscape or Pointe from the date of the merger agreement until the closing of
the merger. In addition, neither Pointe nor Telscape may terminate the merger
agreement or "walk away" from the merger or resolicit the vote of its
shareholders solely because of changes in the market price of the common stock
of Telscape or Pointe. Accordingly, the specific dollar value of the shares to
be issued in the merger is not fixed, and may increase or decrease from the date
you submit your proxy. The share price of the common stock of each of Telscape
and Pointe is subject to the general price fluctuations in the market for
publicly traded equity securities and each has experienced significant
volatility. We urge you to obtain recent market quotations for Telscape and
Pointe common stock. We cannot predict or give any assurances as to the dollar
value of the exchange consideration at any time before or after the completion
of the merger.
IF WE DO NOT SUCCESSFULLY INTEGRATE POINTE'S AND TELSCAPE'S OPERATIONS AND
PERSONNEL AND EFFECTIVELY MANAGE THE COMBINED COMPANY, INCLUDING THE SUCCESSFUL
CROSS-MARKETING OF OUR SERVICES TO OUR CUSTOMERS, WE MAY NOT ACHIEVE THE
BENEFITS OF THE MERGER AND MAY LOSE KEY PERSONNEL AND CUSTOMERS.
We entered into the merger agreement with the expectation that the merger
will result in significant benefits. Achieving the benefits of the merger
depends on the timely, efficient and successful execution of a number of
post-merger events, including integrating the operations and retaining and
attracting personnel for the two companies. We will need to overcome significant
obstacles, however, in order to realize any benefits or synergies from the
merger. The successful execution of these post-merger events will involve
considerable risk and may not be successful. Furthermore, Pointe's principal
offices are located in Roswell, Georgia while Telscape's principal offices are
located in Houston, Texas. For the merger to be successful, we must successfully
integrate Pointe's operations and personnel with Telscape's operations and
personnel. In addition, an important part of our merger strategy is our plan to
offer our products and services to each other's customers, and to develop new
products and services for our combined client base. We cannot assure you that
one company's customers will have any interest in the other company's products
and services or in our anticipated products and services. The failure of these
cross-marketing efforts would diminish the benefits anticipated to be realized
by this merger.
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To date, the companies have not thoroughly investigated the obstacles,
technological, market-driven or otherwise, to developing and marketing these
additional products and services in a timely and efficient way. We cannot assure
you that we will be able to overcome the obstacles in developing new products
and services, or that there will be a market for the new products or services we
develop after the merger. A failure or inability like this could have a material
adverse effect on the combined company's business, financial condition and
operating results or could result in loss of key personnel. In addition, the
attention and effort devoted to integrating the two companies will significantly
divert management's attention from other important issues, and could seriously
harm the combined company. Our failure to complete the integration successfully
could result in the loss of key personnel and customers, and the market price of
the Telscape common stock following the merger may decline as a result.
THE UNCERTAINTIES ASSOCIATED WITH THE MERGER MAY CAUSE TELSCAPE AND POINTE
CUSTOMERS TO DELAY OR DEFER DECISIONS WHICH MAY CAUSE THE LOSS OF CUSTOMERS AND
REVENUES.
Telscape and Pointe customers may, in response to the announcement of the
merger and prior to its effectiveness, delay or defer decisions concerning
business with both companies. Any delay or deferral in those decisions by
Telscape or Pointe customers could have a material adverse effect on Telscape
and/or Pointe's business. For example, Telscape or Pointe could experience a
decrease in expected revenue as a consequence of the uncertainties associated
with the merger.
THE UNCERTAINTIES ASSOCIATED WITH THE MERGER MAY CAUSE POINTE OR TELSCAPE TO
LOSE KEY PERSONNEL.
Current and prospective Telscape and Pointe employees may experience
uncertainty about their future roles with the combined company until strategies
with regard to the combined company are announced or executed. Any uncertainty
may adversely affect Telscape's and Pointe's ability to attract and retain key
management, sales, marketing and technical personnel.
THE METHOD OF ACCOUNTING FOR THE MERGER MAY DELAY PROFITABILITY OF TELSCAPE.
It is anticipated that the merger will be accounted for as a purchase
business combination with Pointe treated as the acquiror. The assets and
liabilities of Telscape will be recorded at fair value with the excess of the
purchase price over the fair value of assets and liabilities acquired recorded
as goodwill. The allocation of the purchase price in the merger is expected to
result in approximately $211.3 million of goodwill and other intangibles which
are expected to be amortized over a weighted average life of 20 years. As a
result, the profitability of the combined company is expected to be delayed
beyond the time frame in which Telscape or Pointe, as independent entities, may
have otherwise achieved profitability because of the additional amortization of
intangibles resulting from the use of the purchase method of accounting.
SHARES ELIGIBLE FOR FUTURE SALE IN THE OPEN MARKET COULD DEPRESS THE MARKET
PRICE OF TELSCAPE COMMON STOCK.
Approximately 16% of the Pointe common stock presently outstanding is
subject to restrictions on transfer, which restriction will not be applicable to
the Telscape common stock to be issued in the merger. Further, upon consummation
of the merger, outstanding shares of Pointe convertible preferred stock will be
exchanged for shares of Telscape convertible preferred stock which will be
immediately convertible into approximately 8.2 million restricted shares of
Telscape common stock. In addition, within 90 days of the closing of the merger,
Telscape will be obligated to register the 8.2 million Telscape common stock
underlying the preferred stock, as well as 4.4 million shares of Telscape common
stock underlying related warrants, to be registered to permit the sale of such
shares without restriction under applicable securities laws. Any significant
sales of Telscape common stock by former Pointe holders who will be eligible to
sell their shares following the merger, and any sales under the described
registration rights, could have a material adverse effect on the market price of
the Telscape common stock. If the sales do have an adverse effect on the price
of Telscape common stock, Telscape may be restricted or unable to raise capital
through the issuance of additional shares of common stock or other equity
securities.
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THE MERGER IS SUBJECT TO CONSENTS AND APPROVALS FROM GOVERNMENT ENTITIES AND
CERTAIN THIRD PARTIES.
The merger is subject to consents and approvals from various government
entities and certain third parties, which may jeopardize or delay completion of
the merger or reduce the anticipated benefits of the merger. In order to
complete the merger, we must make filings with, and receive consents, orders,
approvals or clearances from various governmental agencies, both foreign and
domestic, including particularly filings with state public utility or service
commissions and from certain third parties. These governmental agencies may
condition their action on any number of factors or may not act promptly, which
may jeopardize or delay completion of the merger.
THE MERGER IS SUBJECT TO THE APPROVAL OF SIGNIFICANT CREDITORS.
The merger is subject to the approval of significant creditors, primarily
Lucent Technologies and GE Capital. As of the date of this filing, Lucent has
delivered their approval of the merger to Telscape while GE Capital's consent is
pending.
RISKS RELATED TO THE COMBINED COMPANY FOLLOWING THE MERGER
The following risk factors describe risks which are likely to affect the
operations of the combined company resulting from the merger of Telscape and
Pointe.
THE PLANNED EXPANSION OF THE BUSINESS OF POINTE AND TELSCAPE FOLLOWING THE
MERGER WILL RESULT IN CONTINUED LOSSES.
Telscape's operations have generated cumulative net losses of $31.2 million
from inception in 1995 through March 31, 2000. Pointe's operations have
generated net losses of $75.8 million from its inception in 1995 through March
31, 2000. The pro forma unaudited combined results of operations of the combined
company contained in this joint proxy statement/prospectus indicate that if
merged as of January 1, 1999, the combined company would have incurred
significant losses since that date. As the combined company seeks to complete
and make fully operational Telscape's fiber optic network in Mexico and to
complete and implement Pointe's CLEC strategy, management anticipates that the
combined company will continue to experience significant losses and
expenditures, and that it is likely to experience continuing net losses and
suffer capital dilution over the next several quarters at a minimum.
Specifically, Telscape's investment in its Mexican network may not immediately
generate revenue because of factors that are outside of Telscape's control, such
as:
o delays in expansion of its Mexican network;
o delays in negotiating acceptable interconnection agreements with
Telefonos de Mexico, the former monopoly carrier in Mexico; and
o operational delays caused by its inability to obtain additional
financing in a timely fashion or to meet the conditions precedent to
additional fundings under Telscape's credit facility with Lucent
Technologies.
Further, the implementation of Pointe's CLEC strategy requires considerable
capital expenditures and marketing efforts, and is not anticipated to create
profit in the short term.
As a result of the above factors, the combined company expects to continue
to incur net losses over at least the next several quarters.
TELSCAPE AND POINTE HAVE SIGNIFICANT NEEDS FOR ADDITIONAL CAPITAL.
The combined company must continue to raise significant capital to:
o fund its anticipated operating losses;
o to further enhance Telscape's Mexican telecommunication network;
o to develop Telscape's telecommunications network infrastructure;
o to implement Pointe's CLEC strategy; and
o to meet its combined obligations under loans and financing arrangements.
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As of December 31, 1999, Telscape had negative working capital of $42.5
million. Of this $42.5 million, $24.6 million represents accounts payable
incurred in connection with the construction of the Mexican network and $2.8
million represents accounts payable incurred for switching equipment. On April
20, 2000, Telscape received an additional $16.1 million under the Lucent credit
facility. Telscape plans to finance the remaining network construction accounts
payable under the Lucent credit agreement, subject to availability as discussed
below, and the equipment accounts payable under long term financing.
Additionally, Telscape has classified as current $5.6 million in notes payable
due to non-compliance of certain financial covenants under a loan facility as
discussed below. Telscape also has classified as current $1.2 million under the
Lucent credit facility.
Telscape has begun to address its needs for capital by obtaining funding
from Pointe under the Pointe Loan, a commitment from Lucent to increase
Telscape's borrowings by an additional $20 million, and has secured
subscriptions for the issuance of up to $31.6 million of Telscape Class F Senior
Convertible Preferred Stock. In addition to other conditions, funding of the
Lucent commitment, and the Class F preferred stock subscriptions are conditioned
upon the consummation of the merger. If the merger does not occur or if any of
the other conditions to the fundings are not met, Telscape will not have
sufficient funds for its operations, expansion plans or to repay indebtedness
and will have to seek additional capital and funds for these purposes.
If the merger occurs and the Pointe Loan, additional Lucent commitment,
Telscape Class F preferred stock issuance are completely funded, and the
combined company will continue to require significant funding for its capital
expenditures. The level of capital required to fund future development will
depend upon many factors that are not subject to control, including competitive
conditions, particularly with respect to its ability to attract incremental
traffic or acquire new operations at favorable prices, and regulatory or other
government actions. In the event that the plans or assumptions of the combined
company change or prove to be inaccurate, then some or all of its development
and expansion plans, including expansion of the Telscape Mexican network and the
Pointe CLEC strategy, could be delayed or abandoned.
In the event that the combined company is unable to obtain additional
capital on acceptable terms, or is unable to find suitable strategic investment
alternatives, its business, results of operations, financial condition and
ability to compete could be adversely affected.
THE SUBSTANTIAL INDEBTEDNESS LEVELS OF THE COMBINED COMPANY COULD ADVERSELY
AFFECT ITS ABILITY TO RUN ITS BUSINESS.
On a pro forma basis, the indebtedness of the combined company as of March
31, 2000, was approximately $63.6 million. Additional indebtedness or equity
will be needed to complete the combined company's planned development. Thus, the
ability to make scheduled payments of principal of, or to pay the interest on,
or to refinance, the combined company's indebtedness, or to fund planned capital
expenditures or future acquisitions will depend on its future performance,
which, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond its
control. The combined company cannot predict the impact of future acquisitions
on its cash requirements and it may need to refinance all or a portion of its
outstanding indebtedness on or prior to maturity. There can be no assurance that
the business will generate sufficient cash flow from operations or that
anticipated revenue growth will be realized in an amount sufficient to enable it
to service its indebtedness, make anticipated capital expenditures or fund
future acquisitions. In addition, there can be no assurance that the combined
company will be able to affect any such refinancing on reasonable terms or at
all.
TELSCAPE AND POINTE MAY NOT BE ABLE TO HIRE AND RETAIN THE PERSONNEL THEY NEED
TO SUSTAIN THEIR BUSINESSES.
Telscape and Pointe are highly dependent on the technical and management
skills of key employees and on their ability to hire and keep additional
personnel. Competition for personnel is intense in this market sector and
Telscape and Pointe may not be able to retain existing personnel or hire
additional personnel. The combined company will be highly dependent on the
services of Stephen
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E. Raville, Chairman of the Board of Pointe, and on the services of Manuel
Landa, Chairman of the Board of Telscape. The loss of their services could have
a material adverse effect on the business, financial condition or results of
operations of the combined company.
THE COMBINED COMPANY MUST ADEQUATELY MANAGE ITS ANTICIPATED GROWTH.
Telscape and Pointe each expect their business and network to continue to
grow and expand, specifically, in and to Latin America, and expects this growth
to significantly strain their management, operational and financial resources
and increase demands on their systems and controls. To manage its growth
effectively, the combined company must improve its operational and financial
systems and controls, purchase and utilize other transmission facilities and
expand, train and manage its employee base. Inaccuracies in its traffic
forecasts, its pricing and costing models, or other types of errors or
inaccuracies could result in insufficient or excessive transmission facilities
and disproportionate fixed expenses or deterioration of profit generation.
As the combined company proceeds with its development; there will be
additional demands on its customer support, billings systems and support, sales
and marketing and administrative resources and network infrastructures. The
combined company cannot assure you that its operating and financial control
systems and infrastructure will be adequate to maintain and effectively manage
future growth. If the combined company is unable to upgrade its administrative,
operating and financial control systems or if unexpected expansion difficulties
emerge, its business, results of operations and financial condition could be
materially adversely affected.
TELSCAPE AND POINTE DEPEND ON THEIR INTERNATIONAL OPERATIONS, WHICH SUBJECTS
THEM TO UNPREDICTABLE REGULATORY AND POLITICAL SITUATIONS.
Because Telscape and Pointe have significant operations outside the United
States, they are affected by the risks normally associated with cross-border
business transactions and activities, including:
o fluctuations in exchange rates;
o political and economic instability;
o changes in diplomatic and trade relationships;
o longer payment cycles;
o difficulties in collecting accounts receivable;
o managing independent sales organizations;
o staffing and managing international operations;
o protecting intellectual property and enforcing agreements in other
countries;
o cultural differences affecting product demand;
o potentially adverse tax consequences resulting from operating in
multiple jurisdictions with different tax laws;
o changes in tariffs and other barriers and restrictions; and
o obtaining licenses and suitable alliance partners, wherein, offer
required of foreign companies to transact business in foreign
jurisdictions.
In addition, the uncertainty of the legal environment in these areas could
limit Telscape's and Pointe's ability to effectively enforce their rights. These
factors may require Telscape and Pointe to modify their current business
practices or have a material adverse effect on their business, financial
condition and prospects.
A significant portion of Telscape's assets and revenues are and will be
located in Mexico. Telscape's business, therefore, is affected by prevailing
conditions in the Mexican economy and is, to a significant extent, vulnerable to
economic downturns and changes in government policies. The
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Mexican government exercises significant influence over many aspects of the
Mexican economy. Accordingly, the Mexican government's actions and policies
could have material adverse effects on private sector entities in general and on
Telscape in particular.
TELSCAPE AND POINTE DEPEND ON SUPPLIERS, WHOM THEY DO NOT CONTROL, TO PROVIDE
PRODUCTS AND SERVICES WHICH THEY COULD NOT OPERATE WITHOUT.
Telscape and Pointe are dependent on third party suppliers for many of
their products and services and generally do not have long-term contracts with
their suppliers. Some of these suppliers are or may become competitors, and are
not restricted from competition. If any of these suppliers change their pricing
structure or terminate service, the combined company may be adversely affected.
Telscape and Pointe are each dependent upon third party providers for data
communications facilities and capacity, and physical space for switches, modems
and other equipment. If these suppliers cannot expand their networks or provide
required levels of service to Telscape or Pointe in the future, Telscape or
Pointe's operations could be adversely affected.
Telscape and Pointe have occasionally experienced delays in receipt of
integral services and hardware. A supplier's failure to timely deliver quality
services or products, or their inability to use alternative sources if required,
could result in delays which could have a material adverse effect on Telscape or
Pointe. Telscape and Pointe work with equipment suppliers who design products
and sell them to us for use in our operations. Remedies against these suppliers
for untimely delivery are often limited by practical considerations relating to
the desire to maintain these relationships. As Telscape's and Pointe's suppliers
revise and upgrade the technology of their equipment, we may encounter
difficulties in integrating the new technology into our networks.
TELSCAPE'S AND POINTE'S SECURITY MEASURES MAY NOT BE SUFFICIENT TO PROTECT THEM
FROM UNAUTHORIZED TRANSACTIONS OR THEFTS OF SERVICES.
Despite implementation of security measures, Telscape and Pointe are
vulnerable to computer viruses, break-ins and similar disruptive problems caused
by customers or other Internet users. These problems could lead to interruption,
delays or cessation in service to Telscape's or Pointe's customers.
Additionally, inappropriate use of the voice and data systems by third parties
might jeopardize the integrity of Telscape's or Pointe's customers' computer
systems, which may deter customers from using Telscape's or Pointe's services.
Persistent security problems continue to plague public and private data
networks. Recent break-ins reported in the press have reached computers
connected to the Internet at major corporations and Internet access providers,
and include incidents involving hackers bypassing fire-walls by posing as
trusted computers and stealing information. Alleviating these types of problems
may require significant expenditures of capital and resources, which could have
a material adverse effect on Telscape and Pointe. Also, until better security
technologies are developed, the security and privacy concerns of existing and
potential customers may stifle growth of the Internet and telecommunication
services industry in general, and Telscape's and Pointe's customer base and
revenues in particular.
TELSCAPE AND POINTE ARE SUBJECT TO THE FOREIGN CORRUPT PRACTICES ACT.
Telscape and Pointe are subject to the Foreign Corrupt Practices Act
(FCPA), which generally prohibits U.S. companies and their intermediaries from
bribing or making payments to foreign officials for the purpose of obtaining or
keeping business. Telscape and Pointe may be exposed to liability under the FCPA
as a result of past or future actions taken without their knowledge by agents,
strategic partners and other intermediaries. Such liability could have a
material adverse effect on Telscape's or Pointe's business, operating results
and financial condition.
THE HIGH LEVEL OF FOREIGN ASSETS OF THE COMBINED COMPANY COULD INHIBIT ITS
ABILITY TO GENERATE BORROWINGS.
A significant portion of the assets of the combined company will be located
outside the United States, and thus may not be able to compete for the more
favorable financing terms generally
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available to domestic operations. In addition, several of the subsidiaries of
Telscape and Pointe are organized in jurisdictions outside the United States,
and they do not have direct control over some of these subsidiaries. If any of
these subsidiaries are unable to or fail to pay dividends to their parent, make
intercompany loans or make any other distributions, the ability of the combined
company to make principal and/or interest payments on its indebtedness and,
utilize cash flow from one subsidiary to cover shortfalls in working capital of
another subsidiary would be restricted, which could have a material adverse
effect upon the financial condition and results of operations of the combined
entity.
THE COMBINED COMPANY FACES RISKS OF NETWORK FAILURE IN OPERATING ITS NETWORKS.
The combined company faces risks of network failure in operating and expanding
its networks. New technologies may increase the risk that the combined system
could fail and strain its networks and its ability to enter successfully new
markets. Additionally, the combined networks and operations face risks that
cannot be controlled, including the risk of damage to software, hardware and
facilities resulting from:
o fire;
o power loss;
o construction damage (such as fiber cuts);
o security breaches;
o computer viruses;
o natural disasters; and
o general transmission failures caused by other factors outside its
control.
Telscape's Mexican fiber optic network may also contain undetected design
faults and software bugs that, despite testing, may be discovered only after the
network has been installed and is in use. The failure of any equipment or
facility on the network could result in the interruption of customer service
until Telscape makes appropriate repairs or installs replacement equipment.
During 1999, Pointe implemented a voice and data network connecting New
York City, Miami, Atlanta, Houston, Los Angeles and San Salvador, El Salvador
and Lima, Peru. The network was designed with voice over internet protocol
(VOIP) technology, which is a new network architecture designed to carry voice
and data traffic with equal efficiency. Due the early stage of development of
this network architecture for both Pointe and the equipment supplier, Pointe
experienced a significant delay in implementation of the network. The delay
resulted in both lost customers who had signed contracts for the termination of
wholesale carrier traffic and opportunities with partners to terminate traffic
in Latin America. The network is now in operation, however similar problems may
arise in the future.
TELSCAPE MUST SUCCESSFULLY INCORPORATE FIBER THAT IT HAS SWAPPED INTO ITS
OPERATIONS.
Telscape adopted a "smart build" approach whereby it constructed a
network covering 636 kilometers in Mexico and swapped capacity on its network
with other carriers' networks to achieve coverage of approximately 4,100
kilometers. Telscape must be successful in the process of connecting its network
with the swapped capacity from other carriers. If Telscape is unsuccessful in
this integration or experiences lengthy delays in securing adequate and
efficient ingress and egress over the various segments of its network, it may
suffer material adverse consequences.
THE CONSTRUCTION COSTS OF THE POINTE COMPETITIVE LOCAL EXCHANGE CARRIER NETWORKS
IN THE US MAY BECOME PROHIBITIVE.
Pointe's ability to build its Competitive Local Exchange Carrier (CLEC)
networks in the U.S. is essential to its future success. Pointe is developing
CLEC networks in select cities in the U.S. with significant Hispanic populations
in order to provide a bundle of local, long distance and internet services to
this market segment. The initial markets being targeted are Los Angeles and
Miami, which
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are anticipated to be operational by the beginning of the second quarter of
2000. During 2000, Pointe will also build out San Diego and Houston moving into
New York, San Francisco, Chicago, Dallas and San Juan, Puerto Rico in subsequent
years. There are certain risks associated with Pointe's successful development
of its CLEC networks including:
o the cost of the networks could be more then anticipated;
o the networks may be completed later then anticipated creating a delay in
the start of operations;
o Pointe lacks experience in developing similar networks;
o Pointe may not be able to effectively manage the construction of the
networks; and
o Pointe depends significantly on third party contractors for the
networks' construction.
Pointe cannot assure you that we will be able to construct the networks
without delays and within our anticipated budget or at all. Delays or excess
costs could have a materially adverse effect on the combined company.
TELSCAPE MUST OBTAIN AND MAINTAIN PERMITS AND RIGHTS-OF-WAY TO EXPAND ITS
MEXICAN NETWORK.
The expansion of the Telscape network in Mexico requires that Telscape
obtains local franchises and other permits. Telscape must also obtain rights to
use underground conduit and aerial pole space and other rights-of-way and fiber
capacity. The process of obtaining these franchises, permits and rights is time
consuming and burdensome. If Telscape is unable to obtain and maintain the
franchises, permits and rights needed to construct its network, Telscape's
business could be materially adversely affected. In addition, the cancellation
or non-renewal of the franchises, permits or rights Telscape obtains, or the
loss of the rights-of-way we obtain, could materially adversely affect the
business of the combined company.
A FAILURE IN MANAGEMENT INFORMATION SYSTEMS COULD ADVERSELY AFFECT OUR
OPERATIONS.
The combined company will be dependent upon information systems and
switching equipment to:
o provide service to its customers;
o manage its network;
o collect billing information; and
o perform other vital functions.
The combined company will be dependent upon its billing and collection
system, especially with respect to its prepaid card and wholesale long distance
businesses, because of their high transaction volumes. Telscape has in the past,
and the combined company may in the future, experience technical difficulties
with its hardware or software, which would affect its ability to bill its
customers. If it is unable to bill and collect receivables from its customers
because of problems with its information systems, the combined company's cash
flows could be interrupted which could materially adversely affect its business,
financial condition or results of operations.
THE COMBINED COMPANY WILL DEPEND ON DISTRIBUTORS AND SERVICE PROVIDERS FOR SALES
OF ITS PREPAID CALLING CARDS AND OTHER SERVICES.
The combined company will be dependent on third party distributors in the
United States and Mexico to sell its prepaid calling cards for international and
domestic long distance telecommunications services. Most of its distributors
also sell the services or products of other companies. Accordingly, we cannot
assure you that these distributors will devote sufficient efforts to promoting
and selling our services, or that we will be able to find capable distributors
in any of our new markets. The failure of these distributors to effectively
distribute our prepaid cards would substantially impair our ability to generate
revenues from the sales of these prepaid cards, which could have a material
adverse effect on our business, financial condition or results of operations.
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The combined company will also be dependent on service agreements with
service providers to provide the switching platform and telecommunications
services related to its prepaid calling cards. The combined company will have
its own prepaid calling card switching platforms in Houston, Atlanta and in
Mexico that provide some, but not all, of the switching platform and
telecommunications services related to its prepaid calling cards. The
deterioration or termination of its relationships with its platform service
providers could have a material adverse effect upon its revenue growth, cost
structure, service quality, brand name recognition, network diversity, results
of operations and financial condition.
THE COMBINED COMPANY WILL BE DEPENDENT UPON OPERATING AGREEMENTS WITH FOREIGN
OPERATORS FOR ITS WHOLESALE LONG DISTANCE BUSINESS.
The wholesale long distance business of the combined company and its
ability to terminate and receive return traffic in foreign countries is
substantially dependent on the ability to enter into operating agreements or
carrier agreements with other carriers. The combined company believes that it
would not be able to serve its customers at competitive prices without these
operating and interconnection agreements. Termination of these agreements by
these carriers, therefore, would have a material adverse effect on its business.
Moreover, we cannot assure you that we will be able to enter into additional
operating or interconnection agreements in the future. This could limit our
ability to increase our revenues and create a profit.
A DEFAULT UNDER EXISTING CREDIT AGREEMENTS COULD HAVE A MATERIAL ADVERSE EFFECT
ON OPERATIONS.
Telscape's credit agreement with Lucent contains significant covenants of
Telscape and its subsidiaries including, but not limited to: (a) affirmative
covenants with respect to compliance with laws, inspection rights, performance
of other obligations, delivery of financial statements and other information,
pledge of after-acquired property, and associated agreements requiring the
Telscape's Mexican subsidiaries to apply certain monies to debt repayment, (b)
negative covenants restricting their ability to incur or create (with certain
exceptions) liens, debt and capitalized lease obligations, and otherwise
restricting (with customary exceptions) mergers or consolidations, disposal of
assets, investments, payments of dividends and distributions, modification of
material contracts, changes in the nature of the business conducted, prepayment
or redemption of debt, creation of partnerships and new subsidiaries and
transactions with affiliates; and (c) financial covenants (including, among
others, minimum total debt to total capitalization, total debt to consolidated
EBITDA, maximum annual capital expenditures through the maturity date and
minimum consolidated EBITDA to consolidated debt service obligations. Telscape
is in default of financial covenants under the Credit Agreement but has secured
waivers for such default through May 15, 2000. If the waivers expire, the lender
under the Credit Agreement could terminate their financing agreement with
Telscape. Termination of one or more of Telscape's financing agreements could
have a material adverse effect on its working capital or its ability to expand
its business or execute its business plan.
THE COMBINED COMPANY MUST COMPLY WITH EXTENSIVE REGULATION OF ITS INDUSTRY.
The telecommunications industry is extensively regulated by federal, state,
local and foreign governmental agencies, including common carrier regulation by
the Federal Communications Commission (FCC). The Telecommunications Act of 1996
eliminated many legal barriers to competition in the telephone and video
programming communications businesses, preempted many state barriers to local
telephone service competition, and set basic standards for relationships between
telecommunications providers. In addition, the Telecommunications Act provided
relief from earnings restrictions and price controls that governed the local
telephone business for many years. The Telecommunications Act will also, once
certain thresholds are met, allow ILEC's to enter the long distance market
within their own local service regions. The Telecommunications Act introduced
the possibility of new competition for telecommunications companies and resulted
in greater potential competition for Pointe. The outcome of pending federal and
state administrative proceedings may also affect the nature and extent of
competition that Pointe will face.
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Providing local service requires appropriate licenses in each state where
service is provided. Pointe is currently certified as a Competitive Local
Exchange Carrier, or CLEC, in Georgia, Florida and California. Pointe intends to
apply for certification in Texas, New York and Puerto Rico during 2000. While
Pointe believes that it will be successful in obtaining such certification the
outcome is not assured. Future regulations may prevent Pointe from generating
revenues from sales of database information about consumers obtained by Pointe
from its telephone business. These competitive developments, as well as other
regulatory requirements regarding privacy issues, may have a material adverse
effect on Pointe's business.
In addition, changes in access charges, universal service and regulatory
fee payments will affect the combined company's cost of providing long distance
services. Changes in the regulations requiring local exchange carriers to
provide equal access for the origination and termination of calls by long
distance subscribers, or in the regulations governing access charge rates or
universal service contribution, or substantial increases in other regulatory
fees could materially adversely affect the combined company's business,
financial condition, results of operations and prospects.
TELSCAPE'S MEXICAN FACILITIES-BASED LICENSE IS SUBJECT TO SIGNIFICANT STATUTORY
AND REGULATORY RISKS.
Telscape's Mexican concession is regulated by the Mexican government. The
Mexican government could grant similar concessions to Telscape's competitors, or
affect the value of Telscape's concession. In addition, the Mexican government
also has (1) authority to temporarily seize all assets related to the Mexican
concession in the event of natural disaster, war, significant public disturbance
or threats to internal peace and for other reasons of economic or public order
and (2) the statutory right to expropriate any concession and claim all related
assets for public interest reasons. Although Mexican law provides for
compensation in connection with losses and damages related to temporary seizure
or expropriation, Telscape cannot assure you that the compensation will be
adequate or timely.
The Mexican concession contains several restraints. Specifically, it limits
the scope and location of Telscape's Mexican network and has minimum invested
capital requirements and specific debt to equity requirements. In addition, the
terms of the Mexican concession originally required Telscape to begin operations
by June 3, 1999. As of the date of this filing, the COFETEL, Mexico's regulatory
agency, has approved Telscape's concessionary status and submitted the required
paperwork to Mexico's respective Ministry. Telscape has yet to receive the
documents confirming the good standing of its concessionary rights from the
Ministry but expects to receive it during May 2000. Telscape cannot assure you
that:
o it will be able to obtain financing to complete and develop the Mexican
network;
o if it obtains financing it will be in a timely manner or on favorable
terms;
o Telscape will be able to comply with the Mexican concession's
conditions.
If Telscape fails to comply with the terms of the concession, the Mexican
government may terminate it without compensation to Telscape. A termination
would prevent Telscape from engaging in its proposed business.
TELSCAPE IS SUBJECT TO FOREIGN CURRENCY EXCHANGE RATES.
Although Telscape's sales have generally been denominated in U.S. dollars,
some of its recent contracts are denominated in foreign currencies, and
specifically, in Mexican pesos. Any decrease in the value of the U.S. dollar in
relation to foreign currencies may materially and adversely affect Telscape's
sales to international customers and its cost of procuring, installing and
maintaining equipment abroad. As Telscape expands its international operations
and/or begins to denominate prices in foreign currencies, it will be exposed to
increased risks of currency fluctuation.
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For example, from December 1994 through December 1996, Mexico experienced
an economic crisis which included:
o exchange rate instability;
o a devaluation of the peso;
o high inflation;
o high domestic interest rates;
o negative economic growth (on a cumulative basis);
o a reduction of international capital flow to both the private and public
sectors;
o reduced consumer purchasing power; and
o high unemployment.
Any similar future crisis, including any devaluation of the Mexican peso,
could materially and adversely effect Telscape's financial position and results
of operation.
In the future Telscape may incur currently peso-denominated indebtedness.
In order to construct its Mexican network, Telscape anticipates that it will
generate additional peso-denominated receivables from the provision of domestic
and international long distance services originating in Mexico. As Telscape's
Mexican peso-denominated activities increase, its foreign exchange risk will
also increase.
Telscape currently does not hedge against the risk of exchange rate
fluctuation, but may in the future choose to limit its foreign currency risk
exposure through the purchase of forward foreign exchange contracts or similar
hedging strategies. Telscape cannot assure you that any foreign currency hedging
strategy would be successful in avoiding exchange-related losses or that it
would not exacerbate any exchange-related losses.
THE ECONOMIC SUCCESS OF TELSCAPE'S MEXICAN NETWORK IS LARGELY CONTINGENT ON
TELSCAPE'S SUCCESSFUL NEGOTIATION OF AN INTER-CONNECT AGREEMENT WITH TELMEX.
Telmex is the formerly state-owned tele-communications company of the
country of Mexico. Telscape's Mexican network must be inter-connected with
Telmex's network to allow Telscape to terminate and originate calls within the
country of Mexico over Telscape's network. While negotations with Telmex are in
an advanced stage, Telscape cannot guarantee that they will be concluded in a
manner satisfactory to Telscape's interests. Failure to negotiate an
inter-connect agreement with Telmex could have a material, adverse effect on the
anticipated profitability of Telscape's operations.
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THE TELSCAPE ANNUAL MEETING
DATE, TIME AND PLACE
The Telscape annual meeting will be held on June 2, 2000, at 9:30 a.m.
local time, at the University Club of Houston, 5051 Westheimer, Post Oak Tower,
Suite 355, Houston, Texas 77056.
PURPOSE OF THE TELSCAPE ANNUAL MEETING
At the Telscape annual meeting, you will be asked to:
o approve the issuance of Telscape common stock and preferred stock in
connection with the merger;
o elect seven directors to serve if the merger is not completed;
o approve an amendment to Telscape's articles of incorporation to increase
the number of authorized shares of common stock of Telscape from
25,000,000 shares to 100,000,000 shares and increase the number of
authorized shares of preferred stock of Telscape from 5,000,000 to
10,000,000 and to allow the Telscape board to authorize preemptive
rights to shareholders;
o approve the adoption of the option plans;
o approve the issuance of Class C preferred stock upon conversion of the
$10,000,000 Pointe Note;
o approve the issuance of Telscape Class F preferred stock in connection
with a private placement to accredited investors;
o act on other business that may properly come before the meeting or any
adjournment or postponement; and
o if necessary, approve any postponements or adjournments of the annual
meeting without further notice except by announcement at the meeting
being postponed or adjourned.
THE TELSCAPE BOARD HAS DETERMINED THAT THE ISSUANCE OF THE TELSCAPE CAPITAL
STOCK IN THE MERGER, UPON CONVERSION OF THE POINTE NOTE AND IN THE PRIVATE
PLACEMENT, THE AMENDMENT TO THE ARTICLES OF INCORPORATION AND THE ADOPTION OF
OPTION PLANS ARE ADVISABLE, FAIR TO AND IN THE BEST INTERESTS OF TELSCAPE AND
THE TELSCAPE SHAREHOLDERS. THEREFORE, THE TELSCAPE BOARD HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT, THE MERGER, THE ISSUANCE OF CAPITAL STOCK
PURSUANT TO THE MERGER AGREEMENT, THE AMENDMENT TO THE ARTICLES OF
INCORPORATION, THE ADOPTION OF THE OPTION PLANS AND THE ISSUANCE OF CAPITAL
STOCK UPON CONVERSION OF THE POINTE NOTE AND IN THE PRIVATE PLACEMENTS, AND
UNANIMOUSLY RECOMMENDS THAT TELSCAPE SHAREHOLDERS VOTE FOR EACH PROPOSAL. ALSO,
THE TELSCAPE BOARD UNANIMOUSLY RECOMMENDS THAT THE TELSCAPE SHAREHOLDERS ELECT
THE NOMINEES FOR DIRECTORS.
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
Only holders of record of Telscape common stock at the close of business on
April 17, 2000, the record date, are entitled to notice of and to vote at the
Telscape annual meeting. On the record date, 8,162,526 shares of Telscape common
stock were issued and outstanding (including 83,359 shares of common stock held
in treasury) and held by 90 holders of record and approximately 2,773 beneficial
owners. Holders of record of Telscape common stock on the record date are
entitled to one vote per share held at the Telscape special meeting.
A majority of the shares of Telscape common stock issued and outstanding
and entitled to vote on the record date must be represented in person or by
proxy at the Telscape annual meeting for a
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quorum to be present. Abstentions and broker "non-votes" count as present for
establishing a quorum. "Non-votes" occur when a proxy:
o is returned by a broker or other shareholder who does not have authority
to vote;
o does not give authority to a proxy to vote; or
o withholds authority to vote on one or more proposals.
VOTES REQUIRED
The Market Place Rules of the Nasdaq National Market require that any
issuance of securities which results in a change of control of the company or
which equals or exceeds 20% of the company's outstanding common stock must be
approved by the company's shareholders. For purposes of this rule, the common
stock issued and the common stock which must be issued upon the conversion or
exercise of convertible securities issued are included in the calculation.
Telscape's issuance of its Class C preferred stock and accompanying warrants in
the conversion of the Pointe Loan and its Class F preferred stock and
accompanying warrants in the private placement will exceed the 20% level in the
event the merger is not completed. In addition, the issuance of the common stock
and preferred stock in the merger will exceed the 20% level. The merger also
will result in a change in control because the Pointe shareholders will hold
approximately 59% of the voting power of Telscape after the merger. Therefore,
the approval of holders of a majority of Telscape's common stock entitled to
vote and voting at the special meeting in person or by proxy is required to
approve the issuance of Telscape's Class F preferred stock and warrants in
connection with the private placement and the issuance of Telscape's common
stock, Class D preferred stock and Class E preferred stock in connection with
the merger.
Under Texas corporate law, the affirmative vote of holders of a majority of
the outstanding shares of common stock is required to approve an amendment to a
company's articles of incorporation. Therefore, the proposal to amend Telscape's
articles of incorporation to increase its authorized shares of common stock and
preferred stock must be approved by holders of a majority of the outstanding
shares of Telscape's common stock.
The IRS requires that any stock option plan that includes incentive stock
options be approved by the company's shareholders. Additionally, the Market
Place Rules of the Nasdaq National Market require that the shareholders approve
any stock option plan for officers or directors of the company that may result
in the issuance of more than one percent of the company's outstanding common
stock. Therefore, the approval of holders of a majority of Telscape's common
stock entitled to vote and voting at the special meeting in person or by proxy
is required to approve the adoption of the stock option plans.
Telscape common shareholders will vote to elect the seven directors by a
plurality of votes cast at the annual meeting.
SHAREHOLDER VOTING AGREEMENT
Shareholders, including certain directors and executive officers, owning
approximately 34.4% of the issued and outstanding Telscape common stock have
entered into a voting agreement obligating such shareholders to vote the shares
held by them in favor of the approval of the issuance of shares pursuant to the
merger and restricting such shareholders from placing, or permitting any person
under the shareholder's control from placing, any Telscape capital stock in a
voting trust inconsistent with the terms of such voting agreement. In addition,
these shareholders may not sell or transfer any of the shares covered by the
agreement during the term of the voting agreement. The agreement extends until
the merger is completed or the merger agreement is terminated.
VOTING OF PROXIES
All shares of Telscape common stock represented by properly executed
proxies received before the Telscape annual meeting will be voted at the
Telscape annual meeting in the manner specified in
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the proxies. Properly executed proxies that do not contain voting instructions
will be voted for approval of each of the proposals and for each nominee for
director.
For voting purposes at the Telscape annual meeting, only shares
affirmatively voted for the issuance of Telscape capital stock, the amendment to
the articles of incorporation, and approval of the option plans (including
properly executed proxies that do not contain voting instructions) will be
counted as favorable votes for those proposals. If a Telscape shareholder
abstains from voting or does not vote (either in person or by proxy), it will
have the same effect as if that Telscape shareholder had voted against the
amendment to the articles of incorporation. Under the applicable rules of the
Nasdaq National Market, brokers who hold shares of Telscape stock in street name
for customers who are the beneficial owners of such shares are prohibited from
giving a proxy to vote those customers' shares with respect to the Telscape
proposals in the absence of specific instructions from those customers. These
non-voted shares are referred to as "broker non-votes" and have the same
effect as votes against the proposal to authorize the amendment to the articles
of incorporation. However, "broker non-votes" will have no effect on the
proposals to issue Telscape capital stock and the proposals to adopt the option
plans.
Telscape does not expect that any matter other than as set forth in the
notice of annual meeting will be brought before the Telscape annual meeting. If,
however, the Telscape board properly presents other matters, the persons named
as proxies will vote in accordance with their judgment.
Adjournments may be made, among other things, to solicit additional
proxies. Any adjournment may be made from time to time by approval of the
holders of shares representing a majority of the votes present in person or by
proxy at the meeting, whether or not a quorum exists, without further notice
other than by an announcement made at the meeting. Telscape does not currently
intend to seek an adjournment of the meeting.
HOW TO VOTE BY PROXY
Complete, sign, date and return the enclosed proxy card in the enclosed
postage paid envelope.
REVOCABILITY OF PROXIES
Any Telscape shareholder who delivers a proxy may revoke the proxy and vote
in person at the Telscape annual meeting. A shareholder may revoke a proxy at
any time prior to the annual meeting by (1) filing with the Secretary of
Telscape a duly executed revocation of proxy, (2) submitting a new duly executed
proxy by mail or (3) appearing at the Telscape annual meeting and voting in
person. Attendance at the Telscape annual meeting will not, in and of itself,
constitute revocation of a proxy. A Telscape shareholder whose shares are held
in the name of its broker, bank or other nominee must bring a legal proxy from
its broker, bank or other nominee to the meeting in order to vote in person.
DEADLINE FOR VOTING BY PROXY
Votes cast by mail must be received prior to the annual meeting to be
counted.
SOLICITATION OF PROXIES
Telscape will bear the cost of the solicitation of proxies from its
shareholders. Arrangements will be made with brokerage houses and other
custodians, nominees and fiduciaries for the forwarding of solicitation
materials to the beneficial owners of stock held of record by such persons, and
Telscape will reimburse such custodians, nominees and fiduciaries for their
reasonable out-of-pocket expenses in connection therewith.
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THE POINTE ANNUAL MEETING
DATE, TIME, AND PLACE
The Pointe annual meeting will be held at the J. W. Marriott Hotel Lenox,
3300 Lenox Road, Atlanta, Georgia 30326, on June 2, 2000, starting at 1:00 p.m.
(local time).
PURPOSES OF THE POINTE ANNUAL MEETING
At the Pointe annual meeting, Pointe shareholders will be asked to:
o approve and adopt the merger agreement;
o elect six Pointe directors to serve with the three directors designated
by the holders of Class A preferred stock and Class B preferred stock if
the merger is not completed;
o approve and adopt Pointe's 1999 Executive Market Value Appreciation
Stock Option Plan;
o approve and adopt Pointe's 1999 Pay for Performance Stock Option Plan;
o approve and adopt the proposed amendments to Pointe's articles of
incorporation to increase the amount of authorized Common Stock from
100,000,000 shares to 200,000,000 shares;
o act on any other matter that may be properly come before the meeting or
any adjournment or postponement; and
o if necessary, approve any postponements or adjournments of the annual
meeting without further notice except by announcement at the meeting
being postponed or adjourned.
THE POINTE BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
RECOMMENDS THAT POINTE SHAREHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT. IN ADDITION, THE POINTE BOARD RECOMMENDS THAT POINTE SHAREHOLDERS
VOTE FOR THE SIX NOMINEES FOR DIRECTOR, APPROVAL OF THE STOCK OPTION PLANS AND
APPROVAL OF THE AMENDMENT TO THE ARTICLES OF INCORPORATION.
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM
The Pointe board of directors has fixed the close of business on April 17,
2000 as the record date for Pointe shareholders entitled to notice of and to
vote at the annual meeting. As of the record date, there were 52,152,426 shares
of Pointe common stock outstanding which were held by 254 holders of record and
approximately 3,027 beneficial owners, and an additional 36,783,667 shares of
common stock after conversion of preferred stock for voting purposes.
Shareholders are entitled to one vote for each share of Pointe common stock they
own, plus shares of common stock into which shares of preferred stock they own
are convertible.
A majority of the outstanding shares of Pointe stock issued and entitled to
vote at the annual meeting must be present in person or by proxy to establish a
quorum for business to be conducted at the annual meeting. The judge of voting
appointed for the annual meeting will determine whether or not a quorum is
present. Abstentions and "non-votes" are treated as shares that are present
and entitled to vote for purposes of determining the presence of a quorum.
"Non-votes" occur when a proxy:
o is returned by a broker or other shareholder who does not have authority
to vote;
o does not give authority to a proxy to vote; or
o withholds authority to vote on one or more proposals.
VOTES REQUIRED
Approval of the merger agreement and the amendment to Pointe's articles of
incorporation under Nevada law requires the affirmative vote of the holders of
record of at least a majority of the shares of Pointe capital stock outstanding
and entitled to vote on these matters at the annual meeting. The
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holders of preferred stock do not have the right to vote as separate classes on
any proposals at the annual meeting, including the proposal to adopt the merger
agreement.
All of the Pointe shareholders will vote together to elect six board
members, by a plurality of the votes cast at the meeting. This means that the
six candidates receiving the highest number of votes cast will be elected. The
Class A preferred shareholders are entitled to designate two members to the
board. Class B preferred shareholders are entitled to designate one board
member.
The IRS requires that any stock option plan that includes incentive stock
options be approved by the company's shareholders. Therefore, the approval of
holders of a majority of Pointe's capital stock entitled to vote and voting at
the annual meeting in person or by proxy is required to approve the adoption of
the stock option plans.
SHAREHOLDER VOTING AGREEMENT
Shareholders, including certain directors and executive officers, owning
approximately 59% of the issued and outstanding voting shares of Pointe capital
stock have entered into a voting agreement obligating such shareholders to vote
the shares held by them in favor of the approval of the merger and restricting
such shareholders from placing, or permitting any person under the shareholder's
control from placing, any Pointe capital stock in a voting trust inconsistent
with the terms of such voting agreement. In addition, shareholders may not sell
or transfer any of the shares covered by the agreement during the term of the
voting agreement. The agreement extends until the merger is completed or the
merger agreement is terminated.
VOTING OF PROXIES; EFFECT OF ABSTENTIONS AND NON-VOTES
All valid, unrevoked proxies will be voted as directed. In the absence of
instructions to the contrary, properly executed proxies will be voted in favor
of each of the proposals listed in the notice of annual meeting and for the
election of the six nominees for director set forth herein.
Votes cast in person or by proxy at the annual meeting will be tabulated at
the annual meeting. The following actions will have the effect of negative
votes, against adoption of the merger proposal and the proposal to amend the
articles of incorporation:
o the failure to submit a proxy or to vote at the annual meeting;
o an abstention; or
o a "non-vote."
For all proposals other than the merger proposal and the proposal to amend
the articles of incorporation, abstentions and non-votes ARE NOT included in
vote totals and have no effect on those votes.
If any matters other than those addressed on the proxy card are properly
presented for action at the annual meeting, the persons named in the proxy will
have the discretion to vote on those matters in their best judgment, unless
authorization is withheld.
HOW TO VOTE BY PROXY
Complete, sign, date and return the enclosed proxy card in the enclosed
envelope.
THE MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING ARE OF GREAT IMPORTANCE
TO POINTE SHAREHOLDERS. POINTE URGES YOU TO READ AND CAREFULLY CONSIDER THE
INFORMATION PRESENTED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, AND TO COMPLETE,
DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE.
REVOCABILITY OF PROXIES
Any Pointe shareholder who delivers a properly executed proxy may revoke
the proxy at any time before it is voted. Proxies may be revoked by (1)
delivering a written revocation of the proxy to the Pointe Secretary before the
annual meeting, (2) signing and returning a later dated proxy to the
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Pointe Secretary or (3) appearing at the annual meeting and voting in person.
Attendance at the annual meeting will not, in and of itself, constitute
revocation of a proxy. A Pointe shareholder whose shares are held in the name of
its broker, bank or other nominee must bring a legal proxy from its broker, bank
or other nominee to the meeting in order to vote in person.
DEADLINE FOR VOTING BY PROXY
Votes cast by mail must be received prior to the annual meeting to be
counted.
SOLICITATION OF PROXIES
Proxies will be solicited by mail. Proxies may also be solicited
personally, or by telephone, fax, or other means by the directors, officers and
employees of Pointe. Directors, officers and employees soliciting proxies will
receive no annual or extra compensation, but may be reimbursed for related out-
of-pocket expenses. In addition to solicitation by mail, Pointe will make
arrangements with brokerage houses and other custodians, nominees and
fiduciaries to send the proxy materials to beneficial owners. Pointe will, upon
request, reimburse these brokerage houses, custodians and other persons for
their reasonable out-of-pocket expenses in doing so. The cost of solicitation of
proxies will be paid by Pointe.
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PROPOSAL 1
THE MERGER
BACKGROUND OF THE MERGER
Combinations with complementary businesses have been core growth strategies
for both Pointe and Telscape. The management teams of Pointe and Telscape have
been familiar with each other for several years and the companies have conducted
business together. As part of their commercial relationship, management of
Pointe and Telscape have discussed the synergies of a merger from time to time.
The background leading up to the signing of the merger agreement is described
more fully below.
During early 1999, Stephen E. Raville, CEO of Pointe, and E. Scott Crist,
CEO of Telscape, held several telephonic conversations concerning the
possibility of a merger between Pointe and Telscape. Mr. Raville and Mr. Crist
discussed the advantages of a merger from a strategic, financial and operational
standpoint but were not able to reach an agreement with respect to the structure
of a merger.
On June 18, 1999, a meeting was held at Telscape's headquarters in Houston.
Mr. Raville, Mr. Crist, Manuel Landa, Chairman and Chief Operating Officer of
Telscape, and Todd Binet, President and CFO of Telscape, were present. The
principal purpose of the meeting was to discuss a proposed merger. The parties
once again reviewed the advantages of a merger from a strategic, financial and
operational standpoint but were not able to reach an agreement with respect to
the structure of a merger. Mr. Raville proposed that Credit Suisse First Boston,
investment banker to Pointe, evaluate a potential merger and the parties agreed
to maintain discussions.
On July 15, 1999, a meeting was held at Telscape's headquarters in Houston.
Mr. Raville, Mr. Crist, Mr. Landa, and Patrick Delaney, Chief Financial Officer
of Pointe, were present. The principal purpose of the meeting was to once again
discuss a merger of the two companies. The parties once again reviewed the
advantages of a merger from a strategic, financial and operational standpoint
but were not able to reach an agreement with respect to the structure of a
merger. The parties also updated each other with respect to financing
initiatives.
On October 26, 1999, a meeting was held at the offices of Credit Suisse
First Boston in New York City. Mr. Raville, Mr. Crist, Mr. Delaney, Mr. Landa,
Mr. Binet, Willie Lauterbach of Pointe and James Dorsey, a director of Pointe,
were present, together with representatives of Credit Suisse First Boston. The
parties once again reviewed the advantages of a merger from a strategic,
financial and operational standpoint but were not able to reach an agreement
with respect to the structure of a merger. The parties also updated each other
with respect to financing initiatives.
On November 23, 1999, a meeting was held at the offices of Mr. Raville in
Atlanta, Georgia. Mr. Raville, Mr. Delaney, Mr. Lauterbach, Mr. Dorsey, Mr.
Landa and Mr. Binet were present. Mr. Crist participated by telephone. Mr.
Robert Dyer, outside counsel to Pointe, also participated by phone. The parties
once again reviewed the advantages of a merger from a strategic, financial and
operational standpoint. The parties reached an understanding with respect to the
structure of a merger and signed a letter of intent, with the consummation of
the merger being subject to certain conditions being met, including negotiation
of a definitive agreement and board approval of both parties. The letter of
intent called for an exchange ratio of 0.23 of a share of Telscape common stock
for each share of Pointe common stock with provisions made for adjustment in the
event that either company's share price traded outside a certain range. The
letter of intent also provided that either party could terminate the merger if
the stock price traded outside of a specified range. For tax purposes, the
transaction was to be treated as a tax-free reorganization. For accounting
purposes, the transaction was to be treated as a purchase. The parties agreed to
proceed immediately with due diligence and agreed to have a definitive merger
agreement signed by mid-December. Pointe also agreed to provide a $1.5
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million bridge loan secured by shares of Telscape owned by certain directors.
This bridge loan was subsequently increased to $2.5 million.
Between November 28, 1999, and December 22, 1999, a series of meetings were
held at Telscape's offices in Houston, Texas, Sunnyvale, California and Mexico
City, Mexico and at Pointe's offices in Atlanta, Georgia, Los Angeles,
California and Houston, Texas between marketing, financial, operations and
technical executives of both companies for the purpose of conducting due
diligence.
On November 29, 1999, Pointe's board met to discuss the proposed merger.
Management gave a general summary of the letter of intent that had been signed
with Telscape. The Pointe board was informed that the exchange ratio was
tentatively established as 0.23 per share subject to change and that Stephen E.
Raville and Peter C. Alexander would remain in their current positions as
Chairman and CEO and President, respectively, of the combined company.
Additionally, the Pointe board was informed that the letter of intent called for
a $1.5 million loan from Pointe to Telscape. Further, the Pointe board concluded
that management would commence due diligence and report the results back to the
board.
From November 28, 1999 to December 22, 1999, members of the Telscape and
Pointe management teams, together with their respective legal advisors, held
extensive negotiations regarding the terms and conditions of the definitive
agreements relating to the proposed transaction. During this same period,
members of management of both companies had extensive discussions on the
organization of the combined companies and the integration plan for the merger.
On December 21, 1999, Pointe's board met to discuss the results of due
diligence. After presenting to the board the reports of Pointe's management,
accountants, and legal counsel, management noted that the merger would be
strategically beneficial to Pointe. The Pointe board resolved to recommend the
merger to Pointe's shareholders and authorized its officers to execute a
definitive merger agreement providing that the closing would be conditioned on
Telscape's reaching agreement with Lucent on revising its credit agreement and
increasing the total facility from $40 million to $60 million.
On December 22, 1999, Telscape's board met to discuss the proposed merger.
Management updated the board on the progress of the merger negotiations and
informed the board that the exchange ratio had been fixed at 0.215054 of a share
of Telscape common stock for each share of Pointe common stock with no
provisions for adjustment and that neither party would have the ability to
terminate the transaction based on the relative share prices. The board
unanimously approved the merger, the merger agreement and related documentation,
subject to satisfactory resolution of items relating to terms that remained
under negotiation in the merger agreement, as discussed at that meeting,
including receipt of a fairness opinion. The board agreed to engage Kaufman
Bros., L.P. to render a fairness opinion. The board authorized certain executive
officers to enter into a definitive merger agreement subject to receipt of a
fairness opinion.
From December 23, 1999 to December 31, 1999, members of the Telscape and
Pointe management teams, together with their respective legal advisors,
continued extensive negotiations regarding the terms and conditions of the
definitive agreements relating to the proposed transaction. During this same
period, members of management of both companies continued to discuss the
organization of the combined companies and the integration plan for the merger.
On December 31, 1999, Telscape held a board of directors meeting.
Management updated the board on the progress of the merger and the completion of
satisfactory due diligence. Present at the meeting were representatives of
Swidler Berlin Shereff Friedman L.L.P., outside counsel to Telscape. Kaufman
Bros. then delivered its oral opinion to the board that, as of November 23,
1999, the proposed share exchange ratio was fair from a financial point of view
to Telscape shareholders and committed to deliver a written opinion to that
effect. In their oral presentation, which was supported by a draft written
presentation, Kaufman Bros. set forth the assumptions made, matters considered
and limitations on the review undertaken in connection with the opinion.
Following those presentations,
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Telscape's board engaged in a discussion of the business, financial and legal
terms of the proposed merger, the strategic benefits of the combination, the
terms and conditions of the proposed merger agreement and the analyses and
opinion of Kaufmann Bros. Following the discussion, the Telscape board
unanimously approved the merger agreement and related agreements, and the
issuance of Telscape capital stock in the merger. The Telscape board resolved to
recommend the merger to the shareholders of Telscape and authorized its officers
to execute a definitive merger agreement on behalf of Telscape.
On December 31, 1999, Telscape and Pointe entered into a definitive merger
agreement. On January 4, 2000, Telscape and Pointe issued a joint press release
announcing the proposed business combination.
In March 2000, members of management teams from each of Telscape and Pointe
met via conference calls to discuss amending the definitive merger agreement to
adjust the exchange ratio. On March 30, 2000, Telscape and Pointe executed an
amended and restated merger agreement adjusting the exchange ratio to 0.223514
shares of Telscape common stock being exchanged for every one share of Pointe
common stock. The adjustment was the result of including the ownership in
Telecommute Solutions, Inc., a Pointe partially owned subsidiary, in the
combined company. The definitive merger agreement previously provided for
Telecommute to be spun off prior to the merger.
As a result of the change in the exchange ratio on April 17, 2000, the
Telscape board received a letter from Kaufman Bros. confirming the fairness of
the merger consideration including the updated exchange ratio as of December 31,
1999.
JOINT REASONS FOR THE MERGER; RECOMMENDATIONS OF BOARDS OF DIRECTORS
The Telscape and Pointe boards of directors unanimously concluded that the
merger and merger agreement were advisable and fair to, and in the best
interests of, the shareholders of their respective companies. They concluded
that the combined company following the merger would have the potential to
realize long-term improved operating and financial results and a stronger
competitive position. Potential mutual benefits identified by the boards of
directors include:
o the creation of a strong market position in the U.S. Hispanic and Latin
American communications market by combining Telscape's Mexican fiber
optic network and Pointe's U.S. Hispanic CLEC strategy and presence in
Central and South America, resulting in one of the few
telecommunications companies that will be able to operate in the U.S.
and parts of Latin America;
o the complementary business models and customer bases of Telscape and
Pointe, providing an opportunity to offer a broader range of
complementary products to both new and existing customers;
o the immediate Pan Latin American network reach of the combined company,
enhancing the ability to sell bundles of products and services across an
increased customer base;
o the increased capitalization of the combined company, allowing for
increased access to capital markets and potentially reducing the cost of
capital;
o the synergies of the combined company, including improved market
position through expanded product offerings, extended reach and expanded
network coverage;
o the potential cost savings from the elimination of network and human
resource redundancies; and
o the creation of a combined company with an experienced management team
with a significant Latin component that has the breadth and depth to
lead effectively and manage the combined company's growth.
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TELSCAPE'S REASONS FOR THE MERGER; RECOMMENDATIONS OF TELSCAPE'S BOARD OF
DIRECTORS
The board of directors of Telscape unanimously concluded that the merger
was advisable and fair to, and in the best interests of Telscape and its
shareholders and determined to recommend that the Telscape shareholders approve
the issuance of the shares of Telscape common stock and preferred stock in the
merger.
In addition to the reasons discussed above, Telscape's board of directors
reviewed a number of factors in evaluating the merger, including, but not
limited to, the following:
o historical information concerning Telscape's and Pointe's businesses,
financial performance and condition, operations, technology, networks,
market positions, products and management;
o Telscape's management's view of the financial condition, results of
operations and businesses of Telscape and Pointe before and after giving
effect to the merger and the Telscape board's determination of the
merger's effect on shareholder value;
o current financial market conditions and historical stock market prices,
volatility and trading information of Telscape common stock;
o Telscape would obtain a loan of $10 million from Pointe, which would
satisfy Telscape's immediate cash requirements;
o the opinion of Kaufman Bros. that, as of the date of its opinion, as
confirmed by the subsequent letter, and subject to the assumptions made,
matters considered and limitations of the review undertaken in
connection with the opinion, as set forth in the opinion, the share
exchange ratio in the merger was fair from a financial point of view to
Telscape shareholders;
o the belief that the proposed terms of the merger agreement were
reasonable;
o the expected impact of the merger on Telscape's customers and employees;
and
o results of the due diligence investigation of Pointe conducted by
Telscape's management, accountants and outside legal counsel.
The Telscape board of directors also identified and considered a number of
potentially negative factors in its deliberations concerning the merger,
including the following:
o the potential benefits of the merger that the directors had discussed
might not be realized fully, or within the time frame contemplated;
o the merger might not be consummated, which could have a negative effect
on Telscape's sales and operating results;
o key technical, marketing and management personnel might choose not to
remain employed by Telscape after the merger;
o the substantial charges that the combined company would incur in
connection with the merger, including the costs of integrating the two
companies' businesses and the transaction expenses;
o the combined company would experience negative cash flow potentially for
several quarters and possibly longer;
o the combined company would be substantially leveraged and would need to
raise additional capital in the near term;
o the possibility that the merger may not be consummated, even if approved
by Telscape's and Pointe's shareholders; and
o other applicable risks described in this joint proxy
statement/prospectus under "Risk Factors."
Telscape's board of directors concluded that, on balance, the merger's
potential benefits to Telscape and its shareholders outweighed the associated
risks. This discussion of the information and factors considered by Telscape's
board of directors is not intended to be exhaustive. In view of the variety of
factors considered in connection with its evaluation of the merger, Telscape's
board did not
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find it practicable to, and did not quantify or otherwise assign relative weight
to, the specific factors considered in reaching its determination.
For the reasons discussed above, Telscape's board of directors has
determined the merger agreement and the merger to be advisable and fair to, and
in the best interests of, Telscape's shareholders. In connection with the
merger, Telscape's board of directors unanimously recommends approval of the
issuance of shares of Telscape common stock and preferred as contemplated by the
merger agreement.
POINTE'S REASONS FOR THE MERGER; RECOMMENDATIONS OF POINTE'S BOARD OF DIRECTORS
The board of directors of Pointe unanimously concluded that the merger was
advisable and fair to, and in the best interests of, Pointe and its shareholders
and determined to recommend that the Pointe shareholders approve the merger and
the merger agreement.
In additon to the joint reasons for the merger described above, Pointe's
board of directors reviewed a number of factors in evaluating the merger,
including, but not limited to, the following:
o the historical and current financial condition, results of operations,
prospects and businesses of Pointe and Telscape before and after giving
effect to the merger. The Pointe board of directors determined that the
combined company would have greater growth and financial performance
opportunities than Pointe as a separate company;
o Telscape's license and fiber optic network in Mexico enhances Pointe's
strategy of providing a full range of telecommunications services in
both the U.S. and Latin America. Hispanics of Mexican descent comprise
fifty-nine percent of the Hispanic population in the U.S. making Mexico
the most important Latin American market for Pointe to have a physical
presence;
o the belief that growth in the prepaid calling card market, private line
and dedicated Internet access market and other telecommunications
markets in the U.S., Mexico and other Latin American countries would be
enhanced through the combination of the two companies;
o the potential of the combined companies to operate more efficiently by
gaining economies of scale and reducing duplicate overhead expenses;
o current market conditions and historic votality of the market prices for
Pointe common stock reflect significant volatility. The Pointe board
believes that the merger will provide Pointe shareholders with a more
stable market price and improved liquidity due to Telscape's listing on
the Nasdaq National Market;
o the belief that the increased capitalization of the combined company
would provide improved access to the capital markets than Pointe as a
separate company;
o the merger would combine two experienced management teams with
entrepreneurial cultures;
o the structure of the merger as a tax-free reorganization; and
o the results of the due diligence investigation of Telscape conducted by
Pointe's management, accountants and legal counsel.
The Pointe board of directors also identified and considered a number of
potentially negative factors in its deliberations concerning the merger
including the following:
o the potential benefits of the merger that the directors had discussed
might not be realized fully, or within the time frame contemplated;
o the combined company may not have the anticipated improved access to
capital markets requiring Pointe to fund Telscape's obligations as well
as its own;
o the majority of Telscape's operations, assets and prospects for future
growth are in Mexico, subjecting the company to potential losses as a
result of possible future political and economic instability in the
country;
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o key technical, marketing and management personnel might choose not to
remain employed by the combined company after the merger;
o the substantial charges that the combined company would incur in
connection with the merger, including the costs of integrating the two
companies' businesses and the transaction expenses;
o the combined company would experience negative cash flow potentially for
several quarters and possibly longer;
o the combined company would be substantially leveraged and would need to
raise additional capital in the near term;
o other applicable risks described in this joint proxy
statement/prospectus under "Risk Factors."
Pointe's board of directors concluded that, on balance, the merger's
potential benefits to Pointe and its shareholders outweighed the associated
risks. This discussion of the information and factors considered by Pointe's
board of directors is not intended to be exhaustive. In view of the variety of
factors considered in connection with its evaluation of the merger, Pointe's
board did not find it practicable to, and did not quantify or otherwise assign
relative weight to, the specific factors considered in reaching its
determination.
For the reasons discussed above, Pointe's board of directors has determined
the merger agreement and the merger to be advisable and fair to, and in the best
interests of, Pointe's shareholders. In connection with the merger, Pointe's
board of directors unanimously recommends that the Pointe shareholders approve
the merger agreement and the merger.
OPINION OF FINANCIAL ADVISOR TO TELSCAPE
Telscape has retained Kaufman Bros., to render its opinion as to the
fairness, from a financial point of view, to the shareholders of Telscape, of
the ratio relating to the exchange of shares of Telscape common stock for shares
of Pointe common stock.
Telscape selected Kaufman Bros. for a number of reasons including its
familiarity with Telscape and its experience and reputation in the area of
valuation and financial advice particularly in relation to transactions of the
size and nature of the proposed merger. Kaufman Bros. is a New York based
investment banking firm which is regularly engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
leveraged buyouts, negotiated underwriting, private placements and valuations
for corporate and other purposes. From time to time, Kaufman Bros. may hold long
or short positions in Telscape and/or Pointe common stock.
On December 30, 1999 Kaufman Bros. rendered its opinion orally to
Telscape's board of directors and subsequently confirmed its opinion in writing
to the effect that, based upon and subject to the considerations and limitations
set forth in such opinion, as of December 30, 1999, the exchange ratio was fair,
from a financial point of view, to the shareholders of Telscape.
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 delivered
by Kaufman Bros. to the Telscape board dated December 30, 1999, which sets forth
fully the assumptions made, general procedures followed, matters considered and
limits on the scope of review undertaken, is included as Annex C to this joint
proxy statement/prospectus. Holders of Telscape common stock are urged to read
the Kaufman Bros. opinion carefully and in its entirety.
In conducting its investigation and analysis and in arriving at its
opinion, Kaufman Bros. reviewed the information and took into account the
financial and economic factors as it deemed relevant and material under the
circumstances. In connection with its analysis Kaufman Bros. undertook in its
analysis were as follows:
o Reviewed internal financial information concerning the business and
operations of Telscape and Pointe furnished to Kaufman Bros. for
purposes of its analysis, as well as publicly
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available information including but not limited to Telscape's and
Pointe's recent filings with the SEC;
o Reviewed the merger agreement in the form presented to Telscape's board;
o Compared the historical market prices and trading activity of Telscape
common stock and Pointe common stock with those of other publicly traded
companies that Kaufman Bros. deemed reasonably comparable;
o Compared the financial position and operating results of Telscape and
Pointe with those of other publicly traded companies Kaufman Bros.
deemed reasonably comparable;
o Compared the proposed financial terms of the merger with the financial
terms of other business combinations Kaufman Bros. deemed reasonably
comparable to the proposed merger; and
o Held discussion with members of Telscape's and Pointe's respective
senior management concerning Telscape's and Pointe's historical and
current financial condition and operating results and future prospects.
Telscape did not place any limitation upon Kaufman Bros. with respect to
the procedures to be followed or factors considered in rendering its opinion.
In arriving at its opinion, Kaufman Bros. assumed and relied upon the
accuracy and completeness of all of the financial and other information provided
to it by or on behalf of Telscape and Pointe, or publicly available and did not
independently verify that information. Kaufman Bros. assumed, with Telscape's
consent, that:
o All material asset and liabilities (contingent or otherwise, known or
unknown) of Telscape and Pointe are as set forth in their respective
financial statements;
o Obtaining all regulatory and other approvals and third party consents
required for consummation of the merger would not have a material effect
on the anticipated benefits of the merger; and
o The merger will be consummated in accordance with the terms set forth in
the merger agreement, without any amendment thereto and without waiver
by Telscape or Pointe of any of the conditions to their respective
obligations thereunder.
Kaufman Bros. assumed that the financial forecasts it examined were
reasonably prepared based upon the best available estimates and good faith
judgments of Telscape's and Pointe's respective senior management as to future
performance of Telscape and Pointe. In conducting its review, Kaufman Bros. did
not obtain an independent evaluation or appraisal of any of the assets or
liabilities (contingent or otherwise) of Telscape or Pointe. However, all
financial projections prepared by Pointe were reviewed by the senior management
of Telscape. Kaufman Bros.' opinion did not predict or take into account any
possible economic, monetary or other changes which may occur, or information
which may become available, after the date of the opinion. Furthermore, Kaufman
Bros. expressed no opinion as to the price or trading range at which any of
Telscape's or Pointe's securities (including Telscape common stock and Pointe
common stock) will trade following the date of the opinion.
The following is a summary of the material financial analyses performed by
Kaufman Bros. in connection with rendering opinion.
ANALYSIS OF SELECTED COMPARABLE ACQUISITION TRANSACTIONS
Kaufman Bros. reviewed seven selected acquisition transactions which were
consummated in calendar years 1998 and 1999. The transactions were chosen based
on a review of acquired companies that possessed general business, operating and
financial characteristics representative of companies in the industry in which
Telscape and Pointe operate. Kaufman Bros. noted that none of the selected
transactions reviewed was identical to the merger and that, accordingly, the
analysis of comparable transactions necessarily involves complex consideration
and judgments concerning differences in
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financial and operating characteristics of Telscape and Pointe and other factors
that would affect the acquisition value of comparable transactions including,
among others, the general market conditions prevailing in the equity capital
markets at the time of such transactions.
For each comparable transaction, Kaufman Bros. calculated multiples of
enterprise value of the acquired company to annualized revenues and enterprise
value to property, plant and equipment ("PP&E"). The enterprise value for the
acquired companies was obtained as of the date of the closing of the respective
transaction. The annualized revenues and balance sheet data were based upon the
most recent quarterly publicly available information prior to the closing of the
respective transaction. Kaufman Bros. then compared these multiples to the
relevant Telscape acquisition multiples. The enterprise value for Telscape was
based on an implied equity value of $9.30 (determined by taking Pointe's closing
stock price on December 28, 1999 divided by the exchange ratio). The annualized
revenue and balance sheet data items for Telscape were based upon reported
September 30, 1999 figures.
Based on these analyses:
o The multiple of enterprise value to annualized revenues is 1.0x. This
compares to the median multiple for the selected acquisition
transactions of 1.9x; and.
o The multiple of enterprise value to PP&E is 2.0x. This compares to the
median multiple for the selected acquisition transactions of 3.8x;
Kaufman Bros. also calculated the acquisition premiums paid in selected
transactions (as of the day of transaction announcement) by the acquiring
company over the common stock value of the target company at one day, one week
and four weeks prior to the announcement of such transactions. Based upon this
analysis;
o The implied equity value of Telscape's common stock on November 30, 1999
of $9.30 (determined by taking Pointe's closing stock price on November
30, 1999 divided by the Exchange Ratio) represents a 35.3% premium, a
2.1% discount and 1.5% discount over Telscape's closing stock price four
weeks, one week and one day, respectively, prior to the announcement.
o The median premium over the four-weeks-prior stock price in the selected
transactions was 49.2% with the high being a premium of 76.0% and the
low being a discount of 30.8%.
o The median premium over the one-week-prior stock price in the selected
transactions was 40.8% with the high being a premium of 72.4% and the
low being a discount of 32.3%; and
o The median premium over the one-day-prior stock price in selected
transactions was 35.1% with the high being a premium of 55.6% and the
low being a discount of 30.3%.
ANALYSIS OF VALUATION PREMIUMS
Kaufman Bros. performed analysis of valuation premiums based on Telscape's
and Pointe's respective stock prices on one day, one week and four weeks prior
to the public announcement of the merger on December 1, 1999.
o On November 3, 1999 Telscape's closing stock price was $6.88 per share
and Pointe's closing stock price was $2.00. This date was four weeks
prior to the public announcement of the merger on December 1, 1999.
Based on the exchange ratio, the implied equity value of $9.30 per
Telscape share on such date (determined by taking Pointe's closing stock
price on such date divided by the exchange ratio) represented a premium
of 35.30%.
o On November 24, 1999 Telscape's closing stock price was $9.50 per share
and Pointe's closing stock price was $2.00. This date was one week prior
to the public announcement of the merger. The implied equity value of
$9.30 on such date was very close to Telscape's closing stock price.
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o On November 30, 1999 Telscape's closing stock price was $9.44 per share
and Pointe's closing price was $2.00. This date was one day prior to the
public announcement of the merger. The implied equity value of $9.30 on
such date was very close to Telscape's closing stock price.
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 December 28,
1999 for the following 24 publicly traded companies, seven of which are emerging
multinational carriers ("EMCs"), seven of which are network providers and ten
of which are competitive local exchange carriers ("CLECs") that Kaufman Bros.
deemed reasonably comparable to Telscape:
<TABLE>
<CAPTION>
EMCs Network Providers CLECs
<S> <C> <C>
1. IDT Corporation 1. Cap Rock Communications 1. Allegiance Telecommunications
2. Pacific Gateway 2. Global Telesystem Group 2. VSLEC Corporation
3. Primus Telecommunications 3. Level 3 Communications 3. Focal Communications
4. RSL Communications 4. Metro-Media Fiber Networks 4. McLeodUSA Inc
5. Startec Global Communications 5. Northeast Optic Networks 5. MGC Communications
6. Star Telecommunications 6. Viatel Inc 6. Electric Lightwave Inc
7. World Access 7. ITCDeltaCom Inc 7. e.spire Communications
8. GST Telecommunications
</TABLE>
Kaufmann Bros. noted that none of the selected companies is directly
comparable to Telscape.
For each comparable company, Kaufman Bros. calculated multiples of
enterprise value to annualized revenues, annualized operating income before
depreciation, amortization, interest and taxes ("EBITDA"), net Plant, Property
and Equipment ("PP&E") and stockholder equity based on the closing prices as
of December 28, 1999. Kaufman Bros. then compared these multiples to the similar
Telscape multiples based on the implied equity price as of December 31, 1999 of
$9.30 per share, with the following results:
o The multiple of Telscape's implied enterprise value to annualized
revenue is 1.0x compared to the median multiple of the selected EMC
companies of 1.0x;
o The multiple of Telscape's implied enterprise value to PP&E is 2.0x
compared to the median multiple of the selected EMC companies of 4.3x;
o The multiple of Telscape's implied enterprise value to stockholders
equity is 3.4x compared to the median multiple of comparable EMC
companies of 1.4x;
o The multiple of Telscape's implied enterprise value to annualized EBITDA
was a negative number due the loss realized by both companies during the
last reported quarter.
DISCOUNTED CASH FLOW ANALYSIS
Kaufman Bros. performed a discounted cash flow analysis of Telscape on a
stand alone basis using Telscape management's projections through 2004. In such
analysis, Kaufman Bros. assumed terminal value of free cash flow in 2004 with
the perpetual annual growth of 10% and discount rates of 20% to 35%. Selection
of an appropriate discount rates is an inherently subjective process and is
affected by numerous factors. The discount rates used by Kaufman Bros. were
selected based upon Telscape's recent historical financial results, current
financial condition and the risk associated with Telscape achieving its
financial projections. This range of discount rates also reflects an estimate of
the cost of capital that Telscape would incur based upon the achievement of its
financial projections and the current valuation parameters for comparable public
companies. Such analysis produced present values of Telscape common stock
ranging from $5.62 to $28.55 per share. Kaufman Bros. compared the range of
prices to the implied equity value per share of $9.30 as of December 28, 1999.
Kaufman Bros. performed a discounted cash flow analysis of Pointe, on a
stand-alone basis using Pointe management's projections through 2004. In such
analysis, Kaufman Bros. assumed terminal
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value of free cash flow in the year 2004 with the perpetual annual growth of 10%
and discount rates of 16% to 25%. This analysis produced present values per
share for Pointe common stock ranging from $2.42 to $7.79. Kaufman Bros. then
compared these values to Pointe's closing stock price of $2.00 as of December
28, 1999.
Kaufman Bros. also performed a discounted cash flow analysis of the merged
company on a pro forma combined basis and compared the resulting values to those
of Telscape on a stand-alone basis. In this analysis, Kaufman Bros. assumed
terminal value of free cash flow in the year 2004 with the annual perpetual
growth of 10% and discount rates of 16% to 25%.This analysis produced present
values per share for the merged company's common stock on a pro forma combined
basis ranging from $9.24 to $33.85. The higher DCF valuations are a function of
expected cost synergies resulting from economies of scale coupled with an
estimated lower cost of capital as a combined entity.
IMPLIED HISTORICAL EXCHANGE RATIO ANALYSIS
Kaufman Bros. reviewed the daily closing prices of Telscape common stock
and Pointe common stock for the period of from December 1, 1998 through December
1, 1999. The following chart presents these historical share prices:
[HISTORICAL STOCK PRICES O0F TSCP AND PCOM GRAPH]
Kaufman Bros. derived implied historical exchange ratios for the Telscape
common stock and the Pointe common stock by dividing the closing price per share
of Telscape common stock by the closing price per share of Pointe common stock
for each trading day in the calendar period from December 1, 1998 through
December 1, 1999. This analysis yielded an average implied historical exchange
ratio of 4.28-to-1.00, compared to the actual 4.65-to-1.00 exchange ratio.
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CONFIDENTIAL, FOR USE FO THE COMMISSION ONLY
[IMPLIED HISTORICAL RATIO OF DAILY SHARE PRICES GRAPH]
CONTRIBUTION ANALYSIS
Kaufman Bros. analyzed Telscape's and Pointe's relative contribution to the
combined company with respect to certain measurements, including net sales and
EBITDA. As a result of the merger, holders of Telscape's common stock will own
approximately 36% of the pro forma combined company fully diluted shares.
o Telscape is anticipated to contribute (based on information provided to
Kaufman Bros. by Telscape and Pointe) 67% of the combined sales in
calendar 1999, 56% in 2000, 53% in 2001, 46% in 2002, 43% in 2003 and
43% in 2004. Telscape's contribution to combined EBITDA would be 60% in
2001, 40% in 2002, 50% in 2003 and 38% in 2004. The calculation for
calendar years 1999 and 2000 are not meaningful.
ANALYSIS OF COMBINED COMPANIES
The proforma combined balance sheet of Telscape and Pointe as of September
30, 1999 (assuming no merger related adjustments), would have approximately
$37.2 million in cash, approximately 32.106 million common shares outstanding
and $64.5 million of debt. Shareholders' equity would be approximately $58.3
million, or $1.82 per fully diluted share, compared to Telscape's shareholders'
equity of $31.5 million or $1.53 per fully diluted share as of September 30,
1999.
The foregoing summary does not purport to be a complete description of the
analyses performed by Kaufman Bros. The preparation of a fairness opinion is a
complex process and is not susceptible to partial analysis or summary
description. Kaufman Bros. believes that its analyses must be considered as a
whole, and that selecting portions of such analyses without considering all
analyses and factors, would create an incomplete view of the processes
underlying its opinion. Kaufman Bros. did not attempt to assign specific weights
to particular analyses. Any estimates contained in Kaufman Bros. analyses are
not necessarily indicative of actual values, which may be significantly more or
less favorable than as set forth therein. Estimates of values of companies do
not purport to be appraisals or necessarily to reflect the prices at which
companies may actually be sold. Because such estimates are inherently subject to
uncertainty, Kaufman Bros. does not assume responsibility for their accuracy.
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UPDATE OF OPINION
On March 30, 2000, Telscape, the acquisition subsidiary and Pointe entered
into an Amended and Restated Merger Agreement, effective as of December 31,
1999. The amended and restated merger agreement effected a change in the
exchange ratio resulting from a decision by Pointe not to spin off a partially
owned subsidiary, Telecommute Solutions, Inc., to Pointe's shareholders prior to
the merger as had been contemplated by the original merger agreement. The
amended and restated merger agreement provides, among other things, that, upon
the closing of the merger, each outstanding share of PointeCom common stock
(other than shares held in treasury) will be converted into 0.223514 shares of
Telscape common stock.
In light of this change, Kaufman Bros. rendered an update of its opinion to
Telscape's board on April 17, 2000, to the effect that, based upon and subject
to the considerations and limitations set forth in such opinion, as of December
31, 1999, the revised exchange ratio of 0.223514 was fair, from a financial
point of view, to the shareholders of Telscape and Pointe.
COMPENSATION
Pursuant to the engagement letter dated September 22, 1999, to date,
Kaufman Bros. has been paid $100,000 by Telscape in connection with the opinion
and will receive an additional $200,000 upon closing of the merger. Telscape has
also agreed to reimburse Kaufman Bros. for reasonable out-of-pocket expenses
incurred by Kaufman Bros. 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.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
This section summarizes material U.S. federal income tax considerations
relevant to the merger that apply to the Pointe shareholders. This discussion is
based on existing provisions of the Internal Revenue Code of 1986, as amended,
existing Treasury regulations and current administrative rulings and court
decisions, all of which are subject to change. Any change, which may or may not
be retroactive, could alter the tax consequences of the merger to you. The
Internal Revenue Service may adopt a contrary position.
We do not discuss all U.S. federal income tax considerations that may be
relevant to you in light of your particular circumstances. Factors that could
alter the tax consequences of the merger to you include:
o if you are a dealer in securities;
o if you are a tax-exempt organization;
o if you are subject to the alternative minimum tax provisions of the
Internal Revenue Code;
o if you are a foreign person or entity;
o if you are a financial institution or insurance company;
o if you do not hold your shares as capital assets;
o if you hold your shares as part of an integrated investment, including a
"straddle"; and
o if you hold shares subject to the constructive sale provisions of
Section 1259 of the Internal Revenue Code.
In addition, we do not discuss the tax consequences of the reorganization
under foreign, state or local tax laws, the tax consequences of transactions
effectuated prior or subsequent to, or concurrently with, the merger, whether or
not any of the transactions are undertaken in connection with the
reorganization. Accordingly, we urge you to consult your own tax advisors as to
the specific consequences to you of the merger.
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TAX OPINION. Arthur Andersen LLP, is of the opinion that the merger of
Pointe with Pointe Acquisition Corp., the wholly owned subsidiary of Telscape,
should be a "reorganization" for U.S. federal income tax purposes within the
meaning of section 368(a) of the Internal Revenue Code. Therefore, subject to
the limitations and qualifications described below:
o No gain or loss should be recognized by the Common and Preferred
stockholders of Pointe as a result of the exchange of Pointe voting
Common Stock and Pointe voting Preferred Stock solely for Telscape
Common Stock and Telscape Preferred Stock pursuant to the merger, except
that gain, loss or dividend income should be recognized on the receipt
of cash, if any, received in lieu of fractional shares.
o No gain or loss should be recognized by the holder of a Pointe warrant
as a result of the exchange of such Pointe warrant for a Telscape
warrant pursuant to the merger.
o No gain or loss should be recognized by the holder of a Pointe incentive
stock option as a result of the exchange of the Pointe incentive stock
option for a Telscape incentive stock option pursuant to the merger. The
granting of any substitute Telscape stock option to a holder of a Pointe
incentive stock option, under the Pointe Stock Option Plans, pursuant to
the merger under the provisions discussed above, should not be deemed a
"modification" of any Pointe existing incentive stock option.
o No gain or loss should be recognized by the holder of a Pointe
non-qualified stock option or warrant issued as compensation for
services as a result of the exchange of the Pointe nonqualified stock
option or warrant issued as compensation for services for a Telscape
nonqualified stock option pursuant to the merger.
o The tax basis of the Telscape Common Stock and Telscape Preferred Stock
received by Pointe Common and Preferred stockholders should be the same
as the basis of the Pointe Common Stock and Pointe Preferred Stock
surrendered in the exchange, decreased by the amount of basis allocated
to the fractional shares that are hypothetically received by the
stockholder and redeemed for cash.
o The holding period of the Telscape Common Stock and Telscape Preferred
Stock received by the Pointe common and preferred stockholders should
include the period during which the Pointe Common Stock and Pointe
Preferred Stock surrendered in exchange therefor was held, provided that
the Pointe Common Stock and Pointe Preferred stock is held as a capital
asset in the hands of the Pointe stockholders at the Effective Time.
o The payment of cash in lieu of fractional share interests of Telscape
Common Stock should be treated as if each fractional share was
distributed as part of the exchange and then redeemed by Telscape. The
cash payment should be treated as having been received in redemption of
the Telscape fractional share interest in the Telscape Common Stock
deemed to have been received, provided the redemption is not essentially
equivalent to a dividend under Section 302. Any gain or loss recognized
upon such exchange should be capital gain or loss provided the
fractional share would constitute a capital asset in the hands of the
exchanging stockholder.
o No gain or loss should be recognized by Telscape, Pointe Acquisition
Corp., or Pointe on the merger of Pointe Acquisition Corp. into Pointe
and the exchange of Pointe Common Stock and Pointe Preferred Stock
solely for voting Telscape Common Stock and voting Telscape Preferred
Stock pursuant to the plan of reorganization.
o Gain, if any, (but not loss other than in certain cases) should be
recognized by Pointe stockholders where cash is received for Pointe
shares in connection with dissenters' rights under state law pursuant to
the merger. The tax consequences for Pointe stockholders who receive
cash with respect to their dissenters' rights must be determined on a
stockholder-by-stockholder basis taking into account certain complex
attribution rules. For this reason, it is not possible for us to
conclude as to the specific tax consequences to any particular
stockholder. Therefore, such stockholders should consult their own tax
advisors as to the proper treatment and character of any such gain.
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Neither Pointe nor Telscape has requested a ruling from the Internal
Revenue Service with regard to any of the federal income tax consequences of the
merger. The opinions described above do not bind the Internal Revenue Service
nor preclude it from adopting a contrary position. These opinions are subject to
qualifications, are conditioned upon assumptions and are based upon factual
representations made to Arthur Andersen LLP by the parties to the merger
agreement. The opinions may not be relied upon if these factual representations
are incorrect or incomplete.
BACKUP WITHHOLDING. Cash payments to a Pointe shareholder in connection
with the merger may be subject to 31% "backup withholding" unless the
shareholder provides its taxpayer identification number or social security
number and certifies that the number is correct or properly certifies that it
has applied for and is awaiting a number. Certain shareholders (including, among
others, all corporations and certain foreign individuals) are not subject to
these backup withholding and certain other reporting requirements. If, however,
backup withholding applies, Telscape is required to withhold 31% of any cash
payments made pursuant to the merger. Backup withholding is not an additional
tax, but rather it is an advance tax payment that is subject to refund if it
results in an overpayment of tax. Certain penalties apply for failure to furnish
correct information and for failure to include reportable payments in income.
The tax consequences of the merger may vary depending upon the particular
circumstances of each Pointe shareholder. Accordingly, the shareholders of
Pointe are urged to consult their own tax advisors as to the specific tax
consequences to them of the merger, including the applicability and effect of
state, local, and foreign tax laws.
CREDIT FACILITIES
Telscape and its subsidiaries signed a credit agreement on August 27, 1999
with Lucent Technologies for funding of up to $40 million in long-term notes.
The term of the notes is 5 years from the date of closing and calls for interest
rates ranging from 5.75 to 7.25% over a defined base rate. The credit agreement
contains several financial covenants including minimum EBITDA, debt to equity
ratios and several others. Telscape does not expect to be in compliance with all
of the covenants and has secured a waiver from Lucent for non-compliance on
various covenants for periods through June 15, 2000.
The credit agreement also calls for Lucent to provide its express consent
approving any change of control in Telscape. Lucent has delivered its consent
for the merger and funded an additional $16.1 million under the agreement on
April 20, 2000.
In early February 2000 Lucent delivered to Telscape an offer of commitment
for an additional $20 million in long term financing together with an offer to
re-negotiate the financial covenants contained in the initial credit agreement.
As of the date of this filing, certain items in the $20 million commitment offer
are still under negotiation.
Telscape signed a financing agreement for $7.0 million in January 1999 with
a finance company. As of the date of this filing, Telscape has drawn on $5.6
million of this facility and does not plan on drawing any additional amounts.
Telscape was in default of certain financial covenants stipulated in the
financing agreement for the three months ending September 30, 1999, for which
Telscape obtained a waiver from the finance company. Telscape was in default of
financial covenants for the three months ending December 31, 1999 and has
secured waivers from the finance company covering this period. Telscape
anticipates that the finance company will consent to the merger with Pointe and
is in the process of renegotiating the financial covenants contained in the
original financing agreement with Telscape.
DISSENTER'S AND APPRAISAL RIGHTS
Pointe shareholders are entitled to dissenters rights in the proposed
merger under Nevada Revised Statutes ("NRS") 92A.300 - 92A.500. A copy of the
statute is attached to this joint proxy statement/prospectus as Annex C. Pointe
shareholders who are considering exercising dissenters rights should review NRS
92A.300 - 92A.500 carefully, particularly the steps required to perfect
dissenters rights. No provision under Nevada law provides a shareholder the
right to later withdraw a dissent and demand for payment. Set forth below is a
summary of the steps to be taken by a holder of record to
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exercise the right to appraisal. This summary should be read in conjunction with
the full text of NRS 92A.410 to 92A.480.
Under Nevada Revised Statute 92A.380, shareholders may dissent from some
corporate actions and the corporation must buy their shares. Shareholders may
dissent if a corporation wants to merge with another corporation.
To exercise your right to dissent:
o before the vote is taken, you must deliver written notice to the Pointe
Secretary stating that you intend to demand payment for your shares if
the merger with Telscape is completed; and
o you must NOT vote your shares in favor of the Merger either by proxy or
in person.
If you send written notice of your intent to dissent before the vote on the
Merger, Pointe must send you a written dissenter's notice within 10 days after
the merger is effective telling you:
o where your demand for payment must be sent and where your stock
certificates must be deposited;
o what happens if you own shares but do not have the stock certificate;
and
o the date by which Pointe must receive the demand form, which must be
between 30 and 60 days after notice delivery,
and providing you:
o a form to demand payment, including the date by which you must have
acquired beneficial ownership of your shares in order to dissent; and
o the applicable sections of the Nevada Revised Statutes.
YOUR FAILURE TO DEMAND PAYMENT IN THE PROPER FORM OR DEPOSIT YOUR
CERTIFICATES AS DESCRIBED IN THE DISSENTER'S NOTICE WILL TERMINATE YOUR RIGHT TO
RECEIVE PAYMENT FOR YOUR SHARES. YOUR RIGHTS AS A SHAREHOLDER WILL CONTINUE
UNTIL THOSE RIGHTS ARE CANCELED OR MODIFIED BY THE COMPLETION OF THE MERGER.
Within 30 days of receipt of a properly executed demand for payment, Pointe
must pay you what it determines to be the fair market value for your shares.
Payment must be accompanied by specific financial records of Pointe, a statement
of Pointe's fair value estimate, information regarding you right to challenge
the fair value estimate, and copies of relevant portions of the Nevada Revised
Statutes.
Within 30 days from the receipt of the fair value payment, you may notify
Pointe in writing of your own fair value estimate and demand the difference.
Failure to demand the difference within 30 days of receipt of payment terminates
your right to challenge Pointe's calculation of fair value.
If we cannot agree on fair market value within 60 days after Pointe
receives a shareholder demand, Pointe must commence legal action seeking court
determination of fair market value. If Pointe fails to commence a legal action
within the 60 day period, it must pay each dissenter whose demand remains
unsettled the amount they demanded. Proceedings instituted by Pointe will be in
the district court in Carson City, Nevada. Costs of legal action will be
assessed against Pointe, unless the court finds that the dissenters acted
arbitrarily, in which case costs will be equitably distributed. Attorneys fees
may be divided in the court's discretion among the parties.
ACCOUNTING TREATMENT
It is anticipated that the merger will be accounted for as a purchase
business combination with Pointe treated as the acquiror. The assets and
liabilities of Telscape will be recorded at fair value with the excess of the
purchase price over the fair value of assets and liabilities acquired recorded
as goodwill. The allocation of the purchase price in the merger is expected to
result in approximately $211.3 million of goodwill and other intangibles.
Pointe and Telscape will be treated as separate entities for periods prior
to closing the merger, and thereafter, the consolidated financial statements
will include the accounts of both entities.
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OFFICERS AND DIRECTORS OF THE COMBINED COMPANY FOLLOWING THE MERGER
Following the completion of the merger, the combined company's board of
directors will consist of nine persons, three of whom will be selected by
Telscape and six of whom will be selected by Pointe. Of the proposed directors,
Messrs. Raville, Schmidt, Lee, Thompson, Bizri, and O'Reilly are designees of
Pointe and Messrs. Landa, Crist and Fields are designees of Telscape. The term
of each director of the combined company will be for a term of one year and
until their successor has been elected and qualified. If the merger is not
approved, the directors of Pointe and Telscape will be the persons elected at
the annual meetings of each such company as set forth elsewhere in this joint
proxy statement/prospectus. As all the persons proposed to become directors and
officers of the combined company are presently officers or directors of either
Pointe or Telscape, the biographies of the persons listed below may be found
under the captions "Pointe's Management" and "Telscape's Management"
elsewhere in this proxy statement/prospectus.
NAME AGE POSITION IN THE COMBINED COMPANY
- -------------------------- --- ----------------------------------------------
Stephen E. Raville........ 52 Chairman of the Board; Chief Executive Officer
Peter C. Alexander........ 43 President and Chief Operating Officer
Richard P. Halevy......... 33 Chief Financial Officer
Manuel Landa.............. 39 President, Advanced Services; Director
Ruben Garcia.............. 47 President, Integrated Services
Jesse E. Morris........... 32 President, Long Distance Services
Gerald F. Schmidt......... 59 Director
David C. Lee.............. 34 Director
Darryl B. Thompson........ 38 Director
Rafic A. Bizri............ 51 Director
William P. O'Reilly....... 54 Director
E. Scott Crist............ 35 Director
Jack M. Fields, Jr........ 48 Director
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WARRANTS AND OPTIONS OF POINTE
The outstanding warrants and options of Pointe will be exchanged for
Telscape warrants and options pursuant to the merger and will be exercisable to
purchase shares of Telscape common stock pursuant to the new option plans which
have been adopted by Telscape's board. The exercise price and number of shares
will be adjusted to address the conversion of Pointe common stock to Telscape
common stock. The descriptions of the new option plans are contained in Telscape
Proposals 4 through 8 of this joint proxy statement/prospectus.
INTERESTS OF OFFICERS AND DIRECTORS IN THE MERGER
In considering the recommendations of the Telscape board and the Pointe
board with respect to the merger, shareholders of Telscape and Pointe should be
aware that officers and directors of Telscape and Pointe may have interests in
the merger that are different from, or in addition to, their interests as
shareholders of Telscape and Pointe generally. The Telscape board and the Pointe
board were aware of such interests and considered them, among other matters, in
approving the merger agreement and the transactions contemplated by the merger
agreement.
TELSCAPE
Upon completion of the merger, options to purchase Telscape common stock
held by certain officers and directors will be accelerated to vest automatically
upon the change of control after the issuance of Telscape's common stock and
preferred stock in connection with the merger. Todd M. Binet, Telscape's
President, Chief Financial Officer, and a director, will automatically vest for
the option to purchase 27,773 shares of common stock at $7.50 per share. Paul
Freudenthaler, Telscape's Chief Accounting Officer, will automatically vest for
the option to purchase 12,500 shares of common stock at $7.06 per share. Jesse
Morris, Telscape's Vice President of Strategic Planning, will automatically vest
for the option to purchase 30,000 shares of common stock at $10.25 per share,
5,555 shares of common stock at $7.50 per share, and 20,000 shares of common
stock at $8.88 per share.
POINTE
Telscape and Pointe have agreed that the Telscape board of directors, at
the completion of the merger, will consist of nine members, six of whom will
initially be designated by Pointe from among the existing directors of Pointe.
Ownership of Pointe Capital Stock; Warrants; Stock Options and Convertible
Debentures
As of March 31, 2000, directors and executive officers of Pointe
beneficially owned an aggregate of:
o 13,756,871 shares of common stock or 11.65% of the then outstanding
common stock and exercisable common stock equivalents; and
o 35,982,839 shares of common stock underlying Class A & B Senior
Convertible Preferred Stock or 29.68% of the then outstanding common
stock and exercisable common stock equivalents; and
o 21,326,170 shares of common stock underlying warrants or 17.59% of the
then outstanding common stock and exercisable common stock equivalents;
and
o 575,000 shares of common stock underlying exercisable options or 0.47%
of the then outstanding common stock and exercisable common stock
equivalents; and
o 291,667 shares of common stock underlying convertible debentures or
0.24% of the then outstanding common stock and exercisable common stock
equivalents; and
o 71,932,547 shares or 59.34% of total common stock and exercisable common
stock equivalents.
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The interests of the directors and executive officers listed above
represent 49,759,710 shares (including the 35,982,839 shares underlying the
Preferred Stock) or 55.9% of the shares eligible to vote. The above interests of
the directors and executive officers will not be enhanced or accelerated by the
merger. Pointe's stock option plans provide that options outstanding for a year
at the time of a change of control become immediately vested. However, Pointe
directors will comprise two-thirds of the post-merger board of directors and
Pointe shareholders are expected to hold approximately two-thirds of the
outstanding common stock and exercisable common stock equivalents meaning Pointe
will have control of the company post-merger. Therefore, accelerated vesting of
options is not expected to occur.
The aggregate number of shares of Telscape common stock and exercisable
common stock equivalents which the Pointe directors and executive officers will
hold will be 16,077,931 representing the 71,932,547 shares of Pointe common
stock and exercisable common stock equivalents multiplied by the exchange ratio
of 0.223514.
Pointe director James H. Dorsey has an interest in a $1.5 million loan
obligation owed by Telscape which is independent of and not conditioned on the
merger. Mr. Dorsey's interest in the loan is in connection with a loan
transaction between Telscape and Lennox Invest Ltd., as described in
"Telscape's Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE
Under the merger agreement, Telscape has agreed that it will assume the
same obligations with respect to indemnification of directors or officers of
Pointe or its subsidiaries as were contained in the articles of incorporation or
bylaws of Pointe or its subsidiaries and any indemnification or other agreements
at the date of signing the merger agreement for a period of six years following
the merger.
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THE MERGER AGREEMENT
This section is a summary of the material terms of the merger agreement, a
copy of which is attached as Annex A to this document. The following description
is not a complete description of the merger agreement and is qualified by
reference to the merger agreement. We encourage you to read the full text of the
merger agreement for details of the merger and the terms and conditions of the
merger agreement.
THE MERGER
Pointe Acquisition, Telscape's wholly owned subsidiary formed for the sole
purpose of effecting the merger, will be merged with and into Pointe, which will
be the surviving company. The merger will occur following the approval of the
merger by the Telscape shareholders and Pointe shareholders and the satisfaction
of other conditions to the merger. The holders of Pointe common stock will
become holders of Telscape common stock in the merger.
TIMING OF CLOSING
If the merger agreement is approved by the shareholders, the merger closing
will take place no later than the third business day after the approval,
provided that all other conditions to the closing have been satisfied or waived.
On the date the merger closes, a certificate of merger will be filed with the
Secretary of State of the State of Nevada. The merger will become effective when
the certificate of merger has been duly filed with the Secretary of State of the
State of Nevada.
CONVERSION OF POINTE CAPITAL STOCK
When the merger becomes effective, each outstanding share of Pointe capital
stock will be converted as follows:
o each share of Pointe common stock will be converted into the right to
receive 0.223514 shares of Telscape Common Stock,
o each share of Pointe Class A Convertible Senior Preferred Stock will be
converted into one share of Telscape Class D Convertible Senior
Preferred Stock, the terms of which will be materially the same as the
Pointe Class A Convertible Senior Preferred Stock; each share of
Telscape Class D preferred stock will be convertible into 478.96 shares
of Telscape common stock, or an aggregate of 5,355,341 shares of
Telscape common stock, and
o each share of Pointe Class B Convertible Senior Preferred Stock will be
converted into one share of Telscape Class E Convertible Senior
Preferred Stock, the terms of which will be materially the same as the
Pointe Class B Convertible Senior Preferred Stock , each share of
Telscape Class E preferred stock will be convertible into 383.17 shares
of Telscape common stock, or an aggregate of 2,866,323 shares of
Telscape common stock.
Telscape will not issue fractional shares of Telscape common stock but will
make cash payments for any fractional shares.
CONVERSION OF POINTE OPTIONS, WARRANTS AND OTHER RIGHTS
The outstanding options, warrants and other rights to acquire Pointe common
stock will be exchanged for options, warrants and other rights exercisable for
shares of Telscape common stock. The number of shares upon exercise of the
options, warrants or other rights and the exercise prices will be adjusted to
take into account the conversion rate of the merger.
REPRESENTATION ON TELSCAPE BOARD
Upon the consummation of the merger, the Board of Directors of Telscape
will be adjusted in size and membership so that six of the members will be named
by Pointe and three of the members will be named by Telscape. In the next two
elections of directors of Telscape, the existing Telscape Board will determine
the size of the board and a slate of nominees to be submitted to the
shareholders
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of Telscape. Of these nominees, a majority of the members of Telscape Board who
were designated by Telscape in the merger (or elected to succeed those
designees) will have the right to designate three members of the slate of
nominees. The Telscape Bylaws shall be appropriately amended to reflect these
provisions for determining nominees for election to the Telscape Board.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains customary representations and warranties made
by Telscape, Pointe Acquisition and Pointe regarding aspects of their respective
businesses, financial condition, structure and other facts pertinent to the
merger, which each company relied on when agreeing to the merger and will rely
on when closing the merger. The representations and warranties given by
Telscape, Pointe Acquisition and Pointe relate to the following topics:
o the organization, valid existence and qualification to do business of
the companies and their respective corporate power and authority to own,
operate and lease their assets and to carry on their business as
currently conducted;
o the authorization, execution, delivery and enforceability of the merger
agreement and the transactions contemplated by the merger agreement and
that the merger agreement and the transactions do not conflict with
charter documents, material contracts or applicable licenses, statutes
or orders;
o certain representations to support the merger as a reorganization under
Section 368(a) of the Internal Revenue Code;
o the timeliness and accuracy of all documents and financial statements
filed or to be filed with the SEC;
o the capital structure of the companies, including the number of shares
of capital stock authorized, issued and outstanding;
o ownership of subsidiaries;
o the fair presentation in all material respects of the information in
financial statements and the accuracy of books and records;
o the absence of undisclosed liabilities and obligations;
o accounts and notes receivable;
o ownership, title and condition of assets, including real property and
intangible assets;
o customers and material contracts;
o environmental matters;
o labor and employee relationships;
o insurance;
o compensation and employment agreements for officers, directors,
employees and contractors;
o noncompetition agreements;
o employee benefit plans;
o litigation and compliance with laws, including laws relating to improper
payments;
o taxes;
o the absence of material adverse events or changes;
o the competing lines of business and related party transactions;
o accuracy of disclosures made in connection with the merger; and
o Year 2000 computer issues.
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Additionally, Telscape and Pointe Acquisition represented that the capital
stock of Telscape to be issued in the merger will be fully paid, nonassessable
and not subject to preemptive rights when issued in the merger and that Pointe
Acquisition was formed for the sole purpose of the merger and has no other
operations.
CERTAIN COVENANTS
The merger agreement contains other mutual covenants of the parties that
are typical for a transaction similar to the merger. Those covenants include the
following:
CONDUCT OF BUSINESS. Each of Telscape, Pointe Acquisition and Pointe have
agreed to conduct its business in the ordinary course from the date of the
merger agreement until the earlier of the closing of the merger or the
termination of the merger agreement. Specifically, each of the companies has
agreed to not to do any of the following:
o change its authorized capital stock, except for the changes relating to
the merger and the conversion of the Pointe Note;
o grant any options, warrants, or other rights or commitments for the
issuance of capital stock with limited exceptions;
o declare or pay any dividends or distributions with limited exceptions;
o increase compensation to officers or employees except as consistent with
past practices;
o adopt any new or materially change any employee benefit plan;
o sell, transfer or enter into any agreement to sell or transfer any
material assets or properties other than transfers in the ordinary
course of business and the disposition of certain identified
subsidiaries;
o cancel or agree to cancel any material receivables;
o increase indebtedness or payables except in the ordinary course of
business, including those related to Telscape's telecommunication
network in Mexico and the Pointe Note;
o encumber any assets or properties except for certain permitted
encumbrances (including those related to Telscape's telecommunication
network in Mexico);
o make any commitments for capital improvements, except as disclosed;
o grant any preferential rights or restrictions relating the purchase or
acquisition any of its assets, property or rights except those relating
to the Telscape's telecommunications network in Mexico;
o acquire any property, rights or assets outside of the ordinary course of
business, except those in connection with the Telscape's
telecommunications network in Mexico;
o form any subsidiary other than Pointe Acquisition;
o fail to keep material properties insured substantially to the same
extent as they are currently insured;
o waive any of its material rights or claims; or
o materially breach, materially change the terms of, materially amend or
terminate any material contract, agreement, permit or other right.
REASONABLE EFFORTS. Each of the companies has agreed to use its
commercially reasonable efforts to preserve its business organization and
goodwill.
INSPECTION. Each of the companies has agreed to permit representatives of
the other to examine the properties, books, contracts, tax returns and other
records and to furnish each other with information.
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RESTRAINT ON SOLICITATION. Telscape and Pointe have agreed that they and
their representatives will terminate and not initiate or engage in any
activities or negotiations, or enter to any commitments or agreements, regarding
any transaction involving 25% or more of the assets or equity interests of such
companies. The companies have agreed to certain exceptions that allow the boards
of the companies to respond to unsolicited proposals only if the company has
received a written proposal, the board of the company determines in good faith
based upon advice of a financial advisor that the proposed transaction is
reasonably capable of being completed and if completed would result in greater
value to the shareholders of the company, and the board of the company concludes
that it must pursue such proposed transaction in order to comply with its
fiduciary duties as advised in writing by the company's outside legal counsel.
Either board may withdraw its recommendation of the merger if, following the
receipt of a superior proposal, it determines that the failure to do so would be
in violation of its fiduciary duties as advised in writing by the company's
outside legal counsel. If the board of either company decides to pursue an
alternative transaction, it must offer the other company the opportunity to meet
the proposal or offer a superior proposal, which opportunity must be exercised
within five business days following receipt of the offer. Further, even if the
board of either company decides to pursue an alternative transaction, it must
still submit the merger transaction to the approval of its shareholders.
EXPENSES. Each party has agreed to pay its own expenses in connection with
the merger whether or not the merger is consummated, except that the parties
have agreed that if the merger agreement is terminated after beginning the
preparation of the joint proxy statement/prospectus, the parties will each pay
50% of the expenses relating to the joint proxy statement/prospectus and the
filing under the Hart-Scott-Rodino Act, and Telscape will reimburse Pointe for
all expenses relating to the Pointe Note (and if converted, all costs of the
conversion).
REGISTRATION STATEMENT AND PROXY STATEMENTS. Telscape has agreed to
prepare and file the registration statement and joint proxy statement/prospectus
and to use its commercially reasonable efforts to respond to the SEC's comments
to the filing and to have the filing declared effective. Telscape and Pointe
have agreed to promptly provide information necessary to the registration
statement and joint proxy statement/prospectus and cooperate in the completion
of the filings. Telscape has also agreed to use its commercially reasonable
efforts to cause Telscape common stock to be issued in the merger to be listed
on the Nasdaq National Market.
PREFERRED STOCK ISSUED IN MERGER
DESCRIPTION OF CLASS D PREFERRED STOCK. Pointe has authorized 15,000
shares of its Class A Cumulative Convertible Preferred Stock for issuance.
Dividends on the Class A preferred stock accrue at the rate of 12% and are
payable quarterly in cash or additional shares of Class A preferred stock.
Holders of the preferred stock may elect to convert each share of preferred
stock into 2,143 shares of common stock at any time ($3,000 liquidation value
per preferred share divided by $1.40 per share of common stock) after issuance.
Pointe may require conversion of the preferred stock upon the occurrence of an
offering of common stock or other equity interest at a purchase price in excess
of $4.00 per share that yields net proceeds in excess of $30 million, or after
the first anniversary of the issue date if (1) Pointe's common stock shall have
been listed for trading on the New York Stock Exchange, the Nasdaq National
Market or the American Stock Exchange; (2) the common stock shall have traded on
such exchange for a period of at least 20 consecutive trading days at a price
per share of at least $5.00; and (3) the average daily trading volume of the
common stock during such 20 consecutive trading day period shall be at least
$1,000,000. The conversion rate in these instances of $1.40 per share of common
stock is subject to certain antidilution provisions. If not earlier converted,
the preferred stock must be converted into common stock on the twelfth
anniversary, based on the average of the closing price on the 20 days preceding
the date of mandatory conversion. The holders of Class A preferred stock cannot
demand redemption of the preferred stock in cash.
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Each holder of Class A preferred stock is entitled to receive notice of any
meeting of Pointe's shareholders and is entitled to vote on any proposal the
number of shares into which the preferred stock is convertible. The holders of
Class A preferred stock have the right to designate two members of the board of
directors.
Holders of Pointe's Class A preferred stock will receive, on a one for one
basis, shares of Telscape's newly designated Class D Cumulative Convertible
Preferred Stock, which is substantially identical to Pointe's Class A preferred
stock.
DESCRIPTION OF CLASS E PREFERRED STOCK. Pointe has authorized 10,000
shares of its Class B Cumulative Convertible Preferred Stock for issuance.
Dividends on the Class B preferred stock accrue at the rate of 12% and are
payable quarterly in cash or additional shares of Class B preferred stock.
Holders of the preferred stock may elect to convert each share of preferred
stock into 1,714 shares of common stock at any time ($3,000 liquidation value
per preferred share divided by $1.75 per share of common stock) after issuance.
Pointe may require conversion of the preferred stock upon the occurrence of an
offering of common stock or other equity interest at a purchase price in excess
of $4.00 per share that yields net proceeds in excess of $30 million, or after
the first anniversary of the issue date if (1) Pointe's common stock shall have
been listed for trading on the New York Stock Exchange, the Nasdaq National
Market or the American Stock Exchange; (2) the common stock shall have traded on
such exchange for a period of at least 20 consecutive trading days at a price
per share of at least $5.00; and (3) the average daily trading volume of the
common stock during such 20 consecutive trading day period shall be at least
$1,000,000. The conversion rate in these instances of $1.75 per share of common
stock is subject to certain antidilution provisions. If not earlier converted,
the preferred stock must be converted into common stock on the twelfth
anniversary, based on the average of the closing price on the 20 days preceding
the date of mandatory conversion. The holders of Class B preferred stock cannot
demand redemption of the preferred stock in cash.
Each holder of Class B preferred stock is entitled to receive notice of any
meeting of Pointe's shareholders and is entitled to vote on any proposal the
number of shares into which the preferred stock is convertible. The holders of
Class B preferred stock have the right to designate one member of the board of
directors.
Holders of Pointe's Class B preferred stock will receive, on a one for one
basis, shares of Telscape's newly designated Class E Cumulative Convertible
Preferred Stock, which is substantialy identical to Pointe's Class B preferred
stock.
CERTAIN OTHER COVENANTS
POINTE NOTE AND ESCROW. In connection with the execution of the merger
agreement, Pointe agreed to make a loan of $10,000,000 to Telscape which was
evidenced by a note (the "Pointe Note") of which approximately $7.95 million
has been funded through April 13, 2000. The remainder of the funds under the
Pointe Note remain under an escrow arrangement. The Pointe Note is convertible
into shares of Telscape Class C Convertible Senior Preferred Stock in certain
circumstances. The following is a summary of the Pointe Note, Telscape
Convertible Senior Preferred Stock and escrow arrangement:
POINTE NOTE. Telscape has executed a 12% Convertible Promissory Note with
Pointe in the principal amount of $10,000,000 to evidence Telscape's obligation
to repay Pointe on June 30, 2000, the money that Pointe has lent to Telscape.
The note will accrue interest at 12% per year and may be payable in shares of
Telscape's common stock if the note has been converted. The note may not be
prepaid prior to June 30, 2000, subject to the conversion rights of the parties.
Telscape will be in default on the note if Telscape fails to pay the
principal and interest as they come due, fails to comply with the note, cannot
pay the principal or interest payments because Telscape is insolvent or is in
bankruptcy, or the merger agreement with Pointe is terminated. Pointe may
require full payment of the note, including unpaid interest, if Telscape is in
default.
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The note will be convertible into 100,000 shares of Class C preferred stock
and a warrant to purchase 500,000 shares of Telscape's common stock at $7.00 per
share, unless adjusted by the terms of the warrant agreement. If Telscape
declares a stock split, stock dividend, reverse split or other recapitalization,
the number of shares of Class C Preferred Stock and common stock into which the
warrants are convertible will be adjusted proportionately. If Telscape enters
into a merger or reclassification of Telscape, Telscape will make it a condition
that the note will be convertible into similar securities and in the same
amounts as would have been received if the warrants were converted at the time
of the merger.
If the note remains outstanding, Telscape must give Pointe notice of (1)
any dividend on the Class C Preferred Stock, (2) any offer to sell any
securities to holders of Telscape's Class C Preferred Stock, (3) any proposed
merger, consolidation, reclassification or disposition of substantially all
Telscape's assets, or (4) any voluntary or involuntary dissolution, liquidation
or winding up.
TELSCAPE CLASS C CONVERTIBLE SENIOR PREFERRED STOCK. In connection with
the merger agreement and in anticipation of issuing shares of preferred stock to
holders of Pointe's preferred stock, Telscape has authorized the issuance of
200,000 shares of a newly designated Class C Preferred Stock that has a stated
value of $100.00 per share. The Class C Preferred Stock pays quarterly dividends
at a rate of 12% per year. Telscape first must pay dividends on the Class C
Preferred Stock before making any payments to any junior stock, such as
Telscape's common stock. Telscape has the right to pay the dividends in
additional shares of Class C Preferred Stock.
Upon any liquidation, dissolution or merger whether or not Telscape is the
surviving company, Telscape must pay to the holders of Class C Preferred Stock
their preferred liquidation amount, which is $100.00 per share plus all accrued
but unpaid dividends, prior to paying any liquidation amounts to any junior
stock, such as Telscape's common stock.
The holders of Telscape's Class C Preferred Stock will have the right to
receive notice of a meeting of Telscape's shareholders and to vote the number of
shares into which the Class C Preferred Stock is convertible at any meeting of
Telscape's shareholders. The holders of Class C Preferred Stock vote as a
separate class only on votes that affect their rights or privileges as holders
of Class C Preferred Stock. Any vote of the class of the holders of Class C
Preferred Stock will be approved by a two thirds ( 2/3) majority of those
holders.
The holders of Telscape's Class C Preferred Stock have the right to convert
their shares into Telscape's common stock at any time. The conversion ratio for
each share will be the $100.00 stated value divided by $8.20 per share of common
stock, except that if Telscape does not merge with Pointe and if Pointe or its
shareholders receive Telscape's Class C Preferred Stock as a result of a default
on Telscape's $10,000,000 12% Convertible Promissory Note issued December 31,
1999, see "Pointe Note" above, then the conversion ratio for each share will
be the $100.00 stated value divided by $5.00 per share of common stock.
If Telscape issues any new shares of common stock, other than shares issued
as employees, officers, directors, or consultants exercise their options or
shares issued in connection with Telscape's $10,000,000 12% Convertible
Promissory Note issued December 31, 1999, see "Pointe Note" above, and if the
price for the newly issued shares of common stock is lower than the conversion
price of the Class C Preferred Stock, then Telscape must reduce the conversion
price for the Class C Preferred Stock. Telscape will determine the new
conversion price by dividing (a) the sum of (1) the conversion price times the
total number of outstanding shares of common stock immediately prior to the new
issuance, after taking into account all conversions and exercises of common
stock, plus (2) the value of the consideration that Telscape receives for the
new issuance of the common stock by (b) the total number of outstanding shares
of common stock immediately after the new issuance, after taking into account
the all conversions and exercises of common stock. Telscape also will adjust the
conversion price proportionately for any other adjustments to the number of
shares of outstanding common stock, like in a stock split, stock dividend or
reverse stock split. Upon any merger or reorganization, the Class C Preferred
Stock will be convertible into the number of shares of common stock of the new
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entity as if the shares of Class C Preferred Stock had been converted
immediately prior to the exchange for new securities after the merger or
reorganization.
Telscape has reserved the right to cause the holders of Class C Preferred
Stock to convert their shares if Telscape enters into a public offering of
Telscape's common stock or if after one year from issuing the Class C Preferred
Stock, (1) Telscape's common stock is trading on the New York Stock Exchange,
The Nasdaq National Market or the American Stock Exchange, (2) the common stock
shall have traded for a period of 20 consecutive trading days at a price of
$15.00 (or the adjusted figure after any stock split, stock dividend, reverse
stock split or similar recapitalization event), and (3) the cumulative average
daily trading volume in that period is at least $3,000,000.
Additionally, if the merger agreement is terminated and Pointe elects to
convert the Telscape $10,000,000 12% Convertible Promissory Note issued on
December 31, 1999, see "Pointe Note" above, into Class C Preferred Stock, the
Class C Preferred Stock issued upon this conversion of the Pointe Note will
convert into common stock at the $8.20 conversion price.
Telscape will not issue fractional shares upon any conversion. Telscape
will pay the holders the fraction of common stock times the conversion price in
effect at conversion.
REGISTRATION RIGHTS AGREEMENT. In connection with the merger agreement
with Pointe and the 12% Convertible Promissory Note with Pointe, Telscape has
granted to Pointe the right to register with the SEC Telscape's common stock
which will be issued to Pointe or other holders assigned the common stock or the
right to receive the common stock. The purpose of registering Telscape's common
stock will be to allow holders of Telscape's common stock to resale to the
public.
Telscape has agreed that upon the conversion of the note into shares of
Class C Preferred Stock and warrants to purchase Telscape's common stock,
Telscape will register the common stock underlying the Class C Preferred Stock
and the warrants within 60 days of the conversion. Telscape will use its best
efforts to keep the registration statement effective until the third anniversary
of the conversion of the note unless all of the shares of common stock have been
sold previous to the third anniversary. If at least two thirds of the holders of
Telscape's shares received in the conversion elect to require that the shares be
distributed in an underwriting, Telscape will engage an underwriter pursuant to
a customary underwriting agreement to distribute the shares. The underwriter may
require a decrease in the number of shares offered in the underwriting if market
conditions require it.
Telscape has agreed that, after the conversion of the note into Class C
Preferred Stock and warrants to purchase common stock, if 80% of the holders of
those securities request, Telscape will file a registration statement for at
least 25% of the then outstanding shares after the conversion. Telscape will not
be required to file this registration statement if it is within 180 days of a
firm commitment underwritten offering or if Telscape has filed three previous
registration statements in the same manner as described in this paragraph.
Telscape will engage an underwriter pursuant to a customary underwriting
agreement to distribute the shares. The underwriter may require a decrease in
the number of shares offered in the underwriting if market conditions require
it.
In either type of registered sales as described in the previous two
paragraphs, Telscape has agreed that it will not effect a public sale of
Telscape's securities during a 90 day period after it receives notice of the
intention to sell under a registration statement.
If Telscape decides to file a registration statement, it is required to
give prompt notice to Pointe, or the current holders of Telscape's securities
after conversion of the note, of the registration statement. The holders of
Telscape's common stock can elect to register Telscape's common stock on the
registration statement. If Telscape is selling in an underwritten offering, the
underwriter may require that the holders enter an underwriting agreement to be
part of the offering, and the underwriters may require a reduction in the number
of shares offered on the registration statement.
In each situation where Telscape is required to prepare and file a
registration statement, Telscape will bear the costs of that preparation and
filing of the registration statement. Additionally, Telscape will indemnify the
holders from any liability as a controlling shareholder or any other liability
unless
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the liability arises from an untrue statement or omission of fact made in
reliance on information furnished by the holder.
TELSCAPE KEY MANAGERS AND OFFICERS. Prior to the closing of the merger,
the boards of Pointe and Telscape will jointly designate the officers of
Telscape following the merger and determine the officers and key employees that
will be the recipients of severance and option agreements from Telscape.
INDEMNIFICATION OF DIRECTORS AND OFFICERS OF POINTE. Telscape has agreed
that the indemnification of the present and former directors and officers as
provided in Pointe's organization documents or in agreements with the directors
and officers will survive the merger and remain in effect for a period of not
less than six years following the closing of the merger.
CONDITIONS TO THE COMPLETION OF THE MERGER
The obligations of Telscape, Pointe Acquisition and Pointe to complete the
merger are subject to the satisfaction or waiver of all of the following
conditions:
o no action, suit or proceeding before any governmental authority to
enjoin the merger transactions will be pending on the date of closing;
o the shareholders of Telscape have approved the issuance of the Telscape
capital stock in connection with the merger and the increase in the
number of shares of Telscape common stock to accommodate the issuance;
o the merger agreement and the merger shall have been approved by the
shareholders of Pointe;
o the designated officers, directors, managers and employees of Telscape
and Pointe shall have resigned their respective positions and executed
severance and release agreements acceptable to Telscape and Pointe;
o Telscape shall have obtained the approval of Lucent Technologies and
General Electric (NTFC and Newbridge) to the merger and shall have
modified its existing senior credit facility with Lucent in accordance
with the terms of the merger agreement;
o the applicable waiting periods under the Hart-Scott-Rodino Antitrust
Improvements Act shall have expired or been terminated;
The obligations of Telscape and Pointe Acquisition to complete the merger
are subject to the satisfaction or waiver of all of the following additional
conditions:
o receipt of a certificate from Pointe that:
o all of its representations and warranties in the merger agreement are
true and correct in all material respects as of the closing;
o it has performed of complied in all material respects with its covenants
or conditions in the merger agreement;
o all necessary declarations, notices and filings and authorizations,
consents and approvals of governmental authorities relating to the
merger have been made or obtained; and
o there has been no adverse change in its business, operations or
financial condition;
o the officers of Pointe shall have delivered a certificate with
representations necessary for Arthur Andersen to render its opinion
regarding the tax issues;
o Pointe shall have received a waiver regarding the merger transactions
from the holders of its Class A Preferred Stock; and
o the Pointe Note shall have been consummated and the net proceeds
distributed to Telscape from the escrow arrangement.
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The obligations of Pointe to complete the merger are subject to the
satisfaction or waiver of all of the following additional conditions:
o receipt of a certificate from Telscape and Pointe Acquisition that:
o all of their representations and warranties in the merger agreement are
true and correct in all material respects as of the closing;
o each has performed of complied in all material respects with its
covenants or conditions in the merger agreement;
o all necessary declarations, notices and filings and authorizations,
consents and approvals of governmental authorities relating to the
merger have been made or obtained; and
o there has been no adverse change in their business, operations or
financial condition;
o Pointe shall have received the opinion of Arthur Andersen that the
merger should qualify as a "reorganization" under Section 368 of the
Internal Revenue Code;
o the issuance of the Telscape capital stock in connection with the merger
shall have been registered under the Securities Act of 1933;
o Telscape shall have taken all action to cause its board, effective as of
the merger closing, to be comprised of nine members, six of whom are
designated by Pointe;
o as a condition to the disbursement of funds to Telscape from the escrow
arrangement relating to the Pointe Note, Telscape shall have caused its
counsel to issue an opinion to Pointe; and
o the officers of Telscape shall have delivered a certificate with
representations necessary for Arthur Andersen to render its opinion
regarding the tax issues.
TERMINATION OF MERGER AGREEMENT
The Merger Agreement may be terminated by mutual agreement of the parties
at any time prior to closing. The Merger Agreement may also be terminated in the
following situations:
o By either party if:
o the merger has not occurred by June 30, 2000; or
o if any condition to the merger cannot be satisfied by June 30, 2000, as
a result of a court order, stipulation or injunction that is final and
not appealable.
o By Telscape if:
o a representation or warranty of Pointe becomes untrue in any material
respect; or
o the conditions to be resolved by Pointe for the merger have not been
satisfied; or
o if Pointe has not funded the Pointe Note from the escrow arrangements on
or prior to February 4, 2000, other than as a result of Telscape's
failure to deliver an appropriate legal opinion; or
o Pointe's Board of Directors:
o enters into or publicly announces its intention to enter into an
agreement or agreement in principle with respect to an alternative
transaction,
o withdraws its recommendation of the merger to the Pointe shareholders,
or
o after receipt of the proposal relating to an alternative transactions,
fails to publicly confirm within 10 days after request, its
recommendation to the Pointe shareholders that they approve and adopt
the merger.
o By Pointe if:
o a representation or warranty of Telscape becomes untrue in any material
respect; or
o the conditions to be resolved by Telscape for the merger have not been
satisfied; or
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o Telscape's board of directors:
o enters into or publicly announces its intention to enter into an
agreement or agreement in principle with respect to alternative
transaction,
o withdraws its recommendation of the merger to the Telscape shareholders,
or
o after receipt of the proposal relating to an alternative transactions,
fails to publicly confirm within 10 days after request, its
recommendation to the Telscape shareholders that they approve and adopt
the merger.
Each party is required to notify the other in the event either party
becomes aware of any matters that must be disclosed pursuant to the terms of the
merger agreement. The notified party has a right to terminate the merger
agreement within 10 business days after receiving the notice. If the notified
party does not terminate the merger agreement, then the merger agreement will be
amended, the breach of any representation, warranty or covenant will be deemed
to be cured and performed; and any condition to the notified party's obligation
to consummate the merger relates to the disclosed facts shall be waived.
TERMINATION FEE AND SPECIAL REMEDIES
If the merger agreement is terminated for certain reasons, Telscape and
Pointe have agreed that damages would be difficult to determine and that the
breaching or defaulting party would be obligated to pay a termination fee of $5
million to the non-breaching or non-defaulting party. The termination fee will
be payable in the following circumstances:
o By Telscape to Pointe within 30 days of Pointe's request if Telscape's
board of directors:
o enters into or publicly announces its intent to enter into an agreement
or agreement in principle with respect to an alternative transaction,
o withdraws its recommendation to Telscape shareholders of the merger, or
o fails to publicly confirm its recommendation to the Telscape
shareholders that they adopt and approve the merger.
Alternatively, Pointe may elect to convert the termination fee into shares
of Telscape Class C Preferred Stock (which is convertible into Telscape
Common Stock at a conversion price of $8.20 per share). Pointe may also
convert the Pointe Note into shares of Telscape Common Stock and the Pointe
Note Warrants. If Telscape defaults in the payment of the termination fee,
Pointe may convert the termination fee into 50,000 shares of Telscape Class
C Preferred Stock, which will be convertible at the option of Pointe into
Telscape Common Stock at $8.20 per share. If Telscape defaults in the
repayment of the Pointe Note, Pointe may, at its option, convert the Pointe
Note into 100,000 shares of Telscape Class C Preferred Stock, which will be
convertible, at the option of Pointe, into Telscape Common Stock at $5.00
per share, plus the Pointe Note Warrants.
o By Pointe to Telscape within 30 days of Telscape's request if Pointe's
board of directors:
o enters into or publicly announces its intent to enter into an agreement
or agreement in principle with respect to an alternative transaction,
o withdraws its recommendation to Pointe shareholders of the merger, or
o fails to publicly confirm its recommendation to the Pointe shareholders
that they adopt and approve the merger.
If Pointe terminates the merger agreement as a result of Telscape's breach
of representation, warranty or covenant, the Pointe Note will be due and payable
30 days after demand by Pointe. If Telscape defaults in the repayment of the
Pointe Note, Pointe may, at its option, convert the Pointe Note into Telscape
Class C Preferred Stock, which is convertible into Company Common Stock at $5.00
per share, and the Pointe Note Warrants.
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In the event that the shareholders of Telscape do not approve the merger,
the Pointe Note will be due and payable 30 days after demand by Pointe. If
Telscape defaults in the repayment of the Pointe Note, Pointe may, at its sole
option, convert the Pointe Note into Telscape Class C Convertible Senior
Preferred Stock, which is convertible into Telscape Common Stock at $8.20 per
share, plus the Pointe Note Warrants.
In the event that the Pointe shareholders do not approve the merger, the
Pointe Note will not be accelerated, but Pointe may, at its sole option, convert
the Pointe Note into Telscape Class C Preferred Stock, which is convertible into
Company stock at $8.20 per share, and the Pointe Note Warrants.
DIVIDEND POLICIES
Neither Telscape nor Pointe has ever declared or paid cash dividends on
shares of its common stock. Pointe has never declared or paid cash dividends on
shares of its preferred stock. Pointe has paid dividends of preferred stock on
its preferred stock pursuant to its rights as stated in the designation of
rights and preferences of the preferred stock.
Telscape currently intends to retain all of its earnings to finance the
development and expansion of its business and therefore does not intend to
declare or pay cash dividends on its common stock in the foreseeable future. The
Telscape board, in its discretion, will determine whether to declare and pay
dividends in the future. Any future declaration and payment of dividends will
depend upon:
o Telscape's results of operations;
o Telscape's earnings and financial condition;
o contractual limitations;
o cash requirements;
o future prospects;
o applicable law; and
o other factors deemed relevant by Telscape's board of directors.
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TELSCAPE PROPOSAL 2
Telscape currently has seven directors serving on its board. At the annual
meeting, holders of common stock will elect seven directors to serve Telscape
for period of one year or until a successor has been elected and qualified at
the next annual meeting. The board's nominees are E. Scott Crist, Manual Landa,
Todd M. Binet, Oscar Garcia, Ricardo Orea, Darrel O. Kirkland, and Jack M.
Fields. Each of the nominees currently is a member of Telscape's board.
This board, when elected, will be Telscape's board of directors for the
next year if the proposed merger with Pointe is not completed. If the merger is
completed, a new board of directors will replace the current board. Please see
page 45 under the heading "Officers and Directors of the Combined Company
Following Merger" for a list of the board members after the merger is
completed.
The biographies of the nominees for the director positions appear in the
Telscape's Business Description under the table of the directors, executive
officers, and key employees.
THE TELSCAPE BOARD UNANIMOUSLY RECOMMENDS THAT THE TELSCAPE SHAREHOLDERS
VOTE TO ELECT THE NOMINEE DIRECTORS.
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TELSCAPE PROPOSAL 3
GENERAL
To complete the merger, Telscape must issue 12,038,204 shares of its common
stock, 18,662 shares of its preferred stock (in two newly designated series of
preferred stock) and will be committed by options, warrants, and other
convertible debt instruments to issue an additional 7,810,200 of common stock to
the Pointe shareholders. The preferred stock being issued in the merger will be
convertible into 8,221,665 shares of Telscape's common stock. Additionally,
Telscape is adopting five new stock option plans which reserve a total of
4,500,000 shares of Telscape's common stock for issuance under the plans. As of
May 8, 2000 Telscape had 8,082,958 shares of its common stock outstanding, and
it is committed by options, warrants, preferred stock and other convertible
instruments to issue an additional 5,378,245 shares of its common stock upon
request. In the aggregate, immediately following the merger, 53,449,055 shares
of Telscape's common stock will be either outstanding or committed to being
issued upon requests for conversion.
Currently, Telscape's articles of incorporation authorize the issuance of
25,000,000 shares of common stock, $.001 par value per share, and 5,000,000
shares of preferred stock, $.001 par value per share. Therefore, if all holders
of securities in the post-merger company exercised or converted their securities
into Telscape's common stock, Telscape would exceed its total number of
authorized shares by 28,449,055 shares. Additionally, due to the rights
specified for the preferred stock to be issued in the merger, it is necessary to
allow Telscape's board to authorize preemptive rights.
AMENDMENT
On February 14, 2000, the Board approved an increase in the authorized
number of shares of common stock from 25,000,000 to 100,000,000 shares and the
number of shares of preferred stock from 5,000,000 to 10,000,000 shares, subject
to shareholder approval. If Telscape's shareholders approve this amendment,
75,000,000 additional shares of common stock and 5,000,000 additional shares of
preferred stock will be authorized and available for issuance or sale by
Telscape (excluding shares reserved for issuance for specified purposes, such as
pursuant to stock option plans). The Board will have authority to issue the
additional 75,000,000 shares of common stock at its discretion in accordance
with applicable law. The Board will have authority to issue the additional
5,000,000 shares of Preferred Stock at its discretion in accordance with
applicable law and the rights of other preferred stock shareholders. Issuance of
any of the additional 75,000,000 shares of common stock will dilute the voting
percentage and ownership percentage held by the current holders of common stock.
The preferred stock issued in the merger allows the preferred shareholders
preemptive rights to purchase shares of Telscape's capital stock upon any
additional issuance. The amendment will allow the Board to authorize preemptive
rights to shareholders.
PURPOSES OF PROPOSED AMENDMENT
To complete the merger, Telscape needs to have available enough shares of
common stock and preferred stock to issue the consideration under the merger
agreement and to meet the conversion or exercise requests of holders of its
convertible instruments. To keep its articles of incorporation consistent with
the terms of the merger, Telscape also needs its Board to be authorized to grant
preemptive rights to shareholders. To help Telscape with its ongoing operations
after the merger, it also needs to have the flexibility to issue shares of
common stock for any other purpose, including providing future incentives to key
officers, directors and employees, providing consideration in acquisitions of
either operating companies or operating assets, and providing the means to raise
capital in the public or private equity markets while retaining its cash for its
working capital needs. Telscape believes that this strategy will add value to
Telscape's shareholders and to Telscape.
If the shareholders do not approve this proposed amendment, Telscape may
not be able to complete the merger. If it does complete the merger and this
proposal is not approved, Telscape may fall into default on some of its
conversion obligations which may trigger a requirement that Telscape
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redeem convertible instruments for cash. This result will cause a drain on
Telscape's cash flow and could hinder future operations and acquisitions.
Additionally, Telscape may fall into breach of its agreements with some of the
warrant and option holders and will be limited in its ability to raise capital
or acquire companies or assets.
THE TELSCAPE BOARD UNANIMOUSLY RECOMMENDS THAT THE TELSCAPE SHAREHOLDERS
VOTE FOR PROPOSAL 3 TO APPROVE AN AMENDMENT TO TELSCAPE'S ARTICLES OF
INCORPORATION TO INCREASE TELSCAPE'S AUTHORIZED SHARES.
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TELSCAPE PROPOSAL 4
2000 PAY FOR PERFORMANCE STOCK OPTION PLAN
BACKGROUND AND SUMMARY OF TERMS
In February 2000, the Telscape Board approved the Telscape 2000 Pay for
Performance Stock Option Plan for submission to the shareholders of Telscape.
The pay for performance plan is substantially similar to the Pointe
Communications Corporation 1999 Pay for Performance Plan, which provides for the
issuance of up to 1,500,000 shares of Pointe common stock. Pointe's plan will be
assumed by Telscape in the merger, and Telscape will be obligated to issue its
common stock upon the exercise of any options under the plan by a former Pointe
option holder. The exercise price and number of shares of common stock available
upon exercise by Pointe employees who hold outstanding options as of the date of
the merger will be adjusted to reflect the exchange ratio under the merger so
that the Pointe employees will receive 0.223514 shares of Telscape common stock
for each share of Pointe common stock they previously had the option to
purchase. After the merger, Telscape will use the plan to provide the officers
and key employees of the combined company with a strong incentive to work
towards increasing the per share price of Telscape common stock and to promote a
sense of ownership among employees. The maximum number of shares of common stock
that may be awarded under the pay for performance plan may not exceed 1,500,000
shares.
The following description is only a summary. It does not purport to be
complete or detailed descriptions of all of the provisions of the plan.
The plan permits the grant of options to employees of Telscape or its
subsidiaries, including officers and directors, in the Board's discretion.
The Board administers the plan and has complete discretion, within the
limitations in the plan, to determine the terms of the options granted,
including, but not limited to:
o the term of each option,
o the number of shares subject to each option,
o the exercise price of each option,
o the form of consideration payable upon exercise of each option, and
o the exercise date of each option.
The Board is also permitted to create a compensation committee of at least
two Board members to administer the plans on the Board's behalf.
Options granted are evidenced by stock option agreements between Telscape
and the option holder. The terms of each option granted may vary, but only to
the extent permitted by the terms of the plan. The term of an option granted
under the plan may not exceed ten years from the grant of that option.
The method of payment for options will be determined by the Board at the
time of the grant. In general, payment may be made by cash, check, promissory
note, or if the Board authorizes a "cashless exercise," Telscape will withhold
the number of shares the holder is entitled to purchase for which the equity
buildup is equal to the amount of the option purchase price. The options will be
exercisable at the times and in the manner directed by the Board. Generally,
options granted under the plan vest over three years according to a schedule of
performance (company, unit and employee) goals as determined through a
combination of objective criteria and subjective overall performance reviews.
Under the plan, the Board is authorized to grant either nonqualified stock
options or incentive stock options. The plan requires that the exercise price of
each incentive stock option or ISO be at least 100% of the fair market value of
Telscape's common stock at the time the option is granted. For
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incentive stock options granted to an employee who owns more than 10% of
Telscape's outstanding voting stock:
o the option price must be at least 110% of the fair market value of
Telscape's stock on the date the ISO is granted, and
o the ISO is not exercisable more than five years after it is granted.
Upon termination of employment of an option holder, he may exercise the
options to the extent they are then exercisable. Generally, options which are
not exercisable on the date of termination, or are not exercised within three
months terminate. Upon an option holder's permanent disability, he may exercise
the options to the extent they are then exercisable for up to twelve months
following termination due to the disability. Upon an option holder's death while
an employee, his estate or representative may exercise the options which were
exercisable on the date of death within six months from the date of death. If
the option holder was not a Telscape employee at the time of death, the options
which were exercisable at the time of termination of employment may be exercised
within six months from the date of death. Options which are not exercisable on
the date of death or termination (if before death), or which are not exercised
within six months from the date of death terminate. No option granted under the
plan may be sold, pledged, assigned or transferred other than by will or the
laws of descent and distribution, and during the option holder's lifetime he is
the only person who may exercise the options.
Unless the Board terminates the plan sooner, it will terminate on January
31, 2009, after which no options may be granted under the plan. The Board may
amend, suspend or terminate the plan without shareholder approval, except that
the Board cannot increase the total number of shares available under the plan
without shareholder approval or change the terms of options previously granted
without the consent of the option holder.
Upon the proposed dissolution or liquidation of Telscape, all of the
outstanding options issued under the plan will terminate immediately prior to
the consummation of the proposed action, unless the Board provides otherwise. If
Telscape proposes to sell all or substantially all of its assets or if Telscape
is a party to a merger with or into another company, the outstanding options
issued under the plan must be substituted by equivalent options of the
succeeding corporation or the Board must declare them immediately and fully
exercisable. In the event of a reclassification, stock split, combination of
shares or similar action increasing or decreasing the amount of issued common
stock, the Board will proportionately adjust the terms of the outstanding
options issued under the plan.
The plan and all option agreements shall be construed and enforced in
accordance with and governed by the laws of the State of Texas, except to the
extent preempted by federal law.
There are 1,500,000 shares of our common stock available to be issued under
the plan. As of May 8, 2000, options to purchase a total of 457,168 shares of
common stock under the plan are outstanding to Pointe employees, no options to
purchase shares had been exercised, and a total of 1,042,832 shares were
available for future option grants.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF AWARDS
INCENTIVE STOCK OPTIONS. All stock options that qualify under the rules of
Section 422 of the Internal Revenue Code of 1986, as amended, will be entitled
to ISO treatment. To receive ISO treatment, an optionee must not dispose of the
acquired stock within two years after the option is granted or within one year
after exercise. In addition, the individual must have been an employee of
Telscape for the entire time from the date of grant of the option until three
months (or one year if the employee is disabled) before the date of the
exercise. The requirement that the individual be an employee and the two-year
and one-year holding periods are waived in the case of death of the employee. If
these requirements are met no tax will be imposed on the exercise of the option,
and any gain upon the sale of the acquired stock will be entitled to capital
gain treatment. The employee's gain on exercise (the excess of fair market value
at the time of exercise over the exercise price) of an
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ISO is a tax preference item, and accordingly, is included in the computation of
alternative minimum taxable income.
If an employee does not meet the two-year and one-year holding
requirements, otherwise called a disqualifying disposition, but does meet all
other requirements, tax will be imposed at the time of sale of the acquired
stock, but the employee's gain on exercise of the options will be treated as
ordinary income, rather than capital gain, and Telscape will get a corresponding
deduction at the time of sale in an amount equal to the income that the employee
would have recognized as long-term capital gain, depending on the holding period
of the stock. If the amount realized on the disqualifying disposition is less
than the value at the date of exercise, the amount includible in gross income,
and the amount deductible by Telscape, will equal the excess of the amount
realized on the sale or exchange over the exercise price.
An option agreement with Telscape may permit payment for stock upon the
exercise of an ISO to be made with other shares of common stock. In such a case,
in general, if an employee uses stock acquired pursuant to the exercise of an
ISO to acquire other stock in connection with the exercise of an ISO, it may
result in ordinary income if the stock so used has not met the minimum statutory
holding period necessary for favorable tax treatment as an ISO.
NONQUALIFIED OPTIONS. In general, no taxable income will be recognized by
the optionee, and no deduction will be allowed to Telscape, upon the grant of a
nonqualified option. Upon exercise of a nonqualified option, an optionee will
recognize ordinary income (and Telscape will be entitled to a corresponding tax
deduction if applicable reporting requirements are satisfied) in an amount equal
to the amount by which the fair market value of the shares on the exercise date
exceeds the option exercise price. Any gain or loss realized by an optionee on
disposition of such shares generally is a capital gain or loss and does not
result in any tax deduction to Telscape.
The foregoing information is based upon present federal income tax laws and
regulations and are subject to change if the tax laws and regulations, or
interpretations thereof, are changed.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of the holders of a majority of the shares of Telscape
common stock present in person or represented by proxies at the meeting and
entitled to vote is required to approve the adoption of the pay for performance
plan. If the merger is not completed for any reason, the pay for performance
plan will not be adopted by Telscape.
THE TELSCAPE BOARD UNANIMOUSLY RECOMMENDS THAT THE TELSCAPE SHAREHOLDERS
VOTE FOR PROPOSAL 4 TO APPROVE THE 2000 PAY FOR PERFORMANCE STOCK OPTION PLAN.
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TELSCAPE PROPOSAL 5
2000 EXECUTIVE MARKET VALUE APPRECIATION STOCK OPTION PLAN
BACKGROUND AND SUMMARY OF TERMS
In February 2000, the Telscape Board approved the Telscape 2000 Executive
Market Value Appreciation Stock Option Plan for submission to the shareholders
of Telscape. The executive plan is substantially similar to the Pointe
Communications Corporation 1999 Executive Market Value Appreciation Stock Option
Plan, which provides for the issuance of up to 2,000,000 shares of Pointe common
stock. Pointe's plan will be assumed by Telscape in the merger, and Telscape
will be obligated to issue its common stock upon the exercise of any options
under the plan by a former Pointe option holder. The exercise price and number
of shares of common stock available upon exercise by Pointe employees who hold
outstanding options as of the date of the merger will be adjusted to reflect the
exchange ratio under the merger so that the Pointe employees will receive
0.223514 shares of Telscape common stock for each share of Pointe common stock
they previously had the option to purchase. After the merger, Telscape will use
the plan to provide the key executives of the combined company with a strong
incentive to work towards increasing the per share price of Telscape common
stock. The maximum number of shares of common stock that may be awarded under
the executive plan may not exceed 2,000,000 shares.
The following description is only a summary. It does not purport to be
complete or detailed descriptions of all of the provisions of the plan. A
complete copy of the plan was filed as an exhibit to the registration statement
of which this joint proxy statement/prospectus is a part.
The plan permits the grant of options to employees of Telscape or its
subsidiaries, including officers and directors, in the Board's discretion.
The Board administers the plan and has complete discretion, within the
limitations in the plan, to determine the terms of the options granted,
including, but not limited to:
o the term of each option,
o the number of shares subject to each option,
o the exercise price of each option,
o the form of consideration payable upon exercise of each option, and
o the exercise date of each option.
The Board is also permitted to create a compensation committee of at least
two Board members to administer the plans on the Board's behalf.
Options granted are evidenced by stock option agreements between Telscape
and the option holder. The terms of each option granted may vary, but only to
the extent permitted by the terms of the plan. The term of an option granted
under the plan may not exceed ten years from the grant of that option.
The method of payment for options will be determined by the Board at the
time of the grant. In general, payment may be made by cash, check, promissory
note, or if the Board authorizes a "cashless exercise," Telscape will withhold
the number of shares the holder is entitled to purchase for which the equity
buildup is equal to the amount of the option purchase price. The options will be
exercisable at the times and in the manner directed by the Board. Options
granted under the plan generally vest over five years at a rate of 10% of
options granted for each $4.47 increase in Telscape's stock price, determined at
year end.
Under the plan, the Board is authorized to grant either nonqualified stock
options or incentive stock options. The plan requires that the exercise price of
each incentive stock option or ISO be at least 100% of the fair market value of
Telscape's common stock at the time the option is granted. For
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incentive stock options granted to an employee who owns more than 10% of
Telscape's outstanding voting stock:
o the option price must be at least 110% of the fair market value of
Telscape's stock on the date the ISO is granted, and
o the ISO is not exercisable more than five years after it is granted.
Upon termination of employment of an option holder, he may exercise the
options to the extent they are then exercisable. Generally, options which are
not exercisable on the date of termination, or are not exercised within three
months terminate. Upon an option holder's permanent disability, he may exercise
the options to the extent they are then exercisable for up to twelve months
following termination due to the disability. Upon an option holder's death while
an employee, his estate or representative may exercise the options which were
exercisable on the date of death within six months from the date of death. If
the option holder was not a Telscape employee at the time of death, the options
which were exercisable at the time of termination of employment may be exercised
within six months from the date of death. Options which are not exercisable on
the date of death or termination (if before death), or which are not exercised
within six months from the date of death terminate. No option granted under the
plan may be sold, pledged, assigned or transferred other than by will or the
laws of descent and distribution, and during the option holder's lifetime he is
the only person who may exercise the options.
Unless the Board terminates the plan sooner, it will terminate on January
31, 2009, after which no options may be granted under the plan. The Board may
amend, suspend or terminate the plan without shareholder approval, except that
the Board cannot increase the total number of shares available under the plan
without shareholder approval or change the terms of options previously granted
without the consent of the option holder.
Upon the proposed dissolution or liquidation of Telscape, all of the
outstanding options issued under the plan will terminate immediately prior to
the consummation of the proposed action, unless the Board provides otherwise. If
Telscape proposes to sell all or substantially all of its assets or if Telscape
is a party to a merger with or into another company, the outstanding options
issued under the plan must be substituted by equivalent options of the
succeeding corporation or the Board must declare them immediately and fully
exercisable. In the event of a reclassification, stock split, combination of
shares or similar action increasing or decreasing the amount of issued common
stock, the Board will proportionately adjust the terms of the outstanding
options issued under the plan.
The plan and all option agreements shall be construed and enforced in
accordance with and governed by the laws of the State of Texas, except to the
extent preempted by federal law.
There are 2,000,000 shares of our common stock available to be issued under
the plan. As of May 8, 2000, options to purchase a total of 586,724 shares of
common stock under the plan are outstanding to Pointe employees, no options to
purchase shares had been exercised, and a total of 1,413,276 shares were
available for future option grants.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF AWARDS
INCENTIVE STOCK OPTIONS. All stock options that qualify under the rules of
Section 422 of the Internal Revenue Code of 1986, as amended, will be entitled
to ISO treatment. To receive ISO treatment, an optionee must not dispose of the
acquired stock within two years after the option is granted or within one year
after exercise. In addition, the individual must have been an employee of
Telscape for the entire time from the date of grant of the option until three
months (or one year if the employee is disabled) before the date of the
exercise. The requirement that the individual be an employee and the two-year
and one-year holding periods are waived in the case of death of the employee. If
these requirements are met no tax will be imposed on the exercise of the option,
and any gain upon the sale of the acquired stock will be entitled to capital
gain treatment. The employee's gain on exercise (the excess of fair market value
at the time of exercise over the exercise price) of an
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ISO is a tax preference item, and accordingly, is included in the computation of
alternative minimum taxable income.
If an employee does not meet the two-year and one-year holding
requirements, otherwise called a disqualifying disposition, but does meet all
other requirements, tax will be imposed at the time of sale of the acquired
stock, but the employee's gain on exercise of the options will be treated as
ordinary income, rather than capital gain, and Telscape will get a corresponding
deduction at the time of sale in an amount equal to the income that the employee
would have recognized as long-term capital gain, depending on the holding period
of the stock. If the amount realized on the disqualifying disposition is less
than the value at the date of exercise, the amount includible in gross income,
and the amount deductible by Telscape, will equal the excess of the amount
realized on the sale or exchange over the exercise price.
An option agreement with Telscape may permit payment for stock upon the
exercise of an ISO to be made with other shares of common stock. In such a case,
in general, if an employee uses stock acquired pursuant to the exercise of an
ISO to acquire other stock in connection with the exercise of an ISO, it may
result in ordinary income if the stock so used has not met the minimum statutory
holding period necessary for favorable tax treatment as an ISO.
NONQUALIFIED OPTIONS. In general, no taxable income will be recognized by
the optionee, and no deduction will be allowed to Telscape, upon the grant of a
nonqualified option. Upon exercise of a nonqualified option, an optionee will
recognize ordinary income (and Telscape will be entitled to a corresponding tax
deduction if applicable reporting requirements are satisfied) in an amount equal
to the amount by which the fair market value of the shares on the exercise date
exceeds the option exercise price. Any gain or loss realized by an optionee on
disposition of such shares generally is a capital gain or loss and does not
result in any tax deduction to Telscape.
The foregoing information is based upon present federal income tax laws and
regulations and are subject to change if the tax laws and regulations, or
interpretations thereof, are changed.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of the holders of a majority of the shares of Telscape
common stock present in person or represented by proxies at the meeting and
entitled to vote is required to approve the adoption of the executive plan. If
the merger is not completed for any reason, the executive plan will not be
adopted by Telscape.
THE TELSCAPE BOARD UNANIMOUSLY RECOMMENDS THAT THE TELSCAPE SHAREHOLDERS
VOTE FOR PROPOSAL 5 TO APPROVE THE 2000 EXECUTIVE MARKET VALUE APPRECIATION
STOCK OPTION PLAN.
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TELSCAPE PROPOSAL 6
2000 INCENTIVE STOCK OPTION PLAN
BACKGROUND AND SUMMARY OF TERMS
In February 2000, the Telscape Board approved the Telscape 2000 Incentive
Stock Option Plan for submission to the shareholders of Telscape. The incentive
plan is substantially similar to the Pointe Communications Corporation 1996
Incentive Stock Option Plan, which provides for the issuance of up to 300,000 of
Pointe common stock. Pointe's plan will be assumed by Telscape in the merger,
and Telscape will be obligated to issue its common stock upon the exercise of
any options under the plan by a former Pointe option holder. The exercise price
and number of shares of common stock available upon exercise by Pointe employees
who hold outstanding options as of the date of the merger will be adjusted to
reflect the exchange ratio under the merger so that the Pointe employees will
receive 0.223514 shares of Telscape common stock for each share of Pointe common
stock they previously had the option to purchase. After the merger, Telscape
will use the plan to provide the officers and key employees of the combined
company with a strong incentive to work towards increasing the per share price
of Telscape common stock and to promote a sense of ownership among employees.
The maximum number of shares of common stock that may be awarded under the
incentive plan may not exceed 300,000 shares.
The following description is only a summary. It does not purport to be
complete or detailed descriptions of all of the provisions of the plan. Telscape
will furnish a copy of the plan to any shareholder upon request to the Telscape
secretary at Telscape's executive offices.
The plan permits the grant of options to employees of Telscape or its
subsidiaries, including officers and directors, in the Board's discretion.
The Board administers the plan and has complete discretion, within the
limitations in the plan, to determine the terms of the options granted,
including, but not limited to:
o the term of each option,
o the number of shares subject to each option,
o the exercise price of each option,
o the form of consideration payable upon exercise of each option, and
o the exercise date of each option.
The Board is also permitted to create a compensation committee of at least
two Board members to administer the plans on the Board's behalf.
Options granted are evidenced by stock option agreements between Telscape
and the option holder. The terms of each option granted may vary, but only to
the extent permitted by the terms of the plan. The term of an option granted
under the plan may not exceed ten years from the grant of that option.
The method of payment for options will be determined by the Board at the
time of the grant. In general, payment may be made by cash, check, promissory
note, or if the Board authorizes a "cashless exercise," Telscape will withhold
the number of shares the holder is entitled to purchase for which the equity
buildup is equal to the amount of the option purchase price. The options will be
exercisable at the times and in the manner directed by the Board. Generally,
options granted under the plan vest over three years according to a schedule of
performance (company, unit and employee) goals as determined through a
combination of objective criteria and subjective overall performance reviews.
Under the plan, the Board is authorized to grant incentive stock options.
The plan requires that the exercise price of each incentive stock option or ISO
be at least 100% of the fair market value of
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Telscape's common stock at the time the option is granted. For incentive stock
options granted to an employee who owns more than 10% of Telscape's outstanding
voting stock:]
o the option price must be at least 110% of the fair market value of
Telscape's stock on the date the ISO is granted, and
o the ISO is not exercisable more than five years after it is granted.
Upon termination of employment of an option holder, he may exercise the
options to the extent they are then exercisable. Generally, options which are
not exercisable on the date of termination, or are not exercised within three
months terminate. Upon an option holder's permanent disability, he may exercise
the options to the extent they are then exercisable for up to twelve months
following termination due to the disability. Upon an option holder's death while
an employee, his estate or representative may exercise the options which were
exercisable on the date of death within six months from the date of death. If
the option holder was not a Telscape employee at the time of death, the options
which were exercisable at the time of termination of employment may be exercised
within six months from the date of death. Options which are not exercisable on
the date of death or termination (if before death), or which are not exercised
within six months from the date of death terminate. No option granted under the
plan may be sold, pledged, assigned or transferred other than by will or the
laws of descent and distribution, and during the option holder's lifetime he is
the only person who may exercise the options.
Unless the Board terminates the plan sooner, it will terminate on December
31, 2010, after which no options may be granted under the plan. The Board may
amend, suspend or terminate the plan without shareholder approval, except that
the Board cannot increase the total number of shares available under the plan
without shareholder approval or change the terms of options previously granted
without the consent of the option holder.
Upon the proposed dissolution or liquidation of Telscape, all of the
outstanding options issued under the plan will terminate immediately prior to
the consummation of the proposed action, unless the Board provides otherwise. If
Telscape proposes to sell all or substantially all of its assets or if Telscape
is a party to a merger with or into another company, the outstanding options
issued under the plan must be substituted by equivalent options of the
succeeding corporation or the Board must declare them immediately and fully
exercisable. In the event of a reclassification, stock split, combination of
shares or similar action increasing or decreasing the amount of issued common
stock, the Board will proportionately adjust the terms of the outstanding
options issued under the plan.
The plan and all option agreements shall be construed and enforced in
accordance with and governed by the laws of the State of Texas, except to the
extent preempted by federal law.
There are 300,000 shares of our common stock available to be issued under
the plan. As of May 8, 2000, options to purchase a total of 167,077 shares of
common stock under the plan are outstanding to Pointe employees, and a total of
132,923 shares were available for future option grants.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF AWARDS
INCENTIVE STOCK OPTIONS. All stock options that qualify under the rules of
Section 422 of the Internal Revenue Code of 1986, as amended, will be entitled
to ISO treatment. To receive ISO treatment, an optionee must not dispose of the
acquired stock within two years after the option is granted or within one year
after exercise. In addition, the individual must have been an employee of
Telscape for the entire time from the date of grant of the option until three
months (or one year if the employee is disabled) before the date of the
exercise. The requirement that the individual be an employee and the two-year
and one-year holding periods are waived in the case of death of the employee. If
these requirements are met no tax will be imposed on the exercise of the option,
and any gain upon the sale of the acquired stock will be entitled to capital
gain treatment. The employee's gain on exercise (the excess of fair market value
at the time of exercise over the exercise price) of an ISO is a tax preference
item, and accordingly, is included in the computation of alternative minimum
taxable income.
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If an employee does not meet the two-year and one-year holding
requirements, otherwise called a disqualifying disposition, but does meet all
other requirements, tax will be imposed at the time of sale of the acquired
stock, but the employee's gain on exercise of the options will be treated as
ordinary income, rather than capital gain, and Telscape will get a corresponding
deduction at the time of sale in an amount equal to the income that the employee
would have recognized as long-term capital gain, depending on the holding period
of the stock. If the amount realized on the disqualifying disposition is less
than the value at the date of exercise, the amount includible in gross income,
and the amount deductible by Telscape, will equal the excess of the amount
realized on the sale or exchange over the exercise price.
An option agreement with Telscape may permit payment for stock upon the
exercise of an ISO to be made with other shares of common stock. In such a case,
in general, if an employee uses stock acquired pursuant to the exercise of an
ISO to acquire other stock in connection with the exercise of an ISO, it may
result in ordinary income if the stock so used has not met the minimum statutory
holding period necessary for favorable tax treatment as an ISO.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of the holders of a majority of the shares of Telscape
common stock present in person or represented by proxies at the meeting and
entitled to vote is required to approve the adoption of the incentive plan. If
the merger is not completed for any reason, the incentive plan will not be
adopted by Telscape.
THE TELSCAPE BOARD UNANIMOUSLY RECOMMENDS THAT THE TELSCAPE SHAREHOLDERS
VOTE FOR PROPOSAL 6 TO APPROVE THE 2000 INCENTIVE STOCK OPTION PLAN.
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TELSCAPE PROPOSAL 7
2000 EXECUTIVE LONG-TERM PLAN
BACKGROUND AND SUMMARY OF TERMS
In February 2000, the Telscape Board approved the Telscape 2000 Executive
Long-Term Plan for submission to the shareholders of Telscape. The executive
long-term plan is substantially similar to the Pointe Communications Corporation
1996 Executive Long-Term Plan, which provides for the issuance of up to 200,000
shares of Pointe common stock. Pointe's plan will be assumed by Telscape in the
merger, and Telscape will be obligated to issue its common stock upon the
exercise of any options under the plan by a former Pointe option holder. The
exercise price and number of shares of common stock available upon exercise by
Pointe employees who hold outstanding options as of the date of the merger will
be adjusted to reflect the exchange ratio under the merger so that the Pointe
employees will receive 0.223514 shares of Telscape common stock for each share
of Pointe common stock they previously had the option to purchase. After the
merger, Telscape will use the plan to provide the executive level employees of
the combined company with a strong incentive to work towards increasing the per
share price of Telscape common stock and to promote a sense of ownership among
employees. The maximum number of shares of common stock that may be awarded
under the executive long-term plan may not exceed 200,000 shares.
The following description is only a summary. It does not purport to be
complete or detailed descriptions of all of the provisions of the plan. Telscape
will furnish a copy of the plan to any shareholder upon request to the Telscape
secretary at Telscape's executive offices.
The plan permits the grant of options to employees of Telscape or its
subsidiaries, including officers and directors, in the Board's discretion.
The Board administers the plan and has complete discretion, within the
limitations in the plan, to determine the terms of the options granted,
including, but not limited to:
o the term of each option,
o the number of shares subject to each option,
o the exercise price of each option,
o the form of consideration payable upon exercise of each option, and
o the exercise date of each option.
The Board is also permitted to create a compensation committee of at least
two Board members to administer the plans on the Board's behalf.
Options granted are evidenced by stock option agreements between Telscape
and the option holder. The terms of each option granted may vary, but only to
the extent permitted by the terms of the plan. The term of an option granted
under the plan may not exceed ten years from the grant of that option.
The method of payment for options will be determined by the Board at the
time of the grant. In general, payment may be made by cash, check, promissory
note, or if the Board authorizes a "cashless exercise," Telscape will withhold
the number of shares the holder is entitled to purchase for which the equity
buildup is equal to the amount of the option purchase price. The options will be
exercisable at the times and in the manner directed by the Board. Generally,
options granted under the plan vest over three years according to a schedule of
performance (company, unit and employee) goals as determined through a
combination of objective criteria and subjective overall performance reviews.
Under the plan, the Board is authorized to grant nonqualified stock
options. The plan requires that the exercise price of each stock option be at
least 100% of the fair market value of Telscape's common stock at the time the
option is granted.
Upon termination of employment of an option holder, he may exercise the
options to the extent they are then exercisable. Upon an option holder's
permanent disability, he may exercise the options to the extent they are then
exercisable for up to twelve months following termination due to the disability.
Upon an option holder's death while an employee, his estate or representative
may exercise
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the options which were exercisable on the date of death within six months from
the date of death. If the option holder was not a Telscape employee at the time
of death, the options which were exercisable at the time of termination of
employment may be exercised within six months from the date of death. Options
which are not exercisable on the date of death or termination (if before death),
or which are not exercised within six months from the date of death terminate.
No option granted under the plan may be sold, pledged, assigned or transferred
other than by will or the laws of descent and distribution, and during the
option holder's lifetime he is the only person who may exercise the options.
Unless the Board terminates the plan sooner, it will terminate on December
31, 2010, after which no options may be granted under the plan. The Board may
amend, suspend or terminate the plan without shareholder approval, except that
the Board cannot increase the total number of shares available under the plan
without shareholder approval or change the terms of options previously granted
without the consent of the option holder.
Upon the proposed dissolution or liquidation of Telscape, all of the
outstanding options issued under the plan will terminate immediately prior to
the consummation of the proposed action, unless the Board provides otherwise. If
Telscape proposes to sell all or substantially all of its assets or if Telscape
is a party to a merger with or into another company, the outstanding options
issued under the plan must be substituted by equivalent options of the
succeeding corporation or the Board must declare them immediately and fully
exercisable. In the event of a reclassification, stock split, combination of
shares or similar action increasing or decreasing the amount of issued common
stock, the Board will proportionately adjust the terms of the outstanding
options issued under the plan.
The plan and all option agreements shall be construed and enforced in
accordance with and governed by the laws of the State of Texas, except to the
extent preempted by federal law.
There are 200,000 shares of our common stock available to be issued under
the plan. As of May 8, 2000, options to purchase a total of 83,818 shares of
common stock under the plan are outstanding to Pointe employees and a total of
116,182 shares were available for future option grants.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF AWARDS
NONQUALIFIED OPTIONS. In general, no taxable income will be recognized by
the optionee, and no deduction will be allowed to Telscape, upon the grant of a
nonqualified option. Upon exercise of a nonqualified option, an optionee will
recognize ordinary income (and Telscape will be entitled to a corresponding tax
deduction if applicable reporting requirements are satisfied) in an amount equal
to the amount by which the fair market value of the shares on the exercise date
exceeds the option exercise price. Any gain or loss realized by an optionee on
disposition of such shares generally is a capital gain or loss and does not
result in any tax deduction to Telscape.
The foregoing information is based upon present federal income tax laws and
regulations and are subject to change if the tax laws and regulations, or
interpretations thereof, are changed.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of the holders of a majority of the shares of Telscape
common stock present in person or represented by proxies at the meeting and
entitled to vote is required to approve the adoption of the executive long-term
plan. If the merger is not completed for any reason, the executive long-term
plan will not be adopted by Telscape.
THE TELSCAPE BOARD UNANIMOUSLY RECOMMENDS THAT THE TELSCAPE SHAREHOLDERS
VOTE FOR PROPOSAL 7 TO APPROVE THE 2000 EXECUTIVE LONG-TERM PLAN.
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TELSCAPE PROPOSAL 8
2000 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
BACKGROUND AND SUMMARY OF TERMS
In February 2000, the Telscape Board approved the Telscape 2000
Non-Employee Director Stock Option Plan for submission to the shareholders of
Telscape. The non-employee director plan is substantially similar to the Pointe
Communications Corporation 1996 Non-Employee Director Stock Option Plan, which
provides for the issuance of up to 500,000 shares of Pointe common stock.
Pointe's plan will be assumed by Telscape in the merger, and Telscape will be
obligated to issue its common stock upon the exercise of any options under the
plan by a former Pointe option holder. The exercise price and number of shares
of common stock available upon exercise by Pointe non-employee directors who
hold outstanding options as of the date of the merger will be adjusted to
reflect the exchange ratio under the merger so that the Pointe non-employee
directors will receive 0.223514 shares of Telscape common stock for each share
of Pointe common stock they previously had the option to purchase. After the
merger, Telscape will use the plan to provide non-employee directors of the
combined company with a strong incentive to work towards increasing the per
share price of Telscape common stock. The maximum number of shares of common
stock that may be awarded under the non-employee director plan may not exceed
500,000 shares.
The following description is only a summary. It does not purport to be
complete or detailed descriptions of all of the provisions of the plan. Telscape
will furnish a copy of the plan to any shareholder upon request to the Telscape
secretary at Telscape's executive offices.
The plan provides for the automatic grant, as long as shares are available
under the plan, of a nonqualified option to purchase 20,000 shares of common
stock upon the election to the Board of a person not employed by Telscape. The
option vests and becomes exercisable for 5,000 shares on each of the four
subsequent anniversary dates of the election if the person has served as a
director of Telscape for the entire preceding fiscal year. Telscape has reserved
a total of 500,000 shares of common stock for issuance under the plan. The plan
will be administered by the Board.
Options issued pursuant to the plan terminate with respect to any shares
not exercised upon the earliest to occur of:
o the expiration of 10 years from the date of grant of each option;
o one year after an optionee ceases to be a director of Telscape by reason
of death or disability; or
o three months after such an optionee ceases to be a director of Telscape
for any reason other than death or disability.
The method of payment for options will be determined by the Board at the
time of the grant. In general, payment may be made by cash, check, promissory
note, or if the Board authorizes a "cashless exercise," Telscape will withhold
the number of shares the holder is entitled to purchase for which the equity
buildup is equal to the amount of the option purchase price. The options will be
exercisable at the times and in the manner directed by the Board. Generally,
options granted under the plan vest over three years according to a schedule of
performance (company, unit and employee) goals as determined through a
combination of objective criteria and subjective overall performance reviews.
Unless the Board terminates the plan sooner, it will terminate on December
31, 2010, after which no options may be granted under the plan. The Board may
amend, suspend or terminate the plan without shareholder approval, except that
the Board cannot increase the total number of shares available under the plan
without shareholder approval or change the terms of options previously granted
without the consent of the option holder.
Upon the proposed dissolution or liquidation of Telscape, all of the
outstanding options issued under the plan will terminate immediately prior to
the consummation of the proposed action, unless the Board provides otherwise. If
Telscape proposes to sell all or substantially all of its assets or if
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Telscape is a party to a merger with or into another company, the outstanding
options issued under the plan must be substituted by equivalent options of the
succeeding corporation or the Board must declare them immediately and fully
exercisable. In the event of a reclassification, stock split, combination of
shares or similar action increasing or decreasing the amount of issued common
stock, the Board will proportionately adjust the terms of the outstanding
options issued under the plan.
The plan and all option agreements shall be construed and enforced in
accordance with and governed by the laws of the State of Texas, except to the
extent preempted by federal law.
There are 500,000 shares of our common stock available to be issued under
the plan. As of May 8, 2000, options to purchase a total of 111,757 shares of
common stock under the plan are outstanding to Pointe non-employee directors, no
options to purchase shares had been exercised, and a total of 388,243 shares
were available for future option grants.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF AWARDS
NONQUALIFIED OPTIONS. In general, no taxable income will be recognized by
the optionee, and no deduction will be allowed to Telscape, upon the grant of a
nonqualified option. Upon exercise of a nonqualified option, an optionee will
recognize ordinary income (and Telscape will be entitled to a corresponding tax
deduction if applicable reporting requirements are satisfied) in an amount equal
to the amount by which the fair market value of the shares on the exercise date
exceeds the option exercise price. Any gain or loss realized by an optionee on
disposition of such shares generally is a capital gain or loss and does not
result in any tax deduction to Telscape.
The foregoing information is based upon present federal income tax laws and
regulations and are subject to change if the tax laws and regulations, or
interpretations thereof, are changed.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of the holders of a majority of the shares of Telscape
common stock present in person or represented by proxies at the meeting and
entitled to vote is required to approve the adoption of the non-employee
director plan. If the merger is not completed for any reason, the non-employee
director plan will not be adopted by Telscape.
THE TELSCAPE BOARD UNANIMOUSLY RECOMMENDS THAT THE TELSCAPE SHAREHOLDERS
VOTE FOR PROPOSAL 8 TO APPROVE THE 2000 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN.
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TELSCAPE PROPOSAL 9
2000 PAY FOR PERFORMANCE STOCK OPTION PLAN
BACKGROUND AND SUMMARY OF TERMS
In February 2000, the Telscape Board approved the Telscape 2000 Pay for
Performance Stock Option Plan for submission to the shareholders of Telscape.
Telscape will use the plan to provide the officers and key employees of the
company with a strong incentive to work towards increasing the per share price
of Telscape common stock and to promote a sense of ownership among employees.
The maximum number of shares of common stock that may be awarded under the pay
for performance plan may not exceed 500,000 shares. If the merger with Pointe is
not completed, Telscape intends to use this plan as its main stock option plan
for future grants. If the merger is completed, Telscape will not adopt this
plan.
The following description is only a summary. It does not purport to be
complete or detailed descriptions of all of the provisions of the plan.
The plan permits the grant of options to employees of Telscape or its
subsidiaries, including officers and directors, in the Board's discretion.
The Board administers the plan and has complete discretion, within the
limitations in the plan, to determine the terms of the options granted,
including, but not limited to:
o the term of each option,
o the number of shares subject to each option,
o the exercise price of each option,
o the form of consideration payable upon exercise of each option, and
o the exercise date of each option.
The Board is also permitted to create a compensation committee of at least
two Board members to administer the plans on the Board's behalf.
Options granted are evidenced by stock option agreements between Telscape
and the option holder. The terms of each option granted may vary, but only to
the extent permitted by the terms of the plan. The term of an option granted
under the plan may not exceed ten years from the grant of that option.
The method of payment for options will be determined by the Board at the
time of the grant. In general, payment may be made by cash, check, promissory
note, or if the Board authorizes a "cashless exercise," Telscape will withhold
the number of shares the holder is entitled to purchase for which the equity
buildup is equal to the amount of the option purchase price. The options will be
exercisable at the times and in the manner directed by the Board. Generally,
options granted under the plan vest over three years according to a schedule of
performance (company, unit and employee) goals as determined through a
combination of objective criteria and subjective overall performance reviews.
Under the plan, the Board is authorized to grant either nonqualified stock
options or incentive stock options. The plan requires that the exercise price of
each incentive stock option or ISO be at least 100% of the fair market value of
Telscape's common stock at the time the option is granted. For incentive stock
options granted to an employee who owns more than 10% of Telscape's outstanding
voting stock:
o the option price must be at least 110% of the fair market value of
Telscape's stock on the date the ISO is granted, and
o the ISO is not exercisable more than five years after it is granted.
Upon termination of employment of an option holder, he may exercise the
options to the extent they are then exercisable. Generally, options which are
not exercisable on the date of termination, or are not exercised within three
months terminate. Upon an option holder's permanent disability, he may
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exercise the options to the extent they are then exercisable for up to twelve
months following termination due to the disability. Upon an option holder's
death while an employee, his estate or representative may exercise the options
which were exercisable on the date of death within six months from the date of
death. If the option holder was not a Telscape employee at the time of death,
the options which were exercisable at the time of termination of employment may
be exercised within six months from the date of death. Options which are not
exercisable on the date of death or termination (if before death), or which are
not exercised within six months from the date of death terminate. No option
granted under the plan may be sold, pledged, assigned or transferred other than
by will or the laws of descent and distribution, and during the option holder's
lifetime he is the only person who may exercise the options.
Unless the Board terminates the plan sooner, it will terminate on January
31, 2009, after which no options may be granted under the plan. The Board may
amend, suspend or terminate the plan without shareholder approval, except that
the Board cannot increase the total number of shares available under the plan
without shareholder approval or change the terms of options previously granted
without the consent of the option holder.
Upon the proposed dissolution or liquidation of Telscape, all of the
outstanding options issued under the plan will terminate immediately prior to
the consummation of the proposed action, unless the Board provides otherwise. If
Telscape proposes to sell all or substantially all of its assets or if Telscape
is a party to a merger with or into another company, the outstanding options
issued under the plan must be substituted by equivalent options of the
succeeding corporation or the Board must declare them immediately and fully
exercisable. In the event of a reclassification, stock split, combination of
shares or similar action increasing or decreasing the amount of issued common
stock, the Board will proportionately adjust the terms of the outstanding
options issued under the plan.
The plan and all option agreements shall be construed and enforced in
accordance with and governed by the laws of the State of Texas, except to the
extent preempted by federal law.
There are 500,000 shares of our common stock available to be issued under
the plan.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF AWARDS
INCENTIVE STOCK OPTIONS. All stock options that qualify under the rules of
Section 422 of the Internal Revenue Code of 1986, as amended, will be entitled
to ISO treatment. To receive ISO treatment, an optionee must not dispose of the
acquired stock within two years after the option is granted or within one year
after exercise. In addition, the individual must have been an employee of
Telscape for the entire time from the date of grant of the option until three
months (or one year if the employee is disabled) before the date of the
exercise. The requirement that the individual be an employee and the two-year
and one-year holding periods are waived in the case of death of the employee. If
these requirements are met no tax will be imposed on the exercise of the option,
and any gain upon the sale of the acquired stock will be entitled to capital
gain treatment. The employee's gain on exercise (the excess of fair market value
at the time of exercise over the exercise price) of an ISO is a tax preference
item, and accordingly, is included in the computation of alternative minimum
taxable income.
If an employee does not meet the two-year and one-year holding
requirements, otherwise called a disqualifying disposition, but does meet all
other requirements, tax will be imposed at the time of sale of the acquired
stock, but the employee's gain on exercise of the options will be treated as
ordinary income, rather than capital gain, and Telscape will get a corresponding
deduction at the time of sale in an amount equal to the income that the employee
would have recognized as long-term capital gain, depending on the holding period
of the stock. If the amount realized on the disqualifying disposition is less
than the value at the date of exercise, the amount includible in gross income,
and the amount deductible by Telscape, will equal the excess of the amount
realized on the sale or exchange over the exercise price.
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An option agreement with Telscape may permit payment for stock upon the
exercise of an ISO to be made with other shares of common stock. In such a case,
in general, if an employee uses stock acquired pursuant to the exercise of an
ISO to acquire other stock in connection with the exercise of an ISO, it may
result in ordinary income if the stock so used has not met the minimum statutory
holding period necessary for favorable tax treatment as an ISO.
NONQUALIFIED OPTIONS. In general, no taxable income will be recognized by
the optionee, and no deduction will be allowed to Telscape, upon the grant of a
nonqualified option. Upon exercise of a nonqualified option, an optionee will
recognize ordinary income (and Telscape will be entitled to a corresponding tax
deduction if applicable reporting requirements are satisfied) in an amount equal
to the amount by which the fair market value of the shares on the exercise date
exceeds the option exercise price. Any gain or loss realized by an optionee on
disposition of such shares generally is a capital gain or loss and does not
result in any tax deduction to Telscape.
The foregoing information is based upon present federal income tax laws and
regulations and are subject to change if the tax laws and regulations, or
interpretations thereof, are changed.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of the holders of a majority of the shares of Telscape
common stock present in person or represented by proxies at the meeting and
entitled to vote is required to approve the adoption of the pay for performance
plan. The pay for performance plan will only be adopted by Telscape if the
merger with Pointe is not completed.
THE TELSCAPE BOARD UNANIMOUSLY RECOMMENDS THAT THE TELSCAPE SHAREHOLDERS
VOTE FOR PROPOSAL 9 TO APPROVE THE 2000 PAY FOR PERFORMANCE STOCK OPTION PLAN.
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TELSCAPE PROPOSAL 10
GENERAL
Telscape's common stock currently is listed on the Nasdaq National Market.
Pursuant to the Marketplace Rules for the Nasdaq National Market, Telscape must
obtain shareholder approval prior to issuing common stock or securities
convertible into or exercisable for common stock in a transaction other than a
public offering when the amount of the common stock to be issued, including
shares issuable upon conversion or upon exercise of convertible preferred stock,
warrants or other convertible instruments, is equal to or is greater than 20% of
the common stock or voting power of the issuing company which is outstanding
prior to the issuance.
In connection with the merger agreement, Pointe agreed to make a loan of
$10,000,000 to Telscape which is evidenced by a note that is convertible into
shares of Telscape Class C Convertible Senior Preferred Stock in certain
circumstances Telscape executed the 12% Convertible Promissory Note (the
"Pointe Note") with Pointe in the principal amount of $10,000,000 and payable
on June 30, 2000. The note will accure interest at 12% per year and may not be
prepaid prior to June 30, 2000, subject to the conversion rights at the parties.
Telscape will be in default on the note if Telscape fails to pay the
principal and interest as they come due, fails to comply with the note, cannot
pay the principal or interest payments because Telscape is insolvent or is in
bankruptcy, or the merger agreement with Pointe is terminated. Pointe may
require full payment of the note, including unpaid interest, if Telscape is in
default.
The Pointe Note will be convertible into 100,000 shares of Class C
preferred stock and a warrant to purchase 500,000 shares of Telscape's common
stock at $7.00 per share, unless adjusted by the terms of the warrant agreement.
If Telscape declares a stock split, stock dividend, reverse split or other
recapitalization, the number of shares of Class C preferred stock and common
stock into which the warrants are convertible will be adjusted proportionately.
If Telscape enters into a merger or reclassification of Telscape, Telscape will
make it a condition that the note will be convertible into similar securities
and in the same amounts as would have been received if the warrants were
converted at the time of the merger.
Issuance of the Class C preferred stock and the warrants may exceed 20% of
the outstanding shares of Telscape's common stock.
TELSCAPE CLASS C PREFERRED STOCK
The Class C preferred stock pays quarterly dividends at a rate of 12% per
year. Telscape first must pay dividends on the Class C preferred stock and all
stocks of equal dividend priority, namely the Class D preferred stock, the Class
E preferred stock and the Class F preferred stock, before making any payments to
any junior stock, such as Telscape's common stock. To preserve their ownership
percentage in Telscape, holders of the Class C preferred stock have the right to
purchase Telscape's securities in certain new offerings by Telscape that do not
include a public offering, a merger, exercise of employee stock options, or
exercise of derivative securities outstanding upon the date of issuance of the
Class C preferred stock. Telscape has the right to pay the dividends in
additional shares of Class C preferred stock.
Upon any liquidation, dissolution or merger, regardless of whether Telscape
is the surviving company, Telscape must pay to the holders of Class C preferred
stock their preferred liquidation amount, which is $100.00 per share plus all
accrued but unpaid dividends, prior to paying any liquidation amounts to any
junior stock, such as Telscape's common stock. The Class D preferred stock,
Class E preferred stock and the Class F preferred stock are of equal liquidation
preference with the Class C preferred stock.
The holders of Telscape's Class C preferred stock will have the right to
receive notice of a meeting of Telscape's shareholders and to vote the number of
shares into which the Class C preferred stock is convertible at any meeting of
Telscape's shareholders. The holders of Class C preferred stock vote as a
separate class only as provided in the Texas Business Corporation Act and on
votes that affect their rights or privileges as holders of Class C preferred
stock. Any vote of the class of the holders of Class C preferred stock will be
approved by a two thirds (2/3) majority of those holders.
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The holders of Telscape's Class C preferred stock have the right to convert
their shares into Telscape's common stock at any time. The conversion ratio for
each share will be the $100.00 stated value divided by $8.20 per share of common
stock, except that if Telscape does not merge with Pointe and if Pointe or its
shareholders receive Telscape's Class C Preferred Stock as a result of a
conversion of the Pointe Note as described above, then the conversion ratio for
each share will be the $100.00 stated value divided by $5.00 per share of common
stock.
If Telscape issues any new shares of common stock, other than shares issued
as employees, officers, directors or consultants exercise their options, and if
the price for the newly issued shares of common stock is lower than the
conversion price of the Class F preferred stock, then Telscape must reduce the
conversion price of the Class C Preferred Stock. Telscape will determine the new
conversion price by dividing (a) the sum of (1) the conversion price times the
total number of outstanding shares of common stock immediately prior to the new
issuance, after taking into account all conversions and exercises of common
stock, plus (2) the value of the consideration that Telscape receives for the
new issuance of the common stock by (b) the total number of outstanding shares
of common stock immediately after the new issuance, after taking into account
all conversions and exercises of common stock. Telscape also will adjust the
conversion price proportionately for any other adjustments to the number of
shares of outstanding common stock, like in a stock split, stock dividend or
reverse stock split. Upon any merger or reorganization, the Class C preferred
stock will be convertible into the number of shares of common stock of the new
entity as if the shares of Class C Preferred Stock had been converted
immediately prior to the exchange for new securities after the merger or
reorganization.
Telscape has reserved the right to cause the holders of Class C preferred
stock to convert their shares if Telscape enters into a public offering of
Telscape's common stock to raise at least $30,000,000 or if after one year from
issuing the Class C preferred stock, (1) Telscape's common stock is trading on
the New York Stock Exchange, the Nasdaq National Market or the American Stock
Exchange, (2) the common stock shall have traded for a period of 20 consecutive
trading days at a price of $15.00 (or the adjusted figure after any stock split,
stock dividend, reverse stock split or similar recapitalization event), and (3)
the cumulative average daily trading volume in that period is at least
$3,000,000.
Additionally, if the merger agreement is terminated and Pointe elects to
convert the Pointe Note into Class C preferred stock, the Class C preferred
stock issued upon this conversion of the Pointe Note will convert at the $8.20
conversion price.
Telscape will not issue fractional shares upon any conversion. Telscape
will pay the holders the fraction of common stock times the conversion price in
effect at conversion.
WARRANTS
Telscape has issued warrants to purchase 500,000 shares of Telscape's
common stock in connection with the Pointe Note. The warrants terminate on the
fifth anniversary of the date of issuance. The exercise price of the warrants is
$7.00 per share, subject to adjustment in the same manner as the Class C
preferred stock for any event that changes the number of outstanding shares of
Telscape's common stock. A cashless exercise option is also available to
warrantholders.
If the market price of the common stock is equal to at least $15.00 per
share (as adjusted for stock splits, recapitalizations, mergers, consolidations
and other similar events) for 20 consecutive trading days, Telscape has the
right to cause the warrantholders to exercise the warrants.
If the shareholders do not approve this proposal, Telscape will not be able
to comply with the terms of the Pointe Note to issue shares of Class C preferred
stock upon conversion. Telscape will be required to pay back the full
$10,000,000 of the Pointe Note plus accrued interest on June 30, 2000.
THE TELSCAPE BOARD UNANIMOUSLY RECOMMENDS THAT THE TELSCAPE SHAREHOLDERS
VOTE FOR PROPOSAL 10 TO APPROVE THE ISSUANCE OF THE CLASS C PREFERRED STOCK AND
WARRANTS IN CONNECTION WITH THE CONVERSION OF THE POINTE NOTE.
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TELSCAPE PROPOSAL 11
GENERAL
Telscape's common stock currently is listed on the Nasdaq National Market.
Pursuant to the Marketplace Rules for the Nasdaq National Market, Telscape must
obtain shareholder approval prior to issuing common stock or securities
convertible into or exercisable for common stock in a transaction other than a
public offering when the amount of the common stock to be issued, including
shares issuable upon conversion or upon exercise of convertible preferred stock,
warrants or other convertible instruments, is equal to or is greater than 20% of
the common stock or voting power of the issuing company which is outstanding
prior to the issuance.
Telscape currently is negotiating a transaction to raise approximately
$29,575,000 and exchange an additional $2,000,000 of debt for equity in a
private offering of its newly designated Class F convertible senior preferred
stock that has a stated value of $100.00 per share that is exempt from the
registration requirements of the Securities Act. In connection with this exempt
offering, Telscape has authorized the issuance of 315,750 shares of the Class F
preferred stock which are potentially convertible into an aggregate of 3,850,612
shares of Telscape's common stock. Additionally, in connection with the private
placement, Telscape has authorized the issuance of warrants to purchase
1,925,306 shares of Telscape's common stock, and if the merger with Pointe is
not completed, warrants to purchase an additional 1,925,306 shares of Telscape's
common stock will be issued. In the aggregate, the private placement includes
securities convertible into or exercisable for a total of 5,775,915 shares of
Telscape's common stock which would be equal to approximately 45% of Telscape's
outstanding common stock prior to the merger. Therefore, the Nasdaq rules
require the Telscape shareholders to approve the issuance.
TELSCAPE CLASS F PREFERRED STOCK
The Class F preferred stock pays quarterly dividends at a rate of 12% per
year. Telscape first must pay dividends on the Class F preferred stock and all
stock of equal dividend priority, namely the Class C preferred stock, the Class
D preferred stock and the Class E preferred stock, before making any payments to
any junior stock, such as Telscape's common stock. Telscape has the right to pay
the dividends in additional shares of Class F preferred stock.
Upon any liquidation, dissolution or merger, where Telscape is not the
surviving company, Telscape must pay to the holders of Class F preferred stock
their preferred liquidation amount, which is $100.00 per share plus all accrued
but unpaid dividends, prior to paying any liquidation amounts to any junior
stock, such as Telscape's common stock. The Class C preferred stock, Class D
preferred stock and the Class E preferred stock are of equal liquidation
preference with the Class F preferred stock.
The holders of Telscape's Class F preferred stock will have the right to
receive notice of any meeting of Telscape's shareholders and to vote the number
of shares into which the Class F preferred stock is convertible at any meeting
of Telscape's shareholders. The holders of Class F preferred stock vote as a
separate class only as provided in the Texas Business Corporation Act and on
votes that affect their rights or privileges as holders of Class F preferred
stock. Any vote of the class of the holders of Class F preferred stock will be
approved by a two thirds (2/3) majority of those holders.
The holders of Telscape's Class F preferred stock have the right to convert
their shares into Telscape's common stock at any time. The conversion ratio for
each share will be the $100.00 stated value divided by $8.20 per share of common
stock.
If Telscape issues any new shares of common stock, other than shares issued
as employees, officers, directors, or consultants exercise their current options
or warrants or their options or warrants issued in connection with the merger or
other than shares issued upon the conversion of the Class C, Class D, Class E or
Class F preferred stock, and if the price for the newly issued shares of common
stock is lower than the conversion price of the Class F preferred Stock, then
Telscape must reduce the conversion price for the Class F preferred stock.
Telscape will determine the new conversion price by dividing (a) the sum of (1)
the conversion price times the total number of outstanding shares of common
stock immediately prior to the new issuance, after taking into account all
conversions and
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exercises of common stock, plus (2) the value of the consideration that Telscape
receives for the new issuance of the common stock by (b) the total number of
outstanding shares of common stock immediately after the new issuance, after
taking into account all conversions and exercises of common stock. Telscape also
will adjust the conversion price proportionately for any other adjustments to
the number of shares of outstanding common stock, like in a stock split, stock
dividend or reverse stock split. Upon any merger or reorganization, the Class F
preferred stock will be convertible into the number of shares of common stock of
the new entity as if the shares of Class F preferred stock had been converted
immediately prior to the exchange for new securities after the merger or
reorganization.
Telscape has reserved the right to cause the holders of Class F preferred
stock to convert their shares if Telscape enters into a public offering of
Telscape's common stock or if after one year from issuing the Class F preferred
stock, (1) Telscape's common stock is trading on the New York Stock Exchange,
the Nasdaq National Market or the American Stock Exchange, (2) the common stock
shall have traded for a period of 20 consecutive trading days at a price of
$15.00 (or the adjusted figure after any stock split, stock dividend, reverse
stock split or similar recapitalization event), and (3) the cumulative average
daily trading volume in that period is at least $3,000,000.
Telscape shall be required to exchange all of the class F preferred stock
for shares of Common Stock on the seventh anniversary of the issue date of the
Class F preferred stock; provided that the shares of common stock to be issued
have been registered and listed on each securities exchange, over-the-counter
market or on the Nasdaq National Market on which similar securities issued by
Telscape are then listed.
The proceeds of the Class F Preferred have been placed into escrow. Prior
to the closing of the merger and with the consent of Pointe, Telscape may fund
$4.6 million out of escrow and issue the corresponding Class F Preferred and
warrants. In the event the merger with Pointe is not consummated by June 30,
2000, the holders of Class F preferred stock shall have the right to require
Telscape to redeem the shares of Class F preferred stock for cash in an amount
equal to the purchase price paid for such shares plus accrued and unpaid
dividends. The right of redemption shall be exercisable by the holders of such
shares for the thirty days after the earlier to occur of (i) the date of
termination of the merger agreement, or (i) June 30, 2000. If the right of
redemption is not exercised within such thirty day period, it shall expire and
be of no further force or effect.
WARRANTS
Telscape has issued warrants to purchase 1,925,306 shares of Telscape's
common stock in connection with the private placement offering. The warrants
terminate on the fifth anniversary of the date of issuance. The exercise price
of the warrants is $10.00 per share, subject to adjustment in the same manner as
the Class F preferred stock for any event that changes the number of outstanding
shares of Telscape's common stock. A cashless exercise option is also available
to warrantholders.
If the market price of the common stock is equal to at least $15.00 per
share (as adjusted for stock splits, recapitalizations, mergers, consolidations
and other similar events) for 20 consecutive trading days, Telscape has the
right to cause the warrantholders to exercise the warrants.
If the shareholders do not approve this proposal, Telscape will not be able
to receive funding equal to approximately $29,575,000 which will be used to fund
Telscape's operations plus the exchange of $2,000,000 of debt. Telscape will
need to seek alternate funding that may not be obtained at terms equal to or
more favorable to the terms of the private placement of the Class F preferred
stock.
THE TELSCAPE BOARD UNANIMOUSLY RECOMMENDS THAT THE TELSCAPE SHAREHOLDERS
VOTE FOR PROPOSAL 11 TO APPROVE THE ISSUANCE OF THE CLASS F PREFERRED STOCK AND
WARRANTS IN CONNECTION WITH THE PRIVATE PLACEMENT OF THOSE SECURITIES.
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POINTE PROPOSAL 2
Pointe currently has nine directors serving on its board. At the annual
meeting, holders of common stock and preferred stock will elect six directors to
serve with the two directors designated by the holders of Class A preferred
stock and one director designated by holders of the Class B preferred stock. All
directors are elected for a period of one year or until a successor has been
elected and qualified at the next annual meeting. The board's nominees for the
six positions to be voted at the annual meeting are Stephen E. Raville, Patrick
E. Delaney, William P. O'Reilly, F. Scott Yeager, Gerald F. Schmidt, and James
H. Dorsey III. Each of the nominees currently is a member of Pointe's board.
The two directors designated by the holders of Class A preferred stock are
David C. Lee and Rafic A. Bizri. The director designated by the holders of Class
B preferred stock is Darryl B. Thompson.
This board, when elected, will be Pointe's board of directors for the next
year if the proposed merger with Telscape is not completed. If the merger is
completed, the combined company will have a board of directors comprised of six
Pointe nominees and three Telscape nominees. Please see page 45 under the
heading "Officers and Directors of the Combined Company Following Merger" for
a list of the Telscape board after the merger is completed.
The biographies of the nominees for the director positions and the
directors designated by holders of preferred stock appear in the Pointe's
Business Description under the table of the directors, executive officers, and
key employees.
THE POINTE BOARD UNANIMOUSLY RECOMMENDS THAT THE POINTE SHAREHOLDERS VOTE
TO ELECT THE NOMINEE DIRECTORS.
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POINTE PROPOSAL 3
GENERAL
In its operating history, Pointe has issued options and warrants as a means
of attracting and retaining key employees with a minimum outlay of cash. By
employing this procedure, Pointe has been able to retain cash in its operating
accounts to fund working capital expenditures. Additionally, Pointe has added
key assets to its portfolio of operating assets and has raised additional cash
to fund operations by means of acquisitions and private offerings involving the
issuance of common stock, preferred stock or other securities which are
convertible into common stock.
Currently, the articles of incorporation authorize the issuance of
100,000,000 shares of common stock and 5,000,000 shares of Preferred Stock. As
of May 8, 2000, 53,244,428 shares of common stock were issued and outstanding.
Additionally, Pointe has 18,662 shares of its preferred stock issued and
outstanding and convertible into 36,783,667 shares of common stock. There are
option holders, warrant holders and holders of other convertible debt
instruments which all convert into or can be exercised for Pointe's common
stock. If all holders of convertible instruments converted or exercised those
instruments, Pointe would have to issue a total of, at least, 34,942,777 shares
of common stock, which would mean at any time Point needs, at least, 124,970,872
total shares of its common stock available for issuance.
The Board's decisions to issue Pointe's common stock and other convertible
instruments were made prior to entering into the proposed merger transaction
with Telscape. If the proposed merger is not completed, Pointe plans to continue
its practice of increasing shareholder value by means of issuing Pointe's common
stock and convertible instruments to attract and retain key employees, to
acquire valuable assets, and to fund Pointe's operations.
AMENDMENT
On February 14, 2000, the Board approved an increase in the authorized
number of shares of Common Stock from 100,000,000 to 200,000,000 shares, subject
to shareholder approval. If this amendment is approved by Pointe's shareholders,
100,000,000 additional shares of common stock will be authorized and available
for issuance or sale (excluding shares reserved for issuance for specified
purposes, such as pursuant to stock option plans). The Board will have authority
to issue the additional 100,000,000 shares of common stock at its discretion in
accordance with applicable law. Issuance of any of the additional 100,000,000
shares of common stock will dilute the voting percentage and ownership
percentage held by the current holders of common stock.
PURPOSES OF PROPOSED AMENDMENT
As indicated above, if all convertible instrument were to be converted or
exercised, Pointe would be obligated to issue 71,726,444 shares of common stock
to be added to the 53,244,428 shares of currently outstanding common stock. At
the present time, this number would exceed the currently authorized number of
shares of common stock.
Pointe needs to meet its conversion or exercise requests and it also needs
to have the flexibility to issue shares of common stock for any other purpose,
including providing future incentives to employees, providing consideration in
acquisitions of either operating companies or operating assets, and providing
the means to raise capital in the public or private equity markets. Pointe
believes that these strategies employed by Pointe have added value to Pointe's
shareholders in the past and will continue to add value in the future.
If the shareholders do not approve this proposed amendment, Pointe may fall
into default on some of its conversion obligations which will trigger a
requirement that Pointe redeem certain convertible instruments for cash. This
result will cause a drain on Pointe's cash flow and could hinder future
operations and acquisitions. Additionally, Pointe may fall into breach of its
agreements with some of the warrant and option holders and will be limited in
its ability to raise capital or acquire companies or assets.
THE POINTE BOARD UNANIMOUSLY RECOMMENDS THAT POINTE SHAREHOLDERS VOTE FOR
PROPOSAL 3 TO APPROVE AN AMENDMENT TO POINTE'S ARTICLES OF INCORPORTION TO
INCREASE POINTE'S AUTHORIZED SHARES.
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POINTE PROPOSAL 4
1999 PAY FOR PERFORMANCE STOCK OPTION PLAN
BACKGROUND AND SUMMARY OF TERMS
On August 9, 1999, the Board of Directors adopted the following stock
option plan:
o Pointe Communications Corporation 1999 Pay for Performance Stock
Option Plan.
The plan was adopted to attract and retain qualified employees, including
officers and directors, by providing additional incentive and rewards to
employees for exemplary service. Employees of Pointe and its subsidiaries may be
granted stock options, which may be designated as nonqualified stock options or
incentive stock options. At the Pointe annual meeting, Pointe's shareholders
will be asked to consider and approve this plan.
The plan was adopted by the Board prior to the discussions with Telscape
regarding the proposed merger. Section 422 of the Internal Revenue Code of 1986,
as amended, requires that shareholders must approve any incentive stock option
plan within one year of the adoption of the plan by the company's board of
directors. Pointe's Board believes that Pointe and its shareholders will benefit
from adopting the plan. If Pointe's shareholders do not approve the merger, the
plan still must be approved by Pointe's shareholders to ensure incentive stock
option treatment for awards already granted under the plan.
The following description of the plan is only a summary; it does not
purport to be a complete or detailed description of all of the provisions of the
plan. Pointe will furnish a copy of the plan to any shareholder upon written
request to the Pointe Secretary at Pointe's executive offices.
The plan permits the grant of options to employees of Pointe or its
subsidiaries, including officers and directors, in the Board's discretion.
The Board administers the plan, and has complete discretion, within the
limitations in the plan, to determine the terms of the options granted,
including, but not limited to:
o the term of each option,
o the number of shares subject to each option,
o the exercise price of each option,
o the form of consideration payable upon exercise of each option, and
o the exercise date of each option.
The Board is also permitted to create a compensation committee of at least
two Board members to administer the plan on the Board's behalf.
Options granted are evidenced by stock option agreements between Pointe and
the option holder. The terms of each option granted may vary, but only to the
extent permitted by the terms of the plan. The term of an option granted under
the plan may not exceed ten years from the grant of that option.
The method of payment for options will be determined by the Board at the
time of the grant. In general, payment may be made by cash, check, promissory
note, or if the Board authorizes a "cashless exercise," Pointe will withhold
the number of shares the holder is entitled to purchase for which the equity
buildup is equal to the amount of the option purchase price. The options will be
exercisable at the times and in the manner directed by the Board. Generally,
options granted under the plan vest over seven years according to a schedule of
performance (company, unit and employee) goals as determined through a
combination of objective criteria and subjective overall performance reviews.
Under the plan, the Board is authorized to grant either nonqualified stock
options or incentive stock options. The plan requires that the exercise price of
each incentive stock option or ISO be at least 100% of the fair market value of
Pointe's common stock at the time the option is granted. For
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incentive stock options granted to an employee who owns more than 10% of
Pointe's outstanding voting stock:
o the option price must be at least 110% of the fair market value of
Pointe's stock on the date the ISO is granted; and
o the ISO is not exercisable more than five years after it is granted.
Upon termination of employment of an option holder, he may exercise the
options to the extent they are then exercisable. Generally, options which are
not exercisable on the date of termination, or are not exercised within three
months terminate. Upon an option holder's permanent disability, he may exercise
the options to the extent they are then exercisable for up to twelve months
following termination due to the disability. Upon an option holder's death while
an employee, his estate or representative may exercise the options which were
exercisable on the date of death within six months from the date of death. If
the option holder was not a Pointe employee at the time of death, the options
which were exercisable at the time of termination of employment may be exercised
within six months from the date of death. Options which are not exercisable on
the date of death or termination (if before death), or which are not exercised
within six months from the date of death terminate. No option granted under the
plan may be sold, pledged, assigned or transferred other than by will or the
laws of descent and distribution, and during the option holder's lifetime he is
the only person who may exercise the options.
Unless the Board terminates the plan sooner, it will terminate on January
31, 2009, after which no options may be granted under the plan. The Board may
amend, suspend or terminate the plan without shareholder approval, except that
the Board cannot increase the total number of shares available under the plan
without shareholder approval or change the terms of options previously granted
without the consent of the option holder.
Upon the proposed dissolution or liquidation of Pointe, all of the
outstanding options issued under the plan will terminate immediately prior to
the consummation of the proposed action, unless the Board provides otherwise. If
Pointe proposes to sell all or substantially all of its assets or if Pointe is a
party to a merger with or into another company, the outstanding options issued
under the plan must be substituted by equivalent options of the succeeding
corporation or the Board must declare them immediately and fully exercisable. In
the event of a reclassification, stock split, combination of shares or similar
action increasing or decreasing the amount of issued common stock, the Board
will proportionately adjust the terms of the outstanding options issued under
the plan.
The plan and all option agreements shall be construed and enforced in
accordance with and governed by the laws of the State of Georgia, except to the
extent preempted by federal law.
There are 5,000,000 shares of our common stock available to be issued under
the plan. As of May 8, 2000, options to purchase a total of 2,045,366 shares of
common stock under the plan are outstanding to Pointe employees, no options to
purchase shares had been exercised, and a total of 2,954,634 shares were
available for future option grants.
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The following table is a summary of the options previously granted to
Pointe employees under the plans.
SUMMARY OF OPTIONS GRANTED UNDER THE PLANS
NUMBER OF OPTIONS
RECEIVED UNDER PAY
FOR PERFORMANCE
PLAN
------------------
DIRECTORS AND EXECUTIVE OFFICERS
Stephen E. Raville................... -0-
Chief Executive Officer
Peter C. Alexander................... 500,000
President and Chief Operating
Officer
Patrick E. Delaney................... -0-
Executive Vice President
Federico L. Fuentes.................. -0-
Chief Technical Officer
Ruben Garcia......................... 550,000
President, CLEC Division
Jaime Zambra......................... -0-
President, International Division
John F. Nort......................... -0-
President, Prepaid Solutions
Division
Totals..................... 1,050,000
UNITED STATES TAX CONSEQUENCES OF AWARDS
INCENTIVE STOCK OPTIONS. All stock options that qualify under the rules of
Section 422 of the Internal Revenue Code of 1986, as amended, will be entitled
to ISO treatment. To receive ISO treatment, an optionee must not dispose of the
acquired stock within two years after the option is granted or within one year
after exercise. In addition, the individual must have been an employee of Pointe
for the entire time from the date of grant of the option until three months (or
one year if the employee is disabled) before the date of the exercise. The
requirement that the individual be an employee and the two-year and one-year
holding periods are waived in the case of death of the employee. If these
requirements are met no tax will be imposed on the exercise of the option, and
any gain upon the sale of the acquired stock will be entitled to capital gain
treatment. The employee's gain on exercise (the excess of fair market value at
the time of exercise over the exercise price) of an ISO is a tax preference
item, and accordingly, is included in the computation of alternative minimum
taxable income.
If an employee does not meet the two-year and one-year holding
requirements, otherwise called a disqualifying disposition, but does meet all
other requirements, tax will be imposed at the time of sale of the acquired
stock, but the employee's gain on exercise of the options will be treated as
ordinary income, rather than capital gain, and Pointe will get a corresponding
deduction at the time of sale in an amount equal to the income that the employee
would have recognized as long-term capital gain, depending on the holding period
of the stock. If the amount realized on the disqualifying disposition is less
than the value at the date of exercise, the amount includible in gross income,
and the amount deductible by Pointe, will equal the excess of the amount
realized on the sale or exchange over the exercise price.
An option agreement with Pointe may permit payment for stock upon the
exercise of an ISO to be made with other shares of common stock. In such a case,
in general, if an employee uses stock acquired pursuant to the exercise of an
ISO to acquire other stock in connection with the exercise of an ISO, it may
result in ordinary income if the stock so used has not met the minimum statutory
holding period necessary for favorable tax treatment as an ISO.
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NONQUALIFIED OPTIONS. In general, no taxable income will be recognized by
the optionee, and no deduction will be allowed to Pointe, upon the grant of a
nonqualified option. Upon exercise of a nonqualified option, an optionee will
recognize ordinary income (and Pointe will be entitled to a corresponding tax
deduction if applicable reporting requirements are satisfied) in an amount equal
to the amount by which the fair market value of the shares on the exercise date
exceeds the option exercise price. Any gain or loss realized by an optionee on
disposition of such shares generally is a capital gain or loss and does not
result in any tax deduction to Pointe.
The foregoing information is based upon present federal income tax laws and
regulations and are subject to change if the tax laws and regulations, or
interpretations thereof, are changed.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of the holders of a majority of the shares of Pointe's
common stock and preferred stock present in person or represented by proxies at
the meeting and entitled to vote is required to approve the adoption of the
plan.
THE POINTE BOARD UNANIMOUSLY RECOMMENDS THAT THE POINTE SHAREHOLDERS VOTE
FOR PROPOSAL 4 TO APPROVE THE 1999 PAY FOR PERFORMANCE STOCK OPTION PLAN.
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POINTE PROPOSAL 5
1999 EXECUTIVE MARKET VALUE APPRECIATION STOCK OPTION PLAN
BACKGROUND AND SUMMARY OF TERMS
On August 9, 1999, the Board of Directors adopted the following stock
option plan:
o Pointe Communications Corporation 1999 Executive Market Value
Appreciation Stock Option Plan.
The plan was adopted to attract and retain qualified employees, including
officers and directors, by providing additional incentive and rewards to
employees for exemplary service. Employees of Pointe and its subsidiaries may be
granted stock options, which may be designated as nonqualified stock options or
incentive stock options. At the Pointe annual meeting, Pointe's shareholders
will be asked to consider and approve this plan.
The plan was adopted by the Board prior to the discussions with Telscape
regarding the proposed merger. Section 422 of the Internal Revenue Code of 1986,
as amended, requires that shareholders must approve any incentive stock option
plan within one year of the adoption of the plan by the company's board of
directors. Pointe's Board believes that Pointe and its shareholders will benefit
from adopting the plan. If Pointe's shareholders do not approve the merger, the
plan still must be approved by Pointe's shareholders to ensure incentive stock
option treatment for awards already granted under the plan.
The following description of the plan is only a summary; it does not
purport to be a complete or detailed description of all of the provisions of the
plan. Pointe will furnish a copy of the plan to any shareholder upon written
request to the Pointe Secretary at Pointe's executive offices.
The plan, while being designed for executive personnel, permits the grant
of options to employees of Pointe or its subsidiaries, including officers and
directors, in the Board's discretion.
The Board administers the plan, and has complete discretion, within the
limitations in the plan, to determine the terms of the options granted,
including, but not limited to:
o the term of each option,
o the number of shares subject to each option,
o the exercise price of each option,
o the form of consideration payable upon exercise of each option, and
o the exercise date of each option.
The Board is also permitted to create a compensation committee of at least
two Board members to administer the plan on the Board's behalf.
Options granted are evidenced by stock option agreements between Pointe and
the option holder. The terms of each option granted may vary, but only to the
extent permitted by the terms of the plan. The term of an option granted under
the plan may not exceed ten years from the grant of that option.
The method of payment for options will be determined by the Board at the
time of the grant. In general, payment may be made by cash, check, promissory
note, or if the Board authorizes a "cashless exercise," Pointe will withhold
the number of shares the holder is entitled to purchase for which the equity
buildup is equal to the amount of the option purchase price. The options will be
exercisable at the times and in the manner directed by the Board. Options
granted under the plan generally vest over ten years at a rate of 10% of options
granted for each $1.00 of increase in Pointe's stock price, determined at year
end.
Under the plan, the Board is authorized to grant either nonqualified stock
options or incentive stock options. The plan requires that the exercise price of
each incentive stock option or ISO be at least 100% of the fair market value of
Pointe's common stock at the time the option is granted. For
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<PAGE>
incentive stock options granted to an employee who owns more than 10% of
Pointe's outstanding voting stock:
o the option price must be at least 110% of the fair market value of
Pointe's stock on the date the ISO is granted; and
o the ISO is not exercisable more than five years after it is granted.
Upon termination of employment of an option holder, he may exercise the
options to the extent they are then exercisable. Generally, options which are
not exercisable on the date of termination, or are not exercised within three
months terminate. Upon an option holder's permanent disability, he may exercise
the options to the extent they are then exercisable for up to twelve months
following termination due to the disability. Upon an option holder's death while
an employee, his estate or representative may exercise the options which were
exercisable on the date of death within six months from the date of death. If
the option holder was not a Pointe employee at the time of death, the options
which were exercisable at the time of termination of employment may be exercised
within six months from the date of death. Options which are not exercisable on
the date of death or termination (if before death), or which are not exercised
within six months from the date of death terminate. No option granted under the
plan may be sold, pledged, assigned or transferred other than by will or the
laws of descent and distribution, and during the option holder's lifetime he is
the only person who may exercise the options.
Unless the Board terminates the plan sooner, it will terminate on January
31, 2009, after which no options may be granted under the plan. The Board may
amend, suspend or terminate the plan without shareholder approval, except that
the Board cannot increase the total number of shares available under the plan
without shareholder approval or change the terms of options previously granted
without the consent of the option holder.
Upon the proposed dissolution or liquidation of Pointe, all of the
outstanding options issued under the plan will terminate immediately prior to
the consummation of the proposed action, unless the Board provides otherwise. If
Pointe proposes to sell all or substantially all of its assets or if Pointe is a
party to a merger with or into another company, the outstanding options issued
under the plan must be substituted by equivalent options of the succeeding
corporation or the Board must declare them immediately and fully exercisable. In
the event of a reclassification, stock split, combination of shares or similar
action increasing or decreasing the amount of issued common stock, the Board
will proportionately adjust the terms of the outstanding options issued under
the plan.
The plan and all option agreements shall be construed and enforced in
accordance with and governed by the laws of the State of Georgia, except to the
extent preempted by federal law.
There are 5,000,000 shares of our common stock available to be issued under
the plan. As of May 8, 2000, options to purchase a total of 2,625,000 shares of
common stock under the plan are outstanding to Pointe employees, no options to
purchase shares had been exercised, and a total of 2,375,000 shares were
available for future option grants.
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The following table is a summary of the options previously granted to
Pointe employees under the plans.
SUMMARY OF OPTIONS GRANTED UNDER THE PLANS
NUMBER OF OPTIONS
RECEIVED UNDER
EXECUTIVE
MARKET PLAN
------------------
DIRECTORS AND EXECUTIVE OFFICERS
Stephen E. Raville................... -0-
Chief Executive Officer
Peter C. Alexander................... 500,000
President and Chief Operating
Officer
Patrick E. Delaney................... 400,000
Executive Vice President
Federico L. Fuentes.................. 500,000
Chief Technical Officer
Ruben Garcia......................... 350,000
President, CLEC Division
Jaime Zambra......................... 500,000
President, International Division
John F. Nort......................... 400,000
President, Prepaid Solutions
Division
Totals..................... 2,650,000
UNITED STATES TAX CONSEQUENCES OF AWARDS
INCENTIVE STOCK OPTIONS. All stock options that qualify under the rules of
Section 422 of the Internal Revenue Code of 1986, as amended, will be entitled
to ISO treatment. To receive ISO treatment, an optionee must not dispose of the
acquired stock within two years after the option is granted or within one year
after exercise. In addition, the individual must have been an employee of Pointe
for the entire time from the date of grant of the option until three months (or
one year if the employee is disabled) before the date of the exercise. The
requirement that the individual be an employee and the two-year and one-year
holding periods are waived in the case of death of the employee. If these
requirements are met no tax will be imposed on the exercise of the option, and
any gain upon the sale of the acquired stock will be entitled to capital gain
treatment. The employee's gain on exercise (the excess of fair market value at
the time of exercise over the exercise price) of an ISO is a tax preference
item, and accordingly, is included in the computation of alternative minimum
taxable income.
If an employee does not meet the two-year and one-year holding
requirements, otherwise called a disqualifying disposition, but does meet all
other requirements, tax will be imposed at the time of sale of the acquired
stock, but the employee's gain on exercise of the options will be treated as
ordinary income, rather than capital gain, and Pointe will get a corresponding
deduction at the time of sale in an amount equal to the income that the employee
would have recognized as long-term capital gain, depending on the holding period
of the stock. If the amount realized on the disqualifying disposition is less
than the value at the date of exercise, the amount includible in gross income,
and the amount deductible by Pointe, will equal the excess of the amount
realized on the sale or exchange over the exercise price.
An option agreement with Pointe may permit payment for stock upon the
exercise of an ISO to be made with other shares of common stock. In such a case,
in general, if an employee uses stock acquired pursuant to the exercise of an
ISO to acquire other stock in connection with the exercise of an ISO, it may
result in ordinary income if the stock so used has not met the minimum statutory
holding period necessary for favorable tax treatment as an ISO.
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NONQUALIFIED OPTIONS. In general, no taxable income will be recognized by
the optionee, and no deduction will be allowed to Pointe, upon the grant of a
nonqualified option. Upon exercise of a nonqualified option, an optionee will
recognize ordinary income (and Pointe will be entitled to a corresponding tax
deduction if applicable reporting requirements are satisfied) in an amount equal
to the amount by which the fair market value of the shares on the exercise date
exceeds the option exercise price. Any gain or loss realized by an optionee on
disposition of such shares generally is a capital gain or loss and does not
result in any tax deduction to Pointe.
The foregoing information is based upon present federal income tax laws and
regulations and are subject to change if the tax laws and regulations, or
interpretations thereof, are changed.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of the holders of a majority of the shares of Pointe's
common stock and preferred stock present in person or represented by proxies at
the meeting and entitled to vote is required to approve the adoption of the
plan.
THE POINTE BOARD UNANIMOUSLY RECOMMENDS THAT THE POINTE SHAREHOLDERS VOTE
FOR PROPOSAL 5 TO APPROVE THE 1999 EXECUTIVE MARKET VALUE APPRECIATION STOCK
OPTION PLAN.
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II. FINANCIAL INFORMATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated balance sheet of
Telscape as of March 31, 2000 and unaudited pro forma condensed consolidated
statement of operations of Telscape three months ended March 31, 2000 and for
the year ended December 31, 1999 illustrate the effect of the merger with
Pointe, including the investment in TCS, and additional transactions as
described in the Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements. The unaudited pro forma condensed consolidated balance sheet assumes
that the merger with Pointe and the additional transactions had been completed
as of March 31, 2000 and the unaudited pro forma condensed consolidated
statement of operations assume that the merger with Pointe and the additional
transactions were completed as of January 1, 1999, except as discussed in notes
(a) and (d).
Under the terms of the transaction, the holders of Pointe common stock will
receive 0.223514 shares of Telscape common stock for each Pointe share. Based on
the exchange ratio, Pointe shareholders will obtain a majority of the voting
interest of the combined company. It is therefore anticipated that the merger
will be accounted for as a purchase business combination with Pointe as the
acquiror.
The unaudited pro forma condensed consolidated balance sheet and statement
of operations do not purport to represent what the financial position or results
of operations actually would have been if the merger and the transactions
described in the notes had occurred as of such date or what such results will be
for any future periods.
The unaudited pro forma condensed consolidated financial statements are
derived from the historical financial statements of Telscape and Pointe and the
assumptions and adjustments described in the accompanying notes. Telscape and
Pointe believe that all adjustments necessary to present fairly such unaudited
financial information have been made. The unaudited pro forma financial
information should be read in conjunction with the consolidated financial
statements and the accompanying notes thereto of Telscape and Pointe appearing
elsewhere in the Proxy Statement/Prospectus. The unaudited pro forma condensed
consolidated financial statements do not reflect any cost savings or other
economic efficiencies resulting from the merger.
The pro forma combined income tax benefit may not represent the amount that
would have resulted had Pointe and Telscape filed consolidated income tax
returns during the periods presented.
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
Assets TELSCAPE POINTE ADJUSTMENTS PRO FORMA
- ------------------------------------- -------- --------- ----------- ---------
Current assets:
<S> <C> <C> <C> <C>
Cash............................. $ 2,848 $ 5,772 $ 29,575(a) $ 36,695
(1,500)(c)
Restricted cash.................. -- 184 -- 184
Accounts receivable.............. 13,340 14,555 (7,719)(c) 20,176
Inventory........................ 2,948 1,948 -- 4,896
Other current assets............. 6,756 819 -- 7,575
-------- --------- ----------- ---------
Total current assets........ 25,892 23,278 20,356 69,526
-------- --------- ----------- ---------
Property, net........................ 63,330 31,335 -- 94,665
Other assets:
Intangibles...................... 31,737 19,512 179,519(c) 230,768
Other............................ 8,606 2,481 -- 11,087
-------- --------- ----------- ---------
Total assets............ $129,565 $ 76,606 $ 199,875 $ 406,046
======== ========= =========== =========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of debt and
capital lease obligations...... $ 17,718 $ 3,696 $ (7,719)(c) $ 13,695
Accounts payable................. 47,954 14,799 (16,057)(d) 46,696
Accrued liabilities.............. 16,283 5,495 -- 21,778
Deferred revenue................. -- 1,526 -- 1,526
-------- --------- ----------- ---------
Total current liabilities... 81,955 25,516 (23,776) 83,695
-------- --------- ----------- ---------
Long term portion of debt and capital
lease obligations.................. 26,573 9,785 (2,000)(a) 50,415
16,057(d)
Minority interest.................... 5 -- -- 5
Stockholders' equity:
Preferred stock.................. -- -- -- --
Common stock..................... 8 1 11(c) 20
Additional paid in capital....... 52,907 142,644 60,846(a) 403,250
146,853(c)
Accumulated deficit.............. (31,155) (101,340) (29,271)(a) (130,611)
31,155(c)
Treasury stock................... (480) -- -- (480)
Subscriptions receivable......... (248) -- -- (248)
-------- --------- ----------- ---------
Total stockholders'
equity.................... 21,032 41,305 209,594 271,931
-------- --------- ----------- ---------
Total liabilities and
stockholders'
equity................ $129,565 $ 76,606 $ 199,875 $ 406,046
======== ========= =========== =========
</TABLE>
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
TELSCAPE POINTE ADJUSTMENTS PRO FORMA
-------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues............................. $ 23,224 $14,233 $-- $ 37,457
Operating Expenses:
Cost of revenue...................... 19,868 13,554 -- 33,422
Selling, general and
administrative..................... 6,832 5,758 -- 12,590
Depreciation and amortization........ 1,562 1,153 2,992(c) 5,707
-------- ------- ----------- ---------
Total operating costs........... 28,262 20,465 2,992 51,719
-------- ------- ----------- ---------
Operating loss....................... (5,038) (6,232) (2,992) (14,262)
-------- ------- ----------- ---------
Other (income) expense:
Interest (income) expense, net....... 1,084 (64) -- 1,020
Other, net........................... (136) -- -- (136)
-------- ------- ----------- ---------
Total other expense............. 948 (64) -- 884
-------- ------- ----------- ---------
Net loss before minority interest and
income taxes....................... (5,986) (6,168) (2,992) (15,146)
Income tax expense................... (192) -- -- (192)
-------- ------- ----------- ---------
Net loss before minority interest.... (6,178) (6,168) (2,992) (15,338)
Minority interest.................... (5) -- -- (5)
-------- ------- ----------- ---------
Net loss from continuing
operations......................... (6,183) (6,168) (2,992) (15,343)
Preferred Stock dividends and
beneficial conversion issuances.... -- (1,622) (1,200)(a) (2,822)
-------- ------- ----------- ---------
Net loss from continuing operations
attributable to common
stockholders....................... $ (6,183) $(7,790) $(4,192) $ (18,165)
======== ======= =========== =========
Net loss from continuing operations
per share -- basic and diluted..... $ (0.77) $ (0.15) $ (0.92)
======== ======= =========== =========
Weighted average common shares....... 8,010 51,841 (40,165)(c) 19,686
======== ======= =========== =========
</TABLE>
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TELSCAPE POINTE TELECOMMUTE(B) ADJUSTMENTS PRO FORMA
---------- -------- --------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 106,833 $ 51,925 $ (1,670) $ -- $ 157,088
Operating expenses:
Cost of revenue................. 93,394 50,130 (1,441) -- 142,083
Selling, general and
administrative expenses....... 24,357 19,275 (3,282) -- 40,350
Impairment loss................. 715 -- -- -- 715
Depreciation and amortization... 6,335 4,477 (233) 11,360(d) 21,939
---------- -------- --------------- ------------ ----------
Total operating costs...... 124,801 73,882 (4,956) 11,360 205,087
---------- -------- --------------- ------------ ----------
Operating loss....................... (17,968) (21,957) 3,286 (11,360) (47,999)
---------- -------- --------------- ------------ ----------
Other (income) expense:
Interest expense, net........... 4,252 15,999 (228) -- 20,023
Other, net...................... 683 335 -- (186)(b) 832
---------- -------- --------------- ------------ ----------
Total other expense........ 4,935 16,334 (228) (186) 20,855
---------- -------- --------------- ------------ ----------
Net loss before income taxes......... (22,903) (38,291) 3,514 (11,174) (68,854)
Income tax benefit................... 3,428 -- -- -- 3,428
---------- -------- --------------- ------------ ----------
Net loss............................. (19,475) (38,291) 3,514 (11,174) (65,426)
Preferred stock dividends and
beneficial conversion issuances.... -- (24,506) -- (33,234)(a) (57,740)
---------- -------- --------------- ------------ ----------
Net loss available to common
stockholders....................... $ (19,475) $(62,797) $ 3,514 $(44,408) $ (123,166)
========== ======== =============== ============ ==========
Net loss per share-basic and
diluted............................ $ (2.92) $ (1.36) $ (6.74)
========== ======== ==========
Weighted average common shares....... 6,670 46,204 (34,613)(d) 18,261
========== ======== ============ ==========
</TABLE>
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NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(a) To record the issuance of the Class F preferred stock. Telscape has
received commitments for the issuance of 315,750 shares of Class F preferred
stock with 1,925,306 warrants to purchase shares of common stock for $10 per
share. The issuance of the Class F preferred stock will yield proceeds to
Telscape of approximately $29.6 million and conversion of $2 million of debt
upon completion of the merger based on the firm commitments received to date.
The Class F preferred stock accrues dividends at the rate of 12% per annum
compounding quarterly. The Class F Preferred Stock and warrants were issued with
an implied common stock conversion ratio which was less than fair value.
Accordingly, the combined company will record a charge of approximately $29.3
million to retained earnings for the implicit beneficial conversion feature. The
dividends are included in the pro forma loss available to common stockholders
and loss per share for the three months ended March 31, 2000 and year ended
December 31, 1999. The charge is included in the pro forma loss available to
common stockholders and loss per share for the year ended December 31, 1999,
since this is the period that more closely approximates the recording of the
beneficial conversion feature of the Class F preferred stock.
(b) Reflects Telecommute's issuance of Series B preferred stock which reduced
Pointe's voting interest to less than 50%, and accordingly, Pointe's investment
in Telecommute has been reflected in the accompanying statements using the
equity method of accounting.
(c) To record the merger. It is anticipated that the merger will be accounted
for as a purchase business combination with Pointe treated as the acquiror.
Pointe is considered the acquiror because its shareholders will obtain a
majority of the voting interest of the combined company. Since Pointe is
considered the acquiror, the assets and liabilities of Telscape will be recorded
at fair value with the excess of the purchase price over the fair value of
assets and liabilities acquired recorded as goodwill.
The outstanding shares of Telscape immediately prior to the merger have
been valued at $17.95 per share resulting in a value assigned to the shares of
$145.1 million. The outstanding vested options of Telscape having a weighted
average exercise price of $5.57 per share and a weighted average remaining
contractual life of 6.8 years have been valued at approximately $14.8 million
using the Black Scholes model using the following assumptions: dividend yield of
0%, expected volatility of 65%, risk free rate of 4.5%, and a weighted average
remaining life of 6.8 years. The outstanding warrants of Telscape having a
weighted average exercise price of $4.12 per share and a weighted average
remaining life of 2.9 years have been valued at approximately $39.9 million
using the Black Scholes model using the following assumptions: dividend yield of
0%, expected volatility of 65%, risk free rate of 4.5% and a weighted average
remaining life of 2.9 years. The companies expect to incur costs in connection
with the merger totaling approximately $1.5 million. The pro forma adjustments
to goodwill and additional paid in capital represent the incremental effect of
the merger to the combined company.
The following table summarizes the pro forma net assets purchased in
connection with the merger and the amount attributable to cost in excess of net
assets acquired included in the accompanying unaudited pro forma condensed
consolidated financial statements (in thousands):
Working capital......................... $ (40,006)
Property, plant, and equipment.......... 63,330
Other assets............................ 8,606
Non-current liabilities................. (42,630)
Other equity............................ 728
Goodwill and other intangibles.......... 211,256
Management estimates that Telscape's working capital may be substantially
more or less at closing compared to Telscape's working capital included in the
accompanying unaudited pro forma condensed consolidated balance sheet as of
March 31, 2000. An increase or decrease in Telscape's working capital would
result in a reallocation of the purchase price and would result in increases or
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<PAGE>
decreases in the values assigned to identifiable intangible assets and related
amortization compared to those presented in the accompanying pro forma condensed
consolidated financial statements.
The preliminary estimate of net assets acquired represents management's
best estimate based on currently available information; however, such estimate
may be revised up to one year from the acquisition date.
The goodwill and other identifiable intangibles will be amortized over a
weighted average 15 year period. The statements of operations have been adjusted
to give effect to the additional amortization.
(d) Reflects funding of $16.1 million under the Lucent credit agreement which
took place on April 20, 2000. The pro formas do not reflect any additional
interest expense as the funding was for liabilities incurred in the latter part
of 1999 under a credit agreement that was not in place at the beginning of 1999.
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<PAGE>
TELSCAPE SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
The following selected historical consolidated financial data should be
read in conjunction with Telscape's consolidated financial statements and
related notes and Telscape's "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The consolidated statement of operations
for each of the four years ended December 31, 1996, 1997, 1998 and 1999 and the
consolidated balance sheet data at December 31, 1996, 1997, 1998 and 1999 are
derived from the consolidated financial statements of Telscape which have been
audited by BDO Seidman, LLP, independent certified public accountants. The
summary financial data for the three month periods ended March 31, 1999 and 2000
and as of March 31, 2000 have been derived from Telscape's unaudited financial
statements and in the opinion of Telscape's management include all adjustments
(consisting only of normal recurring adjustments) which are necessary to present
fairly the results of operations and financial position of Telscape for those
periods in accordance with generally accepted accounting principles. Historical
results are not necessarily indicative of the results to be expected in the
future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- ------------------
1995 1996 1997 1998 1999 1999 2000
------ ------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $1,108 $ 5,705 $36,154 $132,179 $106,833 26,564 23,224
Cost of revenues..................... 619 3,041 24,396 111,892 93,394 23,778 19,868
------ ------- ------- -------- -------- ------- -------
Gross profit......................... 489 2,664 11,758 20,287 13,439 2,786 3,356
Selling, general and administrative
expenses........................... 1,349 4,159 8,154 13,774 24,357 4,005 6,832
Depreciation and amortization........ 49 264 622 3,316 6,335 1,352 1,562
Impairment loss on long-lived
assets............................. -- -- -- 1,026 715 -- --
------ ------- ------- -------- -------- ------- -------
Operating (loss) income from
continuing operations.............. (909) (1,759) 2,982 2,171 (17,968) (2,571) (5,038)
Interest income (expense), net....... 230 15 (95) (1,601) (4,252) (854) (1,084)
Other income (expense), net.......... (1) 99 (137) (812) (683) (274) 136
------ ------- ------- -------- -------- ------- -------
(Loss) income from continuing
operations before income taxes and
minority interests................. (680) (1,645) 2,750 (242) (22,903) (3,699) (5,986)
Income tax benefit (provision)....... -- 53 (84) (822) 3,428 928 (192)
------ ------- ------- -------- -------- ------- -------
(Loss) income from continuing
operations before minority
interests.......................... (680) (1,592) 2,666 (1,064) (19,475) (2,771) (6,178)
Minority interests................... 7 (6) 6 34 -- -- (5)
------ ------- ------- -------- -------- ------- -------
(Loss) income from continuing
operations......................... (673) (1,598) 2,672 (1,030) (19,475) (2,771) (6,183)
Discontinued operations:(1)
Loss from operations of
discontinued operations........ -- -- -- -- -- (93) (70)
Loss on disposal of products
division....................... -- -- -- -- -- -- (1,546)
------ ------- ------- -------- -------- ------- -------
Net (loss) income.................... $ (673) $(1,598) $ 2,672 $ (1,030) $(19,475) (2,864) (7,799)
====== ======= ======= ======== ======== ======= =======
Net (loss) income per share from
continuing operations -- basic..... (0.36) (0.52) 0.68 (0.20) (2.92) (0.46) (0.77)
Net (loss) income per
share -- basic..................... $(0.36) $ (0.52) $ 0.68 $ (0.20) $ (2.92) (0.47) (0.97)
Weighted average shares
outstanding........................ 1,890 3,047 3,903 5,052 6,670 6,065 8,010
Net (loss) income per share from
continuing operations -- diluted... N/A N/A 0.53 N/A N/A N/A N/A
Net (loss) income per
share -- diluted................... N/A N/A $ 0.53 N/A N/A N/A N/A
Diluted weighted average shares
outstanding........................ N/A N/A 5,152 N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
-------------------------------------------------- MARCH 31,
1995 1996 1997 1998 1999 2000
------ ------ ------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash, cash equivalents and short-term
investments........................ $3,645 $ 495 $ 4,734 $ 9,631 $ 5,419 2,848
Current assets....................... 4,294 4,665 18,506 32,746 29,997 25,892
Property and equipment, net.......... 154 983 2,679 14,576 58,468 63,330
Goodwill and other intangibles,
net................................ -- 3,246 17,674 31,416 32,342 31,737
Total assets......................... 4,498 9,371 39,635 80,331 127,140 129,565
Notes payable and capital lease
obligations........................ -- -- 3,184 13,133 38,761 44,291
Stockholders' equity................. $3,590 $5,764 $22,088 $34,926 $ 27,044 21,032
</TABLE>
- ------------
(1) In March 2000, the Company announced the decision to close its products
division of its subsidiary, Interlink Communications, Inc. which was
acquired in June, 1998. Operations for 1998 and 1999 have not been restated
to reflect the discontinued operations as their impact is not significant to
the historical data. Revenue attributable to the discontinued operations was
approximately $2,200 in both 1998 and 1999 and net loss attributable to the
discontinued operations was approximately $40 and $400 in 1998 and 1999,
respectively.
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TELSCAPE'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements, the notes thereto and the other financial data included later in
this joint proxy statement/prospectus. The following discussion contains certain
forward-looking statements, or statements that are not statements of historical
fact. The words "believes," "anticipates," "plans," "expects" and
similar expressions are intended to identify forward-looking statements. For a
discussion of important factors, including, but not limited to, the continued
development of our business, actions of regulatory authorities and competitors,
price declines and other factors that could cause actual results to differ
materially from the results referred to in the forward-looking statements, see
the section in this joint proxy statement/prospectus entitled "Risk Factors."
The statements contained in this Joint Proxy Statement/Prospectus that are
not historical facts are "forward-looking statements" (as such term is defined
in the Private Securities Litigation Reform Act of 1995), which can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "estimates," "will," "should," "plans" or
"anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy. Such statements include,
but are not limited to, statements under the captions "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and elsewhere in
this Joint Proxy Statement/Prospectus as to Telscape's plans to implement its
growth strategy, improve its financial performance, expand its infrastructure,
develop new products and services, expand its sales force, expand its customer
base and enter international markets. In addition, from time to time, Telscape
or its representatives have made or may make forward-looking statements, orally
or in writing. Furthermore, such forward-looking statements may be included in,
but are not limited to, various filings made by Telscape with the Securities and
Exchange Commission (the "Commission"), or press releases or oral statements
made by or with the approval of an authorized executive officer of Telscape.
Management of Telscape wishes to caution the reader that the
forward-looking statements referred to above and contained in this joint proxy
statement/prospectus regarding matters that are not historical facts involve and
are based on numerous assumptions and predictions about future conditions that
could prove not to be accurate. No assurance can be given that the future
results will be achieved; actual events, transactions or results may differ
materially as a result of risks facing Telscape. Such risks include, but are not
limited to, the effectiveness of management's strategies and decisions, the
ability to raise the necessary capital to effectuate Telscape's business plan,
changes in business conditions, changes in the telecommunications industry and
the general economy, competition, changes in service offerings and risks
associated with Telscape's limited operating history, entry into developing
markets, managing rapid growth, international operations, dependence on
effective information systems, ability to consummate acquisitions or enter into
joint ventures with companies on terms acceptable to Telscape and development of
Telscape's network, as well as regulatory developments any of which could cause
actual results to vary materially from the future results indicated, expressed
or implied, in such forward-looking statements. No assurance can be given that
these are all of the factors that could cause actual results to vary materially
from the forward-looking statements. Statements with respect to acquisitions and
continued trends are forward-looking and involve risks and uncertainties.
Furthermore, Telscape has significant operations in Mexico, subjecting Telscape
to certain political, economy and commercial risk. Telscape undertakes no
obligation and does not intend to update, revise or otherwise publicly release
the result of any revisions to these forward-looking statements that may be made
to reflect future events or circumstances.
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OVERVIEW
Telscape is a U.S.-based fully integrated communications company. Telscape
supplies voice, video, data, and Internet services principally to, from and
within Latin America. Telereunion, S.A., a subsidiary, has built a
state-of-the-art fiber optic network in Mexico that will reach the vast majority
of the Mexican population. Telscape also owns and operates a satellite teleport
facility in Silicon Valley, which delivers an array of communications services
to customers throughout North, Central, and South America. In addition, Telscape
provides a full range of advanced services and products in Mexico to major
public and private sector customers.
The markets in which Telscape operates are characterized by significant
growth. Telscape will continue to take advantage of the cash flows associated
with the voice component of its business as Telscape also continues building for
the future, which will be characterized by explosive growth in the demand for
video, data, and Internet. In Telscape's voice business, Telscape is focusing
its efforts on retail as Telscape constantly strives to move closer and closer
to the customer. Telscape will continue to be opportunistic on the wholesale
business but is relying on this business to maximize utilization of its network.
Telscape has recently launched additional retail voice services in both the U.S.
and Mexico.
In the data and Internet area, Telscape is focusing on higher margin,
broadband-based products and services. Telscape is well positioned to address
and facilitate its business customers in the natural evolution from the private
network world to the virtual private network world, which is now available
through advanced switched-data public IP services. With the completion of its
fiber optic network in Mexico, the sophistication of Telscape's in-country team
and its seasoned teleport in Silicon Valley, Telscape is well positioned to
provide advanced data and Internet services to, from and within Latin America.
Telscape's Mexican network will also provide Telscape a platform to provide
certain advanced services such as virtual private networks, cache, streaming,
collocation, and hosting.
In June 1998, Telereunion S.A., a Mexican corporation and a subsidiary of
Telscape, was granted the Mexican Concession by the Mexican government. The
Mexican Concession is a 30-year, facilities-based carrier license, which has
allowed Telscape to construct and operate a network over which it can carry
voice, video, data, and Internet traffic. The Mexican network, a fiber-optic
long haul network, connects the United States, the Gulf region of Mexico and
targeted Mexican cities.
In May 1996, Telscape began to focus on providing telecommunication
services to and from Latin America. Telscape acquired all of the stock of
Telereunion, Inc., the owner of 97.0% of Vextro de Mexico S.A. de C.V.
("Vextro"). Vextro is a Mexico-based systems integration company, with an
emphasis on voice solutions. In September 1996, Telscape expanded its operations
to include international long distance by acquiring Orion Communications, Inc.,
a U.S.-based reseller of long distance services ("Orion"). In 1997, Telscape
expanded its systems integration service offerings by acquiring Integracion de
Redes, S.A. de C.V. ("Integracion") and N.S.I., S.A. de C.V. ("N.S.I."),
both focused on data services and based in Mexico City, Mexico. In 1998,
Integracion was renamed as Telscape de Mexico, S.A. de C.V.
In January 1998, Telscape acquired MSN, a leading provider of prepaid cards
that are marketed under the Telefiesta brand name to Hispanic consumers residing
in the United States. The MSN acquisition enhances Telscape's voice business by
providing a retail platform, enhancing Telscape's ability to market additional
products and services to Hispanic customers and increasing Telscape's ability to
generate significant returns of U.S.-outbound traffic to Latin America.
Effective June 1, 1998, Telscape, through its newly-formed subsidiary INTERLINK
Communications, Inc. ("INTERLINK") acquired California Microwave Services
Division, Inc. for $8.8 million in cash. INTERLINK provides Telscape with a
teleport facility in California, thereby enhancing Telscape's position as an
integrated communications provider and contributing to Telscape's ability to
provide voice, video, data, and Internet solutions to its targeted markets in
Latin America.
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Telescape is capitalizing on the deregulating markets of Latin America by
providing international long distance services to and from targeted Latin
American countries. Telescape has also positioned itself to become one of the
leading integrated communications providers in Mexico through the construction
of Telscape's Mexican network and the sophistication of Telscape's in-country
team.
The Mexican network links 22 cities and towns and covers, including
interconnection agreements, a majority of the population in Mexico. The Mexican
network will provide Telscape with the backbone for Telscape's strategy to be a
complete telecommunications service provider for the Latin American market,
beginning with Mexico. The Mexican network will provide Telscape with
significant, carrier-class, cost-effective capacity from which Telscape can grow
its existing retail and wholesale voice business and serve as an important
platform to expand Telscape's data and Internet strategies.
REVENUES
The revenue mix between voice services and advanced services for the years
ended 1999 and 1998 remained almost the same. In 1999, voice services
represented 72.4% of Telscape's consolidated revenues while in 1998, voice
services represented 70.5% of consolidated revenues. In voice services, Telscape
expects revenue growth to come principally from higher margin, one-plus long
distance services through Telscape's recently launched Telefiesta-Amigo program
and prepaid calling cards in Mexico. In advanced services, Telscape expects
growth to come principally from broadband services, customer relationship
management and bundled services to small and medium size enterprises in Mexico.
As part of Telscape's advanced services, Telscape provides value-added and
systems integration services to private and public sector customers in Mexico.
Revenues are derived from providing value-added services and the sale of
equipment. Revenues from this business grew significantly through both internal
growth and strategic acquisitions in 1996, 1997, and 1998. The revenues in this
line of business are subject to economic conditions in Mexico. Revenues relating
to this part of Telscape's advanced services in 1999 decreased by 56% as a
result of weakening economic conditions in Mexico, Y2K worries that encouraged
Telscape's client base to delay investments in their network systems, and
Telscape's decision in early 1999 to reduce sales of lower margin equipment to
certain distributors and increase efforts on higher margin value-added services.
With Telscape's acquisition of INTERLINK in the second quarter of 1998,
Telscape expanded its advanced services offerings. Telscape provides satellite
teleport services, including voice, video, and data transport services including
fractional and full T-1 data broadcast, dedicated circuits, private line up-link
and down-link services Bandwidth-on-Demand, ISDN videoconferencing, and
Internet-through-satellite services to the U.S. and Latin America. INTERLINK
also works with its customers in Latin America to develop the sophisticated
systems necessary to utilize these services.
Through Telscape's call center in Mexico City, Telscape also provides
customer relationship management services. Telscape's largest customer is the
U.S. Embassy in Mexico City and the various U.S. consulates throughout the
country of Mexico. Revenues are derived by providing information about U.S.
visas to Mexican nationals and facilitating appointments, both through the call
center.
Telscape provides voice services on both a wholesale and retail basis.
Wholesale voice services are provided mainly to other carriers. Revenues are
derived from the number of minutes of use (or fraction thereof) billed by
Telscape and are recorded upon completion of calls.
Retail voice services are provided through the sale of prepaid cards.
Telscape has in the past entered into arrangements with third parties whereby
these parties provided, at a fixed cost to Telscape, the long distance
telecommunications services for the prepaid cards that Telscape sells. Telscape
recognized revenues from the sale of prepaid cards under these agreements at the
time of shipment. In other cases, Telscape entered into arrangements whereby
third parties provide certain telecommunications services for the prepaid cards
and bills Telscape for such services based on
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customer usage. Telscape recognizes revenues from the sale of prepaid cards
under these agreements at the time of customer usage.
In early 1998, Telscape discontinued the fixed cost arrangement with third
parties. As a result, revenues were recognized beginning in the second half of
1998 on the prepaid cards at the time of customer usage.
GROSS PROFIT
During 1999, Telscape's gross profit as a percentage of revenues declined.
This decline was largely due to decreasing margins from Telscape's sale of
prepaid cards and wholesale voice services offset principally by increased
margins from Telscape's customer relationship management revenues.
Telscape's strategy to improve gross margins in voice services is to (i)
increase its efforts in the retail market where it can provide product
identification and differentiation, (ii) decrease its dependency on third party
service providers, and (iii) increase the amount of traffic Telscape processes
over its own network, under direct operating agreements Telscape establishes
with other carriers and over the Mexican network.
In the fourth quarter of 1999, Telscape began distributing its prepaid
cards through its own distribution network in Mexico. Telscape believes it is
the first company offering prepaid cards on a country-wide scale in Mexico. In
early 2000, Telscape opened up a direct distribution office for prepaid cards in
Los Angeles, California. Telscape expects that the margins from its prepaid
cards in Mexico will be significantly higher than Telscape's cards in the more
competitive U.S. market. Telscape also expects that its margins from Telscape's
direct distribution efforts in Los Angeles will be higher than those Telscape
gains through its traditional, distributor-focused distribution channels.
During 1999, Telscape expended substantial capital resources in its
network, both in the U.S. and in Mexico. Telscape's total investments in 1999
reached $46 million, the majority of which was related to Telscape's Mexico
Network. Telscape intends to terminate a significant portion of both its retail
and wholesale traffic on Telscape's Mexico Network in the year 2000, which
Telscape expects will improve its overall gross margin levels. As mentioned
above, Telscape also intends to offer Advanced Services to the small and medium
size enterprises in Mexico, utilizing the Mexican network as a foundation.
Telscape expects that many of these services will have higher margins than
traditional Voice Services.
Telscape expects that gross profits from equipment sales will decline over
time as the market becomes more competitive. Telscape's strategy for maintaining
the gross profits Telscape has enjoyed from this business line in the past is to
enter into additional outsourcing contracts and to refocus Telscape's sales
efforts from the simple provision of network equipment to the bundling of
network equipment and the provision of telecommunications services on Telscape's
Mexican network. Telscape's call center operations in Mexico have historically
provided relatively higher gross margins than Telscape's other lines of
business. Telscape intends to shift several of the support functions provided to
Telscape's retail lines of business in the U.S. from Telscape's call center in
the U.S. to Telscape's call center in Mexico in order to take advantage of the
relatively lower cost structure afforded by Telscape's Mexican operations. In
March 2000, Telscape relocated its call center in Mexico to increase Telscape's
capacity from 120 positions to up to 400 positions.
Telscape expects that gross profits as a percentage of revenues as well as
actual gross profit will increase in 2000 primarily because of Telscape's
ability to run an increasing percentage of the traffic Telscape manages over
Telscape's own facilities.
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RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1999
The following tables sets forth for the periods indicated certain financial
data as a percentage of revenues:
PERCENTAGE OF REVENUES
YEARS ENDED DECEMBER 31,
-------------------------
1997 1998 1999
----- ----- -----
Revenues ......................................... 100.0% 100.0% 100.0%
Cost of revenues ................................. 67.5 84.7 87.4
----- ----- -----
Gross profit ..................................... 32.5 15.3 12.6
Selling, general and administrative expense ...... 22.6 10.4 22.8
Depreciation and amortization .................... 1.7 2.5 5.9
Impairment loss on long-lived assets ............. -- 0.8 0.7
----- ----- -----
Operating income (loss) .......................... 8.2 1.6 (16.8)
Other income (expense), net ...................... (0.6) (1.8) (4.6)
----- ----- -----
Income (loss) before income taxes and
minority interest .............................. 7.6 (0.2) (21.4)
Income tax benefit (expense) ..................... (0.2) (0.6) 3.2
----- ----- -----
Income (loss) before minority
interest ....................................... 7.4 (0.8) (18.2)
Minority interest in subsidiaries ................ 0.0 0.0 0.0
----- ----- -----
Net income (loss) ................................ 7.4 (0.8) (18.2)
===== ===== =====
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES decreased from $132.2 million in 1998 to $106.8 million in 1999.
This decrease of $25.4 million, or 19.2%, was due principally to Telscape's
decision to reduce sales to distributors of low margin equipment in Mexico, a
decline in Telscape's voice services revenues in Telscape's wholesale segment,
and the relatively lower prices Telscape is obtaining from the sale of its
prepaid cards. These declines were offset by an increase in revenues from
Telscape's customer relationship management services and the incremental
broadband services and other products revenues from Telscape's INTERLINK
subsidiary, which was acquired in May 1998. Network solutions revenues in Mexico
decreased $16.9 million from $30.2 million in 1998 to $13.3 million in 1999.
This decline is largely attributable to Telscape refocusing on higher margin
products and a general slowdown in the market caused by weakened economic
conditions in Mexico and concerns about the Y2K virus. Wholesale voice services
revenues decreased $16.4 million from $33.0 million for 1998 to $16.6 million
for 1999. Retail voice services revenues increased $0.6 million from $60.1
million in 1998 to $60.7 million in 1999. Customer relationship management
services revenues increased $5.0 million from $2.7 million in 1998 to $7.7
million in 1999 as Telscape increased its operator positions to accommodate
higher demand for its services. Broadband services and other products revenues
increased $2.4 million from $6.1 million in 1998 to $8.5 million in 1999.
COST OF REVENUES decreased from $111.9 million in 1998 to $93.4 million in
1999, or $18.5 million. The 16.5% decrease in cost of revenues was due
principally to the decrease of revenues offset by the increased costs associated
with the voice services. This decrease in cost of revenues was also offset by
the incremental cost of revenues associated with the acquisition of INTERLINK.
The cost of revenues as a percentage of revenues increased from 84.7% to 87.4%,
or 2.7%, due principally to the higher cost of revenues as a percentage of
revenues associated with Telscape's voice services. This increase was offset
partially by the decrease in cost of revenues as a percentage of revenues
associated with the customer relationship management services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") increased from
$13.8 million in 1998 to $24.4 million in 1999, or $10.6 million. The 77%
increase in SG&A was due to the incremental SG&A related to the acquisition of
INTERLINK, the increased staffing associated with the Mexican
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network build out and increased staffing at existing operations to meet the
additional resource requirements associated with these operations and the
overhead necessary to support the growth in its customer relationship management
operations. Additionally, Telscape recorded an additional reserve for doubtful
accounts of $1.6 million and a $400,000 provision for inventory obsolescence in
Mexico.
Overall SG&A as a percentage of revenues increased from 10.4% to 22.8%, or
12.4%, due to the factors stated above.
DEPRECIATION AND AMORTIZATION increased from $3.3 million in 1998 to $6.3
million in 1999, or $3.0 million. Depreciation increased as a result of
Telscape's continuing expansion of Telscape's communications network, which
includes purchases of switches and other telecommunications equipment and
facilities. Telscape expects depreciation expense to increase as Telscape
continues to expand its telecommunications network. In addition, goodwill
amortization increased as a result of the acquisitions of Telereunion and
INTERLINK in 1998.
IMPAIRMENT LOSS ON LONG-LIVED ASSETS. During the year ended December 31,
1998, Telscape determined that the carrying value of certain equipment and other
long-lived assets deployed under certain operating arrangements in Latin America
were impaired, resulting in a charge to operating costs of approximately $1.0
million. During the year ended December 31, 1999, Telscape determined that an
additional $715,000 in carrying value of certain equipment deployed in Latin
America was impaired, resulting in a charge to operating costs.
INTEREST INCOME (EXPENSE), NET increased from ($1.6) million in 1998 to
($4.3) million in 1999, or ($2.7) million. This increase was mainly due to an
increase in Telscape's level of borrowings, including the Deere Park Convertible
Debentures and Gordon Brothers Convertible Debentures issued in connection with
the INTERLINK acquisition, the Senior Notes, the $2 Million Senior Notes,
various bridge financings and the Lucent Credit Agreement. Also, there was an
increase in the amortization of debt offering costs of $1.4 million in 1999.
The Gordon Brothers Convertible Debentures provided for an "exit fee" of
$1.1 million, which was paid at the time of the repayment of the Gordon Brothers
Convertible Debentures in May 1999. In addition, Telscape repaid $1.0 million of
the Deere Park Convertible Subordinated Debentures in May 1999. Telscape paid an
"exit fee" to Deere Park of $120,000 upon the repayment.
Lastly, Telscape recognized additional interest expenses related to its
equipment financing agreements and the Lucent Credit agreement.
OTHER INCOME (EXPENSE) decreased from ($812,000) in 1998 to ($683,000) in
1999, or $129,000. Telscape benefited from a foreign exchange gain of $207,000
in 1999 versus a loss of $639,000 in 1998 as the Mexican Peso remained
relatively stable throughout 1999.
INCOME TAX BENEFIT (EXPENSE) changed from an income tax expense of
($822,000) in 1998 to an income tax benefit of $3.4 million in 1999. Telscape's
overall effective tax benefit for 1999 was 15.0% which reflects the tax benefits
on losses realized offset by a valuation allowance of $3.3 million and by
permanent differences between financial and tax reporting, the most significant
of which is the non-deductible nature of goodwill amortization.
NET INCOME (LOSS). Telscape experienced a net loss of ($1.0) million in
1998 as compared to a net loss of ($19.5) million in 1999 due to a combination
of the factors discussed above.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES increased from $36.2 million in 1997 to $132.2 million in 1998.
This increase of $96.0 million, or 266%, was due principally to the acquisition
of MSN completed in the first quarter of 1998, which provided revenues of $60.1
million for the year ended December 31, 1998. Wholesale voice services revenues
increased $15.7 million from $17.4 million for 1997 to $33.1 million for 1998.
In addition, revenues from advanced services increased $14.2 million from $18.8
million for 1997 to $33.0 million for 1998. This increase in advanced services
revenues is due to the acquisitions of Integracion de Redes, S.A. de C.V.
("Integracion") and N.S.I., S.A. de C.V. ("NSI"), the overall
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growth in demand for these services and the growth in revenues from the call
center operations. Services provided by INTERLINK, following our acquisition of
INTERLINK, generated an additional $6.0 million in revenues.
COST OF REVENUES increased from $24.4 million in 1997 to $111.9 million in
1998, or $87.5 million. The 359% increase in cost of revenues was due
principally to the incremental cost of revenues associated with the acquisition
of MSN, the increase in the sale of wholesale voice services and advanced
services and, to a lesser extent, the incremental cost of revenues attributable
to the acquisition of INTERLINK. The cost of revenues as a percentage of
revenues increased from 67.5% to 84.7%, or 17.2%, due principally to the higher
cost of revenues as a percentage of revenues associated with the sale of prepaid
cards and the higher cost of revenues on wholesale voice services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased from $8.2 million in
1997 to $13.8 million in 1998, or $5.6 million. The 69% increase in SG&A was due
principally to the incremental SG&A related to the operations of the
acquisitions of MSN and INTERLINK and increased staffing at existing operations
of the advanced services business and the wholesale voice services business to
meet the additional resource requirements associated with the growth of these
operations.
In addition, SG&A was negatively impacted by the write off of receivables,
of approximately $541,000, due from a customer who filed for bankruptcy as
discussed above. Included in SG&A are approximately $115,000 associated with
pre-operating costs on Telereunion S.A., our subsidiary which has been granted
the long distance concession in Mexico.
Overall SG&A as a percentage of revenues decreased from 22.6% to 10.4%, or
12.2%. This decrease was due principally to the lower SG&A expenses as a
percentage of revenues associated with MSN and to the growth in overall revenues
rapidly outpacing the growth in SG&A expenses. This improvement was partially
offset by the write off of receivables from the customer, which filed for
bankruptcy as discussed above, and the pre-operating expenses with the Mexican
network.
DEPRECIATION AND AMORTIZATION increased from $622,000 in 1997 to $3.3
million in 1998, or $2.7 million. This increase is due to an increase in
goodwill amortization primarily due to the vesting of performance based warrants
issued in connection with the Telereunion acquisition, which resulted in
additional goodwill being recognized on December 31, 1997 and in the fourth
quarter of 1998 and goodwill recognized on the MSN and INTERLINK acquisitions.
In addition, depreciation increased as a result of Telscape's continuing
expansion of its international wholesale long distance network which includes
purchases of switches and other telecommunications equipment and facilities.
Telscape expects depreciation expense to increase as it continues to expand its
telecommunications network.
IMPAIRMENT LOSS ON LONG-LIVED ASSETS. During the year ended December 31,
1998, Telscape determined that the carrying value of certain equipment and other
long-lived assets deployed under certain operating arrangements in Latin America
were impaired, resulting in a charge to operating costs of approximately $1.0
million.
INTEREST INCOME (EXPENSE), NET increased from ($95,000) in 1997 to ($1.5)
million in 1998, or ($1.4) million. This increase was mainly due to an increase
in Telscape's level of borrowings, including notes issued in connection with the
Integracion and MSN acquisitions, and the Deere Park Convertible Debentures and
Gordon Brothers Convertible Debentures issued in connection with the INTERLINK
acquisition.
The Gordon Brothers Convertible Debentures provide for an "exit fee"
which is payable if the obligation is settled in a cash payment rather than
converted into Common Stock. Included in interest expense for the year ended
December 31, 1998, is an accrual of approximately $470,000 related to exit fees
Telscape expects to pay once the Gordon Brothers Convertible Debentures are paid
in fiscal year 1999.
OTHER INCOME (EXPENSE) increased from ($137,000) in 1997 to ($812,000) in
1998, or ($675,000). This increase is primarily due to foreign exchange
translation losses of $639,000 resulting from the
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translation of financial statements of Telscape's Mexican operations. The
Mexican peso experienced a 22.1% devaluation in the exchange rate to the U.S.
dollar during 1998.
INCOME TAX BENEFIT (EXPENSE) increased from ($84,000) in 1997 to ($822,000)
in 1998. Income tax expense in 1997 was lower than income tax expense in 1998 as
a result of Telscape's utilization of its loss carryforwards to offset taxable
income and the recognition of a portion of the deferred tax benefits related to
Telscape's tax loss carryforward. The effective tax rate for 1998 is higher than
the U.S. and Mexico statutory rate of 34% due to permanent differences, the most
significant of which is the nondeductible nature of goodwill amortization.
NET INCOME (LOSS). Telscape experienced net income of $2.7 million in 1997
as compared to a net loss of ($1.0) million in 1998 due to a combination of the
factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES -- YEAR ENDED DECEMBER 31, 1999
Net cash provided by (used in) operating activities was $6.6 million and
($10.3) million for the years ended December 31, 1998 and December 31, 1999,
respectively. The decrease in net cash provided by operations in 1999 as
compared to 1998 was due primarily to decreased level of revenues and lower
gross margins and higher levels of SG&A incurred to support expanding and new
operations. In addition, Telscape's working capital position was impacted by an
increase in accounts payable of $1.2 million and an increase in accrued
liabilities of $5.3 million.
Net cash used in investing activities was ($17.7) million and ($18.3)
million for the years ended December 31, 1998 and December 31, 1999,
respectively. In 1999, Telscape expended approximately $18.3 million in
constructing its network in Mexico and expanding its switching, transmission and
processing platforms required to provide international wholesale and retail long
distance services. Telscape also incurred additional obligations for $24.6
million for the construction of its Mexican network. This amount is expected to
be financed with long term debt under the Lucent credit facility and is included
in Accounts Payable and Construction in Progress on the December 31, 1999
consolidated balance sheet. Additionally, Telscape incurred obligations for $2.8
million for switching equipment which is expected to be financed through long
term debt in 2000 and is included in Accounts Payable and Property and Equipment
on the December 31, 1999 consolidated balance sheet.
Net cash provided by financing activities was $16.0 million and $24.4
million for the years ended December 31, 1998 and December 31, 1999,
respectively. During 1999, Telscape had proceeds of approximately $3.3 million
(net of commissions) from sales of its common stock and exercise of options and
warrants. Telscape also received $15.4 million from notes payable and $23.9
million in financing under the Lucent credit facility. Telscape made payments of
$10.5 million on its notes payable, $6.0 million on its convertible debt and
$1.7 million on Telscape's revolving line of credit.
As of December 31, 1999, Telscape had cash and cash equivalents of $5.4
million and negative working capital of $42.5 million. Of this $42.5 million,
$24.6 million represents accounts payable incurred in connection with the
construction of the Mexican network of which $16.1 million was funded on April
20, 2000 and $2.8 million represents accounts payable incurred for switching
equipment. Telscape plans to finance the network construction accounts payable
under the Lucent credit agreement subject to availability as discussed below and
the equipment accounts payable under long term financing. Additionally, Telscape
has classified as current $5.6 million in notes payable due to non-compliance of
certain financial covenants under a loan facility as discussed below. Telscape
also has classified as current $1.2 million under the Lucent credit facility.
In the fourth quarter of 1998, Telscape signed a financing arrangement with
a finance company, which provides for funding of equipment purchases of up to
$6.0 million through May 1999. The financing is structured as loans maturing
three years from funding at interest rates 550 basis points above the Federal
Reserve Treasury Constant Maturity Rate. Telscape drew approximately $2.0
million during 1999 under this facility.
In the fourth quarter of 1998, Telscape entered into a stock purchase
agreement with third parties, which allowed Telscape to sell at its option up to
$5.0 million of Telscape's common stock. During
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the fourth quarter of 1998 and the fiscal year 1999, Telscape utilized this
facility entirely. In connection therewith, Telscape issued a total of 783,338
shares of our common stock.
On January 11, 1999, Telscape signed a financing arrangement with a finance
company, which provides for funding of equipment purchases of up to $7.0 million
through December 31, 1999. The financing is structured as long-term loans
maturing January 1, 2005. The loans provide for payments of interest only
through January 1, 2000. Thereafter, payments of principal and interest are due
quarterly. Interest is calculated on available basis during the interest only
period at 425 basis points above the 90 day commercial paper rate. Interest
thereafter is calculated at 500 basis points above the five year Federal Reserve
Treasury Constant Maturity Rate. Telscape has drawn approximately $5.6 million
under this facility through December 31, 1999, of which $2.5 million resulted in
refinancing equipment, which was previously financed through an operating lease.
Telscape is not in compliance with certain financial covenants under this loan
facility and has secured a waiver from the finance company of their rights under
the agreement to enforce default provisions due to non compliance with these
financial covenants for the fourth quarter of 1999. Telscape is not able to draw
down additional financing under this facility until such time as the finance
company allows Telscape to do so. The finance company has also issued Telscape a
forbearance letter informing Telscape that they will not enforce acceleration of
their facility until the earlier of March 31, 2000 or the date Telscape's merger
with Pointe is completed. The finance company has agreed to extend the
forbearance period through May 15, 2000. The amounts outstanding under this
facility of $5.6 million have been classified as current in the financial
statements as of December 31, 1999. Telscape may have to request additional
waivers from the finance company due to non compliance with financial covenants
in future quarters or Telscape may have to request an extension of the
forbearance letter provisions should Telscape's merger with Pointe not be
completed by May 15, 2000. Telscape cannot guarantee that the finance company
would provide Telscape with additional waivers or that they would extend their
forbearance letter in which case they could enforce the default provisions and
accelerate the maturity date. Should that be the case, there is no guarantee
that Telscape would be able to obtain a replacement facility. A default under
this agreement would trigger cross defaults under the Lucent credit facility.
On May 7, 1999, Telscape issued $6,850,000 in senior notes originally
maturing on May 6, 2000. E. Scott Crist, CEO of Telscape, is holder of the
remaining $850,000 balance of the senior notes. These senior notes are subject
to optional prepayment provisions allowing Telscape to prepay a portion or all
of the outstanding principal amount without premium or penalty. Under the terms
of the senior notes, Mr. Crist received on November 6, 1999, 31,805 warrants at
an exercise price of $6.685. In the event that the senior notes are not paid by
May 5, 2000, then Mr. Crist will be issued an additional 31,805 warrants, in
which case the maturity date is extended until November 6, 2000. The maturity of
the senior notes can be extended unilaterally by Telscape through January 4,
2001 with no additional consideration. As a result, the senior notes are
classified as long-term in the financial statements as of December 31, 1999.
Telscape repaid $6,000,000 of the senior notes on August 27, 1999, upon the
funding of the Lucent credit facility. The loan from Mr. Crist bears interest at
8% from May through November 6, 1999. The interest rate increases by 1 percent
for each month thereafter. Pursuant to the terms of the senior notes, Telscape
initially issued to the holders of the senior notes a total of 256,315 warrants
at an exercise price of $6.68 per share. The proceeds from the senior notes were
utilized to repay the entire principal amount of the Gordon Brothers Convertible
Debentures plus $1.1 million in exit fees. Telscape estimated the fair value of
the warrants by utilizing the Black-Scholes option pricing model with the
following assumptions: dividend yield of 0%, expected volatility of 54%, risk
free interest rate of 5% and expected life of one year. The resulting cost of
the initial 256,315 warrants of approximately $398,000 was amortized over three
months, the expected term of the notes at the time they were issued. The
resulting cost of the 31,805 warrants of approximately $49,000 will be amortized
over one year.
On June 18, 1999, Telscape issued $2,000,000 in a different series of
senior notes maturing June 19, 2000. These senior notes are subject to optional
prepayment provisions allowing Telscape to prepay a portion or all of the
outstanding principal amount without premium or penalty. These senior
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notes bear interest at 8% from June through December 17, 1999. The interest rate
increases by 1 percent for each month thereafter. Telscape also initially issued
to the holders of these senior notes a total of 62,501 warrants with an exercise
price of $8.00 per share and a term of three years. On December 18, 1999, the
holders became entitled to an additional 62,501 warrants. In the event that
these senior notes are not paid by June 18, 2000, then the holders will be
issued an additional 62,501 warrants in which case the maturity date is extended
until December 18, 2000. The maturity of the senior notes can be extended
unilaterally by Telscape through February 16, 2001 with no additional
consideration. As a result, these senior notes are classified as long-term in
the financial statements as of December 31, 1999. Telscape estimated the fair
value of the warrants by utilizing the Black-Scholes option pricing model with
the following assumptions: dividend yield of 0%, expected volatility of 54%,
risk free interest rate of 5% and expected life of one year. The resulting cost
of the initial 62,501 warrants of approximately $116,000 was amortized over two
months, the expected term of the notes at the time they were issued. The
resulting cost of the second 62,501 warrants of approximately $143,000 will be
amortized over one year. The holders of these senior notes have provided
Telscape with a letter indicating their agreement, subject to definitive
documentation, to convert their notes into the Class F Preferred described
below.
In July 1999, Telscape's revolving credit facility expired and Telscape
repaid all amounts outstanding at that time.
On July 28, 1999, Telscape issued an unsecured and subordinated promissory
note in the amount of $576,000 maturing on November 24, 1999. Telscape may
prepay this note with no penalty subject to the following limitations. In the
event that Telscape's common stock closes above $11 per share for the five
consecutive trading days prior to November 24, 1999, Telscape may elect to pay
the holder the principal amount in cash plus accrued interest at a rate of 15%
per annum. In the event that the price of Telscape's stock is greater than $5.25
per share and less than $11 per share at the time of maturity, Telscape must
provide the holder of the note with 91,042 shares of Telscape's common stock as
payment of the note and no interest shall be owing. In the event that the price
of Telscape's common stock is less than $5.25 per share, Telscape agrees to pay
the note in cash at maturity plus accrued interest at 15% per annum. On November
24, 1999, Telscape issued 91,042 shares of Telscape's common stock as payment of
the note per the agreement.
Also in July 1999, Telscape received a bridge loan of $3.0 million from
Lucent. The Lucent bridge loan was repaid upon the funding of the Lucent credit
facility. In connection with the bridge loan, Telscape issued to Lucent warrants
to purchase an aggregate of 85,000 shares of common stock at an exercise price
of $8.50 per share. The warrants have a term of three years.
On August 27, 1999, Telscape, along with its subsidiaries, Telereunion S.A.
de C.V. ("Telereunion"), Telereunion International, S.A. de C.V., Telereunion,
Inc., Telscape USA, Inc., MSN Communications, Inc., Interlink Communications,
Inc., TSCP International, Inc., Vextro De Mexico S.A. de C.V., Servicios
Corporativos Vextro, S.A. de C.V., Telscape de Mexico S.A. de C.V., N.S.I. S.A.
de C.V., Lan and Wan S.A. de C.V. and M.S. Noticias y Telecomunicaciones, S.A.
de C.V., signed a credit agreement with Lucent Technologies, Inc. The Lucent
credit agreement provides for up to $40 million in financing. In March 2000,
Lucent signed a commitment letter to increase the size of the facility from $40
million to $60 million, subject to certain conditions including the merger with
Pointe. Telscape borrowed $23.9 million under the credit agreement on August 27,
1999, of which $9.0 million was utilized to repay the $3.0 million Lucent bridge
loan and $6.0 million of senior notes and $14.9 million was utilized to pay for
costs directly related to construction of the Mexican network and some related
debt offering costs. A second funding of $16.1 million was drawn on April 20,
2000 to pay for construction costs of the Mexican network. Subsequent loans
under the Lucent credit agreement are subject to the satisfaction of certain
conditions precedent, one of which has not been satisfied as of the date of this
filing and is dependent upon the cooperation of a third party. Telscape expects,
however, to resolve this issue. Telscape has incurred additional obligations to
Lucent in the construction of Telscape's Mexican network totaling $24.6 million
at December 31, 1999. Telscape funded $16.1 million of these obligations on
April 20, 2000, and expects to fund these obligations and
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other obligations under the facility, with proceeds from the facility, upon
consummation of the merger with Pointe and the increase of the Lucent credit
facility from $40 million to $60 million.
As of December 31, 1999, Telscape was in default of certain financial
covenants under the Lucent credit agreement. In conjunction with the March 2000
commitment for an additional $20 million, Lucent waived these defaults and all
other defaults through May 15, 2000, and has agreed to renegotiate the financial
covenants that will be used to measure Telescape's performance under this
facility. Telscape cannot guarantee that Telscape will be able to secure
additional waivers from Lucent, should they be necessary, or that Telscape can
negotiate financial covenants that will be more favorable than the ones
contained in the initial credit agreement.
On October 22, 1999, Telscape signed a loan agreement with Lennox Invest
Ltd., a BVI Corporation, which provided for funding of up to $10.0 million. A
total of $1.5 million has been funded on this facility, which bears interest at
10% per annum. Interest on each note is to be paid at maturation of the
respective note, which occurs six months after the date of each note. Of the
$1.5 million funded under the facility, $1.0 million matures on April 19, 2000,
and $0.5 million matures on April 26, 2000. As part of this transaction, certain
members of the board of directors agreed to pledge shares of Telscape stock as
collateral. Telscape has agreed to indemnify these directors for the loss of
their shares for any reason other than the non-payment of these loans, and to
compensate these directors as discussed below. In December 1999, Telscape
informed Lennox that Telscape would not be drawing any further funding under
this facility due to a breach of contract on the part of Lennox.
As of December 31, 1999 and the date of this report, Telscape has an
outstanding receivable of $1.4 million from a customer of Telscape's network
solutions business. This receivable has been outstanding since December 31,
1998. Telscape has been forced to utilize legal resources to enforce collection
of this amount and recorded an allowance for doubtful accounts of $700,000
against the amount outstanding during the fourth quarter of 1999. In the event
that Telscape determines that this amount or a portion of the amount is
uncollectible in the future, Telscape may be forced to incur a charge in excess
of the reserve already established for the account.
As of December 31, 1999, Telscape's debt totaled $38.8 million, resulting
in a debt to equity ratio of 143% as compared to $13.1 million and 38%,
respectively, as of December 31, 1998. Fully funding the Lucent credit facility
will significantly increase Telscape's leverage. In addition, Telscape estimates
that there are an additional $10 to $15 million in expenditures related to the
Mexican network and Telscape's network expansion which will be funded with a
combination of the Lucent facility and other debt. During fiscal 1999, Telscape
incurred losses and had negative cash flow from operations. Telscape does not
expect that cash flow from operations will be sufficient to meet anticipated
capital expenditures and debt repayments requirements when they are due without
additional financing. Telscape intend to finance Telscape's growth, principal
and interest obligations under existing debt obligations and additional capital
investments required for Telscape's planned facilities expansion through vendor
financing and the sale of debt or equity securities (or a combination of both).
There can be no assurance that Telscape will be able to obtain additional
financing on commercially reasonable terms, if at all, to fund losses generated
from operations, to fund capital expenditures, to fund debt service obligations
as they become due or to fund strategic investment alternatives.
On November 18, 1999, Telscape entered into an agreement to sell
approximately $5 million worth of excess fiber optic capacity on Telscape's
Mexican network to another Mexican carrier. Under the terms of the agreement,
the carrier has provided a non-refundable deposit of $500,000. The Mexican
carrier is to provide 40% of the purchase price on or before March 31, 2000 and
the balance of the purchase price by June 8, 2000. In the event that the Mexican
carrier does not meet these payment dates then it is subject to certain penalty
provisions.
On November 24, 1999, Telscape signed a letter of intent to merge with
Pointe. In connection with the letter of intent, Pointe agreed to lend Telscape
$1.5 million that was evidenced by a short term promissory note ("Promissory
Note"). As part of this transaction, certain members of the board of directors
agreed to pledge shares of Telscape stock as collateral. Telscape has agreed to
indemnify
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these directors for the loss of their shares for any reason other than the
non-payment of these loans, and to compensate these directors as discussed
below. On December 31, 1999, Telscape signed a definitive merger agreement with
Pointe. In addition, Pointe agreed to lend Telscape $10 million, which was
evidenced by a convertible promissory note. In early January, Pointe funded $8.5
million into escrow. On January 10, 2000, Telscape drew down $1 million from
escrow and the Promissory Note was increased accordingly. On February 7, 2000,
Telscape executed a replacement convertible promissory note ("Replacement
Note") for $10,000,000 with an interest rate of 12% and a maturity of June 30,
2000. The Replacement Note extinguishes the $2.5 million of indebtedness under
the Promissory Note. As of April 14, 2000, Telscape has drawn down $5.45 million
from escrow, creating a $7.95 million obligation to Pointe under the Replacement
Note. Certain circumstances relating to the merger agreement may affect
Telscape's obligations and rights under the Replacement Note.
Although Telscape can provide no assurance, as of the date of this filing,
it is expected that the merger with Pointe will be finalized during the second
quarter of 2000 at which time the companies will begin operating under the
common name of Telscape. The terms of the original merger agreement called for
Telscape to issue its common stock to Pointe shareholders at an exchange ratio
of 0.215054 of a share of Telscape common stock for every share of Pointe common
stock. Also, for each share of Pointe convertible preferred stock outstanding,
Telscape will issue one share of Telscape convertible preferred stock (with
rights and preferences substantially the same as the Pointe convertible
preferred stock). On March 30, 2000 Telscape and Pointe agreed to an adjustment
of the exchange ratio of approximately 4%. The adjusted ratio of shares is the
result of a Pointe subsidiary, TeleCommute Solutions ("TCS"), which recently
received $19 million in new financing led by MCI WorldCom Venture Fund and
others, remaining in the combined companies. The merger agreement had previously
provided that TCS was to be spun off to Pointe shareholders prior to the
consummation of the merger. Consequently, each share of Pointe stock will be
exchanged for 0.223514 shares of Telscape's common stock.
The commitment by Lucent to provide an additional $20 million under the
credit agreement and the Class F Convertible Preferred Stock described below,
are contingent on Telscape's merger with Pointe. Should Telscape not be able to
consummate the merger with Pointe, Telscape's financial condition may be
adversely affected. The merger may not be approved by both Pointe's and
Telscape's shareholder groups, a regulatory agency or other outside party, or
Telscape and Pointe may face undue delays affecting the timeliness in which
Telscape and Pointe can consummate the merger. Should Telscape and Pointe not be
able to consummate the merger in a timely manner, the commitments mentioned
above may expire. Telscape cannot guarantee that such commitments could be
replaced on similar terms, if at all. Should the merger not be approved,
Telscape may have to continue its efforts to identify parties interested and
able to consummate an investment in Telscape. There can be no assurance that
Telscape will be able to identify any future joint ventures, acquisitions,
mergers or strategic alliances or that, if identified, Telscape will be able to
successfully execute these transactions. If necessary funds are not available,
Telscape's business and results of operations and the future expansion of
Telscape's business could be materially adversely affected.
Should the merger be approved by Telscape's and Pointe's shareholders,
Telscape and Pointe intend to jointly finance Telscape's growth, principal and
interest obligations under existing debt obligations, and additional capital
investments required for Telscape's planned facility expansions through cash
flow from operations, vendor financing and the sale of debt or equity securities
(or a combination of both). There can be no assurance that the cash generated
from operations will be sufficient to fund such expenditures or that Telscape
will be able to obtain financing on commercially reasonable terms, if at all. If
necessary funds are not available, Telscape's business and results of operations
and the future expansion of Telscape's business could be materially adversely
affected.
Also in January 2000, Telscape converted $500,000 in notes payable due
January 1, 2000, originally incurred in connection with the Integracion
acquisition, into 47,617 shares of common stock at a price of $10.50 per share.
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Upon the signing of the letter of intent, Telscape and Pointe began a joint
effort to raise capital for the combined companies. In March 2000, Telscape
completed a $31,575,000 private placement consisting of 315,750 shares of Class
F Convertible Senior Preferred Stock, par value $.001 per share (the "Class F
Preferred Stock"), together with five year warrants to purchase 1,925,306
shares of common stock. The Class F Preferred Stock is convertible into
3,850,610 shares of Telscape's common stock at a conversion price equal to $8.20
per share, and the exercise price of the warrants is $10.00 per share. The Class
F Preferred Stock earns dividends at a rate of 12% per annum, which are
cumulative and payable in either cash or shares of Class F Preferred Stock at
our discretion. Pricing for this transaction was established based on a trailing
thirty day average of the closing price of Telscape's common stock as of
December 7, 1999. The proceeds of the Class F Preferred have been placed into
escrow and release of escrow is subject to the consummation of the merger with
Pointe.
Telscape may require the conversion of all of the outstanding Class F
Preferred Stock (i) in conjunction with a qualified offering or (ii) at any time
after the first year anniversary of the first issue date if: (1) Telscape's
common stock shall have been listed for trading on the New York Stock Exchange,
the Nasdaq National Market System or the American Stock Exchange (each, an
"Exchange"); (2) Telscape's common stock shall have traded on such Exchange
for a period of at least 20 consecutive trading days at a price per share of at
least $15.00 (subject to appropriate adjustment for recapitalization events);
and (3) the cumulative average daily trading volume of Telscape's common stock
during such 20 consecutive trading day period shall be at least $3,000,000;
provided, that, the shares of common stock issuable upon such conversion shall
have been registered and listed on each securities exchange, over-the-counter
market or on the Nasdaq National Market on which similar securities issued by
Telscape are then listed. For purposes of this paragraph, qualified offering
shall mean the sale by Telscape of common stock or other equity interests in a
public offering at a purchase price per share in excess of $15.00 per share
(subject to appropriate adjustment for recapitalization events) yielding gross
proceeds of not less than $30,000,000.
Telscape will be required to file a registration statement with the SEC
within 150 days of closing the sale of the Class F Preferred Stock to register
the shares of common stock issued or issuable upon conversion of all the Class F
Preferred Stock (including shares issued as dividends) and the exercise of the
related warrants.
RESULTS OF OPERATIONS -- QUARTER ENDED MARCH 31, 2000
The quarter ended March 31, 2000 furthered our objectives of moving closer
to the customer and enhancing our facilities. In our voice services, we have
focused on expanding our retail lines of business, as the wholesale long
distance business continues to experience increasing competitive pressure and
contracting margins. As pricing pressures have affected the international long
distance revenues, management has elected to dedicate our network assets to
supporting the retail business due to our belief that the retail business has
greater long-term value. We will continue to be opportunistic with respect to
the wholesale voice services.
During the first quarter 2000, we announced completion of the construction
of our Mexican network, thus taking a significant step forward in enhancing our
own facilities. Upon interconnection of our Mexican network, we will be
operating one of the largest fiber optic networks in the country.
Our margins in voice services have steadily declined over the past year.
Our strategy to improve gross margins in voice services is to (i) increase our
efforts in the retail market where we can provide product identification and
differentiation, (ii) decrease our dependency on third party service providers,
and (iii) increase the amount of traffic we process over our own network, under
direct operating agreements we establish with other carriers and over our
Mexican network.
We intend to terminate a significant portion of both our retail and
wholesale traffic on our Mexican network in the year 2000, which we expect will
improve our overall gross margin levels. We also intend to offer advanced
services to the small and medium size enterprises in Mexico, utilizing the
Mexican network as a foundation. We expect that many of these services will have
higher margins than our traditional voice services.
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We expect that gross profits from equipment sales will decline over time as
the market becomes more competitive. Our strategy for maintaining the gross
profits we have enjoyed from this business line in the past is to enter into
additional outsourcing contracts and to refocus our sales efforts from the
simple provision of network equipment to the bundling of network equipment and
the provision of telecommunications services on our Mexican network. Our call
center operations in Mexico have historically provided relatively higher gross
margins than our other lines of business. We intend to shift several of the
support functions provided to our retail lines of business in the U.S. from our
call center in the U.S. to our call center in Mexico in order to take advantage
of the relatively lower cost structure afforded by our Mexican operations. In
March 2000, we relocated our call center in Mexico to increase our capacity from
120 positions to up to 400 positions.
In March 2000, we discontinued the products division of our Interlink
subsidiary. The products division was discontinued due to (i) the high overhead
costs associated with the division, (ii) the low level of margin contribution
and (iii) its lack of fit with the core strategy of the Company. During the
first quarter of 2000, we incurred negative margins of $70,000 on sales of
$679,000 from the products division.
We expect that gross profits as a percentage of revenues as well as actual
gross profit will increase in 2000 primarily because of our ability to run an
increasing percentage of the traffic we manage over our own facilities and a
shift in the mix of our revenues towards the retail sector and advanced
services.
REVENUES. In the first quarter of 2000, our revenue mix changed with voice
services representing 54.8% of revenues in 2000 versus 79.8% in 1999. We will
continue to focus on voice services as a source of cash flow and network
efficiency; however, we will increasingly devote our resources to focus on
advanced and higher margin services.
We provide advanced services through three main segments: network
solutions, customer relationship management and broadband services. Our network
solutions division has historically provided value-added and systems integration
services to private and public sector customers in Mexico. Revenues are derived
from providing value-added services and the sale of equipment. To serve the
complex needs of our customers, the sales teams and technical personnel combines
strong sales capabilities with specialized technical expertise in
product-specific areas such as Private Branch Exchange ("PBX"), voice
processing, Internet, video conferencing and asynchronous transfer mode and
frame relay networks. This highly qualified sales force will be used to begin
promoting voice services on our Mexican network thus permitting us, as a
company, to provide solutions consisting of equipment as well as continuing
telecommunications services.
Until the recent expansion of our call center facilities, our capacity was
largely utilized under our contract with the U.S. Embassy. Given the additional
capacity, we intend to market and sell our bilingual capabilities to customers
in the United States and Mexico through a direct sales effort.
Our current broadband service offerings include voice, video and data
transport services including fractional and full T-1 data broadcast, dedicated
circuits and private line up-link and down-link services to Latin America and
other parts of the world. We have also introduced Bandwidth-on-Demand, ISDN
videoconferencing and Internet-through-satellite services and also serve as an
Internet backbone provider to ISPs in remote areas where access to high speed
fiber optics is limited, as is the case in most Latin American countries. We
have also begun cross-selling our teleport services through our network
solutions sales force in Mexico and our international long distance wholesale
carrier sales force in the U.S.
GROSS PROFIT. We experienced pressure on voice services gross profit
percentage and contribution, but experienced an improvement in the gross margin
percentage of our advanced services business. We have not been able to reduce
our termination costs as quickly as prices have declined in the international
long distance business and we have relied partially on certain lower margin
outsourcing arrangements to support our prepaid calling cards. We expect that we
will be able to
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increase revenues and lower costs in our voice services business as we move more
traffic onto our own facilities and ultimately onto our Mexican network.
OPERATING EXPENSES. We have been in a period of significant investment in
facilities and human resources, principally in connection with the construction
of our Mexican network and to accommodate the growth of certain parts of our
business. We incurred significant initial operating costs related to our Mexico
network, all of which were expensed. We expect operating expenses to continue to
increase as (i) our operations shift from being pre-operational to operational
during 2000 and (ii) as we accommodate expected growth. The expected increase in
operating expenses will be offset partially by the decline resulting from the
discontinuation of the Interlink products division.
REVENUES decreased from $26.6 million in 1999 to $23.2 million in 2000.
This decrease of $3.4 million, or 12.8%, was due principally to weaker sales of
our prepaid cards in the US. The decline in prepaid card sales was offset by an
increase in revenues from each of our other segments, with sales in wholesale
voice services increasing 29.5% from $4.4 million to $5.7 million and advanced
services growing 94.4% from $5.4 million to $10.5 million. Our prepaid sales are
down year over year primarily because of competition in the market, the negative
effect of which is still carrying over into 2000. Within our advanced services,
we experienced strong growth in revenues. Our network solutions sales increased
more than expected because of pent-up demand caused by Y2K concerns in Mexico.
The growth in customer relationship management is primarily from increased
volume from our US Embassy contract. Broadband services increased due largely to
the growing demand in Latin America for bandwidth and associated services.
COST OF REVENUES decreased from $23.8 million in 1999 to $19.9 million in
2000, or $3.9 million. The 16.4% decrease in cost of revenues was due
principally to the decrease in retail voice services revenues offset by the
increased costs associated with greater revenues in all of our other segments,
particularly in network services. The cost of revenues as a percentage of
revenues decreased from 89.5% to 85.8%, or 3.7%, due principally to the change
in sales mix towards advanced services where the Company enjoys a relatively
higher gross margin. This decrease was significantly offset by a compression of
margins from voice services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") increased from $4.0
million in 1999 to $6.8 million in 2000, or $2.8 million. The 70.0% increase in
SG&A was due to the incremental SG&A related to the startup activities of our
Mexican network, increases in expenses to support our new sales and marketing
initiatives, and the growth in our call center operations.
Overall SG&A as a percentage of revenues increased from 15.0% to 29.3%, or
14.3%, due to the factors stated above.
DEPRECIATION AND AMORTIZATION increased from $1.4 million in 1999 to $1.6
million in 2000, or $0.2 million. This increase is a result of our continuing
expansion of our communications network, which includes purchases of switches
and other telecommunications equipment and facilities. We expect depreciation
expense to significantly increase as we start operating our newly completed
Mexican network.
INTEREST INCOME (EXPENSE), NET increased from $(854,000) in 1999 to
$(1,084) in 2000, or $(230,000). This increase was mainly due to an increase in
our level of borrowings, including the Pointe Note and the Lucent Credit
Agreement. Also, there was an increase in the amortization of debt offering
costs primarily related to the Lucent facility of $141,000 in 2000.
OTHER INCOME (EXPENSE), NET changed from $(274,000) in 1999 to $136,000 in
2000, or $(269,000). This change was principally due to a decrease in one time
printing, accounting and other charges of $214,000 recorded in 1999 versus one
time income from a write-off of stale accounts payable of $49,000 and a gain on
the sale of fixed assets of $12,000 in 2000. The Company benefited from a
foreign exchange gain of $72,000 in 2000 versus a loss of $(60,000) in 1999.
INCOME TAX BENEFIT (EXPENSE) changed from an income tax benefit of $928,000
in 1999 to an income tax expense of $(192,000) in 2000. The Company's overall
effective tax benefit for the three months ended March 31, 1999, was 25% which
reflect the tax benefits recognized on the losses
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realized offset by permanent items, the most significant of which is the non
deductible nature of goodwill amortization. In 2000, the Company recognized a
valuation allowance equivalent to 100% of the tax benefit that it otherwise
might have recognized for its US based operations.
LOSS ON DISPOSAL. A loss on the disposal of our Interlink products
division in California was recognized in the first quarter of 2000 for $1.5
million as a result of our decision to discontinue this line of business. The
loss represents the estimated severance benefits to be paid to the affected
employees, losses on disposal of inventory and equipment, and other expenses.
NET INCOME (LOSS). The Company experienced a net loss of $(2.9) million in
1999 as compared to a net loss of $(7.8) million in 2000 due to a combination of
the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES -- QUARTER ENDED MARCH 31, 2000
Net cash used in operating activities was $1.4 million and $6.7 million for
the three months ended March 31, 1999 and March 31, 2000, respectively. The
decrease in net cash provided by operations in 2000 as compared to 1999 was due
primarily to the increase in losses from operations for the respective quarters.
In addition, the Company's working capital position was impacted by decreases in
inventory and deferred revenues offset by an increase in accounts receivable and
accrued liabilities.
Net cash used in investing activities was $3.3 million and $2.4 million for
the three months ended March 31, 1999 and March 31, 2000, respectively. For each
of the three months ended March 31, 1999 and March 31, 2000, we expended
approximately $3.3 and $2.4 million, respectively, on purchases of property and
equipment as part of our network expansion strategy.
Net cash provided by financing activities was $1.1 million and $6.5 million
for the three months ended March 31, 1999 and March 31, 2000, respectively.
During the three months ended March 31, 2000, the Company received approximately
$6.2 million in loan proceeds from Pointe Communications and $475,000 in
proceeds from the exercise of warrants and options during the quarter. The
Company also made payments of $159,000 on its notes payable and $30,000 on
capital lease obligations.
As of March 31, 2000, the Company had cash and cash equivalents of $2.8
million and negative working capital of $56.1 million. Of this $56.1 million,
$27.6 million represents accounts payable incurred in connection with the
construction of the Mexican network and $2.5 million represents accounts payable
incurred for switching equipment. On April 20, 2000, we drew down an additional
$16.1 million under the Lucent facility. We plan to finance the remaining
network construction accounts payable under the Lucent credit agreement subject
to availability as discussed below and the switching equipment accounts payable
under long term financing. Additionally, we have classified as current $5.6
million in notes payable due to non-compliance of certain financial covenants
under a loan facility as discussed below. We also have classified as current
$1.2 million under the Lucent credit facility. Also negatively affecting working
capital are $7.7 million in obligations outstanding to Pointe and $2.0 million
of senior notes due in less than one year. The Pointe note will be eliminated
upon consummation of the merger with Pointe. In the event of the consummation of
the merger with Pointe, the holders of the senior notes have agreed to convert
into Series F preferred shares as discussed below. Lastly, the $1.5 million
Lennox note described below is also included in short term debt.
On January 11, 1999, we signed a financing arrangement with a finance
company, which provides for funding of equipment purchases of up to $7.0 million
through December 31, 1999. The financing is structured as long-term loans
maturing January 1, 2005. The loans provide for payments of interest only
through January 1, 2000. Thereafter, payments of principal and interest are due
quarterly. Interest is calculated on available basis during the interest only
period at 425 basis points above the 90 day commercial paper rate. Interest
thereafter is calculated at 500 basis points above the five year Federal Reserve
Treasury Constant Maturity Rate. We have drawn approximately $5.6 million under
this facility through December 31, 1999, of which $2.5 million resulted in
refinancing equipment, which was previously financed through an operating lease.
We are not in compliance with certain financial covenants under this loan
facility and have secured a waiver from the finance company of their rights
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under the agreement to enforce default provisions due to non compliance with
these financial covenants for the fourth quarter of 1999. We are not able to
draw down additional financing under this facility until such time as the
finance company allows us to do so. The finance company has also issued us a
forbearance letter informing us that they will not enforce acceleration of their
facility until the earlier of March 31, 2000 or the date our merger with Pointe
is completed. The finance company has agreed to extend the forbearance period
through June 15, 2000. The amounts outstanding under this facility of $5.6
million have been classified as current in the financial statements as of March
31, 2000. We may have to request additional waivers from the finance company due
to non compliance with financial covenants in future quarters or we may have to
request an extension of the forbearance letter provisions should our merger with
Pointe not be completed by June 15, 2000. We cannot guarantee that the finance
company would provide us with additional waivers or that they would extend their
forbearance letter in which case they could enforce the default provisions and
accelerate the maturity date. Should that be the case, there is no guarantee
that we would be able to obtain a replacement facility. A default under this
agreement would trigger cross defaults under the Lucent credit facility.
On August 27, 1999, Telscape International, Inc., the registrant, along
with its subsidiaries, Telereunion S.A. de C.V. ("Telereunion"), Telereunion
International, S.A. de C.V., Telereunion, Inc., Telscape USA, Inc., MSN
Communications, Inc., Interlink Communications, Inc., TSCP International, Inc.,
Vextro De Mexico S.A. de C.V., Servicios Corporativos Vextro, S.A. de C.V.,
Telscape de Mexico S.A. de C.V., N.S.I. S.A. de C.V., Lan and Wan, S.A. de C.V.
and M.S. Noticias y Telecomunicaciones, S.A. de C.V. signed a credit agreement
with Lucent Technologies, Inc. The Lucent credit agreement provides for up to
$40 million in financing. In March 2000, Lucent signed a commitment letter to
increase the size of the facility from $40 million to $60 million, subject to
certain conditions including the merger with Pointe. We borrowed $23.9 million
under the credit agreement on August 27, 1999, of which $9.0 million was
utilized to repay the $3.0 million Lucent bridge loan and $6.0 million of senior
notes and $14.9 million was utilized to pay for costs directly related to
construction of the Mexican network and some related debt offering costs. We
funded an additional $16.1 million under the Lucent facility on April 20, 2000,
$14.6 million of which was applied to payables outstanding and $1.5 million of
which was for interest and fees due under the facility.
As of March 31, 2000, we have incurred total obligations to Lucent in the
construction of our network totaling $27.6 million. We funded $14.6 million of
these in April 2000 and expect to fund the balance of these obligations under
the expanded facility with Lucent. However, we can provide no assurance that
this facility will be expanded.
As of March 31, 2000, we were in default of certain financial covenants
under the Lucent credit agreement. In conjunction with the March 2000 commitment
for an additional $20 million, Lucent waived these defaults and all other
defaults through June 15, 2000 and has agreed to renegotiate the financial
covenants that will be used to measure our performance under this facility.
Although we are currently in negotiations to amend the Lucent facility to
accommodate the increase to $60 million, we cannot guarantee that we will be
able to secure additional waivers from Lucent, should they be necessary, or that
we can negotiate financial covenants that will be more favorable than the ones
contained in the initial credit agreement.
As of March 31, 2000 and the date of this report, we have an outstanding
receivable of $1.4 million from a customer of our network solutions business.
This receivable has been outstanding since December 31, 1998. We have been
forced to utilize legal resources to enforce collection of this amount and
recorded an allowance for doubtful accounts of $700,000 against the amount
outstanding during the fourth quarter of 1999. In the event that we determine
that this amount or a portion of the amount is uncollectible in the future, we
may be forced to incur a charge in excess of the reserve already established for
the account.
The Company's debt at March 31, 2000, totaled $44.3 million resulting in a
debt to equity ratio of 211% as compared to $38.8 million and 143%,
respectively, as of December 31, 1999. We expect
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our debt levels to increase in the near term as we plan to finance the network
construction accounts payable under the Lucent credit agreement subject to
availability as discussed below and other equipment accounts payable under long
term financing. In the event that the merger with Pointe occurs and the Series F
Preferred funds, we expect our debt to equity ratio to decrease.
On October 22, 1999, we signed a loan agreement with Lennox Invest Ltd., a
BVI Corporation, which provided for funding of up to $10.0 million. A total of
$1.5 million has been funded on this facility, which bears interest at 10% per
annum. Interest on each note is to be paid at maturation of the respective note,
which occurs six months after the date of each note. Of the $1.5 million funded
under the facility, $1.0 million matures on April 19, 2000, and $0.5 million
matures on April 26, 2000. As part of this transaction, certain members of the
board of directors agreed to pledge shares of Telscape stock as collateral. We
have agreed to indemnify these directors for the loss of their shares for any
reason other than the non-payment of these loans, and to compensate these
directors as discussed below. In December 1999, we informed Lennox that we would
not be drawing any further funding under this facility due to a breach of
contract on the part of Lennox. The notes associated with the $1.5 million have
matured and we are technically in payment default. However, we are currently in
a dispute with Lennox concerning the $1.5 million loan. In addition to the
issues associated with the breach mentioned above, certain parties associated
with Lennox have claimed entitlement to the repayment of the $1.5 million. On
May 10, 2000, we informed Lennox that we were prepared to resolve the disputes
provided that all parties agree to a resolution. The default under this loan
creates cross defaults under other outstanding indebtedness of ours and we
expect to obtain waivers until the resolution of the disputes but there can be
no assurance that such waivers will be obtained.
On November 18, 1999, we entered into an agreement to sell approximately $5
million worth of excess fiber optic capacity on our Mexican network to another
Mexican carrier. Under the terms of the agreement, the carrier has provided a
non-refundable deposit of $500,000. The Mexican carrier was to have provided 40%
of the purchase price on or before March 31, 2000 and the balance of the
purchase price by June 8, 2000. In the event that the Mexican carrier does not
meet these payment dates then it is subject to certain penalty provisions. In
the event that the carrier does not pay the balance by August 8, 2000, the
carrier forfeits the deposit. As of the date of this filing, we have not
received the payment due on or before March 31, 2000.
On November 24, 1999, we signed a letter of intent to merge with Pointe
Communications. In connection with the letter of intent, Pointe agreed to lend
us $1.5 million that was evidenced by a short term promissory note ("Promissory
Note"). As part of this transaction, certain members of the board of directors
agreed to pledge shares of Telscape stock as collateral. We have agreed to
indemnify these directors for the loss of their shares for any reason other than
the non-payment of these loans, and to compensate these directors as discussed
below. On December 31, 1999, we signed a definitive merger agreement with
Pointe. In addition, Pointe agreed to lend us $10 million, which was evidenced
by a convertible promissory note. In early January, Pointe funded $8.5 million
into escrow. On January 10, 2000, we drew down $1 million from escrow and the
Promissory Note was increased accordingly. On February 7, 2000, we executed a
replacement convertible promissory note ("Replacement Note") for $10,000,000
with an interest rate of 12% and a maturity of June 30, 2000. The Replacement
Note extinguishes the $2.5 million of indebtedness under the Promissory Note. As
of March 31, 2000, we have drawn down $6.2 million from escrow, creating a $7.7
million obligation to Pointe under the Replacement Note. Certain circumstances
relating to the merger agreement may affect our obligations and rights under the
Replacement Note. In the event the merger with Pointe Communications is
consummated, the Replacement Note will be extinguished.
The terms of the original merger agreement with Pointe called for Telscape
to issue its common stock to Pointe shareholders at an exchange ratio of
0.215054 of a share of Telscape common stock for every share of Pointe common
stock. Also, for each share of Pointe convertible preferred stock outstanding,
Telscape will issue one share of Telscape convertible preferred stock (with
rights and preferences substantially the same as the Pointe convertible
preferred stock). On March 30, 2000, we
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and Pointe agreed to an adjustment of the exchange ratio of approximately 4%.
The adjusted ratio of shares is the result of a Pointe subsidiary, TeleCommute
Solutions ("TCS"), which recently received $19 million in new financing led by
MCI WorldCom Venture Fund and others, remaining in the combined companies. The
merger agreement had previously provided that TCS was to be spun off to Pointe
shareholders prior to the consummation of the merger. Consequently, each share
of Pointe stock will be exchanged for 0.223514 shares of our common stock.
The commitment by Lucent to provide an additional $20 million under the
credit agreement and the Class F Convertible Preferred Stock described below,
are contingent on our merger with Pointe. Should the Company not be able to
consummate the merger with Pointe, the Company's financial condition may be
adversely affected. The merger may not be approved by both of our company's
shareholder groups, a regulatory agency or other outside party, or we may face
undue delays affecting the timeliness in which we can consummate the merger.
Should we not be able to consummate the merger in a timely manner, the
commitments mentioned above may expire. We cannot guarantee that such
commitments could be replaced on similar terms, if at all. Should the merger not
be approved, we may have to continue our efforts to identify parties interested
and able to consummate an investment in our company. There can be no assurance
that we will be able to identify any future joint ventures, acquisitions,
mergers or strategic alliances or that, if identified, we will be able to
successfully execute these transactions. If necessary funds are not available,
our business and results of operations and the future expansion of our business
could be materially adversely affected.
Also in January 2000, we converted $500,000 in notes payable due January 1,
2000, originally incurred in connection with the Integracion acquisition, into
47,619 shares of common stock at a price of $10.50 per share.
Upon the signing of the letter of intent, we and Pointe began a joint
effort to raise capital for the combined companies. In March, 2000, we completed
a $31,575,000 private placement consisting of 315,750 shares of Class F
Convertible Senior Preferred Stock, par value $.001 per share (the "Class F
Preferred Stock"), together with five year warrants to purchase 1,925,306
shares of common stock. The Class F Preferred Stock is convertible into
3,850,610 shares of our common stock at a conversion price equal to $8.20 per
share, and the exercise price of the warrants is $10.00 per share. The Class F
Preferred Stock earns dividends at a rate of 12% per annum, which are cumulative
and payable in either cash or shares of Class F Preferred Stock at our
discretion. Pricing for this transaction was established based on a trailing
thirty day average of the closing price of our common stock as of December 7,
1999. The proceeds of the Class F Preferred have been placed into escrow. Prior
to the closing of the merger and with the consent of Pointe, we may fund $4.6
million out of escrow and issue the corresponding Class F Preferred and
warrants. In the event that the merger is not consummated, the holders of the
Class F Preferred have the ability to force redemption of their preferred
shares. The balance of the proceeds from the Class F Preferred which are held in
escrow are subject to the consummation of the merger with Pointe.
We may require the conversion of all of the outstanding Class F Preferred
Stock (i) in conjunction with a qualified offering or (ii) at any time after the
first year anniversary of the first issue date if: (1) our common stock shall
have been listed for trading on the New York Stock Exchange, the Nasdaq National
Market System or the American Stock Exchange (each, an "Exchange"); (2) our
common stock shall have traded on such Exchange for a period of at least 20
consecutive trading days at a price per share of at least $15.00 (subject to
appropriate adjustment for recapitalization events); and (3) the cumulative
average daily trading volume of our common stock during such 20 consecutive
trading day period shall be at least $3.0 million; provided, that, the shares of
common stock issuable upon such conversion shall have been registered and listed
on each securities exchange, over-the-counter market or on the Nasdaq National
Market on which similar securities issued by us are then listed. For purposes of
this paragraph, qualified offering shall mean the sale by us of common stock or
other equity interests in a public offering at a purchase price per share in
excess of $15.00 per share (subject to appropriate adjustment for
recapitalization events) yielding gross proceeds of not less than $30.0 million.
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Telscape will be required to file a registration statement with the SEC
within 150 days of closing the sale of the Class F Preferred Stock to register
the shares of common stock issued or issuable upon conversion of all the Class F
Preferred Stock (including shares issued as dividends) and the exercise of the
related warrants.
During the first quarter of 2000, we incurred losses and had negative cash
flow from operations. We do not expect that cash flow from operations will be
sufficient to meet anticipated capital expenditures and debt repayments
requirements when they are due without additional financing. We intend to
finance our growth, principal and interest obligations under existing debt
obligations and additional capital investments required for our planned
facilities expansion through vendor financing and the sale of debt or equity
securities (or a combination of both). There can be no assurance that we will be
able to obtain additional financing on commercially reasonable terms, if at all,
to fund losses generated from operations, to fund capital expenditures, to fund
debt service obligations as they become due or to fund strategic investment
alternatives.
Should our merger be approved by Telscape's and Pointe's shareholders, we
intend to jointly finance our growth, principal and interest obligations under
existing debt obligations, and additional capital investments required for our
planned facility expansions through cash flow from operations, vendor financing
and the sale of debt or equity securities (or a combination of both). There can
be no assurance that the cash generated from operations will be sufficient to
fund such expenditures or that we will be able to obtain financing on
commercially reasonable terms, if at all. If necessary funds are not available,
our business and results of operations and the future expansion of our business
could be materially adversely affected.
FOREIGN CURRENCY TRANSLATION RISK
The general economic conditions of Mexico are greatly affected by the
fluctuations in exchange rates and inflation. Telscape's foreign currency risk
in Mexico has traditionally been mitigated due to the fact that many of
Telscape's customers are multinational firms that pay in United States dollars.
In addition, most of Telscape's customers that pay in pesos pay at the spot
exchange rate in effect at the time of payment as opposed to the exchange rate
at the time the receivable is created. Telscape's functional currency in Mexico
is the United States dollar because the majority of Telscape's transactions are
in such currency. However, given the recent completion of construction of the
Mexican network and Telscape's plans to record dollar-denominated debt on
Telscape's Mexican subsidiaries' books, Telscape may incur some significant
translation gains and losses in the future. Telscape may choose to limit
Telscape's exposure to translation gains and losses through the purchase of
forward foreign exchange contracts or similar hedging strategies. There can be
no assurance that any foreign currency hedging strategy would be successful in
avoiding translation related gains or losses.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are subject to financial market risks, including interest rate risk and
foreign currency exchange risk.
INTEREST RATE RISK
As of December 31, 1999, we had a mix of variable and fixed interest
bearing notes. All of our debt obligations are denominated in U.S. dollars and,
represent interest rate risk. All of our debt obligations are segregated in
fixed and variable rate instruments as shown on the table below. The table shows
the amounts of principal payments due on our various debt instruments and the
weighted average rate for the principal payments then due using the rates in
effect at December 31, 1999. Our Lucent facility has an interest rate calculated
as a base rate plus a margin. The base rate is established at the time of
funding and the margins are pre-determined fixed margins as contained in the
Lucent credit agreement. As the rate for Lucent notes is known and determinable
at the time of funding, all Lucent notes are categorized as fixed in the table
below.
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The table set forth below summarizes the fair values and payment terms of
financial instruments subject to interest rate risk maintained by us as of
December 31, 1999.
<TABLE>
<CAPTION>
FAIR VALUE
AT
DEBT 2000 2001 2002 2003 2004 TOTAL 12/31/99
- ---------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Non-Interest Bearing or Fixed Rate...... $4,870,000 $4,553,000 $5,489,000 $6,615,000 $7,180,000 $28,707,000 $28,707,000
Wtd. Avg. Interest Rate................. 10.30% 11.22% 11.93% 12.28% 12.80% 11.84% --
Variable................................ $1,777,000 4,702,000 1,342,000 1,116,000 1,117,000 10,054,000 10,054,000
Wtd. Avg. Interest Rate................. 10.54% 12.56% 10.52% 10.50% 10.50% 11.48% --
---------- ---------- ---------- ---------- ---------- ----------- -----------
Total............................... $6,647,000 $9,255,000 $6,831,000 $7,731,000 $8,297,000 $38,761,000 $38,761,000
========== ========== ========== ========== ========== =========== ===========
</TABLE>
We have not entered into any derivative contracts or used any other
interest rate risk management techniques to attempt to minimize the interest
rate risk inherent in each of our debt instruments. At the time of this filing,
we have no plans in place to actively manage this risk.
As we do not have a significant amount of variable interest rate
obligations, we have not entered into derivative transactions to hedge our risk.
FOREIGN CURRENCY EXCHANGE RISK
We conduct a significant amount of our operations in countries outside the
United States. Our foreign currency exchange risk includes the following:
The Mexican economy has historically had periods of exchange rate
instability and peso devaluation. 1999 was the first year in recent history in
which not only did the peso not decline but appreciated slightly year over year.
Our advanced services business is conducted in Mexico. The majority of our
revenues in the advanced services business are contracted in dollars or in pesos
indexed to the dollar at the time of settlement. The products and services that
we sell in the advanced services business line are generally imported from the
U.S. or other countries and are payable in dollars. Our remaining operating
costs in this segment are generally paid in pesos. Our major outsourcing
contracts with the U.S. Embassy and the Ministry of Foreign Affairs generate
revenues which are collected in pesos and costs which are paid in pesos.
Additionally, we anticipate receiving a greater portion of our revenues in
Mexican pesos as our voice services, network operations and customer
relationship management services expand. We also anticipate incurring more peso-
denominated costs as our operations in Mexico expand in line with revenues
therefrom. As examples, the prepaid cards that we started selling in late 1999
in Mexico are peso-denominated, the provision of telecommunication services in
tandem with the operation of our Mexican network is likely to be primarily
peso-denominated and our call center services, which we anticipate will continue
to grow, are all presently peso-denominated.
In our broadband services business segment, we generally collect our
revenues in U.S. dollars and pay for our costs to provide these services in U.S.
dollars.
In our voice services business segment, we sell our services to customers
in the U.S. and thus our revenues have been collected in U.S. dollars. Our costs
of providing these services are paid to vendors both in the U.S. and in Mexico
or other Latin American countries. A significant portion of our costs to provide
these services are structured under operating agreements with carriers in Mexico
under which the costs historically have been settled in pesos. We entered into
additional agreements with carriers in Mexico which provided us with additional
termination capacity in Mexico in 1999. These arrangements provide for
settlement in U.S. dollars.
Nonetheless, as stated above, we anticipate having an increasingly larger
portion of our business in Mexico, and conducting that business primarily as
peso-denominated.
We do not have a hedging policy in place but do plan to consider using
derivatives to mitigate the risk of paying off our dollar denominated debt with
increasingly Mexican operations. We have not
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entered into any derivative or futures contracts or used any other such exchange
rate risk management technique as of the date of this filing.
Telscape does not currently hedge against the risk of foreign exchange rate
fluctuations.
YEAR 2000 COMPLIANCE
To date, year 2000 problems have had a minimal effect on Telscape's
business. However, Telscape may not have identified and remediated all
significant year 2000 problems.
Further remediation efforts may involve significant time and expense, and
unremediated problems may have a material adverse effect on Telscape's business.
Also, Telscape sells telecommunications products to companies in a variety of
industries, each of which is experiencing different year 2000 issues. Customer
difficulties with year 2000 issues might require Telscape to devote additional
resources to resolve underlying problems. Finally, although Telscape has not
been made a party to any litigation or arbitration proceeding to date involving
Telscape's products or services and related to year 2000 compliance issues,
Telscape may in the future be required to defend its products or services in
such proceedings, or to negotiate resolutions of claims based on year 2000
issues. The costs of defending and resolving year 2000-related disputes,
regardless of the merits of such disputes, and any liability for year 2000
related damages, including consequential damages, would negatively affect
Telscape's business, results of operations, financial condition and liquidity,
perhaps materially.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES," requires companies to recognize all derivatives contracts as
either assets or liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of gain or
loss recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are attributable
to the hedged risk or (ii) the earnings effect of the hedged forecasted
transaction. For a derivative not designated as a hedging instrument, the gain
or loss is recognized in income in the period of change. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
Historically, Telscape has not entered into derivatives contracts either to
hedge existing risks or for speculative purposes. Accordingly, Telscape does not
expect adoption of the new standard to have a material effect on Telscape's
financial statements.
SOP 98-5, "REPORTING ON THE COSTS OF START-UP ACTIVITIES," requires all
start-up and organizational costs to be expensed as incurred. It also requires
all remaining historically capitalized amounts of these costs existing at the
date of adoption to be expensed and reported as the cumulative effect of a
change in accounting principles. SOP 98-5 is effective for all fiscal years
beginning after December 31, 1998. Adoption of SOP 98-5 did not have a material
effect on our prior years financial statements. Telscape incurred and expensed
significant costs in connection with the start-up of the network in Mexico in
1999.
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POINTE SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
The following summary historical consolidated financial data should be read
in conjunction with Pointe's consolidated financial statements and related notes
and Pointe's "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The consolidated statement of operations for each of
the four years ended December 31, 1996, 1997, 1998, and 1999 and the
consolidated balance sheet data at December 31, 1996, 1997, 1998, and 1999 are
derived from the consolidated financial statements of Pointe which have been
audited by Arthur Andersen LLP, independent public accountants. The summary
financial data for the three month periods ended March 31, 1999 and 2000 and as
of March 31, 2000 have been derived from Pointe's unaudited financial statements
and in the opinion of Pointe's management include all adjustments (consisting
only of normal recurring adjustments) which are necessary to present fairly the
results of operations and financial position of Pointe for those periods in
accordance with generally accepted accounting principles. Historical results are
not necessarily indicative of the results to be expected in the future.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- ------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- -------- ------- -------- ------- -------
STATEMENT OF OPERATIONS DATA
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 113 $ 8,232 $ 12,951 $27,620 $ 51,925 $11,553 $14,233
Cost of revenues..................... 31 6,275 9,765 23,246 50,130 10,247 13,554
------- ------- -------- ------- -------- ------- -------
Gross profit......................... 82 1,957 3,186 4,374 1,795 1,306 679
Selling, general and administrative
expenses........................... 1,365 7,816 8,766 9,933 19,275 2,833 5,758
Depreciation and amortization........ 147 1,429 2,996 3,452 4,477 1,046 1,153
Nonrecurring charge.................. -- -- 2,677 -- -- -- --
------- ------- -------- ------- -------- ------- -------
Operating loss....................... (1,430) (7,288) (11,253) (9,011) (21,957) (2,573) (6,232)
Interest expense, net................ (94) (482) (481) (1,760) (15,999) (1,086) 64
Other (expense) income, net.......... -- -- (242) 1,624 (335) -- --
------- ------- -------- ------- -------- ------- -------
Loss before income taxes and minority
interests.......................... (1,524) (7,770) (11,976) (9,147) (38,291) (3,659) (6,168)
Income tax benefit (provision)....... -- -- -- -- -- -- --
------- ------- -------- ------- -------- ------- -------
Loss before minority interests....... (1,524) (7,770) (11,976) (9,147) (38,291) (3,659) (6,168)
Minority interests................... -- 13 -- -- -- -- --
------- ------- -------- ------- -------- ------- -------
Net loss............................. (1,524) (7,757) (11,976) (9,147) (38,291) (3,659) (6,168)
Preferred stock dividends............ -- -- -- -- (24,506) -- (1,622)
------- ------- -------- ------- -------- ------- -------
Net loss available to common
stockholders....................... $(1,524) $(7,757) $(11,976) $(9,147) $(62,797) $(3,659) $(7,790)
======= ======= ======== ======= ======== ======= =======
Net loss per share -- basic.......... $ (0.26) $ (0.51) $ (0.39) $ (0.22) $ (1.36) $ (0.08) $ (0.15)
Weighted average shares
outstanding........................ 5,780 15,088 31,085 42,144 46,204 45,343 51,841
Net loss per share -- diluted........ $ (0.26) $ (0.51) $ (0.39) $ (0.22) $ (1.36) $ (0.08) $ (0.15)
Diluted weighted average shares
outstanding........................ 5,780 15,088 31,085 42,144 46,204 45,343 51,841
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
----------------------------------------------------- MARCH 31,
1995 1996 1997 1998 1999 2000
------- ------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash, cash equivalents and short term
investments........................ $ 44 $ 320 $ 156 $ 1,255 $ 21,220 5,772
Current assets....................... 149 3,022 3,373 6,257 30,045 23,278
Property and equipment, net.......... 787 5,374 6,630 14,488 24,317 31,335
Goodwill and other intangibles,
net................................ -- 26,313 20,512 20,404 19,851 19,512
Total assets......................... 1,086 34,792 31,066 42,222 76,890 76,606
Notes payable and capital lease
obligations........................ 304 5,960 5,470 16,295 18,172 13,480
Stockholders' (deficit) equity....... $ 364 $18,673 $ 14,376 $12,385 $ 42,822 41,305
</TABLE>
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POINTE'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Pointe began operations in 1995 predominately offering International
Private Line ("IPL") services between the U.S. and Panama. Subsequently,
Pointe has secured various communications licenses in the U.S., Panama, Costa
Rica, Venezuela, El Salvador, Nicaragua, Mexico, and Honduras, acquired ten
companies, entered the prepaid long distance and telecommuting services markets
and increased revenue from $113,000 for the year ended December 31, 1995 to
$51.9 million for the year ended December 31, 1999. Licenses held by Pointe,
which vary by country, typically allow Pointe to offer an array of services
including international private line, long distance, Internet access, and data
transmission. Pointe has established an infrastructure including satellite earth
stations, interconnection agreements, peripheral infrastructure, and sales and
marketing channels in all of the above countries, except Honduras, to service
existing and future customers. Pointe also enjoys strong relationships with the
responsible government agencies, telephone company authorities and international
carriers.
During late 1998, Pointe adopted a strategy to position itself as a cost
efficient, reliable, full-service CLEC tailored specifically to the needs of the
Hispanic Community in the U.S. and in South and Central America. In the U.S.,
Pointe's focus is on major cities with large Hispanic populations.
Internationally, Pointe targets complementary markets with telecommunications
traffic patterns that correspond with the paired U.S. target markets. Pointe's
strategy assumes that there exists (i) a significant population in the U.S. that
is dissatisfied with its current telecommunications service, (ii) substantial
demand for telecommunications services in the U.S. Hispanic population, (iii) a
lack of ready access to telephony services in Latin America for a substantial
portion of the population, and (iv) a natural synergy and cost advantage in
providing local services in both the U.S. and Latin America to meet basic
telephony needs along with bundled services to meet more advanced communications
requirements between the U.S. and Latin America.
In an effort to enhance its CLEC management team and to gain accelerated
access to the West Coast during the third quarter of 1999, HTC Communications,
LLC ("HTC"), a California limited liability company licensed as a CLEC in
California merged with and into Pointe. The management team from HTC assumed
leadership of Pointe's CLEC operations. Their management team has over 70 years
of combined experience in the telecommunications industry including a CEO who
was formerly General Manager of a division at Pacific Bell, responsible for
marketing and offering services to more than 1.1 million Hispanic customers and
generating over $350 million in annual revenues. Funding for the newly adopted
strategy was obtained during the second and third quarters of 1999. Construction
of central switching facilities and co-location sites at the various Incumbent
Local Exchange Carriers ("ILECs") end offices is currently under way in Los
Angeles, Miami, San Diego and Houston. These initial sites are expected to be
operational during the second and third quarters of 2000. Future target markets
include, but are not limited to, New York City, Chicago, San Francisco, Dallas
and San Juan, Puerto Rico.
As a complement to its strategy to become a full-service CLEC in the U.S.
and Latin America, Pointe is establishing an Asynchronous Transfer Mode
("ATM") fiber transport network for both voice and data switching. The network
initially connects Houston, Texas; Atlanta, Georgia; Miami, Florida; New York,
New York; Los Angeles, California; San Salvador, El Salvador; and Lima; Peru
(the latter two via satellite). Future plans include similar network
infrastructure in other U.S. and South American and Central American locations.
The network will allow Pointe to efficiently carry traffic for its CLEC
operations and will also serve to expand the market reach and lower the cost
basis of its existing prepaid long distance services business. Additionally, the
network allows Pointe to enter the wholesale carrier business by capitalizing on
unique partnering opportunities with interconnected foreign Postal, Telephone
and Telegraph companies ("PTTs"). The network became partially operational
during the first quarter of 1999; however, due to unforeseen technical
difficulties with the leading edge technology, Pointe has yet to realize
significant revenues or cost efficiencies.
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Subsequent to year end, Pointe agreed to merge with Telscape in an
all-stock transaction in which each share of Pointe will be exchanged for
0.223514 shares of Telscape common stock. The surviving company will trade under
the ticker symbol "TSCP" on the Nasdaq National Market System. The boards of
directors of both companies have agreed to the merger; however, the closing is
subject to shareholder approval and certain other conditions precedent, such as
Securities Exchange Commission and regulatory approval. Management believes that
the merger of the combined companies creates one of the leading providers of
bundled communications services in the U.S. Hispanic and paired-Latin American
markets. Some of the benefits of the combined companies are:
o An experienced management team with a significant Latin component.
o Creates an integrated communications provider catering to Hispanics in both
the U.S. and Latin America, including a Telscape concession to provide
domestic and international long distance service in Mexico granted to
Telscape by Mexican regulators.
o Infrastructure-based strategy utilizing a "Smart Build" approach
including a fiber optic network under construction by Telscape in Mexico.
o Greater critical mass and compelling synergies and cost savings.
o One of the few companies that can compete in the U.S. and Latin America as
one company.
o Combined company strategy addresses rapidly growing and deregulating
markets with significant competitive opportunities.
See "Liquidity and Capital Resources" for a discussion of Pointe's
ability to meet the capital requirements associated with its expansion plans.
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RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1999
The following table sets forth certain financial data for the years ended
December 31, 1997, 1998 and 1999. Operating results for any period are not
necessarily indicative of results for any future period. Amounts (except per
share data) are shown in thousands.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999
----------------------- ----------------------- -----------------------
% OF % OF % OF
REVENUES REVENUES REVENUES
--------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Communications services and
products...................... $ 10,203 78.8% $ 24,785 89.7% $ 49,809 95.9%
Internet connection services.... 2,748 21.2 2,835 10.3 2,116 4.1
---------- --------- ---------- --------- ---------- ---------
Total revenues....................... 12,951 100.0 27,620 100.0 51,925 100.0
Costs and expenses:
Cost of services and products... 9,766 75.4 23,246 84.1 50,130 96.5
Selling, general and
administrative expenses....... 8,766 67.7 9,933 36.0 19,275 37.1
Nonrecurring charge............. 2,677 20.7 -- -- -- --
Depreciation and amortization... 2,995 23.1 3,452 12.5 4,477 8.6
---------- --------- ---------- --------- ---------- ---------
Total costs and expenses............. 24,204 186.9 36,631 132.6 73,882 142.3
---------- --------- ---------- --------- ---------- ---------
Operating loss....................... (11,253) (86.9) (9,011) (32.6) (21,957) (42.2)
---------- --------- ---------- --------- ---------- ---------
Interest expense, net................ (481) (3.7) (1,760) (6.4) (15,999) (30.8)
Other (loss)/income.................. (242) (1.9) 1,624 5.9 (335) (0.6)
---------- --------- ---------- --------- ---------- ---------
Net loss............................. (11,976) (92.5) (9,147) (33.1) (38,291) (73.7)
---------- --------- ---------- --------- ---------- ---------
Preferred Stock Dividend and
beneficial Conversion charge....... -- -- -- -- (24,506) (47.2)
Net loss available to Common
Stockholders....................... (11,976) (92.5) (9,147) (33.1) (62,797) (120.9)
Net loss per share................... $ (.39) $ (.22) $ (1.36)
---------- ---------- ----------
Shares used in computing net loss per
share.............................. 31,085 42,144 46,204
---------- ---------- ----------
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
During the third quarter of 1999, Pointe evaluated its business focus and
organizational structure. In doing so, it was determined that Pointe operates in
three distinct business segments, which include Retail Services,
Wholesale/International Services and Prepaid Calling Card Services. Retail
services include local, long distance, and Internet access services provided
primarily to Hispanic residential and commercial customers.
Wholesale/International services include carrier terminating services and
International private line provided between the U.S. and various South and
Central American countries as well as voice and data services. Prepaid Card
Services include the sale of both "on-net" (calls carried on Pointe's network)
and "off-net" (calls carried on other companies networks) prepaid calling
cards. The management team and each employee were allocated to the various
business segments and goals and objectives were established for each segment and
each employee. Management will evaluate performance of Pointe and its employees
in part based upon the performance of these individual segments. Pointe has
presented segment information for the 1999 fiscal year in its financial
statements;
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<PAGE>
however, comparable data is not presented for 1998 since Pointe was not managed
in the same manner during 1998. Accordingly, no discussions have been provided
herein regarding segment performance.
Consolidated revenues for the combined lines of business for the years
ended December 31, 1999 and 1998, were $51,925,000 and $27,620,000,
respectively. The increase in revenue was principally the result of increased
prepaid calling card sales, primarily driven by increased distribution of "off-
net" card sales to the U.S. Hispanic community. Other increases came from
international private line, principally to Costa Rica, and wholesale carrier
termination to various destinations in Latin America. The increase in overall
revenues for the year was offset by a decline in Internet connection service
revenues. The decline in internet revenues came primarily from Panama as a
result of the withdrawal of the U.S. Armed Forces during the first quarter of
1999, and from the U.S. where Pointe sold the majority of its dial up
subscribers during the third quarter in an effort to realign its Internet
offering with Pointe's strategic focus on the U.S. Hispanic community. Pointe
intends to increase Internet sales during the year 2000 by selling dial up,
dedicated and DSL services to the U.S. Hispanic residential and business
communities. Cost of services and products for the years ended December 31, 1999
and 1998 were $50,130,000 and $23,246,000 respectively, yielding gross profit
margins of 3.5% for 1999 and 15.8% for 1998. Gross profit margins were adversely
affected during 1999 by the fact that prepaid calling card revenues, which
generally carry a lower margin than Pointe's other products, represented a
higher proportion of total revenues in 1999 than in 1998 and by a significant
increase in fixed dedicated line costs incurred in anticipation of higher
wholesale carrier and CLEC traffic.
SG&A expenses for the year ended December 31, 1999 were $19,275,000 or
37.1% of revenues compared to $9,933,000 or 36.0% of revenues for the year ended
December 31, 1998. The overall increase in expenses was primarily attributable
to expansion of Pointe's operations, particularly the addition of management,
marketing, engineering and administrative personnel necessary to fulfill the
CLEC business plan. This trend is expected to continue throughout 2000 as Pointe
continues to build out its target markets in Los Angeles, Miami, San Diego and
Houston which are expected to open during the second and third quarters of 2000.
Depreciation and amortization expense was $4,477,000 and $3,452,000 for the
years ended December 31, 1999 and 1998, respectively. The increase is
attributable to the increase in property, plant and equipment and amortization
of intangibles resulting from acquisitions completed during 1998 and 1999.
Interest expense was $15,999,000 and $1,760,000, for the years ended
December 31, 1999 and 1998, respectively. The increase during 1999 was due
primarily to the non-cash non-operating beneficial conversion charge taken in
conjunction with the issuance of the notes convertible into Class B Preferred
Stock. The discount recognized in conjunction with the issuance was $11,865,000
for the year ended December 31, 1999. This represented the difference between
the fair value of the Stock underlying the Notes as the proceeds recognized in
conjunction with the issuance. The amount is non-recurring. Additionally, a
number of new debt instruments were entered into in late 1998 and during 1999,
including $11.0 million in bridge loans, $6.0 million in capital leases.
Other income in 1998 resulted from a gain recognized on the settlement of
an account payable to Sprint. An agreement in principal was reached during 1997
to restructure Pointe's payable to Sprint. At year end 1997, the disputed amount
was accrued as a deferred credit. During 1998, Pointe signed a settlement
agreement requiring it to pay $1.0 million, at which time the deferred credit
was recognized in the statement of operations. The settlement agreement
obligates Pointe to pay $100,000 at settlement and $50,000 per month over the
succeeding 18 months. As of December 31, 1999, $150,000 was included in the
current portion of notes payable related to this matter.
There was no income tax benefit recorded in either 1999 or 1998, as
management recorded a valuation reserve because of the uncertainty of the timing
of future taxable income. The net losses for the years ended December 31, 1999
and 1998 were approximately $38,291,000, or $1.36 per share, and $9,147,000, or
$0.22 per share, respectively. Approximately $0.74 of the $1.36 net loss per
share
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<PAGE>
for 1999 is attributable to the non-cash non-operating charge of approximately
$34,039,074 recognized in conjunction with the beneficial conversion feature on
the Class A and note convertible into the Class B preferred stock issued during
the year. (Note 7).
Pointe's international operations, conducted mainly in Panama, Venezuela,
Costa Rica and Mexico accounted for approximately 7.8% of Pointe's overall
revenues and 3.8% of Pointe's net loss during 1999 and approximately 16.7% of
Pointe's revenues and 16.8% of Pointe's net loss during 1998. The decrease in
the international operations' proportionate net loss from 16.8% in 1998 to 3.8%
in 1999 was driven by a reduction in international selling, general and
administrative expenses and cost of services during 1999, which resulted in an
approximate 51.3% decline in net loss from 1998 to 1999 with only an 8.7%
decline in international revenue.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Consolidated revenues for the combined lines of business for the years
ended December 31, 1998 and 1997 were $27,620,000 and $12,951,000, respectively.
The most significant increase in revenue came from communications services and
products which increased from $10,203,000 in 1997 to $24,785,000 in 1998. The
increase in communications services and products revenue was principally the
result of increased prepaid calling card sales, primarily driven by competitive
rates to Latin America, increased quality that resulted from a new calling card
platform purchased during the year, and acquisitions during 1998. Other
increases in communications services came from International Private Line,
mainly to Costa Rica, and the start up of the Telecommuting Services business.
Internet connection services revenues increased from $2,748,000 in 1997 to
$2,835,000 in 1998. The Internet revenues increased primarily in Venezuela
offset by a decline in Panama and in the U.S. Cost of services and products for
the year ended December 31, 1998 were $23,246,000 and $9,766,000 for the
comparable period in 1997, yielding gross profit margins of 15.9% for 1998 and
24.6% for the same period in 1997. The gross profit margin was adversely
affected by the fact that prepaid calling card revenues, which generally carry a
lower margin than Pointe's other products, represented a higher proportion of
total revenues in 1998 than in 1997. Also contributing to the lower margins were
sales of "off-net" prepaid calling cards (i.e., other carriers cards by a
distributor acquired during 1998, which carry a lower margin than revenues
earned on Pointe provided cards.
Selling, general, and administrative expenses for 1998 were $9,933,000 or
36.0% of revenues compared to $8,766,000 or 67.7% of revenues for 1997. The
overall increase in expenses was primarily attributable to expansion of Pointe's
operations; however, Pointe was able to gain economies of scale while expanding
operations as represented by the lower selling, general and administrative
expenses as a proportion of revenues in 1998. Pointe anticipates benefiting
further from economies of scale, as costs such as salaries and wages are not
expected to increase in direct proportion to increases in revenues.
The non-recurring charge during 1997 was primarily the result of a write
off of the assets related to a business that was exited during the year. In an
effort to narrow the scope of Pointe's product offering and to focus resources
on its core competencies, Pointe decided to exit the computer network
integration business. As a result, the assets related to PDS, including
approximately $1,889,000 of goodwill and other intangibles and $250,000 of
hardware and software inventory, were written off and approximately $80,000 in
severance and other related costs were accrued.
Depreciation and amortization expense was $3,452,000 for 1998 compared to
$2,995,000 for the prior year. The increase is attributable to the increase in
property, plant and equipment and amortization associated with the acquisitions
completed during 1998.
Interest expense was $1,760,000 and $481,000 for the years ended December
31, 1998 and 1997, respectively. Interest expense increased significantly during
1998 because of a number of new debt instruments entered into in late 1997 and
during 1998. These include $6.2 million in capital leases, $3.0 million in
financing type leases, $2.0 million in bridge loans, $900,000 in promissory
notes and a $600,000 receivable facility. Also included in interest during 1998
was approximately $400,000 related
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<PAGE>
to a guarantee with regard to shares issued in conjunction with the 1997
financing type leases. The guarantee obligated Pointe to reimburse the holder of
these shares for the difference between $2.33 and the average closing price of
Pointe's stock for the twenty trading days prior to June 30, 1998. The average
closing price for this period was below $2.33 resulting in an approximate
$400,000 liability, which is included in the current portion of notes payable at
December 31, 1998.
Other income in 1998 resulted from a gain recognized on the settlement of
an account payable to Sprint (see "Legal Proceedings"). An agreement in
principal was reached during 1997 to restructure Pointe's payable to Sprint. At
year end 1997, the disputed amount was accrued as a deferred credit. During
1998, Pointe signed a settlement agreement requiring it to pay $1.0 million, at
which time the deferred credit was recognized in the statement of operations.
The settlement agreement obligates Pointe to pay $100,000 at settlement and
$50,000 per month over the succeeding 18 months. As of December 31, 1998,
$700,000 was included in accounts payable, current portion of notes payable and
long term portion of notes payable related to this matter.
There was no income tax benefit recorded in either 1998 or 1997, as
management recorded a valuation reserve due to the uncertainty of the timing of
future taxable income. The net losses for the years ended December 31, 1998 and
1997 were approximately $9,147,000 and $11,976,000, respectively.
Pointe's international operations, conducted mainly in Panama, Venezuela,
Costa Rica and Mexico accounted for approximately 17.9% of Pointe's overall
revenues and 3.2% of Pointe's net loss in 1997 and approximately 16.8% of
Pointe's revenues and 16.8% of Pointe's net loss in 1998. The increase in the
International operations proportionate net loss from 3.2% in 1997 to 16.8% in
1998 was driven mainly by the negative operating results incurred in Panama
during 1998. Pointe's Panamanian operations conduct international private line
(IPL), Internet connection and call center services on U.S. Military bases.
During the year ended 1998, Pointe's Panamanian operations were adversely
effected by a decrease in revenue in each of its businesses. IPL revenues
decreased as a result of both a price decline in switched services making IPL
less cost effective and increased competition from Cable & Wireless, the local
PTT. The decrease in both Internet connection services revenues and call center
services revenues result from a reduction of the U.S. Armed Forces present in
Panama. Fixed cost of services and selling, general and administrative costs
continued to be incurred despite the decrease in revenues.
LIQUIDITY AND CAPITAL RESOURCES -- YEAR ENDED DECEMBER 31, 1999
Pointe has not generated net cash from operations for any period to date.
Pointe has primarily financed its operations to date through private sales of
equity securities and debt to both affiliates and outside investors. During the
first quarter of 1999, in private placement offerings, Pointe entered into three
promissory notes with principal amounts totaling $9.0 million. In conjunction
with the notes, Pointe issued warrants to purchase 1.52 million and 5 million
shares of common stock at $1.00 per share exercisable for three years and eight
months, respectively. The warrants to purchase 5 million shares of common stock
were exercised during the fourth quarter of 1999 in exchange for repayment of
the promissory note. During the second quarter, Pointe completed a private
placement of $30.2 million of $0.01 par value Class A Convertible Senior
Preferred Stock (the "Preferred Stock") and warrants to purchase 10.8 million
shares of common stock. The net proceeds from the private placement totaled
$28.1 million. During the third quarter of 1999, Pointe completed a $21.0
million private placement offering of 12% Convertible Promissory Notes
(convertible into Class B Convertible Senior Preferred Stock and warrants. The
Convertible Notes were automatically converted into Class B Convertible Senior
Preferred Stock and warrants to purchase 9 million shares of common stock
exercisable for 5 years at $1.89 per share on December 31, 1999. Proceeds from
these offerings have been used to offset Pointe's operating cash flow deficit
during 1999 of approximately $22.2 million, repay $6.0 million of promissory
notes as well as $4.3 million of other various notes and capital leases and
purchase assets of approximately $6.6 million. Further, throughout the year
Pointe acquired approximately $5.7 million in assets through various financing
and capital leases.
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Pointe estimates that it will need approximately $70.3 million to fund
existing operations through the end of 2000, including approximately $6.3
million to fund debt due over the next twelve months, $39.0 million to fund
capital expenditures and $25.0 million to fund operating cash flow requirements.
As of year end, Pointe had approximately $21.2 million of cash on hand.
Subsequent to year-end, Pointe entered into an agreement to merge with Telscape
as part of the merger, Pointe entered into a Promissory Note with Telscape
pursuant to which Pointe provided $10.0 million to Telscape. The promissory note
matures on June 30, 2000 (see Note 15 of the Financial Statements). During the
first quarter of 1999, Pointe entered into a $25.0 million master lease
facility. As of December 31, 1999, Pointe had drawn down $6.3 million under the
master lease. Additionally, Pointe is negotiating a potential $15.0 million line
of credit with another major vendor. Pointe intends to use these vendor lines of
credit and lease facilities to finance the majority of its capital asset
purchases for the next year. Pointe is currently seeking to raise additional
capital through the private placement of equity. Additional means of financing
will be sought if necessary and may include, but would not be limited to, vendor
financing agreements, bank loans and private placements of debt and/or equity.
Additionally, Pointe may realize proceeds from the exercise of outstanding
warrants and options. However, there can be no assurance that Pointe will be
able to raise any such capital on terms acceptable to Pointe, if at all. Failure
of Pointe to raise all or a significant portion of the funds needed could
materially and adversely affect Pointe's continuing and its planned operations.
As noted previously, Pointe has not generated net cash from operations for
any period to date and used $22.1 million of cash to fund operating activities
for the year ended December 31, 1999. Management anticipates that Pointe will
not generate cash from operations during 2000. Pointe does not currently have
adequate resources available to achieve all of its potential expansion plans
noted in "Management's Discussion and Analysis" and will not engage in such
expansion until adequate capital sources have been arranged. Accordingly, Pointe
anticipates additional private placements and/or public offerings of debt or
equity securities will be necessary to fund such plans. If such sources of
financing are insufficient or unavailable, Pointe will be required to
significantly change or scale back its operating plans to the extent of
available funding. Pointe may need to raise additional funds in order to take
advantage of unanticipated opportunities, such as acquisitions of complementary
businesses or the development of new products, or to otherwise respond to
unanticipated competitive pressures. There can be no assurance that Pointe will
be able to raise any such capital on terms acceptable to Pointe or at all.
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RESULTS OF OPERATIONS -- QUARTER ENDED MARCH 31, 2000
The following table sets forth certain financial data for the three months
ended March 31, 2000 and 1999. Operating results for any period are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
------------------------- -------------------------
$ % $ %
-------------- --------- -------------- ---------
<S> <C> <C> <C> <C>
Revenues:
Retail Services................. 1,162,236 8.2% 1,009,435 8.7%
Wholesale/International
Services........................ 2,068,826 14.5% 1,162,094 10.1%
Prepaid Card Services........... 10,872,743 76.4% 8,989,363 77.8%
Other........................... 129,268 0.9% 392,634 3.4%
-------------- --------- -------------- ---------
Total revenues............. 14,233,073 100.0% 11,553,526 100.0%
Cost of Services:
Retail Services................. 1,084,861 93.3% 724,923 71.8%
Wholesale/International
Services........................ 2,552,318 123.4% 1,000,409 86.1%
Prepaid Card Services........... 9,784,822 90.0% 8,248,607 91.8%
Other........................... 131,852 102.0% 273,088 69.6%
-------------- --------- -------------- ---------
Total cost of services..... 13,553,853 95.2% 10,247,028 88.7%
Gross Margin:
Retail Services................. 77,375 6.7% 284,512 28.2%
Wholesale/International
Services...................... (483,492) -23.4% 161,685 13.9%
Prepaid Card Services........... 1,087,921 10.0% 740,755 8.2%
Other........................... (2,584) -2.0% 119,546 30.4%
-------------- --------- -------------- ---------
Total Gross Margin......... 679,220 4.8% 1,306,498 11.3%
Selling General & Administrative:
Retail Services................. 1,703,153 146.5% 360,985 35.8%
Wholesale/International
Services........................ 663,985 32.1% 636,571 54.8%
Prepaid Card Services........... 1,212,359 11.2% 663,289 7.4%
Other........................... 395,484 305.9% 520,688 132.6%
Corporate & Network............. 1,782,858 12.5% 651,619 5.6%
-------------- --------- -------------- ---------
Total SG&A................. 5,757,839 40.5% 2,833,152 24.5%
Depreciation & amortization..... 1,153,841 8.1% 1,045,947 9.1%
-------------- --------- -------------- ---------
Total costs and expenses... 20,465,532 143.8% 14,126,127 122.3%
-------------- --------- -------------- ---------
Operating loss....................... (6,232,459) -43.8% (2,572,601) -22.3%
Interest expense, net................ 64,286 0.5% (1,086,438) -9.4%
-------------- --------- -------------- ---------
Net loss................... (6,168,173) -43.3% (3,659,039) -31.7%
Preferred dividends.................. (1,621,992) -11.4% -- --
-------------- --------- -------------- ---------
Net loss available to common
shareholders....................... (7,790,165) -54.7% (3,659,039) -31.7%
-------------- --------- -------------- ---------
Net loss per share......... (0.15) (0.08)
-------------- --------------
Shares used in computing net loss per
share.............................. 51,841,344 45,343,348
-------------- --------------
</TABLE>
Consolidated revenues for the combined lines of business for the three
months ended March 31, 2000 and 1999 were $14,233,000 and $11,554,000
respectively. The increase in revenue was principally the result of an increase
in the Prepaid Card Services segment, primarily driven by increased distribution
of "off-net" cards within the U.S. Hispanic community. Other increases came
from Wholesale/International Services segment principally from carrier
terminating services to Peru and Mexico and international private line to
various South and Central American countries. Retail Services sales remained
relatively flat and Other revenues, which principally represent telecommuting
services, declined as a result of deconsolidating TCS during the first quarter
of 2000. Cost of services
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for the quarter ended March 31, 2000 were $13,554,000 and $10,247,000 for the
comparable quarter in 1999, yielding gross profit margins of 4.8% for 2000 and
11.3% for the same period in 1999. Gross profit margins were adversely affected
primarily by the high fixed costs associated with the Wholesale/International
Services segment with disproportionately lower revenues from the segment. The
Retail Services segment was also adversely affected by high fixed costs without
corresponding revenues. The Company believes that it will be able to add
revenues in both segments without the need to significantly increase its fixed
costs.
Selling, general, and administrative ("SG&A") expenses for the first
quarter of 2000 were $5,758,000 or 40.5% of revenues compared to $2,833,000 or
24.5% of revenues for the same quarter in 1999. The overall increase in expenses
was primarily attributable to expansion of the Company's operations particularly
in the Retail Services segment, which is increasing staff in preparation for the
launch of the CLEC business during the second quarter of 2000. The increase was
also caused by the accrual of severance charges in conjunction with the
termination of employees in the Prepaid Card Services and
Wholesale/International Services segments. The Company terminated these
employees in an effort to reduce overhead in these lower margin business
segments. Also contributing to higher SG&A costs in the Corporate and Network
Overhead segment was approximately $564,000 of non-cash compensation charges
related to variable incentive stock options.
Depreciation and amortization expense was $1,154,000 for the first three
months of 2000 compared to $1,046,000 for the first three months of 1999. The
increase is primarily attributable to the increase in property, plant and
equipment. Interest income (expense) was $64,000 and ($1,086,000) for the
quarters ended March 31, 2000 and 1999, respectively. Interest expense decreased
significantly during 2000 because a number of debt facilities in place during
the first quarter of 1999 were retired. Additionally, during the first quarter
of 2000, the Company earned interest on the $10 million promissory note with
Telscape and on the cash on hand, which exceeded the interest on its various
debt facilities.
There was no income tax benefit recorded in either 2000 or 1999, as
management recorded a valuation reserve due to the uncertainty of the timing of
future taxable income. The net losses for the quarters ended March 31, 2000 and
1999 were approximately $6,168,000 or $0.15 per share and $3,659,000 or $0.08
per share. Also contributing to net loss per share during 2000 was approximately
$1,622,000 in preferred stock dividends on the Class A and B Senior Convertible
Preferred Stock.
LIQUIDITY AND CAPITAL RESOURCES -- QUARTER ENDED MARCH 31, 2000
The Company has not generated net cash from operations for any period
presented. The Company has primarily financed its operations to date through
private sales of equity securities and debt to both affiliates and outside
investors. During 1999, the Company completed a private placement of $51.24
million of $0.01 par value Class A and Class B Convertible Senior Preferred
Stock (the "Preferred Stock"). As of December 31, 1999, the Company had $21.2
million cash on hand. Cash available at year end has been used to offset the
Company's operating cash flow deficit during the first quarter of approximately
$5.4 million. The operating cash deficit includes funding of an $8.5 million
promissory note to Telscape (explained below), offset by approximately $7.0
million of switching equipment purchases in accounts payable pending the closing
of a vendor line of credit of approximately $15 million. The Company anticipates
the vendor line will be completed during the second quarter of 2000.
Additionally, the Company received $1.9 million in repayment of an intercompany
note payable from its subsidiary Telecommute Solutions Inc. ("TCS") upon
completion of the private placement of the Series B Preferred Stock by TCS. As a
result of the private placement, the Company's ownership in TCS was reduced from
100% to approximately 23% and TCS will no longer be consolidated. Additionally,
during the quarter the Company used approximately $5.0 million to fund property
and equipment purchases.
The Company estimates that it will need approximately $60 million to fund
existing operations through March 31, 2001, including approximately $3.7 million
to fund debt due over the next twelve
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months, $40.0 million to fund capital expenditures and $14.3 million to fund
operating cash flow requirements. As of March 31, 2000, the Company had
approximately $5.7 million of cash on hand. During the quarter, the Company
entered into an agreement to merge with Telscape International, Inc.,
("Telscape") as part of the merger, the Company entered into a Promissory Note
with Telscape to provide $10.0 million to Telscape. The promissory note matures
on June 30, 2000 and is convertible at the Company's option into 100,000 shares
of Class C preferred stock and warrants to purchase 500,000 shares of Telscape
common stock at $7.00 per share. Each share of Class C preferred stock is
convertible into 12.195 shares of Telscape common stock. The Company entered
into a $25.0 million master lease with a significant vendor during 1999. As of
March 31, 2000, the Company had drawn down $4.0 million under the master lease.
Additionally, the Company is negotiating a $15.0 million line of credit with
another significant vendor, which it expects to be completed during the second
quarter of 2000. The Company intends to use these vendor lines of credit to
finance the majority of its capital asset purchases for the next year. The
Company is currently seeking to raise additional capital through the private
placement of equity. Additional means of financing will be sought if necessary
and may include, but would not be limited to, vendor financing agreements, bank
loans and private placements of debt and/or equity. Additionally, the Company
may realize proceeds from the exercise of outstanding warrants and options.
However, there can be no assurance that the Company will be able to raise any
such capital on terms acceptable to the Company, if at all. Failure of the
Company to raise all or a significant portion of the funds needed could
materially and adversely affect the Company's continuing and its planned
operations.
The Company has not generated net cash from operations for any period
presented. The net cash used in operating activities for the quarter ended March
31, 2000 was $5.4 million. Management anticipates that the Company will not
generate cash from operations during 2000. The Company does not currently have
adequate resources available to achieve all of its potential expansion plans
noted in "Management's Discussion and Analysis" and will not engage in such
expansion until adequate capital sources have been arranged. Accordingly, the
Company anticipates additional private placements and/or public offerings of
debt or equity securities will be necessary to fund such plans. If such sources
of financing are insufficient or unavailable, the Company will be required to
significantly change or scale back its operating plans to the extent of
available funding. The Company may need to raise additional funds in order to
take advantage of unanticipated opportunities, such as acquisitions of
complementary businesses or the development of new products, or to otherwise
respond to unanticipated competitive pressures. There can be no assurance that
the Company will be able to raise any such capital on terms acceptable to the
Company or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use," which is effective
for fiscal years beginning after December 15, 1998. This statement requires
capitalization of certain costs of internal-use software. The Company adopted
this statement during the first quarter of 1999, and it did not have a material
impact on Pointe's financial statements.
In April 1998, the AICPA issued Statement of Position 98-5 (SOP 98-5),
"Reporting on the Costs of Start-Up Activities," which is effective for fiscal
years beginning after December 15, 1998. SOP 98-5 requires entities to expense
certain start-up costs and organization costs as they are incurred. Pointe
adopted this statement during the first quarter of 1999, and it did not have a
material impact on Pointe's financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 "Accounting for Derivative Instruments and Hedging Activities," which is
effective for fiscal years beginning after June 15, 1999. In June 1999, the FASB
issued Statement No. 137 "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB No. 133," which amends
statement No. 133 to be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The statement establishes accounting and
reporting standards for derivative instruments and
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transactions involving hedge accounting. Pointe does not expect it to have a
material impact on its financial statements.
YEAR 2000
To date, year 2000 problems have had a minimal effect on Pointe's business.
However, Pointe may not have identified and remediated all significant year 2000
problems. Further remediation efforts may involve significant time and expense,
and unremediated problems may have a material adverse effect on Pointe's
business. Finally, although Pointe has not been made a party to any litigation
or arbitration proceeding to date involving our products or services related to
year 2000 compliance issues, Pointe may in the future be required to defend our
products or services in such proceedings, or to negotiate resolutions of claims
based on year 2000 issues. The costs of defending and resolving year
2000-related disputes, regardless of the merits of such disputes, and any
liability for year 2000 related damages, including consequential damages, would
negatively affect Pointe's business, results of operations, financial condition
and liquidity, perhaps materially.
QUANTITAVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Pointe is subject to financial market risks, including interest rate risk
and foreign currency exchange risk.
As of December 31, 1999, Pointe had both variable and fixed interest
bearing notes. All of Pointe's debt obligations are denominated in U.S. dollars
and, represent interest rate risk. All of Pointe's debt obligations are
segregated in fixed and variable rate instruments as shown on the table below.
The table shows the amounts of principal payments due on our various debt
instruments and the weighted average rate for the principal payments then due
using the rates in effect at December 31, 1999. The table set forth below
summarizes the fair values and payment terms of financial instruments subject to
interest rate risk maintained by Pointe as of December 31, 1999.
<TABLE>
<CAPTION>
FAIR VALUE
DEBT 2000 2001 2002 2003 2004 TOTAL AT 12/31/99
- ------------------------------------- ----------- ----------- ----------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Non-Interest Bearing or Fixed Rate... $ 4,807,204 $ 5,251,425 $ 5,972,291 $ 647,325 $ 144,020 $ 16,822,265 $16,822,265
Wtd. Avg. Interest Rate.............. 10.74% 10.80% 12.17% 12.09% 12.00% 11.33% --
Variable............................. 1,350,000 0 0 0 0 1,350,000 1,350,000
Wtd. Avg. Interest Rate.............. 11.06% 0.00% 0.00% 0.00% 0.00% 11.06% --
----------- ----------- ----------- --------- --------- ------------ ------------
Total....................... $ 6,157,204 5,251,425 5,972,291 647,325 144,020 18,172,265 18,172,265
=========== =========== =========== ========= ========= ============ ============
</TABLE>
Pointe has not entered into any derivative contracts or used any other
interest rate risk management techniques to attempt to minimize the interest
rate risk inherent in each of Pointe's debt instruments. At the time of this
filing, Pointe has no plans in place to actively manage this risk. As Pointe
does not have a significant amount of variable interest rate obligations, it has
not entered into derivative transactions to hedge its risk.
FOREIGN CURRENCY EXCHANGE RISK
Pointe has operations in Central and South America, mainly Panama,
Venezuela, Costa Rica and Mexico, which expose it to currency exchange rate
risks (except Panama, whose currency is equal to the US dollar). To manage the
volatility attributable to these exposures, Pointe nets the exposures to take
advantage of natural offsets. Currently, Pointe does not enter into any hedging
arrangements to reduce this exposure. Pointe is not aware of any facts or
circumstances that would significantly impact such exposures in the near-term as
the significant majority of Pointe's activities are settled in the US Dollar.
If, however, there was a 10 percent sustained decline in these currencies versus
the U.S. dollar, then the consolidated financial statements could be effected as
international operations represented approximately 2.1% of total assets as of
December 31, 1999 and 7.8% and 3.8% of total revenues and net loss,
respectively, for the year ended December 31, 1999.
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TELSCAPE BUSINESS
GENERAL
We are a U.S.-based, fully integrated communications company. We supply
voice, video, data and Internet services principally to, from and within Latin
America. Telereunion, one of our subsidiaries, has built a state-of-the-art
fiber optic network in Mexico that will reach the vast majority of the Mexican
population. We also own and operate a satellite teleport facility in Silicon
Valley, which delivers an array of communications services to customers
throughout North, Central and South America. In addition, we provide a full
range of advanced services and products in Mexico to major public and private
sector customers.
We are currently engaged in two primary business segments: Voice Services
and Advanced Services.
Our Voice Services segment supplies international and domestic voice
services, via switched and dedicated networks, principally to, from and within
Latin America. Revenues in the Voice Services segment are generated on a retail
and wholesale basis.
Our Advanced Services segment is made up of three distinct lines of
business: network solution services, customer relationship management and
broadband services and other products. Advanced Services are provided to
customers principally in Latin America. Our network solutions services offer a
full range of network systems integration services. Our customer relationship
management provides value added telecommunications services primarily through
delivering custom developed solutions to client's call center needs. Our
broadband services provides satellite teleport services to customers in the U.S.
and Latin America.
We believe we are well positioned to capitalize on the opportunities
presented by the large and growing voice, video, data and Internet services
market. We are in the process of significantly expanding our facilities-based
telecommunications operations and over the next 12 months intend to broaden our
service offerings in markets where we have established, or expect to establish,
a significant presence. To enhance delivery of our services at the lowest
possible cost, we have completed the construction of a 636 kilometer fiber optic
and microwave network in Mexico. We have taken a "smart build" approach to the
Mexican market. Through swapping fiber optic on that portion of our network,
which we have constructed with that available from other concessionaires, we
plan to have a network covering over 4,000 kilometers in Mexico. We have reached
formal agreements or letters of intent to exchange fiber optic, bringing the
total under some form of agreement to 4,100 kilometers as of the date of this
filing. Our network is one of the largest in Mexico. Our Mexican network is a
combined fiber-optic and microwave long distance network, connecting the United
States, the Gulf region of Mexico and targeted Mexican cities. We believe our
network in Mexico will allow us to enhance our service offerings to business
customers in Mexico while also reducing our cost of terminating voice traffic
into, out of and within Mexico. Our Mexican network will also include
metropolitan fiber rings in some of the largest cities in Latin America,
including Mexico City, Leon and Guadalajara. In those cities, which will have
metropolitan fiber, we will more effectively address the last mile issue and
provide a bundle of advanced networking services at a lower cost. Our Mexican
network is currently being tested.
Telereunion, S.A. de C.V., a subsidiary of ours, owns the Mexican network.
Because of the unique ownership structure that we have employed, we believe that
we are one of the only companies that can operate both in the U.S. and Mexico as
one company, providing a unique competitive advantage. In November 1999, we
issued 400,000 shares of our common stock and 100,000 warrants exercisable at
$7.50 per share to the minority shareholders of Telereunion in exchange for an
additional 27% of the economic interests of Telereunion. This transaction
brought our economic interest up to 92% while our voting interest remains at
49%. However, three of our directors, who are Mexican citizens, collectively own
another 18% of the voting interest of Telereunion, giving us effective control
of Telereunion.
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In January 2000, we and Pointe Communications Corporation jointly announced
a merger of our companies in an all-stock transaction. Pointe common stock is
traded on the over-the-counter bulletin board under the symbol "PCOM". Pointe
provides a wide array of telecommunications and network services, including CLEC
operations, long distance, data, Internet, prepaid calling cards, carrier
wholesale, and telecommuting services. Although we can provide no assurance, as
of the time of this filing, it is expected that the merger with Pointe will be
finalized during the second quarter of 2000 at which time the companies will
begin operating under the common name of Telscape. The terms of the original
merger agreement called for us to issue our common stock to Pointe shareholders
at an exchange ratio of 0.215054 of a share of our common stock for every share
of Pointe common stock. Also, for each share of Pointe convertible preferred
stock outstanding, we will issue one share of our convertible preferred stock
(with rights and preferences substantially the same as the Pointe convertible
preferred stock). On March 30, 2000 we and Pointe agreed to an adjustment of the
exchange ratio of approximately 4%. The adjusted ratio of shares is the result
of a Pointe subsidiary, TeleCommute Solutions ("TCS"), which recently received
$19 million in new financing led by MCI WorldCom Venture Fund and others,
remaining in the combined companies. The merger agreement had previously
provided that TCS was to be spun off to Pointe shareholders prior to the
consummation of the merger. Consequently, each share of Pointe stock will be
exchanged for 0.223514 shares of our common stock.
INDUSTRY BACKGROUND AND MARKET DEMAND
OVERVIEW
The international telecommunications industry is undergoing a period of
fundamental change that has resulted, and is expected to continue to result, in
significant growth in international telecommunications traffic and revenues.
According to the World Telecommunication Development Report 1996/97 published by
the International Telecommunications Union ("ITU") on February 20, 1997 (the
"ITU Report"), the 1998 revenue of the global telecommunications industry was
projected to exceed $1 trillion. According to TeleGeography 1999, revenues
generated from the provision of international long distance services increased
to $65.9 billion in 1997 from $26.8 billion in 1988, a compound annual growth
rate of 10.6%. We believe that Latin American traffic, including traffic between
the United States and Latin America, will continue to grow faster than the
international telecommunications market as a whole as a result of (i) underlying
economic growth within Latin America, (ii) growth of regional trade as a result
of free trade initiatives such as NAFTA, Mercosur and the Andean Pact, (iii)
deregulation and privatization of telecommunications carriers in the region,
(iv) projected regional increases in telephone density and (v) increasing demand
for bandwidth-intensive applications.
We believe that numerous factors have driven the growth in demand for
international telecommunications products and services. Those factors include:
(i) the globalization of the world's economies and the worldwide trend toward
deregulation of the telecommunications sector, (ii) declining prices and a wider
selection of products and services driven by greater competition resulting from
deregulation, (iii) increased telephone accessibility resulting from
technological advances and greater investment in telecommunications
infrastructure, including deployment of wireless networks, (iv) increased
international business and leisure travel and (v) growth of computerized
transmission of voice and data information. These trends have sharply increased
the use of, and reliance upon, telecommunications products and services
throughout the world. We expect these trends to continue for the foreseeable
future.
The growth in the use of telecommunications services and the rapidly
changing international telecommunications market have created a significant
opportunity for carriers such ourselves who can offer high quality, low cost
comprehensive telecommunications products, systems and services. We believe that
a high percentage of the world's business and residential consumers continue to
be subject to high prices with poor quality and lack of availability of service
which have been characteristic of many of the traditional monopolies in mail,
telephony and telegraphy (PTT-Post, Telephone & Telegraph administrations).
Demand for improved service and lower prices has created opportunities
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for private companies to compete in the international telecommunications market
and has spurred a broadening of products and services. New technologies have
contributed to improved quality and increased transmission capacity and speed.
We therefore believe that recent and on-going deregulation and increasing access
to telecommunications facilities in emerging markets will bring a high level of
growth in the demand for telecommunications services outside the United States,
particularly in Latin America.
By eroding the traditional monopolies held by PTT (Post, Telephone &
Telegraph administrations), many of which are or were wholly or partially
government owned, deregulation is providing U.S.-based providers the opportunity
to negotiate more favorable agreements with both the traditional administrations
and emerging foreign providers. In addition, deregulation in certain foreign
countries is enabling U.S.-based providers to establish local switching and
transmission facilities to terminate their own traffic and carry international
long distance traffic originating in those countries. Deregulation,
privatization, the expansion of the resale market and other trends influencing
the international telecommunications market are resulting in decreased
termination costs, a proliferation of routing options and increased competition.
Advances in technology have created multiple ways for telecommunications
carriers to provide customer access to their networks and services. Overall,
these changes have resulted in a trend towards bypassing traditional
international long distance operating agreements as international long distance
companies seek to operate more efficiently. In markets that have not deregulated
or are in the process of implementing deregulation, international long distance
carriers have used advances in technology to develop innovative alternative
methods to meet customer demand.
Recent legislation and the World Trade Organization agreement among
numerous countries are expected to lead to increased liberalization of the
majority of the world's telecommunication markets. Specifically, the WTO
Agreement created a framework under which 69 countries committed to liberalize
their telecommunications laws to permit increased competition and, in most
cases, foreign ownership in their telecommunications markets, beginning in 1998.
The Telecommunications Act of 1996 established a framework for increasing
competition in the U.S. telecommunications services market and the European
Union's Services Directive abolished exclusive rights for the provision of voice
telephony services throughout the European Union and the local Public Switched
Telephone Network of any member country of the EU by January 1, 1998.
We believe that the initiatives mentioned in the prior paragraph, as well
as other proposed legislation and agreements, will provide increased
opportunities for emerging competitive carriers such as Telscape to provide
telecommunications services in targeted markets. Deregulation has encouraged
competition, which in turn has prompted carriers to offer a wider selection of
services and reduce prices. The industry's projections for substantially
increased international minutes of use and revenue by 2000 are based in part on
the belief that reduced pricing as a result of deregulation and competition will
result in a substantial increase in the demand for telecommunications services
in most markets.
LATIN AMERICA
The telecommunications market in Latin America is undergoing a period of
deregulation, privatization, increased competition and rapid growth. According
to TeleGeography 1999, growth in the demand for telecommunications services
across Latin America in 1996-1997 increased at a rate of 7.6%.
We seek to focus on opportunities created by deregulation and market growth
in the rapidly changing international telecommunications markets in Latin
America. Countries in the Latin American region generally are experiencing a
solid period of economic, business and infrastructure growth, reduced inflation
and economic and political stability. Substantial opportunities exist for
providers of telecommunications equipment, system integration, value-added
services and voice and data services as
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Latin American countries move toward privatization and greater liberalization of
their telecommunications markets.
We believe that the small-to medium-sized business segment is the target
market in many countries in Latin America for advanced services such as
Internet, e-commerce, virtual private networks, teleconferencing, advanced
phone, unified messaging, frame relay and asynchronous transfer mode technology.
Unlike larger businesses that have the resources and traffic volume to support
the internal development of a wide range of advanced services, developing and
maintaining such services is not economical for smaller businesses. Accordingly,
to meet these needs smaller businesses may either purchase such services or
outsource their telecommunications services to third parties specializing in
such services, such as Telscape. We believe that our experience and expertise in
providing these services will enable us to compete in this market.
We believe that we are well positioned to capitalize on these opportunities
by providing high quality, low-cost comprehensive telecommunications services.
As a rule, Latin American countries have historically suffered from extremely
low telephone density, and the markets have been subject to characteristically
inefficient, poor-quality service, as well as the unavailability of new and
innovative systems and services. In addition, the Latin American markets in
which we offer services or in which we seek to compete generally are
characterized by a lack of fiber optic cable capacity. Existing satellite-based
capacity offers limited capability to meet the increasing demand for
bandwidth-intensive applications in our targeted countries in the region. There
exists a critical and growing demand for the type of high-quality, innovative
systems, products and services that we are currently providing and seek to
provide in expanding in our current markets and exploiting the opportunities in
new markets throughout Latin America.
We believe that the Latin American region is poised for growth in
telecommunications usage based on the political and economic changes in many
Latin American countries that have modernized their economies, increased
transparency in business and governmental practice and sustained strong economic
growth. In addition, telecommunications growth will be spurred as a result of
the recent and ongoing privatizations by many Latin American governments of
their previously state-owned telecommunications monopolies, as well as ongoing
liberalization of the regulatory frameworks in many countries in the region to
promote competition in telecommunications services.
MEXICO
The market for telecommunications services in Mexico is undergoing rapid
expansion. According to TeleGeography 1999, the volume of telecommunication
traffic to Mexico increased 16.2% in 1996 and 58% in 1997. The 1997 traffic
along the U.S.-Mexico route accounted for 12.1% of the U.S. international market
and 88.6% of the Mexican international telecommunications market. According to a
report issued by the Federal Communications Commission's ("FCC") Common
Carrier Bureau in November 1998, revenues for sales on the U.S.-Mexico route
exceeded $1.1 billion in 1997.
As a result of legislation enacted in 1995, Mexico began the process of
opening the telecommunications market to competition. National and international
long distance services were opened to competition in August 1996, subject to the
issuance of individual concessions. Pure switched international resale is not
allowed in Mexico to date. Advanced services are fully open to competition and
subject to a simple registration process.
We believe we are well positioned to take advantage of the growing demand
for telecommunications services between the United States and Mexico. We
currently provide a full range of systems integration and value-added services
to major public and private customers. In June 1998, our subsidiary Telereunion
S.A., received a concession from the national telecommunications regulatory
agency, the Secretaria de Comunicaciones de Telecomunicaciones ("SCT"), which
had allowed us to construct our Mexican network.
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OTHER LATIN AMERICAN MARKETS
We intend to focus on opportunities created by deregulation of
telecommunications services in other telecommunications markets in Latin
America. Latin American markets have undergone rapid expansion as a result of
regional and global deregulation.
Countries within Latin America have different national regulatory schemes
and are in varying stages of deregulation. The requirements for us to obtain the
necessary approvals to offer value-added services and various other
telecommunications services, including voice telephony, vary from country to
country. In 1999 we entered into several transactions in Latin America including
the provision of Internet services via satellite to Guatemala, Costa Rica and El
Salvador, and the signing of interconnection and correspondent agreements with
Telefonica de El Salvador.
STRATEGY
Our objective is to become a leading provider of high quality,
competitively priced, voice, video, data and Internet services principally to,
from and within Latin America. Key elements of our strategy are to:
o EXPAND NETWORK SERVICES. We intend to continue expanding our network by
acquiring switching and transmission facilities and additional fiber
optic and satellite transmission capacity for the provision of voice,
video, data and Internet services to complement our existing U.S. and
Mexico networks. We also intend to deploy Metropolitan Area Fiber where
appropriate and the investment is justified. Our objectives in making
these investments are to: (i) provide on-net capacity to allow growth in
our voice services business; (ii) increase profitability for switched
services by reducing the amount of our traffic terminated by other long
distance carriers pursuant to resale arrangements; and (iii) use the
expanded network as a platform to support advanced, bandwidth-intensive
data and Internet applications.
o PROVIDE AN INTEGRATED SUITE OF SERVICE OFFERINGS. We plan to provide our
commercial customers in Mexico with a comprehensive suite of
telecommunications services, including international and domestic long
distance services, systems integration, call centers, conference
calling, Internet access and other broadband data services. We believe
that providing multiple service offerings improves customer retention
and the profitability of individual customer relationships. We believe
that Telscape is one of the few companies to offer a wide array of high
quality and competitively priced telecommunications services to
commercial customers in Mexico, and we expect to pursue opportunities to
provide similar services as we expand into other Latin American markets.
o EXPAND SCOPE OF ADVANCED SERVICES OFFERINGS. By leveraging our Mexican
network and teleport assets and our extensive integration experience and
customer base, we are implementing a strategy to become a leading
Enabling Service Provider ("ESP"). As an ESP, we are creating the
telecom and data center infrastructure for businesses to conduct
electronic business and commerce. We will continue to provide on a more
network-centric basis the e-business services that companies in Latin
America need to conduct their internal communications. We are also
currently launching e-commerce services for businesses that involve the
next-generation communications and transactions with the external world.
Some of these e-commerce services include enhanced IP transport and
content delivery, network and systems management, hosting and
collocation, security and customer care services. We believe that
Telscape will be in a position to become a premier e-commerce platform
for companies, e-exchanges, content providers, and ASP's (applications
service providers) interested in pursuing the Latin American and
Hispanic markets.
o EXPAND SCALE AND SCOPE OF RETAIL BUSINESS. We believe that our
Telefiestaprepaid cards position us for expanded growth in the retail
sector of the international telecommunications market. We have recently
launched a prepaid card in the Mexican market, providing us with a cost
effective and efficient means of targeting the retail market. We are
also in the process of
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launching our "Telefiesta-Amigo" program, a unique, one-plus long
distance service in the United States targeted at Hispanic customers
that not only call Mexico frequently but would also like to provide
their counterparts in Mexico with a card to make Northbound calls at
relatively favorable rates by using a Telefiesta card that is billed
directly to their home telephone bill.
o PURSUE STRATEGIC ALLIANCES, JOINT VENTURES AND ACQUISITIONS. We continue
to pursue strategic alliances, joint ventures and acquisitions to expand
our business, increase our customer base, add network and circuit
capacity, enter additional markets and develop new products and
services. We seek to acquire interests in companies that have network
facilities, service offerings or technologies that complement ours.
Since 1996, we have completed six acquisitions, including a U.S.-based
provider of satellite telecommunications services with access to
satellites covering Central and South America, a U.S.-based prepaid card
provider focused on Hispanic consumers in the United States and Latin
American markets, three data and systems integration businesses in
Mexico and a U.S.-based reseller of long distance services. In December
1999, we signed a merger agreement with Pointe Communications of
Atlanta, Georgia.
SERVICES
Telscape currently operates in two primary businesses segments: Voice
Services and Advanced Services. Our business lines within these segments are
designed to serve our targeted commercial and consumer customers. Financial
information about our business segments for each of the three years ended
December 31, 1997, 1998 and 1999, are disclosed in Footnote 9 in the Notes to
the Consolidated Financial Statements.
VOICE SERVICES
RETAIL
We provide national and international long distance services to consumers
in the U.S., primarily first and second generation Hispanic individuals, through
prepaid cards under our Telefiesta brand name. We believe that prepaid cards are
the most effective vehicle in the short-term to provide long distance and other
telecommunications services to our targeted Hispanic residential customer
segment, as well as benefiting customers by enabling them to purchase the card
anonymously and in various fixed dollar amounts. In 1998, we added dual-country
capabilities to our prepaid cards, offering usage in both the U.S. and Mexico,
and, we plan to add other countries throughout Latin America. Late in 1999, we
started distribution of our cards directly to retail outlets throughout select
cities in both Mexico and the U.S. Additionally, we are in the process of
launching our Telefiesta-Amigo program, a unique residential long distance
product based in the U.S. for this same target market. We believe that
Telefiesta is one of the most widely recognized brand names for prepaid card
services among the 30 million Hispanics in the U.S. and that it has historically
enjoyed a market share of approximately 10% of the total U.S. prepaid card
market to Latin America. Through our Telefiesta-Amigo program, we plan to
leverage the brand recognition that Telefiesta enjoys in the Hispanic community.
Our Telefiesta-Amigo program is an important initiative for us because it
created subscribers.
WHOLESALE
We provide wholesale carrier services to first and second-tier carriers in
the U.S. to complement our retail traffic pattern. Providing both retail and
wholesale services on our network allows us to maximize efficiency and better
utilize our network. In addition, we negotiated advantageous rates in our
targeted Latin American countries by leveraging our extensive relationships with
local carriers. We market our wholesale capacity through a direct sales effort.
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We had fiscal 1999 revenues of approximately $77.3 million from our voice
services, representing 72.4% of our consolidated revenues. One customer within
this line of business represented $12.2 million, or 11.45%, of 1999 consolidated
revenues.
ADVANCED SERVICES
We provide a full range of advanced services to major public and private
customers in Latin America.
NETWORK SOLUTIONS
We are one of the largest systems integrators in Mexico, providing
customized and turnkey solutions to corporations and institutions under the same
management team since 1986. Services include developing, building, installing
and servicing corporate voice, video and data networks. Post-sales support
consists of maintenance contracts, outsourcing, network management and
monitoring services. Although we expect that systems integration revenues will
not increase as rapidly as those from our other lines of business, it will
remain an important part of our strategy to introduce commercial customers to
our other telecommunications services and essential in our strategy to provide
our customers with a comprehensive suite of telecommunications services.
Since 1992, we have been one of five distributors in Mexico of Nortel
telecommunications equipment. We also distribute voice and teleconferencing
products manufactured by Polycom, Centigram and VTEL and distribute, install and
maintain data and networking equipment manufactured by 3Com Corporation, Nortel,
Newbridge Networks, ADC Kentrox and Cisco. We are the largest Nortel and 3Com
distributor in Mexico and are consistently recognized as the industry leader in
systems integration.
We anticipate that traditional long distance and local exchange services
will increasingly involve sophisticated, application-oriented services such as
audio, data and video conferencing, enhanced facsimile, telemarketing,
interactive voice response, help-desk, advanced Internet and other content and
service intensive value-added services. We have provided advanced services in
Mexico since 1995, giving us both technical and marketing experience needed to
compete in the advanced services market.
Our sales and technical personnel are organized as teams that combine
strong sales capabilities with specialized technical expertise in cutting-edge,
product-specific areas such as asynchronous transfer mode and frame relay
networks, virtual private networks and telemedicine -- distance learning, help
desks and teleconferencing solutions. For example, we were the first company in
Mexico to offer conference call services. Our systems integration business also
provides a natural channel to introduce, with a high degree of credibility,
commercial customers to our other products and services, further broadening our
relationships with our customers. For example, we now offer our Mexican clients
the opportunity to take advantage of advanced bandwidth-on-demand and disaster
recovery services through our teleport in Mountain View, California. We believe
that much of the expertise developed in Mexico can be replicated in other Latin
American countries. Network solutions customers in Mexico include the Mexican
Stock Exchange, Pepsico (Frito Lay), Hewlett Packard, and Mabe (a GE joint
venture).
CUSTOMER RELATIONSHIP MANAGEMENT
As traditional telecommunications services become more of a commodity, we
believe that advanced services will become an increasingly important component
of our service offerings. We have leveraged our systems integration expertise to
provide outsourced network services, including help desk support and customer
relationship management services.
Our expanding presence in advanced services resulted in an outsourcing
contract, signed in the third quarter of 1997, with the U.S. Embassy in Mexico
City. The contract is a one-year contract and the U.S. government has the option
to renew the contract for up to four additional one-year terms. The contract has
been renewed for the first additional year through the fourth quarter of 1999
and was
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again renewed for another year in the first quarter of 2000. The U.S. Embassy
system is designed to automate delivery of visa applications and enables callers
to request visa information from either a live operator or from an automated
touch-tone system. In connection with this contract, we established a call
center in Mexico City, which we believe will serve as a platform for additional
growth. In the fourth quarter of fiscal 1998, we received approval from the
Mexican Ministry of Foreign Affairs to provide passport information and other
information to the Mexican public via our help desk operations. During 1999, we
obtained a contract to provide assistance to Hertz Car Rental for their
reservation system needs.
During the first quarter of 2000, we moved into a new, larger facility for
our customer relationship management business. Our new premises consist of a
22,000 square feet building equipped with a training and recruiting area,
quality assurance areas, 240 fiber optic telephone lines, an E1/T1 connection to
the United States, dedicated lines connecting our facility to the U.S. Embassy
and, among other security features, back-up electrical power. Our new premises
presently host 160 attendant positions and can be expanded to up to 400
positions. By way of comparison, our prior facility was approximately 4,000
square feet in size and had reached its capacity of 120 attendant positions.
On March 6, 2000, the U.S. Embassy announced that its Border Crossing Cards
program has been modified. This program modification will result in the
substitution of approximately 5 million identification cards. Our new facilities
will allow us to manage this additional traffic while maintaining our high level
of service to the U.S. Embassy. We are presently investing in additional systems
including state-of-the-art workforce management and customer relationship
management software. We plan on continuing our efforts to diversify our customer
base and are moving a larger proportion of our U.S. customer service areas to
our call center in Mexico, where we enjoy a relative cost advantage in
comparison to our U.S.-based customer service facilities.
BROADBAND SERVICES
Through our subsidiary, INTERLINK, we own and operate a satellite teleport
facility in Mountain View, California. INTERLINK provides voice, video, data and
Internet transport services including fractional and full T-1 data broadcast,
dedicated circuits and private line up-link and down-link services to Latin
America and other parts of the world. INTERLINK's satellite teleport has been
operational for more than a decade and we believe it is among the most reliable
in the U.S. INTERLINK's satellite teleport services both our network needs for
our international long distance customers as well as INTERLINK's customers
mainly in the telecommunications, broadcasting and weather service industries.
In addition, INTERLINK has introduced Bandwidth-on-Demand, Integrated Services
Digital Network videoconferencing and Internet-through-satellite services and
also serves as an Internet backbone provider to Internet service providers
("ISPs") in remote areas where access to high speed fiber optics is limited,
as is the case in most Latin American countries. We believe that INTERLINK
enjoys an excellent reputation within the industry for our reliability and
services and has positioned us as a natural "conduit" to provide services from
and to the United States with an emphasis on Latin America. We believe that
INTERLINK has the ability to significantly expand our services and future
revenue. INTERLINK also produces radar detectors, VSATs (Very Small Aperture
Terminals) and telecommunications amplifiers, which represent less than one
fourth of INTERLINK's projected revenues for 2000. See discussion below under
recent developments concerning the discontinuation of the production of these
products.
We had fiscal 1999 revenues of approximately $29.5 million from our
advanced services businesses, representing 27.6% of our consolidated revenues.
No single customer within this line of business represented 10% or more of 1999
consolidated revenues.
NETWORK
We currently manage our own telecommunications network and utilize the
transmission capacity of several carriers. We believe that increasing the
percentage of traffic we carry on-net will enable us
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to increase margins and profitability and ensure quality. In addition, our use
of multiple carriers increases cost efficiencies by establishing additional
routing capability and enables us to obtain sufficient capacity to support our
rapid growth.
Our present network is comprised of leased and owned switches, fixed cost
point-to-point fiber optic cable leases, leased satellite capacity to provide
connectivity for many Central and South American cities and owned fiber optic
cable in Mexico. We intend to expand our network primarily by (i) moving from
the traditional circuit-based technology to packet-based technology as more
advance voice applications are available and IP traffic demands it, (ii)
acquiring additional satellite and fiber optic transmission capacity and (iii)
installing switching equipment in targeted U.S. and Latin American markets. We
expect that we will be able to realize significant cost savings by routing an
increasing portion of our traffic on-net. Please see a more complete discussion
of our network in Mexico below.
SWITCHING FACILITIES
We own and operate a Nortel DMS-250, state-of-the-art digital switch in
Houston, Texas with 11,520 ports. In addition to utilizing this switch as a
tandem switch, we also utilize it to provide prepaid calling card services. We
are currently installing a Lucent 5ESS international gateway switch in Houston,
Texas, which will have 9,780 ports. We also have two Excel switches in Houston,
which are being utilized both in a tandem mode as well as to provide prepaid
calling card services and have approximately 3,100 ports each.
In Monterrey, Mexico we have installed a Lucent 5ESS international gateway
switch with 8,700 ports. We have also purchased a Lucent 5ESS international
gateway switch with 7,620 ports to be installed in Mexico City. In addition, we
have three Excel switches operational in Mexico with ports ranging from 1,440 to
3,744.
SATELLITE FACILITIES
In connection with our acquisition of INTERLINK in 1998, we acquired a
teleport facility in Mountain View, California. We believe that this acquisition
enhanced our position as an integrated telecommunications provider, and helps
assure satellite capacity to our targeted markets in Latin America.
NETWORK CAPACITY
We purchase transmission services on a per minute basis and lease
transmission capacity on a fixed cost basis from a variety of local and long
distance carriers. We are currently expanding our leased on-net capacity in an
attempt to lower costs in our largest distribution areas. We obtain private line
capacity from local domestic and international carriers. Our agreements with
these carriers fix the private line cost for a minimum of one year. Our
agreements with carriers provide that some international per minute rates may
fluctuate with rate change notice periods varying from five days to one month.
The variable nature of the cost of services and many of our contracts and
agreements subject us to the possibility of unanticipated cost increases and the
loss of cost-effective routing alternatives.
We have signed a contract with a third party for the third party vendor to
provide telecommunications services to us including the origination of inbound
800 dialed phone calls for our prepaid cards, and the termination of U.S.
domestic long distance and international long distance. The contract term is
through June 1, 2001, and provides for a minimum monthly purchase commitment of
$750,000 and a total purchase commitment of $31,110,000. We can cancel the
minimum monthly purchase commitment with 30 days notice upon meeting our total
minimum purchase commitment. We estimate that total purchases from this third
party shall continue to exceed the minimum contractual requirements.
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TELECOMMUNICATIONS NETWORK MANAGEMENT AND INFORMATION SYSTEMS
Our network management and information systems enable us to (i)
economically and efficiently route traffic over our network and the networks of
other carriers, (ii) offer reliable services with high call completion rates and
voice quality and (iii) manage an advanced voice, data and video multi-service
platform. We believe that these systems, particularly their ability to provide
flexible, high quality service to international destinations, provide us with a
competitive advantage relative to many other providers of telecommunications
services. We monitor our network and initiate changes to our overall switch
network and traffic routing where appropriate to optimize routing and minimize
costs. Because a substantial portion of the traffic carried by us terminates
internationally and call completions vary by carrier, we monitor the call
completion efficiencies of our suppliers. We intend to continue configuring
large portions of our network with Common Channel Signaling System 7 ("SS7").
SS7 reduces voice call setup and connect time delays and provides additional
technical capabilities and efficiencies for call routing and network
engineering.
NETWORK OPERATIONS CENTER
We have a network operations center ("NOC") in Mexico City, Mexico, which
we will use to monitor and control all switches and other transmission equipment
used in our network. The NOC operates seven days a week, 24 hours per day, 365
days a year. This NOC will be greatly enhanced by the state-of-the-art OSS
(Operation Support Systems) tools acquired in connection with the buildout of
the Mexican network, and will allow us to provide advanced billing,
provisioning, customer care-help desk and network, systems and applications
management services to voice, data and Internet customers.
OUR MEXICAN NETWORK
Our network philosophy is to invest in network facilities only after we
have developed a customer base and to the extent such an investment can improve
our network cost structure and services provided to our customers. We have
developed a substantial presence in Mexico over the last 13 years, and, in June
1998, we, through Telereunion, received a concession, a 30-year,
facilities-based carrier license, from the Mexican government. Telereunion is
one of only 16 concession holders in Mexico. We have now completed the
construction of our network in Mexico.
Our Mexican network provides us with the following: (i) additional capacity
to allow growth in our voice services business; (ii) increased profitability by
bringing traffic on-net; and (iii) the ability to provide advanced,
packet-based, bandwidth-intensive data and multimedia networking applications to
commercial customers in Mexico.
We built the first stage of our Mexican network, consisting of 636 km of
fiber optic cable and microwave, circuit switched type of transmission and
switching facilities, in the Gulf region of Mexico. The fiber optic cable
consists of 48 strands. The first stage provides connectivity from Puebla to
Veracruz to Poza Rica.
We have taken a "smart build" approach to expanding our network coverage
in Mexico. Due to the fact that we selected a very desirable region in which to
construct our Mexican network, other carriers are interested in exchanging fiber
on their own networks for fiber on our network. For instance, in May 1999, we
signed an agreement to exchange eight strands of fiber on our network covering
636 kilometers for four strands of fiber on another carrier's network covering
1100 km. This exchange had the effect of tripling our network coverage for
relatively little additional investment. In November 1999, we signed a letter of
intent to exchange fiber with another carrier, which, upon consummation, will
increase our network coverage by 550 kilometers. In December 1999, we entered
into an agreement with another carrier to exchange fiber. Upon consummation of
this December 1999 agreement as well as the other agreements under negotiation,
we will have a fiber optic network in Mexico of approximately 4,100 route
kilometers, resulting in one of the largest networks in the country. The fiber
obtained through this December 1999 agreement will connect the important cities
of
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Puebla, Mexico City, Toluca, Queretaro, Leon and Guadalajara. In combination
with our own buildout and the agreements described above, our Mexican network
will connect Guadalajara, Leon, Queretaro, Toluca, Mexico City, Puebla,
Veracruz, Poza Rica, Ciudad Victoria, Matamoros, Reynosa, Monterrey, San Luis
Potosi and several other smaller cities in Mexico. The network will also include
metropolitan fiber rings in some of the largest cities in Latin America,
including Mexico City, Leon and Guadalajara. In those cities, which will have
metropolitan fiber, we will more effectively address the last mile issue and
provide a bundle of advanced networking services at a lower cost.
We selected Lucent to engineer, furnish and install our network in Mexico.
In August of 1999, we signed a loan agreement in which Lucent agreed to provide
us with up to $40 million of long term financing. In January 2000, Lucent agreed
to expand this commitment by $20 million, subject to certain conditions,
including the merger with Pointe.
SALES, MARKETING AND DISTRIBUTION
VOICE SERVICES
RETAIL
We market our prepaid cards under the Telefiesta brand name. Our Telefiesta
prepaid cards are sold through distributors to independent retail outlets
throughout the United States. In the U.S., we have traditionally focused on
building a substantial network of wholesale distributors that sell to sub-
distributors and directly to retail outlets. The sub-distributors generally sell
only to retail outlets. We intend to expand our internal sales department in
order to sell directly to large retail chains, department stores, the tourist
industry, airport and hotel gift shops, gas stations and other retail outlets
owned or franchised by larger companies, both in the U.S. and Mexico.
In the United States, we target heavily populated metropolitan areas with
substantial Hispanic populations that generate significant international calling
volume. Many of our distributors are members of such ethnic communities or
otherwise have personal or business relationships in such communities. In
developing relationships with distributors, we also focus on expansion into new
geographic and metropolitan areas with substantial Hispanic populations. We
believe that the success of our prepaid cards has created significant brand
loyalty and encourages distributors and retail outlets to actively market our
products.
We regularly provide distributors and retail outlets with point of purchase
advertising and explanatory materials. We frequently add new prepaid card
products to our service offerings, and adjust our pricing for particular traffic
segments in order to target certain customer groups, respond to competitive
pressures and otherwise increase market share.
In Mexico, in conjunction with the launch of our Telereunion prepaid card,
we established a sales department at one of our subsidiaries to more
aggressively develop distribution channels in which we are selling directly to
the retail outlet, rather than through wholesale distributors as has been
traditionally done in the U.S.
We are launching our Telefiesta-Amigo program using direct distribution
channels and have hired commissioned based sales teams to generate the initial
sales for this product. We intend to engage in an extensive telemarketing effort
whereby we will mine our present customer databases to solicit their long
distance business. This telemarketing effort will take advantage of leads that
we have obtained from several prepaid card promotions requesting user
information as well as databases we have developed containing telephone numbers
of callers that have shown past patterns including calls from the U.S. to
Mexico.
WHOLESALE
Our carrier resale department markets our international outbound switched
and dedicated services on a wholesale basis to other telecommunications
companies through a direct sales effort. To provide a more complete package of
international rates to our customers, we intend to establish strategic
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relationships with entities that have gateways to international destinations, to
complement the capacity we have with our Mexican network. When appropriate, we
may establish in-country relationships for the termination of international long
distance.
ADVANCED SERVICES
NETWORK SOLUTIONS
To serve the complex needs of our customers, we formed a team of sales and
technical personnel that combines strong sales capabilities with specialized
technical expertise in product-specific areas such as Private Branch Exchange
("PBX"), voice processing, Internet, video conferencing and asynchronous
transfer mode and frame relay networks. We believe that this sales approach
allows us to provide innovative solutions to complex systems integration
projects.
In Mexico, we promote our network solutions services through a combination
of advertising, trade shows, direct mail and telemarketing. We historically
utilized our own direct sales force but have recently developed a dealer network
to broaden our distribution channel. Our product managers focus on cultivating
relationships with one or more vendors and with coordinating sales efforts for
their specific product lines.
We market our network solutions services through advertising in trade
magazines, telemarketing, direct mail and attending trade shows. We believe that
our systems integration service base provides an excellent platform for the
follow-up sales of advanced telecommunications services, since many of our
customers have developed confidence in our ability to implement complex
projects.
Our direct sales effort begins with understanding the customer's business.
Sales personnel then identify potential areas where our advanced services could
improve the customer's business, suggesting specific services, customizing those
services to meet the customer's specific needs, implementing network solutions
and monitoring the results and potential changes in the customer's needs.
CUSTOMER RELATIONSHIP MANAGEMENT
Until the recent expansion of our call center facilities, our capacity was
largely utilized under our contract with the U.S. Embassy. Given the additional
capacity, we intend to market and sell our bilingual capabilities to customers
in the United States and Mexico through a direct sales effort.
BROADBAND SERVICES
Our broadband services business markets with satellite teleport services to
other telecommunications companies through a direct sales effort. Our service
offerings include voice, video and data transport services including fractional
and full T-1 data broadcast, dedicated circuits and private line up-link and
down-link services to Latin America and other parts of the world. We have also
introduced Bandwidth-on-Demand, ISDN videoconferencing and
Internet-through-satellite services and also serve as an Internet backbone
provider to ISPs in remote areas where access to high speed fiber optics is
limited, as is the case in most Latin American countries. We have also begun
cross-selling our teleport services through our network solutions sales force in
Mexico and our international long distance wholesale carrier sales force in the
U.S.
CUSTOMERS
VOICE SERVICES
RETAIL
We market our prepaid cards primarily to Hispanic communities in the U.S.
that generate high levels of international traffic to targeted Latin American
countries where we have favorable termination agreements. We sell our prepaid
cards through a network of distributors, who distribute the prepaid cards to
independent retail outlets in 100 cities throughout the U.S. During the year
ended December 31, 1998, no single distributor represented more than 10% of our
overall revenues. During
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the year ended December 31, 1999, one distributor represented $12.2 million or
11.45% of our consolidated sales for the year ended December 31, 1999.
WHOLESALE
Our wholesale customers are primarily other international carriers that
seek termination services in one or more Latin American countries. During the
year ended December 31, 1999, no single wholesale carrier customer represented
more than 10% of our consolidated revenues.
ADVANCED SERVICES
NETWORK SOLUTIONS AND CUSTOMER RELATIONSHIP MANAGEMENT
We perform substantially all of our network solutions and customer
relationship management services for business customers located in Mexico. Our
network solutions business has worked with over 2,500 corporate customers in the
last thirteen months. During the year ended December 31, 1999, no single network
solutions or customer relationship management customer represented more than 10%
of our overall revenues.
BROADBAND SERVICES
Customers for our broadband services include other international carriers
both in the U.S. and in Latin America which utilize our services as a low cost,
dependable and high speed alternative to fiber optic connectivity between the
U.S. and Latin America; private and public corporate companies which utilize our
private line, dedicated circuits and bandwidth on demand services; and Latin
American ISPs which utilize our services as a source for high-speed connectivity
to Tier I Internet backbone providers in the U.S. During the years ended
December 31, 1998, and 1999, no single satellite teleport services customer
represented more than 10% of our consolidated revenues over the respective
period then ended or of our consolidated for the years ended December 31, 1998
or 1999, respectively.
CUSTOMER SUPPORT AND BILLING
We believe that reliable, sophisticated and flexible billing and
information systems are essential to our ability to remain competitive in the
global telecommunications market. Accordingly, we upgraded our billing system
this year and are using a Compaq Proliant 5000 Server with Highland Lakes
Billing Software. As part of our Mexico network construction, we have entered
into a contract for the provision of a turnkey state-of-the-art operating
support system (OSS) from a major U.S. vendor.
Our billing system enables us to (i) accurately analyze network traffic,
revenues and margins by customer and by route on a daily basis, (ii) validate
carrier settlements, and (iii) monitor least cost routing of customer traffic.
These reports produce efficiencies by reducing the need for monitoring by our
employees. We believe that the accuracy and efficiency of our management
information systems provide us with a significant strategic advantage over other
emerging carriers.
COMPETITION
The international and national telecommunications industry is highly
competitive, is subject to rapid change precipitated by advances in technology
and deregulation and is significantly influenced by the pricing and marketing
decisions of larger industry participants. Our success depends upon our ability
to compete with a variety of other telecommunications providers in each of our
markets, including the respective PTT in each country in which we operates.
Other competitors of ours include large, facilities-based, multinational
carriers and smaller facilities-based wholesale long distance service providers
in the United States and overseas that have emerged as a result of deregulation,
switched-based resellers of international long distance services, providers of
systems integration and/or advanced services, prepaid card providers and global
alliances among some of the world's largest telecommunications carriers. We
anticipate that we will encounter additional competition as a result of the
formation of global alliances among large telecommunications providers. Recent
examples of such alliances include AT&T's alliance with Unisource, known as
"Uniworld", Cable & Wireless Plc's
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recent alliance with Italy's STET/Telecom Italia to serve international
customers with a primary focus on the Latin American and European regions,
WorldCom's merger with MCI, Sprint's alliance with Deutsche Telekom and France
Telecom, known as "Global One", and the joint venture between Sprint and
Telmex. Consolidation in the telecommunications industry may create even larger
competitors with greater financial and other resources. The effect of the
aforementioned or other similar mergers and alliances could create increased
competition in the telecommunications services market and potentially reduce the
number of customers that purchase wholesale international long distance services
from us. In the prepaid card business, we currently compete with all of the
first tier telecommunications carriers as well as emerging multinational
carriers such as Star Telecommunications, Inc., RSL Communications, Ltd. and IDT
Corporation, many of which have greater financial resources than us. Because
certain of our current competitors also are or could be our customers, our
business would be materially adversely affected to the extent that a significant
number of such customers limit or cease doing business with us for competitive
or other reasons.
International telecommunications providers such as Telscape compete on the
basis of price, customer service, transmission quality, breadth of service
offerings and value-added services, and our carrier and prepaid card customers
are especially price sensitive. In addition, many of our competitors enjoy
economies of scale that can result in a lower cost structure for termination and
network costs, which could cause significant pricing pressures within the
international communications industry. In recent years, prices for international
and other telecommunications services have decreased substantially, and are
expected to continue to decrease, in most of the markets in which we currently
compete or intend to compete. The intensity of such competition has recently
increased, and we expect that such competition will continue to intensify as the
number of new entrants increases as a result of the new competitive
opportunities created by the 1996 Telecommunications Act, implementation by the
FCC of the U.S. commitment to the WTO and privatization, deregulation and
changes in legislation and regulation in various of our foreign target markets.
There can be no assurance that we will be able to compete successfully in the
future, or that such intense competition will not have a material adverse effect
on our business, financial condition and results of operations.
Many of our competitors are significantly larger, have substantially
greater financial, technical and marketing resources, larger networks and a
broader portfolio of services than ours. Additionally, many competitors have
strong name recognition and "brand" loyalty, long-standing relationships with
our target customers and economies of scale that can result in a lower relative
cost structure for transmission and related costs. These competitors include,
among others, AT&T, MCI WorldCom and Sprint which provide long distance services
in the U.S., Telmex, concessionaires and other registered value-added services
providers in Mexico, as well as PTTs and emerging competitors in other Latin
American markets where we seek to compete.
In Mexico, the regulatory authorities have granted concessions to 16
companies, including Telmex and Telereunion S.A., to construct and operate
public, long distance telecommunications networks in Mexico. Some of these new
competitive entrants have as their partners major U.S. telecommunications
providers, including AT&T (Alestra), MCI WorldCom (Avantel) and Bell Atlantic
(Iusatel). Mexican regulatory authorities have granted concessions to several
competitive local exchange providers, such as Telinor, Megacable, Amaritel,
Unitel, MetroNet, and Red de Servicios and several of Mexico's long distance
concessionaires. With regard to the provision of services in Mexico, we compete
or will compete in Mexico with numerous other systems integration, value-added
services and voice and data services providers, some of which focus their
efforts on the same customers targeted by us. In addition to these competitors,
recent and pending deregulation in Mexico and various other Latin American
countries may encourage new entrants. Moreover, while the WTO Agreement could
create opportunities for us to enter new foreign markets, implementation of the
accord by the United States and other countries could result in new competition
from PTTs previously banned or limited from providing services in the United
States. For example, the joint venture between Sprint and Telmex was granted by
the FCC for authority to enter the U.S. market and to provide resold
international switched services between the United States and Mexico, subject to
various conditions. Increased competition in
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such countries as a result of the foregoing, and other competitive developments,
including entry by ISPs into the long-distance market, could have a material
adverse effect on our business, financial condition and results of operations.
We believe that PTTs generally have certain competitive advantages due to
their control over local connectivity and close ties with national regulatory
authorities. We also believe that, in certain instances, some regulators have
shown a reluctance to adopt policies and grant regulatory approvals that would
result in increased competition for the local PTT. If a PTT were to successfully
pressure national regulators to prevent us from providing our services, we could
be denied regulatory approval in certain jurisdictions in which our services
would otherwise be permitted, thereby requiring us to seek judicial or other
legal enforcement of our right to provide services or to abandon our proposed
market entry. Any delay in obtaining approval, or failure to obtain approval,
could have a material adverse effect on our business, financial condition and
results of operations. If we encounter anti-competitive behavior in countries in
which we operate or intend to operate or if the PTT in any country in which we
operate uses our competitive advantages to the fullest extent, our business,
financial condition and results of operations could be materially adversely
affected.
GOVERNMENT REGULATION
GENERAL
The global telecommunications industry is subject to international treaties
and agreements and to laws and regulations which vary from country to country.
Enforcement and interpretation of these treaties, agreements, laws and
regulations can be unpredictable and are often subject to informal views of
government officials and ministries that regulate telecommunications in each
country. In certain countries, including certain of our target Latin American
markets, such government officials and ministries may be subject to influence by
the local PTT.
We have pursued and expect to continue to pursue a strategy of providing
our services to the maximum extent we believe to be permissible under applicable
laws and regulations. To the extent that the interpretation or enforcement of
applicable laws and regulations is uncertain or unclear, our aggressive strategy
may result in our (i) providing services or using transmission methods that are
found to violate the laws or regulations of those countries where we operate or
plan to operate or (ii) failing to obtain approvals or make filings subsequently
found to be required under such laws or regulations. If our interpretation of
applicable laws and regulations proves incorrect, we could lose, or be unable to
obtain, regulatory approvals necessary to provide certain of our services or to
use certain of our transmission methods, or lose our investments in that
country. There can be no assurance that we will not be subject to fines,
penalties or other sanctions, including being denied the ability to offer our
products and services, as a result of violations regardless of whether such
violations are knowing or willful and regardless of whether such violations are
corrected.
In numerous countries where we operate or plan to operate, local laws or
regulations limit the ability of telecommunications companies to provide
telecommunications services in competition with state-owned or state-sanctioned
monopoly carriers. There can be no assurance that future regulatory, judicial,
legislative or political considerations will permit us to offer all or any of
our products and services in such countries, that regulators or third parties
will not raise material issues regarding our compliance with applicable laws or
regulations, or that such regulatory, judicial, legislative or political
decisions will not have a material adverse effect on us. If we are unable to
provide the services that we presently provide or intend to provide or to use
our existing or contemplated transmission methods due to our inability to obtain
or retain the requisite governmental approvals for such services or transmission
methods, or because we are subjected to adverse regulatory inquiry,
investigation or action, or for any other reason related to regulatory
compliance or lack thereof, such developments could have a material adverse
effect on our business, financial condition and results of operations.
On February 15, 1997, the United States and 68 other countries signed the
WTO Agreement, agreeing to open their respective telecommunications markets to
competition and foreign ownership
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and to adopt regulatory measures to protect market entrants against
anticompetitive behavior by dominant telephone companies. FCC rules implementing
the WTO Agreement became effective in February 1998. The FCC also adopted
streamlined license granting procedures for carriers from WTO Agreement
signatory countries, pursuant to which the FCC granted more than 200
international applications in the first 90 days after the streamlined procedures
became effective. The FCC adopted additional streamlining measures on March 18,
1999. Although we believe that the WTO Agreement could provide us with
significant opportunities to compete in markets that were not previously
accessible, reduce our costs and provide more reliable services, it could also
provide similar opportunities to our competitors. There can be no assurance that
the pro-competitive effects of the WTO Agreement will not have a material
adverse effect on our business, financial condition and results of operations or
that members of the WTO will implement the terms of the WTO Agreement.
UNITED STATES
In the United States, to the extent that we offer services as a carrier,
the provision of our services is subject to the provisions of the Communications
Act of 1934, as amended, the Telecommunications Act of 1996 and the regulations
of the FCC thereunder. There can be no assurance that future regulatory,
judicial and legislative changes will not have a material adverse effect on our
business, financial condition and results of operations. Moreover, to the extent
that the interpretation or enforcement of applicable laws and regulations is
uncertain or unclear, our aggressive strategy may result in our (i) providing
services or using transmission methods that are found to violate the
Communications Act, the Telecommunications Act of 1996 or FCC regulations, or
(ii) failing to obtain approvals or make filings subsequently found to be
required under such laws or regulations. The FCC has the authority to condition,
modify, cancel, terminate or revoke licenses and authorizations for failure to
comply with federal laws or the rules, regulations and policies of the FCC. If
our interpretation of applicable laws and regulations proves incorrect, we could
lose, or be unable to obtain, regulatory approvals necessary to provide certain
of our services or to use certain of our transmission methods. While we believe
we are in compliance with applicable laws and regulations, there can be no
assurance that we will not be subject to fines, penalties or other sanctions as
a result of violations regardless of whether such violations are knowing or
willful and regardless of whether such violations are corrected. There can be no
assurance that if our interpretation of applicable laws and regulations proves
incorrect and/or if we are subject to fines, penalties or other sanctions as a
result, that these events will not have a material adverse effect on our
business, financial condition and results of operations.
U.S. INTERNATIONAL LONG DISTANCE SERVICES
To the extent we offer services as a common carrier, we are subject to FCC
rules requiring authorization from the FCC prior to leasing international
capacity, acquiring international facilities, and/or purchasing switched
minutes, and initiating international service between the United States and
foreign points, as well as to FCC rules that also regulate the manner in which
our international services may be provided, including the circumstances under
which we may provide international switched services by using private lines or
routing traffic through third countries. FCC rules also require prior
authorization before transferring control of or assigning FCC authorizations,
and impose various reporting and filing requirements on companies providing
international services under an FCC authorization. In order to offer
international long distance services, we are also required to file and have
filed with the FCC a tariff containing the rates, terms and conditions
applicable to our international telecommunications services. We have a
continuing obligation to ensure that the tariffs accurately reflect the terms
and conditions associated with our service offerings. We are also required to
file certain carrier to carrier agreements with the FCC. The FCC also requires
carriers such as Telscape to report any affiliations, as defined by the FCC,
with foreign carriers. The FCC may also impose restrictions on affiliations with
certain foreign telecommunications companies. Failure to comply with the FCC's
rules could result in fines, penalties or forfeiture of our FCC authorizations,
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each of which could have a material adverse effect on our business, financial
condition and results of operations.
THE FCC'S PRIVATE LINE RESALE POLICY
The FCC's private line resale policy currently prohibits a carrier from
reselling international private leased circuits to provide switched services
(known as "ISR") to or from a country unless the FCC has designated that
country as one that affords U.S. carriers equivalent opportunities to engage in
similar activities in that country or that the country is a member of the WTO
and the local PTT offers U.S. carriers rates at or below the FCC prescribed
benchmark for terminating the U.S. carriers' traffic. There can be no assurance,
however, that the FCC or any other country's regulatory authority will change
their policies in a way that would have a beneficial impact on us or that would
not have a material adverse effect on our business, financial condition and
results of operations. Furthermore, it is possible, that the FCC could take the
view that certain arrangements by which we provide international services do not
comply with the existing Private Line Resale Policy. If the FCC, on its own
motion or in response to a challenge filed by a third party, determines that
such arrangements do not comply with FCC rules, among other measures, it may
issue a cease and desist order, impose fines on us, or, in extreme
circumstances, revoke or suspend our FCC authorizations.
INTERNATIONAL SETTLEMENTS POLICY
The International Settlements Policy establishes the framework governing
U.S. carriers' relationships with their foreign correspondents who are
designated as dominant, on routes that have not yet been found to be competitive
by the FCC. The FCC revised its International Settlements Policy in an order
released May 6, 1999. Specifically, the current policy governs the exchange of
traffic and settlements between U.S. carriers and dominant foreign
correspondents on non-competitive routes, including the cost of terminating
traffic over each other's networks and prevents dominant foreign carriers from
discriminating among U.S. carriers in the rates they charge to terminate
international traffic.
The FCC revisions to the International Settlements Policy also impact the
FCC's rules on International Simple Resale (sometimes called "ISR"), which
permits U.S. carriers to provide international switched services over private
lines interconnected with the public switched telecommunications network on the
current FCC-authorized routes. The FCC declined to remove the International
Settlements Policy completely on all International Simple Resale-approved
routes, and will continue to maintain a distinction between routes it approves
for International Simple Resale and routes on which it removes the International
Settlements Policy. However, as a result of revisions to the International
Settlements Policy, U.S. carriers may now enter into International Simple Resale
arrangements with non-dominant foreign carriers on any route. On those routes
where the International Settlements Policy continues to apply to dominant
carriers, U.S. carriers may exchange traffic via International Simple Resale
arrangements with such carriers only on the routes authorized for International
Simple Resale by the FCC.
To the extent that the International Settlements Policy still applies, the
FCC could find that we do not meet certain International Settlements Policy
requirements with respect to certain of our foreign carrier agreements. Although
the FCC generally has not issued penalties in this area, it has issued a Notice
of Apparent Liability to a U.S. company for violations of the International
Settlements Policy and it could, among other things, issue a cease and desist
order, impose fines or allow the collection of damages if it finds that we are
not in compliance with the International Settlements Policy. Any of these events
could have a material adverse effect on our business, financial condition or
results of operations.
U.S. DOMESTIC LONG DISTANCE SERVICES
Our ability to provide domestic long distance service in the United States
is subject to regulation by the FCC and relevant state Public Utility
Commissions that regulate the offering of interstate and
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intrastate telecommunications services, respectively. Although no formal
authority is required for the offering of interstate services, we are required
by the FCC to file tariffs listing the rates, terms and conditions of domestic
long distance services provided.
If the stay is lifted and the FCC order becomes effective,
telecommunications carriers, such as us, will no longer be able to rely on the
filing of tariffs with the FCC as a means of providing notice to customers of
prices, terms and conditions on which they offer their interstate services. The
obligation to provide non-discriminatory, just and reasonable prices remains
unchanged under the Communications Act of 1934, as amended.
Our costs of providing long distance services will be affected by changes
in the "access charge" rates imposed by incumbent local exchange carriers on
long distance carriers for origination and termination of calls over local
facilities. The FCC has made major changes in the interstate access charge
structure. In a December 24, 1996 order, the FCC removed restrictions on
incumbent local exchange carrier's ability to lower access prices and
implemented certain access charge reforms and sought comments on others. The
order provides certain immediate regulatory relief to incumbent local exchange
carriers subject to the FCC's price cap regulation, and sets a framework or
"trigger" to provide those companies with greater pricing flexibility to set
interstate access rates as competition increases. The order also initiated a
rulemaking to determine whether the FCC should regulate the access charges of
competitive local exchange carriers. A May 16, 1997 FCC order substantially
increased the amounts that incumbent local exchange carriers subject to the
FCC's price cap rules could recover through monthly flat-rate charges and
substantially decreased the amounts that these local exchange carriers could
recover through traffic sensitive (per-minute) access charges. Several parties
appealed the May 16th order. On August 19, 1998, the U.S. Court of Appeals for
the Eighth Circuit upheld the FCC's access charge reform rules.
UNIVERSAL SERVICE
On May 8, 1997, the FCC issued an order establishing a significantly
expanded federal universal service subsidy regime (the "May 8th Order"). For
example, the FCC established new universal service funds to support
telecommunications and information services provided to qualifying schools and
libraries (with an annual cap of $2.25 billion) and to rural health care
providers (with an annual cap of $400 million). The FCC also expanded the
federal subsidies for local exchange telephone services provided to low-income
consumers and recently doubled the size of the high cost fund for non-rural
LECs. Providers of interstate telecommunications services, such as us, as well
as certain other entities, must pay for these programs. Our contribution to
these universal service funds is based on our telecommunications service
end-user revenues. Currently, the FCC assesses such payments on the basis of a
provider's revenue for the previous year. They are currently 5.877% of
interstate and international end-user telecommunications revenues. We cannot
predict what the amount of universal service fund contributions will be in the
future, as the FCC issues contribution factors on a periodic basis.
Several parties appealed the May 8th Order. The U.S. Court of Appeals for
the Fifth Circuit recently upheld the FCC May 8th Order in most respects, but
rejected the FCC's effort to base contributions on intrastate revenues. The
FCC's universal service program may also be altered as a result of the agency's
reconsideration of its policies, or by future Congressional action.
STATE REGULATION
Prior to the initiation of intrastate long distance service, we generally
must obtain certification from or register with the relevant state Public
Utilities Commission. Providers of intrastate long distance services may also be
required to file tariffs or rate schedules, and may be subject to certain
reporting and fee payment obligations with the relevant commission including,
for pre-paid or debit card operators, the filing of a surety bond. In addition,
intrastate long distance providers may be subject to service standards and
consumer protection rules. If any state Public Utilities Commission were to
conclude that we are or were providing intrastate services without the
appropriate authority,
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the agency could initiate enforcement actions, which could include the
imposition of fines, a requirement to disgorge revenues, or the refusal to grant
the regulatory authority necessary for the future provision of intrastate
communications services. Failure to comply with state law and/or the rules,
regulations and policies of the state commissions, including compliance with
state reporting and fee payment obligations, may result in challenges by third
parties, and/or actions by state commissions or other government authorities,
including conditioning, modifying or revoking state authorization to provide
telecommunications services within the respective state and/or subjecting the
provider to fines, penalties, or other sanctions.
Many states also require prior approval for transfers of control of
certified carriers, corporate reorganizations, acquisitions of
telecommunications operations, assignment of carrier assets, carrier stock
offerings and incurrence of significant debt obligations. The merger between
Telscape and Pointe will generate an obligation on the newly created entity to
file applications for prior approvals or notifications to the Public Utilities
Commission in each and every state where either Telscape, Pointe or their
affiliates are certificated. Telscape and Pointe have begun preparation of these
filings, and anticipate that some, but not all of the required approvals will be
obtained on or before the anticipated date of closing. At this time, we can not
assure you that all of the required approvals will be obtained in a timely
fashion, or that the respective Public Utilities Commissions will approve the
transaction. If any State Public Utilities Commission does not approve the
transaction, we may lose our certification to provide telecommunications
services in that state and/or be subject to the imposition of license
conditions, fines or other sanctions. As a result of Telscape, Pointe or their
affiliates' past or current failure to comply with state regulatory
requirements, it is possible that one or more State Public Utilities Commissions
may reject or condition the requested approval of the merger, or may otherwise
subject Telscape, Pointe or the newly created entity to regulatory sanctions.
MEXICO
In June 1998, our subsidiary Telereunion S.A., received a 30-year
facilities-based carrier license from the SCT, allowing it to originate and
terminate long distance services and to provide data and other value-added
services in Mexico. The Foreign Investment Law and Telecom Law of Mexico
("FTL") opened the local and long distance telecommunications service markets
to competition and imposed varying levels of regulation on Mexican
telecommunications providers. Pursuant to the FTL, the SCT and the Comision
Federal de Telecomunicaciones ("COFETEL") implement the provisions of the FTL.
The FTL imposes regulations on public carriers. Facilities-based public
carriers, those that use the radio spectrum, satellite links or any form of
land-based cables to provide telecommunications services, must obtain
concessions prior to providing service. Concessionaires may also resell the
facilities and services of other concessionaires. Vendors (resellers) of
telecommunications services may not own their own facilities but need only
obtain a permit to provide service. Although the FTL provides for the existence
of resellers, the Mexican government has not issued the implementing rules and
regulations to allow their entry into the market. Consequently, Mexican law does
not currently permit pure switched international resale. Carriers wishing to
offer value-added services need only register with the COFETEL's
Telecommunications Registry.
In addition to the FTL, the Mexican Long Distance International Rules
establish the specific regulatory framework that governs international long
distance services. Among other matters, the rules (i) mandate uniform accounting
rate and proportionate return for three years for all international traffic;
(ii) require concessionaires to obtain additional specific authorization to
install and operate international gateways; (iii) implicitly prohibit ISR for
three years; and (iv) regulate international correspondent agreements, which
must reflect the uniform accounting rate and proportionate return rules. The
International Rules prohibit all telecommunications operators, except those
concessionaires that have obtained the specific authorization from the COFETEL,
to install and operate international gateway switches. Those concessionaires
that have not received such specific authorization, as well as any other
companies that provide telecommunications services, such as providers of
value-added services, cellular concessionaires and paging service providers
cannot directly transmit international
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switched traffic. To date, the SCT and the COFETEL have granted 16 companies,
including Telmex and Telereunion S.A., concessions for the installation,
operation and exploitation of long distance public telecommunications networks,
of which eight have received authorization to install and operate international
gateway facilities. In addition, the SCT and the COFETEL have granted eight
concessions for local switched services as well as numerous registrations for
value-added services.
Pursuant to the FTL, concessions for public telecommunication networks may
only be granted to Mexican citizens or Mexican companies. Foreign investors may
own minority interests in concessionaires, but may not own more than 49% of the
voting ownership interest of we except for companies that provide cellular
service. NAFTA removed certain Mexican restrictions on foreign investment and
U.S. companies may now maintain 100% ownership interests in companies that
provide value-added services in Mexico. Pursuant to Mexican law, only Mexican
citizens or companies incorporated and domiciled in Mexico can register as
providers of value-added services.
OTHER LATIN AMERICAN MARKETS
Our provision of services elsewhere in Latin America is subject to the
developing laws and regulations governing the competitive provision of
telecommunications services in each Latin American country in which it provides
or seeks to provide services. Each such Latin American country in which we
currently conduct or intend to conduct business has a different national
regulatory scheme. Historically, Latin American countries have prohibited voice
telephony except by the PTT. The available opportunities and the requirements
for we to obtain necessary approvals to offer value-added services, systems
integration or the full range of telecommunications services, including voice
telephony, vary considerably from country to country. We currently plan to
provide a limited range of services in certain Latin American countries, as
permitted by regulatory conditions in those markets, and to expand our
operations as these markets implement liberalization to permit competition in
the full range of telecommunications services. The nature, extent and timing of
the opportunity for us to compete in these markets will be determined, in part,
by the actions taken by the governments in these countries to implement
competition and the response of incumbent carriers to these efforts. There can
be no assurance that any of these countries will implement competition in the
near future or at all, that we will be able to take advantage of any such
liberalization in a timely manner, or that our operations in any such country
will be successful. There can be no assurance that we have received all
necessary approvals, filed applications for such approvals, received comfort
letters or obtained all necessary licenses from the applicable regulatory
authorities to offer telecommunications services in the Latin American countries
where it currently provides services or those in which it seeks to provide
services in the future, or that it will do so in the future. Our failure to
obtain, or retain necessary approvals could have a material adverse effect on
our business, financial condition and results of operations.
Liberalization in Latin America is proceeding rapidly and we seek to keep
pace with competition even where PTTs retain a legally mandated monopoly on
voice telephony. We are currently offering or plan to offer certain systems
integration, enhanced services, or value-added services in a number of Latin
American countries where the PTT retains the legally mandated monopoly on voice
telephony. While we believe that we will not be found to be offering voice
telephony in these countries prior to the expiration of the PTT's monopoly on
such services, we have received no assurance from the respective PTTs or from
the respective regulating authorities that this will be the case. It is possible
that we could be fined, or that our facilities or equipment could be
confiscated, or that we would not be allowed to provide specific services in
these countries, among other sanctions, if we were found to be providing voice
telephony before the date in which the PTT's monopoly on Voice Telephony ceases.
Any of such actions could have a material adverse impact on our business,
financial condition and results of operations.
Moreover, we may be incorrect in our assumption that (i) each Latin
American country will abolish, on a timely basis, the respective PTT's monopoly
to provide voice telephony within and between other countries, (ii) deregulation
will continue to occur, and (iii) we will be allowed to
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continue to provide and to expand our services in the Latin American countries.
There can be no assurance that any or all of the Latin American countries will
not adopt laws or regulatory requirements that will adversely affect our
interests. Additionally, there can be no assurance that future regulatory,
judicial or legislative changes in any or all of the Latin American countries
will not have a material adverse effect on us or that regulators or third
parties will not raise material issues with regard to our compliance with
applicable laws or regulations. If we are unable to provide the services we are
presently providing or intend to provide or to use our existing or contemplated
transmission methods due to our inability to receive or retain formal or
informal approvals for such services or transmission methods, or for any other
reason related to regulatory compliance or the lack thereof, such events could
have a material adverse effect on our business, financial condition and results
of operations.
INTELLECTUAL PROPERTY
We use the names "Telscape International," "Telscape" and "TSCP
International" as our primary business names, and received federal trademark
protection for the "Telscape" name and distinctive logo on September 14, 1999.
In 2000 we also filed for a trademark on one of our new subsidiary's name,
"Enable Commerce". This filing is pending, and we have no assurance that it
will be granted. We own a federal trademark registration for the "Telefiesta"
prepaid cards. Telereunion S.A. has a national trademark registration in Mexico
for "Telereunion." We regard our trademarks, service marks, trade names and
logos as valuable assets and believe they have value in the marketing of our
products and services. We intend to protect and defend our name, service marks
and trademarks in the United States and internationally.
EMPLOYEES
As of December 31, 1999, we had 644 full-time employees, with 540 residing
in Mexico and the remainder residing in the United States. Of the total
employees, there are 181 in sales and marketing, 138 in general and
administrative and 325 in operations, engineering, manufacturing and assembly.
None of our employees are subject to a collective bargaining agreement, and we
have not experienced any work stoppage. We believe our relations with our
employees are good.
PROPERTIES.
Our international headquarters are located in Houston, Texas, where we
lease approximately 10,000 square feet of an office building. We also lease
additional facilities in Houston, Texas totaling an additional 10,000 square
feet relating to our Prepaid Card operations and to house telecommunications
equipment relating to our long distance services operations. We lease facilities
in Mexico City, Guadalajara, Tijuana and Monterrey totaling approximately 71,000
square feet and consisting of office and warehousing facilities. We lease
facilities in Sunnyvale and Mountain View, California totaling 80,000 square
feet.
LEGAL PROCEEDINGS.
From time to time, we have been involved in certain legal proceedings.
Currently, we are not
a party to any material pending legal proceedings, other than ordinary routine
litigation incidental
to our business.
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TELSCAPE'S MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The officers, directors and other key employees of Telscape, and their
ages, as of , 2000, are as follows:
NAME AGE POSITION
- ------------------------- --- ----------------------------------------
E. Scott Crist........... 35 Director; Chief Executive Officer
Manuel Landa............. 39 Chairman of the Board; Chief Operating
Officer;
Todd M. Binet(1)......... 35 Director; President; Chief Financial
Officer; Secretary; Treasurer
Oscar Garcia............. 38 Director; Vice President of
International Long Distance Operations
and Value Added Services
Ricardo Orea............. 39 Director; President of Systems
Integration Services
Carlos de Lara........... 40 Chief Technology Officer
Stephen A. Strohman...... 62 President of Interlink
Jose Luis Apan........... 37 Director of Value Added Services of
Mexico
Paul Freudenthaler....... 35 Chief Accounting Officer
Marco A. Castilla........ 33 Vice President of International Affairs
and Corporate Counsel
Jesse E. Morris.......... 32 Vice President Strategic Planning
Darrel O. 60 Director
Kirkland(1)(2).........
Jack M. Fields, 48 Director
Jr.(1)(2)..............
- ------------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
E. SCOTT CRIST has served as Chief Executive Officer of Telscape since July
1996. Mr. Crist also serves on the board of directors of Billserve.com (NASDAQ:
BLL), Salvage Sal., Bynari, Inc. and Realuse.com. Prior to joining Telscape, Mr.
Crist was a founder of Orion Communications, Inc., a long distance company,
where he served as Founder and President. He was also President and Chief
Executive Officer for Matrix Telecom, a long-distance company which ranked #7 on
THE INC. MAGAZINE list of the 500 fastest growing private companies in 1995. He
also founded DNS Communications ("DNS"), a long-distance reseller. He served
as DNS's Chief Executive Officer from its inception until DNS's merger with
Matrix Telecom. Formerly, he served as Vice President of Acquisitions for
Trammell Crow Group, where he specialized in U.S. capital market transactions.
Mr. Crist has an M.B.A. from the J.L. Kellogg School at Northwestern University,
and received a B.S. MAGNA CUM LAUDE in Electrical Engineering with an emphasis
on telecommunications design from North Carolina State University.
MANUEL LANDA has served as Telscape's Chief Operating Officer since January
1999 and as Chairman of the Board and as a member of the Board of Directors
since May 1996. From 1986 until he joined Telscape, Mr. Landa served as Export
Sales Manager for Condumex, the largest Mexican manufacturer of electrical
products with exports to the United States, Canada, Latin America and Europe.
While at Condumex, Mr. Landa also served as Plant Manager, in which capacity he
directed the Insulating Materials Division. Prior to joining Condumex, Mr. Landa
worked in the consumer and industrial electronics business of Philips, a Dutch
company, where he served as Design Engineer for its Industrial Audio-Video
Division. Mr. Landa received a degree in Electronic and Communications
Engineering from La Salle University in Mexico City, where he graduated MAGNA
CUM LAUDE. He also has a diploma in Total Quality Management from the Instituto
Tecnologico de Estudios Superiores Monterrey.
TODD M. BINET has served as Telscape's President and Chief Financial
Officer since January 1999. Prior to that, he served as Telscape's Executive
Vice President and Chief Financial Officer since
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January 1997. Mr. Binet has been a member of the Board of Directors since March
1997. Mr. Binet has over 10 years of business and management experience. Prior
to joining Telscape, he served as an officer and director of St. James Capital
Corp., the general partner to St. James Capital Partners, a merchant banking
fund, from January 1996 to December 1996. Prior to his service with St. James,
from July 1992 to December 1995, Mr. Binet served as Treasurer and Corporate
Counsel for Alamo Group Inc., an international company listed on the New York
Stock Exchange. Mr. Binet received a B.B.A. in finance from Southern Methodist
University and graduated CUM LAUDE. He also received an M.B.A. from the Wharton
School of Business and holds a J.D. from the University of Pennsylvania. Mr.
Binet also holds a license to practice law in the state of Texas, although the
license is currently inactive.
OSCAR GARCIA has served as Telscape's Vice President of International Long
Distance Operations and Value Added Services since December 1998 and as a member
of the Board of Directors of Telscape since May 1996. Mr. Garcia co-founded
Vextro and served as Vextro's Vice President of Operations since 1988. From 1987
until he co-founded Vextro, Mr. Garcia served as Engineering Manager for
Infosistemas, which at that time was the exclusive AT&T telephone equipment
distributor in Mexico. Prior to that, Mr. Garcia was Sales Support Manager for
Macrotel de Mexico S.A. de C.V., a subsidiary of Macrotel, Inc., a Florida
telephone key systems company with exports to Mexico and Latin America. Before
that, Mr. Garcia held the position of design engineer for the R&D department of
GTE, at that time the leading U.S. telecommunications company involved in PBX
and KSU manufacturing in Mexico. Mr. Garcia holds an undergraduate degree in
Electronic and Communications Engineering from La Salle University in Mexico
City, a diploma in Marketing from La Salle University and a degree in Business
Administration from the University of California at Berkeley, extension program
in Mexico City.
RICARDO OREA has served as President of Telscape's Systems Integracion
Services, since December 1998 and has served as a member of the Board of
Directors of Telscape since May 1996. Mr. Orea co-founded Vextro and served as
Vextro's Vice President of Sales and Marketing since 1988. Prior to joining
Vextro, Mr. Orea was Electronic Control Systems Plant Manager for Asea Brown
Boveri, a Swedish electrical control and switchgear equipment manufacturer.
Before that, Mr. Orea worked for GTE in its Purchasing and Logistics Department
as System Integrator and Supplier Development Manager. Earlier, he was Technical
Service Manager for MISA, a Mexican computer mainframes and telecommunications
maintenance service company which served major financial accounts and
universities. Mr. Orea received an undergraduate degree in Electronic and
Communications Engineering from La Salle University in Mexico City and has a
diploma in Business Administration from the University of California at
Berkeley, extension program in Mexico City.
CARLOS J. DE LARA has served as Telscape's Chief Technology Officer since
June 1998. Prior to that, he served as Telscape's Director of Metropolitan
Networks since October 1997. Mr. de Lara has over 20 years of experience in the
computer and communications industries. Prior to joining Telscape, he served as
director of NSI, a network integration company acquired by Telscape in 1997. He
was co-founder on NSI, specialized in big corporate networks, WANs, MANs and
access technologies, from February 1994 to August 1997. Prior to founding NSI,
he served for several companies distributing 3Com equipment, from July 1997 to
January 1994. Prior to that, he served as an independent consultant in
communications, data networking and software development from March 1983 to June
1987. Prior to that, he served as Manager of Operational Optimization and as
Modeling Developer in Multibanco Comermex, from November 1979 to February 1983.
He also has served as Director and Faculty member in the Graduate Program for
Data Networking and Communications, in Universidad Anahuac, in Mexico City, from
June 1992 to August 1995. He also served as adviser in data networking to Dr.
Enrique Melrose, then Director of Research in the Mexican Institute of
Communications, from July 1993 to July 1995. (Dr. Melrose is currently
Commissioner of Engineering and Technology in the COFETEL, which is Mexico's
telecommunications regulatory body). He received a B.S. degree in Industrial and
Systems Engineering from Universidad Anahuac in Mexico City.
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STEPHEN A. STROHMAN has served as President of Interlink Communications,
Inc. since it was founded in May 1998. In 1996, Mr. Strohman joined the Services
Division of California Microwave, Inc. (CMI) as Vice President, Business
Development. Prior to this, Mr. Strohman was the founder and president of
Strohman Associates, Inc. (SAI). SAI was formed in 1984 to focus on the
satellite communications industry and technology. SAI performed network
analysis, design, and systems integration for a number of telecommunications,
manufacturing and services companies. SAI also consulted with investment fund
managers in telecommunications strategies, joint ventures, and mergers and
acquisitions. Mr. Strohman's clients included Xerox, AT&T, Sprint and STM
Wireless. In 1985, Mr. Strohman directed the implementation of the first shared
hub, satellite-based VSAT network for Xerox. Mr. Strohman has also served as
Senior Vice President of STM Wireless, where he led the company's 1992 IPO.
Prior to that, Mr. Strohman was Vice President of Marketing at TRW, and
President of an international subsidiary of Sprint. Mr. Strohman holds a B.A.
from California State University.
JOSE LUIS APAN has served as Director of Value Added Services since
December 1998. Prior to that, he served as Telscape's Director of Marketing
since joining Telscape on July 1, 1996. Prior to joining Telscape, he was
co-founder and Chief Executive Officer of Integracion from 1992 to 1997. From
1986 until he founded Integracion, Mr. Apan served as Regional
Telecommunications Manager for Hewlett-Packard Latin America where he was
responsible for the installation and operation of the Voice, Data and Video
Digital Network for the Latin America Region. Mr. Apan has an MBA from the
Instituto Tecnologico Autonomo de Mexico and holds an undergraduate degree in
Chemical Engineering from the Universidad Iberoamericana in Mexico City. Mr.
Apan is also a Registered Communications Distribution Designer from the Building
Institute of Construction Industry in Tampa, Florida.
E. RUSSELL HARDY has served as Chief Executive Officer of INTERLINK,
Telscape's Satellite Services operations since it was founded in May 1998. Prior
to joining Telscape, Mr. Hardy worked for 28 years in various capacities at
California Microwave, Inc, serving as President of its Services Division for the
last 13 years. While serving at California Microwave, Inc., Mr. Hardy served in
various capacities in the Satellite Communications Division, Defense Products
Division and the Telecommunications Division. Mr. Hardy has a Bachelor of
Science in Electrical Engineering from the University of California at Berkeley
and a Master of Science in Electrical Engineering from San Jose State
University.
PAUL D. FREUDENTHALER has served as Telscape's Chief Accounting Officer
since September 1999. Prior to joining Telscape, Mr. Freudenthaler worked as
Director of International Lending at Bank United and Irwin Mortgage Corporation
from June 1994 to August 1999. Prior to that Mr. Freudenthaler worked as
Corporate Controller for Arvin Sango and as a senior auditor at KPMG Peat
Marwick. Mr. Freudenthaler earned his M.B.A. in Finance from the Wharton School
of Business in May 1994, his Bachelor's of Commerce degree from the University
of Calgary in May 1987, and is a Certified Public Accountant with the State of
Texas.
MARCO A. CASTILLA has served as Vice President of International Affairs and
Corporate Counsel since July 1998. Prior to joining Telscape, Mr. Castilla
worked as Foreign Legal Advisor at Swidler & Berlin, Chartered. At Swidler &
Berlin, Mr. Castilla practiced in the telecommunications group, representing and
advising several U.S. and international telecommunications companies in their
entry into newly competitive markets, including with respect to regulatory and
transactional matters and in structuring their foreign operations. From December
1995 to September 1996, Mr. Castilla worked as a Foreign Associate at the
international law firm Rogers & Wells in Washington D.C. At Rogers & Wells, Mr.
Castilla devoted most of his practice to capital market financing, project
financing and mergers and acquisitions. Mr. Castilla holds law degrees from
Harvard Law School (L.L.M.) and with honors from the Universidad Iberoamericana
in Mexico City (J.D.). Mr. Castilla is a member of the Inter-American Bar
Association and the Harvard International Law Society.
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JESSE E. MORRIS has served as Telscape's Vice President of Strategic
Planning since September of 1999. Prior to that, he served as Vice President of
Finance and Corporate Controller since January 1999 and as the Corporate
Controller since October 1997. Prior to joining Telscape Mr. Morris worked from
January 1992 until October 1997 with Arthur Andersen LLP, a multi-national
accounting and consulting professional services firm, where he last served as
Experienced Audit Manager. Mr. Morris received his B.B.A. in Accounting and
Finance and his Masters in Professional Accountancy from the University of
Texas. Mr. Morris is a Certified Public Accountant with the State of Texas.
DARRELL O. KIRKLAND has served as a member of the Board of Directors of
Telscape since March 1996. Mr. Kirkland is a principal consultant with Kirkland
& Associates, a management consulting firm specializing in telecommunications. A
registered Professional Engineer, Mr. Kirkland has many years of experience in
long distance, microwave, wireless, fiber and local transmission services. He
has held general management and marketing positions with MCI Air Signal, CPI
Microwave, and Discovery Communications. Current and recent clients include MCI,
Skytel, IXC Communications, Prime Cable and Winstar Wireless. Mr. Kirkland
received a B.B.A. from the University of Texas and an M.S. in Industrial
Engineering from the University of Houston.
JACK M. FIELDS, JR. has served as a member of the Board of Directors of
Telscape since November 1998. Mr. Fields served as a U.S. Congressman
representing Texas' 8th Congressional District in the United States House of
Representative from 1981 to 1997, retiring as chairman of the House
Telecommunications and Finance subcommittee. Under his leadership, Congress
enacted the 1996 Telecommunications Act. Mr. Fields served on the
Telecommunications and Finance Subcommittee from 1985 until his retirement.
During his years of service, the subcommittee maintained jurisdiction over
interstate and international telecommunications, the Federal Communications
Commission, as well as the telephone, cellular, cable and broadcast industries.
In addition, the subcommittee maintained jurisdiction over the Securities and
Exchange Commission, including the activities of investment bankers, stock
brokers, investment advisors, stock exchanges and the mutual fund industry.
After retiring in 1997, Mr. Fields founded two companies; Texana Global, Inc.
and international trading corporation, and Twenty-First Century Group, Inc., a
Washington, D.C.-based governmental affairs and strategic planning company. Mr.
Fields currently serves on the boards of AIM Management Group, Inc. and
Administaff, Inc., as well as the Houston Metropolitan Study Group.
Each officer of Telscape holds office until such officer's successor is
chosen and qualified in such officer's stead or until such officer's death or
until such officer's resignation or removal from office. Certain officers have
employment contracts with Telscape (See Employment Agreements).
Each of the directors were elected at the Company's Annual Meeting held on
June 21, 1999 and currently hold office until the next annual meeting of the
Company's stockholders or until their successors are elected and qualified.
CERTAIN INFORMATION RELATING TO THE BOARD OF DIRECTORS AND COMMITTEES OF THE
BOARD
The board of directors of Telscape held nine formal meetings during 1999.
The compensation committee held one formal meeting during the year and the audit
committee held one formal meeting during the year. Each of the directors who
served during 1999 as a director or as a member of the compensation committee or
audit committee attended at least 75% of all of the meetings of the board and
meetings of the committee.
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SUMMARY COMPENSATION TABLE
The following table sets forth the aggregate cash compensation paid for
services rendered to Telscape during the last three fiscal years by Telscape's
Chief Executive Officer and the four other most highly compensated executive
officers of Telscape (together, the "Named Executive Officers") who served as
such during the 1999 fiscal year.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------------
AWARDS
----------------------- PAYOUTS
ANNUAL COMPENSATION (1) SECURITIES -----------
---------------------------------------------- RESTRICTED UNDERLYING
BONUS OTHER ANNUAL STOCK OPTIONS/ LTIP
NAME AND PRINCIPAL POSITION (2) YEAR SALARY ($) ($)(3) COMPENSATION ($) AWARDS($) SARS (#) PAYOUTS (#)
- ------------------------------------- ---- ---------- ------- ---------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Scott Crist; Chief Executive
Officer............................ 1999 $122,692 $ -- -- -- -- --
1998 $109,548 $75,000 -- -- 27,838 --
1997 $ 87,308 $75,000 -- -- -- --
Manuel Landa; Chairman, Chief
Operating Officer.................. 1999 $115,731 $ -- -- -- -- --
1998 $ 80,000 $60,000 -- -- 29,625 --
1997 $ 80,000 $75,000 -- -- -- --
Oscar Garcia; EVP of International
Long Distance Operations........... 1999 $117,000 $ -- -- -- -- --
1998 $ 80,000 $75,000 -- -- 29,625 --
1997 $ 80,000 $50,000 -- -- -- --
Ricardo Orea; President of Systems
Integration and Value Added
Services........................... 1999 $117,000 $ -- -- -- -- --
1998 $ 80,000 $75,000 -- -- 29,625 --
1997 $ 80,000 $50,000 -- -- -- --
Todd M. Binet; President and
Secretary, Treasurer and CFO....... 1999 $121,923 $ -- -- -- -- --
1998 $ 92,684 $75,000 -- -- 37,031 --
1997 $ 74,346 $50,000 -- -- 250,000 --
<CAPTION>
ALL OTHER
COMPENSATION
NAME AND PRINCIPAL POSITION (2) ($)
- ------------------------------------- ------------
Scott Crist; Chief Executive
Officer............................ --
--
--
Manuel Landa; Chairman, Chief
Operating Officer.................. --
--
--
Oscar Garcia; EVP of International
Long Distance Operations........... --
--
--
Ricardo Orea; President of Systems
Integration and Value Added
Services........................... --
--
--
Todd M. Binet; President and
Secretary, Treasurer and CFO....... --
--
--
</TABLE>
- ------------
(1) Each of Telscape's officers received perquisites and other personal benefits
in addition to salary and bonuses. The aggregate amount of such perquisites
and other personal benefits, however, does not exceed the lesser of $50,000
or 10 percent of the total of the annual salary and bonus reported for any
of the Named Executive Officers for each of the reported years.
(2) The following summarizes each executive's employment commencement dates: Mr.
Crist, August, 1996; Mr. Landa, May, 1996; Mr. Garcia, May, 1996; Mr. Orea,
May, 1996; Mr. Binet, January, 1997. Compensation information is provided
for each Named Executive Officer from such officers employment commencement
date.
(3) Represents annual bonus award earned for the fiscal year noted, even though
such bonus was paid in the following fiscal year.
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OPTION/SAR GRANTS IN LAST FISCAL YEAR (1999)
NONE.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
The following table sets forth-certain information with respect to options
exercised during fiscal 1999 by the Named Executive Officers and with respect to
unexercised options held by such persons at the end of fiscal 1999.
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
IN-THE-
MONEY
OPTION/SARS
NUMBER OF SECURITIES AT FISCAL
UNDERLYING UNEXERCISED AT YEAR END
SHARES FISCAL YEAR END (#) ($)(1)
ACQUIRED ON VALUE --------------------------- -------------
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ------------ --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Scott Crist............. -- -- 334,737 20,879 $ 2,698,861 $107,005
Manuel Landa............ -- -- 129,625 -- $ 1,014,953 $ --
Oscar Garcia............ -- -- 129,625 -- $ 1,014,953 $ --
Ricardo Orea............ -- -- 129,625 -- $ 1,014,953 $ --
Todd Binet.............. -- -- 259,258 27,773 $ 2,266,197 $142,337
</TABLE>
- ------------
1) The calculations of the value of unexercised options are based on the
difference between the closing price of $12.625 per share on Nasdaq of the
Common Stock on December 31, 1999 and the exercise price of each option,
multiplied by the number of shares covered by the option.
COMPENSATION OF DIRECTORS
Directors are reimbursed for their ordinary and necessary expenses incurred
in attending meetings of the Board of Directors or a committee thereof. Telscape
pays directors who are not also employees of Telscape $500 for each meeting of
the Board of Directors they attend. Directors of Telscape are eligible to
participate in Telscape's 1996 Stock Option and Appreciation Rights Plan, the
1998 Stock Option and Appreciation Rights Plan, if adopted, and Telscape's 1994
Directors Stock Option Plan.
Non-employee directors may receive an annual grant of options to purchase
10,000 shares of Telscape's Common Stock. In February 1999, Mr. Kirkland and Mr.
Fields each received grants of 10,000 shares of Telscape's common stock
exercisable at $8.188 a share with a one year vesting period.
EMPLOYMENT AGREEMENTS
In connection with Telscape's acquisition of Telereunion, Inc., Telscape
entered into an employment agreement with Mr. Landa, effective as of May 14,
1996. The employment agreement provided, among other things, that Mr. Landa will
serve as President and CEO of Telereunion. The original employment agreement
terminated May 14, 1999 and a new agreement was issued on September 2, 1999 for
a period of three years. Mr. Landa's agreement provided, among other things,
that he will serve as Chief Operating Officer of Telscape reporting to the Chief
Executive Officer of Telscape. Mr. Landa's agreement will be terminated upon the
consummation of Telscape's merger with Pointe.
EXECUTIVE COMPENSATION
TELSCAPE'S REPORT ON EXECUTIVE COMPENSATION
In March 1997, Telscape established the Compensation Committee of the Board
which is responsible for administering Telscape's executive compensation
programs and policies. Telscape's executive compensation programs are designed
to attract, motivate and retain the executive talent needed to optimize
stockholder value in a competitive environment. The programs are intended to
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support the goal of increasing stockholder value while facilitating the business
strategies and long-range plans of Telscape.
The following is the Compensation Committee's report addressing the
compensation of Telscape's executive officers.
TELSCAPE'S COMPENSATION POLICY AND PHILOSOPHY
Telscape's executive compensation policy is designed to establish an
appropriate relationship between executive pay and Telscape's annual
performance, its long term growth objectives and its ability to attract and
retain qualified executive officers. Telscape's policy is based on the belief
that the interests of the executives should be closely aligned with Telscape's
stockholders. The Compensation Committee attempts to achieve these goals by
integrating annual base salaries with (i) annual incentive bonuses based on
corporate performance, based on the achievement of specified performance
objectives set forth in Telscape's financial plan for such fiscal year, and
based on individual performance, and (ii) stock options through Telscape's stock
option plans. The Compensation Committee's philosophy is to review salaries paid
to executive officers with comparable responsibilities in comparable businesses
and offer salaries to its executives which are in the lower range of those
offered by such comparable businesses. In addition, the components of each
executive officer's compensation is weighted to the bonus and option components.
This results in a meaningful portion of each executive's compensation being
placed at-risk and linked to the accomplishment of specific results that are
expected to lead to the creation of value for Telscape's stockholders from both
the short-term performance and long term success of Telscape. The Compensation
Committee considers all elements of compensation and the compensation policy
when determining individual components of pay.
The Compensation Committee believes that leadership and motivation of
Telscape's employees are critical to achieving the objectives of Telscape. The
Compensation Committee is responsible for ensuring that its executive officers
are compensated in a way that furthers Telscape's business strategies and which
aligns their interests with those of the stockholders. To support this
philosophy, the following principles provide a framework for executive
compensation: (i) offer compensation opportunities that attract the best talent
to Telscape; (ii) motivate individuals to perform at their highest levels; (iii)
reward outstanding achievement; (iv) retain those with leadership abilities and
skills necessary for building long-term stockholder value; (v) maintain a
significant portion of executives' total compensation at risk, tied to both the
annual and long-term financial performance of Telscape and the creation of
incremental stockholder value; and (iv) encourage executives to manage from the
perspective of owners with an equity stake in Telscape.
TELSCAPE EXECUTIVE COMPENSATION COMPONENTS
As discussed below, Telscape's executive compensation package is primarily
comprised of three components: base salary, annual incentive bonuses and stock
options.
BASE SALARY. For fiscal 1999, the Compensation Committee approved the base
salaries of the Named Executive Officers (as defined below) based on (i)
salaries paid to executive officers with comparable responsibilities employed by
companies with comparable businesses, (ii) performance and accomplishment of
Telscape in fiscal 1999 which is the most important factor, and (iii) individual
performance reviews for fiscal 1999 for most executive officers. The
Compensation Committee's philosophy is to review salaries paid to executive
officers with comparable responsibilities in comparable businesses and offer
salaries to its executives which are in the lower range of those offered by such
comparable businesses. In addition, the components of each executive officer's
compensation is weighted to the bonus and option components. This results in a
meaningful portion of each executive's compensation being placed at-risk and
linked to the accomplishment of specific results that are expected to lead to
the creation of value for Telscape's stockholders from both the short-term
performance and long term success of Telscape. The Compensation Committee
reviews
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executive officer salaries annually and exercises its judgement based on all the
factors described above in making its decision, subject to the terms of such
officer's employment agreement. No specific formula is applied to determine the
weight of each criteria.
ANNUAL INCENTIVE BONUSES. Annual incentive bonuses for the Named Executive
Officers are based upon the following criteria: (i) Telscape's financial
performance for the current fiscal year, (ii) the furthering of Telscape's
strategic position in the marketplace, and (iii) individual merit. Telscape paid
incentive bonuses to the Named Executive Officers (as defined below) as depicted
in the Summary Compensation Table.
LONG TERM INCENTIVE COMPENSATION. Stock options encourage and reward
effective management which results in long-term corporate financial success, as
measured by stock price appreciation. The Compensation Committee believes that
option grants afford a desirable long-term compensation method because they
closely ally the interests of management with stockholder value and that grants
of stock options are the best way to motivate executive officers to improve
long-term stock market performance. The vesting provisions of options granted
under Telscape's stock option plans are designed to encourage longevity of
employment with Telscape and generally extend over a three year period.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
The Board believes that E. Scott Crist, Telscape's Chief Executive Officer,
provides valuable services to Telscape and that his compensation should
therefore be competitive with that paid to executives at comparable companies.
In addition, the Compensation Committee believes that an important component of
his compensation should be based on Telscape performance. Mr. Crist's annual
base salary for fiscal 1999 was $125,000. As of the date hereof, the
Compensation Committee has not met to review compensation levels for 2000 and
bonuses relating to the Company's financial performance in 1999.
INTERNAL REVENUE CODE SECTION 162(M)
Under Section 162(m) of the Internal Revenue Code (the "Code"), the
amount of compensation paid to certain executives that is deductible with
respect to Telscape's corporate taxes is limited to $1,000,000 annually, if
certain requirements of section 162(m) are not met. It is the current policy of
the Compensation Committee to maximize, to the extent reasonably possible,
Telscape's ability to obtain a corporate tax deduction for compensation paid to
executive officers of Telscape to the extent consistent with the best interests
of Telscape and its stockholders.
The Compensation Committee:
Darrel O. Kirkland
Jack M. Fields, Jr.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Darrell O. Kirkland and Jack M. Fields, Jr., comprise Telscape's
compensation committee. Neither member of the compensation committee is an
executive of Telscape or its subsidiaries and neither serves in a similar
capacity for another entity.
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STOCKHOLDER RETURN PERFORMANCE PRESENTATION
Set forth below is a line graph comparing the yearly change in Telscape's
common stock since Telscape's initial public offering in August 1994 against the
Nasdaq Telecommunications Industry Index and the Nasdaq Stock Market Index.
[Graph]
<TABLE>
<CAPTION>
DESCRIPTION 1994 1995 1996 1997 1998 1999
- ------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Telscape International($)............ $ 100.00 $ 73.33 $ 83.33 $ 211.65 $ 193.33 $ 336.66
S & P 500($)......................... $ 100.00 $ 137.58 $ 169.17 $ 225.60 $ 290.08 $ 351.12
NASDAQ US($)......................... $ 100.00 $ 141.33 $ 173.89 $ 213.07 $ 300.24 $ 542.41
NASDAQ Telecom($).................... $ 100.00 $ 130.91 $ 133.86 $ 195.75 $ 322.30 $ 561.26
</TABLE>
This graph assumes that $100 was invested in August 1994 in Telscape's
common stock and in the S&P 500, the Nasdaq Stock Market Index, and the Nasdaq
Telecommunications Index and that all dividends were re-invested. No dividends
have been declared or paid in Telscape's common stock. Stockholder returns over
the indicated period should not be considered indicative of future stockholder
returns.
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SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of May 4, 2000, with
respect to the beneficial ownership of Common Stock by each director, each Named
Executive Officer included in the Summary Compensation Table, the directors and
executive officers as a group and each stockholder known to management to own
beneficially more than 5% of the Common Stock. Unless otherwise noted, the
persons listed below have sole voting and investment power with respect to such
shares.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF SHARES BENEFICIALLY
NAME AND ADDRESS BENEFICIALLY OWNED OWNED
- ------------------------------------- ------------------ ------------
<S> <C> <C>
E. Scott Crist....................... 1,331,702(1) 12.0%
2700 Post Oak Boulevard, Suite 1000
Houston, Texas 77056
Manuel Landa......................... 1,162,950(2)(3) 10.7%
2700 Post Oak Boulevard, Suite 1000
Houston, Texas 77056
Ricardo Orea......................... 1,161,881(3)(4) 10.7%
Moras No. 430
Col. Del Valle, Del Benito Juarez
03100 Mexico, D.F.
Oscar Garcia......................... 1,155,881(3)(5) 10.6%
Moras No. 430
Col. Del Valle, Del Benito Juarez
03100 Mexico, D.F.
Todd M. Binet........................ 459,582(6) 4.2%
2700 Post Oak Boulevard, Suite 1000
Houston, Texas 77056
Darrel Kirkland...................... 30,125(7) --*
803 Forest View
Austin, TX 78746
Jack M. Fields, Jr................... 23,571(8) --*
8810 Will Clayton Pkwy, Suite E
Humble, TX 77338
All directors and named executive
officers as a group (7 persons).... 5,325,692(9) 48.9%
</TABLE>
- ------------
* Less than 1%
(1) Includes shares of Common Stock issuable upon exercise of (i) a common stock
warrant representing the right to purchase 37,418 shares of Common Stock at
$6.68 per share, (ii) a common stock warrant representing the right to
purchase 31,805 shares of Common Stock at $6.68 per share and (iii) a common
stock warrant representing the right to purchase 31,805 shares of Common
Stock at $11.96 per share. Includes 255,620 shares of Common Stock owned by
Delaware Charter Guaranteed Trust Co. F/B/O Mr. Crist. Includes options to
purchase (i) 327,778 shares of Common Stock at $4.50 per share and (ii)
6,959 shares of Common Stock at $7.50 per share, all of which are presently
exercisable. Excludes options to purchase 20,879 shares of common stock at
$7.50 per share, as such options are not exercisable within sixty (60) days
of this table.
(2) Includes shares of Common Stock issuable upon exercise of a Series A Common
Stock Warrant which have vested and become exercisable with respect to
rights to purchase 231,442 shares of Common Stock at $2.19 per share owned
by Mr. Landa, as well as rights to purchase 326,883 shares of Common Stock
held by Forest International, L.L.C. ("Forest"). Mr. Landa is the
beneficial owner of Forest. The Series A Common Stock Warrant lapses on May
16, 2003. Excludes options to purchase 77,000 shares of Common Stock at
$16.00 per share as such options are not exercisable within sixty (60) days
of the date of this table.
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(3) Includes options to purchase 25,000, 75,000 and 29,625 shares of Common
Stock at $1.35, $4.875 and $7.50 per share, respectively, all of which
options are presently exercisable.
(4) Includes shares of Common Stock issuable upon exercise of the Series A
Common Stock Warrant which have vested and become exercisable with respect
to rights to purchase 247,208 shares of Common Stock at $2.19 per share
owned by Mr. Orea, as well as rights to purchase 310,048 shares of Common
Stock held by Cloud International, L.L.C. ("Cloud"). Mr. Orea is the
beneficial owner of Cloud. The Series A Common Stock Warrant lapses on May
16, 2003. Excludes options to purchase 42,000 shares of Common Stock at
$16.00 per share as such options are not exercisable within sixty (60) days
of this table.
(5) Includes shares of Common Stock issuable upon exercise of the Series A
Common Stock Warrant which have vested and become exercisable with respect
to rights to purchase 241,208 shares of Common Stock at $2.19 per share
owned by Mr. Garcia, as well as rights to purchase 310,048 shares of Common
Stock held by Sky International, L.L.C. ("Sky"). Mr. Garcia is the
beneficial owner of Sky. The Series A Common Stock Warrant lapses on May 16,
2003. Excludes options to purchase 42,000 shares of Common Stock at $16.00
per share as such options are not exercisable within sixty (60) days of this
table.
(6) Includes options to purchase 83,333 shares of Common Stock at $3.25 per
share, options to purchase 166,667 shares of Common Stock at $4.00 per
share, and options to purchase 9,258 shares of Common Stock at $7.50 per
share, all of which are presently exercisable. Excludes options to purchase
27,773 shares of Common Stock at $7.50 per share as such options are not
exercisable within sixty (60) days of this table. Excludes 17,760 shares of
Common Stock, which are held in trust for the benefit of Mr. Binet's two
minor children. Mr. Binet disclaims beneficial ownership of these shares.
(7) Includes options to purchase (i) 10,000 shares of Common Stock at $3.75 per
share, (ii) 9,625 shares of Common Stock at $7.50 per share, and (iii)
10,000 shares of Common Stock at $8.188 per share, all of which options are
presently exercisable.
(8) Includes options to purchase 10,000 shares of Common Stock at $7.25 and
10,000 shares at $8.188, all of which options are presently exercisable.
(9) Includes options and warrants to purchase 2,800,360 shares of Common Stock,
all of which are exercisable within sixty (60) days of the date of this
table.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires Telscape's executive officers
and directors and persons who own more than 10% of a registered class of
Telscape's equity securities to file reports of ownership and changes in
ownership with the SEC and the Nasdaq. Executive officers, directors and greater
than 10% shareholders are required by certain regulations to furnish the Company
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of Forms 3 and 4, as furnished to
Telscape, pursuant to the Exchange Act during its most recent fiscal year, and
Forms 5 with respect to its most recent fiscal year, Telscape believes that any
such forms required to be filed pursuant to Section 16(a) of the Exchange Act
were timely filed, as necessary by the officers, directors and security holders
required to file the same during the fiscal year ended December 31, 1999 with
two exceptions. Mr. Binet did not timely file the necessary Form 4 for a
transaction effectively occurring on December 30, 1999. The Form 5 for this
transaction was subsequently filed on February 17, 2000. Mr. Kirkland did not
timely file the necessary Form 4 for transactions effectively occurring on March
19, 1996, October 9, 1998 and June 21, 1999. The Form 5 for these transactions
was subsequently filed on February 9, 2000.
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POINTE BUSINESS
GENERAL
Pointe Communications Corporation, formerly Charter Communications
International, Inc., is an international facilities based communications company
serving residential and commercial customers in the U.S., Central and South
America. We and our subsidiaries provide enhanced telecommunications products
and services, including:
o local;
o long distance;
o Internet;
o international private line;
o carrier services;
o prepaid calling card; and
o telecommuting services.
We focus on the Hispanic community both domestically and internationally. We
believe that our ethnically focused strategy and our state of the art network
combine to create a unique approach to the telecommunications market.
HISTORY
We were incorporated in Nevada on April 10, 1996, as a wholly owned
subsidiary of Maui Capital Corporation, incorporated in Colorado on August 8,
1988. On April 21, 1996, Maui Capital merged with us, and as the surviving
corporation, we succeeded to all the business, properties, assets and
liabilities of Maui Capital. The merger's purpose was changing Maui Capital's
name and state of incorporation. Maui Capital had no significant business or
assets prior to September 21, 1995, when it acquired TOPS Corporation. (TOPS was
named Charter Communications International, Inc., until April 10, 1996, when our
name was changed so that we could incorporate in Nevada with the same name.)
At the time of the TOPS acquisition, TOPS was the sole shareholder of
Charter Communicaciones Internacionales Grupo, S.A., a Panama corporation, which
was developing a private line telecommunications system in Panama and pursuing
licenses to provide such services in various other Latin American countries.
Since acquiring TOPS, we (and Maui Capital, our predecessor) have sought growth,
both through developing our existing businesses and acquiring complementary
businesses.
Accordingly, on January 8, 1996, we purchased 90% of Phoenix DataNet, a
provider of domestic and international Internet access, for cash. We acquired
Phoenix Data Systems on March 21, 1996, along with the remaining 10% of Phoenix
DataNet in a stock transaction through which we entered the network integration
business. During 1997, we exited the network integration business, wrote off the
assets related to Phoenix Data Systems, and included these assets in as a
non-recurring charge in our statement of operations. In a stock transaction on
July 31, 1996, we acquired Telecommute Solutions, which introduced new
telecommuting services. On September 21, 1996, we acquired Overlook
Communications International Corporation in a stock transaction that added a
variety of domestic and international enhanced telecommunications and long
distance services, including prepaid phone calling cards. We acquired Worldlink
Communications, Inc.,a provider of prepaid long-distance calling cards, in a
stock transaction on October 5, 1996.
On June 1, 1998, we acquired Galatel Inc., a prepaid calling card
distributor servicing the Hispanic community, in a cash and stock transaction.
We acquired Pointe Communications Corporation, a Delaware Corporation, in a cash
and warrant transaction on July 30, 1998. Pointe had no revenue from operations
prior to this acquisition. In August, 1998, our shareholders amended our
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Articles of Incorporation changing our name from Charter Communications
International, Inc. to Pointe Communications Corporation. We acquired
International Digital Telecommunications Systems, Inc. in a cash and stock
transaction on August 12, 1998. International Digital is a facilities based long
distance carrier of voice, data and other types of telecommunications in the
Miami, Florida market. On October 1, 1998, we acquired Rent-A-Line Telephone
Company, LLC, in a stock rights transaction. Rent-A-Line is a reseller of
prepaid local telephone service.
On August 31, 1999, HTC Communications, LLC, which was licensed as a
Competitive Local Exchange Carrier, or CLEC, in California, merged with us. The
merger enhanced our CLEC management team and accelerated our access to West
Coast CLEC markets. The HTC management team assumed leadership of our CLEC
operations. Their management team has over 70 years of combined experience in
the telecommunications industry including a CEO who was formerly General Manager
of a division at Pacific Bell, responsible for marketing and offering services
to more than 1.1 million Hispanic customers and generating over $350 million in
annual revenues.
We obtained funding for our new strategy during the second and third
quarters of 1999. Construction of central switching facilities and co-location
sites at the various Incumbent Local Exchange Carriers end offices is currently
under way in Los Angeles and Miami. These initial sites are expected to be
operational by the end of the first quarter of 2000.
Our principal office is located at 1325 Northmeadow Parkway, Suite 110,
Roswell, Georgia 30076 and our telephone number is (770) 432-6800.
RECENT DEVELOPMENTS
Subsequent to year end Pointe agreed to merge with Telscape International,
Inc. ("Telscape") in an all-stock transaction in which each share of Pointe
will be exchanged for 0.223514 shares of Telscape common stock. The surviving
company will trade under the ticker symbol "TSCP" on the Nasdaq National
Market. The board of directors of both companies have agreed to the merger;
however, the closing is subject to shareholder approval and certain other
conditions precedent, such as Securities Exchange Commission and regulatory
approval. Management believes that the merger of the combined companies creates
one of the leading providers of bundled communications services in the U.S.
Hispanic and paired-Latin American markets. Some of the benefits of the combined
companies are:
o An experienced management team with a significant Latin component.
o Creates an integrated communications provider catering to Hispanics in
both the U.S. and Latin America, including a Telscape concession to
provide domestic and international long distance service in Mexico
granted to Telscape by Mexican regulators.
o Infrastructure-based strategy utilizing "Smart Build" approach including
a fiber optic network under construction by Telscape in Mexico.
o Greater critical mass and compelling synergies and cost savings.
o One of the few companies that can compete in the U.S. and Latin America
as one company.
o Combined company strategy addresses rapidly growing and deregulating
markets with significant competitive opportunities.
STRATEGY
Our goal is to become a leading provider of local, long distance, and
Internet services to Hispanic communities in the United States and corresponding
emigre countries. In doing so, we will focus on the following tenants of our
business plan:
TARGET UNDERSERVED MARKETS.
We intend to capitalize on our existing business experience to further
penetrate select Hispanic communities in the United States. In doing so, we will
select target markets based upon favorable
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demographics with respect to local and long distance telephone usage, including
immigration patterns, population growth and income levels. Initially, we believe
we can obtain significant market share in selected U.S. metropolitan areas by
providing an integrated bundle of telecommunications services directly to the
Hispanic community, a segment which has favorable demographics and telecommuni-
cations traffic patterns relative to our focus on Central and South America. We
believe that incumbent and competitive local exchange providers have
concentrated on targeting broad markets and, with the exception of limited
in-language advertising, have not focused on ethnic markets. We believe we can
capitalize on the experience and customer relationships from our existing
businesses to market telecommunications services effectively to the Hispanic
community.
OFFER AN INTEGRATED SUITE OF TELECOMMUNICATIONS SERVICES.
We offer both consumer and commercial customers an integrated suite of
retail telecommunications services, including local, long distance, Internet
access and data transmission. We believe there is substantial demand among
residential and business customers in our target markets for an integrated
package of telecommunications services. We will focus on providing value to our
customers by combining competitive pricing of our bundled services with a high
level of customer service and care tailored to our targeted markets. Providing
local service requires appropriate licensure in each state where service is
provided. We are currently certified as a Competitive Local Exchange Carrier, or
CLEC in Georgia, California and Florida. We also intend to apply for
certification in Texas, New York, and Puerto Rico during 2000. While we believe
we will be able to obtain certifications, the outcome is not assured.
Implement Competitive Local Exchange Carrier Operations through Success
Based Staged Buildout of Markets.
We intend to implement a success based staged buildout of Competitive Local
Exchange Carrier, or CLEC, operations, including both switched and dedicated
local service, in selected U.S. and Latin American markets. Once we have
targeted a market, rather than installing 100% of our own network (i.e. fiber
and switching equipment), we will co-locate at a Incumbent Local Exchange
Carrier, or ILEC, or other CLEC facilities, install a Class 5 (i.e., local
service) and data switch, and use the fiber/copper provided by the ILEC or CLEC
to reach the end user. We then intend to interconnect our local networks by way
of leases with major wholesalers of IXC (i.e., long distance) services, thereby
establishing our own local, long distance and data network. A staged buildout
will allow us to implement our market pairing strategy and to improve our
ability to originate and terminate telecommunications traffic on our own
network, while at the same time complementing our existing international
carriage network.
CAPITALIZE ON BENEFITS PROVIDED BY PAIRED MARKETS.
By combining CLEC operations in selected domestic and paired Latin American
markets with our existing international carriage network, we believe we can:
o maximize the volume of telecommunications traffic carried on our
network, whether originated, transported or terminated; and
o reduce our overall cost of providing telecommunication services.
By pairing identifiable market sub-segments in U.S. cities with their Latin
American country counterparts, we are able to originate and terminate traffic
between cities that share us as a common network carrier, which will provide an
attractive cost structure.
CONSTRUCT STATE-OF-THE-ART NETWORKS.
Our networks will emphasize flexibility, reliability and scalability as the
basis for all development. We intend to avoid the limitations of legacy
processes by utilizing SONET transport over fiber with an Asynchronous Transfer
Mode backbone and an Internet protocol platform. In addition, we will attempt
strategic partnering to extend the reach and flexibility of our network and
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minimize technological dependence. Larger commercial customers will access our
products by way of fiber connectivity while residential customers will access
our Internet protocol platform services through a seamless switchover from the
serving Incumbent Local Exchange Carrier.
BUILD ON EXPERIENCED MANAGEMENT TEAM.
We believe that the quality of our management team and our extensive
experience in the emerging telecommunications industry are critical factors in
the successful implementation of our strategy. Key personnel possess an average
of 15 years of experience with major telecommunications companies. Stephen
Raville, our Chairman and CEO held the same position with Advanced
Telecommunications Corporation, a domestic, long distance company, which grew
from $50 million in revenue to over $550 million in six years prior to its $900
million merger with MCI/WorldCom. We believe that we will be able to effectively
use the historical relationships and contacts of our management and directors to
enhance our development.
SEGMENT INFORMATION
During the third quarter of 1999, we evaluated our business focus and
organizational structure. In doing so, it was determined that we operate in
three distinct business segments, which include Retail Services,
Wholesale/International Services and Prepaid Calling Card Services. Retail
services include local, long distance, and Internet access services provided
primarily to Hispanic residential and commercial customers.
Wholesale/International services include carrier terminating services and
International private line provided between the US and various South and Central
American countries as well as voice and data services include the sale of both
"on-net" (calls carried on our network) and "off-net" (calls carried on
other companies networks) prepaid calling cards. The management team and each
employee were allocated to the various business segments and goals and
objectives were established for each segment and each employee. Management will
evaluate performance of Pointe and its employees in part based upon the
performance of these individual segments. (See Note 11 to Pointe's Consolidated
Financial Statements for the year ended December 31, 1999, for 1999 Segment
Information which is incorporated herein by this reference).
PRODUCTS AND SERVICES
The following is an overview of our product and service offerings:
PRODUCT DESCRIPTION
- -------------------------------------------------------------------------------
Local..................................... Dial tone, switched access, dedicated
access and value-added services
Long Distance............................. Domestic and international long
distance services
Internet Service.......................... Dedicated and dial-up Internet
access, virtual web hosting, web page
development, e-mail, web commerce,
database management, and remote
Internet access
Prepaid Calling Card Products............. prepaid long distance cards targeted
to Hispanic communities in the U.S.
Carrier Terminating Services.............. Facilities-based backbone with both
voice and data switching capability
to carry wholesale carrier traffic
for U.S. and foreign termination
International Private Line................ Dedicated voice and data private line
carried over our satellite network
marketed to businesses in Mexico,
Panama, Venezuela, El Salvador, Costa
Rica, Nicaragua and the U.S.
INTEGRATED SERVICES
We intend to offer residential and commercial customers a full suite of
integrated telecommunications services, including local, long distance, Internet
access and data transmission.
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LOCAL ACCESS. With the implementation of CLEC operations in each target
market, we will provide residential and commercial accounts with a full range of
local exchange services, including:
o basic local service (including dial tone, local area charges, dedicated
point-to-point intraLATA service and enhanced calling features);
o interstate dedicated access service (i.e., connecting a customer to a
long distance carrier's facilities);
o interstate switched access service (i.e., originating and terminating
calls from a long distance carrier);
o intraLATA toll calls;
o intrastate switched access;
o value-added services (Centrex, voicemail, call forwarding);
o miscellaneous other services (including provision of directories,
billing and collection services).
Providing local service requires appropriate licensing in each state where
service is provided. We are currently certified as a CLEC in Georgia, California
and Florida. We also intend to apply for certification in Texas, New York, and
Puerto Rico during 2000. While we believe we will be successful in obtaining
certification, this is not assured.
LONG DISTANCE. We provide international and domestic long distance
services. An international long distance call typically originates on a local
exchange or private line and is carried to the tandem switch of a long distance
carrier. The call is then transported along a fiber optic cable or a satellite
connection to an international gateway switch in the destination country and
finally to another local exchange or private line where the call is received. A
domestic long distance call is similar to an international long distance call,
but typically only involves one long distance carrier, which transports the call
on fiber, microwave radio or via a satellite connection within the country of
origination and termination. We will provide all or portions of the above
networks, depending on the origin and destination of calls placed.
INTERNET SERVICES. We provide a complete array of Internet services
including dedicated and dial-up Internet access, virtual web hosting, web page
development, e-mail, web commerce, database management and remote Internet
access. We focus on providing defined Internet applications to business and
residential customers instead of simply selling the underlying component
services. When applicable, our Internet solutions are supported through
telephone applications such as Integrated Voice Response, call center services
and 800 services.
PREPAID CALLING CARD
We have developed a set of calling card products, including prepaid calling
cards, prepaid Internet access cards, and enhanced promotional service cards. We
primarily market these cards to the U.S. Hispanic community to call Latin
American Countries. Our market studies have shown that the Hispanic community is
one of the largest segments of the prepaid calling card market. In addition, our
prepaid cards are marketed to other market segments in the United States and
Latin American countries for customers who do not have access to postpaid
telephone services. By leveraging our relationship with certain Latin American
carriers, we are able to provide calling cards with originating access from
Latin American countries. In the past, we have marketed cards to tourists in
Mexico to call the United States and to consumers in other Latin countries to
call the United States.
CARRIER TERMINATING SERVICES
During 1997, we began providing dedicated switched voice services to
certain customers. During 1998, we started constructing a facilities based
backbone for both voice and data switching to carry wholesale carrier traffic
for U.S. and foreign termination. This network will provide a unique partnering
opportunity for us and for foreign Post, Telephone & Telegraph Companies in need
of U.S. termination traffic. We intend to leverage our relationships and our
network in Latin America to provide high quality, cost-competitive services.
Furthermore, we believe our relationships will benefit
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directly from the volume of inbound calling traffic because of our ability to
direct traffic from our interconnection point to our domestic network.
INTERNATIONAL PRIVATE LINE
We currently provide or are licensed to provide international private line,
or IPL, services in:
o Mexico,
o Panama,
o Venezuela,
o El Salvador,
o Nicaragua, and
o Costa Rica.
Our licenses for IPL services are either "on premise" or country
"gateway" stations and are composed of a satellite earth station located in
the service area and an earth station located in the United States. Earth
stations may be located directly on customer premises at or nearby telephone
company facilities (with users connected to the earth station via local lines).
In instances where the local telephone company cannot provide this local
"loop," we can provide wireless land-based systems to connect to the earth
station and lease this service to the customer on a monthly basis in cooperation
with the local telephone company. The wireless system is used as a market entry
alternative and is typically phased out as sufficient scale is reached.
SALES, MARKETING AND DISTRIBUTION
INTEGRATED SERVICES
We intend to target Hispanic customers in dense Hispanic communities in
major metropolitan areas of California, Florida, Texas and Puerto Rico, and in
other Latin American countries. We have initially identified Los Angeles, Miami,
San Diego, and Houston for initial implementation of our operations. Longer
term, we anticipate accessing additional markets including New York City,
Dallas, San Francisco, Chicago, San Juan, Puerto Rico and El Salvador.
We will brand our telecommunications services. We believe success in
marketing to Hispanic consumers lies in creating a culturally-relevant brand,
which appeals to the strong cultural themes common in the Hispanic market. We
will utilize in-language advertising through multiple media channels to convey a
message of value, reliability and utility tailored to the unique needs of this
segment. We will target Hispanics through a comprehensive bilingual and
bicultural marketing program, including bilingual telemarketing, extensive
advertising in Spanish language media, and community event sponsorship.
Management believes this direct multi-media marketing campaign will generate
significant call response from potential customers. Bilingual customer service
representatives will field calls from our state-of-the-art call center, where
they will inform customers about bundled product offerings and enlist orders.
Additionally, we will employ a direct sales force mainly for selling to small to
mid-sized Hispanic businesses. We will also differentiate ourselves within the
Hispanic community by establishing TeleMercados (i.e., retail storefronts) in
locations with heavy foot traffic and significant Hispanic concentration. These
TeleMercados will double as both sales and service centers.
We believe our highly targeted, culturally relevant, direct marketing
approach will:
o yield higher success rates than those experienced by companies using a
"switch now" approach, and
o establish brand name recognition, generating increased use of our
services and enhanced customer retention.
We therefore believe we can establish ourselves as a value leader in
telecommunications services for Hispanics in our target markets. Although we are
sensitive to the role that price of services plays
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in customer decision-making and will offer competitive pricing, we will not
necessarily be the lowest cost provider. Instead, we intend to focus on
providing overall value to our customers by offering a cost-effective,
culturally relevant bundle of integrated telecommunications services.
PREPAID CALLING CARD PRODUCTS
Prepaid calling card products are sold by a direct sales force who are
responsible for establishing and maintaining relationships with the distributors
that provide access to retail outlets (gas stations, convenience stores, etc.)
in targeted ethnic communities throughout the United States. In addition, we
recently acquired a wholesale distributor of Hispanic focused calling cards to
enhance our distribution capabilities and reduce our distribution costs.
CARRIER TERMINATING AND INTERNATIONAL PRIVATE LINE
We have a wholesale sales group actively contracting carrier termination
and international private line in North, Central and South America. We augment
our direct sales efforts through the use of agents and brokers that market our
service to institutional customers and carriers.
CUSTOMER SERVICE AND CARE
We believe customer service and operating support are core components for
success as a new entrant in the Competitive Local Exchange Carrier business. To
enhance our ability in this area we have built a state-of-the-art customer
service call center in Los Angeles, California to compliment our existing
customer service center in Houston, Texas. Additionally, we will invest
approximately $9.8 million over the next two years in an Operating Support
System, which will include billing, order management and provisioning
components. The customer service center will be staffed 24 hours a day, 365 days
per year with bilingual service representatives. We will offer a range of
billing services including integrated billing (i.e., multiple products on a
single invoice), billing in Spanish, and the ability to render a bill in the
U.S. for services provided to a resident of Latin American countries. The latter
is useful if a U.S. resident desires to pay for a relative's phone service in
another country.
NETWORK FACILITIES
CLEC OPERATIONS
Our network is being designed with flexibility, reliability and scalability
as its basis. Network construction will be based on central office technology
interfacing in a client/server-based environment. We believe that this
architecture will provide a competitive advantage. In our target markets we
intend to deploy our own Class 5 (i.e., local service) feature node switching
equipment on a robust data platform. This network is designed to:
o meet demands for enhanced services,
o support different types of network elements,
o adapt to changing service providers, and
o easily meet subscriber requirements.
For example, this network will allow us to provide local, long distance and
data switched services. Our network model will include traditional public
switched telephony services and will perform in a multiservice mode with
Internet servers and data networks such as frame relay and corporate intranet.
Construction of the network has begun and the initial phase to service the first
two markets, Los Angeles and Miami, is expected to be complete by the end of the
second quarter of 2000 with the other initial markets, listed above in Sales and
Marketing, intended to be operational during 2000.
We will rely on Incumbent Local Exchange Carriers, or ILECs, and IXCs
(i.e., long distance providers) to provide communications capacity or
interconnection for most of our local and long distance telephone services.
Interconnection agreements typically require the approval of state
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regulatory authorities. The 1996 Telecommunications Act established certain
requirements and standards for interconnection arrangements. The FCC, in
conjunction with state regulatory bodies, is still developing these requirements
and standards through a process of negotiation and arbitration. ILECs are
required to negotiate in good faith with competitors, such as us, requesting
interconnection. We currently have an interconnection agreement with Bell South
and expect to have completed agreements with PacBell and GTE during the first
quarter of 2000, and will negotiate agreements with Bell Atlantic and Southwest
Bell during the remainder of 2000.
Internationally, we intend to deploy wireless local loop in markets where
terrestrial lines are not available in order to provide complete point to point
services for our bundled retail products.
INTERNATIONAL BACKBONE
Creation of a national and international backbone network and a local
access network plan is critical to cost reduction and corresponding margin
improvement. We have negotiated a long haul dark fiber contract interconnecting
New York, Houston, Atlanta, Los Angeles and Miami, which is an integral
component of the Asynchronous Transfer Mode, or ATM, backbone we established
during 1999. We intend to expand the backbone nationally and internationally to
transport both voice and data to each of our U.S. and Latin American targeted
markets. We have built and will continue to build ATM-based switching facilities
that will have full IP transport capabilities. We will then lease or trade
switching capacity for fiber transport capacity to support our traffic
requirements.
We spent approximately $6.0 million during 1999 on the ATM backbone. We
believe ATM/IP backbones are preferable because
o Internet traffic is growing 15% per month;
o the cost of an ATM infrastructure is less than circuit switching;
o circuit switching platforms cannot meet the demands of today's networks
created by increased data traffic; and
o by the year 2004, voice traffic is expected to consume less than 10% of
network bandwidth.
INTERNET NETWORK
Our network has been designed for reliable, high speed, efficient routing
and low latency. We currently support six Internet access Points of Presence, or
POPs, in the United States and four in Latin American countries. Each POP is
located in secured facilities or computer rooms that have 24 hours per day,
seven days per week secured access. Each POP has high performance routers with
multiple redundant Unix based servers on an FDDI ring. Dial-in access facilities
are provided via fully managed modems. Each facility is backed up by an
Uninterrupted Power Supply, backup generators, and dual entrance fiber
facilities when available.
PREPAID NETWORK
We also operate an enhanced self-contained calling card platform in our
network, which supports our prepaid calling card business. We are interconnected
to a number of long distance providers and the switch performs least cost
routing of prepaid long distance calls over our network.
SATELLITE NETWORK
Our satellite network consists of a series of teleports as well as a number
of smaller, single user, on-premise satellite ground stations. We currently
operate teleports in seven countries:
o Costa Rica,
o El Salvador,
o Mexico,
o Nicaragua,
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o Panama (two locations),
o Venezuela, and
o the United States.
The teleports are capable of providing international satellite services within
the U.S. and Latin American countries. The teleports also provide us with the
ability to provide high quality Internet services.
All of U.S. satellite services are carried over the Satelites Mexicanos, SA
de CV, or Satmex satellite system. The Satmex system is a Mexican owned and
operated satellite system that offers a broad coverage area including all of
North and South America that supports our stated mission of servicing Latin
American countries with first class communications services. IPL and Internet
access services are provided via satellite transmissions through the Satmex
satellite system. We have long-term contracts with Satmex to provide satellite
space segment of sufficient capacity to service our needs for the foreseeable
future.
Our Houston facility is the primary network control center. The Houston
facility is outfitted with two satellite ground stations designed to support
C-band communication links between the U.S. and Latin American countries, and a
Ku-band ground earth station used to carry services from the U.S. to Mexico. The
system has been sized with growth in mind and can be expanded should growth
exceed our projections. We use various providers, on an as-needed basis, to
accommodate extension of our satellite based service to any office site customer
facilities via terrestrial local loops. Use of these providers permits us to be
an "On Net" facility with the ability to offer competitive terrestrial
connections to our U.S. customer base.
We do not rely on any single provider to supply service for any of our
products with the exception of satellite service provided by Satmex. We
continually seek out competitive products to aid in the provision of our
services.
INDUSTRY OVERVIEW
TELECOMMUNICATIONS INDUSTRY
Prior to its court-ordered breakup in 1984, or the divestiture, AT&T
largely monopolized the telecommunications services in the U.S. even though
technological developments had begun to make it economically possible for
companies (primarily entrepreneurial enterprises) to compete for segments of the
communications business.
The present structure of the U.S. telecommunications market is largely the
result of the 1984 divestiture. As part of the divestiture, seven local exchange
holding companies were created to offer services in geographically defined areas
called LATAs. The Regional Bell Operating Companies, or RBOCs, were separated
from the long distance provider, AT&T, resulting in the creation of two distinct
market segments: local exchange and long distance. The divestiture provided for
direct, open competition in the long distance segment.
The divestiture did not provide for competition in the local exchange
market. However, several factors served to promote competition in the local
exchange market, including:
o customer desire for an alternative to the RBOCs, also referred to as the
Incumbent Local Exchange Carriers, or ILECs;
o technological advances in the transmission of data and video requiring
greater capacity and reliability than ILEC networks were able to
accommodate;
o a monopoly position and rate of return-based pricing structure which
provided little incentive for the ILECs to upgrade their networks; and
o the significant fees, called access charges, long distance carriers were
required to pay to the ILECs to access the ILECs' networks.
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The first competitors in the local exchange market, designated as CAPs by
the FCC, were established in the mid-1980s. Most of the early CAPs were
entrepreneurial enterprises that operated limited networks in the central
business districts of major cities in the United States where the highest
concentration of voice and data traffic is found. Since most states prohibited
competition for local switched services, early CAP services primarily consisted
of providing dedicated, unswitched connections to long distance carriers and
large businesses. These connections allowed high-volume users to avoid the
relatively high prices charged by ILECs.
As CAPs proliferated during the latter part of the 1980s, certain federal
and state regulators issued rulings which favored competition and promised to
open local markets to new entrants. These rulings allowed CAPs to offer new
services, including, in some states, a broad range of local exchange services,
including local switched services. Companies providing a combination of CAP and
switched local services are sometimes referred to as Competitive Local Exchange
Carriers, or CLECs. This pro-competitive trend continued with the passage of the
Telecom Act of 1996 (see the Regulation section), which provided a legal
framework for introducing competition to local telecommunications services
throughout the U.S.
Over the last three years, several significant transactions have been
announced representing consolidation of the U.S. telecom industry. Among the
ILECs:
o Bell Atlantic Corporation and NYNEX Corporation merged in August 1997;
and
o Pacific Telesis Group and SBC Communications Inc. merged in April 1997.
Major long distance providers have sought to enhance their positions in local
markets through transactions such as:
o AT&T's acquisition of Teleport Communications Group
o WorldCom's mergers with MFS and Brooks Fiber Properties,
and their competitive positions, through transactions such as WorldCom's merger
with MCI.
Many international markets resemble that of the U.S. prior to the
divestiture. In many countries, traditional telecommunications services have
been provided through a monopoly provider, frequently controlled by the national
government, such as a Post, Telegraph and Telephone Company. In recent years,
there has been a trend toward opening many of these markets, particularly in
Europe. Led by the introduction of competition in the United Kingdom, the
European Union mandated open competition as of January, 1998. Similar trends are
emerging, albeit more slowly, in Latin America.
INTERNET INDUSTRY
The Internet is a global collection of interconnected computer networks
that allows commercial organizations, educational institutions, government
agencies and individuals to communicate electronically, access and share
information and conduct business. The Internet originated with the ARPAnet, a
restricted network that was created in 1969 by the United States Department of
Defense Advanced Research Projects Agency, or DARPA, to provide efficient and
reliable long distance data communications among the disparate computer systems
used by government-funded researchers and academic organizations. The networks
that comprise the Internet are connected in a variety of ways, including by the
public switched telephone network and by high speed, dedicated leased lines.
Communications on the Internet are enabled by Internet Protocol, or IP, an
inter-networking standard that enables communication across the Internet
regardless of the hardware and software used.
Over time, as businesses have begun utilizing e-mail, file transfer and,
more recently, intranet and extranet services, commercial usage has become a
major component of Internet traffic. In 1989, the U.S. government effectively
ceased directly funding any part of the Internet backbone. In the mid-1990s,
contemporaneous with the increase in commercial usage of the Internet, a new
type of provider called an Internet Service Provide, or ISP, became more
prevalent. ISPs offer access, e-mail,
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customized consent and other specialized services and products aimed at allowing
customers to obtain information from, transmit information to, and utilize
resources available on the Internet.
ISPs generally operate networks composed of dedicated lines leased from
Internet backbone providers using IP-based switching and routing equipment and
server-based applications and databases. Customers are connected to the ISP's
points of presence by facilities obtained by the customer or the ISP through
local telephone service providers through a dedicated access line or placement
of a circuit-switched local telephone call to the ISP.
IP COMMUNICATIONS TECHNOLOGY
Circuit-switching systems and packet-switching systems are the two
switching technologies used in currently available communications networks.
Circuit-switch systems establish a dedicated channel for each communication
(such as a telephone call for voice or fax), maintain the channel for the
duration of the call, and disconnect the channel at the conclusion of the call.
Packet-switch based communications systems format the information to be sent,
such as e-mail, voice, fax and data into a series of shorter digital messages
called "packets." Each packet consists of a portion of the complete message
plus the addressing information to identify the destination and return address.
Packet-switch systems offer several advantages over circuit-switch systems,
particularly the ability to commingle packets from several communications
sources together simultaneously onto a single channel. For most communications,
particularly those with bursts of information followed by periods of
"silence," the ability to commingle packets provides for superior network
utilization and efficiency, resulting in more information being transmitted
through a given communication channel. There are, however, certain disadvantages
to packet-switch based systems as currently implemented. Rapidly increasing
demands for data, in part driven by the Internet traffic volumes, strain
capacity and contribute to delays and interruptions in communications
transmissions. There are also concerns about the adequacy of the security and
reliability of packet-switch systems as currently implemented.
Technology development initiatives are under way to address these
disadvantages of packet-switch systems. We believe that the IP standard, which
is an "open networking standard" broadly adopted in the Internet and
elsewhere, should remain a primary focus of these development efforts. We expect
these efforts to result in improved communications, reduced delay and lower
networking hardware costs.
REGULATION
While state-to-state long distance business in the U.S. is generally not
subject to substantial regulation, local service and within-state long distance
service are subject to regulation that varies by state, and can be substantial.
The international long distance business is subject to the FCC's jurisdiction in
the U.S. and foreign governments abroad, some of which limit or prohibit our
services. Foreign local service is governed by the respective jurisdiction.
Local laws and regulations differ significantly among the foreign jurisdictions
in which we operate, and the interpretation and enforcement of such laws and
regulations vary and are often based on the informal views of the local
government ministries, which, in some cases, are subject to influence by local
monopoly companies. Accordingly, in certain of our principal existing and target
markets, there are laws and regulations that either prohibit or limit, or could
be used to prohibit or limit, certain services we market. We intend to provide
our services to the maximum extent we believes permissible under applicable
local laws and regulations, and the licenses we have obtained. Portions of the
services we market and provide, or intend to market and provide, are now or may
in the future be prohibited in certain jurisdictions.
UNITED STATES
We provide telecommunications and information services. The terms and
conditions under which we provides our services are potentially subject to
regulation by the state and federal government agencies. With regard to our
domestic telecommunications services, federal laws and FCC regulations
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generally apply to calls from one state to another, while state regulatory
authorities generally have jurisdiction over calls which are placed and received
within the same state.
LOCAL SERVICE; INTEGRATED SERVICE
Federal regulation has the greatest impact on the telecommunications
industry and has undergone major changes in the last three years as the result
of the adoption of the Telecommunications Act of 1996. The Act provides
comprehensive reform of the nation's telecommunications laws. The Act imposes a
number of access and interconnection requirements on telecommunications carriers
and on all local exchange providers, including CLECs, with additional
requirements imposed on ILECs. The Act provides a detailed list of items that
are subject to these interconnection requirements, as well as a detailed set of
duties for all affected carriers. All telecommunications carriers must
interconnect with the facilities of other carriers and not install features that
will interfere with the interoperability of networks. All LECs, including CLECs,
have a duty to:
o not unreasonably limit the resale of their services,
o provide number portability if technically feasible,
o provide dialing parity to competing providers, and nondiscriminatory
access to telephone numbers, directory assistance, operator services and
directory listings,
o provide access to poles, ducts, conduits, and rights-of-way, and
o establish reciprocal compensation arrangements for the transport and
termination of telecommunications.
In addition to those general duties of all LECs, ILECs have additional duties
to:
o interconnect at any technically feasible point and provide service equal
in quality to that provided to their customers or the ILEC itself,
o provide unbundled access to network elements at any technically feasible
point at just, reasonable and nondiscriminatory rates, terms and
conditions,
o offer retail services at wholesale prices for the use of
telecommunication carriers,
o provide reasonable public notice of changes in the network or the
information necessary to use the network or which affect
interoperability, and
o allow other carriers to enter their premises to install, maintain and
repair that carrier's equipment necessary for access to the ILEC's
network, or
o if on-premise installation is not permitted for practical reasons (i.e.,
space limitations), the ILEC must allow the carrier to use its own
equipment, and electronically monitor and control communications being
placed with the equipment.
The FCC adopted pricing and other guidelines to implement the
interconnection provisions of the Act, but the 8th Circuit Court of Appeals
vacated many of the FCC's guidelines. The Supreme Court has granted a writ of
certiorari to review the 8th Circuit's decision and is expected to decide the
case during its 1998-1999 term. The responsibility for setting pricing and other
guidelines with respect to interconnection has thus been left up to the
individual state public service commissions. It is expected that varying pricing
and guidelines will emerge from state to state and some of these guidelines may
eventually have an indirect adverse effect on our business.
INTERNATIONAL TELECOMMUNICATIONS; LONG DISTANCE
The 1996 Telecommunications Act allows local exchange carriers, including
RBOCs, to provide interLATA long distance service and also grants the FCC the
authority to deregulate other aspects of the telecommunications industry. We are
classified by the FCC as a non-dominant carrier for our common carrier
telecommunications services. We have applied for and received all necessary
authority from the FCC to provide international telecommunications service. The
FCC reserves the right to
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condition, modify, or revoke such international authority for violations of the
Federal Communications Act or the FCC's rules and policies.
The FCC and the state commissions have jurisdiction to act upon complaints
against any common carrier for failure to comply with its statutory obligations.
If the FCC or state regulators find that we were engaging in activities that
required authorizations which we currently do not hold or violated the
regulatory requirements established by the relevant commissions, the FCC or
state regulators could impose financial penalties and order us to comply with
the applicable regulations or cease doing business. Such penalties or action
could materially adversely effect our business, financial condition or results
of operations.
As a telecommunications carrier, we are required to contribute to universal
service funds established by the FCC, the states, or both. Federal contribution
factors have been established by the FCC and are effective. Federal universal
service requirements are now under review by both Congress and the appellate
court. Whether our universal service contributions can be passed on to customers
depends upon the competitive carrier market and potential FCC regulation.
Certain states are in the process of determining what universal service
contribution requirements to adopt and others have already made such
determinations. Current proposals to change the universal service support system
do not entail the imposition of universal service fees on enhanced service
providers. These fees, however, might be assessed in the future. Similarly,
individual states may determine that enhanced services providers should be
required to contribute to state universal service funding mechanisms.
Moreover, information service providers traditionally have been treated by
the FCC as providing an "enhanced" computer processing service rather than a
"basic" telecommunications transmission service and, as a result, were thought
to be beyond the FCC's regulatory authority. A large portion of our business
involves such unregulated enhanced services. Although the 1996
Telecommunications Act continues to distinguish between unregulated information
or enhanced and regulated telecommunications or basic services, the changes made
by the 1996 Telecommunications Act may have important implications for providers
of unregulated enhanced services.
Within-state long distance service is subject to state laws and
regulations, including prior certification, notification and registration
requirements. In certain states, prior regulatory approval may be required for
changes in control of telecommunications operations. We are currently subject to
varying levels of regulation in the states in which we provides "1+" and card
services (which are both generally considered "1+" services by the states).
The vast majority of states require us to:
o apply for certification to provide telecommunications services, or
o at least register or be found exempt from regulation, before commencing
service, and
o file and maintain detailed tariffs listing rates for long distance
service within the state.
Many states also impose various reporting requirements and/or require prior
approval for:
o transfers of control of certified carriers,
o assignments of carrier assets, including customer bases,
o carrier stock offerings, and
o incurrence by carriers by significant debt obligations.
Certificates of authority can generally be conditioned, modified, canceled,
terminated or revoked by state regulatory authorities for failure to comply with
state law and/or the rules regulations and policies of the state regulatory
authorities. Fines and other penalties, including the return of all monies
received for intrastate traffic from residents of a state, may be imposed for
such violations.
INTERNET
We use LEC networks to connect our Internet customers to our POPs. Under
current federal and state regulations, we and our Internet customers pay no
charges for this use of the LECs' networks other than the flat-rate, monthly
service charges that apply to basic telephone service. The LECs have
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asked the FCC to change its rules and require Internet access providers to pay
additional, per minute charges for their use of local networks. Per minute
access charges could significantly increase our cost of doing business and
could, therefore, have a material adverse effect on our business, financial
condition or results of operations. The FCC is currently considering whether to
propose such rule changes.
Data network access providers are generally not regulated under the laws
and regulations governing the telecommunications industry. Accordingly, except
for regulations governing our ability to disclose the contents of communications
by our customers, no state or federal regulations currently exist pertaining to
the pricing, service characteristics or capabilities, geographic distribution or
quality control features of Internet access services. We cannot predict the
impact that future regulation or regulatory changes, if any, may have on our
Internet access business.
The 1996 Telecommunications Act imposes criminal liability on persons
sending or displaying indecent material on the Internet, in a manner available
to minors. The Act also imposes criminal liability on an entity who knowingly
permits facilities under its control to be used for such activities. Entities
solely providing access to facilities not under their control are exempted from
liability, as are service providers that take good faith, reasonable, effective
and appropriate actions to restrict access by minors to the prohibited
communications. The constitutionality of these provisions has been successfully
challenged in lower federal courts and is now before the U.S. Supreme Court; the
final interpretation and enforcement of these provisions is uncertain. The Act
may decrease demand for Internet access, chill the development of Internet
content, or have other adverse effects on Internet access providers such as us.
Additionally, in light of the uncertain interpretation and application of this
law, we may have to modify our operations to comply with the statute, including
prohibiting users from maintaining home pages on the Internet.
STATE REGULATION
The 1996 Telecommunications Act is intended to increase competition in the
telecommunications industry, especially in the local exchange market. The Act
prohibits state and local governments from enforcing any law, rule or legal
requirement that prohibits or has the effect of prohibiting any person from
providing any interstate or intrastate telecommunications service. In addition,
under current FCC policies, any dedicated transmission service or facility that
is used more than 10% of the time for the purpose of interstate or foreign
communication is subject to FCC jurisdiction to the exclusion of any state
regulation. Notwithstanding these prohibitions and limitations, states regulate
telecommunications services, including through:
o certification of providers of intrastate services,
o regulation of intrastate rates and service offerings, and
o other regulations,
and retain jurisdiction under the 1996 Telecommunications Act to:
o adopt regulations necessary to preserve universal service,
o protect public safety and welfare,
o ensure the continued quality of communications services, and
o safeguard the rights of consumers.
Accordingly, the degree of state involvement in local telecommunications
services may be substantial.
The state regulatory environment varies substantially from state to state.
State regulatory agencies have regulatory jurisdiction when Company facilities
and services are used to provide intrastate services. A portion of our current
traffic may be classified as intrastate and therefore subject to state
regulation. Currently, we do not anticipate that the regulatory requirements to
which we will be subject in Florida, Puerto Rico, New York, Texas, Illinois and
California will have any material adverse effect on our operations. In some
jurisdictions, our pricing flexibility for intrastate services
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may be limited because of regulation, although our direct competitors will be
subject to similar restrictions. However, future regulatory, judicial, or
legislative action may have a materially adverse effects on us.
FOREIGN MARKETS
We are subject to the regulatory regimes in each of the countries in which
we conducts business. Local regulations range from permissive to restrictive,
depending upon the country. In general, provision of telecommunications services
in these countries is permitted only through obtaining proper licenses and
service is limited to that specifically provided by the license (see the
LICENSES section for a detailed listing of foreign licenses held by we). The
World Trade Organization, or WTO, Agreement, which became effective in February
1998, is intended to open foreign telecommunications markets of signatory
countries. We do not know whether or how foreign governments will implement the
WTO Agreement.
COMPETITION
We operate in extremely competitive service and geographical markets that
are influenced significantly by larger industry participants and are expected to
become more competitive in the future. There are no substantial barriers to the
entry of additional participants into any of the services in which we compete in
the U.S. In general, provision of service in Latin American countries outside
the U.S. requires a license from the local government.
LOCAL SERVICES; INTEGRATED SERVICES
Our ability to acquire market share from ILECs, CLECs, and resellers will
be contingent on Management's ability to effectively
o sell our services to our target market through culturally relevant
marketing and value driven product bundling,
o build an effective and reliable local access network, and
o develop an excellent Operating Support System to manage orders and
provide service and customer support.
One major impact of the 1996 Telecommunications Act may be a trend toward
the use and the acceptance of bundled service packages, consisting of local and
long distance telephony, combined with other elements such as cable television
and wireless telecommunications service. As a result, we will be competing with:
o ILECs,
o traditional providers of long distance service, such as AT&T, Sprint,
and MCI/WorldCom, and
o other CLECs or CAPs.
We may also face competition from providers of cable television service. Our
ability to compete successfully in telephony will depend on the attributes of
the overall bundle of services we are able to offer, including price, features,
and customer service.
Wireless telephone service (cellular, PCS, and Enhanced Specialized Mobile
Radio) now is generally viewed by consumers as a supplement to, not a
replacement for, wireline telephone service. In particular, wireless is more
expensive than wireline local service and is generally priced on a usage basis.
It is possible, however, that in the future the rate and quality differential
between wireless and wireline service will decrease, leading to more direct
competition between providers of these two types of services. In that event, our
telephony operations may face competition from wireless operators.
INTERNATIONAL TELECOMMUNICATIONS; LONG DISTANCE
We are seeking international telecommunications licenses in various foreign
countries. We face competition for licenses from major international
telecommunications entities as well as from local
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competitors in each country. If a communications license is obtained, our
international telecommunications operations will face competition from existing
government owned or monopolistic telephone service companies and other operators
who receive licenses. We may also face significant potential competition from
other communication technologies that are being or may be developed or perfected
in the future. Some of our competitors have substantially greater financial,
marketing, and technical resources. Thus, we may not be successful in obtaining
additional licenses or competing effectively in international telecommunication
operations.
We compete with:
o IXCs engaged in the provision of long distance access and other long
distance resellers and providers, including large U.S. carriers;
o foreign PTTs;
o other marketers of international long distance and call reorigination
services;
o wholesale providers of international long distance services;
o alliances for providing wholesale carrier services;
o new entrants to the long distance market such as the RBOCs in the United
States, who have entered or have announced plans to enter the U.S.
interstate long distance market pursuant to recent legislation
authorizing such entry, and utilities; and
o small resellers and facility-based IXCs.
Many of our competitors are significantly larger and have substantially greater
market presence and financial, technical, operational, marketing, and other
resources and experience than we do.
Because of their close ties to their national regulatory authorities,
foreign PTTs and newly privatized successor companies can influence their
national regulatory authorities to our detriment. With increasing privatization
of international telecommunications in foreign countries, it is possible that
new foreign service providers, with close ties to their national regulatory
authorities and customer bases, will enter into competition with us, or that
PTTs will become deregulated and gain the pricing flexibility to compete more
effectively with us. The ability of a deregulated PTT to compete on the basis of
greater size and resources and long-standing relationships with customers in its
own country could have a material adverse effect on our business, financial
condition or results of operations.
Although the large U.S. long distance carriers have previously been
reluctant to compete directly with the PTTs, other large carriers may begin to
compete in the industry. Because of their ability to compete on the basis of
superior financial and technical resources, the entry of any large U.S. long
distance carrier into the business could have a material adverse effect on our
business, financial condition or results of operations.
Competition for customers in our international telecommunication and long
distance markets is primarily on the basis of price and, to a lesser extent, on
the basis of the type and quality of service offered. Increased competition
could force us to reduce our prices and profit margins if our competitors are
able to procure rates or enter into service agreements comparable to or better
than those we obtain, or to offer other incentives to existing and potential
customers. Similarly, we have no control over the prices set by our competitors
in the long distance resale carrier-to-carrier market. We could also face
significant pricing pressure if we experience a decrease in our market share of
international long distance traffic, as our ability to obtain favorable rates
and tariffs depends, in large part, on the volume of international long distance
call traffic we can generate for third-party IXCs. We might not be able to
maintain the volume of domestic and international long distance traffic
necessary to obtain favorable rates and tariffs. In addition, we are aware that
our ability to market our carrier services depends upon the existence of spreads
between the rates offered by us and those offered by the IXCs with whom we
compete as well as those from whom we obtain service. A decrease in rate spreads
could cause us to lose customers and therefore materially adversely effect our
business, financial condition, or results of operations.
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INTERNET ACCESS
Our current and prospective competitors include many large companies that
have substantially greater market presence and financial, technical,
operational, marketing and other resources and experience than ours. Our
Internet access business competes or expects to compete directly or indirectly
with the following categories of companies:
o other national and regional commercial Internet access providers;
o established on-line services companies that offer Internet access;
o software and technology companies;
o national long distance telecommunications carriers;
o RBOCs;
o cable television operators;
o nonprofit or educational Internet service providers; and
o newly licensed providers of spectrum-based wireless data services.
Many of the established on-line services companies and telecommunications
companies are offering or planning to offer expanded Internet access services.
We expect that all of the major on-line services companies will eventually
compete fully in the Internet access market. In addition, we believe that new
competitors, including large computer hardware and software, cable, media,
wireless, and wireline telecommunications companies such as the RBOCs, will
enter the Internet access market, resulting in even greater competition. The
ability of these competitors or others to bundle services and products not
offered by us with Internet access services could place us at a significant
competitive disadvantage. Also, certain of our telecommunications company
competitors may be able to offer customers reduced communications charges in
connection with their Internet access services or other incentives, reducing the
overall cost of their Internet access solution and increasing price pressures on
us. This price competition could reduce the average selling price of our
services. Additionally, increased competition for new subscribers could result
in increased sales and marketing expenses and related subscriber acquisition
costs, which could materially adversely affect our profitability. We may not be
able to offset the effects of price reductions or incentives with increases in
our number of customers, higher revenue from enhanced services, cost reductions
or otherwise.
Competition is also expected to increase in overseas markets, where
Internet access services are just being introduced. We might not be able to
increase our presence in the overseas markets we presently serve, or enter new
overseas markets. We may not be able to obtain the capital required to finance
continued expansion. Additionally, we might not be able to obtain the permits
and operating licenses required for operating, hiring and training employees or
marketing, selling and delivering services in foreign countries. Further, entry
into foreign markets will result in competition from local companies that may
have long-standing relationships with or possess a better understanding of their
local markets, regulatory authorities, customers and suppliers. We may not be
able to obtain similar levels of local knowledge, which could place us at a
serious competitive disadvantage. To the extent the ability to provide access to
service overseas becomes a competitive advantage in the Internet access
industry, failure to penetrate or increase our presence in overseas markets we
presently serve may result in our being at a competitive disadvantage relative
to other Internet access providers.
We believe that our ability to compete successfully in the Internet access
market depends upon a number of factors, including:
o market presence;
o the adequacy of our customer support services;
o the capacity, reliability and security of our network infrastructure;
o the ease of access to and navigation of the Internet;
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o the pricing policies of our competitors and suppliers;
o regulatory price requirements for interconnection to and use of existing
local exchange networks by Internet services;
o the timing of introductions of new products and services by we and our
competitors;
o our ability to support existing and emerging industry standards; and
o trends within the industry as well as the general economy.
We may not have the financial resources, technical expertise or marketing and
support capabilities to continue to compete successfully in the Internet access
market.
LICENSES
In the United States, licenses must be obtained from the FCC or state
regulatory authorities depending upon the type of license and/or services to be
offered. In order to provide telecommunications services outside the United
States, we must obtain appropriate licenses or enter into agreements with the
foreign government or PTT.
In most foreign countries where we operate, telecommunications licenses
must be held by a corporation organized under the laws of that country. In
Panama, Venezuela, Mexico, El Salvador, Nicaragua and Costa Rica, we have:
o created a local corporation,
o obtained appropriate licenses with the assistance of local partners, and
o obtained a majority ownership position in exchange for the capital
required to build out the system.
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<TABLE>
<CAPTION>
TYPE OF
LICENSE OR
COUNTRY AGREEMENT DATE SCOPE
- ---------------- ----------------- --------- ------------------------------------
<S> <C> <C> <C>
Costa Rica Satellite Aug. 1997 Establish and operate "on premise"
private satellite earth stations;
license from both Costarricense Elec-
tricidad, or ICE and Radiografica
Costarricense S.A., or RACSA
Costa Rica Teleport Jan. 1998 Establish Teleport services; license
issued by RACSA
Costa Rica Private Satellite Aug. 1997 Private satellite stations; we are
Stations obligated to pay Costa Rican tariff
for satellite services, but a
discounted tariff is provided when we
provide the satellite station; agree-
ment with ICE and RACSA
Costa Rica Teleport Apr. 1998 Teleport services (which will avoid
the cost of single user private
satellite stations); agreement with
RACSA
El Salvador Satellite Jul. 1996 Provide "on premises" private
satellite earth stations using the
Solidaridad satellite system; license
issued by ANATEL
Mexico Satellite Jul. 1995 Provide satellite services with
Mexico and complete use of Mexican
Solidaridad satellite system;
agreements with Telecom de Mexico
Mexico Communications Jan. 1998 Provide value-added services
communications services; license
issued by Telecom de Mexico.
Nicaragua Internet Provide Internet services; license
Nicaragua Teleport Provide Teleport services; license
Nicaragua IPL Right to sell dedicated services
international private lines;
agreement with Nicaraguan government.
Nicaragua International International switched voice;
Switched Voice agreement with Nicaraguan government.
Panama Satellite Dec. 1995 Authorized to provide international
carrier voice and data via the
Solidaridad satellite system and
other agreed communications services;
joint venture with Instituto Nacional
de Telecomunicaciones de Panama, or
Intel
Panama Internet Dec. 1995 Authorized by Intel to provide
Internet services retail and
wholesale within Panama; license
Panama Digital IPL Construction of digital Teleport;
services Teleport provides IPL for Panamanian
services customers
United States International Aug. 1999 International facilities-based
facilities-based carrier; license from FCC
carrier
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TYPE OF
LICENSE OR
COUNTRY AGREEMENT DATE SCOPE
- ---------------- ----------------- --------- ------------------------------------
<S> <C> <C> <C>
United States International May 1995 International satellite connectivity;
satellite license connectivity from FCC
connectivity
United States Radio station Apr. 1996 Fixed earth station in Clear Lake
City, Texas, for domestic fixed
satellite service and international
fixed satellite service;
authorization from FCC
United States Radio station Sep. 1996 Fixed earth station in Houston,
Texas, for domestic fixed satellite
service and international fixed
satellite service; authorization from
FCC
United States Long distance Various Long distance services
(Various States) certification from respective state
Public Service Commissions
United States CLEC May 1997 Interim certification of authority to
(Georgia) provide CLEC services; by Georgia
Public Service Commission
United States CLEC May 1999 Authority to provide CLEC services;
(Florida) issued by Florida Public Service
Commission
United States CLEC July 1999 Authority to provide CLEC services;
(California) issued by California Public Service
Commission
Venezuela Point to point; Apr. 1996 Provide voice, data and video point
point to to point and point to multipoint
multipoint services throughout Venezuela and
internationally; license authorized
by Commision Nacional de
Telecomunicaciones, or Conatel
Venezuela Access Jul. 1996 To offer domestic and international
access to databases for offering
enhanced services such as Internet
services, e-mail, etc.; concession
from Conatel
Venezuela Digital Teleport; Mar. 1997 Construction of digital Teleport to
provide IPL services for Venezuelan
customers; we pay Conatel on an
annual basis the equivalent of
agreement of 1% of gross invoicing
for the services provided under the
Agreement; IPL services
</TABLE>
EMPLOYEES
As of December 31, 1999, we had 241 full time employees, located in the US
and various Latin American countries. None of our employees are represented by a
labor union or covered by a collective bargaining agreement and we have never
experienced a work stoppage. We believe that relations with our employees are
good.
PROPERTY
Our corporate headquarters are located in Roswell, Georgia. We lease
approximately 6,200 square feet of office space at 1325 Northmeadow Parkway,
Roswell, Georgia 30076. The lease commenced on April 15, 1999, with a base rent
of $5,385 per month and continues for 36 months, expiring on March 15, 2002.
We lease approximately 16,800 square feet of office space at 606 E.
Huntington Drive, Monrovia, California 91016, which serves as our administrative
headquarters for Competitive Local Exchange Carrier, or CLEC, operations. The
lease commenced on September 15, 1999, with a base rate of $18,809 and is for an
initial term of five years expiring on September 30, 2004.
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We own an office building with approximately 6,400 square feet in El Monte,
California, which serves as our central office for Los Angeles CLEC operations.
We lease approximately 7,220 square feet of office space at 99 SE 5th
Street, Miami, Florida, which serves as our central office for Miami CLEC
operations. The lease commenced on December 1, 1999, with a base rate of
$11,533.95 and is for an initial term of 10 years expiring on November 30, 2010.
We lease approximately 11,500 square feet of office space at 2839 Paces
Ferry Road, Suites 500 and 250, Atlanta, Georgia 30339. The term of the lease
commenced on October 1, 1995, with a base rent of $18,267 per month and
continues for sixty months, expiring September 30, 2000.
We lease approximately 10,000 square feet of office space at 17100 El
Camino Real, Houston, Texas 77058. The lease is for an initial term of five
years and expires on June 30, 2001, unless we exercise our contractual right to
renew the lease for two additional terms of five years each. The monthly rental
under the lease is currently $9,800.
We lease approximately 1,700 square feet of office space at 28 West Flagler
Street, Miami, Florida 33130. The lease is for an initial term of three years
and has been extended two years until January 1, 2001. The monthly rental under
the lease is currently $2,054.
We lease additional office and equipment co-location space in the U.S. in
Phoenix, Arizona; Ft. Lauderdale, Florida; Atlanta, Georgia; Houston, Texas; New
York, New York; Los Angeles, California; San Diego, California. The monthly
rental under these leases is currently $28,120.
We also lease office or equipment co-location space in the following
countries with current monthly rental in the amount of $14,725:
o Panama City, Panama;
o Colon, Panama;
o Caracas, Venezuela;
o San Salvador, El Salvador;
o Managua, Nicaragua; and
o San Jose, Costa Rica.
Our physical properties are in good condition.
LEGAL PROCEEDINGS
From time to time, we have been involved in certain legal proceedings.
Currently, we are not a party to any material pending legal proceedings, other
than ordinary routine litigation incidental to our business.
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POINTE MANAGEMENT
POINTE MANAGEMENT
The following table lists the name and age of each of our directors and
executive officers, as well as those persons expected to make a significant
contribution to us during 2000. Each director has been elected to serve until
the next annual meeting of shareholders. A biography of each executive officer
follows this table.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------- ---- -------------------------------------
<S> <C> <C>
Stephen E. Chairman of the Board, Chief
Raville........... 52 Executive Officer
Peter C.
Alexander......... 43 President and Chief Operating Officer
Richard P. Halevy... 33 Chief Financial Officer
Patrick E.
Delaney........... 46 Director, Executive Vice President
Federico L.
Fuentes........... 45 Chief Technical Officer
Ruben Garcia........ 47 President, CLEC Division
Jaime D. Zambra..... 55 President, International Division
William P.
O'Reilly.......... 54 Director
F. Scott Yeager..... 48 Director
Gerald F. Schmidt... 59 Director
James H. Dorsey..... 40 Director
Rafic A. Bizri...... 51 Director
David C. Lee........ 34 Director
Darryl B.
Thompson.......... 38 Director
</TABLE>
STEPHEN E. RAVILLE. Mr. Raville has been a director of ours since December
14, 1995, Chairman since January 28, 1997 and Chief Executive Officer since
September 12, 1997. Mr. Raville has been President of First Southeastern Corp.,
a private investment company, since it was formed shortly after Mr. Raville's
departure from Advanced Telecommunications Corporation, or ATC, where he served
as Chairman of the Board and Chief Executive Officer. Prior to the merger of ATC
and Atlanta based TA Communications, Mr. Raville served as a President of TA
Communications. Additionally, he was a partner in the Atlanta law firm of Hurt,
Richardson, Garner, Todd & Cadenhead. Mr. Raville currently serves on the Board
of numerous private concerns.
PETER C. ALEXANDER. Mr. Alexander joined us in December 1999 with a strong
record of international business successes. Most recently Mr. Alexander was
President of Premiere Technologies, Inc., an Internet communications service
provider. Prior to Premiere, he served as Senior Vice President of non-U.S.
operations for GE Capital Information Technology Solutions, a $3.5 billion
division of GE Capital Services Company. Prior to his GE affiliation, Mr.
Alexander served as President of AmeriData Global Limited, an international IT
services group of AmeriData Technologies, and Vice President of International
Operations for Vanstar Corporation.
RICHARD P. HALEVY. Mr. Halevy started with Pointe in March 1997 as
Treasurer/VP of Finance, the position he held until March 2000 when he was
appointed to Chief Financial Officer. During his time with the Company, Pointe
has grown revenues from $8 million in 1996 to $52 million in 1999 and has raised
in excess of $70 million in debt and equity financing. Prior to joining Pointe,
Mr. Halevy was a Vice-President with Credit Suisse First Boston's Controllers
Group and began his career with Ernst & Young. Mr. Halevy is a Certified Public
Accountant in the State of New York, holds a B.S. in Accounting from Fordham
University and an MBA in Finance from New York University.
PATRICK E. DELANEY. Mr. Delaney has been a Director since September 12,
1996. Additionally, Mr. Delaney served as Chief Financial Officer for Pointe
from September 12, 1996 to December 31, 1999. Mr. Delaney has over twenty years
of diverse business management experience in
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such industries as chemical engineering, insurance and telecommunications. As
Chief Financial Officer of Advanced Telecommunications Corporation, or ATC, Mr.
Delaney was instrumental in growing ATC's annual revenues from $50,000,000 to
$500,000,000 in less than six years. Mr. Delaney's other key responsibilities at
ATC included directing mergers and acquisitions activities, which resulted in
over fifteen transactions, as well as placing financing in excess of
$250,000,000 in debt and equity. During 1993-1994, Mr. Delaney served as a board
member and Chief Financial Officer for RealCom, Inc., the second largest shared
tenant services company in the country until its acquisition by MFS
Communications.
FEDERICO L. FUENTES. Mr. Fuentes joined us under a consulting agreement in
March of 1999 and currently serves as our Chief Technical Officer. Mr. Fuentes
has in excess of 20 years of experience in International telecommunications
engineering. Prior to joining us, Mr. Fuentes was a co-founder of a number of
telecommunications businesses in the US and Latin America including Psychologic,
a company that developed short messaging software. The software was able to
produce messaging in 30 languages and was selected by Motorola for their pagers.
He was co-founder and Chief Engineer for Bozdatos, a Venezuelan company which
acted as consultant for the Iridium satellite project in Latin America,
implemented an ATM banking network, developed a public payphone network,
installed fiber optic cable for CANTV, and developed the first prepaid calling
card for cellular services in Venezuela. He was the founder of Multielectronica,
a developer of billing software for telecommunications services. He was also
Chief Engineer at ELCA, a provider of rural and GSM cellular telephone services
in Venezuela. Prior to founding his own businesses, Mr. Fuentes spent a number
of years as an Operations Manager for the local PTT of Venezuela. He holds a
B.S. in Chemical Engineering from Simon Bolivar in Venezuela.
RUBEN GARCIA. Mr. Garcia joined us in July of 1999 as President of the CLEC
Division. Mr. Garcia has more than twenty years of telecommunications management
experience in marketing, sales and customer service. Prior to joining us, Mr.
Garcia was President of HTC Communications, a California-based CLEC, acquired by
us during the third quarter of 1999. He previously served as Chief Operating
Officer at ConexOne Wireless, where he joined the firm as the 10th employee.
During Mr. Garcia's tenure, ConexOne was ranked the 19th fastest growing
Hispanic owned firm in the U.S. and became a member of the Hispanic 500.
Previously, Mr. Garcia was Vice-President and General Manager at Pacific Bell,
responsible for marketing and offering services to more than 1.1 million
Hispanic customers and managing 1,200 employees. His group generated over $350
million in annual revenues for Pacific Bell.
JAIME D. ZAMBRA. Mr. Zambra joined us under a consulting agreement in March
of 1999 and currently serves as our President of the International Division. Mr.
Zambra has 25 years of experience in Business Development throughout Central and
South America. Prior to joining Pointe's International team in March 1999, Mr.
Zambra was a co-founder and Business Development Manager for Bozdatos, a
Venezuelan company which acted as consultant for the Iridium satellite project
in Latin America, implemented an ATM banking network, developed a public
payphone network, installed fiber optic cable for CANTV, and developed the first
prepaid calling card for cellular services in Venezuela. He was Business
Development Manager and a Member of the Board of Directors for Multicanal, a
media company with financial backing from ABC/Disney, which was the first to
bring Digital Compression TV to Europe. The company provided six channels to
Spain and Portugal. He was also Business Development Manager at ELCA, a provider
of rural and GSM cellular telephone services in Venezuela. Prior to his
independent ventures, Mr. Zambra spent 17 years in the petrochemical,
pharmaceutical and consumer products business for Dow Chemical. Mr. Zambra holds
a B.S. in Electrical Engineering from Catholic University and an MBA in Finance
from the University of Houston.
WILLIAM P. O'REILLY. Mr. O'Reilly has been a director since December 14,
1995. Mr. O'Reilly has over 20 years experience in the telecommunication
industry and has initiated several successful business ventures. In 1981, he was
the founder and Chief Executive Officer of Lexitel
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Corporation, which is currently part of ALC Communications, Inc. Mr. O'Reilly
was also a founder and Chief Executive Officer of Digital Signal, a leading
provider of low-cost fiber optic capacity to long distance carriers. In 1989, he
acquired Military Communications Corporation, or MCC. MCC provides international
public switched network services via phone centers to the U.S. military
worldwide. Mr. O'Reilly sold MCC to LDDS in 1997. Mr. O'Reilly is currently
Chairman and Chief Executive Officer of ELTRAX Systems, Inc., a public company.
F. SCOTT YEAGER. Mr. Yeager has been a director since February 26, 1996.
Mr. Yeager has extensive experience in the communications industry and has
founded both Network Communications Inc., a company created to install, own and
operate a fiber optic network in Houston, Texas to compete with Southwestern
Bell Telephone Company, and YSA Inc., a systems integrator of fiber optic
components, including cable connectors, test equipment and multiplexers. In
1989, following the purchase of Network Communications Inc., by MFS, Mr. Yeager
became City Director of MFS of Houston, Inc. In 1991, he developed the concept
of high speed data-networking over the MFS fiber infrastructure. In 1992, he
became Vice President of Sales and Distribution of MFS Datanet, Inc., where he
developed the sales organization and marketing approach of MFS Datanet. Mr.
Yeager most recently served as Vice President of Business Development of MFS
Global Services, Inc. Currently, Mr. Yeager is independently employed as a
telecommunications industry consultant.
GERALD F. SCHMIDT. Mr. Schmidt joined us as a director on February 28,
1997. Mr. Schmidt is Chairman, a director and a shareholder of Cordova
Technologies, Inc. As Chairman, he is responsible for the major policy decisions
of the General Partner and the Partnership. Mr. Schmidt is a co-founder of
Cordova Capital and also President of Cordova Capital Inc. and Cordova Capital
II, Inc., and is a shareholder and member of the Board of Directors of each. A
major portion of his career was spent with Jostens, Inc., a publicly-traded NYSE
company on the Standard & Poor's 500, based in Minneapolis and involved in the
manufacturing and sale of motivation and recognition products to educational
institutions and companies. While there, he was responsible for $170 million in
sales through more than 500 independent sales representatives and led a sales
and design team that won the opportunity to produce the gold, silver and bronze
medals for the games of the XXIII Olympiad held in Los Angeles. Upon leaving
Jostens in 1984, he spent five years as senior vice president of O'Neill
Developments, Inc., a privately-held merchant developer of real estate
properties headquartered in Atlanta. Mr. Schmidt left in 1988 to join Manderson
& Associates, where Cordova Capital was founded. Mr. Schmidt serves on the Board
of Directors of USBA Holdings, Ltd., a financial services company providing
products and services to banks, Investors Financial Group, Inc., a full service
broker-dealer, and Premis Corporation, a publicly traded Nasdaq company that
designs, develops and markets software systems for point of sale.
JAMES H. DORSEY. Mr. Dorsey is currently the founder and CEO of Boom, Inc.,
with offices in New York City and Florida. This new venture, aimed at the Baby
Boomer Generation, is a discount membership club set up as a multimedia company,
comprised of a TV show, a Web Site and a magazine. In addition, Mr. Dorsey is
the founder and President of three Florida based companies: Landmark Design
Custom Builders, LLC, Dorsey Realty Investments, LLC, and Dorsey Investments
Properties, LLC, all headquartered in Delray Beach, Florida. The three companies
buy and develop properties in Miami Beach, Colorado and Jackson Hole, Wyoming,
concentrating in new construction as well as renovation. In 1989, Mr. Dorsey
founded American Hydro-Surgical Instruments, Inc., also in Delray Beach, and
served as President, CEO and Chairman of the Board for the next six years. Begun
with the design for a single product for the growing field of laparoscopic
surgery, the company recorded sales of 20 million dollars in 1995 and had 175
employees including a national sales force and approximately 200 products. Mr.
Dorsey was awarded 14 patents for surgical products issued in his name. In 1995,
the company was merged with CR Bard, a leader in the pharmaceutical industry.
Mr. Dorsey served as a full time medical consultant for CR Bard for a year, and
since then has been retained as a patent and product consultant. From 1989 to
1992, Mr. Dorsey also served as President and CEO of Sigmatec Medical Inc., in
Delray Beach, a company he founded to serve South Florida as
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a sales organization for American Hydro Surgical Instruments, Inc. With sales of
3.5 million, Sigmatec was merged with American Hydro Surgical Instruments in
1992.
RAFIC A. BIZRI. Mr. Bizri was named to our Board of Directors in June 1999
in conjunction with Oger Pensat's investment in our Class A Senior Convertible
Preferred Stock. Mr. Bizri is currently President and sole director of Hariri
Holding, an investment company with investments throughout the United States.
Prior to Hariri Holding, Mr. Bizri held the positions of Controller and Investor
Representative for Mediterranean Investors Group, Controller for Holiday Inn,
and Financial Officer of Saudi Oger, one of the largest construction and
development companies in Saudi Arabia. Mr. Bizri also heads the Hariri
Foundation-USA, an organization which at its peak sponsored 2,300 scholars in
the U.S. and Canada. Mr. Bizri holds a Bachelor of Accounting and Finance from
Virginia Commonwealth University.
DAVID C. LEE. Mr. Lee was named to our Board of Directors in June 1999 in
conjunction with Sandler Capital's investment in our Class A Senior Convertible
Preferred Stock. Mr. Lee is currently Managing Director of Sandler Capital, and
is experienced in a broad range of communications services. He is responsible
for analyzing, structuring and managing Sandler Capital's private equity
investments in the telecommunications industry. Prior to joining Sandler
Capital, he was a Managing Director at Lazard Freres, where he worked on a wide
range of advisory and financial assignments, with special emphasis in the
communications sector. Mr. Lee has a Bachelor of Science in economics from The
Wharton School at the University of Pennsylvania.
DARRYL B. THOMPSON. Mr. Thompson was named to our Board of Directors in
June 1999 in conjunction with TSG Capital's investment in our Convertible Notes
convertible into the Class B Senior Convertible Preferred Stock. Mr. Thompson is
currently a Partner at TSG Capital Group. Mr. Thompson began his investment
career at Morgan Stanely & Co. as a Financial Analyst and Senior Associate. He
subsequently joined TLC Group, L.P., as special assistant to its Chairman,
Reginald F. Lewis. At TLC, Mr. Thompson managed operating company acquisitions
and financings. He joined TSG Capital as Senior Vice President in 1992. Mr.
Thompson holds an AB Degree in Chemistry and Mathematics from the University of
North Carolina at Chapel Hill, an MS in Technology and Policy from the
Massachusetts Institute of Technology (MIT) and an MBA from Stanford University.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. We filed to
register our Common Stock under Section 12(g) of the Exchange Act of June 11,
1996, which registration became effective 60 days after such filing. To our
knowledge, the following persons have filed late reports pursuant to Section 16
relating to their beneficial ownership of our securities:
In June 1999, Mr. Comee sold or transferred 100,000 shares of common stock.
To our knowledge, a Form 4 reporting this sale has not been filed.
In December 1999, Mr. Delaney sold or transferred 248,750 shares of common
stock. To our knowledge, a Form 4 reporting this sale has not been filed.
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EXECUTIVE COMPENSATION.
The following table summarizes the compensation we paid to our Chief
Executive Officer and all of our executive officers whose salary and bonus from
us for services rendered during 1999 exceeded $100,000. Information is not
included for any persons not serving as an executive officer as of December 31,
1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------
AWARDS PAYOUTS
------------------------- -------
SECURITIES
ANNUAL COMPENSATION RESTRICTED UNDERLYING
NAME AND --------------------------- OTHER ANNUAL STOCK OPTIONS/ LTIP
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS SARS PAYOUTS
- ------------------------------------- ----- -------- ------- -------------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Stephen E. Raville................... 1999 $ 13,000
Chief Executive Officer.............. 1998 $ 10,000
1997 $ -0-
Peter C. Alexander................... 1999 $ 17,692 1,000,000
President and Chief
Operating Officer
Patrick E. Delaney................... 1999 $ 75,356 $50,000 400,000
Executive Vice President............. 1998 $ 81,995(1)
1997 $100,000
Federico L. Fuentes.................. 1999 $113,358(2) 500,000
Chief Technical Officer
Ruben Garcia......................... 1999 $ 71,077 900,000
President CLEC Division
Jaime Zambra......................... 1999 $113,358(2) 500,000
President--
International Division
John F. Nort......................... 1999 $115,000 $50,000 400,000
President--Prepaid 1998 $100,000 150,000
Solutions Division 1997 $100,000
</TABLE>
- ------------
(1) In addition to the salary listed, Mr. Delaney received $19,336 for royalties
and $12,500 for personally pledging 1 million shares of common stock as
collateral for a $1 million bridge loan we entered into during December
1998.
(2) We entered into a consulting agreement with Multielectronica, CYRF C.A., a
Venezuelan company which Mr. Fuentes and Zambra are principals. Under the
agreement we are obligated to pay $37,000 plus related expenses for the
services of four individuals, two of whom are Mr. Fuentes and Zambra.
We have adopted a Nonemployee Director Stock Option Plan pursuant to which
2,000,000 shares of our Common Stock have been reserved for issuance to our
Nonemployee directors. Options are granted with an exercise price at fair market
value on the date of grant, are exercisable upon the one year anniversary of the
date of grant and expire upon the earliest to occur of:
o ten years after the date of grant,
o one year after the recipient ceases to be a director by reason of death
or disability, or
o three months after the recipient ceases to be a director for any reason
other than death or disability.
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To date, we have granted options to purchase 100,000 shares under the plan to
each of the following persons:
o Stephen E. Raville,
o William P. O'Reilly,
o F. Scott Yeager,
o Gerald F. Schmidt,
o and James H. Dorsey.
The options vest in 25,000 share increments on each one year anniversary
date of election to the board of directors. As of December 31, 1999, Messrs.
Raville, O'Reilly and Yeager were vested in 100,000 options, Mr. Schmidt was
vested in 75,000 options, and Mr. Dorsey was vested in 50,000 options.
SUMMARY FISCAL YEAR OPTION GRANT TABLE
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED TO EXERCISE
UNDERLYING EMPLOYEES IN PRICE EXPIRATION
NAME AND PRINCIPAL POSITION OPTIONS GRANTED FISCAL YEAR ($/SH) DATE
- ------------------------------------- --------------- ------------------ -------- ----------
<S> <C> <C> <C> <C>
Peter C. Alexander
President and Chief Operating
Officer............................ 500,000(1) 16.9% $ 2.125 1-31-09
500,000(2) 2.125 12-3-04
Patrick E. Delaney
Executive Vice President........... 400,000(1) 6.8% $ 1.75 1-31-09
Federico L. Fuentes
Chief Technical Officer............ 500,000(1) 8.5% $ 1.75 1-31-09
Ruben Garcia
President, CLEC Division........... 350,000(1) 15.3% $ 1.75 1-31-09
550,000(2) 1.75 8-31-07
Jaime Zambra
President International Division... 500,000(1) 8.5% $ 1.75 1-31-09
John F. Nort
President, Prepaid Solutions
Division........................... 400,000(1) 6.8% $ 1.75 1-31-09
</TABLE>
- ------------
(1) These options were granted under the Executive Market Value Appreciation
Stock Option Plan. Under this plan, options become vested on December 31st
of each year outstanding at the rate of 5% of the options granted for each
$1.00 (adjusted for certain capital transactions) of increase in our stock
price, and they become contingently vested in an equal number of shares but
may not exercise until fully vested. The contingently vested options become
fully vested on the following December 31st assuming the stock price is at
least the same as that on the previous December 31st when they became
contingently vested. Any optioned shares that have not vested after the
seventh full year shall vest pro rata on December 31st of years eight, nine
and ten.
(2) These options were granted under the Pay for Performance Stock Option Plan
in conjunction with our merger with HTC Communications LLC. Options become
vested under this grant according to a schedule, which includes 50,000 to
100,000 shares for opening each of eight CLEC markets for us over three
years beginning September 1, 1999. An open market is defined as one which
generates a minimum of $25,000 gross monthly income.
(3) These options were granted under the Pay for Performance Stock Option Plan.
They terminate five years from the grant date and become exercisable
according to the following schedule: half upon the second consecutive
quarter in which we have achieved positive Earnings Before Interest Taxes
Depreciation and Amortization (EBITDA) excluding the Competitive Local
Exchange Carrier business. The second half becomes exercisable upon the
second consecutive quarter in which we as a whole have achieved positive
EBITDA).
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SUMMARY AGGREGATE OPTION EXERCISE AND VALUE TABLE
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF IN-THE-
UNEXERCISED MONEY(1)OPTIONS AT
SHARES OPTIONS AT FY-END FY-END 1999
ACQUIRED ON VALUE 1999 EXERCISABLE/ EXERCISABLE/
NAME AND PRINCIPAL POSITION EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
- ------------------------------------- ----------- -------- ------------------ --------------------
<S> <C> <C> <C> <C>
Peter C. Alexander................... - 0 - $ 0 12,500 $ 1,562
President and Chief Operating
Officer 987,500 $123,438
Patrick E. Delaney................... - 0 - $ 0 10,000 $ 5,000
Executive Vice President 390,000 $195,000
Federico L. Fuentes.................. - 0 - $ 0 12,500 $ 6,250
Chief Technical Officer 487,500 $243,750
Ruben Garcia......................... - 0 - $ 0 8,750 $ 4,375
President, CLEC Division 891,250 $445,625
Jaime Zambra......................... - 0 - $ 0 12,500 $ 6,250
President, International
Division 487,500 $243,750
John F. Nort......................... - 0 - $ 0 160,000 $155,000
President, Prepaid Division 390,000 $195,000
</TABLE>
- ------------
(1) Assumes a fair market value at December 31, 1999 of $2.25.
EMPLOYMENT ARRANGEMENTS
In August 1999, Pointe entered into an employment agreement with Ruben
Garcia to be President of U.S. CLEC operations for a period of three years.
Under the plan, Mr. Garcia will receive an annual salary of $140,000 and is
eligible for a bonus of up to 50% of annual salary based upon performance. In
addition, Mr. Garcia was granted an option under the Executive Market Value
Appreciation Plan to purchase up to 350,000 shares of common stock at $1.75 per
share. The options vest on December 31st of each year outstanding at the rate of
5% of the grant for each $1.00 of increase in our stock price, and they become
contingently vested in an equal number of shares but may not exercise until
fully vested. The contingently vested options become fully vested on the
following December 31st assuming the stock price is at least the same as the
previous December 31st. Additionally, Mr. Garcia was granted an option to
purchase 550,000 shares of common stock under the Pay For Performance Plan. The
options become vested according to a schedule which includes 50,000 to 100,000
shares for opening each of eight CLEC markets for us over three years. An open
market is defined as one which generates a minimum of $25,000 gross monthly
income.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Stephen E. Raville, James H. Dorsey III and F. Scott Yeager act in the same
capacity as a compensation Committee; however, Pointe does not have an appointed
compensation Committee. Except for Mr. Raville, the Company's Chief Executive
Officer, the other directors acting in the capacity of a compensation committee
are not executives of Pointe or its subsidiaries, and none act in a similar
capacity for another entity. Additionally, no director or officer of Pointe
serves in a similar capacity for an entity whose officers or directors serve on
Pointe's compensation committee.
DIRECTORS COMPENSATION
Pointe's directors do not receive cash compensation for their services as
directors. Pointe does pay for out of pocket expenses related to attending a
board meeting. Pointe does grant each non-employee director an option to
purchase 100,000 shares of Pointe's common stock, which vests over a four year
period and terminates within 90 days after the person ceases to be a director.
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EXECUTIVE COMPENSATION
Pointe has not elected a compensation committee; however, Stephen E.
Raville, the Company's Chief Executive Officer, James H. Dorsey, III, and F.
Scott Yeager act in the same capacity as a compensation committee. Mr. Dorsey
and Mr. Yeager are not officers or employees of Pointe. These individuals have
put together compensation packages designed to attract and retain the
executives.
Pointe bases its compensation to executives on the level of expertise the
individual has for the position, the executive's performance, the compensation
for similar executives in similar businesses, and the tenure of the executive
with Pointe. Pointe attempts to align the executive pay with Pointe's overall
performance and to provide an incentive to the executive to achieve positive
results for Pointe's shareholders. Pointe achieves these goals by providing the
executive with competitive market salaries along with the opportunity to earn
performance based bonuses and ownership in Pointe through Pointe's Executive
Market Value Appreciation Stock Option Plan, which provides executives with the
ability to accelerate the vesting of their options through exceptional
performance. Pointe believes that the executives have incentive to perform well
because of the risk of not receiving a certain portion of the annual
compensation.
Messrs. Raville, Dorsey, and Yeager review the base salaries of the named
executive officers annually and recommend new salaries for the next year. In the
analysis, comparable market information, performance individually and as a
company, and projections for Pointe are used to determine the new salary. A
similar analysis is performed in determining performance bonuses, with the
emphasis on the performance of the executive in the year. Additionally, stock
options are granted both as reward for performance by the executive but also as
incentive to the executive to remain with Pointe.
Mr. Raville does not participate in setting his personal compensation.
Messrs. Dorsey and Yeager and the Board generally set the compensation for
Pointe's Chief Executive Officer. Mr. Raville receives $13,000 annually, and he
is vested in options to purchase 100,000 shares of common stock, which
previously were granted to Mr. Raville under Pointe's Non-employee Director
Stock Option Plan when he was not an employee. Mr. Raville does not receive any
other cash, stock, or stock option compensation. Mr. Raville's salary is not
based on performance.
THE BOARD OF DIRECTORS
Stephen E. Raville Patrick E. Delaney William P. O'Reilly
F. Scott Yeager James H. Dorsey, III Gerald F. Schmidt
Rafic A. Bizri David C. Lee Darryl B. Thompson
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STOCKHOLDER RETURN PERFORMANCE PRESENTATION
Set forth below is a line graph comparing the yearly percentage change in
the total stockholders' return on Pointe's common stock against the S&P 500 and
the Nasdaq Telecommunications Industry Index.
[Graph]
DESCRIPTION 1996 1997 1998 1999
- ------------------------------------- ---- ---- ---- ----
Pointe (%)........................... 50% 10% -30% 110%
S & P 500 (%)........................ 50% 90% 150% 180%
NASDAQ Telecom (%)................... 40% 90% 200% 520%
- ------------
Source: Bloomberg, L.P.
The graph assumes that all dividends were re-invested. No dividends have
been declared or paid in Pointe's common stock. Stockholder returns over the
indicated period should not be considered indicative of future stockholder
returns.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of May 4, 2000, information regarding
the ownership of our Common Stock owned by:
o each person (or "group" within the meaning of Section 13(d)(3) of the
Security Exchange Act of 1934) known by us to own beneficially more than
5% of the Common Stock;
o each of our directors;
o each of the named executive officers; and
o all of our officers and directors as a group.
BENEFICIAL OWNERS NUMBER %OF TOTAL
- ------------------------------------- ------------ ----------
DIRECTORS AND EXECUTIVE OFFICERS
Patrick E. Delaney...................... 2,538,173(1) 2.09%
William P. O'Reilly..................... 599,846(2) *
F. Scott Yeager......................... 280,000(3) *
Stephen E. Raville...................... 7,643,965(4) 6.29%
Gerald F. Schmidt....................... 3,496,667(5) 2.88%
John F. Nort............................ 812,387(6) 0
James H. Dorsey......................... 1,292,955(7) 1.06%
David C. Lee............................ 17,241,939(8) 14.19%
Rafic A. Bizri.......................... 17,241,939(9) 14.19%
Darryl B. Thompson...................... 20,784,676(10) 17.11%
EXECUTIVE OFFICERS AND DIRECTORS AS A
GROUP:................................ 71,120,160 58.53%
BENEFICIAL OWNER OF 5% OF THE COMMON
STOCK
TSG Capital Fund III, L.P............... 20,430,837(10) 4.40%
Sandler Capital Partners................ 16,897,616(8) 14.31%
Oger Pensat Holdings.................... 16,897,616(9) 14.31%
Zephyr International Limited............ 5,194,666 4.40%
The business address for each of the above Directors and Executive Officers is
1325 Northmeadow Parkway, Roswell, Georgia 30076.
- ------------
(1) Includes 72,423 shares owned by family members, the ownership of which is
disclaimed; and warrants to purchase 30,000 shares at $1.00 per share.
(2) Includes the vested portion of Nonemployee Director option of 100,000
shares at $0.70, and 83,333 shares subject to a convertible debenture at a
conversion price of $1.20 per share.
(3) Includes 9,000 shares owned by minor children, the ownership of which is
disclaimed, and the vested portion of Nonemployee Director option of
100,000 shares at $0.70 per share.
(4) Includes 6,489,798 of our shares which are owned by the Star Insurance
Company, or Star. On May 12, 1998, the shares were sold to Star by the
Raville 1994 Family Limited Partnership of which Mr. Raville is the
Managing General Partner. Mr. Raville disclaims ownership of these shares
but retains full power to vote these shares. Also includes the vested
portion Nonemployee Director option of 100,000 shares at $0.70 per share;
warrants to purchase 30,000 shares at $1.00 per share; warrants to purchase
97,500 shares at $3.00 per share; warrants to purchase 760,000 shares at
$1.00 per share; and 166,667 shares subject to a convertible debenture at a
conversion price of $1.20 per share.
(5) Includes 3,000,000 shares owned by Cordova Capital Partners LP Enhanced
Appreciation, an investment Limited Partnership of which Cordova Capital is
general partner, the ownership of shares is disclaimed; warrants held by
Cordova Capital Partners LP Enhanced Appreciation to purchase 380,000
shares at $1.00 per share, the ownership of shares is disclaimed; the
vested portion of Nonemployee Director option of 75,000 shares at $1.00 per
share; and 41,667 shares subject to a convertible debenture at a conversion
price of $1.20 per share.
(6) Includes Employee Incentive Stock options to purchase 150,000 shares at
$1.25 per share; warrants to purchase 100,000 shares at $3.00 per share.
(7) Includes the vested portion of Nonemployee Director option to purchase
50,000 shares at $1.00 per share; warrants to purchase 97,500 shares at
$3.00 per share; and warrants to purchase 545,455 shares at 1.375 per
share.
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(8) Includes 11,540,473 shares underlying the Class A Senior Convertible
Preferred Stock and warrants to purchase 5,357,143 shares for $1.625 per
share owned by Sandler Capital Partners IV, L.P. and Sandler Capital
Partners IV FTE, L.P.
(9) Includes 11,540,473 shares underlying the Class A Senior Convertible
Preferred Stock and warrants to purchase 5,357,143 shares for $1.625 per
share owned by Oger Pensat Holdings Ltd.
(10) Includes 11,859,408 shares underlying the Class B Senior Convertible
Preferred Stock and warrants to purchase 8,571,429 shares for $1.89 per
share owned by TSG Capital Fund III, L.P.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 1998, we entered into various equity and debt private placements
with officers and directors. During the first quarter, the Chairman of the Board
of Directors and another Director, purchased 3,400,000 and 600,000 shares of
stock for $1,700,000 and $300,000, respectively. During the second quarter, we
issued a promissory note to a Director for $750,000, which is non-interest
bearing and matures June 1, 1999. In conjunction with the promissory note, we
issued 545,455 warrants to purchase common stock at $1.375 for a period of one
year from issuance. The note and the warrants were extended in May 1999 for two
years ending June 1, 2001.
During the third quarter of 1998, we issued a promissory note to Peachtree
Capital Corporation, a company affiliated with the Chairman, and a Director, for
$150,000 payable on demand. The note was repaid on March 15, 1999. Also during
the third quarter of 1998, an executive officer purchased 100,000 shares of
common stock and warrants to purchase 100,000 shares of common stock at $3.00
per share for gross proceeds of $100,000. During the fourth quarter of 1998, we
issued a $1 million promissory note to Cordova Capital Partners LP--Enhanced
Appreciation, which is affiliated with a Director. In conjunction with the
notes, we issued 380,000 warrants to purchase common stock at $1.00 per share.
Also, during the fourth quarter of 1998, we acquired Rent-A-Line Telephone
Company LLC, or Rent, a portion of which was owned by an executive officer at
the time of acquisition. The executive officer received the right to convert a
$38,150 promissory note, owed by Rent, into 77,243 shares of Common Stock as
consideration for his ownership of Rent. Further during the fourth quarter of
1998, the Chairman of our Board of Directors and an executive officer pledged
shares of their common stock as collateral for the $2.0 million bridge loans
entered into during the same quarter.
During the first quarter of 1999, we issued a $2 million promissory note to
First Southeastern Corp., which is an entity affiliated with the Chairman. In
conjunction with the notes, we issued 380,000 warrants to purchase common stock
at $1.00 per share. Also during the first quarter of 1999, we entered into a
consulting contract with Multielectronica CYRF C.A., a Venezuelan company, whose
affiliates include two of our executive officers. Under the agreement, we are
obligated to pay $37,000 per month plus related expenses for the services of the
two executive officers and two engineers. The term of the contact is one year
commencing March 15, 1999. The agreement automatically renews unless written
notice of termination is given by either party 30 days prior to the end of the
initial term.
During 1998 and 1999, a company affiliated with an executive officer of
ours conducted business with us as a distributor of prepaid calling cards. The
affiliated company distributed a total of $523,026 and $602,382 of prepaid cards
during 1998 and 1999, respectively. Also during 1998 and 1999, we provided loans
to certain of its officers and key employees in the amount of $254,770.
CERTAIN INFORMATION RELATING TO THE BOARD OF DIRECTORS AND COMMITTEES OF THE
BOARD
The board of directors of Pointe held nine formal meetings during 1999.
Except for F. Scott Yeager, each of the directors who served during 1999 as a
director attended at least 75% of all of the meetings of the board.
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III. CERTAIN LEGAL INFORMATION
COMPARISON OF TELSCAPE AND POINTE SHAREHOLDER RIGHTS
Upon consummation of the Merger, the shareholders of Pointe, a Nevada
corporation, will become shareholders of Telscape, a Texas corporation, and
their rights will be governed by Telscape's charter and bylaws which differ in
certain material respects from Pointe's charter and bylaws. As shareholders of
Telscape, the rights of the former shareholders of Pointe will be governed by
the Texas Business Corporation Act. Copies of the Pointe charter and bylaws and
copies of the Telscape charter and bylaws, in each case as in effect on the date
of this joint proxy statement/prospectus, are incorporated by reference and will
be sent to shareholders of Telscape and Pointe upon request. See "Where You Can
Find More Information." The following summary is not intended to be complete
and is qualified by reference to Texas law, Nevada law, the Pointe charter, the
Pointe bylaws, the Telscape charter and the Telscape bylaws, in each case as in
effect on the date of this joint proxy statement/prospectus.
AUTHORIZED CAPITAL
TELSCAPE. Under Telscape's articles of incorporation, Telscape has
authority to issue 25,000,000 shares of common stock, par value $.001 per share,
and 5,000,000 shares of preferred stock, par value $.001 per share. Of the
5,000,000 authorized shares of preferred stock, 1,000,000 shares are designated
as Class A Preferred Stock, and 380,000 shares are designated as Class B
Non-Voting, Non-Participating Preferred Stock. As of May 8, 2000, 8,166,317
shares of Telscape's common stock were outstanding, including 83,359 shares were
held in Telscape's treasury, and approximately 5.4 million shares were reserved
for issuance upon the exercise of outstanding options and warrants to purchase
shares of Telscape's common stock. As of May 8, 2000, no shares of Telscape's
preferred stock were issued and outstanding or held in Telscape's treasury.
POINTE. Under Pointe's articles of incorporation, Pointe has authority to
issue 100,000,000 shares of common stock, par value $.00001 per share, and
100,000 shares of preferred stock, par value $.01 per share of the 100,000
shares of Preferred Stock authorized, 15,000 shares are designated as Class A
Convertible Senior Preferred Stock and 10,000 shares are designated as Class B
Convertible Senior Preferred Stock. As of May 8, 2000, 53,244,428 shares of
Pointe's common stock were issued and outstanding, and no shares were held in
Pointe's treasury. As of May 8, 2000, 18,662 shares of Pointe's preferred stock
were issued and outstanding, and no shares were held in Pointe's treasury.
NOTICE TO SHAREHOLDERS
TELSCAPE. Under Telscape's bylaws, written notice of a shareholders'
meeting must be served upon each shareholder entitled to vote at the meeting
either personally or by mail, not less than ten days nor more than 60 days prior
to the meeting. In the event of a merger or consolidation, such notice shall be
delivered not less than twenty days before the meeting.
POINTE. Under Pointe's bylaws, written notice of a shareholders' meeting
must be served upon each shareholder entitled to vote at the meeting either
personally or by mail, not less than ten days nor more than 60 days prior to the
meeting.
ANNUAL MEETING OF SHAREHOLDERS
TELSCAPE. Under Telscape's bylaws, an annual meeting of shareholders shall
be held at such date and time as designated by the board of directors. The
shareholders shall elect a board of directors and may transact any business
properly brought before the meeting.
POINTE. Under Pointe's bylaws, an annual meeting of shareholders shall be
held at such date and time as designated by the board of directors. The
shareholders shall elect a board of directors and may transact any business
properly brought before the meeting. The failure to hold the annual meeting or
to file a written consent in lieu thereof will not cause a forfeiture or
dissolution of Pointe.
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SPECIAL MEETING OF SHAREHOLDERS
TELSCAPE. Under Telscape's bylaws, a special meeting of the shareholders
may be called by the chairman of the board, the chief executive officer, the
president, the board of directors or the holders of at least ten percent (10%)
of all shares entitled to vote at the meetings.
POINTE. Under Pointe's bylaws, a special meeting of shareholders may be
called by the president, the board of directors or the chairman of the board.
QUORUM AT SHAREHOLDER MEETINGS
TELSCAPE. Under Telscape's bylaws, the holders of a majority of the
outstanding capital stock entitled to vote, present in person or represented by
proxy, constitute a quorum at each shareholder meeting. When a quorum is
present, the vote of a majority of the outstanding capital stock entitled to
vote, shall decide any question brought before such meeting, unless otherwise
provided by applicable law or Telscape's articles of incorporation or bylaws.
POINTE. Under Pointe's bylaws, the holders of a majority of the
outstanding capital stock entitled to vote, or in the event of any vote by class
or classes, a majority of each class of the shares entitled to vote as a class,
represented in person or by proxy, constitute a quorum at each shareholder
meeting, unless otherwise provided by applicable law or Pointe's articles of
incorporation or the bylaws. If, however, a quorum is not present or represented
by proxy at a shareholders' meeting, the shareholders present in person or
represented by proxy shall have the power to adjourn the meeting, without notice
other than announcement at the meeting. At any adjourned meeting at which a
quorum is present or represented, any business may be transacted which might
have been transacted at the meeting as originally notified.
VOTING OF SHARES
TELSCAPE. Under Telscape's bylaws, with respect to any matter other than
the election of directors or a matter for which the affirmative vote of the
shareholders of a specified portion of the shares is required by law, the
affirmative vote of the holders of a majority of the shares entitled to vote on
that matter and represented in person or by proxy at a meeting shall be the act
of the shareholders. Directors shall be elected by a plurality of the votes cast
by the holders of shares entitled to vote in the election of directors at a
meeting of shareholders at which a quorum is present. No proxy shall be valid
after eleven (11) months from the date of its execution, unless otherwise
provided in the proxy.
POINTE. Under Pointe's bylaws, when a quorum is present at the meeting,
the vote of the holders of a majority of all the shares entitled to vote
represented in person or by proxy shall be the act of the shareholders, unless
the vote of a greater number is required by statute, the articles of
incorporation or the bylaws.
CUMULATIVE VOTING
TELSCAPE. Under Telscape's bylaws, cumulative voting is prohibited.
POINTE. Under Nevada law, the articles of incorporation may provide the
right of cumulative voting. Pointe's articles of incorporation do not provide
for cumulative voting for the election of directors.
SHAREHOLDER ACTION BY WRITTEN CONSENT
TELSCAPE. Under Telscape's bylaws, any action required or permitted to be
taken at a meeting of the shareholders may be taken without a meeting if a
consent in writing setting forth the action is signed by all of the shareholders
entitled to vote with respect to the subject matter thereof, and such consent
shall have the same force and effect as a unanimous vote of the shareholders.
Under Telscape's articles of incorporation, any action of shareholders may be
taken without a meeting, without prior notice, and without a vote, if a consent
in writing, setting forth the actions taken, is
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<PAGE>
signed by the holders of shares having at least the minimum number of votes that
would be necessary to take such action at a meeting at which the holding of all
shares entitled to vote on the actions were present and voted.
POINTE. Under Pointe's bylaws, any action required or permitted to be
taken at any annual or special meeting of shareholders may be taken without a
meeting, if a written consent setting forth the action authorized is:
o signed by each of the shareholders entitled to vote on the date the last
shareholder signs such consent; and
o filed with the officer of Pointe having custody of its books and
records.
VOTING LIST
TELSCAPE. Neither Telscape's articles of incorporation nor bylaws set
forth any voting list requirement.
POINTE. Under Pointe's bylaws, any action required by statute to be taken
at a meeting of the shareholders may be taken without a meeting if a consent in
writing, setting forth the action so taken, shall be signed by all of the
shareholders entitled to vote with respect to the subject matter thereof.
SHAREHOLDER INSPECTION OF BOOKS AND RECORDS
TELSCAPE. Under Texas law, any person who has been a shareholder for at
least six months immediately prior to such person's request or is a holder of at
least five percent (5%) of all outstanding shares of Telscape capital stock is
entitled, upon written demand, to inspect and copy its relevant books and
records for any proper purpose.
POINTE. Under Nevada law, any person who has been a shareholder for at
least six months immediately prior to such person's request or is the holder of
at least five percent (5%) of all outstanding shares of Pointe capital stock is
entitled, upon at least five days' written request, to inspect and make copies
of Pointe's articles of incorporation, bylaws and stock ledger. Pointe may deny
a shareholder's right of inspection if the shareholder refuses to furnish Pointe
with an affidavit stating that (i) the inspection is not desired for a purpose
other than one involving Pointe's business, and (ii) the shareholder has not
sold, offered for sale or helped anyone procure any list of shareholders for any
purpose other than one related to Pointe's business.
SALE OF ASSETS
TELSCAPE. Under Texas law, and unless otherwise provided in Telscape's
articles of incorporation, the sale or other disposition of all, or
substantially all, of Telscape's assets in the usual and regular course of
business may be authorized by the board of directors, without authorization of
the shareholders. Telscape's articles of incorporation do not provide otherwise.
POINTE. Under Nevada law, the sale of all of Pointe's assets must be
approved by a majority of Telscape's outstanding capital stock entitled to vote.
AMENDMENT OF BYLAWS
TELSCAPE. Under Telscape's bylaws, a majority of the directors who have
been nominated by the holders of Telscape's Class C Convertible Preferred Stock
and a majority of all other directors may amend or repeal the bylaws, unless (1)
the articles of incorporation or Texas law reserves the power exclusively to the
shareholders in whole or in part, or (2) the shareholders in amending, repealing
or adopting a particular bylaw expressly provide that the board of directors may
not amend or repeal the bylaw. Unless the articles of incorporation or a bylaw
adopted by the shareholders provides otherwise, the shareholders may amend,
repeal or adopt the bylaws even though the bylaws may be amended, repealed or
adopted by the board of directors.
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POINTE. Under Pointe's bylaws, the bylaws may be altered, amended or
repealed, and new bylaws may be adopted, by the affirmative vote of a majority
of either the board of directors or the holders of a majority of the shares
entitled to vote, present at any meeting at which a quorum of each respective
body is present, provided that notice of the proposed alteration, amendment,
repeal or adoption shall be contained in the notice of the meeting. The power to
alter, amend or repeal the bylaws, and to adopt new bylaws, may be modified or
divested by action of the holders of a majority of the shares entitled to vote
taken at any regular or special meeting of the shareholders.
SHAREHOLDER DERIVATIVE SUITS
TELSCAPE. Under Texas law, a shareholder who pursues a derivative action
must fairly and adequately represent the interest of Telscape in enforcing
Telscape's rights.
POINTE. Under Nevada law, a shareholder who pursues a derivative action
must fairly and adequately represent the interest of the other shareholders in
enforcing Pointe's rights.
DISSOLUTION
TELSCAPE. Under Texas law, Telscape may be dissolved upon the approval of:
o the majority of its board of directors;
o at least two-thirds of the outstanding shares within each class entitled
to vote as a class; and
o at least two-thirds of the outstanding shares otherwise entitled to
vote.
Texas law further provides that Telscape may be voluntarily dissolved by a
written consent of all shareholders.
POINTE. Under Nevada law, Pointe may be dissolved upon the majority vote
of its board of directors and shareholders.
BOARD OF DIRECTORS
TELSCAPE. Under Telscape's bylaws, the number of directors shall be no
less than one, as determined from time to time by resolution of the board of
directors. Telscape currently has directors.
POINTE. Under Pointe's articles of incorporation, the number of directors
shall be no less than one, determined from time to time by resolution of the
board of directors. Pointe currently has directors.
NEWLY CREATED DIRECTORSHIPS AND VACANCIES
TELSCAPE. Under Telscape's bylaws, vacancies and newly created
directorships shall be filled by the affirmative vote of a majority of the
remaining directors though less than a quorum. A director elected to fill a
vacancy shall be elected for the unexpired term of his predecessor in office.
Any directorship to be filled by reason of an increase in the number of
directors may be filled by election at an annual or special meeting of
shareholders called for that purpose or may be filled by the board of directors
for a term of office continuing only until the next election of one or more
directors by the shareholders, provided, that the board of directors may not
fill more than two such directorships during the period between any two
successive annual meetings of the shareholders.
POINTE. Under Pointe's bylaws, vacancies and newly created directorships
shall be filled by the affirmative vote of a majority of the directors then in
office though less than a quorum, or by a sole remaining director. A director
elected to fill a vacancy shall be elected for the unexpired term of his
predecessor in office. Any directorship to be filled by reason of an increase in
the number of directors may be filled by election at an annual or special
meeting of shareholders called for that purpose or may be filled by the board of
directors for a term of office continuing only until the election of one or more
directors by election at an annual or special meeting of shareholders called for
that purpose.
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REMOVAL OF DIRECTORS
TELSCAPE. Under Telscape's bylaws, at any meeting of the shareholders
called expressly for such purpose, any director may be removed from office, with
or without cause, by the affirmative vote of the holders of a majority of the
shares entitled to vote at an election of such directors.
POINTE. Pointe's bylaws and articles of incorporation do not address the
removal of directors. Under Nevada law, any director may be removed from office
by the vote of shareholders representing not less than two-thirds of the voting
power of the issued and outstanding stock entitled to voting power.
LIABILITY OF DIRECTORS
TELSCAPE. Under Texas law, only Telscape's articles of incorporation may
eliminate or limit the personal liability of its directors or officers. Under
Telscape's articles of incorporation, a direction of the corporation shall not
be liable to the corporation or its shareholders for monetary damages for an act
or omission in the director's capacity as a director to the fullest extent
permitted by the Texas Miscellaneous Corporation Laws Act.
POINTE. Under Pointe's articles of incorporation, to the fullest extent
permitted by Nevada statutes, as the same exist or may hereafter be amended
(but, in the case of any such amendment, only to the extent that such amendment
permits broader limitations than permitted prior to such amendment), a director
of Pointe shall not be liable to Pointe or its shareholders for monetary damages
for an act or omission in the director's capacity as a director.
INDEMNIFICATION
TELSCAPE. Under Telscape's bylaws, Telscape has the authority to
indemnify and advance expenses to the directors, officers, employees, agents or
any other persons serving at the request of Telscape in such capacities in a
manner and to the maximum extent permitted by applicable state or federal law.
Telscape may purchase and maintain liability insurance or make other
arrangements for such obligations to the extent permitted by law.
POINTE. Under Pointe's articles of incorporation, Pointe shall indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, except an action by or in the right
of Pointe, by reason of the fact that he is or was a director, officer, employee
or agent of Pointe, against expenses, including attorneys' fees, judgments,
fines and amounts paid in settlement actually and reasonably incurred by him in
connection with the action, suit or proceeding if he acted in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interests of Pointe, and with respect to any criminal action or proceeding, had
no reasonable cause to believe his conduct was unlawful. The termination of any
action or proceeding by judgment, order, settlement, conviction or upon a plea
of NOLO CONTENDERE or its equivalent, does not, of itself, create a presumption
that the person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of Pointe, and that, with
respect to any criminal action or proceeding, he had reasonable cause to believe
that his conduct was unlawful.
Any indemnification, unless ordered by a court or advanced, must be made by
Pointe only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances. The determination must be made (i) by the shareholders, (ii) by
the board of directors by majority vote of a quorum consisting of directors who
were not parties to the act, suit or proceedings, (iii) if a majority vote of a
quorum consisting of directors who were not parties to the act, suit or
proceedings so orders, by independent legal counsel in a written opinion, or
(iv) if a quorum consisting of directors who were not parties to the act, suit
or proceedings cannot be obtained, by independent legal counsel in a written
opinion.
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DESCRIPTION OF TELSCAPE CAPITAL STOCK
Telscape's authorized capital stock consists of 25,000,000 shares of common
stock, 5,000,000 shares of preferred stock and 1,000,000 shares of Class A
preferred stock.
The statements under this caption are brief summaries of certain material
provisions of Telscape's certificate of incorporation and by-laws. These
summaries do not purport to be complete, and are subject to, and are qualified
in their entirety by reference to, such documents.
COMMON STOCK
As of May 8, 2000, there were 8,166,317 shares of common stock outstanding
(including 83,359 shares of treasury stock) that were held of record by
approximately 90 shareholders. In addition, as of May 8, 2000, Telscape had
issued options and warrants to purchase a total of 5,378,245 shares of common
stock that are currently exercisable within 60 days of the date of this filing.
Holders of Telscape common stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Subject to the rights of the
holders of the shares of Telscape outstanding preferred stock, holders of
Telscape common stock are entitled to receive ratably any dividends that the
Telscape board of directors may from time to time declare out of funds legally
available therefor. In the event of the liquidation, dissolution or winding up
of the company, whether voluntary or involuntary, holders of Telscape common
stock are entitled to share ratably in all assets legally available for
distribution, if any, remaining after the payment or provision for the payment
of all debts and other liabilities and the payment and setting aside for payment
of any preferential amount due to the holders of shares of Telscape outstanding
preferred stock. Telscape common stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to Telscape common stock. All outstanding shares of Telscape common
stock are fully paid and nonassessable.
PREFERRED STOCK
The Telscape board of directors has the authority to issue up to 5,000,000
shares of preferred stock in one or more series. The board is authorized to fix
the rights, preferences, privileges and restrictions of the preferred stock,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of such series, without any
action by the shareholders. The issuance of preferred stock may have the effect
of delaying, deferring or preventing a change in control of Telscape and may
adversely affect the voting and other rights of the holders of Telscape common
stock. The issuance of preferred stock with voting and conversion rights may
adversely affect the voting power of the holders of Telscape common stock,
including the loss of voting control to others. At present, Telscape has no
preferred stock outstanding, and we have no plans to issue any preferred stock
except for the issuance of Class C preferred stock in connection with the
$10,000,000 Pointe Note, Class D preferred stock and Class E preferred stock in
connection with the merger and Class F preferred stock in connection with the
$29,575,000 private placement and exchange of an additional $2,000,000 of debt
to equity.
CLASS A PREFERRED STOCK
The Telscape board of directors has the authority to issue up to 1,000,000
shares of Class A preferred stock in one or more series. The Class A preferred
stock:
o participates equally with each share of common stock in all dividends;
o is redeemable, in whole or in part, at Telscape's option;
o is convertible, at the holder's option, into one fully paid and
non-assessable share of common stock;
o is entitled to one vote for each share with the same voting rights as if
each such share were one share of Telscape common stock; and
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o in the event of any liquidation, dissolution or winding up of the
affairs of Telscape, after payment of all of Telscape liabilities,
entitles the holder thereof to receive, prior to any payments to the
holders of Telscape common stock, out of Telscape remaining net assets,
an amount in cash equal to all other shares of Class A preferred stock,
but not more than the amount of consideration originally paid for such
shares.
At present the Telscape has no plans to issue any of the Class A
preferred stock.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF TELSCAPE'S CERTIFICATE OF INCORPORATION,
BYLAWS AND
TEXAS LAW
CERTIFICATE OF INCORPORATION AND BYLAWS. Telscape's Amended and Restated
Certificate of Incorporation provides that the members of the Telscape board of
directors are elected annually or as otherwise provided by resolution.
Provisions of Telscape's bylaws and Amended and Restated Certificate of
Incorporation provide that the shareholders may amend the bylaws or certain
provisions of Telscape's Amended and Restated Certificate of Incorporation only
with the affirmative vote of 67% of the outstanding shares of Telscape capital
stock. These provisions of the Amended and Restated Certificate of Incorporation
and bylaws could discourage potential acquisition proposals and could delay or
prevent a change in control of Telscape. These provisions are intended to
enhance the likelihood of continuity and stability in the composition of the
board of directors and in the policies formulated by the board of directors and
to discourage certain types of transactions that may involve an actual or
threatened change of control of Telscape. The provisions are designed to reduce
the vulnerability of Telscape to an unsolicited acquisition proposal. The
provisions also are intended to discourage certain tactics that may be used in
proxy fights. However, such provisions could have the effect of discouraging
others from making tender offers for Telscape shares and, as a consequence, also
may inhibit fluctuations in the market price of Telscape shares that could
result from actual or rumored takeover attempts. Such provisions also may have
the effect of preventing changes in Telscape management.
TEXAS BUSINESS COMBINATION LAW. Telscape is subject to Part 13 of the
Texas Business Corporation Act, which, subject to certain exceptions, prohibits
a Texas corporation from engaging in any business combination with any
affiliated shareholder, or any affiliate or associate of the affiliated
shareholder, for a period of three years following the date that the shareholder
became an affiliated shareholder, unless (i) the business combination or the
purchase or acquisition of shares made by the affiliated shareholder on the
affiliated shareholder's share acquisition date is approved by the board of
directors of the issuing public corporation before the affiliated shareholder's
share acquisition date or (ii) the business combination is approved, by the
affirmative vote of the holders of at least two-thirds of the outstanding voting
shares of the issuing public corporation not beneficially owned by the
affiliated shareholder or an affiliate or associate of the affiliated
shareholder, at a meeting of shareholders and not by written consent, duly
called for that purpose not less than six months after the affiliated
shareholder's share acquisition date.
Part 13 defines "business combination" to include:
o any merger, share exchange, or conversion of an issuing public
corporation or a subsidiary with:
o an affiliated shareholder;
o a foreign or domestic corporation or other entity that is, or after the
merger, share exchange or conversion would be, an affiliate or associate
of the affiliated shareholder; or
o another domestic or foreign corporation or other entity, if the merger,
share exchange or conversion is caused by an affiliated shareholder, or
an affiliate or associate of an affiliated shareholder, and as a result
of the merger, share exchange or conversion Part 13 does not apply to
the surviving corporation or other entity;
o a sale, lease, exchange, mortgage, pledge, transfer or other
disposition, in one transaction or a series of transactions, including
an allocation of assets pursuant to a merger, to or with the
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affiliated shareholder, or an affiliate or associate of the affiliated
shareholder, of assets of the issuing public corporation or any
subsidiary that:
o has an aggregate market value equal to 10% or more of the aggregate
market value of all the assets, determined on a consolidated basis, of
the issuing public corporation;
o has an aggregate market value equal to 10% or more of the aggregate
market value of all the outstanding common stock of the issuing public
corporation; or
o represents 10% or more of the earning power or net income, determined on
a consolidated basis, of the issuing public corporation;
o the issuance or transfer by an issuing public corporation or a
subsidiary to an affiliated shareholder or an affiliate or associate of
the affiliated shareholder, in one transaction or a series of
transactions, of shares of the issuing public corporation or a
subsidiary, except by the exercise of warrants or rights to purchase
shares of the issuing public corporation offered, or a share dividend
paid, pro rata to all shareholders of the issuing public corporation
after the affiliated shareholder's share acquisition date;
o the adoption of a plan or proposal for the liquidation or dissolution of
an issuing public corporation proposed by, or pursuant to any agreement,
arrangement or understanding, whether or not in writing, with an
affiliated shareholder or an affiliate or associate of the affiliated
shareholder older;
o a reclassification of securities, including a reverse share split or a
share split up, share dividend or other distribution of shares, a
recapitalization of the issuing public corporation, a merger of the
issuing public corporation with a subsidiary or pursuant to which the
assets and liabilities of the issuing public corporation are allocated
among two or more surviving or new domestic or foreign corporations or
other entities, or any other transaction whether or not with, into, or
otherwise involving the affiliated shareholder, proposed by, or pursuant
to an agreement, arrangement or understanding, whether or not in
writing, with an affiliated shareholder or an affiliate or associate of
the affiliated shareholder that has the effect, directly or indirectly,
of increasing the proportionate ownership percentage of the outstanding
shares of a class or series of voting shares or securities convertible
into voting shares of the issuing public corporation that is
beneficially owned by the affiliated shareholder or an affiliate or
associate of the affiliated shareholder, except as a result of
immaterial changes due to fractional share adjustments; or
o the direct or indirect receipt by an affiliated shareholder or an
affiliate or associate of the affiliated shareholder of the benefit of a
loan, advance, guarantee, pledge or other financial assistance or a tax
credit or other tax advantage provided by or through the issuing public
corporation, except proportionately as a shareholder of the issuing
public corporation.
Part 13 defines an affiliated shareholder as a person, other than the
issuing public corporation or a wholly owned subsidiary of the issuing public
corporation, that is the beneficial owner of 20% or more of the outstanding
voting shares of the issuing public corporation or that, within the preceding
three-year period, was the beneficial owner of 20% or more of the then
outstanding voting shares of the issuing public corporation. For the purpose of
determining whether a person is an affiliated shareholder, the number of voting
shares of the issuing public corporation considered outstanding includes shares
considered beneficially owned by that person under Subdivision (3) of Part 13,
but does not include other unissued voting shares of the issuing public
corporation that may be issuable pursuant to an agreement, arrangement or
understanding, or on exercise of conversion rights, warrants or options, or
otherwise.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for Telscape common stock is American
Stock Transfer, 40 Wall Street, 46th Floor, New York, NY 10005 (718) 921-8275.
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DESCRIPTION OF POINTE CAPITAL STOCK
The following summary of the terms of the capital stock of Pointe prior to
completion of the merger is not meant to be complete and is qualified by
reference to the Pointe charter and Pointe by-laws. Copies of the Pointe charter
and Pointe by-laws are incorporated by reference and will be sent to holders of
shares of Pointe common stock and Telscape common stock upon request. See
"Where You Can Find More Information."
AUTHORIZED CAPITAL STOCK
Pointe's authorized capital stock consists of 100,000,000 shares of Common
Stock, $0.00001 par value, and 10,000,000 shares of Preferred Stock, $0.01 par
value. The Pointe board of directors has created 15,000 shares of Class A
preferred stock and 10,000 shares of Class B preferred stock.
At May 8, 2000, there were:
o 53,244,428 shares of common stock outstanding, owned by approximately
254 holders of record
o 11,181 shares of Class A convertible preferred stock outstanding, owned
by 4 holders of record; and
o 7,481 shares of Class B convertible preferred stock outstanding, owned
by 3 holders of record.
A total of 20,000,000 shares of Pointe's common stock is reserved for
issuance to non-employee directors, officers and employees under various stock
option plans.
DIVIDENDS
The Board of Directors can declare dividends on Pointe's common stock.
There is no requirement that dividends be paid on the common stock. Each class
of Pointe's preferred stock is guaranteed a twelve percent dividend compounding
quarterly, with dividends being fully cumulative and payable in-kind or in cash
at Pointe's option. Pointe may not declare a dividend for the common stock, or
other classes of Pointe stock which are junior in payment rights to either class
of preferred stock, while any shares of preferred stock are outstanding.
VOTING RIGHTS
ELECTION OF THE BOARD OF DIRECTORS. Pointe's board members are elected by
the shareholders at the annual meeting by a plurality of the votes cast at the
meeting. The term of office of each board member will be until the next annual
meeting is held and until his successor is elected and qualified. Two Class A
shareholders each may designate one director on behalf of the Class A preferred
stock, for a total of two directors. The holders of Class B preferred stock have
the right to elect one director by a plurality of the Class B votes cast at the
annual meeting. Pointe's Articles of Incorporation do not provide for cumulative
voting.
MEETINGS OF SHAREHOLDERS OF POINTE. Annual meetings of shareholders will
be held at least once a year, unless a unanimous consent of the shareholders
indicates otherwise. Special meetings of shareholders may be held as often as
deemed necessary and may be called by the board of directors, the Chairman of
the Board, or the President. Notices convening a meeting of the shareholders
must be delivered to all shareholders, either personally or by mail, no less
than ten nor more than sixty days before the meeting.
Generally, resolutions are adopted at general meetings of shareholders by a
majority of the votes cast (except for electing directors) in a meeting in which
holders of at least a majority of the issued and outstanding shares are
represented. Each share of Common Stock carries one vote. Each share of Class A
and Class B preferred stock carry a number of votes equal to the number of
shares of Common Stock into which they are then convertible. The conversion
rates are determined in the certificates designating the rights of the Class A
and Class B preferred stock.
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AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS. The Board of Directors
must propose amendments to the Articles of Incorporation. A resolution is
submitted to a vote of the shareholders entitled to vote, at a meeting with a
quorum present. A majority of the total number of outstanding and issued shares
of Pointe capital stock must approve the amendment. The Bylaws may be amended by
either an affirmative vote of a majority of the Board of Directors or an
affirmative vote of a majority of the shares entitled to vote, at a meeting of
either body with a quorum present.
If a proposed amendment to the Articles of Incorporation or the Bylaws
adversely affects the rights granted to the Class A or Class B preferred stock,
the adversely affected class must approve the amendment by the affirmative vote
of sixty-six and two-thirds percent (66 2/3%) of the total number of outstanding
and issued shares in that class.
REGISTRATION RIGHTS
Pointe was required to file a registration statement with the SEC within
120 days after the closing of the private offering of the Class A convertible
preferred stock and warrants to register the shares of common stock issued or
issuable upon conversion of the Class A convertible preferred stock (including
shares issued as dividends) and the exercise of the warrants. More than 120 days
have passed since the closing, and Pointe has not filed the registration
statement. The holders of the preferred stock have signed a waiver to extend the
date by which Pointe has agreed to complete the required registration to the
date that is 90 days after either the date of consummation of the merger or the
termination of the merger agreement.
PREEMPTIVE RIGHTS
Pointe's Articles of Incorporation provide that there will be no preemptive
rights.
ANTI-TAKEOVER PROVISIONS
Nevada law provides for special protection in the event that a person or
group obtains a controlling voting interest in the corporation. The Pointe
Bylaws specifically provide that Pointe will not be governed by these
provisions, or any other similar provisions that may be enacted by the Nevada
legislature.
INDEMNIFICATION AND LIABILITY OF DIRECTORS AND OFFICERS
As permitted by Section 78.037 of the Nevada Revised Statutes ("NRS"),
Pointe's Articles of Incorporation and Bylaws intend to take full advantage of
the NRS provisions relating to limiting personal liability of officers,
directors, employees and agents. The Articles provide that a Pointe director
shall not be liable to Pointe or its shareholders for monetary damages for acts
or omissions in the director's capacity as a director. Liability is limited to
the fullest extent currently permitted by the NRS and as broadened in the
future. The Articles and Bylaws provide that Pointe shall indemnify current and
former directors, officers, employees and agents, and persons serving in similar
capacities in Pointe's subsidiaries or other entities in which Pointe has an
interest, against expenses, judgments, fines and amounts paid in settlement,
incurred if these persons acted in good faith and in a manner the person
reasonably believed to be in, or not opposed to, the best interests of Pointe
and, with respect to a criminal proceeding, had no reasonable cause to believe
their conduct was unlawful. This determination shall be made by the Board of
Directors, independent legal counsel, or the Pointe shareholders.
Further, if a person agrees in writing that he will pay back monies
advanced, Pointe will advance money before the matter is complete and before it
is determined that indemnification is required. Pointe may not be able to
recover these funds even if it is later determined that indemnification is
improper.
Pointe maintains Directors' and Officers' Liability Insurance which insures
Pointe's current and former directors and officers (and their estates, heirs,
legal representatives or assigns) and Pointe and its majority owned subsidiaries
from damages, settlements and the cost of defense associated with acts,
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omissions, and breaches of duty by the directors and officers of Pointe in their
duties as directors or officers of Pointe. Standard exclusions apply to these
policies which limit the insurer's liability, including that payment shall not
be made in connection with claims that are contributed to by fraudulent,
dishonest, or criminal acts of the directors or officers of Pointe.
Pointe also has contracts to indemnify specific Pointe directors and
officers which basically mirror the provisions in Pointe's Articles of
Incorporation and Bylaws.
Although the foregoing provisions may provide otherwise, the Securities and
Exchange Commission has stated its position that indemnification for liability
arising under the Securities Act of 1933 is against public policy as expressed
in the Act and is, therefore, unenforceable.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for Pointe common stock is Corporate Stock
Transfer, 3200 Cherry Creek Drive South, Suite 430, Denver Colorado 80209. (303)
282-4800.
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IV. ADDITIONAL INFORMATION FOR SHAREHOLDERS
FUTURE SHAREHOLDER PROPOSALS
TELSCAPE
If a Telscape shareholder intends to present a proposal for action at the
2001 annual meeting and wishes to have such proposal considered for inclusion in
the Company's proxy materials in reliance on Rule 14a-8 under the Securities
Exchange Act of 1934, as amended, the proposal must be submitted in writing and
received by Telscape by January 12, 2001. Such proposals must also meet the
other requirements of the rules of the SEC relating to shareholders' proposals.
In addition, if a shareholder submits a proposal outside of Rule 14a-8 for
the 2001 annual meet-
ing, Telscape's proxy may confer discretionary authority on the persons being
appointed as proxies on behalf of management to vote on the proposal. Proposals
should be addressed to the Secretary of Telscape, Todd M. Binet, 2700 Post Oak
Blvd., Suite 1000, Houston, Texas 77056.
POINTE
If a Pointe shareholder intends to present a proposal for action at the
2001 annual meeting and wishes to have such proposal considered for inclusion in
the Company's proxy materials in reliance on Rule 14a-8 under the Securities
Exchange Act of 1934, as amended, the proposal must be submitted in writing and
received by Pointe by January 12, 2001. Such proposals must also meet the other
requirements of the rules of the SEC relating to shareholders' proposals.
In addition, if a shareholder submits a proposal outside of Rule 14a-8 for
the 2001 annual meeting, Pointe's proxy may confer discretionary authority on
the persons being appointed as proxies on behalf of management to vote on the
proposal. Proposals should be addressed to the Secretary of Pointe, Richard P.
Halevy, 1325 Northmeadow Parkway, Suite 110, Roswell, Georgia 30076.
EXPERTS
TELSCAPE
The financial statements and schedule of Telscape and subsidiaries included
in this joint proxy statement/prospectus and in the registration statement have
been audited by BDO Seidman, LLP, independent certified public accountants, to
the extent and for the periods set forth in their reports appearing elsewhere
herein and in the registration statement, and are included in reliance upon such
reports given upon the authority of BDO Seidman, LLP as experts in auditing and
accounting.
POINTE
The financial statements and schedule of Pointe and subsidiaries included
in this joint proxy statement/prospectus and in the registration statement have
been audited by Arthur Andersen LLP, independent certified public accountants,
to the extent and for the periods set forth in their reports appearing elsewhere
herein and in the registration statement, and are included in reliance upon such
reports given upon the authority of Arthur Andersen LLP as experts in auditing
and accounting.
LEGAL MATTERS
The validity of the Telscape common stock to be issued to Pointe
shareholders in the merger will be passed upon by Thompson Knight Brown Parker &
Leahy, L.L.P., Houston, Texas, counsel to Telscape. Certain tax aspects of the
merger of Telscape and Pointe will be passed on by Arthur Andersen LLP. It is a
condition to the completion of the merger that Pointe receives an opinion from
Arthur Andersen LLP that the merger should qualify as a tax free reorganization.
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INDEPENDENT PUBLIC ACCOUNTANTS
TELSCAPE
One or more representatives of BDO Seidman, LLP, Telscape's principal
accountants for the current year and for the most recently completed fiscal
year, (i) will attend the special meeting; (ii) will have the opportunity to
make a statement if they desire to do so; and (iii) will be available to respond
to appropriate questions.
POINTE
One or more representatives of Arthur Andersen LLP, Pointe's principal
accountants for the current year and for the most recently completed fiscal
year, (i) will attend the annual meeting; (ii) will have the opportunity to make
a statement if they desire to do so; and (iii) will be available to respond to
appropriate questions.
WHERE YOU CAN FIND MORE INFORMATION
Telscape and Pointe file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information Telscape and Pointe file at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Telscape and Pointe SEC filings are also available to
the public from commercial document retrieval services and at the web site
maintained by the SEC at "http://www.sec.gov."
Telscape filed a registration statement on Form S-4 to register with the
SEC the Telscape common stock to be issued to Pointe shareholders in the merger.
This joint proxy statement/prospectus is a part of that registration statement
and constitutes a prospectus of Telscape in addition to being a proxy statement
of Telscape and Pointe for their respective meetings. As allowed by SEC rules,
this joint proxy statement/prospectus does not contain all the information you
can find in the registration statement or the exhibits to the registration
statement.
You may request a copy of Telscape's or Pointe's annual, quarterly and
special reports, proxy statements and other information, at no cost, by writing
or telephoning the companies at the following addresses:
Telscape International, Inc. Pointe Communications Corporation
2700 Post Oak Boulevard, Suite 1000 1325 Northmeadow Parkway
Houston, Texas 77056 Roswell, Georgia 30076
(713) 968-0968 (770) 432-6800
Telscape has supplied all information contained in this joint proxy
statement/prospectus relating to Telscape, and Pointe has supplied all such
information relating to Pointe.
You should rely only on the information contained in this joint proxy
statement/prospectus to vote on the Telscape proposals and the Pointe proposals,
as the case may be. Neither Telscape nor Pointe has authorized anyone to provide
you with information that is different from what is contained in this joint
proxy statement/prospectus. This joint proxy statement/prospectus is dated May
12, 2000. You should not assume that the information contained in the joint
proxy statement/prospectus is accurate as of any date other than that date, and
neither the mailing of this joint proxy statement/prospectus to shareholders nor
the issuance of Telscape common stock in the merger shall create any implication
to the contrary.
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OTHER BUSINESS
Neither Telscape nor Pointe intends to bring any business before the
meetings other than matters referred to in the accompanying notice and at this
date has not been informed of any matters that may be presented to the meetings
by others.
DISCRETIONARY AUTHORITY
At the time of mailing this joint proxy statement/prospectus, the Boards of
Telscape and Pointe were not aware of any other matters which might be presented
at the meeting. If any matter not described in this joint proxy
statement/prospectus should properly be presented, the persons named in the
accompanying form of proxy will vote such proxy in accordance with their
judgment.
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Telscape International, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of Telscape
International, Inc. and subsidiaries as of December 31, 1998 and 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three year period ended December 31, 1999. We
have also audited the financial statement schedule for the year ended December
31, 1999, listed in the accompanying index. These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements and the schedule. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Telscape
International, Inc. and subsidiaries at December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
Also, in our opinion, the financial statement schedule presents fairly, in
all material respects, the information set forth therein.
BDO SEIDMAN, LLP
Houston, Texas
March 10, 2000
F-2
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
-------------------------------
1998 1999
-------------- ---------------
CURRENT ASSETS:
Cash and cash equivalents.......... $ 9,631,000 $ 5,419,000
Accounts receivable, less allowance
for doubtful accounts of
$500,000 and $2,110,000,
respectively.................... 14,387,000 12,283,000
Inventories........................ 4,581,000 5,838,000
Prepaid expenses and other......... 3,519,000 4,203,000
Deferred income taxes.............. 628,000 2,254,000
-------------- ---------------
Total current assets....... 32,746,000 29,997,000
PROPERTY AND EQUIPMENT, net of
accumulated depreciation........... 14,576,000 58,468,000
GOODWILL AND OTHER INTANGIBLES, net
of accumulated amortization........ 31,416,000 32,342,000
DEFERRED INCOME TAXES................ 35,000 2,587,000
OTHER ASSETS......................... 1,558,000 3,746,000
-------------- ---------------
Total assets............... $ 80,331,000 $ 127,140,000
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................... $ 22,090,000 $ 45,841,000
Accrued expenses................... 10,182,000 15,494,000
Current portion of notes payable
and capital lease obligations... 2,714,000 11,112,000
Convertible debentures............. 4,996,000 --
-------------- ---------------
Total current liabilities.. 39,982,000 72,447,000
NOTES PAYABLE AND CAPITAL LEASE
OBLIGATIONS, net of current portion.. 1,488,000 27,649,000
CONVERTIBLE SUBORDINATED
DEBENTURES........................... 3,935,000 --
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value,
5,000,000 shares authorized;
without defined preference
rights.......................... -- --
Series A preferred stock, $.001 par
value, 1,000,000 shares
authorized...................... -- --
Common stock, $.001 par value,
25,000,000 shares authorized;
6,048,909 and 7,975,837 issued,
respectively.................... 6,000 8,000
Additional paid-in capital......... 39,398,000 51,142,000
Accumulated deficit................ (3,881,000) (23,356,000)
Treasury stock..................... (480,000) (480,000)
Capital subscriptions receivable... (117,000) (270,000)
-------------- ---------------
Total stockholders'
equity..................... 34,926,000 27,044,000
-------------- ---------------
Total liabilities and
stockholders' equity....... $ 80,331,000 $ 127,140,000
============== ===============
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1998 1999
-------------- --------------- ---------------
<S> <C> <C> <C>
REVENUES............................. $ 36,154,000 $ 132,179,000 $ 106,833,000
COST OF REVENUES..................... 24,396,000 111,892,000 93,394,000
-------------- --------------- ---------------
GROSS PROFIT......................... 11,758,000 20,287,000 13,439,000
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 8,154,000 13,774,000 24,357,000
DEPRECIATION AND AMORTIZATION........ 622,000 3,316,000 6,335,000
IMPAIRMENT LOSS ON LONG-LIVED
ASSETS............................. -- 1,026,000 715,000
-------------- --------------- ---------------
OPERATING INCOME (LOSS).............. 2,982,000 2,171,000 (17,968,000)
OTHER INCOME (EXPENSE):
Interest income................. 171,000 195,000 268,000
Interest expense................ (266,000) (1,660,000) (3,155,000)
Amortization of debt offering
costs......................... -- (136,000) (1,365,000)
Foreign exchange gain (loss).... (126,000) (639,000) 207,000
Other, net...................... (11,000) (173,000) (890,000)
-------------- --------------- ---------------
Total other expense, net... (232,000) (2,413,000) (4,935,000)
-------------- --------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES AND
MINORITY INTERESTS................. 2,750,000 (242,000) (22,903,000)
INCOME TAX BENEFIT (EXPENSE)......... (84,000) (822,000) 3,428,000
-------------- --------------- ---------------
INCOME (LOSS) BEFORE MINORITY
INTERESTS.......................... 2,666,000 (1,064,000) (19,475,000)
MINORITY INTERESTS IN SUBSIDIARIES... 6,000 34,000 --
-------------- --------------- ---------------
NET INCOME (LOSS).................... $ 2,672,000 $ (1,030,000) $ (19,475,000)
============== =============== ===============
EARNINGS (LOSS) PER SHARE:
Basic........................... $ 0.68 $ (0.20) $ (2.92)
Diluted (1)..................... $ 0.53 $ N/A $ N/A
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic........................... 3,903,470 5,052,096 6,669,987
Diluted (1)..................... 5,152,211 N/A N/A
</TABLE>
- ------------
(1) Inclusion of additional shares under a diluted analysis is inappropriate due
to the anti-dilutive effect
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CAPITAL
------------------ PAID-IN ACCUMULATED TREASURY SUBSCRIPTIONS
SHARES AMOUNT CAPITAL DEFICIT STOCK RECEIVABLE
--------- ------ ---------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996........... 3,935,969 $4,000 $11,884,000 $(5,523,000) $ -- $(600,000)
Issuance of stock in connection with
warrants and options exercised..... 148,058 -- 1,004,000 -- -- --
Compensation related to common stock
and warrants granted............... 20,000 -- 188,000 -- -- --
Repurchase of treasury shares........ -- -- -- -- (297,000) --
Release of stock in escrow........... -- -- -- -- -- 600,000
Additional consideration recognized
upon vesting of warrants........... -- -- 12,156,000 -- -- --
Net income........................... -- -- -- 2,672,000 -- --
--------- ------ ---------- ----------- --------- -------------
Balance, December 31, 1997........... 4,104,027 4,000 25,232,000 (2,851,000) (297,000) --
Issuance of stock in connection with
warrants and options exercised..... 1,242,151 2,000 5,052,000 -- -- --
Issuance of stock and warrants in
connection with acquisition........ 100,000 -- 980,000 -- -- --
Issuance of stock in connection with
debt conversion.................... 333,000 -- 888,000 -- -- --
Additional consideration recognized
upon vesting of warrants........... -- -- 5,479,000 -- -- --
Issuance of warrants with convertible
debt placement..................... -- -- 479,000 -- -- --
Sale of common stock................. 269,731 -- 1,288,000 -- 107,000 (117,000)
Repurchase of treasury shares........ -- -- -- -- (290,000) --
Net loss............................. -- -- -- (1,030,000) -- --
--------- ------ ---------- ----------- --------- -------------
Balance, December 31, 1998........... 6,048,909 6,000 39,398,000 (3,881,000) (480,000) (117,000)
Issuance of stock in connection with
warrants and options exercised..... 400,445 -- 382,000 -- -- --
Issuance of stock and warrants in
connection with acquisition of
minority interest.................. 400,000 -- 3,305,000 -- -- --
Issuance of stock in connection with
debt conversion.................... 567,359 1,000 3,671,000 -- -- --
Issuance of warrants in connection
with financings and services
provided........................... -- -- 1,275,000 -- -- --
Sale of common stock................. 559,124 1,000 3,111,000 -- -- (153,000)
Net loss............................. -- -- -- (19,475,000) -- --
--------- ------ ---------- ----------- --------- -------------
Balance, December 31, 1999........... 7,975,837 $8,000 $51,142,000 $(23,356,000) $(480,000) $(270,000)
========= ====== ========== =========== ========= =============
</TABLE>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
Balance, December 31, 1996........... $ 5,765,000
Issuance of stock in connection with
warrants and options exercised..... 1,004,000
Compensation related to common stock
and warrants granted............... 188,000
Repurchase of treasury shares........ (297,000)
Release of stock in escrow........... 600,000
Additional consideration recognized
upon vesting of warrants........... 12,156,000
Net income........................... 2,672,000
-------------
Balance, December 31, 1997........... 22,088,000
Issuance of stock in connection with
warrants and options exercised..... 5,054,000
Issuance of stock and warrants in
connection with acquisition........ 980,000
Issuance of stock in connection with
debt conversion.................... 888,000
Additional consideration recognized
upon vesting of warrants........... 5,479,000
Issuance of warrants with convertible
debt placement..................... 479,000
Sale of common stock................. 1,278,000
Repurchase of treasury shares........ (290,000)
Net loss............................. (1,030,000)
-------------
Balance, December 31, 1998........... 34,926,000
Issuance of stock in connection with
warrants and options exercised..... 382,000
Issuance of stock and warrants in
connection with acquisition of
minority interest.................. 3,305,000
Issuance of stock in connection with
debt conversion.................... 3,672,000
Issuance of warrants in connection
with financings and services
provided........................... 1,275,000
Sale of common stock................. 2,959,000
Net loss............................. (19,475,000)
-------------
Balance, December 31, 1999........... $ 27,044,000
=============
The accompanying notes are integral part of these financial statements.
F-5
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1998 1999
-------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................ $ 2,672,000 $ (1,030,000) $ (19,475,000)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Provision for doubtful
accounts.................. 277,000 560,000 1,996,000
Provision for inventory
obsolescence.............. 53,000 22,000 450,000
Depreciation and
amortization.............. 622,000 3,316,000 6,335,000
Write-off of investment in
operating venture......... 196,000 -- --
Deferred income taxes....... (1,566,000) (339,000) (4,178,000)
Impairment loss on
long-lived assets......... -- 1,026,000 715,000
Interest accrued on
non-interest bearing notes
and amortization of debt
offering costs............ 136,000 270,000 1,588,000
Minority interest in
subsidiaries' loss........ (6,000) (34,000) --
Equity in income from
unconsolidated subsidiary. -- 198,000 97,000
Refinancing charges of
operating lease........... -- -- 327,000
Expenses for warrants issued
to third parties.......... -- -- 163,000
Changes in assets and
liabilities:
Accounts receivable..... (1,623,000) (6,404,000) 108,000
Inventories............. (2,359,000) 493,000 (1,707,000)
Prepaid and other assets (2,634,000) (1,345,000) (3,202,000)
Accounts payable........ 6,954,000 6,296,000 1,157,000
Accrued liabilities..... 1,866,000 3,582,000 5,312,000
-------------- --------------- ---------------
Net cash provided by (used in)
operating activities............... 4,588,000 6,611,000 (10,314,000)
-------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment....................... (1,682,000) (6,159,000) (18,268,000)
Acquisition of Integracion, net
of cash acquired................ 117,000 -- --
Mandatory redemption of preferred
stock........................... -- (380,000) --
Acquisition of N.S.I., net of
cash acquired................... (49,000) -- --
Acquisition of MSN, net of cash
acquired........................ -- (2,353,000) --
Acquisition of INTERLINK, net of
cash acquired................... -- (8,805,000) --
Investment in BCH Holdings....... (185,000) -- --
-------------- --------------- ---------------
Net cash used in investing
activities......................... (1,799,000) (17,697,000) (18,268,000)
-------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease
obligations..................... (104,000) (66,000) (144,000)
Payments on notes payable........ (50,000) (681,000) (10,500,000)
Proceeds from notes payable...... -- -- 15,426,000
Proceeds from capital
subscriptions................... 600,000 -- --
Purchase of treasury shares...... -- (290,000) --
Borrowings on line of credit..... -- 1,948,000 --
Payments on line of credit....... -- (260,000) (1,688,000)
Borrowings under Lucent Credit
Facility........................ -- -- 23,935,000
Proceeds from warrants and
options exercised............... 1,004,000 5,054,000 382,000
Proceeds from issuance of
convertible debts............... -- 10,000,000 --
Payments on convertible debts.... -- (1,000,000) (6,000,000)
Proceeds from sale of common
stock........................... -- 1,278,000 2,959,000
-------------- --------------- ---------------
Net cash provided by financing
activities......................... 1,450,000 15,983,000 24,370,000
-------------- --------------- ---------------
Net increase (decrease) in cash and
cash equivalents................... 4,239,000 4,897,000 (4,212,000)
Cash and cash equivalents at
beginning of period................ 495,000 4,734,000 9,631,000
-------------- --------------- ---------------
Cash and cash equivalents at end of
period............................. $ 4,734,000 $ 9,631,000 $ 5,419,000
============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1998 1999
-------------- ------------ --------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid...................... $ 121,000 $ 855,000 $ 2,477,000
Income taxes paid.................. 505,000 1,657,000 1,001,000
NON-CASH TRANSACTIONS:
Property and equipment acquired by
execution of capital lease
obligation........................ 329,000 45,000 318,000
Issuance of common stock, warrants
and promissory notes in connection
with acquisition of MSN:
Promissory notes................. -- 672,000 --
Common stock and warrants........ -- 980,000 --
Issuance of notes and acquisition
of treasury shares in litigation
settlement:
Litigation settlement............ (3,000) -- --
Treasury stock................... (297,000) -- --
Notes payable...................... 300,000 -- --
Issuance of common stock and
warrants in exchange for services
provided in connection with
severance agreement............... 188,000 -- --
Issuance of promissory notes in
connection with the acquisition of
Integracion....................... 2,555,000 -- --
Additional contingent consideration
recorded:
2,175,000 in 1997 and 500,000 in
1998 warrants issued in
connection with Telereunion and
Integracion acquisitions vesting
upon achievement of certain
operating performance
measures........................ 12,156,000 5,479,000 --
Issuance of common stock and
warrants in exchange for
additional economic interests of
Telereunion SA de CV.............. -- -- 3,305,000
Accrual of redemption of 380,000
shares of Series B preferred stock
to be redeemed based upon
achievement of certain operating
performance measures.............. 380,000 -- --
Debt issuance costs in connection
with financings and convertible
debentures........................ -- 479,000 1,275,000
Issuance of common stock in
connection with conversion of
notes and convertible
debentures........................ -- 888,000 3,672,000
Network construction costs and
equipment purchases incurred and
included as accounts payable
expected to be financed through
long-term loans or lease finance
arrangement....................... -- 3,500,000 27,464,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Telscape International, Inc. (collectively with its subsidiaries, the
"Company") is an emerging, fully-integrated telecommunications company. The
Company supplies U.S.-originated international long distance services on a
wholesale and retail basis, via switched and dedicated networks, with an
emphasis on Latin America. In addition, the Company provides a full range of
advanced services and systems integration services in Mexico to major public and
private sector customers.
Through its Telscape USA, Inc. ("Telscape USA") and TSCP International,
Inc. ("TSCP") subsidiaries, the Company is a facilities-based long distance
telecommunications services company providing international long distance
services for calls originating in the United States and terminating in other
countries, primarily in Latin America. Through its subsidiary, MSN
Communications, Inc. ("MSN"), the Company is engaged in the distribution and
sale of prepaid phone cards across the United States, targeted mainly at the
Hispanic community.
Through its Mexican subsidiaries, Vextro de Mexico, S.A. de C.V.
("Vextro"), Telscape de Mexico, S.A. de C.V. (formerly Integracion de Redes,
S.A. de C.V.) ("Integracion") and N.S.I., S.A. de C.V. ("N.S.I."), the
Company is engaged in the distribution and sale of voice, data and networking
equipment and provides value-added services in network integration. Each of
these Mexican entities is owned principally by Telereunion, Inc.
("Telereunion"), a wholly-owned subsidiary of the Company. The Company
established Servicios de Comunicacion Popular S. de R.L. ("SCP") in 1999, a
wholly-owned subsidiary of the Company, to sell and distribute prepaid cards
throughout Mexico.
Through its subsidiary, INTERLINK Communications, Inc. ("INTERLINK"), the
Company provides satellite teleport services including voice, video and data
transport services to customers in the U.S., Latin America and other parts of
the world.
In June 1998, Telereunion S.A. de C.V. ("Telereunion S.A."), a subsidiary
of the Company, received a 30-year, facilities-based carrier license from the
Mexican government allowing it to construct and operate a network over which the
Company can carry voice, video, data and Internet traffic in Mexico (the
"Mexican Concession"). Through its wholly-owned subsidiary, Telereunion
International, S.A, de C.V. ("Telereunion International"), the Company owns
approximately 92% of the economic interests and 49% of the voting interests of
Telereunion S.A. In addition, three directors of the Company own an additional
18% of the voting interests and 1% of the economic interests of Telereunion
S.A., resulting in the Company and such directors together controlling 93% of
the economic interests and 67% of the voting interests of Telereunion S.A. Under
Mexican law, foreign investors may own more than a majority of the economic
interests in a concessionaire but may not own more than 49% of the voting
ownership of any concessionaire. The Company did not have significant operations
from Telereunion, S.A. in 1998. In the second quarter of 1999, the Company began
the construction of a combined fiber-optic and microwave long haul network which
was still in process at December 31, 1999.
In 1999, the Company incorporated enablecommerce.com Inc. ("Enable"), to
launch a business to business electronic commerce platform in Latin America. The
Company did not have significant operations from Enable in 1999.
PROPOSED MERGER
In January 2000, the Company and Pointe Communications, Inc. ("Pointe")
jointly announced a merger of the companies in an all-stock transaction. In
conjunction with the merger agreement, the $1.5 million note extended by Pointe
in December 1999 was converted into a $1.5 million note convertible into the
Company's preferred stock under terms contained in the merger agreement. The
merger agreement calls for funding of up to $10 million in such convertible
notes. It is expected that the merger with Pointe will be finalized during the
second quarter of 2000 at which time the companies will begin operating under
the common name of Telscape. The terms of the original merger agreement called
for the Company to issue its common stock to Pointe shareholders at an exchange
ratio of 0.215054 of a share of the Company's common stock for every share of
Pointe common stock. On March 30, 2000 the Company and Pointe agreed to an
adjustment of the exchange ratio of approximately 4%. The adjusted ratio of
shares is the result of a Pointe subsidiary, TeleCommute Solutions ("TCS"),
which recently received $19 million in new financing led by MCI WorldCom Venture
Fund and others, remaining in the combined companies. The merger agreement had
previously provided that TCS was to be spun off to Pointe shareholders prior to
the consummation of the merger. Consequently, each share of Pointe stock will be
exchanged for 0.223514 shares of the Company's common stock. There can be no
assurance that the merger with Pointe will be completed. Also, for each share of
Pointe convertible preferred stock outstanding, the Company will issue one share
of the Company's convertible preferred stock (with rights and preferences
substantially the same as the Pointe convertible preferred stock).
F-8
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FINANCIAL CONDITION
As of December 31, 1999, the Company had negative working capital of $42.5
million, primarily resulting from the Company's loss from operations and to the
substantial resources expended on the construction of the Company's
telecommunications network in Mexico. The Company does not expect that cash
flows from operations will be sufficient to meet anticipated capital
expenditures and debt repayment requirements as they become due without
additional financing. Such efforts by the Company are described in Notes 4 and
11. Should the proposed merger be approved by the Company's and Pointe's
shareholders, the Company intends to jointly finance the Company's growth, the
principal and interest obligations under existing debt, and the additional
capital investments required for the Company's planned facility expansions
through cash flows from operations, vendor financing and the sale of debt or
equity securities (or a combination of both). While management of the Company
believes that the merger will be approved, there can be no assurance that the
cash generated from the combined operations will be sufficient to fund such
expenditures or that the Company will be able to obtain financing on
commercially reasonable terms, if at all. If necessary funds are not available,
the Company's business and results of operations and the future expansion of the
Company's business could be materially adversely affected.
SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
all wholly and majority owned subsidiaries, as well as entities over which it
exercises voting control. The Company recognizes the minority interests in the
financial statements, which represents the portion of majority owned
subsidiaries attributable to minority owners. Investments in affiliates in which
the Company owns a 20% to 50% ownership interest, and in which the Company
exercises significant influence over operating and financial policies, are
accounted for by the equity method. Investments of less than 20% ownership are
recorded at cost, which does not exceed the estimated net realizable value of
such investments. All significant intercompany transactions and balances have
been eliminated in consolidation.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
year presentation.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The accompanying financial statements are prepared in conformity with
generally accepted accounting principles which requires management to make
estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The Company reviews all significant estimates
affecting the financial statements on a recurring basis and records the effect
of any necessary adjustments prior to their issuance. The actual results could
differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue from long distance telecommunications
services at the time of customer usage. Revenue from sales of equipment are
recognized at time of shipment. Revenue from data and network integration
value-added services are recognized when services are performed. In certain
cases, the Company had entered into arrangements with third parties whereby
these parties provide long distance telecommunication services for prepaid phone
cards sold at a fixed cost. As the earnings process is complete at time of
shipment under those arrangements, the Company recognized revenues (and cost of
revenues) from the sale of cards at the time of shipment of its cards. The
Company discontinued these types of arrangements in the second quarter of 1998.
In other cases, the Company has entered into arrangements with third parties
whereby these parties provide certain of the long distance telecommunications
services for prepaid phone cards and bills the Company for these services as the
cards are utilized. Under these arrangements, the earnings process is not
complete until the cards are utilized, and, accordingly, the Company defers
revenues at time of shipment and recognizes revenues (and cost of revenues) from
the sale of cards as the cards are utilized and the costs measured.
RECEIVABLES
The Company maintains an allowance for doubtful accounts based on the
expected collectbility of all consolidated trade accounts receivable. The
allowance for doubtful accounts as of December 31, 1998 and December 31, 1999
was $500,000 and $2,110,000, respectively. In 1998, the
F-9
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company wrote off $541,000 in receivables from a customer which filed for
bankruptcy. The Company increased its allowance for doubtful accounts in the
fourth quarter of 1999 primarily resulting from a disputed accounts receivable
balance of $1.4 million from a major customer in Mexico.
CASH AND CASH EQUIVALENTS
The Company considers cash in banks and short-term investments with
original maturities of three months or less as cash and cash equivalents.
FINANCIAL INSTRUMENTS
The Company assesses and discloses the fair value of its financial
instruments; however, this information does not represent the aggregate net fair
value of the Company. Some of the information used to determine fair value is
subjective and judgmental in nature; therefore, fair value estimates, especially
for less marketable securities may vary. The amounts actually realized or paid
upon settlement or maturity could be significantly different.
Unless quoted market price indicates otherwise, the fair values of cash and
cash equivalents, short-term investments, escrowed deposits and investments
(certificates of deposit) generally approximate market value because of the
short maturity of these instruments. The Company's notes payable also
approximate market value as the underlying borrowing rates are similar to other
financial instruments with similar maturities and terms.
INVENTORIES
Inventories consist principally of telecommunications equipment acquired
from manufacturers for distribution and are stated at the lower of cost
(first-in, first-out) or market. The Company maintains a reserve for inventory
obsolescence. The reserve as of December 31, 1998 and December 31, 1999, was
$1,047,000 and $1,313,000, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The cost of major renewals and
betterments is capitalized; repairs and maintenance costs are expensed when
incurred. Upon retirement or sale, the cost of the assets disposed of and the
related accumulated depreciation are removed from the accounts, with any
resultant gain or loss being reflected in the Consolidated Statement of
Operations. In 1998 and again in 1999, the Company recognized an impairment loss
of $1.0 million and $715,000, respectively, as it determined that the carrying
value of certain equipment and long-lived assets deployed under certain
operating arrangements in Latin America were impaired. Depreciation of property
and equipment for financial reporting purposes is computed using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements and capital leases are amortized over the lesser of the life of the
lease or the useful life of the asset. For income tax purposes, accelerated
methods of depreciation are used. The Company capitalized interest related to
the construction of its Mexican network for a total of $638,000 in 1999.
F-10
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the Company's property and equipment and
their estimated useful lives:
ESTIMATED
AS OF DECEMBER 31, USEFUL
------------------------------ LIVES
1998 1999 (YEARS)
-------------- -------------- ---------
Land................................ $ -- $ 190,000
Computer equipment and software..... 2,419,000 3,465,000 3
Telecommunications equipment........ 9,918,000 17,497,000 5-10
Furniture and Fixtures.............. 932,000 1,141,000 5-10
Leasehold improvements.............. 1,085,000 1,336,000 3-20
Transportation equipment............ 371,000 417,000 4
Teleport equipment.................. 3,947,000 4,328,000 5-15
Call center equipment............... 47,000 65,000 3
Network construction in progress.... -- 38,588,000
-------------- --------------
$ 18,719,000 $ 67,027,000
Less accumulated depreciation....... (4,143,000) (8,559,000)
-------------- --------------
$ 14,576,000 $ 58,468,000
============== ==============
GOODWILL AND OTHER INTANGIBLES
The major classes of intangible assets are summarized below:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AMORTIZATION
------------------------------ PERIOD
1998 1999 (YEARS)
-------------- -------------- -------------
<S> <C> <C> <C>
Goodwill............................. $ 33,760,000 $ 36,815,000 15
Other................................ 73,000 373,000 5
Less accumulated amortization........ (2,417,000) (4,846,000)
-------------- --------------
$ 31,416,000 $ 32,342,000
============== ==============
</TABLE>
Intangible assets are amortized using the straight-line method for periods
noted above. Goodwill is recognized for the excess of the purchase price of the
various business combinations over the estimated fair value of the identifiable
net tangible and intangible assets acquired. In connection with certain of the
Company's acquisitions, the Company issued performance-based warrants. The
Company records such contingent consideration at the time the contingency is
resolved and the consideration becomes issuable or when the outcome of the
contingency is determinable beyond a reasonable doubt. During the year ended
December 31, 1998, the remaining 500,000 warrants issued in connection with the
Telereunion acquisition vested resulting in the Company recording $5,479,000 in
additional consideration with this acquisition. See Note 2 for further
discussion regarding the Company's acquisitions. Realization of long-lived
assets, including goodwill, is periodically assessed by the management of the
Company. Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. In connection with such assessment by management, the
Company recorded an impairment loss of $1.0 million and $715,000 for the year
ended December 31, 1998 and 1999 respectively, relating to certain long-lived
assets in Latin America.
In November 1999, the Company issued 400,000 shares and 100,000 warrants to
the minority shareholders of its subsidiary, Telereunion S.A., in exchange for
an additional 27% of the economic interests in Telereunion, S.A. This resulted
in the Company's economic ownership interest in Telereunion S.A. increasing to
92% while the Company's voting interest remains at 49%. Three of the Company's
directors own an additional 1% of the economic interests and 18% of the voting
interests in Telereunion S.A. resulting in a combined control of 93% of the
economic interests and 67% of the voting interests. The Company determined the
fair value of the shares issued to the minority interest holders based on the
closing price of the Company's common stock on the date the agreement was
signed. The Company estimated the fair value of the warrants by utilizing the
Black-Scholes option pricing model with the following assumptions: dividend
yield of 0%, expected volatility of 54%,
F-11
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
risk free interest rate of 5% and expected life of one year. The resulting cost
totaling approximately $3.3 million was recorded as goodwill in the fourth
quarter of 1999.
WARRANTY RESERVES
The Company generally provides its network solutions customers a warranty
on each sale of equipment and related products and accrues warranty expense at
the time of sale based upon actual claims history. Actual warranty costs
incurred are charged against such accrual when paid.
PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid expenses and other current assets include the following:
AS OF DECEMBER 31,
--------------------------
1998 1999
------------ ------------
Value-added taxes receivable......... $ 1,748,000 $ 2,142,000
Deposits............................. 322,000 106,000
Prepaid insurance and other
expenses........................... 963,000 1,537,000
Other................................ 486,000 418,000
------------ ------------
$ 3,519,000 $ 4,203,000
============ ============
ACCRUED EXPENSES:
Accrued expenses include the following:
AS OF DECEMBER 31,
------------------------------
1998 1999
-------------- --------------
Customer prepayments................. $ 1,369,000 $ 3,946,000
Deferred Revenues.................... 5,497,000 2,877,000
Accrued interest..................... 584,000 1,439,000
Accrued wages........................ 1,041,000 797,000
Taxes payable........................ 745,000 423,000
Telecommunications taxes and fees
payable............................ 324,000 4,411,000
Other................................ 622,000 1,601,000
-------------- --------------
$ 10,182,000 $ 15,494,000
============== ==============
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The Company has determined that the U.S. dollar is the functional currency
for its operations outside the U.S. As such, gains and losses resulting from
foreign exchange transactions are included in the Consolidated Statements of
Operations. The Company recognized a foreign exchange gain (loss) of ($126,000),
($639,000) and $207,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
INCOME TAXES
Income taxes are calculated using the liability method. Under this method,
deferred tax assets and liabilities are determined based on differences between
the financial reporting and income tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when
differences are expected to reverse. A valuation allowance is used to reduce
deferred tax assets to the amount that is more likely than not to be realized.
F-12
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is calculated as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1998 1999
------------ -------------- ---------------
<S> <C> <C> <C>
Basic
Net income (loss) as reported...... $ 2,672,000 $ (1,030,000) $ (19,475,000)
Weighted average common shares
outstanding....................... 3,903,470 5,052,096 6,669,987
Basic earnings (loss) per share.... $ 0.68 $ (0.20) $ (2.92)
Diluted
Net income (loss) as reported...... $ 2,672,000 $ (1,030,000) $ (19,475,000)
Interest expense on convertible
debt.............................. 42,000 -- --
------------ -------------- ---------------
Net income (loss) applicable to
common stockholders............... $ 2,714,000 $ (1,030,000) $ (19,475,000)
Weighted average common shares
outstanding....................... 3,903,470 5,052,096 6,669,987
Options............................ 430,969 891,211 901,220
Warrants........................... 651,272 1,945,848 1,588,970
Convertible debt................... 166,500 -- --
------------ -------------- ---------------
Total weighted average dilutive
potential common shares
outstanding....................... 1,248,741 2,837,059 2,490,190
Weighted average common and
dilutive potential common shares
outstanding....................... 5,152,211 7,889,155 9,160,177
Diluted net income (loss) per
share............................. $ 0.53 $ (0.13) $ (2.13)
</TABLE>
Diluted EPS for the years ended December 31, 1998 and 1999, was not
disclosed on the Consolidated Statement of Operations as the effect is
anti-dilutive. Certain performance based warrants vested at December 31, 1997
and during the year ended December 31, 1998 upon the achievement of certain
operating performance measures (See Note 2). These contingently issuable shares
were included in the calculation of diluted EPS when all the necessary
conditions were met. If all the necessary conditions have not been satisfied by
the end of the period, the number of contingently issuable shares that would
have been issued if the reporting period was the end of the contingency period
are included in the calculation as if those shares were issued at the beginning
of that period. For year to date calculations, contingent shares are weighted
for the interim periods in which they are included in the computation of diluted
EPS. Accordingly, 1,000,000 warrants were included in the calculation of diluted
EPS for the year ended December 31, 1997 as if those shares were issued on July
1, 1997 and 1,175,000 warrants were included as if those shares were issued on
October 1, 1997. In addition, 500,000 warrants are included in the calculation
of diluted EPS for the year ended December 31, 1998 as if those shares were
issued July 1, 1998. At December 31, 1997, 1998 and 1999, there were 500,000, 0
and 0 performance based warrants, respectively, which had not vested which were
not included in the calculation of diluted EPS. Additionally, 666,270, 95,619
and 930,101 options and warrants outstanding at December 31, 1997, 1998 and
1999, respectively, were not included in the calculation of diluted EPS as their
exercise prices were greater than the average market price of the Company's
Common Stock during the period and inclusion of these securities in the
calculation would result in an anti-dilutive effect.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
requires companies to recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivatives contracts either
to hedge existing risks or for speculative purposes. Accordingly, the Company
does not expect adoption of the new standard to have a material effect on its
financial statements.
SOP 98-5, "REPORTING ON THE COSTS OF START-UP ACTIVITIES," requires all
start-up and organizational costs to be expensed as incurred. It also requires
all remaining historically capitalized amounts of these costs existing at the
date of adoption to be expensed and reported as the cumulative effect of a
change in accounting principles. SOP 98-5 is effective for all fiscal years
beginning after December 31, 1998. Adoption of
F-13
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SOP 98-5 did not have a material effect on the Company's prior years financial
statements. The Company incurred and expensed significant costs in connection
with the start-up of the network in Mexico in 1999.
2. MERGERS AND ACQUISITIONS
TELEREUNION ACQUISITION
On May 17, 1996, the Company acquired all of the outstanding common stock
of Telereunion, which had previously acquired a 97% ownership of Vextro in a
triangular reverse acquisition, accounted for as a purchase. Vextro is engaged
in the distribution and sale of voice, data and networking equipment and
provides value-added telecommunications services and network integration
services in Mexico.
Under the terms of the acquisition, the Company issued to the shareholders
of Telereunion 1,605,000 shares of Common Stock of the Company, 380,000 shares
of non-voting, non-participatory Series B preferred stock and warrants to
purchase up to 2,595,000 additional shares of Common Stock at $2.19 per share.
The warrants vest and become exercisable upon Vextro meeting certain operating
performance measures and expire seven years after closing. The preferred stock
was mandatorily redeemable at $380,000 in the aggregate upon the Company meeting
certain operating performance measures. In addition, the Company converted and
amended certain non-qualified options outstanding under the Telereunion 1995
Stock Option and Appreciation Rights Plan to provide for the right to acquire an
aggregate of 216,618 shares of Common Stock of the Company at an exercise price
of $1.35 per share. The purchase price was allocated to the acquired company's
assets and liabilities based upon an estimate of fair values at the date of
acquisition and resulted in $3,312,000 of goodwill, which is being amortized
over 15 years. During the year ended December 31, 1997, certain of the operating
performance measures were met resulting in 2,095,000 warrants vesting and the
380,000 preferred shares being mandatorily redeemable at $1.00 per share. The
preferred shares were redeemed in the first quarter of 1998. As a result,
$12,114,000 in additional contingent consideration and the related goodwill was
recognized relating to the acquisition of Telereunion at December 31, 1997.
During the year ended December 31, 1998, the remaining 500,000 warrants vested
resulting in an additional $5,479,000 additional contingent consideration and
the related goodwill being recognized.
In November 1999, the Company issued 400,000 shares and 100,000 warrants to
the minority shareholders of our subsidiary Telereunion S.A. in exchange for an
additional 27% of the economic interests in Telereunion, S.A. This resulted in
the Company's economic ownership interest in Telereunion S.A. increasing to 92%
while the Company's voting interest remains at 49%. Three of the Company's
directors own an additional 1% of the economic interests and 18% of the voting
interests in Telereunion S.A. resulting in a combined control of 93% of the
economic interests and 67% of the voting interests. The Company calculated the
fair value of the shares issued to the minority interest holders based on the
closing price of the Company's common stock on the date the agreement was
signed. The Company estimated the fair value of the warrants by utilizing the
Black-Scholes option pricing model with the following assumptions: dividend
yield of 0%, expected volatility of 54%, risk free interest rate of 5% and
expected life of 3 years. The resulting cost totaling approximately $3.3 million
was recorded as goodwill in the fourth quarter of 1999.
INTEGRACION ACQUISITION
Effective July 1, 1997, pursuant to a stock purchase agreement, the Company
acquired all of the outstanding shares of Integracion. Integracion is a systems
integrator engaged in the distribution and sale of data and network equipment
and also provides value-added services in network integration in Mexico.
Under the terms of the transaction, the Company paid the following to the
selling shareholders of Integracion: i) the sum of $130,000 in cash, ii) an
aggregate of $2,201,000 in non-interest bearing promissory notes maturing at
various dates through January 1, 2001, iii) an aggregate of $999,000 in
non-interest bearing convertible notes maturing on September 1, 1999, which are
convertible into 333,000 shares of Common Stock of the Company at a price of
$3.00 per share, representing the quoted market price of the Company's Common
Stock on the date of the transaction, iv) warrants for the purchase of up to
100,000 shares of Common Stock of the Company based on Integracion meeting
certain performance requirements and v) a covenant by the Purchasers to pay
$280,000 in the event that Integracion meets certain performance requirements
over the cumulative periods beginning January 1, 1997 and ending December 31,
2000. The acquisition was accounted for under the purchase method of accounting.
The financial position and results of operations of Integracion have been
included in the Company's consolidated financial statements since the effective
date of the acquisition.
The consideration paid for Integracion measured at the acquisition date was
$2,745,000 and consisted of cash of $130,000, promissory notes with a discounted
value of $2,555,000 and transaction costs of $60,000. The purchase price was
allocated to the acquired company's assets and
F-14
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
liabilities based upon an estimate of fair values at the date of acquisition and
resulted in $1,756,000 of goodwill, which is being amortized over 15 years.
During the year ended December 31, 1997, certain of the operating
performance measures were met resulting in 80,000 warrants vesting. The
remaining 20,000 warrants were forfeited. As a result, $422,000 in additional
contingent consideration and the related goodwill was recognized on the
acquisition of Integracion at December 31, 1997.
N.S.I. ACQUISITION
On October 1, 1997, pursuant to a stock purchase agreement, the Company
acquired all of the outstanding shares of N.S.I. N.S.I. is a systems integrator
engaged in the distribution and sale of data and network equipment and also
provides value-added services in network integration in Mexico.
Under the terms of the acquisition, the Company paid cash of $1,000 to the
shareholders of N.S.I. and agreed to guarantee the repayment of approximately
$260,000 of N.S.I. debt to one of the sellers. The purchase price was allocated
to the acquired company's assets and liabilities based upon an estimate of fair
values at the date of acquisition and resulted in $430,000 of goodwill, which is
being amortized over 15 years. The acquisition was accounted for under the
purchase method of accounting. The financial position and results of operations
of N.S.I. have been included in the Company's consolidated financial statements
since the effective date of the acquisition.
MSN ACQUISITION
Effective January 1, 1998, the Company acquired all of the outstanding
common stock of MSN. MSN, through its Telefiesta brand, markets prepaid
telephone calling cards across the United States primarily to the Hispanic
community. Under the terms of the transaction, the Company paid the following to
the shareholders of MSN: i) the sum of $3,250,000 in cash, ii) $750,000 in
non-interest bearing promissory notes payable in eight equal quarterly
installments, and iii) 100,000 shares of the Company's Common Stock. In
addition, the two selling shareholders were each granted 50,000 options to
purchase the Company's Common Stock at $7.50 per share. The acquisition was
accounted for under the purchase method of accounting. The financial position
and results of operations of MSN are included in the Company's financial
statements from the effective date of the acquisition.
The consideration paid for MSN measured at the acquisition date was
$4,880,000 and consisted of cash of $3,250,000, non-interest bearing promissory
notes with a discounted value of $672,000, Common Stock and warrants valued at
$980,000 and transaction costs of $80,000. The purchase price was allocated to
the acquired company's assets and liabilities based upon an estimate of fair
values at the date of acquisition and resulted in $6,193,000 of goodwill, which
is being amortized over 15 years. The purchase price of the acquisition has been
allocated as follows:
FAIR
VALUE
--------------
Cash................................. $ 3,250,000
Promissory Notes (discounted
value)............................. 672,000
Common Stock......................... 980,000
Transaction Costs.................... 80,000
--------------
Purchase consideration............... 4,982,000
Cash................................. 977,000
Accounts receivable.................. 1,042,000
Other assets......................... 90,000
Accounts payable and accrued
liabilities........................ (1,323,000)
Deferred revenue..................... (1,997,000)
--------------
Excess of liabilities assumed over
fair value of net assets
acquired........................... (1,211,000)
--------------
Goodwill............................. $ 6,193,000
==============
INTERLINK ACQUISITION
Effective June 1, 1998, pursuant to an asset purchase agreement, the
Company acquired substantially all of the assets and certain of the liabilities
of California Microwave Services Division, Inc. ("CMSD"), a subsidiary of
California Microwave, Inc., for approximately $8.8 million
F-15
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in cash. As part of the acquisition, the Company formed INTERLINK
Communications, Inc. ("INTERLINK"), to acquire CMSD. The primary asset of
INTERLINK is a satellite teleport facility in Mountain View, California.
The purchase price was allocated to the acquired assets and liabilities
based upon an estimate of fair values at the date of acquisition resulting in
$3.6 million in goodwill, which is being amortized over 15 years. In addition, a
covenant not to compete of $250,000 was recognized which is being amortized over
5 years. The acquisition was accounted for under the purchase method of
accounting. The financial results and operations of INTERLINK have been included
in the Company's consolidated financial statements since the effective date of
acquisition.
The purchase price of the acquisition of the acquisition has been allocated
as follows:
FAIR VALUE
------------
Cash................................. $ 8,612,000
Transaction Costs.................... 262,000
------------
Purchase Consideration............... 8,874,000
Cash................................. 69,000
Accounts Receivable.................. 1,438,000
Property and Equipment............... 4,542,000
Other assets......................... 896,000
Accounts payable and accrued
liabilities........................ (1,423,000)
Deferred revenue..................... (471,000)
------------
Fair value of net assets acquired.... 5,051,000
============
Goodwill............................. $ 3,573,000
============
Covenant not to compete.............. $ 250,000
============
The following presents the unaudited pro forma results of operations of the
Company for the year ended December 31, 1997 and 1998, as if the acquisitions of
Integracion, N.S.I., MSN and INTERLINK had occurred on January 1, 1997:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1998
-------------- ---------------
(UNAUDITED)
Pro forma revenues................... $ 78,730,000 $ 135,415,000
Pro forma operating income........... 1,755,000 971,000
Pro forma net income (loss).......... 1,010,000 (2,407,000)
Pro forma basic net income (loss) per
share.............................. $ 0.25 $ (0.48)
Pro forma diluted net income (loss)
per share(1)....................... $ 0.20 N/A
- ------------
(1) Inclusion of additional shares under a diluted analysis for 1998 is
inappropriate due to the anti-dilutive effect.
The information is not necessarily indicative of the results of operations
and financial position of the Company as they may be in the future or as they
might have been had the business combinations been consummated as of January 1,
1997.
BCH
The Company owns 24% of the common stock outstanding in BCH Holding
Company, Inc. ("BCH"), a Nevada corporation with a full service
telecommunications operation based in Warsaw, Poland. Accordingly, the Company's
investment in BCH is accounted for under the equity method.
In January 1999, BCH approved the issuance to an investor of 20% of its
outstanding shares for $1.2 million, and warrants for another 20% of its common
stock with an exercise price equal to the same price per share as the stock
issuance. In addition, BCH can borrow an additional $2.5 million under a 13%
senior secured convertible note with the investor. Under the terms of the senior
secured convertible note, the Company
F-16
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
has pledged all of its common stock in BCH to the investor. The Company's
carrying amount of this investment at December 31, 1999 is not material.
POINTE COMMUNICATIONS MERGER
In January 2000, the Company and Pointe jointly announced a merger of the
companies in an all-stock transaction. In conjunction with the merger agreement,
the $1.5 million note extended by Pointe in December 1999 was converted into a
$1.5 million note convertible into Telscape preferred stock under terms
contained in the merger agreement. The merger agreement calls for funding of up
to $10 million in such convertible notes. It is expected that the merger with
Pointe will be finalized during the second quarter of 2000 at which time the
companies will begin operating under the common name of Telscape. The terms of
the original merger agreement called for the Company to issue its common stock
to Pointe shareholders at an exchange ratio of 0.215054 of a share of the
Company's common stock for every share of Pointe common stock. Also, for each
share of Pointe convertible preferred stock outstanding, the Company will issue
one share of the Company's convertible preferred stock (with rights and
preferences substantially the same as the Pointe convertible preferred stock).
On March 30, 2000 the Company and Pointe agreed to an adjustment of the exchange
ratio of approximately 4%. The adjusted ratio of shares is the result of a
Pointe subsidiary, TeleCommute Solutions ("TCS"), which recently received $19
million in new financing led by MCI WorldCom Venture Fund and others, remaining
in the combined companies. The merger agreement had previously provided that TCS
was to be spun off to Pointe shareholders prior to the consummation of the
merger. Consequently, each share of Pointe stock will be exchanged for 0.223514
shares of the Company's common stock. No assurance can be given that the merger
with Pointe will be completed.
3. CONCENTRATION OF RISK
CONCENTRATION OF RISK -- MEXICO
Mexico has experienced periodic economic crises in the past recent years
resulting from sudden, significant devaluations of the Mexican peso. The last
such devaluation of the Mexican peso in late 1994 caused Mexico to experience an
economic crisis characterized by exchange rate instability, increased inflation,
high domestic interest rates, reduced consumer purchasing power and high
unemployment. Consequently, the Mexican government has exercised, and continues
to exercise, significant influence over the Mexican economy. Accordingly,
Mexican governmental actions could have a significant effect on Mexican
companies, including the Company's customers, and overall market conditions. For
the years ended December 31, 1997 and 1998, the peso experienced devaluations in
exchange rates versus the dollar of 2.9% and 22.1%, respectively. In the year
ended December 31, 1999, the peso appreciated 3.5% in exchange rates versus the
dollar.
The Company's foreign currency risk is mitigated in Mexico due to the fact
that many of the Company's customers are multinational firms that pay in U.S.
dollars. In addition, most of the customers that do pay in pesos pay at the spot
exchange rate in effect at the time of payment as opposed to the exchange rate
at the time the receivable is created. Nevertheless, significant adverse effects
from any material devaluation in the Mexican peso could result in an adverse
effect on the Company's operations. In addition, the Company anticipates an
increasing number of peso denominated receivables from customers in Mexico as
its network in Mexico becomes operational.
SIGNIFICANT CUSTOMERS AND RECEIVABLES
The Company's credit risks primarily consist of accounts receivable from
its customers, many of which are located in Mexico. Management performs ongoing
credit valuations of its customers and provides allowances for credit losses
when necessary. The Company maintains an allowance for doubtful accounts based
on the expected collectibility of all consolidated trade accounts receivable.
The allowance for doubtful accounts as of December 31, 1998 and December 31,
1999 was $500,000 and $2,110,000, respectively. In 1998, the Company wrote off
$541,000 in receivables from a customer which filed for bankruptcy. The Company
increased its allowance for doubtful accounts in the fourth quarter of 1999
primarily resulting from a disputed accounts receivable balance of $1.4 million
from a major customer in Mexico.
Major customers are those that individually account for more than 10% of
the Company's total revenues. For the year ended December 31, 1997, one customer
accounted for 28% of the Company's total revenues and 56% of the Company's voice
services revenues. For the year ended December 31, 1998, no customer represented
greater than 10% of revenues. For the year ended December 31, 1999, one customer
accounted for 11% of the Company's total revenues.
F-17
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
The Company's notes payable and capital lease obligations consist of the
following:
AS OF DECEMBER 31,
--------------------------
1998 1999
------------ ------------
Deere Park Convertible Subordinated
Debentures, bearing interest at 8%,
convertible into Common Stock,
maturing three years from closing.. $ 3,935,000 $ --
Gordon Brothers Convertible
Debentures, bearing interest at 8%,
convertible into Common Stock,
secured by substantially all assets
of Interlink Communications, Inc.
and stock of Telereunion, Inc.,
matured on May 29, 1999............ 4,996,000 --
Non-interest bearing promissory
notes, imputed interest at 10%,
unamortized discount of $228,000
and $73,000, respectively, issued
in connection with Integracion
acquisition, maturing at various
dates through January 1, 2001...... 1,713,000 1,328,000
Promissory note issued to repurchase
common stock, payable in six
semi-annual installments through
May 20, 2000, and bearing interest
at 6%, secured by common shares
repurchased........................ 150,000 50,000
Capital lease obligations payable in
monthly installments of $13,258
including principal and interest,
maturing at various dates through
December 1, 2003, secured by
equipment and furniture............ 221,000 395,000
Non-interest bearing promissory note,
imputed interest at 10%,
unamortized discount of $49,000 and
$0, respectively, issued in
connection with MSN acquisition,
matured on June 17, 1999........... 430,000 --
Revolving credit facility bearing
interest at prime plus 1%, secured
by accounts receivable, matured
July 31, 1999...................... 1,688,000 --
Promissory note, interest at 10.62%,
payable in 36 equal monthly
installments of $52,234 including
principal and interest, maturing
April 1, 2002, secured by
equipment.......................... -- 1,250,000
Promissory note, interest at 10.93%,
payable in 36 equal monthly
installments of $14,700 including
principal and interest, maturing
June 1, 2002, secured by
equipment.......................... -- 373,000
Promissory note, interest and payment
terms described below, maturing
January 1, 2005, secured by
equipment.......................... -- 5,581,000
Senior Notes, interest and payment
terms described below, maturing
January 4, 2001.................... -- 850,000
$2.0 Million Senior Notes, interest
and payment terms described below,
maturing February 16, 2001......... -- 2,000,000
Promissory notes, interest and
payment terms described below,
maturing August 27, 2004, secured
as described below................. -- 23,934,000
Lennox promissory note, interest and
payment terms described below...... -- 1,500,000
Pointe promissory notes, bearing
interest at 10%, maturing February
28, 2000, secured as described
below.............................. -- 1,500,000
------------ ------------
Total notes payable and capital
leases............................. 13,133,000 38,761,000
Current portion...................... 7,710,000 11,112,000
------------ ------------
Long-term portion.................... $ 5,423,000 $ 27,649,000
============ ============
The annual maturities of the debt indicated above for the five years
following December 31, 1999, are $6,647,000 in 2000, $9,255,000 in 2001,
$6,831,000 in 2002, $7,731,000 in 2003 and $8,297,000 in 2004. Included in the
current portion of debt at December 31, 1999, is $4.5 million related to the
note which is not in compliance with certain financial covenants as described
below.
In May and June 1998, the Company issued $5,000,000 in 8% Convertible
Subordinated Debentures (the "Deere Park Convertible Debentures") to Deere
Park Capital Management, LLC ("Deere Park") through three separate draws, with
all issuances maturing three years from their respective closing dates. In
connection with these issuances, Deere Park received warrants to purchase an
aggregate of 8,952 shares of common stock at an exercise price of $16.76,
warrants to purchase an aggregate of 2,427 shares of common stock at $20.60 per
share and warrants to purchase an aggregate of 6,382 shares of common stock at
$15.67 per share. These warrants have a term of three years from the
effectiveness of a registration statement covering such warrants. On October 26,
1998, the Company issued an additional 8,000 warrants to Deere Park with an
exercise price at the then current market prices in return for a restructuring
of the conversion terms and, in addition, repaid $1,000,000 of the convertible
debentures at 107% plus accrued interest. At various dates in 1999, $3,000,000
of the convertible debentures was converted into 476,317 shares of the Company's
common stock. The per share value for all transactions was computed based upon
the average of the three highest of the five lowest closing prices of the
Company's common stock for the 20 days preceding the conversion date, as per the
agreements. The remaining $1,000,000 was paid on May 11, 1999. In connection
with the payment of the debentures, the Company paid "exit fees" of $120,000,
as per the agreement.
In May 1998, the Company issued $5,000,000 in 8% Convertible Debentures
(the "Gordon Brothers Convertible Debentures") maturing one year from closing
to Gordon Brothers Capital, LLC ("Gordon Brothers"). In connection with this
issuance, Gordon Brothers received warrants to purchase an aggregate of 12,136
shares of common stock at an exercise price of $20.60 per share with a term of
three years from the effectiveness of the registration statement covering such
warrants. On October 26, 1998 an agreement was reached with Gordon Brothers to
fix
F-18
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the conversion price at $15 per share in exchange for reducing the exercise
price of the warrants to purchase 12,136 shares of common stock to $15 per
share. In May 1999, the Company repaid the $5,000,000 of debentures and paid
$1,100,000 of "exit fees", as per the agreement.
In connection with the issuance of the Deere Park Convertible Debentures
and the Gordon Brother Convertible Debentures, the Company issued to the
placement agent warrants to purchase 59,340 shares of common stock with exercise
prices ranging from $16.76 to $20.60 per share. The warrants have terms of two
years.
The Company estimated the fair value of the warrants issued in connection
with the Deere Park Convertible Debentures and Gordon Brothers Convertible
Debentures by utilizing the Black-Scholes option pricing model with the
following assumptions: dividend yield of 0%, expected volatility of 50%, risk
free interest rate of 5% and expected lives of an average of two years. The
resulting fair value of the warrants of approximately $570,000 was amortized
over the life of the debentures as interest expense and deferred offering costs.
In July 1998, holders of the non-interest bearing convertible notes issued
in connection with the Integracion acquisition converted these notes into
333,000 shares of Common Stock.
In the fourth quarter of 1998, the Company signed a financing arrangement
with a finance company which provided for funding of equipment purchases of up
to $6.0 million through May 1999. The financing is structured as loans maturing
three years from funding at interest rates 550 basis points above the Federal
Reserve Treasury Constant Maturity Rate. The Company has drawn approximately
$2.0 million under this facility through December 31, 1999.
On January 11, 1999, the Company signed a financing arrangement with a
finance company which provided for funding of equipment purchases of up to $7.0
million through December 31, 1999. The financing is structured as long-term
loans maturing January 1, 2005. The loans provide for payments of interest only
through January 1, 2000. Thereafter, payments of principal and interest are due
quarterly. Interest is calculated, during the interest only period, at 425 basis
points above the 90 day commercial paper rate. Interest thereafter is calculated
at 500 basis points above the five year Federal Reserve Treasury Constant
Maturity Rate. The interest rate in effect at December 31, 1999 was 9%. The
Company has drawn approximately $5.6 million under this facility through
December 31, 1999, of which $2.5 million resulted in refinancing equipment which
was previously financed through an operating lease. The Company was not in
compliance with certain financial covenants under this loan facility and has
secured a waiver from the finance company of its rights under the agreement to
enforce default provisions due to non compliance with these financial covenants
for the fourth quarter of 1999. The Company is not able to draw down additional
financing under this facility until such time as the finance company allows it
to do so. The finance company has also issued to the Company a forbearance
letter indicating that it will not enforce acceleration of the facility until
the earlier of March 31, 2000 or the date the Company's proposed merger with
Pointe is completed. The finance company has agreed to extend the forbearance
period through May 15, 2000. The amounts outstanding under this facility of $5.6
million have been classified as current in the financial statements as of
December 31, 1999. The Company may have to request additional waivers from the
finance company due to non compliance with financial covenants in future
quarters or the Company may have to request an extension of the forbearance
letter provisions should the merger with Pointe not be completed by May 15,
2000. The Company cannot guarantee that the finance company would provide the
Company with additional waivers or that they would extend their forbearance
letter in which case they could enforce the default provisions and accelerate
the maturity date. Should that be the case, there is no guarantee that the
Company would be able to obtain a replacement facility. A default under this
agreement would trigger cross defaults under the Lucent credit facility.
On May 7, 1999, the Company issued $6,850,000 in senior notes originally
maturing on May 6, 2000 (the "Senior Notes"). E. Scott Crist, CEO of the
Company, is holder of the remaining $850,000 balance of the Senior Notes. The
Senior Notes are subject to optional prepayment provisions allowing the Company
to prepay a portion or all of the outstanding principal amount without premium
or penalty. Under the terms of the Senior Notes, Mr. Crist received on November
6, 1999, 31,805 warrants at an exercise price of $6.685. In the event that the
Senior Notes are not paid by May 5, 2000, then Mr. Crist will be issued an
additional 31,805 warrants, in which case the maturity date is extended until
November 6, 2000. The maturity of the Senior Notes can be extended unilaterally
by the Company through January 4, 2001 with no additional consideration. As a
result, the Senior Notes are classified as long-term in the financial statements
as of December 31, 1999. The Company repaid $6,000,000 of the Senior Notes on
August 27, 1999, upon the funding of the Lucent Credit Agreement (defined
below). The loan from Mr. Crist bears interest at 8% from May through November
6, 1999. The interest rate increases by 1 percent for each month thereafter.
Pursuant to the terms of the Senior Notes, the Company initially issued to the
holders of the senior notes a total of 256,315 warrants at an exercise price of
$6.68 per share. The proceeds from the Senior Notes were utilized to repay the
entire principal amount of the Gordon Brothers Convertible Debentures plus $1.1
million in exit fees. The Company estimated the fair value of the warrants by
utilizing the Black-Scholes option pricing
F-19
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
model with the following assumptions: dividend yield of 0%, expected volatility
of 54%, risk free interest rate of 5% and expected life of one year. The
resulting cost of the initial 256,315 warrants of approximately $398,000 was
amortized over three months, the expected term of the notes at the time they
were issued. The resulting cost of the 31,805 warrants of approximately $49,000
will be amortized over one year.
On June 18, 1999, the Company issued $2,000,000 in a different series of
senior notes maturing June 18, 2000 (the "$2 Million Senior Notes"). These $2
Million Senior Notes are subject to optional prepayment provisions allowing the
Company to prepay a portion or all of the outstanding principal amount without
premium or penalty. These $2 Million Senior Notes bear interest at 8% from June
through December 17, 1999. The interest rate increases by 1 percent for each
month thereafter. The Company also initially issued to the holders of these $2
Million Senior Notes a total of 62,501 warrants with an exercise price of $8.00
per share and a term of three years. The holders were issued an additional
62,501 warrants in December 1999. In the event that the $2 Million Senior Notes
are not paid by June 18, 2000, then the holders will be issued an additional
62,501 warrants in which case the maturity date is extended until December 18,
2000. The maturity of the $2 Million Senior Notes can be extended unilaterally
by the Company through February 16, 2001 with no additional consideration. As a
result, the $2 Million Senior Notes are classified as long-term in the financial
statements as of December 31, 1999. The Company estimated the fair value of the
warrants by utilizing the Black-Scholes option pricing model with the following
assumptions: dividend yield of 0%, expected volatility of 54%, risk free
interest rate of 5% and expected life of one year. The resulting cost of the
initial 62,501 warrants of approximately $116,000 was amortized over two months,
the expected term of the notes at the time they were issued. The resulting cost
of the second 62,501 warrants of approximately $143,000 will be amortized over
one year. The holders of these senior notes have provided the Company with a
letter indicating their agreement, subject to definitive documentation, to
convert their notes into the Class F Preferred.
In July 1999, the Company's revolving credit facility expired and the
Company repaid all amounts outstanding at that time.
On July 28, 1999, the Company issued an unsecured and subordinated
promissory note in the amount of $576,000 maturing on November 24, 1999. On
November 24, 1999, the Company issued 91,042 shares of the Company's common
stock as payment of the note per the agreement.
Also in July 1999, the Company received a bridge loan of $3.0 million from
Lucent Technologies, Inc. (the "Lucent Bridge Loan"). The Lucent Bridge Loan
was repaid upon the funding of the Lucent Credit Agreement (defined below). In
connection therewith, the Company issued to Lucent warrants to purchase an
aggregate of 85,000 shares of Common Stock at an exercise price of $8.50 per
share. The warrants have a term of three years. The Company estimated the fair
value of the warrants by utilizing the Black-Scholes option pricing model with
the following assumptions: dividend yield of 0%, expected volatility of 54%,
risk free interest rate of 5% and expected life of 1 year. The resulting cost of
approximately $168,000 will be amortized over five years, the term of the Lucent
Credit Facility.
On August 27, 1999, the Company, along with its subsidiaries, Telereunion
S.A. de C.V., Telereunion International, S.A. de C.V., Telereunion, Inc.,
Telscape USA, Inc., MSN Communications, Inc., Interlink Communications, Inc.,
TSCP International, Inc., Vextro De Mexico S.A. de C.V., and its wholly-owned
subsidiary, Servicios Corporativos Vextro, S.A. de C.V., Telscape de Mexico S.A.
de C.V., N.S.I. S.A. de C.V., Lan and Wan S.A. de C.V. and M.S. Noticias y
Telecomunicaciones, S.A. de C.V. signed a credit agreement with Lucent
Technologies, Inc. (the "Lucent Credit Agreement").
The Lucent Credit Agreement provides for up to $40 million in financing
under long-term repayment terms. In March 2000, Lucent extended its commitment,
subject to certain conditions precedent including the merger with Pointe, by an
additional $20 million. The Company borrowed $23.9 million under the Lucent
Credit Agreement on August 27, 1999, of which $9.0 million was utilized to repay
the $3.0 million Lucent Bridge Loan and $6.0 million of the Senior Notes and
$14.9 million was utilized to pay for costs directly related to construction of
the network in Mexico and related debt offering costs. Subsequent loans under
the Lucent Credit Agreement are subject to the satisfaction of certain
conditions precedent. The Company has incurred obligations in the construction
of the network in Mexico totaling $24.6 million at December 31, 1999. The
Company intends to fund these obligations and capitalize some of the initial
interest payments due on amounts outstanding under this facility, with proceeds
from the facility, upon consummation of the merger with Pointe.
As of December 31, 1999, the Company was in default of a financial covenant
under the Lucent Credit Agreement. In conjunction with the March 2000 commitment
for an additional $20 million, Lucent waived this covenant and all other
financial covenants through April 15, 2000. In addition, Lucent has committed,
subject to certain conditions, to long-term repayment arrangements and to
renegotiate the financial covenants under its facility. Since the Company
believes that it is probable that such credit arrangements will be achieved, it
has classified $22.7 million of debt to Lucent at December 31, 1999 as
long-term. However, the Company cannot guarantee that it will be able to secure
additional waivers
F-20
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from Lucent, should they be necessary, or that the Company can negotiate
financial covenants that will be more favorable than the ones contained in the
initial credit agreement.
The Lucent Credit Agreement provides for principal payments on each loan to
be made in nine installments with the first installment due on the first
anniversary of the closing date with each succeeding installment due in six
month increments. The amount of the payment on each installment shall be a
percentage of the total aggregate amount of each loan, as follows: installments
1-2: 5%; installments 3-4: 10%; installments 5-6: 12.5%; installments 7-9: 15%.
In addition, the Lucent Credit Agreement provides for annual mandatory
prepayments beginning in the year ended December 31, 2000 equal to 50% of Excess
Cash Flow of such year. Excess Cash Flow is defined in the Credit Agreement and
includes EBITDA (as defined) less certain items including capital expenditures,
payments of indebtedness, income tax payments, and equity investments in
telecommunications companies.
Interest under the Lucent Credit Agreement is calculated, at the borrowers'
option, at either the London interbank offered rates plus an Applicable Margin
or the Bank of America, N.A. prime lending rate plus an Applicable Margin.
Applicable Margin is defined as follows: Year 1: 5.75%; Year 2: 6.00%; Year 3:
6.25%; Year 4: 6.75%, Year 5: 7.25%. The Company has the option of borrowing
under the Lucent Credit Facility for interest payments until the first
anniversary date of the closing date. There is a 0.75% commitment fee on the
unutilized and undrawn commitment until the commitment termination date, which
is on the first anniversary of the closing date of the Lucent Credit Agreement.
The Lucent Credit Agreement is secured by substantially all of the assets
of the Company including the network assets, accounts receivable, the capital
and equity interests of the subsidiaries of the Company, and all other tangible
and intangible assets of the Company excluding encumbered assets at the time of
signing.
On October 22, 1999, the Company signed a loan agreement with Lennox Invest
Ltd., a BVI Corporation, which provides for funding of up to $10.0 million. A
total of $1.5 million has been funded on this facility, which bears interest at
10% per annum. Interest on each note is to be paid at maturation of the
respective note, which occurs six months after the date of each note. Of the
$1.5 million funded under the facility, $1.0 million matures on April 19, 2000,
and $0.5 million matures on April 26, 2000. As part of this transaction, certain
members of the board of directors agreed to pledge shares of Telscape stock as
collateral. In December 1999, the Company informed Lennox that it would not be
drawing any further funding under this facility due to a breach of contract on
the part of Lennox.
The Company's debt at December 31, 1999 totaled $38.8 million, resulting in
a debt to equity ratio of 143% as compared to $13.1 million and 38%,
respectively, as of December 31, 1998. Fully funding the Lucent Credit Agreement
will significantly increase the Company's leverage. In addition, the Company
estimates that there are an additional $10 to $15 million in expenditures
related to the Mexican network and its network expansion which will be funded
with a combination of the Lucent facility and other debt.
On November 24, 1999, the Company signed a letter of intent to merge with
Pointe. In connection with the letter of intent, Pointe agreed to lend the
Company $1.5 million that was evidenced by a short term promissory note
("Promissory Note"). As part of this transaction, certain members of the board
of directors agreed to pledge shares of Telscape stock as collateral. On
December 31, 1999, the Company signed a definitive merger agreement with Pointe.
In addition, Pointe agreed to lend the Company $10 million, which was evidenced
by a convertible promissory note. In early January, Pointe funded $8.5 million
into escrow. On January 10, 2000, the Company drew down $1 million from escrow
and the Promissory Note was increased accordingly. On February 7, 2000, the
Company executed a replacement convertible promissory note ("Replacement
Note") for $10,000,000 with an interest rate of 12% and a maturity of June 30,
2000. The Replacement Note extinguishes the $2.5 million of indebtedness under
the Promissory Note.
Certain of the funding agreements that the Company has obtained, including
the additional $20 million available under the Lucent Credit Agreement and the
Class F Convertible Preferred Stock (see Note 11), are contingent on the
Company's merger with Pointe. Should the Company not be able to consummate the
merger with Pointe in a timely manner, the commitments mentioned above may
expire. The Company cannot guarantee that such commitments could be replaced on
similar terms, if at all.
In January 2000, the holders of $500,000 in notes payable due January 1,
2000, originally incurred in connection with the Integracion acquisition,
converted these obligations into 47,619 shares of common stock at a price of
$10.50 per share.
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A significant difference
relates to the treatment of inventories under the
F-21
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Mexican Tax Law. Under this law, the cost of sales for financial statement
purposes is not deductible for income tax purposes. Instead, inventory purchases
are deductible for income tax purposes in the year the purchases are made.
Significant components of the Company's deferred tax liabilities and assets
at December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
-------------------------- ---------------------------
UNITED STATES FOREIGN UNITED STATES FOREIGN
------------- --------- ------------- ----------
<S> <C> <C> <C> <C>
Current:
Operating loss carryforwards and tax
credits............................ $ 417,000 $ 311,000 $ -- $ 698,000
Accrued expenses..................... 159,000 -- 68,000 143,000
Other assets......................... -- -- -- --
Allowance for doubtful accounts...... 26,000 74,000 185,000 583,000
Inventories.......................... 14,000 (812,000) 256,000 (918,000)
Customer prepayments................. -- 439,000 -- 1,239,000
------------- --------- ------------- ----------
Net current deferred tax asset
(liability)........................ $ 616,000 $ 12,000 $ 509,000 $1,745,000
============= ========= ============= ==========
</TABLE>
<TABLE>
<CAPTION>
1998 1999
-------------------------- ---------------------------
UNITED STATES FOREIGN UNITED STATES FOREIGN
------------- --------- ------------- ----------
<S> <C> <C> <C> <C>
Long-term:
Operating loss carryforwards and tax
credits............................ $ -- $ -- $ 5,922,000 $ --
Basis differences in assets.......... 4,000 14,000 37,000 (182,000)
Accrued employee benefits and
other.............................. -- 17,000 36,000 26,000
Valuation allowance.................. -- -- (3,252,000) --
------------- --------- ------------- ----------
Net long term deferred tax asset
(liability)........................ $ 4,000 $ 31,000 $ 2,743,000 $ (156,000)
============= ========= ============= ==========
</TABLE>
The Company records valuation allowances based upon judgments as to the
future realization of deferred tax benefits supported by demonstrated trends in
the Company's operating results. No valuation allowance was recorded at December
31, 1998 and $3,252,000 was recorded at December 31, 1999. This valuation
allowance reduced the deferred tax asset to a net amount which the Company
believes more likely than not that it would realize, based on the Company's
estimates of its future earnings.
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1998 1999
-------------- ------------ --------------
<S> <C> <C> <C>
Current:
Federal......................... $ 1,146,000 $ -- $ 57,000
Foreign......................... 504,000 1,161,000 693,000
-------------- ------------ --------------
Total current.............. $ 1,650,000 $ 1,161,000 $ 750,000
Deferred:
Federal......................... (1,545,000) (97,000) (2,632,000)
Foreign......................... (21,000) (242,000) (1,546,000)
-------------- ------------ --------------
Total deferred............. $ (1,566,000) $ (339,000) $ (4,178,000)
-------------- ------------ --------------
Total provision
(benefit)................. $ 84,000 $ 822,000 $ (3,428,000)
============== ============ ==============
</TABLE>
F-22
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation of income taxes calculated at the United
States federal
statutory rate to the income tax provision (benefit):
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
Provision (benefit) for income taxes
at U.S. statutory rate............. 34% (34)% (34)%
Non-deductible amortization of
intangible assets.................. 7 252 3
Non-deductible litigation loss....... 2 -- --
Non-deductible warrant expense....... -- -- 1
Other items, net..................... 4 108 --
Effect of utilization of net
operating loss carryforwards, tax
credits and reversal/recording of
valuation allowance................ (44) 14 15
--------- --------- ---------
Income tax provision (benefit)....... 3% 340% (15)%
========= ========= =========
At December 31, 1999, the Company had available for U.S. federal income tax
purposes unused net operating loss carryforwards of approximately $16,964,000
which may provide future tax benefits and which will expire in years 2005
through 2019. The Company recognized the deferred tax benefits, net of the
valuation allowance of $3,252,000 at December 31, 1999. Additionally, as of
December 31, 1999, the Company had approximately $154,000 in alternative minimum
tax and foreign tax credits which can be utilized to offset future tax
liabilities.
In accordance with Mexican Tax Law, effective January 1, 1999, a company is
subject to income taxes based upon the greater of 35% (34% in 1998 and 1997) of
taxable income and 1.8% of net assets, as defined in the tax law. For Mexican
tax purposes, companies may carryforward an income tax loss for ten years. Any
tax on assets paid is recoverable and can be carried forward for ten years in
the event a company begins paying taxes on income. At December 31, 1999, the
Company had available for Mexican income tax purposes operating loss
carryforwards of approximately $1,993,000 which expire in 2009 and net asset
taxes credits of approximately $410,000 which expire in 2009.
6. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
1993 STOCK OPTION PLAN
Under the terms of its 1993 Stock Option Plan, the Company may grant
incentive and non-qualified stock options to purchase up to 218,145 shares of
its Common Stock to the Company's employees, directors or consultants. Options
must be granted at not less than the fair market value of the Company's Common
Stock at the date of grant as determined by the Company's Board of Directors
(110% of fair market value for stockholders owning 10% or more of the Company's
Common Stock) for incentive stock options, or not less than 85% of the fair
market value for non-qualified stock options. Options granted under this plan
may be for a term of up to 10 years (5 years for incentive stock options granted
to stockholders owning 10% or more of the Company's Common Stock) and are
exercisable as determined by the Board of Directors.
1994 DIRECTORS STOCK OPTION PLAN
Effective June 1, 1994, the Company adopted the 1994 Directors Stock Option
Plan, which provides that the Company may grant non-qualified options to
directors of the Company or any majority-owned subsidiary who are not salaried
employees to purchase up to 31,163 shares of its Common Stock. Options must be
granted by June 1, 2004, at prices not less than the fair market value of the
Company's Common Stock at the date of grant and must be exercised within ten
years of the date of grant. Upon a change of control of the Company, all granted
but unvested options under the plan will vest immediately.
TELEREUNION 1995 STOCK OPTION PLAN
As stated in Note 2, the Company assumed Telereunion's Stock Option Plan in
connection with the acquisition of Telereunion. Under the terms of this Plan,
the Company may grant non-qualified or incentive stock options to employees,
directors and consultants. Options must be granted at not less than the fair
market value of the Company's Common Stock at the date of grant as determined by
the Company's Board of Directors (110% of fair market value for stockholders
owning 10% or more of the Company's Common Stock) for incentive stock options,
or not less than 85% of the fair market value for non-qualified stock options.
The terms of the options are determined by the Company's Board of
F-23
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Directors. Any options granted must be exercised within ten years of the date of
grant (5 years for incentive stock options granted to stockholders owning 10% or
more of the Company's Common Stock).
1996 STOCK OPTION AND APPRECIATION RIGHTS PLAN
During 1996, the Company adopted the 1996 Stock Option and Appreciation
Rights Plan, which provides that the Company may grant non-qualified or
incentive stock options to purchase up to 1,200,000 shares of its Common Stock
to the Company's employees, directors or consultants. The plan also provides for
grants of stock appreciation rights in connection with the grant of options
under the plan. Options must be granted at not less than the fair market value
of the Company's Common Stock at the date of grant as determined by the
Company's Board of Directors (110% of fair market value for stockholders owning
10% or more of the Company's Common Stock) for incentive stock options, or not
less than 85% of the fair market value for non-qualified stock options. The
terms of the options are determined by the Company's Board of Directors. Any
options granted must be exercised within ten years of the date of grant (5 years
for incentive stock options granted to stockholders owning 10% or more of the
Company's Common Stock).
1998 STOCK OPTION AND APPRECIATION PLAN
During June 1998, the Company adopted the "1998 Stock Option and
Appreciation Rights Plan." Pursuant to the Company's 1998 Stock Option and
Appreciation Rights Plan, the Company may grant the Company's employees,
directors and consultants non-qualified options to purchase up to 800,000 shares
of Common Stock. The maximum number of shares of Common Stock that may be
granted to any individual under this plan may not exceed 250,000 shares.
Incentive stock options must be granted at not less than the fair market value
of the Company's Common Stock at the date of grant as determined by the
Company's Board of Directors (110% of fair market value for stockholders owning
10% or more of the Company's Common Stock). The terms of the options are
determined by the Company's Board of Directors. Any options granted must be
exercised within ten years of the date of grant or within five years from the
date of grant for options granted to stockholders owning 10% or more of the
Company's Common Stock. Unexercised vested and unvested options terminate
immediately if the employment or service of an option holder is terminated for
cause. Unvested options terminate if the employment or service of an option
holder is terminated without cause or for disability. The Company may also grant
SARs in connection with any option, which permits cashless exercises of the
options. SARs allow an option holder to surrender an option and to receive the
difference between the exercise price of the option and the then fair market
value of the Common Stock. The Company may also make loans to any option holder
in order to permit the option holder to pay the purchase price upon exercise of
the option.
1998 MSN STOCK OPTION AND APPRECIATION RIGHTS PLAN
During June 1998, the Company adopted the "1998 MSN Stock Option and
Appreciation Rights Plan." Pursuant to the Company's 1998 MSN Stock Option and
Appreciation Rights Plan, the Company may grant the Company's employees,
directors and consultants non-qualified options to purchase up to 100,000 shares
of Common Stock. The maximum number of shares of Common Stock that may be
granted to any individual under this plan may not exceed 50,000 shares. The
terms of the options are determined by the Company's Board of Directors. Any
options granted must be exercised within ten years of the date of grant or
within five years from the date of grant for options granted to stockholders
owning 10% or more of the Company's Common Stock. Unexercised vested and
unvested options terminate immediately if the employment or service of an option
holder is terminated for cause. Unvested options terminate if the employment or
service of an option holder is terminated without cause or for disability. The
Company may also grant SARs in connection with any option, which permits
cashless exercises of the options. SARs allow an option holder to surrender an
option and to receive the difference between the exercise price of the option
and the then fair market value of the Common Stock. The Company may also make
loans to any option holder in order to permit the option holder to pay the
purchase price upon exercise of the option.
F-24
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's fixed option plans as of December 31, 1997, 1998
and 1999 is presented below:
<TABLE>
<CAPTION>
WTD.
MSN AVG.
1993 1994 1995 1996 1998 1998 TOTAL EXER.
PLAN PLAN PLAN PLAN PLAN PLAN ALL PLANS PRICE
--------- --------- --------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at December 31,
1996............................... 86,032 10,000 145,809 1,120,000 -- -- 1,361,841 3.95
Max. shares exercisable.............. 86,032 10,000 145,809 225,000 -- -- 466,841 3.16
Options granted...................... 115,500 -- -- 440,000 -- -- 555,500 5.74
Options exercised.................... (15,828) -- -- (25,000) -- -- (40,828) 1.87
Options cancelled.................... (9,700) -- -- (420,000) -- -- (429,700) 4.50
--------- --------- --------- --------- --------- --------- ---------
Options outstanding at December 31,
1997............................... 176,004 10,000 145,809 1,115,000 -- -- 1,446,813 4.51
Max. shares exercisable.............. 70,204 10,000 145,809 393,333 -- -- 619,346 3.60
Options granted...................... -- 18,125 -- 60,000 100,000 1,045,142 1,223,267 11.49
Options exercised.................... (50,204) -- -- (140,554) -- -- (190,758) 2.57
Options cancelled.................... (20,000) -- -- (5,000) -- (527,250) (552,250) 16.48
--------- --------- --------- --------- --------- --------- ---------
Options outstanding at December 31,
1998............................... 105,800 28,125 145,809 1,029,446 100,000 517,892 1,927,072 5.67
Max. shares exercisable.............. 35,267 10,000 145,809 725,988 27,776 5,000 949,840 4.43
Options granted...................... -- -- 69,316 23,000 100,000 353,000 545,316 8.22
Options exercised.................... -- -- (70,809) (90,834) -- -- (161,643) 2.70
Options cancelled.................... (9,500) (8,500) -- (15,834) (100,000) (86,625) (220,459) 7.76
--------- --------- --------- --------- --------- --------- ---------
Options, outstanding at December 31,
1999............................... 96,300 19,625 144,316 945,778 100,000 784,267 2,090,286 6.37
========= ========= ========= ========= ========= ========= =========
Max. shares exercisable.............. 57,533 19,625 75,000 868,639 -- 132,979 1,153,776 5.04
</TABLE>
SFAS No. 123 requires the Company to provide pro forma information
regarding net income (loss) applicable to common stockholders and income (loss)
per share as if compensation cost for the Company's stock options granted had
been determined in accordance with the fair value based method prescribed in
that Statement. The Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 1997, 1998 and 1999: dividend
yield of 0% for all years; expected volatility ranging from 80% to 90%, 55% to
65% and 55% to 65%; risk-free interest rates ranging from 5.65% to 5.80%, 5% to
5.15% and 5% to 5.15%; and expected lives averaging 8.5 years, 5.0 years and 5.0
years, respectively.
Under the accounting provisions of SFAS No. 123, the Company's net income
(loss) applicable to common stockholders and income (loss) per share would have
been revised to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1998 1999
------------ -------------- ---------------
<S> <C> <C> <C>
Net income (loss):
As reported..................... $ 2,672,000 $ (1,030,000) $ (19,475,000)
Pro Forma....................... $ 1,955,000 $ (2,700,000) $ (21,234,000)
Net income (loss) per share:
Basic
As reported..................... $0.68 $(0.20) $(2.92)
Pro Forma....................... $0.50 $(0.53) $(3.18)
Diluted
As reported..................... $0.53 n/a n/a
Pro Forma....................... $0.38 n/a n/a
</TABLE>
WARRANTS
Following is a description of the Company's warrants outstanding at
December 31, 1999:
#
DESCRIPTION OF WARRANTS: OUTSTANDING
- ------------------------------------- -----------
F-25
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Series A Warrants (unregistered)
issued in connection with the
acquisition of Telereunion on May
17, 1996, exercisable at $2.19 at
stated percentages only upon
achieving certain operating
performance measures or fully
vesting upon maintaining a $12
share price for 90 consecutive
trading days; expiration date of
May 16, 2003, 2,000,000 of which
vested at December 31, 1997 and
500,000 of which vested during the
year ended December 31, 1998 (See
Note 2)............................ 1,731,385
Series B Warrants (unregistered)
issued in connection with the
acquisition of Telereunion on May
17, 1996, currently exercisable at
$2.19 as certain operating
performance measures were achieved
during the year ended December 31,
1997, expiration date May 16, 2003
(See Note 2)....................... 10,000
Warrants (unregistered) issued on
February 29, 1996, in connection
with former officer's severance
agreement exercisable at any time
at $2.94 prior to expiration on
February 28, 2001.................. 72,000
Warrants (unregistered) issued on
November 17, 1999 to the minority
shareholders of Telereunion S.A. de
C.V. in exchange for an additional
27% of the economic interests of
Telereunion, S.A. de C.V. Term of
three years and exercisable at
$7.50 per share.................... 100,000
Warrants (unregistered) issued on
January 5, 1999 to Strategic Growth
International in connection with
investor relations services
agreement exercisable at any time
at $6.813-$7.4375 prior to
expiration on January 5, 2002 or
two years from termination of
agreement, whichever is sooner..... 110,000
Warrants (unregistered) issued to
bridge lenders exercisable at any
time at $6.68-$9.85 per share, with
three year terms................... 569,550
Registered warrants issued to
debenture holders and placement
agent in connection with issuance
of Deere Park Convertible
Debentures and Gordon Brothers
Convertible Debentures exercisable
at any time at $8.50-$20.60 per
share, with two to three year terms
(See Note 4)....................... 138,619
-----------
Total warrants outstanding... 2,731,554
===========
7. STOCK ISSUANCES
In the fourth quarter of 1998, the Company entered into a stock purchase
agreement with third parties (the "Stock Purchase Commitment"), which allowed
the Company to sell at the Company's option (subject to certain conditions
precedent), up to $5.0 million of the Company's Common Stock. During the fourth
quarter of 1998 and the fiscal year 1999, the Company utilized this facility
entirely. In connection therewith, the Company issued a total of 783,338 shares
of the Company's Common Stock.
8. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
As of December 31, 1999, the Company is obligated under certain long-term
non-cancelable operating lease agreements for equipment, office and warehouse
space as follows:
YEAR ENDED AMOUNT
- ------------------------------------- ----------
2000 $2,894,000
2001............................... 2,664,000
2002............................... 2,331,000
2003............................... 467,000
2004............................... 126,000
----------
$8,482,000
==========
Total rent expense under such operating leases was $229,000, $914,000 and
$2,168,000, respectively, for the years ended December 31, 1997, 1998 and 1999.
At December 31, 1999, the Company has employment agreements with eleven
officers, which expire in 2002. Future minimum commitments under these
agreements, excluding incentive bonuses or stock options, as of December 31,
1999, are as follows:
YEAR ENDED AMOUNT
- ------------------------------------- ----------
2000............................... $ 849,000
2001............................... 360,000
2002............................... 125,000
----------
$1,334,000
==========
The Company has signed a contract with a third party vendor to provide
telecommunications services to the Company including the origination of inbound
800 dialed phone calls for its prepaid phone cards, and the termination of U.S.
domestic long distance and international long distance. The contract term is
through June 1, 2001, and provides for a minimum monthly purchase commitment of
$750,000 and a total purchase commitment of $31,110,000. The Company can cancel
the minimum monthly purchase commitment with 30 days notice upon meeting its
total minimum purchase commitment.
F-26
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is in the process of negotiating certain significant supply
contracts for its Operating Support Systems in Mexico and an interconnect
agreement with the National Telephone Company of Mexico (Telefonos de Mexico, or
Telmex). The Company is presently unable to estimate the contingencies that
might be agreed to, if any, as part of the inter-connect agreement with Telmex.
The Company is liable to the Internal Revenue Service ("IRS") for federal
excise taxes totaling $1.4 million related to such taxes due for the periods
December 1998, March 1999 and June 1999. The Company has contacted the IRS and
has been negotiating a payment plan for the payment of these taxes due and for a
waiver of interest and penalties due. An agreement has not been reached to date.
The Company has accrued the amounts outstanding for such taxes to the IRS on its
consolidated balance sheet as of December 31, 1999.
On September 29, 1996, the Federal Communications Commission ("FCC")
issued order FCC96-388, 11FCC Rcd. 20541, requiring telecommunications carriers
to reimburse operators of public payphones for the use of such payphones for the
origination of toll free telephone calls from payphones. On the December 31,
1999 consolidated balance sheet, the Company has accrued a total of $1.1 million
as an estimate of such fees payable to payphone operators.
The Company has signed several agreements in which it is swapping some of
the capacity available on its Mexican network with capacity available on other
carriers networks. Some of these swap agreements require that the Company pay
some additional monies in addition to the actual facilities exchange. The
Company has committed to a total payment of $4,279,000 and $2,140,000 in the
years 2000 and 2001, respectively, under such swap agreements.
9. SEGMENT INFORMATION
The Company has two reportable segments: Voice Services and Advanced
Services. Revenues in the Voice Services segment are generated on a retail and
wholesale basis. Revenues in the Advanced Services segment are generated from
network solutions services, customer relationship management and broadband
services and products. The Company provides Voice Services to customers in the
United States and in Mexico. Advanced Services are provided to customers in the
United States, Mexico and other parts of Latin America. The Company measures
segment profit as earnings before interest, depreciation, amortization of
intangibles, other income and taxes (EBITDA).
F-27
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues, operating information and identifiable assets by business segment
are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1998 1999
-------------- --------------- ---------------
<S> <C> <C> <C>
Revenues
Voice services:
Retail.......................... $ -- $ 60,127,000 $ 60,682,000
Wholesale....................... 17,390,000 33,029,000 16,636,000
Advanced services:
Network solutions............... 18,764,000 30,220,000 13,298,000
Customer relationship
management..................... -- 2,744,000 7,692,000
Broadband services and
products....................... -- 6,059,000 8,525,000
-------------- --------------- ---------------
Total revenues....................... $ 36,154,000 $ 132,179,000 $ 106,833,000
-------------- --------------- ---------------
Operating income (loss) before
interest, depreciation and
amortization
Voice services, including
impairment loss.................. $ 3,823,000 $ 3,505,000 $ (8,838,000)
Advanced services.................. (107,000) 2,153,000 (2,417,000)
Corporate and other................ (112,000) (171,000) (378,000)
-------------- --------------- ---------------
Total operating income (loss) before
interest, depreciation and
amortization....................... 3,604,000 5,487,000 (11,633,000)
Depreciation and amortization...... 622,000 3,316,000 6,335,000
-------------- --------------- ---------------
Consolidated Operating income (loss)
as reported on the Statements of
Operations......................... $ 2,982,000 $ 2,171,000 $ (17,968,000)
-------------- --------------- ---------------
Capital Expenditures
Voice services..................... $ 734,000 $ 5,813,000 $ 16,552,000
Advanced services.................. 940,000 298,000 1,648,000
Corporate and other................ 8,000 48,000 68,000
-------------- --------------- ---------------
Total capital expenditures...... $ 1,682,000 $ 6,159,000 $ 18,268,000
-------------- --------------- ---------------
Identifiable Assets
Voice services..................... $ 5,978,000 $ 25,578,000 $ 64,619,000
Advanced services.................. 17,619,000 32,427,000 37,611,000
Corporate and other................ 16,038,000 22,326,000 24,910,000
-------------- --------------- ---------------
Total identifiable assets....... $ 39,635,000 $ 80,331,000 $ 127,140,000
-------------- --------------- ---------------
</TABLE>
F-28
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information concerning principal geographic areas is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1998 1999
-------------- ---------------- ---------------
<S> <C> <C> <C>
Revenues
United States...................... $ 17,390,000 $ 97,903,000 $ 83,316,000
Mexico............................. 18,031,000 32,965,000 20,990,000
Latin America...................... -- 1,311,000 2,527,000
Poland............................. 733,000 -- --
-------------- ---------------- ---------------
Total revenues....................... $ 36,154,000 $ 132,179,000 $ 106,833,000
-------------- ---------------- ---------------
Fixed assets, net of accumulated
depreciation
United States...................... $ 692,000 $ 7,297,000 $ 13,523,000
Mexico............................. 1,987,000 5,174,000 44,439,000
Latin America...................... -- 2,105,000 506,000
-------------- ---------------- ---------------
Total fixed assets................... $ 2,679,000 $ 14,576,000 $ 58,468,000
-------------- ---------------- ---------------
</TABLE>
10. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR
-------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
1997
Revenues............................. $ 3,771,000 $ 6,170,000 $ 12,193,000 $ 14,020,000 $ 36,154,000
Operating income (loss).............. (386,000) 696,000 1,169,000 1,503,000 2,982,000
Income (loss) before taxes and
minority interests................. (359,000) 402,000 1,110,000 1,597,000 2,750,000
Net income (loss).................... (324,000) 538,000 1,202,000 1,256,000 2,672,000
Basic EPS............................ $(0.08) $0.14 $0.31 $0.32 $0.68
Diluted EPS (1)...................... N/A $0.13 $0.22 $0.18 $0.53
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR
-------------- -------------- -------------- -------------- ---------------
1998
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 33,399,000 $ 32,378,000 $ 36,529,000 $ 29,873,000 $ 132,179,000
Operating income (loss).............. 2,219,000 (461,000) 2,182,000 (1,769,000) 2,171,000
Income (loss) before taxes and
minority interests................. 2,089,000 (672,000) 1,507,000 (3,166,000) (242,000)
Net income (loss).................... 1,114,000 (622,000) 869,000 (2,391,000) (1,030,000)
Basic EPS............................ $0.25 $(0.13) $0.16 $(0.42) $(0.20)
Diluted EPS (1)...................... $0.15 N/A $0.11 N/A N/A
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR
-------------- -------------- -------------- -------------- ---------------
1999
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 27,019,000 $ 29,709,000 $ 26,613,000 $ 23,492,000 $ 106,833,000
Operating loss....................... (2,685,000) (2,271,000) (4,539,000) (8,473,000) (17,968,000)
Loss before taxes and minority
interests.......................... (3,840,000) (4,353,000) (4,983,000) (9,727,000) (22,903,000)
Net loss............................. (2,864,000) (3,078,000) (3,695,000) (9,838,000) (19,475,000)
Basic EPS............................ (0.47) (0.47) (0.53) (1.36) (2.92)
Diluted EPS (1)...................... N/A N/A N/A N/A N/A
</TABLE>
- ------------
(1) Inclusion of additional shares under a diluted analysis for loss period is
inappropriate due to the anti-dilutive effect.
F-29
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENTS (UNAUDITED)
In March 2000, the Company completed a $31,575,000 private placement
consisting of 315,750 shares of Class F Convertible Senior Preferred Stock, par
value $.001 per share (the "Class F Preferred Stock"), together with five year
warrants to purchase 1,925,306 shares of common stock. The Class F Preferred
Stock is convertible into 3,850,610 shares of Company common stock at a
conversion price equal to $8.20 per share, and the exercise price of the
warrants is $10.00 per share. The Class F Preferred Stock earns dividends at a
rate of 12% per annum, which are cumulative and payable in either cash or shares
of Class F Preferred Stock at the Company's discretion. Pricing for this
transaction was established based on a trailing thirty day average of the
closing price of the common stock as of December 7, 1999. The proceeds of the
Class F Preferred have been placed into escrow and release of escrow is subject
to the consummation of the merger with Pointe.
The Company will be required to file a registration statement with the SEC
within 150 days of closing the sale of the Class F Preferred Stock to register
the shares of Common Stock issued or issuable upon conversion of all the Class F
Preferred Stock (including shares issued as dividends) and the exercise of the
related warrants.
In March 2000, the Company's executive management team decided to shut down
the Company's manufacturing facilities at its Interlink subsidiary. The shut
down, which is expected to both reduce the Company's cost structure and increase
its margins with respect to sales, is intended to focus the Company's attention
on its core voice and data services' strategies. The shut down includes the
elimination of certain products, termination of employees, vacating certain
facilities and the possible cancellation of real estate leases. As of the end of
March 1999, the Company expected to terminate between 20 and 25 employees as a
result of the shut down. Shut down charges to be incurred in 2000 are estimated
at $1.6 million.
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF END OF
PERIOD ADDITIONS DEDUCTIONS PERIOD
------------ --------- ---------- ----------
<S> <C> <C> <C> <C>
FY 1999................................. $ 500,000 $1,996,000 $386,000 $2,110,000
FY 1998*................................ 200,000 925,000 625,000 500,000
FY 1997................................. 57,000 277,000 134,000 200,000
INVENTORY RESERVES
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF END OF
PERIOD ADDITIONS DEDUCTIONS PERIOD
------------ --------- ---------- ----------
<S> <C> <C> <C> <C>
FY 1999................................. $1,047,000 $ 450,000 $184,000 $1,313,000
FY 1998*................................ 352,000 946,000 251,000 1,047,000
FY 1997................................. 299,000 53,000 -- 352,000
</TABLE>
- ------------
* Additions and deductions for 1998 include activity related to the Company's
acquisitions during that year. As such, the 1998 additions do not agree to the
related entries shown for the same items on the consolidated Statement of Cash
Flows.
F-30
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pointe Communications Corporation:
We have audited the accompanying consolidated balance sheets of POINTE
COMMUNICATIONS CORPORATION (a Nevada corporation) AND SUBSIDIARIES (formerly,
"Charter Communications International, Inc.") as of December 31, 1998 and 1999
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pointe Communications
Corporation and subsidiaries as of December 31, 1999 and 1998 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 14, 2000
F-36
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1999
DECEMBER 31, DECEMBER 31,
1998 1999
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents............ $ 1,255,199 $ 21,219,684
Restricted cash...................... 185,000 542,913
Accounts receivable, net of allowance
for doubtful accounts of $900,000
and $1,508,458 in 1998 and 1999,
respectively....................... 3,686,153 3,639,378
Notes receivable, net................ 215,337 2,270,750
Inventory, net....................... 652,187 1,742,543
Prepaid expenses and other........... 263,249 629,787
------------- -------------
Total current assets....... 6,257,125 30,045,055
------------- -------------
PROPERTY AND EQUIPMENT, at cost:
Equipment and machinery.............. 11,157,928 23,360,356
Earth station facility............... 835,527 1,471,822
Software............................. 1,732,700 2,016,576
Furniture and fixtures............... 578,698 1,257,666
Other................................ 1,157,344 1,586,359
Construction in progress............. 3,010,500 1,452,303
------------- -------------
18,472,697 31,145,082
Accumulated depreciation and
amortization....................... (3,984,392) (6,827,740)
------------- -------------
Property and equipment,
net........................ 14,488,305 24,317,342
------------- -------------
OTHER ASSETS:
Goodwill, net of accumulated
amortization of $1,544,360 and
$2,190,266 in 1998 and 1999,
respectively....................... 17,709,865 17,237,653
Acquired customer bases, net of
accumulated amortization of
$969,182 and $1,131,507 in 1998 and
1999, respectively................. 844,543 890,271
Other intangibles, net of accumulated
amortization of $1,184,062 and
$1,946,521 in 1998 and 1999,
respectively....................... 1,848,762 1,723,225
Other................................ 1,073,279 2,676,217
------------- -------------
Total other assets......... 21,476,449 22,527,366
------------- -------------
TOTAL ASSETS............... $ 42,221,879 $ 76,889,763
============= =============
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Balance Sheets.
F-37
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1999
DECEMBER 31, DECEMBER 31,
1998 1999
------------- -------------
CURRENT LIABILITIES:
Current portion of notes payable..... $ 5,398,062 $ 2,795,256
Current portion of lease
obligations........................ 1,273,298 3,242,776
Accounts payable..................... 6,282,952 6,233,914
Accrued liabilities.................. 2,346,622 6,132,570
Unearned revenue..................... 2,928,990 1,514,329
------------- -------------
Total current
liabilities........................ 18,229,924 19,918,845
------------- -------------
LONG-TERM LIABILITIES:
Capital and financing lease
obligations........................ 7,128,451 10,367,260
Convertible debentures............... 1,180,000 900,000
Senior subordinated notes............ 690,278 --
Notes payable and other long-term
obligations........................ 626,022 866,974
------------- -------------
Total long-term
liabilities........................ 9,624,751 12,134,234
------------- -------------
MINORITY INTEREST.................... 1,981,959 2,014,959
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value;
100,000 shares authorized, 0 and
18,121 shares issued and
outstanding in 1998 and 1999,
respectively....................... -- 181
Common stock, $0.00001 par value;
100,000,000 shares authorized;
45,339,839 and 51,694,189 shares
issued and outstanding in 1998 and
1999, respectively................. 454 517
Additional paid-in-capital........... 43,137,654 136,370,654
Accumulated deficit.................. (30,752,863) (93,549,626)
------------- -------------
Total stockholders'
equity..................... 12,385,245 42,821,726
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................... $ 42,221,879 $ 76,889,763
============= =============
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Balance Sheets.
F-38
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
--------------- -------------- ---------------
<S> <C> <C> <C>
Revenues:
Communications services and
products...................... $ 10,203,787 $ 24,784,756 $ 49,808,827
Internet connection services.... 2,747,635 2,835,446 2,116,093
--------------- -------------- ---------------
Total revenues.................. 12,951,422 27,620,202 51,924,920
--------------- -------------- ---------------
Costs and Expenses:
Cost of services and products... 9,765,856 23,246,432 50,129,620
Selling, general, and
administrative expenses....... 8,766,282 9,933,265 19,274,799
Nonrecurring charge............. 2,677,099 -- --
Depreciation and amortization... 2,995,334 3,451,982 4,477,292
--------------- -------------- ---------------
Total costs and expenses........ 24,204,571 36,631,679 73,881,711
--------------- -------------- ---------------
Operating Loss....................... (11,253,149) (9,011,477) (21,956,791)
--------------- -------------- ---------------
Interest Expense, net................ (480,924) (1,760,315) (15,998,840)
Other (Expense) Income............... (241,785) 1,624,310 (335,225)
--------------- -------------- ---------------
Net Loss Before Income Taxes......... (11,975,858) (9,147,482) (38,290,855)
Income Tax Benefit................... -- -- --
Net Loss............................. $ (11,975,858) $ (9,147,482) $ (38,290,855)
=============== ============== ===============
NET LOSS PER SHARE --
Basic and Diluted (Note 2)......... $ (0.39) $ (0.22) $ (1.36)
=============== ============== ===============
Shares Used In Computing Net Loss Per
Share.............................. 31,084,693 42,143,733 46,204,130
=============== ============== ===============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Statements.
F-39
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------ --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- ------ ------------ ------ -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996......... -- $-- 24,202,779 $ 242 $28,302,025
Issuance of common stock ($1.00 per
share) (Note 7).................... -- -- 9,283,997 93 9,203,844
Retirement of shares in conjunction
with a contribution agreement
executed by certain members of
management......................... -- -- (2,500,000) (25) (3,538,698)
Issuance of common stock in
conjunction with conversion of
debenture, net ($.50 per share)
(Note 7)........................... -- -- 2,200,000 22 999,978
Issuance of common stock in
conjunction with the acquisition of
communications operating
licenses........................... -- -- 400,000 4 399,996
Issuance of common stock in
conjunction with financing lease
transaction (Note 4)............... -- -- 450,000 5 449,995
Issuance of common stock in
conjunction with debt issuance..... -- -- 98,000 -- 98,000
Issuance of common stock warrants in
conjunction with operating lease
($0.34 per warrant)................ -- -- -- -- 66,300
Net loss............................. -- -- -- -- --
-------- ------ ------------ ------ -----------
Balance at December 31, 1997......... -- -- 34,134,776 341 35,981,440
Issuance of common stock ($.50 per
share) (Note 7).................... -- -- 9,500,000 95 4,499,905
Issuance of common stock ($1.00 per
share) (Note 7).................... -- -- 850,000 9 849,991
Issuance of common stock warrants in
conjunction with promissory note
($0.21 per warrant) (Note 4)....... -- -- -- -- 114,069
Issuance of common stock in
conjunction with a merger ($0.90
per share) (Note 3)................ -- -- 206,250 2 186,761
Issuance of common stock ($1.30 per
share) (Note 7).................... -- -- 500,000 5 649,995
Issuance of common stock warrants in
conjunction with a merger ($0.49
per warrant) (Note 3).............. -- -- -- -- 289,100
Exercise of warrants ($0.70 per
share)............................. -- -- 10,354 -- 7,248
Exercise of warrants ($0.70 per
share)............................. -- -- 20,709 1 14,496
Exercise of stock options ($1.00 per
share)............................. -- -- 117,750 1 117,749
Issuance of common stock rights in
conjunction with a merger ($0.44
per warrant) (Note 3).............. -- -- -- -- 272,500
Issuance of common stock warrants in
conjunction with promissory note
($0.18 per warrant) (Note 4)....... -- -- -- -- 68,400
Issuance of common stock warrants in
conjunction with promissory note
($0.16 per warrant) (Note 4)....... -- -- -- -- 60,800
Issuance of common stock warrants in
conjunction with promissory note
($0.21 per warrant) (Note 4)....... -- -- -- -- 25,200
Net Loss............................. -- -- -- -- --
-------- ------ ------------ ------ -----------
Balance at December 31, 1998......... -- -- 45,339,839 454 43,137,654
Issuance of common stock warrants in
conjunction with promissory note
($0.18 per warrant) (Note 4)....... -- -- -- -- 129,200
Issuance of common stock warrants in
conjunction with promissory note
($0.25 per warrant) (Note 4)....... -- -- -- -- 190,000
Issuance of common stock warrants in
conjunction with promissory note
($0.08 per warrant) (Note 4)....... -- -- -- -- 391,950
Issuance of common stock warrants in
conjunction with promissory note
($0.49 per warrant) (Note 4)....... -- -- -- -- 98,751
Issuance of common stock warrants in
conjunction with promissory note
($0.40 per warrant) (Note 4)....... -- -- -- -- 216,170
Issuance of common stock in
conjunction with a merger ($1.50
per share) (Note 3)................ -- -- 37,589 -- 56,383
Issuance of common stock in
conjunction with purchase of
minority interest in a subsidiary
($1.17 per share).................. -- -- 300,000 3 352,800
Issuance of common stock in
conjunction with settlement of
payables (average of $0.26 per
share)............................. -- -- 75,776 1 20,209
Issuance of common stock in
conjunction with conversion of
debentures ($1.20 per share)....... -- -- 166,666 2 200,000
(TABLE CONTINUED ON FOLLOWING PAGE)
</TABLE>
F-40
<PAGE>
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------ --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- ------ ------------ ------ -----------
<S> <C> <C> <C> <C> <C>
Issuance of common stock in
conjunction with exercise of
conversion rights ($0.36 per
share)............................. -- -- 625,000 6 108,552
Issuance of common stock in
conjunction with exercise of
options ($1.25 per share).......... -- -- 149,319 1 203,955
Issuance of common stock warrants in
conjunction with an acquisition of
a customer base ($0.66 per
warrant)........................... -- -- -- -- 118,363
Issuance of common stock in
conjunction with exercise of
warrants ($1.00 per share)......... -- -- 5,000,000 50 4,999,950
Issuance of Class A Senior
Convertible Preferred Stock and
warrants, net of issuance cost
($3,000.00 per share).............. 10,080 101 -- -- 50,152,024
Issuance of Class A Senior
Convertible Preferred Stock as
payment for dividends on Class A
Senior Convertible Preferred
Stock.............................. 777 8 -- -- 2,331,826
Issuance of Class B Senior
Convertible Preferred Stock and
warrants in conjunction with
conversion of convertible
debentures and accrued interest on
convertible debentures............. 7,264 72 -- -- 33,505,712
Compensation on variable options..... -- -- -- -- 157,155
Net loss............................. -- -- -- -- --
-------- ------ ------------ ------ -----------
Balance at December 31, 1999......... 18,121 $ 181 51,694,189 $ 517 136,370,654
======== ====== ============ ====== ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Statements.
F-41
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
----------- -------------
Balance at December 31, 1996............ ($9,629,523) $18,672,744
Issuance of common stock ($1.00 per
share) (Note 7)....................... -- 9,203,937
Retirement of shares in conjunction with
a contribution agreement executed by
certain members of management......... -- (3,538,723)
Issuance of common stock in conjunction
with conversion of debenture, net
($.50 per share) (Note 7)............. -- 1,000,000
Issuance of common stock in conjunction
with the acquisition of communications
operating licenses.................... -- 400,000
Issuance of common stock in conjunction
with financing lease transaction (Note
4).................................... -- 450,000
Issuance of common stock in conjunction
with debt issuance.................... -- 98,000
Issuance of common stock warrants in
conjunction with operating lease
($0.34 per warrant)................... -- 66,300
Net loss................................ (11,975,858) (11,975,858)
----------- -------------
Balance at December 31, 1997............ (21,605,381) 14,376,400
Issuance of common stock ($.50 per
share) (Note 7)....................... -- 4,500,000
Issuance of common stock ($1.00 per
share) (Note 7)....................... -- 850,000
Issuance of common stock warrants in
conjunction with promissory note
($0.21 per warrant) (Note 4).......... -- 114,069
Issuance of common stock in conjunction
with a merger ($0.90 per share) (Note
3).................................... -- 186,763
Issuance of common stock ($1.30 per
share) (Note 7)....................... -- 650,000
Issuance of common stock warrants in
conjunction with a merger ($0.49 per
warrant) (Note 3)..................... -- 289,100
Exercise of warrants ($0.70 per
share)................................ -- 7,248
Exercise of warrants ($0.70 per
share)................................ -- 14,497
Exercise of stock options ($1.00 per
share)................................ -- 117,750
Issuance of common stock rights in
conjunction with a merger ($0.44 per
warrant) (Note 3)..................... -- 272,500
Issuance of common stock warrants in
conjunction with promissory note
($0.18 per warrant) (Note 4).......... -- 68,400
Issuance of common stock warrants in
conjunction with promissory note
($0.16 per warrant) (Note 4).......... -- 60,800
Issuance of common stock warrants in
conjunction with promissory note
($0.21 per warrant) (Note 4).......... -- 25,200
Net Loss................................ (9,147,482 ) (9,147,482)
----------- -------------
Balance at December 31, 1998............ (30,752,863) 12,385,245
Issuance of common stock warrants in
conjunction with promissory note
($0.18 per warrant) (Note 4).......... -- 129,200
Issuance of common stock warrants in
conjunction with promissory note
($0.25 per warrant) (Note 4).......... -- 190,000
Issuance of common stock warrants in
conjunction with promissory note
($0.08 per warrant) (Note 4).......... -- 391,950
Issuance of common stock warrants in
conjunction with promissory note
($0.49 per warrant) (Note 4).......... -- 98,751
Issuance of common stock warrants in
conjunction with promissory note
($0.40 per warrant) (Note 4).......... -- 216,170
Issuance of common stock in conjunction
with a merger ($1.50 per share) (Note
3).................................... -- 56,383
Issuance of common stock in conjunction
with purchase of minority interest in
a subsidiary ($1.17 per share)........ -- 352,803
Issuance of common stock in conjunction
with settlement of payables (average
of $0.26 per share)................... -- 20,210
Issuance of common stock in conjunction
with conversion of debentures ($1.20
per share)............................ -- 200,002
Issuance of common stock in conjunction
with exercise of conversion rights
($0.36 per share)..................... -- 108,558
Issuance of common stock in conjunction
with exercise of options ($1.25 per
share)................................ -- 203,956
Issuance of common stock warrants in
conjunction with an acquisition of a
customer base ($0.66 per warrant)..... -- 118,363
Issuance of common stock in conjunction
with exercise of warrants ($1.00 per
share)................................ -- 5,000,000
Issuance of Class A Senior Convertible
Preferred Stock and warrants, net of
issuance cost ($3,000.00 per share)... (22,174,074) 27,978,051
Issuance of Class A Senior Convertible
Preferred Stock as payment for
dividends on Class A Senior
Convertible Preferred Stock........... (2,331,834 ) --
Issuance of Class B Senior Convertible
Preferred Stock and warrants in
conjunction with conversion of
convertible debentures and accrued
interest on convertible debentures.... -- 33,506,415
Compensation on variable options........ -- 157,155
Net loss................................ (38,290,855) (38,290,855)
----------- -------------
Balance at December 31, 1999............ $(92,359,845) $42,821,726
=========== =============
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Statements.
F-42
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss.............................. $(11,975,858) $(9,147,482) $(38,290,855)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization..... 2,995,334 3,451,982 4,477,292
Bad debt expense.................. 586,687 883,462 1,586,491
Amortization of discounts on debt
and lease obligations........... 56,891 250,244 13,825,619
Interest on convertible debenture
paid in-kind.................... -- -- 791,662
Loss on extinguishment of debt.... 241,785 -- --
Nonrecurring charge............... 2,677,099 -- --
Deferred settlement gain.......... -- (2,757,132) --
Changes in operating assets and
liabilities:
Accounts receivable, net........ (1,645,919) (1,820,958) (506,518)
Notes receivable................ 63,802 (215,337) (3,088,611)
Inventory....................... (194,180) (155,880) (1,090,356)
Prepaid expenses................ 23,832 (38,654) (366,538)
Other assets.................... (225,135) (640,641) (1,839,700)
Accounts payable, accrued, and
other liabilities............. 998,031 1,460,510 3,692,179
Unearned revenue................ (185,009) 1,283,268 (1,414,661)
----------------- ----------------- -----------------
Total adjustments........... 5,393,218 1,700,864 16,066,859
----------------- ----------------- -----------------
Net cash used in operating
activities................ (6,582,640) (7,446,618) (22,223,996)
----------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.... (2,577,080) (3,505,889) (6,644,342)
Restricted cash....................... (135,000) (50,000) (357,913)
Acquisition of businesses, net of cash
acquired............................ -- (350,633) (137,140)
----------------- ----------------- -----------------
Net cash used in investing
activities................ (2,712,080) (3,906,522) (7,139,395)
----------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred
stock, net.......................... -- -- 27,978,051
Proceeds from convertible
debentures.......................... 2,180,000 -- 20,849,118
Proceeds from issuance of common
stock............................... 5,831,604 6,000,000 --
Proceeds from issuance of preferred
stock in subsidiary................. -- 1,981,959 --
Proceeds from exercise of warrants and
options............................. -- 25,495 170,622
Proceeds from lease obligations....... 2,086,096 754,891 --
Proceeds from notes payable, net...... 476,046 4,336,403 10,633,000
Repayment of notes payable and lines
of credit........................... (1,443,775) (243,181) (9,319,466)
Repayment of financing lease
obligations......................... -- (402,731) (903,449)
Repayment of convertible debentures... -- -- (80,000)
----------------- ----------------- -----------------
Net cash provided by
financing activities...... 9,129,971 12,452,836 49,327,876
----------------- ----------------- -----------------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS........................... (164,749) 1,099,696 19,964,485
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR............................... 320,252 155,503 1,255,199
----------------- ----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR.................................. $ 155,503 $ 1,255,199 $21,219,684
================= ================= =================
Supplemental Disclosures:
Cash paid for interest................ $ 339,874 $ 1,238,442 $ 2,093,800
Cash paid for income taxes............ -- -- --
Supplemental Noncash Disclosures:
Exchange of promissory note for
exercise of warrants................ -- -- 5,000,000
Assets acquired under financing and
capital leases...................... -- 6,219,977 6,002,111
Assets acquired in excess of
liabilities assumed................. -- 1,381,531 1,146,728
Purchase price adjustments............ 864,612 -- --
Value of warrants issued.............. -- 830,069 1,026,071
Value of stock issued for
acquisition......................... -- 186,761 56,383
Incurrance of notes payable to pay
operating obligations............... -- 1,397,000 --
Conversion of liabilities to equity
Subordinated debentures............. 2,115,000 -- 200,000
Stockholder loans................... 937,865 -- --
Notes Payable....................... -- -- 225,145
Accrued liabilities................. 319,468 -- --
Giveback of shares by members of
management............................ 3,538,723 -- --
Deferred settlement gain................ 2,757,132 -- --
Conversion of subordinated debenture.... 1,000,000 -- --
Shares issued for operating licenses.... 400,000 -- --
Shares issued for operating payables.... -- -- 20,210
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Statements.
F-43
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
1. ORGANIZATION AND NATURE OF BUSINESS
Pointe Communications Corporation ("Pointe" or the "Company", formerly
Charter Communications International, Inc.) is an international facilities based
integrated communications provider ("ICP") serving residential and commercial
customers in the U.S., Central and South America. The Company and its
subsidiaries provide enhanced telecommunications products and services,
including local, long distance, Internet, international private line, carrier
services, prepaid calling card, and telecommuting services, with a focus on the
Hispanic community both domestically and internationally. The Company is
implementing a facilities based infrastructure on a staged basis in certain
identified U.S. markets with significant Hispanic presence with the ultimate
objective of being a full-service Competetive Local Exchange Carrier ("CLEC")
with a low-cost base of operations. During 1999, the Company was successful in
completing private placements of Class A Senior Convertible Preferred Stock and
Class B Convertible Promissory Notes (which converted to Class B Senior
Convertible Preferred Stock during the quarter ended December 31, 1999) for
gross proceeds totaling approximately $50 million, which will be used to fund
the initial phase of its CLEC market construction including Los Angeles, Miami,
San Diego, and Houston.
The Company was incorporated in Nevada on April 10, 1996 as a wholly owned
subsidiary of Maui Capital Corporation, a Colorado Corporation ("Maui
Capital"), which incorporated on August 8, 1988. On April 21, 1996, Maui
Capital and the Company merged with the Company being the surviving corporation
and succeeding to all the business, properties, assets, and liabilities of Maui
Capital. The purpose of the merger of Maui Capital and the Company was to change
the name and state of incorporation of Maui Capital. Maui Capital had no
business or assets prior to September 21, 1995 when it acquired TOPS Corporation
("TOPS"), a Nevada corporation (TOPS was named Charter Communications
International, Inc. until April 10, 1996, when its name was changed so that the
Company could be formed in Nevada with the same name). At the time of the
acquisition, TOPS was the sole stockholder of Charter Communicaciones
Internacionales Grupo, S.A., a Panama corporation ("Charter Panama"), which
was engaged in developing a private line telecommunications system in Panama and
pursuing licenses to provide such services in various other Latin American
countries. Since the acquisition of TOPS, the Company has endeavored to grow
both through the development of its existing businesses and through the
acquisition of complementary businesses. Proceeds from private placements of
securities with principals and outside investors have funded the development of
the Company to date.
On June 1, 1998, the Company acquired Galatel Inc. ("Galatel"), a
distributor of prepaid calling cards primarily to the Hispanic community, in a
cash and stock transaction. On July 30, 1998, the Company acquired Pointe
Communications Corporation ("Pointe Communications"), a Delaware corporation,
in a cash and warrant transaction. Pointe Communications did not have revenue
from operations prior to its acquisition. On August 31, 1998, the Company's
stockholders approved an amendment to the Company's Articles of Incorporation to
effect a change in the Company's name from Charter Communications International,
Inc. to Pointe Communications Corporation. On August 12, 1998, the Company
acquired International Digital Telecommunications Systems, Inc. ("IDTS") in a
cash and stock transaction. IDTS is a facilities-based long-distance carrier of
voice, data, and other types of telecommunications in the Miami, Florida market.
On October 1, 1998, the Company acquired Rent-A-Line Telephone Company, LLC
("Rent-A-Line") in a stock rights transaction. Rent-A-Line is a reseller of
prepaid local telephone service. All of these transactions were accounted for as
purchases (See Note 3).
F-44
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On August 16, 1999, HTC Communications, LLC ("HTC"), a California limited
liability company licensed as a CLEC in California, merged with and into the
Company. As consideration for the merger, the Company will issue 600,000 shares
of common stock to the members of HTC upon the satisfaction by the members of
opening two competitive local exchange markets for the Company within 12 months
of the closing date of the merger. At the same time, the Company entered into 36
month employment agreements with two of the members of HTC for the purpose of
development and oversight of the Company's CLEC operations.
Subsequent to year-end, the Company agreed to merge with Telscape
International, Inc. ("Telscape") in an all-stock transaction in which each
share of the Company will be exchanged for 0.224215 shares of Telscape common
stock. Pointe shareholders will obtain a majority of the outstanding voting
stock of Telscape after the merger. The surviving company will trade under the
ticker symbol "TSCP" on the NASDAQ National Market System. The board of
directors of both companies have agreed to the merger; however, the closing is
subject to shareholder approval and certain other conditions precedent, such as
Securities Exchange Commission and regulatory approval. Telscape is an
integrated communications provider, which operates in the U.S., Mexico and other
Latin American countries. During 1998, Telscape's subsidiary, Telereunion S.A.
de C.V., received a 30 year facilities-based carrier license from the Mexican
Government to construct and operate a network to carry long-distance voice and
data traffic.
Some of the telecommunications services offered by Pointe require licensing
by U.S. federal and state agencies and the foreign countries wherein services
are offered. Pointe has formed wholly owned or majority-owned foreign
corporations. Pointe maintains financial control of all subsidiaries. The
Company has been licensed by the U.S. Federal Communications Commission
("FCC") as an international facilities-based carrier. Pointe has selected the
Mexican Solidaridad system as its primary satellite carrier. A variety of U.S.
carriers are used to provide domestic long-distance services. The Company is
licensed to provide enhanced communications services in Panama, Mexico,
Honduras, Venezuela, El Salvador, Nicaragua, and Costa Rica. As of December 31,
1999, the Company was operating in the United States, Panama, Venezuela, Costa
Rica, Mexico, El Salvador and Nicaragua. In the U.S., the Company or its
subsidiaries have been granted two FCC 214 licenses to provide international
long-distance service and operate satellite teleports in the U.S., as well as,
Competetive Local Exchange Licenses in California, Florida, and Georgia and
interexchange carrier licenses in many states.
The Company may also face significant potential competition from other
communication technologies that are being or may be developed or perfected in
the future. Some of the Company's competitors have substantially greater
financial, marketing, and technical resources than does the Company. The
Company's international telecommunications operations face competition from
existing government-owned or monopolistic telephone service companies and from
other operators who receive licenses to provide services similar to the
Company's. Accordingly, there can be no assurance that the Company will be able
to obtain any additional licenses or that it will be able to compete
effectively.
The Company, which has never operated at a profit, has experienced
operating losses since its inception as a result of efforts to build its
customer base and develop its operations. The Company estimates that its cash
and financing needs for its current business through 2000 will be met by the
cash on hand; $40 million of capital lease commitments - $25 million of which
are completed and $15 million of which are being negotiated; and private
placements of equity currently being sought. However, certain of these
facilities and placements are not completed, and there can be no assurance that
the Company will be able to raise any such capital on terms acceptable to the
Company or at all. Additionally, any increases in the Company's growth rate,
shortfalls in anticipated revenues, increases in anticipated expenses, or
significant acquisition or expansion opportunities could have a material
F-45
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
adverse effect on the Company's liquidity and capital resources and would
require the Company to raise additional capital from public or private equity or
debt sources in order to finance operating losses, anticipated growth, and
contemplated capital expenditures and expansions. The Company has significant
expansion plans which it intends to fund with the facilities discussed above;
however, if there is any delay in the anticipated closing of these facilities or
any shortfall, the Company will not engage in such expansion until adequate
capital sources have been arranged. Accordingly, the Company may need additional
future private placements and/or public offerings of debt or equity securities
to fund such plans. If such sources of financing are insufficient or
unavailable, the Company will be required to modify its growth and operating
plans or scale back operations to the extent of available funding. The Company
may need to raise additional funds in order to take advantage of unanticipated
opportunities, such as acquisitions of complementary businesses or the
development of new products, or otherwise respond to unanticipated competitive
pressures. There can be no assurance that the Company will be able to raise any
such capital on terms acceptable to the Company or at all.
The Company expects to continue to focus on developing and expanding its
enhanced telecommunications service offerings while continuing to expand its
current operation's market penetration. Accordingly, the Company expects that
its capital expenditures and cost of revenues and depreciation and amortization
expenses will continue to increase significantly, all of which could have a
negative impact on short-term operating results. In addition, the Company may
change its strategy to respond to a changing competitive environment. There can
be no assurance that growth in the Company's revenue or market penetration will
continue, that its expansion efforts will be profitable, or that the Company
will be able to achieve or sustain profitability or positive cash flow. Further,
the Company may require substantial financing to accomplish any significant
acquisition or merger transaction and for working capital to operate its current
and proposed expanded operations until profitability is achieved, if ever. While
the Company currently expects to meet its 2000 operating cash flow and capital
expenditure requirements through cash on hand, vendor financing and private
placements of equity, there can be no assurance that this will be achieved. The
availability of such financing on terms acceptable to the Company is not
assured. Accordingly, there can be no assurance that the Company's planned
expansion of its operations will be successful.
2. SUMMARY OF ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements are prepared on the
accrual basis of accounting and include the accounts of the Company and all of
its majority-owned subsidiaries. All significant intercompany balances have been
eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
SOURCE OF SUPPLIES
The Company relies on local and long-distance telephone companies to
provide certain communications services. Although management feels that
alternative telecommunications facilities could be found in a timely manner, any
disruption of these services could have an adverse effect on operating results.
F-46
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
There are a limited number of vendors which provide the equipment the
Company is using to expand its network. If these vendors are unable to meet the
Company's needs related to the timing and amount of equipment needed by the
Company, it would have an adverse impact on the Company's financial position and
results of operations.
PRESENTATION
Certain prior year amounts have been reclassified to conform with the
current year presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposits, and
short-term investments with original maturities of three months or less. The
carrying value of the cash and cash equivalents approximates fair market value
at December 31, 1998 and 1999.
RESTRICTED CASH
The Company's restricted cash represents deposits on hand with a bank as
security for letters of credit.
CONCENTRATION OF RISK
A portion of the Company's assets and operations are located in various
South and Central American countries. The Company's business cannot operate
unless the governments of these countries provide licenses, privileges or other
regulatory clearances. No such assurance can be given that such rights, once
granted, could not be revoked without due cause.
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. The Company's risk of loss is
limited due to advance billings to customers for services and the ability to
terminate access on delinquent accounts. The concentration of credit risk is
mitigated by the large number of customers comprising the customer base;
however, one significant customer comprises approximately 17% and 11% of the
total receivable balance at December 31, 1998 and 1999, respectively. The
carrying amount of the Company's receivables approximates their fair value.
NOTES RECEIVABLE
The following table summarizes the components of notes receivable as of
December 31:
1998 1999
------------ ------------
Telscape International, Inc. ........ $ 0 $ 1,518,500
Affiliates and employees............. 537,503 628,836
International business partners...... 0 1,140,178
Allowance............................ (322,166) (1,016,764)
------------ ------------
Total........................... $ 215,337 $ 2,270,750
============ ============
During the quarter, the Company entered into promissory note with Telscape
International, Inc. evidencing Telscape's obligation to repay the Company on or
before February 28, 2000. The note accrues interest at 12% and is secured by
Telscape common stock owned by two affiliates of Telscape. The note was replaced
with $10.0 million convertible promissory note entered into with Telscape in
conjunction with the merger agreement (see Note 15).
F-47
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES
Inventories consist primarily of prepaid calling cards. All inventory is
recorded as finished goods and is available for sale. Inventories are stated at
the lower of cost or market. Cost is determined on the first-in, first-out
method.
PROPERTY AND DEPRECIATION
Property and equipment are recorded at cost, including certain engineering
and internal software development costs. Engineering costs totaled $1,390,776
with $1,025,245 allocated to Machinery and Equipment and $104,767 allocated to
Other Property and Equipment. The engineering costs incurred represent salaries
and related taxes and benefits paid to engineers to design and install the
Company's network infrastructure, as well as building improvements necessary to
allow for equipment installations. Internal software development costs incurred
totaled $260,764. Software costs represent salaries and related taxes and
benefits paid to employees during the application development stage for software
used internally. The property and equipment acquired in conjunction with the
acquisitions were recorded on the Company's books at net book value, which
approximated fair market value at the dates of acquisition. The Company records
depreciation using the straight-line method over the estimated useful lives of
the assets, which are as follows:
ESTIMATED
CLASSIFICATION USEFUL LIVES
- ------------------------------------- ------------
Equipment and machinery.............. 5-10 years
Earth station facility............... 10 years
Software............................. 5-7 years
Furniture and fixtures............... 5-7 years
Other property....................... 3-10 years
Leasehold improvements are amortized over the shorter of the useful life of
the improvement or the life of the lease. The Company's policy is to remove the
cost and accumulated depreciation of retirements from the accounts and recognize
the related gain or loss upon the disposition of assets. Such gains and losses
were not material for any period presented. Property and equipment recorded
under capital and financing leases are included with the Company's owned assets.
Amortization of assets recorded under capital leases is included in depreciation
expense.
INTANGIBLES
In conjunction with its acquisitions in 1999 (see Note 3), the Company
recorded intangible assets of approximately $1,146,000 due to the purchase
prices exceeding the values of the tangible net assets acquired. After
identifying the tangible assets and liabilities, the Company allocated the
excess to identifiable intangible assets and the remainder to goodwill.
Allocation of the purchase price among tangible and intangible assets is
performed based upon information available at the time of acquisition and is
subject to adjustment for up to one year after acquisition in accordance with
Accounting Principles Board ("APB") Opinion No. 16. Amortization of these
costs is included in depreciation and amortization in the accompanying
statements of operations. The following table summarizes the intangible assets'
respective amortization periods:
AMORTIZATION
CATEGORY PERIOD
- ------------------------------------- -------------
Acquired Customer Base............... 3-10 years
Other Intangibles.................... 3-10 years
Goodwill............................. 3-30 years
F-48
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically reviews the values assigned to long-lived assets,
including property and equipment and intangibles, to determine whether any
impairments have occurred in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." If events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable, the future cash flows expected to result from the use of the asset
and its eventual disposition are estimated. Future cash flows are the future
cash inflows expected to be generated by an asset less the future cash outflows
expected to be necessary to obtain those inflows. If the sum of the expected
future cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, an impairment loss is recognized in accordance
with SFAS No. 121.
An impairment loss is measured as the amount by which the carrying amount
of the asset exceeds the fair value of the asset. The fair value of an asset is
the amount at which the asset could be bought or sold in a current transaction
between willing parties, that is, other than in a forced or liquidation sale.
The fair value of an asset is determined using various techniques including, but
not limited to, the present value of estimated expected future cash flows and
fundamental analysis. Management believes that the long-lived assets in the
accompanying balance sheets are appropriately valued.
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans under APB
Opinion No. 25, "Accounting for Stock Issued to Employees." The Company
adopted the disclosure option of SFAS No. 123, "Accounting for Stock-Based
Compensation" (Note 8), for all options granted subsequent to January 1, 1995.
SFAS No. 123 defines a fair value-based method of accounting for an employee
stock option or similar equity instrument and encourages all entities to adopt
that method of accounting for all of their employee stock compensation plans.
SFAS No. 123 requires that companies which do not choose to account for
stock-based compensation as prescribed by this statement shall disclose the pro
forma effects on earnings and earnings per share as if SFAS No. 123 had been
adopted. Additionally, certain other disclosures are required with respect to
stock compensation and the assumptions used to determine the pro forma effects
of SFAS No. 123.
REVENUE RECOGNITION
Revenues from telecommunications services and products and Internet access
services are generally recognized when the services are provided. Invoices
rendered and payments received for telecommunications services and Internet
access in advance of the period when revenues are earned are recorded as
deferred revenues and are recognized ratably over the period the services are
provided or the term of the Internet subscription agreements, which are
generally 3 to 12 months. Sales of prepaid phone calling cards are recorded as
deferred revenues, and revenue is recognized as minutes are used or when the
cards expire.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred. Advertising costs
were $265,291, $152,000 and $409,000, for the years ended December 31, 1997,
1998 and 1999, respectively.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at
exchange rates in effect at the balance sheet date, except that fixed assets are
translated at exchange rates in effect when the assets are acquired. Revenues
and expenses of foreign operations are translated at average monthly
F-49
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exchange rates prevailing during the year, except that depreciation and
amortization charges are translated at the exchange rates in effect when the
related assets are acquired.
The national currency of Panama is the U.S. dollar. The currency of
Venezuela is considered hyper-inflationary; therefore, the U.S. dollar is the
functional currency. Accordingly, no foreign currency translation is required
upon the consolidation of the Company's Panamanian and Venezuelan, operations.
The effects of foreign currency translation on the Company's El Salvadoran,
Mexican, Nicaraguan, and Costa Rican operations were not material.
NET LOSS PER SHARE
Effective with the fourth quarter of 1997, the Company adopted SFAS No.
128, "Earnings Per Share." This standard requires the computation of basic
earnings per share using only the weighted average common shares outstanding and
diluted earnings per share using the weighted average common shares outstanding,
adjusted for potentially dilutive instruments using either the if-converted or
treasury stock method, as appropriate, if dilutive. This statement required
retroactive restatement of all prior period earnings per share data presented.
The adoption of this statement had no effect on the Company, as for all periods,
the effect of any potentially dilutive instruments was antidilutive.
Accordingly, for all periods presented, basic and diluted earnings per share are
the same.
During 1999, the Company issued Class A Senior Convertible Preferred Stock
together with warrants for gross proceeds totaling $30.2 million and Class B
Promissory Notes (which converted to Class B Senior Convertible Preferred Stock
and warrants to purchase shares of the Company's common stock during the quarter
ended December 31, 1999) for gross proceeds of $21.0 million (Note 7). Dividends
and interest accrue at a rate of 12% per annum and are payable in cash or in
kind, which the Company elected to pay in kind during 1999. The interest on the
Class B Promissory Notes has been included as interest expense in the statement
of operations. The dividends on the Class A Preferred Stock are deducted from
net loss in arriving at net loss available to common stockholders for purposes
of computing basic and diluted loss per share. Additionally, after assigning a
value to the warrants, the resulting proceeds from the offering were assigned to
the preferred stock, and the resulting value implied a per share common stock
conversion ratio for the Class A Preferred Stock which was less than fair value
on the date of issuance. Since the Preferred Stock was convertible at the date
of issuance, the Company recorded a charge to accumulated deficit of $22,174,074
which represented the difference between the fair value of common stock on the
date of issuance of the Class A Preferred Stock and the implied conversion price
per share. Such charge is deducted from net loss in arriving at net loss
available to common stockholders for purposes of computing basic and diluted
loss per share.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1999 DEC. 31, 1998 DEC. 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net loss............................. $ (38,290,855) $ (9,147,482) $ (11,975,858)
Beneficial conversion feature........ (22,174,074) -- --
Preferred stock dividends............ (2,331,834) -- --
------------- ------------- -------------
Net loss available to common
stockholders....................... $ (62,796,760) (9,147,482) (11,975,858)
============= ============= =============
Net loss per share................... $ (1.36) $ (0.22) $ (0.39)
============= ============= =============
Shares used in computing net loss per
share.............................. 46,204,130 42,143,733 31,084,693
============= ============= =============
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the Company was subject to the provisions of SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About
Segments of an Enterprise and
F-50
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Related Information." SFAS No. 130 had no impact on the Company's financial
statements, as it has no comprehensive income elements other than distributions
to owners and returns on equity. The Company adopted SFAS No. 131 in 1998, and
during 1998, the Company determined that it operated in one segment. During
1999, the Company established chief decision makers for certain of the Company's
lines of business and in accordance with SFAS No. 131 has disclosed relevant
segment data for 1999 (see Note 11).
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which is effective for fiscal years beginning after June 15, 1999. In June 1999,
the FASB issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of SFAS No. 133," which amends
SFAS No. 133 to be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The statement establishes accounting and
reporting standards for derivative instruments and transactions involving hedge
accounting. The Company does not expect it to have a material impact on its
financial statements.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use", which is effective
for fiscal years beginning after December 15, 1998. This statement requires
capitalization of certain costs of internal-use software. The Company adopted
this statement during the first quarter of 1999, and it did not have a material
impact on the Company's financial statements.
In April 1998, the AICPA issued Statement of Position 98-5 (SOP 98-5),
"Reporting on the Costs of Start-Up Activities," which is effective for fiscal
years beginning after December 15, 1998. SOP 98-5 requires entities to expense
certain start-up costs and organization costs as they are incurred. The Company
adopted this statement during the first quarter of 1999, and it did not have a
material impact on the Company's financial statements.
3. BUSINESS COMBINATIONS AND ACQUISITIONS
During 1999, HTC, a California limited liability company licensed as a CLEC
in California, merged with and into the Company. As consideration for the
merger, the Company will issue 600,000 shares of common stock to the members of
HTC upon satisfaction by the members of opening two competitive local exchange
markets for the Company within 12 months of the closing date of the merger. At
the same time, the Company entered into 36 month employment agreements with two
of the members of HTC for the purpose of development and oversight of the
Company's CLEC operations. In addition to base compensation and participation in
the recently adopted Market Value Appreciation Stock Option Plan (Note 8), the
agreements entitle the employees to receive options to purchase up to a total of
1.1 million shares of the Company's common stock at a strike price of $1.75,
pursuant to the Pay for Performance Plan. Vesting of such options is according
to a schedule, which includes a specified number of shares for opening each of
eight CLEC markets for the Company. The transaction was accounted for as a
purchase, and the shares issuable upon the opening of the CLEC markets will be
valued at the date of issuance. The merger was not considered to be a
significant business combination. Accordingly, no pro forma information is
presented.
During 1998, the Company acquired 100% of the outstanding capital stock in
four companies for cash, stock, and warrants/stock rights. All of these
transactions were accounted for as purchases. On June 1, 1998, the Company
acquired Galatel, a distributor of prepaid calling cards, for up to $200,000 and
300,000 shares of common stock, of which $162,500 and 175,000 shares were
earned. The shares have been valued at a weighted average price of $0.90 per
share, the estimated fair value at the date of issuance. On July 30, 1998, the
Company acquired Pointe Communications, a Delaware corporation,
F-51
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for $168,000 and 590,000 warrants to purchase common stock at $1.50 for five
years. The warrants have been valued at $0.49 per warrant. On August 12, 1998,
the Company acquired IDTS for $150,000 and 50,000 shares of stock of which
37,589 were released in 1999. IDTS is a facilities based long distance carrier
of voice, data and other types of telecommunications in the Miami, Florida
market. On October 1, 1998, the Company acquired Rent-A-Line Telephone Company,
LLC in a stock transaction for rights to purchase 625,000 shares at prices that
range from $0.01 to $0.63 until December 31, 2000. The rights have been valued
at a weighted average price of $0.44 per share. Rent-A-Line is a reseller of
prepaid local telephone service. All of these transactions were accounted for as
purchases and were not considered to be significant business combinations.
Accordingly, no pro forma information is presented.
4. LONG-TERM OBLIGATIONS
Obligations consist of the following as of December 31, 1998 and 1999:
DECEMBER 31, DECEMBER 31,
1998 1999
------------- -------------
18% Convertible Debentures due
October 1, 2002.................... $ 900,000 $ 1,180,000
Financing Lease Obligation, net of
discount of $306,672 and $197,049
as of December 31, 1998 and 1999,
respectively....................... 1,832,446 2,230,029
12% Senior Subordinated Notes due
December 2000, net of discount of
$39,722 and $9,722 as of December
31, 1998 and 1999, respectively.... 720,278 690,278
Notes Payable and other.............. 2,941,952 4,128,584
Bridge Loans due April 1999, net of
discount of $104,500 at December
31, 1998........................... -- 1,895,500
Capital Lease Obligations............ 11,777,590 6,171,720
------------- -------------
18,172,266 16,296,111
Less current portion................. 6,038,032 6,671,360
------------- -------------
Long-term obligations................ $ 12,134,234 $ 9,624,751
------------- -------------
During 1998, the Company entered into two promissory notes totaling
$2,000,000, which earned interest at 10% and became due in April 1999. In
conjunction with these notes, the Company issued 760,000 warrants to purchase
common stock at $1.00 per share for three years. The fair market value of these
warrants was estimated to be $129,200, which has been recorded as additional
paid-in capital and a discount on the notes amortized over the term of the
notes. During the first quarter of 1999, one of the notes for $1,000,000 was
refinanced with a $5,000,000 promissory note which earned interest at 10% and
became due in November 1999. In conjunction with this note, the Company issued
warrants to purchase 5,000,000 shares of common stock at $1.00 per share
exercisable for eight months. The fair market value of these warrants was
estimated to be $391,950, which has been recorded as additional paid-in capital
and a discount on the notes amortized over the term of the notes. Also during
the first quarter of 1999, the Company entered into three additional promissory
notes totaling $5,000,000, which earned interest at 10% and became due in May
and September 1999. In conjunction with the notes, the Company issued 1,686,667
warrants to purchase common stock at $1.00 per share exercisable for three
years. The fair market value of these warrants was estimated to be $417,951,
which has been recorded as additional paid-in capital and a discount on the
notes amortized over the term of the notes. The Company undertook these
short-term obligations in order to fund operations and network requirements in
advance of a private placement of $30,000,000 of the Company's convertible
preferred stock which was completed during the second quarter of 1999. All of
the above notes were repaid on their respective maturities during 1999, and the
5,000,000 warrants
F-52
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
issued with one of the notes during the first quarter of 1999 were exercised
during the fourth quarter of 1999.
During 1999, the Company renewed a Receivable Purchase Facility Agreement,
which enables it to sell its receivables to the purchaser, up to the maximum
facility amount of $600,000. Receivables are sold at 60% of book value with the
additional 40% representing collateral until the receivables are paid,
repurchased, or substituted with other receivables, at which time the 40% is
returned to the Company. Interest accrues on the purchase amount at a rate of
prime (8.5% at December 31, 1999) plus 2%, per annum until the receivables are
paid, repurchased, or substituted. As of the date of this report, the Company
has received $600,000 for receivables sold under this facility.
During 1999, the Company renewed a $750,000 Promissory Note payable to a
member of the Company's board of directors (Note 13), which earns interest at
10% and matures June 1, 2001. In conjunction with the promissory note, the
Company issued 545,455 warrants to purchase common stock at $1.375 which are
exercisable for a period of two years from issuance. The fair market value of
these warrants was estimated to be $216,170, which has been recorded as
additional paid-in capital and a discount on the note to be amortized over the
term of the note. This note is unsecured.
During 1999, the Company's subsidiary, Telecommute, entered into a $750,000
promissory note which earns interest at 11.5% per annum and matures at the
earlier of the completion of a $20 million private placement of preferred stock
in Telecommute or February 13, 2000. In connection with the promissory note,
Telecommute issued warrants to purchase 19,841 shares of Telecommute stock at
$3.78 per share exercisable for five years. The fair market value of these
warrants was estimated to be $15,000, which has been recorded as minority
interest and a discount on the notes amortized over the term of the notes.
Also during 1998, the Company reached a settlement with Sprint over its
disputed trade payable. The settlement agreement obligated the Company to pay
Sprint $1,000,000, $100,000 of which was paid at the time of settlement. The
remaining $900,000 was converted into a noninterest-bearing promissory note,
under which the Company is obligated to pay $50,000 per month for 18 months. The
balance remaining at December 31, 1998 and 1999 was $700,000 and $150,000,
respectively.
During 1997, the Company entered into a $3,000,000 sale-leaseback facility
with regard to certain of its assets included in property and equipment. There
were three leases drawn under the facility for a total of $3,000,000. The term
of each lease is five years commencing December 1, 1997, February 1, 1998, and
December 1, 1998, respectively. Lease payments are due monthly in arrears. The
lease obligations are stated net of discount, which is being amortized over the
term of the lease. As of December 31, 1998 and 1999, the net balance of the
leases was $2,230,029 and $1,832,446, respectively. The leases include options
for the Company to repurchase the equipment at the end of the lease term. In
conjunction with the lease, a security agreement was signed granting the lessor
a security interest in all current and future purchases (for the life of the
lease) of plant and equipment, receivables, and inventory. Also, in conjunction
with the lease, 450,000 shares of common stock were granted to the lessor and
its agent. The Company issued a guarantee with regard to these shares stating
that it would reimburse the holder of these shares for the difference between
$2.33 and the average closing price of the Company's stock for the 20 trading
days prior to June 30, 1998. The average closing price for this period was below
$2.33 resulting in an approximate $400,000 liability of the Company, which was
converted into an unsecured promissory note due June 30, 1999 earning interest
at 14%. In conjunction with the promissory note, the holders received 120,000
warrants to purchase common stock at $0.78 for three years. The fair market
value of these warrants was estimated to be $25,200, which has been recorded as
additional paid in capital and a discount on the notes to be amortized over the
term of the notes. The note was repaid at maturity.
F-53
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1999, the Company (and its subsidiaries) entered into capital leases
with one major vendor for a total of $6.0 million. The leases generally include
six months of accreted interest and 30 months of payments on a 48-month
amortization schedule with a balloon payment due in the 36th month. The rates
range from 7% to 14% and include options to purchase the equipment at the end of
the lease period. Also, during 1998, the Company entered into five capital
leases for a total value of approximately $6.2 million. The leases range from
three to seven years and are payable monthly in arrears. The Company holds
options to purchase the equipment at the end of the lease period for $1.00 with
respect to $3.0 million, 10% with respect to $1.0 million, 15% with respect to
$0.7 million, and fair market value with respect to $1.5 million.
During 1997, the Company issued, in a private offering, $1,180,000
principal amount of 18% convertible subordinated debentures due October 1, 2002.
The debentures are convertible at any time into shares of common stock at a
price of $1.20 per share. Interest is payable quarterly at a rate of 18% per
annum in arrears. The debentures were noncallable for a period of one year from
issuance and are not secured by any assets of the Company or guaranty. As of
December 31, 1999, $900,000 remained outstanding.
During 1995 and 1996, the Company issued, in a private offering, $2,845,000
of 12% senior subordinated notes due December 31, 2000 with attached warrants
which grant the purchasers of the notes the right to buy 2,244,000 shares of the
Company's common stock at $2.50 in 2000. As of December 31, 1999, 176,000 of
these warrants remained outstanding. Interest is payable quarterly at the rate
of 12% per annum in arrears. The fair market value of the 2,244,000 warrants
issued in conjunction with the notes was estimated by the Company to be $345,000
and was recorded as additional paid-in capital and a discount on the notes. The
notes are stated net of discount, which is being amortized over the term of the
notes. Amortization of this discount is included in the accompanying financial
statements as interest expense. The notes are not secured by any assets of the
Company or guaranty. During 1997, principal amounts of $2,115,000 of the senior
subordinated notes were converted to common stock in the January 1997 private
placement.
At December 31, 1999, the Company had other outstanding term notes payable
with varying terms and conditions in the total amount of $691,952. The portion
of the total notes payable, including other notes discussed above, that will
become due within the next 12 months amounted to $2,795,256 at December 31,
1999.
The carrying value of the long-term obligations approximated market value
at December 31, 1999.
F-54
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities of long-term obligations, including capital and
financing leases, are as follows for the years ended December 31:
<TABLE>
<CAPTION>
NOTES AND LEASE
DEBT OBLIGATIONS TOTAL
---------- ------------ --------------
<S> <C> <C> <C>
2000................................. $2,807,548 $ 4,677,130 $ 7,484,678
2001................................. 877,808 5,110,332 5,988,140
2002................................. 903,317 6,235,213 7,138,530
2003................................. 3,646 660,367 664,013
2004................................. 4,008 11,854 15,862
Thereafter........................... 131,316 -- 131,316
Total...................... 4,727,643 16,694,896 21,422,539
---------- ------------ --------------
Interest............................. -- (2,887,811) (2,887,811)
Discounts............................ (165,413) (197,049) (362,462)
---------- ------------ --------------
Principal............................ $4,562,230 $ 13,610,036 $ 18,172,266
</TABLE>
5. OTHER INCOME
Since mid-1996, a subsidiary negotiated with Sprint Communications L.P.
("Sprint") to resolve a dispute involving Sprint's past services to the
subsidiary. The Company had accrued the entire amount which Sprint claimed.
During 1997, the subsidiary reached an agreement in principle with Sprint to pay
$100,000 down and $50,000 per month for 18 months for a total of $1,000,000 with
release of all claims against the subsidiary regarding the remaining balance. As
of December 31, 1997, the disputed balance was recorded as a deferred settlement
gain on the Company's balance sheet. A definitive settlement agreement was
signed during the second quarter of 1998, at which time payments commenced and
the Company recognized the deferred settlement gain of $2,757,132 in other
income and cost of services. This is offset by approximately $232,000 for legal
fees and settlement of a lawsuit with the Company's former president over
certain agreements, including an executive employment agreement.
6. MINORITY INTEREST
The Company's subsidiary, Telecommute, completed a private placement of
2,000 shares of its $1.00 par value Series A preferred stock during 1998. The
preferred stock is convertible at any time on or prior to the third anniversary
date of issuance into 1,321,500 shares of Telecommute's common stock or 666,667
shares of the Company's common stock. At the same time, the purchaser also
received an option to purchase 2,000 shares of Series B Preferred Stock at any
time prior to August 7, 1999. The Series B shares are convertible at any time
until August 7, 2001 into 528,500 shares of Telecommute or 500,000 shares of the
Company's common stock. The purchaser did not exercise its option to purchase
the Series B shares of Telecommute. The preferred stock is nonredeemable and
nonvoting and does not pay dividends. Total proceeds received in the private
placement were $2,000,000, which is recorded net of issuance costs of $18,041,
as minority interest in the accompanying balance sheets. Subsequent to December
31, 1999, the preferred stock was converted into common stock of Telecommute
(See Subsequent Events -- Note 15).
7. STOCKHOLDERS' EQUITY
The articles of incorporation provide for the issuance of 100,000,000
shares of $0.00001 par value common stock and 100,000 shares of $0.01 par value
preferred stock. As of December 31, 1999, there were 10,857 shares of Class A
Convertible Senior Preferred Stock and 7,264 shares of Class B Convertible
Senior Preferred Stock outstanding. The $0.00001 common stock authorized for
F-55
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
issuance represents an increase from 45,000,000 shares authorized as of December
31, 1997. The increase was approved by the Company's shareholders at a meeting
on August 31, 1998. As of December 31, 1999, if all such convertible preferred
stock, convertible debentures, warrants and options were converted or exercised,
the Company would be obligated to issue 72,638,084 shares of common stock,
however, as of December 31, 1999, the Company had only 48,305,811 shares
available under the currently authorized number of shares of common stock. The
board of directors has approved an increase in the number of authorized common
shares to 200,000,000, such increase is subject to shareholder approval.
COMMON STOCK
During 1999, the Company issued shares of common stock as follows:
5,000,000 shares at $1.00 per share in conjunction with the exercise of
warrants; 625,000 shares in conjunction with the exercise of rights held by the
previous owners of Rent-A-Line Telephone Company LLC, which the Company
purchased during 1998; 300,000 shares as consideration for the purchase of
shares in the Company's subsidiary in Venezuela owned by minority shareholders;
166,666 shares in conjunction with the conversion of 18% convertible debentures;
149,319 shares in conjunction with the exercise of options; 37,589 in
conjunction with the 1998 purchase of IDTS; and 75,776 in settlement of various
payables.
During 1998, the Company issued shares of common stock through various
private placement offerings as follows: 9,000,000 shares at $0.50 per share,
850,000 shares at $1.00 per share and 500,000 shares at $1.30 per share for
gross proceeds totaling $6,000,000. Additionally, during the year, the Company
issued 500,000 shares as commission for one of the private placements, 206,250
shares in conjunction with a merger, 31,063 shares for warrant exercises at
$0.70 per share, and 117,750 shares for option exercises at $1.00 per share. In
conjunction with certain of the private placements, warrants to purchase
additional shares of common stock were granted to the purchasers. The warrants
granted the holders the right to purchase 500,000 shares at $1.25 for a period
of two years, 150,000 shares at $1.50 for three years, and 600,000 shares for
$3.00 for a period of three years.
During 1997, the Company issued 5,911,664 shares of common stock at $1 per
share, or $5,911,664 gross proceeds; 2,115,000 shares of common stock for
conversion of senior subordinated debt; 937,865 shares of common stock for
conversion of shareholder loans; 319,468 shares of common stock for conversion
of other accrued liabilities; and 400,000 shares of common stock to an agent in
conjunction with securing licenses to operate in two Latin American countries.
All of the preceding conversions of stock for liabilities were executed at a
rate of $1 of the related liability for $1 of common stock. Also, during 1997,
the Company issued 2,000,000 shares of common stock for conversion of the
$1,000,000 par value subordinated debenture issued to offshore investors at a
rate of $.50 per share. In conjunction with the issuance of these shares,
holders were granted 2,000,000 warrants to purchase the Company's common stock
at $1.50 per share. In conjunction with the placement of the subordinated
debenture, the Company issued 200,000 shares to the placement agent in an
offshore market. In conjunction with the January 1997 private placement, certain
major stockholders returned 2,500,000 shares of common stock to the Company for
no consideration, and such shares were retired.
PREFERRED STOCK
CLASS A CONVERTIBLE SENIOR PREFERRED STOCK
During 1999, the Company completed a $30 million private placement offering
of 10,080 shares of the Company's $0.01 par value Class A Convertible Senior
Preferred Stock (the "Class A Preferred Stock") and warrants to purchase
10,800,000 shares of common stock. The Class A Preferred Stock
F-56
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
has a liquidation preference of $3,000 per share. Net proceeds from this
offering totaled $28.1 million and are being used to fund network expansion,
repay indebtedness, and fund operations. The Class A Preferred Stock earns
dividends at a rate of 12% per annum, which are cumulative and payable in either
cash or shares of Class A Preferred Stock at the Company's discretion. Each
share of Class A Preferred Stock is convertible at the holder's option into
2,142.85 shares of common stock (subject to adjustment for certain diluting
issues) at any time while the Class A Preferred Stock remains outstanding. The
Company may require the conversion of all of the Class A Preferred Stock as
follows: (a) in conjunction with an offering of the Company's common stock in a
firm commitment underwritten public offering at a purchase price in excess of
$4.00 per common share (subject to adjustment for certain diluting issues)
yielding net proceeds in excess of $30.0 million, or (b) one year after issuance
if the common stock shall have been listed for trading on the New York Stock
Exchange, American Stock Exchange, or the Nasdaq National Market System, and the
common stock shall have traded on such exchange at a price of at least $5.00 per
share (subject to adjustment for certain diluting issues) for 20 consecutive
trading days and the average daily value of shares traded during that 20 day
period was at least $1.0 million. On the twelfth anniversary, if the Class A
Preferred Stock is still outstanding and the underlying common stock has been
listed on one of the aforementioned exchanges, the Company is required to
exchange the Class A Preferred Stock for common stock at a conversion price
equal to the average trading price for the 20 consecutive trading days
immediately prior to the exchange date. During the year, the Company issued 777
additional shares of the Class A Preferred Stock to the holders in settlement of
dividends accrued.
The warrants give the holders the right to purchase 10,800,000 shares at a
price of $1.625 per share exercisable for a period of five years after the
issuance date, and were valued at $11.9 million, or $1.10 per share. The
warrants have been included in additional paid in capital at December 31, 1999.
The Company may require exercise of the warrants if the underlying common stock
has been registered with the SEC and is listed on one of the aforementioned
exchanges and has traded on such exchange at a price of at least $5.00 per share
(subject to adjustment for certain diluting issues) for 20 consecutive trading
days. The Company is required to file a registration statement with the SEC
within 120 days after closing the private offering of Class A Preferred Stock
and warrants to register the shares of common stock issued or issuable upon
conversion of the Class A Preferred Stock (including shares issued as dividends)
and the exercise of the warrants. It has been more than 120 days since the
closing, and the Company has not yet filed the registration statement. The
holders of the Preferred Stock have each signed a waiver to extend the date by
which the Company must file the required registration statement to the date that
is 90 days after either the date of consumation of the merger with Telscape
International, Inc. or the termination of the merger agreement.
In conjunction with the issuance of the Preferred Stock, the Company
evaluated whether a beneficial conversion feature existed on the date of
issuance, as defined in the Emerging Issues Task Force ("EITF") 98-5. The
proceeds received in conjunction with the issuance were first allocated to the
$11.9 million fair value of the warrants, as calculated using the Black-Scholles
model. The remaining proceeds of $18.3 million were allocated to the Preferred
Stock. This amount was then compared to the fair market value of the shares
underlying the Preferred Stock of $40.5 million, determined by multiplying the
number of shares by the market price on the date of issuance of $1.875. The
difference of $22.2 million has been recognized as a beneficial conversion
feature on the Preferred Stock and recorded as a non-operating non-cash charge
directly to accumulated deficit and an increase in additional paid in capital.
CLASS B CONVERTIBLE SENIOR PREFERRED STOCK
Also during 1999, the Company completed a $21 million private placement
offering of convertible promissory notes (the "Notes"). The Notes accrue
interest at 12% per annum compounded
F-57
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
quarterly and payable in preferred stock at maturity. During the quarter ended
December 31, 1999, the Notes and accrued interest automatically converted into
7,264 shares of the Company's $0.01 par value Class B Convertible Senior
Preferred Stock (the "Class B Preferred Stock") and warrants to purchase
9,000,000 shares of common stock. Each share of the Class B Preferred Stock is
convertible into 1,714.28 shares of common stock of the Company. Net proceeds
from this offering totaled $20.8 million and are being used to fund network
expansion, repay indebtedness and fund operations. The Class B Preferred Stock
earns dividends at a rate of 12% per annum, which are cumulative and payable in
either cash or shares of Class B Preferred Stock at the Company's discretion.
The Class B Preferred Stock has a liquidation preference of $3,000 per share.
The dividend and liquidation rights of the Class B Preferred Stock are PARI
PASSU with the Class A Preferred Stock. Additionally, the Company may require
conversion under the same conditions as the Class A Preferred Stock and if the
Class B Preferred Stock is still outstanding on the twelfth anniversary from
issuance, the Company is required to exchange the Preferred Stock for common
stock at a conversion price equal to the average trading price for the 20
consecutive trading days immediately prior to the exchange date.
The warrants give the holders the right to purchase 9,000,000 shares at a
price of $1.89 per share exercisable for a period of five years after the
issuance date. The Company may require exercise of the warrants if the
underlying common stock has been registered with the SEC and is listed on one of
the aforementioned exchanges and has traded on such exchange at a price of at
least $5.00 per share (subject to adjustment for certain diluting issues) for 20
consecutive trading days. The Company is required to file a registration
statement with the SEC within 120 days of issuance of the Class B Preferred
Stock to register the shares of common stock issued or issuable upon conversion
of the Class B Preferred Stock (including shares issued as dividends) and the
exercise of the warrants.
In conjunction with the issuance of the Notes, the Company evaluated
whether a beneficial conversion feature existed on the date of issuance, as
defined in EITF 98-5. As explained above, the Notes were convertible into Class
B Preferred Stock and warrants, with an initial conversion price and exercise
price of $2.16 and $2.33, respectively. In order to calculate the beneficial
conversion feature the Company compared the total proceeds received with respect
to the preferred stock and warrants underlying the Notes, including the proceeds
to be received upon exercise of the warrants. The aggregate proceeds were
determined to be $38.0 million. This amount was then compared to the fair market
value of shares underlying the preferred stock and warrants of $40.4 million,
determined by multiplying the number of shares by the market price on the date
of issuance. This resulted in a $2.4 million beneficial conversion included as a
discount to the Notes, as of the date of issuance amortized into interest
expense the period from issuance to December 31, 1999. During the quarter ended
December 31, 1999, the conversion price of the Class B Preferred Stock and the
exercise price of the warrants both underlying the Notes were adjusted to $1.75
and $1.89, respectively, as a result of the fact that the Pensat Transaction did
not close. During the quarter ended December 31, 1999 when the contingency
resolved itself and the exchange and exercise prices were adjusted the company
performed a similar calculation using the new terms. The aggregate proceeds were
measured against the fair market value of the increased number of shares
underlying the Notes multiplied by the market price at issuance. The market
value was determined to be $49.9 million resulting in a discount of $11.9
million. Since the Notes converted on December 31, 1999, the entire discount has
been recognized during 1999.
F-58
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMON STOCK WARRANTS
At December 31, 1999, the Company had outstanding warrants that gave the
holders the right to purchase a total of 28,055,120 shares of common stock
(including the warrants issued in conjunction with the Class A and B Preferred
Stock discussed above) at prices ranging from $0.70 to $4.00 per share as
summarized in the table below:
NUMBER OF EXERCISE REMAINING WEIGHTED
SHARES PRICE AVERAGE LIFE
--------- --------- -------------------
250,000 $0.70 1.0 years
120,000 $0.78 1.8 years
2,510,000 $1.00 2.0 years
166,666 $1.10 4.2 years
500,000 $1.25 0.4 years
545,454 $1.37 1.4 years
432,000 $1.40 4.4 years
2,590,000 $1.50 1.2 years
10,800,000 $1.63 4.4 years
9,000,000 $1.89 5.0 years
176,000 $2.25 1.0 years
150,000 $2.50 1.8 years
795,000 $3.00 1.8 years
20,000 $4.00 1.5 years
8. STOCK OPTION PLANS
1995 OPTIONS
During 1995, the Company granted 1,250,000 stock options to certain key
employees and directors. The director shares were subsequently changed to be
issued under the Non-employee Director Stock Option Plan ("NEDSOP"). The
exercise price of the stock options granted to the employees and directors is
$0.70 per share, the estimated fair market value of the Company's common stock
at the date of grant. Options generally vest ratably over four years and expire
five years after becoming fully vested. As of December 31, 1999, 400,000
non-NEDSOP options issued in 1995 were still outstanding, of which 370,000 were
exercisable.
STOCK OPTION PLANS
The Company had established three stock option plans prior to 1999: the
Long-Term Stock Option Plan ("LTSOP"), the Incentive Stock Option Plan
("ISOP"), and the NEDSOP (collectively, the "Plans"); 3.0 million, 5.0
million and 2.0 million shares of common stock were authorized for issuance
under each plan, respectively, by the shareholders at a special meeting held on
August 31, 1998. Options are exercisable at the fair market value of the common
stock (as determined by the board of directors) on the date of grant. Options
generally vest ratably over four years and expire seven years after the date of
grant. The plans contain various provisions pertaining to accelerated vesting in
the event of significant corporate changes. During 1999, the Company established
two new stock option plans: the Executive Market Value Appreciation Plan (the
"Market Value Plan") and the Pay for Performance Stock Option Plan (the "Pay
for Performance Plan"). The Market Value Plan and the Pay for Performance Plan
authorize the issuance of 5.0 million and 2.0 million shares of common stock,
respectively. Options under both plans are exercisable at the fair market value
of the common stock (as determined by the Board of Directors) on the date of
grant. Options granted under the Market Value Plan become vested on December 31
of each year outstanding at the rate of 5% of
F-59
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the options granted for each $1.00 of increase in the Company's stock price, and
they become contingently vested in an equal number of shares but may not
exercise until fully vested. The contingently vested options become fully vested
on the following December 31 assuming the stock price is at least the same as
that on the previous December 31 when they became contingently vested. Any
optioned shares that have not vested after the seventh full year shall vest pro
rata on December 31 of years eight, nine, and ten. Options granted pursuant to
the Pay for Performance Plan become eligible for accelerated vesting based upon
achievement of Company, division, and individual objectives as determined on
December 31 of the year of grant. Options eligible for accelerated vesting vest
ratably on three consecutive December 31 beginning in the year of grant.
Optionees are eligible to vest in up to 120% of the amount granted.
The following table summarizes the activity for each plan for each of the
three years in the period ended December 31, 1999.
<TABLE>
<CAPTION>
LTSOP ISOP NEDSOP PFP MVAP
---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996......... 260,002 392,000 400,000 0 0
Granted.............................. 464,000 1,380,964 200,000 0 0
Forfeited............................ (120,002) (376,500) 0 0 0
Exercised............................ 0 0 0 0 0
Balance at December 31, 1997......... 604,000 1,396,464 600,000 0 0
Granted.............................. 0 755,000 0 0 0
Forfeited............................ 0 (603,250) 0 0 0
Exercised............................ (114,000) (3,750) 0 0 0
Balance at December 31, 1998......... 490,000 1,544,464 600,000 0 0
Granted.............................. 0 181,000 0 2,201,501 4,050,000
Forfeited............................ 0 (204,390) (100,000) 0 0
Exercised............................ (7,000) (169,832) 0 0 0
Balance at December 31, 1999......... 483,000 1,351,242 500,000 2,201,501 4,050,000
Exercisable.......................... 463,000 793,742 375,000 110,606 90,000
</TABLE>
In addition to the amounts under the above plans, the Company had 80,000
options outstanding as of December 31, 1999 at a price of $6.00 per share, which
vest ratably over three years.
The exercise price of the stock options granted to the employees is equal
to the estimated fair market value of the Company's common stock at the date of
grant. During the first quarter of 1998, the Company reestablished the exercise
price of all existing employees options granted under the ISOP and LTSOP, with a
strike price greater than $1.00, at $1.00 per share, which was the fair market
value on the date of repricing.
F-60
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
The Company accounts for its stock-based compensation related to all plans
under APB 25; accordingly, no compensation expense has been recognized, as all
options have been granted with an exercise price equal to the fair value of the
Company's stock on the date of grant. For SFAS No. 123 pro forma purposes, the
fair value of each option grant has been estimated as of the date of grant using
the Black-Scholes option pricing model with the following assumptions:
1997 1998 1999
--------- --------- ---------
Risk-free interest rate.............. 5.70% 5.00% 5.00%
Expected dividend yield.............. 0 0 0
Expected lives....................... 5.0 years 5.0 years 7.0 years
Expected volatility.................. 64% 80% 60%
Using these assumptions, the fair value of the stock options granted during
1997, 1998 and 1999 is $1,274,520, $685,023, and $6,829,428, respectively, which
would be amortized as compensation expense over the vesting period of the
options. The 1997 fair value of stock options granted was calculated using the
revised price of $1 per share. Had compensation cost been determined consistent
with the provisions of SFAS No. 123, the Company's net loss and pro forma net
loss per share for 1997, 1998 and 1999 would have been as follows:
<TABLE>
<CAPTION>
1997 1998 1999
--------------- -------------- ---------------
<S> <C> <C> <C>
Net loss:
As reported..................... $ (11,975,858) $ (9,147,482) $ (62,796,760)
Pro forma....................... $ (12,421,433) $ (9,691,957) $ (64,425,012)
Net loss per share:
As reported..................... $(0.39) $(0.22) $(1.36)
Pro forma....................... $(0.40) $(0.23) $(1.40)
</TABLE>
There were no issues prior to January 1, 1995 and the resulting pro forma
compensation cost may not be representative of that expected in future years.
A summary of the status of the Company's stock option plans at December 31,
1997, 1998 and 1999 and changes during the years ended December 31, 1997, 1998
and 1999 are presented in the following table:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------ -----------------
Outstanding at December 31, 1996..... 2,432,002 $1.27
Granted.............................. 2,049,964 1.06
Forfeited............................ (1,551,502) 1.05
Exercised............................ 0 0.00
Outstanding at December 31, 1997..... 2,930,464 $1.22
Granted.............................. 755,000 1.26
Forfeited............................ (603,250) 1.06
Exercised............................ (117,750) 1.00
Outstanding at December 31, 1998..... 2,964,464 $1.27
Granted.............................. 6,632,151 1.74
Forfeited............................ (304,390) 0.96
Exercised............................ (176,832) 1.18
Outstanding at December 31, 1999..... 9,115,393 $1.62
F-61
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes, as of December 31, 1999, the number of
options outstanding, the exercise price range, weighted average exercise price,
and remaining contractual lives by year of grant:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
GRANT NUMBER OF EXERCISE AVERAGE REMAINING
YEAR SHARES PRICE RANGE PRICE CONTRACTUAL LIFE
- ------------------------------------- ----------- ------------- --------- -----------------
<S> <C> <C> <C> <C>
1999................................. 5,445,151 $1.00-$2.25 $1.74 9.4 years
1998................................. 577,501 $1.00-$2.00 $1.20 5.1 years
1997................................. 855,000 $1.00-$1.25 $1.06 4.2 years
1996................................. 637,741 $1.00-$7.00 $1.87 3.2 years
1995................................. 600,000 $0.70-$3.50 $1.74 2.4 years
</TABLE>
Total stock options exercisable at December 31, 1999 were 2,282,348 at a
weighted average exercise price of $1.42.
TELECOMMUTE SOLUTIONS STOCK OPTION PLAN
During 1998, the Company's subsidiary TeleCommute Solutions established a
stock option plan, the TeleCommute Solutions Stock Option Plan ("TCS Plan").
The number of shares authorized for issuance under the TCS Plan is 600,000.
Options are exercisable at the fair market value of the common stock (as
determined by the board of directors of Telecommute Solutions) on the date of
grant. Options generally vest ratably over three years and expire seven years
after the date of grant. The plan contains various provisions pertaining to
accelerated vesting in the event of significant corporate changes. A summary of
the combined status of the TCS Plan at December 31, 1999 and 1998 is as follows:
WEIGHTED
AVERAGE
PRICE
SHARES PER SHARE
--------- ---------
December 31, 1997.................... 0 $0.00
Grants.......................... 547,900 1.52
--------- ---------
December 31, 1998 547,900 1.52
Grants.......................... 100,200 1.52
Forfeitures..................... (48,100) 1.52
--------- ---------
December 31, 1999.................... 600,000 $1.52
--------- ---------
As of December 31, 1999, 166,717 were exercisable at a price of $1.52. The
weighted average remaining contractual life of options outstanding as of
December 31, 1999 was 8.7 years, respectively.
The Company has computed for pro forma disclosure purposes the value of all
TCS Plan options granted during 1998 and 1999 using the Black-Scholes option
Pricing model as prescribed by SFAS No. 123. The following weighted-average
Assumptions were used for grants in 1998 and 1999:
1999 1998
------- -------
Risk-free interest rate.............. 5% 5%
Expected dividend yield.............. 0 0
Expected lives....................... 3 years 3 years
Expected volatility.................. 80% 80%
The total value of TCS Plan options granted during 1998 and 1999 were
completed as approximately $627,469 and $127,254, respectively, which would be
amortized on a pro forma basis
F-62
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
over the vesting period of the options. If the Company had accounted for the TCS
Plan in accordance with SFAS No. 123, the Company's net loss for the years ended
December 31, 1998 and 1999 would have increased by $209,000 and $230,000,
respectively.
2000 STOCK OPTION PLAN
Subsequent to year-end, TeleCommute Solutions adopted the 2000 stock option
plan pursuant to which TeleCommute Solutions reserved 1,625,000 common shares
for issuance. TeleCommute Solutions has granted 945,800 options at $1.52 per
share pursuant to the 2000 stock option plan. Options granted pursuant to the
2000 stock option plan generally vest over 4 years from the date of grant and
are exercisable for 10 years from the date of the grant.
9. NONRECURRING CHARGE
In March 1996, the Company purchased PDS, which engaged in the business of
providing computer network integration. During 1997, in an effort to narrow the
scope of the Company's product offering and to focus resources on its core
competencies, the Company decided to exit the computer network integration
business. As a result, the assets related to PDS, including approximately
$1,889,000 of goodwill and other intangibles and $250,000 of hardware and
software inventory, were written off and approximately $80,000 in severance and
other related costs were accrued. The associated charges to operations are
included in the nonrecurring charge to operations.
Also during 1997, the Company was party to arbitration proceedings related
to an employee terminated subject to an employment contract. The arbitrator
ruled in favor of the employee and awarded approximately $300,000 plus 80,000
options to purchase the Company's stock at a price of $6.00 per share. The
associated charge, including related legal fees, is included in the nonrecurring
charge to operations in 1997.
10. INCOME TAXES
The following is a summary of the items which caused recorded income taxes
to differ from taxes computed using the statutory federal income tax rate:
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
Statutory federal tax benefit........ (34)% (34)% (34)%
Increase (decrease) in tax benefit
resulting from:
State taxes, net of Federal
benefit......................... (3) (3) (3)
Nonrecurring charge............. 6 0 0
Goodwill amortization........... 5 7 2
Other........................... 1 1 2
Valuation allowance............. 25 29 33
--------- --------- ---------
Actual income tax benefit............ 0% 0% 0%
========= ========= =========
F-63
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The sources of differences between the financial accounting and tax bases
of assets and liabilities which gave rise to the net deferred tax assets are as
follows:
DECEMBER 31, DECEMBER 31,
1998 1999
------------- -------------
Deferred tax assets:
Net operating loss
carryforwards................... $ 8,166,000 $ 17,861,000
Unearned revenue................ 964,000 572,000
Accrued expenses................ 385,000 200,000
Accounts receivable............. 333,000 599,000
Other........................... 97,000 76,000
------------- -------------
9,945,000 19,308,000
------------- -------------
Deferred tax liabilities:
Depreciation.................... (405,000) (1,172,000)
------------- -------------
Net deferred tax assets before
valuation allowance................ 9,540,000 18,136,000
Valuation allowance.................. (9,540,000) (18,136,000)
------------- -------------
Net deferred tax assets.............. $ 0 $ 0
============= =============
The Tax Reform Act of 1986 provided for certain limitations on the
utilization of net operating loss carryforwards ("NOLs") if certain events
occur, such as a 50% change in ownership. The Company has had changes in
ownership, and accordingly, the Company's ability to utilize the carryforwards
is limited. Also, the NOLs used to affect any taxes calculated as alternative
minimum tax could be significantly less than the regular tax NOLs. The NOLs will
be utilized to offset taxable income generated in future years, subject to the
applicable limitations and their expiration between 2006 and 2019. Since it
currently cannot be determined that it is not more likely than not that the net
deferred tax assets resulting from the NOLs and other temporary items will be
realized, a valuation allowance for the full amount of the net deferred tax
assets has been provided in the accompanying consolidated financial statements.
11. SEGMENT INFORMATION
Effective January 1998, the Company adopted SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information," which established
revised standards for the reporting of financial and descriptive information
about operating segments in financial statements. During 1998, the Company's
management did not utilize segment data for making decisions and assessing
performance because it provided various services over a single interconnected
network. During 1999, management identified segments, changed its focus, and
began using segment data in its decision-making process and for assessing
performance.
While management of the Company monitors the revenue and costs of services
generated from each of the various services, operations are managed and
financial performance is evaluated based on the delivery of multiple services
being provided over a single network. As a result of multiple services being
provided over a single network, there are many shared administrative expenses
and shared assets related to the provision of various services to customers.
Management believes that any allocation of the shared expenses or assets to the
segments would be arbitrary and impractical. The operating segments were
aggregated into reportable segments based upon such characteristics as products
and services, operating methods, customers, and distribution methods. The
segments include Retail Services, Wholesale/International Services, Prepaid Card
Services, and Corporate and Network overhead. Retail services include local,
long distance, and Internet access services provided primarily
F-64
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to Hispanic residential and commercial customers. Wholesale/International
Services include carrier terminating services and international private line
provided between the U.S. and various South and Central American countries as
well as voice and data services provided within the various Latin American
countries listed above. Prepaid Card services include the sale of both
"on-net" (calls carried on the Company's network) and "off-net" (calls
carried on other Companies networks) prepaid calling cards. Corporate and
Network includes corporate and network overhead including finance and
accounting, human resources, legal, information technology, LAN administration,
and engineering overhead. Intersegment sales and transfers occur as segments
utilize carrier capacity of other segments. Intersegment transactions are
accounted for on the same basis as transactions with third parties.
Revenues and cost of services by service and product offering for the year
ended December 31, 1999 are as follows:
<TABLE>
<CAPTION>
WHOLESALE/
PREPAID CARD RETAIL INTERNATIONAL CORPORATE &
SERVICES SERVICES SERVICES OTHER NETWORK TOTAL
------------ ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $40,880,125 $4,463,032 $4,894,286 $ 1,687,477 0 $51,924,920
Cost of revenues........................ 38,251,567 3,896,820 6,588,630 1,392,603 0 50,129,620
------------ ------------ ------------ ----------- ------------ ------------
Gross Margin........................ 2,628,558 566,212 (1,694,344) 294,874 0 1,795,300
SG&A.................................... 3,917,923 2,875,029 4,080,209 3,239,587 5,162,051 19,274,799
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
LEASES
During 1998 and 1999, the Company entered into approximately $6.2 and $6.0
million in capital and financing leases related to the acquisition of machinery
and equipment (see Note 4 for a discussion of the transactions as well as a
table of future minimum lease payments related to the leases). As of December
31, 1999, the Company is also in receipt of approximately $8 million of
additional equipment which has not been recorded as assets or liabilities in the
accompanying balance sheet. Although management has disputed the receipt of the
equipment, no assurance can be given that management will be able to return the
equipment. Operating lease expenses primarily relate to the lease of office
space and equipment and include leases with affiliates. Rents charged to expense
were approximately $680,000, $832,000 and $1,461,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.
At December 31, 1999, future minimum lease payments under noncancelable
operating leases with initial remaining terms of more than one year are as
follows for the years ended December 31:
2000.................................... $ 1,267,842
2001.................................... 871,929
2002.................................... 566,637
2003.................................... 407,107
2004.................................... 358,717
Thereafter.............................. 680,501
------------
Total.............................. $ 4,152,733
============
In August 1999, Pointe entered into an employment agreement with the
president of U.S. CLEC operations and a key employee for a period of three
years. Under the agreements, they will receive annual salaries of $140,000 and
$125,000, respectively, and are eligible for bonuses of up to 50% of annual
salary based upon performance. In addition, they were granted options under the
Executive Market Value Appreciation Plan to purchase up to 350,000 and 250,000
shares of common stock, respectively, at $1.75 per share. Additionally, they
were each granted options to purchase 550,000
F-65
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares of common stock under the Pay For Performance Plan. The options become
vested according to a schedule which includes 50,000 to 100,000 shares for
opening each of eight CLEC markets over three years. An open market is defined
as one which generates a minimum of $25,000 gross monthly income.
During the quarter ended December 31, 1999, the Company entered into a
Global Purchase Agreement with an equipment vendor to purchase an aggregate of
$30.0 million of telecommunications equipment over a 36 month period. The
equipment pricing is based upon the Company fulfilling its $30.0 million
commitment. If the Company does not meet its purchase commitment over 36 months,
the vendor may invoice the Company for the price differential between the
original price (I.E., based upon fulfilling the entire commitment) and the
applicable pricing tier. There are three pricing tiers with descending prices
based upon the actual aggregate purchases as follows: Tier 1 -- $0 to $10.0
million; Tier 2 -- $10.0 million to $20.0 million; and Tier 3 -- $20.0 to $30.0
million. The Company has purchased approximately $4.6 million from the vendor.
LITIGATION
The Company is subject to litigation related to matters arising in the
normal course of business. Management is not aware of any asserted or pending
litigation or claims against the Company that would have a material adverse
effect on the results of operations or liquidity.
13. TRANSACTIONS WITH AFFILIATES
During 1998, the Company entered into various equity and debt private
placements with officers and directors. During the first quarter, the chairman
of the board of directors and another director purchased 3,400,000 and 600,000
shares of stock for $1,700,000 and $300,000, respectively. During the second
quarter, the Company issued a promissory note to a director for $750,000, which
is noninterest bearing and matures on June 1, 1999. In conjunction with the
promissory note, the Company issued 545,455 warrants to purchase common stock at
$1.375 exercisable for a period of one year from issuance. The note and the
warrants were extended in May 1999 and now are due and expire, respectively, on
June 1, 2001.
During the third quarter of 1998, the Company issued a promissory note to
Peachtree Capital Corporation, a company affiliated with the chairman, and a
director, for $150,000 payable on demand. The note was repaid on March 15, 1999.
Also during the third quarter of 1998, an executive officer purchased 100,000
shares of common stock and warrants to purchase 100,000 shares of common stock
at $3.00 per share for gross proceeds of $100,000. During the fourth quarter of
1998, the Company issued a $1 million promissory note to Cordova Capital
Partners LP -- Enhanced Appreciation, which is an entity affiliated with a
director. In conjunction with the notes, the Company issued 380,000 warrants to
purchase common stock at $1.00 per share. Also, during the fourth quarter of
1998, the Company acquired Rent-A-Line, a portion of which was owned by an
executive officer at the time of acquisition. The executive officer received the
right to convert a $38,150 promissory note, owed by Rent-A-Line, into 77,243
shares of Pointe common stock as consideration for his ownership of Rent-A-Line.
Further during the fourth quarter of 1998, the Chairman of the Company's Board
of Directors and an executive officer pledged shares of their Company common
stock as collateral for the $2.0 million bridge loans entered into during the
same quarter.
During the first quarter of 1999, the Company issued a $2 million
promissory note to First Southeastern Corp., which is an entity affiliated with
the chairman. In conjunction with the notes, the Company issued 380,000 warrants
to purchase common stock at $1.00 per share. Also during the first quarter of
1999, the Company entered into a consulting contract with Multielectronica CYRF
C.A., a Venezuelan company whose affiliates include two executive officers of
the Company. Under the
F-66
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreement, the Company is obligated to pay $37,000 per month plus related
expenses for the services of the two executive officers and two engineers. The
term of the contact is one year commencing March 15, 1999. The agreement
automatically renews unless written notice of termination is given by either
party 30 days prior to the end of the initial term.
During 1997, the Company entered into a five year operating lease of earth
station equipment located in Panama, Costa Rica and Nicaragua. There are two
lessors, one of which is a company whose principal shareholder is the Chairman
of the Company's board of directors, and the other is a director. The lease
obligations total approximately $70,000 per annum. In conjunction with the
lease, the Company issued 195,000 warrants, which grant the holders the right to
purchase shares of the Company's common stock at a price of $3.00 per share.
During 1998 and 1999, a company affiliated with an executive officer of the
Company conducted business with the Company as a distributor of prepaid calling
cards. The affiliated company distributed a total of $523,026 and $602,382 of
prepaid cards during 1998 and 1999, respectively. Also during 1998 and 1999, the
Company provided loans to certain of its officers and key employees in the
amount of $254,770.
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table summarizes the Company's quarterly results of
operations for 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 QUARTERS FIRST SECOND THIRD FOURTH
- ---------------------------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues................................ $ 2,749,355 $ 3,321,055 $ 3,197,172 $ 3,683,840
Operating Loss.......................... (2,156,847) (1,778,036) (1,516,171) (5,802,095)
Net Loss................................ (2,540,621) (1,857,555) (1,405,009) (6,172,673)
Net Loss Per Share...................... ($0.09) ($0.06) ($0.04) ($0.18)
<CAPTION>
1998 QUARTERS FIRST SECOND THIRD FOURTH
- ---------------------------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues................................ $ 4,098,866 $ 5,275,304 $ 9,008,987 $ 9,237,045
Operating Loss.......................... (2,061,633) (1,360,892) (1,521,831) (4,067,121)
Net Loss................................ (2,322,700) 7,975 (1,835,418) (4,997,339)
Net Loss Per Share...................... ($0.06) $0.00 ($0.04) ($0.11)
<CAPTION>
1999 QUARTERS FIRST SECOND THIRD FOURTH
- ---------------------------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues................................ $ 11,553,526 $ 13,154,066 $ 12,965,451 $ 14,251,878
Operating Loss.......................... (2,572,601) (3,919,793) (5,518,186) (9,946,210)
Net Loss................................ (3,659,039) (5,457,412) (6,536,122 (1) (22,638,282)
Net Loss Per Share...................... ($0.08) ($0.65 (1) ($0.16 (1) ($0.44)
</TABLE>
- ------------
(1) Amounts as restated for the quarters ended June 30, 1999 and September 30,
1999. The Company recorded certain adjustments to more accurately state the
fiscal 1999 interim financial statements. These adjustments related to the
recording of beneficial conversion charges related to the issuance of the
Class A Preferred Stock and Class B Notes.
15. SUBSEQUENT EVENTS
Subsequent to year-end the Company agreed to merge with Telscape in an
all-stock transaction in which each share of Pointe will be exchanged for
0.224215 shares of Telscape common stock. The surviving company will trade under
the ticker symbol "TSCP" on the NASDAQ National Market System. The board of
directors of both companies have agreed to the merger; however, the closing is
subject to shareholder approval and certain other conditions precedent, such as
Securities Exchange
F-67
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Commission and regulatory approval. Telscape is an integrated communications
provider, which operates in the U.S., Mexico and other Latin American countries.
During 1998, Telscape's subsidiary, Telereunion S.A. de C.V. received a 30 year
facilities-based carrier license from the Mexican government to construct and
operate a network to carry long distance voice and data traffic.
In conjunction with the merger agreement, the Company executed a $10.0
million convertible promissory note with Telscape to evidence Telscape's
obligation to repay the Company by June 30, 2000. This note replaces the
promissory note entered into with Telscape during the fourth quarter of 1999,
under which the Company advanced Telscape $1.5 million. The excess of $8.5
million over the $1.5 million previously advanced was placed in escrow for
Telscape. As of March 30, 2000, $2.8 million remained in escrow. If Telscape
fails to make principle or interest payments when due, fails to comply with the
note, becomes insolvent or is in bankruptcy, or the merger agreement with Pointe
is terminated, Telscape will be in default and the Company may demand full
payment. Additionally, the note is convertible at the Company's option into
100,000 shares of Class C preferred stock and warrants to purchase 500,000
shares of Telscape common stock at $7.00 per share. Each share of Class C
preferred stock is convertible into 12.195 shares of Telscape common stock.
Also subsequent to year end, the Company's subsidiary, Telecommute
Solutions, Inc. completed a private placement of $19.0 million of voting Series
B convertible preferred stock and the holders of Series A Convertible Preferred
Stock in Telecommute converted their preferred stock into common stock of
Telecommute. As a result, the Company's voting interest in Telecommute was
reduced from 100% to approximately 23%. Beginning with the first quarter of
2000, the Company will account for its investment in Telecommute using the
equity method of accounting.
F-68
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE
We have audited, in accordance with auditing standards generally accepted
in the United States, the consolidated financial statements of POINTE
COMMUNICATIONS CORPORATION AND ITS SUBSIDIARIES as of and for the year ended
December 31, 1999 included in this Form 10-K and have issued our report thereon
dated April 14, 2000. Our audit was made for the purpose of forming an opinion
on the basic financial statements taken as a whole. The schedule listed in the
index is the responsibility of the Company's management, and is presented for
purposes of complying with the Securities and Exchange Commission's rules, and
is not part of the basic financial statements. This schedule has been subjected
to the auditing procedures applied in the audits of the basic financial
statements and, in our opinion, fairly states, in all material respects, the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 14, 2000
F-69
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
BALANCE AT WRITE-OFFS, BALANCE AT
BEGINNING NET OF END OF
CLASSIFICATION OF PERIOD ADDITIONS RECOVERIES PERIOD
- ------------------------------------- ---------- ---------- ------------ -----------
For the Year Ended December 31, 1997
Allowance for Doubtful Accounts...... 435,000 715,737 (507,737) 650,000
Allowance for Obsolete Inventory..... 70,000 250,000 0 320,000
---------- ---------- ------------ -----------
505,000 965,737 (507,737) 970,000
---------- ---------- ------------ -----------
For the Year Ended December 31, 1998
Allowance for Doubtful Accounts...... 650,000 883,462 (633,462) 900,000
Allowance for Notes Receivable....... 0 322,166 0 322,166
Allowance for Obsolete Inventory..... 320,000 0 (13,000) 307,000
---------- ---------- ------------ -----------
1,205,628 (646,462) 1,525,166
---------- ---------- ------------ -----------
For the Year Ended December 31, 1999
Allowance for Doubtful Accounts...... 900,000 891,892 (283,434) 1,508,458
Allowance for Notes Receivable....... 322,166 694,599 0 1,016,765
Allowance for Obsolete Inventory..... 307,000 0 (307,000) 0
---------- ---------- ------------ -----------
1,529,166 1,586,491 (590,434) 2,525,223
========== ========== ============ ===========
</TABLE>
F-70
<PAGE>
TELSCAPE INTERNATIONAL, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 (UNAUDITED) AND DECEMBER 31, 1999
DECEMBER 31, MARCH 31,
1999 2000
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 5,419,000 $ 2,848,000
Accounts receivable, less allowance
for doubtful accounts of and
$2,110,000 and $2,386,000
(unaudited), respectively....... 12,283,000 13,340,000
Inventories........................ 5,838,000 2,948,000
Prepaid expenses and other......... 4,203,000 5,127,000
Deferred income taxes.............. 2,254,000 1,629,000
------------ ------------
Total current assets............ 29,997,000 25,892,000
PROPERTY AND EQUIPMENT, net of
accumulated depreciation........... 58,468,000 63,330,000
GOODWILL AND OTHER INTANGIBLES, net
of accumulated amortization........ 32,342,000 31,737,000
DEFERRED INCOME TAXES................ 2,587,000 4,288,000
OTHER ASSETS......................... 3,746,000 4,318,000
------------ ------------
Total assets............... $127,140,000 $129,565,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................... $ 45,841,000 $ 47,954,000
Accrued expenses................... 15,494,000 16,283,000
Current portion of notes payable
and capital lease obligations... 11,112,000 17,718,000
------------ ------------
Total current liabilities....... 72,447,000 81,955,000
NOTES PAYABLE AND CAPITAL LEASE
OBLIGATIONS........................ 27,649,000 26,573,000
MINORITY INTERESTS................... -- 5,000
COMMITMENTS AND CONTINGENCIES........ -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value,
5,000,000 shares authorized;
without defined preference
rights.......................... -- --
Series A preferred stock, $.001 par
value, 1,000,000 shares
authorized...................... -- --
Common stock, $.001 par value,
25,000,000 shares authorized;
7,975,837 and 8,083,662 issued,
respectively.................... 8,000 8,000
Additional paid-in capital......... 51,142,000 52,907,000
Accumulated deficit................ (23,356,000) (31,155,000)
Treasury stock..................... (480,000) (480,000)
Capital subscriptions receivable... (270,000) (248,000)
------------ ------------
Total stockholders'
equity.................. 27,044,000 21,032,000
------------ ------------
Total liabilities and
stockholders' equity.... $127,140,000 $129,565,000
============ ============
The accompanying notes are an integral part of these financial statements.
F-71
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED) AND 1999 (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------------
1999 2000
-------------- --------------
REVENUES............................. $ 26,564,000 $ 23,224,000
COST OF REVENUES..................... 23,778,000 19,868,000
-------------- --------------
GROSS PROFIT......................... 2,786,000 3,356,000
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 4,005,000 6,832,000
DEPRECIATION AND AMORTIZATION........ 1,352,000 1,562,000
-------------- --------------
OPERATING LOSS FROM CONTINUING
OPERATIONS......................... (2,571,000) (5,038,000)
OTHER INCOME (EXPENSE):
Interest income.................... 71,000 56,000
Interest expense................... (807,000) (881,000)
Amortization of debt offering
costs........................... (118,000) (259,000)
Foreign exchange gain (loss)....... (60,000) 72,000
Other, net......................... (214,000) 64,000
-------------- --------------
Total other expense, net... (1,128,000) (948,000)
-------------- --------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND MINORITY
INTERESTS.......................... (3,699,000) (5,986,000)
INCOME TAX BENEFIT (EXPENSE)......... 928,000 (192,000)
-------------- --------------
LOSS FROM CONTINUING OPERATIONS
BEFORE MINORITY INTERESTS.......... (2,771,000) (6,178,000)
MINORITY INTERESTS IN SUBSIDIARIES... -- (5,000)
-------------- --------------
LOSS FROM CONTINUING OPERATIONS...... (2,771,000) (6,183,000)
DISCONTINUED OPERATIONS:
LOSS FROM OPERATIONS OF DISCONTINUED
PRODUCTS DIVISION.................. (93,000) (70,000)
LOSS ON DISPOSAL OF PRODUCTS
DIVISION........................... -- (1,546,000)
-------------- --------------
NET LOSS............................. $ (2,864,000) $ (7,799,000)
============== ==============
LOSS PER SHARE:
Basic loss from continuing
operations...................... $ (0.46) $ (0.77)
Basic loss......................... $ (0.47) $ (0.97)
Diluted loss from continuing
operations(1)................... $ N/A $ N/A
Diluted loss(1).................... $ N/A $ N/A
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic.............................. 6,064,701 8,009,824
Diluted(1)......................... N/A N/A
- ------------
(1) Inclusion of additional shares under a diluted analysis is inappropriate due
to the anti-dilutive effect
The accompanying notes are an integral part of these financial statements.
F-72
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED) AND 1999 (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------------
1999 2000
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................... $ (2,864,000) $ (7,799,000)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Provision for doubtful
accounts...................... 52,000 276,000
Provision for inventory
obsolescence.................. -- 8,000
Provision for plant shut down... -- 1,546,000
Depreciation and amortization... 1,378,000 1,607,000
Deferred income tax benefit..... (1,251,000) (507,000)
Interest accrued on non-interest
bearing notes and amortization
of debt offering costs........ 48,000 277,000
Expenses for warrants issued to
third parties................. -- 33,000
Minority interest in
subsidiaries' income (loss)... -- 5,000
Equity in income from
unconsolidated subsidiary..... 34,000 --
Changes in assets and liabilities:
Accounts receivable........... 2,781,000 (1,333,000)
Inventories................... (746,000) 2,333,000
Prepaid and other assets...... (1,801,000) (1,032,000)
Accounts payable.............. (734,000) (1,375,000)
Deferred revenue.............. 842,000 1,452,000
Accrued liabilities........... 837,000 (2,189,000)
-------------- --------------
Net cash used in operating
activities......................... (1,424,000) (6,698,000)
-------------- --------------
CASH FLOWS USED IN INVESTING
ACTIVITIES:
Purchases of property and
equipment....................... (3,250,000) (2,382,000)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease
obligations..................... (12,000) (29,000)
Payments on notes payable.......... (494,000) (159,000)
Payments on line of credit......... (288,000) --
Proceeds from notes payable........ -- 6,200,000
Proceeds from sales of common
stock........................... 1,939,000 22,000
Proceeds from warrants and options
exercised....................... -- 475,000
-------------- --------------
Net cash provided by financing
activities......................... 1,145,000 6,509,000
-------------- --------------
Net decrease in cash and cash
equivalents........................ (3,529,000) (2,571,000)
-------------- --------------
Cash and cash equivalents at
beginning of period................ 9,631,000 5,419,000
-------------- --------------
Cash and cash equivalents at end of
period............................. $ 6,102,000 $ 2,848,000
============== ==============
The accompanying notes are an integral part of these financial statements.
F-73
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED) AND 1999 (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 2000
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid...................... $ 227,000 $ 210,000
Income taxes paid.................. 48,000 165,000
NON-CASH TRANSACTIONS:
Network construction costs and
equipment purchases incurred and
included as accounts payable
expected to be financed through
long-term loans or lease finance
arrangements.................... 1,604,000 3,487,000
Issuance of common stock in
connection with conversion of
notes payable................... -- 500,000
Issuance of warrants in connection
with service agreements......... -- 791,000
The accompanying notes are an integral part of these financial statements.
F-74
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
include the accounts of Telscape International, Inc. and its subsidiaries
(collectively, the "Company"). The unaudited condensed consolidated financial
statements of the Company for the three months ended March 31, 1999 and March
31, 2000 have been prepared without an audit pursuant to the rules and
regulations of the Securities and Exchange Commission. They do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments, which consist of normal recurring adjustments, considered necessary
to present fairly the financial position, results of operations and cash flows
for all periods presented have been made. Operating results for the three months
ended March 31, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000. For further information, refer
to the consolidated financial statements and footnotes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
PROPOSED MERGER
In January 2000, the Company entered into a definitive merger agreement
with Pointe Communications, Inc. ("Pointe") in an all-stock transaction in
which each share of Pointe will be exchanged for 0.223514 shares of Telscape
common stock. The merger is expected to close in the second quarter of 2000.
While Telscape is issuing common stock in the transaction, upon consummation of
the transaction, Pointe will own 60% of the post-merger entity. Since Pointe
will control a majority of the stock outstanding in the new entity, it will be
treated as the acquirer for accounting purposes. The following table presents
the unaudited pro forma consolidated results of operations of the post-merger
entity as though the merger took place on January 1, 1999:
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1999 2000
------------ ---------------
Revenues............................. $ 157,000 $ 37,000
============ ===============
Net loss from continuing
operations......................... $ (123,000) $ (18,000)
============ ===============
Net loss per share from continuing
operations, basic and diluted...... $ (6.74) $ (.92)
============ ===============
The pro forma financial information does not purport to represent what the
consolidated results of operations would have been if the merger had in fact
occurred on these dates, nor does it purport to indicate the future consolidated
financial position or future consolidated results of operations of the
post-merger entity. The pro forma adjustments are based on currently available
information and certain assumptions that management of Pointe and Telscape
believe to be reasonable.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The accompanying financial statements are prepared in conformity with
generally accepted accounting principles which require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. The Company reviews all significant estimates
affecting the financial statements on a recurring basis and records the effect
of any necessary adjustments prior to their issuance. The actual results could
differ from those estimates.
F-75
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
CONCENTRATION OF RISK -- MEXICO
Mexico has experienced periodic economic crises in the past recent years
resulting from sudden, significant devaluations of the Mexican peso. The last
such devaluation of the Mexican peso in late 1994 caused Mexico to experience an
economic crisis characterized by exchange rate instability, increased inflation,
high domestic interest rates, reduced consumer purchasing power and high
unemployment. Consequently, the Mexican government has exercised, and continues
to exercise, significant influence over the Mexican economy. Accordingly,
Mexican governmental actions could have a significant effect on Mexican
companies, including the Company's customers, and overall market conditions.
The Company's foreign currency risk is mitigated in Mexico due to the fact
that many of the Company's customers are multinational firms that pay in U.S.
dollars. In addition, most of the customers that do pay in pesos pay at the spot
exchange rate in effect at the time of payment as opposed to the exchange rate
at the time the receivable is created. Nevertheless, significant adverse effects
from any devaluation in the Mexican peso could result in an adverse effect on
the Company's operations. In addition, the Company anticipates an increasing
number of peso denominated receivables from customers in Mexico as its network
in Mexico becomes operational.
NEW ACCOUNTING STANDARDS
SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES," requires companies to recognize all derivatives contracts as
either assets or liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of gain or
loss recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are attributable
to the hedged risk or (ii) the earnings effect of the hedged forecasted
transaction. For a derivative not designated as a hedging instrument, the gain
or loss is recognized in income in the period of change. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivatives contracts either
to hedge existing risks or for speculative purposes. The Company does not expect
adoption of the new standard to have a material effect on its financial
statements.
NOTE 2 -- LOSS PER SHARE
Loss per share is calculated as follows:
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------------
1999 2000
-------------- --------------
BASIC
Loss from continuing
operations.................... $ (2,771,000) $ (6,183,000)
Loss from discontinued
operations.................... (93,000) (1,616,000)
-------------- --------------
Net loss as reported............ $ (2,864,000) $ (7,799,000)
============== ==============
Weighted average common shares
outstanding................... 6,064,701 8,009,824
Basic loss from continuing
operations per share.......... $ (0.46) $ (0.77)
Basic loss from discontinued
operations per share.......... (0.01) (0.20)
-------------- --------------
Basic loss per share............ $ (0.47) $ (0.97)
============== ==============
F-76
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------------
1999 2000
-------------- --------------
DILUTED
Loss from continuing
operations.................... $ (2,771,000) $ (6,183,000)
Loss from discontinued
operations.................... (93,000) (1,616,000)
-------------- --------------
Net loss as reported............ $ (2,864,000) $ (7,799,000)
============== ==============
Weighted average common shares
outstanding................... 6,064,701 8,009,824
Weighted average diluted
potential common shares
outstanding................... 2,151,928 3,124,778
-------------- --------------
Weight average common and
dilutive potential common
shares outstanding............ 8,216,629 11,134,602
Diluted loss from continuing
operations per share.......... $ (0.34) $ (0.55)
Diluted loss from discontinued
operations per share.......... (0.01) (0.15)
-------------- --------------
Diluted loss per share.......... $ (0.35) $ (0.70)
============== ==============
Diluted EPS for the three months ended March 31, 1999 and 2000 was not
disclosed on the Unaudited Condensed Consolidated Statement of Operations as the
effect is anti-dilutive. Options and warrants totaling 589,000 and 43,000 were
outstanding at March 31, 1999 and 2000, respectively, and were not included in
the calculation of diluted EPS as their exercise prices were greater than the
average market price of the Company's common stock during the period and
inclusion of these securities in the calculation would result in an
anti-dilutive effect.
F-77
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 3 -- NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
The Company's notes payable and capital lease obligations consist of the
following:
DECEMBER 31, MARCH 31,
1999 2000
------------- -----------
Non-interest bearing promissory
notes, imputed interest at 10%,
unamortized discount of $73,000 and
$55,000, respectively, issued in
connection with Integracion
acquisition, maturing at various
dates through January 1, 2001...... $ 1,328,000 $ 846,000
Promissory note issued to repurchase
common stock, payable in six semi-
annual installments through May 20,
2000, and bearing interest at 6%,
secured by common shares
repurchased........................ 50,000 50,000
Capital lease obligations payable in
monthly installments of $13,258
including principal and interest,
maturing at various dates through
December 1, 2003, secured by
equipment and furniture............ 395,000 366,000
Promissory note, interest at 10.62%,
payable in 36 equal monthly
installments of $52,234 including
principal and interest, maturing
April 1, 2002, secured by
equipment.......................... 1,250,000 1,125,000
Promissory note, interest at 10.93%,
payable in 36 equal monthly
installments of $14,700 including
principal and interest, maturing
June 1, 2002, secured by
equipment.......................... 373,000 339,000
Promissory note, maturing January 1,
2005, secured by equipment......... 5,581,000 5,581,000
Senior Notes maturing January 4,
2001............................... 850,000 850,000
$2.0 Million Senior Notes, interest
and payment terms described below,
maturing February 16, 2001......... 2,000,000 2,000,000
Promissory notes, maturing August 27,
2004............................... 23,934,000 23,934,000
Lennox promissory note, interest and
payment terms described below...... 1,500,000 1,500,000
Pointe replacement note, bearing
interest at 12%, maturing June 30,
2000, secured as described below... 1,500,000 7,700,000
------------- -----------
Total notes payable and capital
leases............................. 38,761,000 44,291,000
Current portion...................... 11,112,000 17,718,000
------------- -----------
Long-term portion.................... $ 27,649,000 $26,573,000
============= ===========
The annual maturity of the debt indicated above for the five years
following December 31, 1999 are $6,647,000 in 2000, $9,255,000 in 2001,
$6,831,000 in 2002, $7,731,000 in 2003 and $8,297,000 in 2004.
On June 18, 1999, the Company issued $2.0 million in a series of senior
notes maturing June 19, 2000. These senior notes are subject to optional
prepayment provisions allowing the Company to prepay a portion or all of the
outstanding principal amount without premium or penalty. These senior notes bear
interest at 8% from June through December 17, 1999. The interest rate increases
by 1 percent for each month thereafter. The Company also initially issued to the
holders of these senior notes a total of 62,501 warrants with an exercise price
of $8.00 per share and a term of three years. On December 18, 1999, the holders
became entitled to an additional 62,501 warrants. In the event that these senior
notes are not paid by June 18, 2000, then the holders will be issued an
additional 62,501 warrants in which case the maturity date is extended until
December 18, 2000. The maturity of the senior notes can be extended unilaterally
by the Company through February 16, 2001 with no additional consideration. In
the event that the merger with Pointe Communications Corporation ("Pointe") is
consummated, the holders have agreed to convert into the Class F Preferred
described
F-78
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
below. Should the merger not be consummated then the terms of the senior notes
will revert to the original structure.
On August 27, 1999, the Company, along with its subsidiaries, Telereunion
S.A. de C.V., Telereunion International, S.A. de C.V., Telereunion, Inc.,
Telscape USA, Inc., MSN Communications, Inc., Interlink Communications, Inc.,
TSCP International, Inc., Vextro De Mexico S.A. de C.V., and its wholly-owned
subsidiary, Servicios Corporativos Vextro, S.A. de C.V., Telscape de Mexico S.A.
de C.V., N.S.I. S.A. de C.V., Lan and Wan S.A. de C.V. and M.S. Noticias y
Telecomunicaciones, S.A. de C.V. signed a credit agreement with Lucent
Technologies, Inc. (the "Lucent Credit Agreement").
The Lucent Credit Agreement provides for up to $40 million in financing
under long-term repayment terms. In March 2000, Lucent extended its commitment,
subject to certain conditions precedent including the merger with Pointe, by an
additional $20 million. The Company borrowed $23.9 million under the Lucent
Credit Agreement on August 27, 1999, of which $9.0 million was utilized to repay
the $3.0 million Lucent Bridge Loan and $6.0 million of the Senior Notes and
$14.9 million was utilized to pay for costs directly related to construction of
the network in Mexico and related debt offering costs. The Company has incurred
obligations in the construction of the network in Mexico totaling $27.6 million
at March 31, 2000. The Company funded an additional $16.1 million under the
Lucent facility on April 20, 2000, $14.6 million of which was applied to
payables outstanding and $1.5 million of which was for interest and fees due
under the facility. The Company intends to fund the balance of the network
obligations and capitalize some of the initial interest payments due on amounts
outstanding under this facility, with proceeds from the facility, upon
consummation of the merger with Pointe.
On October 22, 1999, the Company signed a loan agreement with Lennox Invest
Ltd., a BVI Corporation, which provided for funding of up to $10.0 million. A
total of $1.5 million has been funded on this facility, which bears interest at
10% per annum. Interest on each note is to be paid at maturation of the
respective note, which occurs six months after the date of each note. Of the
$1.5 million funded under the facility, $1.0 million matures on April 19, 2000,
and $0.5 million matures on April 26, 2000. As part of this transaction, certain
members of the board of directors agreed to pledge shares of Telscape stock as
collateral. The Company agreed to indemnify these directors for the loss of
their shares for any reason other than the non-payment of these loans, and to
compensate these directors as discussed below. In December 1999, the Company
informed Lennox that it would not be drawing any further funding under this
facility due to a breach of contract on the part of Lennox. The notes associated
with the $1.5 million have matured and the Company is technically in payment
default. However, the Company is currently in a dispute with Lennox concerning
the $1.5 million loan. In addition to the issues associated with the breach
mentioned above, certain parties associated with Lennox have claimed entitlement
to the repayment of the $1.5 million. On May 10, 2000, the Company informed
Lennox that it was prepared to resolve the disputes provided that all parties
agree to a resolution. Litigation may be required to resolve this matter. The
default under this loan creates cross defaults under other outstanding
indebtedness of the Company and the Company expects to obtain waivers until the
resolution of the disputes but there can be no assurance that such waivers will
be obtained.
On November 24, 1999, the Company signed a letter of intent to merge with
Pointe. In connection with the letter of intent, Pointe agreed to lend the
Company $1.5 million that was evidenced by a short term promissory note
("Promissory Note"). As part of this transaction, certain members of the board
of directors agreed to pledge shares of the Company's common stock as
collateral. On December 31, 1999, the Company signed a definitive merger
agreement with Pointe. In addition, Pointe agreed to lend the Company $10.0
million, which was evidenced by a convertible
F-79
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
promissory note. In early January, Pointe funded $8.5 million into escrow. On
January 10, 2000, the Company drew down $1.0 million from escrow and the
Promissory Note was increased accordingly. On February 7, 2000, the Company
executed a replacement convertible promissory note ("Replacement Note") for
$10.0 million with an interest rate of 12% and a maturity of June 30, 2000. The
Replacement Note extinguishes the $2.5 million of indebtedness under the
Promissory Note. In the event that the merger with Pointe is consummated, the
Replacement Note will be extinguished.
Certain of the funding commitments that the Company has obtained, including
the additional $20.0 million to which Lucent has committed and the Class F
Convertible Preferred Stock, are contingent upon the Company's merger with
Pointe. Should the Company not be able to consummate the merger with Pointe in a
timely manner, the commitments mentioned above may expire. The Company cannot
guarantee that such commitments could be replaced on similar terms, if at all.
In January 2000, the holders of $500,000 in notes payable due January 1,
2000, converted these obligations into 47,617 shares of common stock at a price
of $10.50 per share.
NOTE 4 -- DISCONTINUED OPERATIONS
In March 2000, the Company announced the decision to close the products
division of its subsidiary, Interlink Communications, Inc. This division is a
component of the Company's broadband services and products business line of the
Advanced Services segment. The Company expects to close the products division
during the second quarter of fiscal 2000. The Company recorded a loss on the
discontinuance of this operation, for the period ended March 31, 2000, of $1.5
million, primarily relating to accruals for severance pay, closing expenses, and
fixed asset write-offs. The results of operations of the products division for
the three months ended March 31, 2000 have been classified as discontinued
operations and the prior period (March 31, 1999) has been restated to also
reflect the discontinued operations. Shown below is a summary of the remaining
net assets of the products division discontinued operations as of March 31, 1999
and 2000, respectively:
MARCH 31, 1999 MARCH 31, 2000
-------------- --------------
Current Assets....................... $1,206,000 $ 818,000
Net Fixed Assets..................... 498,000 378,000
Current Liabilities.................. (525,000) (364,000)
-------------- --------------
Net Assets........................... $1,179,000 $ 832,000
============== ==============
NOTE 5 -- SEGMENT INFORMATION
The Company has two reportable segments: Voice Services and Advanced
Services. Revenues in the Voice Services segment are generated on a retail and
wholesale basis. Revenues in the Advanced Services segment are generated from
network solutions services, customer relationship management and broadband
services. The Company provides voice services to customers in the United States
and in Mexico. Advanced services are provided to customers in the United States,
Mexico and other parts of Latin America. The Company measures segment profit as
earnings before interest, depreciation, amortization of intangibles, other
income and taxes (EBITDA).
F-80
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
Revenues, operating information and identifiable assets by business segment
are as follows:
THREE MONTHS ENDED
MARCH 31,
------------------------------
1999 2000
-------------- --------------
Revenues from continuing operations
Voice services:
Retail.......................... $ 16,814,000 $ 7,062,000
Wholesale....................... 4,394,000 5,685,000
Advanced services:
Network solutions............... 2,610,000 5,970,000
Customer relationship
management.................... 1,300,000 2,505,000
Broadband services.............. 1,446,000 2,002,000
-------------- --------------
Total revenues from continuing
operations......................... $ 26,564,000 $ 23,224,000
-------------- --------------
Operating loss from continuing
operations before interest,
depreciation and amortization
Voice services..................... $ (14,000) $ (2,022,000)
Advanced services.................. (545,000) (503,000)
Corporate and other................ (660,000) (951,000)
Depreciation and amortization...... (1,352,000) (1,562,000)
-------------- --------------
Consolidated Operating loss from
continuing operations as reported
on the Statements of Operations.... $ (2,571,000) $ (5,038,000)
-------------- --------------
Capital Expenditures
Voice services..................... $ 2,967,000 $ 1,526,000
Advanced services.................. 260,000 853,000
Corporate and other................ 23,000 3,000
-------------- --------------
Total capital
expenditures............ $ 3,250,000 $ 2,382,000
-------------- --------------
Identifiable Assets
Voice services..................... $ 25,917,000 $ 67,938,000
Advanced services.................. 32,482,000 32,743,000
Corporate and other................ 21,287,000 28,884,000
-------------- --------------
Total identifiable
assets.................. $ 79,686,000 $ 129,565,000
-------------- --------------
F-81
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
Information concerning principal geographic areas is as follows:
THREE MONTHS ENDED
MARCH 31,
------------------------------
1999 2000
-------------- --------------
Revenues
United States...................... $ 22,151,000 $ 12,554,000
Mexico............................. 3,910,000 9,590,000
Latin America...................... 503,000 1,080,000
-------------- --------------
Total revenues....................... $ 26,564,000 $ 23,224,000
-------------- --------------
Fixed assets, net of accumulated
depreciation
United States...................... $ 9,545,000 $ 15,711,000
Mexico............................. 5,523,000 47,192,000
Latin America...................... 2,088,000 427,000
-------------- --------------
Total fixed assets................... $ 17,156,000 $ 63,330,000
-------------- --------------
F-82
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 (UNAUDITED) AND DECEMBER 31, 1999
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents............ $ 5,771,920 $ 21,219,684
Restricted cash...................... 184,000 542,913
Accounts receivable, net of allowance
for doubtful accounts of $1,541,414
and $1,508,458, respectively....... 3,339,120 3,639,378
Notes receivable, net................ 11,215,859 2,270,750
Inventory, net....................... 1,948,013 1,742,543
Prepaid expenses and other........... 818,685 629,787
----------- ------------
Total current assets............ 23,277,596 30,045,055
----------- ------------
PROPERTY AND EQUIPMENT, at cost:
Equipment and machinery.............. 19,895,274 23,090,486
Earth station facility............... 1,475,124 1,471,822
Software............................. 2,136,207 2,176,944
Furniture and fixtures............... 1,553,075 1,257,666
Other................................ 2,137,009 1,695,861
Construction in progress............. 11,411,900 1,452,303
----------- ------------
38,608,589 31,145,082
Accumulated depreciation and
amortization....................... (7,273,976) (6,827,740)
----------- ------------
Propertyy and equipment, net.... 31,334,613 24,317,342
----------- ------------
OTHER ASSETS:
Goodwill, net of accumulated
amortization of $1,544,360 and
$2,190,266, respectively........... 17,076,997 17,237,653
Acquired customer bases, net of
accumulated amortization of
$969,182 and $1,131,507,
respectively....................... 858,561 890,271
Other intangibles, net of accumulated
amortization of $1,184,062 and
$1,946,521, respectively........... 1,576,599 1,723,225
Other................................ 2,481,349 2,676,217
----------- ------------
Total other assets.............. 21,993,505 22,527,366
----------- ------------
TOTAL ASSETS.................... $76,605,714 $ 76,889,763
=========== ============
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Balance Sheets
F-83
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 (UNAUDITED) AND DECEMBER 31, 1999
MARCH 31, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
CURRENT LIABILITIES:
Current portion of notes payable..... $ 1,349,739 $ 2,795,256
Current portion of lease
obligations........................ 2,345,864 3,242,776
Accounts payable..................... 14,798,555 6,233,914
Accrued liabilities.................. 5,495,745 6,132,570
Unearned revenue..................... 1,526,097 1,514,329
------------- ------------
Total current liabilities....... 25,516,000 19,918,845
------------- ------------
LONG-TERM LIABILITIES:
Capital and financing lease
obligations........................ 7,996,360 10,367,260
Convertible debentures............... 900,000 900,000
Notes payable and other long-term
obligations........................ 888,267 866,974
------------- ------------
Total long-term liabilities..... 9,784,627 12,134,234
------------- ------------
MINORITY INTEREST.................... -- 2,014,959
------------- ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value;
100,000 shares authorized, 0 and
18,121 shares issued and
outstanding, respectively.......... 187 181
Common stock, $0.00001 par value;
100,000,000 shares authorized;
45,339,839 and 52,152,426 shares
issued and outstanding,
respectively....................... 521 517
Additional paid-in-capital........... 142,644,169 136,370,654
Accumulated deficit.................. (101,339,791) (93,549,626)
------------- ------------
Total stockholders' equity...... 41,305,086 42,821,726
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................. $ 76,605,714 $ 76,889,763
============= ============
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Balance Sheets.
F-84
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
--------------- ---------------
(UNAUDITED) (UNAUDITED)
REVENUES:
Communications services and
products...................... $13,761,470 $10,933,887
Internet connection services.... 471,602 619,639
--------------- ---------------
Total revenues............. 14,233,072 11,553,526
--------------- ---------------
COSTS AND EXPENSES:
Cost of services and products... 13,553,852 10,247,028
Selling, general, and
administrative expenses....... 5,757,838 2,833,152
Depreciation and amortization... 1,153,841 1,045,947
--------------- ---------------
Total costs and expenses... 20,465,531 14,126,127
--------------- ---------------
OPERATING LOSS....................... (6,232,459) (2,572,601)
--------------- ---------------
INTEREST EXPENSE, net................ 64,286 (1,086,438)
OTHER (EXPENSE) INCOME............... -- --
--------------- ---------------
NET LOSS BEFORE INCOME TAXES......... (6,168,173) (3,659,039)
INCOME TAX BENEFIT................... -- --
--------------- ---------------
NET LOSS............................. $(6,168,173) $(3,659,039)
=============== ===============
NET LOSS PER SHARE --
BASIC AND DILUTED............... $ (0.15) $ (0.08)
=============== ===============
SHARES USED IN COMPUTING NET LOSS PER
SHARE.............................. 51,841,344 45,343,348
=============== ===============
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Statements.
F-85
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
--------------- ---------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................... $(6,168,173) $(3,659,039)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization... 1,153,841 1,045,947
Bad debt expense................ 76,329 58,894
Amortization of discounts on
debt and lease obligations.... 79,693 525,479
Non-cash stock compensation..... 516,942 --
Changes in operating assets and
liabilities:
Accounts receivable, net...... (73,004) 211,874
Notes receivable.............. (8,945,109) (64,658)
Inventory..................... (250,491) (591,338)
Prepaid expenses.............. (202,853) (72,452)
Other assets.................. 60,388 (522,996)
Accounts payable, accrued, and
other liabilities.......... 8,299,691 225,587
Unearned revenue.............. 11,768 (793,371)
--------------- ---------------
Total adjustments.......... 727,195 22,966
--------------- ---------------
Net cash used in operating
activities.............. (5,440,978) (3,636,073)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and
equipment....................... (11,975,662) (2,106,781)
Restricted cash.................... 358,913 (163,900)
Repayment of intercompany debt by
deconsolidated subsidiary....... 1,909,596 --
Reduction in cash due to
deconsolidation of subsidiary,
net............................. (48,968) --
--------------- ---------------
Net cash used in investing
activities.............. (9,756,121) (2,270,681)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants
and options..................... 429,763 --
Repayment of lease obligations..... -- (101,671)
(Repayment of)/Proceeds from leases
and notes payable, net.......... (680,429) 7,524,420
--------------- ---------------
Net cash provided by
financing activities.... (250,666) 7,422,748
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS........................ (15,447,765) 1,515,995
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 21,219,684 1,255,199
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF
QUARTER............................ $ 5,771,920 $ 2,771,194
=============== ===============
Supplemental Disclosures:
Cash paid for interest............. $ 391,926 $ 552,883
Cash paid for income taxes......... -- --
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Statements.
F-86
<PAGE>
POINTE COMMUNICATIONS CORPORATION
CONDENSED NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
1. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to Rule
10-01 of Regulation S-X of the Securities and Exchange Commission ("SEC"). The
accompanying unaudited condensed consolidated financial statements reflect, in
the opinion of management, all adjustments necessary to achieve a fair statement
of financial position and results for the interim periods presented. All such
adjustments are of a normal recurring nature. Preparing financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses. Actual results could
differ from those estimates. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
2. Certain amounts in the prior period financial statements have been
reclassified to conform to the current year presentation.
3. Basic net loss per share is computed using the weighted average number
of shares outstanding. Diluted net loss per share is computed using the weighted
average number of shares outstanding, adjusted for common stock equivalents,
when dilutive. For the periods presented, the effect of common stock equivalents
was antidilutive, as a result, basic and diluted net loss per share are the
same. The following table has been added to reconcile Net income/(loss) to Net
income/(loss) available to common stockholders. The difference represents
payment of dividends issued on Class A and B Senior Convertible Preferred Stock
("Preferred Stock") during the quarter. The dividends were paid with
additional shares of Preferred Stock.
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
--------------- ---------------
Net income/(loss).................... $(6,168,173) $(3,659,039)
Preferred stock dividend............. (1,621,992) --
--------------- ---------------
Net income/(loss) available for
common stockholders................ $(7,790,165) $(3,659,039)
=============== ===============
Net loss per share................... $ (0.15) $ (0.08)
=============== ===============
Shares used in computing net loss per
share.............................. 51,841,344 45,343,348
=============== ===============
4. There was no provision for or cash payment of income taxes for the
three months ended March 31, 2000 and 1999, respectively, as the Company had net
taxable losses for 1999 and anticipates a net taxable loss for the year ended
December 31, 2000.
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<PAGE>
5. During the quarter ended March 31, 2000, the Company entered into an
Agreement and Plan of Merger ("Merger Agreement") with Telscape International,
Inc. ("Telscape") in an all-stock transaction in which each share of PointeCom
will be exchanged for 0.223514 shares of Telscape common stock. The merger is
expected to close in the second quarter of 2000. Pointe will be viewed as the
acquiror for accounting purposes. The following table presents the unaudited pro
forma consolidated results of operations of the Company as though the merger
took place on January 1, 1999:
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 2000 MARCH 31, 2000
------------------ ---------------
Revenues............................. $ 157,088 $ 37,457
================== ===============
Net loss from continuing
operations........................... $ (123,166) $ (18,165)
================== ===============
Net loss per share from continuing
operations, basic and diluted...... $ (6.74) $ (0.92)
================== ===============
The pro forma financial information does not purport to represent what the
consolidated results of operations would have been if the Acquisitions had in
fact occurred on these dates, nor does it purport to indicate our future
consolidated financial position or future consolidated results of operations.
The pro forma adjustments are based on currently available information and
certain assumptions that management believes to be reasonable.
In conjunction with the Merger Agreement, the Company executed a $10.0
million convertible promissory note with Telscape to evidence Telscape's
obligation to repay the Company by June 30, 2000. This note replaces the
promissory note entered into with Telscape during the fourth quarter of 1999,
under which the Company advanced Telscape $1.5 million. The excess of $8.5
million over the $1.5 million previously advanced was placed in escrow for
Telscape. As of March 31, 2000, $2.3 million remained in escrow. If Telscape
fails to make principle or interest payments when due, fails to comply with the
note, becomes insolvent or is in bankruptcy, or the Merger Agreement with the
Company is terminated Telscape will be in default and the Company may demand
full payment. Additionally, the note is convertible at the Company's option into
100,000 shares of Class C preferred stock and warrants to purchase 500,000
shares of Telscape common stock at $7.00 per share. Each share of Class C
preferred stock is convertible into 12.195 shares of Telscape common stock.
6. During the quarter ended March 31, 2000, the Company's subsidiary
Telecommute Solutions Inc. ("TCS") completed a private placement of its Series
B Convertible Preferred Stock for gross proceeds totaling approximately $19
million. The preferred stock is convertible into shares of TCS common stock and
votes with common stockholders on an as converted basis. Upon issuance of the
Series B Preferred Stock, the TCS Series A convertible non-voting preferred
stockholders converted their stock into TCS common stock. As a result of these
transactions the Company's ownership of TCS was reduced from 100% to
approximately 23%. Therefore, TCS is no longer a consolidated subsidiary and the
Company will account for its ownership using the equity method. As of the date
of deconsolidation, TCS's cumulative losses exceeded the Company's investment.
Therefore, the investment account was a credit balance of approximately $3.5
million, which has been reclassed to additional paid in capital along with the
minority interest related to the Class A preferred stock of approximately $2.0
million, in accordance with Staff Accounting Bulletin No. 51. TCS is in a net
loss position and after the entries above, the Company's basis in the TCS
investment is $0, therefore, no income/loss has been recognized during the first
quarter.
7. Effective January 1998, the Company adopted SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information," which established
revised standards for the reporting of financial and descriptive information
about operating segments in financial statements. During 1998, the Company's
management did not utilize segment data for making decisions and assessing
performance because it provided various services over a single interconnected
network. During 1999,
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<PAGE>
management identified segments, changed its focus, and began using segment data
in its decision-making process and for assessing performance.
While management of the Company monitors the revenue and costs of services
generated from each of the various services, operations are managed and
financial performance is evaluated based on the delivery of multiple services
provided over a single network. As a result of multiple services being provided
over a single network, there are many shared administrative expenses and shared
assets related to the provision of various services to customers. Management
believes that any allocation of the shared expenses or assets to the segments
would be arbitrary and impractical. The operating segments were aggregated into
reportable segments based upon such characteristics as products and services,
operating methods, customers, and distribution methods. The segments include
Retail Services, Wholesale/International Services, Prepaid Calling Card
Services, and Corporate and Network overhead. Retail services include local,
long distance, and Internet access services provided primarily to Hispanic
residential and commercial customers. Wholesale/International Services include
carrier terminating services and International private line provided between the
US and various South and Central American countries as well as voice and data
services provided within various Latin American countries. Prepaid Calling Card
services include the sale of both "on-net" (calls carried on the Company's
network) and "off-net" (calls carried on other Companies networks) prepaid
calling cards. Corporate and Network includes corporate and network overhead
including finance and accounting, human resources, legal, information
technology, lan administration, and engineering overhead. Intersegment sales and
transfers occur as segments utilize carrier capacity of other segments.
Intersegment transactions are accounted for on the same basis as transactions
with third parties.
Revenues, cost of services and selling general and administrative expenses
for each segment for the quarter ended March 31, 2000 are as follows:
<TABLE>
<CAPTION>
PREPAID WHOLESALE/
CARD RETAIL INTERNATIONAL CORPORATE &
SERVICES SERVICES SERVICES OTHER NETWORK TOTAL
----------- ---------- -------------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $10,872,743 $1,162,236 $2,068,826 $ 129,268 $ -- $ 14,233,073
Cost of revenues..................... 9,784,822 1,084,861 2,552,318 131,852 -- 13,553,853
----------- ---------- -------------- ---------- ------------ --------------
Gross Margin......................... 1,087,921 77,375 (483,492) (2,584) -- 679,220
SG&A................................. 1,212,359 1,703,153 663,985 395,484 1,782,858 5,757,839
</TABLE>
Revenues, cost of services and selling general and administrative expenses
for each segment for the quarter ended March 31, 1999 are as follows:
<TABLE>
<CAPTION>
PREPAID WHOLESALE/
CARD RETAIL INTERNATIONAL CORPORATE &
SERVICES SERVICES SERVICES OTHER NETWORK TOTAL
----------- ---------- -------------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 8,989,363 $1,009,435 $1,162,094 $ 392,634 $ -- $ 11,553,526
Cost of revenues..................... 8,248,607 724,923 1,000,409 273,089 -- 10,247,028
----------- ---------- -------------- ---------- ------------ --------------
Gross Margin......................... 740,756 284,512 161,685 119,545 -- 1,306,498
SG&A................................. 663,289 360,985 636,571 520,688 651,619 2,833,152
</TABLE>
8. During the first quarter of 1999, the Company issued 400,416 shares of
common stock in conjunction with the exercise of employee stock options. Certain
of the options were issued in cashless exercise transactions in which the
Company withheld from the issuance the number of shares which market value was
equal to the aggregate exercise price of the options exercised. In conjunction
with these cashless exercises, the Company recognized $264,524 in compensation
expense. Additionally, the Company recognized compensation expense with regard
to variable options in the amount of $252,418, which represents the appreciation
in market price over the exercise price amortized over the vesting period of the
options. Also during the quarter, the Company issued 57,821 shares of common
stock in conjunction with the exercise of warrants.
F-89
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "AGREEMENT")
is made as of December 31, 1999, by and among Pointe Communications Corporation,
a Nevada corporation ("POINTECOM"), Pointe Acquisition, Corp., a Nevada
corporation that is a wholly owned subsidiary of Telscape International, Inc.
("NEWCO"), and Telscape International, Inc., a Texas corporation (the
"COMPANY").
WHEREAS, the respective Boards of Directors of PointeCom, Newco and the
Company (collectively referred to as the "CONSTITUENT CORPORATIONS") deem it
advisable and in the best interests of the Constituent Corporations and their
respective stockholders that Newco merge with and into PointeCom (the
"MERGER"); and
WHEREAS, the Boards of Directors of the Constituent Corporations have
approved and adopted this Agreement as a plan of reorganization within the
provisions of Section 368 of the Internal Revenue Code of 1986, as amended (the
"CODE", and the Treasury Regulations thereunder);
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements, representations, warranties, provisions and covenants contained
herein, the parties hereto, intending to be legally bound, agree as follows:
ARTICLE I
DEFINITIONS
1.1. DEFINITIONS Capitalized terms used in this Agreement shall have the
following meanings:
"ACQUISITION PROPOSAL" means with respect to any Person, a proposal or
offer (including, without limitation, any proposal or offer to stockholders of
such Person) with respect to a merger, acquisition, consolidation,
recapitalization, liquidation, tender offer or exchange offer or similar
transaction involving, or any purchase of 25% or more of the consolidated assets
of, or any equity interest representing 25% or more of the outstanding shares of
capital stock in, such Person.
"AFFILIATE" of, or "AFFILIATED" with, a specified Person or entity
means any entity directly or indirectly controlling, controlled by or under
direct or indirect common Control with such specified Person and includes, but
is not limited to, (a) any Person who is a director or beneficial owner of at
least 5% of such Person's equity securities, (b) any Person of which such
specified Person or any Affiliate of such specified Person owns at least 10% of
such Person's equity securities or (c) family members of any such Person
specified in clause (a) or (b).
"AGREEMENT" has the meaning set forth in the first paragraph of this
Agreement and also includes the Schedules and Exhibits hereto.
"BALANCE SHEET DATE" has the meaning set forth in SECTION 5.9.
"BUSINESS DAYS" means Monday through Friday of each calendar week,
exclusive of federal holidays.
"CLASS C CONVERTIBLE SENIOR PREFERRED STOCK" means the preferred stock to
be issued by the Company, par value $0.001, upon conversion of the Note,
pursuant to the Certificate of Designation attached hereto as EXHIBIT A".
"CLOSING" has the meaning set forth in ARTICLE IV.
"CLOSING DATE" has the meaning set forth in ARTICLE IV.
"CODE" has the meaning set forth in the third paragraph of this
Agreement.
"COMPANY" has the meaning set forth in the first paragraph of this
Agreement.
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<PAGE>
"COMPANY CLASS D CONVERTIBLE SENIOR PREFERRED STOCK" means the preferred
stock issued by the Company, par value $0.001 having the same rights and
preferences as the PointeCom Class A Preferred Stock.
"COMPANY CLASS E CONVERTIBLE SENIOR PREFERRED STOCK" means the preferred
stock issued by the Company, par value $0.001 having the same rights and
preferences as the PointeCom Class B Preferred Stock.
"COMPANY COMMON STOCK" means the common stock of the Company, $0.001 par
value, per share.
"COMPANY PERMITS" has the meaning set forth in SECTION 5.14.
"COMPANY PREFERRED STOCK" means the Company Class D Convertible Senior
Preferred Stock and the Company Class E Convertible Senior Preferred Stock,
collectively.
"COMPANY THIRD PARTY" means any Person (or group of Persons) other than
Pointe or its respective Affiliates.
"COMPETITIVE BUSINESS" means any business that competes with the business
of the Company as conducted at the Effective Time or the businesses of PointeCom
and the Surviving Corporation as conducted or proposed to be conducted at the
Effective Time.
"CONSTITUENT CORPORATIONS" has the meaning set forth in the second
paragraph of this Agreement.
"CONTROL" (including, with its correlative meanings, "controlled by"and
"under common control with") means possession, directly or indirectly, of
power to direct or cause the direction of management or policies (whether
through ownership of securities or other ownership interests, by contract or
otherwise) of any Person.
"DISSENTING SHARES" has the meaning set forth in SECTION 3.3.
"EFFECTIVE TIME" has the meaning set forth in SECTION 2.2.
"ENCUMBRANCES" means all liens, encumbrances, mortgages, pledges,
security interests, conditional sales agreements, charges, options, preemptive
rights, rights of first refusal, reservations, restrictions or other
encumbrances or defects in title.
"EMPLOYEE BENEFIT PLAN" has the meaning set forth in SECTION 5.20.
"ENVIRONMENTAL, HEALTH AND SAFETY LAWS" means any federal, state or local
Law now or hereafter in effect which are binding on any of the parties hereto,
including, without limitation, any judicial or administrative interpretation
thereof, any judicial or administrative order, consent decree or judgment, or
agreement with any Governmental Authority, relating to (a) pollution, exposure
to oil, pollutants, contaminants, hazardous or toxic materials or waste, (b) the
protection, preservation or restoration of the environment, including laws
relating to exposures to, or emissions, discharges, releases or threatened
releases of oil, pollutants, contaminants, hazardous or toxic materials or
wastes into ambient air, surface water, ground water or land surface or
subsurface strata or (c) the manufacture, processing, labeling, distribution,
use, treatment, storage, transport, handling or disposal of oil, pollutants,
contaminants, hazardous or toxic materials or wastes or relating to the
environment, plant and animal life, natural resources or health, safety or any
Hazardous Substance. "ENVIRONMENTAL, HEALTH AND SAFETY LAWS" include, without
limitation, (i) the Federal Comprehensive Environmental Response Compensation
and Liability Act of 1980 (CERCLA), 42 U.S.C. ss 9601 ET SEQ., the Resource
Conservation and Recovery Act, 42 U.S.C. ss6901 ET SEQ., the Federal Water
Pollution Control Act, 33 U.S.C. ss1251 ET SEQ., the Toxic Substances Control
Act, 15 U.S.C. ss2601 ET SEQ., the Clean Air Act, 42 U.S.C. ss7401 ET SEQ., the
Safe Drinking Water Act, 42 U.S.C. ss300f ET SEQ., the Hazardous Materials
Transportation Act, 49 U.S.C. ss5101 ET SEQ., the Atomic Energy Act, 42 U.S.C.
ss2011 ET SEQ., the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C.
ss136 ET SEQ., and the Occupational Safety and Health Act, 29 U.S.C. ss651 ET
SEQ., in each case as amended from time to time, and any other federal, state or
local Laws now or hereafter relating to any of the foregoing, and
A-2
<PAGE>
(ii) any common law or equitable doctrine (including, without limitation,
injunctive relief and tort doctrines such as negligence, nuisance, trespass and
strict liability) that may impose liability or obligations for injuries or
damages due to, or threatened as a result of, the presence of, effects of or
exposure to any Hazardous Substance.
"ERISA" has the meaning set forth in SECTION 5.20.
"ERISA AFFILIATE" has the meaning set forth in SECTION 5.20.
"FINANCIAL STATEMENTS" has the meaning set forth in SECTION 5.9.
"GAAP" means generally accepted accounting principles as currently
applied by the respective party on a basis consistent with preceding years and
throughout the periods involved.
"GOVERNMENTAL AUTHORITY" means any federal, state, local or foreign
government, political subdivision or governmental or regulatory authority,
agency, board, bureau, commission, instrumentality or court or
quasi-governmental authority.
"HAZARDOUS SUBSTANCES" means any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, under any Environmental, Health or Safety Law. The term
"HAZARDOUS SUBSTANCES" includes, without limitation, any substance to which
exposure is regulated by any Governmental Authority or any Environmental, Health
or Safety Law including, without limitation, any toxic waste, pollutant,
contaminant, hazardous substance, toxic substance, hazardous waste, special
waste, industrial substance or petroleum or any derivative or by-product
thereof, radon, radioactive material, asbestos or asbestos containing material,
urea formaldehyde foam insulation, lead or polychlorinated biphenyls.
"INTERIM BALANCE SHEET" has the meaning set forth in SECTION 5.9.
"INTERIM FINANCIAL STATEMENTS" has the meaning set forth in SECTION 5.9.
"LAW" or "LAWS" means any and all federal, state, local or foreign
statutes, laws, ordinances, proclamations, code, regulations, legal doctrine,
published requirements, orders, decrees, judgments, injunctions and rules of any
Governmental Authority, including, without limitation, those covering
environmental, Tax, energy, safety, health, transportation, bribery,
recordkeeping, zoning, discrimination, antitrust and wage and hour matters, in
each case as amended and in effect from time to time.
"LOSS" or "LOSSES" means all liabilities, losses, claims, damages,
actions, suits, proceedings, demands, assessments, adjustments, fees, costs and
expenses (including specifically, but without limitation, reasonable attorneys'
fees and costs and expenses of investigation), net of income Tax effects with
respect thereto (including, without limitation, income Tax benefits recognized
in connection therewith and income Taxes upon any indemnification recovery
thereof).
"MATERIAL ADVERSE EFFECT" means, with respect to any Person, any material
adverse effect on the financial condition, business, assets or results of
operations of such person and its subsidiaries, taken as a whole.
"MERGER CONSIDERATION" has the meaning set forth in SECTION 3.1.
"MERGER FILING" has the meaning set forth in SECTION 2.2.
"MERGER" has the meaning set forth in the second paragraph of this
Agreement.
"NASDAQ" means a national securities market run by the National
Association of Securities Dealers.
"NEWCO" has the meaning set forth in the first paragraph of this
Agreement.
"NEWCO COMMON STOCK" has the meaning set forth in SECTION 5.6.
"NOTE" means the 12% Convertible Promissory Note issued by the Company in
an original principal amount of $10,000,000 in connection with the PointeCom
Loan, a copy of which is attached hereto as EXHIBIT "B".
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<PAGE>
"NRS" means the Nevada Revised Statutes, as amended.
"1933 ACT" means the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder.
"1934 ACT" means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.
"ORGANIZATIONAL DOCUMENTS" shall mean, with respect to a corporation, the
certificate of incorporation or articles of incorporation and bylaws of such
corporation.
"PERMITTED ENCUMBRANCES" means (a) any Encumbrances reserved against in
the Interim Balance Sheet, (b) Encumbrances for property or ad valorem Taxes not
yet due and payable or which are being contested in good faith and by
appropriate proceedings if adequate reserves with respect thereto are maintained
on the Company's books in accordance with GAAP, (c) obligations under operating
and capital leases described in SCHEDULE 5.12, and (d) statutory liens or
landlord's, carriers', warehouseman's, mechanic's, suppliers', materialmen's,
repairmen's or other like Encumbrances arising in the ordinary course of
business.
"PERSON" means any natural person, corporation, partnership,
proprietorship, other business organization, trust, union, association or
Governmental Authority, whether incorporated or unincorporated.
"PLAN" has the meaning set forth in SECTION 5.20.
"POINTECOM" has the meaning set forth in the first paragraph of this
Agreement.
"POINTECOM BALANCE SHEET DATE" has the meaning set forth in SECTION 6.6.
"POINTECOM CLASS A PREFERRED STOCK" means the Class A Convertible Senior
Preferred Stock of PointeCom, par value $0.01 per share, issued pursuant to that
certain Certificate of Designations of Pointe Communications Corporation filed
with the Secretary of State of Nevada on May 11, 1999.
"POINTECOM CLASS B PREFERRED STOCK" means the Class B Convertible Senior
Preferred Stock of PointeCom, par value $0.01 per share, issued pursuant to that
certain Certificate of Designations of Pointe Communications Corporation filed
with the Secretary of State of Nevada on September 7, 1999.
"POINTECOM COMMON STOCK" means PointeCom's common stock, $.00001 par
value per share.
"POINTECOM ERISA AFFILIATE" has the meaning set forth in SECTION 6.24.
"POINTECOM FINANCIAL STATEMENTS" has the meaning set forth in SECTION
6.6.
"POINTECOM INTERIM BALANCE SHEET" has the meaning set forth in SECTION
6.6.
"POINTECOM INTERIM FINANCIAL STATEMENTS" has the meaning set forth in
SECTION 6.6.
"POINTECOM LOAN" has the meaning set forth in SECTION 7.10.
"POINTECOM PERMITS" has the meaning set forth in SECTION 6.10.
"POINTECOM PLAN" has the meaning set forth in Section 6.24.
"POINTE PREFERRED STOCK" means the PointeCom Class A Preferred Stock and
the PointeCom Class B Preferred Stock, collectively.
"POINTECOM THIRD PARTY" means any Person (or group of Persons) other than
PointeCom or its respective Affiliates.
"POINTECOM YEAR-END FINANCIAL STATEMENTS" has the meaning set forth in
SECTION 6.6.
"QUALIFIED PLANS" has the meaning set forth in SECTION 5.20.
"QUALIFIED POINTECOM PLANS" has the meaning set forth in SECTION 6.24.
"REGISTRATION RIGHTS AGREEMENT" means that certain Registration Rights
Agreement attached hereto as EXHIBIT "C".
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<PAGE>
"REGISTRATION STATEMENT" has the meaning set forth in SECTION 7.10.
"REQUISITE STOCKHOLDER APPROVAL" means, with respect to the Company, the
affirmative vote of a majority of the holders of the outstanding shares of
Company Common Stock in favor of (a) approval of the issuance of shares of
Company Common Stock and Company Preferred Stock in connection with the Merger
as provided in this Agreement in accordance with the rules of NASDAQ and (b) an
amendment to the Company's certificate of incorporation to increase the
authorized capital stock of the Company (including designation of the rights and
preferences for Company Class D and E Senior Preferred Stock) in accordance with
the Texas Business Corporation Act; or with respect to PointeCom, the
affirmative vote of a majority of the holders of outstanding shares of PointeCom
capital stock in favor of the adoption of this Agreement in accordance with the
NRS.
"SEC" means the Securities and Exchange Commission.
"SUBSIDIARY" means, as to a particular parent business entity, any
business entity of which 50% or more of the indicia of equity rights is at the
time directly or indirectly owned by the parent or by one or more Persons
controlled by, controlling or under common control with the parent.
"SURVIVING CORPORATION" has the meaning set forth in SECTION 2.1.
"SURVIVING SECURITIES" means the warrants, options and other rights of
PointeCom as defined in SECTION 3.4.
"TAXES" has the meaning set forth in SECTION 5.22.
"TRANSACTION DOCUMENTS" shall refer to this Agreement and any other
agreements and documents to be executed and delivered pursuant to this Agreement
by a party hereto.
"WARRANT AGREEMENT" means that certain Warrant Agreement attached hereto
as EXHIBIT "D".
"WARRANTS" shall mean the warrants of the Company to be issued pursuant
to the Warrant Agreement.
"YEAR-END FINANCIAL STATEMENTS" has the meaning set forth in SECTION 5.9.
"YEAR 2000 COMPLIANT" has the meaning set forth in SECTION 5.28.
1.2. INTERPRETATION. For all purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in SECTION 1.1 and elsewhere in this Agreement
include the plural as well as the singular;
(b) all accounting terms not otherwise defined herein have the meanings
ascribed to them in accordance with GAAP;
(c) the words "herein", "hereof", and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision;
(d) as used herein, the words "knowledge" or "known" shall, (i) with
respect to the Company or Newco, mean the actual knowledge of the corporate
executive officers of the Company or Newco, respectively, in each case after
such individuals have made due and diligent inquiry as to the matters which are
the subject of the statements which are "known" by the Company or Newco,
respectively, or made to the "knowledge" of the Company or Newco,
respectively, and (ii) with respect to PointeCom, mean the actual knowledge of
the corporate executive officers of PointeCom, in each case after such
individuals have made due and diligent inquiry as to the matters which are the
subject of the statements which are "known" by PointeCom or made to the
"knowledge" of PointeCom; and
(e) disclosure of any matter in a Schedule shall not be deemed an
admission that such matter is material.
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<PAGE>
ARTICLE II
THE MERGER AND THE SURVIVING CORPORATION
2.1. THE MERGER. Upon the terms and subject to the conditions of this
Agreement, at the Effective Time, Newco shall be merged with and into PointeCom
and the separate existence of Newco shall thereupon cease in accordance with the
NRS. PointeCom shall be the surviving corporation in the Merger (hereinafter
sometimes referred to as the "SURVIVING CORPORATION").
2.1. EFFECTIVE TIME OF THE MERGER. The Merger shall become effective (the
"EFFECTIVE TIME") at 1:59 p.m., Nevada time, on June 30, 2000, or such other
time and date mutually agreeable to the parties hereto and stated in a
certificate of merger, in a form mutually acceptable to PointeCom and the
Company, filed with the Secretary of State of the State of Nevada in accordance
with the NRS (the "MERGER FILING"). The Merger Filing shall be made
simultaneously with or as soon as practicable after the Closing. The Surviving
Corporation may, at any time after the Effective Time, take any action
(including executing and delivering any document) in the name and on behalf of
the Company, Newco or PointeCom in order to carry out and effectuate the
transactions contemplated by this Agreement.
2.3. CERTIFICATE OF INCORPORATION, BYLAWS AND BOARD OF DIRECTORS OF
SURVIVING CORPORATION. As a result of the Merger and at the Effective Time:
(a) The Certificate of Incorporation of PointeCom in effect on the date
hereof, shall become the Certificate of Incorporation of the Surviving
Corporation. After the Effective Time, the Certificate of Incorporation of the
Surviving Corporation may be amended in accordance with its terms and as
provided in the NRS.
(b) The Bylaws of PointeCom in effect on the date hereof, shall become the
Bylaws of the Surviving Corporation, and thereafter may be amended in accordance
with their terms and as provided by the Certificate of Incorporation of the
Surviving Corporation and the NRS.
(c) Upon consummation of the Merger, the Board of Directors of the
Surviving Corporation shall consist of nine members, of which six members shall
be named by PointeCom and three members shall be named by the Company and such
individuals shall serve in such positions until their respective successors have
been duly elected or appointed and qualified or until their earlier death,
resignation or removal in accordance with the Surviving Corporation's
Certificate of Incorporation and Bylaws. From and after the Effective Time, the
Surviving Corporation shall possess all rights, powers, privileges and
franchises and be subject to all of the obligations, liabilities, restrictions
and disabilities of PointeCom and Newco, all as provided under the NRS.
ARTICLE III
CONSIDERATION
3.1. CONVERSION OF SHARES. At the Effective Time, by virtue of the
Merger, and without any action on the part of any holder of any capital stock of
PointeCom, each share of PointeCom Common Stock issued and outstanding
immediately prior to the Effective Time shall be converted into the right to
receive 0.223514 of a share of Company Common Stock (the "EXCHANGE RATIO") and
all such shares of PointeCom Common Stock shall no longer be outstanding, shall
be canceled and shall cease to exist, and each holder of any such shares of
PointeCom Common Stock shall thereafter cease to have any rights with respect to
such shares of PointeCom Common Stock except the right to receive 0.223514
shares of Company Common Stock for each such share of PointeCom Common Stock and
unpaid dividends and distributions, if any, to which the holder of such shares
of PointeCom Common Stock is entitled at the Effective Time; each share of
PointeCom Class A Preferred Stock issued and outstanding immediately prior to
the Effective Time shall be converted into the right to receive one share of
Company Class D Convertible Senior Preferred Stock and all such shares of
PointeCom Class A Preferred Stock shall no longer be outstanding, shall be
canceled and shall cease to exist, and each holder of any such shares of
PointeCom Class A Preferred Stock shall thereafter
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cease to have any rights with respect to such shares of PointeCom Class A
Preferred Stock except the right to receive one share of Company Class D
Convertible Senior Preferred Stock for each such share of PointeCom Class A
Preferred Stock (the terms of which shall be in all material respects the same
as the PointeCom Class A Preferred Stock, except that Company Class A
Convertible Senior Preferred Stock shall be convertible into such number of
shares of Company Common Stock as would have been issued to the holders of the
PointeCom Class A Preferred Stock if such holders had converted the PointeCom
Class A Preferred Stock into PointeCom Common Stock prior to the Effective Time)
and unpaid dividends and distributions, if any, to which the holder of such
shares of PointeCom Class A Preferred Stock is entitled at the Effective Time;
and each share of PointeCom Class B Preferred Stock issued and outstanding
immediately prior to the Effective Time shall be converted into the right to
receive one share of Company Class E Convertible Senior Preferred Stock and all
such shares of PointeCom Class B Preferred Stock shall no longer be outstanding,
shall be canceled and shall cease to exist, and each holder of any such shares
of PointeCom Class B Preferred Stock shall thereafter cease to have any rights
with respect to such shares of PointeCom Class B Preferred Stock except the
right to receive one share of Company Class E Convertible Senior Preferred Stock
for each such share of PointeCom Class B Preferred Stock (the terms of which
shall be in all material respects the same as the PointeCom Class B Preferred
Stock, except that Company Class E Convertible Senior Preferred Stock shall be
convertible into such number of shares of Company Common Stock as would have
been issued to the holders of the PointeCom Class B Preferred Stock if such
holders had converted the PointeCom Class B Preferred Stock into PointeCom
Common Stock prior to the Effective Time) and unpaid dividends and
distributions, if any, to which the holder of such shares of PointeCom Class B
Preferred Stock is entitled at the Effective Time. The Company capital stock to
be issued as described above in exchange for the PointeCom capital stock shall
be referred to herein as the "MERGER CONSIDERATION". Except with respect to
fractional shares (as provided in SECTION 3.2, below) and Dissenting Shares (as
provided in SECTION 3.3, below), PointeCom shareholders will receive only voting
shares of the Company as consideration for the Merger.
3.2. FRACTIONAL SHARES. No scrip or fractional shares of Company Common
Stock shall be issued in the Merger. All fractional shares of Company Common
Stock to which a holder of PointeCom Common Stock immediately prior to the
Effective Date would otherwise be entitled at the Effective Date shall be
aggregated. If a fractional share results from such aggregation, such
stockholder shall be entitled, after the later of (a) the Effective Date or (b)
the surrender of such stockholder's certificate representing his PointeCom
Common Stock that represent such shares of PointeCom Common Stock, to receive
from the Company an amount in cash in lieu of such fractional share, based on
the average trading price for Company Common Stock during the twenty trading
days that end on the last trading day prior to the Closing Date. The Company
will make available the cash necessary for the purpose of paying cash for
fractional shares.
The payment of cash in lieu of fractional shares of Company Common Stock is
solely for the purpose of avoiding the expense and inconvenience to the Company
of issuing fractional shares and does not represent separately bargained-for
consideration. The total cash consideration that will be paid in the Merger to
the PointeCom stockholders instead of issuing fractional shares of Company
Common Stock will not exceed one percent (1%) of the total consideration that
will be issued in the Merger to the PointeCom stockholders in exchange for their
shares of PointeCom capital stock. The fractional shares interests of each
PointeCom stockholder will be aggregated, and no PointeCom stockholder will
receive cash in an amount greater to or greater than the value of one full share
of Company Common Stock.
3.1. DISSENTING SHARES. To the extent that appraisal rights are available
under the NRS, shares of PointeCom Common Stock that are issued and outstanding
immediately prior to the Effective Date and that have not been voted for
adoption of the Merger and with respect of which appraisal rights have been
properly demanded in accordance with the applicable provisions of the NRS (the
"DISSENTING SHARES") shall not be converted into the right to receive the
Merger Consideration at or after the Effective Date unless and until the holder
of such shares withdraws his demand for such
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appraisal (in accordance with the applicable provisions of the NRS) or becomes
ineligible for such appraisal. If a holder of Dissenting Shares withdraws his
demand for such appraisal (in accordance with the applicable provisions of the
NRS) or becomes ineligible for such appraisal, then, as of the Effective Date or
the occurrence of such event, whichever occurs later, such holder's Dissenting
Shares shall cease to be Dissenting Shares and shall be converted into and
represent the right to receive the Merger Consideration. If any holder of
PointeCom Common Stock shall assert the right to be paid the fair value of such
PointeCom Common Stock as described above, PointeCom shall give the Company
notice thereof and the Company shall have the right to participate in all
negotiations and proceedings with respect to any such demands. PointeCom shall
not, except with the prior written consent of the Company, which shall not be
unreasonably withheld, voluntarily make any payment with respect to, or settle
or offer to settle, any such demand for payment. After the Effective Date, the
Company will cause the Surviving Corporation to pay its statutory obligations to
holders of Dissenting Shares; provided, however, that PointeCom will be solely
responsible for such payments to the holders of Dissenting Shares and the
Company will not contribute funds nor loan funds to PointeCom in connection with
such payments.
3.4. OTHER POINTECOM SECURITIES. To the extent of any outstanding
warrants, options or other conversion or purchase rights (the "SURVIVING
SECURITIES") that have been issued by PointeCom or its Affiliates prior to the
Effective Time to purchase PointeCom Common Stock, the Company shall reserve
shares of Company Common Stock for future issuance upon exercise of the
Surviving Securities. At the Effective Time, by virtue of the Merger, and
without any action on the part of any holder of a Surviving Security, each
Surviving Security (a) may be exercised only for Company Common Stock
notwithstanding any contrary agreement or document relating to the Surviving
Securities or pursuant to which any Surviving Securities were issued, (b) each
such Surviving Security shall at the Effective Time become a right to acquire a
number of shares of Company Common Stock equal to the product arrived at by
multiplying the Exchange Ratio by the number of shares of PointeCom Common Stock
subject to such right immediately prior to the Effective Time and upon exercise,
conversion or purchase of the Surviving Securities cash shall be paid in lieu of
fractional shares of Company Common Stock in an amount based on the average
trading price for Company Common Stock during the twenty trading days that end
on the last trading day prior to the date of exercise, conversion or purchase
thereof less the exercise price thereof, and (c) the exercise price or purchase
price per share of Company Common Stock for which each such right (as exchanged)
is exercisable shall be the amount (rounded up the next whole cent) arrived at
by dividing the exercise price or purchase price per share of PointeCom Common
Stock at which such Surviving Security is exercisable immediately prior to the
Effective Time by the Exchange Ratio. At the Closing, each holder of a Surviving
Security shall furnish to the Company the certificates or other documents
representing his Surviving Security, duly endorsed in blank (or affidavits of
lost certificates and indemnification in lieu thereof) and the Company shall
deliver to each holder of a Surviving Security a Company warrant, option or
right with the same terms and conditions as such Surviving Security (except that
the number of shares of Company Common Stock issuable upon exercise thereof
shall be modified as set forth in this SECTION 3.4).
3.5. NEWCO SHARES. At the Effective Time, by virtue of the Merger and
without any action on the part of the Company as the sole holder of the capital
stock of Newco, each issued and outstanding share of common stock, par value
$0.01 per share, of Newco shall be converted in one share of common stock,
$0.00001 par value, of the Surviving Corporation.
3.6. DELIVERY OF MERGER CONSIDERATION. At the Closing, (a) each
stockholder of the PointeCom shall furnish to the Company the certificates
representing his PointeCom Common Stock and PointeCom Preferred Stock, duly
endorsed in blank by such stockholder or accompanied by duly executed blank
stock powers (or affidavits of lost certificates and indemnification in lieu
thereof), and (b) the Company shall deliver to each such stockholder a copy of
an irrevocable instruction letter to the Company's transfer agent directing that
certificates representing the shares of Company Common Stock and Company
Preferred Stock be delivered to each such stockholder pursuant to SECTION 3.1,
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other than as provided in SECTIONS 3.2 and 3.3 hereof. PointeCom agrees promptly
to use commercially reasonable efforts to cure any deficiencies with respect to
the endorsement of the certificates or other documents of conveyance with
respect to the PointeCom Common Stock and PointeCom Preferred Stock or with
respect to the stock powers accompanying such stock.
3.7. NO EFFECT ON CAPITAL STOCK OF COMPANY. Each share of the outstanding
capital stock of the Company issued and outstanding immediately prior to the
Effective Time shall remain outstanding and shall be unchanged after the Merger.
3.8. CLOSING OF TRANSFER RECORDS. After the Effective Time, no transfer
of shares of PointeCom Common Stock, or PointeCom Preferred Stock outstanding
prior to the Effective Time shall be made on the stock transfer books of the
Surviving Corporation. If, after the Effective Time, certificates representing
such shares are presented for transfer to the Exchange Agent, they shall be
canceled and exchanged for certificates representing shares of Company Common
Stock, Company Class D Convertible Senior Preferred Stock or Company Class E
Convertible Senior Preferred Stock, as the case may be, cash in lieu of
fractional shares, if any, and unpaid dividends and distributions, if any, as
provided in Section 3.1.
3.9. EFFECT ON TREASURY OR UNISSUED SHARES OF POINTECOM CAPITAL STOCK. As
of the Effective Time, by virtue of the Merger and without any action on the
part of the holder of any of the issued and outstanding shares of Company Common
Stock or PointeCom Common Stock, each unissued or treasury share of PointeCom
Common Stock, PointeCom Class A Preferred Stock and PointeCom Class B Preferred
Stock shall automatically be cancelled and retired and shall cease to exist, and
no consideration shall be delivered in exchange therefor.
3.10. RULE 16B-3. The Company and PointeCom shall take all steps as may
be required to cause the consummation of the transactions contemplated by this
Article III and any other disposition of PointeCom equity securities (including
derivative securities) or acquisitions of Company equity securities (including
derivative securities) in connection with this Agreement by each individual who
(x) is a director or officer of PointeCom or (y) at the Effective Time, will
become a director or officer of the Company, to be exempt under Rule 16b-3
promulgated under the 1934 Act, such steps to be taken in accordance with the
No-Action Letter dated January 12, 1999, issued by the SEC to Skadden, Arps,
Slate, Meagher & Flom LLP.
ARTICLE IV
CLOSING
The consummation of the Merger and delivery of the consideration described
in SECTION 3.6 hereof and the other transactions contemplated by this Agreement
(the "CLOSING") shall take place at the offices of Gardere & Wynne, 1000
Louisiana, Suite 3400, Houston, Texas 77002, not later than the third business
day after the date all conditions in Article VIII have been satisfied or waived
in writing, which Closing shall not be later than June 30, 2000, or at such
other location, time and date as PointeCom and the Company may mutually agree,
which date is herein referred to as the "CLOSING DATE."
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND NEWCO
A. The Company, on the one hand, and Newco, on the other hand, represent
and warrant to PointeCom as follows:
5.1. DUE ORGANIZATION AND QUALIFICATION. Each of the Company and Newco is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Texas and the NRS, respectively, and each has all corporate
power required to carry on its business as now conducted. Except as set forth in
SCHEDULE 5.1, each of the Company and Newco is qualified to do
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business as a foreign corporation in each jurisdiction where the character of
the property owned or leased by it or the nature of its activities makes such
qualification necessary, except for those jurisdictions where the failure to be
so qualified would not have a Material Adverse Effect on the Company or Newco.
Each of the Company and Newco has the requisite corporate power and corporate
authority to own, lease and operate its assets and properties and to carry on
its own business as such business is currently being conducted. Correct and
complete copies of all stock records and minute books of the Company and Newco
have been made available to PointeCom.
5.2. AUTHORIZATION; NON-CONTRAVENTION; APPROVALS.
(a) Each of the Company and Newco has the corporate power and corporate
authority to enter into each of the Transaction Documents to which each is a
party, and, subject to obtaining the hereinafter described approvals, to
consummate the transactions contemplated hereby, including issuance of the
Merger Consideration. The execution, delivery and performance by the Company and
Newco of each of the Transaction Documents to which it is party is subject to
the Requisite Stockholder Approval of the Company. Other than such stockholder
approval, no additional corporate proceedings on the part of the Company or
Newco are necessary to authorize the execution and delivery of each of the
Transaction Documents to which it is a party and the consummation of the
transactions contemplated hereby. Subject to obtaining the foregoing approvals,
each of the Transaction Documents to which it is a party has been duly and
validly executed and delivered by the Company and Newco and (assuming the due
authorization, execution and delivery by PointeCom, and that each Transaction
Document to which it is a party constitutes a valid and binding agreement of
PointeCom) constitutes valid and binding agreements of the Company and Newco in
accordance with its terms, except as the same may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar Laws now or
hereafter in effect, affecting the enforcement of creditors'rights generally and
general equitable principles regardless of whether such enforceability is
considered in a proceeding at law or in equity.
(b) Subject to obtaining the foregoing approvals, the execution and
delivery by each of the Company and Newco of each of the Transaction Documents
to which it is a party does not, and the consummation by the Company and Newco
of the transactions contemplated hereby will not (i) violate or result in a
breach of any provision of the Certificate of Incorporation or Bylaws of the
Company or Newco, (ii) assuming compliance with matters referred to in paragraph
(c) of this section, violate or result in a breach of any Laws applicable to the
Company or Newco or the properties or assets of either or (iii) violate or
result in a breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
or result in the termination of, or accelerate the performance required by, or
result in a right of termination or acceleration under, or result in the
creation of any Encumbrance upon any of the properties or assets of the Company
or Newco under any of the terms, conditions or provisions of, except as set
forth in SCHEDULE 5.2, any note, bond, mortgage, indenture, deed of trust,
license, franchise, permit, concession, lease or other instrument, obligation or
agreement of any kind to which the Company or Newco is now a party or by which
the Company or Newco or any of the properties or assets of either may be bound
or affected, except in the case of clauses (ii) and (iii), for any such
violation or breach that would not have a Material Adverse Effect on the Company
or Newco.
(c) Except for obtaining the foregoing approvals, the Merger Filing and
such filings as may be required under federal or state securities Laws, no
declaration, filing or registration with, or notice to, or authorization,
consent or approval of, any Governmental Authority or third party is necessary
for the execution and delivery of each of the Transaction Documents to which it
is a party by the Company and Newco or the consummation by the Company and Newco
of the transactions contemplated hereby. Except as set forth in SCHEDULE 5.2,
none of the agreements, licenses or permits to which the Company or Newco is a
party requires notice to, or the consent or approval of any third party for the
execution and delivery of each of the Transaction Documents to which it is a
party by each of the Company and Newco and the consummation of the transactions
contemplated hereby.
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5.3. COMPANY COMMON STOCK.
The shares of Company Common Stock, and Company Preferred Stock to be
issued to the stockholders of PointeCom pursuant to the Merger (including upon
exercise of the Surviving Securities), when authorized and issued in accordance
with the terms of this Agreement, will be validly issued, fully paid and
nonassessable and not subject to any preemptive rights.
5.4. TAX-FREE REORGANIZATION REPRESENTATIONS.
(a) The fair market value of the Company capital stock received by each
PointeCom shareholder pursuant to this Agreement will be approximately equal to
the fair market value of the PointeCom capital stock surrendered in the
exchange.
(b) The Company has no plan or intention to cause PointeCom to issue
additional shares of PointeCom stock that would result in the Company losing
control of PointeCom within the meaning of Section 368 (c) of the Code.
(c) The Company has no plan or intention to liquidate PointeCom; to merge
PointeCom into another corporation (except as contemplated by this Agreement);
to cause PointeCom to sell or otherwise dispose of any of its assets, except for
dispositions made in the ordinary course of business; or to sell or otherwise
dispose of any of the stock acquired in the transaction, except for transfers
described in Section 368 (a)(2)(C) of the Code.
(d) The Company has no plan or intention to reacquire any of its stock
issued in the Merger.
(e) The Company, PointeCom, and the shareholders of PointeCom will pay
their respective expenses, if any, incurred in connection with the transaction.
(f) The Company will acquire PointeCom capital stock solely in exchange
for Company voting stock. (For purposes of this representation, PointeCom
capital stock redeemed for cash or other property furnished by the Company will
be considered as acquired by the Company.) Further, no liabilities of PointeCom
or the PointeCom shareholders will be assumed by the Company, nor will any of
the PointeCom capital stock that is exchanged pursuant to this Agreement be
subject to any liabilities.
(g) The Company does not own, directly or indirectly, nor has it owned
during the past five years, directly or indirectly, any stock of PointeCom.
(h) Following the Merger, the Company shall cause PointeCom to continue
its historic business or use a significant portion of its historic business
assets in a business.
(i) Neither the Company nor Newco are investment companies as defined in
Section 368 (a)(2)(F)(iii) and (iv) of the Code.
(j) The Company shall cause PointeCom to pay any dissenting shareholders
the value of their stock out of PointeCom funds, no funds will be supplied for
that purpose, directly or indirectly, by the Company, nor will the Company
directly or indirectly reimburse PointeCom for any payments to dissenters.
(k) There is no indebtedness between the Company and PointeCom that will
be settled at a discount.
(l) The holders of PointeCom Common Stock and PointeCom Preferred Stock
will receive voting shares of Company Common Stock and voting shares of Company
Preferred Stock having a fair market value equal to at least 50% of the value of
their PointeCom capital stock at the Effective Time. Under the terms of the
Merger, the stockholders of PointeCom will receive solely Company Common Stock
and Company Preferred Stock in exchange for such PointeCom capital stock.
However, redemptions or acquisitions of PointeCom capital stock by the Company
or PointeCom or any related party and extraordinary distributions (i.e.,
distributions with respect to stock other that regular, normal dividends), prior
to and in connection with the Merger will be taken into account for purposes of
this representation. Neither the Company nor a related party has a plan or
intention to
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reacquire or acquire any of the Company Common Stock or Company Preferred Stock
issued to PointeCom stockholders in the Merger. For purposes of this
representation, a "RELATED PARTY" includes any corporation (i) that is a
member of any affiliated group of which PointeCom or the Company is a member, as
defined in Section 1504 (determined without regard to Section 1504(b)), or (ii)
a corporation in which the Company owns, directly or indirectly, stock
possessing at least fifty percent (50%) of the total combined voting power of
all classes of stock entitled to vote, or at least fifty percent (50%) of the
total value of shares of all classes of stock (determined by taking into account
the constructive stock ownership rules of Section 318(a) of the Code as modified
by Section 304(c)). For purposes of the foregoing, (i) a corporation will be a
related party if either of the relationships described above exists immediately
before the Merger, immediately after the Merger, or is created in connection
with the Merger, and (ii) a related party will be considered as acquiring its
proportionate share of any Company Common Stock or Company Preferred Stock
acquired by a partnership in which it is a partner.
(m) The payment of cash in lieu of fractional shares of Company Common
Stock is solely for the purpose of avoiding the expense and inconvenience to the
Company of issuing fractional shares and does not represent separately
bargained-for consideration. The total cash consideration that will be paid in
the Merger to the PointeCom stockholders instead of issuing fractional shares of
Company Common Stock will not exceed one percent (1%) of the total consideration
that will be issued in the Merger to the PointeCom stockholders in exchange for
their shares of PointeCom capital stock. The fractional shares interests of each
PointeCom stockholder will be aggregated, and no PointeCom stockholder will
receive cash in an amount greater to or greater than the value of one full share
of Company Common Stock.
(n) None of the compensation received by any shareholder-employee of
PointeCom will be separate consideration for, or allocable to, any of their
shares of PointeCom capital stock; none of the shares of Company Common Stock or
Company Preferred Stock received by any shareholder-employee will be separate
consideration for, or allocable to, any employment agreement; and the
compensation paid to any shareholder-employee will be for services actually
rendered and will be commensurate with amounts paid to third parties bargaining
at arm's length for similar services.
(o) Company is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
5.5. SEC FILINGS; DISCLOSURE. The Company has filed with the SEC all
material forms, statements, reports and documents required to be filed by it
prior to the date hereof under each of the 1933 Act, the 1934 Act, and the
respective rules and regulations thereunder, (a) all of which, as amended, if
applicable, complied when filed in all material respects with all applicable
requirements of the appropriate Act and the rules and regulations thereunder,
and (b) none of which, as amended, if applicable, contains any untrue statement
of material fact or omits to state a material fact required to be stated therein
or necessary in order to make the statements made therein, in the light of the
circumstances under which they were made and at the time they were made, not
misleading. The financial statements of the Company included in the Company's
annual report on Form 10-KSB for the fiscal year ended December 31, 1998 and
Form 10-Q for the fiscal quarter ended September 30, 1999, comply as to form in
all material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto, have been prepared in
accordance with GAAP, applied on a consistent basis during the period covered
and fairly represent, in all material respects, the financial position of the
Company as of the date thereof and the results of operations and changes in
financial position for the period then ended. The Company is eligible to file a
registration statement on Form S-4 covering the Merger Consideration to be
issued pursuant to this Agreement.
5.6. INTERIM OPERATIONS OF NEWCO. Newco was formed solely for the purpose
of engaging in the transactions contemplated by this Agreement, has engaged, and
will engage, in no other business activities and has, and will continue to have,
no debt outstanding. The authorized capital stock of
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Newco consists solely of 10,000 shares of common stock, par value $0.01 per
share ("NEWCO COMMON STOCK), of which 100 shares are issued and outstanding.
All of the issued and outstanding shares of Newco Common Stock have been duly
authorized and validly issued, are fully paid and nonassessable. All of the
issued and outstanding shares of Newco Common Stock are owned by the Company,
and the Company has not entered into any agreements or arrangements to sell or
transfer such stock to a third party.
5.7. CAPITALIZATION. The authorized, issued and outstanding capital stock
of the Company is set forth on SCHEDULE 5.7. All of the issued and outstanding
shares of Company Common Stock have been duly authorized and validly issued, are
fully paid and nonassessable, and were offered, issued, sold and delivered by
the Company in compliance with all applicable Laws, including, without
limitation, those Laws concerning the issuance of securities. None of such
shares were issued in violation of the preemptive rights of any past or present
stockholders. Except as set forth in SCHEDULE 5.7, no subscription, option,
warrant, call, convertible or exchangeable security, other conversion right or
commitment of any kind exists which obligates the Company to issue any of its
capital stock.
5.8. SUBSIDIARIES. Except as set forth in SCHEDULE 5.8, the Company owns,
of record or beneficially, or controls, directly or indirectly, no capital
stock, securities convertible into or exchangeable for capital stock or any
other equity interest in any corporation, association or other business entity.
Except as set forth in SCHEDULE 5.8, the Company is not, directly or indirectly,
a participant in any joint venture, limited liability company, partnership or
other noncorporate entity.
5.9. FINANCIAL STATEMENTS.
(a) The Company has delivered to PointeCom complete copies of the
following financial statements:
(i) the audited balance sheets of the Company as of December 31,
1996, 1997 and 1998 and the related audited statements of
income, stockholders' equity and cash flows for the three
annual periods ended December 31, 1998, together with the
related notes, schedules and audit report of the Company's
independent accountants (such balance sheets and the related
statements of income and the related notes and schedules are
referred to herein as the "YEAR-END FINANCIAL STATEMENTS");
and;
(ii) the unaudited balance sheet (the "INTERIM BALANCE SHEET") of
the Company as of September 30, 1999 (the "BALANCE SHEET
DATE") and the related unaudited statement of operations for
the interim period ended on the Balance Sheet Date, together
with the related notes and schedules (such balance sheets, the
related statements of income and the related notes and
schedules are referred to herein as the "INTERIM FINANCIAL
STATEMENTS"). The Year-End Financial Statements and the
Interim Financial Statements (collectively, the "FINANCIAL
STATEMENTS") are attached as SCHEDULE 5.9 to this Agreement.
(b) Except as set forth in SCHEDULE 5.9, the Financial Statements have
been or will be prepared from the books and records of the Company in conformity
with GAAP (except for the absence of notes in the Interim Financial Statements
and that the Interim Financial Statements are subject to year-end audit
adjustments, none of which are expected to be material) and will present fairly
in all material respects the financial position and results of operations of the
Company as of the dates of such statements and for the periods covered thereby.
The books of account of the Company have been kept accurately in all material
respects in the ordinary course of business, the transactions entered therein
represent bona fide transactions, and the revenues, expenses, assets and
liabilities of the Company have been properly recorded therein in all material
respects.
5.10. LIABILITIES AND OBLIGATIONS. Except as set forth in SCHEDULE 5.10,
as of the Balance Sheet Date the Company did not have, nor has it incurred since
that date, any liabilities or obligations (whether absolute, accrued, contingent
or otherwise) of any nature which would have a Material Adverse Effect on the
Company, except (a) liabilities, obligations or contingencies (i) that are
accrued
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or reserved against in the Financial Statements or reflected in the notes
thereto or (ii) that were incurred after the Balance Sheet Date and were
incurred in the ordinary course of business, consistent with past practices, and
(b) liabilities and obligations that are of a nature not required to be
reflected in the Financial Statements prepared in accordance with GAAP and that
were incurred in the normal course of business, which material liabilities and
obligations are described in SCHEDULE 5.10 or another Schedule hereto. SCHEDULE
5.10 sets forth the Company's outstanding principal amount of indebtedness for
borrowed money (including overdrafts) as of November 30, 1999.
5.11. ACCOUNTS AND NOTES RECEIVABLE. SCHEDULE 5.11 sets forth an accurate
list of the accounts and notes receivable of the Company as of the Balance Sheet
Date. Receivables from and advances to employees are separately identified in
SCHEDULE 5.11. SCHEDULE 5.11 also sets forth an accurate aging of all accounts
and notes receivable as of the Balance Sheet Date, showing amounts due in 30-day
aging categories. The trade and other accounts receivable of the Company,
including without limitation those classified as current assets on the Interim
Balance Sheet, are bona fide receivables, were acquired in the ordinary course
of business, are stated in accordance with GAAP and are collectible in the
amounts shown on SCHEDULE 5.11, net of reserves reflected in the Interim
Financial Statements with respect to the accounts receivable as of the Balance
Sheet Date, and net of reserves reflected in the books and records of the
Company (consistent with the methods used in the Interim Financial Statements)
with respect to receivables of the Company after the Balance Sheet Date.
5.12. ASSETS.
(a) SCHEDULE 5.12 sets forth an accurate list of all real and personal
property included in "property and equipment" on the Interim Balance Sheet and
all other tangible assets of the Company with a book value in excess of $10,000
acquired since the Balance Sheet Date. The Company shall make available to
PointeCom true, complete and correct copies of leases for significant equipment
and for all real property leased by the Company. SCHEDULE 5.12 indicates which
assets used in the operation of the businesses of the Company are currently
owned by Affiliates of the Company. Except as specifically identified in
SCHEDULE 5.12, all of the material tangible assets, vehicles and other
significant machinery and equipment of the Company listed in SCHEDULE 5.12 are
in sufficient condition for the conduct of the Company's business. Except as
specifically described in SCHEDULE 5.12, all material fixed assets used by the
Company in its business are either owned by the Company or leased under
agreements identified in SCHEDULE 5.12. All material leases set forth in
SCHEDULE 5.12 are in full force and effect and constitute valid and binding
agreements of the Company or Newco as applicable, and to the knowledge of the
Company, the other parties thereto in accordance with their respective terms.
SCHEDULE 5.12 contains true, complete and correct copies of all title reports
and title insurance policies received or owned by the Company.
(b) The Company has good and marketable title to, or valid leasehold
interests in, the tangible and intangible personal property owned by it and used
in its business, including the properties identified in SCHEDULE 5.12 as owned
real property, free and clear of all Encumbrances other than Permitted
Encumbrances and those set forth in Schedule 5.12.
(c) Except as specifically described in SCHEDULE 5.12, the tangible and
intangible assets owned or leased by the Company include all the material assets
used in the operation of the business of the Company as conducted at the Interim
Balance Sheet Date, except for dispositions of such assets since such date in
the ordinary course of business, consistent with past practices.
5.13. MATERIAL CUSTOMERS AND CONTRACTS.
(a) SCHEDULE 5.13 sets forth an accurate list of (i) all customers
representing 10% or more of the Company's revenues for the fiscal year ended
December 31, 1998 or the interim period ended on the Balance Sheet Date (the
"MATERIAL CUSTOMERS"), and (ii) all material executory contracts, warranties,
commitments and similar agreements to which the Company is currently a party or
by which it or any of its properties is bound, involving, (A) customer contracts
in excess of $100,000, including, without
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limitation, consignment contracts, (B) contracts with any labor organizations,
(C) leases providing for annual rental payments in excess of $100,000, (D) loan
agreements, (E) pledge and security agreements, (F) indemnity or guaranty
agreements or obligations, (G) bonds, (H) notes, (I) mortgages, (J) joint
venture or partnership agreements, (K) options to purchase real or personal
property, and (L) agreements relating to the purchase or sale by the Company of
assets (other than oral agreements relating to sales of inventory or services in
the ordinary course of business, consistent with past practices) or securities
for more than $100,000, individually. Prior to the date hereof, the Company has
made available to PointeCom complete and correct copies of all such agreements.
(b) Except to the extent set forth in SCHEDULE 5.13, since the Balance
Sheet Date, (i) no Material Customer has canceled or substantially reduced or,
to the knowledge of the Company, intends to cancel or substantially reduce its
purchases of the Company's products or services; and (ii) the Company is in
compliance with all material commitments and obligations pertaining to it under
such agreements and is not in material default under any of the agreements
described in subsection (a), no notice of default has been received by the
Company, and to the knowledge of the Company, there is no event which, with
notice or the passage of time or both, would result in a default under any of
the agreements described in subsection (a), in any case where such non
compliance or default would have a Material Adverse Effect on the Company.
(c) Except to the extent set forth in SCHEDULE 5.13, the Company is not a
party to any governmental contracts subject to price redetermination or
renegotiation. Except to the extent set forth in SCHEDULE 5.13, the Company is
not required to provide any bonding or other financial security arrangements in
any amount in connection with any transactions with any of its customers or
suppliers, the failure of which would have a Material Adverse Effect on the
Company.
5.14. PERMITS. Except as set forth on SCHEDULE 5.14, the Company has all
franchises, permits, licenses and any other governmental authority necessary for
the conduct of its business as now being conducted, the lack of which would have
a Material Adverse Effect (the "COMPANY PERMITS"). The Company Permits are
valid, and the Company has not received any written notice that any Governmental
Authority intends to cancel, terminate or not renew any such Permit. The Company
Permits are all the permits that are required by Law for the operation of the
business of the Company as conducted at the Balance Sheet Date and the ownership
of the assets of the Company, except such Company Permits, which the failure to
possess would not have a Material Adverse Effect on the Company. The Company has
conducted and is conducting its business in substantial compliance with the
Company Permits and is not in violation of any of the foregoing, except for any
violations that individually or in the aggregate do not have a Material Adverse
Effect on the Company. Except as specifically provided in SCHEDULE 5.14, the
transactions contemplated by this Agreement will not result in a default under
or a breach or violation of, or adversely affect the rights and benefits
afforded to the Company by, any Company Permits except for breaches or
violations that would not have a Material Adverse Effect on the Company.
5.15. ENVIRONMENTAL MATTERS. Except as set forth in SCHEDULE 5.15 and
except for such matters as would not have a Material Adverse Effect on the
Company, (a) the Company has complied with and is in compliance, in all material
respects, with all Environmental, Health and Safety Laws, including, without
limitation, Environmental, Health and Safety Laws relating to air, water, land
and the generation, storage, use, handling, transportation, treatment or
disposal of Hazardous Substances; (b) the Company has obtained and complied, in
all material respects, with all necessary permits and other approvals necessary
to treat, transport, store, dispose of and otherwise handle Hazardous Substances
and has reported, to the extent required by all Environmental, Health and Safety
Laws, all past and present sites owned or operated by the Company where
Hazardous Substances have been treated, stored, disposed of or otherwise
handled; (c) to the Company's knowledge, there have been no "releases" or
threats of "releases" (as defined in any Environmental, Health and Safety
Laws) at, from, in or on any property owned or operated by the Company; (d) to
the Company's knowledge, there is no on-site or off-site location to which the
Company has transported or disposed of Hazardous
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Substances or arranged for the transportation or disposal of Hazardous
Substances which is the subject of any federal, state, local or foreign
enforcement action or any other investigation which could lead to any claim
against the Surviving Corporation, PointeCom or Newco for any clean-up cost,
remedial work, damage to natural resources or personal injury, including, but
not limited to, any claim under (i) the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, (ii) the Resource
Conservation and Recovery Act, (iii) the Hazardous Materials Transportation Act,
or (iv) comparable state and local statutes and regulations; and (e) to the
Company's knowledge, the Company has no contingent liability in connection with
any release or disposal of any Hazardous Substance into the environment. To the
Company's knowledge, none of the past or present sites owned or operated by the
Company is currently or has ever been designated as a treatment, storage and/or
disposal facility, nor has any such facility ever applied for a Permit
designating it as a treatment, storage and/or disposal facility, under any
Environmental, Health or Safety Law.
5.16. LABOR AND EMPLOYEE RELATIONS. Except as set forth in SCHEDULE 5.16,
the Company is not bound by or subject to any arrangement with any labor union.
Except as set forth in SCHEDULE 5.16, no employees of the Company are
represented by any labor union or covered by any collective bargaining agreement
nor, to the Company's knowledge, is any campaign to establish such
representation in progress. There is no pending or, to the Company's knowledge,
threatened labor dispute involving the Company and any group of its employees
nor has the Company experienced any significant labor interruptions over the
past five years.
5.17. INSURANCE. SCHEDULE 5.17 sets forth an accurate list as of the
Balance Sheet Date of all insurance policies that are material to the Company.
The policies described in such SCHEDULE 5.17 for the current policy year are
currently in full force and effect and, to the knowledge of the Company, no
defaults exist under any of them.
5.18. COMPENSATION; EMPLOYMENT AGREEMENTS. The Company has provided
PointeCom with an accurate written list of all officers, directors and employees
of the Company with annual salaries of $100,000 or more, listing the rate of
compensation (and the portions thereof attributable to salary, bonus, benefits
and other compensation, respectively) of each of such persons as of (a) the
Balance Sheet Date and (b) the date hereof. The Company shall make available to
PointeCom true, complete and correct copies of each employment or consulting
agreement with any employee of the Company. Except as disclosed on SCHEDULE
5.18, the Company is not a party to or bound by, with respect to any officer,
employee or independent contractor of the Company, any (i) employment,
termination or severance agreement, (ii) agreement (A) the benefits of which are
contingent, or the terms of which are materially altered, upon the occurrence of
a transaction involving the Company of the nature of any of the transactions
contemplated by this Agreement, (B) providing any term of employment or
compensation guarantee extending for a period of one year or longer or (C)
providing severance benefits or other benefits after the termination of
employment not comparable to benefits available to employees generally, (iii)
agreement, plan or arrangement under which any person may receive payments that
may be subject to the tax imposed by Section 4999 of the Code or included in the
determination of such person's "parachute payment" under Section 280G of the
Code and (iv) agreement or plan, including any stock option plan or stock
purchase plan, any of the benefits of which will be increased, or the vesting or
other realization of the benefits of which will be accelerated, by the
occurrence of the transactions contemplated by this Agreement or the value of
any of the benefits of which will be calculated on the basis of or otherwise
affected by the transactions contemplated by this Agreement.
5.19. NONCOMPETITION AND NONSOLICITATION AGREEMENTS. SCHEDULE 5.19 sets
forth all agreements containing covenants not to compete or solicit employees to
which the Company is bound or under which the Company has any material rights or
obligations.
5.20. EMPLOYEE BENEFIT PLANS.
(a) SCHEDULE 5.20 sets forth an accurate schedule of each "EMPLOYEE
BENEFIT PLAN," as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and
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all nonqualified deferred compensation arrangements, whether formal or informal
and whether legally binding or not, under which the Company or an ERISA
Affiliate has any current or future obligation or liability or under which any
present or former employee of the Company or an ERISA Affiliate, or such present
or former employee's dependents or beneficiaries, has any current or future
right to benefits (each such plan and arrangement referred to hereinafter as a
"Plan"), and the Company has provided or made available to PointeCom true and
complete copies of such Plans, any trusts and other arrangements related
thereto, and classifications of employees covered thereby as of the Balance
Sheet Date. Except as set forth in SCHEDULE 5.20, neither the Company nor any
ERISA Affiliate sponsors, maintains or is obligated to contribute currently, or
at any time during the preceding five years, has sponsored, maintained or was
obligated to contribute to, any plan, program, fund or arrangement that
constitutes an employee pension benefit plan as defined in Section 3(2) of ERISA
that is subject to Title IV of ERISA. Each Plan may be terminated by the
Company, or if applicable, by an ERISA Affiliate at any time without any
liability, cost or expense, other than costs and expenses that are customary in
connection with the termination of a Plan. For purposes of this Agreement, the
term ERISA Affiliate" means any corporation or trade or business which is, or
ever was, treated as a single employer with the Company under Section 414(b),
(c), (m) or (o) of the Code.
(b) Except as set forth on SCHEDULE 5.20(B), each Plan listed in SCHEDULE
5.20 is in compliance in all material respects with its own terms and the
applicable provisions of ERISA, the Code, and any other applicable Law. Except
as set forth in SCHEDULE 5.20, with respect to each Plan of the Company and each
ERISA Affiliate (other than a "MULTIEMPLOYER PLAN", as defined in Section
4001(a)(3) of ERISA), all reports and other documents required under ERISA or
other applicable Law to be filed with any Governmental Authority, the failure of
which to file could reasonably be expected to result in a material liability to
the Company or any ERISA Affiliate, including all Forms 5500 or required to be
distributed to participants or beneficiaries, have been duly and timely filed or
distributed. True and complete copies of all such reports and other documents
with respect to the past three years (if applicable) for each Plan have been
provided to, or made available to, PointeCom. No "ACCUMULATED FUNDING
DEFICIENCY" (as defined in Section 412(a) of the Code) with respect to any Plan
has been incurred (without regard to any waiver granted under Section 412 of the
Code), nor has any funding waiver from the Internal Revenue Service been
received or requested. Except as set forth in SCHEDULE 5.20, each Plan that is
intended to be "qualified" within the meaning of Section 401(a) of the Code (a
"QUALIFIED PLAN") IS, AND HAS BEEN DURING THE PERIOD FROM ITS ADOPTION TO THE
DATE HEREOF, SO QUALIFIED, BOTH AS TO FORM AND OPERATION AND ALL NECESSARY
APPROVALS OF GOVERNMENTAL AUTHORITIES HAVE BEEN TIMELY OBTAINED. EXCEPT AS SET
FORTH IN SCHEDULE 5.20, all accrued contribution obligations, and any other
liability to pay benefits, of the Company with respect to any Plan have either
been fulfilled in their entirety or are fully reflected in the Financial
Statements.
(c) Except as set forth in SCHEDULE 5.20(C), no Plan has incurred or is
reasonably likely to incur, and neither the Company nor any ERISA Affiliate has
incurred or is reasonably likely to incur with respect to any Plan, any
liability for excise tax or penalty due to the Internal Revenue Service or any
other governmental authority, and no Plan termination or discontinuance of
contributions to any Plan has resulted in or is reasonably likely to result in
the retroactive disqualification of any Plan "qualified" under Section 401(a)
of the Code or has resulted in or is reasonably likely to result in any
liability to the Company or any ERISA Affiliate. There have been no
terminations, partial terminations or discontinuances of contributions by the
Company or any ERISA Affiliate to any Qualified Plan during the preceding five
years.
(d) Except as set forth in SCHEDULE 5.20(D), neither the Company nor any
ERISA Affiliate has made any promises of retirement or other benefits to
employees, except as set forth in the Plans, and neither the Company nor any
ERISA Affiliate maintains or has established any arrangement for retiree medical
liabilities or any Plan that is a "WELFARE BENEFIT PLAN" within the meaning of
Section 3(1) of ERISA that provides for continuing benefits or coverage for any
participant or any beneficiary of a participant after such participant's
termination of employment, except as may be required by Part 6 of Subtitle B of
Title I of ERISA and Section 4980B of the Code and similar state Law provisions.
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Except as set forth in SCHEDULE 5.16(D), neither the Company nor any ERISA
Affiliate maintains, has established or has ever participated in a "welfare
benefit fund" as defined in Section 419(e) of the Code, a multiple employer
welfare benefit arrangement as described in Section 3(40)(A) of ERISA or a
welfare benefit plan, within said meaning, which provides benefits other than
through insurance policies. Except as set forth in SCHEDULE 5.16, neither the
Company nor any ERISA Affiliate has any current or future obligation or
liability with respect to a Plan pursuant to the provisions of a collective
bargaining agreement.
(e) Except as set forth in SCHEDULE 5.20(E), neither the Company nor any
ERISA Affiliate has incurred any material liability to the Pension Benefit
Guaranty Corporation in connection with any Plan. The assets of each Plan that
is subject to Title IV of ERISA are sufficient to provide the benefits under
such Plan, the payment of which the Pension Benefit Guaranty Corporation would
guarantee in full if such Plan were terminated, and such assets are also
sufficient to provide all other "BENEFITS LIABILITIES" (as defined in ERISA
Section 4001(a)(16)) due under such Plan upon termination.
(f) Except as set forth in SCHEDULE 5.20(F), no "REPORTABLE EVENT" (as
defined in Section 4043 of ERISA) has occurred and is continuing with respect to
any Plan. There are no pending, or to the Company's knowledge, threatened
claims, lawsuits or actions (other than routine claims for benefits in the
ordinary course) asserted or instituted against, and the Company has no
knowledge of any threatened litigation or claims against, the assets of any Plan
or its related trust or against any fiduciary of a Plan with respect to the
operation of such Plan. To the Company's knowledge, there are no investigations
or audits of any Plan by any Governmental Authority currently pending and there
have been no such investigations or audits that have been concluded that
resulted in any liability to the Company or any ERISA Affiliate that has not
been fully discharged. Neither the Company nor any ERISA Affiliate has
participated in any voluntary compliance or closing agreement programs
established with respect to the form or operation of a Plan.
(g) Neither the Company nor any ERISA Affiliate has engaged in, and no
Plan has otherwise been involved in, any prohibited transaction, within the
meaning of Section 406 of ERISA or Section 4975 of the Code, for which exemption
was not available. No fiduciary of any Plan is in violation of any duty imposed
by ERISA. Except as set forth in SCHEDULE 5.20(G), neither the Company nor any
ERISA Affiliate is, or ever has been, a participant in or is obligated to make
any payment to a multiemployer plan, or to a multiple employer plan described in
Section 413(c) of the Code. To the Company's knowledge, no person or entity that
was engaged by the Company or an ERISA Affiliate as an independent contractor
within the last five years reasonably can or will be characterized or deemed to
be an employee of the Company or an ERISA Affiliate under applicable Laws for
any purpose whatsoever, including, without limitation, for purposes of federal,
state and local income taxation, workers'compensation and unemployment insurance
and Plan eligibility.
5.21. LITIGATION AND COMPLIANCE WITH LAW. Except as set forth in SCHEDULE
5.21, THERE ARE NO ACTIONS, SUITS OR PROCEEDINGS, PENDING (OF WHICH THE COMPANY
HAS RECEIVED NOTICE OR WITH RESPECT TO WHICH SERVED WITH PROCESS) OR, TO THE
KNOWLEDGE OF THE COMPANY THREATENED AGAINST THE COMPANY, AT LAW OR IN EQUITY, OR
BEFORE OR BY ANY GOVERNMENTAL AUTHORITY HAVING JURISDICTION OVER THE COMPANY. NO
WRITTEN NOTICE OF ANY CLAIM, ACTION, SUIT OR PROCEEDING, WHETHER PENDING OR
THREATENED, HAS BEEN RECEIVED BY THE COMPANY. EXCEPT TO THE EXTENT SET FORTH IN
SCHEDULE 5.21, the Company has conducted and is conducting its business in
compliance with all Laws applicable to the Company, its assets or the operation
of its business, except such non-compliance that would not have a Material
Adverse Effect on the Company.
5.22. TAXES. For purposes of this Agreement, the term "TAXES" shall
mean all taxes, charges, fees, levies or other assessments including, without
limitation, income, gross receipts, excise, property, sales, withholding, social
security, unemployment, occupation, use, service, service use, license, payroll,
franchise, transfer and recording taxes, fees and charges, imposed by the United
States or any state, local or foreign government or subdivision or agency
thereof, whether computed on a separate,
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consolidated, unitary, combined or any other basis; and such term shall include
any interest, fines, penalties or additional amounts attributable to or imposed
with respect to any such taxes, charges, fees, levies or other assessments. The
Each of the Company and its Subsidiaries has filed all federal, state, local and
other Tax returns it was required to file, and has duly paid in full or made
adequate provision in its books and records for the payment of all Taxes it was
required to pay, except to the extent that such failure to pay or reserve would
not have a Material Adverse Effect on the Company or its Subsidiaries. All such
tax returns were correct and complete in all material respects. Neither the
Company nor its Subsidiaries is currently the beneficiary of any extension of
time within which to file any tax return. Each of the Company and its
Subsidiaries has duly withheld and paid or remitted all Taxes required to have
been withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, shareholder or other person or entity that
required withholding under any applicable Law, including, without limitation,
any amounts required to be withheld or collected with respect to social
security, unemployment compensation, sales or use taxes or workers'
compensation, except where such failure to withhold or pay would not have a
Material Adverse Effect on the Company or its Subsidiaries. Except as set forth
in SCHEDULE 5.22, there are no examinations in progress or material claims
against the Company or its Subsidiaries relating to Taxes for any period or
periods prior to and including the Balance Sheet Date and no written notice of
any claim for Taxes, whether pending or threatened, has been received which
claim has not been finally settled. Neither the Company nor its Subsidiaries has
granted or been requested to grant any extension of the limitation period not
yet closed or agreed to any extension of time applicable to any claim for Taxes
which still is in effect or assessments with respect to Taxes and has not
executed a closing agreement pursuant to Section 7121 of the Code, or any
predecessor provision thereof or any similar provision of state, local, foreign
or other tax law that relates to the assets or operations of the Company or its
Subsidiaries which still is in effect. Neither the Company nor its Subsidiaries
is a party to any Tax allocation or sharing agreement. The Company has never
been (nor has any liability for Taxes because it once was) a member of an
affiliated group filing a consolidated federal income tax return, other than
with respect to the consolidated federal income tax returns of the Company and
its Subsidiaries, has not incurred any liability for the Taxes of any person
under Treasury Regulations s1.1502-6 (or any similar provision of law) and has
never incurred any liability for the Taxes of any person as a transferee or
successor, by contract or otherwise. The unpaid Taxes of the Company and/or its
Subsidiaries (a) did not, as of the Balance Sheet Date, exceed any material
amount the amount shown as accrual for Taxes on the Interim Balance Sheet and
(b) will not exceed by any material amount that accrual as adjusted for
operation and transactions of the Company or its Subsidiaries through the
Closing Date in accordance with the past custom and practice of the Company in
filing its tax returns. True and complete copies of (a) any tax examinations and
statements of deficiencies, (b) extensions of statutory limitations and (c) the
federal, state and local Tax returns of the Company and its Subsidiaries for the
last three fiscal years have been previously provided to PointeCom. There are no
requests for ruling in respect of any Tax pending between the Company or its
Subsidiaries and any Taxing authority. Except with respect to MSN
Communications, Inc., neither the Company nor its subsidiaries has ever been
taxed under the provisions of Subchapter S of the Code. The Company and its
Subsidiaries currently utilize the accrual method of accounting for income tax
purposes; and such method of accounting has not changed in the past three years.
No written notice has been received from any Tax authority in any jurisdiction
in which the Company or its Subsidiaries does not file tax returns that it is or
may be subject to taxation by that jurisdiction. There are no security interests
or liens for Taxes on any asset of the Company or its Subsidiaries, except for
Permitted Encumbrances. Neither the Company nor its Subsidiaries has filed a
consent under section 341(f) of the Code concerning collapsible corporations and
neither the Company nor its Subsidiaries has been a United States real property
holding corporation within the meaning of Section 897(c)(2) of the Code at any
time during the applicable period set forth in Section 897(e)(1)(A)(ii) of the
Code. None of the assets and properties of the Company or its Subsidiaries
secures any indebtedness, the interest on which is tax-exempt under Section
103(a) of the Code or is an asset or property that the Company or any of its
affiliates is or will be required to treat as being (i) owned by
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any other person pursuant to the provisions of section 168(f)(8) of the Internal
Revenue Code of 1954, as amended, as in effect immediately before the enactment
of the Tax Reform Act of 1986, or (ii) tax-exempt use property within the
meaning of Section 168(h)(1) of the Code. Neither the Company nor its
Subsidiaries has made any payments, is not obligated to make any payments, and
is not a party to any agreement that under certain circumstances could require
it to make any payments, that would not be deductible by reason of the
application of Section 280G of the Code. The Company has not deferred any
taxable income associated with any inter-company transactions as defined under
the Regulations to Section 1502 of the Code.
5.23. ABSENCE OF CHANGES. Since the Balance Sheet Date, except as set
forth in SCHEDULE 5.23, the Company has conducted, in all material respects, its
operations in the ordinary course and there has not been:
(a) any material adverse change in the business, operations, properties,
condition (financial or other), assets, liabilities (contingent or otherwise) or
results of operations of the Company, individually or in the aggregate;
(b) any damage, destruction or loss (whether or not covered by insurance)
materially adversely affecting the properties or business of the Company,
individually or in the aggregate;
(c) except as contemplated by this Agreement or the transactions
contemplated hereby, any change in the authorized capital stock of the Company
or in its outstanding securities or any grant of any options, warrants, calls,
conversion rights or commitments;
(d) except as contemplated by this Agreement or the transactions
contemplated hereby, any declaration or payment of any dividend or distribution
in respect of the capital stock or any direct or indirect redemption, purchase
or other acquisition of any of the capital stock of the Company;
(e) any increase in the compensation payable or to become payable by the
Company to its stockholders or to any of its officers, directors, employees,
consultants or agents, except for ordinary and customary bonuses and salary
increases for employees in accordance with past practice, which bonuses and
salary increases are set forth in SCHEDULE 5.18;
(f) any material labor disputes, labor grievances or labor claims filed;
(g) except for the Merger and any disposition contemplated by Section
7.1(f), any sale or transfer, or any agreement to sell or transfer, any material
assets, properties or rights of the Company to any person;
(h) any cancellation, or agreement to cancel, any material indebtedness or
other material obligation owing to the Company;
(i) any increase in the indebtedness of the Company, other than the
PointeCom Loan and accounts payable incurred in the ordinary course of business,
consistent with past practices or incurred in connection with the transactions
contemplated by this Agreement;
(j) any plan, agreement or arrangement granting any preferential rights to
purchase or acquire any interest in any of the assets, property or rights of the
Company or requiring consent of any party to the transfer and assignment of any
such assets, property or rights;
(k) any purchase or acquisition of, or agreement, plan or arrangement to
purchase or acquire, any property, rights or assets outside of the ordinary
course of the Company's business;
(l) any waiver of any material rights or claims of the Company;
(m) any material breach, amendment or termination of any material
contract, agreement, Permit or other right to which the Company is a party or
any of its property is subject, except that which would not have a Material
Adverse Effect on the Company; or
(n) except for the transactions contemplated by this Agreement, any other
material transaction by the Company outside the ordinary course of business.
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5.24. ABSENCE OF CERTAIN BUSINESS PRACTICES. Neither the Company nor any
of its Affiliates on behalf of the Company has given or offered to give anything
of value to any governmental official, political party or candidate for
government office that was illegal to so offer or give nor has it otherwise
taken any action which would constitute a violation of the Foreign Corrupt
Practices Act of 1977, as amended, or any similar Law.
5.25. COMPETING LINES OF BUSINESS; RELATED-PARTY TRANSACTIONS. Except as
set forth in SCHEDULE 5.25, no officer, director or any other Affiliate of the
Company owns, directly or indirectly, any interest (other than up to five
percent (5%) of any class of securities listed on a national securities exchange
or traded publicly in the over-the-counter market) in, or is an officer,
director, employee or consultant of or otherwise receives remuneration from, any
business which is in a Competitive Business or is a competitor, lessor, lessee,
customer or supplier of the Company. Except as set forth in SCHEDULE 5.25, no
officer or director of the Company has any interest in any property, real or
personal, tangible or intangible, used in or pertaining to the business of the
Company.
5.26. INTANGIBLE PROPERTY. SCHEDULE 5.26 sets forth an accurate list of
all patents, patent applications, trademarks, service marks, technology,
licenses, trade names, copyrights and other intellectual property or proprietary
property rights owned or used by the Company, which are material to the conduct
of the Company's business. The Company owns or possesses sufficient legal rights
to use all of such items, except where failure to own or possess such rights
would not have a Material Adverse Effect on the Company.
5.27. DISCLOSURE. No representation or warranty of the Company or Newco
to PointeCom in this Agreement contains or will contain (at the time such
representation or warranty is repeated) any untrue statement of a material fact
or omits to state a material fact necessary in order to make the statements
herein, in light of the circumstances under which they were made, not
misleading.
5.28. YEAR 2000 COMPLIANCE. All devices, systems, machinery, information
technology, computer software and hardware, and other date sensitive technology
(jointly and severally its "SYSTEMS") owned by the Company and necessary for
the operation of the Company's business as presently conducted, will be Year
2000 Compliant within a period of time calculated to result in no material
disruption of any of its business operations, and any systems that are not
compliant will not have a Material Adverse Effect on the Company. For purposes
hereof, "Year 2000 Compliant" means that such systems are designed to be used
prior to, during and after the Gregorian calendar year 2000 A.D. and will
operate during each such time period substantially without error relating to
date data, specifically including any error relating to, or the product of, date
data which represents or references different centuries or more than one
century.
None of the representations and warranties of the Company and Newco shall
survive the Closing hereunder.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF POINTECOM
PointeCom represents and warrants to the Company and Newco as follows:
6.1. ORGANIZATION. PointeCom is a corporation duly organized, validly
existing and in good standing under the Laws of the State of Nevada, has all
corporate power required to carry on its business as now conducted and is duly
authorized and qualified under all applicable Laws to carry on its business in
the places and in the manner now conducted. Except as set forth in SCHEDULE 6.1,
PointeCom is qualified to do business as a foreign corporation in each
jurisdiction where the character of the property owned or leased by it or the
nature of its activities makes such qualification necessary, except for
jurisdiction where the failure to qualify would not have a Material Adverse
Effect on PointeCom. PointeCom has the requisite corporate power and corporate
authority to own, lease and operate its assets and properties and to carry on
its business as such business is currently being
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conducted. Correct and complete copies of all stock records and minute books of
PointeCom have been made available to the Company.
6.2. AUTHORIZATION; NON-CONTRAVENTION; APPROVALS.
(a) PointeCom has the corporate power and corporate authority to enter
into each of the Transaction Documents to which it is a party, and, subject to
obtaining the hereinafter described approvals, to consummate the transactions
contemplated hereby. The execution, delivery and performance of each of the
Transaction Documents to which it is party is subject to the Requisite
Stockholder Approval of PointeCom. Other than such board and shareholder
approval, no additional corporate proceedings on the part of PointeCom is
necessary to authorize the execution and delivery of each of the Transaction
Documents to which it is a party and the consummation of the transactions
contemplated hereby. Subject to obtaining the foregoing approvals, each of the
Transaction Documents to which it is a party has been duly and validly executed
and delivered by PointeCom and (assuming the due authorization, execution and
delivery by the Company and Newco, and each Transaction Document to which it is
a party constitutes a valid and binding agreement of the Company and Newco)
constitutes valid and binding agreements of PointeCom in accordance with its
terms, except as the same may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar Laws now or hereafter in effect, affecting
the enforcement of creditors' rights generally and general equitable principles
regardless of whether such enforceability is considered in a proceeding at law
or in equity.
(b) Subject to obtaining the foregoing approvals, the execution and
delivery of each of the Transaction Documents to which it is a party by
PointeCom do not, and the consummation by PointeCom of the transactions
contemplated hereby will not (i) violate or result in a breach of any provision
of the Certificate of Incorporation or Bylaws of the PointeCom, (ii) assuming
compliance with matters referred to in paragraph (c) of this section, violate or
result in a breach of any Laws applicable to PointeCom or its properties or
assets or (iii) violate or result in a breach of any provision of, or constitute
a default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration
under, or result in the creation of any Encumbrance upon any of the properties
or assets of PointeCom under any of the terms, conditions or provisions of,
except as set forth in SCHEDULE 6.2, any note, bond, mortgage, indenture, deed
of trust, license, franchise, permit, concession, lease or other instrument,
obligation or agreement of any kind to which the PointeCom is now a party or by
which any of its properties or assets may be bound or affected, except in the
case of clauses (ii) and (iii), for any such violation or breach that would not
have a Material Adverse Effect on PointeCom.
(c) Except for obtaining the foregoing approvals, the Merger Filing and
such filings as may be required under federal or state securities Laws, no
declaration, filing or registration with, or notice to, or authorization,
consent or approval of, any Governmental Authority or third party is necessary
for the execution and delivery of each of the Transaction Documents to which it
is a party by PointeCom or the consummation by PointeCom of the transactions
contemplated hereby. Except as set forth in SCHEDULE 6.2, none of the
agreements, licenses or permits to which the PointeCom is a party requires
notice to, or the consent or approval of any third party for the execution and
delivery of each of the Transaction Documents to which it is a party by
PointeCom and the consummation of the transactions contemplated hereby.
6.3. SEC FILINGS; DISCLOSURE. PointeCom has filed with the SEC all
material forms, statements, reports and documents required to be filed by it
prior to the date hereof under each of the 1933 Act, the 1934 Act, and the
respective rules and regulations thereunder, (a) except as set forth on SCHEDULE
6.3, all of which, as amended, if applicable, complied when filed in all
material respects with all applicable requirements of the appropriate Act and
the rules and regulations thereunder, and (b) none of which, as amended, if
applicable, contains any untrue statement of material fact or omits to state a
material fact required to be stated therein or necessary in order to make the
statements made
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therein, in the light of the circumstances under which they were made and at the
time they were made, not misleading. The financial statements of PointeCom
included in PointeCom's annual report on Form 10-KSB for the fiscal year ended
December 31, 1998 and Form 10-Q for the fiscal quarter ended September 30, 1999,
comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto, have been prepared in accordance with GAAP, applied on a consistent
basis during the period covered and fairly represent, in all material respects,
the financial position of PointeCom as of the date thereof and the results of
operations and changes in financial position for the period then ended.
6.4. CAPITALIZATION. The authorized, issued and outstanding capital stock
of PointeCom is set forth on SCHEDULE 6.4. All of the issued and outstanding
shares of PointeCom Common Stock have been duly authorized and validly issued
(except as set forth on Annex J to SCHEDULE 6.4), are fully paid and
nonassessable, and were offered, issued, sold and delivered by PointeCom in
compliance with all applicable Laws, including, without limitation, those Laws
concerning the issuance of securities. None of such shares were issued in
violation of the preemptive rights of any past or present stockholders. Except
as set forth in SCHEDULE 6.4, no subscription, option, warrant, call,
convertible or exchangeable security, other conversion right or commitment of
any kind exists which obligates PointeCom to issue any of its capital stock.
6.5. SUBSIDIARIES. Except as set forth in SCHEDULE 5, PointeCom owns, of
record or beneficially, or controls, directly or indirectly, no capital stock,
securities convertible into or exchangeable for capital stock or any other
equity interest in any corporation, association or other business entity. Except
as set forth in SCHEDULE 6.5, PointeCom is not, directly or indirectly, a
participant in any joint venture, limited liability company, partnership or
other noncorporate entity.
6.6. FINANCIAL STATEMENTS.
(a) PointeCom has delivered to the Company complete copies of the
following financial statements:
(i) the audited balance sheets of PointeCom as of December 31,
1996, 1997 and 1998 and the related audited statements of
income, stockholders'equity and cash flows for the three-year
period ended December 31, 1998, together with the related
notes, schedules and audit report of PointeCom's independent
accountants (such balance sheets and the related statements of
income and the related notes and schedules are referred to
herein as the "POINTECOM YEAR-END FINANCIAL STATEMENTS");
and;
(ii) the unaudited balance sheet (the "POINTECOM INTERIM BALANCE
SHEET") of PointeCom as of September 30, 1999 (the
"POINTECOM BALANCE SHEET DATE") and the related unaudited
statement of operations for the interim period ended on the
PointeCom Balance Sheet Date, together with the related notes
and schedules (such balance sheets, the related statements of
income and the related notes and schedules are referred to
herein as the "POINTECOM INTERIM FINANCIAL STATEMENTS"). The
PointeCom Year-End Financial Statements and the PointeCom
Interim Financial Statements (collectively, the "POINTECOM
FINANCIAL STATEMENTS") are attached as SCHEDULE 6.6 to this
Agreement.
(b) Except as set forth in SCHEDULE 6.6, the PointeCom Financial
Statements have been prepared from the books and records of PointeCom in
conformity with GAAP (except for the absence of notes in the Interim PointeCom
Financial Statements and that the Interim PointeCom Financial Statements are
subject to year-end audit adjustments, none of which are expected to be
material) and will present fairly in all material respects the financial
position and results of operations of PointeCom as of the dates of such
statements and for the periods covered thereby. The books of account of
PointeCom have been kept accurately in all material respects in the ordinary
course of business, the transactions entered therein represent bona fide
transactions, and the revenues, expenses, assets and liabilities of PointeCom
have been properly recorded therein in all material respects.
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6.7. LIABILITIES AND OBLIGATIONS. Except as set forth in SCHEDULE 6.7, as
of the PointeCom Balance Sheet Date, PointeCom did not have, nor has it incurred
since that date, any liabilities or obligations (whether absolute, accrued,
contingent or otherwise) of any nature which would have a Material Adverse
Effect on PointeCom, except (a) liabilities, obligations or contingencies (i)
that are accrued or reserved against in the PointeCom Financial Statements or
reflected in the notes thereto or (ii) that were incurred after the PointeCom
Balance Sheet Date and were incurred in the ordinary course of business,
consistent with past practices, and (b) liabilities and obligations that are of
a nature not required to be reflected in the PointeCom Financial Statements
prepared in accordance with GAAP and that were incurred in the normal course of
business, which material liabilities and obligations are described in SCHEDULE
6.7. SCHEDULE 6.7 sets forth PointeCom's outstanding principal amount of
indebtedness for borrowed money (including overdrafts) as of November 30, 1999.
6.8. ASSETS.
(a) SCHEDULE 6.8 sets forth an accurate list of all real and personal
property included in "property and equipment" on the PointeCom Interim Balance
Sheet and all other tangible assets of PointeCom with a book value in excess of
$10,000 acquired since the PointeCom Balance Sheet Date. PointeCom shall make
available to the Company true, complete and correct copies of leases for
significant equipment and for all real property leased by PointeCom. SCHEDULE
6.8 indicates which assets used in the operation of the businesses of PointeCom
are currently owned by Affiliates of PointeCom. Except as specifically
identified in SCHEDULE 6.8, all of the material tangible assets, vehicles and
other significant machinery and equipment of PointeCom listed in SCHEDULE 6.8
are in sufficient condition for the conduct of PointeCom's business. Except as
specifically described in SCHEDULE 6.8, all fixed assets used by PointeCom in
its business are either owned by PointeCom or leased under agreements identified
in SCHEDULE 6.8. All material leases set forth in SCHEDULE 6.8 are in full force
and effect and constitute valid and binding agreements of PointeCom, and to the
knowledge of PointeCom, the other parties thereto in accordance with their
respective terms. SCHEDULE 6.8 contains true, complete and correct copies of all
title reports and title insurance policies received or owned by PointeCom.
(b) PointeCom has good and marketable title to, or valid leasehold
interests in, the tangible and intangible personal property owned by it and used
in its business, including the properties identified in SCHEDULE 6.8 as owned
real property, free and clear of all Encumbrances other than Permitted
Encumbrances and those set forth in SCHEDULE 6.8. PointeCom does not own any
real property.
(c) Except as specifically described in SCHEDULE 6.8, the tangible and
intangible assets owned or leased by PointeCom include all the material assets
used in the operation of the business of PointeCom as conducted at the PointeCom
Balance Sheet Date, except for dispositions of such assets since such date in
the ordinary course of business, consistent with past practices.
6.9. MATERIAL CUSTOMERS AND CONTRACTS.
(a) SCHEDULE 6.9 sets forth an accurate list of (i) all customers
representing 10% or more of PointeCom's revenues for the fiscal year ended in
1998 or the interim period ended on the PointeCom Balance Sheet Date, and (ii)
all material executory contracts, warranties, commitments and similar agreements
to which PointeCom is currently a party or by which it or any of its properties
is bound, including, but not limited to, (A) all customer contracts in excess of
$100,000, including, without limitation, consignment contracts, (B) contracts
with any labor organizations, (C) leases providing for annual rental payments in
excess of $100,000, (D) loan agreements, (E) pledge and security agreements, (F)
indemnity or guaranty agreements or obligations, (G) bonds, (H) notes, (I)
mortgages, (J) joint venture or partnership agreements, (K) options to purchase
real or personal property, and (L) agreements relating to the purchase or sale
by PointeCom of assets (other than oral agreements relating to sales of
inventory or services in the ordinary course of business, consistent with past
practices) or securities for more than $100,000, individually. Prior to the date
hereof, PointeCom has made available to the Company complete and correct copies
of all such agreements.
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(b) Except to the extent set forth in SCHEDULE 6.9, since the PointeCom
Balance Sheet Date, (i) no material customer has canceled or substantially
reduced or, to the knowledge of PointeCom, intends to cancel or substantially
reduce its purchases of PointeCom's products or services; and (ii) PointeCom is
in compliance with all material commitments and obligations pertaining to it
under such agreements and is not in material default under any of the agreements
described in SUBSECTION (A), no notice of default has been received by
PointeCom, and to the knowledge of PointeCom, there is no event which, with
notice or the passage of time or both, would result in a default under any of
the agreements described in subsection (a), where such a default would have a
Material Adverse Effect on PointeCom.
(c) Except to the extent set forth in SCHEDULE 6.9, PointeCom is not a
party to any governmental contracts subject to price redetermination or
renegotiation. Except to the extent set forth in SCHEDULE 6.9, PointeCom is not
required to provide any bonding or other financial security arrangements in any
amount in connection with any transactions with any of its customers or
suppliers, the failure of which would have a Material Adverse Effect on
PointeCom.
6.10. PERMITS. Except as set forth on SCHEDULE 6.10, PointeCom has all
franchises, permits, licenses and any other governmental authority necessary for
the conduct of its business as now being conducted, the lack of which would have
a Material Adverse Effect (the "POINTECOM PERMITS"). The PointeCom Permits are
valid, and PointeCom has not received any written notice that any Governmental
Authority intends to cancel, terminate or not renew any such Permit. The
PointeCom Permits are all the permits that are required by Law for the operation
of the business of PointeCom as conducted at the PointeCom Balance Sheet Date
and the ownership of the assets of PointeCom, except such PointeCom Permits,
which the failure to possess would not have a Material Adverse Effect on
PointeCom. PointeCom has conducted and is conducting its business in substantial
compliance with the PointeCom Permits and is not in violation of any of the
foregoing, except for any violations that individually or in the aggregate do
not have a Material Adverse Effect on PointeCom. Except as specifically provided
in SCHEDULE 6.10, the transactions contemplated by this Agreement will not
result in a default under or a breach or violation of, or adversely affect the
rights and benefits afforded to PointeCom by, any PointeCom Permits, except for
breaches or violations that would not have a Material Adverse Effect on
PointeCom.
6.11. ENVIRONMENTAL MATTERS. Except as set forth in SCHEDULE 6.11, and
except for such matters as would not have a Material Adverse Effect on
PointeCom, (a) PointeCom has complied with and is in compliance, in all material
respects, with all Environmental, Health and Safety Laws, including, without
limitation, Environmental, Health and Safety Laws relating to air, water, land
and the generation, storage, use, handling, transportation, treatment or
disposal of Hazardous Substances; (b) PointeCom has obtained and complied, in
all material respects, with all necessary permits and other approvals necessary
to treat, transport, store, dispose of and otherwise handle Hazardous Substances
and has reported, to the extent required by all Environmental, Health and Safety
Laws, all past and present sites owned or operated by PointeCom where Hazardous
Substances have been treated, stored, disposed of or otherwise handled; (c) to
PointeCom's knowledge, there have been no "releases" or threats of
"releases" (as defined in any Environmental, Health and Safety Laws) at, from,
in or on any property owned or operated by PointeCom; (d) to PointeCom's
knowledge, there is no on-site or off-site location to which PointeCom has
transported or disposed of Hazardous Substances or arranged for the
transportation or disposal of Hazardous Substances which is the subject of any
federal, state, local or foreign enforcement action or any other investigation
which could lead to any claim against the Surviving Corporation, PointeCom or
Newco for any clean-up cost, remedial work, damage to natural resources or
personal injury, including, but not limited to, any claim under (i) the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, (ii) the Resource Conservation and Recovery Act, (iii) the Hazardous
Materials Transportation Act, or (iv) comparable state and local statutes and
regulations; and (e) to PointeCom's knowledge, PointeCom has no contingent
liability in connection with any release or disposal of any Hazardous Substance
into the environment. To PointeCom's knowledge, none of the past or present
sites owned or operated by
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PointeCom is currently or has ever been designated as a treatment, storage
and/or disposal facility, nor has any such facility ever applied for a Permit
designating it as a treatment, storage and/or disposal facility, under any
Environmental, Health or Safety Law.
6.12. LABOR AND EMPLOYEE RELATIONS. Except as set forth in SCHEDULE 6.12,
PointeCom is not bound by or subject to any arrangement with any labor union.
Except as set forth in SCHEDULE 6.12, no employees of PointeCom are represented
by any labor union or covered by any collective bargaining agreement nor, to
PointeCom's knowledge, is any campaign to establish such representation in
progress. There is no pending or, to PointeCom's knowledge, threatened labor
dispute involving PointeCom and any group of its employees nor has PointeCom
experienced any significant labor interruptions over the past five years.
PointeCom has no knowledge of any significant issues or problems in connection
with the relationship of PointeCom with its employees.
6.13. INSURANCE. SCHEDULE 6.13 sets forth an accurate list as of the
PointeCom Balance Sheet Date of all insurance policies that are material to
PointeCom. The policies described in such SCHEDULE 6.13 for the current policy
year are currently in full force and effect and, to the knowledge of PointeCom,
no defaults exist under any of them.
6.14. COMPENSATION; EMPLOYMENT AGREEMENTS. SCHEDULE 6.14 sets forth an
accurate list of all officers, directors and employees of PointeCom with annual
salaries of $100,000 or more, listing the rate of compensation (and the portions
thereof attributable to salary, bonus, benefits and other compensation,
respectively) of each of such persons as of (a) the PointeCom Balance Sheet Date
and (b) the date hereof. PointeCom shall make available to the Company true,
complete and correct copies of each employment or consulting agreement with any
employee of PointeCom. Except as disclosed on SCHEDULE 6.14, PointeCom is not a
party to or bound by, with respect to any officer, employee or independent
contractor of PointeCom, any (i) employment, termination or severance agreement,
(ii) agreement (A) the benefits of which are contingent, or the terms of which
are materially altered, upon the occurrence of a transaction involving PointeCom
of the nature of any of the transactions contemplated by this Agreement, (B)
providing any term of employment or compensation guarantee extending for a
period of one year or longer or (C) providing severance benefits or other
benefits after the termination of employment not comparable to benefits
available to employees generally, (iii) agreement, plan or arrangement under
which any person may receive payments that may be subject to the tax imposed by
Section 4999 of the Code or included in the determination of such person's
"PARACHUTE PAYMENT" under Section 280G of the Code and (iv) agreement or plan,
including any stock option plan or stock purchase plan, any of the benefits of
which will be increased, or the vesting or other realization of the benefits of
which will be accelerated, by the occurrence of the transactions contemplated by
this Agreement or the value of any of the benefits of which will be calculated
on the basis of the transactions contemplated by this Agreement.
6.15. NONCOMPETITION AND NONSOLICITATION AGREEMENTS. SCHEDULE 6.15 sets
forth all agreements containing covenants not to compete or solicit employees to
which PointeCom is bound or under which PointeCom has any material rights or
obligations.
6.16. LITIGATION AND COMPLIANCE WITH LAW. Except as set forth in SCHEDULE
6.16, there are no actions, suits or proceedings, pending (of which the
PointeCom has received notice or with respect to which served with process) or,
to the knowledge of PointeCom, threatened against PointeCom, at law or in
equity, or before or by any Governmental Authority having jurisdiction over
PointeCom. No written notice of any claim, action, suit or proceeding, whether
pending or threatened, has been received by PointeCom. Except to the extent set
forth in SCHEDULE 6.16, PointeCom has conducted and is conducting its business
in compliance with all Laws applicable to PointeCom, its assets or the operation
of its business, except such non-compliance that would not have a Material
Adverse Effect on PointeCom.
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6.17. TAXES. Each of PointeCom and its Subsidiaries has filed all
federal, state, local and other Tax returns it was required to file, and has
duly paid in full or made adequate provision in the books and records for the
payment of all Taxes it was required to pay, except to the extent that such
failure to pay or to reserve would not have a Material Adverse Effect on
PointeCom or its Subsidiaries. All such Tax returns were correct and complete in
all material respects. Neither PointeCom nor its Subsidiaries is currently the
beneficiary of any extension of time within which to file any tax return.
PointeCom and its Subsidiaries have duly withheld and paid or remitted all Taxes
required to have been withheld and paid in connection with amounts paid or owing
to any employee, independent contractor, creditor, shareholder or other person
or entity that required withholding under any applicable Law, including, without
limitation, any amounts required to be withheld or collected with respect to
social security, unemployment compensation, sales or use taxes or
workers'compensation, except where such failure would not have a Material
Adverse Effect on PointeCom or its Subsidiaries. Except as set forth in SCHEDULE
6.17, there are no examinations in progress or material claims against PointeCom
or its Subsidiaries relating to Taxes for any period or periods prior to and
including the PointeCom Balance Sheet Date and no written notice of any claim
for Taxes, whether pending or threatened, has been received which claim has not
been finally settled. Neither PointeCom nor its Subsidiaries has granted or been
requested to grant any extension of the limitation period not yet closed or
agreed to any extension of time applicable to any claim for Taxes which is still
in effect or assessments with respect to Taxes and has not executed a closing
agreement pursuant to Section 7121 of the Code, or any predecessor provision
thereof or any similar provision of state, local, foreign or other tax law that
relates to the assets or operations of PointeCom or its Subsidiaries which is
still in effect. Neither PointeCom nor its Subsidiaries is a party to any Tax
allocation or sharing agreement. Neither PointeCom nor its Subsidiaries has ever
been (nor has any liability for Taxes because it once was) a member of an
affiliated group filing a consolidated federal income tax return, other than
with respect to the consolidated federal income tax return of PointeCom and its
Subsidiaries, has not incurred any liability for the Taxes of any person under
Treasury Regulations ^1.1502-6 (or any similar provision of law) and has never
incurred any liability for the Taxes of any person as a transferee or successor,
by contract or otherwise. The unpaid Taxes of PointeCom and/or its Subsidiaries
(a) did not, as of the PointeCom Balance Sheet Date, exceed any material amount
the amount shown as accrual for Taxes on the PointeCom Interim Balance Sheet and
(b) will not exceed by any material amount that accrual as adjusted for
operation and transactions of PointeCom or its Subsidiaries through the Closing
Date in accordance with the past custom and practice of PointeCom in filing its
tax returns. True and complete copies of (a) any tax examinations and statements
of deficiencies, (b) extensions of statutory limitations and (c) the federal,
state and local Tax returns of PointeCom and its Subsidiaries for the last three
fiscal years have been previously provided to PointeCom. There are no requests
for ruling in respect of any Tax pending between PointeCom or its Subsidiaries
and any Taxing authority. Neither PointeCom nor its Subsidiaries has ever been
taxed under the provisions of Subchapter S of the Code. PointeCom and its
Subsidiaries currently utilize the accrual method of accounting for income tax
purposes; and such method of accounting has not changed in the past three years.
No written notice has been received from any Tax authority in any jurisdiction
in which PointeCom or its Subsidiaries does not file tax returns that it is or
may be subject to taxation by that jurisdiction. There are no security interests
or liens for Taxes on any asset of PointeCom or its Subsidiaries, except for
Permitted Encumbrances. Neither PointeCom nor its Subsidiaries has filed a
consent under section 341(f) of the Code concerning collapsible corporations and
neither PointeCom nor its Subsidiaries has been a United States real property
holding corporation within the meaning of Section 897(c)(2) of the Code at any
time during the applicable period set forth in Section 897(e)(1)(A)(ii) of the
Code. None of the assets and properties of PointeCom or its Subsidiaries secures
any indebtedness, the interest on which is tax-exempt under Section 103(a) of
the Code or is an asset or property that PointeCom or any of its affiliates is
or will be required to treat as being (i) owned by any other person pursuant to
the provisions of section 168(f)(8) of the Internal Revenue Code of 1954, as
amended, as in effect immediately before the enactment of the Tax Reform Act of
1986, or (ii) tax-exempt use property within the meaning of Section 168(h)(1) of
the Code. Neither PointeCom nor its Subsidiaries has made any payments, is not
obligated to make any payments, and is not a party to any agreement that under
certain circumstances could require it to make any payments, that would not be
deductible by reason of the application of Section 280G of the Code.
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6.18. ABSENCE OF CHANGES. Since the PointeCom Balance Sheet Date, except
as set forth in SCHEDULE 6.18, PointeCom has conducted, in all material
respects, its operations in the ordinary course and there has not been:
(a) any material adverse change in the business, operations, properties,
condition (financial or other), assets, liabilities (contingent or otherwise) or
results of operations of PointeCom, individually or in the aggregate;
(b) any damage, destruction or loss (whether or not covered by insurance)
materially adversely affecting the properties or business of PointeCom,
individually or in the aggregate;
(c) except as contemplated by this Agreement or the transactions
contemplated hereby, any change in the authorized capital stock of PointeCom or
in its outstanding securities or any grant of any options, warrants, calls,
conversion rights or commitments;
(d) except as contemplated by this Agreement or the transactions
contemplated hereby, any declaration or payment of any dividend or distribution
in respect of the capital stock or any direct or indirect redemption, purchase
or other acquisition of any of the capital stock of PointeCom;
(e) any increase in the compensation payable or to become payable by
PointeCom to its stockholders or to any of its officers, directors, employees,
consultants or agents, except for ordinary and customary bonuses and salary
increases for employees in accordance with past practice, which bonuses and
salary increases are set forth in SCHEDULE 6.14;
(f) any material labor disputes, labor grievances or labor claims filed;
(g) except for the Merger, any sale or transfer, or any agreement to sell
or transfer, any material assets, properties or rights of PointeCom to any
person;
(h) any cancellation, or agreement to cancel, any material indebtedness or
other material obligation owing to PointeCom;
(i) any increase in the indebtedness of PointeCom, other than related to
the Class B Convertible Preferred Stock and accounts payable incurred in the
ordinary course of business, consistent with past practices or incurred in
connection with the transactions contemplated by this Agreement;
(j) any plan, agreement or arrangement granting any preferential rights to
purchase or acquire any interest in any of the assets, property or rights of
PointeCom or requiring consent of any party to the transfer and assignment of
any such assets, property or rights;
(k) any purchase or acquisition of, or agreement, plan or arrangement to
purchase or acquire, any property, rights or assets outside of the ordinary
course of PointeCom's business;
(l) any waiver of any material rights or claims of PointeCom;
(m) any material breach, amendment or termination of any material
contract, agreement, Permit or other right to which PointeCom is a party or any
of its property is subject, except that which would not have a Material Adverse
Effect on PointeCom; or
(n) any other material transaction by PointeCom, other than as
contemplated by this Agreement, outside the ordinary course of business.
6.19. ABSENCE OF CERTAIN BUSINESS PRACTICES. Neither PointeCom nor any of
its Affiliates has given or offered to give anything of value to any
governmental official, political party or candidate for government office that
was illegal to so offer or give nor has it otherwise taken any action which
would constitute a violation of the Foreign Corrupt Practices Act of 1977, as
amended, or any similar Law.
6.20. COMPETING LINES OF BUSINESS; RELATED-PARTY TRANSACTIONS. Except as
set forth in SCHEDULE 6.20, no officer or director or any other Affiliate of
PointeCom owns, directly or indirectly, any interest (other than up to five
percent (5%) of any class of securities listed on a national securities exchange
or traded publicly in the over-the-counter market) in, or is an officer,
director, employee or
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consultant of or otherwise receives remuneration from, any business which is in
a Competitive Business or is a competitor, lessor, lessee, customer or supplier
of PointeCom. Except as set forth in SCHEDULE 6.20, no officer or director of
PointeCom has any interest in any property, real or personal, tangible or
intangible, used in or pertaining to the business of PointeCom.
6.21. INTANGIBLE PROPERTY. SCHEDULE 6.21 sets forth an accurate list of
all patents, patent applications, trademarks, service marks, technology,
licenses, trade names, copyrights and other intellectual property or proprietary
property rights owned or used by PointeCom, which are material to the conduct of
PointeCom's business. PointeCom owns or possesses sufficient legal rights to use
all of such items, except where failure to own or possess such rights would not
have a Material Adverse Effect on PointeCom.
6.22. DISCLOSURE. None of the information so provided nor any
representation or warranty of PointeCom to the Company or Newco in this
Agreement contains or will contain (at the time such representation or warranty
is repeated) any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements herein, in light of the
circumstances under which they were made, not misleading.
6.23. YEAR 2000 COMPLIANCE. All devices, systems, machinery, information
technology, computer software and hardware, and other date sensitive technology
(jointly and severally its "SYSTEMS") owned by PointeCom and necessary for the
operation of PointeCom's business as presently conducted will be Year 2000
Compliant within a period of time calculated to result in no material disruption
of any of its business operations, and any systems that are not compliant will
not have a Material Adverse Effect on PointeCom.
6.24. EMPLOYEE BENEFIT PLANS.
(a) SCHEDULE 6.24 sets forth an accurate schedule of each "EMPLOYEE
BENEFIT PLAN," as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and all nonqualified deferred
compensation arrangements, whether formal or informal and whether legally
binding or not, under which PointeCom or an ERISA Affiliate has any current or
future obligation or liability or under which any present or former employee of
PointeCom or an ERISA Affiliate, or such present or former employee's dependents
or beneficiaries, has any current or future right to benefits (each such plan
and arrangement referred to hereinafter as a "POINTECOM PLAN"), and PointeCom
has provided or made available to the Company true and complete copies of such
PointeCom Plans, any trusts and other arrangements related thereto, and
classifications of employees covered thereby as of the PointeCom Balance Sheet
Date. Except as set forth in SCHEDULE 6.27, neither PointeCom nor any ERISA
Affiliate sponsors, maintains or is obligated to contribute currently, or at any
time during the preceding five years, has sponsored, maintained or was obligated
to contribute to, any plan, program, fund or arrangement that constitutes an
employee pension benefit plan as defined in Section 3(2) of ERISA that is
subject to Title IV of ERISA. Each PointeCom Plan may be terminated by
PointeCom, or if applicable, by an ERISA Affiliate at any time without any
liability, cost or expense, other than costs and expenses that are customary in
connection with the termination of a PointeCom Plan. For purposes of this
Agreement, the term "POINTECOM ERISA AFFILIATE" means any corporation or trade
or business which is, or ever was, treated as a single employer with PointeCom
under Section 414(b), (c), (m) or (o) of the Code.
(b) Except as set forth on SCHEDULE 6.24(B), each Plan listed in SCHEDULE
6.24 is in compliance in all material respects with its own terms and the
applicable provisions of ERISA, the Code, and any other applicable Law. Except
as set forth in SCHEDULE 6.24, with respect to each Plan of PointeCom and each
PointeCom ERISA Affiliate (other than a "MULTIEMPLOYER PLAN," as defined in
Section 4001(a)(3) of ERISA), all reports and other documents required under
ERISA or other applicable Law to be filed with any Governmental Authority, the
failure of which to file could reasonably be expected to result in a material
liability to PointeCom or any PointeCom ERISA Affiliate, including all Forms
5500 or required to be distributed to participants or beneficiaries, have been
duly and timely filed or distributed. True and complete copies of all such
reports and other documents with respect to the past
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three years (if applicable) for each Plan have been provided to, or made
available to, the Company. No "ACCUMULATED FUNDING DEFICIENCY" (as defined in
Section 412(a) of the Code) with respect to any Plan has been incurred (without
regard to any waiver granted under Section 412 of the Code), nor has any funding
waiver from the Internal Revenue Service been received or requested. Except as
set forth in SCHEDULE 6.24, each Plan that is intended to be "QUALIFIED"
within the meaning of Section 401(a) of the Code (a "QUALIFIED PLAN") is, and
has been during the period from its adoption to the date hereof, so qualified,
both as to form and operation and all necessary approvals of Governmental
Authorities have been timely obtained. Except as set forth in SCHEDULE 6.24, all
accrued contribution obligations, and any other liability to pay benefits, of
PointeCom with respect to any Plan have either been fulfilled in their entirety
or are fully reflected in the Financial Statements.
(c) Except as set forth in SCHEDULE 6.24(C), no Plan has incurred or is
reasonably likely to incur, and neither PointeCom nor any PointeCom ERISA
Affiliate has incurred or is reasonably likely to incur with respect to any
Plan, any liability for excise tax or penalty due to the Internal Revenue
Service or any other governmental authority, and no Plan termination or
discontinuance of contributions to any Plan has resulted in or is reasonably
likely to result in the retroactive disqualification of any Plan "QUALIFIED"
under Section 401(a) of the Code or has resulted in or is reasonably likely to
result in any liability to PointeCom or any ERISA Affiliate. There have been no
terminations, partial terminations or discontinuances of contributions by
PointeCom or any PointeCom ERISA Affiliate to any Qualified Plan during the
preceding five years.
(d) Except as set forth in SCHEDULE 6.24(D), neither PointeCom nor any
PointeCom ERISA Affiliate has made any promises of retirement or other benefits
to employees, except as set forth in the Plans, and neither PointeCom nor any
PointeCom ERISA Affiliate maintains or has established any arrangement for
retiree medical liabilities or any Plan that is a "WELFARE BENEFIT PLAN"
within the meaning of Section 3(1) of ERISA that provides for continuing
benefits or coverage for any participant or any beneficiary of a participant
after such participant's termination of employment, except as may be required by
Part 6 of Subtitle B of Title I of ERISA and Section 4980B of the Code and
similar state Law provisions. Except as set forth in SCHEDULE 6.24(D), neither
PointeCom nor any PointeCom ERISA Affiliate maintains, has established or has
ever participated in a "welfare benefit fund" as defined in Section 419(e) of
the Code, a multiple employer welfare benefit arrangement as described in
Section 3(40)(A) of ERISA or a welfare benefit plan, within said meaning, which
provides benefits other than through insurance policies. Except as set forth in
SCHEDULE 6.24, neither PointeCom nor any PointeCom ERISA Affiliate has any
current or future obligation or liability with respect to a Plan pursuant to the
provisions of a collective bargaining agreement.
(e) Except as set forth in SCHEDULE 6.24(E), neither PointeCom nor any
PointeCom ERISA Affiliate has incurred any material liability to the Pension
Benefit Guaranty Corporation in connection with any Plan. The assets of each
Plan that is subject to Title IV of ERISA are sufficient to provide the benefits
under such Plan, the payment of which the Pension Benefit Guaranty Corporation
would guarantee in full if such Plan were terminated, and such assets are also
sufficient to provide all other "BENEFITS LIABILITIES" (as defined in ERISA
Section 4001(a)(16)) due under such Plan upon termination.
(f) Except as set forth in SCHEDULE 6.24(F), no "REPORTABLE EVENT" (as
defined in Section 4043 of ERISA) has occurred and is continuing with respect to
any Plan. There are no pending, or to PointeCom's knowledge, threatened claims,
lawsuits or actions (other than routine claims for benefits in the ordinary
course) asserted or instituted against, and PointeCom has no knowledge of any
threatened litigation or claims against, the assets of any Plan or its related
trust or against any fiduciary of a Plan with respect to the operation of such
Plan. To PointeCom's knowledge, there are no investigations or audits of any
Plan by any Governmental Authority currently pending and there have been no such
investigations or audits that have been concluded that resulted in any liability
to PointeCom or any PointeCom ERISA Affiliate that has not been fully
discharged. Neither PointeCom
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nor any PointeCom ERISA Affiliate has participated in any voluntary compliance
or closing agreement programs established with respect to the form or operation
of a Plan.
(g) Neither PointeCom nor any PointeCom ERISA Affiliate has engaged in,
and no PointeCom Plan has otherwise been involved in, any prohibited
transaction, within the meaning of Section 406 of ERISA or Section 4975 of the
Code, for which exemption was not available. No fiduciary of any PointeCom Plan
is in violation of any duty imposed by ERISA. Except as set forth in SCHEDULE
6.24(G), neither PointeCom nor any PointeCom ERISA Affiliate is, or ever has
been, a participant in or is obligated to make any payment to a multiemployer
plan, or to a multiple employer plan described in Section 413(c) of the Code. To
PointeCom's knowledge, no person or entity that was engaged by PointeCom or any
PointeCom ERISA Affiliate as an independent contractor within the last five
years reasonably can or will be characterized or deemed to be an employee of
PointeCom or any PointeCom ERISA Affiliate under applicable Laws for any purpose
whatsoever, including, without limitation, for purposes of federal, state and
local income taxation, workers' compensation and unemployment insurance and Plan
eligibility.
6.25. TAX FREE REORGANIZATION.
(a) There is no plan or intention by and to the knowledge of PointeCom,
there is no plan or intention on the part of the shareholders of PointeCom who
own five percent (5%) or more of the PointeCom capital stock, or the remaining
shareholders of PointeCom to sell, exchange or otherwise dispose of a number of
share of the Company Common Stock or Company Preferred Stock received in the
Merger that would reduce the PointeCom shareholders' ownership of the Company
capital stock to a number of shares having a value as of the Effective Time, of
less than fifty percent (50%) of the value of all of the formerly outstanding
capital stock of PointeCom as of the same date. For purposes of this
representation, shares of PointeCom capital stock surrendered by dissenters or
exchanged for cash in lieu of fractional shares of Company stock will be treated
as outstanding PointeCom capital stock on the date of the transaction. Moreover,
shares of PointeCom capital stock and shares of Company capital stock held by
PointeCom shareholders and otherwise sold, redeemed or disposed of prior to or
subsequent to the transaction will be considered in making this representation.
(b) PointeCom has no plan or intention to issue additional shares of its
stock that would result in the Company losing control of PointeCom within the
meaning of Section 368 (c) of the Code.
(c) PointeCom has no plan or intention to liquidate; to merge into another
corporation (except as contemplated by this Agreement); to sell or otherwise
dispose of any of its assets, except for dispositions made in the ordinary
course of business; or to sell or otherwise dispose of any of the stock acquired
in the transaction, except for transfers described in Section 368 (a)(2)(C) of
the Code.
(d) The Company, PointeCom, and the shareholders of PointeCom will pay
their respective expenses, if any, incurred in connection with the transaction.
(e) At the time of the transaction, PointeCom will not have any
outstanding warrants, options, convertible securities, or any other type of
right pursuant to which any person could acquire stock in PointeCom that, if
exercised or converted, would affect the Company's acquisition or retention of
control of PointeCom, as defined in Section 368 (c) of the Code.
(f) The Company does not own, directly or indirectly, nor has it owned
during the past five years, directly or indirectly, any stock of PointeCom.
(g) Following the Merger, PointeCom will continue its historic business or
use a significant portion of its historic business assets in a business.
(h) PointeCom is not an investment company as defined in Section 368
(a)(2)(F)(iii) and (iv) of the Code.
(i) PointeCom will pay its dissenting shareholders the value of their
stock out of its own funds, no funds will be supplied for that purpose, directly
or indirectly, by the Company, nor will the Company directly or indirectly
reimburse PointeCom for any payments to dissenters.
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(j) As of the Effective Time, the fair market value of the assets of
PointeCom will exceed the sum of its liabilities plus the liabilities, if any,
to which the assets are subject.
(k) PointeCom is not a collapsible corporation under Section 341 of the
Code.
(l) The payment of cash in lieu of fractional shares of Company Common
Stock is solely for the purpose of avoiding the expense and inconvenience to the
Company of issuing fractional shares and does not represent separately
bargained-for consideration. The total cash consideration that will be paid in
the Merger to the PointeCom stockholders instead of issuing fractional shares of
Company Common Stock will not exceed one percent (1%) of the total consideration
that will be issued in the Merger to the PointeCom stockholders in exchange for
their shares of PointeCom capital stock. The fractional shares interests of each
PointeCom stockholder will be aggregated, and no PointeCom stockholder will
receive cash in an amount greater to or greater than the value of one full share
of Company Common Stock.
(m) None of the compensation received by any shareholder-employee of
PointeCom will be separate consideration for, or allocable to, any of their
shares of PointeCom capital stock; none of the shares of Company Common Stock or
Company Preferred Stock received by any shareholder-employee will be separate
consideration for, or allocable to, any employment agreement; and the
compensation paid to any shareholder-employee will be for services actually
rendered and will be commensurate with amounts paid to third parties bargaining
at arm's length for similar services.
(n) The holders of PointeCom Common Stock and PointeCom Preferred Stock
will receive voting shares of Company Common Stock and voting shares of Company
Preferred Stock having a fair market value equal to at least 50% of the value of
their PointeCom capital stock at the Effective Time. Under the terms of the
Merger, the stockholders of PointeCom will receive solely Company Common Stock
and Company Preferred Stock in exchange for such PointeCom capital stock.
However, redemptions or acquisitions of PointeCom capital stock by the Company
or PointeCom or any related party and extraordinary distributions (i.e.,
distributions with respect to stock other that regular, normal dividends), prior
to and in connection with the Merger will be taken into account for purposes of
this representation. Neither the Company nor a related party has a plan or
intention to reacquire or acquire any of the Company Common Stock or Company
Preferred Stock issued to PointeCom stockholders in the Merger. For purposes of
this representation, a "RELATED PARTY" includes any corporation (i) that is a
member of any affiliated group of which PointeCom or the Company is a member, as
defined in Section 1504 (determined without regard to Section 1504(b)), or (ii)
a corporation in which the Company owns, directly or indirectly, stock
possessing at least fifty percent (50%) of the total combined voting power of
all classes of stock entitled to vote, or at least fifty percent (50%) of the
total value of shares of all classes of stock (determined by taking into account
the constructive stock ownership rules of Section 318(a) of the Code as modified
by Section 304(c)). For purposes of the foregoing, (i) a corporation will be a
related party if either of the relationships described above exists immediately
before the Merger, immediately after the Merger, or is created in connection
with the Merger, and (ii) a related party will be considered as acquiring its
proportionate share of any Company Common Stock or Company Preferred Stock
acquired by a partnership in which it is a partner.
(o) PointeCom is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
(p) There are no non-voting shares of PointeCom capital stock outstanding
prior to the Merger.
6.26. ACCOUNTS AND NOTES RECEIVABLE. SCHEDULE 6.26 sets forth an accurate
list of the accounts and notes receivable of PointeCom as of the Balance Sheet
Date. Receivables from and advances to employees are separately identified in
SCHEDULE 6.26. SCHEDULE 6.26 also sets forth an accurate aging of all accounts
and notes receivable as of the Balance Sheet Date, showing amounts due in 30-day
aging categories. The trade and other accounts receivable of PointeCom,
including without limitation those classified as current assets on the Interim
Balance Sheet, are bona fide
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receivables, were acquired in the ordinary course of business, are stated in
accordance with GAAP and are collectible in the amounts shown on SCHEDULE 6.26,
net of reserves reflected in the Interim Financial Statements with respect to
the accounts receivable as of the Balance Sheet Date, and net of reserves
reflected in the books and records of PointeCom (consistent with the methods
used in the Interim Financial Statements) with respect to receivables of
PointeCom after the Balance Sheet Date.
None of the representations and warranties of PointeCom shall survive the
Closing hereunder.
ARTICLE VII
CERTAIN COVENANTS
7.1. CONDUCT OF BUSINESS. From the date of this Agreement until the
Effective Time, or earlier termination of this Agreement pursuant to the terms
of this Agreement, each of PointeCom, Newco and Company shall conduct its
business only in the ordinary course and, without limiting the generality of the
foregoing, each of PointeCom, Newco and the Company shall not, except as
otherwise expressly provided in this Agreement or unless the written consent of
the other parties shall have been obtained:
(a) except as expressly provided elsewhere in this Agreement or pursuant
to the terms of any outstanding securities, make or agree to make any change in
its authorized capital stock, other than, in the case of the Company, the
amendment to its Articles of Incorporation to create (x) the Company Class D
Convertible Senior Preferred Stock having in all material respects the same
rights and preferences as the PointeCom Class A Preferred Stock, (y) the Company
Class E Convertible Senior Preferred Stock having in all material respects the
same rights and preferences as the PointeCom Class B Preferred Stock (except
that the Company Preferred Stock shall be convertible into such number of shares
of Company Common Stock as would have been issued to the holders of the
PointeCom Preferred Stock if such holders had converted the PointeCom Preferred
Stock into PointeCom Common Stock prior to the Effective Time), and (z) the
Class C Convertible Senior Preferred Stock and related warrants issuable upon
conversion of the PointeCom Loan;
(b) none of the Company, Newco or PointeCom will grant any option,
warrant, purchase right, subscription right, conversion right, exchange right or
other contract, commitment or security providing for the issuance or sale of any
capital stock, or otherwise causing to become outstanding any capital stock, or
issue, sell, authorize or otherwise dispose of any of its capital stock ("STOCK
RIGHTS"), except (i) upon the conversion or exercise of Stock Rights
outstanding as of the date of this Agreement; (ii) for stock options issued to
employees of the Company and its Subsidiaries or PointeCom and its Subsidiaries
in a manner consistent with past practice which (I) do not provide for the
issuance of more than 200,000 shares of common stock of the Company or PointeCom
in any calendar quarter, (II) are issued at not less than the market price of
the Company Stock on the date of grant, (III) are not issued to any executive
officer or director of the Company or its Subsidiaries, and (IV) do not provide
for accelerated vesting as a result of the Merger.
(c) declare or pay any dividend or distribution, other than as provided in
SECTION 7.1(F), in respect of its capital stock, or except as expressly provided
elsewhere in this Agreement or pursuant to the terms of any outstanding
securities, directly or indirectly redeem, combine, split, purchase or otherwise
acquire any of its capital stock;
(d) increase the compensation payable or to become payable to any of its
officers, directors, employees, consultants or agents, except in the ordinary
course of business consistent with past practices;
(e) adopt any new or materially amend any existing employee benefit plan
or any employment agreement or severance agreement, except as may be required by
law;
(f) sell or transfer, or enter into any agreement to sell or transfer, any
material assets, properties or rights to any person other than sales or
transfers in the ordinary course of business consistent with
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past practice; provided, however, that the Company shall have the right and
option to dispose of by sale or otherwise its subsidiary enablecommerce.com
prior to the Closing Date;
(g) cancel, or agree to cancel, any of its material receivables;
(h) increase indebtedness, other than accounts payable incurred in the
ordinary course of business, consistent with past practices, incurred in
connection with the construction, development, deployment and/or operation of
the Company's telecommunications network in Mexico or incurred in connection
with the transactions contemplated by this Agreement and as contemplated in
SECTION 7.10 below;
(i) encumber any of its property or assets except for Permitted
Encumbrances or except encumbrances incurred in connection with the
construction, development, deployment and/or operation of the Company's
telecommunications network in Mexico;
(j) make any commitments for capital improvements not disclosed on
SCHEDULE 7.1;
(k) enter into, or agree to enter into, any plan, agreement or arrangement
granting any preferential rights to purchase or acquire any interest in any of
its assets, property or rights or requiring consent of any party to the transfer
and assignment of any such assets, property or rights except plans, agreements
or arrangements entered into in connection with the construction, development,
deployment and/or operation of the Company's telecommunications network in
Mexico;
(l) purchase or acquire, or enter into any agreement, plan or arrangement
to purchase or acquire, any property, rights or assets outside of the ordinary
course of business except those purchases or acquisitions made in connection
with the construction, development, deployment and/or operation of the Company's
telecommunications network in Mexico;
(m) form or cause to be formed any subsidiary other than in the case of
the Company, Newco;
(n) fail to keep its material properties insured substantially to the same
extent as they are currently insured;
(o) waive any of its material rights or claims; or
(p) materially breach, materially change the terms of, materially amend or
terminate any material contract, agreement, Permit or other right to which it is
a party or any of its property is subject.
In the event either party shall request the other party to consent in
writing to an action otherwise prohibited by this SECTION 7.1, such other party
shall use reasonable efforts to respond in a prompt and timely fashion (but in
no event later than ten (10) business days following such request), but may
otherwise respond affirmatively or negatively in its sole discretion.
7.2. REASONABLE EFFORTS. Each of the Company and PointeCom shall use all
commercially reasonable efforts to preserve intact its business organization and
to preserve its goodwill as to customers, suppliers and others having business
relations with it.
7.3. INSPECTION. The Company shall permit representatives of PointeCom,
and PointeCom shall permit representatives of the Company, during normal
business hours, to examine the other party's properties, books, contracts, Tax
returns and other records and shall furnish such representatives with all such
information in its possession or control concerning such affairs as they may
reasonably request.
7.4. RESTRAINT ON SOLICITATION.
(a) COMPANY EXCLUSIVITY.
(i) The Company shall, and shall cause its Subsidiaries and
Representatives to, immediately cease and terminate any existing solicitation,
initiation, encouragement, activity, discussion or negotiation with any Persons
conducted heretofore by the Company, its Subsidiaries or any of their respective
Affiliates, officers, directors, employees, financial advisors, agents or
representatives (each a "REPRESENTATIVE") with respect to any proposed,
potential or contemplated Acquisition Proposal.
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(ii) From and after the date hereof, without the prior written consent of
PointeCom, the Company will not authorize or permit any of its Subsidiaries to,
and shall cause any and all of its Representatives not to, directly or
indirectly, (A) solicit, initiate, or encourage any inquiries or proposals that
constitute, or could reasonably be expected to lead to, an Acquisition Proposal,
or (B) engage in negotiations or discussions with any Company Third Party
concerning, or provide any non-public information to any person or entity
relating to, an Acquisition Proposal, or (C) enter into any letter of intent,
agreement in principle or any acquisition agreement or other similar agreement
with respect to any Acquisition Proposal; PROVIDED, HOWEVER, that nothing
contained in this SECTION 7.4(A)(II) shall prevent the Company or the Company
Board of Directors prior to receipt of the Requisite Stockholder Approval of the
Company stockholders, from furnishing non-public information to, or entering
into discussions or negotiations with, any Company Third Party in connection
with an unsolicited, bona fide written proposal for an Acquisition Proposal by
such Company Third Party, if and only to the extent that (1) such Company Third
Party has made a written proposal to the Company Board of Directors to
consummate an Acquisition Proposal, (2) the Company Board of Directors
determines in good faith, based upon the advice of a financial advisor of
nationally recognized reputation, that such Acquisition Proposal is reasonably
capable of being completed on substantially the terms proposed, and would, if
consummated, result in a transaction that would provide greater value to the
holders of the shares of Company Common Stock than the transaction contemplated
by this Agreement (a "Superior Proposal"), (3) the failure to take such action
would, in the reasonable good faith judgment of the Company Board of Directors,
based upon a written opinion of the Company's outside legal counsel, be a
violation of its fiduciary duties to the Company's stockholders under applicable
law, and (4) prior to furnishing such non-public information to, or entering
into discussions or negotiations with, such Person, the Company Board of
Directors receives from such Person an executed confidentiality agreement that
provides prior notice of its decision to take such action to PointeCom. The
Company agrees not to release any Company Third Party from, or waive any
provision of, any standstill agreement to which it is a party or any
confidentiality agreement between it and another Person who has made, or who may
reasonably be considered likely to make, an Acquisition Proposal, unless the
failure to take such action would, in the reasonable good faith judgment of the
Company Board of Directors, based upon the written opinion of the Company's
outside legal counsel, be a violation of its fiduciary duties to the Company
stockholders under applicable law and such action is taken prior to receipt of
the Requisite Stockholder Approval of the Company stockholders. Without limiting
the foregoing, it is understood that any violation of the restrictions set forth
in the preceding sentence by any Representative of the Company or any of its
Subsidiaries shall be deemed to be a breach of this SECTION 7.4(A) by the
Company.
(iii) The Company shall notify PointeCom promptly after receipt by the
Company or the Company's knowledge of the receipt by any of its Representatives
of any Acquisition Proposal or any request for non-public information in
connection with an Acquisition Proposal or for access to the properties, books
or records of the Company by any Person that informs such party that it is
considering making or has made an Acquisition Proposal. Such notice shall be
made orally and in writing and shall indicate the identity of the offeror and
the terms and conditions of such proposal, inquiry or contact. The Company shall
keep PointeCom informed of the status (including any change to the material
terms) of any such Acquisition Proposal or request for non-public information.
(iv) The Company Board of Directors may not withdraw or modify, or propose
to withdraw or modify, in a manner adverse to PointeCom, the approval or
recommendation by the Company Board of this Agreement or the Merger unless,
following the receipt of a Superior Proposal but prior to receipt of the
Requisite Stockholder Approval of the Company stockholders, in the reasonable
good faith judgment of the Company Board of Directors, based upon the written
opinion of Company's outside legal counsel, the failure to do so would be a
violation of the Company Board of Director's fiduciary duties to the Company's
stockholders under applicable law; PROVIDED, HOWEVER, that, the Company Board of
Directors shall submit this Agreement and the Merger to the Company's
stockholders for adoption and approval, whether or not the Company Board of
Directors at any time
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subsequent to the date hereof determines that this Agreement is no longer
advisable or recommends that the stockholders of the Company reject it or
otherwise modifies or withdraws its recommendation. Unless the Company Board of
Directors has withdrawn its recommendation of this Agreement in compliance
herewith, the Company shall use its best efforts to solicit from the Company's
stockholders proxies in favor of (a) approval of the issuance of shares of
Company Common Stock in connection with the Merger as provided in this Agreement
in accordance with the rules of NASDAQ and (b) an amendment to the Company's
articles of incorporation to increase the authorized capital stock of the
Company in accordance with the Texas Business Corporation Act and its articles
of incorporation and by-laws.
(v) In the event the Company receives a Superior Proposal, the Company
shall offer to PointeCom the right to equal such Superior Proposal or make a
proposal that is superior to the Company's stockholders than such Superior
Proposal. If PointeCom wishes to exercise such right, it must give the Company
written notice of its decision to do so within five Business Days after the
Company gives written notice to Pointe Com of such Superior Proposal.
(b) POINTECOM EXCLUSIVITY.
(i) PointeCom shall, and shall cause its Subsidiaries and Representatives
to, immediately cease and terminate any existing solicitation, initiation,
encouragement, activity, discussion or negotiation with any Persons conducted
heretofore by PointeCom, its Subsidiaries or any of their Representatives with
respect to any proposed, potential or contemplated Acquisition Proposal.
(ii) From and after the date hereof, without the prior written consent of
the Company, PointeCom will not authorize or permit any of its Subsidiaries to,
and shall cause any and all of its Representatives not to, directly or
indirectly, (A) solicit, initiate, or encourage any inquiries or proposals that
constitute, or could reasonably be expected to lead to, an Acquisition Proposal,
or (B) engage in negotiations or discussions with any PointeCom Third Party
concerning, or provide any non-public information to any person or entity
relating to, an Acquisition Proposal, or (C) enter into any letter of intent,
agreement in principle or any acquisition agreement or other similar agreement
with respect to any Acquisition Proposal; provided, however, that nothing
contained in this SECTION 7.4(B)(II) shall prevent PointeCom or the PointeCom
Board of Directors prior to receipt of the Requisite Stockholder Approval of
PointeCom stockholders, from furnishing non-public information to, or entering
into discussions or negotiations with, any PointeCom Third Party in connection
with an unsolicited, bona fide written proposal for an Acquisition Proposal by
such PointeCom Third Party, if and only to the extent that (1) such PointeCom
Third Party has made a written proposal to the PointeCom Board of Directors to
consummate an Acquisition Proposal, (2) the PointeCom Board of Directors
determines in good faith, based upon the advice of a financial advisor of
nationally recognized reputation, that such Acquisition Proposal is reasonably
capable of being completed on substantially the terms proposed, and would, if
consummated, result in a transaction that would provide greater value to the
holders of the shares of PointeCom Common Stock than the transaction
contemplated by this Agreement (a "SUPERIOR POINTECOM PROPOSAL"), (3) the
failure to take such action would, in the reasonable good faith judgment of the
PointeCom Board of Directors, based upon a written opinion of PointeCom outside
legal counsel, be a violation of its fiduciary duties to PointeCom's
stockholders under applicable law, and (4) prior to furnishing such non-public
information to, or entering into discussions or negotiations with, such Person,
PointeCom's Board of Directors receives from such Person an executed
confidentiality agreement that provides prior notice of its decision to take
such action to the Company. PointeCom agrees not to release any PointeCom Third
Party from, or waive any provision of, any standstill agreement to which it is a
party or any confidentiality agreement between it and another Person who has
made, or who may reasonably be considered likely to make, an Acquisition
Proposal, unless the failure to take such action would, in the reasonable good
faith judgment of the PointeCom Board of Directors, based upon written opinion
of PointeCom outside legal counsel, be a violation of its fiduciary duties to
PointeCom stockholders under applicable law and such action is taken prior to
receipt of the Requisite Stockholder Approval
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of PointeCom stockholders. Without limiting the foregoing, it is understood that
any violation of the restrictions set forth in the preceding sentence by any
Representative of PointeCom or any of its Subsidiaries shall be deemed to be a
breach of this SECTION 7.4(B) by PointeCom.
(iii) PointeCom shall notify the Company promptly after receipt by
PointeCom or PointeCom's knowledge of the receipt by any of its Representatives
of any Acquisition Proposal or any request for non-public information in
connection with an Acquisition Proposal or for access to the properties, books
or records of PointeCom by any Person that informs such party that it is
considering making or has made an Acquisition Proposal. Such notice shall be
made orally and in writing and shall indicate the identity of the offeror and
the terms and conditions of such proposal, inquiry or contact. PointeCom shall
keep the Company informed of the status (including any change to the material
terms) of any such Acquisition Proposal or request for non-public information.
(iv) The PointeCom Board of Directors may not withdraw or modify, or
propose to withdraw or modify, in a manner adverse to the Company, the approval
or recommendation by PointeCom Board of this Agreement or the Merger unless,
following the receipt of a Superior PointeCom Proposal but prior to receipt of
the Requisite Stockholder Approval of PointeCom stockholders, in the reasonable
good faith judgment of PointeCom Board of Directors, based upon the written
opinion of PointeCom's outside legal counsel, the failure to do so would be a
violation of the PointeCom Board of Director's fiduciary duties to PointeCom's
stockholders under applicable law; PROVIDED, HOWEVER, that, the PointeCom Board
of Directors shall submit this Agreement and the Merger to PointeCom's
stockholders for adoption and approval, whether or not PointeCom Board of
Directors at any time subsequent to the date hereof determines that this
Agreement is no longer advisable or recommends that the stockholders of
PointeCom reject it or otherwise modifies or withdraws its recommendation.
Unless the PointeCom Board of Directors has withdrawn its recommendation of this
Agreement in compliance herewith, PointeCom shall use its best efforts to
solicit from PointeCom's stockholders proxies in favor of adoption and approval
of the Merger and this Agreement in accordance with the NRS and its articles of
incorporation and by-laws.
(v) In the event PointeCom receives a Superior PointeCom Proposal,
PointeCom shall offer to the Company the right to equal such Superior PointeCom
Proposal or make a proposal that is superior to PointeCom's stockholders than
such Superior PointeCom Proposal. If the Company wishes to exercise such right,
it must give PointeCom written notice of its decision to do so within five
Business Days after PointeCom gives written notice to the Company of such
Superior PointeCom Proposal.
7.5. UPDATE INFORMATION. Not earlier than ten days and not less than five
days before the date scheduled for Closing, each party to this Agreement shall
correct and supplement in writing any information furnished on Schedules that,
to the knowledge of such party, is incorrect or incomplete in any material
respect, and shall promptly furnish such corrected and supplemented information
to the other parties, so that such information shall be correct and complete at
the time such updated information is so provided. Thereafter, to the Closing,
such party shall notify the other parties in writing of any changes or
supplements to the updated information needed, to the knowledge of such party,
to make such information correct and complete at all times to the Closing. If
any corrected or supplemented information or schedules are not objected to in
writing by the receiving party or parties within five Business Days of receipt,
such shall be deemed accepted without objection.
7.6 FUTURE COOPERATION; TAX MATTERS. The Company and PointeCom shall each
deliver or cause to be delivered to the other following the Closing such
additional instruments as the other may reasonably request for the purpose of
fully carrying out this Agreement. The Company and PointeCom will cooperate and
use their commercially reasonable efforts to have the present officers,
directors and employees cooperate with each other at and after the Closing in
furnishing information, evidence, testimony and other assistance in connection
with any actions, proceedings, arrangements or disputes of any nature with
respect to matters pertaining to all periods prior to the Closing. The party
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requesting cooperation, information or actions under this SECTION 7.6 shall
reimburse the other party for all reasonable out-of-pocket costs and expenses
paid or incurred in connection therewith.
7.7. EXPENSES. Each party will pay the fees, expenses and disbursements
of such party and its agents, representatives, financial advisors, accountants
and counsel incurred in connection with the execution, delivery and performance
of this Agreement and any amendments hereto and the consummation of the
transaction contemplated hereby. Notwithstanding the immediately preceding
sentence, in the event this Agreement is terminated after the preparation of the
Joint Proxy Statement/Prospectus has begun, the Company and PointeCom shall each
pay 50% of the fees and expenses incurred in connection with such Joint Proxy
Statement/Prospectus; and the Company shall reimburse PointeCom for all expenses
associated with the PointeCom Loan and in the event the Note is converted into
Class C Convertible Senior Preferred Stock, any expenses of PointeCom associated
with the conversion shall be reimbursed.
7.8. REGISTRATION STATEMENT AND PROXY STATEMENT.
(a) The Company shall promptly prepare and file a registration statement
on Form S-4 (which registration statement, in the form it is declared effective
by the SEC, together with any and all amendments and supplements thereto and all
information incorporated by reference therein, is referred to herein as the
"REGISTRATION STATEMENT") under and pursuant to the provisions of the 1933 Act
for the purpose of registering the Company Common Stock, the Company Preferred
Stock, and the Surviving Securities to be issued in the Merger, together with
any Company Common Stock issuable upon conversion of the Company Preferred Stock
or upon exercise of the Surviving Securities (the "UNDERLYING SECURITIES").
PointeCom shall be allowed to participate in the preparation and review of the
Registration Statement prior to filing with the SEC by the Company. The Company
shall use commercially reasonable efforts to receive and respond to the comments
of the SEC and have the Registration Statement declared effective. The Company
and PointeCom shall promptly mail to their respective stockholders the proxy
statement in its definitive form contained in the Registration Statement. Such
proxy statement shall also serve as the prospectus to be included in the
Registration Statement (such proxy statement, prospectus, and any amendments or
supplements thereto, the "JOINT PROXY STATEMENT/PROSPECTUS"). Each of
PointeCom and the Company agrees to provide as promptly as practical to the
other, such information concerning its business and financial statements and
affairs as, in the reasonable judgment of counsel for the other party, may be
required or appropriate for inclusion in the Registration Statement and the
Joint Proxy Statement/Prospectus and to cause its counsel and auditors to
cooperate with the other counselors and auditors in the preparation of the
Registration Statement and the Joint Proxy Statement/Prospectus. The Company
shall use its commercially reasonable efforts to have the Company Common Stock
to be issued in the Merger, or upon conversion of the Company Preferred Stock
and the Surviving Securities to be listed on NASDAQ, effective with the issuance
thereof.
7.9. COMPANY FINANCINGS. Upon execution of this Agreement, PointeCom
shall make a loan to the Company in the amount of $10,000,000 (the "POINTECOM
LOAN") upon the terms and conditions set forth on EXHIBIT B attached hereto.
The outstanding $1,500,000 loan from PointeCom to the Company shall be repaid by
the Company simultaneously with PointeCom's funding of the PointeCom Loan. The
net proceeds of such loan ($8,481,500) will be held in escrow and disbursed
pursuant to the terms of the escrow agreement attached hereto as EXHIBIT "E".
7.10. VOTING AGREEMENTS. The Company and PointeCom shall use their best
efforts to cause the Voting Agreement in the form attached hereto as EXHIBIT F
to be executed by (i) the stockholders owning a majority of the voting power of
the outstanding capital stock of PointeCom and (ii) stockholders owning 37% of
the voting power of the outstanding capital stock of the Company. The Company,
as the sole stockholder of Newco, hereby consents to the adoption of this
Agreement by Newco and agrees that such consent shall be treated for all
purposes as a vote duly adopted at a meeting of the stockholders of Newco for
this purpose.
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7.11. COMPANY BOARD OF DIRECTORS AND OFFICERS. Upon consummation of the
Merger, the Board of Directors of the Company shall be adjusted in size and
membership so that the total number of directors is nine, of which six of the
initial members shall be named by PointeCom and three of the initial members
shall be named by the Company. In connection with the next two elections of
directors of the Company by the shareholders of the Company that occur
subsequent to election of the initial Board of Directors as provided in the
preceding sentence, the then existing Board of Directors of the Company shall
determine the size of the board and a slate of nominees to be submitted to the
shareholders of the Company. Of these nominees, a majority of the members of the
then existing board who were designated by the Company (or elected to succeed
such designees pursuant the procedure described in this sentence) shall have the
right to designate three members of such slate of nominees. Prior to Closing,
the By-laws (or other appropriate governing instruments) of the Company shall be
appropriately amended to reflect these provisions for determining nominees for
election to the Board of Directors subsequent to consummation of the Merger.
7.12. KEY MANAGERS AND EMPLOYEES. Prior to Closing, and subject to the
approval of the Company and PointeCom, the Boards of Directors of the Company
and PointeCom shall designate certain officers, directors, managers and
employees of the respective companies as the recipients of severance and/or
option agreements to be entered into as of the Effective Time. All accrued
bonuses shall be paid to employees of both companies for calendar year 1999.
7.13. NOTICES AND CONSENTS. Each of the Company, Newco and PointeCom will
give any required notices (and will cause each of their respective Subsidiaries
to give any required notices) to third parties, and will use commercially
reasonable efforts to obtain (and will cause each of their respective
Subsidiaries to use commercially reasonable efforts to obtain) any third-party
consents that may be required to consummate the Merger.
7.14. INDEMNIFICATION OF DIRECTORS AND OFFICERS OF POINTECOM.
(a) The Company agrees that, at the Effective Time, all rights to
indemnification existing in favor of the present or former directors and
officers of PointeCom (as such), or present or former officers or directors of
PointeCom serving or who served at PointeCom's request as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise (together with such person's heirs,
executors or administrators, a "COMPANY INDEMNIFIED PARTY" and collectively,
the "COMPANY INDEMNIFIED PARTIES"), as provided in the Company's
Organizational Documents and the indemnification agreements with such present
and former directors and officers as in effect as of the date hereof with
respect to matters occurring at or prior to the Effective Time, all of which
agreements are set forth on SCHEDULE 7.14 attached hereto, shall survive the
Merger and shall continue in full force and effect and without modification
(other than modifications which would enlarge the indemnification rights) for a
period of not less than six years and the Surviving Corporation shall comply
fully with its obligations hereunder and thereunder.
(b) Any Company Indemnified Party wishing to claim indemnification under
SECTION 7.14(A), notwithstanding anything to the contrary in the provisions set
forth in the Company's or the Surviving Corporation's certificate of
incorporation, by-laws or other agreements respecting indemnification of
directors or officers, upon learning of any such claim, action, suit, proceeding
or investigation, shall promptly notify the Company thereof, but the failure to
so notify shall not relieve the Company of any liability it may have to such
Indemnified Party if such failure does not materially prejudice the Company. In
the event of any such claim, action, suit, proceeding or investigation (whether
arising before or after the Effective Time), (A) the Company or the Surviving
Corporation shall have the right following the Effective Time to assume the
defense thereof and Surviving Corporation shall not be liable to such Company
Indemnified Parties for any legal expenses of other counsel or any other
expenses subsequently incurred by such Company Indemnified Parties in connection
with the defense thereof, except that if the Company or the Surviving
Corporation fails to assume such defense or counsel for the Company Indemnified
Party advises that there are issues which raise conflicts of interest between
the Company or the Surviving Corporation, on the one hand, and the Company
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Indemnified Parties, on the other hand, the Company Indemnified Parties may
retain counsel satisfactory to them, and the Company or Surviving Corporation
shall pay all reasonable fees and expenses of such counsel for the Company
Indemnified Parties promptly as statements therefor are received; PROVIDED,
HOWEVER, that Surviving Corporation and the Company shall be obligated to pay
for only one firm of counsel for all Company Indemnified Parties in any
jurisdiction unless the use of one counsel for such Company Indemnified Parties
would present such counsel with a conflict of interest, in which case Surviving
Corporation and the Company need only pay for separate counsel to the extent
necessary to resolve such conflict; (B) the Company Indemnified Parties will
reasonably cooperate in the defense of any such matter; and (C) Surviving
Corporation and the Company shall not be liable for any settlement effectuated
without its express prior written consent, which consent shall not be
unreasonably withheld or delayed. Surviving Corporation and the Company shall
not settle any action or claim identified in this SECTION 7.14(B) in any manner
that would impose any liability or penalty on a Company Indemnified Party not
paid by the Company or the Surviving Corporation without such Company
Indemnified Party's prior written consent, which consent shall not be
unreasonably withheld or delayed.
(c) Notwithstanding anything contained in clause (b) above, Surviving
Corporation and the Company shall not have any obligation hereunder to any
Company Indemnified Party (A) if the indemnification of such Company Indemnified
Party by Surviving Corporation or the Company in the manner contemplated hereby
is prohibited by applicable law, (B) the conduct of the Company Indemnified
Party relating to the matter for which indemnification is sought involved bad
faith, gross negligence or willful misconduct of such Company Indemnified Party,
(C) with respect to actions taken by any such Company Indemnified Party in his
or her individual capacity, including, without limitation, with respect to any
matters relating, directly or indirectly, to the purchase, sale or trading of
securities issued by the Company other than a tender or sale pursuant to a stock
tender agreement or (D) if such Company Indemnified Party shall have breached
its obligation to cooperate with Surviving Corporation or the Company in the
defense of any claim in respect of which indemnification is sought and such
breach (x) materially and adversely affects Surviving Corporation's or the
Company's defense of such claim or (y) will materially and adversely affect
Surviving Corporation's or the Company's defense of such claim if such breach is
not cured within ten days after notice of such breach is delivered to the
Company Indemnified Party and such breach is not cured during such period.
7.15. REGULATORY MATTERS AND APPROVALS. In addition to the requirements
of SECTION 7.8, each of the Company, Newco and PointeCom, promptly after the
date hereof, will (and the Company and PointeCom, promptly after the date
hereof, will cooperate to cause each of its Subsidiaries to) give any notices
to, make any filings with and use commercially reasonable efforts to obtain any
authorizations, consents and approvals of Governmental Authorities in connection
with the matters referred to in SECTION 5.2(C) and SECTION 6.2(C) above. Without
limiting the generality of the foregoing:
(a) STATE CORPORATION LAW. The Company will take all action, to the extent
necessary in accordance with applicable law, its certificate of incorporation
and by-laws to convene a special meeting of its stockholders (the "COMPANY
SPECIAL MEETING"), as soon as reasonably practicable in order that its
stockholders may consider and vote upon the adoption of this Agreement and the
approval of the Merger in accordance with the Texas Business Corporation Act,
the issuance of Company Common Stock in connection with the Merger as provided
in this Agreement as required by the rules of NASDAQ and an amendment to the
certificate of incorporation of the Company to increase the number of authorized
shares of Company Common Stock and to approve new stock option plansas required
to effectuate the terms of this transaction. PointeCom will take all action, to
the extent necessary in accordance with applicable law, its certificate of
incorporation and by-laws to convene a special meeting of its stockholders (the
"POINTECOM SPECIAL MEETING"), as soon as reasonably practicable in order that
its stockholders may consider and vote upon the adoption of this Agreement and
the approval of the Merger in accordance with the NRS. The Company and PointeCom
shall mail the Joint Proxy Statement/Prospectus to their respective stockholders
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simultaneously and as soon as reasonably practicable. Subject to SECTION 7.4,
the Joint Proxy Statement/Prospectus shall contain the affirmative unanimous
recommendations of the Company Board of Directors (i) in favor of the adoption
of this Agreement and the approval of the Merger, (ii) in favor of issuance of
shares of Company Common Stock in connection with the Merger as provided in the
Agreement as required by the rules of NASDAQ and (iii) in favor of the increase
in the number of authorized shares of Company Common Stock in accordance with
the Texas Business Corporation Act; and of the PointeCom Board of Directors in
favor of the adoption of this Agreement and the approval of the Merger.
(b) PERIODIC REPORTS. Each of the Parties and its counsel shall be given
an opportunity to review each Form 10-K and Form 10-Q (and any amendments
thereto) to be filed by the other Party under the 1934 Act prior to their being
filed with the SEC and NASDAQ, and shall be provided with final copies thereof
concurrently with their filing with the SEC.
7.16. CONTINUITY OF BUSINESS ENTERPRISE. The Company, Surviving
Corporation or any other member of the qualified group (as defined in Treasury
Regulation s1.368-1(d)) shall, for the foreseeable future, continue at least one
significant historic business line of the Company or use at least a significant
portion of the Company's historic business assets in a business, in each case
within the meaning of Treasury Regulation s1.368-1(d).
ARTICLE VIII
CONDITIONS TO CLOSING
8.1. CONDITIONS TO OBLIGATIONS OF POINTECOM. Except as may be waived by
PointeCom in writing, the obligations of PointeCom to consummate the
transactions contemplated herein are subject to satisfaction of the following
conditions:
(a) PointeCom shall have received a certificate from the Company and Newco
that (i) the representations and warranties of the Company and Newco contained
in this Agreement are true in all material respects at and as of the Closing, as
though such representations and warranties had been made at and as of the
Closing, except for such representations and warranties that are made as of an
earlier date; (ii) each of the Company and Newco has performed and complied in
all material respects with the covenants or conditions required by this
Agreement or any of the agreements, documents or instruments executed pursuant
hereto or thereto to be performed and complied with by the Company and Newco
prior to the Closing; (iii) all declarations, filings and registrations with,
notices to, and authorizations, consents and approvals of any Governmental
Authority or third party set forth in SCHEDULE 5.2 have been made or obtained;
and (iv) there has been no material adverse change in the business, operations,
or financial condition of the Company or Newco since the date of this Agreement.
(b) PointeCom shall have received the opinion, based on representations of
the Company, Newco and PointeCom, and/or certain assumptions, of its attorneys
or independent accountants that the Merger should qualify as a
"reorganization" under Section 368 of the Code.
(c) No action, suit or proceeding before any Governmental Authority, to
enjoin the transactions contemplated by this Agreement, will have been
instituted on or before the Closing Date that has not been dismissed as of the
Closing Date.
(d) This Agreement and the transactions contemplated hereby shall have
been approved by the Requisite Stockholder Approval of PointeCom.
(e) This Agreement and the transaction contemplated hereby shall have the
Requisite Stockholder Approval of the Company.
(f) At the Effective Time, the officers, managers and employees
contemplated in SECTION 7.14, shall have resigned from their respective
positions and executed such documents as are mutually acceptable to the Company
and PointeCom to release PointeCom and the Company from any and all claims that
any such individual may have as a result of such employment.
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(g) The shares of Merger Consideration to be issued to the PointeCom
shareholders shall have been registered under the 1933 Act.
(h) The Company's Board of Directors shall cause to be taken all necessary
actions required to cause, effective at the Closing (i) the Board of Directors
of the Company to have nine members, of which six shall be named by PointeCom.
(i) The Company shall have obtained the approval of Lucent Technologies,
Inc. and General Electric (NTFC and Newbridge) to the Merger and shall have
modified the existing senior credit facility with Lucent Technologies, Inc.,
substantially in accordance with Exhibit A to the Escrow Agreement.
(j) Any applicable waiting period under the Hart Scott Rodino Act shall
have (i) expired without action by the Department of Justice or the Federal
Trade Commission to prevent consummation of the Merger or the complete
consummation of the Merger or (ii) been earlier terminated.
(k) As a condition precedent to the disbursement of funds to the Company
pursuant to the Escrow Agreement, the Company shall cause its legal counsel,
Swidler Berlin Shereff Friedman, LLP, to deliver to PointeCom a legal opinion
with respect to the PointeCom Loan in substantially the form attached hereto as
EXHIBIT G.
(l) The Company shall cause one of its officers to execute and deliver a
certificate containing the representations set forth in EXHIBIT H attached
hereto and any other representations which may be reasonably requested in
connection with the rendering of the required federal income tax opinion.
8.2. CONDITIONS TO OBLIGATIONS OF THE COMPANY AND NEWCO. Except as may be
waived by the Company and Newco in writing, the obligation of the Company and
Newco to consummate the transactions contemplated herein is subject to
satisfaction of the following conditions:
(a) The Company and Newco shall have received a certificate of PointeCom
that (i) the representations and warranties of PointeCom contained in this
Agreement are true in all material respects at and as of the Closing, as though
such representations and warranties had been made at and as of the Closing, (ii)
PointeCom has performed and complied in all material respects with the covenants
or conditions required by this Agreement or any of the agreements, documents or
instruments executed pursuant hereto or thereto to be performed and complied
with by PointeCom prior to the Closing, (iii) all declarations, filings and
registrations with, notices to, and authorizations, consents and approvals of
any Governmental Authority or third party set forth in SCHEDULE 6.2 have been
made or obtained and (iv) there has been no material adverse change in the
business, operations, or financial condition of PointeCom since the date of this
Agreement.
(b) No action, suit or proceeding before any Governmental Authority, to
enjoin the transactions contemplated by this Agreement or to its consummation,
will have been instituted on or before the Closing Date.
(c) The Agreement and the transaction contemplated hereby shall have been
approved by the Requisite Stockholder Approval of the Company.
(d) This Agreement and the transaction contemplated hereby shall have the
Requisite Stockholder Approval of PointeCom.
(e) At the Effective Time, the officers, directors, managers and employees
contemplated in SECTION 7.12, shall have resigned from their respective
positions and executed such documents as are mutually acceptable to the Company
and PointeCom to release PointeCom and the Company from any and all claims that
any such individual may have as a result of such employment.
(f) The Company shall have obtained the approval of Lucent Technologies,
Inc. and General Electric (NTFC and Newbridge) to the Merger and shall have
modified the existing senior credit facility with Lucent Technologies, Inc.,
substantially in accordance with Exhibit A to the Escrow Agreement.
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(g) Any applicable waiting period under the Hart Scott Rodino Act shall
have (i) expired without action by the Department of Justice or the Federal
Trade Commission to prevent consummation of the Merger or the complete
consummation of the Merger or (ii) been earlier terminated.
(h) PointeCom shall cause one of its officers to execute and deliver a
certificate containing the representations set forth in EXHIBIT H attached
hereto and any other representations which may be reasonably requested in
connection with the rendering of the required federal income tax opinion.
(i) PointeCom shall have obtained a written waiver with regard to this
transaction of the rights of PointeCom Class A Preferred stockholders pursuant
to Section 2 of the Certificate of Designations for such PointeCom Class A
Preferred Stock.
(j) The PointeCom Loan shall have been consummated and the proceeds of
such loan disbursed to the Company pursuant to the terms of the Escrow
Agreement.
ARTICLE IX
NONDISCLOSURE OF CONFIDENTIAL INFORMATION
9.1. GENERAL. Each party hereto will hold, and will use its best efforts
to cause its Affiliates and their respective representatives to hold, in strict
confidence from any Person (other than any such Affiliate or representative),
unless (a) compelled to disclose by judicial or administrative process or by
other requirements of Law or (b) disclosed in an action or proceeding brought by
a party hereto in pursuit of its rights or in the exercise of its remedies
hereunder, all documents and information concerning the other party hereto or
any of its Affiliates furnished to it by such other party or such other party's
representatives in connection with this Agreement or the transactions
contemplated hereby, except to the extent that such documents or information can
be shown to have been (i) previously known by the party receiving such documents
or information, (ii) in the public domain (either prior to or after the
furnishing of such documents or information hereunder) through no fault of such
receiving party or (iii) later acquired by the receiving party from another
source if the receiving party is not aware that such source is under an
obligation to another party hereto to keep such documents and information
confidential. In the event of a breach or threatened breach by any party of the
provisions of this Section, all other parties shall be entitled to an injunction
restraining such party from disclosing, in whole or in part, such confidential
information. Nothing herein shall be construed as prohibiting any party from
pursuing any other available remedy for such breach or threatened breach,
including, without limitation, the recovery of damages.
9.2. EQUITABLE RELIEF. Because of the difficulty of measuring economic
losses as a result of the breach of the foregoing covenants, because a breach of
such covenant would diminish the value of the assets and business of the Company
or PointeCom, and because of the immediate and irreparable damage that would be
caused for which the Surviving Corporation and/or PointeCom and/or the Company
would have no other adequate remedy, each party to this Agreement agrees that
the foregoing covenants may be enforced against it by injunctions, restraining
orders and other equitable actions.
ARTICLE X
INTENDED TAX TREATMENT
10.1. TAX-FREE REORGANIZATION. PointeCom and the Company are entering
into this Agreement with the intention that the Merger qualify as a tax-free
reorganization for federal income tax purposes and neither PointeCom nor the
Company will take any actions that disqualify the Merger for such treatment.
Neither PointeCom, Newco nor the Company will take or omit to take any action
that would cause the Merger not to be described as a reorganization under
Section 368(a) of the Code (or any comparable provisions of applicable state or
local law) and the parties will characterize the Merger as such a reorganization
for purposes of all tax returns and other filings.
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ARTICLE XI
TERMINATION
11.1. TERMINATION. This Agreement may be terminated and the transaction
contemplated hereby abandoned:
(a) By mutual written consent of the parties at any time prior to Closing.
(b) Prior to the Closing, by written notice to the Company and Newco from
PointeCom, if (i) there is material breach of any representation, warranty or
covenant (including the failure of a party to consummate the Closing, if the
other parties are willing, ready and able to consummate the Closing in
accordance with this Agreement) on the part of the Company or Newco, or if a
representation or warranty of the Company or Newco shall be untrue in any
material respect, or (ii) if the conditions specified in SECTION 8.1 have not
been satisfied, and any such matter described in clauses (i) and (ii) of this
paragraph has not been cured by the Company or Newco within 10 Business Days
after written notice thereof from PointeCom.
(c) Prior to the Closing, by written notice to PointeCom from the Company
and Newco (i) if there is material breach of any representation, warranty or
covenant (including the failure of a party to consummate the Closing, if the
other parties are willing, ready and able to consummate the Closing in
accordance with this Agreement) on the part of PointeCom or if a representation
or warranty of PointeCom shall be untrue in any material respect, or (ii) if the
conditions specified in SECTION 8.2 have not been satisfied, and any such matter
described in clauses (i) and (ii) of this paragraph has not been cured by
PointeCom within 10 Business Days after written notice thereof from the Company.
(d) By action of the Board of Directors of either PointeCom or the
Company, before or after the approval by the Company stockholders or the
PointeCom stockholders, (A) if the Effective Time shall not have occurred by
June 30, 2000 (the "OUTSIDE DATE") (unless the failure to consummate the
Merger by such date is due to the action or failure to act of the party seeking
to terminate); or (B) if any condition to the obligation of the terminating
party to consummate the Merger shall have become incapable of being satisfied
prior to the Outside Date as a result of a court order, stipulation or
injunction that is final and non-appealable.
(e) By PointeCom if the Company Board of Directors (i) enters into or
publicly announces its intention to enter into an agreement or agreement in
principle with respect to an Acquisition Proposal, (ii) withdraws its
recommendation to the Company stockholders of this Agreement or the Merger, or
(iii) after the receipt of an Acquisition Proposal, fails to confirm publicly,
within ten Business Days after the request of PointeCom, its recommendation to
the Company stockholders that the Company stockholders adopt and approve this
Agreement and the Merger.
(f) By the Company if the PointeCom Board of Directors (i) enters into or
publicly announces its intention to enter into an agreement or agreement in
principle with respect to an Acquisition Proposal, (ii) withdraws its
recommendation to the PointeCom stockholders of this Agreement or the Merger or
(iii) after the receipt of an Acquisition Proposal, fails to confirm publicly,
within ten Business Days after the request of the Company, its recommendation to
the PointeCom stockholders that the PointeCom stockholders adopt and approve
this Agreement and the Merger.
(g) In the event any party becomes aware, and notifies the other party
(the "Notified Party") in writing, of any matter, fact or circumstance which
would be required to be disclosed by any party as of the date hereof or at the
Closing, and such matter, fact or circumstance is such that the Notified Party
would not be obligated hereunder to consummate the Closing, then the Notified
Party shall have the right to terminate this Agreement within 10 Business Days
after having received such notice, such period being subject to an extension at
the written request of the Notified Party of up to five additional Business Days
as reasonably required to allow the Notified Party to evaluate the matter, fact
or circumstance of which it has been notified, or if the Notified Party does not
so terminate this Agreement, then (i) such notice shall be deemed to amend the
schedule or appropriate disclosure hereunder as of the date hereof; (ii) any
breach of any representation, warranty or covenant hereunder
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that could have existed as a result of the occurrence or existence of such fact,
matter or circumstance shall be deemed cured and performed; and (iii) any
condition to such Notified Party's obligation to consummate the Closing which
would otherwise not be fulfilled as a result of the occurrence or existence of
such fact, matter or circumstance shall be deemed waived.
11.2. EFFECT. Any termination of this Agreement shall not release either
PointeCom on the one hand or the Company and Newco on the other from any
liability (for damages or otherwise) or other consequences arising from any
breach or violation by such party of the terms of this Agreement prior to the
effective time of such termination, nor shall any such termination release any
party from its obligations or duties under this Agreement, which, by their terms
and/or expressed intent, may require performance subsequent to any such
termination, and all provisions of this Agreement that set forth such
obligations or duties (including, without limitation SECTIONS 7.7, AND 11.3) and
such other general or procedural provisions that maybe relevant to any attempt
to enforce such obligations or duties, shall survive any such termination of
this Agreement until such obligations or duties shall have been performed or
discharged in full. Notwithstanding the foregoing, if Section 11.3 is applicable
to a termination and a party satisfies all of its obligations as set forth in
SECTION 11.3, no further liability or obligation shall extend to such party,
other than as set forth in SECTION 11.3.
11.3. SPECIAL REMEDIES.
(a) For purposes of the remedies available under this SECTION 11.3, the
parties acknowledge that it would be extremely impractical and difficult to
ascertain the actual damages that would be suffered by the parties if any party
or parties fails to consummate the transactions contemplated herein (for any
reason other than a party's failure, refusal or inability to perform any of its
covenants and agreements hereunder or the failure of any other of the conditions
to the party's obligation to consummate the transactions herein) and this
Agreement is terminated as hereinafter provided in this SECTION 11.3. The
parties have considered carefully the loss to each non-breaching or
non-defaulting party that would result from the failure of the transactions to
be consummated as a result of such a breach or default hereunder by a party or
parties; and other damages that the non-breaching or non-defaulting party or
parties will sustain but which the parties cannot calculate with absolute
certainty. Accordingly, to the extent set forth in this SECTION 11.3, the
parties' damages under the circumstances hereinafter described would reasonably
be expected to amount to the sum of $5,000,000 (in the aggregate), which shall
be paid as full and complete liquidated damages (the "TERMINATION FEE").
(b) In the event of any termination of this Agreement pursuant to SECTION
11.1(E), then the Company shall, at the option of PointeCom, promptly, but in no
event later than thirty Business Days after demand by PointeCom, pay to
PointeCom the Termination Fee, plus all amounts due (by acceleration or
otherwise) under the PointeCom Loan. Alternatively, PointeCom may, at its sole
option, convert the PointeCom Loan and the amount owed as the Termination Fee
into Class C Convertible Senior Preferred Stock (100,000 shares and 50,000
shares, respectively), which preferred stock shall automatically convert into
Company Common Stock at a conversion price of $8.20 per share as therein
provided, and Warrants. If the Company defaults in the payment of the
Termination Fee, PointeCom may, at its option, convert the Termination Fee into
50,000 shares of Class C Convertible Senior Preferred Stock (which is
convertible, at the option of PointeCom, into Company Common Stock at $8.20 per
share with regard to the Termination Fee); if the Company defaults in the
repayment of the PointeCom Loan, PointeCom may, at its option, convert the
PointeCom Loan into 100,000 shares (plus shares equal to accrued interest) of
Class C Convertible Senior Preferred Stock (which is convertible, at the option
of PointeCom, into Company Common Stock at $5.00 per share with regard to the
PointeCom Loan) and Warrants.
(c) In the event of any termination of this Agreement pursuant to SECTION
11.1(F), then PointeCom shall promptly, but in no event later than thirty
Business Days after written request by the Company, pay to the Company the
Termination Fee.
(d) In the event of termination of this Agreement pursuant to SECTION
11.1(B)(I), then the Termination Fee shall not be payable, PointeCom may pursue
its remedies at law or in equity and the
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Company shall, at the option of PointeCom, promptly, but in no event later than
thirty Business Days after demand by PointeCom, pay to PointeCom all amounts due
(by acceleration or otherwise) under the PointeCom Loan. If the Company defaults
in the repayment of the PointeCom Loan, then PointeCom may, at its option,
convert the PointeCom Loan into Class C Convertible Senior Preferred Stock
(which is convertible into Company Common Stock at $5.00 per share with regard
to the PointeCom Loan) and Warrants as provided under the terms of the PointeCom
Loan.
(e) In the event of termination of this Agreement pursuant to SECTION
11.1(C)(I), then the Termination Fee shall not be payable and the Company may
pursue its remedies at law or in equity.
(f) In the event of termination of this Agreement because the conditions
specified in SECTIONS 8.1(G), (J) OR (K) have not been satisfied, then the
Termination Fee shall not be payable and the PointeCom Loan shall not be
accelerated. If the Company defaults in the repayment of the PointeCom Loan when
said loan shall become due, then PointeCom may, at its option, convert the
PointeCom Loan into Class C Convertible Senior Preferred Stock (which are
convertible into Company Common Stock at $8.20 per share) and Warrants of the
Company as provided under the terms of the PointeCom Loan.
(g) In the event of termination of this Agreement because the condition
specified in SECTION 8.1(E) has not been satisfied (under circumstances that are
not encompassed by paragraph 11.3(b) above), then the Termination Fee shall not
be payable and the Company shall promptly, but in no event later than thirty
Business Days after demand by PointeCom, pay to PointeCom all amounts due (by
acceleration or otherwise) under the PointeCom Loan. If the Company defaults in
the repayment of the PointeCom Loan, then PointeCom may, at its sole option,
convert the PointeCom Loan into Class C Convertible Senior Preferred Stock
(which is convertible into Company Common Stock at $8.20 per share) and Warrants
of the Company as provided under the terms of the PointeCom Loan.
(h) In the event of termination of this Agreement because the condition
specified in SECTION 8.2(D) has not been satisfied, then this Agreement shall
terminate, the Termination Fee shall not be payable and the PointeCom Loan shall
not be accelerated, and PointeCom may, at its sole option, convert the PointeCom
Loan into Class C Convertible Senior Preferred Stock (which is convertible into
Company Common Stock at $8.20 per share) and Warrants as provided under the
terms of the PointeCom Loan.
(i) In order for PointeCom to convert the Termination Fee into 50,000
shares of Class C Convertible Senior Preferred Stock, PointeCom shall give the
Company written notice that PointeCom elects to convert such fee. The date of
receipt of such notice by the Company shall be the "CONVERSION DATE". The
Company shall, as soon as practicable after receipt of such notice and no later
than 10 days thereafter, issue and deliver to PointeCom a certificate for 50,000
shares of Class C Convertible Senior Preferred Stock, together with a duly
executed Registration Rights Agreement. Such conversion shall be deemed to have
been made immediately prior to the close of business on the Conversion Date, and
PointeCom shall be regarded for all corporate purposes as the holder of the
number of shares of Class C Convertible Senior Preferred Stock to which it is
entitled upon the Conversion Date.
ARTICLE XII
MISCELLANEOUS
12.1. SUCCESSORS AND ASSIGNS. This Agreement and the rights, interests
and obligations of the parties hereunder may not be assigned or delegated (by
operation of Law or otherwise) and shall be binding upon and shall inure to the
benefit of the parties hereto, the successors of PointeCom, Newco, and the
Company.
12.2. ENTIRE AGREEMENT. This Agreement (including the Schedules, exhibits
and annexes attached hereto) and the documents delivered pursuant hereto
constitute the entire agreement and understanding among the Company, Newco and
PointeCom and supersede any prior agreement and
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understanding relating to the subject matter of this Agreement, including the
term sheet dated November 23, 1999. This Agreement may be modified or amended
only by a written instrument executed by the parties hereto, acting through
their respective officers, duly authorized by their respective Boards of
Directors.
12.3. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument. Facsimile
transmission of any signed original document and/or retransmission of any signed
facsimile transmission will be deemed the same as delivery of an original. At
the request of any party, the parties will confirm facsimile transmission by
signing a duplicate original document.
12.4. BROKERS AND AGENTS. Each party hereto represents and warrants that
it employed no broker or agent in connection with the transactions contemplated
by this Agreement. Each party agrees to indemnify each other party against all
loss, cost, damages or expense arising out of claims for fees or commissions of
brokers employed or alleged to have been employed by such indemnifying party in
connection with the transactions contemplated by this Agreement.
12.5. NOTICES. All notices and communications required or permitted
hereunder shall be in writing and may be given by facsimile or by depositing the
same in the United States mail, addressed to the party to be notified, postage
prepaid and registered or certified with return receipt requested, or by
delivering the same in person to an officer or agent of such party, as follows:
(a) If to PointeCom, addressed to them at:
Pointe Communications Corporation
1325 North Meadow Parkway, Suite 110
Roswell, GA 30076
FAX: (770) 319-2834
with a copy (which shall not constitute notice) to:
W. Robert Dyer, Jr.
Gardere & Wynne, L.L.P.
1601 Elm Street, Suite 3000
Dallas, Texas 75201-4761
FAX: (214) 999-3574
(b) If to the Company or Newco, addressed as follows:
Telscape International, Inc.
2700 Post Oak Boulevard, Suite 100
Houston, Texas 77056
FAX: (713) 968-0930
with a copy (which shall not constitute notice) to:
John J. Klusaritz
Swidler Berlin Shereff Friedman, LLP
3000 K St., NW, Suite 300
Washington, DC 20007
FAX: (202) 424-7647
or such other address as any party hereto shall specify pursuant to this SECTION
12.5 from time to time.
12.6. EXERCISE OF RIGHTS AND REMEDIES. Except as otherwise provided
herein, no delay of or omission in the exercise of any right, power or remedy
accruing to any party as a result of any breach or default by any other party
under this Agreement shall impair any such right, power or remedy, nor shall it
be construed as a waiver of or acquiescence in any such breach or default, or of
any similar breach or default occurring later; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
occurring before or after that waiver.
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12.7. REFORMATION AND SEVERABILITY. In case any provision of this
Agreement shall be invalid, illegal or unenforceable, it shall, to the extent
possible, be modified in such manner as to be valid, legal and enforceable, but
so as to most nearly retain the intent of the parties, and if such modification
is not possible, such provision shall be severed from this Agreement, and in
either case, the validity, legality and enforceability of the remaining
provisions of this Agreement shall not in any way be affected or impaired
thereby.
12.8. GOVERNING LAW. This Agreement shall be construed in accordance with
the laws of the State of Texas (except for its principles governing conflicts of
laws).
12.9. NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any Person other than the parties hereto and their
respective successors and permitted assigns; PROVIDED, HOWEVER, that (i) the
provisions in Article III above (A) concerning payment of the Merger
Consideration are intended for the benefit of PointeCom stockholders and (B)
concerning the conversion of the stock options are intended for the benefit of
the holders of such stock options, (ii) the provisions in Section 7.14 above
concerning indemnification are intended for the benefit of the individuals
specified therein and their respective legal representatives and (iii) the
provisions of Sections 7.4, and 10.1 are intended for the benefit of the Company
stockholders and the PointeCom stockholders.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
POINTE COMMUNICATIONS CORPORATION
By:
Name:
Title:
POINTE ACQUISITION, CORP.
By:
Name:
Title:
TELSCAPE INTERNATIONAL, INC.
By:
Name:
Title:
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April 17, 2000
To the Board of Directors of
Telscape International, Inc.
2700 Post Oak Blvd.
Suite 1000
Houston, Texas 77056-3031
Gentlemen:
Reference is made to our letter to you, dated December 31, 1999 (the
"Original Letter"), relating to the proposed merger (the "Merger") of Pointe
Acquisition, Inc. ("Newco"), a wholly-owned subsidiary of Telscape
International, Inc. (the "Company"), with and into Pointe Communications
Corporation ("PointeCom"). Terms used herein and not otherwise defined have the
meanings ascribed to them in the Original Letter.
We understand that on March 30, 2000, the Company, Newco and PointeCom
entered into an Amended and Restated Merger Agreement, effective as of December
31, 1999 (the "Amended Merger Agreement"). The Amended Merger Agreement effected
a change in the Exchange Ratio resulting from a decision by PointeCom not to
spin-off a subsidiary, TeleCommute Solutions, Inc. ("TCS"), to PointeCom's
shareholders prior to the Merger as had been contemplated by the Merger
Agreement. The Amended Merger Agreement provides, among other things, that, upon
the closing of the Merger, each outstanding share of PointeCom common stock
(other than shares held in Treasury) will be converted into 0.223514 shares of
common stock of the Company (the "Revised Exchange Ratio").
On December 31, 1999, we delivered to you our opinion, as investment
bankers, in the form of the Original Letter, to the effect that, as of that
date, the Exchange Ratio (as then defined) was fair, from a financial point of
view, to the shareholders of the Company. You have asked us to advise you
whether, had the Revised Exchange Ratio been the Exchange Ratio at December 31,
1999, such change would have changed our opinion.
In conducting our analysis and arriving at our revised opinion as
expressed herein, we have, among other things:
o reviewed the Amended Merger Agreement;
o reviewed certain information relating to a private placement of convertible
preferred stock of TCS;
o held discussions with certain officers and employees of the Company and
PointeCom; and
o reviewed such additional information and performed such analyses as we
deemed appropriate.
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Our opinion as expressed herein is subject to and is qualified in its
entirety by all of the limitations and qualifications contained in the Original
Letter, including, without limitation, those contained in the sixth through the
tenth paragraphs thereof. Our opinion relates solely to the fairness, as of
December 31, 1999, from a financial point of view, of the Revised Exchange Ratio
to the shareholders of the Company and has been prepared at the request of, and
for the information of, the Board of Directors of the Company solely for its use
in evaluating the same. 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 December 31, 1999, the Revised Exchange Ratio
was fair, from a financial point of view, to the shareholders of the Company.
Very truly yours,
KAUFMAN BROS., L.P.
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UPDATE OF OPINION
On March 30, 2000, Telscape, the acquisition subsidiary and Pointe entered
into an Amended and Restated Merger Agreement, effective as of December 31,
1999. The amended and restated merger agreement effected a change in the
exchange ratio resulting from a decision by Pointe not to spin off a partially
owned subsidiary, Telecommute Solutions, Inc., to Pointe's shareholders prior to
the merger as had been contemplated by the original merger agreement. The
amended and restated merger agreement provides, among other things, that, upon
the closing of the merger, each outstanding share of PointeCom common stock
(other than shares held in treasury) will be converted into 0.223514 shares of
Telscape common stock.
In light of this change, Kaufman Bros. rendered an update of its opinion to
Telscape's board on April 17, 2000, to the effect that, based upon and subject
to the considerations and limitations set forth in such opinion, as of December
31, 1999, the revised exchange ratio of 0.223514 was fair, from a financial
point of view, to the shareholders of Telscape and Pointe.
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[KBRO KAUFMAN BROS., L.P. LETTERHEAD]
December 31, 1999
To the Board of Directors of
Telscape International, Inc.
2700 Post Oak Blvd.
Suite 1000
Houston, Texas 77056-3031
Gentlemen:
We understand that Telscape International, Inc. (the "Company"), Pointe
Acquisition, Inc., a wholly owned subsidiary of the Company ("Newco"), and
Pointe Communications Corporation ("PointeCom") propose to enter into an
Agreement and Plan of Merger (the "Merger Agreement") pursuant to which
PointeCom will merge with and into Newco with PointeCom as the surviving
corporation (the "Merger"), as a result of which PointeCom will become a
wholly-owned subsidiary of the Company. The Merger Agreement provides, among
other things, that, upon the closing of the Merger (the "Closing"), each
outstanding share of PointeCom common stock (other than shares held in Treasur)
will be converted into 0.215054 shares of common stock of the Company (the
"Exchange Ratio"), and all shares of PointeCom Class A Preferred Stock and Class
B Preferred Stock shall be converted into an equal number of shares of common
stock of Class D Convertible Preferred Stock and Class E Convertible Preferred
Stock, respectively, of the Company, the terms of which shall be the same as the
PointCom Class A Preferred Stock and Class B Preferred Stock, respectively,
except the number of shares of common stock of the Company into which the Class
D Convertible Preferred Stock and Class E Convertible Preferred Stock of the
Company initially shall be convertible, shall be adjusted by the Exchange Ratio.
In addition, all employee options to purchase PointeCom common stock that are
granted and outstanding at the Closing (less any options that have expired or
will expire by their terms if not exercised as a result of the Merger) will be
converted into options to purchase the same number of shares of common stock of
the Company, on comparable terms and with comparable vesting schedules. It is
also contemplated that all other options, warrants or other rights or securities
exercisable, convertible or exchangeable for PointeCom stock outstanding at the
Closing (other than such options, warrants or other rights or securities which
would, by their terms, expire upon consummation of the Merger if not exercised
prior thereto) will be converted into substantially equivalent options, warrants
or rights or securities exercisable, convertible or exchangeable for shares of
common stock of the Company. The parties expect that the Merger will meet all
necessary conditions in order to be accounted for as a tax free organization
under Section 368 of the Internal Revenue Code of 1986, as amended. The Merger
is subject to, among other things, the approval of the shareholders of the
Company.
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Telscape International, Inc.
December 31, 1999
Page 2
In connection with your review and analysis of the Merger, you have
requested our opinion, as investment bankers, as to the fairness, from a
financial point of view, of the Exchange Ratio to the shareholders of the
Company.
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:
o a draft of the Agreement and Plan of Merger, dated December 28, 1999, by
and among the Company, Newco and PointeCom;
o certain documents and reports filed by the Company and PointeCom with the
Securities and Exchange Commission;
o certain internal information and documents relating to the Company and
PointeCom provided to us their respective managements, including historical
financial information and financial forecasts;
o the reported prices and trading activity of the Company's and PointeCom's
common stock;
o the financial and business prospects for the merged entity and the industry
in which it completes;
o certain publicly available information concerning certain other companies
engaged in businesses which we believe to be reasonably comparable to the
Company and PointeCom and the trading markets for such other companies'
securities; and
o information concerning certain other business transactions which we believe
to be reasonably comparable to the Merger.
We have also discussed with certain officers and employees of the Company
and PointeCom their respective businesses and operations, assets, present
condition and future prospects, and performed such analyses as we deemed
appropriate.
In arriving at our opinion, we did not visit the properties and facilities
of the Company and PointeCom nor have we made, obtained or been provided with
any independent evaluation or appraisal of such properties and facilities or of
any the assets or liabilities of the Company or PointeCom (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 assurances of the respective managements of the Company and PointeCom 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
respective managements of the Company and PointeCom, and we assumed without
independent investigation, that they were reasonably prepared and reflected, as
of the times
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Telscape International, Inc.
December 31, 1999
Page 3
they were delivered to us, the best currently available estimates and judgement
as to the expected future performance of the Company or PointeCom, as the case
may be.
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 thereof. 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.
In the ordinary course of our business, we may hold and actively trade
securities of the Company and PointeCom 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 the Company should take in connection
with the Merger or any aspect thereof and is not recommendation to any person on
how such person should vote in the consideration of the Merger. Our opinion
relates soley to the fairness, as of the date hereof, from a financial point of
view, of the Exchange Ratio to the shareholders of the Company. We express no
opinion herein as to the structure, terms or effect of any aspect of the Merger,
the merits of the underlying decision of the Company to enter into the Merger or
any other transactions or business strategies discussed by the Board of
Directors of the Company as alternatives to the Merger.
This opinion has been prepared at the request of, and for the information
of, the Board of Directors of the Company solely for its use in evaluating the
fairness, from a financial point of view, of the Exchange Ratio to the
shareholders of the Company. 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 Exchange Ratio is fair, from a
financial point of view, to the shareholders of the Company.
Very truly yours,
KAUFMAN BROS., L.P.
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RIGHTS OF DISSENTING OWNERS
NRS 92A.300 DEFINITIONS. As used in NRS 92A.300 to 92A.500, inclusive,
unless the context otherwise requires, the words and terms defined in NRS
92A.305 to 92A.335, inclusive, have the meanings ascribed to them in those
sections. (Added to NRS by 1995, 2086)
NRS 92A.305 "BENEFICIAL STOCKHOLDER" DEFINED. "Beneficial stockholder"
means a person who is a beneficial owner of shares held in a voting trust or by
a nominee as the stockholder of record. (Added to NRS by 1995, 2087)
NRS 92A.310 "CORPORATE ACTION" DEFINED. "Corporate action" means the
action of a domestic corporation. (Added to NRS by 1995, 2087)
NRS 92A.315 "DISSENTER" DEFINED. "Dissenter" means a stockholder who is
entitled to dissent from a domestic corporation's action under NRS 92A.380 and
who exercises that right when and in the manner required by NRS 92A.400 to
92A.480, inclusive. (Added to NRS by 1995, 2087; A 1999, 1631)
NRS 92A.320 "FAIR VALUE" DEFINED. "Fair value," with respect to a
dissenter's shares, means the value of the shares immediately before the
effectuation of the corporate action to which he objects, excluding any
appreciation or depreciation in anticipation of the corporate action unless
exclusion would be inequitable. (Added to NRS by 1995, 2087)
NRS 92A.325 "STOCKHOLDER" DEFINED. "Stockholder" means a stockholder of
record or a beneficial stockholder of a domestic corporation. (Added to NRS by
1995, 2087)
NRS 92A.330 "STOCKHOLDER OF RECORD" DEFINED. "Stockholder of record"
means the person in whose name shares are registered in the records of a
domestic corporation or the beneficial owner of shares to the extent of the
rights granted by a nominee's certificate on file with the domestic corporation.
(Added to NRS by 1995, 2087)
NRS 92A.335 "SUBJECT CORPORATION" DEFINED. "Subject corporation" means
the domestic corporation which is the issuer of the shares held by a dissenter
before the corporate action creating the dissenter's rights becomes effective or
the surviving or acquiring entity of that issuer after the corporate action
becomes effective. (Added to NRS by 1995, 2087)
NRS 92A.340 COMPUTATION OF INTEREST. Interest payable pursuant to NRS
92A.300 to 92A.500, inclusive, must be computed from the effective date of the
action until the date of payment, at the average rate currently paid by the
entity on its principal bank loans or, if it has no bank loans, at a rate that
is fair and equitable under all of the circumstances. (Added to NRS by 1995,
2087)
NRS 92A.350 RIGHTS OF DISSENTING PARTNER OF DOMESTIC LIMITED PARTNERSHIP. A
partnership agreement of a domestic limited partnership or, unless otherwise
provided in the partnership agreement, an agreement of merger or exchange, may
provide that contractual rights with respect to the partnership interest of a
dissenting general or limited partner of a domestic limited partnership are
available for any class or group of partnership interests in connection with any
merger or exchange in which the domestic limited partnership is a constituent
entity. (Added to NRS by 1995, 2088)
NRS 92A.360 RIGHTS OF DISSENTING MEMBER OF DOMESTIC LIMITED-LIABILITY
COMPANY. The articles of organization or operating agreement of a domestic
limited-liability company or, unless otherwise provided in the articles of
organization or operating agreement, an agreement of merger or exchange, may
provide that contractual rights with respect to the interest of a dissenting
member are available in connection with any merger or exchange in which the
domestic limited-liability company is a constituent entity. (Added to NRS by
1995, 2088)
NRS 92A.370 RIGHTS OF DISSENTING MEMBER OF DOMESTIC NONPROFIT CORPORATION.
1. Except as otherwise provided in subsection 2, and unless otherwise
provided in the articles or bylaws, any member of any constituent domestic
nonprofit corporation who voted against the merger may, without prior notice,
but within 30 days after the effective date of the merger, resign from
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membership and is thereby excused from all contractual obligations to the
constituent or surviving corporations which did not occur before his resignation
and is thereby entitled to those rights, if any, which would have existed if
there had been no merger and the membership had been terminated or the member
had been expelled.
2. Unless otherwise provided in its articles of incorporation or bylaws,
no member of a domestic nonprofit corporation, including, but not limited to, a
cooperative corporation, which supplies services described in chapter 704 of NRS
to its members only, and no person who is a member of a domestic nonprofit
corporation as a condition of or by reason of the ownership of an interest in
real property, may resign and dissent pursuant to subsection 1. (Added to NRS by
1995, 2088)
NRS 92A.380 RIGHT OF STOCKHOLDER TO DISSENT FROM CERTAIN CORPORATE ACTIONS AND
TO OBTAIN PAYMENT FOR SHARES.
1. Except as otherwise provided in NRS 92A.370 and 92A.390, a stockholder
is entitled to dissent from, and obtain payment of the fair value of his shares
in the event of any of the following corporate actions:
(a) Consummation of a plan of merger to which the domestic
corporation is a party:
(1) If approval by the stockholders is required for the merger by
NRS 92A.120 to 92A.160, inclusive, or the articles of incorporation
and he is entitled to vote on the merger; or
(2) If the domestic corporation is a subsidiary and is merged
with its parent under NRS 92A.180.
(b) Consummation of a plan of exchange to which the domestic
corporation is a party as the corporation whose subject owner's interests
will be acquired, if he is entitled to vote on the plan.
(c) Any corporate action taken pursuant to a vote of the stockholders
to the event that the articles of incorporation, bylaws or a resolution of
the board of directors provides that voting or nonvoting stockholders are
entitled to dissent and obtain payment for their shares.
2. A stockholder who is entitled to dissent and obtain payment under NRS
92A.300 to 92A.500, inclusive, may not challenge the corporate action creating
his entitlement unless the action is unlawful or fraudulent with respect to him
or the domestic corporation. (Added to NRS by 1995, 2087)
NRS 92A.390 LIMITATIONS ON RIGHT OF DISSENT: STOCKHOLDERS OF CERTAIN CLASSES OR
SERIES; ACTION OF STOCKHOLDERS NOT REQUIRED FOR PLAN OF MERGER.
1. There is no right of dissent with respect to a plan of merger or
exchange in favor of stockholders of any class or series which, at the record
date fixed to determine the stockholders entitled to receive notice of and to
vote at the meeting at which the plan of merger or exchange is to be acted on,
were either listed on a national securities exchange, included in the national
market system by the National Association of Securities Dealers, Inc., or held
by at least 2,000 stockholders of record, unless:
(a) The articles of incorporation of the corporation issuing the
shares provide otherwise; or
(b) The holders of the class or series are required under the plan of
merger or exchange to accept for the shares anything except:
(1) Cash, owner's interests or owner's interests and cash in lieu
of fractional owner's interests of:
(I) The surviving or acquiring entity; or
(II) Any other entity which, at the effective date of the
plan of merger or exchange, were either listed on a national
securities exchange, included in the national
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market system by the National Association of Securities Dealers,
Inc., or held of record by a least 2,000 holders of owner's
interests of record; or
(2) A combination of cash and owner's interests of the kind
described in sub-subparagraphs (I) and (II) of subparagraph (1) of
paragraph (b).
2. There is no right of dissent for any holders of stock of the surviving
domestic corporation if the plan of merger does not require action of the
stockholders of the surviving domestic corporation under NRS 92A.130. (Added to
NRS by 1995, 2088)
NRS 92A.400 LIMITATIONS ON RIGHT OF DISSENT: ASSERTION AS TO PORTIONS ONLY TO
SHARES REGISTERED TO STOCKHOLDER; ASSERTION BY BENEFICIAL STOCKHOLDER.
1. A stockholder of record may assert dissenter's rights as to fewer than
all of the shares registered in his name only if he dissents with respect to all
shares beneficially owned by any one person and notifies the subject corporation
in writing of the name and address of each person on whose behalf he asserts
dissenter's rights. The rights of a partial dissenter under this subsection are
determined as if the shares as to which he dissents and his other shares were
registered in the names of different stockholders.
2. A beneficial stockholder may assert dissenter's rights as to shares
held on his behalf only if:
(a) He submits to the subject corporation the written consent of the
stockholder of record to the dissent not later than the time the beneficial
stockholder asserts dissenter's rights; and
(b) He does so with respect to all shares of which he is the
beneficial stockholder or over which he has power to direct the vote.
(Added to NRS by 1995, 2089)
NRS 92A.410 NOTIFICATION OF STOCKHOLDERS REGARDING RIGHT OF DISSENT.
1. If a proposed corporate action creating dissenters' rights is submitted
to a vote at a stockholders' meeting, the notice of the meeting must state that
stockholders are or may be entitled to assert dissenters' rights under NRS
92A.300 to 92A.500, inclusive, and be accompanied by a copy of those sections.
2. If the corporate action creating dissenters' rights is taken by written
consent of the stockholders or without a vote of the stockholders, the domestic
corporation shall notify in writing all stockholders entitled to assert
dissenters' rights that the action was taken and send them the dissenter's
notice described in NRS 92A.430. (Added to NRS by 1995, 2089; A 1997, 730)
NRS 92A.420 PREREQUISITES TO DEMAND FOR PAYMENT FOR SHARES.
1. If a proposed corporate action creating dissenters' rights is submitted
to a vote at a stockholders' meeting, a stockholder who wishes to assert
dissenter's rights:
(a) Must deliver to the subject corporation, before the vote is taken,
written notice of his intent to demand payment for his shares if the
proposed action is effectuated; and
(b) Must not vote his shares in favor of the proposed action.
2. A stockholder who does not satisfy the requirements of subsection 1 and
NRS 92A.400 is not entitled to payment for his shares under this chapter. (Added
to NRS by 1995, 2089; 1999, 1631)
NRS 92A.430 DISSENTER'S NOTICE: DELIVERY TO STOCKHOLDERS ENTITLED TO ASSERT
RIGHTS; CONTENTS.
1. If a proposed corporate action creating dissenters' rights is
authorized at a stockholders' meeting, the subject corporation shall deliver a
written dissenter's notice to all stockholders who satisfied the requirements to
assert those rights.
2. The dissenter's notice must be sent no later than 10 days after the
effectuation of the corporate action, and must:
(a) State where the demand for payment must be sent and where and when
certificates, if any, for shares must be deposited;
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(b) Inform the holders of shares not represented by certificates to
what extent the transfer of the shares will be restricted after the demand
for payment is received;
(c) Supply a form for demanding payment that includes the date of the
first announcement to the news media or to the stockholders of the terms of
the proposed action and requires that the person asserting dissenter's
rights certify whether or not he acquired beneficial ownership of the
shares before that date;
(d) Set a date by which the subject corporation must receive the
demand for payment, which may not be less than 30 nor more than 60 days
after the date the notice is delivered; and
(e) Be accompanied by a copy of NRS 92A.300 to 92A.500, inclusive.
(Added to NRS by 1995, 2089)
NRS 92A.440 DEMAND FOR PAYMENT AND DEPOSIT OF CERTIFICATES; RETENTION OF RIGHTS
OF STOCKHOLDER.
1. A stockholder to whom a dissenter's notice is sent must:
(a) Demand payment;
(b) Certify whether he acquired beneficial ownership of the shares
before the date required to be set forth in the dissenter's notice for this
certification; and
(c) Deposit his certificates, if any, in accordance with the terms of
the notice.
2. The stockholder who demands payment and deposits his certificates, if
any, before the proposed corporate action is taken retains all other rights of a
stockholder until those rights are canceled or modified by the taking of the
proposed corporate action.
3. The stockholder who does not demand payment or deposit his certificates
where required, each by the date set forth in the dissenter's notice, is not
entitled to payment for his shares under this chapter. (Added to NRS by 1995,
2090; A 1997, 730)
NRS 92A.450 UNCERTIFICATED SHARES: AUTHORITY TO RESTRICT TRANSFER AFTER DEMAND
FOR PAYMENT; RETENTION OF RIGHTS OF STOCKHOLDER.
1. The subject corporation may restrict the transfer of shares not
represented by a certificate from the date the demand for their payment is
received.
2. The person for whom dissenter's rights are asserted as to shares not
represented by a certificate retains all other rights of a stockholder until
those rights are canceled or modified by the taking of the proposed corporate
action. (Added to NRS by 1995, 2090)
NRS 92A.460 PAYMENT FOR SHARES: GENERAL REQUIREMENTS.
1. Except as otherwise provided in NRS 92A.470, within 30 days after
receipt of a demand for payment, the subject corporation shall pay each
dissenter who complied with NRS 92A.440 the amount the subject corporation
estimates to be the fair value of his shares, plus accrued interest. The
obligation of the subject corporation under this subsection may be enforced by
the district court:
(a) Of the county where the corporation's registered office is
located; or
(b) At the election of any dissenter residing or having its registered
office in this state, of the county where the dissenter resides or has its
registered office. The court shall dispose of the complaint promptly.
2. The payment must be accompanied by:
(a) The subject corporation's balance sheet as of the end of a fiscal
year ending not more than 16 months before the date of payment, a statement
of income for that year, a statement of changes in the stockholders' equity
for that year and the latest available interim financial statements, if
any;
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(b) A statement of the subject corporation's estimate of the fair
value of the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's rights to demand payment under NRS
92A.480; and
(e) A copy of NRS 92A.300 to 92A.500, inclusive. (Added to NRS by
1995, 2090)
NRS 92A.470 PAYMENT FOR SHARES: SHARES ACQUIRED ON OR AFTER DATE OF DISSENTER'S
NOTICE.
1. A subject corporation may elect to withhold payment from a dissenter
unless he was the beneficial owner of the shares before the date set forth in
the dissenter's notice as the date of the first announcement to the news media
or to the stockholders of the terms of the proposed action.
2. To the extent the subject corporation elects to withhold payment, after
taking the proposed action, it shall estimate the fair value of the shares, plus
accrued interest, and shall offer to pay this amount to each dissenter who
agrees to accept it in full satisfaction of his demand. The subject corporation
shall send with its offer a statement of its estimate of the fair value of the
shares, an explanation of how the interest was calculated, and a statement of
the dissenters' right to demand payment pursuant to NRS 92A.480. (Added to NRS
by 1995, 2091)
NRS 92A.480 DISSENTER'S ESTIMATE OF FAIR VALUE: NOTIFICATION OF SUBJECT
CORPORATION; DEMAND FOR PAYMENT OF ESTIMATE.
1. A dissenter may notify the subject corporation in writing of his own
estimate of the fair value of his shares and the amount of interest due, and
demand payment of his estimate, less any payment pursuant to NRS 92A.460, or
reject the offer pursuant to NRS 92A.470 and demand payment of the fair value of
his shares and interest due, if he believes that the amount paid pursuant to NRS
92A.460 or offered pursuant to NRS 92A.470 is less than the fair value of his
shares or that the interest due is incorrectly calculated.
2. A dissenter waives his right to demand payment pursuant to this section
unless he notifies the subject corporation of his demand in writing within 30
days after the subject corporation made or offered payment for his shares.
(Added to NRS by 1995, 2091)
NRS 92A.490 LEGAL PROCEEDING TO DETERMINE FAIR VALUE: DUTIES OF SUBJECT
CORPORATION; POWERS OF COURT; RIGHTS OF DISSENTER.
1. If a demand for payment remains unsettled, the subject corporation
shall commence a proceeding within 60 days after receiving the demand and
petition the court to determine the fair value of the shares and accrued
interest. If the subject corporation does not commence the proceeding within the
60-day period, it shall pay each dissenter whose demand remains unsettled the
amount demanded.
2. A subject corporation shall commence the proceeding in the district
court of the county where its registered office is located. If the subject
corporation is a foreign entity without a resident agent in the state, it shall
commence the proceeding in the county where the registered office of the
domestic corporation merged with or whose shares were acquired by the foreign
entity was located.
3. The subject corporation shall make all dissenters, whether or not
residents of Nevada, whose demands remain unsettled, parties to the proceeding
as in an action against their shares. All parties must be served with a copy of
the petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
4. The jurisdiction of the court in which the proceeding is commenced
under subsection 2 is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive evidence and recommend a decision on the
question of fair value. The appraisers have the powers described in the order
appointing them, or any amendment thereto. The dissenters are entitled to the
same discovery rights as parties in other civil proceedings.
5. Each dissenter who is made a party to the proceeding is entitled to a
judgment:
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(a) For the amount, if any, by which the court finds the fair value
of his shares, plus interest, exceeds the amount paid by the subject
corporation; or
(b) For the fair value, plus accrued interest, of his after-acquired
shares for which the subject corporation elected to withhold payment
pursuant to NRS 92A.470. (Added to NRS by 1995, 2091)
NRS 92A.500 LEGAL PROCEEDING TO DETERMINE FAIR VALUE: ASSESSMENT OF COSTS AND
FEES.
1. The court in a proceeding to determine fair value shall determine all
of the costs of the proceeding, including the reasonable compensation and
expenses of any appraisers appointed by the court. The court shall assess the
costs against the subject corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously or not
in good faith in demanding payment.
2. The court may also assess the fees and expenses of the counsel and
experts for the respective parties, in amounts the court finds equitable:
(a) Against the subject corporation and in favor of all dissenters if
the court finds the subject corporation did not substantially comply with
the requirements of NRS 92A.300 to 92A.500, inclusive; or
(b) Against either the subject corporation or a dissenter in favor of
any other party, if the court finds that the party against whom the fees
and expenses are assessed acted arbitrarily, vexatiously or not in good
faith with respect to the rights provided by NRS 92A.300 to 92A.500,
inclusive.
3. If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the subject corporation, the
court may award to those counsel reasonable fees to be paid out of the amounts
awarded to the dissenters who were benefited.
4. In a proceeding commenced pursuant to NRS 92A.460, the court may assess
the costs against the subject corporation, except that the court may assess
costs against all or some of the dissenters who are parties to the proceeding,
in amounts the court finds equitable, to the extent the court finds that such
parties did not act in good faith in instituting the proceeding.
5. This section does not preclude any party in a proceeding commenced
pursuant to NRS 92A.460 or 92A.490 from applying the provisions of N.R.C.P. 68
or NRS 17.115. (Added to NRS by 1995, 2092)
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PROXY POINTE COMMUNICATIONS CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
POINTE COMMUNICATIONS CORPORATION
The undersigned hereby appoints Stephen E. Raville and Richard P. Halevy,
and each of them, as proxies for the undersigned, with full power to appoint a
substitute, and hereby authorizes each to represent and to vote, as designated
below, all shares of the $.00001 par value common stock of Pointe Communications
Corporation ("Pointe" or the "Company"), which the undersigned is entitled
to vote at the Annual Meeting of the Shareholders of the Company to be held at
the J.W. Marriott Hotel Lenox, 3300 Lenox Road, Atlanta, Georgia 30326, on June
2, 2000, at 1:00 p.m., local time (the "Meeting"), or at any and all
postponements, continuations or adjournments thereof.
Only holders of record of the Company's common stock and preferred stock
outstanding at the close of business on April 17, 2000, will be entitled to
notice of and to vote at the Annual Meeting or any postponements or adjournments
thereof, notwithstanding the transfer of any stock on the books of the Company
after such record date. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE
MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE,
THIS PROXY WILL BE VOTED FOR THE PROPOSALS AND FOR THE NOMINEES. In their
discretion, proxies named above are authorized to vote upon such other business
as may properly come before the Meeting or any adjournment or postponement
thereof.
THE BOARD RECOMMENDS A VOTE FOR THE PROPOSALS AND FOR THE NOMINEES.
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1. Proposal to approve the merger agreement amont Pointe, Telescape International, Inc., a
Texas corporation ("Telscape"), and Pointe Acquisition Corp., a wholly owned subsidiary of
Telscape, under which Pointe will become a wholly owned subsidiary of Telscape.
FOR [ ] AGAINST [ ]
2. Proposal to elect six directors to serve until their respective successors are duly elected
and qualified. The Board of Directors recommends a vote for the following nominees: (1)
Stephen E. Raville, (2) Patrick E. Delaney, (3) William P. O'Reilly, (4) F. Scott Yeager,
(5) Gerald F. Schmidt, and (6) James H. Dorsey, III.
FOR ALL NOMINEES [ ] WITHHOLD ALL NOMINEES [ ]
WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE THE NUMBER(S) OF NOMINEE(S) BELOW [ ]
Use Number Only:___________________________________
3. Proposal to amend Pointe's Articles of Incorporation to increase the number of authorized
shares of Pointe common stock, par value $.0001 per share, from 100,000,000 shares to
200,000,000 shares.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. Proposal to approve the 1999 Pointe Communications Corporation Pay for Performance Stock
Option Plan.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. Proposal to approve the 1999 Pointe Communications Corporation Executive Market Value
Appreciation Stock Option Plan.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
</TABLE>
PLEASE READ INSTRUCTIONS ON THE REVERSE SIDE AND EXECUTE
[ ]Mark here for address change and note below.
PLEASE SIGN BELOW EXACTLY AS NAME APPEARS ON THIS PROXY FORM. If shares are
registered in more than one name, the signatures of all such persons are
required. A corporation should sign in its full corporate name by a duly
authorized officer, stating his title. Trustees, guardians, executors and
administrators should sign in their official capacity, giving their full title
as such. If a partnership, please sign in the partnership name by authorized
persons.
The undersigned acknowledges receipt of the Notice of the Annual Meeting and
the Joint Proxy Statement/Prospectus dated May 12, 2000 by signing this proxy.
<TABLE>
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Dated:________________________________, 2000
(Paste mailing label from ____________________________________________
Transfer Agent here) (Number of Shares)
____________________________________________
(Signature of Shareholder)
____________________________________________
(Additional Signatures, if held jointly)
____________________________________________
Change of Address: (Title or Authority, if applicable)
Please mark boxes [X] in ink. Sign, date and
return this Proxy Form promptly using the enclosed
envelope.
______________________________________________
______________________________________________
______________________________________________
</TABLE>
