UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM _____________ TO ____________
COMMISSION FILE NUMBER 0-20843
POINTE COMMUNICATIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 84-1097751
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1325 NORTHMEADOW PARKWAY
ROSWELL, GEORGIA 30076
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
770-432-6800
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
COMMON STOCK, $.00001 PAR VALUE
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No .
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K contained in this form, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K ____.
<PAGE>
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or
the average bid and asked prices of such common equity, as of a specified
date within the past 60 days of the filing.
The aggregate market value of such stock on April 13, 2000, based on the
average of the bid and asked prices on that date was $113,811,954.
The number of shares of the issuer's common stock outstanding on April 13,
2000 was 51,694,189
<PAGE>
FORM 10-K
ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
Page
PART I
Item 1. BUSINESS 1
Item 2. PROPERTIES 27
Item 3. LEGAL PROCEEDINGS 28
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS 29
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS 30
Item 6. SELECTED FINANCIAL DATA
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERAITONS 31
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 32
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 38
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON 39
ACCOUNTING AND FINANCIAL DISCLOSURE 39
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT 39
Item 11. EXECUTIVE COMPENSATION 43
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 48
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 49
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 50
<PAGE>
PART I
FORWARD-LOOKING STATEMENTS. - This report on Form 10-K contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ from those projected in any
forward-looking statements for the reasons detailed in the "Risk Factors" below
as well as in other sections of this report on Form 10-K. The forward-looking
statements contained herein are made as of the date of this report and the
Company assumes no obligation to update such forward-looking statements, or to
update the reasons why actual results could differ from those projected in such
forward-looking statements. Investors should consult the Risk Factors and the
other information set forth from time to time in the Company's reports on Forms
10-QSB, 8-K, 10-KSB and Annual Report to Stockholders.
ITEM 1. DESCRIPTION OF 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:
- local;
- long distance;
- Internet;
- international private line;
- carrier services;
- prepaid calling card; and
- 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.
<PAGE>
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
the remaining 10% of Phoenix Datanet in a Stock transaction. 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 ("Pointe Communications"), a
Delaware Corporation, in a cash and warrant transaction on July 30, 1998. Pointe
Communications had no revenue from operations prior to this acquisition. In
August, 1998, our shareholders amended our 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 CLEC 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, San Diego and Miami. These initial sites are expected
to be operational during the second 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 the Company agreed to merge with Telscape
International, Inc. ("Telscape") in an all-stock transaction in which each share
of PointeCom 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. 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:
- - An experienced management team with a significant Latin component.
- - 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.
- - Infrastructure-based strategy utilizing "Smart Build" approach including a
fiber optic network under construction by Telscape in Mexico.
- - Greater critical mass and compelling synergies and cost savings.
- - One of the few companies that can compete in the U.S. and Latin America as
one company.
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 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 telecommunications 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:
- maximize the volume of telecommunications traffic carried on our
network, whether originated, transported or terminated; and
- 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
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, the Company evaluated its business focus
and organizational structure. In doing so, it was determined that the Company
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 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 the Company'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 the Company and its employees in part based upon the performance
of these individual segments. (See Note 11 to the Company'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:
<TABLE>
<CAPTION>
Product Description
- ----------------------------- --------------------------------------------------
<S> <C>
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.
</TABLE>
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.
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:
- basic local service (including dial tone, local area charges, dedicated
point-to-point intraLATA service and enhanced calling features);
- interstate dedicated access service (i.e., connecting a customer to a
long distance carrier's facilities);
- interstate switched access service (i.e., originating and terminating
calls from a long distance carrier);
- intraLATA toll calls;
- intrastate switched access;
- value-added services (Centrex, voicemail, call forwarding);
- 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.
<PAGE>
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 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:
- Mexico,
- Panama,
- Venezuela,
- El Salvador,
- Nicaragua, and
<PAGE>
- 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 TeleMercadosTM (i.e., retail storefronts) in
locations with heavy foot traffic and significant Hispanic concentration. These
TeleMercadosTM will double as both sales and service centers.
We believe our highly targeted, culturally relevant, direct marketing
approach will:
- yield higher success rates than those experienced by companies using a
"switch now" approach, and
- 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 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.)
<PAGE>
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 S9.8 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:
- meet demands for enhanced services,
- support different types of network elements,
- adapt to changing service providers, and
- 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 three markets,
Los Angeles, San Diego and Miami, is expected to be complete during the second
first 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 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
<PAGE>
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 ATMAP backbones are preferable because
- Internet traffic is growing 15% per month;
- the cost of an ATM infrastructure is less than circuit switching;
- circuit switching platforms cannot meet the demands of today's networks
created by increased data traffic; and
- 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:
<PAGE>
- Costa Rica,
- El Salvador,
- Mexico,
- Nicaragua,
- Panama (two locations),
- Venezuela, and
- 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
<PAGE>
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 :
- customer desire for an alternative to the RBOCs, also referred to as the
Incumbent Local Exchange Carriers, or ILECs;
- technological advances in the transmission of data and video requiring
greater capacity and reliability than ILEC networks were able to
accommodate;
- a monopoly position and rate of return-based pricing structure which
provided little incentive for the ILECs to upgrade their networks; and
- the significant fees, called access charges, long distance carriers were
required to pay to the ILECs to access the ILECs' networks.
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 I 980s, 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:
- Bell Atlantic Corporation and NYNEX Corporation merged in August 1997;
and
- 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:
- AT&T's acquisition of Teleport Communications Group
- WorldCom's mergers with MFS and Brooks Fiber Properties, and to
otherwise improve 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,
<PAGE>
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, 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
<PAGE>
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 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:
- not unreasonably limit the resale of their services,
- provide number portability if technically feasible,
- provide dialing parity to competing providers, and nondiscriminatory
access to telephone numbers, directory assistance, operator services and
directory listings,
- provide access to poles, ducts, conduits, and rights-of-way, and
- 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:
<PAGE>
- interconnect at any technically feasible point and provide service equal
in quality to that provided to their customers or the ILEC itself,
- provide unbundled access to network elements at any technically feasible
point at just, reasonable and nondiscriminatory rates, terms and
conditions,
- offer retail services at wholesale prices for the use of telecommunication
carriers,
- provide reasonable public notice of changes in the network or the
information necessary to use the network or which affect interoperability,
and
- 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
- 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 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,
<PAGE>
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 "l+" services by the states). The
vast majority of states require us to:
- apply for certification to provide telecommunications services, or
- at least register or be found exempt from regulation, before commencing
service, and
- 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:
- transfers of control of certified carriers,
- assignments of carrier assets, including customer bases,
- carrier stock offerings, and
- 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 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
<PAGE>
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:
- certification of providers of intrastate services,
- regulation of intrastate rates and service offerings, and
- other regulations,
and retain jurisdiction under the 1996 Telecommunications Act to:
- adopt regulations necessary to preserve universal service,
- protect public safety and welfare,
- ensure the continued quality of communications services, and
- 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 may be limited
because of regulation, although our direct competitors will be subject to
<PAGE>
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
- sell our services to our target market through culturally relevant
marketing and value driven product bundling,
- build an effective and reliable local access network, and
- 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:
- ILECs,
- traditional providers of long distance service, such as AT&T, Sprint, and
MCI/WorldCom, and
- 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.
<PAGE>
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 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:
- IXCs engaged in the provision of long distance access and other long
distance resellers and providers, including large U.S. carriers;
- foreign PTTs;
- other marketers of international long distance and call reorigination
services;
- wholesale providers of international long distance services;
- alliances for providing wholesale carrier services;
- 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
- 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.
<PAGE>
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.
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:
- other national and regional commercial Internet access providers;
- established on-line services companies that offer Internet access;
- software and technology companies;
- national long distance telecommunications carriers;
- RBOCs;
- cable television operators;
- nonprofit or educational Internet service providers; and
- 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.
<PAGE>
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:
- market presence;
- the adequacy of our customer support services;
- the capacity, reliability and security of our network infrastructure;
- the ease of access to and navigation of the Internet;
- the pricing policies of our competitors and suppliers;
- regulatory price requirements for interconnection to and use of
existing local exchange networks by Internet services;
- the timing of introductions of new products and services by we and
our competitors;
- our ability to support existing and emerging industry standards; and
- 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:
- created a local corporation,
- obtained appropriate licenses with the assistance of local partners, and
- obtained a majority ownership position in exchange for the capital
required to build out the system.
<PAGE>
<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 Electricidad, 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 obligated to
Stations pay Costa Rican tariff for satellite services,
but a discounted tariff is provided when we
provide the satellite station; agreement 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
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; agreement with
Switched Voice 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; Teleport
provides IPL services for Panamanian services
customers
<PAGE>
TYPE OF
LICENSE OR
COUNTRY AGREEMENT DATE SCOPE
- -------------- ------------------ --------- ------------------------------------------------
<S> <C> <C> <C>
United States International Aug. 1999 International facilities-based carrier; license
facilities-based from FCC
carrier
United States International May 1995 International satellite connectivity; license
satellite 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 certification
(Various States) from respective state Public Service
Commissions
United States CLEC May 1997 Interim certification of authority to provide
(Georgia) CLEC services; by Georgia Public Service
Commission
United States CLEC May 1999 Authority to provide CLEC services; issued by
(Florida) Florida Public Service Commission
United States CLEC July 1999 Authority to provide CLEC services; issued by
(California) California Public Service Commission
Venezuela Point to point; Apr. 1996 Provide voice, data and video point to point
point to and point to multipoint services throughout
multipoint Venezuela and internationally; license
authorized by Commision Nacional de
Telecomunicaci ones, 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>
RISK FACTORS
Limited Operating History; Operating Losses
The Company has only a limited history upon which an evaluation of it and
its prospects can be based. Although the Company has experienced substantial
revenue growth since the inception of its business in April 1995, it has
incurred losses, totaling approximately $92,359,845 as of December 31, 1999.
As of December 31, 1999, the Company had stockholders' equity of $42,821,726.
The Company's current focus is on increasing its customer and subscriber bases,
and the Company continues to hire additional personnel and to increase its
expenses related to product development, marketing, network infrastructure,
technical resources and customer support. As a result, the Company expects
that it will continue to incur net operating losses at least through the end
of 2000. There can be no assurance that revenue growth will continue or that
the Company will in the future achieve or sustain profitability on either a
quarterly or annual basis.
The Company may implement its strategy to grow its customer and subscriber
bases through methods that may result in increases in costs as a percentage of
revenues, such as expansions of its promotional programs and implementation of
new pricing programs. In addition, an acceleration in the growth of the
Company's subscriber and customer bases or changes in usage patterns among
subscribers may also increase costs as a percentage of revenues. Consequently,
there can be no assurance that the Company's operating margins will not be
adversely affected in the future by these strategies or events.
Need for additional capital to finance growth and capital
requirements
The Company must continue to enhance and expand its network in order to
maintain its competitive position and continue to meet the increasing demands
for service quality, availability and competitive pricing. The Company's ability
to grow depends, in part, on its ability to expand its operations through the
establishment of new points of presence, which requires significant advance
capital equipment expenditures as well as advance expenditures and commitments
for leased telephone company facilities and circuits and advertising. The
Company will need to raise additional capital from equity or debt sources to
fund its anticipated development. There can be no assurance that the Company
will be able to raise such capital on favorable terms or at all. If the Company
is unable to obtain such additional capital, the Company may be required to
reduce the scope of its anticipated expansion, which could have a material
adverse effect on the Company's business, financial condition or results of
operations and its ability to compete.
Risks of Growth and Expansion
The number of the Company's employees has grown rapidly and several members
of the Company's current management team have joined the Company recently. The
Company's growth has placed, and is expected to continue to place, a significant
strain on the Company's management, administrative, operational, financial and
technical resources and increased demands on its systems and controls. The
Company believes that it will need, in the long term, to hire additional
qualified administrative management personnel in the accounting and finance
areas to manage its financial control systems. In addition, there can be no
assurance that the Company's operating and financial control systems,
infrastructure and existing facilities will be adequate to support the Company's
future operations or maintain and effectively monitor future growth. Failure to
manage the Company's growth properly could have a material adverse effect on the
Company's business, financial condition or results of operations.
The Company plans to build additional points-of-presence ("POPs"). There
can be no assurance that the Company will be able to add service in new cities
at the rate presently planned by it. In addition, increases in the Internet
<PAGE>
subscriber base will result in additional demands on its customer support,
sales, marketing, administrative and technical resources and network
infrastructure. Increases in the Company's telecommunications customer base will
also produce increased demands on its sales, marketing and administrative
resources, as well as on its engineering resources and on its switching and
routing capabilities. The Company anticipates that its continued growth will
require it to recruit and hire a substantial number of new managerial, technical
and sales and marketing personnel. The inability to continue to upgrade the
networking systems of the operation and financial control systems, the inability
to recruit and hire necessary personnel or the emergence of unexpected expansion
difficulties could have a material adverse effect on the Company's business,
financial condition or results of operations.
Demands on the Company's network infrastructure and technical staff and
resources have grown rapidly with the Company's expanding customer base, and the
Company has in the past experienced difficulties satisfying the requests for its
Internet access and telecommunications services. The Company expects to
experience even greater strain on its billing and operational systems as it
develops, operates and maintains its network. There can be no assurance that the
Company's finance and technical staff will be adequate to facilitate the
Company's growth. The Company believes that its ability to provide timely access
for subscribers and adequate customer support services will largely depend upon
the Company's ability to attract, identify, train, integrate and retain
qualified personnel. There can be no assurance that the Company will be able to
do this. A failure to effectively manage its customer base and reduce its
subscriber cancellation rate could have a material adverse effect on the
Company's business, financial condition or results of operations.
Dependence on Key Personnel; Need to Hire Additional Qualified Personnel
The Company is highly dependent on the technical and management skills of
its key employees, including technical, sales, marketing, financial and
executive personnel, and on its ability to identify, hire and retain additional
personnel. Competition for such personnel is intense and there can be no
assurance that the Company will be able to retain existing personnel or identify
or hire additional personnel. In addition, the Company is highly dependent on
the services of Stephen E. Raville, Chairman of the Board and Chief Executive
Officer. The loss of his services could have a material adverse effect on the
Company's business, financial condition or results of operations.
Shares Available for Future Sale
The Company has financed its operations and acquisitions principally
through the issuance of securities in "private placements" exempt from
registration under federal and applicable state securities laws. As a
consequence, approximately sixteen percent (16%) of the Company's issued and
outstanding common stock at December 31, 1999 are "restricted securities" which
cannot be resold except in compliance with similar exemptions from federal and
applicable state securities laws. Under Rule 144 as currently in effect,
restricted securities are generally available for public resale after such
securities have been held by the purchasers thereof for a period of one year.
After the expiration of the one year holding period, such securities may be sold
in "broker's transactions" provided that certain requirements are met and that
the sales by a holder of such securities during any three month period do not
exceed the greater of one percent (1%) of the then issued and outstanding shares
of the issuer or the average weekly trading volume of such shares in the
over-the counter market during the four calendar weeks preceding the date on
which a notice of such sale is sent to the Securities and Exchange Commission.
At the end of two years, persons not "affiliated" with the issuer may sell
restricted securities without regard to the volume limitations imposed by Rule
144. Persons "affiliated" with the issuer are persons deemed to be in control of
the issuer, including executive officers, directors and ten percent or greater
shareholders; such persons may sell shares only in compliance with the
requirements of Rule 144, including the volume limitations imposed thereby,
regardless of the length of time such securities have been held. As of December
31, 1999, approximately twenty-seven percent (27%) of the Company's issued and
outstanding stock is held by affiliates. Most of the Common Stock of the Company
will be available for
<PAGE>
public sale within the next twelve months. The large numbers of the
Company's shares which have or will become available for public sale in the near
future, along with the demand and piggyback registration rights granted by the
Company (described elsewhere herein) create the possibility of volatility in the
market for the Company's stock and the possibility of adverse effects on the
prevailing market price of the Company's stock.
Dependence on Technological Development
The markets the Company serves are characterized by rapidly changing
technology, evolving industry standards, emerging competition and frequent new
service and product introductions. There can be no assurance that the Company
can successfully identify new service opportunities and develop and bring new
products and services to market in a timely and cost-effective manner, or that
products, services or technologies developed by others will not render the
Company's products, services or technologies noncompetitive or obsolete. In
addition, there can be no assurance that product or service developments or
enhancements introduced by the Company will achieve or sustain market acceptance
or be able to effectively address the compatibility and inoperability issues
raised by technological changes or new industry standards.
The Company is also at risk to fundamental changes in the way Internet
access services are delivered. Currently, Internet services are accessed
primarily by computers through telephone lines. However, several companies have
recently introduced, on an experimental basis, delivery of Internet access
services through cable television lines. If the Internet becomes accessible by
cable modem, screen-based telephones, television or other consumer electronic
devices, or customer requirements change the way Internet access is provided,
the Company will need to develop new technology or modify its existing
technology to accommodate these developments. Required technological advances
by the Company as the industry evolves could include compression, full motion
video, and integration of video, voice, data and graphics. The Company's
pursuit of these technological advances may require substantial time and
expense, and there can be no assurance that the Company will succeed in adapting
its Internet service business to alternate access devices and conduits.
The Company's success is dependent in part upon its ability to enhance
existing products and services and to develop new products and services that
meet changing customer requirements on a timely and cost-effective basis. There
can be no assurance that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technology. In addition, there can be no assurance that licenses for
any intellectual property that might be required for the Company's services or
products would be available on reasonable terms if at all.
Dependence on Suppliers
The Company is dependent on third party suppliers of hardware and network
connectivity for many of its products and services and generally does not have
long-term contracts with suppliers. Certain of these suppliers are or may
become competitors of the Company, and such suppliers are not subject to
restrictions upon their ability to compete with the Company. To the extent that
any of these suppliers change their pricing structure or terminate service, the
Company may be adversely affected. The Company is dependent upon third party
providers, which are the primary providers to the Company of data communications
facilities and capacity and lease to the Company physical space for switches,
modems and other equipment. If these suppliers are unable to expand their
networks or unwilling to provide or expand their current level of service to the
Company in the future, the Company's operations could be adversely affected.
The Company has from time to time experienced delays in the receipt of
network access and telecommunications services. In addition, the Company has
also from time to time experienced delays in the receipt of certain hardware
components. A failure by a supplier to deliver quality services or products on
a timely basis, or the inability to develop alternative sources if and as
required, could result in delays which could have a material adverse effect on
<PAGE>
the Company. In addition, the Company maintains relationships with certain
equipment suppliers in the design of products, which they sell to the Company.
The Company's remedies against suppliers who fail to deliver products on a
timely basis are limited, in many cases, by practical considerations relating to
the Company's desire to maintain relationships with the suppliers. As the
Company's suppliers revise and upgrade the technology of their equipment, the
Company may encounter difficulties in integrating the new technology into its
network.
International Expansion
The Company's strategy includes expansion of its business into
international markets. There can be no assurance that the Company will be able
to obtain the permits and operating licenses, if any are required, necessary for
it to operate, to hire and train employees or to market, sell and deliver high
quality services in these markets. In many countries, the Company may need to
enter into a joint venture or other strategic relationship with one or more
third parties in order to successfully conduct its operations. There can be no
assurance that such factors will not have a material adverse effect on the
Company's future international operations and, consequently, on the Company's
business, financial condition or results of operations.
International Economic Volatility
The Company and its customers are subject to a variety of risks in
connection with conducting business internationally, including: fluctuations in
exchange rates; political and economic instability; changes in diplomatic and
trade relationships; longer payment cycles; difficulties in collecting accounts
receivable; managing independent sales organizations; staffing and managing
international operations; protecting intellectual property and enforcing
agreements in other countries; cultural differences affecting product demand;
potentially adverse tax consequences resulting from operating in multiple
jurisdictions with different tax laws; and changes in tariffs and other barriers
and restrictions. There can be no assurance that such factors will not require
the Company to modify its current business practices or have a material adverse
impact on the Company's business, financial condition and prospects.
New and Uncertain Market
The market for Internet connectivity services and related software products
is in an early stage of growth. Since this market is relatively new and because
current and future competitors are likely to introduce Internet connectivity
and/or online services and products, it is difficult to predict the rate at
which the market will grow or at which new or increased connection will result
in market saturation. The novelty of the market for Internet access services
may also adversely affect the Company's ability to retain new customers, as
customers unfamiliar with the Internet may be more likely to discontinue the
Company's services after an initial trial period than other subscribers. If
demand for Internet services fails to grow, grows more slowly than anticipated,
or becomes saturated with competitors, the Company's business, operating results
and financial condition will be adversely affected.
To continue to realize customer growth in all its markets, the Company must
continue to replace terminating customers and attract additional customers.
However, the sales and marketing expenses and acquisition costs associated with
attracting new customers are substantial. Accordingly, the Company's ability to
improve operating margins will depend in part on the Company's ability to retain
its customers. The Company continues to invest significant resources in its
telecommunications infrastructure and customer support resources in connection
with all its businesses. There can be no assurance that the Company's
investments in telecommunications infrastructure and customer support
capabilities will improve customer retention. Since the Company's markets are
new and the utility of available service is not well understood by new and
potential customers, the Company is unable to predict future customer retention
rates.
<PAGE>
Risks of Implementation of the CLEC Networks
The Company's ability to achieve its strategic objectives will depend in
large part upon the successful, timely, and cost-effective completion of its
networks. The Company's inability to complete its CLEC networks in a timely,
cost-efficient manner will have a material adverse effect on the Company's
business, financial condition, and results of operations.
Uncertainty of Market Acceptance; Potential Lack of Customer Demand
The Company has not yet commenced marketing certain of its services to
potential subscribers. There can be no assurance that there will be sufficient
demand from its target customers for its services, and if such demand exists,
there can be no assurance that the Company will be able to service successfully
its target market on a profitable basis. The Company's ability to attract and
retain customers (including those that switch their current telecommunications
service to the Company) is crucial to the Company's success.
To continue to realize customer growth in all its markets, the Company must
continue to replace terminating customers and attract additional customers.
However, customer acquisition costs are substantial. Accordingly, the Company's
ability to improve operating margins will depend in part on the Company's
ability to retain its customers. Since the Company's markets are new and the
utility of available service is not well understood by new and potential
customers, the Company is unable to predict future customer retention rates.
Risk of System Failure
The success of the Company is largely dependent upon its ability to deliver
high quality, uninterrupted access to the Internet and other telecommunication
services. Any system failure that causes interruptions in the Company's
operations could have a material adverse effect on the Company. The Company has
experienced failure relating to individual POP's and the Company's customers
have experienced difficulties in accessing, and maintaining connection to the
Internet. The backbone of the Company's network, in addition to the Company's
overall telecommunications and Internet network, is currently leased from
certain suppliers, such as Quest LCI, Sprint, Cable & Wireless, and
MCI/Worldcom. If these suppliers are unable to expand their networks or are
unwilling to provide or expand their current level of service to the Company in
the future, the Company's operations could be adversely affected. As the Company
attempts to expand its network and data traffic grows, there will be increased
stress on network hardware and traffic management systems. However, there can be
no assurance that the Company will not experience failures relating to
individual POP's or even failure of the entire network. The Company's operations
also are dependent on its ability to successfully expand its network and
integrate new and emerging technologies and equipment into its network, which
are likely to increase the risk of system failure and cause unforeseen strains
upon the network. The Company attempts to minimize customer inconvenience in the
event of a system disruption by high quality services and redundancy. However,
significant or prolonged system failures, or difficulties for subscribers in
accessing, and maintaining connection with the Internet could damage the
reputation of the Company and result in the loss of subscribers. Such damage or
losses could have a material adverse effect on the Company's ability to obtain
new subscribers and on the Company's business, financial condition or results of
operations.
The Company's operations are dependent on its ability to protect its
software and hardware against damage from fire, earthquake, power loss,
telecommunications failure, natural disaster and similar events. A significant
portion of the Company's switches and other telephone equipment are located in
Houston, Texas; Los Angeles, California, Miami, Florida; Atlanta, Georgia; New
York, New York; Panama City and Colon, Panama; Caracas, Venezuela; San Jose,
Costa Rica; Mexico City, Mexico; Managua, Nicaragua; and San Salvador, El
Salvador. Any damage or failure that causes interruptions in the
<PAGE>
Company's operations could have a material adverse effect on the Company's
business and results of operations. While the Company and its subsidiaries carry
some property and business interruption insurance, such coverage may not be
adequate to compensate the Company for all losses that may occur.
Security Risks
Despite the implementation of network security measures by the Company,
such as limiting physical and network access to its routers, its
telecommunications infrastructure is vulnerable to computer viruses, break-ins
and similar disruptive problems caused by its customers or other Internet users.
Computer viruses, break-ins or other problems caused by third parties could lead
to interruption, delays or cessation in service to not only the Company's
Internet customers, but also the Company's telecommunication users. Furthermore,
such inappropriate use of the voice and data systems by third parties could also
potentially jeopardize the security of confidential information stored in the
computer systems of the Company's customers and other parties, which may deter
potential subscribers. Persistent security problems continue to plague public
and private data networks. Recent break-ins reported in the press and otherwise
have reached computers connected to the Internet at major corporations and
Internet access providers and have included incidents involving hackers
by-passing fire-walls by posing as trusted computers and involving the theft of
information. Alleviating problems caused by computer viruses, break-ins or other
problems caused by third parties may require significant expenditures of capital
and resources by the Company, which could have a material adverse effect on the
Company. Moreover, until more comprehensive security technologies are developed,
the security and privacy concerns of existing and potential customers may
inhibit the growth of the Internet service industry in general and the Company's
customer base and revenues in particular.
Potential Liability for Information Disseminated Through the Network
Internet service providers face potential liability of uncertain scope for
the actions of subscribers and others using their systems, including liability
for infringement of intellectual property rights, rights of publicity,
defamation, libel and criminal activity under the laws of the U.S. and foreign
jurisdictions. The Company carries errors and omissions insurance; however, such
insurance may not be adequate to compensate the Company for all liability that
may be imposed. Any imposition of liability in excess of the Company's coverage
could have a material adverse effect on the Company. In addition, recent
legislative enactments and pending legislative proposals aimed at limiting the
use of the Internet to transmit indecent or pornographic materials could,
depending upon their interpretation and application, result in significant
potential liability to Internet access and service providers including the
Company, as well as additional costs and technological challenges in complying
with any statutory or regulatory requirements imposed by such legislation.
Fluctuations in Quarterly Operating Results
The Company's quarterly operating results have fluctuated in the past and
may fluctuate significantly in the future as a result of a variety of factors,
some of which are outside the Company's control. These factors include general
economic conditions, acceptance and use of the Internet, user demand for long-
distance telecommunication services, capital expenditures and other costs
relating to the expansion of operations, the timing of new product announcements
by the Company or its competitors, changes in pricing strategies by the Company
or its competitors, market availability and acceptance of new and enhanced
versions of the Company's or its competitors' products and services and the
rates of new subscriber and customer acquisition and retention. These factors
could also have a material adverse effect on the Company's annual results of
operations and financial condition.
Volatility of Stock Price
<PAGE>
The market price of the Company's Common Stock may be highly volatile. The
"public float" of the Company's Common Stock is a small percentage of the total
issued and outstanding shares of Common Stock and substantial numbers of shares
have been subject to restrictions on transfer which will terminate in the near
future. Factors such as variations in the Company's revenue, earnings and cash
flow and announcements of new service offerings, technological innovations or
price reductions by the Company, its competitors or providers or alternative
services could cause the market price of the Common Stock to fluctuate
substantially. In addition, the stock markets recently have experienced
significant price and volume fluctuations that particularly have affected
companies in the technology sector and resulted in changes in the market price
of the stocks of many companies that have not been directly related to the
operating performance of those companies.
Ability of Management to Dictate Corporate Policy and the Composition of
the Board of Directors
Management and certain members of the board of directors of the Company own
or control, directly or indirectly, approximately 56% of the voting shares of
the Company, including two board members appointed by the Class A Senior
Convertible Preferred Stock holders and one board member appointed by the Class
B Senior Convertible Preferred Stock holders each of whom indirectly control
13.5% for a total of 40.5% of the voting interests. The Articles of
Incorporation and Bylaws of the Company provide that: (1) the presence of a
majority of the shareholders eligible to vote is required to constitute a quorum
at shareholders' meetings; (2) the vote of the holders of a majority of the
shares present at a meeting where a quorum is constituted is required to adopt
any resolution, unless a greater percentage is required by statute, in which
case a majority of the outstanding shares will be required; (3) shareholder
action may be taken by written consent, without prior notice, signed by the
holder(s) of the number of shares necessary to approve such action; and (4)
voting is noncumulative. As a consequence of the concentrations of stock
ownership in the hands of such persons, they have the ability to significantly
influence corporate policy, the persons elected to the Board of Directors of the
Company and may be able to block certain corporate actions.
Potential Adverse Impact of Antitakeover Provisions
The Company's articles of incorporation and bylaws and the provisions of
the Nevada General Corporation Law may have the effect of delaying, deterring or
preventing a change in control or an acquisition of the Company. The Company's
articles of incorporation authorizes the issuance of "blank check" preferred
stock, which, in the event of issuance, could be utilized by the board of
directors of the Company as a method of discouraging, delaying or preventing a
change in control or an acquisition of the Company, even though such an attempt
might be economically beneficial to the holders of Common Stock. Such
provisions may have an adverse impact from time to time on the price of the
Common Stock.
Government Regulation
The telecommunications industry is subject to extensive regulation by
federal, state and local governmental agencies, including common carrier
regulation by the Federal Communications Commission ("FCC"). The
Telecommunications Act of 1996 (the "1996 Telecommunications Act") eliminates
many of the pre-existing legal barriers to competition in the telephone and
video programming communications businesses, preempts many of the state barriers
to local telephone service competition that previously existed in state and
local laws and regulations, and sets basic standards for relationships between
telecommunications providers. Among other things, the 1996 Telecommunications
Act removes barriers to entry in the local exchange telephone market by
preempting state and local laws that restrict competition and by requiring LECs
to provide nondiscriminatory access and interconnection to potential
competitors, such as cable operators, wireless telecommunications providers, and
long distance companies. In addition, the 1996 Telecommunications Act provides
relief from the earnings restrictions and price controls that have governed the
<PAGE>
local telephone business for many years. The 1996 Telecommunications Act will
also, once certain thresholds are met, allow ILECs to enter the long distance
market within their own local service regions. The 1996 Telecommunications Act
thus introduced the possibility of new, non-traditional competition for
telecommunications companies and resulted in greater potential competition for
the Company. The outcome of pending federal and state administrative
proceedings may also affect the nature and extent of competition that will be
encountered by the Company.
Providing local service requires appropriate licensure in each state where
service is provided. The Company is currently certified as a Competitive Local
Exchange Carrier ("CLEC") in Georgia, Florida and California. The Company also
intends to apply for certification in Texas, New York, and Puerto Rico during
2000. While the Company believes it will be successful in obtaining such
certification, the outcome cannot be assured. Future regulations may prevent the
Company from generating revenues from sales of database information about
consumers obtained by the Company from its telephone business. These competitive
developments, as well as other regulatory requirements relating to privacy
issues, may have a material adverse effect on the Company's business.
The Company is also subject to regulation by governmental authorities in
certain foreign countries with respect to the licenses it holds, agreements to
which it is a party, and its operations in such foreign countries.
EMPLOYEES
As of December 31, 1999, the Company had 241 full time employees,
located in the U.S. and located in various Latin American countries. None
of the Company's employees is represented by a labor union or covered by a
collective bargaining agreement and the Company has never experienced a work
stoppage. The Company believes that its relations with its employees
are good.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company has its Corporate Headquarters located in Roswell, Georgia.
The Company leases 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
April 15, 2002.
The Company leases approximately 16,800 square feet of office space at 606
E. Huntington Drive, Monrovia, California 91016, which serves as its
Administrative Headquarters for CLEC operations. The lease commenced on
September 15, 1999, with a base rate of $18,809 per month and is for an initial
term of five years expiring on September 30, 2004.
The Company owns an office building with approximately 6,400 square feet in
El Monte, California, which serves as its Central Office for Los Angeles CLEC
operations.
The Company leases approximately 7,220 square feet of office space at 99 SE
5th Street, Miami, Florida, which serves as its Central Office for Miami CLEC
operations. The lease commenced on December 1, 1999, with a base rate of $11,553
per month and is for an initial term of 10 years expiring on November 30, 2009.
The Company leases 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.
The Company leases 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 the Company exercises its
<PAGE>
contractual right to renew the lease for two additional terms of five years
each. The monthly rental under the lease is currently $9,800.
The Company leases approximately 1,700 square feet of office space at
28 West Flagler Street, Miami, Florida, 33130. The lease is for an initial term
of five years and expired on December 31, 1998 and has been extended for an
additional two years until January 1, 2001. The monthly rental under the
lease is currently $2,054.
The Company leases 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, and San Diego,
California. The aggregate monthly rental under these leases is currently
$28,120.
The Company also leases office or equipment co-location space in Panama
City, Panama; Colon, Panama; Caracas, Venezuela; San Salvador, El Salvador;
Managua, Nicaragua and San Jose, Costa Rica. The aggregate monthly rental
under these leases is currently $14,725.
The physical properties of the Company are in good condition.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceeding or dispute which is not
routine and incidental to the business or which involves an amount, exclusive
of interest and costs, which exceeds ten percent of the current assets of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted by the Company to a vote of the Company's
security holders, through the solicitation of proxies or otherwise, during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded in the over-the-counter market. The
table set forth below reflects high and low closing bid prices on a quarterly
basis for the period beginning January 1, 1998 and ending December 31, 1999. The
information was obtained from the National Quotation Bureau. The quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not represent actual transactions.
=================================
1999 HIGH BID LOW BID
- -------------- -------- -------
First Quarter 1.437 .781
- -------------- -------- -------
Second Quarter 1.969 1.125
- -------------- -------- -------
Third Quarter 2.563 1.750
- -------------- -------- -------
Fourth Quarter 2.500 1.875
- -------------- -------- -------
<PAGE>
1998 HIGH BID LOW BID
- -------------- -------- -------
First Quarter 1.421 .797
- -------------- -------- -------
Second Quarter 1.687 .875
- -------------- -------- -------
Third Quarter 1.687 .781
- -------------- -------- -------
Fourth Quarter 1.156 .594
- -------------- -------- -------
As of December 31, 1999, the Company's Common Stock was held by
approximately 276 holders of record. The Company estimates that it has a
significantly larger number of shareholders because a substantial number of the
Company's shares are held by broker-dealers for their customers in street
name. The Company has not paid any cash dividends on its Common Stock to date.
The Company's current policy is to retain earnings to provide funds for the
operation and expansion of its business. The Company may pay dividends to
Common Stock Holders only after all accumulated and unpaid dividends on the
Class A and B Convertible Preferred Stock have been declared, set aside and
paid.
During the quarter ended December 31 1999, the $21 million of Convertible
Promissory Notes issued during the third quarter of 1999 automatically converted
into 7,000 shares of the Company's $0.01 par value Class B Convertible Senior
Preferred Stock (the "Preferred Stock") and warrants to purchase 9,000,000
shares of common stock. Each share of Preferred Stock is convertible into
1,714.286 shares of common stock and has a liquidation preference of $3,000 per
share. In conjunction with the issuance of the Preferred Stock, the holders
received warrants to purchase 9,000,000 shares of common stock exercisable for
five years at a strike price of $1.89 per share. The dividend and liquidation
rights of the Preferred Stock are parri passu with the Class A Convertible
Senior Preferred Stock. The Company is required to file a registration statement
with the SEC within 120 days after conversion of the Notes to register the
shares of common stock issuable upon conversion of the Preferred Stock
(including shares issued as dividends) and the exercise of the warrants.
Additionally, during the last quarter of 1999, the Company issued 5,000,000
shares of common stock in conjunction with the exercise of warrants to purchase
common stock for $1.00 per share, which were issued during the first quarter of
1999.
Item 6. SELECTED FINANCIAL DATA
POINTE SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
The following selected 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 statements 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 accounts. Historical results
are not necessarily indicative of the results to be expected in the future.
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . $ 113 $ 8,232 $ 12,951 $27,620 $ 51,925
Cost of revenues. . . . . . . . . . . . . . . . . . . . . . 31 6,275 9,765 23,246 50,130
-------- -------- --------- -------- ---------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . 82 1,957 3,186 4,374 1,795
Selling, general and administrative expenses. . . . . . . . 1,365 7,816 8,766 9,933 19,275
Depreciation and amortization . . . . . . . . . . . . . . . 147 1,429 2,996 3,452 4,477
Nonrecurring charge . . . . . . . . . . . . . . . . . . . . - - 2,677 - -
-------- -------- --------- -------- ---------
Operating loss. . . . . . . . . . . . . . . . . . . . . . . (1,430) (7,288) (11,253) (9,011) (21,957)
Interest expense, net . . . . . . . . . . . . . . . . . . . (94) (482) (481) (1,760) (15,999)
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)
Income tax benefit (provision). . . . . . . . . . . . . . . - - - - -
-------- -------- --------- -------- ---------
Loss before minority interests. . . . . . . . . . . . . . . (1,524) (7,770) (11,976) (9,147) (38,291)
Minority interests. . . . . . . . . . . . . . . . . . . . . - 13 - - -
-------- -------- --------- -------- ---------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . (1,524) (7,757) (11,976) (9,147) (38,291)
Preferred stock dividends and beneficial conversion charge. - - - - (24,506)
-------- -------- --------- -------- ---------
Net loss available to common stockholders . . . . . . . . . $(1,524) $(7,757) $(11,976) $(9,147) $(62,797)
======== ======== ========= ======== =========
Net loss per share - basic. . . . . . . . . . . . . . . . . $ (0.26) $ (0.51) $ (0.39) $ (0.22) $ (1.36)
Weighted average shares outstanding . . . . . . . . . . . . 5,780 15,088 31,085 42,144 46,204
Net loss per share - diluted. . . . . . . . . . . . . . . . $ (0.26) $ (0.51) $ (0.39) $ (0.22) $ (1.36)
Diluted weighted average shares outstanding . . . . . . . . 5,780 15,088 31,085 42,144 46,204
At December 31,
--------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- --------- -------- ---------
BALANCE SHEET DATA
Cash, cash equivalents and short term investments . . . . . $ 44 $ 320 $ 156 $ 1,255 $ 21,220
Current assets. . . . . . . . . . . . . . . . . . . . . . . 149 3,022 3,373 6,257 30,045
Property and equipment, net . . . . . . . . . . . . . . . . 787 5,374 6,630 14,488 24,317
Goodwill and other intangibles, net . . . . . . . . . . . . - 26,313 20,512 20,404 19,851
Total assets. . . . . . . . . . . . . . . . . . . . . . . . 1,086 34,792 31,066 42,222 76,890
Notes payable and capital lease obligations . . . . . . . . 304 5,960 5,470 16,295 18,172
Stockholders' equity. . . . . . . . . . . . . . . . . . . . $ 364 $18,673 $ 14,376 $12,385 $ 42,822
</TABLE>
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Pointe Communications Corporation (formerly Charter Communications
International, Inc., "PointeCom" or the "Company") began operations in 1995
predominately offering International Private Line ("IPL") services between the
U.S. and Panama. Subsequently, the Company 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 the Company, which vary by country, typically allow the
Company to offer an array of services including international private line, long
distance, Internet access, and data transmission. The Company 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. The
Company also enjoys strong relationships with the responsible government
agencies, telephone company authorities and international carriers.
<PAGE>
During late 1998, the Company adopted a strategy to position itself as a
cost efficient, reliable, full-service Competitive Local Exchange Carrier
("CLEC") tailored specifically to the needs of the Hispanic Community in the
U.S. and in South and Central America. In the U.S., the Company's focus is on
major cities with large Hispanic populations. Internationally, the Company
targets complementary markets with telecommunications traffic patterns that
correspond with the paired U.S. target markets. The Company'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 Competitive
Local Exchange Carrier ("CLEC") in California merged with and into the Company.
The management team from HTC assumed leadership of the Company'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, the Company 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 the Company 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 the Company 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, the Company has yet to
realize significant revenues or cost efficiencies.
Subsequent to year end, the Company agreed to merge with Telscape
International, Inc. ("Telscape") in an all-stock transaction in which each share
of PointeCom 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 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:
- - An experienced management team with a significant Latin component.
- - 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.
- - Infrastructure-based strategy utilizing a "Smart Build" approach including
a fiber optic network under construction by Telscape in Mexico.
<PAGE>
- - Greater critical mass and compelling synergies and cost savings.
- - One of the few companies that can compete in the U.S. and Latin America as
one company.
- - Combined company strategy addresses rapidly growing and deregulating markets
with significant competitive opportunities.
See "Liquidity and Capital Resources" for a discussion of the Company's
ability to meet the capital requirements associated with its expansion plans.
RESULTS OF OPERATIONS
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>
<PAGE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
- -------------------------------------------------------------------------------
During the third quarter of 1999, the Company evaluated its business focus
and organizational structure. In doing so, it was determined that the Company
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 US 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 the Company'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 the Company and its employees
in part based upon the performance of these individual segments. The Company
has presented segment information for the 1999 fiscal year in its financial
statements; however, comparable data is not presented for 1998 since the
company 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 the Company sold the majority of its dial up
subscribers during the third quarter in an effort to realign its Internet
offering with the Company's strategic focus on the U.S. Hispanic community. The
Company 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 the Company'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 Competitive Local Exchange
Carrier ("CLEC") traffic.
Selling, general, and administrative ("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
the Company'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 the
Company 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.
<PAGE>
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 the Company's payable to Sprint. At year end 1997, the disputed
amount was accrued as a deferred credit. During 1998, the Company 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 the Company 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
$1.33 net loss per share 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 Class B preferred stock issued
during the year. (Note 7).
The Company's international operations, conducted mainly in Panama,
Venezuela, Costa Rica and Mexico accounted for approximately 7.8% of the
Company's overall revenues and 3.8% of the Company's net loss during 1999 and
approximately 16.7% of the Company's revenues and 16.8% of the Company'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 the Company'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 Company 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 the
Company's operations; however, the Company was able to gain economies of scale
while expanding operations as represented by the lower selling, general and
administrative expenses as a proportion of
<PAGE>
revenues in 1998. The Company 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 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.
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 to a guarantee with regard to
shares issued in conjunction with the 1997 financing type leases. The guarantee
obligated the Company to reimburse the holder of these shares for the difference
between $2.33 and the average closing price of the Company'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 the Company's payable to
Sprint. At year end 1997, the disputed amount was accrued as a deferred credit.
During 1998, the Company 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 the Company 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.
The Company's international operations, conducted mainly in Panama,
Venezuela, Costa Rica and Mexico accounted for approximately 17.9% of the
Company's overall revenues and 3.2% of the Company's net loss in 1997 and
approximately 16.8% of the Company's revenues and 16.8% of the Company'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. The Company's Panamanian
operations conduct international private line (IPL), Internet connection and
call center services on U.S. Military bases. During the year ended 1998, The
Company'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.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has not generated net cash from operations for any period
to date. The Company 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,
the Company entered into three promissory notes with principal amounts
totaling $9.0 million. In conjunction with the notes, the Company 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, the Company 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, the Company 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 the Company'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 the Company acquired approximately $5.7 million in assets through
various financing and capital leases.
The Company 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, the Company had approximately $21.2 million of
cash on hand. Subsequent to year-end, 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 pursuant to which the
company 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, the Company entered into a $25.0 million master lease
facility. As of December 31, 1999, the Company had drawn down $6.3 million
under the master lease. Additionally, the Company is negotiating a potential
$15.0 million line of credit with another major vendor. The Company intends to
use these vendor lines of credit and lease facilities 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.
As noted previously, the Company 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
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
<PAGE>
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
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.
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 transactions involving hedge
accounting. The Company 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 our business.
However, we 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 our business.
Finally, although we have not been made a party to any litigation or arbitration
proceeding to date involving our products or services related to year 2000
compliance issues, we 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
our business, results of operations, financial condition and liquidity, perhaps
materially.
ITEM 7A. QUANTITAVE AND QUALITATIVE DISCLOSURE 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 both 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. 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
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>
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
The Company 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, the Company nets the exposures to
take advantage of natural offsets. Currently, the Company does not enter into
any hedging arrangements to reduce this exposure. The Company is not aware
of any facts or circumstances that would significantly impact such exposures
in the near-term as the significant majority of the Company'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.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Attached following the Signature Pages and Exhibits, see the index to the
financial statements.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company has not had any disagreements with its independent accountants
and auditors.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
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. 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
- ------------------- --- ----------------------------------------------
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
- ------------------- --- ----------------------------------------------
John F. Nort 51 President, Prepaid Solutions 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
<PAGE>
law firm of Hurt, Richardson, Gamer, Todd & Cadenhead. Mr. Raville currently
serves on the Board of numerous private concerns. Mr. Raville also sits
on the Board of Eltrax Systems, Inc.
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 NYU.
PATRICK E. DELANEY. Mr. Delaney has been a Director since September 12,
1996. Additionally, Mr. Delaney served as Chief Financial Officer for the
Company from September 12, 1996 to December 31, 1999. Mr. Delaney has over
twenty years of diverse business management experience in 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 U.S. 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.
<PAGE>
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.
JOHN F. NORT. Mr. Nort joined us in October 1996 and is currently the
President of the Prepaid Solutions division. Mr. Nort was an early pioneer in
the prepaid calling card industry. Worldlink Communications, a Company he
founded in 1992, was one of the first companies offering a long distance
telephone debit card for use from any touch tone phone in the U.S.. Mr. Nort's
early market experience has benefitted us, as we have grown prepaid revenue from
$6 million in 1996 to approximately $44 million in 1999 and has developed strong
positions in both the domestic and international prepaid long distance market.
Under Nort's direction the group has had significant retail success,
particularly in the Hispanic community. Prior to joining us, Mr. Nort founded
WorldLink Communications, Inc., which we acquired in 1996. Mr. Nort also founded
National Telephone Company, a payphone operator, and was a director/owner of
Rent-A-Line Telephone Company, a prepaid CLEC reseller, until its acquisition by
us in 1998.
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 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.
<PAGE>
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 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-U.S.A., 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 Sandier Capital's investment in our Class A Senior Convertible
Preferred Stock. Mr. Lee is currently a 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 & Co. LLC, where he
worked on a wide range of advisory and financial assignments, with special
emphasis in the communications sector. Mr. Lee holds a BS in economics from The
Wharton School at the University of Pennsylvania.
<PAGE>
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 Stanley & 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.
ITEM 11. 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.
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
-------------------------- --------------------------------
Awards Payouts
------------------ --------
Securities
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
<FN>
(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 SI 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 monthly plus related expenses for the services of four individuals, two of
whom are Mr. Fuentes and Zambra.
</TABLE>
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:
- ten years after the date of grant,
- one year after the recipient ceases to be a director by reason of death or
disability, or
- three months after the recipient ceases to be a director for any reason
other than death or disability.
To date, we have granted options to purchase 100,000 shares under the plan
to each of the following persons:
- Stephen E. Raville,
- William P. O'Reilly,
- F. Scott Yeager,
<PAGE>
- Gerald F. Schmidt,
- 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.
<PAGE>
<TABLE>
<CAPTION>
SUMMARY FISCAL YEAR OPTION GRANT TABLE
PERCENT OF TOTAL
NUMBER OF OPTIONS GRANTED
SECURITIES TO EXERCISE
UNDERLYING EMPLOYEES IN PRICE EXPIRATION
NAME AND PRINCIPAL POSITION OPTIONS GRANTED FISCAL YEAR (S/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(3) $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 8-31-06
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
<FN>
(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 FITC 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).
</TABLE>
SUMMARY AGGREGATE OPTION EXERCISE AND VALUE TABLE
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED 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
<FN>
(1) Assumes a fair market value at December 31, 1999 of $2.10.
</TABLE>
EMPLOYMENT ARRANGEMENTS
In August 1999, Pointe entered into an employment agreement with Ruben
Garcia to be President of U.S. CLEC operations for a period of three years.
Under the plan, Mr. Garcia will receive an annual salary of$ 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, the Company 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 the Company or its subsidiaries,
and none act in a similar capacity for another entity. Additionally, no director
or officer of the Company serves in a similar capacity for an entity whose
officers or directors serve on the Company's compensation committee.
DIRECTORS COMPENSATION
The Company's directors do not receive cash compensation for their services
as directors. The Company does pay for out of pocket expenses related to
attending a board meeting. The Company does grant each non-employee director an
option to purchase 100,000 shares of the Company's common stock, which vests
over a four year period and terminates within 90 days after the person ceases to
be a director.
Executive Compensation
----------------------
The Company 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 the Company. These individuals
have put together compensation packages designed to attract and retain the
executives.
The Company 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 the Company. The Company attempts to align the executive pay
with the Company's overall performance and to provide an incentive to the
executive to achieve positive results for the Company's shareholders. The
Company achieves these goals by providing the executive with competitive market
salaries along with the opportunity to earn performance based bonuses and
ownership in the Company through the Company's Executive Market Value
Appreciation Stock Option Plan, which provides executives with the ability to
accelerate the vesting of their options through exceptional performance. The
Company 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 the Company 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 the Company.
Mr. Raville does not participate in setting his personal compensation.
Messrs. Dorsey and Yeager and the Board generally set the compensation for the
Company'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 the Company's Non-employee Director
Stock Option Plan when he was not an employee of the Company. 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
STOCKHOLDER RETURN PERFORMANCE PRESENTATION
Set forth below is a line graph comparing the yearly percentage change
in the total stockholders' return on the Company's common stock against the S&P
500 and the Nasdaq Telecommunications Industry Index.
[GRAPHIC OMITED]
<TABLE>
<CAPTION>
DESCRIPTION 1996 1997 1998 1999
<S> <C> <C> <C> <C>
POINTE (%) 50% 10% -30% 110%
S & P 500 (%) 50% 90% 150% 180%
NASDAQ TELECOM (%) 40% 90% 200% 520%
Source: Bloomberg, L.P.
</TABLE>
The graph assumes that all dividends were re-invested. No dividends have
been declared or paid in the Company's common stock. Stockholder returns over
the indicated period should not be considered indicative of future stockholder
returns.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of December 31, 1999, information
regarding the ownership of our Common Stock owned by:
- 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;
- each of our directors;
- each of the named executive officers; and
- all of our officers and directors as a group.
<TABLE>
<CAPTION>
% OF
BENEFICIAL OWNERS NUMBER TOTAL
- -------------------------------------------- -------------- ------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Patrick E. Delaney 2,538,173(1) 2.15%
William P. O'Reilly 599,846(2) *
F. Scott Yeager 280,000(3) *
Stephen E. Raville 7,643,965(4) 6.47%
Gerald F. Schmidt 3,496,667(5) 2.96%
John F. Nort 812,387(6) 0
James H. Dorsey 1,292,955(7) 1.09%
Davis C. Lee 16,887,616(8) 14.31%
Rafic A. Bizri 15,897,616(9) 14.31%
Darryl B. Thompson 20,430,837(10) 17.30%
EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP: 70,890,062 61.04%
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, Suite 110 Roswell, Georgia 30076.
_______________
<FN>
(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.
<PAGE>
(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.
(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. the Ownership of Shares is disclaimed
(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. the Ownership of Shares is
disclaimed
(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. the Ownership of Shares
is disclaimed
</TABLE>
ITEM 13. 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 exercisable for a
period of one year from issuance. The maturity date of the note and the term of
the warrants were extended in May 1999 for two years to 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 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
<PAGE>
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
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.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Supplementary Data, Financial Statement
Schedules and Exhibits
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1998 and 1999 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999 F-4
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1997, 1998 and 1999 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999 F-7
Notes to Consolidated Financial Statements F-8
2. FINANCIAL STATEMENT SCHEDULES: All Financial Statement Schedules have been
omitted because they are not required, are not applicable or the information
required has been included elsewhere herein.
3. EXHIBITS:
<TABLE>
<CAPTION>
Exhibit No. Description Location
- ----------- --------------------------------------- -----------------------------
<S> <C> <C>
2.01 Amended and Restated Agreement and Filed herewith
and Plan of Merger dated
December 31, 1999
3.01 Articles of Incorporation Form 10-QSB for the quarter
ended March 31, 1996
3.01.01 Certificate of Amendment to Form 10-KSB for the year end
Articles of Incorporation December 31, 1998
3.03 Bylaws Form 10-QSB for the quarter
ended June 30, 1996
4.2 Form of 18% Convertible, Form 10-KSB for year ended
Subordinated Debenture 12/31/97
10.1 Contract with INTEL Form 10-KSB for the year
ended 12/31/95
10.2 Employee Incentive Stock Option Plan Form S-8 filed August 7, 1998
10.3 Executive Long Term Stock Option Plan Form S-8 filed August 7, 1998
10.4 Non-employee Director Stock Form S-8 filed August 7, 1998
Option Plan
10.5 Agreement with Hondutel Form 10-QSB for the quarter
ended June 30, 1996
10.6 Agreement with Telecommunicaciones Form 10-QSB for the quarter
de Mexico ended June 30, 1996
10.7 Agreement with Comison Nacional de Form 10-QSB for the quarter
Telecommunications (Conatel) ended June 30, 1996
10.8 Form of Purchase and Sale Agreement Form 10-KSB for the year end
December 31, 1997
10.9 Form of Equipment Lease Agreement Form 10-KSB for the year end
December 31, 1997
10.10 Form of Security Agreement Form 10-KSB for the year end
December 31, 1997
10.11 Receivable Purchase Facility Agreement Form 10-KSB for the year end
December 31, 1997
10.12 Registration Rights and Minimum Value Form 10-KSB for the year end
Guarantee Agreement December 31, 1997
10.13 Master Lease Agreement and Warrant Form 10-KSB for the year end
December 31, 1997
10.14 Promissory Note, Security Agreement Form 10-KSB for the year end
and Warrant Agreement - Cordova December 31, 1998
10.15 Promissory Note, Security Agreement Form 10-KSB for the year end
and Warrant Agreement - FSE December 31, 1998
10.16 Promissory Note, Security Agreement Form 10-KSB for the year end
and Warrant Agreement - Gibralt December 31, 1998
10.17 Promissory Note, Security Agreement Form 10-KSB for the year end
and Warrant Agreement - EGL December 31, 1998
10.18 Telecommute Solutions Stock Option Form 10-KSB for the year end
Option Plan December 31, 1998
10.19 Purchase of Preferred Stock in Form 10-KSB for the year end
Telecommute Solutions Inc. December 31, 1998
10.20 Securities Purchase Agreement Form 10-QSB for the quarter
Class A Senior Convertible Preferred ended March 31, 1999
10.21 Certificate of Designations Class A Form 10-QSB for the quarter
Senior Convertible Preferred Stock ended March 31, 1999
10.22 Warrant Agreement with Class A Form 10-QSB for the quarter
Senior Convertible Preferred ended March 31, 1999
10.23 Registration Rights Agreement with Form 10-QSB for the quarter
Class A Senior Convertible Preferred ended March 31, 1999
10.24 Promissory Note - EGL Form 10-QSB for the quarter
ended March 31, 1999
10.25 Warrant to Purchase Common Stock - EGL Form 10-QSB for the quarte
ended March 31, 1999
10.26 Master Lease Agreement - Ascend Form 10-QSB for the quarter
ended March 31, 1999
10.27 Securities Purchase Agreement Form 10-QSB for the quarter
Class B Senior Convertible Preferred ended September 30, 1999
10.28 Convertible Promissory Note Form 10-QSB for the quarter
ended September 30, 1999
10.28 Certificate of Designations Class B Form 10-QSB for the quarter
Senior Convertible Preferred Stock ended September 30, 1999
10.30 Voting Agreement Form 10-QSB for the quarter
ended September 30, 1999
10.31 Executive Market Value Appreciation Form 10-QSB for the quarter
Stock Option Plan ended September 30, 1999
10.32 Executive Market Value Appreciation Form 10-QSB for the quarter
Stock Option Form ended September 30, 1999
<PAGE>
10.33 Pay for Performance Form 10-QSB for the quarter
Stock Option Plan ended September 30, 1999
10.34 Pay for Performance Form 10-QSB for the quarter
Stock Option Form ended September 30, 1999
10.35 Warrant Agreement with Class B Filed herewith
Senior Convertible Preferred ended
10.36 Registration Rights Agreement with Filed herewith
Class B Senior Convertible Preferred
10.37 Convertible Promissory Note - Telscape Filed herewith
10.38 Telscape Certificate of Designations Filed herewith
11.1 Net Loss Per Share Calculation Filed herewith
21.1 List of subsidiaries Filed herewith
23.1 Consent of Arthur Andersen LLP Filed herewith
27 Financial Data Schedule Filed herewith
</TABLE>
(b) Reports on Form 8-K.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
POINTE COMMUNICATIONS CORPORATION
By: /s/ STEPHEN E. RAVILLE Date: April 14, 2000
- ------------------------------
STEPHEN E. RAVILLE
CHIEF EXECUTIVE OFFICER
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Stephen E. Raville, his true and lawful
attorney in-fact and agent with full power of substitution and resubstitution,
to sign any and all amendments (including post effective amendments) to this
Annual Report on Form 10-K and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully to all intents and purposes as he
could do in person, hereby ratifying and confirming that said attorney-in-fact
or his substitute, or any of them shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------- ----------------------------- --------------
<S> <C> <C>
By: /s/ STEPHEN E. RAVILLE Chief Executive Officer and April 14, 2000
- ---------------------------
STEPHEN E. RAVILLE Director
By: /s/ PETER C. ALEXANDER President and Chief Operating April 14, 2000
- ---------------------------
PETER C. ALEXANDER Officer
By: /s/ PATRICK E. DELANEY Executive Vice-President and April 14, 2000
- ---------------------------
PATRICK E. DELANEY Director
By: /s/ RICHARD P. HALEVY Chief Financial Officer April 14, 2000
- ---------------------------
RICHARD P. HALEVY
By: /s/ WILLIAM P. O'REILLY Director April 14, 2000
- ---------------------------
WILLIAM P. O'REILLY
By: /s/ GERALD F. SCHMIDT Director April 14, 2000
- ---------------------------
GERALD F. SCHMIDT
By: /s/ F. SCOTT YEAGER Director April 14, 2000
- ---------------------------
F. SCOTT YEAGER
By: /s/ JAMES R. DORSEY Director April 14, 2000
- ---------------------------
JAMES R. DORSEY
<PAGE>
By: /s/ RAFIC A. BIZRI Director April 14, 2000
- ---------------------------
RAFIC A. BIZRI
By: /s/ DAVID C. LEE Director April 14, 2000
- ---------------------------
DAVID C. LEE
By: /s/ DARRYL B. THOMPSON Director April 14, 2000
- ---------------------------
DARRYL B. THOMPSON
</TABLE>
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1998 and 1999 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999 F-4
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1997, 1998 and 1999 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999 F-7
Notes to Consolidated Financial Statements F-8
<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-1
<PAGE>
<TABLE>
<CAPTION>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1999
December 31, December 31,
1998 1999
-------------- --------------
<S> <C> <C>
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
============== ==============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Balance Sheets.
F-2
<PAGE>
<TABLE>
<CAPTION>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1999
December 31, December 31,
1998 1999
-------------- --------------
<S> <C> <C>
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
============= =============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Balance Sheets.
F-3
<PAGE>
<TABLE>
<CAPTION>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
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-4
<PAGE>
<TABLE>
<CAPTION>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
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
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-5
<PAGE>
<TABLE>
<CAPTION>
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
------------- ---------------
<S> <C> <C>
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
============= ===============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
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-7
<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.
F-8
<PAGE>
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).
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
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,
<PAGE>
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.
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.
<PAGE>
NOTES RECEIVABLE
The following table summarizes the components of notes receivable as of
December 31:
<TABLE>
<CAPTION>
1998 1999
---------- ------------
<S> <C> <C>
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
</TABLE>
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).
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:
<TABLE>
<CAPTION>
Classification Estimated Useful Lives
- ----------------------- ----------------------
<S> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Category Amortization Period
- ---------------------- -------------------
<S> <C>
Acquired Customer Base 3-10 years
Other Intangibles 3-10 years
Goodwill 3-30 years
</TABLE>
<PAGE>
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 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
<PAGE>
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 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.
<PAGE>
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, 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:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
------------- -------------
</TABLE>
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
<PAGE>
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 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.
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
<PAGE>
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.
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
<PAGE>
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
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
<PAGE>
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 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
Internatinoal, Inc. or the termination of the merger agreeement.
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 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 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 parri 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.
On December 31, 1999, the convertible Promissory Notes were automatically
exchanged for Class B Preferred Stock and warrants. The conversion price of the
preferred stock was adjusted to $1.75 and the number of shares underlying the
warrants and exercise price of the warrants were adjusted to 9.0 million and
$1.89, respectively. The Company calculated the beneficial conversion feature
with respect to the exchange as the increase in the fair market value of the
additional securities received by the investors. The increase in the number of
shares of common stock underlying the preferred stock was 2.3 million shares
from 9.7 million shares to 12 million shares. The increase in value
attributable to the increased number of shares is 5.4 million which is measured
at the market price on issuance date. The increase in the value of the warrants
received was $2.8 million measured as the difference between the fair market
value of the original number of warrants and the adjusted number. The total
beneficial conversion feature recognized in conjunction with the issuance of the
Class B Preferred Stock during the fourth quarter of 1999 is the sum of the two
Componants or $8.2 million recognized as a charge directly to accumulated
deficit (and a charge to net loss available to common stockholders) and a credit
to additional paid in capital.
<PAGE>
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 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
Planbecome 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.
<PAGE>
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.
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:
1997 1998 1999
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)
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:
Weighted
Number of 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
<PAGE>
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:
Weighted
Average
Grant Number of Exercise Weighted Remaining
Year Shares Price Range Average Price Contractual Life
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
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 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 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
<PAGE>
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%
--- --- ---
--- --- ---
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
<PAGE>
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 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>
PREPAID CARD RETAIL WHOLESALE/ CORPORATE &
SERVICES SERVICES INTERNATIONAL OTHER NETWORK TOTAL
SERVICES
- --------------------------------------------------------------------------------------------------
<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 assurnace 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:
<TABLE>
<CAPTION>
<S> <C>
2000 $1,267,842
2001 871,929
2002 566,637
2003 407,107
2004 358,717
Thereafter 680,501
--------
Total $4,152,733
==========
</TABLE>
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 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.
<PAGE>
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 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)
<PAGE>
The following table summarizes the Company's quarterly results of
operations for 1997, 1998 and 1999:
1997 Quarters FIRST SECOND THIRD FOURTH
- ---------------------------------------------------------------------------
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)
1998 Quarters FIRST SECOND THIRD FOURTH
- ---------------------------------------------------------------------------
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)
<TABLE>
<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)
<FN>
(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.
</TABLE>
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 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.
<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
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
UPDATE
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------------------ ---------- --------- ------------ ----------
Balance at Write-offs, Balance at
Beginning Net of End of
Classification of Period Additions Recoveries Period
- ------------------------------------ ---------- --------- ------------ ----------
<S> <C> <C> <C> <C>
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>
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
by and among
POINTE COMMUNICATIONS CORPORATION,
POINTE ACQUISITION, CORP.,
AND
TELSCAPE INTERNATIONAL, INC.
Dated as of December 31, 1999
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.
<PAGE>
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
Persons equity securities, (b) any Person of which such specified Person or any
Affiliate of such specified Person owns at least 10% of such Persons 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.
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.
<PAGE>
Company Third Party means any Person (or group of Persons) other than PointeCom
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. 9601 et seq., the Resource
Conservation and Recovery Act, 42 U.S.C. 6901 et seq., the Federal Water
Pollution Control Act, 33 U.S.C. 1251 et seq., the Toxic Substances Control
Act, 15 U.S.C. 2601 et seq., the Clean Air Act, 42 U.S.C. 7401 et seq., the
Safe Drinking Water Act, 42 U.S.C. 300f et seq., the Hazardous Materials
Transportation Act, 49 U.S.C. 5101 et seq., the Atomic Energy Act, 42 U.S.C.
2011 et seq., the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C.
136 et seq., and the Occupational Safety and Health Act, 29 U.S.C. 651 et seq.,
<PAGE>
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 (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
<PAGE>
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.
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 landlords,
carriers, warehousemans, mechanics, suppliers, materialmens, repairmens or other
like Encumbrances arising in the ordinary
course of business.
Person means any natural person, corporation, partnership, proprietorship, other
<PAGE>
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.
PointeCom 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.
<PAGE>
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.
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.
<PAGE>
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.
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).
2.2. 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.
<PAGE>
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 Corporations 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 0.215054 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 0.215054 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 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
<PAGE>
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
stockholders 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
<PAGE>
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.
3.3. 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 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 holders 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
<PAGE>
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, 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
<PAGE>
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 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
<PAGE>
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.
<PAGE>
(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.
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
<PAGE>
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 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.
<PAGE>
(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 arms 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 Newco consists solely of
10,000 shares of common stock, par value $0.01 per share (Newco Common Stock),
<PAGE>
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.
<PAGE>
(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 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
<PAGE>
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 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
<PAGE>
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
<PAGE>
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 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
<PAGE>
may be subject to the tax imposed by Section 4999 of the Code or included in the
determination of such persons 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 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 employees 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.
<PAGE>
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 participants
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 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
<PAGE>
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
<PAGE>
States or any state, local or foreign government or subdivision or agency
thereof, whether computed on a separate, 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 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 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
<PAGE>
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 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;
<PAGE>
(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.
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
<PAGE>
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
<PAGE>
business is currently being 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
<PAGE>
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
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 6.5, 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.
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(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.
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.
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(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
<PAGE>
date hereof, PointeCom has made available to the Company complete and correct
copies of all such agreements.
(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,
<PAGE>
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
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
<PAGE>
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 persons
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.
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
<PAGE>
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
<PAGE>
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.
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;
<PAGE>
(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 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
<PAGE>
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 employees 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 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
<PAGE>
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
participants 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)
<PAGE>
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 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.
<PAGE>
(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.
(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.
<PAGE>
(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 arms 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
<PAGE>
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 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.
<PAGE>
(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 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 and PointeCom shall have the right and option to dispose of (or arrange for
the disposition subsequent to the Effective Time) its interest in Telecommute
Solutions, Inc. by distributing such interest to its shareholders, or otherwise,
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
<PAGE>
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.
(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
<PAGE>
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.
<PAGE>
(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 Directors 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 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
<PAGE>
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 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 nonpublic 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
<PAGE>
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
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.
<PAGE>
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.
<PAGE>
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 owning37% 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.
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,
<PAGE>
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise (together with such persons 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 Corporations 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 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.
<PAGE>
(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 Corporations or the
Company's defense of such claim or (y) will materially and adversely affect
Surviving Corporations 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 plans as required
to effectuate the terms of this transaction. PointeCom will take all action, to
the extent necessary in accordance wit h 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
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
<PAGE>
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
1.368-1(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 1.368-1(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.
<PAGE>
(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.
(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
<PAGE>
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.
(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.
<PAGE>
(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.
<PAGE>
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
<PAGE>
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 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
<PAGE>
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 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.
<PAGE>
(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)(ii) 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)(ii) 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.
<PAGE>
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 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:
<PAGE>
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.
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.
<PAGE>
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:
<PAGE>
Exhibit A
Certificate of Designation
<PAGE>
Exhibit B
Form of Promissory Note
<PAGE>
Exhibit C
Registration Rights Agreement
<PAGE>
Exhibit D
Warrant Agreement
<PAGE>
Exhibit E
Escrow Agreement
<PAGE>
Exhibit F
Voting Agreement
<PAGE>
Exhibit G
Form of Legal Opinion
<PAGE>
Exhibit H
Officer's Representations
<PAGE>
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS
1.1. Definitions1
1.2. Interpretation7
ARTICLE II
THE MERGER AND THE SURVIVING CORPORATION
2.1. The Merger7
2.2. Effective Time of the Merger7
2.3. Certificate of Incorporation, Bylaws and Board of Directors of Surviving
Corporation8
ARTICLE III
CONVERSION OF SHARES
3.1. Conversion of Shares8
3.2. Fractional Shares9
3.3. Dissenting Shares10
3.4. Company Options10
3.5. Newco Shares10
3.6. Delivery of Merger Consideration11
3.7. No Effect on Capital Stock of Company11
3.8. Closing of Transfer Records11
3.9. Effect on Treasury of Unissued Shares of PointeCom Capital Stock11
3.10. Rule 166-310
ARTICLE IV
CLOSING 12
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND NEWCO
5.1. Due Organization and Qualification12
5.2. Authorization; Non-Contravention; Approvals12
5.3. Company Common Stock13
5.4. Tax Free Reorganization13
5.5. SEC Filings; Disclosure15
5.6. Interim Operations of Newco16
5.7. Capitalization.16
5.8. Subsidiaries16
5.9. Financial Statements16
5.10. Liabilities and Obligations17
5.11. Accounts and Notes Receivable.17
5.12. Assets17
<PAGE>
5.13. Material Customers and Contracts18
5.14. Permits19
5.15. Environmental Matters19
5.16. Labor and Employee Relations20
5.17. Insurance20
5.18. Compensation; Employment Agreements20
5.19. Noncompetition and Nonsolicitation Agreements20
5.20. Employee Benefit Plans20
5.21. Litigation and Compliance with Law22
5.22. Taxes23
5.23. Absence of Changes24
5.24. Absence of Certain Business Practices25
5.25. Competing Lines of Business; Related-Party Transactions25
5.26. Intangible Property25
5.27. Disclosure26
5.28. Year 2000 Compliance26
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF POINTECOM AND NEWCO
6.1. Organization26
6.2. Authorization; Non-Contravention; Approvals26
6.3. SEC Filings; Disclosure27
6.4. Capitalization28
6.5. Subsidiaries28
6.6. Financial Statements28
6.7. Liabilities and Obligations29
6.8. Assets29
6.9. Material Customers and Contracts30
6.10. Permits30
6.11. Environmental Matters31
6.12. Labor and Employee Relations31
6.13. Insurance31
6.14. Compensation; Employment Agreements31
6.15. Noncompetition and Nonsolicitation Agreements32
6.16. Litigation and Compliance with Law32
6.17. Taxes32
6.18. Absence of Changes33
6.19. Absence of Certain Business Practices34
6.20. Competing Lines of Business; Related-Party Transactions35
6.21. Intangible Property35
6.22. Disclosure35
6.23. Year 2000 Compliance35
6.24. Employee Benefit Plans35
6.25. Tax Free Reorganization37
6.26. Accounts and Notes Receivable39
<PAGE>
ARTICLE VII
CERTAIN COVENANTS
7.1. Conduct of Business40
7.2. Reasonable Efforts42
7.3. Inspection42
7.4. Restraint on Solicitation.42
7.5. Update Information45
7.6. Future Cooperation; Tax Matters45
7.7. Expenses46
7.8. Registration Statement and Proxy Statement46
7.9. Company Financings46
7.10. Voting Agreements47
7.11. Company Board of Directors and Officers47
7.12. Key Managers and Employees47
7.13. Notices and Consents47
7.14. Indemnification of Officers and Directors of PointeCom47
7.15. Regulatory Matters and Approvals49
7.16. Continuity of Business Enterprise49
ARTICLE VIII
CONDITIONS TO CLOSING
8.1. Conditions to Obligations of PointeCom50
8.2. Conditions to Obligations the Company and Newco51
ARTICLE IX
NONDISCLOSURE OF CONFIDENTIAL INFORMATION
9.1. General52
9.2. Equitable Relief52
ARTICLE X
INTENDED TAX TREATMENT
10.1. Tax-Free Reorganization53
ARTICLE XI
TERMINATION
11.1. Termination53
11.2. Effect54
11.3. Special Remedies55
ARTICLE XII
MISCELLANEOUS
12.1. Successors and Assigns56
12.2. Entire Agreement57
12.3. Counterparts57
12.4. Brokers and Agents57
<PAGE>
12.5. Notices57
12.6. Exercise of Rights and Remedies58
12.7. Reformation and Severability58
12.8. Governing Law58
12.9. No Third-Party Beneficiaries58
Schedules
Schedule 5.1 Company Organization and Qualification
Schedule 5.2 Company Authority
Schedule 5.7 Company Capitalization
Schedule 5.8 Company Subsidiaries
Schedule 5.9 Company Financial Statements
Schedule 5.10 Company Liabilities and Obligations
Schedule 5.11 Company Accounts and Notes Receivable
Schedule 5.12 Company Assets
Schedule 5.13 Company Material Customers and Contracts
Schedule 5.14 Company Permits
Schedule 5.15 Company Environmental Matters
Schedule 5.16 Company labor and Employee Relations
Schedule 5.17 Company Insurance
Schedule 5.18 Company Compensation; Employment Agreements
Schedule 5.19 Company Noncompetition, Confidentiality and Non-Solicitation
Agreements
Schedule 5.20 Company Employee Benefit Plans
Schedule 5.21 Company Litigation and Compliance with Laws
Schedule 5.22 Company Taxes
Schedule 5.23 Company Absence of Changes
Schedule 5.25 Company Competing Lines of Business; Related Party Transactions
Schedule 5.26 Company Intangible Property
Schedule 6.1 PointeCom Organization
Schedule 6.2 PointeCom Authorization
Schedule 6.3 PointeCom SEC Filings; Disclosure
Schedule 6.4 PointeCom Capitalization
Schedule 6.5 PointeCom Subsidiaries
Schedule 6.6 PointeCom Financial Statements
Schedule 6.7 PointeCom Liabilities and Obligations
Schedule 6.8 PointeCom Assets
Schedule 6.9 PointeCom Material Customers and Contracts
Schedule 6.10 PointeCom Permits
Schedule 6.11 PointeCom Environmental Matters
Schedule 6.12 PointeCom labor and Employee Relations
Schedule 6.13 PointeCom Insurance
Schedule 6.14 PointeCom Compensation; Employment Agreements
Schedule 6.15 PointeCom Noncompetition, Confidentiality and Non-Solicitation
Agreements
<PAGE>
Schedule 6.16 PointeCom Litigation and Compliance with Laws
Schedule 6.17 PointeCom Taxes
Schedule 6.18 PointeCom Absence of Changes
Schedule 6.20 PointeCom Competing Lines of Business; Related Party Transactions
Schedule 6.21 PointeCom Intangible Property
Schedule 6.24 PointeCom Employee Benefit Plans
Schedule 6.26 PointeCom Accounts and Notes Receivable
Exhibits
Exhibit A - Certificate of Designation
Exhibit B - Form of Promissory Note
Exhibit C - Registration Rights Agreement
Exhibit D - Warrant Agreement
Exhibit E - Escrow Agreement
Exhibit F - Voting Agreement
Exhibit G - Form of Legal Opinion
Exhibit H - Officers Representations
<PAGE>
WARRANT AGREEMENT
-----------------
THIS WARRANT AGREEMENT (this "Agreement"), dated as of December 31, 1999,
---------
by and among POINTE COMMUNICATIONS CORPORATION, a Nevada corporation (the
"Company"), TSG CAPITAL FUND III, L.P., a Delaware limited partnership and its
- --------
Affiliates ("TSG"), Opportunity Capital Partners II, L.P., a Delaware limited
---
partnership and its Affiliates ("OCP II") and Opportunity Capital Partners III,
------
L.P., a Delaware limited partnership and its Affiliates ("OCP III")
--------
(collectively TSG, OCP II and OCP III shall be referred to as "Investors").
---------
R E C I T A L S:
----------------
WHEREAS, concurrently with the execution and delivery of this Agreement,
the Company is issuing shares of Class B Convertible Senior Preferred Stock and
Warrants of the Company in the amount and for the aggregate purchase price as
set forth on Schedule 1 attached hereto (being referred to herein as the
-----------
"Warrants"), such Warrants initially entitling the holders thereof to purchase
- ---------
9,000,000 shares of common stock of the Company, par value $0.00001 per share
(the "Common Stock"), subject to adjustment as hereinafter provided and as
-------------
provided in the Securities Purchase Agreement (as defined herein) (the Common
Stock and, pursuant to Article 7 hereof, such other securities as may be
issuable upon exercise of the Warrants being referred to herein as the "Warrant
-------
Shares"); and
- ------
WHEREAS, the Company wishes to define the terms and provisions of the
Warrants and the respective rights and obligations thereunder of the Company and
the holders of the Warrants (the "Warrantholders");
--------------
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
agreements herein set forth, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.1 Certain Definitions. As used in this Agreement, the
--------------------
following terms have the meanings specified below:
"Amended Articles" means the Amended Articles of Incorporation of the
-----------------
Company as amended to include the Certificate of Designations setting forth the
rights, preferences and privileges of the Class B Preferred Stock (as defined).
"Board of Directors" means the Board of Directors of the Company.
--------------------
Page 1
<PAGE>
"Business Day" means any day other than Saturday, Sunday or any other day
-------------
on which banking institutions in the City of New York, New York are permitted or
required to close.
"Class B Preferred Stock" means the Class B Convertible Senior Preferred
--------------------------
Stock, par value $0.01 per share, of the Company issued to the Investors.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
-------------
the rules and regulations promulgated thereunder.
"GAAP" means United States generally accepted accounting principles set
----
forth in opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as may be approved by a significant segment of
the accounting profession, in each case as the same are applicable to the
circumstances as of the date of the determination.
"Pensat Transaction" shall mean the transactions contemplated by that
-------------------
certain letter of intent and term sheet between the Company and Pensat
International Communications, Inc. ("Pensat"), dated July 26, 1999, including,
but not limited to, the purchase by Pensat or affiliates thereof, or other
parties, of Class C Preferred Sock for an aggregate purchase price of at least
$20,000,000.
"Person" means an individual, partnership, corporation (including a
------
business trust), limited liability company, joint stock company, trust,
unincorporated association, joint venture or other entity.
"SEC" means the Securities and Exchange Commission or any successor
---
thereto.
"Securities Act" means the Securities Act of 1933, as amended, and the
---------------
rules and regulations promulgated thereunder.
"Securities Purchase Agreement" means that certain Securities Purchase
-------------------------------
Agreement by and among the Company and the Investors dated as of September 1,
1999.
Page 2
<PAGE>
ARTICLE 2
ISSUANCE, FORM AND EXECUTION OF WARRANT CERTIFICATES
SECTION 2.1 Issuance of Warrants. The Warrants shall be originally
----------------------
issued by the Company in connection with the issuance of Class B Preferred Stock
pursuant to the Securities Purchase Agreement. The Warrants shall be evidenced
by Warrant Certificates (as defined herein), and each Warrant Certificate shall
represent the right, subject to the provisions contained herein and therein, to
purchase from the Company (and the Company shall issue and sell to the
registered holder of such Warrants) the number of shares of Common Stock (as may
be adjusted pursuant to Article 7 hereof) issuable to such Warrantholder upon
exercise of such Warrants, at the price specified herein and therein.
SECTION 2.2 Form of Warrant Certificates. The certificates evidencing
----------------------------
the Warrants (the "Warrant Certificates") shall be in registered form only and
shall be substantially in the form set forth in Exhibit A attached hereto, shall
---------
be dated the date on which signed by the Company and may have such letters,
numbers or other marks of identification or designation printed, lithographed,
engraved or otherwise affixed thereon as the Company may deem appropriate and as
are not inconsistent with the provisions of this Agreement or the Securities
Purchase Agreement, or as may be required to comply with any law or with any
rule or regulation made pursuant thereto.
SECTION 2.3 Execution of Warrant Certificates. Warrant Certificates
----------------------------------
shall be executed on behalf of the Company by the president, any vice president
or the treasurer of the Company and signed by the secretary or any assistant
secretary of the Company and have affixed thereon the seal of the Company. Each
such signature and seal may be manual or facsimile.
In case any officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be such officer before countersignature and delivery
by the Company, such Warrant Certificates, nevertheless, may be countersigned,
issued and delivered with the same force and effect as though such person had
not ceased to be such officer; and any Warrant Certificate may be signed on
behalf of the Company by any person who, at the actual date of the execution of
such Warrant Certificate, shall be a proper officer of the Company to sign such
Warrant Certificate, although at the date of the execution of this Agreement
such person was not such an officer of the Company. Upon countersignature on
behalf of the Company and delivery, the Warrant Certificate shall be valid and
binding upon the Company, and the Warrantholder thereof shall be entitled to all
of the benefits of this Agreement.
ARTICLE 3
REGISTRATION
SECTION 3.1 Registration. The Company shall number and register the
------------
Warrant Certificates in a register (the "Warrant Register") maintained at 1325
Northmeadow Parkway, Suite 110, Roswell, Georgia 30076 (the "Office") as they
are issued by the Company (or such other location as the Company may establish
after giving notice thereof to the Warrantholders). The Company shall keep
copies of this Agreement available for inspection by the Warrantholders during
normal business hours at the Office.
Page 3
<PAGE>
ARTICLE 4
TRANSFER, EXCHANGE OR REPLACEMENT OF WARRANT CERTIFICATES
SECTION 4.1 Registration of Transfers. The Company shall from time to
-------------------------
time register the transfer of any outstanding Warrant Certificate on the Warrant
Register maintained at the Office, upon surrender thereof accompanied by a
written instrument or instruments of transfer in form reasonably satisfactory to
the Company, duly endorsed by the registered holder thereof or by such
Warrantholder's appointed legal representative or attorney-in-fact, or
accompanied by proper evidence of succession, assignment or authority to
transfer. In all cases of transfer by an attorney, the original power of
attorney, duly approved, or an official copy thereof, duly certified, shall be
deposited and remain with the Company. Upon any such registration or transfer
in such name or names as may be directed in writing by the Warrantholder, the
Company shall execute and deliver (or cause to be delivered) a new Warrant
Certificate(s) without charge to such Warrantholder, or to the Person or Persons
entitled to receive the same, and the surrendered Warrant Certificate shall be
canceled by the Company.
SECTION 4.2 Exchanges of Warrant Certificates. Each Warrant
------------------------------------
Certificate may be exchanged at the option of the Warrantholder without charge
to such Warrantholder when surrendered to the Company at the Office properly
endorsed in the manner described in Section 4.1 hereof for another Warrant
Certificate(s) of like tenor and representing in the aggregate a like number of
shares of Common Stock, as may be adjusted pursuant to Article 7 hereof.
Thereupon, the Company shall execute and deliver to the Person(s) entitled
thereto a new Warrant Certificate(s) as so requested. Warrant Certificates
surrendered for exchange shall be canceled by the Company.
Page 4
<PAGE>
SECTION 4.3 Mutilated or Missing Warrant Certificates. In the event
-------------------------------------------
that any Warrant Certificate shall be mutilated, lost, stolen or destroyed, the
Company shall execute and deliver in exchange and substitution for and upon
cancellation of the mutilated Warrant Certificate, or in lieu of and
substitution for the Warrant Certificate lost, stolen or destroyed, a new
Warrant Certificate of like tenor and representing Warrants for a like amount of
Warrant Shares, but only, in case of a lost, stolen or destroyed Warrant
Certificate, upon receipt of evidence satisfactory to the Company of such loss,
theft or destruction and, upon the Company's request, evidence of indemnity and
bond satisfactory to the Company and the absence of actual notice to the Company
that such Warrant Certificate has been acquired by a bona fide purchaser or
holder in due course. Every substitute Warrant Certificate executed and
delivered pursuant to this Section 4.3 in lieu of any lost, stolen or destroyed
warrant Certificate shall constitute an additional contractual obligation of the
Company, whether or not the lost, stolen or destroyed Warrant Certificate shall
be at any time enforceable by anyone, and shall be entitled to the benefits of
(but shall be subject to all the limitations of rights set forth in) this
Agreement equally and proportionately with any and all other Warrant
Certificates duly executed and delivered hereunder. The provisions of this
Section 4.3 are exclusive with respect to the replacement of mutilated, lost,
stolen or destroyed Warrant Certificates.
ARTICLE 5
EXERCISE OF WARRANTS; EXERCISE PRICE; EXERCISE PERIOD
SECTION 5.1 Exercise of Warrants. Subject to the provisions of this
----------------------
Agreement, each Warrantholder shall have the right to purchase from the Company
the number of shares of Common Stock that the Warrantholder may at the time be
entitled to purchase on exercise of the Warrants and payment of the Exercise
Price (as defined below) for such Warrant Shares.
SECTION 5.2 Mechanics of Exercise.
-----------------------
(a) Subject to the provisions of this Agreement, Warrants may be
exercised by the Warrantholder in whole or in part upon surrender at the Office
to the Company of the Warrant Certificate(s) evidencing the Warrants, together
with the form of election to purchase (the "Election to Purchase"), in the form
set forth as Exhibit B hereto or in the form set forth as Exhibit C hereto (in
--------- ------- -
the case of a Warrant Exchange (as defined)), duly completed and signed by such
warrantholder or by such Warrantholder's appointed legal representative or
attorney-in--fact and upon payment in full of the Exercise Price for each
Warrant exercised (except in the case of a Warrant Exchange). Payment of the
aggregate Exercise Price shall be made by certified or official bank check
payable to the order of the Company.
(b) Upon due exercise of the Warrants and surrender of the Warrant
Certificate, duly completed and signed, and payment of' the Exercise Price as
aforesaid, the Company shall cause to be issued to or upon the written order of
the Warrantholder and in such name or names as the Warrantholder may designate
in the Election to Purchase, the Warrant Shares so purchased. In lieu of
delivering physical certificates representing the Warrant Shares, provided the
Company's transfer agent is participating in the Depositary Trust Issuer Fast
Automated Securities Transfer ("FAST") program, upon request of the
Warrantholder, the Company shall use its best efforts to cause its transfer
agent to electronically transmit the Warrant Shares issuable upon exercise of
the Warrants to the holder by crediting the account of the Warrantholder's prime
broker with Depositary Trust Company through its Deposit Withdrawal Agent
Commission system (an "Electronic Transfer"). If all of the items referred to
in the first sentence of the preceding paragraph are received by the Company at
or prior to 1:00 p.m., Nevada time, on a Business Day, the exercise of the
Warrants to which such items relate will be effective on such Business Day. If
all of such items are received after 1:00 p.m., Nevada time, on a Business Day,
the exercise of the Warrants to which such items relate will be effective on the
next Business Day.
(c) The number and kind of Warrant Shares for which Warrants may be
exercised shall be subject to adjustment from time to time as set forth in
Article 7 hereof.
Page 5
<PAGE>
(d) The Warrants shall be exercisable as provided herein at the
election of the Warrantholder in whole or in part. In the event that the holder
of a Warrant Certificate shall exercise Warrants with respect to fewer than all
the Warrant Shares evidenced thereby, a new Warrant Certificate(s) evidencing
the remaining unexercised Warrant Shares shall be issued to such Warrantholder,
and the Company is hereby irrevocably authorized to execute and deliver the
required new Warrant Certificate(s) pursuant to provisions of Article 2 and
Article 3 of this Agreement.
(e) All Warrant Certificates surrendered upon exercise of Warrants
shall be canceled and disposed of by the Company.
SECTION 5.3 Exercise Price.
---------------
(a) The price at which each of the Warrants shall be exercisable in
exchange for Warrant Shares shall be $1.89 per Warrant Share (as such price may
be adjusted pursuant to Article 7 hereof) (being referred to herein as the
"Exercise Price").
(b) Notwithstanding Section 5.3(a), if the Pensat Transaction is
consumated and the Conversion Price of the Class B Preferred Stock is adjusted
as a consequence of the Pensat Transaction in accordance with the terms of the
second paragraph of Section 4 (d) (iv) of the Certificate of Designations of
Pointe Communications Corporation, the Exercise Price of the Warrants shall
automatically be adjusted to be equal to one hundred eight percent (108%) of the
adjusted Conversion Price of the Class B Preferred Stock as of the date of the
adjustment to such Conversion Price.
SECTION 5.4 Exercise Period. The right to exercise the Warrants shall
----------------
terminate on the date which is the fifth anniversary of the date of issuance of
the Warrants (the "Expiration Date"). A Warrantholder may exercise any Warrant
from the date of issuance up to and including the Expiration Date. The Company
shall record the Expiration Date of each Warrant in the Warrant Register.
SECTION 5.5 Cashless Exercise.
------------------
Page 6
<PAGE>
(a) At any time prior to the Expiration Date of any Warrants, the
Warrantholder may, at its option, exchange such Warrants, in whole or in part (a
"Warrant Exchange"), into the number of fully paid and non-assessable Warrant
Shares determined in accordance with this Section 5.5, by surrendering the
Warrant Certificate relating to such Warrants at the Office, accompanied by a
notice stating such Warrantholder's intent to effect such cashless exchange, the
number of Warrant Shares to be issued upon such Warrant Exchange and the date on
which the Warrantholder requests that such cashless Warrant Exchange occur (the
"Notice of Exchange"). The cashless Warrant Exchange shall take place on the
date specified in the Notice of Exchange, or, if later, the date the Notice of
Exchange is received by the Company (the "Exchange Date"). Certificates for the
Warrant Shares issuable upon such cashless Warrant Exchange and, if applicable,
a new Warrant Certificate of like tenor evidencing the balance of the Warrant
Shares remaining subject to the Warrantholder's Warrant Certificate, shall be
issued as of the Exchange Date and delivered to the Warrantholder within three
Business Days following the Exchange Date, or by Electronic Transfer. In
connection with any cashless Warrant Exchange, the Warrantholder's Warrant
Certificate shall represent the right to subscribe for and acquire the number of
Warrant Shares (rounded to the next highest integer) equal to (A) the number of
Warrant Shares specified by the Warrantholder in its Notice of Exchange (the
"Total Share Number") less (B) the number of Warrant Shares equal to the
quotient obtained by dividing (i) the product of the Total Share Number and the
existing Exercise Price per Warrant Share by (ii) the Market Price (as hereafter
defined) of a share of Common Stock.
(b) As used in this Section 5.5, the phrase "Market Price" at any date
shall be deemed to be the last reported sale price, or, in case no such reported
sale takes place on such day, the average of the last reported sale prices for
the last three trading days, in either case as officially reported by the
principal securities exchange on which the Common Stock is listed or admitted to
trading or by the Nasdaq Stock Market National Market ("Nasdaq"), or, if the
Common Stock is not listed or admitted to trading on any national securities
exchange or quoted by Nasdaq, the average closing bid price as furnished by the
National Association of Securities Dealers, Inc. ("NASD") through Nasdaq or
similar organization if Nasdaq is no longer reporting such information, or if
the Common Stock is not quoted on Nasdaq, any exchange or similar organization,
as determined in good faith by resolution of the Board of Directors of the
Company, based on the best information available to it for the two days
immediately preceding such issuance or sale and the day of such issuance or
sale.
SECTION 5.6 Mandatory Exercise.
-------------------
(a) In the event the closing bid price of the Common Stock for twenty
(20) consecutive trading days is equal to at least $5.00 per share (as
appropriately adjusted for stock splits, stock dividends, combinations,
recapitalizations, reclassifications, mergers, consolidations and other similar
events), the Company shall have the right to cause the exercise of the Warrants
at any time thereafter by the Warrantholders by giving written notice to each
Warrantholder of such election (a "Mandatory Exercise Election Notice");
provided that the Warrant Shares issuable upon such exercise shall have been
Registered (as defined) and listed on each securities exchange,
over-the-counter market or on the Nasdaq National Market on which similar
Securities issued by the Company are then listed. "Registered" refers to a
registration effected by preparing and filing with the SEC, a registration
statement in compliance with the Securities Act, as amended, and the declaration
or ordering by the Commission of the effectiveness of such registration
statement.
Page 7
<PAGE>
(b) Upon receipt of a Mandatory Exercise Election Notice, each
Warrantholder shall have the right to exercise its Warrants on the terms and
conditions herein (including Section 5.5); provided, however, that the
------------------
Expiration Date with respect to such Warrants shall be deemed to be the date
that is fifteen (15) Business Days immediately after the date of the Mandatory
Exercise Election Notice.
ARTICLE 6
RESERVATION OF WARRANT SHARES
SECTION 6.1 Reservation. Subject to the terms of Sections 6.6 and 8 of
-----------
the Securities Purchase Agreement, the Company shall at all times keep reserved,
free from preemptive rights, out of its authorized Common Stock, or other
securities of the Company issuable upon the exercise of the Warrants, a number
of shares of Common Stock, or such other securities, sufficient to provide for
the exercise of' the right of purchase represented by all outstanding and
unexpired Warrants.
SECTION 6.2 Covenant. The Company covenants that any Warrant Shares
--------
will, upon issuance, be (i) validly issued and upon payment of the exercise
price therefor, fully paid and free from all taxes payable by the Company,
liens, charges and security interests (except any liens, charges or security
interests created or suffered to be created by any of the Warrantholders), and
will not be subject to any restrictions on voting or transfer thereof that are
created by the Company, except for such restrictions on transfer under the
Securities Act or applicable state securities laws; and (ii) Registered and
listed on each securities exchange, over-the-counter market or on the Nasdaq
National Market on which similar securities issued by the Company are then
listed.
ARTICLE 7
ADJUSTMENTS AFFECTING THE EXERCISE OF WARRANTS
SECTION 7.1 Special Definitions. For purposes of this Article 7, the
--------------------
following definitions shall apply:
(a) "Additional Shares of Common Stock" shall mean all shares of Common
Stock issued (or, pursuant to Section 7.2 below, deemed to be issued) by the
Company after the Original Issue Date, other than shares of Common Stock issued
or issuable:
(i) upon conversion of shares of the Company's Class A and B
Preferred Stock outstanding on the Original Issue Date;
(ii) upon the exercise of warrants outstanding on the Original
Issue Date or issued under the Securities Purchase Agreement;
(iii) as a dividend or distribution on the Company's Class A and B
Preferred Stock or such Warrants;
Page 8
<PAGE>
(iv) in connection with an acquisition or other transaction by the
Company (including the Pensat Transaction), in either case approved by the
Investors, unless the Company agrees to include such issuance in the definition
of Additional Shares of Common Stock in connection with obtaining the approval
of the Investors to such acquisition or other transaction;
(v) by reason of a dividend, stock split, split--up or other
distribution on shares of Common Stock excluded from the definition of
Additional Shares of Common Stock by the foregoing clauses (i), (ii), (iii), and
(iv) or this clause (v);
(vi) upon the exercise of options excluded from the definition of
"Option" in Section 7.1(c).
(b) "Convertible Securities" shall mean any evidences of indebtedness,
shares or other securities other than options excluded from the definition of
"Option" in Section 7.1(c) directly or indirectly convertible into or
exchangeable for Common Stock.
(c) "Option" shall mean rights, options or warrants to subscribe for,
purchase or otherwise acquire Common Stock or Convertible Securities, excluding
(i) options granted to employees, officers, directors or issued to consultants
of the Company or rights, convertible securities or warrants which, in each such
case, are outstanding as of the date of this Agreement, (ii) any Warrants
outstanding on the Original Issue Date or issued under this Agreement or as a
direct result of the issuance of Class A or B Preferred Stock, (iii) options
granted to employees, officers, directors or consultants pursuant to stock
option plans existing on the Original Issue Date (as defined) or adopted by the
Board of Directors and approved by the Compensation Committee of the Board of
Directors and by the Investors after the date hereof, or (iv) any Warrants
issued as a direct result of the issuance of Class C Preferred Stock in
connection with the Pensat Transaction.
(d) "Original Issue Date" shall mean the date on which a Warrant was
first issued.
Page 9
<PAGE>
SECTION 7.2 Issue of Securities Deemed Issue of Additional Shares of
------------------------------------- --------------------
Common Stock. If the Company at any time or from time to time after the
- -------------
Original Issue Date shall issue any Options or Convertible Securities, then the
maximum number of shares of Common Stock (as set forth in the instrument
relating thereto without regard to any provision contained therein for a
subsequent adjustment of such number) issuable upon the exercise of such Options
or, in the case of Convertible Securities and Options therefor, the conversion
or exchange of such Convertible Securities and the exercise of such Options
therefor, shall be deemed to be Additional Shares of Common Stock issued as of
the time of such issuance, provided that Additional Shares of Common Stock shall
not be deemed to have been issued unless the consideration per share (determined
pursuant to Section 7.4 hereof) of such Additional Shares of Common Stock would
be less than the applicable Exercise Price in effect immediately prior to such
issuance and provided further that in any such case in which Additional Shares
of Common Stock are deemed to be issued:
(a) No further adjustment in the Exercise Price shall be made upon the
subsequent issuance of Convertible Securities or shares of Common Stock upon the
exercise of such Options or conversion or exchange of such Convertible
Securities;
(b) If such Options or Convertible Securities by their terms provide,
with the passage of time or otherwise, for any increase in the consideration
payable to the Company, or decrease in the number of shares of Common Stock
issuable, upon the exercise, conversion or exchange thereof, the Exercise Price
computed upon the original issuance thereof, and any subsequent adjustments
based thereon, shall, upon any such increase or decrease becoming effective, be
recomputed to reflect such increase or decrease insofar as it affects such
Options or the rights of conversion or exchange under such Convertible
Securities;
(c) No readjustment pursuant to clause (b) above shall have the effect
of increasing the Exercise Price to an amount which exceeds the Exercise Price
on the original adjustment date; and
(d) In the event of any change in the number of shares of Common Stock
issuable upon the exercise, conversion or exchange of any Option or Convertible
Security, including, but not limited to, a change resulting from the
anti-dilution provisions thereof, the Exercise Price then in effect shall
forthwith be readjusted to such Exercise Price as would have obtained had the
adjustment which was made upon the issuance of such Option or Convertible
Security which have not been exercised oi converted prior to such change in the
number of shares of Common Stock been made upon the basis of such change, but no
further adjustment shall be made for the actual issuance of Common Stock upon
the exercise or conversion of any such option or Convertible Security.
Page 10
<PAGE>
SECTION 7.3 Adjustment of Exercise Price Upon Issuance of Additional
----------------------------------------------------------
Shares of Common Stock. In the event the Company Shall at any time after the
- -------------------------
Original Issue Date issue Additional Shares of Common Stock (including
Additional Shares of Common Stock deemed to be issued pursuant to Section 7.2,
but excluding shares issued as a dividend or distribution as provided in Section
7.6 or upon a stock split or combination as provided in Section 7.5), without
consideration or for a consideration per share (determined pursuant to Section
7.4 hereof) less than the applicable Exercise Price in effect immediately prior
to such issuance, then and in such event, such Exercise Price shall be reduced,
concurrently with such issuance, to an Exercise Price equal to the price
determined by dividing (a) the sum of (1) the product derived by multiplying the
Exercise Price in effect immediately prior to such issuance by the number of
shares of Common Stock outstanding immediately prior to such issuance (together
with the number of shares of Common Stock then issuable upon exercise of the
outstanding Warrants and the conversion or exercise of any Convertible
Securities or Options), plus (2) the aggregate consideration received by the
Corporation (as determined pursuant to Section 7.4 below) upon such issuance, by
(b) the number of shares of Common Stock outstanding immediately after such
issuance (together with the number of shares of Common Stock then issuable upon
exercise of the outstanding Warrants and the conversion or exercise of any
Convertible Securities or Options).
SECTION 7.4 Determination of Consideration. For purposes of this
--------------------------------
Section 7, the consideration received by the Company for the issuance of any
Additional Shares of Common Stock shall be computed as follows:
(a) Cash and Property. Such consideration shall:
-------------------
(i) insofar as it consists of cash, be computed at the aggregate
of cash received by the Company, excluding amounts paid or payable for accrued
interest or accrued dividends;
(ii) insofar as it consists of property other than cash, be
computed at the fair market value thereof at the time of such issuance, as
determined in good faith by the Board of Directors; and
(iii) in the event Additional Shares of Common Stock are issued
together with other shares of securities or other assets of the Company for
consideration which covers both, be the proportion of such consideration so
received, computed as provided in clauses (i) and (ii) above, as determined in
good faith by the Board of Directors.
(b) Options and Convertible Securities. The consideration per share
-------------------------------------
received by the Company for Additional Shares of Common Stock deemed to have
been issued pursuant to Section 7.2, relating to Options and Convertible
Securities, shall be determined by dividing:
(i) the total amount, if any, received or receivable by the
Company as consideration for the issuance of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such consideration) payable to
the Company upon the exercise of such Options or the conversion or exchange of
such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such options for Convertible Securities and the
conversion or exchange of such Convertible Securities, by the maximum number of
shares of Common Stock (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a subsequent adjustment of
such number) issuable upon the exercise of such options or the conversion or
exchange of such Convertible Securities.
Page 11
<PAGE>
SECTION 7.5 Adjustment for Stock Splits and Combinations. If the
-------------------------------------------------
Company shall at any time or from time to time after the Original Issue Date for
the Warrants effect a subdivision of the outstanding Common Stock, the Exercise
Price of each Warrant then in effect immediately before that subdivision shall
be proportionately decreased and the number of shares of Common Stock issuable
upon exercise of such Warrant shall be proportionately increased. If the
Company shall at any time or from time to time after the Original Issue Date for
the Warrants combine the outstanding shares of Common Stock, the Exercise Price
of each Warrant then in effect immediately before the combination shall be
proportionately increased and the number of shares of Common Stock issuable upon
exercise of such Warrant shall be proportionately decreased. Any adjustment
under this Section 7.5 shall become effective at the close of business on the
date the subdivision or combination becomes effective.
SECTION 7.6 Adjustment for Certain Dividends and Distributions. In the
------------------------------------ -------------
event the Company at any time or from time to time after the Original Issue Date
for the Warrants shall make or issue a dividend or other distribution payable in
additional shares of Common Stock, then and in each such event the Exercise
Price for the Warrants then in effect shall be decreased as of the time of such
issuance or, in the event such a record date shall have been fixed, as of the
close of business on such record date, by multiplying the Exercise Price for the
Warrants then in effect by a fraction:
(a) the numerator of which shall be the total number of shares of
Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date, and
(b) the denominator of which shall be the total number of shares of
Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date plus the number of shares
of Common Stock issuable in payment of such dividend or distribution; provided,
--------
however, if such record date shall have been fixed and such dividend is not
- -------
fully paid or if such distribution is not fully made on the date fixed therefor,
the Exercise Price for the Warrants shall be recomputed accordingly as of the
close of business on such record date and thereafter the Exercise Price for the
Warrants shall be adjusted pursuant to this paragraph as of the time of actual
payment of such dividends or distributions.
The number of Warrant Shares issuable upon the exercise of the Warrants
shall be adjusted by multiplying a number equal to the Exercise Price in effect
immediately prior to such adjustment by the number of shares issuable upon the
exercise of the Warrants immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price.
Page 12
<PAGE>
SECTION 7.7 Adjustments for Other Dividends and Distributions. In the
-------------------------------------------------
event the Company at any time or from time to time after the Original Issue Date
for the Warrants shall make or issue a dividend or other distribution payable in
securities of the Company other than shares of Common Stock, then and in each
such event provision shall be made so that the holders of the Warrants shall
receive upon exercise thereof in addition to the number of shares of Common
Stock receivable thereupon, the amount of securities of the Company that they
would have received had their Warrants been exercised on the date of such event
and had thereafter, during the period from the date of such event to and
including the conversion date, retained such securities receivable by them as
aforesaid during such period giving application to all adjustments called for
during such period, under this paragraph with respect to the rights of the
holders of the Warrants.
SECTION 7.8 Adjustment for Reclassification, Exchange, or Substitution.
--------------------------------------------- ------------
If the Common Stock issuable upon the exercise of the Warrants shall be changed
into the same or a different number of shares of any class or classes of stock,
whether by capital reorganization, reclassification or otherwise (other than a
subdivision or combination of shares or stock dividend provided for above, or a
reorganization, merger, consolidation, or sale of assets provided for below),
then and in each such event the holder of the Warrants shall have the right
thereafter to convert each such share of Common Stock issuable upon the exercise
of the Warrants into the kind and amount of shares of stock and other securities
and property receivable upon such reorganization, reclassification, or other
change, by holders of the number of shares of Common Stock for which such
Warrants might have been exercised immediately prior to such reorganization,
reclassification, or change, all subject to further adjustment as provided
herein.
SECTION 7.9 Adjustment for Merger or Reorganization. In case of any
-----------------------------------------
consolidation or merger of the Company with or into another Company, each
Warrant shall thereafter be exercisable for the kind and amount of shares of
stock or other securities or property to which a holder of the number of shares
of Common Stock of the Company deliverable upon exercise of such Warrant world
have been entitled upon such consolidation or merger; and, in such case,
appropriate adjustment (as determined in good faith by the Board of Directors)
shall be made in the application of the provisions in this Article 7 set forth
with respect to the rights and interest thereafter of the holders of the
Warrants, to the end that the provisions set forth in this Article 7 (including
provisions with respect to changes in and other adjustments of the Exercise
Price) shall thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other property thereafter deliverable upon
the exercise of the Warrants.
SECTION 7.10 Notice of Adjustment to Exercise Price and Warrant Shares.
-----------------------------------------------------------
(a) Whenever the Exercise Price is required to be adjusted as provided
in this Article 7, simultaneously with the adjustment of the Exercise Price, the
number of Warrant Shares issuable upon the exercise of the Warrants shall be
adjusted by multiplying a number equal to the Exercise Price in effect
immediately prior to such adjustment by the number of shares issuable upon the
exercise of the Warrants immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price.
Page 13
<PAGE>
(b) Whenever the Exercise Price is required to be adjusted as provided
in this Article 7, or any other adjustment is required pursuant to this Article
7, the Company shall forthwith compute the adjusted Exercise Price and the
corresponding number of Warrant Shares purchaseable upon the exercise of the
Warrants or any other adjustment made pursuant to this Article 7 and shall
prepare a certificate setting forth such adjusted Exercise Price and the
corresponding number of Warrant Shares purchaseable upon the exercise of the
Warrants or any other adjustment made pursuant to this Article 7 and showing in
reasonable detail the facts upon which such adjustments are based. Whenever the
Exercise Price and the corresponding number of Warrant Shares purchaseable upon
the exercise of the Warrants are adjusted or any other adjustment is made
pursuant to this Article 7, the Company shall promptly mail, or cause to be
mailed, to the Warrantholders a statement setting forth the adjustments and the
reasons for such adjustments.
SECTION 7.11 Form of Warrant Certificate. Irrespective of any
------------------------------
adjustments in the Exercise Price or the kind of Warrant Shares purchasable upon
the exercise of the Warrants, Warrant Certificates evidencing such Warrants
theretofore or thereafter issued may continue to express the same number and
kind of Warrant Shares as are stated in the Warrant Certificates initially
issuable pursuant to this Agreement.
SECTION 7.12 No Impairment. Without limiting the generality of the
--------------
foregoing, the Company shall take all such action as may be necessary or
appropriate in order that the Warrant Shares to be issued upon the exercise of
the Warrants from time to time outstanding will, when issued, be fully paid and
non-assessable. In addition, without limiting the generality of Section 6.1,
the Company shall take all such action as shall be necessary so that, after any
adjustment to the Exercise Price required hereunder, the total number of shares
of Common Stock or other capital stock of the Company then authorized by the
Amended Articles and available for the purpose of issuance upon such exercise
shall exceed the total number of shares of Common Stock issuable upon the
exercise of all of the outstanding Warrants. The Company will not, by amendment
of its Articles of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Company, but will
at all times in good faith assist in the carrying out of all the provisions of
this Article 7 and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Warrantholders against
impairment.
ARTICLE 8
NOTICES
SECTION 8.1 Notices to Warrantholders.
---------------------------
(a) Notices to holders of Warrants shall be delivered to such holders
at the addresses of such holders as they appear in Section 8.2 hereof or in the
Warrant Register (in the case of transfers). Any such notice shall be
sufficiently given if sent by first-class certified or registered mail, postage
prepaid, facsimile or overnight courier.
Page 14
<PAGE>
(b) In the event (i) of any consolidation or merger or binding exchange
of interests to which the Company is a party and for which approval of the
Investors or any holders of equity interests of the Company is required, or of
the conveyance or sale of all or substantially all of the assets of the Company,
or of any change of the Common Stock or other securities issuable upon exercise
of the Warrants; or (ii) the Company shall make any distribution in respect of
the Common Stock; or (iii) of the voluntary or involuntary dissolution,
liquidation or winding up of the Company; then the Company shall send to each
Warrantholder at least thirty days prior to the applicable date hereinafter
specified, a written notice stating (A) the date for the determination of the
holders of Common Stock (or other Securities issuable upon the exercise of the
Warrants) entitled to receive any such distribution, (B) the initial expiration
date Set forth in any offer for exchange of interests, or (C) the date on which
any such consolidation, merger, exchange of interests, conveyance, transfer,
reclassification, dissolution, liquidation or winding up is expected to become
effective or consummated, and the date as of which it is expected that holders
of record of Common Stock (or other securities issuable upon the exercise of the
Warrants) shall be entitled to exchange such Common Stock for securities or
other property, if any, deliverable upon such reclassification, consolidation,
merger, exchange of interests, conveyance, transfer, dissolution, liquidation or
winding up.
SECTION 8.2 Notices to Company. Any notice or demand authorized by this
-------------------
Agreement to be given to or on the parties shall be delivered in person or by
facsimile transmission, by courier guaranteeing overnight delivery or mailed by
first-class United States certified or registered mail, postage prepaid, as
follows:
a) if to the Company:
Pointe Communications Corporation
1325 Northmeadow Parkway
Suite 110
Roswell, Georgia 30076
Attention: Stephen E. Raville
Facsimile: (770) 319-2834
with a copy to:
Gardere & Wynne, LLP
3000 Thanksgiving Tower
1601 Elm Street
Dallas, TX 75201-4761
Attention: W. Robert Dyer Jr.
Facsimile: (214) 999-3574
Page 15
<PAGE>
(b) if to TSG:
TSG Capital Fund III, L.P.
177 Broad Street, 12th Floor
Stamford, CT 06901
Attention: Darryl B. Thompson
Facsimile: (203) 406-1590
with a copy to (which shall not constitute notice):
Mayer, Brown & Platt
1675 Broadway
New York, NY 10019
Attention: Kathleen A. Walsh
Facsimile: (212) 262-1910
(c) if to OCP II:
Opportunity Capital Partners II, L.P.
2201 Walnut Avenue, Suite 210
Fremont, California 94538
Attention: Lewis E. Byrd
Facsimile: (510) 494-5439
with a copy to (which shall not constitute notice):
Folger Levin & Kahn, L.L.P.
Embarcadero Center West
275 Battery Street, 23rd Floor
San Francisco, California 94111
Attention: Christopher Conner, Esq.
Facsimile: (415) 986-2827
(d) if to OCP III:
Opportunity Capital Partners III, L.P.
2201 Walnut Avenue, Suite 210
Fremont, California 94538
Attention: Lewis E. Byrd
Facsimile: (510) 494-5439
Page 16
<PAGE>
with a copy to (which shall not constitute notice):
Folger Levin & Kahn, L.L.P.
Embarcadero Center West
275 Battery Street, 23rd Floor
San Francisco, California 94111
Attention: Christopher Conner, Esq.
Facsimile: (415) 986-2827
SECTION 8.3 Receipt of Notice. Any notice hereunder shall be in writing
------------------
and shall be deemed effectively given and received upon delivery in person, or
two business days after delivery by national overnight courier service or by
telecopier transmission with acknowledgment of transmission receipt, or five
business days after deposit via certified or registered mail, return receipt
requested.
ARTICLE 9
MISCELLANEOUS
SECTION 9.1 WAIVER OF JURY TRIAL. THE COMPANY AND EACH INVESTOR DO
-----------------------
HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY AND IRREVOCABLY WAIVE SUCH RIGHT
ANY PARTY MAY HAVE TO A JURY TRIAL IN EVERY JURISDICTION IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY OF THE PARTIES HERETO OR THEIR
RESPECTIVE AFFILIATES, SUCCESSORS OR ASSIGNS AGAINST ANY OTHER PARTY HERETO OR
THEIR RESPECTIVE AFFILIATES, SUCCESSORS OR ASSIGNS IN RESPECT OF ANY MATTER
ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER DOCUMENT
EXECUTED AND DELIVERED BY ANY PARTY IN CONNECTION THEREWITH (INCLUDING, WITHOUT
LIMITATION, ANY ACTION TO RESCIND OR CANCEL THIS AGREEMENT, AND ANY CLAIMS OR
DEFENSES ASSERTING THAT THIS AGREEMENT WAS FRAUDULENTLY INDUCED OR OTHERWISE
VOID OR VOIDABLE).
SECTION 9.2 Payment of Taxes. The Company covenants and agrees that
-----------------
it will pay when due and payable all documentary, stamp and other taxes
attributable to the issuance or delivery of the Warrant Certificates or of the
Warrant Shares purchasable upon the exercise of Warrants; provided, however, the
--------
Company shall not be required to pay any tax or taxes that may be payable in
respect of any transfer involving the issue of any Warrant Certificate(s) or any
certificates) for Warrant Shares in a name other than that of the Warrantholder
of such exercised Warrant Certificate (s)
Page 17
<PAGE>
SECTION 9.3 Amendment.
---------
(a) The Company may modify this Agreement and the terms of the Warrants
only with the consent of the Warrantholders representing at least sixty-six and
two-thirds percent (66 2/3%) of the Warrant Shares for the purpose of adding any
provision to or changing in any manner or eliminating any of the provisions of
this Agreement or modifying in any manner the rights of the holders of the
outstanding Warrants; provided, however, that no such modification that (i)
-------- -------
materially and adversely affects the exercise rights of the holders of the
Warrants or (ii) reduces the percentage required for modification, may be made
without the consent of the holder of all outstanding warrants.
(b) Any such modification or amendment will be conclusive and binding
on all present and future holders of Warrant Certificates whether or not they
have consented to such modification or amendment or waiver and whether or not
notation of such modification or amendment is made upon such Warrant
Certificates. Any instrument given by or on behalf of any holder of a Warrant
Certificate in connection with any consent to any modification or amendment will
be conclusive and binding on all Subsequent holders of such Warrant Certificate.
SECTION 9.4 Termination. This Agreement shall terminate on or upon (a)
-----------
the repurchase by the Company of all Warrants, (b) the fifteenth day following
the date on which all of the Warrant Shares have been issued upon the exercise
of all Warrants issued pursuant hereto, or (c) the Expiration Date.
SECTION 9.5 Reports to Warrantholders. The Company will cause to be
---------------------------
delivered, by first-class mail, postage prepaid, facsimile or overnight courier,
to each Warrantholder at such Warrantholder's address appearing on the Warrant
Register, a copy of any reports delivered by the Company to any of the holders
of Class B Preferred Stock or to holders of the Common Stock.
SECTION 9.6 GOVERNING LAW. THE LAWS OF THE STATE OF NEW YORK SHALL GOVERN
-------------
THIS AGREEMENT AND THE WARRANT CERTIFICATES WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAW.
SECTION 9.7 Benefits of this Agreement. Nothing in this Agreement shall
----------------------------
be construed to give to any Person other than the Company, the Warrantholders
and the holders of Warrant Shares any legal or equitable right, remedy or claim
under this Agreement; this Agreement shall be for the sole and exclusive benefit
of the Company, the Warrantholders and the holders of Warrant Shares.
Page 18
<PAGE>
SECTION 9.8 Counterparts. This Agreement may be executed in any number of
------------
counterparts, and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together 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 any original. At the request of any party, the parties will
confirm facsimile transmission by signing a duplicate original document.
SECTION 9.9 Severability of Provisions. Any provision of this Agreement
---------------------------
that is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
SECTION 9.10 Headings. The headings of the sections of this Agreement are
--------
inserted for convenience only and shall not constitute a part of this Agreement.
SECTION 9.11 Access to Company Records. So long as Warrants remain
----------------------------
outstanding, each Investor shall be entitled to review the financial and
corporate books and records of the Company and to meet with the executive
officers and independent accountants of the Company for purposes reasonably
related to the Investor's ownership of the Warrants, which review and/or
meetings shall take place at reasonable times during the normal business hours
of the Company and in such a manner as to not unduly interfere with the conduct
of the Company's business.
Page 19
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement
to be duly executed, as of the date first above written.
POINTE COMMUNICATIONS CORPORATION
By:______________________________________
Patrick E. Delaney
Chief Financial Officer
TSG CAPITAL FUND III, L.P.,
a Delaware limited partnership
By: TSG Associates III, L.L.C.,
Its General Partner
By:_________________________
Name:_______________________
Title:________________________
OPPORTUNITY CAPITAL PARTNERS II, L.P.
a Delaware limited partnership
By: Thompson Capital Management, L.P.
Its General Partner
By:_______________________________
Lewis E. Byrd
Partner
Page 20
<PAGE>
OPPORTUNITY CAPITAL PARTNERS III, L.P.
a Delaware limited partnership
By: JM Capital Management, L.P.
Its General Partner
By:_______________________________
Lewis E. Byrd
General Partner
Page 21
<PAGE>
EXHIBIT A
---------
POINTE COMMUNICATIONS CORPORATION
Common Stock Purchase Warrant
Number _____
Warrant Certificate Evidencing Right to Purchase
I ] Shares of Common Stock
This is to certify that [Investor], [a _________________], or assigns, is
entitled to purchase at any time or from time to time up to the above-referenced
number of shares of Common Stock ("Common Stock"), of Pointe Communications
Corporation, a Nevada corporation (the "Company"), for the Exercise Price for
the Warrants specified in the Warrant Agreement, dated as of_________, 1999,
between the Company and TSG Capital Fund III, L.P. (the "Warrant Agreement"),
pursuant to which this Warrant Certificate is issued. All rights of the holder
of this Warrant Certificate are subject to the terms and provisions of the
Warrant Agreement, copies of which are available for inspection the Company's
office located at1325 Northmeadow Parkway, Suite 110, Roswell, Georgia 30076
(the "Office"). The Expiration Date (as defined in the Warrant Agreement) of
the right to purchase Common Stock pursuant to this Certificate is August _____,
2004.
NEITHER THE WARRANTS REPRESENTED BY THIS CERTIFICATE NOR THE SHARES OF
COMMON STOCK THAT MAY BE PURCHASED UPON EXERCISE HEREOF HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER ANY
APPLICABLE STATE LAW. SUCH WARRANTS AND SHARES MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR PLEDGED WITHOUT (1) REGISTRATION UNDER THE ACT AND ANY
APPLICABLE STATE LAW, OR (2) THE AVAILABILITY OF AN EXEMPTION FROM SUCH
REGISTRATION.
Subject to the provisions of the Act, applicable state laws and such
Warrant Agreement, this Warrant Certificate and all rights hereunder are
transferable, in whole or in part, at the Office by the holder hereof in person
or by a duly authorized attorney, upon surrender of this Warrant Certificate,
together with the assignment hereof duly endorsed. Until transfer of this
Warrant Certificate on the books of the Company, the Company may treat the
registered holder hereof as the owner hereof for all purposes.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
executed on this ___ day of_________, 1999 in Atlanta, Georgia by its proper
corporate officers thereunto duly authorized.
POINTE COMMUNICATIONS CORPORATION
a Nevada corporation
By:______________________________________
Name:____________________________________
Title:_____________________________________
Attest:_________________________________
Name:_________________________________
Title:__________________________________
<PAGE>
EXHIBIT B
---------
Election to Purchase
(To be executed by the registered holder if
such holder desires to exercise any Warrant Certificate)
The undersigned, the registered holder of the attached Warrant Certificate,
hereby irrevocably elects to exercise Warrants represented by such Warrant
Certificate and acquire an
aggregate of _____ shares of Common Stock of Pointe Communications Corporation,
a Nevada corporation, and herewith tenders payment for such Common Stock in the
amount of $_______ (by certified check or official bank check) in accordance
with the terms hereof. The undersigned requests that the aforementioned Common
Stock be registered in the name of whose address is
_____________________________________________.
Dated:________________________
Name of registered holder of Warrant Certificate:
_____________________________________________________________________________
(please print)
Address of registered
holder:______________________________________________________
Signature:________________________________________
(Note: the signature to the foregoing Election must correspond to the name
as written upon the face of the Warrant Certificate in every particular, without
alteration or any change whatsoever.)
<PAGE>
EXHIBIT C
---------
Election to Purchase
(To be executed by the registered holder if such holder
desires to effect cashless exercise any Warrant Certificate)
The undersigned, the registered holder of the attached Warrant Certificate,
hereby irrevocably elects to exchange Warrants represented by such Warrant
Certificate and acquire an
aggregate of _________ shares of Common Stock of Pointe Communications
Corporation, a Nevada corporation on [DATE]. The undersigned requests
-------------
that the aforementioned Common Stock be registered in the name of whose address
is __________________________ ___________________________________________.
Dated:_______________________________
Name of registered holder of Warrant Certificate:
_____________________________________________________________________________
(please print)
Address of registered
holder:______________________________________________________
Signature:______________________________________
(Note: the signature to the foregoing Election must correspond to the name
as written upon the face of the Warrant Certificate in every particular, without
alteration or any change whatsoever)
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
----------
Aggregate
Purchase
Number of Price of
Purchaser Warrants* Warrants*
- -------------------------------------- --------- ----------
<S> <C> <C>
TSG Capital Fund III, L.P. 8,571,429 $ 80,000
Opportunity Capital Partners II, L.P., 385,714 $ 3,600
Opportunity Capital Partners III, L.P. 42,857 $ 400
<FN>
*Subject to adjustment.
</TABLE>
<PAGE>
REGISTRATION RIGHTS AGREEMENT
by and among
POINTE COMMUNICATIONS CORPORATION,
TSG CAPITAL FUND III, L.P.,
OPPORTUNITY CAPITAL PARTNERS II, L.P.,
and
OPPORTUNITY CAPITAL PARTNERS III, L.P.
Dated as of December 31, 1999
<PAGE>
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is entered into as of
---------
December 31, 1999, by and among POINTE COMMUNICATIONS CORPORATION, a Nevada
corporation (the "Company"), TSG CAPITAL FUND III, L.P., a Delaware limited
-------
partnership and its Affiliates ("TSG"), OPPORTUNITY CAPITAL PARTNERS II, L.P. a
---
Delaware limited partnership ("OCP II"), and OPPORTUNITY CAPITAL PARTNERS III,
------
L.P., a Delaware limited partnership ("OCP III") (hereinafter, TSG, OCP II, and
-------
OCP III shall each be referred to as a "Purchaser" and shall collectively be
---------
referred to as "Purchasers").
----------
WITNESSETH:
-----------
WHEREAS, the Company has entered into that certain Securities Purchase
Agreement (the "Securities Purchase Agreement") dated September 7, 1999, with
------------------------------
Purchasers pursuant to which the Company issued a Promissory Note (each, a
"Note" and collectively, the "Notes") to each Purchaser convertible into shares
-----
of the Company's Class B Convertible Senior Preferred Stock, par value $0.01 per
share (the "Class B Preferred"), and Warrants to acquire shares of the Company's
-----------------
Common Stock (as defined herein); and
WHEREAS, the Company has agreed to grant certain registration rights with
respect to the shares of the Company's Common Stock, par value $0.00001 per
share (the "Common Stock"), issuable upon conversion of the Class B Preferred
-------------
(including shares of Class B Preferred issued as dividends) and upon exercise of
the Warrants;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises and covenants contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties, intending to be legally bound, hereby agree as follows:
ARTICLE 1
DEFINITIONS
As used herein, the following terms shall have the following respective
meanings:
1.1 "Commission" shall mean the Securities and Exchange Commission, or
----------
any other successor federal agency at the time administering the Securities Act.
1.2 "Common Stock" shall mean the Company's common stock, par value
-------------
$0.00001 per share.
<PAGE>
1.3 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
-------------
amended, or any similar federal statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
1.4 "Initiating Holders" shall mean any Holder or Holders who in the
-------------------
aggregate own not less than twenty percent (20%) of the Registrable Securities.
1.5 "Holders" shall mean and include Purchasers and any person or
-------
entity that shall, pursuant to Article 11 hereof, become a party hereto, and any
permitted transferee under Article 10 hereof which holds Registrable Securities.
1.6 "Qualified Offering" shall mean the closing of a firm commitment
-------------------
underwritten public offering pursuant to an effective registration statement
under the Securities Act, covering the offer and sale of Common Stock to the
public that raises net aggregate proceeds for the Company in excess of
$30,000,000 and at a purchase price per share in excess of $4.00 per share.
1.7 The terms "register," "registered" and "registration" refer to a
-------- ---------- ------------
registration effected by preparing and filing with the Commission a registration
statement in compliance with the Securities Act, and the declaration or ordering
by the Commission of the effectiveness of such registration statement.
1.8 "Registrable Securities" means any and all shares of Common Stock:
-----------------------
(1) issued or issuable upon conversion of the Class B Preferred, including
shares of Class B Preferred issued as dividends; (2) issued or issuable upon
exercise of the Warrants; (3) issued or issuable with respect to the securities
referred to in clause (1) above by way of any stock split, stock dividend,
combination, recapitalization, reclassification, merger, consolidation or other
similar event; and (4) otherwise held or acquired by holders of securities
described in clause (1) above, excluding in all cases, however, Registrable
Securities sold by a Holder to the public or pursuant to Rule 144 promulgated
under the Securities Act (or any similar or analogous rule promulgated under the
Securities Act) or shares of Common Stock acquired by a Holder in an open market
transaction. For purposes of this Agreement, a person will be deemed to be a
Holder of Registrable Securities whenever such person has the right to acquire
directly or indirectly such Registrable Securities (upon conversion or exercise
in connection with a transfer of securities or otherwise, but disregarding any
restrictions or limitations upon the exercise of such right), whether or not
such acquisition has actually been effected.
2
<PAGE>
1.9 "Registration Expenses" shall mean all expenses incurred by
----------------------
the Company in complying with Articles 2, 3 and 4 hereof, including, without
limitation, all registration, qualification and filing fees, printing expenses,
messenger and delivery expenses, escrow fees, fees and disbursements of legal
counsel for the Company and all independent certified public accountants,
underwriters (excluding discounts and commissions) and persons retained by the
Company (but excluding the compensation of regular employees of the Company,
which shall be paid in any event by the Company), fees and disbursements of one
legal counsel for the selling Holders (not to exceed $50,000), blue sky fees and
expenses, and the expense of any special audits incident to or required by any
such registration.
1.10 "Securities Act" shall mean the Securities Act of 1933, as
---------------
amended, or any similar federal statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
1.11 "Selling Expenses" shall mean all underwriting fees, discounts,
-----------------
selling commissions and stock transfer taxes applicable to the Registrable
Securities registered by the Holders.
ARTICLE 2
REQUIRED REGISTRATION
2.1 Required Registration.
----------------------
(a) Subject to the provisions set forth in Article 5, within 120 days
after conversion of the Notes into shares of Class B Preferred, the Company
shall file with the Commission a registration statement under the Securities Act
on Form S-3 or any appropriate form (or any successor form) pursuant to Rule 415
under the Securities Act (the "Required Registration"). The Company shall use
---------------------
its best efforts to cause the Required Registration to be declared effective
under the Securities Act as soon as practicable after filing, and once
effective, the Company shall cause such Required Registration to remain
effective for a Period ending on the earlier of: (i) the third anniversary of
the Closing under the Securities Purchase Agreement; (ii) the date on which all
Registrable Securities have been sold pursuant to the Required Registration; and
(iii) the date as of which there are no longer any Registrable Securities in
existence (the "Effective Period"). The registration statement for the Required
----------------
Registration shall contain a broad-form plan of distribution.
2.2 Underwriting.
------------
(a) An underwriting may be selected as a method of distribution of the
Registrable Securities covered by the Required Registration by Holders holding
sixty-six and two-thirds percent (66 2/3%) (a "Supermajority") of the
-------------
Registrable Securities.
3
<PAGE>
(b) If a distribution of the Registrable Securities is to be effected
by means of an underwriting, the Company (together with all Holders proposing to
distribute their securities through such underwriting (the "Participating
-------------
Holders")) shall use its best efforts to enter into an underwriting agreement in
-
customary form and reasonably acceptable to the Company with a managing
underwriter of nationally recognized standing selected for such underwriting by
the Company and approved by the Participating Holders holding a Supermajority of
the Registrable Securities proposed to be distributed through such underwriting,
which approval shall not be unreasonably withheld. In no event shall the
Company include any securities under the Required Registration which are not
Registrable Securities without the prior written consent of the Holders of a
Supermajority of Registrable Securities, and any such securities permitted to be
sold under the Required Registration shall only be sold in connection with a
sale. Notwithstanding any other provision of this Article 2, if the managing
underwriter advises the Participating Holders in writing that marketing factors
require a limitation of the number of shares to be underwritten, then the
underwriters may exclude some or all of the shares requested to be included in
such underwriting, and the number of shares of Registrable Securities that may
be included in the underwriting shall be allocated among all Participating
Holders thereof in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities held by such Participating Holders. No
Registrable Securities excluded from the underwriting by reason of the managing
underwriter's marketing limitation shall be included in such underwriting.
(c) If a distribution of the Registrable Securities is effected by
means of an underwriting and if any Participating Holder of Registrable
Securities disapproves of the terms of the underwriting, such person may elect
to withdraw therefrom by written notice to the Company, the managing underwriter
and the other Participating Holders. The Registrable Securities and/or other
securities so withdrawn shall also be withdrawn from such underwriting;
provided, however, that if by the withdrawal of such Registrable Securities a
-------
greater number of Registrable Securities held by other Participating Holders may
be included in such underwriting (up to the maximum of any limitation imposed by
the underwriters), then the Company shall offer to all Participating Holders who
have included Registrable Securities in the registration the right to include
additional Registrable Securities in the same proportion used in determining the
underwriter limitation in this Section 2.2.
2.3 Eligibility. The Company represents, warrants and covenants that
-----------
it currently is, and shall use its best efforts to remain at all times during
the Effective Period, eligible to use Form S-3 under the Securities Act.
2.4 Opinion of Counsel. Upon the request of the Holders of a
--------------------
Supermajority of the Registrable Securities, the Company shall furnish such
Holders with an opinion of counsel satisfactory to such Holders stating that the
registration statement filed in connection with the Required Registration is
effective and stating such other opinions as such Holders shall reasonably
request.
ARTICLE 3
REQUESTED REGISTRATION
4
<PAGE>
3.1 Request for Registration. Beginning on the date which is
--------------------------
immediately after the third anniversary of the date of this Agreement,
Initiating Holders may request registration in accordance with this Article 3;
provided, that such registration covers Registrable Securities representing 25%
of the then total amount of the Registrable Securities; and further provided
that OCP II and OCP III shall have the right to join in such request by
Initiating Holders. In the event the Company shall receive from any one or more
of the Initiating Holders a written request that the Company effect any such
registration, qualification or compliance with respect to Registrable
Securities, the Company will:
(a) promptly give written notice of the proposed registration,
qualification or compliance to all other Holders; and
(b) use its best efforts to effect such registration, qualification or
compliance as soon as practicable (including, without limitation, undertaking to
file post-effective amendments, appropriate qualifications under applicable blue
sky or other state securities laws, and appropriate compliance with applicable
regulations issued under the Securities Act, and any other governmental
requirements or regulations) as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Registrable
Securities as are specified in such request, together with all or such portion
of the Registrable Securities of any Holder or Holders joining in such request
as are specified in a written request received by the Company within 15 days
after the receipt of the written notice from the Company described in Section
3.1(a); provided, however, that the Company shall not be obligated to take any
-------- -------
action to effect any such registration, qualification or compliance Pursuant to
this Article 3:
(i) in any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting such
registration, qualification or compliance, unless the Company is already subject
to service in such jurisdiction and except as may be required by the Securities
Act ;
(ii) within one hundred and eighty (180) days immediately
following the effective date of any registration statement pertaining to a firm
commitment underwritten offering of securities of the Company for its own
account;
(iii) after the Company has effected three (3) such requested
registrations pursuant to this Article 3, each such registration has been
declared or ordered effective, and the Registrable Securities offered pursuant
to each such registration have been sold, or if the Company has effected any
requested registration pursuant to this Agreement during the previous six-month
period;
(iv) if the Company, within ten (10) days of the receipt of the
request of the Holder or Holders, gives notice of its bona fide intention to
effect the filing of a registration statement with the Commission within
forty-five (45) days of receipt of such request (other than with respect to a
registration statement relating to a Rule 145 transaction or an offering solely
to employees).
5
<PAGE>
(c) Subject to the foregoing clauses (i) through (iv), the Company
shall file a registration statement covering the Registrable Securities so
requested to be registered as soon as practicable after receipt of the request
of the Initiating Holders and provide notice to the other Holders as required by
Section 3.1(a); provided, however, that if the Company shall furnish to such
-------- -------
Holders a certificate signed by the Chairman or Chief Executive Officer of the
Company stating that in the good faith judgment of the Board of Directors of the
Company, it would be detrimental to the Company and its stockholders for such
registration statement to be filed, the Company shall have the right to defer
such filing for a period of not more than 180 days after receipt of the request
of the Initiating Holders; provided, further, that the Company shall not be
-------- -------
permitted to exercise such deferral right under this Section 3.1(c) more than
once in any 365-day period.
3.2 Underwriting.
------------
(a) The distribution of the Registrable Securities covered by the
request of the Holders shall be effected by means of the method of distribution
selected by the Holders holding a Supermajority of the Registrable Securities
covered by such registration. If such distribution is effected by means of an
underwriting, the right of any Holder to registration pursuant to this Article 3
shall be conditioned upon such Holder's participation in such underwriting and
the inclusion of such Holder's Registrable Securities in the underwriting to the
extent provided herein.
(b) If such distribution is effected by means of an underwriting, the
Company (together with the Participating Holders in such Underwriting) shall use
its best efforts to enter into an underwriting agreement in customary form and
reasonably acceptable to the Company with a managing underwriter of nationally
recognized standing selected for such underwriting by the Company and approved
by a Supermajority in interest of the Participating Holders, which approval
shall not be unreasonably withheld. Notwithstanding any other provision of this
Article 3, if the managing underwriter advises the Participating Holders in
writing that marketing factors require a limitation of the number off shares to
be underwritten, then the underwriters may exclude shares requested to be
included in such registration. The number of shares of Registrable Securities
to be included in the registration and underwriting shall be allocated amongst
the Participating Holders in proportion, as nearly as practicable, to the
respective amounts of Registrable Securities held by such Participating Holders
at the time of filing the registration statement. No Registrable Securities
excluded from the underwriting by reason of the managing underwriter's marketing
limitation shall be included in such registration.
(c) If any Participating Holder disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the managing underwriter and the other Participating Holders. The
Registrable Securities and/or other securities so withdrawn shall also be
withdrawn from registration; provided, however, that if by the withdrawal of
-------- -------
such Registrable Securities a greater number of Registrable Securities held by
other Participating Holders may be included in such registration (up to the
maximum of any limitation imposed by the underwriters), then the Company shall
offer to all Participating Holders who have included Registrable Securities in
the registration the right to include additional Registrable Securities in the
same proportion used in determining the underwriter limitation in this Section
3.2.
6
<PAGE>
3.3 Cancellation of Registration. A Supermajority in interest of the
------------------------------
Participating Holders shall have the right to cancel a proposed registration of
Registrable Securities pursuant to Article 3 when, in their discretion, market
conditions are so unfavorable as to be seriously detrimental to an offering
pursuant to such registration. Such cancellation of a registration shall not be
counted as one of the three (3) such requested registrations pursuant to Section
3.1(b)(iii); provided, however, that the Holders canceling such registration
shall pay expenses attributable to such registration.
ARTICLE 4
COMPANY REGISTRATION
4.1 Notice of Registration to Holders. If at any time or from time to
----------------------------------
time the Company shall determine to register any of its securities, either for
its own account or the account of a security holder or holders, other than (i) a
registration relating solely to employee benefit plans on Form S-8 (or any
successor form) or (ii) a registration relating solely to a Commission Rule 145
transaction on Form S-4 (or any successor form), the Company will:
(a) promptly give to each Holder written notice thereof, and
(b) include in such registration (and any related qualification under
blue sky laws or other compliance), and in any underwriting involved therein,
all the Registrable Securities specified in a written request or requests, made
within 30 days after receipt of such written notice from the Company described
in Section 4.1(a), by any Holder or Holders.
4.2 Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 4.1(a). In such event, the right of any Holder to
registration pursuant to this Article 4 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
(together with the Company) enter into an underwriting agreement in customary
form with the managing underwriter selected for such underwriting by the
Company.
(a) Notwithstanding any other provision of this Article 4, if the
managing underwriter determines that marketing factors require a limitation of
the number of shares to be underwritten, the underwriter may exclude some or all
Registrable Securities from such registration and underwriting. The Company
shall so advise all Holders of Registrable Securities, and the number of shares
of Common Stock to be included in such registration shall be allocated as
follows: first, for the account of the Company, all shares of Common Stock
proposed to be sold by the Company, and second, for the account of any other
stockholders of the Company participating in such registration, the number of
shares of Common Stock requested to be included in the registration by such
other stockholders in proportion, as nearly as practicable, to the respective
amounts of securities that are proposed to be offered and sold by such other
stockholders of such securities at the time of filing the registration
statement. No Registrable Securities excluded from the underwriting by reason
of the underwriters, marketing limitation shall be included in such
registration.
7
<PAGE>
(b) The Company shall so advise all Holders and the other holders
distributing their securities through such underwriting of any such limitation,
and the number of shares of Registrable Securities held by Holders that may be
included in the registration. If any Holder disapproves of the terms of any
such underwriting, such Holder may elect to withdraw therefrom by written notice
to the Company and the managing underwriter. Any securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration, but
the Holder shall continue to be bound by Article 8 hereof.
(c) The Company shall have the right to terminate or withdraw any
registration initiated by it under this Article 4 prior to the pricing of such
offering, whether or not a Holder has elected to include Registrable Securities
in such registration.
ARTICLE 5
HOLDBACK AGREEMENT
If any Participating Holder notifies the Company that they intend to effect
the sale of Registrable Securities pursuant to Articles 2 or 3 above (each, a
"Sale"), the Company shall not effect any public sale or distribution of its
---
equity securities, or any securities convertible into or exchangeable or
-
exercisable for its equity securities, during the 90-day period beginning on the
-
date such notice of a Sale is received; provided that such notice shall not be
given by any Holder or Holders more than one time during any 180-day period.
ARTICLE 6
EXPENSES OF REGISTRATION
All Registration Expenses shall be borne by the Company. All Selling
Expenses relating to Registrable Securities registered by the Holders shall be
borne by the Holders of such Registrable Securities pro rata on the basis of the
--- ----
number of shares so registered.
ARTICLE 7
REGISTRATION PROCEDURES
(a) In the case of each registration effected by the Company pursuant
to this Agreement, the Company will keep each Holder advised in writing as to
the initiation of the registration effected by the Company pursuant to this
Agreement and as to the completion thereof. The Company agrees to use its best
efforts to effect or cause such registration to permit the sale of the
Registrable Securities covered thereby by the Holders thereof in accordance with
the intended method or methods of distribution thereof described in such
registration statement. In connection with any registration of any Registrable
Securities pursuant to Articles 2, 3 or 4 hereof, the Company shall, as soon as
reasonably practicable:
8
<PAGE>
(i) prepare and file with the Commission a registration statement
with respect to such Registrable Securities within the time period prescribed in
Section 2.1(a) and use its best efforts to cause such registration statement
filed to become effective (provided that before filing a registration statement
or prospectus or any amendments or supplements thereto, the Company shall comply
with subparagraph (iii) of this paragraph (a)) as soon as reasonably possible
thereafter;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus included therein
as may be necessary to effect and maintain the effectiveness of such
registration statement as may be required by the applicable rules and
regulations of the Commission and the instructions applicable to Form S-3 (or
any successor form), and furnish to the holders of the Registrable Securities
covered thereby copies of any such supplement or amendment prior to this being
used and/or filed with the Commission; and comply with the provisions of the
Securities Act with respect to the disposition of all the Registrable Securities
to be included in such registration statement during such period in accordance
with the intended methods of disposition by the sellers thereof set forth in
such registration statement;
(iii) provide (A) the Holders of the Registrable Securities to be
included in such registration statement, (B) the underwriters (which term, for
purposes of this Agreement, shall include a person deemed to be an underwriter
within the meaning of Section 2(11) of the Securities Act), if any, thereof, (C)
the sales or placement agent, if any, therefor, (D) one counsel for such
underwriters or agent, and (E) not more than one counsel for all the Holders of
such Registrable Securities, the opportunity to participate in the preparation
of such registration statement, each prospectus included therein or filed with
the Commission, and each amendment or supplement thereto;
9
<PAGE>
(iv) for a reasonable period prior to the filing of such
registration statement, and throughout the period specified above, make
available for inspection by the parties referred to in Section 6(a)(iii) above
such financial and other information and books and records of the Company, and
cause the officers, directors, employees, counsel and independent certified
public accountants of the Company to respond to such inquiries, as shall be
reasonably necessary, in the judgment of the respective counsel referred to in
such Section 6(a)(iii), to conduct a reasonable investigation within the meaning
of the Securities Act; provided, however, that each such party shall be required
to maintain in confidence and not disclose to any other Person or entity any of
such information or records reasonably designated by the Company in writing as
being confidential, until such time as (a) such information becomes a matter of
public record (whether by virtue of its inclusion in such registration statement
or otherwise but not as a result of the disclosure by such party), or (b) such
party shall be required so to disclose such information pursuant to the subpoena
or order of any court or other governmental agency or body having jurisdiction
over the matter (in which case such party will provide the Company notice of any
such requirement so that the Company may seek an appropriate protective order),
or (c) such information as is required to be set forth in such registration
statement or the prospectus included therein or in an amendment to such
registration statement or an amendment or supplement to such prospectus in order
that such registration statement, prospectus, amendment or supplement, as the
case may be, does not include an untrue statement of a material fact or omit to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; and provided, further, that the Company
need not make such information available, nor need it cause any officer,
director or employee to respond to such inquiry, unless each such Holder of
Registrable Securities and such counsel, upon the Company's request, execute and
deliver to the Company an undertaking to substantially the same effect contained
in the second preceding proviso in form reasonably satisfactory to the Company;
(v) promptly notify the Holders of Registrable Securities, the
sales or placement agent, if any, therefor and the managing underwriter of the
securities being sold and confirm such advice in writing, (A) when such
registration statement or the prospectus included therein or any prospectus
amendment or supplement or post-effective amendment has been filed, and, with
respect to such registration statement or any post-effective amendment, when the
same has become effective, (B) of any comments by the Commission and by the blue
sky or securities commissioner or regulator of any state with respect thereto or
any request by the Commission for amendments or supplements to such registration
statement or the prospectus or for additional information, (C) of the issuance
by the Commission of any stop order suspending the effectiveness of such
registration statement or the initiation of any proceedings for that purpose,
(D) of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Registrable Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose, or (E) if it shall be the case, at any time when a prospectus is
required to be delivered under the Securities Act, that such registration
statement, prospectus, or any document incorporated by reference in any of the
foregoing contains an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing;
(vi) use its best efforts to obtain the withdrawal of any order
suspending the effectiveness of such registration statement or any
post-effective amendment thereto or of any order suspending or preventing the
use of any related prospectus or suspending the qualification of any Registrable
Securities included in such registration statement for sale in any jurisdiction
at the earliest practicable date;
(vii) if requested by any managing underwriter or underwriter, any
placement or sales agent or any Holder of Registrable Securities, promptly
incorporate in a prospectus, prospectus supplement or post-effective amendment
such information as is required by the applicable rules and regulations of the
Commission and as such managing underwriter or underwriters, such agent or such
Holder may reasonably specify should be included therein relating to the terms
of the sale of the Registrable Securities included thereunder, including,
without limitation, information with respect to the number of Registrable
Securities being sold by such Holder or agent or to such underwriters, the name
and description of such Holder, the offering price of such Registrable
Securities and any discount, commission or other compensation payable in respect
thereof, the purchase price being paid therefor by such underwriters and with
respect to any other terms of the offering of the Registrable Securities to be
sold in such offering; and make all required filings of such prospectus;
prospectus supplement or post--effective amendment promptly after notification
of the matters to be incorporated in such prospectus, prospectus supplement or
post-effective amendment;
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(viii) furnish to each Holder of Registrable Securities, each
placement or sales agent, if any, therefor, each underwriter, if any, thereof
and the counsel referred to in Section 4(a)(iii) an executed copy of such
registration statement, each such amendment and supplement thereto (in each case
excluding all exhibits and documents incorporated by reference) and such number
of copies of the registration statement (excluding exhibits thereto and
documents incorporated by reference therein unless specifically so requested by
such holder, agent or underwriter, as the case may be) of the prospectus
included in such registration statement (including each preliminary prospectus
and any summary prospectus), in conformity with the requirements of the
Securities Act, as such Holder, agent, if any, and underwriter, if any, may
reasonably request in order to facilitate the disposition of the Registrable
Securities owned by such Holder sold by such agent or underwritten by such
underwriter and to permit such Holder, agent and underwriter to satisfy the
prospectus delivery requirements of the Securities Act; and the Company hereby
consents to the use of such prospectus and any amendment or supplement thereto
by each such Holder and by any such agent and underwriter, in each case in the
form most recently provided to such party by the Company, in connection with the
offering and sale of the Registrable Securities covered by the prospectus
(including such preliminary and summary prospectus) or any supplement or
amendment thereto;
(ix) use its best efforts to (A) register or qualify the
Registrable Securities under such other securities laws or blue sky laws of such
jurisdictions to be designated by the Holders of a Supermajority of such
Registrable Securities and each placement or sales agent, if any, therefor and
underwriter, if any, thereof, as any Holder and each underwriter, if any, of
the securities being sold shall reasonably request, (B) keep such registrations
or qualifications in effect and comply with such laws so as to permit the
continuance of offers, sales and dealings therein in such jurisdictions for so
long as may be necessary to enable such Holder, agent or underwriter to complete
its distribution of the Registrable Securities pursuant to such registration
statement and (C) take any and all such actions as may be reasonably necessary
or advisable to enable such Holder, agent, if any, and underwriter to consummate
the disposition in such jurisdictions of such Registrable Securities; provided,
however, that the Company shall not be required for any such purpose to (1) take
any action to effect any such registration, qualification or compliance in any
particular jurisdiction in which it would not otherwise be required to execute a
general consent to service of process in effectuating such registration,
qualification or compliance, but for the requirements of this Section 7(a)(ix),
or (2) subject itself to taxation in any such jurisdiction;
(x) cooperate with the Holders of the Registrable Securities and
the managing underwriters to facilitate the timely preparation and delivery of
certificates representing Registrable Securities to be sold, which certificates
shall be printed, lithographed or engraved, or produced by any combination of
such methods, on steel engraved borders and which shall not bear any restrictive
legends; and enable such Registrable Securities to be in such denominations and
registered in such names as the managing underwriters may request at least two
business days prior to any sale of the Registrable Securities;
11
<PAGE>
(xi) obtain a CUSIP number for all Registrable Securities, not
later than the effective date of the registration statement;
(xii) use its best efforts to enter into one or more underwriting
agreements, engagement letters, agency agreements, "best efforts" underwriting
agreements or similar agreements, as appropriate, and take such other actions in
connection therewith as the Holders of at least a Supermajority of the
Registrable Securities being sold shall reasonably request in order to expedite
or facilitate the disposition of such Registrable Securities;
12
<PAGE>
(xiii) whether or not an agreement of the type referred to in the
preceding subsection is entered into and whether or not any portion of the
offering contemplated by such registration statement is an underwritten offering
or is made trough a placement or sales agent or any other entity, (A) make such
representations and warranties to the Holders of such Registrable Securities and
the placement or sales agent, if any, therefor and the underwriters, if any,
thereof in form, substance and scope as are customarily made in connection with
any offering or equity securities pursuant to any appropriate agreement and/or
to a registration statement filed on the form applicable to such registration
statement; (B) obtain an opinion of counsel to the Company in customary form and
covering such matters, of the type customarily covered by such an opinion, as
the managing underwriters, if any, and as the Holders of at least a
Supermajority of such Registrable Securities may reasonably request, addressed
to such Holders and the placement or sales agent, if any, therefor and the
underwriters, if any, thereof and dated the effective date of such registration
statement (and if such registration statement contemplates an underwritten
offering of a party or of all of the Registrable Securities, dated the date of
the closing under the underwriting agreement relating thereto) (it being agreed
that the matters to be covered by such opinion shall include, without
limitation, the due organization of the Company, and its subsidiaries, if any;
the qualification of the Company, and its subsidiaries, if any, to transact
business as foreign companies; the due authorization, execution and delivery of
this Agreement and of any agreement of the typed referred to in Section
7(a)(xii) hereof; the due authorization, valid issuance, and the fully paid
status of the capital stock of the Company; the absence of (governmental
approvals required to be obtained in connection with the registration statement,
the offering and sale of the Registrable Securities, this Agreement or any
agreement of the type referred to in Section 7(a)(xii.) hereof; the compliance
as to form of such registration statement and any documents incorporated by
reference therein with the requirements of the Securities Act; the effectiveness
of such registration statement under the Securities Act; and, as of the date of
the opinion and of the registration statement or most recent post-effective
amendment thereto, as the case may be, the absence, to the knowledge of such
counsel, from such registration statement and the prospectus included therein,
as then amended or supplemented, and from the documents incorporated by
reference therein of an untrue statement of a material fact or the omission to
state therein a material fact necessary to make the statements therein not
misleading (in case of such documents, in the light of the circumstances
existing at the time that such documents were filed with the Commission under
the Exchange Act)); (C) obtain a "cold" comfort letter or letters from the
independent certified public accountants of the Company addressed to the Holders
and the placement or sales agent, if any, therefor and the underwriters, if any,
thereof, dated (I) the effective date of such registration statement and (II)
the effective date of any Prospectus supplement to the prospectus included in
such Registration statement or post-effective amendment to such registration
statement which includes unaudited or audited financial statements as of a date
or for a period subsequent to that of the latest such statements included in
such prospectus (and, if such registration statement contemplates an
underwritten offering pursuant to any prospectus supplement to the prospectus
included in such registration statement or post-effective amendment to such
registration statement which includes unaudited or audited financial statements
as of a date or for a period subsequent to that of the latest such statements
included in such prospectus, dated the date of the closing under the
underwriting agreement relating thereto), such letter or letters to be in
customary form and covering such matters of the type customarily covered by
letters of such type; (D) deliver such documents and certificates, including
officers' certificates, as may be reasonably requested by Holders of at least a
Supermajority of the Registrable Securities being sold and the placement or
sales agent, if any, therefor and the managing underwriters, if any, thereof to
evidence the accuracy of the representations and warranties made pursuant to
clause (A) above and the compliance with or satisfaction of any agreements or
conditions contained in the underwriting agreement or other agreement entered
into by the Company; and (E) undertake such obligations relating to expense
reimbursement, indemnification and contribution as are provided in, Article 6
and 8 hereof;
(xiv) notify in writing each Holder of Registrable Securities of
any proposal by the Company to amend or waive any provision of this Agreement
and of any amendment or waiver effected pursuant thereto, each of which notices
shall contain the text of the amendment or waiver proposed or effected, as the
case may be;
(xv) engage to act on behalf of the Company with respect to the
Registrable Securities to be so registered a registrar and transfer agent having
such duties and responsibilities (including, without limitation, registration of
transfers and maintenance of stock registers) as are customarily discharged by
such an agent, and to enter into such agreements and to offer such indemnities
as are customary in respect thereof;
(xvi) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its Holders, as
soon as practicable, but in any event not later than 18 months after the
effective date of such registration statement, an earnings statement covering a
period of at least twelve months which shall satisfy the provisions of Section
6(a) of the Securities Act (including, at the option of the Company, pursuant to
Rule 158 thereunder); and
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(xvii) cause all such Registrable Securities to be listed on each
securities exchange, over-the-counter market or on the Nasdaq National Market
("Nasdaq Market") on which similar securities issued by the Company are then
--------------
listed and, if not so listed, to be listed and, if listed on the Nasdaq Market,
-
use its best efforts to secure designation of all such Registrable Securities
covered by such registration statement as a Nasdaq "national market system
security" within the meaning of Rule llAa2-1 of the Commission or, failing that,
to secure Nasdaq Market authorization for such Registrable Securities and,
without limiting the generality of the foregoing, to arrange for at least two
market makers to register as such with respect to such Registrable Securities
with the National Association of Securities Dealers.
(b) In the event that the Company would be required, pursuant to
Section 7(a)(v)(E) above, to notify the Holders of Registrable Securities
included in a registration statement hereunder, the sales or placement agent, if
any, and the managing underwriters, if any, of the securities being sold, the
Company shall prepare and furnish to each such Holder, to each such agent, if
any, and to each underwriter, if any, a reasonable number of copies of a
prospectus supplement or amendment so that, as thereafter delivered to the
purchasers of Registrable Securities, such prospectus shall not contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing. Each Holder agrees that upon receipt
of any notice from the Company pursuant to Section 7(a)(v)(E) hereof, such
Holder shall forthwith discontinue the distribution of Registrable Securities
until such Holder shall have received copies of such amended or supplemented
registration statement or prospectus, and if so directed by the Company, such
Holder shall deliver to the Company (at the Company's expense) all copies, other
than permanent file copies, then in such Holder's possession of the prospectus
covering such Registrable Securities at the time of receipt of such notice.
(c) The Company may require each Holder of Registrable Securities as to
which any registration is being effected to furnish to the Company such
information regarding such Holder and such Holder's method of distribution of
such Registrable Securities as the Company may from time to time reasonably
request in writing but only to the extent that such information is required in
order to comply with the Securities Act. Each such Holder agrees to notify the
Company as promptly as practicable of any inaccuracy or change in information
previously furnished by such Holder to the Company or of the occurrence of any
event in either case as a result of which any prospectus relating to such
registration contains or would contain an untrue statement of a material fact
regarding such Holder or the distribution of such Registrable Securities or
omits to state any material fact regarding such Holder or the distribution of
such Registrable Securities required to be stated therein or necessary to make
the statements therein not misleading in light of the circumstances then
existing, and promptly to furnish to the Company any additional information
required to correct and update any previously furnished information or required
so that such Prospectus shall not contain, with respect to such Holder or the
distribution of such Registrable Securities, an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading in light of the circumstances then
existing.
ARTICLE 8
INDEMNIFICATION
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8.1 The Company will indemnify each Holder, each of its Officers and
directors and partners, and each person controlling any such persons within the
meaning of Section 15 of the Securities Act, with respect to which registration
of any of the Registrable Securities under the Securities Act has been effected
pursuant to this Agreement, and each underwriter, if any, and each person who
controls any underwriter within the meaning of Section 15 of the Securities Act,
against all expenses, claims, losses, damages and liabilities (or actions in
respect thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
registration statement, prospectus, offering circular or other document, or any
amendment or supplement thereof, incident to any such registration of any of the
Registrable Securities under the Securities Act which has been effected pursuant
to this Agreement, or based on any omission (or alleged omission) to state
therein, a material fact required to be stated therein or necessary to make the
statements therein, not misleading, or any violation by the Company of any rule
or regulation promulgated under the Securities Act or any state securities laws
applicable to the Company and relating to action or inaction by the Company in
connection with any such Registration, qualification or compliance, and will
reimburse each such Holder, each of its officers and directors and partners, and
each person controlling any such persons, each such Underwriter and each person
who controls any such underwriter, for any legal and any other expenses
reasonably incurred in connection with investigating, preparing or defending any
such claim, loss, damage, liability or action; provided, however, that the
-------- -------
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission or alleged untrue statement or omission, made in reliance
upon and in conformity with written information furnished to the Company by such
Holder or underwriter and expressly intended for use in such registration
statement, prospectus, offering circular or other, document, or any amendment or
supplement thereof.
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8.2 Each Holder will, if Registrable Securities held by such Holder are
included in the securities as to which such registration is being effected,
severally and not jointly, indemnify and hold harmless the Company, each of its
directors and officers, each underwriter, if any, of the Company's securities
covered by such a registration statement, each person who controls the Company
or such underwriter within the meaning of Section 15 of the Securities Act, and
each other such Holder, each of its officers, directors, partners, and each
person controlling such Holder within the meaning of Section 15 of the
Securities Act, against all expenses, claims, losses, damages and liabilities
(or actions in respect thereof), to which the Company or such officer, director,
underwriter or person who controls the Company or such underwriter, within the
meaning of Section 15 of the Securities Act, including any of the foregoing
incurred in settlement of any litigation, commenced or threatened, arising out
of or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any such registration statement, prospectus, offering circular
or other document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company, such Holders, such directors, officers, partners, underwriters or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or alleged
omission), made in such registration statement, prospectus, offering circular,
other document or amendment or supplement in reliance upon and in conformity
with written information furnished to the Company by such Holder and expressly
intended for use in such registration statement, prospectus, offering circular
or other document, or any amendment or supplement thereof; provided, however,
-------- -------
that the obligations of each Holder hereunder shall be limited to an amount
equal to the proceeds to such Holder of Registrable Securities sold as
contemplated herein.
8.3 Each party entitled to indemnification under this Section 5 (the
"Indemnified Party") shall give notice to the party required to provide
-----------------
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
------ ------------------
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld). The Indemnified Party may participate in such defense at such
party's expense; provided, however, that the Indemnifying Party shall bear the
expense of such defense of the Indemnified Party if representation of both
parties by the same counsel would be inappropriate due to actual or potential
conflicts of interest. The failure of any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its obligations
under this Agreement, unless such failure is prejudicial to the ability of the
Indemnifying Party to defend the action. No Indemnifying Party, in the defense
of any such claim or litigation, shall, except with the consent of each
Indemnified Party not to be unreasonably withheld, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect of such claim or litigation.
16
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8.4 If the indemnification provided for in Section 8.1 or 8.2 is
unavailable or insufficient to hold harmless an Indemnified Party, then each
Indemnifying Party shall contribute to the amount paid or payable by such
Indemnified Party as a result of the expenses, claims, losses, damages or
liabilities (actions or proceedings in respect thereof) referred to in Section
8.1 or 8.2, in such proportion as is appropriate to reflect the relative fault
of the Company on the one hand and the sellers of Registrable Securities on the
other hand in connection with statements or omissions which resulted in such
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) or expenses, as well as any other relevant equitable considerations.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the sellers of Registrable Securities and the
parties, relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. The Company and the
Holders agree that it would not be just and equitable if contributions pursuant
to this Section 8.4 were to be determined by pro rata allocation (even if all
Sellers of Registrable Securities were treated as one entity for such purpose)
or by any other method of allocation which does not take account of the
equitable considerations referred to in the first sentence of this Section 8.4.
The amount paid by an Indemnified Party as a result of the expenses, claims,
losses, damages or liabilities (or actions or proceedings in respect thereof)
referred to in the first sentence of this Section 8.4 shall be deemed to include
any legal or other expenses reasonably incurred by such Indemnified Party in
connection with investigating or defending any claim, action or proceeding which
is the subject of this Section 8.4. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation. The obligations of sellers of Registrable
Securities to Contribute pursuant to this Section 8.4 shall be several in
Proportion to the respective amount of Registrable Securities sold by them
pursuant to a registration statement.
ARTICLE 9
RULE 144 REPORTING
With a view to making available the benefits of certain rules and
regulations of the Commission which may at any time permit the sale of
securities of the Company to the public without registration, the Company agrees
use its best efforts to:
9.1 Make and keep public information available as those terms are
understood and defined in Rule 144 under the Securities Act (or any similar or
analogous rule promulgated under the Securities Act); and
9.2 File with the Commission in a timely manner all reports, and other
documents required of the Company under the Securities Act and the Exchange Act
and make available the benefits of Rule 144; and
9.3 So long as any Holder owns any Registrable Securities, furnish to
such Holder forthwith upon request a written statement by the Company as to its
compliance with the public information requirements of said Rule 144, the
Securities Act and the Exchange Act, a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents of the
Company as such Holder may reasonably request in availing itself of any rule or
regulation of the Commission allowing it to sell any such securities without
registration.
ARTICLE 10
TRANSFER OF REGISTRATION RIGHTS
The rights to cause the Company to register Registrable Securities granted
Holders under Articles 2, 3 and 4 hereof may be assigned in connection with any
permitted transfer or assignment of the Holder's Registrable Securities. All
transferees and assignees of the rights to cause the Company to register
Registrable Securities granted Holders under Articles 2, 3 and 4 hereof, as a
condition to the transfer of such rights, shall agree in writing to be bound by
the agreements set forth herein.
ARTICLE 11
LIMITATIONS ON REGISTRATION RIGHTS
GRANTED TO OTHER SECURITIES
The parties hereto agree that additional holders may, with the consent of
the Company and the Holders of a Supermajority of the Registrable Securities
then outstanding, be added as parties to this Agreement with respect to any or
all securities of the Company held by them; provided, however, that from and
-------- -------
after the date of this Agreement, the Company shall not without the prior
written consent of the Holders of a Supermajority of the Registrable Securities
then outstanding, enter into any agreement with any holder or prospective holder
of any securities of the Company providing for the grant to such holder of
registration rights superior to, or pari passu with, those granted herein. Any
---- -----
additional parties shall execute a counterpart of this Agreement, and upon
execution by such additional parties and by the Company, shall be considered
Holders for purposes of this Agreement, and shall be added to the Schedule of
Registration Rights Holders.
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ARTICLE 12
MISCELLANEOUS
12.1 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
---------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED ENTIRELY WITHIN
THE STATE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
12.2 WAIVER OF JURY TRIAL. EACH PARTY TO THIS AGREEMENT HEREBY WAIVES,
--------------------
TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM,
DEMAND, ACTION, OR CAUSE OF ACTION (I) ARISING UNDER THIS AGREEMENT OR (II) IN
ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES
HERETO IN RESPECT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS RELATED HERETO,
IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT,
TORT, EQUITY, OR OTHERWISE. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY AGREES
AND CONSENTS THAT ANY CLAIM, DEMAND, ACTION, OR CAUSE OF ACTION SHALL BE DECIDED
BY COURT TRIAL WITHOUT A JURY AND THAT THE PARTIES TO THIS AGREEMENT MAY FILE AN
ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO
TRIAL BY JURY.
12.3 Successors and Assigns. Except as otherwise expressly provided
------------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
12.4 Entire Agreement. This Agreement constitutes the full arid entire
----------------
understanding and agreement between the parties with regard to the subject
matter hereof. Any provision of this Agreement may be amended, waived or
modified, and this Agreement may be terminated, if, but only if, such amendment,
waiver or modification or termination is in writing and is signed by the Company
and the holders of a Supermajority of the Registrable Securities; whenever any
provision of this Agreement requires action or approval by the holders of a
specified number of Registrable Securities, such action or approval may be
evidenced by a written consent executed by the requisite holders of Registrable
Securities, without any requirement of a meeting or prior notice to the other
holders of such shares.
12.5 Notices. All notices, requests, consents, and other
-------
communications hereunder shall be in writing and shall be deemed effectively
given and received upon delivery in person, or two business days after delivery
by national overnight courier service or by telecopier transmission with
acknowledgment of transmission receipt, or five business days after deposit via
certified or registered mail, return receipt requested, in each case addressed
as follows:
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if to the Company:
Pointe Communications Corporation
1325 Northmeadow Parkway, Suite 110
Roswell, GA 30076
Attention: Stephen E. Raville
Facsimile: (707)319-2834
with a copy to (which shall not constitute notice):
Gardere & Wynne, L.L.P.
3000 Thanksgiving Tower
1601 Elm Street
Dallas, Texas 75201-4761
Attention: W. Robert Dyer, Jr.
Facsimile: (214) 999-3574
if to TSG:
TSG Capital Fund III, L.P.
177 Broad Street, 12th Floor
Stamford, CT 06901
Attention: Darryl B. Thompson
Facsimile: (203) 406-1590
with copy to (which shall not constitute notice):
Mayer, Brown & Platt
1675 Broadway
New York, NY 10019
Attention: Kathleen A. Walsh
Facsimile: (212) 262-1910
if to OCP II:
Opportunity Capital Partners II, L.P.
2201 Walnut Avenue, Suite 210
Fremont, California 94538
Attention: Lewis E. Byrd
Facsimile: (510) 494-5439
with a copy to (which shall not constitute notice):
Folger Levin & Kahn, L.L.P.
Embarcadero Center West
275 Battery Street, 23rd Floor
San Francisco, California 94111
Attention: Christopher Conner, Esq.
Facsimile: (415) 986-2827
if to OCP III:
Opportunity Capital Partners III, L.P.
2201 Walnut Avenue, Suite 210
Fremont, California 94538
Attention: Lewis E. Byrd
Facsimile: (510) 494-5439
19
<PAGE>
with a copy to (which shall not constitute notice):
Folger Levin & Kahn, L.L.P.
Embarcadero Center West
275 Battery Street, 23rd Floor
San Francisco, California 94111
Attention: Christopher Conner, Esq.
Facsimile: (415) 986-2827
or, in any such case, at such other address or addresses as shall have been
furnished in writing by such party to the others.
12.6 Severability. In case any provision of this Agreement shall be
------------
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions of this Agreement shall not in any way be affected or
impaired thereby.
12.7 Titles and Subtitles. The titles of the sections and subsections
---------------------
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
12.8 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
constitute one 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.
[SIGNATURES ON FOLLOWING PAGE]
20
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the 31st
day of December, 1999.
POINTE COMMUNICATIONS CORPORATION,
a Nevada corporation
By:_______________________________________
Name:_____________________________________
Title:______________________________________
TSG CAPITAL FUND III, L.P.,
a Delaware limited partnership
By: TSG Associates III, L.L.C.,
Its General Partner
By:___________________________
Name:_________________________
Title:__________________________
OPPORTUNITY CAPITAL PARTNERS II, L.P.,
a Delaware limited partnership
By: Thompson Capital Management, L.P.
Its General Partner
By:___________________________
Lewis E. Byrd
Partner
OPPORTUNITY CAPITAL PARTNERS III, L.P.,
a Delaware limited partnership
By: JM Capital Management, L.P.
Its General Partner
By:___________________________
Lewis E. Byrd
General Partner
21
<PAGE>
THE SECURITIES REPRESENTED BY THIS NOTE AND THE PREFERRED STOCK ISSUABLE THEREBY
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND, ACCORDINGLY, THE
----------
SECURITIES REPRESENTED BY THIS NOTE MAY NOT BE RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER, OR IN
A TRANSACTION EXEMPT FROM REGISTRATION UNDER, THE SECURITIES ACT AND IN
ACCORDANCE WITH ANY OTHER APPLICABLE SECURITIES LAWS.
TELSCAPE INTERNATIONAL, INC.
FIRST REPLACEMENT 12% CONVERTIBLE PROMISSORY NOTE
$10,000,000.00 Houston, Texas February 7, 2000
Telscape International, Inc., a Texas corporation (the "Company"), for
-------
value received, hereby promises to pay to the order of Pointe Communications
Corporation, a Nevada corporation ("Holder"), the principal sum of up to Ten
------
Million and No/100 Dollars ($10,000,000.00) or so much thereof as may be
advanced as provided herein, together with interest on the outstanding amount of
such principal sum, payable in accordance with the terms set forth below.
ARTICLE 1
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
1.1 Definitions. For all purposes of this Note, except as otherwise
-----------
expressly provided or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings assigned to
them in this Article and include the plural as well as the
singular;
(2) all accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting
principles as promulgated from time to time by the Association of
Independent Certified Public Accountants; and
(3) the words "herein," "hereof" and "hereunder" and other words of
------ ------ ---------
similar import refer to this Note as a whole and not to any
particular Article, Section, or other subdivision.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday, and Friday
-------------
that is not a day on which banking institutions in Houston, Texas, are
authorized or obligated by law or executive order to be closed.
<PAGE>
"Class C Preferred Stock" means shares of the Class C Convertible Senior
--------------------------
Preferred Stock, par value $0.001 per share, of the Company, with rights in
accordance with the Certificate of Designation attached to the Merger Agreement
as Exhibit A.
----------
"Common Stock" means the common stock of the Company, par value $0.001 per
-------------
share.
"Escrow Agreement" means that certain Escrow Agreement dated December 31,
-----------------
1999, as amended from time to time, by and among the Company, Holder and Gardere
& Wynne, L.L.P. ("Escrow Agent"), pursuant to which the unfunded portion of the
------------
proceed of this Note are being held in escrow by Escrow Agent.
"Event of Default" has the meaning specified in Section 3.1.
------------------ ------------
"First Note" means that certain Promissory Note dated November 24, 1999,
-----------
issued by the Company to Holder in the original principal amount of $1,500,000,
as modified by that certain Modification Agreement dated January 10, 2000,
increasing the principal amount to $2,500,000.
"Maturity Date," when used with respect to this Note means June 30, 2000
--------------
(or such earlier date upon which this Note is due and payable under Section
-------
3.3).
- ----
"Merger Agreement" means that certain Agreement and Plan of Merger dated
-----------------
December 31, 1999, by and among the Company, Holder, and Pointe Acquisition,
Corp., as amended from time to time.
"Note" means this First Replacement 12% Convertible Promissory Note, as
----
hereafter amended, modified, substituted, or replaced.
"Person" means any individual, corporation, entity, limited liability
------
partnership or company, partnership, joint venture, association, joint stock
company, trust, unincorporated organization, or government or any agency or
political subdivision thereof.
"Registration Rights Agreement" means that certain Registration Rights
-------------------------------
Agreement attached to the Merger Agreement as Exhibit C.
----------
"Second Note" means that certain 12% Convertible Promissory Note dated
December 31, 1999, issued by the Company to Holder in the original principal
amount of $10,000,000.
"Warrant Agreement" means that certain Warrant Agreement attached to the
------------------
Merger Agreement as Exhibit D.
----------
.
"Warrants" means warrants of the Company issuable upon conversion of the
--------
Note pursuant to Section 4.1 and evidenced by the Warrant Agreement.
------------
<PAGE>
ARTICLE 2
BALANCE, ADVANCES AND PAYMENTS
2.1 Replacement Note. This Note is given in full payment and
-----------------
replacement of the First Note and the Second Note having an aggregate principal
balance of $2,500,000 and accrued and unpaid interest of $46,500.
2.2 Balance. The sum of $2,546,500 has been advanced to pay the
-------
outstanding principal and interest due on the First Note and the Second Note.
An additional $3,200,000 is being disbursed simultaneously upon the issuance of
this Note. The unfunded principal sum of this Note is $4,253,500 as of the date
hereof.
2.3 Advances. Holder agrees to advance in installments from time to
--------
time the unfunded portion of the principal sum of this Note upon receipt from
the Company of a written request for funds itemizing the use of such requested
funds in a manner satisfactory to Holder. If Holder approves such request for
funds, Holder shall provide Escrow Agent with written instructions authorizing
the disbursement of the requested funds to the Company. Escrow Agent shall
disburse such requested funds to the Company within three Business Days after
receipt of such instructions. The Company will not use any proceeds of this
Note for purposes other than those approved by Holder in the request for funds.
In the event of termination of the Merger Agreement, Holder will have no
obligation to advance further sums to the Company, even if a portion of the
principal remains unfunded.
2.4 Interest. From the date of this Note through the Maturity Date,
--------
interest shall accrue hereunder on the unpaid outstanding principal sum of this
Note at 12% per annum, calculated on the basis of a 365 day year. Interest
shall be fully cumulative and shall be payable in kind (by issuance of shares of
stock) upon the Conversion of the Note as set forth in Article IV.
-----------
2.5 Payment of Principal and Interest. The principal and accrued and
-----------------------------------
unpaid interest of this Note shall be due and payable in full on the Maturity
Date.
2.6 No Prepayments. Subject to Holder's right to convert or the
---------------
Company's right to require the Holder to convert, the Company may not prepay
this Note in whole or in part.
2.7 Manner of Payment. Payments of principal and interest on this Note
-----------------
will be made by delivery of Company checks to Holder at its address as set forth
in this Note or by wire transfers pursuant to instructions from Holder. If the
date upon which the payment of principal or interest is required to be made
pursuant to this Note occurs other than on a Business Day, then such payment of
principal and interest shall be due and payable and made on, and shall include
unpaid interest accrued through, the next occurring Business Day following such
payment date.
Page 3
<PAGE>
ARTICLE 3
REMEDIES
3.1 Events of Default. An "Event of Default" shall be deemed to exist
------------------ ----------------
if the following occurs and is continuing:
(1) the Company defaults in the payment of the principal or interest on
this Note when such principal or interest becomes due and payable and such
default remains uncured for a period of five Business Days after written notice
thereof has been provided to the Company; or
(1) the Company defaults in the performance of any covenant made by the
Company in this Note (other than as set forth in Section 3.1(a)), and such
--------------
default remains uncured for a period of thirty (30) days after written notice
thereof has been provided to the Company; or
(2) a court of competent jurisdiction enters (i) a decree or order for
relief in respect of the Company in an involuntary case or proceeding under any
applicable federal or state bankruptcy, insolvency, reorganization or other
similar law or (ii) a decree or order adjudging the Company a bankrupt or
insolvent, or approving as properly filed a petition seeking reorganization,
arrangement, adjustment, or composition of or in respect of the Company under
any applicable federal or state law, or appointing a custodian, receiver,
liquidator, assignee, trustee, sequestrator, or other similar official of the
Company or of any substantial part of the property of the Company or ordering
the winding up or liquidation of the affairs of the Company and any such decree
or order of relief or any such other decree or order remains unstayed for a
period of ninety (90) days from its date of entry; or
(4) the Company commences a voluntary case or proceeding under any
applicable federal or state bankruptcy, insolvency, reorganization, or other
similar law or any other case or proceeding to be adjudicated a bankrupt or
insolvent, or the Company files a petition, answer or consent seeking
reorganization or relief under any applicable federal or state law, or the
Company makes an assignment for the benefit of creditors, or admits in writing
its inability to pay its debts generally as they become due; or
(3) if the Merger Agreement is terminated by either the Company or
Holder for any reason other than pursuant to Section 11.3(f) or (h) thereof and
the Company does not repay this Note within thirty (30) days after demand for
payment is made by the Holder.
3.2 Past Due Rate. Upon the occurrence and during the continuance of
---------------
an Event of Default described in Section 3.1(a), interest shall thereafter
--------------
accrue on all such past due amounts at the rate of 14% per annum calculated on
the basis of a 365 day year.
3.3 Acceleration of Maturity. Upon the occurrence and during the
--------------------------
continuance of an Event of Default, the entire principal balance and accrued but
unpaid interest thereof shall, at the option of Holder, upon written notice to
the Company, at once become due and payable.
Page 4
<PAGE>
ARTICLE 4
CONVERSION OF NOTE
4.1 Conversion Privilege and Conversion Price. At the option of the
------------------------------------------
Holder, this Note shall be convertible at any time into (i) 100,000 shares of
Class C Preferred Stock and (ii) 500,000 Warrants (plus such additional shares
equal to the accrued and unpaid interest on the Note), or the proportionate part
thereof represented by the then outstanding principal amount of the Note as a
percentage of $10,000,000.
4.2 Effect of Conversion. Upon any conversion pursuant to this Article
-------------------- -------
IV, this Note shall thereupon cease to be an obligation of the Company and shall
- --
only represent the right to receive the Class C Preferred Stock and Warrants for
all amounts unpaid on the Note.
4.3 Mechanics of Conversion. In order for the Holder of this Note to
convert the Note into Class C Preferred Stock and Warrants, such Holder shall
give the Company written notice that such Holder elects to convert the Note.
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 that 10 days thereafter, issue and deliver to the Holder a
certificate for the number of shares of Class C Preferred Stock to which such
Holder shall be entitled as aforesaid, together with a duly executed
Registration Rights Agreement and Warrant Agreement, and Warrants for the
appropriate number of shares of Common Stock of the Company. Such conversion
shall be deemed to have been made immediately prior to close of business on the
Conversion Date, and the Holder shall be regarded for all corporate purposes as
the holder of the number of shares of Class C Preferred Stock and Warrants to
which it is entitled upon the Conversion Date.
ARTICLE 5
ADJUSTMENT OF CONVERSION SHARES
5.1 Stock Dividends, Stock Splits and Reverse Splits. If the Company
--------------------------------------------------
shall at any time (a) subdivide its outstanding shares of Common Stock into a
greater number of shares or (b) declare a dividend or make any other
distribution upon any shares of the Company, payable in Common Stock, then the
number of shares of Class C Preferred Stock and Warrants shall be
proportionately increased. If the outstanding shares of Common Stock shall at
any time be combined into a smaller number of shares, the number of shares of
Class C Preferred Stock and Warrants shall be proportionately reduced.
5.2 Reorganizations and Asset Sales. If any capital reorganization or
---------------------------------
reclassification of the capital stock of the Company, or any consolidation,
merger, or share exchange of the Company with another Person, or the sale,
transfer, or other disposition of all or substantially all of its assets to
another Person shall be effected in such a way that holders of Class C Preferred
Stock and Warrants shall be entitled to receive capital stock, securities or
assets in exchange for their shares of Class C Preferred Stock and Warrants,
then, if this Note shall not have been converted into shares of Class C
Preferred Stock and Warrants prior to any such transaction, the following
provisions shall apply:
(1) As a condition of such reorganization, reclassification,
consolidation, merger, share exchange, sale, transfer, or other disposition,
lawful and adequate provisions shall be made whereby the holder of this Note
shall thereafter have the right to purchase and receive upon the terms and
conditions specified in this Note and in lieu of the shares immediately
theretofore receivable upon the exercise of the rights represented hereby, such
shares of capital stock, securities, or assets as may be issued or payable with
respect to or in exchange for a number of outstanding shares of such Class C
Preferred Stock and Warrants equal to the number of shares of Class C Preferred
Stock and Warrants immediately theretofore so receivable had such
reorganization, reclassification, consolidation, merger, share exchange, or sale
not taken place, and in any such case appropriate provision shall be made with
respect to the rights and interests of such holder to the end that the
provisions hereof (including, without limitation, provisions for adjustments of
the number of shares receivable upon the exercise) shall thereafter be
applicable, as nearly as possible, in relation to any shares of capital stock,
securities, or assets thereafter deliverable upon the exercise of this Note.
Page 5
<PAGE>
(1) In the event of a merger, share exchange, or consolidation of the
Company with or into another Person as a result of which a number of shares of
Class C Preferred stock and Warrants or their equivalent of the successor Person
greater or lesser than the number of shares of Class C Preferred Stock and
Warrants outstanding immediately prior to such merger, share exchange or
consolidation are issuable to holders of Class C Preferred Stock, then the
number of shares of Class C Preferred Stock and Warrants into which this Note is
convertible in effect immediately prior to such merger, share exchange or
consolidation shall be adjusted in the same manner as though there were a
subdivision or combination of the outstanding shares of Class C Preferred Stock
and Warrants.
5.3 De Minimis Adjustments. No adjustment in the number of shares of
------------------------
Class C Preferred Stock and Warrants purchasable hereunder shall be required
unless such adjustment would require an increase or decrease of at least one
share of Class C Preferred Stock purchasable upon conversion of the Note;
provided, however, that any adjustments which by reason of this Section 5.3 are
--- ------- -----------
not required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations shall be made to the nearest full
share, as applicable. No fractional shares of Class C Preferred Stock or scrip
shall be issued upon conversion.
5.4 Notice of Adjustment. Whenever the number of shares of Class C
----------------------
Preferred Stock and Warrants issuable upon the conversion of this Note shall be
adjusted as herein provided, or the rights of the holder hereof shall change by
reason of other events specified herein, the Company shall compute the adjusted
number of shares of Class C Preferred Stock and Warrants in accordance with the
provisions hereof and shall prepare a certificate setting forth the adjusted
number of shares of Class C Preferred Stock and Warrants or specifying the other
shares of stock, securities, or assets receivable as a result of such change in
rights, and showing in reasonable detail the facts and calculations upon which
such adjustments or other changes are based. The Company shall cause to be
mailed to the Holder copies of such certificate, together with a notice stating
that the number of shares of Class C Preferred Stock and Warrants has been
adjusted, and setting forth the adjusted number of shares of Class C Preferred
Stock and Warrants or other securities or assets purchasable upon conversion of
this Note.
Page 6
<PAGE>
5.5 Notifications to Holder. If at any time the Company proposes:
-------------------------
(1) to declare any dividend upon Class C Preferred Stock payable in
capital stock to the holders of Class C Preferred Stock;
(2) to offer for subscription pro rata to all of the holders of its
Class C Preferred Stock any additional shares of capital stock of
any class or other rights;
(3) to effect any capital reorganization, or reclassification of the
capital stock of the Company, or consolidation, merger, or share
exchange of the Company with another Person, or sale, transfer, or
other disposition of all or substantially all of its assets; or
(4) to effect a voluntary or involuntary dissolution, liquidation, or
winding up of the Company;
then, in any one or more of such cases, the Company shall, if known at the time
of such notice, give Holder (i) written notice of the date on which the books of
the Company shall close or a record shall be taken for such dividend,
distribution, or subscription rights or for determining rights to vote in
respect of any such issuance, reorganization, reclassification, consolidation,
merger, share exchange, sale, transfer, disposition, dissolution, liquidation,
or winding up, and (ii) in the case of any such issuance, reorganization,
reclassification, consolidation, merger, share exchange, sale, transfer,
disposition, dissolution, liquidation, or winding up, written notice of the date
when the same shall take place. Such notice in accordance with the foregoing
clause shall also, if known at the time of such notice, (i) specify, in the case
of any such dividend, distribution, or subscription rights, the date on which
the holders of Class C Preferred Stock shall be entitled thereto, and such
notice in accordance with the foregoing clause (ii) specify the date on which
the holders of Class C Preferred Stock shall be entitled to exchange their Class
C Preferred Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, share exchange, sale,
transfer, disposition, dissolution, liquidation, or winding up, as the case may
be.
ARTICLE 6
MISCELLANEOUS
6.1 Collection; Fees. If this Note is placed in the hands of an
-----------------
attorney for collection, and if it is collected through any legal proceedings at
law or in equity or in bankruptcy, receivership, or other court proceedings, the
Company hereby undertakes to pay all costs and expenses of collection including,
but not limited to, court costs and the reasonable attorneys' fees of Holder.
6.2 Benefits of Note. Nothing in this Note, express or implied, shall
------------------
give to any Person, other than the Company, Holder and their successors any
benefit or any legal or equitable right, remedy or claim under or in respect of
this Note.
6.3 Successors and Assigns. All covenants and agreements in this Note
------------------------
contained by or on behalf of the Company and Holder shall bind and inure to the
benefit of the respective successors and permitted assigns of the Company and
Holder.
Page 7
<PAGE>
6.4 Restrictions on Transfer. Notwithstanding anything to the contrary
-------------------------
contained herein, neither this Note, nor the rights of Holder hereunder, may be
transferred, assigned or pledged by Holder other than pursuant to written
agreement between the Company and Holder.
6.5 Notice; Address of Parties. All notices, requests, consents,
-----------------------------
directions, and other instruments and communications required or permitted to be
given under this Agreement shall be in writing and shall be deemed to have been
duly given if delivered personally, if sent by third party courier or overnight
delivery service, if mailed first-class, postage prepaid, registered or
certified mail, or if sent by telecopy, telecommunication or other similar form
of communication (with receipt confirmed), as follows:
(1) If to the Company, addressed to it as follows:
Telscape International, Inc.
2700 Post Oak Boulevard
Suite 100
Houston, Texas
Attn: Todd M. Binet
Facsimile:(713) 968-0930
with a copy (which shall not constitute notice) to:
Swidler Berlin Shereff Friedman, LLP
3000 K St., NW
Suite 300
Washington, D.C. 20007
Attn: John J. Klusaritz
Facsimile: (202) 424-7647
(2) If to Holder, addressed to it as follows:
Pointe Communications Corporation
1325 Northmeadow Parkway, Suite 110
Roswell, Georgia 30076
Attn: Patrick E. Delaney
Facsimile: (770) 319-2834
with a copy (which shall not constitute notice) to:
Gardere & Wynne, L.L.P.
1601 Elm Street, Suite 3000
Dallas, Texas 75201
Attn: W. Robert Dyer, Jr., Esq.
Facsimile: (214) 999-3574
or such other address as the Company or Holder hereto shall specify pursuant to
this Section 6.5 from time to time.
------------
6.6 Severability Clause. In case any provision in this Note shall be
--------------------
invalid, illegal, or unenforceable in any jurisdiction, the validity, legality,
and enforceability of the remaining provisions in such jurisdiction shall not in
any way be affected or impaired thereby; provided, however, such construction
-------- -------
does not destroy the essence of the bargain provided for hereunder.
Page 8
<PAGE>
6.7 Governing Law. This Note shall be governed by, and construed in
--------------
accordance with, the internal laws of the State of Texas (without regard to
principles of choice of law).
6.8 Usury. It is the intention of the parties hereto to conform
-----
strictly to the applicable laws of the State of Texas and the United States of
America, and judicial or administrative interpretations or determinations
thereof regarding the contracting for, charging and receiving of interest for
the use, forbearance, and detention of money (hereinafter referred to in this
Section 6.8 as "Applicable Law"). Holder shall have no right to claim, to
- ------------ ---------------
charge, or to receive any interest in excess of the maximum rate of interest, if
any, permitted to be charged on that portion of the amount representing
principal which is outstanding and unpaid from time to time by Applicable Law.
Determination of the rate of interest for the purpose of determining whether
this Note is usurious under Applicable Law shall be made by amortizing,
prorating, allocating, and spreading in equal parts during the period of the
actual time of this Note, all interest or other sums deemed to be interest
(hereinafter referred to in this Section 6.8 as "Interest") at any time
------------ --------
contracted for, charged, or received from the Company in connection with this
Note. Any Interest contracted for, charged or received in excess of the maximum
rate allowed by Applicable Law shall be deemed a result of a mathematical error
and a mistake. If this Note is paid in part prior to the end of the full stated
term of this Note and the Interest received for the actual period of existence
of this Note exceeds the maximum rate allowed by Applicable Law, Holder shall
credit the amount of the excess against any amount owing under this Note or, if
this Note has been paid in full, or if it has been accelerated prior to
maturity, Holder shall refund to the Company the amount of such excess, and
shall not be subject to any of the penalties provided by Applicable Law for
contracting for, charging, or receiving Interest in excess of the maximum rate
allowed by Applicable Law. Any such excess which is unpaid shall be canceled.
6.9 Stock Legends. Certificates for shares of Class C Preferred Stock,
-------------
Warrants or other securities issued upon conversion of this Note shall bear the
following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE NOT ISSUED IN A
TRANSACTION REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
("SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT
BE SOLD OR TRANSFERRED UNLESS SUCH SALE OR TRANSFER IS COVERED BY AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE
STATE SECURITIES LAWS OR, IN THE WRITTEN OPINION OF COUNSEL TO THE ISSUER,
IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND
SUCH LAWS.
Page 9
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed on the date first above written.
TELSCAPE INTERNATIONAL, INC.,
a Texas corporation
By:
Todd M. Binet, President
Page 10
<PAGE>
CERTIFICATE OF DESIGNATION OF
TELSCAPE INTERNATIONAL, INC.
Telscape International, Inc. (the "Corporation"), a corporation organized
and existing under the laws of the State of Texas, certifies that pursuant to
the authority contained in Article IV of its Articles of Incorporation, as
amended (the "Articles of Incorporation") and in accordance with the provisions
of Article 2.13 of the Texas Business Corporation Act (the "TBCA"), the Board of
Directors of the Corporation (the "Board of Directors") has adopted the
following resolution which resolution remains in full force and effect on the
date hereof.
RESOLVED, that pursuant to the authority vested in the Board of Directors
by the Articles of Incorporation, the Board of Directors does hereby designate,
create, authorize and provide for the issuance of Class C Convertible Senior
Preferred Stock (the "Class C Preferred Stock"), par value $0.001 per share
consisting of 200,000 shares, no shares of which have heretofore been issued by
the Corporation, having the following voting powers, preferences and relative,
participating, optional and other special rights, and qualifications,
limitations and restrictions thereof as follows:
Section 1. Dividends.
---------
(1) Priority of Dividends. No dividends shall be declared or set
----------------------
aside for the Common Stock or any other class or series of the Corporation's
capital stock that ranks junior to the Class C Preferred Stock (collectively,
the "Junior Stock") unless prior thereto all accumulated and unpaid dividends on
the Class C Preferred Stock shall be declared, set aside and paid. So long as
any Class C Preferred Stock remains outstanding, without the prior written
consent of the holders of a sixty-six and two-thirds percent (66 2/3%) (a
"Supermajority") of the outstanding shares of Class C Preferred Stock, the
Corporation shall not, nor shall it permit any of its subsidiaries to, redeem,
purchase or otherwise acquire directly or indirectly any Junior Stock, nor shall
the Corporation directly or indirectly pay or declare any dividend or make any
distribution upon any Junior Stock, if at the time of any such redemption,
purchase, acquisition, dividend or distribution the Corporation has failed to
pay the full amount of all accumulated and unpaid dividends on the Class C
Preferred Stock or the Corporation has failed to make any redemption of the
Class C Preferred Stock required hereunder.
(2) If the Board of Directors determines to pay dividends due and
payable pursuant to this Section 1 in cash, and in the event that funds legally
available for distribution of such dividends on any Dividend Payment Date (as
defined in paragraph (c) of this Section 1) are insufficient to fully pay the
cash dividend due and payable on such Dividend Payment Date to all holders of
outstanding Class C Preferred Stock, then all funds legally available for
distribution shall be paid in cash to holders of Class C Preferred Stock in
accordance with the number of shares of Class C Preferred Stock held by each
such holder. Any remaining dividend amount owed to holders of the Class C
Preferred Stock shall be accrued in accordance with paragraph (c) of this
Section 1. The holders of the Class C Preferred Stock shall have senior
preference and priority to the dividends of the Corporation on any Junior Stock.
<PAGE>
(3) Stock Dividend Rate; Dividend Payment Dates. Each holder of
---------------------------------------------
Class C Preferred Stock shall be entitled to receive when and as declared by the
Board, out of funds legally available therefor, cumulative dividends, in
preference and priority to dividends on any Junior Stock, that shall accrue
daily, and compound annually, on each share of the Class C Preferred Stock at
the rate of twelve percent (12%) per annum on the sum of the Liquidation Price
(as defined) thereof plus all accumulated and unpaid dividends thereon, from and
including the date on which such stock was first issued (the "Original Issue
Date") to and including the date on which such share ceases to be outstanding.
The accrued dividends will be appropriately adjusted for stock splits, stock
dividends, combinations, recapitalizations, reclassifications, mergers,
consolidations and other similar events (each, a "Recapitalization Event" and
collectively, "Recapitalization Events") which affect the number of outstanding
shares of the Class C Preferred Stock. Accrued dividends on the Class C
Preferred Stock shall be payable out of funds legally available therefor
quarterly on March 31, June 30, September 30 and December 31 of each year (each
a "Dividend Payment Date"), to the holders of record of the Class C Preferred
Stock as of the close of business on the applicable record date. Such dividends
shall accrue whether or not they have been declared and whether or not there are
profits, surplus or other funds of the Corporation legally available for the
payment of dividends, and such dividends shall be fully cumulative and shall
accrue on a daily basis based on a 365-day or 366-day year, as the case may be,
without regard to the occurrence of a Dividend Payment Date and whether or not
such dividends have been declared and whether or not there are any unrestricted
funds of the Corporation legally available for the payment of dividends. The
amount of dividends "accrued" with respect to any share of Class C Preferred
Stock as of the first Dividend Payment Date after the Original Issue Date, or as
of any other date after the Original Issue Date that is not a Dividend Payment
Date, shall be calculated on the basis of the actual number of days elapsed from
and including the Original Issue Date, in the case of the first Dividend Payment
Date and any date of determination prior to the first Dividend Payment Date, or
from and including the last preceding Dividend Payment Date, in the case of any
other date of determination, to and including such date of determination which
is to be made, in each case based on a year of 365 or 366 days, as the case may
be. Whenever the Board declares any dividend pursuant to this Section 1, notice
of the applicable record date and related Dividend Payment Date shall be given
in accordance with Section 4(k) hereof.
(4) Pro Rata Declaration and Payment of Dividends. All dividends
----------------------------------------------
paid with respect to shares of the Class C Preferred Stock pursuant to this
Section 1 shall be declared and paid pro rata to all the holders of the shares
--- ----
of Class C Preferred Stock outstanding as of the applicable record date.
-2-
<PAGE>
(5) Payment of Dividends with Additional Shares. Notwithstanding
--------------------------------------------
any other provision of this Section 1, in the sole discretion of the
Corporation's Board of Directors, any dividends accruing on the Class C
Preferred Stock may be paid in lieu of cash dividends by the issuance on the
applicable Dividend Payment Date, ratably among the holders of Class C
Preferred, of that number of additional shares of Class C Preferred Stock
(including fractional shares) ("Additional Shares") in an aggregate number equal
to (i) the aggregate amount of the dividend to be paid divided by (ii) the
Stated Value then existing as of such applicable Dividend Payment Date. If and
when any Additional Shares are issued under this Section 1(e) for the payment of
accrued dividends, such Additional Shares shall be deemed to be validly issued
and outstanding and fully-paid and nonassessable.
Section 2. Liquidation, Dissolution or Winding Up.
------------------------------------------
(1) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, any merger as a result of which
the stockholders of the Corporation do not have a majority of the voting power
of the stockholders of the surviving entity, or consolidation of the Corporation
with another entity (whether or not the Corporation is the surviving entity) or
the sale of substantially all of its assets (each such event, a "Liquidation"),
except as provided in paragraph (b) of this Section 2, the holders of shares of
Class C Preferred Stock then outstanding shall be entitled, ratably in
proportion to the number of shares of Class C Preferred Stock held by such
holders, to be paid out of the assets of the Corporation available for
distribution to its stockholders before payment to the holders of Junior Stock
by reason of their ownership thereof, an amount equal to $100.00 per share of
Class C Preferred Stock (subject to appropriate adjustment for any
Recapitalization Events) (the "Stated Value"), plus an amount equal to all
accumulated and unpaid dividends on such share of Class C Preferred Stock since
the Original Issue Date thereof as of such time of determination (collectively,
the "Liquidation Price" per share). Upon such payment, the Class C Preferred
Stock will be retired.
(2) If upon any such Liquidation the remaining assets of the
Corporation available for distribution to its shareholders shall be insufficient
to pay the holders of shares of Class C Preferred Stock the full amount to which
they shall be entitled, then the entire assets of the Corporation shall be
distributed among the holders of shares of Class C Preferred Stock, ratably in
proportion to the full amount to which such holders are entitled.
(3) After the payment of all preferential amounts required to be
paid to the holders of Class C Preferred Stock, upon a Liquidation, the holders
of shares of the Junior Stock then outstanding shall be entitled to receive the
remaining assets and funds of the Corporation available for distribution to its
shareholders.
(4) In the event of a distribution pursuant to this Section 2,
such distribution shall be paid in cash or in the event and to the extent that
cash is not available for distribution, in securities or property. Whenever
such distribution shall be in securities or property other than cash, the value
of such securities or property other than cash shall be the fair market value of
such securities or other property as determined by the Board of Directors in
good faith.
Section 3. Voting Rights.
--------------
-3-
<PAGE>
(1) Each holder of shares of Class C Preferred Stock shall be
entitled to votes equal in the aggregate to the number of votes to which the
number of whole shares of Common Stock into which such shares of Class C
Preferred Stock held by such holder are convertible would be entitled (as
adjusted from time to time pursuant to Section 4 hereof), at each meeting of the
shareholders of the Corporation (and for purposes of written actions of
shareholders in lieu of meetings) with respect to any and all matters presented
to the shareholders of the Corporation for their action or consideration, and
shall be entitled to notice of any shareholders' meeting in accordance with the
Bylaws of the Corporation. Except as otherwise provided herein or required by
law, holders of shares of Class C Preferred Stock shall vote with the holders of
shares of Common Stock and any other class of stock of the Corporation entitled
to vote and not as a separate class. Holders of shares of the Class C Preferred
Stock shall have the right to vote as a class on all matters requiring their
vote or approval under, and in the manner set forth in, the TBCA and as provided
herein. Except as otherwise provided herein, any class vote pursuant to this
Section 3 or required by law shall be determined by the holders of a
Supermajority of the shares of capital stock of such class voting as a class as
of the applicable record date.
(2) For so long as any shares of Class C Preferred Stock remain
outstanding, the Corporation shall not amend, alter or repeal or otherwise
change any provision of these Articles of Incorporation, as amended (whether by
merger, consolidation or otherwise), the resolutions of its Board authorizing
and designating the Class C Preferred Stock, or the preferences, special rights
or other powers of the Class C Preferred Stock, in each case so as to affect
adversely any of the rights, powers, preferences or privileges of the Class C
Preferred Stock, without the written consent or affirmative vote of the holders
of at least a Supermajority of the then outstanding shares of Class C Preferred
Stock, given in writing or by vote at a meeting, consenting or voting (as the
case may be) separately as a class, in person or by proxy. For this purpose,
without limiting the generality of the foregoing, amendments, alterations,
repeals or other changes to any provision of these Articles of Incorporation, as
amended (whether by merger, consolidation or otherwise), considered to affect
adversely any of the rights, powers, preferences or privileges of the Class C
Preferred Stock shall include, but are not limited to: (i) the creation,
authorization, issuance, or increase in the authorized amount of, any preferred
stock (except for increases in the authorized amount of and issuance of shares
of Class C Preferred Stock solely for the purpose of paying dividends pursuant
to Section 1(e) hereof) or any other class or series of any equity securities,
or any warrants, options or other rights convertible or exchangeable into any
class or series of any equity securities of the Corporation, having a preference
or priority over or ranking pari passu with the Class C Preferred Stock as to
---- -----
the right to receive dividends or amounts distributable upon Liquidation of the
Corporation; (ii) those that reduce the dividend rates on the Class C Preferred
Stock or cancel accumulated and unpaid dividends; (iii) those that change the
relative seniority rights of the holders of the Class C Preferred Stock as to
the payment of dividends in relation to the holders of any other capital stock
of the Corporation; or (iv) those that reduce the amount payable to the holders
of the Class C Preferred Stock upon a Liquidation or change the seniority of the
liquidation preferences of the holders of the Class C Preferred Stock relative
to the rights upon a Liquidation of the holders of any other capital stock of
the Corporation.
-4-
<PAGE>
Section 4. Conversion at the Option of a Holder.
------------------------------------------
The holders of the Class C Preferred Stock shall have conversion rights as
follows (the "Conversion Rights"):
(1) Right to Convert. Each share of Class C Preferred Stock shall
----------------
be convertible at the option of the holder thereof, at any time, into such
number of fully-paid and nonassessable shares of Common Stock as determined by
dividing the Conversion Value (as defined) by the Conversion Price (as defined)
then in effect (as appropriately adjusted in accordance with this Section 4).
No additional consideration shall be paid by a holder of Class C Preferred Stock
upon exercise of its respective Conversion Rights pursuant to this paragraph
(a).
(1) Conversion Value. The "Conversion Value" for each share
-----------------
of Class C Preferred Stock shall be the Liquidation Price per share of Class C
Preferred Stock.
(2) Conversion Price. The conversion price at which shares
-----------------
of Common Stock shall be deliverable upon conversion of Class C Preferred Stock
without the payment of additional consideration by the holder thereof shall
initially be $8.20 per share of Common Stock (the "Conversion Price"), provided,
however, that if: (a) that certain Agreement and Plan of Merger dated December
31, 1999, by and among the Corporation, Pointe Communications Corporation and
Pointe Acquisition, Corp. (as amended from time to time, the "Merger Agreement")
is terminated pursuant to Section 11.3(b) or (d) thereof, (b) an event of
default set forth in Section 3.1(a) of that certain 12% Convertible Promissory
Note issued December 31, 1999 in the original principal amount of $10,000,000
(the "Note"), occurs and is continuing, and (c) during the continuation of such
event of default, the Note is converted into, inter alia, shares of Class C
Preferred Stock ("Default Series C") the Conversion Price for Default Series C
shall be $5.00 per share of Common Stock. Such Conversion Price (and therefore
the corresponding rate at which shares of Class C Preferred Stock may be
converted into shares of Common Stock), shall be subject to adjustment as
provided in this Section 4.
----------
(2) Fractional Shares. No fractional shares of Common Stock shall
-----------------
be issued upon conversion of the Class C Preferred Stock. In lieu of any
fractional shares to which a holder of Class C Preferred Stock would otherwise
be entitled, the Corporation shall pay cash equal to such fraction multiplied by
the then effective Conversion Price.
(3) Mechanics of Conversion.
-------------------------
-5-
<PAGE>
(1) In order for a holder of Class C Preferred Stock to
convert shares of Class C Preferred Stock into shares of Common Stock, such
holder shall surrender the certificate or certificates for such shares of Class
C Preferred Stock at the office of the transfer agent for the Class C Preferred
Stock (or at the principal office of the Corporation if the Corporation serves
as its own transfer agent), together with written notice that such holder elects
to convert all or any number of the shares of Class C Preferred Stock
represented by such certificate or certificates and stating therein the name or
names in which the holder desires the certificate or certificates for shares of
the Common Stock to be issued. If required by the Corporation, certificates
surrendered for conversion shall be endorsed or accompanied by a written
instrument or instruments of transfer, in form satisfactory to the Corporation,
duly executed by the registered holder or his or its attorney duly authorized in
writing. Each date of receipt of such certificates and notice by the
transferring agent (or by the Corporation if the Corporation serves as its own
transfer agent) shall be a conversion date (each, a "Conversion Date"). The
Corporation shall, as soon as practicable after each Conversion Date and no
later than ten (10) days after the Conversion Date, (i) issue and deliver at
such office to such holder of Class C Preferred Stock, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled as aforesaid, together with cash in lieu of any fraction of a share
in accordance with paragraph (b) above, or (ii) in lieu of delivering physical
certificates representing the shares of Common Stock, provided the Corporation's
transfer agent is participating in the Depositary Trust Issuer Fast Automated
Securities Transfer ("FAST") program, upon request of the holder, the
Corporation shall use its best efforts to cause its transfer agent to
electronically transmit the shares of Common Stock issuable upon conversion of
the Class C Preferred Stock to the holder by crediting the account of the
holder's prime broker with Depositary Trust Company through its Deposit
Withdrawal Agent Commission system. Such conversion shall be deemed to have
been made immediately prior to the close of business on the applicable
Conversion Date, and the person entitled to receive certificates of Common Stock
on such date shall be regarded for all corporate purposes as the holder of the
number of shares of Common Stock to which it is entitled upon the conversion on
such Conversion Date.
(2) The Corporation shall, at all times when any of the Class
C Preferred Stock shall remain outstanding, reserve and keep available out of
its authorized but unissued stock, for the purpose of effecting the conversion
of the Class C Preferred Stock, such number of its duly authorized shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding Class C Preferred Stock.
(3) All shares of Class C Preferred Stock which shall have
been surrendered for conversion as herein provided shall no longer be deemed to
be outstanding and all rights with respect to such shares shall immediately
cease and terminate on the Conversion Date, except only the right of the holders
thereof to receive shares of Common Stock and cash in lieu of fractional shares
in exchange therefor. Any shares of Class C Preferred Stock so converted shall
be retired and canceled and shall not be reissued, and the Corporation may from
time to time take such appropriate action as may be necessary to reduce the
authorized Class C Preferred Stock, accordingly.
(4) Adjustments to Conversion Price for Diluting Issues.
---------------------------------------------------------
(1) Special Definitions. For purposes of this Section 4(d),
-------------------- -----------
the following definitions shall apply:
(1) "Option" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire Common Stock or Convertible
Securities (as defined), excluding (1) options granted to employees, officers,
directors or consultants of the Corporation or its subsidiaries or rights,
warrants, or other convertible securities which, in each case, are outstanding
as of the First Issue Date (as defined), (2) any warrants issued on the First
Issue Date or in connection with the conversion of the Note (as defined in
Section 4(a)(ii)), or (3) options granted to employees, officers, directors or
------------
consultants pursuant to stock option plans existing on the First Issue Date or
adopted by the Board of Directors and approved by the Compensation Committee of
the Board of Directors and by the holders of Class C Preferred Stock after the
First Issue Date.
(1)
-6-
<PAGE>
(2) "First Issue Date" shall mean the Original Issue
Date (as defined in Section 1(c).
(3) "Convertible Securities" shall mean any evidences of
indebtedness, shares or other securities directly or indirectly convertible into
or exchangeable for Common Stock, other than (1) securities excluded from the
definition of "Option" in subparagraph (A) of this Section 4(d)(i), or (2)
outstanding on the First Issue Date.
(4) "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued (or, pursuant to subparagraph (iii) below, deemed
to be issued) by the Corporation after the First Issue Date, other than shares
of Common Stock issued or issuable:
(1) upon the conversion of shares of Class C
Preferred Stock outstanding;
(2) as a dividend or distribution on Class C
Preferred Stock;
(3) by reason of a dividend, stock split, split-up
or other distribution on shares of the Class C Preferred Stock or Common Stock;
(4) upon the exercise of securities excluded from
the definition of "Option" in subparagraph (A) of this Section 4(d)(i) and
"Convertible Securities" under subparagraph (c) of this Section 4 (d) (i); or
(5) in connection with an acquisition or other
transaction by the Corporation, in either case approved by the holders of at
least a Supermajority of the then outstanding shares of the Class C Preferred
Stock, unless the Corporation agrees to include such issuance in the definition
of "Additional Shares of Common Stock" in connection with obtaining the approval
of the holders of at least a Supermajority of the then outstanding shares of the
Class C Preferred Stock to such acquisition or other transaction; or
(6) by reason of a dividend, stock split, split-up
or other distribution on shares of Common Stock excluded from the definition of
"Additional Shares of Common Stock" by the foregoing clauses (1), (2), (3), (4)
and (5) or this clause (6).
-7-
<PAGE>
(2) No Adjustment of Conversion Price. No adjustment in the
----------------------------------
number of shares of Common Stock into which the Class C Preferred Stock is
convertible shall be made, by adjustment in the Conversion Price thereof: (A)
unless the consideration per share (determined pursuant to subparagraph (v)
below) for an Additional Share of Common Stock issued or deemed to be issued
pursuant to subparagraph (iii) below by the Corporation is less than the
Conversion Price in effect immediately prior to, the issuance of such Additional
Share of Common Stock, or (B) if prior to such issuance, the Corporation
receives written notice from the holders of at least a Supermajority of the then
outstanding shares of Class C Preferred Stock agreeing that no such adjustment
shall be made as the result of the issuance of such Additional Shares of Common
Stock.
(3) Issue of Securities Deemed Issue of Additional Shares of
---------------------------------------------------------
Common Stock. If the Corporation at any time or from time to time after the
- -------------
First Issue Date shall issue any Options or Convertible Securities, then the
maximum number of shares of Common Stock (as set forth in the instrument
relating thereto without regard to any provision contained therein for a
subsequent adjustment of such number) issuable upon the exercise of such Options
or, in the case of Convertible Securities and Options therefor, the conversion
or exchange of such Convertible Securities, shall be deemed to be Additional
Shares of Common Stock issued as of the time of such issuance, provided that
Additional Shares of Common Stock shall not be deemed to have been issued unless
the consideration per share (determined pursuant to subparagraph (v) below) of
such Additional Shares of Common Stock would be less than the Conversion Price
in effect immediately prior to such issuance, and provided further that in any
such case in which Additional Shares of Common Stock are deemed to be issued:
(1) No further adjustment in the Conversion Price shall
be made upon the subsequent issuance of Convertible Securities or shares of
Common Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(2) If such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase in the
consideration payable to the Corporation, or decrease in the number of shares of
Common Stock issuable, upon the exercise, conversion or exchange thereof, the
conversion price computed upon the original issuance thereof, and any subsequent
adjustments based thereon, shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or decrease insofar as it
affects such Options or the rights of conversion or exchange under such
Convertible Securities;
(3) No readjustment pursuant to clause (B) above shall
have the effect of increasing the Conversion Price to an amount which exceeds
the Conversion Price on the original adjustment date; and
(4) In the event of any change in the number of shares
of Common Stock issuable upon the exercise, conversion or exchange of any Option
or Convertible Security, including, but not limited to, a change resulting from
the anti-dilution provisions thereof, the Conversion Price then in effect shall
forthwith be readjusted to such Conversion Price as would have obtained had the
adjustment which was made upon the issuance of any such Option or Convertible
Security which had not been exercised or converted prior to such change been
made upon the basis of such change in the number of shares of Common Stock, but
no further adjustment shall be made for the actual issuance of Common Stock upon
the exercise or conversion of any such Option or Convertible Security.
-8-
<PAGE>
(5) Upon the expiration of any such Options or any
rights of conversion or exchange under such Convertible Securities which shall
not have been exercised, the Conversion Price computed upon the original issue
date thereof, and any subsequent adjustments based thereon, shall, upon such
expiration, be recomputed as if:
(1) in the case of Convertible Securities or
Options for Common Stock, the only Additional Shares of Common Stock issued were
the shares of Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities and the
consideration received therefor was the consideration actually received by the
Company upon such exercise; or for the issue of all such Convertible Securities
which were actually converted or exchanged, plus the additional consideration,
if any, actually received by the Company upon such conversion or exchange; and
(2) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issue of such Options, and the
consideration received by the Company for the Additional Shares of Common Stock
deemed to have been then issued was the consideration actually received by the
Company for the issue of all such Options, whether or not exercised, plus the
consideration deemed to have been received by the Company upon the issue of the
Convertible Securities with respect to which such Options were actually
exercised.
(4) Adjustment of Conversion Price Upon Issuance of
-----------------------------------------------------
Additional Shares of Common Stock. In the event the Corporation shall at any
- ------------------------------------
time after the First Issue Date issue Additional Shares of Common Stock
(including Additional Shares of Common Stock deemed to be issued pursuant to
subparagraph (iii) above, but excluding shares issued as a dividend or
distribution as provided in paragraph (f) below or upon a stock split or
combination as provided in paragraph (e) below), for a consideration per share
(determined pursuant to subparagraph (v) below) less than the Conversion Price
in effect immediately prior to such issuance, then and in each such case, such
Conversion Price shall be reduced, concurrently with such issuance, to a
Conversion Price equal to the price determined by dividing (a) the sum of (1)
the product derived by multiplying the Conversion Price in effect immediately
prior to such issuance by the number of shares of Common Stock outstanding
immediately prior to such issuance (together with the number of shares of Common
Stock then issuable upon conversion of the outstanding shares of Class C
Preferred Stock and the conversion or exercise of any Convertible Securities or
Options (including for this purpose any securities of the Corporation which
would be excluded from the definitions of Options and Convertible Securities
pursuant to Sections 4(d)(i)(A) and (C))), plus (2) the aggregate consideration
---------------------------
received by the Corporation (as determined pursuant to subparagraph (v) below)
upon such issuance, by (b) the number of shares of Common Stock outstanding
immediately after such issuance (together with the number of shares of Common
Stock then issuable upon conversion of the outstanding shares of Class C
Preferred Stock and the conversion or exercise of any Convertible Securities or
Options (including for this purpose any securities of the Corporation which
would be excluded from the definitions of Options and Convertible Securities
pursuant to Sections 4(d)(i)(A) and (C))).
------------------------------
-9-
<PAGE>
No adjustment of the Conversion Price, however, shall be made in
an amount less than $.01 per share, and any such lesser adjustment shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment which together with any adjustments so carried forward
shall amount to $.01 per share or more. Any adjustments to the Conversion Price
shall be rounded to the nearest $.01 per share.
(5) Determination of Consideration. For purposes of this
--------------------------------
Section 4(d), the consideration received by the Corporation for the issuance of
any Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property. Such consideration shall:
-------------------
(1) insofar as it consists of cash, be computed at
the aggregate of cash received by the Corporation, excluding amounts paid or
payable for accrued interest or accrued dividends;
(2) insofar as it consists of property other than
cash, be computed at the fair market value thereof at the time of such issuance,
as is reasonably determined in good faith by the Board of Directors; and
(3) in the event Additional Shares of Common Stock
are issued together with other shares of securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (1) and (2) above, as
is reasonably determined in good faith by the Board of Directors.
(2) Options and Convertible Securities. The
-------------------------------------
consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to subparagraph (iii) above,
relating to Options and Convertible Securities, shall be determined by dividing:
(1) the total amount, if any, received or
receivable by the Corporation as consideration for the issuance of such Options
or Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
consideration) payable to the Corporation upon the exercise of such Options or
the conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities, by
(2) the maximum number of shares of Common Stock
(as set forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such number) issuable
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
-10-
<PAGE>
(5) Adjustment for Stock Splits and Combinations. If the
-------------------------------------------------
Corporation shall at any time or from time to time after the First Issue Date
effect a subdivision of the outstanding Common Stock, the Conversion Price then
in effect immediately before that subdivision shall be proportionately decreased
and the number of shares of Common Stock issuable upon the conversion of the
Class C Preferred Stock shall be proportionately increased. If the Corporation
shall at any time or from time to time after the First Issue Date combine the
outstanding shares of Common Stock, the Conversion Price then in effect
immediately before the combination shall be proportionately increased and the
number of shares of Common Stock issuable upon the conversion of the Class C
Preferred Stock shall be proportionately decreased. Any adjustment under this
paragraph shall become effective at the close of business on the date the
subdivision or combination becomes effective.
(6) Adjustment for Certain Dividends and Distributions. In the
------------------------------------------------------
event the Corporation at any time, or from time to time after the First Issue
Date, shall make or issue a dividend or other distribution payable in additional
shares of Common Stock, then and in each such event the Conversion Price then in
effect shall be decreased as of the time of such issuance, by multiplying the
Conversion Price then in effect by a fraction:
(1) the numerator of which shall be the total number of
shares of Common Stock issued and outstanding immediately prior to the time of
such issuance or the close of business on such record date, and
(2) the denominator of which shall be the total number
of shares of Common Stock issued and outstanding immediately prior to the time
of such issuance or the close of business on such record date plus the number of
shares of Common Stock issuable in payment of such dividend or distribution;
provided, however, if such record date shall have been fixed and such dividend
is not fully paid or if such distribution is not fully made on the date fixed
therefor, the Conversion Price shall be recomputed accordingly as of the close
of business on such record date and thereafter the Conversion Price shall be
adjusted pursuant to this paragraph as of the time of actual payment of such
dividends or distributions.
(7) Adjustments for Other Dividends and Distributions. In the event the
-------------------------------------------------
Corporation at any time or from time to time after the First Issue Date shall
make or issue a dividend or other distribution payable in securities of the
Corporation other than shares of Common Stock, then and in each such event
provision shall be made so that the holders of the Class C Preferred Stock shall
receive upon conversion thereof in addition to the number of shares of Common
Stock receivable thereupon, the amount of securities of the Corporation that
they would have received had their Class C Preferred Stock been converted into
Common Stock on the date of such event and had thereafter, during the period
from the date of such event to and including the conversion date, retained such
securities receivable by them as aforesaid during such period giving application
to all adjustments called for during such period under this paragraph with
respect to the rights of the holders of the Class C Preferred Stock.
-11-
<PAGE>
(8) Adjustment for Reclassification, Exchange, or Substitution.
-------------------------------------------------------------
If the Common Stock issuable upon the conversion of the Class C Preferred Stock
shall be changed into the same or a different number of shares of any class or
classes of stock, whether by capital reorganization, reclassification or
otherwise (other than a subdivision or combination of shares or stock dividend
provided for above, or a reorganization, merger, consolidation, or sale of
assets provided for below), then and in each such event the holder of each such
share of Class C Preferred Stock shall have the right thereafter to convert such
share into the kind and amount of shares of stock and other securities and
property receivable upon such reorganization, reclassification, or other change,
by holders of the number of shares of Common Stock into which such shares of
Class C Preferred Stock might have been converted immediately prior to such
reorganization, reclassification, or change, all subject to further adjustment
as provided herein.
(9) Adjustment for Merger or Reorganization. In case of any
-------------------------------------------
consolidation or merger of the Corporation with or into another corporation,
each share of Class C Preferred Stock shall thereafter be convertible into the
kind and amount of shares of stock or other securities or property to which a
holder of the number of shares of Common Stock of the Corporation deliverable
upon conversion of such Class C Preferred Stock would have been entitled if it
had converted its shares immediately prior to such consolidation or merger; and,
in such case, appropriate adjustment (as determined in good faith by the Board
of Directors) shall be made in the application of the provisions in this Section
4 set forth with respect to the rights and interest thereafter of the holders of
the Class C Preferred Stock, to the end that the provisions set forth in this
Section 4 (including provisions with respect to changes in and other adjustments
of the Conversion Price) shall thereafter be applicable, as nearly as reasonably
may be practicable, in relation to any shares of stock or other property
thereafter deliverable upon the conversion of the Class C Preferred Stock.
(10) No Impairment. The Corporation will not, by amendment of
--------------
these Articles of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation, but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 4 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Class C Preferred Stock.
(11) Notice of Record Date. In the event:
------------------------
(1) that the Corporation shall propose to declare a dividend
(or any other distribution) on its Common Stock, whether payable in cash,
property, Common Stock or other securities of the Corporation, whether or not a
regular cash dividend and whether or not out of earnings or earned surplus;
(2) that the Corporation shall propose to subdivide or
combine its outstanding shares of Common Stock;
(3) that the Corporation shall propose to effect any
reclassification or recapitalization of the Common Stock of the Corporation
outstanding (other than a subdivision or combination of its outstanding shares
of Common Stock or a stock dividend or stock distribution thereon), or any
consolidation or merger of the Corporation into or with another corporation; or
-12-
<PAGE>
(4) that the Corporation shall propose to effect the
Liquidation of the Corporation;
then in connection with each such event, the Corporation shall cause to be filed
at its principal office or at the office of the transfer agent of the Class C
Preferred Stock and shall cause to be mailed to each of the holders of the Class
C Preferred Stock at their last addresses as shown on the records of the
Corporation or such transfer agent, at least ten (10) days prior to the record
date specified in (A) below or at least twenty (20) days before the date
specified in (B) below, a notice stating:
(1) the record date of such dividend, distribution,
subdivision or combination, or, if a record is not to be taken, the date as of
which the holders of Common Stock of record to be entitled to such dividend,
distribution, subdivision or combination are to be determined, or
(2) the date on which such reclassification,
consolidation, merger, or Liquidation is expected to become effective, and the
date as of which it is expected that holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reclassification, consolidation, merger, or
Liquidation.
(12) Certificate as to Adjustments. Upon the occurrence of each
-------------------------------
adjustment or readjustment pursuant to this Section 4, the Corporation at its
expense shall promptly compute such adjustment or readjustment in accordance
with the terms hereof and furnish to each holder of Class C Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Corporation
shall, upon the written request at any time of any holder of Class C Preferred
Stock furnish or cause to be furnished to such holder a similar certificate
setting forth (i) such adjustments and readjustments; (ii) the Conversion Price
then in effect; and (iii) the number of shares of Common Stock and the amount,
if any, of other property which then would be received upon the conversion of
Class C Preferred Stock.
-13-
<PAGE>
(13) Stock to be Reserved. The Corporation will at all times
-----------------------
reserve and keep available out of its authorized Common Stock, solely for the
purpose of issuance upon the conversion of Class C Preferred Stock as herein
provided, such number of shares of Common Stock as shall then be issuable upon
the conversion of all outstanding shares of Class C Preferred Stock. The
Corporation covenants that all shares of Common Stock which shall be so issued
shall be duly and validly issued and fully-paid and nonassessable and free from
all taxes, liens and charges with respect to the issue thereof, and, without
limiting the generality of the foregoing, the Corporation covenants that it will
from time to time take all such action as may be requisite to assure that the
par value per share of the Common Stock is at all times equal to or less than
the Conversion Price in effect at the time. The Corporation will take all such
action as may be necessary to assure that all such shares of Common Stock may be
so issued without violation of any applicable law or regulation, or of any
requirement of any national securities exchange or market upon which the Common
Stock may be listed. The Corporation will not take any action which results in
any adjustment of the Conversion Price if the total number of shares of Common
Stock issued and issuable after such action upon conversion of the Class C
Preferred Stock would exceed the total number of shares of Common Stock then
authorized by these Articles of Incorporation, as amended.
(14) Issue Tax. The issuance of certificates for shares of Common
---------
Stock upon conversion of the Class C Preferred Stock, shall be made without
charge to the holders thereof for any issuance tax in respect thereof, provided
that the Corporation shall not be required to pay any tax which may be payable
in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the holder of the Class C Preferred
Stock which is being converted.
Section 5. Mandatory Conversion.
---------------------
(1) The Corporation may require the conversion of all of the
outstanding Class C Preferred Stock (i) in conjunction with a Qualified Offering
(as defined) or (ii) at any time after the first year anniversary of the First
Issue Date if: (1) the 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) 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 $15.00 (subject to appropriate adjustment for Recapitalization
Events); and (3) the cumulative average daily trading volume of the 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 (as defined) and listed on each securities exchange,
over-the-counter market or on the NASDAQ National Market on which similar
securities issued by the Corporation are then listed. "Registered" shall refer
to a registration effected by preparing and filing with the Securities and
Exchange Commission (the "Commission") a registration statement in compliance
with the Securities Act of 1933, as amended, and the declaration or ordering by
the Commission of the effectiveness of such registration statement. A mandatory
conversion pursuant to a Qualified Offering shall only be effected at the time
of and subject to the closing of the Qualified Offering and upon written notice
of such mandatory conver-sion delivered to all holders of Class C Preferred
Stock at least seven (7) days prior to such closing. The Corporation shall
deliver written notice of a mandatory conversion pursuant to clause (ii) of this
paragraph (a) to all holders of Class C Preferred Stock at least seven (7) days
prior to such conversion. For purposes of this paragraph (a), the term
"Qualified Offering" shall mean the sale by the Corporation of its 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 to the Corporation not less
than $30,000,000.
In addition, the Class C Preferred Stock shall automatically convert,
based upon the Conversion Price of $8.20 per share of Common Stock as set forth
in Section 4(a)(ii) above, if issued upon conversion of the Note pursuant to
Section 11.3(b) of the Merger Agreement prior to any event of default under the
Note.
-14-
<PAGE>
(2) On the date fixed for conversion, all rights with respect to
the Class C Preferred Stock so converted will terminate upon conversion. If so
required by the Corporation, certificates surrendered for conversion shall be
endorsed or accompanied by written instrument or instruments of transfer, in
form satisfactory to the Corporation, duly executed by the registered holder or
by his or its attorney duly authorized in writing. As soon as practicable after
the date of such conversion and the surrender of the certificate or certificates
for Class C Preferred Stock, the Corporation shall cause to be issued and
delivered to such holder, or on his or its written order, a certificate or
certificates for the number of full shares of Common Stock issuable on such
conversion in accordance with the provisions hereof and cash as provided in
Section 4(c) in respect of any fraction of a share of Common Stock otherwise
issuable upon such conversion.
(3) All certificates evidencing shares of Class C Preferred Stock
which are required to be surrendered for conversion in accordance with the
provisions hereof shall, from and after the date such certificates are so
required to be surrendered, be deemed to have been retired and canceled and the
shares of Class C Preferred Stock represented thereby converted into Common
Stock for all purposes as of the date of conversion set forth in paragraph (a)
above, notwithstanding the failure of the holder or holders thereof to surrender
such certificates.
Section 6. Events of Noncompliance.
-------------------------
(1) Definition. An Event of Noncompliance shall have occurred if:
----------
(1) the Corporation fails to pay on any Dividend Payment Date
the full amount of dividends then accrued on the Class C Preferred Stock,
whether or not such payments are legally permissible or are prohibited by any
agreement to which the Corporation is subject;
(2) the Corporation fails to exchange the Class C Preferred
Stock as required hereunder, whether or not such redemption is legally
permissible or is prohibited by any agreement to which the Corporation is
subject;
(3) subject to subparagraph (iv) below, the Corporation
breaches any provision of that certain Registration Rights Agreement dated as of
December 31, 1999, by and between the Corporation and Pointe Communications
Corporation (the "Registration Rights Agreement") and fails to cure such breach
within 45 days of notice thereof (in which case, the Event of Noncompliance
shall be deemed to have occurred on the original date of such breach); or
(4) the Corporation breaches Section 2.1(a) of the
Registration Rights Agreement.
(2) Consequences of Events of Noncompliance.
-------------------------------------------
-15-
<PAGE>
(1) If an Event of Noncompliance has occurred, (1) the
dividend rate on the Class C Preferred Stock set forth in Section 1(a) shall be
deemed to increase immediately by an increment of twelve (12) percentage points
and (2) all dividends on the Class C Preferred Stock thereafter shall be paid by
the issuance of Additional Shares as set forth in Section 1(e). Any increase of
the dividend rate resulting from the operation of this subparagraph shall
terminate as of the close of business on the date on which no Event of
Noncompliance exists.
(2) If any Event of Noncompliance of the type described in
subparagraph 6(a)(i) has occurred, for each such occurrence of the failure to
pay on any Dividend Payment Date the full amount of dividends then accrued on
the Class C Preferred, whether or not such payments are legally permissible or
are prohibited by any agreement to which the Corporation is subject, the
Conver-sion Price shall be reduced immediately by fifty percent (50%) from the
Conversion Price in effect immediately prior to such adjustment. In no event
shall any Conversion Price adjustment be rescinded.
(3) If any Event of Noncompliance exists, each holder of
Class C Preferred Stock shall also have any other rights which such holder is
entitled to under the Securities Purchase Agreement or any other contract or
agreement with such holder at any time and any other rights which such holder
may have pursuant to applicable law.
Section 7. Transfer. Prior to termination of the Merger
--------
Agreement, or consummation of the transactions provided for therein, a holder of
Class C Preferred Stock shall not transfer such shares without the prior written
consent of the Corporation.
The foregoing was duly adopted by the Board of Directors as of December 22,
1999, pursuant to the provisions of the Texas Business Corporation Act.
The foregoing resolution was duly adopted by all necessary action on the
part of the corporation.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designations to be signed by the undersigned as of January 19, 2000.
TELSCAPE INTERNATIONAL, INC.
By:_____________________________
Name:___________________________
Title: ________________________
-16-
<PAGE>
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
- -------------------------------------------------------- -----------------------------
<S> <C>
TOPS Corporation Nevada
Overlook Communications International Corporation North Carolina
WorldLink Communications, Inc. Georgia
Phoenix DataNet, Inc. Texas
Phoenix Data Systems, Inc. Texas
Telecommute Solutions, Inc. Texas
International Digital Telecommunications Systems, Inc. Florida
Pointe Communications Corporation Delaware
Pointecom, Inc. Delaware
Galatel, Inc. Georgia
Rent-A-Line Telephone Company, LLC Georgia
Charter Comunicaciones Internacionales Grupo, S.A. Panama
Phoenix Datanet de Panama S.A. Panama
Charter Communications International de Venezuela, S.A. Venezuela
U.S. Charter de Mexico, S.A. Mexico
C-Com Comunicaciones Internacionales de Costa Rica, S.A. Costa Rica
Charter Comunicaciones de El Salvador, S.A. El Salvador
Charter Comunicaciones Internacionales, S.A. de C.V. Honduras
Charter Comunicaciones de Nicaragua, S.A. Nicaragua
HTC Communications, LLC California
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion of our
reports dated April 14, 2000 included in Pointe Communications Corporation's
Annual Report on Form 10-K for the year ending December 31, 1999 as well as the
incorporation by reference of such reports into the Company's previously filed
Registration Statement File Nos. 333-61061, 333-84927, and 333-61037.
Atlanta, Georgia
April 14, 2000
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
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