SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported):
June 2, 2000
TELSCAPE INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
TEXAS
(State or Other Jurisdiction of Incorporation)
0-24622 75-2433637
(Commission File Number) (IRS Employer Identification Number)
1325 Northmeadow Parkway, Roswell, Georgia 30076
(Address of Principal Executive Offices and Zip Code)
(770) 432-6800
(Registrant's Telephone Number, Including Area Code)
2700 Post Oak Boulevard, Suite 1000, Houston, Texas 77056
(Former Address)
<PAGE>
Item 1. Change in Control.
On June 2, 2000, Telscape International, Inc. ("Telscape") completed its
merger with Pointe Communications Corporation ("Pointe") pursuant to the Amended
and Restated Agreement and Plan of Merger dated December 31, 1999, by and among
Telscape, Pointe Acquisition Corp., a wholly owned subsidiary of Telscape
("Acquisition"), and Pointe. As a result of the merger, Acquisition merged with
and into Pointe with Pointe surviving the merger to become a wholly owned
subsidiary of Telscape.
Upon the consummation of the merger, each share of Pointe common stock,
$.00001 par value, converted into the right to receive 0.223514 of a share of
Telscape common stock, $.001 par value. Additionally, upon the consummation of
the merger, each share of Pointe preferred stock, $.00001 par value, converted
into the right to receive one share of substantially identical Telscape
preferred stock, $.001 par value. Any holder of other Pointe derivative
securities has the right to exercise such securities for shares of Telscape
common stock based on the above described exchange ratio. Telscape will not
issue fractional shares in the merger but will pay cash in lieu of fractional
shares based on a price per share of Telscape common stock of $9.337.
In the merger, as described above, Telscape will issue shares of its newly
designated Class D Convertible Senior Preferred Stock and Class E Convertible
Senior Preferred Stock which will have substantially identical rights and
preferences to Pointe's Class A Cumulative Convertible Preferred Stock and Class
B Cumulative Convertible Preferred Stock, respectively. The new Class D
preferred stock and Class E preferred stock both pay quarterly dividends at a
rate of 12% per year, which may be paid in additional shares of Class D or Class
E preferred stock, respectively. Each preferred shareholder has the right to
receive notice of any meeting of Telscape's shareholders and the right to vote
the number of shares of Telscape common stock into which the preferred shares
are convertible. Holders of Class D preferred stock may convert each share of
Class D preferred stock into 479 shares of Telscape common stock. Holders of
Class E preferred stock may convert each share of Class D preferred stock into
383 shares of Telscape common stock.
As a result of the merger, the former Pointe shareholders hold
approximately 60% of the voting power of Telscape.
Item 2. Acquisition or Disposition of Assets.
In the merger, Telscape has acquired Pointe as a subsidiary. Management of
Telscape negotiated the exchange ratio of 0.223514 based on the relative values
of the assets of both Telscape and Pointe, the values of the outstanding
securities of both Telscape and Pointe, and the potential for growth in revenues
of both Telscape and Pointe.
Pointe's business is similar to Telscape's in that its business strategy is
to provide communications services between Latin America and Hispanic
communities in the United States. Pointe recently developed a licensed
competitive local exchange carrier which allows the combined entity to originate
and terminate local and long distance calls. Additionally, Pointe holds licenses
in the United States and in several Latin American countries, including
<PAGE>
Costa Rica, El Salvador, Mexico, Nicaragua, Panama, and Venezuela, which allow
it to provide telecommunications, radio, Internet and satellite services between
the United States and the Latin American country. A large percentage of
Pointe's revenues comes from its prepaid calling card services which will add to
Telscape's current revenue stream from prepaid calling services and a wider
distribution chain.
Item 7. Financial Statements and Exhibits.
(a) Financial statements of business acquired (Pointe Communications
Corporation).
Report of Independent Public Accountants F-1
Pointe Consolidated Balance Sheets as of December 31, 1998 and 1999 F-2
Pointe Consolidated Statement of Operations for the Years Ended December
31, 1997, 1998 and 1999 F-4
Pointe Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1997, 1998 and 1999 F-5
Pointe Consolidated Statements of Cash Flows for the Years Ended December
31, 1997, 1998 and 1999 F-9
Note to Consolidated Financial Statements F-11
Pointe Consolidated Balance Sheets as of March 31, 2000, (Unaudited) and
December 31, 1999 (Audited) F-29
Pointe Consolidated Statement of Operations For the Three Months Ended
March 31, 2000 (Unaudited) and 1999 (Unaudited) F-31
Pointe Consolidated Statements of Cash Flows For the Three Months Ended
March 31, 2000 (Unaudited) and 1999 (Unaudited) F-32
Notes to the Condensed Financial Statements F-33
(b) Pro forma financial information.
Unaudited Pro Forma Condensed Consolidated Financial Statements F-36
Unaudited Pro Form Condensed Consolidated Balance Sheet as of
March 31, 2000 F-37
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Three Months Ended March 31, 2000 F-38
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Year Ended December 31, 1999 F-39
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements F-40
(c) Exhibits.
Exhibit No. Descriptions
2.1 Amended and Restated Agreement and Plan of Merger dated
December 31, 1999 (Incorporated herein by this reference
to Exhibit 2.1 of Telscape's Annual Report on Form 10-K
for the year ended December 31, 1999)
<PAGE>
*4.1 Certificate of Designation of Preferences, Rights, and
Privileges of Class D Convertible Senior Preferred Stock
*4.2 Certificate of Designation of Preferences, Rights, and
Privileges of Class E Convertible Senior Preferred Stock
*23.1 Consent of Arthur Andersen LLP
_________________
* Filed Herewith
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TELSCAPE INTERNATIONAL, INC.
(Registrant)
Date: June 15, 2000 By: /s/ Stephen E. Raville
----------------------------
Stephen E. Raville
Chief Executive Officer
<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>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1999
DECEMBER 31, DECEMBER 31,
1998 1999
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents............ $ 1,255,199 $ 21,219,684
Restricted cash...................... 185,000 542,913
Accounts receivable, net of allowance
for doubtful accounts of $900,000
and $1,508,458 in 1998 and 1999,
respectively....................... 3,686,153 3,639,378
Notes receivable, net................ 215,337 2,270,750
Inventory, net....................... 652,187 1,742,543
Prepaid expenses and other........... 263,249 629,787
------------- -------------
Total current assets....... 6,257,125 30,045,055
------------- -------------
PROPERTY AND EQUIPMENT, at cost:
Equipment and machinery.............. 11,157,928 23,360,356
Earth station facility............... 835,527 1,471,822
Software............................. 1,732,700 2,016,576
Furniture and fixtures............... 578,698 1,257,666
Other................................ 1,157,344 1,586,359
Construction in progress............. 3,010,500 1,452,303
------------- -------------
18,472,697 31,145,082
Accumulated depreciation and
amortization....................... (3,984,392) (6,827,740)
------------- -------------
Property and equipment,
net........................ 14,488,305 24,317,342
------------- -------------
OTHER ASSETS:
Goodwill, net of accumulated
amortization of $1,544,360 and
$2,190,266 in 1998 and 1999,
respectively....................... 17,709,865 17,237,653
Acquired customer bases, net of
accumulated amortization of
$969,182 and $1,131,507 in 1998 and
1999, respectively................. 844,543 890,271
Other intangibles, net of accumulated
amortization of $1,184,062 and
$1,946,521 in 1998 and 1999,
respectively....................... 1,848,762 1,723,225
Other................................ 1,073,279 2,676,217
------------- -------------
Total other assets......... 21,476,449 22,527,366
------------- -------------
TOTAL ASSETS............... $ 42,221,879 $ 76,889,763
============= =============
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Balance Sheets.
F-2
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1999
DECEMBER 31, DECEMBER 31,
1998 1999
------------- -------------
CURRENT LIABILITIES:
Current portion of notes payable..... $ 5,398,062 $ 2,795,256
Current portion of lease
obligations........................ 1,273,298 3,242,776
Accounts payable..................... 6,282,952 6,233,914
Accrued liabilities.................. 2,346,622 6,132,570
Unearned revenue..................... 2,928,990 1,514,329
------------- -------------
Total current
liabilities........................ 18,229,924 19,918,845
------------- -------------
LONG-TERM LIABILITIES:
Capital and financing lease
obligations........................ 7,128,451 10,367,260
Convertible debentures............... 1,180,000 900,000
Senior subordinated notes............ 690,278 --
Notes payable and other long-term
obligations........................ 626,022 866,974
------------- -------------
Total long-term
liabilities........................ 9,624,751 12,134,234
------------- -------------
MINORITY INTEREST.................... 1,981,959 2,014,959
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value;
100,000 shares authorized, 0 and
18,121 shares issued and
outstanding in 1998 and 1999,
respectively....................... -- 181
Common stock, $0.00001 par value;
100,000,000 shares authorized;
45,339,839 and 51,694,189 shares
issued and outstanding in 1998 and
1999, respectively................. 454 517
Additional paid-in-capital........... 43,137,654 136,370,654
Accumulated deficit.................. (30,752,863) (93,549,626)
------------- -------------
Total stockholders'
equity..................... 12,385,245 42,821,726
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................... $ 42,221,879 $ 76,889,763
============= =============
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Balance Sheets.
F-3
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
--------------- -------------- ---------------
<S> <C> <C> <C>
Revenues:
Communications services and
products...................... $ 10,203,787 $ 24,784,756 $ 49,808,827
Internet connection services.... 2,747,635 2,835,446 2,116,093
--------------- -------------- ---------------
Total revenues.................. 12,951,422 27,620,202 51,924,920
--------------- -------------- ---------------
Costs and Expenses:
Cost of services and products... 9,765,856 23,246,432 50,129,620
Selling, general, and
administrative expenses....... 8,766,282 9,933,265 19,274,799
Nonrecurring charge............. 2,677,099 -- --
Depreciation and amortization... 2,995,334 3,451,982 4,477,292
--------------- -------------- ---------------
Total costs and expenses........ 24,204,571 36,631,679 73,881,711
--------------- -------------- ---------------
Operating Loss....................... (11,253,149) (9,011,477) (21,956,791)
--------------- -------------- ---------------
Interest Expense, net................ (480,924) (1,760,315) (15,998,840)
Other (Expense) Income............... (241,785) 1,624,310 (335,225)
--------------- -------------- ---------------
Net Loss Before Income Taxes......... (11,975,858) (9,147,482) (38,290,855)
Income Tax Benefit................... -- -- --
Net Loss............................. $ (11,975,858) $ (9,147,482) $ (38,290,855)
=============== ============== ===============
NET LOSS PER SHARE --
Basic and Diluted (Note 2)......... $ (0.39) $ (0.22) $ (1.36)
=============== ============== ===============
Shares Used In Computing Net Loss Per
Share.............................. 31,084,693 42,143,733 46,204,130
=============== ============== ===============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Statements.
F-4
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------ --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- ------ ------------ ------ -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996......... -- $-- 24,202,779 $ 242 $28,302,025
Issuance of common stock ($1.00 per
share) (Note 7).................... -- -- 9,283,997 93 9,203,844
Retirement of shares in conjunction
with a contribution agreement
executed by certain members of
management......................... -- -- (2,500,000) (25) (3,538,698)
Issuance of common stock in
conjunction with conversion of
debenture, net ($.50 per share)
(Note 7)........................... -- -- 2,200,000 22 999,978
Issuance of common stock in
conjunction with the acquisition of
communications operating
licenses........................... -- -- 400,000 4 399,996
Issuance of common stock in
conjunction with financing lease
transaction (Note 4)............... -- -- 450,000 5 449,995
Issuance of common stock in
conjunction with debt issuance..... -- -- 98,000 -- 98,000
Issuance of common stock warrants in
conjunction with operating lease
($0.34 per warrant)................ -- -- -- -- 66,300
Net loss............................. -- -- -- -- --
-------- ------ ------------ ------ -----------
Balance at December 31, 1997......... -- -- 34,134,776 341 35,981,440
Issuance of common stock ($.50 per
share) (Note 7).................... -- -- 9,500,000 95 4,499,905
Issuance of common stock ($1.00 per
share) (Note 7).................... -- -- 850,000 9 849,991
Issuance of common stock warrants in
conjunction with promissory note
($0.21 per warrant) (Note 4)....... -- -- -- -- 114,069
Issuance of common stock in
conjunction with a merger ($0.90
per share) (Note 3)................ -- -- 206,250 2 186,761
Issuance of common stock ($1.30 per
share) (Note 7).................... -- -- 500,000 5 649,995
Issuance of common stock warrants in
conjunction with a merger ($0.49
per warrant) (Note 3).............. -- -- -- -- 289,100
Exercise of warrants ($0.70 per
share)............................. -- -- 10,354 -- 7,248
Exercise of warrants ($0.70 per
share)............................. -- -- 20,709 1 14,496
Exercise of stock options ($1.00 per
share)............................. -- -- 117,750 1 117,749
Issuance of common stock rights in
conjunction with a merger ($0.44
per warrant) (Note 3).............. -- -- -- -- 272,500
Issuance of common stock warrants in
conjunction with promissory note
($0.18 per warrant) (Note 4)....... -- -- -- -- 68,400
Issuance of common stock warrants in
conjunction with promissory note
($0.16 per warrant) (Note 4)....... -- -- -- -- 60,800
Issuance of common stock warrants in
conjunction with promissory note
($0.21 per warrant) (Note 4)....... -- -- -- -- 25,200
Net Loss............................. -- -- -- -- --
-------- ------ ------------ ------ -----------
Balance at December 31, 1998......... -- -- 45,339,839 454 43,137,654
Issuance of common stock warrants in
conjunction with promissory note
($0.18 per warrant) (Note 4)....... -- -- -- -- 129,200
Issuance of common stock warrants in
conjunction with promissory note
($0.25 per warrant) (Note 4)....... -- -- -- -- 190,000
Issuance of common stock warrants in
conjunction with promissory note
($0.08 per warrant) (Note 4)....... -- -- -- -- 391,950
Issuance of common stock warrants in
conjunction with promissory note
($0.49 per warrant) (Note 4)....... -- -- -- -- 98,751
F-5
<PAGE>
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-6
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
----------- -------------
Balance at December 31, 1996............ ($9,629,523) $18,672,744
Issuance of common stock ($1.00 per
share) (Note 7)....................... -- 9,203,937
Retirement of shares in conjunction with
a contribution agreement executed by
certain members of management......... -- (3,538,723)
Issuance of common stock in conjunction
with conversion of debenture, net
($.50 per share) (Note 7)............. -- 1,000,000
Issuance of common stock in conjunction
with the acquisition of communications
operating licenses.................... -- 400,000
Issuance of common stock in conjunction
with financing lease transaction (Note
4).................................... -- 450,000
Issuance of common stock in conjunction
with debt issuance.................... -- 98,000
Issuance of common stock warrants in
conjunction with operating lease
($0.34 per warrant)................... -- 66,300
Net loss................................ (11,975,858) (11,975,858)
----------- -------------
Balance at December 31, 1997............ (21,605,381) 14,376,400
Issuance of common stock ($.50 per
share) (Note 7)....................... -- 4,500,000
Issuance of common stock ($1.00 per
share) (Note 7)....................... -- 850,000
Issuance of common stock warrants in
conjunction with promissory note
($0.21 per warrant) (Note 4).......... -- 114,069
Issuance of common stock in conjunction
with a merger ($0.90 per share) (Note
3).................................... -- 186,763
Issuance of common stock ($1.30 per
share) (Note 7)....................... -- 650,000
Issuance of common stock warrants in
conjunction with a merger ($0.49 per
warrant) (Note 3)..................... -- 289,100
Exercise of warrants ($0.70 per
share)................................ -- 7,248
Exercise of warrants ($0.70 per
share)................................ -- 14,497
Exercise of stock options ($1.00 per
share)................................ -- 117,750
Issuance of common stock rights in
conjunction with a merger ($0.44 per
warrant) (Note 3)..................... -- 272,500
Issuance of common stock warrants in
conjunction with promissory note
($0.18 per warrant) (Note 4).......... -- 68,400
Issuance of common stock warrants in
conjunction with promissory note
($0.16 per warrant) (Note 4).......... -- 60,800
Issuance of common stock warrants in
conjunction with promissory note
($0.21 per warrant) (Note 4).......... -- 25,200
Net Loss................................ (9,147,482) (9,147,482)
----------- -------------
Balance at December 31, 1998............ (30,752,863) 12,385,245
Issuance of common stock warrants in
conjunction with promissory note
($0.18 per warrant) (Note 4).......... -- 129,200
Issuance of common stock warrants in
conjunction with promissory note
($0.25 per warrant) (Note 4).......... -- 190,000
Issuance of common stock warrants in
conjunction with promissory note
($0.08 per warrant) (Note 4).......... -- 391,950
Issuance of common stock warrants in
conjunction with promissory note
($0.49 per warrant) (Note 4).......... -- 98,751
Issuance of common stock warrants in
conjunction with promissory note
($0.40 per warrant) (Note 4).......... -- 216,170
Issuance of common stock in conjunction
with a merger ($1.50 per share) (Note
3).................................... -- 56,383
F-7
<PAGE>
Issuance of common stock in conjunction
with purchase of minority interest in
a subsidiary ($1.17 per share)........ -- 352,803
Issuance of common stock in conjunction
with settlement of payables (average
of $0.26 per share)................... -- 20,210
Issuance of common stock in conjunction
with conversion of debentures ($1.20
per share)............................ -- 200,002
Issuance of common stock in conjunction
with exercise of conversion rights
($0.36 per share)..................... -- 108,558
Issuance of common stock in conjunction
with exercise of options ($1.25 per
share)................................ -- 203,956
Issuance of common stock warrants in
conjunction with an acquisition of a
customer base ($0.66 per warrant)..... -- 118,363
Issuance of common stock in conjunction
with exercise of warrants ($1.00 per
share)................................ -- 5,000,000
Issuance of Class A Senior Convertible
Preferred Stock and warrants, net of
issuance cost ($3,000.00 per share)... (22,174,074) 27,978,051
Issuance of Class A Senior Convertible
Preferred Stock as payment for
dividends on Class A Senior
Convertible Preferred Stock........... (2,331,834) --
Issuance of Class B Senior Convertible
Preferred Stock and warrants in
conjunction with conversion of
convertible debentures and accrued
interest on convertible debentures.... -- 33,506,415
Compensation on variable options........ -- 157,155
Net loss................................ (38,290,855) (38,290,855)
------------ -------------
Balance at December 31, 1999............ $(92,359,845) $42,821,726
============ =============
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Statements.
F-8
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss.............................. $(11,975,858) $(9,147,482) $(38,290,855)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization..... 2,995,334 3,451,982 4,477,292
Bad debt expense.................. 586,687 883,462 1,586,491
Amortization of discounts on debt
and lease obligations........... 56,891 250,244 13,825,619
Interest on convertible debenture
paid in-kind.................... -- -- 791,662
Loss on extinguishment of debt.... 241,785 -- --
Nonrecurring charge............... 2,677,099 -- --
Deferred settlement gain.......... -- (2,757,132) --
Changes in operating assets and
liabilities:
Accounts receivable, net........ (1,645,919) (1,820,958) (506,518)
Notes receivable................ 63,802 (215,337) (3,088,611)
Inventory....................... (194,180) (155,880) (1,090,356)
Prepaid expenses................ 23,832 (38,654) (366,538)
Other assets.................... (225,135) (640,641) (1,839,700)
Accounts payable, accrued, and
other liabilities............. 998,031 1,460,510 3,692,179
Unearned revenue................ (185,009) 1,283,268 (1,414,661)
----------------- ----------------- -----------------
Total adjustments........... 5,393,218 1,700,864 16,066,859
----------------- ----------------- -----------------
Net cash used in operating
activities................ (6,582,640) (7,446,618) (22,223,996)
----------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.... (2,577,080) (3,505,889) (6,644,342)
Restricted cash....................... (135,000) (50,000) (357,913)
Acquisition of businesses, net of cash
acquired............................ -- (350,633) (137,140)
----------------- ----------------- -----------------
Net cash used in investing
activities................ (2,712,080) (3,906,522) (7,139,395)
----------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred
stock, net.......................... -- -- 27,978,051
Proceeds from convertible
debentures.......................... 2,180,000 -- 20,849,118
Proceeds from issuance of common
stock............................... 5,831,604 6,000,000 --
Proceeds from issuance of preferred
stock in subsidiary................. -- 1,981,959 --
Proceeds from exercise of warrants and
options............................. -- 25,495 170,622
Proceeds from lease obligations....... 2,086,096 754,891 --
Proceeds from notes payable, net...... 476,046 4,336,403 10,633,000
Repayment of notes payable and lines
of credit........................... (1,443,775) (243,181) (9,319,466)
Repayment of financing lease
obligations......................... -- (402,731) (903,449)
Repayment of convertible debentures... -- -- (80,000)
----------------- ----------------- -----------------
Net cash provided by
financing activities...... 9,129,971 12,452,836 49,327,876
----------------- ----------------- -----------------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS........................... (164,749) 1,099,696 19,964,485
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR............................... 320,252 155,503 1,255,199
----------------- ----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR.................................. $ 155,503 $ 1,255,199 $21,219,684
================= ================= =================
F-9
<PAGE>
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-10
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
1. ORGANIZATION AND NATURE OF BUSINESS
Pointe Communications Corporation ("Pointe" or the "Company", formerly
Charter Communications International, Inc.) is an international facilities based
integrated communications provider ("ICP") serving residential and commercial
customers in the U.S., Central and South America. The Company and its
subsidiaries provide enhanced telecommunications products and services,
including local, long distance, Internet, international private line, carrier
services, prepaid calling card, and telecommuting services, with a focus on the
Hispanic community both domestically and internationally. The Company is
implementing a facilities based infrastructure on a staged basis in certain
identified U.S. markets with significant Hispanic presence with the ultimate
objective of being a full-service Competetive Local Exchange Carrier ("CLEC")
with a low-cost base of operations. During 1999, the Company was successful in
completing private placements of Class A Senior Convertible Preferred Stock and
Class B Convertible Promissory Notes (which converted to Class B Senior
Convertible Preferred Stock during the quarter ended December 31, 1999) for
gross proceeds totaling approximately $50 million, which will be used to fund
the initial phase of its CLEC market construction including Los Angeles, Miami,
San Diego, and Houston.
The Company was incorporated in Nevada on April 10, 1996 as a wholly owned
subsidiary of Maui Capital Corporation, a Colorado Corporation ("Maui Capital"),
which incorporated on August 8, 1988. On April 21, 1996, Maui Capital and the
Company merged with the Company being the surviving corporation and succeeding
to all the business, properties, assets, and liabilities of Maui Capital. The
purpose of the merger of Maui Capital and the Company was to change the name and
state of incorporation of Maui Capital. Maui Capital had no business or assets
prior to September 21, 1995 when it acquired TOPS Corporation ("TOPS"), a Nevada
corporation (TOPS was named Charter Communications International, Inc. until
April 10, 1996, when its name was changed so that the Company could be formed in
Nevada with the same name). At the time of the acquisition, TOPS was the sole
stockholder of Charter Communicaciones Internacionales Grupo, S.A., a Panama
corporation ("Charter Panama"), which was engaged in developing a private line
telecommunications system in Panama and pursuing licenses to provide such
services in various other Latin American countries. Since the acquisition of
TOPS, the Company has endeavored to grow both through the development of its
existing businesses and through the acquisition of complementary businesses.
Proceeds from private placements of securities with principals and outside
investors have funded the development of the Company to date.
On June 1, 1998, the Company acquired Galatel Inc. ("Galatel"), a
distributor of prepaid calling cards primarily to the Hispanic community, in a
cash and stock transaction. On July 30, 1998, the Company acquired Pointe
Communications Corporation ("Pointe Communications"), a Delaware corporation, in
a cash and warrant transaction. Pointe Communications did not have revenue from
operations prior to its acquisition. On August 31, 1998, the Company's
stockholders approved an amendment to the Company's Articles of Incorporation to
effect a change in the Company's name from Charter Communications International,
Inc. to Pointe Communications Corporation. On August 12, 1998, the Company
acquired International Digital Telecommunications Systems, Inc. ("IDTS") in a
cash and stock transaction. IDTS is a facilities-based long-distance carrier of
voice, data, and other types of telecommunications in the Miami, Florida market.
On October 1, 1998, the Company acquired Rent-A-Line Telephone Company, LLC
("Rent-A-Line") in a stock rights transaction. Rent-A-Line is a reseller of
prepaid local telephone service. All of these transactions were accounted for as
purchases (See Note 3).
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.
F-11
<PAGE>
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
bCompany'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, 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.
F-12
<PAGE>
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.
NOTES RECEIVABLE
The following table summarizes the components of notes receivable as of
December 31:
1998 1999
------------ ------------
Telscape International, Inc. ........ $ 0 $ 1,518,500
Affiliates and employees............. 537,503 628,836
International business partners...... 0 1,140,178
Allowance............................ (322,166) (1,016,764)
------------ ------------
Total........................... $ 215,337 $ 2,270,750
============ ============
During the quarter, the Company entered into promissory note with Telscape
International, Inc. evidencing Telscape's obligation to repay the Company on or
before February 28, 2000. The note accrues interest at 12% and is secured by
Telscape common stock owned by two affiliates of Telscape. The note was replaced
with $10.0 million convertible promissory note entered into with Telscape in
conjunction with the merger agreement (see Note 15).
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.
F-13
<PAGE>
PROPERTY AND DEPRECIATION
Property and equipment are recorded at cost, including certain engineering
and internal software development costs. Engineering costs totaled $1,390,776
with $1,025,245 allocated to Machinery and Equipment and $104,767 allocated to
Other Property and Equipment. The engineering costs incurred represent salaries
and related taxes and benefits paid to engineers to design and install the
Company's network infrastructure, as well as building improvements necessary to
allow for equipment installations. Internal software development costs incurred
totaled $260,764. Software costs represent salaries and related taxes and
benefits paid to employees during the application development stage for software
used internally. The property and equipment acquired in conjunction with the
acquisitions were recorded on the Company's books at net book value, which
approximated fair market value at the dates of acquisition. The Company records
depreciation using the straight-line method over the estimated useful lives of
the assets, which are as follows:
ESTIMATED
CLASSIFICATION USEFUL LIVES
------------------------------------- ------------
Equipment and machinery.............. 5-10 years
Earth station facility............... 10 years
Software............................. 5-7 years
Furniture and fixtures............... 5-7 years
Other property....................... 3-10 years
Leasehold improvements are amortized over the shorter of the useful life of
the improvement or the life of the lease. The Company's policy is to remove the
cost and accumulated depreciation of retirements from the accounts and recognize
the related gain or loss upon the disposition of assets. Such gains and losses
were not material for any period presented. Property and equipment recorded
under capital and financing leases are included with the Company's owned assets.
Amortization of assets recorded under capital leases is included in depreciation
expense.
INTANGIBLES
In conjunction with its acquisitions in 1999 (see Note 3), the Company
recorded intangible assets of approximately $1,146,000 due to the purchase
prices exceeding the values of the tangible net assets acquired. After
identifying the tangible assets and liabilities, the Company allocated the
excess to identifiable intangible assets and the remainder to goodwill.
Allocation of the purchase price among tangible and intangible assets is
performed based upon information available at the time of acquisition and is
subject to adjustment for up to one year after acquisition in accordance with
Accounting Principles Board ("APB") Opinion No. 16. Amortization of these costs
is included in depreciation and amortization in the accompanying statements of
operations. The following table summarizes the intangible assets' respective
amortization periods:
AMORTIZATION
CATEGORY PERIOD
------------------------------------- -------------
Acquired Customer Base............... 3-10 years
Other Intangibles.................... 3-10 years
Goodwill............................. 3-30 years
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
F-14
<PAGE>
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 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.
F-15
<PAGE>
<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.
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
F-16
<PAGE>
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:
DECEMBER 31, DECEMBER 31,
1998 1999
------------- -------------
18% Convertible Debentures due
October 1, 2002.................... $ 900,000 $ 1,180,000
Financing Lease Obligation, net of
discount of $306,672 and $197,049
as of December 31, 1998 and 1999,
respectively....................... 1,832,446 2,230,029
12% Senior Subordinated Notes due
December 2000, net of discount of
$39,722 and $9,722 as of December
31, 1998 and 1999, respectively.... 720,278 690,278
Notes Payable and other.............. 2,941,952 4,128,584
Bridge Loans due April 1999, net of
discount of $104,500 at December
31, 1998........................... -- 1,895,500
Capital Lease Obligations............ 11,777,590 6,171,720
------------- -------------
18,172,266 16,296,111
Less current portion................. 6,038,032 6,671,360
------------- -------------
Long-term obligations................ $ 12,134,234 $ 9,624,751
------------- -------------
During 1998, the Company entered into two promissory notes totaling
$2,000,000, which earned interest at 10% and became due in April 1999. In
conjunction with these notes, the Company issued 760,000 warrants to purchase
common stock at $1.00 per share for three years. The fair market value of these
warrants was estimated to be $129,200, which has been recorded as additional
paid-in capital and a discount on the notes amortized over the term of the
notes. During the first quarter of 1999, one of the notes for $1,000,000 was
refinanced with a $5,000,000 promissory note which earned interest at 10% and
became due in November 1999. In conjunction with this note, the Company issued
warrants to purchase 5,000,000 shares of common stock at $1.00 per share
exercisable for eight months. The fair market value of these warrants was
estimated to be $391,950, which has been recorded as additional paid-in capital
and a discount on the notes amortized over the term of the notes. Also during
the first quarter of 1999, the Company entered into three additional promissory
notes totaling $5,000,000, which earned interest at 10% and became due in May
and September 1999. In conjunction with the notes, the Company issued 1,686,667
warrants to purchase common stock at $1.00 per share exercisable for three
years. The fair market value of these warrants was estimated to be $417,951,
which has been recorded as additional paid-in capital and a discount on the
notes amortized over the term of the notes. The Company undertook these
short-term obligations in order to fund operations and network requirements in
advance of a private placement of $30,000,000 of the Company's convertible
preferred stock which was completed during the second quarter of 1999. All of
the above notes were repaid on their respective maturities during 1999, and the
5,000,000 warrants ssued with one of the notes during the first quarter of 1999
were exercised uring 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.
F-17
<PAGE>
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
amortization schedule with a balloon payment due in the 36th month. The rates
range from 7% to 14% and include options to purchase the equipment at the end of
the lease period. Also, during 1998, the Company entered into five capital
leases for a total value of approximately $6.2 million. The leases range from
three to seven years and are payable monthly in arrears. The Company holds
options to purchase the equipment at the end of the lease period for $1.00 with
respect to $3.0 million, 10% with respect to $1.0 million, 15% with respect to
$0.7 million, and fair market value with respect to $1.5 million.
During 1997, the Company issued, in a private offering, $1,180,000
principal amount of 18% convertible subordinated debentures due October 1, 2002.
The debentures are convertible at any time into shares of common stock at a
price of $1.20 per share. Interest is payable quarterly at a rate of 18% per
annum in arrears. The debentures were noncallable for a period of one year from
issuance and are not secured by any assets of the Company or guaranty. As of
December 31, 1999, $900,000 remained outstanding.
During 1995 and 1996, the Company issued, in a private offering, $2,845,000
of 12% senior subordinated notes due December 31, 2000 with attached warrants
which grant the purchasers of the notes the right to buy 2,244,000 shares of the
Company's common stock at $2.50 in 2000. As of December 31, 1999, 176,000 of
these warrants remained outstanding. Interest is payable quarterly at the rate
of 12% per annum in arrears. The fair market value of the 2,244,000 warrants
issued in conjunction with the notes was estimated by the Company to be $345,000
and was recorded as additional paid-in capital and a discount on the notes. The
notes are stated net of discount, which is being amortized over the term of the
notes. Amortization of this discount is included in the accompanying financial
statements as interest expense. The notes are not secured by any assets of the
Company or guaranty. During 1997, principal amounts of $2,115,000 of the senior
subordinated notes were converted to common stock in the January 1997 private
placement.
At December 31, 1999, the Company had other outstanding term notes payable
with varying terms and conditions in the total amount of $691,952. The portion
of the total notes payable, including other notes discussed above, that will
become due within the next 12 months amounted to $2,795,256 at December 31,
1999.
The carrying value of the long-term obligations approximated market value
at December 31, 1999.
F-18
<PAGE>
Scheduled maturities of long-term obligations, including capital and
financing leases, are as follows for the years ended December 31:
<TABLE>
<CAPTION>
NOTES AND LEASE
DEBT OBLIGATIONS TOTAL
---------- ------------ --------------
<S> <C> <C> <C>
2000................................. $2,807,548 $ 4,677,130 $ 7,484,678
2001................................. 877,808 5,110,332 5,988,140
2002................................. 903,317 6,235,213 7,138,530
2003................................. 3,646 660,367 664,013
2004................................. 4,008 11,854 15,862
Thereafter........................... 131,316 -- 131,316
Total...................... 4,727,643 16,694,896 21,422,539
---------- ------------ --------------
Interest............................. -- (2,887,811) (2,887,811)
Discounts............................ (165,413) (197,049) (362,462)
---------- ------------ --------------
Principal............................ $4,562,230 $ 13,610,036 $ 18,172,266
</TABLE>
5. OTHER INCOME
Since mid-1996, a subsidiary negotiated with Sprint Communications L.P.
("Sprint") to resolve a dispute involving Sprint's past services to the
subsidiary. The Company had accrued the entire amount which Sprint claimed.
During 1997, the subsidiary reached an agreement in principle with Sprint to pay
$100,000 down and $50,000 per month for 18 months for a total of $1,000,000 with
release of all claims against the subsidiary regarding the remaining balance. As
of December 31, 1997, the disputed balance was recorded as a deferred settlement
gain on the Company's balance sheet. A definitive settlement agreement was
signed during the second quarter of 1998, at which time payments commenced and
the Company recognized the deferred settlement gain of $2,757,132 in other
income and cost of services. This is offset by approximately $232,000 for legal
fees and settlement of a lawsuit with the Company's former president over
certain agreements, including an executive employment agreement.
6. MINORITY INTEREST
The Company's subsidiary, Telecommute, completed a private placement of
2,000 shares of its $1.00 par value Series A preferred stock during 1998. The
preferred stock is convertible at any time on or prior to the third anniversary
date of issuance into 1,321,500 shares of Telecommute's common stock or 666,667
shares of the Company's common stock. At the same time, the purchaser also
received an option to purchase 2,000 shares of Series B Preferred Stock at any
time prior to August 7, 1999. The Series B shares are convertible at any time
until August 7, 2001 into 528,500 shares of Telecommute or 500,000 shares of the
Company's common stock. The purchaser did not exercise its option to purchase
the Series B shares of Telecommute. The preferred stock is nonredeemable and
nonvoting and does not pay dividends. Total proceeds received in the private
placement were $2,000,000, which is recorded net of issuance costs of $18,041,
as minority interest in the accompanying balance sheets. Subsequent to December
31, 1999, the preferred stock was converted into common stock of Telecommute
(See Subsequent Events -- Note 15).
7. STOCKHOLDERS' EQUITY
The articles of incorporation provide for the issuance of 100,000,000
shares of $0.00001 par value common stock and 100,000 shares of $0.01 par value
preferred stock. As of December 31, 1999, there were 10,857 shares of Class A
Convertible Senior Preferred Stock and 7,264 shares of Class B Convertible
Senior Preferred Stock outstanding. The $0.00001 common stock authorized for
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.
F-19
<PAGE>
During 1998, the Company issued shares of common stock through various
private placement offerings as follows: 9,000,000 shares at $0.50 per share,
850,000 shares at $1.00 per share and 500,000 shares at $1.30 per share for
gross proceeds totaling $6,000,000. Additionally, during the year, the Company
issued 500,000 shares as commission for one of the private placements, 206,250
shares in conjunction with a merger, 31,063 shares for warrant exercises at
$0.70 per share, and 117,750 shares for option exercises at $1.00 per share. In
conjunction with certain of the private placements, warrants to purchase
additional shares of common stock were granted to the purchasers. The warrants
granted the holders the right to purchase 500,000 shares at $1.25 for a period
of two years, 150,000 shares at $1.50 for three years, and 600,000 shares for
$3.00 for a period of three years.
During 1997, the Company issued 5,911,664 shares of common stock at $1 per
share, or $5,911,664 gross proceeds; 2,115,000 shares of common stock for
conversion of senior subordinated debt; 937,865 shares of common stock for
conversion of shareholder loans; 319,468 shares of common stock for conversion
of other accrued liabilities; and 400,000 shares of common stock to an agent in
conjunction with securing licenses to operate in two Latin American countries.
All of the preceding conversions of stock for liabilities were executed at a
rate of $1 of the related liability for $1 of common stock. Also, during 1997,
the Company issued 2,000,000 shares of common stock for conversion of the
$1,000,000 par value subordinated debenture issued to offshore investors at a
rate of $.50 per share. In conjunction with the issuance of these shares,
holders were granted 2,000,000 warrants to purchase the Company's common stock
at $1.50 per share. In conjunction with the placement of the subordinated
debenture, the Company issued 200,000 shares to the placement agent in an
offshore market. In conjunction with the January 1997 private placement, certain
major stockholders returned 2,500,000 shares of common stock to the Company for
no consideration, and such shares were retired.
PREFERRED STOCK
CLASS A CONVERTIBLE SENIOR PREFERRED STOCK
During 1999, the Company completed a $30 million private placement offering
of 10,080 shares of the Company's $0.01 par value Class A Convertible Senior
Preferred Stock (the "Class A Preferred Stock") and warrants to purchase
10,800,000 shares of common stock. The Class A Preferred Stock has a liquidation
preference of $3,000 per share. Net proceeds from this offering totaled $28.1
million and are being used to fund network expansion, repay indebtedness, and
fund operations. The Class A Preferred Stock earns dividends at a rate of 12%
per annum, which are cumulative and payable in either cash or shares of Class A
Preferred Stock at the Company's discretion. Each share of Class A Preferred
Stock is convertible at the holder's option into 2,142.85 shares of common stock
(subject to adjustment for certain diluting issues) at any time while the Class
A Preferred Stock remains outstanding. The Company may require the conversion of
all of the Class A Preferred Stock as follows: (a) in conjunction with an
offering of the Company's common stock in a firm commitment underwritten public
offering at a purchase price in excess of $4.00 per common share (subject to
adjustment for certain diluting issues) yielding net proceeds in excess of $30.0
million, or (b) one year after issuance if the common stock shall have been
listed for trading on the New York Stock Exchange, American Stock Exchange, or
the Nasdaq National Market System, and the common stock shall have traded on
such exchange at a price of at least $5.00 per share (subject to adjustment for
certain diluting issues) for 20 consecutive trading days and the average daily
value of shares traded during that 20 day period was at least $1.0 million. On
the twelfth anniversary, if the Class A Preferred Stock is still outstanding and
the underlying common stock has been listed on one of the aforementioned
exchanges, the Company is required to exchange the Class A Preferred Stock for
common stock at a conversion price equal to the average trading price for the 20
consecutive trading days immediately prior to the exchange date. During the
year, the Company issued 777 additional shares of the Class A Preferred Stock to
the holders in settlement of dividends accrued.
The warrants give the holders the right to purchase 10,800,000 shares at a
price of $1.625 per share exercisable for a period of five years after the
issuance date, and were valued at $11.9 million, or $1.10 per share. The
warrants have been included in additional paid in capital at December 31, 1999.
The Company may require exercise of the warrants if the underlying common stock
has been registered with the SEC and is listed on one of the aforementioned
exchanges and has traded on such exchange at a price of at least $5.00 per share
(subject to adjustment for certain diluting issues) for 20 consecutive trading
days. The Company is required to file a registration statement with the SEC
within 120 days after closing the private offering of Class A Preferred Stock
and warrants to register the shares of common stock issued or issuable upon
conversion of the Class A Preferred Stock (including shares issued as dividends)
and the exercise of the warrants. It has been more than 120 days since the
closing, and the Company has not yet filed the registration statement. The
holders of the Preferred Stock have each signed a waiver to extend the date by
which the Company must file the required registration statement to the date that
is 90 days after either the date of consumation of the merger with Telscape
International, Inc. or the termination of the merger agreement.
F-20
<PAGE>
In conjunction with the issuance of the Preferred Stock, the Company
evaluated whether a beneficial conversion feature existed on the date of
issuance, as defined in the Emerging Issues Task Force ("EITF") 98-5. The
proceeds received in conjunction with the issuance were first allocated to the
$11.9 million fair value of the warrants, as calculated using the Black-Scholles
model. The remaining proceeds of $18.3 million were allocated to the Preferred
Stock. This amount was then compared to the fair market value of the shares
underlying the Preferred Stock of $40.5 million, determined by multiplying the
number of shares by the market price on the date of issuance of $1.875. The
difference of $22.2 million has been recognized as a beneficial conversion
feature on the Preferred Stock and recorded as a non-operating non-cash charge
directly to accumulated deficit and an increase in additional paid in capital.
CLASS B CONVERTIBLE SENIOR PREFERRED STOCK
Also during 1999, the Company completed a $21 million private placement
offering of convertible promissory notes (the "Notes"). The Notes accrue
interest at 12% per annum compounded quarterly and payable in preferred stock at
maturity. During the quarter ended December 31, 1999, the Notes and accrued
interest automatically converted into 7,264 shares of the Company's $0.01 par
value Class B Convertible Senior Preferred Stock (the "Class B Preferred Stock")
and warrants to purchase 9,000,000 shares of common stock. Each share of the
Class B Preferred Stock is convertible into 1,714.28 shares of common stock of
the Company. Net proceeds from this offering totaled $20.8 million and are being
used to fund network expansion, repay indebtedness and fund operations. The
Class B Preferred Stock earns dividends at a rate of 12% per annum, which are
cumulative and payable in either cash or shares of Class B Preferred Stock at
the Company's discretion. The Class B Preferred Stock has a liquidation
preference of $3,000 per share. The dividend and liquidation rights of the Class
B Preferred Stock are PARI PASSU with the Class A Preferred Stock. Additionally,
the Company may require conversion under the same conditions as the Class A
Preferred Stock and if the Class B Preferred Stock is still outstanding on the
twelfth anniversary from issuance, the Company is required to exchange the
Preferred Stock for common stock at a conversion price equal to the average
trading price for the 20 consecutive trading days immediately prior to the
exchange date.
The warrants give the holders the right to purchase 9,000,000 shares at a
price of $1.89 per share exercisable for a period of five years after the
issuance date. The Company may require exercise of the warrants if the
underlying common stock has been registered with the SEC and is listed on one of
the aforementioned exchanges and has traded on such exchange at a price of at
least $5.00 per share (subject to adjustment for certain diluting issues) for 20
consecutive trading days. The Company is required to file a registration
statement with the SEC within 120 days of issuance of the Class B Preferred
Stock to register the shares of common stock issued or issuable upon conversion
of the Class B Preferred Stock (including shares issued as dividends) and the
exercise of the warrants.
In conjunction with the issuance of the Notes, the Company evaluated
whether a beneficial conversion feature existed on the date of issuance, as
defined in EITF 98-5. As explained above, the Notes were convertible into Class
B Preferred Stock and warrants, with an initial conversion price and exercise
price of $2.16 and $2.33, respectively. In order to calculate the beneficial
conversion feature the Company compared the total proceeds received with respect
to the preferred stock and warrants underlying the Notes, including the proceeds
to be received upon exercise of the warrants. The aggregate proceeds were
determined to be $38.0 million. This amount was then compared to the fair market
value of shares underlying the preferred stock and warrants of $40.4 million,
determined by multiplying the number of shares by the market price on the date
of issuance. This resulted in a $2.4 million beneficial conversion included as a
discount to the Notes, as of the date of issuance amortized into interest
expense the period from issuance to December 31, 1999. During the quarter ended
December 31, 1999, the conversion price of the Class B Preferred Stock and the
exercise price of the warrants both underlying the Notes were adjusted to $1.75
and $1.89, respectively, as a result of the fact that the Pensat Transaction did
not close. During the quarter ended December 31, 1999 when the contingency
resolved itself and the exchange and exercise prices were adjusted the company
performed a similar calculation using the new terms. The aggregate proceeds were
measured against the fair market value of the increased number of shares
underlying the Notes multiplied by the market price at issuance. The market
value was determined to be $49.9 million resulting in a discount of $11.9
million. Since the Notes converted on December 31, 1999, the entire discount has
been recognized during 1999.
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:
F-21
<PAGE>
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 Plan
become eligible for accelerated vesting based upon achievement of Company,
division, and individual objectives as determined on December 31 of the year of
grant. Options eligible for accelerated vesting vest ratably on three
consecutive December 31 beginning in the year of grant. Optionees are eligible
to vest in up to 120% of the amount granted.
The following table summarizes the activity for each plan for each of the
three years in the period ended December 31, 1999.
<TABLE>
<CAPTION>
LTSOP ISOP NEDSOP PFP MVAP
---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996......... 260,002 392,000 400,000 0 0
Granted.............................. 464,000 1,380,964 200,000 0 0
Forfeited............................ (120,002) (376,500) 0 0 0
Exercised............................ 0 0 0 0 0
Balance at December 31, 1997......... 604,000 1,396,464 600,000 0 0
Granted.............................. 0 755,000 0 0 0
Forfeited............................ 0 (603,250) 0 0 0
Exercised............................ (114,000) (3,750) 0 0 0
Balance at December 31, 1998......... 490,000 1,544,464 600,000 0 0
Granted.............................. 0 181,000 0 2,201,501 4,050,000
Forfeited............................ 0 (204,390) (100,000) 0 0
Exercised............................ (7,000) (169,832) 0 0 0
Balance at December 31, 1999......... 483,000 1,351,242 500,000 2,201,501 4,050,000
Exercisable.......................... 463,000 793,742 375,000 110,606 90,000
</TABLE>
F-22
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1998 1999
--------------- -------------- ---------------
<S> <C> <C> <C>
Net loss:
As reported..................... $ (11,975,858) $ (9,147,482) $ (62,796,760)
Pro forma....................... $ (12,421,433) $ (9,691,957) $ (64,425,012)
Net loss per share:
As reported..................... $(0.39) $(0.22) $(1.36)
Pro forma....................... $(0.40) $(0.23) $(1.40)
</TABLE>
There were no issues prior to January 1, 1995 and the resulting pro forma
compensation cost may not be representative of that expected in future years.
A summary of the status of the Company's stock option plans at December 31,
1997, 1998 and 1999 and changes during the years ended December 31, 1997, 1998
and 1999 are presented in the following table:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------ -----------------
Outstanding at December 31, 1996..... 2,432,002 $1.27
Granted.............................. 2,049,964 1.06
Forfeited............................ (1,551,502) 1.05
Exercised............................ 0 0.00
Outstanding at December 31, 1997..... 2,930,464 $1.22
Granted.............................. 755,000 1.26
Forfeited............................ (603,250) 1.06
Exercised............................ (117,750) 1.00
Outstanding at December 31, 1998..... 2,964,464 $1.27
Granted.............................. 6,632,151 1.74
Forfeited............................ (304,390) 0.96
Exercised............................ (176,832) 1.18
Outstanding at December 31, 1999..... 9,115,393 $1.62
The following table summarizes, as of December 31, 1999, the number of
options outstanding, the exercise price range, weighted average exercise price,
and remaining contractual lives by year of grant:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
GRANT NUMBER OF EXERCISE AVERAGE REMAINING
YEAR SHARES PRICE RANGE PRICE CONTRACTUAL LIFE
------------------------------------- ----------- ------------- --------- -----------------
<S> <C> <C> <C> <C>
1999................................. 5,445,151 $1.00-$2.25 $1.74 9.4 years
1998................................. 577,501 $1.00-$2.00 $1.20 5.1 years
1997................................. 855,000 $1.00-$1.25 $1.06 4.2 years
1996................................. 637,741 $1.00-$7.00 $1.87 3.2 years
1995................................. 600,000 $0.70-$3.50 $1.74 2.4 years
</TABLE>
F-23
<PAGE>
Total stock options exercisable at December 31, 1999 were 2,282,348 at a
weighted average exercise price of $1.42.
TELECOMMUTE SOLUTIONS STOCK OPTION PLAN
During 1998, the Company's subsidiary TeleCommute Solutions established a
stock option plan, the TeleCommute Solutions Stock Option Plan ("TCS Plan"). The
number of shares authorized for issuance under the TCS Plan is 600,000. Options
are exercisable at the fair market value of the common stock (as determined by
the board of directors of Telecommute Solutions) on the date of grant. Options
generally vest ratably over three years and expire seven years after the date of
grant. The plan contains various provisions pertaining to accelerated vesting in
the event of significant corporate changes. A summary of the combined status of
the TCS Plan at December 31, 1999 and 1998 is as follows:
WEIGHTED
AVERAGE
PRICE
SHARES PER SHARE
--------- ---------
December 31, 1997.................... 0 $0.00
Grants.......................... 547,900 1.52
--------- ---------
December 31, 1998 547,900 1.52
Grants.......................... 100,200 1.52
Forfeitures..................... (48,100) 1.52
--------- ---------
December 31, 1999.................... 600,000 $1.52
--------- ---------
As of December 31, 1999, 166,717 were exercisable at a price of $1.52. The
weighted average remaining contractual life of options outstanding as of
December 31, 1999 was 8.7 years, respectively.
The Company has computed for pro forma disclosure purposes the value of all
TCS Plan options granted during 1998 and 1999 using the Black-Scholes option
Pricing model as prescribed by SFAS No. 123. The following weighted-average
Assumptions were used for grants in 1998 and 1999:
1999 1998
------- -------
Risk-free interest rate.............. 5% 5%
Expected dividend yield.............. 0 0
Expected lives....................... 3 years 3 years
Expected volatility.................. 80% 80%
The total value of TCS Plan options granted during 1998 and 1999 were
completed as approximately $627,469 and $127,254, respectively, which would be
amortized on a pro forma basis 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
F-24
<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
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
F-25
<PAGE>
provided between the U.S. and various South and Central American countries as
well as voice and data services provided within the various Latin American
countries listed above. Prepaid Card services include the sale of both "on-net"
(calls carried on the Company's network) and "off-net" (calls carried on other
Companies networks) prepaid calling cards. Corporate and Network includes
corporate and network overhead including finance and accounting, human
resources, legal, information technology, LAN administration, and engineering
overhead. Intersegment sales and transfers occur as segments utilize carrier
capacity of other segments. Intersegment transactions are accounted for on the
same basis as transactions with third parties.
Revenues and cost of services by service and product offering for the year
ended December 31, 1999 are as follows:
<TABLE>
<CAPTION>
WHOLESALE/
PREPAID CARD RETAIL INTERNATIONAL CORPORATE &
SERVICES SERVICES SERVICES OTHER NETWORK TOTAL
------------ ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $40,880,125 $4,463,032 $4,894,286 $ 1,687,477 0 $51,924,920
Cost of revenues........................ 38,251,567 3,896,820 6,588,630 1,392,603 0 50,129,620
------------ ------------ ------------ ----------- ------------ ------------
Gross Margin........................ 2,628,558 566,212 (1,694,344) 294,874 0 1,795,300
SG&A.................................... 3,917,923 2,875,029 4,080,209 3,239,587 5,162,051 19,274,799
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
LEASES
During 1998 and 1999, the Company entered into approximately $6.2 and $6.0
million in capital and financing leases related to the acquisition of machinery
and equipment (see Note 4 for a discussion of the transactions as well as a
table of future minimum lease payments related to the leases). As of December
31, 1999, the Company is also in receipt of approximately $8 million of
additional equipment which has not been recorded as assets or liabilities in the
accompanying balance sheet. Although management has disputed the receipt of the
equipment, no assurance can be given that management will be able to return the
equipment. Operating lease expenses primarily relate to the lease of office
space and equipment and include leases with affiliates. Rents charged to expense
were approximately $680,000, $832,000 and $1,461,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.
At December 31, 1999, future minimum lease payments under noncancelable
operating leases with initial remaining terms of more than one year are as
follows for the years ended December 31:
2000.................................... $ 1,267,842
2001.................................... 871,929
2002.................................... 566,637
2003.................................... 407,107
2004.................................... 358,717
Thereafter.............................. 680,501
------------
Total.............................. $ 4,152,733
============
In August 1999, Pointe entered into an employment agreement with the
president of U.S. CLEC operations and a key employee for a period of three
years. Under the agreements, they will receive annual salaries of $140,000 and
$125,000, respectively, and are eligible for bonuses of up to 50% of annual
salary based upon performance. In addition, they were granted options under the
Executive Market Value Appreciation Plan to purchase up to 350,000 and 250,000
shares of common stock, respectively, at $1.75 per share. Additionally, they
were each granted options to purchase 550,000 shares of common stock under the
Pay For Performance Plan. The options become vested according to a schedule
which includes 50,000 to 100,000 shares for opening each of eight CLEC markets
over three years. An open market is defined as one which generates a minimum of
$25,000 gross monthly income.
During the quarter ended December 31, 1999, the Company entered into a
Global Purchase Agreement with an equipment vendor to purchase an aggregate of
$30.0 million of telecommunications equipment over a 36 month period. The
equipment pricing is based upon the Company fulfilling its $30.0 million
commitment. If the Company does not meet its purchase commitment over 36 months,
the vendor may invoice the Company for the price differential between the
original price (I.E., based upon fulfilling the entire commitment) and the
applicable pricing tier. There are three pricing tiers with descending prices
based upon the actual aggregate purchases as follows: Tier 1 -- $0 to $10.0
million; Tier 2 -- $10.0 million to $20.0 million; and Tier 3 -- $20.0 to $30.0
million. The Company has purchased approximately $4.6 million from the vendor.
LITIGATION
F-26
<PAGE>
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)
The following table summarizes the Company's quarterly results of
operations for 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 QUARTERS FIRST SECOND THIRD FOURTH
---------------------------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues................................ $ 2,749,355 $ 3,321,055 $ 3,197,172 $ 3,683,840
Operating Loss.......................... (2,156,847) (1,778,036) (1,516,171) (5,802,095)
Net Loss................................ (2,540,621) (1,857,555) (1,405,009) (6,172,673)
Net Loss Per Share...................... ($0.09) ($0.06) ($0.04) ($0.18)
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)
1999 QUARTERS FIRST SECOND THIRD FOURTH
---------------------------------------- -------------- -------------- -------------- --------------
Revenues................................ $ 11,553,526 $ 13,154,066 $ 12,965,451 $ 14,251,878
Operating Loss.......................... (2,572,601) (3,919,793) (5,518,186) (9,946,210)
Net Loss................................ (3,659,039) (5,457,412) (6,536,122)(1) (22,638,282)
Net Loss Per Share...................... ($0.08) ($0.65)(1) ($0.16)(1) ($0.44)
</TABLE>
F-27
<PAGE>
------------
(1) Amounts as restated for the quarters ended June 30, 1999 and September 30,
1999. The Company recorded certain adjustments to more accurately state the
fiscal 1999 interim financial statements. These adjustments related to the
recording of beneficial conversion charges related to the issuance of the Class
A Preferred Stock and Class B Notes.
15. SUBSEQUENT EVENTS
Subsequent to year-end the Company agreed to merge with Telscape in an
all-stock transaction in which each share of Pointe will be exchanged for
0.224215 shares of Telscape common stock. The surviving company will trade under
the ticker symbol "TSCP" on the NASDAQ National Market System. The board of
directors of both companies have agreed to the merger; however, the closing is
subject to shareholder approval and certain other conditions precedent, such as
Securities Exchange Commission and regulatory approval. Telscape is an
integrated communications provider, which operates in the U.S., Mexico and other
Latin American countries. During 1998, Telscape's subsidiary, Telereunion S.A.
de C.V. received a 30 year facilities-based carrier license from the Mexican
government to construct and operate a network to carry long distance voice and
data traffic.
In conjunction with the merger agreement, the Company executed a $10.0
million convertible promissory note with Telscape to evidence Telscape's
obligation to repay the Company by June 30, 2000. This note replaces the
promissory note entered into with Telscape during the fourth quarter of 1999,
under which the Company advanced Telscape $1.5 million. The excess of $8.5
million over the $1.5 million previously advanced was placed in escrow for
Telscape. As of March 30, 2000, $2.8 million remained in escrow. If Telscape
fails to make principle or interest payments when due, fails to comply with the
note, becomes insolvent or is in bankruptcy, or the merger agreement with Pointe
is terminated, Telscape will be in default and the Company may demand full
payment. Additionally, the note is convertible at the Company's option into
100,000 shares of Class C preferred stock and warrants to purchase 500,000
shares of Telscape common stock at $7.00 per share. Each share of Class C
preferred stock is convertible into 12.195 shares of Telscape common stock.
Also subsequent to year end, the Company's subsidiary, Telecommute
Solutions, Inc. completed a private placement of $19.0 million of voting Series
B convertible preferred stock and the holders of Series A Convertible Preferred
Stock in Telecommute converted their preferred stock into common stock of
Telecommute. As a result, the Company's voting interest in Telecommute was
reduced from 100% to approximately 23%. Beginning with the first quarter of
2000, the Company will account for its investment in Telecommute using the
equity method of accounting.
F-28
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 (UNAUDITED) AND DECEMBER 31, 1999
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents............ $ 5,771,920 $ 21,219,684
Restricted cash...................... 184,000 542,913
Accounts receivable, net of allowance
for doubtful accounts of $1,541,414
and $1,508,458, respectively....... 3,339,120 3,639,378
Notes receivable, net................ 11,215,859 2,270,750
Inventory, net....................... 1,948,013 1,742,543
Prepaid expenses and other........... 818,685 629,787
----------- ------------
Total current assets............ 23,277,596 30,045,055
----------- ------------
PROPERTY AND EQUIPMENT, at cost:
Equipment and machinery.............. 19,895,274 23,090,486
Earth station facility............... 1,475,124 1,471,822
Software............................. 2,136,207 2,176,944
Furniture and fixtures............... 1,553,075 1,257,666
Other................................ 2,137,009 1,695,861
Construction in progress............. 11,411,900 1,452,303
----------- ------------
38,608,589 31,145,082
Accumulated depreciation and
amortization....................... (7,273,976) (6,827,740)
----------- ------------
Propertyy and equipment, net.... 31,334,613 24,317,342
----------- ------------
OTHER ASSETS:
Goodwill, net of accumulated
amortization of $1,544,360 and
$2,190,266, respectively........... 17,076,997 17,237,653
Acquired customer bases, net of
accumulated amortization of
$969,182 and $1,131,507,
respectively....................... 858,561 890,271
Other intangibles, net of accumulated
amortization of $1,184,062 and
$1,946,521, respectively........... 1,576,599 1,723,225
Other................................ 2,481,349 2,676,217
----------- ------------
Total other assets.............. 21,993,505 22,527,366
----------- ------------
TOTAL ASSETS.................... $76,605,714 $ 76,889,763
=========== ============
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Balance Sheets
F-29
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 (UNAUDITED) AND DECEMBER 31, 1999
MARCH 31, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
CURRENT LIABILITIES:
Current portion of notes payable..... $ 1,349,739 $ 2,795,256
Current portion of lease
obligations........................ 2,345,864 3,242,776
Accounts payable..................... 14,798,555 6,233,914
Accrued liabilities.................. 5,495,745 6,132,570
Unearned revenue..................... 1,526,097 1,514,329
------------- ------------
Total current liabilities....... 25,516,000 19,918,845
------------- ------------
LONG-TERM LIABILITIES:
Capital and financing lease
obligations........................ 7,996,360 10,367,260
Convertible debentures............... 900,000 900,000
Notes payable and other long-term
obligations........................ 888,267 866,974
------------- ------------
Total long-term liabilities..... 9,784,627 12,134,234
------------- ------------
MINORITY INTEREST.................... -- 2,014,959
------------- ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value;
100,000 shares authorized, 0 and
18,121 shares issued and
outstanding, respectively.......... 187 181
Common stock, $0.00001 par value;
100,000,000 shares authorized;
45,339,839 and 52,152,426 shares
issued and outstanding,
respectively....................... 521 517
Additional paid-in-capital........... 142,644,169 136,370,654
Accumulated deficit.................. (101,339,791) (93,549,626)
------------- ------------
Total stockholders' equity...... 41,305,086 42,821,726
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................. $ 76,605,714 $ 76,889,763
============= ============
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Balance Sheets.
F-30
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
--------------- ---------------
(UNAUDITED) (UNAUDITED)
REVENUES:
Communications services and
products...................... $13,761,470 $10,933,887
Internet connection services.... 471,602 619,639
--------------- ---------------
Total revenues............. 14,233,072 11,553,526
--------------- ---------------
COSTS AND EXPENSES:
Cost of services and products... 13,553,852 10,247,028
Selling, general, and
administrative expenses....... 5,757,838 2,833,152
Depreciation and amortization... 1,153,841 1,045,947
--------------- ---------------
Total costs and expenses... 20,465,531 14,126,127
--------------- ---------------
OPERATING LOSS....................... (6,232,459) (2,572,601)
--------------- ---------------
INTEREST EXPENSE, net................ 64,286 (1,086,438)
OTHER (EXPENSE) INCOME............... -- --
--------------- ---------------
NET LOSS BEFORE INCOME TAXES......... (6,168,173) (3,659,039)
INCOME TAX BENEFIT................... -- --
--------------- ---------------
NET LOSS............................. $(6,168,173) $(3,659,039)
=============== ===============
NET LOSS PER SHARE --
BASIC AND DILUTED............... $ (0.15) $ (0.08)
=============== ===============
SHARES USED IN COMPUTING NET LOSS PER
SHARE.............................. 51,841,344 45,343,348
=============== ===============
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Statements.
F-31
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
--------------- ---------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................... $(6,168,173) $(3,659,039)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization... 1,153,841 1,045,947
Bad debt expense................ 76,329 58,894
Amortization of discounts on
debt and lease obligations.... 79,693 525,479
Non-cash stock compensation..... 516,942 --
Changes in operating assets and
liabilities:
Accounts receivable, net...... (73,004) 211,874
Notes receivable.............. (8,945,109) (64,658)
Inventory..................... (250,491) (591,338)
Prepaid expenses.............. (202,853) (72,452)
Other assets.................. 60,388 (522,996)
Accounts payable, accrued, and
other liabilities.......... 8,299,691 225,587
Unearned revenue.............. 11,768 (793,371)
--------------- ---------------
Total adjustments.......... 727,195 22,966
--------------- ---------------
Net cash used in operating
activities.............. (5,440,978) (3,636,073)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and
equipment....................... (11,975,662) (2,106,781)
Restricted cash.................... 358,913 (163,900)
Repayment of intercompany debt by
deconsolidated subsidiary....... 1,909,596 --
Reduction in cash due to
deconsolidation of subsidiary,
net............................. (48,968) --
--------------- ---------------
Net cash used in investing
activities.............. (9,756,121) (2,270,681)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants
and options..................... 429,763 --
Repayment of lease obligations..... -- (101,671)
(Repayment of)/Proceeds from leases
and notes payable, net.......... (680,429) 7,524,420
--------------- ---------------
Net cash provided by
financing activities.... (250,666) 7,422,748
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS........................ (15,447,765) 1,515,995
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 21,219,684 1,255,199
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF
QUARTER............................ $ 5,771,920 $ 2,771,194
=============== ===============
Supplemental Disclosures:
Cash paid for interest............. $ 391,926 $ 552,883
Cash paid for income taxes......... -- --
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Statements.
F-32
<PAGE>
POINTE COMMUNICATIONS CORPORATION
CONDENSED NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
1. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to Rule
10-01 of Regulation S-X of the Securities and Exchange Commission ("SEC"). The
accompanying unaudited condensed consolidated financial statements reflect, in
the opinion of management, all adjustments necessary to achieve a fair statement
of financial position and results for the interim periods presented. All such
adjustments are of a normal recurring nature. Preparing financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses. Actual results could
differ from those estimates. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
2. Certain amounts in the prior period financial statements have been
reclassified to conform to the current year presentation.
3. Basic net loss per share is computed using the weighted average number
of shares outstanding. Diluted net loss per share is computed using the weighted
average number of shares outstanding, adjusted for common stock equivalents,
when dilutive. For the periods presented, the effect of common stock equivalents
was antidilutive, as a result, basic and diluted net loss per share are the
same. The following table has been added to reconcile Net income/(loss) to Net
income/(loss) available to common stockholders. The difference represents
payment of dividends issued on Class A and B Senior Convertible Preferred Stock
("Preferred Stock") during the quarter. The dividends were paid with additional
shares of Preferred Stock.
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
--------------- ---------------
Net income/(loss).................... $(6,168,173) $(3,659,039)
Preferred stock dividend............. (1,621,992) --
--------------- ---------------
Net income/(loss) available for
common stockholders................ $(7,790,165) $(3,659,039)
=============== ===============
Net loss per share................... $ (0.15) $ (0.08)
=============== ===============
Shares used in computing net loss per
share.............................. 51,841,344 45,343,348
=============== ===============
4. There was no provision for or cash payment of income taxes for the three
months ended March 31, 2000 and 1999, respectively, as the Company had net
taxable losses for 1999 and anticipates a net taxable loss for the year ended
December 31, 2000.
5. During the quarter ended March 31, 2000, the Company entered into an
Agreement and Plan of Merger ("Merger Agreement") with Telscape International,
Inc. ("Telscape") in an all-stock transaction in which each share of PointeCom
will be exchanged for 0.223514 shares of Telscape common stock. The merger is
expected to close in the second quarter of 2000. Pointe will be viewed as the
acquiror for accounting purposes. The following table presents the unaudited pro
forma consolidated results of operations of the Company as though the merger
took place on January 1, 1999:
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 2000 MARCH 31, 2000
------------------ ---------------
Revenues............................. $ 157,088 $ 37,457
================== ===============
Net loss from continuing
operations........................... $ (123,166) $ (18,165)
================== ===============
Net loss per share from continuing
operations, basic and diluted...... $ (6.74) $ (0.92)
================== ===============
The pro forma financial information does not purport to represent what the
consolidated results of operations would have been if the Acquisitions had in
fact occurred on these dates, nor does it purport to indicate our future
consolidated financial position or future consolidated results of operations.
The pro forma adjustments are based on currently available information and
certain assumptions that management believes to be reasonable.
In conjunction with the Merger Agreement, the Company executed a $10.0
million convertible promissory note with Telscape to evidence Telscape's
obligation to repay the Company by June 30, 2000. This note replaces the
F-33
<PAGE>
promissory note entered into with Telscape during the fourth quarter of 1999,
under which the Company advanced Telscape $1.5 million. The excess of $8.5
million over the $1.5 million previously advanced was placed in escrow for
Telscape. As of March 31, 2000, $2.3 million remained in escrow. If Telscape
fails to make principle or interest payments when due, fails to comply with the
note, becomes insolvent or is in bankruptcy, or the Merger Agreement with the
Company is terminated Telscape will be in default and the Company may demand
full payment. Additionally, the note is convertible at the Company's option into
100,000 shares of Class C preferred stock and warrants to purchase 500,000
shares of Telscape common stock at $7.00 per share. Each share of Class C
preferred stock is convertible into 12.195 shares of Telscape common stock.
6. During the quarter ended March 31, 2000, the Company's subsidiary
Telecommute Solutions Inc. ("TCS") completed a private placement of its Series B
Convertible Preferred Stock for gross proceeds totaling approximately $19
million. The preferred stock is convertible into shares of TCS common stock and
votes with common stockholders on an as converted basis. Upon issuance of the
Series B Preferred Stock, the TCS Series A convertible non-voting preferred
stockholders converted their stock into TCS common stock. As a result of these
transactions the Company's ownership of TCS was reduced from 100% to
approximately 23%. Therefore, TCS is no longer a consolidated subsidiary and the
Company will account for its ownership using the equity method. As of the date
of deconsolidation, TCS's cumulative losses exceeded the Company's investment.
Therefore, the investment account was a credit balance of approximately $3.5
million, which has been reclassed to additional paid in capital along with the
minority interest related to the Class A preferred stock of approximately $2.0
million, in accordance with Staff Accounting Bulletin No. 51. TCS is in a net
loss position and after the entries above, the Company's basis in the TCS
investment is $0, therefore, no income/loss has been recognized during the first
quarter.
7. Effective January 1998, the Company adopted SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information," which established
revised standards for the reporting of financial and descriptive information
about operating segments in financial statements. During 1998, the Company's
management did not utilize segment data for making decisions and assessing
performance because it provided various services over a single interconnected
network. During 1999, management identified segments, changed its focus, and
began using segment data in its decision-making process and for assessing
performance.
While management of the Company monitors the revenue and costs of services
generated from each of the various services, operations are managed and
financial performance is evaluated based on the delivery of multiple services
provided over a single network. As a result of multiple services being provided
over a single network, there are many shared administrative expenses and shared
assets related to the provision of various services to customers. Management
believes that any allocation of the shared expenses or assets to the segments
would be arbitrary and impractical. The operating segments were aggregated into
reportable segments based upon such characteristics as products and services,
operating methods, customers, and distribution methods. The segments include
Retail Services, Wholesale/International Services, Prepaid Calling Card
Services, and Corporate and Network overhead. Retail services include local,
long distance, and Internet access services provided primarily to Hispanic
residential and commercial customers. Wholesale/International Services include
carrier terminating services and International private line provided between the
US and various South and Central American countries as well as voice and data
services provided within various Latin American countries. Prepaid Calling Card
services include the sale of both "on-net" (calls carried on the Company's
network) and "off-net" (calls carried on other Companies networks) prepaid
calling cards. Corporate and Network includes corporate and network overhead
including finance and accounting, human resources, legal, information
technology, lan administration, and engineering overhead. Intersegment sales and
transfers occur as segments utilize carrier capacity of other segments.
Intersegment transactions are accounted for on the same basis as transactions
with third parties.
Revenues, cost of services and selling general and administrative expenses
for each segment for the quarter ended March 31, 2000 are as follows:
<TABLE>
<CAPTION>
PREPAID WHOLESALE/
CARD RETAIL INTERNATIONAL CORPORATE &
SERVICES SERVICES SERVICES OTHER NETWORK TOTAL
----------- ---------- -------------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $10,872,743 $1,162,236 $2,068,826 $ 129,268 $ -- $ 14,233,073
Cost of revenues..................... 9,784,822 1,084,861 2,552,318 131,852 -- 13,553,853
----------- ---------- -------------- ---------- ------------ --------------
Gross Margin......................... 1,087,921 77,375 (483,492) (2,584) -- 679,220
SG&A................................. 1,212,359 1,703,153 663,985 395,484 1,782,858 5,757,839
</TABLE>
Revenues, cost of services and selling general and administrative expenses
for each segment for the quarter ended March 31, 1999 are as follows:
F-34
<PAGE>
<TABLE>
<CAPTION>
PREPAID WHOLESALE/
CARD RETAIL INTERNATIONAL CORPORATE &
SERVICES SERVICES SERVICES OTHER NETWORK TOTAL
----------- ---------- -------------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 8,989,363 $1,009,435 $1,162,094 $ 392,634 $ -- $ 11,553,526
Cost of revenues..................... 8,248,607 724,923 1,000,409 273,089 -- 10,247,028
----------- ---------- -------------- ---------- ------------ --------------
Gross Margin......................... 740,756 284,512 161,685 119,545 -- 1,306,498
SG&A................................. 663,289 360,985 636,571 520,688 651,619 2,833,152
</TABLE>
8. During the first quarter of 1999, the Company issued 400,416 shares of
common stock in conjunction with the exercise of employee stock options. Certain
of the options were issued in cashless exercise transactions in which the
Company withheld from the issuance the number of shares which market value was
equal to the aggregate exercise price of the options exercised. In conjunction
with these cashless exercises, the Company recognized $264,524 in compensation
expense. Additionally, the Company recognized compensation expense with regard
to variable options in the amount of $252,418, which represents the appreciation
in market price over the exercise price amortized over the vesting period of the
options. Also during the quarter, the Company issued 57,821 shares of common
stock in conjunction with the exercise of warrants.
F-35
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated balance sheet of
Telscape as of March 31, 2000 and unaudited pro forma condensed consolidated
statement of operations of Telscape three months ended March 31, 2000 and for
the year ended December 31, 1999 illustrate the effect of the merger with
Pointe, including the investment in TCS, and additional transactions as
described in the Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements. The unaudited pro forma condensed consolidated balance sheet assumes
that the merger with Pointe and the additional transactions had been completed
as of March 31, 2000 and the unaudited pro forma condensed consolidated
statement of operations assume that the merger with Pointe and the additional
transactions were completed as of January 1, 1999, except as discussed in notes
(a) and (d).
Under the terms of the transaction, the holders of Pointe common stock will
receive 0.223514 shares of Telscape common stock for each Pointe share. Based on
the exchange ratio, Pointe shareholders will obtain a majority of the voting
interest of the combined company. It is therefore anticipated that the merger
will be accounted for as a purchase business combination with Pointe as the
acquiror.
The unaudited pro forma condensed consolidated balance sheet and statement
of operations do not purport to represent what the financial position or results
of operations actually would have been if the merger and the transactions
described in the notes had occurred as of such date or what such results will be
for any future periods.
The unaudited pro forma condensed consolidated financial statements are
derived from the historical financial statements of Telscape and Pointe and the
assumptions and adjustments described in the accompanying notes. Telscape and
Pointe believe that all adjustments necessary to present fairly such unaudited
financial information have been made. The unaudited pro forma financial
information should be read in conjunction with the consolidated financial
statements and the accompanying notes thereto of Telscape and Pointe appearing
elsewhere in the Proxy Statement/Prospectus. The unaudited pro forma condensed
consolidated financial statements do not reflect any cost savings or other
economic efficiencies resulting from the merger.
The pro forma combined income tax benefit may not represent the amount that
would have resulted had Pointe and Telscape filed consolidated income tax
returns during the periods presented.
F-36
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
Assets TELSCAPE POINTE ADJUSTMENTS PRO FORMA
------------------------------------- -------- --------- ----------- ---------
Current assets:
<S> <C> <C> <C> <C>
Cash............................. $ 2,848 $ 5,772 $ 29,575(a) $ 36,695
(1,500)(c)
Restricted cash.................. -- 184 -- 184
Accounts receivable.............. 13,340 14,555 (7,719)(c) 20,176
Inventory........................ 2,948 1,948 -- 4,896
Other current assets............. 6,756 819 -- 7,575
-------- --------- ----------- ---------
Total current assets........ 25,892 23,278 20,356 69,526
-------- --------- ----------- ---------
Property, net........................ 63,330 31,335 -- 94,665
Other assets:
Intangibles...................... 31,737 19,512 179,519(c) 230,768
Other............................ 8,606 2,481 -- 11,087
-------- --------- ----------- ---------
Total assets............ $129,565 $ 76,606 $ 199,875 $ 406,046
======== ========= =========== =========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of debt and
capital lease obligations...... $ 17,718 $ 3,696 $ (7,719)(c) $ 13,695
Accounts payable................. 47,954 14,799 (16,057)(d) 46,696
Accrued liabilities.............. 16,283 5,495 -- 21,778
Deferred revenue................. -- 1,526 -- 1,526
-------- --------- ----------- ---------
Total current liabilities... 81,955 25,516 (23,776) 83,695
-------- --------- ----------- ---------
Long term portion of debt and capital
lease obligations.................. 26,573 9,785 (2,000)(a) 50,415
16,057(d)
Minority interest.................... 5 -- -- 5
Stockholders' equity:
Preferred stock.................. -- -- -- --
Common stock..................... 8 1 11(c) 20
Additional paid in capital....... 52,907 142,644 60,846(a) 403,250
146,853(c)
Accumulated deficit.............. (31,155) (101,340) (29,271)(a) (130,611)
31,155(c)
Treasury stock................... (480) -- -- (480)
Subscriptions receivable......... (248) -- -- (248)
-------- --------- ----------- ---------
Total stockholders'
equity.................... 21,032 41,305 209,594 271,931
-------- --------- ----------- ---------
Total liabilities and
stockholders'
equity................ $129,565 $ 76,606 $ 199,875 $ 406,046
======== ========= =========== =========
</TABLE>
F-37
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
TELSCAPE POINTE ADJUSTMENTS PRO FORMA
-------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues............................. $ 23,224 $14,233 $-- $ 37,457
Operating Expenses:
Cost of revenue...................... 19,868 13,554 -- 33,422
Selling, general and
administrative..................... 6,832 5,758 -- 12,590
Depreciation and amortization........ 1,562 1,153 2,992(c) 5,707
-------- ------- ----------- ---------
Total operating costs........... 28,262 20,465 2,992 51,719
-------- ------- ----------- ---------
Operating loss....................... (5,038) (6,232) (2,992) (14,262)
-------- ------- ----------- ---------
Other (income) expense:
Interest (income) expense, net....... 1,084 (64) -- 1,020
Other, net........................... (136) -- -- (136)
-------- ------- ----------- ---------
Total other expense............. 948 (64) -- 884
-------- ------- ----------- ---------
Net loss before minority interest and
income taxes....................... (5,986) (6,168) (2,992) (15,146)
Income tax expense................... (192) -- -- (192)
-------- ------- ----------- ---------
Net loss before minority interest.... (6,178) (6,168) (2,992) (15,338)
Minority interest.................... (5) -- -- (5)
-------- ------- ----------- ---------
Net loss from continuing
operations......................... (6,183) (6,168) (2,992) (15,343)
Preferred Stock dividends and
beneficial conversion issuances.... -- (1,622) (1,200)(a) (2,822)
-------- ------- ----------- ---------
Net loss from continuing operations
attributable to common
stockholders....................... $ (6,183) $(7,790) $(4,192) $ (18,165)
======== ======= =========== =========
Net loss from continuing operations
per share -- basic and diluted..... $ (0.77) $ (0.15) $ (0.92)
======== ======= =========== =========
Weighted average common shares....... 8,010 51,841 (40,165)(c) 19,686
======== ======= =========== =========
</TABLE>
F-38
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TELSCAPE POINTE TELECOMMUTE(B) ADJUSTMENTS PRO FORMA
---------- -------- --------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 106,833 $ 51,925 $ (1,670) $ -- $ 157,088
Operating expenses:
Cost of revenue................. 93,394 50,130 (1,441) -- 142,083
Selling, general and
administrative expenses....... 24,357 19,275 (3,282) -- 40,350
Impairment loss................. 715 -- -- -- 715
Depreciation and amortization... 6,335 4,477 (233) 11,360(d) 21,939
---------- -------- --------------- ------------ ----------
Total operating costs...... 124,801 73,882 (4,956) 11,360 205,087
---------- -------- --------------- ------------ ----------
Operating loss....................... (17,968) (21,957) 3,286 (11,360) (47,999)
---------- -------- --------------- ------------ ----------
Other (income) expense:
Interest expense, net........... 4,252 15,999 (228) -- 20,023
Other, net...................... 683 335 -- (186)(b) 832
---------- -------- --------------- ------------ ----------
Total other expense........ 4,935 16,334 (228) (186) 20,855
---------- -------- --------------- ------------ ----------
Net loss before income taxes......... (22,903) (38,291) 3,514 (11,174) (68,854)
Income tax benefit................... 3,428 -- -- -- 3,428
---------- -------- --------------- ------------ ----------
Net loss............................. (19,475) (38,291) 3,514 (11,174) (65,426)
Preferred stock dividends and
beneficial conversion issuances.... -- (24,506) -- (33,234)(a) (57,740)
---------- -------- --------------- ------------ ----------
Net loss available to common
stockholders....................... $ (19,475) $(62,797) $ 3,514 $(44,408) $ (123,166)
========== ======== =============== ============ ==========
Net loss per share-basic and
diluted............................ $ (2.92) $ (1.36) $ (6.74)
========== ======== ==========
Weighted average common shares....... 6,670 46,204 (34,613)(d) 18,261
========== ======== ============ ==========
</TABLE>
F-39
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(a) To record the issuance of the Class F preferred stock. Telscape has received
commitments for the issuance of 315,750 shares of Class F preferred stock with
1,925,306 warrants to purchase shares of common stock for $10 per share. The
issuance of the Class F preferred stock will yield proceeds to Telscape of
approximately $29.6 million and conversion of $2 million of debt upon completion
of the merger based on the firm commitments received to date. The Class F
preferred stock accrues dividends at the rate of 12% per annum compounding
quarterly. The Class F Preferred Stock and warrants were issued with an implied
common stock conversion ratio which was less than fair value. Accordingly, the
combined company will record a charge of approximately $29.3 million to retained
earnings for the implicit beneficial conversion feature. The dividends are
included in the pro forma loss available to common stockholders and loss per
share for the three months ended March 31, 2000 and year ended December 31,
1999. The charge is included in the pro forma loss available to common
stockholders and loss per share for the year ended December 31, 1999, since this
is the period that more closely approximates the recording of the beneficial
conversion feature of the Class F preferred stock.
(b) Reflects Telecommute's issuance of Series B preferred stock which reduced
Pointe's voting interest to less than 50%, and accordingly, Pointe's investment
in Telecommute has been reflected in the accompanying statements using the
equity method of accounting.
(c) To record the merger. It is anticipated that the merger will be accounted
for as a purchase business combination with Pointe treated as the acquiror.
Pointe is considered the acquiror because its shareholders will obtain a
majority of the voting interest of the combined company. Since Pointe is
considered the acquiror, the assets and liabilities of Telscape will be recorded
at fair value with the excess of the purchase price over the fair value of
assets and liabilities acquired recorded as goodwill.
The outstanding shares of Telscape immediately prior to the merger have
been valued at $17.95 per share resulting in a value assigned to the shares of
$145.1 million. The outstanding vested options of Telscape having a weighted
average exercise price of $5.57 per share and a weighted average remaining
contractual life of 6.8 years have been valued at approximately $14.8 million
using the Black Scholes model using the following assumptions: dividend yield of
0%, expected volatility of 65%, risk free rate of 4.5%, and a weighted average
remaining life of 6.8 years. The outstanding warrants of Telscape having a
weighted average exercise price of $4.12 per share and a weighted average
remaining life of 2.9 years have been valued at approximately $39.9 million
using the Black Scholes model using the following assumptions: dividend yield of
0%, expected volatility of 65%, risk free rate of 4.5% and a weighted average
remaining life of 2.9 years. The companies expect to incur costs in connection
with the merger totaling approximately $1.5 million. The pro forma adjustments
to goodwill and additional paid in capital represent the incremental effect of
the merger to the combined company.
The following table summarizes the pro forma net assets purchased in
connection with the merger and the amount attributable to cost in excess of net
assets acquired included in the accompanying unaudited pro forma condensed
consolidated financial statements (in thousands):
Working capital......................... $ (40,006)
Property, plant, and equipment.......... 63,330
Other assets............................ 8,606
Non-current liabilities................. (42,630)
Other equity............................ 728
Goodwill and other intangibles.......... 211,256
Management estimates that Telscape's working capital may be substantially
more or less at closing compared to Telscape's working capital included in the
accompanying unaudited pro forma condensed consolidated balance sheet as of
March 31, 2000. An increase or decrease in Telscape's working capital would
result in a reallocation of the purchase price and would result in increases or
decreases in the values assigned to identifiable intangible assets and related
amortization compared to those presented in the accompanying pro forma condensed
consolidated financial statements.
The preliminary estimate of net assets acquired represents management's
best estimate based on currently available information; however, such estimate
may be revised up to one year from the acquisition date.
The goodwill and other identifiable intangibles will be amortized over a
weighted average 15 year period. The statements of operations have been adjusted
to give effect to the additional amortization.
(d) Reflects funding of $16.1 million under the Lucent credit agreement which
took place on April 20, 2000. The pro formas do not reflect any additional
interest expense as the funding was for liabilities incurred in the latter part
of 1999 under a credit agreement that was not in place at the beginning of 1999.
F-40
<PAGE>
EXHIBIT INDEX
Exhibit No. Descriptions
2.1 Amended and Restated Agreement and Plan of Merger dated
December 31, 1999 (Incorporated herein by this reference
to Exhibit 2.1 of Telscape's Annual Report on Form 10-K
for the year ended December 31, 1999)
*4.1 Certificate of Designation of Preferences, Rights, and
Privileges of Class D Convertible Senior Preferred Stock
*4.2 Certificate of Designation of Preferences, Rights, and
Privileges of Class E Convertible Senior Preferred Stock
*23.1 Consent of expert if incorporated into previously filed
registration statement.
_________________
* Filed Herewith
<PAGE>
