U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 0-24622
TELSCAPE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-2433637
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
2700 POST OAK BLVD., SUITE 1000
HOUSTON, TEXAS 77056
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 968-0968
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK ($.001 PAR VALUE)
----------------------------------
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of common stock held by non-affiliates of the
registrant (based on the closing price as reported on the Nasdaq National Market
on March 15, 2000, was approximately $91,560,000. Shares of common stock
held by each executive officer and director and by ach stockholder affiliated
with a director have been excluded from this calculation because such
persons may be deemed to be affiliates. The determination of affiliate status
is not necessarily a conclusive determination for other purposes. The number of
outstanding shares of the registrant's Common Stock as of March 15, 2000 was
7,989,762.
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TELSCAPE INTERNATIONAL, INC.
TABLE OF CONTENTS
FORM 10-K REPORT
DECEMBER 31, 1999
Page
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Part I
Item 1. Business. 1
Item 2. Properties. 18
Item 3. Legal Proceedings. 18
Item 4. Submission of Matters to a Vote of Security Holders. 18
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. 19
Item 6. Selected Financial Data. 20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 21
Item 7A. Quantitative and Qualitative
Disclosures about Market Risk 31
Item 8. Financial Statements and Supplementary Data. 33
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. 62
Part III
Item 10. Directors and Executive Officers of the Registrant. 63
Item 11. Executive Compensation. 68
Item 12. Security Ownership of Certain
Beneficial Owners and Management. 71
Item 13. Certain Relationships and Related Transactions. 72
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K. 74
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The statements contained in this Annual Report on Form 10-K that are not
historical facts are "forward-looking statements" (as such term is defined in
the Private Securities Litigation Reform Act of 1995), which can be identified
by the use of forward-looking terminology such as "believes," "expects," "may,"
"estimates," "will," "should," "plans" or "anticipates" or the negative thereof
or other variations thereon or comparable terminology, or by discussions of
strategy. Such statements include, but are not limited to, statements under the
captions "Business", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Annual Report on Form
10-K as to our plans to implement its growth strategy, improve its financial
performance, expand its infrastructure, develop new products and services,
expand its sales force, expand its customer base and enter international
markets. In addition, from time to time, we or our representatives have made or
may make forward-looking statements, orally or in writing. Furthermore, such
forward-looking statements may be included in, but are not limited to, various
filings made by us with the Securities and Exchange Commission (the
"Commission"), or press releases or oral statements made by or with the approval
of an authorized executive officer of ours.
Management wishes to caution the reader that the forward-looking statements
referred to above and contained in this Annual Report on Form 10-K regarding
matters that are not historical facts involve and are based on numerous
assumptions and predictions about future conditions that could prove not to be
accurate. No assurance can be given that the future results will be achieved;
actual events, transactions or results may differ materially as a result of
risks facing us. Such risks include, but are not limited to, the effectiveness
of management's strategies and decisions, changes in business conditions,
changes in the telecommunications industry and the general economy, competition,
changes in service offerings and risks associated with our limited operating
history, entry into developing markets, managing rapid growth, international
operations, dependence on effective information systems, ability to consummate
acquisitions or enter into joint ventures with companies on terms acceptable to
us and development of its network, as well as regulatory developments any of
which could cause actual results to vary materially from the future results
indicated, expressed or implied, in such forward-looking statements. No
assurance can be given that these are all of the factors that could cause actual
results to vary materially from the forward-looking statements. Statements with
respect to acquisitions and continued trends are forward-looking and involve
risks and uncertainties. Furthermore, we have significant operations in Mexico,
subjecting us to certain political and commercial risk. We undertake no
obligation and do not intend to update, revise or otherwise publicly release the
result of any revisions to these forward-looking statements that may be made to
reflect future events or circumstances.
PART I
ITEM 1. BUSINESS.
GENERAL
We are a U.S.-based, fully integrated communications company. We supply
voice, video, data and Internet services principally to, from and within Latin
America. Telereunion, one of our subsidiaries, has built a state-of-the-art
fiber optic network in Mexico that will reach the vast majority of the Mexican
population. We also own and operate a satellite teleport facility in Silicon
Valley, which delivers an array of communications services to customers
throughout North, Central and South America. In addition, we provide a full
range of advanced services and products in Mexico to major public and private
sector customers.
We are currently engaged in two primary business segments: Voice Services
and Advanced Services.
Our Voice Services segment supplies international and domestic voice
services, via switched and dedicated networks, principally to, from and within
Latin America. Revenues in the Voice Services segment are generated on a retail
and wholesale basis.
Our Advanced Services segment is made up of three distinct lines of
business: network solution services, customer relationship management and
broadband services and other products. Advanced Services are provided to
customers principally in Latin America. Our network solutions services offer a
full range of network systems integration services. Our customer relationship
management provides value added telecommunications services primarily through
delivering custom developed solutions to client's call center needs. Our
broadband services provides satellite teleport services to customers in the U.S.
and Latin America.
We believe we are well positioned to capitalize on the opportunities
presented by the large and growing voice, video, data and Internet services
market. We are in the process of significantly expanding our facilities-based
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telecommunications operations and over the next 12 months intend to broaden our
service offerings in markets where we have established, or expect to establish,
a significant presence. To enhance delivery of our services at the lowest
possible cost, we have completed the construction of a 636 kilometer fiber optic
and microwave network in Mexico. We have taken a "smart build" approach to the
Mexican market. Through swapping fiber optic on that portion of our network,
which we have constructed with that available from other concessionaires, we
plan to have a network covering approximately 4,000 kilometers in Mexico. We
have reached formal agreements or letters of intent to exchange fiber optic,
bringing the total under some form of agreement to 3,300 kilometers as of the
date of this filing. Our network is one of the largest in Mexico. Our Mexican
network is a combined fiber-optic and microwave long distance network,
connecting the United States, the Gulf region of Mexico and targeted Mexican
cities. We believe our network in Mexico will allow us to enhance our service
offerings to business customers in Mexico while also reducing our cost of
terminating voice traffic into, out of and within Mexico. Our Mexican network
will also include metropolitan fiber rings in some of the largest cities in
Latin America, including Mexico City, Leon and Guadalajara. In those cities,
which will have metropolitan fiber, we will more effectively address the last
mile issue and provide a bundle of advanced networking services at a lower cost.
Our Mexican network is currently being tested.
Telereunion, S.A. de C.V., a subsidiary of ours, owns the Mexican network.
Because of the unique ownership structure that we have employed, we believe that
we are one of the only companies that can operate both in the U.S. and Mexico as
one company, providing a unique competitive advantage. In November 1999, we
issued 400,000 shares of our common stock and 100,000 warrants exercisable at
$7.50 per share to the minority shareholders of Telereunion in exchange for an
additional 27% of the economic interests of Telereunion. This transaction
brought our economic interest up to 92% while our voting interest remains at
49%. However, three of our directors, who are Mexican citizens, collectively own
another 18% of the voting interest of Telereunion, giving us effective control
of Telereunion.
In January 2000, we and Pointe Communications Corporation jointly announced
a merger of our companies in an all-stock transaction. Pointe common stock is
traded on the over-the-counter bulletin board under the symbol ''PCOM''. Pointe
provides a wide array of telecommunications and network services, including CLEC
operations, long distance, data, Internet, prepaid calling cards, carrier
wholesale, and telecommuting services. Although we can provide no assurance,
as of the time of this filing, it is expected that the merger with
Pointe will be finalized during the second quarter of 2000 at which time
the companies will begin operating under the common name of Telscape.
The terms of the original merger agreement called for us to issue
our common stock to Pointe shareholders at an exchange ratio of 0.215054 of
a share of our common stock for every share of Pointe common stock. Also, for
each share of Pointe convertible preferred stock outstanding, we will issue one
share of our convertible preferred stock (with rights and preferences
substantially the same as the Pointe convertible preferred stock). On March 30,
2000, Telscape and Pointe agreed to an adjustment of the exchange ratio of
approximately 4%. The adjusted ratio of shares is the result of a Pointe
subsidiary, TeleCommute Solutions ("TCS"), which recently received $19 million
in new financing led by the MCI WorldCom Venture Fund and others, remaining in
the combined companies. The merger agreement had previously provided that TCS
was to be spun off to Pointe shareholders prior to the consumation of the
merger. Consequently, each share of Pointe stock will be exchanged for 0.223514
shares of our common stock.
INDUSTRY BACKGROUND AND MARKET DEMAND
Overview
The international telecommunications industry is undergoing a period of
fundamental change that has resulted, and is expected to continue to result, in
significant growth in international telecommunications traffic and revenues.
According to the World Telecommunication Development Report 1996/97 published by
the International Telecommunications Union (''ITU'') on February 20, 1997 (the
''ITU Report''), the 1998 revenue of the global telecommunications industry is
projected to exceed $1 trillion. According to TeleGeography 1999, revenues
generated from the provision of international long distance services increased
to $65.9 billion in 1997 from $26.8 billion in 1988, a compound annual growth
rate of 10.6%. We believe that Latin American traffic, including traffic between
the United States and Latin America, will continue to grow faster than the
international telecommunications market as a whole as a result of (i) underlying
economic growth within Latin America, (ii) growth of regional trade as a result
of free trade initiatives such as NAFTA, Mercosur and the Andean Pact, (iii)
deregulation and privatization of telecommunications carriers in the region,
(iv) projected regional increases in telephone density and (v) increasing demand
for bandwidth-intensive applications.
We believe that numerous factors have driven the growth in demand for
international telecommunications products and services. Those factors include:
(i) the globalization of the world's economies and the worldwide trend toward
deregulation of the telecommunications sector, (ii) declining prices and a wider
selection of products and services driven by greater competition resulting from
deregulation, (iii) increased telephone accessibility resulting from
technological advances and greater investment in telecommunications
infrastructure, including deployment of wireless networks, (iv) increased
international business and leisure travel and (v) growth of computerized
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transmission of voice and data information. These trends have sharply increased
the use of, and reliance upon, telecommunications products and services
throughout the world. We expect these trends to continue for the foreseeable
future.
The growth in the use of telecommunications services and the rapidly
changing international telecommunications market have created a significant
opportunity for carriers such ourselves who can offer high quality, low cost
comprehensive telecommunications products, systems and services. We believe that
a high percentage of the world's business and residential consumers continue to
be subject to high prices with poor quality and lack of availability of service
which have been characteristic of many of the traditional monopolies in mail,
telephony and telegraphy (PTT-Post, Telephone & Telegraph administrations).
Demand for improved service and lower prices has created opportunities for
private companies to compete in the international telecommunications market and
has spurred a broadening of products and services. New technologies have
contributed to improved quality and increased transmission capacity and speed.
We therefore believe that recent and on-going deregulation and increasing access
to telecommunications facilities in emerging markets will bring a high level of
growth in the demand for telecommunications services outside the United States,
particularly in Latin America.
By eroding the traditional monopolies held by PTT (Post, Telephone &
Telegraph administrations), many of which are or were wholly or partially
government owned, deregulation is providing U.S.-based providers the opportunity
to negotiate more favorable agreements with both the traditional administrations
and emerging foreign providers. In addition, deregulation in certain foreign
countries is enabling U.S.-based providers to establish local switching and
transmission facilities to terminate their own traffic and carry international
long distance traffic originating in those countries. Deregulation,
privatization, the expansion of the resale market and other trends influencing
the international telecommunications market are resulting in decreased
termination costs, a proliferation of routing options and increased competition.
Advances in technology have created multiple ways for telecommunications
carriers to provide customer access to their networks and services. Overall,
these changes have resulted in a trend towards bypassing traditional
international long distance operating agreements as international long distance
companies seek to operate more efficiently. In markets that have not deregulated
or are in the process of implementing deregulation, international long distance
carriers have used advances in technology to develop innovative alternative
methods to meet customer demand.
Recent legislation and the World Trade Organization agreement among
numerous countries are expected to lead to increased liberalization of the
majority of the world's telecommunication markets. Specifically, the WTO
Agreement created a framework under which 69 countries committed to liberalize
their telecommunications laws to permit increased competition and, in most
cases, foreign ownership in their telecommunications markets, beginning in 1998.
The Telecommunications Act of 1996 established a framework for increasing
competition in the U.S. telecommunications services market and the European
Union's Services Directive abolished exclusive rights for the provision of voice
telephony services throughout the European Union and the local Public Switched
Telephone Network of any member country of the EU by January 1, 1998.
We believe that the initiatives mentioned in the prior paragraph, as well
as other proposed legislation and agreements, will provide increased
opportunities for emerging competitive carriers such as Telscape to provide
telecommunications services in targeted markets. Deregulation has encouraged
competition, which in turn has prompted carriers to offer a wider selection of
services and reduce prices. The industry's projections for substantially
increased international minutes of use and revenue by 2000 are based in part on
the belief that reduced pricing as a result of deregulation and competition will
result in a substantial increase in the demand for telecommunications services
in most markets.
Latin America
The telecommunications market in Latin America is undergoing a period of
deregulation, privatization, increased competition and rapid growth. According
to TeleGeography 1999, growth in the demand for telecommunications services
across Latin America in 1996-1997 increased at a rate of 7.6%.
We seek to focus on opportunities created by deregulation and market growth
in the rapidly changing international telecommunications markets in Latin
America. Countries in the Latin American region generally are experiencing a
solid period of economic, business and infrastructure growth, reduced inflation
and economic and political stability. Substantial opportunities exist for
providers of telecommunications equipment, system integration, value-added
services and voice and data services as Latin American countries move toward
privatization and greater liberalization of their telecommunications markets.
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We believe that the small-to medium-sized business segment is the target
market in many countries in Latin America for advanced services such as
Internet, e-commerce, virtual private networks, teleconferencing, advanced
phone, unified messaging, frame relay and asynchronous transfer mode technology.
Unlike larger businesses that have the resources and traffic volume to support
the internal development of a wide range of advanced services, developing and
maintaining such services is not economical for smaller businesses. Accordingly,
to meet these needs smaller businesses may either purchase such services or
outsource their telecommunications services to third parties specializing in
such services, such as Telscape. We believe that our experience and expertise in
providing these services will enable us to compete in this market.
We believe that we are well positioned to capitalize on these opportunities
by providing high quality, low-cost comprehensive telecommunications services.
As a rule, Latin American countries have historically suffered from extremely
low telephone density, and the markets have been subject to characteristically
inefficient, poor-quality service, as well as the unavailability of new and
innovative systems and services. In addition, the Latin American markets in
which we offer services or in which we seek to compete generally are
characterized by a lack of fiber optic cable capacity. Existing satellite-based
capacity offers limited capability to meet the increasing demand for
bandwidth-intensive applications in our targeted countries in the region. There
exists a critical and growing demand for the type of high-quality, innovative
systems, products and services that we are currently providing and seek to
provide in expanding in our current markets and exploiting the opportunities in
new markets throughout Latin America.
We believe that the Latin American region is poised for growth in
telecommunications usage based on the political and economic changes in many
Latin American countries that have modernized their economies, increased
transparency in business and governmental practice and sustained strong economic
growth. In addition, telecommunications growth will be spurred as a result of
the recent and ongoing privatizations by many Latin American governments of
their previously state-owned telecommunications monopolies, as well as ongoing
liberalization of the regulatory frameworks in many countries in the region to
promote competition in telecommunications services.
Mexico
The market for telecommunications services in Mexico is undergoing rapid
expansion. According to TeleGeography 1999, the volume of telecommunication
traffic to Mexico increased 16.2% in 1996 and 58% in 1997. The 1997 traffic
along the U.S.-Mexico route accounted for 12.1% of the U.S. international market
and 88.6% of the Mexican international telecommunications market. According to a
report issued by the Federal Communications Commission's (''FCC'') Common
Carrier Bureau in November 1998, revenues for sales on the U.S.-Mexico route
exceeded $1.1 billion in 1997.
As a result of legislation enacted in 1995, Mexico began the process of
opening the telecommunications market to competition. National and international
long distance services were opened to competition in August 1996, subject to the
issuance of individual concessions. Pure switched international resale is not
allowed in Mexico to date. Advanced services are fully open to competition and
subject to a simple registration process.
We believe we are well positioned to take advantage of the growing demand
for telecommunications services between the United States and Mexico. We
currently provide a full range of systems integration and value-added services
to major public and private customers. In June 1998, our subsidiary Telereunion
S.A., received a concession from the national telecommunications regulatory
agency, the Secretaria de Comunicaciones de Telecomunicaciones (''SCT''), which
had allowed us to construct our Mexican network.
Other Latin American Markets
We intend to focus on opportunities created by deregulation of
telecommunications services in other telecommunications markets in Latin
America. Latin American markets have undergone rapid expansion as a result of
regional and global deregulation.
Countries within Latin America have different national regulatory schemes
and are in varying stages of deregulation. The requirements for us to obtain the
necessary approvals to offer value-added services and various other
telecommunications services, including voice telephony, vary from country to
country. In 1999 we entered into several transactions in Latin America including
the provision of Internet services via satellite to Guatemala, Costa Rica and El
Salvador, and the signing of interconnection and correspondent agreements with
Telefonica de El Salvador.
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Strategy
Our objective is to become a leading provider of high quality,
competitively priced, voice, video, data and Internet services principally to,
from and within Latin America. Key elements of our strategy are to:
- Expand Network Services. We intend to continue expanding our network
by acquiring switching and transmission facilities and additional
fiber optic and satellite transmission capacity for the provision of
voice, video, data and Internet services to complement our existing
U.S. and Mexico networks. We also intend to deploy Metropolitan Area
Fiber where appropriate and the investment is justified. Our
objectives in making these investments are to: (i) provide on-net
capacity to allow growth in our voice services business; (ii) increase
profitability for switched services by reducing the amount of our
traffic terminated by other long distance carriers pursuant to resale
arrangements; and (iii) use the expanded network as a platform to
support advanced, bandwidth-intensive data and Internet applications.
- Provide an Integrated Suite of Service Offerings. We plan to provide
our commercial customers in Mexico with a comprehensive suite of
telecommunications services, including international and domestic long
distance services, systems integration, call centers, conference
calling, Internet access and other broadband data services. We believe
that providing multiple service offerings improves customer retention
and the profitability of individual customer relationships. We believe
that Telscape is one of the few companies to offer a wide array of
high quality and competitively priced telecommunications services to
commercial customers in Mexico, and we expect to pursue opportunities
to provide similar services as we expand into other Latin American
markets.
- Expand Scope of Advanced Services Offerings. By leveraging our Mexican
network and teleport assets and our extensive integration experience
and customer base, we are implementing a strategy to become a leading
Enabling Service Provider ("ESP"). As an ESP, we are creating the
telecom and data center infrastructure for businesses to conduct
electronic business and commerce. We will continue to provide on a
more network-centric basis the e-business services that companies in
Latin America need to conduct their internal communications. We are
also currently launching e-commerce services for businesses that
involve the next-generation communications and transactions with the
external world. Some of these e-commerce services include enhanced IP
transport and content delivery, network and systems management,
hosting and collocation, security and customer care services. We
believe that the Company will be in a position to become a premier
e-commerce platform for companies, e-exchanges, content providers, and
ASP's (applications service providers) interested in pursuing the
Latin American and Hispanic markets.
- Expand Scale and Scope of Retail Business. We believe that our
Telefiesta prepaid cards position us for expanded growth in the retail
sector of the international telecommunications market. We have
recently launched a prepaid card in the Mexican market, providing us
with a cost effective and efficient means of targeting the retail
market. We are also in the process of launching our
''Telefiesta-Amigo'' program, a unique, one-plus long distance service
in the United States targeted at Hispanic customers that not only call
Mexico frequently but would also like to provide their counterparts in
Mexico with a card to make Northbound calls at relatively favorable
rates by using a Telefiesta card that is billed directly to their home
telephone bill.
- Pursue Strategic Alliances, Joint Ventures and Acquisitions. We
continue to pursue strategic alliances, joint ventures and
acquisitions to expand our business, increase our customer base, add
network and circuit capacity, enter additional markets and develop new
products and services. We seek to acquire interests in companies that
have network facilities, service offerings or technologies that
complement ours. Since 1996, we have completed six acquisitions,
including a U.S.-based provider of satellite telecommunications
services with access to satellites covering Central and South America,
a U.S.-based prepaid card provider focused on Hispanic consumers in
the United States and Latin American markets, three data and systems
integration businesses in Mexico and a U.S.-based reseller of long
distance services. In December 1999, we signed a merger agreement with
Pointe Communications of Atlanta, Georgia.
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SERVICES
Telscape currently operates in two primary businesses segments: Voice
Services and Advanced Services. Our business lines within these segments are
designed to serve our targeted commercial and consumer customers. Financial
information about our business segments for each of the three years ended
December 31, 1997, 1998 and 1999, are disclosed in Footnote 9 in the Notes to
the Consolidated Financial Statements.
VOICE SERVICES
Retail
We provide national and international long distance services to consumers
in the U.S., primarily first and second generation Hispanic individuals, through
prepaid cards under our Telefiesta brand name. We believe that prepaid cards
are the most effective vehicle in the short-term to provide long distance and
other telecommunications services to our targeted Hispanic residential customer
segment, as well as benefiting customers by enabling them to purchase the card
anonymously and in various fixed dollar amounts. In 1998, we added dual-country
capabilities to our prepaid cards, offering usage in both the U.S. and Mexico,
and, we plan to add other countries throughout Latin America. Late in 1999, we
started distribution of our cards directly to retail outlets throughout select
cities in both Mexico and the U.S. Additionally, we are in the process of
launching our Telefiesta-Amigo program, a unique residential long distance
product based in the U.S. for this same target market. We believe that
Telefiesta is one of the most widely recognized brand names for prepaid card
services among the 30 million Hispanics in the U.S. and that it has historically
enjoyed a market share of approximately 10% of the total U.S. prepaid card
market to Latin America. Through our Telefiesta-Amigo program, we plan to
leverage the brand recognition that Telefiesta enjoys in the Hispanic
community. Our Telefiesta-Amigo program is an important initiative for us
because it created subscribers.
Wholesale
We provide wholesale carrier services to first and second-tier carriers in
the U.S. to complement our retail traffic pattern. Providing both retail and
wholesale services on our network allows us to maximize efficiency and better
utilize our network. In addition, we negotiated advantageous rates in our
targeted Latin American countries by leveraging our extensive relationships with
local carriers. We market our wholesale capacity through a direct sales effort.
We had fiscal 1999 revenues of approximately $77.3 million from our voice
services, representing 72.4% of our consolidated revenues. One customer within
this line of business represented $12.2 million, or 11.45%, of 1999 consolidated
revenues.
ADVANCED SERVICES
We provide a full range of advanced services to major public and private
customers in Latin America .
Network Solutions
We are one of the largest systems integrators in Mexico, providing
customized and turnkey solutions to corporations and institutions under the same
management team since 1986. Services include developing, building, installing
and servicing corporate voice, video and data networks. Post-sales support
consists of maintenance contracts, outsourcing, network management and
monitoring services. Although we expect that systems integration revenues will
not increase as rapidly as those from our other lines of business, it will
remain an important part of our strategy to introduce commercial customers to
our other telecommunications services and essential in our strategy to provide
our customers with a comprehensive suite of telecommunications services.
Since 1992, we have been one of five distributors in Mexico of Nortel
telecommunications equipment. We also distribute voice and teleconferencing
products manufactured by Polycom, Centigram and VTEL and distribute, install and
maintain data and networking equipment manufactured by 3Com Corporation, Nortel,
Newbridge Networks, ADC Kentrox and Cisco. We are the largest Nortel and 3Com
distributor in Mexico and are consistently recognized as the industry leader in
systems integration.
We anticipate that traditional long distance and local exchange services
will increasingly involve sophisticated, application-oriented services such as
audio, data and video conferencing, enhanced facsimile, telemarketing,
interactive voice response, help-desk, advanced Internet and other content and
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service intensive value-added services. We have provided advanced services in
Mexico since 1995, giving us both technical and marketing experience needed to
compete in the advanced services market.
Our sales and technical personnel are organized as teams that combine
strong sales capabilities with specialized technical expertise in cutting-edge,
product-specific areas such as asynchronous transfer mode and frame relay
networks, virtual private networks and telemedicine-distance learning, help
desks and teleconferencing solutions. For example, we were the first company in
Mexico to offer conference call services. Our systems integration business also
provides a natural channel to introduce, with a high degree of credibility,
commercial customers to our other products and services, further broadening our
relationships with our customers. For example, we now offer our Mexican clients
the opportunity to take advantage of advanced bandwidth-on-demand and disaster
recovery services through our teleport in Mountain View, California. We believe
that much of the expertise developed in Mexico can be replicated in other Latin
American countries. Network solutions customers in Mexico include the Mexican
Stock Exchange, Pepsico (Frito Lay), Hewlett Packard, and Mabe (a GE joint
venture).
Customer Relationship Management
As traditional telecommunications services become more of a commodity, we
believe that advanced services will become an increasingly important component
of our service offerings. We have leveraged our systems integration expertise to
provide outsourced network services, including help desk support and customer
relationship management services.
Our expanding presence in advanced services resulted in an outsourcing
contract, signed in the third quarter of 1997, with the U.S. Embassy in Mexico
City. The contract is a one-year contract and the U.S. government has the option
to renew the contract for up to four additional one-year terms. The contract has
been renewed for the first additional year through the fourth quarter of 1999
and was again renewed for another year in the first quarter of 2000. The U.S.
Embassy system is designed to automate delivery of visa applications and enables
callers to request visa information from either a live operator or from an
automated touch-tone system. In connection with this contract, we established a
call center in Mexico City, which we believe will serve as a platform for
additional growth. In the fourth quarter of fiscal 1998, we received approval
from the Mexican Ministry of Foreign Affairs to provide passport information and
other information to the Mexican public via our help desk operations. During
1999, we obtained a contract to provide assistance to Hertz Car Rental for their
reservation system needs.
During the first quarter of 2000, we moved into a new, larger facility for
our customer relationship management business. Our new premises consist of a
22,000 square feet building equipped with a training and recruiting area,
quality assurance areas, 240 fiber optic telephone lines, an E1/T1 connection to
the United States, dedicated lines connecting our facility to the U.S. Embassy
and, among other security features, back-up electrical power. Our new premises
presently host 160 attendant positions and can be expanded to up to 400
positions. By way of comparison, our prior facility was approximately 4,000
square feet in size and had reached its capacity of 120 attendant positions.
On March 6, 2000, the U.S. Embassy announced that its Border Crossing
Cards program has been modified. This program modification will result in the
substitution of approximately 5 million identification cards. Our new facilities
will allow us to manage this additional traffic while maintaining our high level
of service to the U.S. Embassy. We are presently investing in additional systems
including state-of-the-art workforce management and customer relationship
management software. We plan on continuing our efforts to diversify our customer
base and are moving a larger proportion of our U.S. customer service areas to
our call center in Mexico, where we enjoy a relative cost advantage in
comparison to our U.S.-based customer service facilities.
Broadband Services
Through our subsidiary, INTERLINK, we own and operate a satellite teleport
facility in Mountain View, California. INTERLINK provides voice, video, data and
Internet transport services including fractional and full T-1 data broadcast,
dedicated circuits and private line up-link and down-link services to Latin
America and other parts of the world. INTERLINK's satellite teleport has been
operational for more than a decade and we believe it is among the most reliable
in the U.S. INTERLINK's satellite teleport services both our network needs for
our international long distance customers as well as INTERLINK's customers
mainly in the telecommunications, broadcasting and weather service industries.
In addition, INTERLINK has introduced Bandwidth-on-Demand, Integrated Services
Digital Network videoconferencing and Internet-through-satellite services and
also serves as an Internet backbone provider to Internet service providers
(''ISPs'') in remote areas where access to high speed fiber optics is limited,
as is the case in most Latin American countries. We believe that INTERLINK
enjoys an excellent reputation within the industry for our reliability and
services and has positioned us as a natural ''conduit'' to provide services from
and to the United States with an emphasis on Latin America. We believe that
INTERLINK has the ability to significantly expand our services and future
revenue. INTERLINK also produces radar detectors, VSATs (Very Small Aperture
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Terminals) and telecommunications amplifiers, which represent less than one
fourth of INTERLINK's projected revenues for 2000. See discussion below under
recent developments concerning the discontinuation of the production of these
products.
We had fiscal 1999 revenues of approximately $29.5 million from our
Advanced services businesses, representing 27.6% of our consolidated revenues.
No single customer within this line of business represented 10% or more
of 1999 consolidated revenues.
NETWORK
We currently manage our own telecommunications network and utilize the
transmission capacity of several carriers. We believe that increasing the
percentage of traffic we carry on-net will enable us to increase margins and
profitability and ensure quality. In addition, our use of multiple carriers
increases cost efficiencies by establishing additional routing capability and
enables us to obtain sufficient capacity to support our rapid growth.
Our present network is comprised of leased and owned switches, fixed cost
point-to-point fiber optic cable leases, leased satellite capacity to provide
connectivity for many Central and South American cities and owned fiber optic
cable in Mexico. We intend to expand our network primarily by (i) moving from
the traditional circuit-based technology to packet-based technology as more
advance voice applications are available and IP traffic demands it, (ii)
acquiring additional satellite and fiber optic transmission capacity and (iii)
installing switching equipment in targeted U.S. and Latin American markets. We
expect that we will be able to realize significant cost savings by routing an
increasing portion of our traffic on-net. Please see a more complete discussion
of our network in Mexico below.
Switching Facilities
We own and operate a Nortel DMS-250, state-of-the-art digital switch in
Houston, Texas with 11,520 ports. In addition to utilizing this switch as a
tandem switch, we also utilize it to provide prepaid calling card services. We
are currently installing a Lucent 5ESS international gateway switch in Houston,
Texas, which will have 9,780 ports. We also have two Excel switches in Houston,
which are being utilized both in a tandem mode as well as to provide prepaid
calling card services and have approximately 3,100 ports each.
In Monterrey, Mexico we have installed a Lucent 5ESS international gateway
switch with 8,700 ports. We have also purchased a Lucent 5ESS international
gateway switch with 7,620 ports to be installed in Mexico City. In addition, we
have three Excel switches operational in Mexico with ports ranging from 1,440 to
3,744.
Satellite Facilities
In connection with our acquisition of INTERLINK in 1998, we acquired a
teleport facility in Mountain View, California. We believe that this acquisition
enhanced our position as an integrated telecommunications provider, and helps
assure satellite capacity to our targeted markets in Latin America.
Network Capacity
We purchase transmission services on a per minute basis and lease
transmission capacity on a fixed cost basis from a variety of local and long
distance carriers. We are currently expanding our leased on-net capacity in an
attempt to lower costs in our largest distribution areas. We obtain private line
capacity from local domestic and international carriers. Our agreements with
these carriers fix the private line cost for a minimum of one year. Our
agreements with carriers provide that some international per minute rates may
fluctuate with rate change notice periods varying from five days to one month.
The variable nature of the cost of services and many of our contracts and
agreements subject us to the possibility of unanticipated cost increases and the
loss of cost-effective routing alternatives.
We have signed a contract with a third party for the third party vendor to
provide telecommunications services to us including the origination of inbound
800 dialed phone calls for our prepaid cards, and the termination of U.S.
domestic long distance and international long distance. The contract term is
through June 1, 2001, and provides for a minimum monthly purchase commitment of
$750,000 and a total purchase commitment of $31,110,000. We can cancel the
minimum monthly purchase commitment with 30 days notice upon meeting our total
minimum purchase commitment. We estimate that total purchases from this third
party shall continue to exceed the minimum contractual requirements.
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Telecommunications Network Management and Information Systems
Our network management and information systems enable us to (i)
economically and efficiently route traffic over our network and the networks of
other carriers, (ii) offer reliable services with high call completion rates and
voice quality and (iii) manage an advanced voice, data and video multi-service
platform. We believe that these systems, particularly their ability to provide
flexible, high quality service to international destinations, provide us with a
competitive advantage relative to many other providers of telecommunications
services. We monitor our network and initiate changes to our overall switch
network and traffic routing where appropriate to optimize routing and minimize
costs. Because a substantial portion of the traffic carried by us terminates
internationally and call completions vary by carrier, we monitor the call
completion efficiencies of our suppliers. We intend to continue configuring
large portions of our network with Common Channel Signaling System 7 (''SS7'').
SS7 reduces voice call setup and connect time delays and provides additional
technical capabilities and efficiencies for call routing and network
engineering.
Network Operations Center
We have a network operations center (''NOC'') in Mexico City, Mexico, which
we will use to monitor and control all switches and other transmission equipment
used in our network. The NOC operates seven days a week, 24 hours per day, 365
days a year. This NOC will be greatly enhanced by the state-of-the-art OSS
(Operation Support Systems) tools acquired in connection with the buildout of
the Mexican network, and will allow us to provide advanced billing,
provisioning, customer care- help desk and network, systems and applications
management services to voice, data and Internet customers.
Our Mexican network
Our network philosophy is to invest in network facilities only after we
have developed a customer base and to the extent such an investment can improve
our network cost structure and services provided to our customers. We have
developed a substantial presence in Mexico over the last 13 years, and, in June
1998, we, through Telereunion, received a concession, a 30-year,
facilities-based carrier license, from the Mexican government. Telereunion is
one of only 16 concession holders in Mexico. We have now completed the
construction of our network in Mexico.
Our Mexican network provides us with the following: (i) additional capacity
to allow growth in our voice services business; (ii) increased profitability by
bringing traffic on-net; and (iii) the ability to provide advanced,
packet-based, bandwidth-intensive data and multimedia networking applications to
commercial customers in Mexico.
We built the first stage of our Mexican network, consisting of 636 km of
fiber optic cable and microwave, circuit switched type of transmission and
switching facilities, in the Gulf region of Mexico. The fiber optic cable
consists of 48 strands. The first stage provides connectivity from Puebla to
Veracruz to Poza Rica.
We have taken a "smart build" approach to expanding our network coverage in
Mexico. Due to the fact that we selected a very desirable region in which to
construct our Mexican network, other carriers are interested in exchanging fiber
on their own networks for fiber on our network. For instance, in May 1999, we
signed an agreement to exchange eight strands of fiber on our network covering
636 kilometers for four strands of fiber on another carrier's network covering
1100 km. This exchange had the effect of tripling our network coverage for
relatively little additional investment. In November 1999, we signed a letter of
intent to exchange fiber with another carrier, which, upon consummation, will
increase our network coverage by 550 kilometers. In December 1999, we entered
into an agreement with another carrier to exchange fiber. Upon consummation of
this December 1999 agreement as well as the other agreements described above, we
will have a fiber optic network in Mexico of approximately 3,300 route
kilometers, resulting in one of the largest networks in the country. The fiber
obtained through this December 1999 agreement will connect the important cities
of Puebla, Mexico City, Toluca, Queretaro, Leon and Guadalajara. In combination
with our own buildout and the agreements described above, our Mexican network
will connect Guadalajara, Leon, Queretaro, Toluca, Mexico City, Puebla,
Veracruz, Poza Rica, Ciudad Victoria, Matamoros, Reynosa, Monterrey, San Luis
Potosi and several other smaller cities in Mexico. The network will also include
metropolitan fiber rings in some of the largest cities in Latin America,
including Mexico City, Leon and Guadalajara. In those cities, which will have
metropolitan fiber, we will more effectively address the last mile issue and
provide a bundle of advanced networking services at a lower cost.
We selected Lucent to engineer, furnish and install our network in Mexico.
In August of 1999, we signed a loan agreement in which Lucent agreed to provide
us with up to $40 million of long term financing. In January 2000, Lucent agreed
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to expand this commitment by $20 million, subject to certain conditions,
including the merger with Pointe.
SALES, MARKETING AND DISTRIBUTION
VOICE SERVICES
Retail
We market our prepaid cards under the Telefiesta brand name. Our
Telefiesta prepaid cards are sold through distributors to independent retail
outlets throughout the United States. In the U.S., we have traditionally focused
on building a substantial network of wholesale distributors that sell to
sub-distributors and directly to retail outlets. The sub-distributors generally
sell only to retail outlets. We intend to expand our internal sales department
in order to sell directly to large retail chains, department stores, the tourist
industry, airport and hotel gift shops, gas stations and other retail outlets
owned or franchised by larger companies, both in the U.S. and Mexico.
In the United States, we target heavily populated metropolitan areas with
substantial Hispanic populations that generate significant international calling
volume. Many of our distributors are members of such ethnic communities or
otherwise have personal or business relationships in such communities. In
developing relationships with distributors, we also focus on expansion into new
geographic and metropolitan areas with substantial Hispanic populations. We
believe that the success of our prepaid cards has created significant brand
loyalty and encourages distributors and retail outlets to actively market our
products.
We regularly provide distributors and retail outlets with point of purchase
advertising and explanatory materials. We frequently add new prepaid card
products to our service offerings, and adjust our pricing for particular traffic
segments in order to target certain customer groups, respond to competitive
pressures and otherwise increase market share.
In Mexico, in conjunction with the launch of our Telereunion prepaid card,
we established a sales department at one of our subsidiaries to more
aggressively develop distribution channels in which we are selling directly to
the retail outlet, rather than through wholesale distributors as has been
traditionally done in the U.S.
We are launching our Telefiesta-Amigo program using direct distribution
channels and have hired commissioned based sales teams to generate the initial
sales for this product. We intend to engage in an extensive telemarketing effort
whereby we will mine our present customer databases to solicit their long
distance business. This telemarketing effort will take advantage of leads that
we have obtained from several prepaid card promotions requesting user
information as well as databases we have developed containing telephone numbers
of callers that have shown past patterns including calls from the U.S. to
Mexico.
Wholesale
Our carrier resale department markets our international outbound switched
and dedicated services on a wholesale basis to other telecommunications
companies through a direct sales effort. To provide a more complete package of
international rates to our customers, we intend to establish strategic
relationships with entities that have gateways to international destinations, to
complement the capacity we have with our Mexican network. When appropriate, we
may establish in-country relationships for the termination of international long
distance.
ADVANCED SERVICES
Network Solutions
To serve the complex needs of our customers, we formed a team of sales and
technical personnel that combines strong sales capabilities with specialized
technical expertise in product-specific areas such as Private Branch Exchange
(''PBX''), voice processing, Internet, video conferencing and asynchronous
transfer mode and frame relay networks. We believe that this sales approach
allows us to provide innovative solutions to complex systems integration
projects.
In Mexico, we promote our network solutions services through a combination
of advertising, trade shows, direct mail and telemarketing. We historically
utilized our own direct sales force but have recently developed a dealer network
to broaden our distribution channel. Our product managers focus on cultivating
relationships with one or more vendors and with coordinating sales efforts for
their specific product lines.
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We market our network solutions services through advertising in trade
magazines, telemarketing, direct mail and attending trade shows. We believe that
our systems integration service base provides an excellent platform for the
follow-up sales of advanced telecommunications services, since many of our
customers have developed confidence in our ability to implement complex
projects.
Our direct sales effort begins with understanding the customer's business.
Sales personnel then identify potential areas where our advanced services could
improve the customer's business, suggesting specific services, customizing those
services to meet the customer's specific needs, implementing network solutions
and monitoring the results and potential changes in the customer's needs.
Customer Relationship Management
Until the recent expansion of our call center facilities, our capacity was
largely utilized under our contract with the U.S. Embassy. Given the additional
capacity, we intend to market and sell our bilingual capabilities to customers
in the United States and Mexico through a direct sales effort.
Broadband Services
Our broadband services business markets with satellite teleport services to
other telecommunications companies through a direct sales effort. Our service
offerings include voice, video and data transport services including fractional
and full T-1 data broadcast, dedicated circuits and private line up-link and
down-link services to Latin America and other parts of the world. We have also
introduced Bandwidth-on-Demand, ISDN videoconferencing and
Internet-through-satellite services and also serve as an Internet backbone
provider to ISPs in remote areas where access to high speed fiber optics is
limited, as is the case in most Latin American countries. We have also begun
cross-selling our teleport services through our network solutions sales force in
Mexico and our international long distance wholesale carrier sales force in the
U.S.
CUSTOMERS
VOICE SERVICES
Retail
We market our prepaid cards primarily to Hispanic communities in the U.S.
that generate high levels of international traffic to targeted Latin American
countries where we have favorable termination agreements. We sell our prepaid
cards through a network of distributors, who distribute the prepaid cards to
independent retail outlets in 100 cities throughout the U.S. During the year
ended December 31, 1998, no single distributor represented more than 10% of our
overall revenues. During the year ended December 31, 1999, one distributor
represented $12.2 million or 11.45% of our consolidated sales for the year ended
December 31, 1999.
Wholesale
Our wholesale customers are primarily other international carriers that
seek termination services in one or more Latin American countries. During the
year ended December 31, 1999, no single wholesale carrier customer represented
more than 10% of our consolidated revenues.
ADVANCED SERVICES
Network Solutions and Customer Relationship Management
We perform substantially all of our network solutions and customer
relationship management services for business customers located in Mexico. Our
network solutions business has worked with over 2,500 corporate customers in the
last thirteen months. During the year ended December 31, 1999, no single
network solutions or customer relationship management customer represented more
than 10% of our overall revenues.
Broadband Services
Customers for our broadband services include other international carriers
both in the U.S. and in Latin America which utilize our services as a low cost,
dependable and high speed alternative to fiber optic connectivity between the
U.S. and Latin America; private and public corporate companies which utilize our
private line, dedicated circuits and bandwidth on demand services; and Latin
American ISPs which utilize our services as a source for high-speed connectivity
to Tier I Internet backbone providers in the U.S. During the years ended
December 31, 1998, and 1999, no single satellite teleport services customer
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represented more than 10% of our consolidated revenues over the respective
period then ended or of our consolidated for the years ended December 31, 1998
or 1999, respectively.
CUSTOMER SUPPORT AND BILLING
We believe that reliable, sophisticated and flexible billing and
information systems are essential to our ability to remain competitive in the
global telecommunications market. Accordingly, we upgraded our billing system
this year and are using a Compaq Proliant 5000 Server with Highland Lakes
Billing Software. As part of our Mexico network construction, we have entered
into a contract for the provision of a turnkey state-of-the-art operating
support system (OSS) from a major U.S. vendor.
Our billing system enables us to (i) accurately analyze network traffic,
revenues and margins by customer and by route on a daily basis, (ii) validate
carrier settlements, and (iii) monitor least cost routing of customer traffic.
These reports produce efficiencies by reducing the need for monitoring by our
employees. We believe that the accuracy and efficiency of our management
information systems provide us with a significant strategic advantage over other
emerging carriers.
COMPETITION
The international and national telecommunications industry is highly
competitive, is subject to rapid change precipitated by advances in technology
and deregulation and is significantly influenced by the pricing and marketing
decisions of larger industry participants. Our success depends upon our ability
to compete with a variety of other telecommunications providers in each of our
markets, including the respective PTT in each country in which we operates.
Other competitors of ours include large, facilities-based, multinational
carriers and smaller facilities-based wholesale long distance service providers
in the United States and overseas that have emerged as a result of deregulation,
switched-based resellers of international long distance services, providers of
systems integration and/or advanced services, prepaid card providers and global
alliances among some of the world's largest telecommunications carriers. We
anticipate that we will encounter additional competition as a result of the
formation of global alliances among large telecommunications providers. Recent
examples of such alliances include AT&T's alliance with Unisource, known as
''Uniworld'', Cable & Wireless Plc's recent alliance with Italy's STET/Telecom
Italia to serve international customers with a primary focus on the Latin
American and European regions, WorldCom's merger with MCI, Sprint's alliance
with Deutsche Telekom and France Telecom, known as ''Global One'', and the joint
venture between Sprint and Telmex. Consolidation in the telecommunications
industry may create even larger competitors with greater financial and other
resources. The effect of the aforementioned or other similar mergers and
alliances could create increased competition in the telecommunications services
market and potentially reduce the number of customers that purchase wholesale
international long distance services from us. In the prepaid card business, we
currently compete with all of the first tier telecommunications carriers as well
as emerging multinational carriers such as Star Telecommunications, Inc., RSL
Communications, Ltd. and IDT Corporation, many of which have greater financial
resources than us. Because certain of our current competitors also are or could
be our customers, our business would be materially adversely affected to the
extent that a significant number of such customers limit or cease doing business
with us for competitive or other reasons.
International telecommunications providers such as Telscape compete on the
basis of price, customer service, transmission quality, breadth of service
offerings and value-added services, and our carrier and prepaid card customers
are especially price sensitive. In addition, many of our competitors enjoy
economies of scale that can result in a lower cost structure for termination and
network costs, which could cause significant pricing pressures within the
international communications industry. In recent years, prices for international
and other telecommunications services have decreased substantially, and are
expected to continue to decrease, in most of the markets in which we currently
compete or intend to compete. The intensity of such competition has recently
increased, and we expect that such competition will continue to intensify as the
number of new entrants increases as a result of the new competitive
opportunities created by the 1996 Telecommunications Act, implementation by the
FCC of the U.S. commitment to the WTO and privatization, deregulation and
changes in legislation and regulation in various of our foreign target markets.
There can be no assurance that we will be able to compete successfully in the
future, or that such intense competition will not have a material adverse effect
on our business, financial condition and results of operations.
Many of our competitors are significantly larger, have substantially
greater financial, technical and marketing resources, larger networks and a
broader portfolio of services than ours. Additionally, many competitors have
strong name recognition and ''brand'' loyalty, long-standing relationships with
our target customers and economies of scale that can result in a lower relative
cost structure for transmission and related costs. These competitors include,
among others, AT&T, MCI WorldCom and Sprint which provide long distance services
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in the U.S., Telmex, concessionaires and other registered value-added services
providers in Mexico, as well as PTTs and emerging competitors in other Latin
American markets where we seek to compete.
In Mexico, the regulatory authorities have granted concessions to 16
companies, including Telmex and Telereunion S.A., to construct and operate
public, long distance telecommunications networks in Mexico. Some of these new
competitive entrants have as their partners major U.S. telecommunications
providers, including AT&T (Alestra), MCI WorldCom (Avantel) and Bell Atlantic
(Iusatel). Mexican regulatory authorities have granted concessions to several
competitive local exchange providers, such as Telinor, Megacable, Amaritel,
Unitel, MetroNet, and Red de Servicios and several of Mexico's long distance
concessionaires. With regard to the provision of services in Mexico, we compete
or will compete in Mexico with numerous other systems integration, value-added
services and voice and data services providers, some of which focus their
efforts on the same customers targeted by us. In addition to these competitors,
recent and pending deregulation in Mexico and various other Latin American
countries may encourage new entrants. Moreover, while the WTO Agreement could
create opportunities for us to enter new foreign markets, implementation of the
accord by the United States and other countries could result in new competition
from PTTs previously banned or limited from providing services in the United
States. For example, the joint venture between Sprint and Telmex was granted by
the FCC for authority to enter the U.S. market and to provide resold
international switched services between the United States and Mexico, subject to
various conditions. Increased competition in such countries as a result of the
foregoing, and other competitive developments, including entry by ISPs into the
long-distance market, could have a material adverse effect on our business,
financial condition and results of operations.
We believe that PTTs generally have certain competitive advantages due to
their control over local connectivity and close ties with national regulatory
authorities. We also believe that, in certain instances, some regulators have
shown a reluctance to adopt policies and grant regulatory approvals that would
result in increased competition for the local PTT. If a PTT were to successfully
pressure national regulators to prevent us from providing our services, we could
be denied regulatory approval in certain jurisdictions in which our services
would otherwise be permitted, thereby requiring us to seek judicial or other
legal enforcement of our right to provide services or to abandon our proposed
market entry. Any delay in obtaining approval, or failure to obtain approval,
could have a material adverse effect on our business, financial condition and
results of operations. If we encounter anti-competitive behavior in countries in
which we operate or intend to operate or if the PTT in any country in which we
operate uses our competitive advantages to the fullest extent, our business,
financial condition and results of operations could be materially adversely
affected.
GOVERNMENT REGULATION
General
The global telecommunications industry is subject to international treaties
and agreements and to laws and regulations which vary from country to country.
Enforcement and interpretation of these treaties, agreements, laws and
regulations can be unpredictable and are often subject to informal views of
government officials and ministries that regulate telecommunications in each
country. In certain countries, including certain of our target Latin American
markets, such government officials and ministries may be subject to influence by
the local PTT.
We have pursued and expect to continue to pursue a strategy of providing
our services to the maximum extent we believe to be permissible under applicable
laws and regulations. To the extent that the interpretation or enforcement of
applicable laws and regulations is uncertain or unclear, our aggressive strategy
may result in our (i) providing services or using transmission methods that are
found to violate the laws or regulations of those countries where we operate or
plan to operate or (ii) failing to obtain approvals or make filings subsequently
found to be required under such laws or regulations. If our interpretation of
applicable laws and regulations proves incorrect, we could lose, or be unable to
obtain, regulatory approvals necessary to provide certain of our services or to
use certain of our transmission methods, or lose our investments in that
country. There can be no assurance that we will not be subject to fines,
penalties or other sanctions, including being denied the ability to offer our
products and services, as a result of violations regardless of whether such
violations are knowing or willful and regardless of whether such violations are
corrected.
In numerous countries where we operate or plan to operate, local laws or
regulations limit the ability of telecommunications companies to provide
telecommunications services in competition with state-owned or state-sanctioned
monopoly carriers. There can be no assurance that future regulatory, judicial,
legislative or political considerations will permit us to offer all or any of
our products and services in such countries, that regulators or third parties
will not raise material issues regarding our compliance with applicable laws or
regulations, or that such regulatory, judicial, legislative or political
decisions will not have a material adverse effect on us. If we are unable to
provide the services that we presently provide or intend to provide or to use
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our existing or contemplated transmission methods due to our inability to obtain
or retain the requisite governmental approvals for such services or transmission
methods, or because we are subjected to adverse regulatory inquiry,
investigation or action, or for any other reason related to regulatory
compliance or lack thereof, such developments could have a material adverse
effect on our business, financial condition and results of operations.
On February 15, 1997, the United States and 68 other countries signed the
WTO Agreement, agreeing to open their respective telecommunications markets to
competition and foreign ownership and to adopt regulatory measures to protect
market entrants against anticompetitive behavior by dominant telephone
companies. FCC rules implementing the WTO Agreement became effective in February
1998. The FCC also adopted streamlined license granting procedures for carriers
from WTO Agreement signatory countries, pursuant to which the FCC granted more
than 200 international applications in the first 90 days after the streamlined
procedures became effective. The FCC adopted additional streamlining measures on
March 18, 1999. Although we believe that the WTO Agreement could provide us with
significant opportunities to compete in markets that were not previously
accessible, reduce our costs and provide more reliable services, it could also
provide similar opportunities to our competitors. There can be no assurance that
the pro-competitive effects of the WTO Agreement will not have a material
adverse effect on our business, financial condition and results of operations or
that members of the WTO will implement the terms of the WTO Agreement.
United States
In the United States, to the extent that we offer services as a carrier,
the provision of our services is subject to the provisions of the Communications
Act of 1934, as amended, the Telecommunications Act of 1996 and the regulations
of the FCC thereunder. There can be no assurance that future regulatory,
judicial and legislative changes will not have a material adverse effect on our
business, financial condition and results of operations. Moreover, to the extent
that the interpretation or enforcement of applicable laws and regulations is
uncertain or unclear, our aggressive strategy may result in our (i) providing
services or using transmission methods that are found to violate the
Communications Act, the Telecommunications Act of 1996 or FCC regulations, or
(ii) failing to obtain approvals or make filings subsequently found to be
required under such laws or regulations. The FCC has the authority to condition,
modify, cancel, terminate or revoke licenses and authorizations for failure to
comply with federal laws or the rules, regulations and policies of the FCC. If
our interpretation of applicable laws and regulations proves incorrect, we could
lose, or be unable to obtain, regulatory approvals necessary to provide certain
of our services or to use certain of our transmission methods. While we believe
we are in compliance with applicable laws and regulations, there can be no
assurance that we will not be subject to fines, penalties or other sanctions as
a result of violations regardless of whether such violations are knowing or
willful and regardless of whether such violations are corrected. There can be no
assurance that if our interpretation of applicable laws and regulations proves
incorrect and/or if we are subject to fines, penalties or other sanctions as
a result, that these events will not have a material adverse effect on our
business, financial condition and results of operations.
U.S. International Long Distance Services
To the extent we offer services as a common carrier, we are subject to FCC
rules requiring authorization from the FCC prior to leasing international
capacity, acquiring international facilities, and/or purchasing switched
minutes, and initiating international service between the United States and
foreign points, as well as to FCC rules that also regulate the manner in which
our international services may be provided, including the circumstances under
which we may provide international switched services by using private lines or
routing traffic through third countries. FCC rules also require prior
authorization before transferring control of or assigning FCC authorizations,
and impose various reporting and filing requirements on companies providing
international services under an FCC authorization. In order to offer
international long distance services, we are also required to file and have
filed with the FCC a tariff containing the rates, terms and conditions
applicable to our international telecommunications services. We have a
continuing obligation to ensure that the tariffs accurately reflect the terms
and conditions associated with our service offerings. We are also required to
file certain carrier to carrier agreements with the FCC. The FCC also requires
carriers such as Telscape to report any affiliations, as defined by the FCC,
with foreign carriers. The FCC may also impose restrictions on affiliations with
certain foreign telecommunications companies. Failure to comply with the FCC's
rules could result in fines, penalties or forfeiture of our FCC authorizations,
each of which could have a material adverse effect on our business, financial
condition and results of operations.
The FCC's Private Line Resale Policy
The FCC's private line resale policy currently prohibits a carrier from
reselling international private leased circuits to provide switched services
(known as ''ISR'') to or from a country unless the FCC has designated that
country as one that affords U.S. carriers equivalent opportunities to engage in
similar activities in that country or that the country is a member of the WTO
and the local PTT offers U.S. carriers rates at or below the FCC-prescribed
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benchmark for terminating the U.S. carriers' traffic. There can be no
assurance, however, that the FCC or any other country's regulatory authority
will change their policies in a way that would have a beneficial impact on us or
that would not have a material adverse effect on our business, financial
condition and results of operations. Furthermore, it is possible, that the FCC
could take the view that certain arrangements by which we provide international
services do not comply with the existing Private Line Resale Policy. If the FCC,
on its own motion or in response to a challenge filed by a third party,
determines that such arrangements do not comply with FCC rules, among other
measures, it may issue a cease and desist order, impose fines on us, or, in
extreme circumstances, revoke or suspend our FCC authorizations.
International Settlements Policy
The International Settlements Policy establishes the framework governing
U.S. carriers' relationships with their foreign correspondents who are
designated as dominant, on routes that have not yet been found to be competitive
by the FCC. The FCC revised its International Settlements Policy in an order
released May 6, 1999. Specifically, the current policy governs the exchange of
traffic and settlements between U.S. carriers and dominant foreign
correspondents on non-competitive routes, including the cost of terminating
traffic over each other's networks and prevents dominant foreign carriers from
discriminating among U.S. carriers in the rates they charge to terminate
international traffic.
The FCC revisions to the International Settlements Policy also impact the
FCC's rules on International Simple Resale (sometimes called ''ISR''), which
permits U.S. carriers to provide international switched services over private
lines interconnected with the public switched telecommunications network on the
current FCC-authorized routes. The FCC declined to remove the International
Settlements Policy completely on all International Simple Resale-approved
routes, and will continue to maintain a distinction between routes it approves
for International Simple Resale and routes on which it removes the International
Settlements Policy. However, as a result of revisions to the International
Settlements Policy, U.S. carriers may now enter into International Simple Resale
arrangements with non-dominant foreign carriers on any route. On those routes
where the International Settlements Policy continues to apply to dominant
carriers, U.S. carriers may exchange traffic via International Simple Resale
arrangements with such carriers only on the routes authorized for International
Simple Resale by the FCC.
To the extent that the International Settlements Policy still applies, the
FCC could find that we do not meet certain International Settlements Policy
requirements with respect to certain of our foreign carrier agreements. Although
the FCC generally has not issued penalties in this area, it has issued a Notice
of Apparent Liability to a U.S. company for violations of the International
Settlements Policy and it could, among other things, issue a cease and desist
order, impose fines or allow the collection of damages if it finds that we are
not in compliance with the International Settlements Policy. Any of these events
could have a material adverse effect on our business, financial condition or
results of operations.
U.S. Domestic Long Distance Services
Our ability to provide domestic long distance service in the United States
is subject to regulation by the FCC and relevant state Public Utility
Commissions that regulate the offering of interstate and intrastate
telecommunications services, respectively. Although no formal authority is
required for the offering of interstate services, we are required by the FCC to
file tariffs listing the rates, terms and conditions of domestic long distance
services provided.
If the stay is lifted and the FCC order becomes effective,
telecommunications carriers, such as us, will no longer be able to rely on the
filing of tariffs with the FCC as a means of providing notice to customers of
prices, terms and conditions on which they offer their interstate services. The
obligation to provide non-discriminatory, just and reasonable prices remains
unchanged under the Communications Act of 1934, as amended.
Our costs of providing long distance services will be affected by changes
in the "access charge" rates imposed by incumbent local exchange carriers on
long distance carriers for origination and termination of calls over local
facilities. The FCC has made major changes in the interstate access charge
structure. In a December 24, 1996 order, the FCC removed restrictions on
incumbent local exchange carrier's ability to lower access prices and
implemented certain access charge reforms and sought comments on others. The
order provides certain immediate regulatory relief to incumbent local exchange
carriers subject to the FCC's price cap regulation, and sets a framework or
''trigger'' to provide those companies with greater pricing flexibility to set
interstate access rates as competition increases. The order also initiated a
rulemaking to determine whether the FCC should regulate the access charges of
competitive local exchange carriers. A May 16, 1997 FCC order substantially
increased the amounts that incumbent local exchange carriers subject to the
FCC's price cap rules could recover through monthly flat-rate charges and
substantially decreased the amounts that these local exchange carriers could
recover through traffic sensitive (per-minute) access charges. Several parties
appealed the May 16th order. On August 19, 1998, the U.S. Court of Appeals for
the Eighth Circuit upheld the FCC's access charge reform rules.
15
<PAGE>
Universal Service
On May 8, 1997, the FCC issued an order establishing a significantly
expanded federal universal service subsidy regime (the ''May 8th Order''). For
example, the FCC established new universal service funds to support
telecommunications and information services provided to qualifying schools and
libraries (with an annual cap of $2.25 billion) and to rural health care
providers (with an annual cap of $400 million). The FCC also expanded the
federal subsidies for local exchange telephone services provided to low-income
consumers and recently doubled the size of the high cost fund for non-rural
LECs. Providers of interstate telecommunications services, such as us, as well
as certain other entities, must pay for these programs. Our contribution to
these universal service funds is based on our telecommunications service
end-user revenues. Currently, the FCC assesses such payments on the basis of a
provider's revenue for the previous year. They are currently 5.877% of
interstate and international end-user telecommunications revenues. We cannot
predict what the amount of universal service fund contributions will be in the
future, as the FCC issues contribution factors on a periodic basis.
Several parties appealed the May 8th Order. The U.S. Court of Appeals for
the Fifth Circuit recently upheld the FCC May 8th Order in most respects, but
rejected the FCC's effort to base contributions on intrastate revenues. The
FCC's universal service program may also be altered as a result of the agency's
reconsideration of its policies, or by future Congressional action.
State Regulation
Prior to the initiation of intrastate long distance service, we generally
must obtain certification from or register with the relevant state Public
Utilities Commission. Providers of intrastate long distance services may also be
required to file tariffs or rate schedules, and may be subject to certain
reporting and fee payment obligations with the relevant commission including,
for pre-paid or debit card operators, the filing of a surety bond. In addition,
intrastate long distance providers may be subject to service standards and
consumer protection rules. If any state Public Utilities Commission were to
conclude that we are or were providing intrastate services without the
appropriate authority, the agency could initiate enforcement actions, which
could include the imposition of fines, a requirement to disgorge revenues, or
the refusal to grant the regulatory authority necessary for the future provision
of intrastate communications services. Failure to comply with state law and/or
the rules, regulations and policies of the state commissions, including
compliance with state reporting and fee payment obligations, may result in
challenges by third parties, and/or actions by state commissions or other
government authorities, including conditioning, modifying or revoking state
authorization to provide telecommunications services within the respective state
and/or subjecting the provider to fines, penalties, or other sanctions.
Many states also require prior approval for transfers of control of
certified carriers, corporate reorganizations, acquisitions of
telecommunications operations, assignment of carrier assets, carrier stock
offerings and incurrence of significant debt obligations. The merger between
Telscape and Pointe will generate an obligation on the newly created entity to
file applications for prior approvals or notifications to the Public Utilities
Commission in each and every state where either Telscape, Pointe or their
affiliates are certificated. Telscape and Pointe have begun preparation of these
filings, and anticipate that some, but not all of the required approvals will be
obtained on or before the anticipated date of closing. At this time, we can not
assure you that all of the required approvals will be obtained in a timely
fashion, or that the respective Public Utilities Commissions will approve the
transaction. If any State Public Utilities Commission does not approve the
transaction, we may lose our certification to provide telecommunications
services in that state and/or be subject to the imposition of license
conditions, fines or other sanctions. As a result of Telscape, Pointe or their
affiliates' past or current failure to comply with state regulatory
requirements, it is possible that one or more State Public Utilities Commissions
may reject or condition the requested approval of the merger, or may otherwise
subject Telscape, Pointe or the newly created entity to regulatory sanctions.
Mexico
In June 1998, our subsidiary Telereunion S.A., received a 30-year
facilities-based carrier license from the SCT, allowing it to originate and
terminate long distance services and to provide data and other value-added
services in Mexico. The Foreign Investment Law and Telecom Law of Mexico ("FTL")
opened the local and long distance telecommunications service markets to
competition and imposed varying levels of regulation on Mexican
telecommunications providers. Pursuant to the FTL, the SCT and the Comision
Federal de Telecomunicaciones ("COFETEL") implement the provisions of the FTL.
The FTL imposes regulations on public carriers. Facilities-based public
carriers, those that use the radio spectrum, satellite links or any form of
land-based cables to provide telecommunications services, must obtain
16
<PAGE>
concessions prior to providing service. Concessionaires may also resell the
facilities and services of other concessionaires. Vendors (resellers) of
telecommunications services may not own their own facilities but need only
obtain a permit to provide service. Although the FTL provides for the existence
of resellers, the Mexican government has not issued the implementing rules and
regulations to allow their entry into the market. Consequently, Mexican law does
not currently permit pure switched international resale. Carriers wishing to
offer value-added services need only register with the COFETEL's
Telecommunications Registry.
In addition to the FTL, the Mexican Long Distance International Rules
establish the specific regulatory framework that governs international long
distance services. Among other matters, the rules (i) mandate uniform accounting
rate and proportionate return for three years for all international traffic;
(ii) require concessionaires to obtain additional specific authorization to
install and operate international gateways; (iii) implicitly prohibit ISR for
three years; and (iv) regulate international correspondent agreements, which
must reflect the uniform accounting rate and proportionate return rules. The
International Rules prohibit all telecommunications operators, except those
concessionaires that have obtained the specific authorization from the COFETEL,
to install and operate international gateway switches. Those concessionaires
that have not received such specific authorization, as well as any other
companies that provide telecommunications services, such as providers of
value-added services, cellular concessionaires and paging service providers
cannot directly transmit international switched traffic. To date, the SCT and
the COFETEL have granted 16 companies, including Telmex and Telereunion S.A.,
concessions for the installation, operation and exploitation of long distance
public telecommunications networks, of which eight have received authorization
to install and operate international gateway facilities. In addition, the SCT
and the COFETEL have granted eight concessions for local switched services as
well as numerous registrations for value-added services.
Pursuant to the FTL, concessions for public telecommunication networks may
only be granted to Mexican citizens or Mexican companies. Foreign investors may
own minority interests in concessionaires, but may not own more than 49% of the
voting ownership interest of we except for companies that provide cellular
service. NAFTA removed certain Mexican restrictions on foreign investment and
U.S. companies may now maintain 100% ownership interests in companies that
provide value-added services in Mexico. Pursuant to Mexican law, only Mexican
citizens or companies incorporated and domiciled in Mexico can register as
providers of value-added services.
Other Latin American Markets
Our provision of services elsewhere in Latin America is subject to the
developing laws and regulations governing the competitive provision of
telecommunications services in each Latin American country in which it provides
or seeks to provide services. Each such Latin American country in which we
currently conduct or intend to conduct business has a different national
regulatory scheme. Historically, Latin American countries have prohibited voice
telephony except by the PTT. The available opportunities and the requirements
for we to obtain necessary approvals to offer value-added services, systems
integration or the full range of telecommunications services, including voice
telephony, vary considerably from country to country. We currently plan to
provide a limited range of services in certain Latin American countries, as
permitted by regulatory conditions in those markets, and to expand our
operations as these markets implement liberalization to permit competition in
the full range of telecommunications services. The nature, extent and timing of
the opportunity for us to compete in these markets will be determined, in part,
by the actions taken by the governments in these countries to implement
competition and the response of incumbent carriers to these efforts. There can
be no assurance that any of these countries will implement competition in the
near future or at all, that we will be able to take advantage of any such
liberalization in a timely manner, or that our operations in any such country
will be successful. There can be no assurance that we have received all
necessary approvals, filed applications for such approvals, received comfort
letters or obtained all necessary licenses from the applicable regulatory
authorities to offer telecommunications services in the Latin American countries
where it currently provides services or those in which it seeks to provide
services in the future, or that it will do so in the future. Our failure to
obtain, or retain necessary approvals could have a material adverse effect on
our business, financial condition and results of operations.
Liberalization in Latin America is proceeding rapidly and we seek to keep
pace with competition even where PTTs retain a legally mandated monopoly on
voice telephony. We are currently offering or plan to offer certain systems
integration, enhanced services, or value-added services in a number of Latin
American countries where the PTT retains the legally mandated monopoly on voice
telephony. While we believe that we will not be found to be offering voice
telephony in these countries prior to the expiration of the PTT's monopoly on
such services, we have received no assurance from the respective PTTs or from
the respective regulating authorities that this will be the case. It is possible
that we could be fined, or that our facilities or equipment could be
confiscated, or that we would not be allowed to provide specific services in
these countries, among other sanctions, if we were found to be providing voice
telephony before the date in which the PTT's monopoly on Voice Telephony ceases.
Any of such actions could have a material adverse impact on our business,
financial condition and results of operations.
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<PAGE>
Moreover, we may be incorrect in our assumption that (i) each Latin
American country will abolish, on a timely basis, the respective PTT's monopoly
to provide voice telephony within and between other countries, (ii) deregulation
will continue to occur, and (iii) we will be allowed to continue to provide and
to expand our services in the Latin American countries. There can be no
assurance that any or all of the Latin American countries will not adopt laws or
regulatory requirements that will adversely affect our interests. Additionally,
there can be no assurance that future regulatory, judicial or legislative
changes in any or all of the Latin American countries will not have a material
adverse effect on us or that regulators or third parties will not raise material
issues with regard to our compliance with applicable laws or regulations. If we
are unable to provide the services we are presently providing or intend to
provide or to use our existing or contemplated transmission methods due to our
inability to receive or retain formal or informal approvals for such services or
transmission methods, or for any other reason related to regulatory compliance
or the lack thereof, such events could have a material adverse effect on our
business, financial condition and results of operations.
Intellectual Property
We use the names ''Telscape International,'' ''Telscape'' and ''TSCP
International'' as our primary business names, and received federal trademark
protection for the ''Telscape'' name and distinctive logo on September 14, 1999.
In 2000 we also filed for a trademark on one of our new subsidiary's name,
''Enable Commerce''. This filing is pending, and we have no assurance that it
will be granted. We own a federal trademark registration for the ''Telefiesta ''
prepaid cards. Telereunion S.A. has a national trademark registration in Mexico
for ''Telereunion.'' We regard our trademarks, service marks, trade names and
logos as valuable assets and believe they have value in the marketing of our
products and services. We intend to protect and defend our name, service marks
and trademarks in the United States and internationally.
Employees
As of December 31, 1999, we had 644 full-time employees, with 540 residing
in Mexico and the remainder residing in the United States. Of the total
employees, there are 181 in sales and marketing, 138 in general and
administrative and 325 in operations, engineering, manufacturing and assembly.
None of our employees are subject to a collective bargaining agreement, and we
have not experienced any work stoppage. We believe our relations with our
employees are good.
ITEM 2. PROPERTIES.
Our international headquarters are located in Houston, Texas, where we
lease approximately 10,000 square feet of an office building. The Company also
leases additional facilities in Houston, Texas totaling an additional 10,000
square feet relating to our prepaid card operations and to house
telecommunications equipment relating to its long distance services operations.
We lease facilities in Mexico City, Guadalajara, Tijuana and Monterrey, totaling
approximately 71,000 square feet and consisting of office and warehousing
facilities. We lease facilities in Sunnyvale and Mountain View, California
totaling 80,000 square feet.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we have been involved in certain legal proceedings.
Currently, we are not a party to any material pending legal proceedings, other
than ordinary routine litigation incidental to our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1999.
18
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Telscape's common stock was traded on the Nasdaq Small Cap Market under the
symbol "PTMC" from August 10, 1994 until June 28, 1996, when it began trading
under the symbol "TSCP." Telscape's common stock began trading on the Nasdaq
National Market ("Nasdaq NM") on July 31, 1998. The following table sets forth
the range of the quarterly high and low sales prices for the common stock, as
reported by the Nasdaq Small Cap Market and the Nasdaq NM for each quarter
within the last two fiscal years.
<TABLE>
<CAPTION>
High Low
------- -------
1998
- -------
<S> <C> <C>
First Quarter $17.625 $ 8.25
Second Quarter 23.188 14.125
Third Quarter 16.375 7.000
Fourth Quarter 10.250 6.688
1999
- -------
First Quarter $10.000 $ 6.313
Second Quarter 8.563 5.375
Third Quarter 9.375 5.875
Fourth Quarter 13.313 5.688
</TABLE>
As of March 15, 2000, there were approximately 93 holders of record of
Telscape's common stock.
Telscape has never paid any cash dividends on its common stock. We expect
that we will retain all available earnings generated by our operations for the
development and growth of our business and do not anticipate paying any cash
dividends in the foreseeable future. In addition, our ability to pay dividends
may be adversely affected if, in the future, the Mexican government were to
impose restrictions on our ability to repatriate profits.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain historical financial data relating
to Telscape. The information set forth below is not necessarily indicative of
the results of future operations and should be read in conjunction with "Item 7
- - Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the notes thereto
included in Item 8 of this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------------------------------------
1995 1996 1997 1998 1999
---------------- ------------- ---------------- --------------- -------------
STATEMENT OF OPERATIONS DATA
<S> <C> <C> <C> <C> <C>
Revenues $ 1,108,000 $ 5,705,000 $ 36,154,000 $ 132,179,000 $106,833,000
Cost of revenues 619,000 3,041,000 24,396,000 111,892,000 93,394,000
---------------- ------------- ---------------- --------------- -------------
Gross profit 489,000 2,664,000 11,758,000 20,287,000 13,439,000
Selling, general and
administrative expenses 1,349,000 4,159,000 8,154,000 13,774,000 24,357,000
---------------- ------------- ---------------- --------------- -------------
Operating income (loss) before
depreciation and amortization
and impairment loss (860,000) (1,495,000) 3,604,000 6,513,000 (10,918,000)
Depreciation and amortization 49,000 264,000 622,000 3,316,000 6,335,000
Impairment loss on long-lived
assets --- --- --- 1,026,000 715,000
---------------- ------------- ---------------- --------------- -------------
Operating income (loss) (909,000) (1,759,000) 2,982,000 2,171,000 (17,968,000)
Other income (expense), net 229,000 114,000 (232,000) (2,413,000) (4,935,000)
---------------- ------------- ---------------- --------------- -------------
Income (loss) before income
taxes and minority interests (680,000) (1,645,000) 2,750,000 (242,000) (22,903,000)
Income tax benefit (expense) - 53,000 (84,000) (822,000) 3,428,000
---------------- ------------- ---------------- --------------- -------------
Income (loss) before minority
interests (680,000) (1,592,000) 2,666,000 (1,064,000) (19,475,000)
Minority interests 7,000 (6,000) 6,000 34,000 ---
---------------- ------------- ---------------- --------------- -------------
Net income (loss) $ (673,000) $ (1,598,000) $ 2,672,000 $ (1,030,000) $(19,475,000)
================ ============= ================ =============== =============
Net income (loss) per share-Basic $ (0.36) $ (0.52) $ 0.68 $ (0.20) $ (2.92)
Weighted average shares
outstanding 1,890,442 3,046,594 3,903,470 5,052,096 6,669,987
Net income (loss) per share-
Diluted (1) n/a n/a $ 0.53 n/a n/a
Diluted weighted average shares
outstanding (1) n/a n/a 5,152,211 n/a n/a
At December 31,
---------------------------------------------------------------------------------
1995 1996 1997 1998 1999
---------------- ------------- ---------------- --------------- -------------
BALANCE SHEET DATA
Cash, cash equivalents and short
term investments $ 3,645,000 $ 495,000 $ 4,734,000 $ 9,631,000 $ 5,419,000
Current assets 4,294,000 4,665,000 18,506,000 32,746,000 29,997,000
Property and equipment, net 154,000 983,000 2,679,000 14,576,000 58,468,000
Goodwill and other intangibles,
net --- 3,246,000 17,674,000 31,416,000 32,342,000
Total assets 4,498,000 9,371,000 39,635,000 80,331,000 127,140,000
Notes payable, convertible
debentures and capital lease
obligations --- --- 3,184,000 13,133,000 38,761,000
Stockholders' equity $ 3,590,000 $ 5,764,000 $ 22,088,000 $ 34,926,000 $ 27,044,000
<FN>
(1) Inclusion of additional shares under a dilutive analysis is inappropriate due to the anti-dilutive effect.
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Telscape is a U.S.-based fully integrated communications company. We supply
voice, video, data and Internet services principally to, from and within Latin
America. Telereunion, S.A., a subsidiary, has built a state-of-the-art fiber
optic network in Mexico that will reach the vast majority of the Mexican
population. We also own and operate a satellite teleport facility in Silicon
Valley, which delivers an array of communications services to customers
throughout North, Central and South America. In addition, we provide a full
range of advanced services and products in Mexico to major public and private
sector customers.
The markets in which Telscape operates are characterized by significant
growth. Telscape will continue to take advantage of the cash flows associated
with the voice component of our business as we also continue building for the
future, which will be characterized by explosive growth in the demand for video,
data and Internet. In our voice business, we are focusing our efforts on retail
as we constantly strive to move closer and closer to the customer. We will
continue to be opportunistic on the wholesale business but are relying on this
business to maximize utilization of our network. We have recently launched
additional retail voice services in both the U.S. and Mexico.
In the data and Internet area, we are focusing on higher margin,
broadband-based products and services. Telscape is well positioned to address
and facilitate our business customers in the natural evolution from the private
network world to the virtual private network world, which is now available
through advanced switched-data public IP services. With the completion of our
fiber optic network in Mexico, the sophistication of our in-country team and our
seasoned teleport in Silicon Valley, we are well positioned to provide advanced
data and Internet services to, from and within Latin America. Our Mexican
network will also provide us a platform to provide certain advanced services
such as virtual private networks, cache, streaming, collocation and hosting.
In June 1998, Telereunion S.A., a Mexican corporation and a subsidiary of
ours, was granted the Mexican Concession by the Mexican government. The Mexican
Concession is a 30-year, facilities-based carrier license, which has allowed us
to construct and operate a network over which we can carry voice, video, data
and Internet traffic. The Mexican network, a fiber-optic long haul network,
connects the United States, the Gulf region of Mexico and targeted Mexican
cities.
In May 1996, we began to focus on providing telecommunication services to
and from Latin America. We acquired all of the stock of Telereunion, Inc., the
owner of 97.0% of Vextro de Mexico S.A. de C.V. ("Vextro"). Vextro is a
Mexico-based systems integration company, with an emphasis on voice solutions.
In September 1996, we expanded our operations to include international long
distance by acquiring Orion Communications, Inc., a U.S.-based reseller of long
distance services ("Orion"). In 1997, we expanded our systems integration
service offerings by acquiring Integracion de Redes, S.A. de C.V. ("Integraci
n") and N.S.I., S.A. de C.V. ("N.S.I."), both focused on data services and based
in Mexico City, Mexico. In 1998, Integracion was renamed as Telscape de Mexico,
S.A. de C.V.
In January 1998, we acquired MSN, a leading provider of prepaid cards that
are marketed under the Telefiesta brand name to Hispanic consumers residing in
the United States. The MSN acquisition enhances our voice business by providing
a retail platform, enhancing our ability to market additional products and
services to Hispanic customers and increasing our ability to generate
significant returns of U.S.-outbound traffic to Latin America. Effective June
1, 1998, we, through our newly-formed subsidiary INTERLINK Communications, Inc.
("INTERLINK") acquired California Microwave Services Division, Inc. for $8.8
million in cash. INTERLINK provides us with a teleport facility in California,
thereby enhancing our position as an integrated communications provider and
contributing to our ability to provide voice, video, data and Internet solutions
to our targeted markets in Latin America.
We are capitalizing on the deregulating markets of Latin America by
providing international long distance services to and from targeted Latin
American countries. We have also positioned ourselves to become one of the
leading integrated communications providers in Mexico through the construction
of our Mexican network and the sophistication of our in-country team.
The Mexican network links 22 cities and towns and covers, including
interconnection agreements, a majority of the population in Mexico. The Mexican
network will provide us with the backbone for our strategy to be a complete
telecommunications service provider for the Latin American market, beginning
with Mexico. The Mexican network will provide us with significant,
carrier-class, cost-effective capacity from which we can grow our existing
retail and wholesale voice business and serve as an important platform to expand
our data and Internet strategies.
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<PAGE>
REVENUES
The revenue mix between voice services and advanced services for the years
ended 1999 and 1998 remained almost the same. In 1999, voice services
represented 72.4% of our consolidated revenues while in 1998, voice services
represented 70.5% of consolidated revenues. In voice services, we expect
revenue growth to come principally from higher margin, one-plus long distance
services through our recently launched Telefiesta-Amigo program and prepaid
calling cards in Mexico. In advanced services, we expect growth to come
principally from broadband services, customer relationship management and
bundled services to small and medium size enterprises in Mexico.
As part of our advanced services, we provide value-added and systems
integration services to private and public sector customers in Mexico. Revenues
are derived from providing value-added services and the sale of equipment.
Revenues from this business grew significantly through both internal growth and
strategic acquisitions in 1996, 1997 and 1998. The revenues in this line of
business are subject to economic conditions in Mexico. Revenues relating to
this part of our advanced services in 1999 decreased by 56% as a result of
weakening economic conditions in Mexico, Y2K worries that encouraged our client
base to delay investments in their network systems, and our decision in early
1999 to reduce sales of lower margin equipment sales to certain distributors and
increase efforts on higher margin value-added services.
With our acquisition of INTERLINK in the second quarter of 1998, we
expanded our advanced services offerings. We provide satellite teleport
services, including voice, video and data transport services including
fractional and full T-1 data broadcast, dedicated circuits and private line
up-link and down-link services Bandwidth-on-Demand, ISDN videoconferencing and
Internet-through-satellite services to the U.S. and Latin America. INTERLINK
also works with its customers in Latin America to develop the sophisticated
systems necessary to utilize these services.
Through our call center in Mexico City, we also provide customer
relationship management services. Our largest customer is the U.S. Embassy in
Mexico City and the various U.S. consulates throughout the country of Mexico.
Revenues are derived by providing information about U.S. visas to Mexican
nationals and facilitating appointments, both through the call center.
We provide voice services on both a wholesale and retail basis. Wholesale
voice services are provided mainly to other carriers. Revenues are derived from
the number of minutes of use (or fraction thereof) billed by us and are recorded
upon completion of calls.
Retail voice services are provided through the sale of prepaid cards. We
have in the past entered into arrangements with third parties whereby these
parties provided, at a fixed cost to us, the long distance telecommunications
services for the prepaid cards that we sell. We recognized revenues from the
sale of prepaid cards under these agreements at the time of shipment. In other
cases, we entered into arrangements whereby third parties provide certain
telecommunications services for the prepaid cards and bills us for such services
based on customer usage. We recognize revenues from the sale of prepaid cards
under these agreements at the time of customer usage.
In early 1998, we discontinued the fixed cost arrangement with third
parties. As a result, revenues were recognized beginning in the second half of
1998 on the prepaid cards at the time of customer usage.
GROSS PROFIT
During 1999, our gross profit as a percentage of revenues declined. This
decline was largely due to decreasing margins from our sale of prepaid cards and
wholesale voice services offset principally by increased margins from our
customer relationship management revenues.
Our strategy to improve gross margins in voice services is to (i) increase
our efforts in the retail market where it can provide product identification and
differentiation, (ii) decrease our dependency on third party service providers,
and (iii) increase the amount of traffic we process over our own network, under
direct operating agreements we establish with other carriers and over the
Mexican network.
In the fourth quarter of 1999, we began distributing our prepaid cards
through our own distribution network in Mexico. We believe we are the first
company offering prepaid cards on a country-wide scale in Mexico. In early
2000, we opened up a direct distribution office for prepaid cards in Los
Angeles, California. We expect that the margins from our prepaid cards in
Mexico will be significantly higher than our cards in the more competitive U.S.
market. We also expect that our margins from our direct distribution efforts in
Los Angeles will be higher than those we gain through our traditional,
distributor-focused distribution channels.
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During 1999, we expended substantial capital resources in our network, both
in the U.S. and in Mexico. Our total investments in 1999 reached $46 million,
the majority of which was related to our Mexico Network. We intend to terminate
a significant portion of both our retail and wholesale traffic on our Mexico
Network in the year 2000, which we expect will improve our overall gross margin
levels. As mentioned above, we also intend to offer Advanced Services to the
small and medium size enterprises in Mexico, utilizing the Mexican network as a
foundation. We expect that many of these services will have higher margins than
traditional Voice Services.
We expect that gross profits from equipment sales will decline over time as
the market becomes more competitive. Our strategy for maintaining the gross
profits we have enjoyed from this business line in the past is to enter into
additional outsourcing contracts and to refocus our sales efforts from the
simple provision of network equipment to the bundling of network equipment and
the provision of telecommunications services on our Mexican network. Our call
center operations in Mexico have historically provided relatively higher gross
margins than our other lines of business. We intend to shift several of the
support functions provided to our retail lines of business in the U.S. from our
call center in the U.S. to our call center in Mexico in order to take advantage
of the relatively lower cost structure afforded by our Mexican operations. In
March 2000, we relocated our call center in Mexico to increase our capacity from
120 positions to up to 400 positions.
We expect that gross profits as a percentage of revenues as well as actual
gross profit will increase in 2000 primarily because of our ability to run
an increasing percentage of the traffic we manage over our own facilities.
RESULTS OF OPERATIONS
The following tables sets forth for the periods indicated certain financial
data as a percentage of revenues:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
YEAR ENDED DECEMBER 31,
1997 1998 1999
-----------------------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of revenues 67.5 84.7 87.4
------ ------ ------
Gross profit 32.5 15.3 12.6
Selling, general and administrative expense 22.6 10.4 22.8
Depreciation and amortization 1.7 2.5 5.9
Impairment loss on long-lived assets - 0.8 0.7
------ ------ ------
Operating income (loss) 8.2 1.6 (16.8)
Other income (expense), net (0.6) (1.8) (4.6)
------ ------ ------
Income (loss) before income taxes and minority interest 7.6 (0.2) (21.4)
Income tax benefit (expense) (0.2) (0.6) 3.2
------ ------ ------
Income (loss) before minority interest 7.4 (0.8) (18.2)
Minority interest in subsidiaries 0.0 0.0 0.0
------ ------ ------
Net income (loss) 7.4 (0.8) (18.2)
====== ====== ======
</TABLE>
Year Ended December 31, 1999 Compared To Year Ended December 31, 1998
Revenues decreased from $132.2 million in 1998 to $106.8 million in 1999.
This decrease of $25.4 million, or 19.2%, was due principally to our decision to
reduce sales to distributors of low margin equipment in Mexico, a decline in our
voice services revenues in our wholesale segment, and the relatively lower
prices we are obtaining from the sale of our prepaid cards. These declines were
offset by an increase in revenues from our customer relationship management
services and the incremental broadband services and other products revenues from
our INTERLINK subsidiary, which was acquired in May 1998. Network solutions
revenues in Mexico decreased $16.9 million from $30.2 million in 1998 to $13.3
million in 1999. This decline is largely attributable to our refocusing on
higher margin products and a general slowdown in the market caused by weakened
economic conditions in Mexico and concerns about the Y2K virus. Wholesale voice
services revenues decreased $16.4 million from $33.0 million for 1998 to $16.6
million for 1999. Retail voice services revenues increased $0.6 million from
$60.1 million in 1998 to $60.7 million in 1999. Customer relationship
management services revenues increased $5.0 million from $2.7 million in 1998 to
$7.7 million in 1999 as we increased our operator positions to accommodate
higher demand for our services. Broadband services and other products revenues
increased $2.4 million from $6.1 million in 1998 to $8.5 million in 1999.
23
<PAGE>
Cost of Revenues decreased from $111.9 million in 1998 to $93.4 million in
1999, or $18.5 million. The 16.5% decrease in cost of revenues was due
principally to the decrease of revenues offset by the increased costs
associated with the voice services. This decrease in cost of revenues was also
offset by the incremental cost of revenues associated with the acquisition of
INTERLINK. The cost of revenues as a percentage of revenues increased from
84.7% to 87.4%, or 2.7%, due principally to the higher cost of revenues as a
percentage of revenues associated with our voice services. This increase was
offset partially by the decrease in cost of revenues as a percentage of revenues
associated with the customer relationship management services.
Selling, General and Administrative Expenses ("SG&A") increased from $13.8
million in 1998 to $24.4 million in 1999, or $10.6 million. The 77% increase in
SG&A was due to the incremental SG&A related to the acquisition of INTERLINK,
the increased staffing associated with the Mexican network build out and
increased staffing at existing operations to meet the additional resource
requirements associated with these operations and the overhead necessary to
support the growth in our customer relationship management operations.
Additionally, we recorded an additional reserve for doubtful accounts of $1.6
million and a $400,000 provision for inventory obsolescence in Mexico.
Overall SG&A as a percentage of revenues increased from 10.4% to 22.8%, or
12.4%, due to the factors stated above.
Depreciation and amortization increased from $3.3 million in 1998 to $6.3
million in 1999, or $3.0 million. Depreciation increased as a result of our
continuing expansion of our communications network, which includes purchases of
switches and other telecommunications equipment and facilities. We expect
depreciation expense to increase as we continue to expand our telecommunications
network. In addition, goodwill amortization increased as a result of the
acquisitions of Telereunion and INTERLINK in 1998.
Impairment Loss on Long-lived Assets. During the year ended December
31, 1998, we determined that the carrying value of certain equipment and other
long-lived assets deployed under certain operating arrangements in Latin America
were impaired, resulting in a charge to operating costs of approximately $1.0
million. During the year ended December 31, 1999, we determined that an
additional $715,000 in carrying value of certain equipment deployed in Latin
America was impaired, resulting in a charge to operating costs.
Interest Income (Expense), net increased from ($1.5) million in 1998 to
($2.9) million in 1999, or ($1.4) million. This increase was mainly due to an
increase in our level of borrowings, including the Deere Park Convertible
Debentures and Gordon Brothers Convertible Debentures issued in connection with
the INTERLINK acquisition, the Senior Notes, the $2 Million Senior Notes,
various bridge financings and the Lucent Credit Agreement.
The Gordon Brothers Convertible Debentures provided for an "exit fee" of
$1.1 million, which was paid at the time of the repayment of the Gordon Brothers
Convertible Debentures in May 1999. In addition, we repaid $1.0 million of the
Deere Park Convertible Subordinated Debentures in May 1999. We paid an "exit
fee" to Deere Park of $120,000 upon the repayment.
Lastly, we recognized additional interest expenses related to our equipment
financing agreements and the Lucent Credit agreement.
Other Income (Expense) increased from ($948,000) in 1998 to ($2.0) million
in 1999, or ($1.1) million. The increase in other expenses was due primarily to
an increase in the amortization of debt offering costs of $1.4 million in 1999.
We also benefited from a foreign exchange gain of $207,000 in 1999 versus a loss
of $639,000 in 1998 as the Mexican Peso remained relatively stable throughout
1999.
Income Tax Benefit (Expense) changed from an income tax expense of
($822,000) in 1998 to an income tax benefit of $3.4 million in 1999. Our
overall effective tax benefit for 1999 was 15.0% which reflects the tax benefits
on losses realized offset by a valuation allowance of $3.3 million and by
permanent differences between financial and tax reporting, the most significant
of which is the non-deductible nature of goodwill amortization.
Net Income (Loss). We experienced a net loss of ($1.0) million in 1998 as
compared to a net loss of ($19.5) million in 1999 due to a combination of the
factors discussed above.
Year Ended December 31, 1998 Compared To Year Ended December 31, 1997
Revenues increased from $36.2 million in 1997 to $132.2 million in 1998.
This increase of $96.0 million, or 266%, was due principally to the acquisition
of MSN completed in the first quarter of 1998, which provided revenues of $60.1
million for the year ended December 31, 1998. Wholesale voice services revenues
increased $15.7 million from $17.4 million for 1997 to $33.1 million for 1998.
In addition, revenues from advanced services increased $14.2 million from $18.8
million for 1997 to $33.0 million for 1998. This increase in advanced services
revenues is due to the acquisitions of Integracion de Redes, S.A. de C.V.
("Integracion") and N.S.I., S.A. de C.V. ("NSI"), the overall growth in demand
for these services and the growth in revenues from the call center operations.
Services provided by INTERLINK, following our acquisition of INTERLINK,
generated an additional $6.0 million in revenues.
24
<PAGE>
Cost of Revenues increased from $24.4 million in 1997 to $111.9 million in
1998, or $87.5 million. The 359% increase in cost of revenues was due
principally to the incremental cost of revenues associated with the acquisition
of MSN, the increase in the sale of wholesale voice services and advanced
services and, to a lesser extent, the incremental cost of revenues attributable
to the acquisition of INTERLINK. The cost of revenues as a percentage of
revenues increased from 67.5% to 84.7%, or 17.2%, due principally to the higher
cost of revenues as a percentage of revenues associated with the sale of prepaid
cards and the higher cost of revenues on wholesale voice services.
Selling, General and Administrative Expenses ("SG&A") increased from $8.2
million in 1997 to $13.8 million in 1998, or $5.6 million. The 69% increase in
SG&A was due principally to the incremental SG&A related to the operations of
the acquisitions of MSN and INTERLINK and increased staffing at existing
operations of the advanced services business and the wholesale voice services
business to meet the additional resource requirements associated with the growth
of these operations.
In addition, SG&A was negatively impacted by the write off of receivables,
of approximately $541,000, due from a customer who filed for bankruptcy as
discussed above. Included in SG&A are approximately $115,000 associated with
pre-operating costs on Telereunion S.A., our subsidiary which has been granted
the long distance concession in Mexico.
Overall SG&A as a percentage of revenues decreased from 22.6% to 10.4%, or
12.2%. This decrease was due principally to the lower SG&A expenses as a
percentage of revenues associated with MSN and to the growth in overall revenues
rapidly outpacing the growth in SG&A expenses. This improvement was partially
offset by the write off of receivables from the customer, which filed for
bankruptcy as discussed above, and the pre-operating expenses with the Mexican
network.
Depreciation and amortization increased from $622,000 in 1997 to $3.3
million in 1998, or $2.7 million. This increase is due to an increase in
goodwill amortization primarily due to the vesting of performance based warrants
issued in connection with the Telereunion acquisition, which resulted in
additional goodwill being recognized on December 31, 1997 and in the fourth
quarter of 1998 and goodwill recognized on the MSN and INTERLINK acquisitions.
In addition, depreciation increased as a result of our continuing expansion of
its international wholesale long distance network which includes purchases of
switches and other telecommunications equipment and facilities. We expect
depreciation expense to increase as it continues to expand its
telecommunications network.
Impairment Loss on Long-lived Assets. During the year ended December
31, 1998, we determined that the carrying value of certain equipment and other
long-lived assets deployed under certain operating arrangements in Latin America
were impaired, resulting in a charge to operating costs of approximately $1.0
million.
Interest Income (Expense), net increased from ($95,000) in 1997 to ($1.5)
million in 1998, or ($1.4) million. This increase was mainly due to an increase
in our level of borrowings, including notes issued in connection with the
Integracion and MSN acquisitions, and the Deere Park Convertible Debentures and
Gordon Brothers Convertible Debentures issued in connection with the INTERLINK
acquisition.
The Gordon Brothers Convertible Debentures provide for an "exit fee" which
is payable if the obligation is settled in a cash payment rather than converted
into Common Stock. Included in interest expense for the year ended December 31,
1998, is an accrual of approximately $470,000 related to exit fees we expect to
pay once the Gordon Brothers Convertible Debentures are paid in fiscal year
1999.
Other Income (Expense) increased from ($137,000) in 1997 to ($812,000) in
1998, or ($675,000). This increase is primarily due to foreign exchange
translation losses of $639,000 resulting from the translation of financial
statements of our Mexican operations. The Mexican peso experienced a 22.1%
devaluation in the exchange rate to the U.S. dollar during 1998.
Income Tax Benefit (Expense) increased from ($84,000) in 1997 to ($822,000)
in 1998. Income tax expense in 1997 was lower than income tax expense in 1998
as a result of our utilization of our loss carryforwards to offset taxable
income and the recognition of a portion of the deferred tax benefits related to
our tax loss carryforward. The effective tax rate for 1998 is higher than the
U.S. and Mexico statutory rate of 34% due to permanent differences, the most
significant of which is the nondeductible nature of goodwill amortization.
25
<PAGE>
Net Income (Loss). We experienced net income of $2.7 million in 1997 as
compared to a net loss of ($1.0) million in 1998 due to a combination of the
factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $6.6 million and
($10.3) million for the years ended December 31, 1998 and December 31, 1999,
respectively. The decrease in net cash provided by operations in 1999 as
compared to 1998 was due primarily to decreased level of revenues and lower
gross margins and higher levels of SG&A incurred to support expanding and new
operations. In addition, our working capital position was impacted by an
increase in accounts payable of $1.2 million and an increase in accrued
liabilities of $5.3 million.
Net cash used in investing activities was ($17.7) million and ($18.3)
million for the years ended December 31, 1998 and December 31, 1999,
respectively. In 1999, we expended approximately $18.3 million in constructing
our network in Mexico and expanding our switching, transmission and processing
platforms required to provide international wholesale and retail long distance
services. We also incurred additional obligations for $24.6 million for the
construction of our Mexican network. This amount is expected to be financed
with long term debt under the Lucent credit facility and is included in Accounts
Payable and Construction in Progress on the December 31, 1999 consolidated
balance sheet. Additionally, we incurred obligations for $2.8 million for
switching equipment which is expected to be financed through long term debt in
2000 and is included in Accounts Payable and Property and Equipment on the
December 31, 1999 consolidated balance sheet.
Net cash provided by financing activities was $16.0 million and $24.4
million for the years ended December 31, 1998 and December 31, 1999,
respectively. During 1999, we had proceeds of approximately $3.3 million (net
of commissions) from sales of our common stock and exercise of options and
warrants. We also received $15.4 million from notes payable and $23.9 million
in financing under the Lucent credit facility. We made payments of $10.5
million on our notes payable, $6.0 million on our convertible debt and $1.7
million on our revolving line of credit.
As of December 31, 1999, we had cash and cash equivalents of $5.4 million
and negative working capital of $42.5 million. Of this $42.5 million, $24.6
million represents accounts payable incurred in connection with the construction
of the Mexican network and $2.8 million represents accounts payable incurred for
switching equipment. We plan to finance the network construction accounts
payable under the Lucent credit agreement subject to availability as discussed
below and the equipment accounts payable under long term financing.
Additionally, we have classified as current $5.6 million in notes payable due to
non-compliance of certain financial covenants under a loan facility as discussed
below. We also have classified as current $1.2 million under the Lucent credit
facility.
In the fourth quarter of 1998, we signed a financing arrangement with a
finance company, which provides for funding of equipment purchases of up to $6.0
million through May 1999. The financing is structured as loans maturing three
years from funding at interest rates 550 basis points above the Federal Reserve
Treasury Constant Maturity Rate. We drew approximately $2.0 million during 1999
under this facility.
In the fourth quarter of 1998, we entered into a stock purchase agreement
with third parties, which allowed us to sell at our option up to $5.0 million
of our common stock. During the fourth quarter of 1998 and the fiscal year 1999,
we utilized this facility entirely. In connection therewith, we issued a total
of 783,338 shares of our common stock.
On January 11, 1999, we signed a financing arrangement with a finance
company, which provides for funding of equipment purchases of up to $7.0 million
through December 31, 1999. The financing is structured as long-term loans
maturing January 1, 2005. The loans provide for payments of interest only
through January 1, 2000. Thereafter, payments of principal and interest are due
quarterly. Interest is calculated on available basis during the interest only
period at 425 basis points above the 90 day commercial paper rate. Interest
thereafter is calculated at 500 basis points above the five year Federal Reserve
Treasury Constant Maturity Rate. We have drawn approximately $5.6 million under
this facility through December 31, 1999, of which $2.5 million resulted in
refinancing equipment, which was previously financed through an operating lease.
We are not in compliance with certain financial covenants under this loan
facility and have secured a waiver from the finance company of their rights
under the agreement to enforce default provisions due to non compliance with
these financial covenants for the fourth quarter of 1999. We are not able to
draw down additional financing under this facility until such time as the
finance company allows us to do so. The finance company has also issued us a
forbearance letter informing us that they will not enforce acceleration of their
facility until the earlier of March 31, 2000 or the date our merger with Pointe
26
<PAGE>
is completed. The finance company has agreed to extend the forbearance period
through May 15, 2000. The amounts outstanding under this facility of $5.6
million have been classified as current in the financial statements as of
December 31, 1999. We may have to request additional waivers from the finance
company due to non compliance with financial covenants in future quarters or we
may have to request an extension of the forbearance letter provisions should our
merger with Pointe not be completed by May 15, 2000. We cannot guarantee that
the finance company would provide us with additional waivers or that they would
extend their forbearance letter in which case they could enforce the default
provisions and accelerate the maturity date. Should that be the case, there is
no guarantee that we would be able to obtain a replacement facility. A default
under this agreement would trigger cross defaults under the Lucent credit
facility.
On May 7, 1999, we issued $6,850,000 in senior notes originally maturing on
May 6, 2000. E. Scott Crist, CEO of Telscape, is holder of the remaining
$850,000 balance of the senior notes. These senior notes are subject to optional
prepayment provisions allowing us to prepay a portion or all of the outstanding
principal amount without premium or penalty. Under the terms of the senior
notes, Mr. Crist received on November 6, 1999, 31,805 warrants at an exercise
price of $6.685. In the event that the senior notes are not paid by May 5, 2000,
then Mr. Crist will be issued an additional 31,805 warrants, in which case the
maturity date is extended until November 6, 2000. The maturity of the senior
notes can be extended unilaterally by us through January 4, 2001 with no
additional consideration. As a result, the senior notes are classified as
long-term in the financial statements as of December 31, 1999. We repaid
$6,000,000 of the senior notes on August 27, 1999, upon the funding of the
Lucent credit facility. The loan from Mr. Crist bears interest at 8% from May
through November 6, 1999. The interest rate increases by 1 percent for each
month thereafter. Pursuant to the terms of the senior notes, we initially
issued to the holders of the senior notes a total of 256,315 warrants at an
exercise price of $6.68 per share. The proceeds from the senior notes were
utilized to repay the entire principal amount of the Gordon Brothers Convertible
Debentures plus $1.1 million in exit fees. We estimated the fair value of the
warrants by utilizing the Black-Scholes option pricing model with the following
assumptions: dividend yield of 0%, expected volatility of 54%, risk free
interest rate of 5% and expected life of one year. The resulting cost of the
initial 256,315 warrants of approximately $398,000 was amortized over three
months, the expected term of the notes at the time they were issued. The
resulting cost of the 31,805 warrants of approximately $49,000 will be amortized
over one year.
On June 18, 1999, we issued $2,000,000 in a different series of senior
notes maturing June 19, 2000. These senior notes are subject to optional
prepayment provisions allowing us to prepay a portion or all of the outstanding
principal amount without premium or penalty. These senior notes bear interest at
8% from June through December 17, 1999. The interest rate increases by 1 percent
for each month thereafter. We also initially issued to the holders of these
senior notes a total of 62,501 warrants with an exercise price of $8.00 per
share and a term of three years. On December 18, 1999, the holders became
entitled to an additional 62,501 warrants. In the event that these senior notes
are not paid by June 18, 2000, then the holders will be issued an additional
62,501 warrants in which case the maturity date is extended until December 18,
2000. The maturity of the senior notes can be extended unilaterally by us
through February 16, 2001 with no additional consideration. As a result, these
senior notes are classified as long-term in the financial statements as of
December 31, 1999. We estimated the fair value of the warrants by utilizing the
Black-Scholes option pricing model with the following assumptions: dividend
yield of 0%, expected volatility of 54%, risk free interest rate of 5% and
expected life of one year. The resulting cost of the initial 62,501 warrants of
approximately $116,000 was amortized over two months, the expected term of the
notes at the time they were issued. The resulting cost of the second 62,501
warrants of approximately $143,000 will be amortized over one year. The holders
of these senior notes have provided us with a letter indicating their agreement,
subject to definitive documentation, to convert their notes into the Class F
Preferred described below.
In July 1999, our revolving credit facility expired and we repaid all
amounts outstanding at that time.
On July 28, 1999, the Company issued an unsecured and subordinated
promissory note in the amount of $576,000 maturing on November 24, 1999. The
Company may prepay this note with no penalty subject to the following
limitations. In the event that the Company's common stock closes above $11 per
share for the five consecutive trading days prior to November 24, 1999, the
Company may elect to pay the holder the principal amount in cash plus accrued
interest at a rate of 15% per annum. In the event that the price of the
Company's stock is greater than $5.25 per share and less than $11 per share at
the time of maturity, the Company must provide the holder of the note with
91,042 shares of the Company's common stock as payment of the note and no
interest shall be owing. In the event that the price of the Company's common
stock is less than $5.25 per share, the Company agrees to pay the note in cash
at maturity plus accrued interest at 15% per annum. On November 24, 1999, the
Company issued 91,042 shares of the Company's common stock as payment of the
note per the agreement.
Also in July 1999, we received a bridge loan of $3.0 million from Lucent.
The Lucent bridge loan was repaid upon the funding of the Lucent credit
facility. In connection with the bridge loan, we issued to Lucent warrants to
purchase an aggregate of 85,000 shares of common stock at an exercise price of
$8.50 per share. The warrants have a term of three years.
27
<PAGE>
On August 27, 1999, Telscape International, Inc., the registrant, along
with its subsidiaries, Telereunion S.A. de C.V. ("Telereunion"), Telereunion
International, S.A. de C.V., Telereunion, Inc., Telscape USA, Inc., MSN
Communications, Inc., Interlink Communications, Inc., TSCP International, Inc.,
Vextro De Mexico S.A. de C.V., Servicios Corporativos Vextro, S.A. de C.V.,
Telscape de Mexico S.A. de C.V., N.S.I. S.A. de C.V., Lan and Wan S.A. de C.V.
and M.S. Noticias y Telecomunicaciones, S.A. de C.V. signed a credit agreement
with Lucent Technologies, Inc. The Lucent credit agreement provides for up to
$40 million in financing. In March 2000, Lucent signed a commitment letter to
increase the size of the facility from $40 million to $60 million, subject to
certain conditions including the merger with Pointe. We borrowed $23.9 million
under the credit agreement on August 27, 1999, of which $9.0 million was
utilized to repay the $3.0 million Lucent bridge loan and $6.0 million of senior
notes and $14.9 million was utilized to pay for costs directly related to
construction of the Mexican network and some related debt offering costs.
Subsequent loans under the Lucent credit agreement are subject to the
satisfaction of certain conditions precedent, one of which has not been
satisfied as of the date of this filing and is dependent upon the cooperation of
a third party. We expect, however, to resolve this issue. We have incurred
additional obligations to Lucent in the construction of our Mexican network
totaling $24.6 million at December 31, 1999. We expect to fund these
obligations and other obligations under the facility, with proceeds from the
facility, upon consummation of the merger with Pointe and the increase of the
Lucent credit facility from $40 million to $60 million.
As of December 31, 1999, we were in default of certain financial covenants
under the Lucent credit agreement. In conjunction with the March 2000
commitment for an additional $20 million, Lucent waived these defaults and all
other defaults through April 15, 2000 and has agreed to renegotiate the
financial covenants that will be used to measure our performance under this
facility. We cannot guarantee that we will be able to secure additional waivers
from Lucent, should they be necessary, or that we can negotiate financial
covenants that will be more favorable than the ones contained in the initial
credit agreement.
On October 22, 1999, we signed a loan agreement with Lennox Invest Ltd., a
BVI Corporation, which provided for funding of up to $10.0 million. A total of
$1.5 million has been funded on this facility, which bears interest at 10% per
annum. Interest on each note is to be paid at maturation of the respective note,
which occurs six months after the date of each note. Of the $1.5 million funded
under the facility, $1.0 million matures on April 19, 2000, and $0.5 million
matures on April 26, 2000. As part of this transaction, certain members of the
board of directors agreed to pledge shares of Telscape stock as collateral. We
have agreed to indemnify these directors for the loss of their shares for any
reason other than the non-payment of these loans, and to compensate these
directors as discussed below. In December 1999, we informed Lennox that we would
not be drawing any further funding under this facility due to a breach of
contract on the part of Lennox.
As of December 31, 1999 and the date of this report, we have an outstanding
receivable of $1.4 million from a customer of our network solutions business.
This receivable has been outstanding since December 31, 1998. We have been
forced to utilize legal resources to enforce collection of this amount and
recorded an allowance for doubtful accounts of $700,000 against the amount
outstanding during the fourth quarter of 1999. In the event that we determine
that this amount or a portion of the amount is uncollectible in the future, we
may be forced to incur a charge in excess of the reserve already established for
the account.
As of December 31, 1999, our debt totaled $38.8 million, resulting in a
debt to equity ratio of 143% as compared to $13.1 million and 38%, respectively,
as of December 31, 1998. Fully funding the Lucent credit facility will
significantly increase our leverage. In addition, we estimate that there are an
additional $10 to $15 million in expenditures related to the Mexican network and
our network expansion which will be funded with a combination of the Lucent
facility and other debt. During fiscal 1999, we incurred losses and had
negative cash flow from operations. We do not expect that cash flow from
operations will be sufficient to meet anticipated capital expenditures and debt
repayments requirements when they are due without additional financing. We
intend to finance our growth, principal and interest obligations under existing
debt obligations and additional capital investments required for our planned
facilities expansion through vendor financing and the sale of debt or equity
securities (or a combination of both). There can be no assurance that we will be
able to obtain additional financing on commercially reasonable terms, if at all,
to fund losses generated from operations, to fund capital expenditures, to fund
debt service obligations as they become due or to fund strategic investment
alternatives.
On November 18, 1999, we entered into an agreement to sell approximately $5
million worth of excess fiber optic capacity on our Mexican network to another
Mexican carrier. Under the terms of the agreement, the carrier has provided a
non-refundable deposit of $500,000. The Mexican carrier is to provide 40% of the
purchase price on or before March 31, 2000 and the balance of the purchase price
by June 8, 2000. In the event that the Mexican carrier does not meet these
payment dates then it is subject to certain penalty provisions.
28
<PAGE>
On November 24, 1999, we signed a letter of intent to merge with Pointe. In
connection with the letter of intent, Pointe agreed to lend us $1.5 million that
was evidenced by a short term promissory note ("Promissory Note"). As part of
this transaction, certain members of the board of directors agreed to pledge
shares of Telscape stock as collateral. We have agreed to indemnify these
directors for the loss of their shares for any reason other than the non-payment
of these loans, and to compensate these directors as discussed below. On
December 31, 1999, we signed a definitive merger agreement with Pointe. In
addition, Pointe agreed to lend us $10 million, which was evidenced by a
convertible promissory note. In early January, Pointe funded $8.5 million into
escrow. On January 10, 2000, we drew down $1 million from escrow and the
Promissory Note was increased accordingly. On February 7, 2000, we executed a
replacement convertible promissory note ("Replacement Note") for $10,000,000
with an interest rate of 12% and a maturity of June 30, 2000. The Replacement
Note extinguishes the $2.5 million of indebtedness under the Promissory Note. As
of March 27, 2000, we have drawn down $4.7 million from escrow, creating a $7.2
million obligation to Pointe under the Replacement Note. Certain circumstances
relating to the merger agreement may affect our obligations and rights under the
Replacement Note. See further discussion of the Replacement Note in the Amended
and Restated Agreement and Plan of Merger filed as Exhibit 2.1 to this report.
Although we can provide no assurance, as of the date of this filing,
it is expected that the merger with Pointe will be finalized during
the second quarter of 2000 at which time the companies will begin
operating under the common name of Telscape. The terms of the
original merger agreement called for us to issue our common stock to
Pointe shareholders at an exchange ratio of 0.215054 of a share of our
common stock for every share of Pointe common stock. Also, for each
share of Pointe convertible preferred stock outstanding, we will issue one
share of our convertible preferred stock (with rights and preferences
substantially the same as the Pointe convertible preferred stock). On March 30,
2000, Telscape and Pointe agreed to an adjustment of the exchange ratio of
approximately 4%. The adjusted ratio of shares is the result of a Pointe
subsidiary, TeleCommute Solutions ("TCS"), which recently received $19 million
in new financing led by the MCI WorldCom Venture Fund and others, remaining in
the combined companies. The merger agreement had previously provided that TCS
was to be spun off to Pointe shareholders prior to the consumation of the
merger. Consequently, each share of Pointe stock will be exchanged for 0.223514
shares of our common stock.
The commitment by Lucent to provide an additional $20 million under the
credit agreement and the Class F Convertible Preferred Stock described below,
are contingent on our merger with Pointe. Should the Company not be able to
consummate the merger with Pointe, the Company's financial condition may be
adversely affected. The merger may not be approved by both of our company's
shareholder groups, a regulatory agency or other outside party, or we may
face undue delays affecting the timeliness in which we can consummate the
merger. Should we not be able to consummate the merger in a timely
manner, the commitments mentioned above may expire. We cannot guarantee
that such commitments could be replaced on similar terms, if at all.
Should the merger not be approved, we may have to continue our efforts to
identify parties interested and able to consummate an investment in our company.
There can be no assurance that we will be able to identify any future joint
ventures, acquisitions, mergers or strategic alliances or that, if identified,
we will be able to successfully execute these transactions. If necessary funds
are not available, our business and results of operations and the future
expansion of our business could be materially adversely affected.
Should our merger be approved by Telscape's and Pointe's shareholders, we
intend to jointly finance our growth, principal and interest obligations under
existing debt obligations, and additional capital investments required for our
planned facility expansions through cash flow from operations, vendor financing
and the sale of debt or equity securities (or a combination of both). There can
be no assurance that the cash generated from operations will be sufficient to
fund such expenditures or that we will be able to obtain financing on
commercially reasonable terms, if at all. If necessary funds are not available,
our business and results of operations and the future expansion of our business
could be materially adversely affected.
Also in January 2000, we converted $500,000 in notes payable due January 1,
2000, originally incurred in connection with the Integracion acquisition, into
47,619 shares of common stock at a price of $10.50 per share.
Upon the signing of the letter of intent, we and Pointe began a joint
effort to raise capital for the combined companies. In March 2000, we completed
a $31,575,000 private placement consisting of 315,750 shares of Class F
Convertible Senior Preferred Stock, par value $.001 per share (the ''Class F
Preferred Stock''), together with five year warrants to purchase 1,925,306
shares of common stock. The Class F Preferred Stock is convertible into
3,850,610 shares of our common stock at a conversion price equal to $8.20 per
share, and the exercise price of the warrants is $10.00 per share. The Class F
Preferred Stock earns dividends at a rate of 12% per annum, which are cumulative
and payable in either cash or shares of Class F Preferred Stock at our
discretion. Pricing for this transaction was established based on a trailing
thirty day average of the closing price of our common stock as of December 7,
1999. The proceeds of the Class F Preferred have been placed into escrow
and release of escrow is subject to the consummation of the merger with
Pointe.
29
<PAGE>
We may require the conversion of all of the outstanding Class F Preferred
Stock (i) in conjunction with a qualified offering or (ii) at any time after the
first year anniversary of the first issue date if: (1) our common stock shall
have been listed for trading on the New York Stock Exchange, the Nasdaq National
Market System or the American Stock Exchange (each, an "Exchange"); (2) our
common stock shall have traded on such Exchange for a period of at least 20
consecutive trading days at a price per share of at least $15.00 (subject to
appropriate adjustment for recapitalization events); and (3) the cumulative
average daily trading volume of our common stock during such 20 consecutive
trading day period shall be at least $3,000,000; provided, that, the shares of
common stock issuable upon such conversion shall have been registered and listed
on each securities exchange, over-the-counter market or on the Nasdaq National
Market on which similar securities issued by us are then listed. For purposes
of this paragraph, qualified offering shall mean the sale by us of common stock
or other equity interests in a public offering at a purchase price per share in
excess of $15.00 per share (subject to appropriate adjustment for
recapitalization events) yielding gross proceeds of not less than $30,000,000.
Telscape will be required to file a registration statement with the SEC
within 150 days of closing the sale of the Class F Preferred Stock to register
the shares of common stock issued or issuable upon conversion of all the Class
F Preferred Stock (including shares issued as dividends) and the exercise of the
related warrants.
FOREIGN CURRENCY TRANSLATION RISK
The general economic conditions of Mexico are greatly affected by the
fluctuations in exchange rates and inflation. Our foreign currency risk in
Mexico has traditionally been mitigated due to the fact that many of our
customers are multinational firms that pay in United States dollars. In
addition, most of our customers that pay in pesos pay at the spot exchange rate
in effect at the time of payment as opposed to the exchange rate at the time the
receivable is created. Our functional currency in Mexico is the United States
dollar because the majority of its transactions are in such currency. However,
given the recent completion of construction of the Mexican network and our plans
to record dollar-denominated debt on our Mexican subsidiaries' books, we may
incur some significant translation gains and losses in the future. We may choose
to limit our exposure to translation gains and losses through the purchase of
forward foreign exchange contracts or similar hedging strategies. There can be
no assurance that any foreign currency hedging strategy would be successful in
avoiding translation related gains or losses.
We do not currently hedge against the risk of foreign exchange rate
fluctuations. See further discussion in Item 7A - Quantitative and Qualitative
Disclosures about Market Risk - Foreign Currency Exchange Risk.
YEAR 2000 COMPLIANCE
To date, year 2000 problems have had a minimal effect on our business.
However, we may not have identified and remediated all significant year 2000
problems.
Further remediation efforts may involve significant time and expense, and
unremediated problems may have a material adverse effect on our business. Also,
we sell telecommunications products to companies in a variety of industries,
each of which is experiencing different year 2000 issues. Customer difficulties
with year 2000 issues might require us to devote additional resources to resolve
underlying problems. Finally, although we have not been made a party to any
litigation or arbitration proceeding to date involving our products or services
and related to year 2000 compliance issues, we may in the future be required to
defend our products or services in such proceedings, or to negotiate resolutions
of claims based on year 2000 issues. The costs of defending and resolving year
2000-related disputes, regardless of the merits of such disputes, and any
liability for year 2000 related damages, including consequential damages, would
negatively affect our business, results of operations, financial condition and
liquidity, perhaps materially.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," requires companies to recognize all derivatives contracts as either
assets or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000.
30
<PAGE>
Historically, we have not entered into derivatives contracts either to
hedge existing risks or for speculative purposes. Accordingly, we do not expect
adoption of the new standard to have a material effect on our financial
statements.
SOP 98-5, "Reporting on the Costs of Start-up Activities," requires all
start-up and organizational costs to be expensed as incurred. It also requires
all remaining historically capitalized amounts of these costs existing at the
date of adoption to be expensed and reported as the cumulative effect of a
change in accounting principles. SOP 98-5 is effective for all fiscal years
beginning after December 31, 1998. Adoption of SOP 98-5 did not have a material
effect on our prior years financial statements. We incurred and expensed
significant costs in connection with the start-up of the network in Mexico in
1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are subject to financial market risks, including interest rate risk and
foreign currency exchange risk.
INTEREST RATE RISK
As of December 31, 1999, we had a mix of variable and fixed interest
bearing notes. All of our debt obligations are denominated in U.S. dollars and,
represent interest rate risk. All of our debt obligations are segregated in
fixed and variable rate instruments as shown on the table below. The table
shows the amounts of principal payments due on our various debt instruments and
the weighted average rate for the principal payments then due using the rates in
effect at December 31, 1999. Our Lucent facility has an interest rate
calculated as a base rate plus a margin. The base rate is established at the
time of funding and the margins are pre-determined fixed margins as contained in
the Lucent credit agreement. As the rate for Lucent notes is known and
determinable at the time of funding, all Lucent notes are categorized as fixed
in the table below.
The table set forth below summarizes the fair values and payment terms of
financial instruments subject to interest rate risk maintained by us as of
December 31, 1999.
<TABLE>
<CAPTION>
Fair Value
DEBT 2000 2001 2002 2003 2004 Total at 12/31/99
- ------------- ------------ ---------- ---------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Non-Interest
Bearing or
Fixed Rate $ 4,870,000 4,553,000 5,489,000 6,615,000 7,180,000 28,707,000 28,707,000
Wtd. Avg.
Interest Rate 10.30% 11.22% 11.93% 12.28% 12.80% 11.84% ---
Variable $ 1,777,000 4,702,000 1,342,000 1,116,000 1,117,000 10,054,000 10,054,000
Wtd. Avg.
Interest Rate 10.54% 12.56% 10.52% 10.50% 10.50% 11.48% ---
---------------------------------------------------------------------------------------
Total $ 6,647,000 9,255,000 6,831,000 7,731,000 8,297,000 38,761,000 38,761,000
=======================================================================================
</TABLE>
We have not entered into any derivative contracts or used any other
interest rate risk management techniques to attempt to minimize the interest
rate risk inherent in each of our debt instruments. At the time of this filing,
we have no plans in place to actively manage this risk.
As we do not have a significant amount of variable interest rate
obligations, we have not entered into derivative transactions to hedge our risk.
FOREIGN CURRENCY EXCHANGE RISK
We conduct a significant amount of its operations in countries outside the
United States. Our foreign currency exchange risk includes the following:
The Mexican economy has historically had periods of exchange rate
instability and peso devaluation. 1999 was the first year in recent history in
which not only did the peso not decline but appreciated slightly year over year.
Our advanced services business is conducted in Mexico. The majority of our
revenues in the advanced services business are contracted in dollars or in pesos
indexed to the dollar at the time of settlement. The products and services that
31
<PAGE>
we sell in the advanced services business line are generally imported from the
U.S. or other countries and are payable in dollars. Our remaining operating
costs in this segment are generally paid in pesos. Our major outsourcing
contracts with the U.S. Embassy and the Ministry of Foreign Affairs generate
revenues which are collected in pesos and costs which are paid in pesos.
Additionally, we anticipate receiving a greater portion of our revenues in
Mexican pesos as our voice services, network operations and customer
relationship management services expand. We also anticipate incurring more
peso-denominated costs as our operations in Mexico expand in line with revenues
therefrom. As examples, the prepaid cards that we started selling in late 1999
in Mexico are peso-denominated, the provision of telecommunication services in
tandem with the operation of our Mexican network is likely to be primarily
peso-denominated and our call center services, which we anticipate will continue
to grow are all presently peso-denominated.
In our broadband services business segment, we generally collect our
revenues in U.S. dollars and pay for our costs to provide these services in U.S.
dollars
In our voice services business segment, we sell our services to customers
in the U.S. and thus our revenues have been collected in U.S. dollars. Our costs
of providing these services are paid to vendors both in the U.S. and in Mexico
or other Latin American countries. A significant portion of our costs to provide
these services are structured under operating agreements with carriers in Mexico
under which the costs historically have been settled in pesos. We entered into
additional agreements with carriers in Mexico which provided us with additional
termination capacity in Mexico in 1999. These arrangements provide for
settlement in U.S. dollars.
Nonetheless, as stated above, we anticipate having an increasingly larger
portion of our business in Mexico, and conducting that business primarily as
peso-denominated.
We do not have a hedging policy in place but do plan to consider using
derivatives to mitigate the risk of paying off our dollar denominated debt with
increasingly Mexican operations. We have not entered into any derivative or
futures contracts or used any other such exchange rate risk management technique
as of the date of this filing.
32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements:
Page
----
Report of Independent Certified Public Accountants 34
Consolidated Balance Sheets - At December 31, 1998 and 1999 35
Consolidated Statements of Operations - For the years ended
December 31, 1997, 1998 and 1999 36
Consolidated Statements of Stockholders' Equity - For the
years ended December 31, 1997, 1998 and 1999 37
Consolidated Statements of Cash Flows - For the years ended
December 31, 1997, 1998 and 1999 38
Notes to Consolidated Financial Statements 40
Schedule II Valuation and Qualifying Accounts 75
33
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Telscape International, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of Telscape
International, Inc. and subsidiaries as of December 31, 1998 and 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three year period ended December 31, 1999. We
have also have audited the financial statement schedule for the year ended
December 31 1999, listed in the accompanying index. These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements and the schedule. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Telscape
International, Inc. and subsidiaries at December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
Also, in our opinion, the financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO SEIDMAN, LLP
Houston, Texas
March 10, 2000
34
<PAGE>
<TABLE>
<CAPTION>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
--------------------------
1998 1999
------------- ------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 9,631,000 $ 5,419,000
Accounts receivable, less allowance for doubtful accounts of
$500,000 and $2,110,000, respectively 14,387,000 12,283,000
Inventories 4,581,000 5,838,000
Prepaid expenses and other 3,519,000 4,203,000
Deferred income taxes 628,000 2,254,000
------------- ------------
Total current assets 32,746,000 29,997,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation 14,576,000 58,468,000
GOODWILL AND OTHER INTANGIBLES, net of accumulated amortization 31,416,000 32,342,000
DEFERRED INCOME TAXES 35,000 2,587,000
OTHER ASSETS 1,558,000 3,746,000
------------- ------------
Total assets $ 80,331,000 $127,140,000
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $22,090,000 $ 45,841,000
Accrued expenses 10,182,000 15,494,000
Current portion of notes payable and capital lease obligations 2,714,000 11,112,000
Convertible debentures 4,996,000 ---
------------ -------------
Total current liabilities 39,982,000 72,447,000
NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS, net of current portion 1,488,000 27,649,000
CONVERTIBLE SUBORDINATED DEBENTURES 3,935,000 ---
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 5,000,000 shares authorized;
without defined preference rights --- ---
Series A preferred stock, $.001 par value, 1,000,000 shares authorized --- ---
Common stock, $.001 par value, 25,000,000 shares authorized;
6,048,909 and 7,975,837 issued, respectively 6,000 8,000
Additional paid-in capital 39,398,000 51,142,000
Accumulated deficit (3,881,000) (23,356,000)
Treasury stock (480,000) (480,000)
Capital subscriptions receivable (117,000) (270,000)
------------ -------------
Total stockholders' equity 34,926,000 27,044,000
------------ -------------
Total liabilities and stockholders' equity $80,331,000 $127,140,000
============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
<TABLE>
<CAPTION>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
---------------------------------------------
1997 1998 1999
-------------- -------------- -------------
<S> <C> <C> <C>
REVENUES $ 36,154,000 $ 132,179,000 $106,833,000
COST OF REVENUES 24,396,000 111,892,000 93,394,000
-------------- -------------- -------------
GROSS PROFIT 11,758,000 20,287,000 13,439,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 8,154,000 13,774,000 24,357,000
DEPRECIATION AND AMORTIZATION 622,000 3,316,000 6,335,000
IMPAIRMENT LOSS ON LONG-LIVED ASSETS --- 1,026,000 715,000
-------------- -------------- -------------
OPERATING INCOME (LOSS) 2,982,000 2,171,000 (17,968,000)
OTHER INCOME (EXPENSE):
Interest income 171,000 195,000 268,000
Interest expense (266,000) (1,660,000) (3,155,000)
Amortization of debt offering costs --- (136,000) (1,365,000)
Foreign exchange gain (loss) (126,000) (639,000) 207,000
Other, net (11,000) (173,000) (890,000)
-------------- -------------- -------------
Total other expense, net (232,000) (2,413,000) (4,935,000)
-------------- -------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTERESTS 2,750,000 (242,000) (22,903,000)
INCOME TAX BENEFIT (EXPENSE) (84,000) (822,000) 3,428,000
-------------- -------------- -------------
INCOME (LOSS) BEFORE MINORITY INTERESTS 2,666,000 (1,064,000) (19,475,000)
MINORITY INTERESTS IN SUBSIDIARIES 6,000 34,000 ---
-------------- -------------- -------------
NET INCOME (LOSS) $ 2,672,000 $ (1,030,000) $(19,475,000)
============== ============== =============
EARNINGS (LOSS) PER SHARE:
Basic $ 0.68 $ (0.20) $ (2.92)
Diluted (1) $ 0.53 $ N/A $ N/A
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 3,903,470 5,052,096 6,669,987
Diluted (1) 5,152,211 N/A N/A
<FN>
(1) Inclusion of additional shares under a diluted analysis is inappropriate due to the anti-dilutive effect
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
<TABLE>
<CAPTION>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
COMMON STOCK ADDITIONAL CAPITAL TOTAL
------------------ PAID-IN ACCUMULATED TREASURY SUBSCRIPTIONS STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT STOCK RECEIVABLE EQUITY
--------- ------- ----------- ------------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 3,935,969 $ 4,000 $11,884,000 $ (5,523,000) --- $ (600,000) $ 5,765,000
Issuance of stock in connection with
warrants and options exercised 148,058 --- 1,004,000 --- --- --- 1,004,000
Compensation related to common stock
and warrants granted 20,000 --- 188,000 --- --- --- 188,000
Repurchase of treasury shares --- --- --- --- (297,000) --- (297,000)
Release of stock in escrow --- --- --- --- --- 600,000 600,000
Additional consideration recognized
upon vesting of warrants --- --- 12,156,000 --- --- --- 12,156,000
Net income --- --- --- 2,672,000 --- --- 2,672,000
--------- ------- ----------- ------------- ---------- -------------- -------------
Balance, December 31, 1997 4,104,027 4,000 25,232,000 (2,851,000) (297,000) --- 22,088,000
Issuance of stock in connection with
warrants and options exercised 1,242,151 2,000 5,052,000 --- --- --- 5,054,000
Issuance of stock and warrants in
connection with acquisition 100,000 --- 980,000 --- --- --- 980,000
Issuance of stock in connection with
debt conversion 333,000 --- 888,000 --- --- --- 888,000
Additional consideration recognized
upon vesting of warrants --- --- 5,479,000 --- --- --- 5,479,000
Issuance of warrants with convertible
debt placement --- --- 479,000 --- --- --- 479,000
Sale of common stock 269,731 --- 1,288,000 --- 107,000 (117,000) 1,278,000
Repurchase of treasury shares --- --- --- --- (290,000) --- (290,000)
Net loss --- --- --- (1,030,000) --- --- (1,030,000)
--------- ------- ----------- ------------ ----------- ------------- -------------
Balance, December 31, 1998 6,048,909 6,000 39,398,000 (3,881,000) (480,000) (117,000) 34,926,000
Issuance of stock in connection with
warrants and options exercised 400,445 --- 382,000 --- --- --- 382,000
Issuance of stock and warrants in
connection with acquisition of
minority interest 400,000 --- 3,305,000 --- --- --- 3,305,000
Issuance of stock in connection with
debt conversion 567,359 1,000 3,671,000 --- --- --- 3,672,000
Issuance of warrants in connection with --- 1,275,000
financings and services provided --- --- --- --- 1,275,000
Sale of common stock 559,124 1,000 3,111,000 --- --- (153,000) 2,959,000
Net loss --- --- --- (19,475,000) --- --- (19,475,000)
--------- ------- ----------- ------------- ---------- -------------- -------------
Balance, December 31, 1999 7,975,837 $ 8,000 $51,142,000 $(23,356,000) $(480,000) $ (270,000) $ 27,044,000
========= ======= =========== ============= ========== ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
</PAGE>
<TABLE>
<CAPTION>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------------------------
1997 1998 1999
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 2,672,000 $ (1,030,000) $(19,475,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for doubtful accounts 277,000 560,000 1,996,000
Provision for inventory obsolescence 53,000 22,000 450,000
Depreciation and amortization 622,000 3,316,000 6,335,000
Write-off of investment in operating venture 196,000 --- ---
Deferred income taxes (1,566,000) (339,000) (4,178,000)
Impairment loss on long-lived assets --- 1,026,000 715,000
Interest accrued on non-interest bearing notes and
amortization of debt offering costs 136,000 270,000 1,588,000
Minority interest in subsidiaries' loss (6,000) (34,000) ---
Equity in income from unconsolidated subsidiary --- 198,000 97,000
Refinancing charges of operating lease --- --- 327,000
Expenses for warrants issued to third parties --- --- 163,000
Changes in assets and liabilities:
Accounts receivable (1,623,000) (6,404,000) 108,000
Inventories (2,359,000) 493,000 (1,707,000)
Prepaid and other assets (2,634,000) (1,345,000) (3,202,000)
Accounts payable 6,954,000 6,296,000 1,157,000
Accrued liabilities 1,866,000 3,582,000 5,312,000
------------- ------------- -------------
Net cash provided by (used in) operating activities 4,588,000 6,611,000 (10,314,000)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,682,000) (6,159,000) (18,268,000)
Acquisition of Integracion, net of cash acquired 117,000 --- ---
Mandatory redemption of preferred stock --- (380,000) ---
Acquisition of N.S.I., net of cash acquired (49,000) --- ---
Acquisition of MSN, net of cash acquired --- (2,353,000) ---
Acquisition of INTERLINK, net of cash acquired --- (8,805,000) ---
Investment in BCH Holdings (185,000) --- ---
------------- ------------- -------------
Net cash used in investing activities (1,799,000) (17,697,000) (18,268,000)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (104,000) (66,000) (144,000)
Payments on notes payable (50,000) (681,000) (10,500,000)
Proceeds from notes payable --- --- 15,426,000
Proceeds from capital subscriptions 600,000 --- ---
Purchase of treasury shares --- (290,000) ---
Borrowings on line of credit --- 1,948,000 ---
Payments on line of credit --- (260,000) (1,688,000)
Borrowings under Lucent Credit Facility --- --- 23,935,000
Proceeds from warrants and options exercised 1,004,000 5,054,000 382,000
Proceeds from issuance of convertible debts --- 10,000,000 ---
Payments on convertible debts --- (1,000,000) (6,000,000)
Proceeds from sale of common stock --- 1,278,000 2,959,000
------------- ------------- -------------
Net cash provided by financing activities 1,450,000 15,983,000 24,370,000
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 4,239,000 4,897,000 (4,212,000)
Cash and cash equivalents at beginning of period 495,000 4,734,000 9,631,000
------------- ------------- -------------
Cash and cash equivalents at end of period $ 4,734,000 $ 9,631,000 $ 5,419,000
============== ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------------------
1997 1998 1999
---------- ---------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<S> <C> <C> <C>
Interest paid $ 121,000 $ 855,000 $ 2,477,000
Income taxes paid 505,000 1,657,000 1,001,000
NON-CASH TRANSACTIONS:
Property and equipment acquired by execution of
capital lease obligation 329,000 45,000 318,000
Issuance of common stock, warrants and promissory
notes in connection with acquisition of MSN:
Promissory notes --- 672,000 ---
Common stock and warrants --- 980,000 ---
Issuance of notes and acquisition of treasury
shares in litigation settlement :
Litigation settlement (3,000) --- ---
Treasury stock (297,000) --- ---
Notes payable 300,000 --- ---
Issuance of common stock and warrants in
exchange for services provided in connection
with severance agreement 188,000 --- ---
Issuance of promissory notes in connection with
the acquisition of Integracion 2,555,000 --- ---
Additional contingent consideration recorded:
2,175,000 in 1997 and 500,000 in 1998 warrants
issued in connection with Telereunion and
Integracion acquisitions vesting upon achievement
of certain operating performance measures 12,156,000 5,479,000 ---
Issuance of common stock and warrants in
Exchange for additional economic interests
of Telereunion SA de CV --- --- 3,305,000
Accrual of redemption of 380,000 shares of
Series B preferred stock to be redeemed based
Upon achievement of certain operating
performance measures 380,000 --- ---
Debt issuance costs in connection with
financings and convertible debentures --- 479,000 1,275,000
Issuance of common stock in connection with
conversion of notes and convertible debentures --- 888,000 3,672,000
Network construction costs and equipment purchases
incurred and included as accounts payable
expected to be financed through long-term loans
or lease finance arrangement --- 3,500,000 27,464,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Telscape International, Inc. (collectively with its subsidiaries, the
"Company") is an emerging, fully-integrated telecommunications company. The
Company supplies U.S.-originated international long distance services on a
wholesale and retail basis, via switched and dedicated networks, with an
emphasis on Latin America. In addition, the Company provides a full range of
advanced services and systems integration services in Mexico to major public and
private sector customers.
Through its Telscape USA, Inc. ("Telscape USA") and TSCP International,
Inc. ("TSCP") subsidiaries, the Company is a facilities-based long distance
telecommunications services company providing international long distance
services for calls originating in the United States and terminating in other
countries, primarily in Latin America. Through its subsidiary, MSN
Communications, Inc. ("MSN"), the Company is engaged in the distribution and
sale of prepaid phone cards across the United States, targeted mainly at the
Hispanic community.
Through its Mexican subsidiaries, Vextro de Mexico, S.A. de C.V.
("Vextro"), Telscape de Mexico, S.A. de C.V. (formerly Integracion de Redes,
S.A. de C.V.) ("Integracion") and N.S.I., S.A. de C.V. ("N.S.I."), the Company
is engaged in the distribution and sale of voice, data and networking equipment
and provides value-added services in network integration. Each of these Mexican
entities is owned principally by Telereunion, Inc. ( "Telereunion" ), a
wholly-owned subsidiary of the Company. The Company established Servicios de
Comunicacion Popular S. de R.L. ("SCP") in 1999, a wholly-owned subsidiary of
the Company, to sell and distribute prepaid cards throughout Mexico.
Through its subsidiary, INTERLINK Communications, Inc. ("INTERLINK"), the
Company provides satellite teleport services including voice, video and data
transport services to customers in the U.S., Latin America and other parts of
the world.
In June 1998, Telereunion S.A. de C.V. ("Telereunion S.A."), a subsidiary
of the Company, received a 30-year, facilities-based carrier license from the
Mexican government allowing it to construct and operate a network over which the
Company can carry voice, video, data and Internet traffic in Mexico (the
"Mexican Concession"). Through its wholly-owned subsidiary, Telereunion
International, S.A, de C.V. ("Telereunion International"), the Company owns
approximately 92% of the economic interests and 49% of the voting interests of
Telereunion S.A. In addition, three directors of the Company own an additional
18% of the voting interests and 1% of the economic interests of Telereunion
S.A., resulting in the Company and such directors together controlling 93% of
the economic interests and 67% of the voting interests of Telereunion S.A. Under
Mexican law, foreign investors may own more than a majority of the economic
interests in a concessionaire but may not own more than 49% of the voting
ownership of any concessionaire. The Company did not have significant
operations from Telereunion, S.A. in 1998. In the second quarter of 1999, the
Company began the construction of a combined fiber-optic and microwave long haul
network which was still in process at December 31, 1999.
In 1999, the Company incorporated enablecommerce.com Inc. ("Enable"), to
launch a business to business electronic commerce platform in Latin America.
The Company did not have significant operations from Enable in 1999.
PROPOSED MERGER
In January 2000, the Company and Pointe Communications, Inc. ("Pointe")
jointly announced a merger of the companies in an all-stock transaction. In
conjunction with the merger agreement, the $1.5 million note extended by Pointe
in December 1999 was converted into a $1.5 million note convertible into the
Company's preferred stock under terms contained in the merger agreement. The
merger agreement calls for funding of up to $10 million in such convertible
notes. It is expected that the merger with Pointe will be finalized during the
second quarter of 2000 at which time the companies will begin operating under
the common name of Telscape. The terms of the original merger agreement called
for the Company to issue the Company's common stock to Pointe shareholders
at an exchange ratio of 0.215054 of a share of the Company's common
stock for every share of Pointe common stock. Also, for each share of
Pointe convertible preferred stock outstanding, the Company will issue one
share of the Company's convertible preferred stock (with rights and preferences
substantially the same as the Pointe convertible preferred stock). On March 30,
2000, the Company and Pointe agreed to an adjustment of the exchange ratio of
approximately 4%. The adjusted ratio of shares is the result of a Pointe
subsidiary, TeleCommute Solutions ("TCS"), which recently received $19 million
in new financing led by the MCI WorldCom Venture Fund and others, remaining in
the combined companies. The merger agreement had previously provided that TCS
was to be spun off to Pointe shareholders prior to the consumation of the
merger. Consequently, each share of Pointe stock will be exchanged for 0.223514
shares of the Company's common stock.
40
<PAGE>
FINANCIAL CONDITION
As of December 31, 1999, the Company had negative working capital of $42.5
million, primarily resulting from the Company's loss from operations and to the
substantial resources expended on the construction of the Company's
telecommunications network in Mexico. The Company does not expect that cash
flows from operations will be sufficient to meet anticipated capital
expenditures and debt repayment requirements as they become due without
additional financing. Such efforts by the Company are described in Notes 4 and
11. Should the proposed merger be approved by the Company's and Pointe's
shareholders, the Company intends to jointly finance the Company's growth, the
principal and interest obligations under existing debt, and the additional
capital investments required for the Company's planned facility expansions
through cash flows from operations, vendor financing and the sale of debt or
equity securities (or a combination of both). While management of the Company
believes that the merger will be approved, there can be no assurance that the
cash generated from the combined operations will be sufficient to fund such
expenditures or that the Company will be able to obtain financing on
commercially reasonable terms, if at all. If necessary funds are not available,
the Company's business and results of operations and the future expansion of
the Company's business could be materially adversely affected.
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
all wholly and majority owned subsidiaries, as well as entities over which it
exercises voting control. The Company recognizes the minority interests in the
financial statements , which represents the portion of majority owned
subsidiaries attributable to minority owners. Investments in affiliates in which
the Company owns a 20% to 50% ownership interest, and in which the Company
exercises significant influence over operating and financial policies, are
accounted for by the equity method. Investments of less than 20% ownership are
recorded at cost, which does not exceed the estimated net realizable value of
such investments. All significant intercompany transactions and balances have
been eliminated in consolidation.
Reclassifications
Certain prior year amounts have been reclassified to conform to current
year presentation.
Management's Estimates and Assumptions
The accompanying financial statements are prepared in conformity with
generally accepted accounting principles which requires management to make
estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The Company reviews all significant estimates
affecting the financial statements on a recurring basis and records the effect
of any necessary adjustments prior to their issuance. The actual results could
differ from those estimates.
Revenue Recognition
The Company recognizes revenue from long distance telecommunications
services at the time of customer usage. Revenue from sales of equipment are
recognized at time of shipment. Revenue from data and network integration
value-added services are recognized when services are performed. In certain
cases, the Company had entered into arrangements with third parties whereby
these parties provide long distance telecommunication services for prepaid phone
cards sold at a fixed cost. As the earnings process is complete at time of
shipment under those arrangements, the Company recognized revenues (and cost of
revenues) from the sale of cards at the time of shipment of its cards. The
Company discontinued these types of arrangements in the second quarter of 1998.
In other cases, the Company has entered into arrangements with third parties
whereby these parties provide certain of the long distance telecommunications
services for prepaid phone cards and bills the Company for these services as the
cards are utilized. Under these arrangements, the earnings process is not
complete until the cards are utilized, and, accordingly, the Company defers
revenues at time of shipment and recognizes revenues (and cost of revenues) from
the sale of cards as the cards are utilized and the costs measured.
41
<PAGE>
Receivables
The Company maintains an allowance for doubtful accounts based on the
expected collectbility of all consolidated trade accounts receivable. The
allowance for doubtful accounts as of December 31, 1998 and December 31, 1999
was $500,000 and $2,110,000, respectively. In 1998, the Company wrote off
$541,000 in receivables from a customer which filed for bankruptcy. The Company
increased its allowance for doubtful accounts in the fourth quarter of 1999
primarily resulting from a disputed accounts receivable balance of $1.4 million
from a major customer in Mexico.
Cash and Cash Equivalents
The Company considers cash in banks and short-term investments with
original maturities of three months or less as cash and cash equivalents.
Financial Instruments
The Company assesses and discloses the fair value of its financial
instruments; however, this information does not represent the aggregate net fair
value of the Company. Some of the information used to determine fair value is
subjective and judgmental in nature; therefore, fair value estimates, especially
for less marketable securities may vary. The amounts actually realized or paid
upon settlement or maturity could be significantly different.
Unless quoted market price indicates otherwise, the fair values of cash and
cash equivalents, short-term investments, escrowed deposits and investments
(certificates of deposit) generally approximate market value because of the
short maturity of these instruments. The Company's notes payable also
approximate market value as the underlying borrowing rates are similar to other
financial instruments with similar maturities and terms.
Inventories
Inventories consist principally of telecommunications equipment acquired
from manufacturers for distribution and are stated at the lower of cost
(first-in, first-out) or market. The Company maintains a reserve for inventory
obsolescence. The reserve as of December 31, 1998 and December 31, 1999, was
$1,047,000 and $1,313,000, respectively.
Property and Equipment
Property and equipment are stated at cost. The cost of major renewals and
betterments is capitalized; repairs and maintenance costs are expensed when
incurred. Upon retirement or sale, the cost of the assets disposed of and the
related accumulated depreciation are removed from the accounts, with any
resultant gain or loss being reflected in the Consolidated Statement of
Operations. In 1998 and again in 1999, the Company recognized an impairment loss
of $1.0 million and $715,000, respectively, as it determined that the carrying
value of certain equipment and long-lived assets deployed under certain
operating arrangements in Latin America were impaired. Depreciation of property
and equipment for financial reporting purposes is computed using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements and capital leases are amortized over the lesser of the life of the
lease or the useful life of the asset. For income tax purposes, accelerated
methods of depreciation are used. The Company capitalized interest related to
the construction of its Mexican network for a total of $638,000 in 1999.
42
<PAGE>
The following is a summary of the Company's property and equipment and their
Estimated useful lives:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, ESTIMATED
--------------------------- USEFUL LIVES
1998 1999 (YEARS)
------------- ------------ -----------
<S> <C> <C> <C>
Land $ --- $ 190,000
Computer equipment and software 2,419,000 3,465,000 3
Telecommunications equipment 9,918,000 17,497,000 5-10
Furniture and Fixtures 932,000 1,141,000 5-10
Leasehold improvements 1,085,000 1,336,000 3-20
Transportation equipment 371,000 417,000 4
Teleport equipment 3,947,000 4,328,000 5-15
Call center equipment 47,000 65,000 3
Network construction in progress --- 38,588,000
------------- -------------
$ 18,719,000 $ 67,027,000
Less accumulated depreciation (4,143,000) (8,559,000)
------------- -------------
$ 14,576,000 $ 58,468,000
============= =============
</TABLE>
Goodwill and Other Intangibles
The major classes of intangible assets are summarized below:
<TABLE>
<CAPTION>
As of December 31, Amortization
---------------------------- Period
1998 1999 (Years)
------------- ------------- ------------
<S> <C> <C> <C>
Goodwill $ 33,760,000 $36,815,000 15
Other 73,000 373,000 5
Less accumulated amortization (2,417,000) (4,846,000)
------------- -------------
$ 31,416,000 $32,342,000
============= =============
</TABLE>
Intangible assets are amortized using the straight-line method for periods
noted above. Goodwill is recognized for the excess of the purchase price of the
various business combinations over the estimated fair value of the identifiable
net tangible and intangible assets acquired. In connection with certain of the
Company's acquisitions, the Company issued performance-based warrants. The
Company records such contingent consideration at the time the contingency is
resolved and the consideration becomes issuable or when the outcome of the
contingency is determinable beyond a reasonable doubt. During the year ended
December 31, 1998, the remaining 500,000 warrants issued in connection with the
Telereunion acquisition vested resulting in the Company recording $5,479,000 in
additional consideration with this acquisition. See Note 2 for further
discussion regarding the Company's acquisitions. Realization of long-lived
assets, including goodwill, is periodically assessed by the management of the
Company. Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. In connection with such assessment by management, the
Company recorded an impairment loss of $1.0 million and $715,000 for the year
ended December 31, 1998 and 1999 respectively, relating to certain long-lived
assets in Latin America.
In November 1999, the Company issued 400,000 shares and 100,000 warrants to
the minority shareholders of its subsidiary, Telereunion S.A., in exchange for
an additional 27% of the economic interests in Telereunion, S.A. This resulted
in the Company's economic ownership interest in Telereunion S.A. increasing to
92% while the Company's voting interest remains at 49%. Three of the Company's
directors own an additional 1% of the economic interests and 18% of the voting
interests in Telereunion S.A. resulting in a combined control of 93% of the
economic interests and 67% of the voting interests. The Company determined the
fair value of the shares issued to the minority interest holders based on the
closing price of the Company's common stock on the date the agreement was
signed. The Company estimated the fair value of the warrants by utilizing the
Black-Scholes option pricing model with the following assumptions: dividend
yield of 0%, expected volatility of 54%, risk free interest rate of 5% and
expected life of one year. The resulting cost totaling approximately $3.3
million was recorded as goodwill in the fourth quarter of 1999.
43
<PAGE>
Warranty Reserves
The Company generally provides its network solutions customers a warranty
on each sale of equipment and related products and accrues warranty expense at
the time of sale based upon actual claims history. Actual warranty costs
incurred are charged against such accrual when paid.
Prepaid expenses and other current assets:
Prepaid expenses and other current assets include the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------
1998 1999
----------- ----------
<S> <C> <C>
Value-added taxes receivable $ 1,748,000 $2,142,000
Deposits 322,000 106,000
Prepaid insurance and other expenses 963,000 1,537,000
Other 486,000 418,000
----------- ----------
$ 3,519,000 $4,203,000
=========== ==========
</TABLE>
Accrued expenses:
Accrued expenses include the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1998 1999
------------ -----------
<S> <C> <C>
Customer prepayments $ 1,369,000 $ 3,946,000
Deferred Revenues 5,497,000 2,877,000
Accrued interest 584,000 1,439,000
Accrued wages 1,041,000 797,000
Taxes payable 745,000 423,000
Telecommunications taxes and fees payable 324,000 4,411,000
Other 622,000 1,601,000
------------ -----------
$ 10,182,000 $15,494,000
============ ===========
</TABLE>
Foreign Currency Translation and Transactions
The Company has determined that the U.S. dollar is the functional currency
for its operations outside the U.S. As such, gains and losses resulting from
foreign exchange transactions are included in the Consolidated Statements of
Operations. The Company recognized a foreign exchange gain (loss) of
($126,000), ($639,000) and $207,000 for the years ended December 31, 1997, 1998
and 1999, respectively.
Income Taxes
Income taxes are calculated using the liability method. Under this method,
deferred tax assets and liabilities are determined based on differences between
the financial reporting and income tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when
differences are expected to reverse. A valuation allowance is used to reduce
deferred tax assets to the amount that is more likely than not to be realized.
44
<PAGE>
Earnings (Loss) Per Share
Earnings (loss) per share is calculated as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
------------- ------------ -------------
<S> <C> <C> <C>
Basic
Net income (loss) as reported $ 2,672,000 $(1,030,000) $(19,475,000)
Weighted average common shares
Outstanding 3,903,470 5,052,096 6,669,987
Basic earnings (loss) per share $ 0.68 $ (0.20) $ (2.92)
Diluted
Net income (loss) as reported $ 2,672,000 $(1,030,000) $(19,475,000)
Interest expense on convertible debt 42,000 --- ---
------------- ------------ -------------
Net income (loss) applicable
to common stockholders $ 2,714,000 $(1,030,000) $(19,475,000)
Weighted average common
Shares outstanding 3,903,470 5,052,096 6,669,987
Options 430,969 891,211 901,220
Warrants 651,272 1,945,848 1,588,970
Convertible debt 166,500 --- ---
------------- ------------ -------------
Total weighted average
Dilutive potential common
shares outstanding 1,248,741 2,837,059 2,490,190
------------- ------------ -------------
Weighted average common
and dilutive potential
common shares outstanding 5,152,211 7,889,155 9,160,177
Diluted net income (loss) per share $ 0.53 $ (0.13) $ (2.13)
</TABLE>
Diluted EPS for the years ended December 31, 1998 and 1999, was not
disclosed on the Consolidated Statement of Operations as the effect is
anti-dilutive. Certain performance based warrants vested at December 31, 1997
and during the year ended December 31, 1998 upon the achievement of certain
operating performance measures (See Note 2). These contingently issuable shares
were included in the calculation of diluted EPS when all the necessary
conditions were met. If all the necessary conditions have not been satisfied by
the end of the period, the number of contingently issuable shares that would
have been issued if the reporting period was the end of the contingency period
are included in the calculation as if those shares were issued at the beginning
of that period. For year to date calculations, contingent shares are weighted
for the interim periods in which they are included in the computation of diluted
EPS. Accordingly, 1,000,000 warrants were included in the calculation of diluted
EPS for the year ended December 31, 1997 as if those shares were issued on July
1, 1997 and 1,175,000 warrants were included as if those shares were issued on
October 1, 1997. In addition, 500,000 warrants are included in the calculation
of diluted EPS for the year ended December 31, 1998 as if those shares were
issued July 1, 1998. At December 31, 1997, 1998 and 1999, there were 500,000,
0 and 0 performance based warrants, respectively, which had not vested which
were not included in the calculation of diluted EPS. Additionally, 666,270,
95,619 and 930,101 options and warrants outstanding at December 31, 1997, 1998
and 1999, respectively, were not included in the calculation of diluted EPS as
their exercise prices were greater than the average market price of the
Company's Common Stock during the period and inclusion of these securities in
the calculation would result in an anti-dilutive effect.
Recent Accounting Pronouncements
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
requires companies to recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivatives contracts either
to hedge existing risks or for speculative purposes. Accordingly, the Company
does not expect adoption of the new standard to have a material effect on its
financial statements.
45
<PAGE>
SOP 98-5, "Reporting on the Costs of Start-up Activities," requires all
start-up and organizational costs to be expensed as incurred. It also requires
all remaining historically capitalized amounts of these costs existing at the
date of adoption to be expensed and reported as the cumulative effect of a
change in accounting principles. SOP 98-5 is effective for all fiscal years
beginning after December 31, 1998. Adoption of SOP 98-5 did not have a material
effect on the Company's prior years financial statements. The Company incurred
and expensed significant costs in connection with the start-up of the network in
Mexico in 1999.
2. MERGERS AND ACQUISITIONS
Telereunion Acquisition
On May 17, 1996, the Company acquired all of the outstanding common stock
of Telereunion, which had previously acquired a 97% ownership of Vextro in a
triangular reverse acquisition, accounted for as a purchase. Vextro is engaged
in the distribution and sale of voice, data and networking equipment and
provides value-added telecommunications services and network integration
services in Mexico.
Under the terms of the acquisition, the Company issued to the shareholders
of Telereunion 1,605,000 shares of Common Stock of the Company, 380,000 shares
of non-voting, non-participatory Series B preferred stock and warrants to
purchase up to 2,595,000 additional shares of Common Stock at $2.19 per share.
The warrants vest and become exercisable upon Vextro meeting certain operating
performance measures and expire seven years after closing. The preferred stock
was mandatorily redeemable at $380,000 in the aggregate upon the Company meeting
certain operating performance measures. In addition, the Company converted and
amended certain non-qualified options outstanding under the Telereunion 1995
Stock Option and Appreciation Rights Plan to provide for the right to acquire an
aggregate of 216,618 shares of Common Stock of the Company at an exercise price
of $1.35 per share. The purchase price was allocated to the acquired company's
assets and liabilities based upon an estimate of fair values at the date of
acquisition and resulted in $3,312,000 of goodwill, which is being amortized
over 15 years. During the year ended December 31, 1997, certain of the operating
performance measures were met resulting in 2,095,000 warrants vesting and the
380,000 preferred shares being mandatorily redeemable at $1.00 per share. The
preferred shares were redeemed in the first quarter of 1998. As a result,
$12,114,000 in additional contingent consideration and the related goodwill was
recognized relating to the acquisition of Telereunion at December 31, 1997.
During the year ended December 31, 1998, the remaining 500,000 warrants vested
resulting in an additional $5,479,000 additional contingent consideration and
the related goodwill being recognized.
In November 1999, the Company issued 400,000 shares and 100,000 warrants to
the minority shareholders of our subsidiary Telereunion S.A. in exchange for an
additional 27% of the economic interests in Telereunion, S.A. This resulted in
the Company's economic ownership interest in Telereunion S.A. increasing to 92%
while the Company's voting interest remains at 49%. Three of the Company's
directors own an additional 1% of the economic interests and 18% of the voting
interests in Telereunion S.A. resulting in a combined control of 93% of the
economic interests and 67% of the voting interests. The Company calculated the
fair value of the shares issued to the minority interest holders based on the
closing price of the Company's common stock on the date the agreement was
signed. The Company estimated the fair value of the warrants by utilizing the
Black-Scholes option pricing model with the following assumptions: dividend
yield of 0%, expected volatility of 54%, risk free interest rate of 5% and
expected life of 3 years. The resulting cost totaling approximately $3.3
million was recorded as goodwill in the fourth quarter of 1999.
Integracion Acquisition
Effective July 1, 1997, pursuant to a stock purchase agreement, the Company
acquired all of the outstanding shares of Integracion. Integracion is a systems
integrator engaged in the distribution and sale of data and network equipment
and also provides value-added services in network integration in Mexico.
Under the terms of the transaction, the Company paid the following to the
selling shareholders of Integracion: i) the sum of $130,000 in cash, ii) an
aggregate of $2,201,000 in non-interest bearing promissory notes maturing at
various dates through January 1, 2001, iii) an aggregate of $999,000 in
non-interest bearing convertible notes maturing on September 1, 1999, which are
convertible into 333,000 shares of Common Stock of the Company at a price of
$3.00 per share, representing the quoted market price of the Company's Common
Stock on the date of the transaction, iv) warrants for the purchase of up to
100,000 shares of Common Stock of the Company based on Integracion meeting
certain performance requirements and v) a covenant by the Purchasers to pay
$280,000 in the event that Integracion meets certain performance requirements
over the cumulative periods beginning January 1, 1997 and ending December 31,
2000. The acquisition was accounted for under the purchase method of accounting.
The financial position and results of operations of Integracion have been
included in the Company's consolidated financial statements since the effective
date of the acquisition.
46
<PAGE>
The consideration paid for Integracion measured at the acquisition date was
$2,745,000 and consisted of cash of $130,000, promissory notes with a discounted
value of $2,555,000 and transaction costs of $60,000. The purchase price was
allocated to the acquired company's assets and liabilities based upon an
estimate of fair values at the date of acquisition and resulted in $1,756,000 of
goodwill, which is being amortized over 15 years.
During the year ended December 31, 1997, certain of the operating
performance measures were met resulting in 80,000 warrants vesting. The
remaining 20,000 warrants were forfeited. As a result, $422,000 in additional
contingent consideration and the related goodwill was recognized on the
acquisition of Integracion at December 31, 1997.
N.S.I. Acquisition
On October 1, 1997, pursuant to a stock purchase agreement, the Company
acquired all of the outstanding shares of N.S.I. N.S.I. is a systems integrator
engaged in the distribution and sale of data and network equipment and also
provides value-added services in network integration in Mexico.
Under the terms of the acquisition, the Company paid cash of $1,000 to the
shareholders of N.S.I. and agreed to guarantee the repayment of approximately
$260,000 of N.S.I. debt to one of the sellers. The purchase price was allocated
to the acquired company's assets and liabilities based upon an estimate of fair
values at the date of acquisition and resulted in $430,000 of goodwill, which is
being amortized over 15 years. The acquisition was accounted for under the
purchase method of accounting. The financial position and results of operations
of N.S.I. have been included in the Company's consolidated financial statements
since the effective date of the acquisition.
MSN Acquisition
Effective January 1, 1998, the Company acquired all of the outstanding
common stock of MSN. MSN, through its Telefiesta brand, markets prepaid
telephone calling cards across the United States primarily to the Hispanic
community. Under the terms of the transaction, the Company paid the following to
the shareholders of MSN: i) the sum of $3,250,000 in cash, ii) $750,000 in
non-interest bearing promissory notes payable in eight equal quarterly
installments, and iii) 100,000 shares of the Company's Common Stock. In
addition, the two selling shareholders were each granted 50,000 options to
purchase the Company's Common Stock at $7.50 per share. The acquisition was
accounted for under the purchase method of accounting. The financial position
and results of operations of MSN are included in the Company's financial
statements from the effective date of the acquisition.
The consideration paid for MSN measured at the acquisition date was
$4,880,000 and consisted of cash of $3,250,000, non-interest bearing promissory
notes with a discounted value of $672,000, Common Stock and warrants valued at
$980,000 and transaction costs of $80,000. The purchase price was allocated to
the acquired company's assets and liabilities based upon an estimate of fair
values at the date of acquisition and resulted in $6,193,000 of goodwill, which
is being amortized over 15 years. The purchase price of the acquisition has been
allocated as follows:
FAIR
VALUE
------------
Cash $ 3,250,000
Promissory Notes (discounted value) 672,000
Common Stock 980,000
Transaction Costs 80,000
------------
Purchase consideration 4,982,000
Cash 977,000
Accounts receivable 1,042,000
Other assets 90,000
Accounts payable and accrued liabilities (1,323,000)
Deferred revenue (1,997,000)
------------
Excess of liabilities assumed over fair
value of net assets acquired (1,211,000)
============
Goodwill $ 6,193,000
============
47
<PAGE>
INTERLINK Acquisition
Effective June 1, 1998, pursuant to an asset purchase agreement, the
Company acquired substantially all of the assets and certain of the liabilities
of California Microwave Services Division, Inc. ("CMSD"), a subsidiary of
California Microwave, Inc., for approximately $8.8 million in cash. As part of
the acquisition, the Company formed INTERLINK Communications, Inc.
("INTERLINK"), to acquire CMSD. The primary asset of INTERLINK is a satellite
teleport facility in Mountain View, California.
The purchase price was allocated to the acquired assets and liabilities
Based upon an estimate of fair values at the date of acquisition resulting in
$3.6 million in goodwill, which is being amortized over 15 years. In addition, a
covenant not to compete of $250,000 was recognized which is being amortized over
5 years. The acquisition was accounted for under the purchase method of
accounting. The financial results and operations of INTERLINK have been
included in the Company's consolidated financial statements since the effective
date of acquisition.
The purchase price of the acquisition of the acquisition has been allocated as
follows:
FAIR VALUE
------------
Cash $ 8,612,000
Transaction Costs 262,000
------------
Purchase Consideration 8,874,000
Cash 69,000
Accounts Receivable 1,438,000
Property and Equipment 4,542,000
Other assets 896,000
Accounts payable and accrued liabilities (1,423,000)
Deferred revenue (471,000)
------------
Fair value of net assets acquired 5,051,000
============
Goodwill $ 3,573,000
============
Covenant not to compete $ 250,000
============
The following presents the unaudited pro forma results of operations of the
Company for the year ended December 31, 1997 and 1998, as if the acquisitions of
Integracion, N.S.I., MSN and INTERLINK had occurred on January 1, 1997:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998
----------- -------------
(Unaudited)
<S> <C> <C>
Pro forma revenues $78,730,000 $135,415,000
Pro forma operating income 1,755,000 971,000
Pro forma net income (loss) 1,010,000 (2,407,000)
Pro forma basic net income (loss) per share $ 0.25 $ (0.48)
Pro forma diluted net income (loss) per share(1) $ 0.20 N/A
<FN>
(1) Inclusion of additional shares under a diluted analysis for 1998 is
inappropriate due to the anti-dilutive effect.
</TABLE>
The information is not necessarily indicative of the results of operations
and financial position of the Company as they may be in the future or as they
might have been had the business combinations been consummated as of January 1,
1997.
BCH
The Company owns 24% of the common stock outstanding in BCH Holding
Company, Inc. ("BCH"), a Nevada corporation with a full service
telecommunications operation based in Warsaw, Poland. Accordingly, the Company's
investment in BCH is accounted for under the equity method.
In January 1999, BCH approved the issuance to an investor of 20% of its
outstanding shares for $1.2 million, and warrants for another 20% of its common
stock with an exercise price equal to the same price per share as the stock
issuance. In addition, BCH can borrow an additional $2.5 million under a 13%
senior secured convertible note with the investor. Under the terms of the
senior secured convertible note, the Company has pledged all of its common
stock in BCH to the investor. The Company's carrying amount of this investment
at December 31, 1999 is not material.
48
<PAGE>
Pointe Communications Merger
In January 2000, the Company and Pointe jointly announced a merger of the
companies in an all-stock transaction. In conjunction with the merger
agreement, the $1.5 million note extended by Pointe in December 1999 was
converted into a $1.5 million note convertible into Telscape preferred stock
under terms contained in the merger agreement. The merger agreement calls for
funding of up to $10 million in such convertible notes. It is expected that the
merger with Pointe will be finalized during the second quarter of 2000 at which
time the companies will begin operating under the common name of Telscape. The
terms of the original merger agreement called for the Company to issue the
Company's common stock to Pointe shareholders at an exchange ratio of 0.215054
of a share of the Company's common stock for every share of Pointe common stock.
Also, for each share of Pointe convertible preferred stock outstanding,
the Company will issue one share of the Company's convertible preferred stock
(with rights and preferences substantially the same as the Pointe convertible
preferred stock). On March 30, 2000, the Company and Pointe agreed to an
adjustment of the exchange ratio of approximately 4%. The adjusted ratio of
shares is the result of a Pointe subsidiary, TeleCommute Solutions ("TCS"),
which recently received $19 million in new financing led by the MCI WorldCom
Venture Fund and others, remaining in the combined companies. The merger
agreement had previously provided that TCS was to be spun off to Pointe
shareholders prior to the consumation of the merger. Consequently, each share
of Pointe stock will be exchanged for 0.223514 shares of the Company's common
stock. No assurance can be given that the merger with Pointe will be completed.
3. CONCENTRATION OF RISK
Concentration of Risk - Mexico
Mexico has experienced periodic economic crises in the past recent years
resulting from sudden, significant devaluations of the Mexican peso. The last
such devaluation of the Mexican peso in late 1994 caused Mexico to
experience an economic crisis characterized by exchange rate instability,
increased inflation, high domestic interest rates, reduced consumer purchasing
power and high unemployment. Consequently, the Mexican government has exercised,
and continues to exercise, significant influence over the Mexican economy.
Accordingly, Mexican governmental actions could have a significant effect on
Mexican companies, including the Company's customers, and overall market
conditions. For the years ended December 31, 1997 and 1998, the peso
experienced devaluations in exchange rates versus the dollar of 2.9% and 22.1%,
respectively. In the year ended December 31, 1999, the peso appreciated 3.5% in
exchange rates versus the dollar.
The Company's foreign currency risk is mitigated in Mexico due to the fact
that many of the Company's customers are multinational firms that pay in U.S.
dollars. In addition, most of the customers that do pay in pesos pay at the spot
exchange rate in effect at the time of payment as opposed to the exchange rate
at the time the receivable is created. Nevertheless, significant adverse effects
from any material devaluation in the Mexican peso could result in an adverse
effect on the Company's operations. In addition, the Company anticipates an
increasing number of peso denominated receivables from customers in Mexico as
its network in Mexico becomes operational.
Significant Customers and Receivables
The Company's credit risks primarily consist of accounts receivable from
its customers, many of which are located in Mexico. Management performs ongoing
credit valuations of its customers and provides allowances for credit losses
when necessary. The Company maintains an allowance for doubtful accounts based
on the expected collectibility of all consolidated trade accounts receivable.
The allowance for doubtful accounts as of December 31, 1998 and December 31,
1999 was $500,000 and $2,110,000, respectively. In 1998, the Company wrote off
$541,000 in receivables from a customer which filed for bankruptcy. The Company
increased its allowance for doubtful accounts in the fourth quarter of 1999
primarily resulting from a disputed accounts receivable balance of $1.4 million
from a major customer in Mexico.
Major customers are those that individually account for more than 10% of
the Company's total revenues. For the year ended December 31, 1997, one customer
accounted for 28% of the Company's total revenues and 56% of the Company's voice
services revenues. For the year ended December 31, 1998, no customer
represented greater than 10% of revenues. For the year ended December 31,
1999, one customer accounted for 11% of the Company's total revenues.
49
<PAGE>
4. Notes Payable and Capital Lease Obligations
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1998 1999
------------ -----------
<S> <C> <C>
Deere Park Convertible Subordinated Debentures,
bearing interest at 8%, convertible into Common Stock,
maturing three years from closing $ 3,935,000 ---
Gordon Brothers Convertible Debentures, bearing
interest at 8%, convertible into Common Stock,
secured by substantially all assets of Interlink
Communications, Inc. and stock of Telereunion, Inc.,
matured on May 29, 1999 4,996,000 ---
Non-interest bearing promissory notes, imputed
interest at 10%, unamortized discount of $228,000
and $73,000, respectively, issued in connection with
Integracion acquisition, maturing at various dates
through January 1, 2001 1,713,000 1,328,000
Promissory note issued to repurchase common stock,
payable in six semi-annual installments through May 20,
2000, and bearing interest at 6% , secured by common
shares repurchased 150,000 50,000
Capital lease obligations payable in monthly installments
of $13,258 including principal and interest, maturing at
various dates through December 1, 2003, secured by
equipment and furniture 221,000 395,000
Non-interest bearing promissory note, imputed interest
at 10%, unamortized discount of $49,000 and $0,
respectively, issued in connection with MSN acquisition,
matured on June 17, 1999 430,000 ---
Revolving credit facility bearing interest at prime plus 1%,
secured by accounts receivable, matured July 31, 1999 1,688,000 ---
Promissory note, interest at 10.62%, payable in 36 equal
monthly installments of $52,234 including principal and
interest, maturing April 1, 2002, secured by equipment --- 1,250,000
Promissory note, interest at 10.93%, payable in 36 equal
monthly installments of $14,700 including principal and
interest, maturing June 1, 2002, secured by equipment --- 373,000
Promissory note, interest and payment terms described
below, maturing
January 1, 2005, secured by equipment --- 5,581,000
Senior Notes, interest and payment terms described below,
maturing January 4, 2001 --- 850,000
2.0 Million Senior Notes, interest and payment terms
described below, maturing February 16, 2001 --- 2,000,000
Promissory notes, interest and payment terms described
below, maturing August 27, 2004, secured as described below --- 23,934,000
Lennox promissory note, interest and payment terms described below --- 1,500,000
Pointe promissory notes, bearing interest at 10%,
maturing February 28, 2000, secured as described below --- 1,500,000
------------ -----------
Total notes payable and capital leases 13,133,000 38,761,000
Current portion 7,710,000 11,112,000
------------ -----------
Long-term portion $ 5,423,000 $27,649,000
============ ===========
</TABLE>
50
<PAGE>
The annual maturities of the debt indicated above for the five years
following December 31, 1999, are $6,647,000 in 2000, $9,255,000 in 2001,
$6,831,000 in 2002, $7,731,000 in 2003 and $8,297,000 in 2004. Included in the
current portion of debt at December 31, 1999, is $4.5 million related to the
note which is not in compliance with certain financial covenants as described
below.
In May and June 1998, the Company issued $5,000,000 in 8% Convertible
Subordinated Debentures (the "Deere Park Convertible Debentures") to Deere Park
Capital Management, LLC ("Deere Park") through three separate draws, with all
issuances maturing three years from their respective closing dates. In
connection with these issuances, Deere Park received warrants to purchase an
aggregate of 8,952 shares of common stock at an exercise price of $16.76,
warrants to purchase an aggregate of 2,427 shares of common stock at $20.60 per
share and warrants to purchase an aggregate of 6,382 shares of common stock at
$15.67 per share. These warrants have a term of three years from the
effectiveness of a registration statement covering such warrants. On October
26, 1998, the Company issued an additional 8,000 warrants to Deere Park with an
exercise price at the then current market prices in return for a restructuring
of the conversion terms and, in addition, repaid $1,000,000 of the convertible
debentures at 107% plus accrued interest. At various dates in 1999, $3,000,000
of the convertible debentures was converted into 476,317 shares of the Company's
common stock. The per share value for all transactions was computed based upon
the average of the three highest of the five lowest closing prices of the
Company's common stock for the 20 days preceding the conversion date, as per the
agreements. The remaining $1,000,000 was paid on May 11, 1999. In connection
with the payment of the debentures, the Company paid "exit fees" of $120,000, as
per the agreement.
In May 1998, the Company issued $5,000,000 in 8% Convertible Debentures
(the "Gordon Brothers Convertible Debentures") maturing one year from closing to
Gordon Brothers Capital, LLC ("Gordon Brothers"). In connection with this
issuance, Gordon Brothers received warrants to purchase an aggregate of 12,136
shares of common stock at an exercise price of $20.60 per share with a term of
three years from the effectiveness of the registration statement covering such
warrants. On October 26, 1998 an agreement was reached with Gordon Brothers to
fix the conversion price at $15 per share in exchange for reducing the exercise
price of the warrants to purchase 12,136 shares of common stock to $15 per
share. In May 1999, the Company repaid the $5,000,000 of debentures and paid
$1,100,000 of "exit fees", as per the agreement.
In connection with the issuance of the Deere Park Convertible Debentures
and the Gordon Brother Convertible Debentures, the Company issued to the
placement agent warrants to purchase 59,340 shares of common stock with exercise
prices ranging from $16.76 to $20.60 per share. The warrants have terms of two
years.
The Company estimated the fair value of the warrants issued in connection
with the Deere Park Convertible Debentures and Gordon Brothers Convertible
Debentures by utilizing the Black-Scholes option pricing model with the
following assumptions: dividend yield of 0%, expected volatility of 50%, risk
free interest rate of 5% and expected lives of an average of two years. The
resulting fair value of the warrants of approximately $570,000 was amortized
over the life of the debentures as interest expense and deferred offering costs.
In July 1998, holders of the non-interest bearing convertible notes issued
in connection with the Integracion acquisition converted these notes into
333,000 shares of Common Stock.
In the fourth quarter of 1998, the Company signed a financing arrangement
with a finance company which provided for funding of equipment purchases of up
to $6.0 million through May 1999. The financing is structured as loans maturing
three years from funding at interest rates 550 basis points above the Federal
Reserve Treasury Constant Maturity Rate. The Company has drawn approximately
$2.0 million under this facility through December 31, 1999.
On January 11, 1999, the Company signed a financing arrangement with a
finance company which provided for funding of equipment purchases of up to $7.0
million through December 31, 1999. The financing is structured as long-term
loans maturing January 1, 2005. The loans provide for payments of interest only
through January 1, 2000. Thereafter, payments of principal and interest are due
quarterly. Interest is calculated, during the interest only period, at 425
basis points above the 90 day commercial paper rate. Interest thereafter is
calculated at 500 basis points above the five year Federal Reserve Treasury
Constant Maturity Rate. The interest rate in effect at December 31, 1999 was
9%. The Company has drawn approximately $5.6 million under this facility
through December 31, 1999, of which $2.5 million resulted in refinancing
equipment which was previously financed through an operating lease. The Company
was not in compliance with certain financial covenants under this loan facility
and has secured a waiver from the finance company of its rights under the
agreement to enforce default provisions due to non compliance with these
financial covenants for the fourth quarter of 1999. The Company is not able to
draw down additional financing under this facility until such time as the
finance company allows it to do so. The finance company has also issued to the
Company a forbearance letter indicating that it will not enforce acceleration
of the facility until the earlier of March 31, 2000 or the date the Company's
proposed merger with Pointe is completed. The finance company has agreed to
extend the forbearance period through May 15, 2000. The amounts outstanding
51
<PAGE>
under this facility of $5.6 million have been classified as current in the
financial statements as of December 31, 1999. The Company may have to request
additional waivers from the finance company due to non compliance with financial
covenants in future quarters or the Company may have to request an extension of
the forbearance letter provisions should the merger with Pointe not be
completed by May 15, 2000. The Company cannot guarantee that the finance
company would provide the Company with additional waivers or that they would
extend their forbearance letter in which case they could enforce the default
provisions and accelerate the maturity date. Should that be the case, there is
no guarantee that the Company would be able to obtain a replacement facility. A
default under this agreement would trigger cross defaults under the Lucent
credit facility.
On May 7, 1999, the Company issued $6,850,000 in senior notes originally
maturing on May 6, 2000 (the "Senior Notes"). E. Scott Crist, CEO of the
Company, is holder of the remaining $850,000 balance of the Senior Notes. The
Senior Notes are subject to optional prepayment provisions allowing the Company
to prepay a portion or all of the outstanding principal amount without premium
or penalty. Under the terms of the Senior Notes, Mr. Crist received on November
6, 1999, 31,805 warrants at an exercise price of $6.685. In the event that the
Senior Notes are not paid by May 5, 2000, then Mr. Crist will be issued an
additional 31,805 warrants, in which case the maturity date is extended until
November 6, 2000. The maturity of the Senior Notes can be extended unilaterally
by the Company through January 4, 2001 with no additional consideration. As a
result, the Senior Notes are classified as long-term in the financial statements
as of December 31, 1999. The Company repaid $6,000,000 of the Senior Notes on
August 27, 1999, upon the funding of the Lucent Credit Agreement (defined
below). The loan from Mr. Crist bears interest at 8% from May through November
6, 1999. The interest rate increases by 1 percent for each month thereafter.
Pursuant to the terms of the Senior Notes, the Company initially issued to the
holders of the senior notes a total of 256,315 warrants at an exercise price of
$6.68 per share. The proceeds from the Senior Notes were utilized to repay the
entire principal amount of the Gordon Brothers Convertible Debentures plus $1.1
million in exit fees. The Company estimated the fair value of the warrants by
utilizing the Black-Scholes option pricing model with the following assumptions:
dividend yield of 0%, expected volatility of 54%, risk free interest rate of 5%
and expected life of one year. The resulting cost of the initial 256,315
warrants of approximately $398,000 was amortized over three months, the expected
term of the notes at the time they were issued. The resulting cost of the
31,805 warrants of approximately $49,000 will be amortized over one year.
On June 18, 1999, the Company issued $2,000,000 in a different series of
Senior notes maturing June 18, 2000 (the "$2 Million Senior Notes"). These $2
Million Senior Notes are subject to optional prepayment provisions allowing the
Company to prepay a portion or all of the outstanding principal amount without
premium or penalty. These $2 Million Senior Notes bear interest at 8% from June
through December 17, 1999. The interest rate increases by 1 percent for each
month thereafter. The Company also initially issued to the holders of these $2
Million Senior Notes a total of 62,501 warrants with an exercise price of $8.00
per share and a term of three years. The holders were issued an additional
62,501 warrants in December 1999. In the event that the $2 Million Senior Notes
are not paid by June 18, 2000, then the holders will be issued an additional
62,501 warrants in which case the maturity date is extended until December 18,
2000. The maturity of the $2 Million Senior Notes can be extended unilaterally
by the Company through February 16, 2001 with no additional consideration. As a
result, the $2 Million Senior Notes are classified as long-term in the financial
statements as of December 31, 1999. The Company estimated the fair value of the
warrants by utilizing the Black-Scholes option pricing model with the following
assumptions: dividend yield of 0%, expected volatility of 54%, risk free
interest rate of 5% and expected life of one year. The resulting cost of the
initial 62,501 warrants of approximately $116,000 was amortized over two months,
the expected term of the notes at the time they were issued. The resulting
cost of the second 62,501 warrants of approximately $143,000 will be amortized
over one year. The holders of these senior notes have provided the Company with
a letter indicating their agreement, subject to definitive documentation, to
convert their notes into the Class F Preferred.
In July 1999, the Company's revolving credit facility expired and the
Company repaid all amounts outstanding at that time.
On July 28, 1999, the Company issued an unsecured and subordinated
promissory note in the amount of $576,000 maturing on November 24, 1999. On
November 24, 1999, the Company issued 91,042 shares of the Company's common
stock as payment of the note per the agreement.
52
<PAGE>
Also in July 1999, the Company received a bridge loan of $3.0 million from
Lucent Technologies, Inc. (the "Lucent Bridge Loan"). The Lucent Bridge Loan
was repaid upon the funding of the Lucent Credit Agreement (defined below). In
connection therewith, the Company issued to Lucent warrants to purchase an
aggregate of 85,000 shares of Common Stock at an exercise price of $8.50 per
share. The warrants have a term of three years. The Company estimated the fair
value of the warrants by utilizing the Black-Scholes option pricing model with
the following assumptions: dividend yield of 0%, expected volatility of 54%,
risk free interest rate of 5% and expected life of 1 year. The resulting cost
of approximately $168,000 will be amortized over five years, the term of the
Lucent Credit Facility.
On August 27, 1999, the Company, along with its subsidiaries, Telereunion
S.A. de C.V., Telereunion International, S.A. de C.V., Telereunion, Inc.,
Telscape USA, Inc., MSN Communications, Inc., Interlink Communications, Inc.,
TSCP International, Inc., Vextro De Mexico S.A. de C.V., and its wholly-owned
subsidiary, Servicios Corporativos Vextro, S.A. de C.V., Telscape de Mexico S.A.
de C.V., N.S.I. S.A. de C.V., Lan and Wan S.A. de C.V. and M.S. Noticias y
Telecomunicaciones, S.A. de C.V. signed a credit agreement with Lucent
Technologies, Inc. (the "Lucent Credit Agreement").
The Lucent Credit Agreement provides for up to $40 million in financing
under long-term repayment terms. In March 2000, Lucent extended its commitment,
subject to certain conditions precedent including the merger with Pointe, by an
additional $20 million. The Company borrowed $23.9 million under the Lucent
Credit Agreement on August 27, 1999, of which $9.0 million was utilized to repay
the $3.0 million Lucent Bridge Loan and $6.0 million of the Senior Notes and
$14.9 million was utilized to pay for costs directly related to construction of
the network in Mexico and related debt offering costs. Subsequent loans under
the Lucent Credit Agreement are subject to the satisfaction of certain
conditions precedent. The Company has incurred obligations in the construction
of the network in Mexico totaling $24.6 million at December 31, 1999. The
Company intends to fund these obligations and capitalize some of the initial
interest payments due on amounts outstanding under this facility, with proceeds
from the facility, upon consummation of the merger with Pointe.
As of December 31, 1999, the Company was in default of a financial covenant
under the Lucent Credit Agreement. In conjunction with the March 2000
commitment for an additional $20 million, Lucent waived this covenant and all
other financial covenants through April 15, 2000. In addition, Lucent has
committed, subject to certain conditions, to long-term repayment arrangements
and to renegotiate the financial covenants under its facility. Since the
Company believes that it is probable that such credit arrangements will be
achieved, it has classified $22.7 million of debt to Lucent at December 31, 1999
as long-term. However, the Company cannot guarantee that it will be able to
secure additional waivers from Lucent, should they be necessary, or that the
Company can negotiate financial covenants that will be more favorable than the
ones contained in the initial credit agreement.
The Lucent Credit Agreement provides for principal payments on each loan to
be made in nine installments with the first installment due on the first
anniversary of the closing date with each succeeding installment due in six
month increments. The amount of the payment on each installment shall be a
percentage of the total aggregate amount of each loan, as follows: installments
1-2: 5%; installments 3-4: 10%; installments 5-6: 12.5%; installments 7-9: 15%.
In addition, the Lucent Credit Agreement provides for annual mandatory
prepayments beginning in the year ended December 31, 2000 equal to 50% of Excess
Cash Flow of such year. Excess Cash Flow is defined in the Credit Agreement and
includes EBITDA (as defined) less certain items including capital expenditures,
payments of indebtedness, income tax payments, and equity investments in
telecommunications companies.
Interest under the Lucent Credit Agreement is calculated, at the borrowers'
option, at either the London interbank offered rates plus an Applicable Margin
or the Bank of America, N.A. prime lending rate plus an Applicable Margin.
Applicable Margin is defined as follows: Year 1: 5.75%; Year 2: 6.00%; Year 3:
6.25%; Year 4: 6.75%, Year 5: 7.25%. The Company has the option of borrowing
under the Lucent Credit Facility for interest payments until the first
anniversary date of the closing date. There is a 0.75% commitment fee on the
unutilized and undrawn commitment until the commitment termination date, which
is on the first anniversary of the closing date of the Lucent Credit Agreement.
The Lucent Credit Agreement is secured by substantially all of the assets
of the Company including the network assets, accounts receivable, the capital
and equity interests of the subsidiaries of the Company, and all other tangible
and intangible assets of the Company excluding encumbered assets at the time of
signing.
53
<PAGE>
On October 22, 1999, the Company signed a loan agreement with Lennox Invest
Ltd., a BVI Corporation, which provides for funding of up to $10.0 million. A
total of $1.5 million has been funded on this facility, which bears interest at
10% per annum. Interest on each note is to be paid at maturation of the
respective note, which occurs six months after the date of each note. Of the
$1.5 million funded under the facility, $1.0 million matures on April 19, 2000,
and $0.5 million matures on April 26, 2000. As part of this transaction, certain
members of the board of directors agreed to pledge shares of Telscape stock as
collateral. In December 1999, the Company informed Lennox that it would not be
drawing any further funding under this facility due to a breach of contract on
the part of Lennox.
The Company's debt at December 31, 1999 totaled $38.8 million, resulting
in a debt to equity ratio of 143% as compared to $13.1 million and 38%,
respectively, as of December 31, 1998. Fully funding the Lucent Credit
Agreement will significantly increase the Company's leverage. In addition, the
Company estimates that there are an additional $10 to $15 million in
expenditures related to the Mexican network and its network expansion which
will be funded with a combination of the Lucent facility and other debt.
On November 24, 1999, the Company signed a letter of intent to merge with
Pointe. In connection with the letter of intent, Pointe agreed to lend the
Company $1.5 million that was evidenced by a short term promissory note
("Promissory Note"). As part of this transaction, certain members of the
board of directors agreed to pledge shares of Telscape stock as collateral. On
December 31, 1999, the Company signed a definitive merger agreement with Pointe.
In addition, Pointe agreed to lend the Company $10 million, which was evidenced
by a convertible promissory note. In early January, Pointe funded $8.5 million
into escrow. On January 10, 2000, the Company drew down $1 million from escrow
and the Promissory Note was increased accordingly. On February 7, 2000, the
Company executed a replacement convertible promissory note ("Replacement Note")
for $10,000,000 with an interest rate of 12% and a maturity of June 30, 2000.
The Replacement Note extinguishes the $2.5 million of indebtedness under the
Promissory Note.
Certain of the funding agreements that the Company has obtained, including
the additional $20 million available under the Lucent Credit Agreement and the
Class F Convertible Preferred Stock (see Note 11), are contingent on the
Company's merger with Pointe. Should the Company not be able to consummate the
merger with Pointe in a timely manner, the commitments mentioned above may
expire. The Company cannot guarantee that such commitments could be replaced
on similar terms, if at all.
In January 2000, the holders of $500,000 in notes payable due January 1,
2000, originally incurred in connection with the Integracion acquisition,
converted these obligations into 47,619 shares of common stock at a price of
$10.50 per share.
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A significant difference
relates to the treatment of inventories under the Mexican Tax Law. Under this
law, the cost of sales for financial statement purposes is not deductible for
income tax purposes. Instead, inventory purchases are deductible for income tax
purposes in the year the purchases are made.
Significant components of the Company's deferred tax liabilities and assets
at December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
-------------------------- ---------------------------
Current: UNITED STATES FOREIGN UNITED STATES FOREIGN
------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Operating loss carryforwards and tax credits $ 417,000 $ 311,000 $ --- $ 698,000
Accrued expenses 159,000 --- 68,000 143,000
Other assets --- --- --- ---
Allowance for doubtful accounts 26,000 74,000 185,000 583,000
Inventories 14,000 (812,000) 256,000 (918,000)
Customer prepayments --- 439,000 --- 1,239,000
------------- ----------- -------------- -----------
Net current deferred tax asset (liability) $ 616,000 $ 12,000 $ 509,000 $1,745,000
------------- ----------- -------------- -----------
</TABLE>
<TABLE>
<CAPTION>
1998 1999
---------------------- -------------------------
Long-term: UNITED STATES FOREIGN UNITED STATES FOREIGN
------------- ------- ------------- ----------
<S> <C> <C> <C> <C>
Operating loss carryforwards and tax credits $ --- $ --- $ 5,922,000 $ ---
Basis differences in assets 4,000 14,000 37,000 (182,000)
Accrued employee benefits and other --- 17,000 36,000 26,000
Valuation allowance --- --- (3,252,000) ---
------------- ------- ------------- ----------
Net long term deferred tax asset (liability) $ 4,000 $31,000 $ 2,743,000 $(156,000)
------------- ------- ------------- ----------
</TABLE>
54
<PAGE>
The Company records valuation allowances based upon judgments as to the
future realization of deferred tax benefits supported by demonstrated trends in
the Company's operating results. No valuation allowance was recorded at
December 31, 1998 and $3,252,000 was recorded at December 31, 1999. This
valuation allowance reduced the deferred tax asset to a net amount which the
Company believes more likely than not that it would realize, based on the
Company's estimates of its future earnings.
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
------------ ----------- ------------
<S> <C> <C> <C>
Current:
Federal $ 1,146,000 $ --- $ 57,000
Foreign 504,000 1,161,000 693,000
------------ ----------- ------------
Total current $ 1,650,000 $1,161,000 $ 750,000
Deferred:
Federal (1,545,000) (97,000) (2,632,000)
Foreign (21,000) (242,000) (1,546,000)
------------ ----------- ------------
Total deferred $(1,566,000) $ (339,000) $(4,178,000)
------------ ----------- ------------
Total provision (benefit) $ 84,000 $ 822,000 $(3,428,000)
------------ ----------- ------------
</TABLE>
The following is a reconciliation of income taxes calculated at the
United States federal statutory rate to the income tax provision (benefit):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Provision (benefit) for income taxes
at U.S. statutory rate 34% (34)% (34)%
Non-deductible amortization of
intangible assets 7 252 3
Non-deductible litigation loss 2 --- ---
Non-deductible warrant expense --- --- 1
Other items, net 4 108 ---
Effect of utilization of net operating
loss carryforwards, tax credits and
reversal/recording of valuation
allowance (44) 14 15
----- ----- -----
Income tax provision (benefit) 3% 340% (15)%
===== ===== =====
</TABLE>
At December 31, 1999, the Company had available for U.S. federal income tax
purposes unused net operating loss carryforwards of approximately $16,964,000
which may provide future tax benefits and which will expire in years 2005
through 2019. The Company recognized the deferred tax benefits, net of the
valuation allowance of $3,252,000 at December 31, 1999. Additionally, as of
December 31, 1999, the Company had approximately $154,000 in alternative minimum
tax and foreign tax credits which can be utilized to offset future tax
liabilities.
In accordance with Mexican Tax Law, effective January 1, 1999, a company is
subject to income taxes based upon the greater of 35% (34% in 1998 and 1997) of
taxable income and 1.8% of net assets, as defined in the tax law. For Mexican
tax purposes, companies may carryforward an income tax loss for ten years. Any
tax on assets paid is recoverable and can be carried forward for ten years in
the event a company begins paying taxes on income. At December 31, 1999, the
Company had available for Mexican income tax purposes operating loss
carryforwards of approximately $1,993,000 which expire in 2009 and net asset
taxes credits of approximately $410,000 which expire in 2009.
55
<PAGE>
6. STOCK OPTIONS AND WARRANTS
Stock Options
1993 Stock Option Plan
Under the terms of its 1993 Stock Option Plan, the Company may grant
incentive and non-qualified stock options to purchase up to 218,145 shares of
its Common Stock to the Company's employees, directors or consultants. Options
must be granted at not less than the fair market value of the Company's Common
Stock at the date of grant as determined by the Company's Board of Directors
(110% of fair market value for stockholders owning 10% or more of the Company's
Common Stock) for incentive stock options, or not less than 85% of the fair
market value for non-qualified stock options. Options granted under this plan
may be for a term of up to 10 years (5 years for incentive stock options granted
to stockholders owning 10% or more of the Company's Common Stock) and are
exercisable as determined by the Board of Directors.
1994 Directors Stock Option Plan
Effective June 1, 1994, the Company adopted the 1994 Directors Stock Option
Plan, which provides that the Company may grant non-qualified options to
directors of the Company or any majority-owned subsidiary who are not salaried
employees to purchase up to 31,163 shares of its Common Stock. Options must be
granted by June 1, 2004, at prices not less than the fair market value of the
Company's Common Stock at the date of grant and must be exercised within ten
years of the date of grant. Upon a change of control of the Company, all granted
but unvested options under the plan will vest immediately.
Telereunion 1995 Stock Option Plan
As stated in Note 2, the Company assumed Telereunion's Stock Option Plan in
connection with the acquisition of Telereunion. Under the terms of this Plan,
the Company may grant non-qualified or incentive stock options to employees,
directors and consultants. Options must be granted at not less than the fair
market value of the Company's Common Stock at the date of grant as determined by
the Company's Board of Directors (110% of fair market value for stockholders
owning 10% or more of the Company's Common Stock) for incentive stock options,
or not less than 85% of the fair market value for non-qualified stock options.
The terms of the options are determined by the Company's Board of Directors. Any
options granted must be exercised within ten years of the date of grant (5 years
for incentive stock options granted to stockholders owning 10% or more of the
Company's Common Stock).
1996 Stock Option and Appreciation Rights Plan
During 1996, the Company adopted the 1996 Stock Option and Appreciation
Rights Plan, which provides that the Company may grant non-qualified or
incentive stock options to purchase up to 1,200,000 shares of its Common Stock
to the Company's employees, directors or consultants. The plan also provides for
grants of stock appreciation rights in connection with the grant of options
under the plan. Options must be granted at not less than the fair market value
of the Company's Common Stock at the date of grant as determined by the
Company's Board of Directors (110% of fair market value for stockholders owning
10% or more of the Company's Common Stock) for incentive stock options, or not
less than 85% of the fair market value for non-qualified stock options. The
terms of the options are determined by the Company's Board of Directors. Any
options granted must be exercised within ten years of the date of grant (5 years
for incentive stock options granted to stockholders owning 10% or more of the
Company's Common Stock).
1998 Stock Option and Appreciation Plan
During June 1998, the Company adopted the "1998 Stock Option and
Appreciation Rights Plan." Pursuant to the Company's 1998 Stock Option and
Appreciation Rights Plan, the Company may grant the Company's employees,
directors and consultants non-qualified options to purchase up to 800,000 shares
of Common Stock. The maximum number of shares of Common Stock that may be
granted to any individual under this plan may not exceed 250,000 shares.
Incentive stock options must be granted at not less than the fair market value
of the Company's Common Stock at the date of grant as determined by the
Company's Board of Directors (110% of fair market value for stockholders owning
10% or more of the Company's Common Stock). The terms of the options are
determined by the Company's Board of Directors. Any options granted must be
exercised within ten years of the date of grant or within five years from the
date of grant for options granted to stockholders owning 10% or more of the
56
<PAGE>
Company's Common Stock. Unexercised vested and unvested options terminate
immediately if the employment or service of an option holder is terminated for
cause. Unvested options terminate if the employment or service of an option
holder is terminated without cause or for disability. The Company may also grant
SARs in connection with any option, which permits cashless exercises of the
options. SARs allow an option holder to surrender an option and to receive the
difference between the exercise price of the option and the then fair market
value of the Common Stock. The Company may also make loans to any option holder
in order to permit the option holder to pay the purchase price upon exercise of
the option.
1998 MSN Stock Option and Appreciation Rights Plan
During June 1998, the Company adopted the "1998 MSN Stock Option and
Appreciation Rights Plan." Pursuant to the Company's 1998 MSN Stock Option and
Appreciation Rights Plan, the Company may grant the Company's employees,
directors and consultants non-qualified options to purchase up to 100,000 shares
of Common Stock. The maximum number of shares of Common Stock that may be
granted to any individual under this plan may not exceed 50,000 shares. The
terms of the options are determined by the Company's Board of Directors. Any
options granted must be exercised within ten years of the date of grant or
within five years from the date of grant for options granted to stockholders
owning 10% or more of the Company's Common Stock. Unexercised vested and
unvested options terminate immediately if the employment or service of an option
holder is terminated for cause. Unvested options terminate if the employment or
service of an option holder is terminated without cause or for disability. The
Company may also grant SARs in connection with any option, which permits
cashless exercises of the options. SARs allow an option holder to surrender an
option and to receive the difference between the exercise price of the option
and the then fair market value of the Common Stock. The Company may also make
loans to any option holder in order to permit the option holder to pay the
purchase price upon exercise of the option.
A summary of the Company's fixed option plans as of December 31, 1997, 1998
and 1999 is presented below:
<TABLE>
<CAPTION>
MSN WTD. AVG.
1993 1994 1995 1996 1998 1998 TOTAL EXER.
PLAN PLAN PLAN PLAN PLAN PLAN ALL PLANS PRICE
-------- ------- -------- ---------- --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at December 31 ,1996 86,032 10,000 145,809 1,120,000 --- --- 1,361,841 3.95
Max. shares exercisable 86,032 10,000 145,809 225,000 --- --- 466,841 3.16
Options granted 115,500 --- --- 440,000 --- --- 555,500 5.74
Options exercised (15,828) --- --- (25,000) --- --- (40,828) 1.87
Options cancelled (9,700) --- --- (420,000) --- --- (429,700) 4.50
-------- ------- -------- ---------- --------- ---------- ------------
Options outstanding at December 31,1997 176,004 10,000 145,809 1,115,000 --- --- 1,446,813 4.51
Max. shares exercisable 70,204 10,000 145,809 393,333 --- --- 619,346 3.60
Options granted --- 18,125 --- 60,000 100,000 1,045,142 1,223,267 11.49
Options exercised (50,204) --- --- (140,554) --- --- (190,758) 2.57
Options cancelled (20,000) --- --- (5,000) --- (527,250) (552,250) 16.48
-------- ------- -------- ---------- --------- ---------- ------------
Options outstanding at December 31,1998 105,800 28,125 145,809 1,029,446 100,000 517,892 1,927,072 5.67
Max. shares exercisable 35,267 10,000 145,809 725,988 27,776 5,000 949,840 4.43
Options granted --- --- 69,316 23,000 100,000 353,000 545,316 8.22
Options exercised --- --- (70,809) (90,834) --- --- (161,643) 2.70
Options cancelled (9,500) (8,500) --- (15,834) (100,000) (86,625) (220,459) 7.76
-------- ------- -------- ---------- --------- ---------- ------------
Options outstanding at December 31,1999 96,300 19,625 144,316 945,778 100,000 784,267 2,090,286 6.37
======== ======= ======== ========== ========= ========== ===========
Max. shares exercisable 57,533 19,625 75,000 540,861 --- 132,979 825,998 5.25
</TABLE>
SFAS No. 123 requires the Company to provide pro forma information
regarding net income (loss) applicable to common stockholders and income (loss)
per share as if compensation cost for the Company's stock options granted had
been determined in accordance with the fair value based method prescribed in
that Statement. The Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 1997, 1998 and 1999: dividend
yield of 0% for all years; expected volatility ranging from 80% to 90%, 55% to
65% and 55% to 65%; risk-free interest rates ranging from 5.65% to 5.80%, 5% to
5.15% and 5% to 5.15%; and expected lives averaging 8.5 years, 5.0 years and 5.0
years, respectively.
57
<PAGE>
Under the accounting provisions of SFAS No. 123, the Company's net income
(loss) applicable to common stockholders and income (loss) per share would have
been revised to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------
1997 1998 1999
------------ ------------ -------------
Net income (loss):
<S> <C> <C> <C>
As reported $ 2,672,000 $(1,030,000) $(19,475,000)
Pro Forma $ 1,955,000 $(2,700,000) $(21,234,000)
Net income (loss) per share:
Basic
As reported $ 0.68 $ (0.20) $ (2.92)
Pro Forma $ 0.50 $ (0.53) $ (3.18)
Diluted
As reported $ 0.53 n/a n/a
Pro Forma $ 0.38 n/a n/a
</TABLE>
Warrants
Following is a description of the Company's warrants outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Description of warrants: # outstanding
------------------------ -------------
<S> <C>
Series A Warrants (unregistered) issued in connection with
the acquisition of Telereunion on May 17, 1996, exercisable
at $2.19 at stated percentages only upon achieving certain
operating performance measures or fully vesting upon maintaining
a $12 share price for 90 consecutive trading days; expiration date
of May 16, 2003, 2,000,000 of which vested at December 31, 1997
and 500,000 of which vested during the year ended December 31, 1998
(See Note 2) 1,731,385
Series B Warrants (unregistered) issued in connection
with the acquisition of Telereunion on May 17, 1996,
currently exercisable at $2.19 as certain operating
performance measures were achieved during the year
ended December 31, 1997, expiration date May 16, 2003 (See Note 2) 10,000
Warrants (unregistered) issued on February 29, 1996, in
connection with former officer's severance agreement exercisable
at any time at $2.94 prior to expiration on February 28, 2001 72,000
Warrants (unregistered) issued on November 17, 1999 to
the minority shareholders of Telereunion S.A. de C.V. in
exchange for an additional 27% of the economic interests
of Telereunion, S.A. de C.V. Term of three years and
exercisable at $7.50 per share 100,000
Warrants (unregistered) issued on January 5, 1999 to
Strategic Growth International in connection with investor
relations services agreement exercisable at any time at
$6.813-$7.4375 prior to expiration on January 5, 2002 or
two years from termination of agreement, whichever is sooner 110,000
Warrants (unregistered) issued to bridge lenders exercisable
at any time at $6.68 - $9.85 per share, with three year terms 569,550
Registered warrants issued to debenture holders and placement
agent in connection with issuance of Deere Park Convertible
Debentures and Gordon Brothers Convertible Debentures exercisable
at any time at $8.50 - $20.60 per share, with two to three year
terms (See Note 4). 138,619
-------------
Total warrants outstanding 2,731,554
=============
</TABLE>
7. STOCK ISSUANCES
In the fourth quarter of 1998, the Company entered into a stock purchase
agreement with third parties (the "Stock Purchase Commitment"), which allowed
the Company to sell at the Company's option (subject to certain conditions
precedent), up to $5.0 million of the Company's Common Stock. During the fourth
quarter of 1998 and the fiscal year 1999, the Company utilized this facility
entirely. In connection therewith, the Company issued a total of 783,338 shares
of the Company's Common Stock.
58
<PAGE>
8. COMMITMENTS AND CONTINGENCIES
Commitments
As of December 31, 1999, the Company is obligated under certain long-term
non-cancelable operating lease agreements for equipment, office and warehouse
space as follows:
Year Ended AMOUNT
---------- -----------
2000 $ 2,894,000
2001 2,664,000
2002 2,331,000
2003 467,000
2004 126,000
-----------
$ 8,482,000
===========
Total rent expense under such operating leases was $229,000, $914,000 and
$2,168,000, respectively, for the years ended December 31, 1997, 1998 and 1999.
At December 31, 1999, the Company has employment agreements with eleven
officers, which expire in 2002. Future minimum commitments under these
agreements, excluding incentive bonuses or stock options, as of December 31,
1999, are as follows:
Year Ended AMOUNT
---------- -----------
2000 849,000
2001 360,000
2002 125,000
-----------
$ 1,334,000
===========
The Company has signed a contract with a third party vendor to provide
telecommunications services to the Company including the origination of inbound
800 dialed phone calls for its prepaid phone cards, and the termination of U.S.
domestic long distance and international long distance. The contract term is
through June 1, 2001, and provides for a minimum monthly purchase commitment of
$750,000 and a total purchase commitment of $31,110,000. The Company can cancel
the minimum monthly purchase commitment with 30 days notice upon meeting its
total minimum purchase commitment.
The Company is in the process of negotiating certain significant supply
contracts for its Operating Support Systems in Mexico and an interconnect
agreement with the National Telephone Company of Mexico (Telefonos de M xico, or
Telmex). The Company is presently unable to estimate the contingencies that
might be agreed to, if any, as part of the inter-connect agreement with Telmex.
The Company is liable to the Internal Revenue Service ("IRS") for federal
excise taxes totaling $1.4 million related to such taxes due for the periods
December 1998, March 1999 and June 1999. The Company has contacted the IRS and
has been negotiating a payment plan for the payment of these taxes due and for a
waiver of interest and penalties due. An agreement has not been reached to
date. The Company has accrued the amounts outstanding for such taxes to the IRS
on its consolidated balance sheet as of December 31, 1999.
On September 29, 1996, the Federal Communications Commission ("FCC") issued
order FCC96-388, 11FCC Rcd. 20541, requiring telecommunications carriers to
reimburse operators of public payphones for the use of such payphones for the
origination of toll free telephone calls from payphones. On the December 31,
1999 consolidated balance sheet, the Company has accrued a total of $1.1 million
as an estimate of such fees payable to payphone operators.
The Company has signed several agreements in which it is swapping some of
the capacity available on its Mexican network with capacity available on other
carriers networks. Some of these swap agreements require that the Company pay
some additional monies in addition to the actual facilities exchange. The
Company has committed to a total payment of $4,279,000 and $2,140,000 in the
years 2000 and 2001, respectively, under such swap agreements.
59
<PAGE>
9. SEGMENT INFORMATION
The Company has two reportable segments: Voice Services and Advanced
Services. Revenues in the Voice Services segment are generated on a retail and
wholesale basis. Revenues in the Advanced Services segment are generated from
network solutions services, customer relationship management and broadband
services and products. The Company provides Voice Services to customers in the
United States and in Mexico. Advanced Services are provided to customers in the
United States, Mexico and other parts of Latin America. The Company measures
segment profit as earnings before interest, depreciation, amortization of
intangibles, other income and taxes (EBITDA).
Revenues, operating information and identifiable assets by business segment are
as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
------------ ------------- -------------
<S> <C> <C> <C>
Revenues
Voice services:
Retail $ --- $ 60,127,000 $ 60,682,000
Wholesale 17,390,000 33,029,000 16,636,000
Advanced services:
Network solutions 18,764,000 30,220,000 13,298,000
Customer relationship management --- 2,744,000 7,692,000
Broadband services and products --- 6,058,000 8,525,000
------------ ------------- -------------
Total revenues $36,154,000 $132,179,000 $106,833,000
------------ ------------- -------------
Operating income (loss) before interest,
depreciation and amortization
Voice services, including impairment loss $ 3,823,000 $ 3,505,000 $ (8,838,000)
Advanced services (107,000) 2,153,000 (2,417,000)
Corporate and other (112,000) (171,000) (378,000)
------------ ------------- -------------
Total operating income (loss) before interest,
depreciation and amortization 3,604,000 5,487,000 (11,633,000)
Depreciation and amortization 622,000 3,316,000 6,335,000
------------ ------------- -------------
Consolidated Operating income (loss) as
reported on the Statements of Operations $ 2,982,000 $ 2,171,000 $(17,968,000)
------------ ------------- -------------
Capital Expenditures
Voice services $ 734,000 $ 5,813,000 $ 16,552,000
Advanced services 940,000 298,000 1,648,000
Corporate and other 8,000 48,000 68,000
------------ ------------- -------------
Total capital expenditures $ 1,682,000 $ 6,159,000 $ 18,268,000
------------ ------------- -------------
Identifiable Assets
Voice services $ 5,978,000 $ 25,578,000 $ 64,619,000
Advanced services 17,619,000 32,427,000 37,611,000
Corporate and other 16,038,000 22,326,000 24,910,000
------------ ------------- -------------
Total identifiable assets $39,635,000 $ 80,331,000 $127,140,000
------------ ------------- -------------
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Revenues
United States $17,390,000 $ 97,903,000 $ 83,316,000
Mexico 18,031,000 32,965,000 20,990,000
Latin America --- 1,311,000 2,527,000
Poland 733,000 --- ---
----------- ------------ ------------
Total revenues $36,154,000 $132,179,000 $106,833,000
----------- ------------ ------------
Fixed assets, net of accumulated depreciation
United States $ 692,000 $ 7,297,000 $ 13,523,000
Mexico 1,987,000 5,174,000 44,439,000
Latin America --- 2,105,000 506,000
----------- ------------ ------------
Total fixed assets $ 2,679,000 $ 14,576,000 $ 58,468,000
----------- ------------ ------------
</TABLE>
10. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR
------------ ------------ ------------ ------------ -------------
1997
<S> <C> <C> <C> <C> <C>
Revenues $ 3,771,000 $ 6,170,000 $12,193,000 $14,020,000 $ 36,154,000
Operating income (loss) (386,000) 696,000 1,169,000 1,503,000 2,982,000
Income (loss) before taxes and
minority interests (359,000) 402,000 1,110,000 1,597,000 2,750,000
Net income (loss) (324,000) 538,000 1,202,000 1,256,000 2,672,000
Basic EPS $ (0.08) $ 0.14 $ 0.31 $ 0.32 $ 0.68
Diluted EPS (1) N/A $ 0.13 $ 0.22 $ 0.18 $ 0.53
FIRST SECOND THIRD FOURTH YEAR
------------ ------------ ------------ ------------ -------------
1998
Revenues $33,399,000 $32,378,000 $36,529,000 $29,873,000 $132,179,000
Operating income (loss) 2,219,000 (461,000) 2,182,000 (1,769,000) 2,171,000
Income (loss) before taxes and
minority interests 2,089,000 (672,000) 1,507,000 (3,166,000) (242,000)
Net income (loss) 1,114,000 (622,000) 869,000 (2,391,000) (1,030,000)
Basic EPS $ 0.25 $ (0.13) $ 0.16 $ (0.42) $ (0.20)
Diluted EPS (1) $ 0.15 N/A $ 0.11 N/A N/A
FIRST SECOND THIRD FOURTH YEAR
------------ ------------ ------------ ------------ -------------
1999
Revenues $27,019,000 $29,709,000 $26,613,000 $23,492,000 $106,833,000
Operating loss (2,685,000) (2,271,000) (4,539,000) (8,473,000) (17,968,000)
Loss before taxes and
minority interests (3,840,000) (4,353,000) (4,983,000) (9,727,000) (22,903,000)
Net loss (2,864,000) (3,078,000) (3,695,000) (9,838,000) (19,475,000)
Basic EPS (0.47) (0.47) (0.53) (1.36) (2.92)
Diluted EPS (1) N/A N/A N/A N/A N/A
<FN>
(1) Inclusion of additional shares under a diluted analysis for loss
period is inappropriate due to the anti-dilutive effect.
</TABLE>
11. SUBSEQUENT EVENTS (UNAUDITED)
In March 2000, the Company completed a $31,575,000 private placement
consisting of 315,750 shares of Class F Convertible Senior Preferred Stock, par
value $.001 per share (the ''Class F Preferred Stock''), together with five year
warrants to purchase 1,925,306 shares of common stock. The Class F Preferred
61
<PAGE>
Stock is convertible into 3,850,610 shares of Company common stock at a
conversion price equal to $8.20 per share, and the exercise price of the
warrants is $10.00 per share. The Class F Preferred Stock earns dividends at a
rate of 12% per annum, which are cumulative and payable in either cash or shares
of Class F Preferred Stock at the Company's discretion. Pricing for this
transaction was established based on a trailing thirty day average of the
closing price of the common stock as of December 7, 1999. The proceeds of the
Class F Preferred have been placed into escrow and release of escrow is subject
to the consummation of the merger with Pointe.
The Company will be required to file a registration statement with the SEC
within 150 days of closing the sale of the Class F Preferred Stock to register
the shares of Common Stock issued or issuable upon conversion of all the Class
F Preferred Stock (including shares issued as dividends) and the exercise of the
related warrants.
In March 2000, the Company's executive management team decided to shut down
the Company's manufacturing facilities at its Interlink subsidiary. The shut
down, which is expected to both reduce the Company's cost structure and increase
its margins with respect to sales, is intended to focus the Company's attention
on its core voice and data services' strategies. The shut down includes the
elimination of certain products, termination of employees, vacating certain
facilities and the possible cancellation of real estate leases. As of the end
of March 1999, the Company expected to terminate between 20 and 25 employees as
a result of the shut down. Shut down charges to be incurred in 2000 are
estimated at $1.6 million.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
62
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant
OFFICERS, DIRECTORS AND OTHER KEY EMPLOYEES
The officers, directors and other key employees of the Company, and their ages,
as of March 15, 2000 are as follows:
Name Age Position
- ---- --- --------
E. Scott Crist 35 Director; Chief Executive Officer
Manuel Landa 39 Chairman of the Board; Chief Operating Officer;
Todd M. Binet (1) 35 Director; President; Chief Financial Officer;
Secretary; Treasurer
Oscar Garcia 38 Director; Executive Vice President of
International Long Distance Operations
Ricardo Orea 39 Director; President of Systems Integration and
Value Added Services
Carlos de Lara 40 Chief Technology Officer
Stephen A. Strohman 62 President of INTERLINK
Jose Luis Apan 37 Director of Value Added Services of Mexico
Paul Freudenthaler 35 Chief Accounting Officer
Marco A. Castilla 33 Vice President of International Affairs
and Corporate Counsel
Jesse E. Morris 32 Vice President of Strategic Development
Darrel O. Kirkland 60 Director
(1)(2)
Jack M. Fields, Jr. 48 Director
(1)(2)
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
E. Scott Crist has served as Chief Executive Officer of Telscape since July
1996. Mr. Crist also serves on the board of directors of Billserve.com (NASDAQ:
BLLS), SalvageSale.com, Bynari, Inc. and RealUse.com. Prior to joining Telscape,
Mr. Crist was President and Chief Executive Officer for Matrix Telecom, a
long-distance company which ranked #7 on THE INC. MAGAZINE list of the 500
fastest growing private companies in 1995. He also founded DNS Communications
(''DNS''), a long-distance reseller. He served as DNS's Chief Executive Officer
from its inception until DNS's merger with Matrix Telecom. Formerly, he served
as Vice President of Acquisitions for Trammell Crow Group, where he specialized
in U.S. capital market transactions. Mr. Crist has an M.B.A. from the J.L.
Kellogg School at Northwestern University, and received a B.S. MAGNA CUM LAUDE
in Electrical Engineering with an emphasis on telecommunications design from
North Carolina State University.
Manuel Landa has served as Telscape's Chief Operating Officer since January 1999
and as Chairman of the Board and as a member of the Board of Directors since May
1996. From 1986 until he joined Telscape, Mr. Landa served as Export Sales
Manager for Condumex, the largest Mexican manufacturer of electrical products
with exports to the United States, Canada, Latin America and Europe. While at
Condumex, Mr. Landa also served as Plant Manager, in which capacity he directed
the Insulating Materials Division. Prior to joining Condumex, Mr. Landa worked
in the consumer and industrial electronics business of Philips, a Dutch company,
where he served as Design Engineer for its Industrial Audio-Video Division. Mr.
Landa received a degree in Electronic and Communications Engineering from La
Salle University in Mexico City, where he graduated MAGNA CUM LAUDE. He also has
a diploma in Total Quality Management from the Instituto Tecnologico de Estudios
Superiores Monterrey.
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<PAGE>
Todd M. Binet has served as Telscape's President and Chief Financial Officer
since January 1999. Prior to that, he served as Telscape's Executive Vice
President and Chief Financial Officer since January 1997. Mr. Binet has been a
member of the Board of Directors since March 1997. Mr. Binet has over 10 years
of business and management experience. Prior to joining Telscape, he served as
an officer and director of St. James Capital Corp., the general partner to St.
James Capital Partners, a merchant banking fund, from January 1996 to December
1996. Prior to his service with St. James, from July 1992 to December 1995, Mr.
Binet served as Treasurer and Corporate Counsel for Alamo Group Inc., an
international company listed on the New York Stock Exchange. Mr. Binet received
a B.B.A. in finance from Southern Methodist University and graduated CUM LAUDE.
He also received an M.B.A. from the Wharton School of Business and holds a J.D.
from the University of Pennsylvania. Mr. Binet also holds a license to practice
law in the state of Texas, although the license is currently inactive.
Oscar Garcia has served as Telscape's Vice President of International Long
Distance Operations and Value Added Services since December 1998 and as a member
of the Board of Directors of Telscape since May 1996. Mr. Garcia co-founded
Vextro and served as Vextro's Vice President of Operations since 1988. From 1987
until he co-founded Vextro, Mr. Garcia served as Engineering Manager for
Infosistemas, which at that time was the exclusive AT&T telephone equipment
distributor in Mexico. Prior to that, Mr. Garcia was Sales Support Manager for
Macrotel de Mexico S.A. de C.V., a subsidiary of Macrotel, Inc., a Florida
telephone key systems company with exports to Mexico and Latin America. Before
that, Mr. Garcia held the position of design engineer for the R&D department of
GTE, at that time the leading U.S. telecommunications company involved in PBX
and KSU manufacturing in Mexico. Mr. Garcia holds an undergraduate degree in
Electronic and Communications Engineering from La Salle University in Mexico
City, a diploma in Marketing from La Salle University and a degree in Business
Administration from the University of California at Berkeley, extension program
in Mexico City.
Ricardo Orea has served as President of Telscape's Systems Integracion Services,
since December 1998 and has served as a member of the Board of Directors of
Telscape since May 1996. Mr. Orea co-founded Vextro and served as Vextro's Vice
President of Sales and Marketing since 1988. Prior to joining Vextro, Mr. Orea
was Electronic Control Systems Plant Manager for Asea Brown Boveri, a Swedish
electrical control and switchgear equipment manufacturer. Before that, Mr. Orea
worked for GTE in its Purchasing and Logistics Department as System Integrator
and Supplier Development Manager. Earlier, he was Technical Service Manager for
MISA, a Mexican computer mainframes and telecommunications maintenance service
company which served major financial accounts and universities. Mr. Orea
received an undergraduate degree in Electronic and Communications Engineering
from La Salle University in Mexico City and has a diploma in Business
Administration from the University of California at Berkeley, extension program
in Mexico City.
Carlos J. de Lara has served as Telscape's Chief Technology Officer since June
1998. Prior to that, he served as Telscape's Director of Metropolitan Networks
since October 1997. Mr. de Lara has over 20 years of experience in the computer
and communications industries. Prior to joining Telscape, he served as director
of NSI, a network integration company acquired by Telscape in 1997. He was
co-founder on NSI, specialized in big corporate networks, WANs, MANs and access
technologies, from February 1994 to August 1997. Prior to founding NSI, he
served for several companies distributing 3Com equipment, from July 1987 to
January 1994. Prior to that, he served as an independent consultant in
communications, data networking and software development from March 1983 to June
1987. Prior to that, he served as Manager of Operational Optimization and as
Modeling Developer in Multibanco Comermex, from November 1979 to February 1983.
He also has served as Director and Faculty member in the Graduate Program for
Data Networking and Communications, in Universidad Anahuac, in Mexico City, from
June 1992 to August 1995. He also served as advisor in data networking to Dr.
Enrique Melrose, then Director of Research in the Mexican Institute of
Communications, from July 1993 to July 1995. (Dr. Melrose is currently
Commissioner of Engineering and Technology in the COFETEL, which is Mexico's
telecommunications regulatory body). He received a B.S. degree in Industrial
and Systems Engineering from the Universidad Anahuac in Mexico City.
Stephen A. Strohman has served as President of Interlink Communications, Inc.
since it was founded in May 1998. In 1996, Mr. Strohman joined the Services
Division of California Microwave, Inc. (CMI) as Vice President, Business
Development. Prior to this, Mr. Strohman was the founder and president of
Strohman Associates, Inc. (SAI). SAI was formed in 1984 to focus on the
satellite telecommunications industry and technology. SAI performed network
analysis, design, and systems integration for a number of telecommunications,
manufacturing and services companies. SAI also consulted with investment fund
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<PAGE>
managers in telecommunications strategies, joint ventures, and mergers and
acquisitions. Mr. Strohman's clients included Xerox, AT&T, Sprint and STM
Wireless. In 1985, Mr. Strohman directed the implementation of the first shared
hub, satellite-based VSAT network for Xerox. Mr. Strohman has also served as
Senior Vice President of STM Wireless, where he led the company's 1992 IPO.
Prior to that, Mr. Strohman was Vice President of marketing at TRW, and
President of an international subsidiary of Sprint. Mr. Strohman holds a B.A.
from California State University.
Jose Luis Apan has served as Director of Value Added Services since December
1998. Prior to that, he served as Telscape's Director of Marketing since joining
Telscape on July 1, 1996. Prior to joining Telscape, he was co-founder and Chief
Executive Officer of Integracion from 1992 to 1997. From 1986 until he founded
Integracion, Mr. Apan served as Regional Telecommunications Manager for
Hewlett-Packard Latin America where he was responsible for the installation and
operation of the Voice, Data and Video Digital Network for the Latin America
Region. Mr. Apan has an MBA from the Instituto Tecnologico Autonomo de Mexico
and holds an undergraduate degree in Chemical Engineering from the Universidad
Iberoamericana in Mexico City. Mr. Apan is also a Registered Communications
Distribution Designer from the Building Institute of Construction Industry in
Tampa, Florida.
Paul D. Freudenthaler has served as Telscape's Chief Accounting Officer since
September 1999. Prior to joining Telscape, Mr. Freudenthaler worked as Director
of International Lending at Bank United and Irwin Mortgage Corporation from June
1994 to August 1999. Prior to that Mr. Freudenthaler worked as Corporate
Controller for Arvin Sango and as a senior auditor at KPMG Peat Marwick. Mr.
Freudenthaler earned his M.B.A. in Finance from the Wharton School of Business
in May 1994, his Bachelor's of Commerce degree from the University of Calgary in
May 1997, and is a Certified Public Accountant with the State of Texas.
Marco A. Castilla has served as Vice President of International Affairs and
Corporate Counsel since July 1998. Prior to joining Telscape, Mr. Castilla
worked as Foreign Legal Advisor at Swidler & Berlin, Chartered. At Swidler &
Berlin, Mr. Castilla practiced in the telecommunications group, representing and
advising several U.S. and international telecommunications companies in their
entry into newly competitive markets, including with respect to regulatory and
transactional matters and in structuring their foreign operations. From December
1995 to September 1996, Mr. Castilla worked as a Foreign Associate at the
international law firm Rogers & Wells in Washington D.C. At Rogers & Wells, Mr.
Castilla devoted most of his practice to capital market financing, project
financing and mergers and acquisitions. Mr. Castilla holds law degrees from
Harvard Law School (L.L.M.) and with honors from the Universidad Iberoamericana
in Mexico City (J.D.). Mr. Castilla is a member of the Inter-American Bar
Association and the Harvard International Law Society.
Jesse E. Morris has served as Telscape's Vice President of Strategic Planning
since September of 1999. Prior to that, he served as Vice President of Finance
and Corporate Controller since January 1999 and as the Corporate Controller
since October 1997. Prior to joining Telscape Mr. Morris worked from January
1992 until October 1997 with Arthur Andersen LLP, a multi-national accounting
and consulting professional services firm, where he last served as Experienced
Audit Manager. Mr. Morris received his B.B.A. in Accounting and Finance and his
Masters in Professional Accountancy from the University of Texas. Mr. Morris is
a Certified Public Accountant with the State of Texas.
Darrell O. Kirkland has served as a member of the Board of Directors of Telscape
since March 1996. Mr. Kirkland is a principal consultant with Kirkland &
Associates, a management consulting firm specializing in telecommunications. A
registered Professional Engineer, Mr. Kirkland has many years of experience in
long distance, microwave, wireless, fiber and local transmission services. He
has held general management and marketing positions with MCI Air Signal, CPI
Microwave, and Discovery Communications. Current and recent clients include MCI,
Skytel, IXC Communications, Prime Cable and Winstar Wireless. Mr. Kirkland
received a B.B.A. from the University of Texas and an M.S. in Industrial
Engineering from the University of Houston.
Jack M. Fields, Jr. has served as a member of the Board of Directors of Telscape
since November 1998. Mr. Fields served as a U.S. Congressman representing Texas'
8th Congressional District in the United States House of Representative from
1981 to 1997, retiring as chairman of the House Telecommunications and Finance
subcommittee. Under his leadership, Congress enacted the 1996 Telecommunications
Act. Mr. Fields served on the Telecommunications and Finance Subcommittee from
1985 until his retirement. During his years of service, the subcommittee
maintained jurisdiction over interstate and international telecommunications,
the Federal Communications Commission, as well as the telephone, cellular, cable
and broadcast industries. In addition, the subcommittee maintained jurisdiction
over the Securities and Exchange Commission, including the activities of
investment bankers, stock brokers, investment advisors, stock exchanges and the
mutual fund industry. After retiring in 1997, Mr. Fields founded two companies;
Texana Global, Inc. and international trading corporation, and Twenty-First
Century Group, Inc., a Washington, D.C.-based governmental affairs and strategic
planning company. Mr. Fields currently serves on the boards of AIM Management
Group, Inc. and Administaff, Inc., as well as the Houston Metropolitan Study
Group.
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<PAGE>
Each officer of Telscape holds office until such officer's successor is
chosen and qualified in such officer's stead or until such officer's death or
until such officer's resignation or removal from office. Certain officers have
employment contracts with Telscape (See Employment Agreements).
Each of the directors were elected at the Company's Annual Meeting held on
June 21, 1999 and currently hold office until the next annual meeting of the
Company's stockholders or until their successors are elected and qualified.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive officers
and directors and persons who own more than 10% of a registered class of the
Company's equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission and the Nasdaq. Executive
officers, directors and greater than 10% stockholders are required by certain
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on its review of the copies of Forms 3 and 4, as furnished
to the Company, pursuant to the Exchange Act during its most recent fiscal year,
and Forms 5 with respect to its most recent fiscal year, it is the Company's
belief that any such forms required to be filed pursuant to Section 16(a) of the
Exchange Act were timely filed, as necessary by the officers, directors and
security holders required to file the same during the fiscal year ended December
31, 1999 with the two exceptions. Mr. Binet did not timely file the necessary
Form 4 for a transaction effectively occurring on December 30, 1999. The Form 5
for this transaction was subsequently filed on February 17, 2000. Mr. Kirkland
did not timely file the necessary Form 4 for transactions effectively occurring
on March 19, 1996, October 9, 1998 and June 21, 1999. The Form 5 for these
transactions was subsequently filed on February 9, 2000.
ITEM 11. Executive Compensation
Report on Executive Compensation
--------------------------------
In March 1997, the Company established the Compensation Committee of the
Board which is responsible for administering the Company's executive
compensation programs and policies. The Company's executive compensation
programs are designed to attract, motivate and retain the executive talent
needed to optimize stockholder value in a competitive environment. The programs
are intended to support the goal of increasing stockholder value while
facilitating the business strategies and long-range plans of the Company.
The following is the Compensation Committee's report addressing the
compensation of the Company's executive officers.
Compensation Policy and Philosophy
----------------------------------
The Company's executive compensation policy is designed to establish an
appropriate relationship between executive pay and the Company's annual
performance, its long term growth objectives and its ability to attract and
retain qualified executive officers. The Company's policy is based on the belief
that the interests of the executives should be closely aligned with the
Company's stockholders. The Compensation Committee attempts to achieve these
goals by integrating annual base salaries with (i) annual incentive bonuses
based on corporate performance, based on the achievement of specified
performance objectives set forth in the Company's financial plan for such fiscal
year, and based on individual performance, and (ii) stock options through the
Company's stock option plans. The Compensation Committee's philosophy is to
review salaries paid to executive officers with comparable responsibilities in
comparable businesses and offer salaries to its executives which are in the
lower range of those offered by such comparable businesses. In addition, the
components of each executive officer's compensation is weighted to the bonus and
option components. This results in a meaningful portion of each executive's
compensation being placed at-risk and linked to the accomplishment of specific
results that are expected to lead to the creation of value for the Company's
stockholders from both the short-term performance and long term success of the
Company. The Compensation Committee considers all elements of compensation and
the compensation policy when determining individual components of pay.
The Compensation Committee believes that leadership and motivation of the
Company's employees are critical to achieving the objectives of the Company. The
Compensation Committee is responsible for ensuring that its executive officers
are compensated in a way that furthers the Company's business strategies and
which aligns their interests with those of the stockholders. To support this
philosophy, the following principles provide a framework for executive
compensation: (i) offer compensation opportunities that attract the best talent
to the Company; (ii) motivate individuals to perform at their highest levels;
(iii) reward outstanding achievement; (iv) retain those with leadership
abilities and skills necessary for building long-term stockholder value; (v)
maintain a significant portion of executives' total compensation at risk, tied
to both the annual and long-term financial performance of the Company and the
creation of incremental stockholder value; and (iv) encourage executives to
manage from the perspective of owners with an equity stake in the Company.
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<PAGE>
Executive Compensation Components
---------------------------------
As discussed below, the Company's executive compensation package is
primarily comprised of three components: base salary, annual incentive bonuses
and stock options.
Base Salary. For fiscal 1999, the Compensation Committee approved the base
salaries of the Named Executive Officers (as defined below) based on (i)
salaries paid to executive officers with comparable responsibilities employed by
companies with comparable businesses, (ii) performance and accomplishment of the
Company in fiscal 1999 which is the most important factor, and (iii) individual
performance reviews for fiscal 1999 for most executive officers. The
Compensation Committee's philosophy is to review salaries paid to executive
officers with comparable responsibilities in comparable businesses and offer
salaries to its executives which are in the lower range of those offered by such
comparable businesses. In addition, the components of each executive officer's
compensation is weighted to the bonus and option components. This results in a
meaningful portion of each executive's compensation being placed at-risk and
linked to the accomplishment of specific results that are expected to lead to
the creation of value for the Company's stockholders from both the short-term
performance and long term success of the Company. The Compensation Committee
reviews executive officer salaries annually and exercises its judgement based on
all the factors described above in making its decision, subject to the terms of
such officer's employment agreement. No specific formula is applied to determine
the weight of each criteria.
Annual Incentive Bonuses. Annual incentive bonuses for the Named Executive
Officers are based upon the following criteria: (i) the Company's financial
performance for the current fiscal year, (ii) the furthering of the Company's
strategic position in the marketplace, and (iii) individual merit. The Company
paid incentive bonuses to the Named Executive Officers (as defined below) as
depicted in the Summary Compensation Table.
Long Term Incentive Compensation. Stock options encourage and reward
effective management which results in long-term corporate financial success, as
measured by stock price appreciation. The Compensation Committee believes that
option grants afford a desirable long-term compensation method because they
closely ally the interests of management with stockholder value and that grants
of stock options are the best way to motivate executive officers to improve
long-term stock market performance. The vesting provisions of options granted
under the Company's stock option plans are designed to encourage longevity of
employment with the Company and generally extend over a three year period.
Compensation of Chief Executive Officer
---------------------------------------
The Board believes that E. Scott Crist, the Company's Chief Executive
Officer, provides valuable services to the Company and that his compensation
should therefore be competitive with that paid to executives at comparable
companies. In addition, the Compensation Committee believes that an important
component of his compensation should be based on Company performance. Mr.
Crist's annual base salary for fiscal 1999 was $125,000. Mr. Crist's annual
base salary for fiscal 2000 is $125,000. The factors which the Compensation
Committee considered in setting his annual base salary were his individual
performance and pay practices of peer companies relating to executives of
similar responsibility.
Internal Revenue Code Section 162(m)
------------------------------------
Under Section 162(m) of the Internal Revenue Code (the "Code"), the amount
of compensation paid to certain executives that is deductible with respect to
the Company's corporate taxes is limited to $1,000,000 annually, if certain
requirements of section 162(m) are not met. It is the current policy of the
Compensation Committee to maximize, to the extent reasonably possible, the
Company's ability to obtain a corporate tax deduction for compensation paid to
executive officers of the Company to the extent consistent with the best
interests of the Company and its stockholders.
The Compensation Committee:
Darrel O. Kirkland
Jack M. Fields, Jr.
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<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth the aggregate cash compensation paid for services
rendered to the Company during the last three fiscal years by the Company's
Chief Executive Officer and the four other most highly compensated executive
officers of the Company (together, the "Named Executive Officers") who served as
such during the 1999 fiscal year.
<TABLE>
<CAPTION>
Long-Term Compensation
---------------------------------------------------------------------------
Annual Compensation (1) Awards Payouts
-----------------------------------------------------------------------------------------------------
Securities
Name and Other Underlying
Principal Bonus Annual Restricted Options/ LTIP All Other
Position (2) Year Salary ($) ($)(3) Compensation($) Stock Awards($) SARs (#) Payouts(#) Compensation($)
- ------------------------ ---- ----------- ------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Scott Crist; Chief 1999 $ 122,692 --- -- -- -- -- --
Executive Officer 1998 $ 109,548 $75,000 -- -- 27,838 -- --
1997 $ 87,308 $75,000 -- -- -- -- --
Manuel Landa; 1999 $ 115,731 --- -- -- -- -- --
Chairman, 1998 $ 80,000 $60,000 -- -- 29,625 -- --
Chief Operating Officer 1997 $ 80,000 $75,000 -- -- -- -- --
Oscar Garcia; 1999 $ 117,000 --- -- -- -- -- --
EVP of 1998 $ 80,000 $75,000 -- -- 29,625 -- --
International 1997 $ 80,000 $50,000 -- -- -- -- --
Long Distance
Operations
Ricardo Orea; 1999 $ 117,000 --- -- -- -- -- --
President of 1998 $ 80,000 $75,000 -- -- 29,625 -- --
Systems 1997 $ 80,000 $50,000 -- -- -- -- --
Integration and
Value AddedServices
Todd M. Binet; 1999 $ 121,923 --- -- -- -- -- --
President and 1998 $ 92,684 $75,000 -- -- 37,031 -- --
Secretary, 1997 $ 74,346 $50,000 -- -- 250,000 -- --
Treasurer and
CFO
<FN>
______________________
(1) Each of the Company's officers received perquisites and other personal benefits in addition to salary and bonuses.
The aggregate amount of such perquisites and other personal benefits, however, does not exceed the lesser of $50,000 or 10
percent of the total of the annual salary and bonus reported for any of the Named Executive Officers for each of the reported
years.
(2) The following summarizes each executive's employment commencement dates: Mr. Crist, August, 1996; Mr. Landa, May,
1996; Mr. Garcia, May, 1996; Mr. Orea, May, 1996; Mr. Binet, January, 1997. Compensation information is provided for each Named
Executive Officer from such officers employment commencement date.
(3) Represents annual bonus award earned for the fiscal year noted, even though such bonus was paid in the following
fiscal year.
</TABLE>
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OPTION/SAR GRANTS IN LAST FISCAL YEAR (1999)
There were no option or SAR grants to named executive officers during the fiscal
year 1999.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
The following table sets forth-certain information with respect to options
exercised during fiscal 1999 by the Named Executive Officers and with respect to
unexercised options held by such persons at the end of fiscal 1999.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised In-the-
Underlying Unexercised at Money Option/SARs at Fiscal
------
Shares Fiscal Year End (#) Year End ($)(1)
Acquired on Value ------------------- ---------------
NAME Exercise (#) Realized EXERCISABLE Unexercisable EXERCISABLE Unexercisable
------------ -------- ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Scott Crist -- -- 334,737 20,879 $ 2,698,861 $ 107,005
Manuel Landa -- -- 129,625 --- $ 1,014,953 $ ---
Oscar Garcia -- -- 129,625 --- $ 1,014,953 $ ---
Ricardo Orea -- -- 129,625 --- $ 1,014,953 $ ---
Todd Binet -- -- 259,258 27,773 $ 2,266,197 $ 142,337
<FN>
(1) The calculations of the value of unexercised options are based on the difference
between the closing price of $12.625 per share on Nasdaq of the Common Stock on December 31,
1999 and the exercise price of each option, multiplied by the number of shares covered by the
option.
</TABLE>
LONG TERM INCENTIVE GRANTS IN THE LAST FISCAL YEAR (1999)
There were no long term incentive grants to named executive officers
during the fiscal year 1999.
COMPENSATION OF DIRECTORS
Directors are reimbursed for their ordinary and necessary expenses incurred
in attending meetings of the Board of Directors or a committee thereof. Telscape
pays directors who are not also employees of Telscape $500 for each meeting of
the Board of Directors they attend. Directors of Telscape are eligible to
participate in Telscape's 1996 Stock Option and Appreciation Rights Plan, the
1998 Stock Option and Appreciation Rights Plan, if adopted, and Telscape's 1994
Directors Stock Option Plan.
Non-employee directors may receive an annual grant of options to purchase
10,000 shares of Telscape's Common Stock. In February 1999, Mr. Kirkland and Mr.
Fields each received grants of 10,000 shares of Telscape's common stock
exercisable at $8.188 a share with a one year vesting period.
EMPLOYMENT AGREEMENTS
In connection with the Company's acquisition of Telereunion, Inc., the
Company entered into an employment agreement with Mr. Landa, effective as of May
14, 1996. The employment agreement provided, among other things, that Mr. Landa
will serve as President and CEO of Telereunion. The original employment
agreement terminated May 14, 1999 and a new agreement was issued on September
2, 1999 for a period of three years. Mr. Landa's agreement provided, among
other things, that he will serve as Chief Operating Officer of the Company,
reporting to the Chief Executive Officer of the Company. Mr. Landa's agreement
will be terminated upon the consummation of the Company's merger with Pointe
Communications, Inc.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Darrel O. Kirkland and Jack M. Fields, Jr., comprise the Company's
compensation committee. Neither member of the compensation committee is an
executive of the Company or its subsidiaries and neither serves in a similar
capacity for another entity. Additionally, no director or officer of the
Company serves in a similar capacity for an entity whose officers or directors
serve on Telscape's compensation committee.
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STOCKHOLDER RETURN PERFORMANCE PRESENTATION
Set forth below is a line graph comparing the yearly change in the
Company's Common Stock since the Company's initial public offering in August
1994 against the NASDAQ Telecommunications Industry Index and the NASDAQ Stock
Market Index.
[Stockholder Return Performance Presentation Chart]
<TABLE>
<CAPTION>
DESCRIPTION 1994 1995 1996 1997 1998 1999
- -------------------------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Telscape International ($) $100.00 $ 73.33 $ 83.33 $211.65 $193.33 $336.66
- -------------------------- ------- ------- ------- ------- ------- -------
S & P 500 ($) $100.00 $137.58 $169.17 $225.60 $290.08 $351.12
- -------------------------- ------- ------- ------- ------- ------- -------
NASDAQ US ($) $100.00 $141.33 $173.89 $213.07 $300.24 $542.41
- -------------------------- ------- ------- ------- ------- ------- -------
NASDAQ Telecom ($) $100.00 $130.91 $133.86 $195.75 $322.30 $561.26
- -------------------------- ------- ------- ------- ------- ------- -------
</TABLE>
The graph assumes that $100 was invested in August 1994 in the Company's
Common Stock and in the S & P 500, the NASDAQ Stock Market Index and the NASDAQ
Telecommunications Index and that all dividends were re-invested. No dividends
have been declared or paid in the Company's Common Stock. Stockholder returns
over the indicated period should not be considered indicative of future
stockholder returns.
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ITEM 12. Security Ownership Of Certain Beneficial Owners And Management
The following table sets forth certain information, as of March 15,
2000, with respect to the beneficial ownership of Common Stock by each director,
each Named Executive Officer included in the Summary Compensation Table, the
directors and executive officers as a group and each stockholder known to
management to own beneficially more than 5% of the Common Stock. Unless
otherwise noted, the persons listed below have sole voting and investment power
with respect to such shares.
<TABLE>
<CAPTION>
Name and Number of Shares Percentage
Address Beneficially Owned Beneficially Owned
- ------------------------------------ ------------------- -------------------
<S> <C> <C>
E. Scott Crist 1,299,953(1) 12.0%
2700 Post Oak Boulevard, Suite 1000
Houston, Texas 77056
Manuel Landa 1,162,950(2)(3) 10.8%
2700 Post Oak Boulevard, Suite 1000
Houston, Texas 77056
Ricardo Orea 1,161,881(3)(4) 10.8%
Moras No. 430
Col. Del Valle, Del Benito Juarez
03100 Mexico, D.F.
Oscar Garcia 1,155,881(3)(5) 10.7%
Moras No. 430
Col. Del Valle, Del Benito Juarez
03100 Mexico, D.F.
Todd M. Binet 464,936(6) 4.3%
2700 Post Oak Boulevard, Suite 1000
Houston, Texas 77056
Darrel Kirkland 30,125(7) ---*
803 Forest View
Austin, TX 78746
Jack M. Fields, Jr. 23,571(8) ---*
8810 Will Clayton Pkwy, Suite E
Humble, TX 77338
All directors and named executive
officers as a group (7 persons) 5,299,297(9) 49.0%
<FN>
- --------------------------------------------------------------------------------
* Less than 1%
</TABLE>
(1) Includes shares of Common Stock issuable upon exercise of the Series A
Common Stock Warrant which have vested and are exercisable with respect to
rights to purchase 500 shares of Common Stock at $2.19 per share. The Series A
Common Stock Warrant is currently exercisable and lapses on May 16, 2003. Also
included are the shares of Common Stock issuable upon exercise of (i) a common
stock warrant representing the right to purchase 37,418 shares of Common Stock
at $6.68 per share and (ii) a common stock warrant representing the right to
purchase 31,805 shares of Common Stock at $6.68 per share. Includes 255,620
shares of Common Stock owned by Delaware Charter Guaranteed Trust Co. F/B/O Mr.
Crist. Includes options to purchase (i) 327,778 shares of Common Stock at $4.50
per share and (ii) 6,959 shares of Common Stock at $7.50 per share, all of which
are presently exercisable. Excludes options to purchase 20,879 shares of common
stock at $7.50 per share, as such options are not exercisable within sixty (60)
days of this table.
(2) Includes shares of Common Stock issuable upon exercise of a Series A
Common Stock Warrant which have vested and become exercisable with respect to
rights to purchase 231,442 shares of Common Stock at $2.19 per share owned by
Mr. Landa, as well as rights to purchase 326,883 shares of Common Stock held by
Forest International, L.L.C. (''Forest''). Mr. Landa is the beneficial owner of
Forest. The Series A Common Stock Warrant lapses on May 16, 2003. Excludes
options to purchase 77,000 shares of Common Stock at $16.00 per share as such
options are not exercisable within sixty (60) days of the date of this table.
71
<PAGE>
(3) Includes options to purchase 25,000, 75,000 and 29,625 shares of
Common Stock at $1.35, $4.875, and $7.50 per share, respectively, all of which
options are presently exercisable.
(4) Includes shares of Common Stock issuable upon exercise of the Series A
Common Stock Warrant which have vested and become exercisable with respect to
rights to purchase 247,208 shares of Common Stock at $2.19 per share owned by
Mr. Orea, as well as rights to purchase 310,048 shares of Common Stock held by
Cloud International, L.L.C. (''Cloud''). Mr. Orea is the beneficial owner of
Cloud. The Series A Common Stock Warrant lapses on May 16, 2003. Excludes
options to purchase 42,000 shares of Common Stock at $16.00 per share as such
options are not exercisable within sixty (60) days of the date of this table.
(5) Includes shares of Common Stock issuable upon exercise of the Series A
Common Stock Warrant which have vested and become exercisable with respect to
rights to purchase 241,208 shares of Common Stock at $2.19 per share owned by
Mr. Garcia, as well as rights to purchase 310,048 shares of Common Stock held by
Sky International, L.L.C. (''Sky''). Mr. Garcia is the beneficial owner of Sky.
The Series A Common Stock Warrant lapses on May 16, 2003. Excludes options to
purchase 42,000 shares of Common Stock at $16.00 per share as such options are
not exercisable within sixty (60) days of the date of this table.
(6) Includes shares of Common Stock issuable upon exercise of the Series A
Common Stock Warrant representing the right to purchase 47,798 shares of Common
Stock at $2.19 per share. The Series A Common Stock Warrant expires on May 16,
2003. Includes options to purchase 83,333 shares of Common Stock at $3.25 per
share, options to purchase 166,667 shares of Common Stock at $4.00 per share,
and options to purchase 9,258 shares of Common Stock at $7.50 per share, all of
which are presently exercisable. Excludes options to purchase 27,773 shares of
Common Stock at $7.50 per share as such options are not exercisable within sixty
(60) days of this table. Excludes 10,000 Series A Warrants and 10,000 Series B
Warrants which are held in trust for the benefit of Mr. Binet's two minor
children. Mr. Binet disclaims beneficial ownership of these shares.
(7) Includes options to purchase (i) 10,000 shares of Common Stock at $3.75
per share, (ii) 9,625 shares of Common Stock at $7.50 per share, and (iii)
10,000 shares of Common Stock at $8.188 per share, all of which options are
presently exercisable.
(8) Includes options to purchase 10,000 shares of Common Stock at $7.25 and
10,000 shares at $8.188 , all of which options are presently exercisable.
(9) Includes options and warrants to purchase 2,816,853 shares of Common
Stock, all of which are exercisable within sixty (60) days of the date of this
table.
ITEM 13. Certain Relationships and Related Transactions
TRANSACTIONS WITH MANAGEMENT AND OTHERS
On October 22, 1999, we signed a loan agreement with Lennox Invest Ltd., a
BVI Corporation, which provided for funding of up to $10.0 million. A total of
$1.5 million has been funded on this facility, which bears interest at 10% per
annum. Interest on each note is to be paid at maturation of the respective note,
which occurs six months after the date of each note. Of the $1.5 million funded
under the facility, $1.0 million matures on April 19, 2000, and $0.5 million
matures on April 26, 2000. As part of this transaction, certain members of the
board of directors agreed to pledge shares of Telscape stock as collateral. We
have agreed to indemnify these directors for the loss of their shares for any
reason other than the non-payment of these loans, and to compensate these
directors by immediately vesting options to acquire 22,219 shares at $7.50 per
share for each of Messrs. Landa, Orea and Garcia. In December 1999, we informed
Lennox that we would not be drawing any further funding under this facility due
to a breach of contract on the part of Lennox.
On November 24, 1999, we signed a letter of intent to merge with
Pointe. In connection with the letter of intent, Pointe agreed to lend us $1.5
million that was evidenced by a short term promissory note ("Promissory Note").
As part of this transaction, certain members of the board of directors agreed to
pledge shares of Telscape stock as collateral. We have agreed to indemnify these
directors for the loss of their shares for any reason other than the non-payment
of these loans, and to compensate these directors.
72
<PAGE>
INDEBTEDNESS OF MANAGEMENT
On December 10, 1998, Manual Landa issued a Promissory Note to the
Company in the amount of $270,000, bearing simple interest at an annual rate of
9%. The outstanding balance of the Note due to the Company at December 31, 1999
was $220,336, including principal and accrued interest.
On May 7, 1999, the Company issued $1,000,000 in senior notes to E.
Scott Crist, bearing interest at 8% until November 6, 1999. Thereafter, the
interest rate increased by 1% for each month after November 6, 1999. The
Company repaid $150,000 to Mr. Crist on August 27, 1999. The outstanding
balance of the Note due to Mr. Crist at December 31, 1999 is $850,000.
On August 16, 1999, E. Scott Crist issued a Promissory Note to the
Company in the amount of $95,000, bearing simple interest at an annual rate of
8%. The outstanding balance of the Note due to the Company at December 31, 1999
was $97,873, including principal and accrued interest.
On December 31, 1998 and January 15, 1999, Marco Castilla issued
Promissory Notes under the Executive Loan Program of 1998 to the Company
totaling $76,405, bearing interest at the Bank of America Prime Rate. The
outstanding balance of the Notes due to the Company at December 31, 1999 was
$82,498, including principal and accrued interest.
FUTURE TRANSACTIONS
Although the Company intends that the terms of any future transactions
and agreements between the Company and its directors, officers, principal
stockholders or other affiliates will be no less favorable than could be
obtained from unaffiliated third parties, no assurances can be given in this
regard. Any such future transactions that are material to the Company and are
not in the ordinary course of business will be approved by a majority of the
Company's independent and disinterested directors.
73
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits. See Index to Exhibits on page 77. Each of the following
exhibits described on the index to exhibits is a management
contract or compensatory plan or arrangement: 10.1, 10.2, 10.11,
10.12, 10.13, 10.15 and 10.16.
(b) Financial Statement Schedules: See Schedule II - Valuation and
Qualifying Accounts on page 75.
(c) Reports on Form 8-K: On September 20, 1999, the Company filed a
report on Form 8-K reporting that the Company had signed a credit
agreement with Lucent Technologies, Inc. for up to $40 million in
financing.
74
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
Balance at Balance at
Beginning of Period Additions Deductions End of Period
<S> <C> <C> <C> <C>
FY 1999 $ 500,000 $1,996,000 $ 386,000 $ 2,110,000
FY 1998* 200,000 925,000 625,000 500,000
FY 1997 57,000 277,000 134,000 200,000
</TABLE>
INVENTORY RESERVES
<TABLE>
<CAPTION>
Balance at
Beginning of Balance at
Period Additions Deductions End of Period
<S> <C> <C> <C> <C>
FY 1999 $ 1,047,000 $ 450,000 $ 184,000 $ 1,313,000
FY 1998* 352,000 946,000 251,000 1,047,000
FY 1997 299,000 53,000 --- 352,000
<FN>
* Additions and deductions for 1998 include activity related to the Company's
acquisitions during that year. As such, the 1998 additions do not agree to the
related entries shown for the same items on the consolidated Statement of Cash
Flows.
</TABLE>
75
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TELSCAPE INTERNATIONAL, INC.
(Registrant)
March 30, 2000 /s/ E. SCOTT CRIST
---------------------
E. Scott Crist
CEO and Principal Executive Officer
March 30, 2000 /s/ TODD M. BINET
--------------------
Todd M. Binet
President, CFO and
Principal Financial Officer
March 30, 2000 /s/ PAUL FREUDENTHALER
------------------------
Paul Freudenthaler
CAO and Principal Accounting Officer
Pursuant to requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ E. SCOTT CRIST Director March 30, 2000
- ---------------------
E. Scott Crist
/s/ MANUEL LANDA Director March 30, 2000
- ------------------
Manuel Landa
/s/ OSCAR GARCIA Director March 30, 2000
- ------------------
Oscar Garcia
/s/ RICARDO OREA Director March 30, 2000
- ------------------
Ricardo Orea
/s/ TODD M. BINET Director March 30, 2000
- --------------------
Todd M. Binet
/s/ DARREL O. KIRKLAND Director March 30, 2000
- -------------------------
Darrel O. Kirkland
/s/ JACK M. FIELDS Director March 30, 2000
- ---------------------
Jack M. Fields
76
<PAGE>
<TABLE>
<CAPTION>
INDEX OF EXHIBITS
Exhibit No. Description
- ----------- -------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement between the Company, BT Alex. Brown Incorporated
and Lehman Brother Inc. (Incorporated herein by reference to Exhibit 1.1 to the
Company's Registration Statement No. 333-60271)
*2.1 Amended and Restated Agreement and Plan of Merger dated as of December 31, 1999 by
and among Telscape International, Inc., Pointe Communications Corporation and Pointe
Acquisition, Corp.
3.1 Articles of Incorporation of the Registrant, as amended (filed as Exhibit 3.1 to the
Company's Registration Statement No. 33-80542-D and incorporated herein by
reference)
3.2 Bylaws of the Registrant, as amended (filed as Exhibit 3.2 to the Company's Registration
Statement No. 33-80542-D and incorporated herein by reference)
3.3 Articles of Incorporation of Polish Microwave, Inc. (filed as Exhibit 3.3 to the
Company's Registration Statement No. 33-80542-D and incorporated herein by
reference)
3.4 Bylaws of Polish Microwave, Inc. (filed as Exhibit 3.4 to the Company's Registration
Statement No. 33-80542-D and incorporated herein by reference)
3.5 Contract of Limited Liability Company of DTS/ZWUT (filed as Exhibit 3.5 to the
Company's Registration Statement No. 33-80542-D and incorporated herein by
reference)
4.1 Form of Certificate evidencing Common Stock (filed as Exhibit 4.1 to the
Company'sRegistration Statement No. 33-80542-D and incorporated herein by
reference)
4.2 Form of Warrant Agreement between American Stock Transfer & Trust Company and
the Company (filed as Exhibit 4.2 to the Company's Registration Statement No. 33-
80542-D and incorporated herein by reference)
4.3 Form of Warrant Certificate evidencing the Warrants (filed as Exhibit 4.3 to the
Company's Registration Statement No. 33-80542-D and incorporated herein by
reference)
4.4 Form of Statement of the establishment of the Series B non-voting, nonparticipating
Preferred Stock (filed as Exhibit 4.1 to the Company's Report on Form 10-QSB for the
quarter ended March 31, 1996 and incorporated herein by reference)
10.1 Form of Representative's Warrants (filed as Exhibit 10.8 to the Company's Registration
Statement No. 33-80542-D and incorporated herein by reference)
10.2 Warrant Agreement between the Company and S.P. Krishna Murthy (filed as Exhibit
10.13 to the Company's Report on Form 10-KSB for the year ended December 31, 1995
and incorporated herein by reference)
10.3 Form of Series A Common Stock Warrant (filed as Exhibit 10.4 to the Company's Report
on Form 10-QSB for the quarter ended March 31, 1996 and incorporated herein by
reference)
10.4 Form of Series B Common Stock Warrant (filed as Exhibit 10.5 to the Company's Report
on Form 10-QSB for the quarter ended March 31, 1996 and incorporated herein by
reference)
10.5 Form of Employment Agreement for Manuel Landa, Ricardo Orea Gudino and Oscar
Garcia Mora (filed as Exhibit 10.6 to the Company's Report on Form 10-QSB for the
quarter ended March 31, 1996 and incorporated herein by reference)
10.6 Form of Non-Qualified Stock Option Certificate and Agreement, as amended, for Manuel
Landa, Ricardo Orea Gudino and Oscar Garcia Mora (filed as Exhibit 10.7 to the
Company's Report on Form 10-QSB for the quarter ended March 31, 1996 and
incorporated herein by reference)
10.7 Form of Series A Common Stock Warrant dated May 17, 1996 between the Company
and Manuel Landa, Ricardo Orea Gudino, Oscar Garcia Mora and Christopher Efird
(filed as Exhibit 10.1 to the Company's Report on Form 8-K dated June 3, 1996 and
incorporated herein by reference)
10.8 Employment Agreement for E. Scott Crist (filed as Exhibit 10.1 to the Company's Report
on Form 10-QSB for the quarter ended September 30, 1996 and incorporated herein by
reference)
10.9 Employment agreement for Todd Binet (filed as Exhibit 10.29 to the Company's Report
on Form 10-KSB for the year ended December 31, 1996 and incorporated herein by
reference)
10.10 Form of Promissory Note dated July 1, 1997, between Telereunion and Jose Luis Apan
Wong, Raul de la Parra Zavala and Alejandro Apan Wong (filed as Exhibit 10.4 to the
Company's Current Report on Form 8-K dated August 5, 1997 and incorporated herein
by reference)
10.11 Form of Common Stock Warrant dated July 1, 1997, between the Company and Jose Luis
Apan Wong, Raul de la Parra Zavala and Alejandro Apan Wong (filed as Exhibit 10.4 to
the Company's Current Report on Form 8-K dated August 5, 1997 and incorporated
herein by reference)
10.12 Stock Purchase Agreement dated July 1, 1997, by and among the Company, Telscape
USA, Inc., Telereunion and Jose Luis Apan Wong, Raul de la Parra Zavala and Alejandro
Apan Wong (filed as Exhibit 10.4 to the Company's Current Report on Form 8-K dated
August 5, 1997 and incorporated herein by reference)
10.13 Stock Purchase Agreement dated October 1, 1997, by and among Telscape USA, Inc.,
Telereunion, Inc. and Jose Martin Pena Nunez, Carlos Joaquin De Lara Y Campos, Jorge
Pena Nunez, Martha Teresita Martin Del Campo Gutierrez (filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K dated October 15, 1997 and incorporated herein
by reference)
10.14 Stock Purchase Agreement dated January 22, 1998, by and among the Company; MSN
Communications, Inc.; Stuart Newman and Michael Newman, together with Form of
Promissory Note dated January 23, 1998 in the principal amount of $375,000 payable to
Stuart Newman attached as Exhibit B-1 and Form of Promissory Note dated January 23,
1998 in the principal amount of $375,000 payable to Michael Newman attached as
Exhibit B-2 (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated
February 6, 1998 and incorporated herein by reference)
10.15 Stock Purchase Agreement dated May 18, 1998, by and among Telscape International,
Inc., California Microwave, Inc. and California Microwave Services Divisions, Inc.
together with a Form of Supply Agreement between California Microwave, Inc. and
California Microwave Services Division, Inc. as Exhibit B (Incorporated herein by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated June 9,
1998)
10.16 Securities Purchase Agreement between Deere Park Capital Management, LLC and
Telscape International, Inc. dated as of May 1, 1998; Registration Rights Agreement
dated as of May 1, 1998 between Telscape International, Inc. and Deere Park Capital
Management, LLC; Form of Convertible Debenture for $3,000,000 dated May 1, 1998;
Form of Stock Purchase Warrant to Purchase 8,952 shares of Common Stock of Telscape
International, Inc. dated May 12, 1998 (all filed as Exhibit 4.4 to the Company's Report
on Form 10Q for the quarter ended March 31, 1998 and incorporated herein by reference)
10.17 Form of Convertible Debenture in the principal amount of $1,000,000 between Deere
Park Capital Management, LLC and Telscape International, Inc. dated as of May 28,
1998 and a form of Stock Purchase Warrant to Purchase 2,427 shares of Common Stock
of Telscape International, Inc. dated May 28, 1998 (Incorporated herein by reference to
Exhibit 10.3 to the Company's Current Report on Form 8-K dated June 9, 1998)
10.18 Securities Purchase Agreement dated May 29, 1998 by and between Telscape
International, Inc. and Gordon Brothers Capital, LLC; together with a Form of
Convertible Debenture in the principal amount of $5,000,000 payable to Gordon Brothers
Capital, LLC attached as Exhibit A; a Form of Stock Purchase Warrant for Gordon
Brothers, LLC for 12,136 shares of Common Stock of Telscape International, Inc.
attached as Exhibit B; and a Registration Rights Agreement by and between Gordon
Brothers Capital, LLC and Telscape International, Inc. attached as Exhibit C
(Incorporated herein by reference to Exhibit 10.4 to the Company's Current Report on
Form 8-K dated June 9, 1998)
10.19 Equity Purchase Agreement by and between INTERLINK Communications Holding Co.,
Inc. and each of Telscape International, Inc., E. Russell Hardy, Stephen Strohman, Monty
J. Moore, and Salvador Giblas dated as of May 19, 1998 (Incorporated herein by
reference to Exhibit 10.5 to the Company's Current Report on Form 8-K dated June 9,
1998)
10.20 Form of Employment Agreement by and between California Microwave Services
Division, Inc. and E. Russell Hardy dated as of May 18, 1998 (Incorporated herein by
reference to Exhibit 10.6 to the Company's Current Report on Form 8-K dated June 9,
1998)
10.21 Form of Employment Agreement by and between California Microwave Services
Division, Inc. and Stephen Strohman dated as of May 18, 1998 (Incorporated herein by
reference to Exhibit 10.7 to the Company's Current Report on Form 8-K dated June 9,
1998)
10.22 Form of Employment Agreement by and between California Microwave Services
Division, Inc. and Monty J. Moore dated as of May 18, 1998 (Incorporated herein by
reference to Exhibit 10.8 to the Company's Current Report on Form 8-K dated June 9,
1998)
10.23 Form of Consulting Agreement by and between California Microwave Services Division,
Inc. and Salvador Giblas dated as of May 18, 1998 (Incorporated herein by reference to
Exhibit 10.9 to the Company's Current Report on Form 8-K dated June 9, 1998)
10.24 Loan Agreement between Telscape USA, Inc. and MSN Communications, Inc. and
Southwest Bank of Texas dated May 19, 1998 (Incorporated herein by reference to
Exhibit 10.24 to the Company's Registration Statement No. 333-60271)
10.25 Outside Directors Stock Option Plan of the Polish Telephones and Microwave
Corporation (Incorporated herein by reference to Exhibit 10.24 to the Company's
Registration Statement No. 333-60271)
10.26 Form of Financing Agreement by and between the Company and Newbridge Financial
Services Networks dated as of December 7, 1998 (Incorporated herein by reference to
Exhibit 10.26 to the Company's Report on Form 10-K for the year ended December 31,
1998)
10.27 Form of Financing Agreement by and between the Company and NTFC Capital
Corporation dated as of January 11, 1999 (Incorporated herein by reference to Exhibit
10.27 to the Company's Report on Form 10-K for the year ended December 31, 1998)
10.28 Form of Securities Purchase Agreement by and between the Company and Kendu
Partners and MDNH Partners, L.P. dated as of December 18, 1998, and Exhibit B to this
agreement representing the Form of Registration Rights Agreement (Incorporated herein
by reference to Exhibit 10.28 to the Company's Report on Form 10-K for the year ended
December 31, 1998)
10.29 Form of Securities Purchase Agreement by and between Telscape International, Inc.,
INTERLINK Communications, Inc. and Cahill, Warnock, Strategic Partners Fund, L.P.
dated as of May 5, 1999, Exhibit A representing the form of the Increasing Rate Secured
Promissory Note, Exhibit B representing the form of Warrant, and Exhibit C representing
the Security Agreement. (Incorporated herein by reference to Exhibit 10.29 to the
Company's Report on Form 10-Q for the quarter ended March 31, 1999)
10.30 Form of Securities Purchase Agreement by and between Telscape International, Inc.,
INTERLINK Communications, Inc. and Cahill, Warnock, Strategic Partners Fund, L.P.
dated as of June 18, 1999, Exhibit A representing the form of the Increasing Rate Secured
Promissory Note, Exhibit B representing the form of Warrant, and Exhibit C representing
the Security Agreement and Amendment No. 1 to Securities Purchase Agreement.
(Incorporated herein by reference to Exhibit 10.30 to the Company's Report on form 10-
Q for the quarter ended June 30, 1999)
10.31 Securities Purchase Agreement dated July 19, 1999 by and between Telscape
International, Inc., Telscape USA, Inc., TSCP International, Inc., MSN Communications,
Inc. and Lucent Technologies Inc., together with a Form of Demand Note in the principal
amount of $3,000,000 payable to Lucent Technologies Inc. attached as Exhibit A; a Form
of Stock Purchase Warrant for Lucent Technologies Inc. for 85,000 shares of Common
Stock of Telscape International, Inc. attached as Exhibit B; and a Security Agreement by
and between Telscape International, Inc., Telscape USA, Inc., MSN Communications,
Inc., TSCP International, Inc. and State Street Bank and Trust Company attached as
Exhibit C. (Incorporated herein by reference to Exhibit 10.31 to the Company's Report
on form 10-Q for the quarter ended June 30, 1999)
10.32 Credit Agreement dated August 27, 1999 by and between Telscape International, Inc.,
Telereunion S.A. de C.V., Telereunion International, S.A. de C.V., Telereunion, Inc.,
Telscape USA, Inc., MSN Communications, Inc., Interlink Communications, Inc., TSCP
International, Inc., Vextro de Mexico S.A. de C.V., Servicios Corporativos, Telscape de
Mexico S.A. de C.V., N.S.I. S.A de C.V., Lan and Wan S.A. de C.V., MS Noticias y
Telecomunicaciones, S.A. de C.V., and Lucent Technologies Inc. (Incorporated herein by
reference to Exhibit 10.1 to the Company's Report on Form 8-K dated September 20,
1999)
10.33 Loan Agreement dated October 22, 1999 by and between Telscape International, Inc. and
Lennox Invest Ltd. Promissory Note dated October 22, 1999 in the principal amount of
1,060,000 payable to Lennox Invest, Ltd., Stock Pledge Agreement dated October 22,
1999, and Warrant Certificate issued to Lennox Invest, Ltd. To purchase 35,714 shares of
Common Stock of Telscape International, Inc. dated October 22, 1999. (Incorporated
herein by reference to Exhibit 10.33 to the Company's Report on form 10-Q for the
quarter ended September 30, 1999)
*10.34 Swap Agreement ("Contrato de Compra-Venta de Fibras") dated December 8, 1999 by
and between Iusatel S.A. de C.V and Telereunion, S.A. de C.V.
*10.35 Commitment Agreement dated August 16, 1999, by and between Telscape International,
Inc. and Comercializadora Lufravic, S.A. de C.V.
*10.36 Fiber Optic Telecommunications Services Exchange Agreement dated May 14, 1999 by
and between Avantel, S.A. de C.V. and Telereunion S.A de C.V.
*21.1 Subsidiaries of the registrant
*23.1 Consent of Independent Public Accountants
*27.1 Financial Data Schedule 1999
<FN>
________________
* Filed herewith
</TABLE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
by and among
POINTE COMMUNICATIONS CORPORATION,
POINTE ACQUISITION, CORP.,
AND
TELSCAPE INTERNATIONAL, INC.
Dated as of December 31, 1999
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this Agreement) is made
as of December 31, 1999, by and among Pointe Communications Corporation, a
Nevada corporation (PointeCom), Pointe Acquisition, Corp., a Nevada corporation
that is a wholly owned subsidiary of Telscape International, Inc. (Newco), and
Telscape International, Inc., a Texas corporation (the Company).
WHEREAS, the respective Boards of Directors of PointeCom, Newco and the Company
(collectively referred to as the Constituent Corporations) deem it advisable and
in the best interests of the Constituent Corporations and their respective
stockholders that Newco merge with and into PointeCom (the Merger); and
WHEREAS, the Boards of Directors of the Constituent Corporations have approved
and adopted this Agreement as a plan of reorganization within the provisions of
Section 368 of the Internal Revenue Code of 1986, as amended (the Code, and the
Treasury Regulations thereunder);
NOW, THEREFORE, in consideration of the premises and of the mutual agreements,
representations, warranties, provisions and covenants contained herein, the
parties hereto, intending to be legally bound, agree as follows:
ARTICLE I. DEFINITIONS
1.1. Definitions. Capitalized terms used in this Agreement shall have the
following meanings:
Acquisition Proposal means with respect to any Person, a proposal or offer
(including, without limitation, any proposal or offer to stockholders of such
Person) with respect to a merger, acquisition, consolidation, recapitalization,
liquidation, tender offer or exchange offer or similar transaction involving, or
any purchase of 25% or more of the consolidated assets of, or any equity
interest representing 25% or more of the outstanding shares of capital stock in,
such Person.
<PAGE>
Affiliate of, or Affiliated with, a specified Person or entity means any entity
directly or indirectly controlling, controlled by or under direct or indirect
common Control with such specified Person and includes, but is not limited to,
(a) any Person who is a director or beneficial owner of at least 5% of such
Persons equity securities, (b) any Person of which such specified Person or any
Affiliate of such specified Person owns at least 10% of such Persons equity
securities or (c) family members of any such Person specified in clause (a) or
(b).
Agreement has the meaning set forth in the first paragraph of this Agreement and
also includes the Schedules and Exhibits hereto.
Balance Sheet Date has the meaning set forth in Section 5.9.
Business Days means Monday through Friday of each calendar week, exclusive of
federal holidays.
Class C Convertible Senior Preferred Stock means the preferred stock to be
issued by the
Company, par value $0.001, upon conversion of the Note, pursuant to the
Certificate of Designation attached hereto as Exhibit A.
Closing has the meaning set forth in Article IV.
Closing Date has the meaning set forth in Article IV.
Code has the meaning set forth in the third paragraph of this Agreement.
Company has the meaning set forth in the first paragraph of this Agreement.
Company Class D Convertible Senior Preferred Stock means the preferred stock
issued by the Company, par value $0.001 having the same rights and preferences
as the PointeCom Class A Preferred Stock.
Company Class E Convertible Senior Preferred Stock means the preferred stock
issued by the Company, par value $0.001 having the same rights and preferences
as the PointeCom Class B Preferred Stock.
Company Common Stock means the common stock of the Company, $0.001 par value,
per share.
Company Permits has the meaning set forth in Section 5.14.
Company Preferred Stock means the Company Class D Convertible Senior Preferred
Stock and the Company Class E Convertible Senior Preferred Stock, collectively.
<PAGE>
Company Third Party means any Person (or group of Persons) other than PointeCom
or its respective Affiliates.
Competitive Business means any business that competes with the business of the
Company as conducted at the Effective Time or the businesses of PointeCom and
the Surviving Corporation as conducted or proposed to be conducted at the
Effective Time.
Constituent Corporations has the meaning set forth in the second paragraph of
this Agreement.
Control (including, with its correlative meanings, controlled by and under
common control with) means possession, directly or indirectly, of power to
direct or cause the direction of management or policies (whether through
ownership of securities or other ownership interests, by contract or otherwise)
of any Person.
Dissenting Shares has the meaning set forth in Section 3.3.
Effective Time has the meaning set forth in Section 2.2.
Encumbrances means all liens, encumbrances, mortgages, pledges, security
interests, conditional sales agreements, charges, options, preemptive rights,
rights of first refusal, reservations, restrictions or other encumbrances or
defects in title.
Employee benefit plan has the meaning set forth in Section 5.20.
Environmental, Health and Safety Laws means any federal, state or local Law now
or hereafter in effect which are binding on any of the parties hereto,
including, without limitation, any judicial or administrative interpretation
thereof, any judicial or administrative order, consent decree or judgment, or
agreement with any Governmental Authority, relating to (a) pollution, exposure
to oil, pollutants, contaminants, hazardous or toxic materials or waste, (b) the
protection, preservation or restoration of the environment, including laws
relating to exposures to, or emissions, discharges, releases or threatened
releases of oil, pollutants, contaminants, hazardous or toxic materials or
wastes into ambient air, surface water, ground water or land surface or
subsurface strata or (c) the manufacture, processing, labeling, distribution,
use, treatment, storage, transport, handling or disposal of oil, pollutants,
contaminants, hazardous or toxic materials or wastes or relating to the
environment, plant and animal life, natural resources or health, safety or
any Hazardous Substance. Environmental, Health and Safety Laws include, without
limitation, (i) the Federal Comprehensive Environmental Response Compensation
and Liability Act of 1980 (CERCLA), 42 U.S.C. 9601 et seq., the Resource
Conservation and Recovery Act, 42 U.S.C. 6901 et seq., the Federal Water
Pollution Control Act, 33 U.S.C. 1251 et seq., the Toxic Substances Control
Act, 15 U.S.C. 2601 et seq., the Clean Air Act, 42 U.S.C. 7401 et seq., the
Safe Drinking Water Act, 42 U.S.C. 300f et seq., the Hazardous Materials
Transportation Act, 49 U.S.C. 5101 et seq., the Atomic Energy Act, 42 U.S.C.
2011 et seq., the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C.
136 et seq., and the Occupational Safety and Health Act, 29 U.S.C. 651 et seq.,
<PAGE>
in each case as amended from time to time, and any other federal, state or local
Laws now or hereafter relating to any of the foregoing, and (ii) any common
law or equitable doctrine (including, without limitation, injunctive relief and
tort doctrines such as negligence, nuisance, trespass and strict liability)
that may impose liability or obligations for injuries or damages due to, or
threatened as a result of, the presence of, effects of or exposure to any
Hazardous Substance.
ERISA has the meaning set forth in Section 5.20.
ERISA Affiliate has the meaning set forth in Section 5.20.
Financial Statements has the meaning set forth in Section 5.9.
GAAP means generally accepted accounting principles as currently applied by the
respective party on a basis consistent with preceding years and throughout the
periods involved.
Governmental Authority means any federal, state, local or foreign government,
political
subdivision or governmental or regulatory authority, agency, board, bureau,
commission, instrumentality or court or quasi-governmental authority.
Hazardous Substances means any substance presently listed, defined, designated
or classified as hazardous, toxic, radioactive or dangerous, or otherwise
regulated, under any Environmental, Health or Safety Law. The term Hazardous
Substances includes, without limitation, any substance to which exposure is
regulated by any Governmental Authority or any Environmental, Health or Safety
Law including, without limitation, any toxic waste, pollutant, contaminant,
hazardous substance, toxic substance, hazardous waste, special waste, industrial
substance or petroleum or any derivative or by-product thereof,
radon, radioactive material, asbestos or asbestos containing material, urea
formaldehyde foam insulation, lead or polychlorinated biphenyls.
Interim Balance Sheet has the meaning set forth in Section 5.9.
Interim Financial Statements has the meaning set forth in Section 5.9.
Law or Laws means any and all federal, state, local or foreign statutes, laws,
ordinances,
proclamations, code, regulations, legal doctrine, published requirements,
orders, decrees, judgments, injunctions and rules of any Governmental Authority,
including, without limitation, those covering environmental, Tax, energy,
safety, health, transportation, bribery, recordkeeping, zoning, discrimination,
antitrust and wage and hour matters, in each case as amended and in effect from
time to time.
Loss or Losses means all liabilities, losses, claims, damages, actions, suits,
proceedings, demands, assessments, adjustments, fees, costs and expenses
(including specifically, but without limitation, reasonable attorneys fees and
costs and expenses of investigation), net of income Tax effects with respect
thereto (including, without limitation, income Tax benefits recognized in
<PAGE>
connection therewith and income Taxes upon any indemnification recovery
thereof).
Material Adverse Effect means, with respect to any Person, any material adverse
effect on the financial condition, business, assets or results of operations of
such person and its subsidiaries, taken as a whole.
Merger Consideration has the meaning set forth in Section 3.1.
Merger Filing has the meaning set forth in Section 2.2.
Merger has the meaning set forth in the second paragraph of this Agreement.
NASDAQ means a national securities market run by the National Association of
Securities Dealers.
Newco has the meaning set forth in the first paragraph of this Agreement.
Newco Common Stock has the meaning set forth in Section 5.6.
Note means the 12% Convertible Promissory Note issued by the Company in an
original principal amount of $10,000,000 in connection with the PointeCom Loan,
a copy of which is attached hereto as Exhibit B.
NRS means the Nevada Revised Statutes, as amended.
1933 Act means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
1934 Act means the Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated thereunder.
Organizational Documents shall mean, with respect to a corporation, the
certificate of incorporation or articles of incorporation and bylaws of such
corporation.
Permitted Encumbrances means (a) any Encumbrances reserved against in the
Interim Balance Sheet, (b) Encumbrances for property or ad valorem Taxes not yet
due and payable or which are being contested in good faith and by appropriate
proceedings if adequate reserves with respect thereto are maintained on the
Company's books in accordance with GAAP, (c) obligations under operating and
capital leases described in Schedule 5.12, and (d) statutory liens or landlords,
carriers, warehousemans, mechanics, suppliers, materialmens, repairmens or other
like Encumbrances arising in the ordinary
course of business.
Person means any natural person, corporation, partnership, proprietorship, other
<PAGE>
business organization, trust, union, association or Governmental Authority,
whether incorporated or unincorporated.
Plan has the meaning set forth in Section 5.20.
PointeCom has the meaning set forth in the first paragraph of this Agreement.
PointeCom Balance Sheet Date has the meaning set forth in Section 6.6.
PointeCom Class A Preferred Stock means the Class A Convertible Senior Preferred
Stock of PointeCom, par value $0.01 per share, issued pursuant to that certain
Certificate of Designations of Pointe Communications Corporation filed with the
Secretary of State of Nevada on May 11, 1999.
PointeCom Class B Preferred Stock means the Class B Convertible Senior Preferred
Stock of PointeCom, par value $0.01 per share, issued pursuant to that certain
Certificate of Designations of Pointe Communications Corporation filed with the
Secretary of State of Nevada on September 7, 1999.
PointeCom Common Stock means PointeCom's common stock, $.00001 par value per
share.
PointeCom ERISA Affiliate has the meaning set forth in Section 6.24.
PointeCom Financial Statements has the meaning set forth in Section 6.6.
PointeCom Interim Balance Sheet has the meaning set forth in Section 6.6.
PointeCom Interim Financial Statements has the meaning set forth in Section 6.6.
PointeCom Loan has the meaning set forth in Section 7.10.
PointeCom Permits has the meaning set forth in Section 6.10.
PointeCom Plan has the meaning set forth in Section 6.24.
PointeCom Preferred Stock means the PointeCom Class A Preferred Stock and the
PointeCom Class B Preferred Stock, collectively.
PointeCom Third Party means any Person (or group of Persons) other than
PointeCom or its respective Affiliates.
PointeCom Year-End Financial Statements has the meaning set forth in Section
6.6.
Qualified Plans has the meaning set forth in Section 5.20.
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Qualified PointeCom Plans has the meaning set forth in Section 6.24.
Registration Rights Agreement means that certain Registration Rights Agreement
attached hereto as Exhibit C.
Registration Statement has the meaning set forth in Section 7.10.
Requisite Stockholder Approval means, with respect to the Company, the
affirmative vote of a majority of the holders of the outstanding shares of
Company Common Stock in favor of (a) approval of the issuance of shares of
Company Common Stock and Company Preferred Stock in connection with the Merger
as provided in this Agreement in accordance with the rules of NASDAQ and (b) an
amendment to the Company's certificate of incorporation to increase the
authorized capital stock of the Company (including designation of the rights and
preferences for Company Class D and E Senior Preferred Stock) in accordance with
the Texas Business Corporation Act; or with respect to PointeCom, the
affirmative vote of a majority of the holders of outstanding shares of PointeCom
capital stock in favor of the adoption of this Agreement in accordance with the
NRS.
SEC means the Securities and Exchange Commission.
Subsidiary means, as to a particular parent business entity, any business entity
of which 50% or more of the indicia of equity rights is at the time directly or
indirectly owned by the parent or by one or more Persons controlled by,
controlling or under common control with the parent.
Surviving Corporation has the meaning set forth in Section 2.1.
Surviving Securities means the warrants, options and other rights of PointeCom
as defined in Section 3.4.
Taxes has the meaning set forth in Section 5.22.
Transaction Documents shall refer to this Agreement and any other agreements and
documents to be executed and delivered pursuant to this Agreement by a party
hereto.
Warrant Agreement means that certain Warrant Agreement attached hereto as
Exhibit D.
Warrants shall mean the warrants of the Company to be issued pursuant to the
Warrant Agreement.
Year-End Financial Statements has the meaning set forth in Section 5.9.
Year 2000 Compliant has the meaning set forth in Section 5.28.
<PAGE>
1.2. Interpretation. For all purposes of this Agreement, except as otherwise
expressly provided or unless the context otherwise requires:
(a) the terms defined in Section 1.1 and elsewhere in this Agreement include the
plural as well as the singular;
(b) all accounting terms not otherwise defined herein have the meanings ascribed
to them in accordance with GAAP;
(c) the words herein, hereof, and hereunder and other words of similar import
refer to this
Agreement as a whole and not to any particular Article, Section or other
subdivision;
(d) as used herein, the words knowledge or known shall, (i) with respect to the
Company or Newco, mean the actual knowledge of the corporate executive officers
of the Company or Newco, respectively, in each case after such individuals have
made due and diligent inquiry as to the matters which are the subject of the
statements which are known by the Company or Newco, respectively, or made to the
knowledge of the Company or Newco, respectively, and (ii) with respect to
PointeCom, mean the actual knowledge of the corporate executive officers of
PointeCom, in each case after such individuals have made due and diligent
inquiry as to the matters which are the subject of the statements which are
known by PointeCom or made to the knowledge of PointeCom; and
(e) disclosure of any matter in a Schedule shall not be deemed an admission that
such matter is material.
ARTICLE II. THE MERGER AND THE SURVIVING CORPORATION
2.1. The Merger. Upon the terms and subject to the conditions of this
Agreement, at the Effective Time, Newco shall be merged with and into PointeCom
and the separate existence of Newco shall thereupon cease in accordance with the
NRS. PointeCom shall be the surviving corporation in the Merger (hereinafter
sometimes referred to as the Surviving Corporation).
2.2. Effective Time of the Merger. The Merger shall become effective (the
Effective Time) at 1:59 p.m., Nevada time, on June 30, 2000, or such other time
and date mutually agreeable to the parties hereto and stated in a certificate of
merger, in a form mutually acceptable to PointeCom and the Company, filed with
the Secretary of State of the State of Nevada in accordance with the NRS (the
Merger Filing). The Merger Filing shall be made simultaneously with or as soon
as practicable after the Closing. The Surviving Corporation may, at any time
after the Effective Time, take any action (including executing and delivering
any document) in the name and on behalf of the Company, Newco or PointeCom in
order to carry out and effectuate the transactions contemplated by this
Agreement.
2.3. Certificate of Incorporation, Bylaws and Board of Directors of Surviving
Corporation.
<PAGE>
As a result of the Merger and at the Effective Time:
(a) The Certificate of Incorporation of PointeCom in effect on the date hereof,
shall become the Certificate of Incorporation of the Surviving Corporation.
After the Effective Time, the Certificate of Incorporation of the Surviving
Corporation may be amended in accordance with its terms and as provided in the
NRS.
(b) The Bylaws of PointeCom in effect on the date hereof, shall become the
Bylaws of the Surviving Corporation, and thereafter may be amended in accordance
with their terms and as provided by the Certificate of Incorporation of the
Surviving Corporation and the NRS.
(c) Upon consummation of the Merger, the Board of Directors of the Surviving
Corporation shall consist of nine members, of which six members shall be named
by PointeCom and three members shall be named by the Company and such
individuals shall serve in such positions until their respective successors have
been duly elected or appointed and qualified or until their earlier death,
resignation or removal in accordance with the Surviving Corporations Certificate
of Incorporation and Bylaws. From and after the Effective Time, the Surviving
Corporation shall possess all rights, powers, privileges and franchises and be
subject to all of the obligations, liabilities, restrictions and disabilities of
PointeCom and Newco, all as provided under the NRS.
ARTICLE III. CONSIDERATION
3.1. Conversion of Shares.
At the Effective Time, by virtue of the Merger, and without any action on the
part of any holder of any capital stock of PointeCom, each share of PointeCom
Common Stock issued and outstanding immediately prior to the Effective Time
shall be converted into the right to receive 0.215054 of a share of Company
Common Stock (the Exchange Ratio) and all such shares of PointeCom Common Stock
shall no longer be outstanding, shall be canceled and shall cease to exist, and
each holder of any such shares of PointeCom Common Stock shall thereafter cease
to have any rights with respect to such shares of PointeCom Common Stock except
the right to receive 0.215054 shares of Company Common Stock for each such share
of PointeCom Common Stock and unpaid dividends and distributions, if any, to
which the holder of such shares of PointeCom Common Stock is entitled at the
Effective Time; each share of PointeCom Class A Preferred Stock issued and
outstanding immediately prior to the Effective Time shall be converted into the
right to receive one share of Company Class D Convertible Senior Preferred Stock
and all such shares of PointeCom Class A Preferred Stock shall no longer be
outstanding, shall be canceled and shall cease to exist, and each holder of any
such shares of PointeCom Class A Preferred Stock shall thereafter cease to have
any rights with respect to such shares of PointeCom Class A Preferred Stock
except the right to receive one share of Company Class D Convertible Senior
Preferred Stock for each such share of PointeCom Class A Preferred Stock (the
terms of which shall be in all material respects the same as the PointeCom Class
<PAGE>
A Preferred Stock, except that Company Class A Convertible Senior Preferred
Stock shall be convertible into such number of shares of Company Common Stock as
would have been issued to the holders of the PointeCom Class A Preferred Stock
if such holders had converted the PointeCom Class A Preferred Stock into
PointeCom Common Stock prior to the Effective Time) and unpaid dividends and
distributions, if any, to which the holder of such shares of PointeCom Class A
Preferred Stock is entitled at the Effective Time; and each share of PointeCom
Class B Preferred Stock issued and outstanding immediately prior to the
Effective Time shall be converted into the right to receive one share of Company
Class E Convertible Senior Preferred Stock and all such shares of PointeCom
Class B Preferred Stock shall no longer be outstanding, shall be canceled and
shall cease to exist, and each holder of any such shares of PointeCom Class B
Preferred Stock shall thereafter cease to have any rights with respect to such
shares of PointeCom Class B Preferred Stock except the right to receive one
share of Company Class E Convertible Senior Preferred Stock for each such share
of PointeCom Class B Preferred Stock (the terms of which shall be in all
material respects the same as the PointeCom Class B Preferred Stock, except that
Company Class E Convertible Senior Preferred Stock shall be convertible into
such number of shares of Company Common Stock as would have been issued to the
holders of the PointeCom Class B Preferred Stock if such holders had converted
the PointeCom Class B Preferred Stock into PointeCom Common Stock prior to the
Effective Time) and unpaid dividends and distributions, if any, to which the
holder of such shares of PointeCom Class B Preferred Stock is entitled at the
Effective Time. The Company capital stock to be issued as described above in
exchange for the PointeCom capital stock shall be referred to herein as the
Merger Consideration. Except with respect to fractional shares (as provided in
Section 3.2, below) and dissenting Shares (as provided in Section 3.3, below),
PointeCom shareholders will receive only voting shares of the Company as
consideration for the Merger.
3.2. Fractional Shares. No scrip or fractional shares of Company Common Stock
shall be issued in the Merger. All fractional shares of Company Common Stock to
which a holder of PointeCom Common Stock immediately prior to the Effective Date
would otherwise be entitled at the Effective Date shall be aggregated. If a
fractional share results from such aggregation, such stockholder shall be
entitled, after the later of (a) the Effective Date or (b) the surrender of such
stockholders certificate representing his PointeCom Common Stock that represent
such shares of PointeCom Common Stock, to receive from the Company an amount in
cash in lieu of such fractional share, based on the average trading price for
Company Common Stock during the twenty trading days that end on the last trading
day prior to the Closing Date. The Company will make available the cash
necessary for the purpose of paying cash for fractional shares.
The payment of cash in lieu of fractional shares of Company Common Stock is
solely for the purpose of avoiding the expense and inconvenience to the Company
of issuing fractional shares and does not represent separately bargained-for
consideration. The total cash consideration that will be paid in the Merger to
the PointeCom stockholders instead of issuing fractional shares of Company
Common Stock will not exceed one percent (1%) of the total consideration that
will be issued in the Merger to the PointeCom stockholders in exchange for their
<PAGE>
shares of PointeCom capital stock. The fractional shares interests of each
PointeCom stockholder will be aggregated, and no PointeCom stockholder will
receive cash in an amount greater to or greater than the value of one full share
of Company Common Stock.
3.3. Dissenting Shares. To the extent that appraisal rights are available
under the NRS, shares of PointeCom Common Stock that are issued and outstanding
immediately prior to the Effective Date and that have not been voted for
adoption of the Merger and with respect of which appraisal rights have been
properly demanded in accordance with the applicable provisions of the NRS (the
Dissenting Shares) shall not be converted into the right to receive the Merger
Consideration at or after the Effective Date unless and until the holder of such
shares withdraws his demand for such appraisal (in accordance with the
applicable provisions of the NRS) or becomes ineligible for such appraisal. If
a holder of Dissenting Shares withdraws his demand for such appraisal (in
accordance with the applicable provisions of the NRS) or becomes ineligible for
such appraisal, then, as of the Effective Date or the occurrence of such event,
whichever occurs later, such holders Dissenting Shares shall cease to be
Dissenting Shares and shall be converted into and represent the right to receive
the Merger Consideration. If any holder of PointeCom Common Stock shall assert
the right to be paid the fair value of such PointeCom Common Stock as described
above, PointeCom shall give the Company notice thereof and the Company shall
have the right to participate in all negotiations and proceedings with respect
to any such demands. PointeCom shall not, except with the prior written consent
of the Company, which shall not be unreasonably withheld, voluntarily make any
payment with respect to, or settle or offer to settle, any such demand for
payment. After the Effective Date, the Company will cause the Surviving
Corporation to pay its statutory obligations to holders of Dissenting Shares;
provided, however, that PointeCom will be solely responsible for such payments
to the holders of Dissenting Shares and the Company will not contribute funds
nor loan funds to PointeCom in connection with such
payments.
3.4. Other PointeCom Securities. To the extent of any outstanding warrants,
options or other conversion or purchase rights (the Surviving Securities) that
have been issued by PointeCom or its Affiliates prior to the Effective Time to
purchase PointeCom Common Stock, the Company shall reserve shares of Company
Common Stock for future issuance upon exercise of the Surviving Securities. At
the Effective Time, by virtue of the Merger, and without any action on the part
of any holder of a Surviving Security, each Surviving Security (a) may be
exercised only for Company Common Stock notwithstanding any contrary agreement
or document relating to the Surviving Securities or pursuant to which any
Surviving Securities were issued, (b) each such Surviving Security shall at the
Effective Time become a right to acquire a number of shares of Company Common
Stock equal to the product arrived at by multiplying the Exchange Ratio by the
number of shares of PointeCom Common Stock subject to such right immediately
prior to the Effective Time and upon exercise, conversion or purchase of the
Surviving Securities cash shall be paid in lieu of fractional shares of Company
Common Stock in an amount based on the average trading price for Company Common
Stock during the twenty trading days that end on the last trading day prior to
the date of exercise, conversion or purchase thereof less the exercise price
<PAGE>
thereof, and (c) the exercise price or purchase price per share of Company
Common Stock for which each such right (as exchanged) is exercisable shall be
the amount (rounded up the next whole cent) arrived at by dividing the exercise
price or purchase price per share of PointeCom Common Stock at which such
Surviving Security is exercisable immediately prior to the Effective Time by the
Exchange Ratio. At the Closing, each holder of a Surviving Security shall
furnish to the Company the certificates or other documents representing his
Surviving Security, duly endorsed in blank (or affidavits of lost certificates
and indemnification in lieu thereof) and the Company shall deliver to each
holder of a Surviving Security a Company warrant, option or right with the same
terms and conditions as such Surviving Security (except that the number of
shares of Company Common Stock issuable upon exercise thereof shall be modified
as set forth in this Section 3.4).
3.5. Newco Shares. At the Effective Time, by virtue of the Merger and
without any action on the part of the Company as the sole holder of the capital
stock of Newco, each issued and outstanding share of common stock, par value
$0.01 per share, of Newco shall be converted in one share of common stock,
$0.00001 par value, of the Surviving Corporation.
3.6. Delivery of Merger Consideration. At the Closing, (a) each stockholder
of the PointeCom shall furnish to the Company the certificates representing his
PointeCom Common Stock and PointeCom Preferred Stock, duly endorsed in blank by
such stockholder or accompanied by duly executed blank stock powers (or
affidavits of lost certificates and indemnification in lieu thereof), and (b)
the Company shall deliver to each such stockholder a copy of an irrevocable
instruction letter to the Company's transfer agent directing that certificates
representing the shares of Company Common Stock and Company Preferred Stock be
delivered to each such stockholder pursuant to Section 3.1, other than as
provided in Sections 3.2 and 3.3 hereof. PointeCom agrees promptly to use
commercially reasonable efforts to cure any deficiencies with respect to the
endorsement of the certificates or other documents of conveyance with respect to
the PointeCom Common Stock and PointeCom Preferred Stock or with respect to the
stock powers accompanying such stock.
3.7. No Effect on Capital Stock of Company. Each share of the outstanding
capital stock of the Company issued and outstanding immediately prior to the
Effective Time shall remain outstanding and shall be unchanged after the Merger.
3.8. Closing of Transfer Records. After the Effective Time, no transfer of
shares of PointeCom Common Stock, or PointeCom Preferred Stock outstanding prior
to the Effective Time shall be made on the stock transfer books of the Surviving
Corporation. If, after the Effective Time, certificates representing such
shares are presented for transfer to the Exchange Agent, they shall be canceled
and exchanged for certificates representing shares of Company Common Stock,
Company Class D Convertible Senior Preferred Stock or Company Class E
Convertible Senior Preferred Stock, as the case may be, cash in lieu of
<PAGE>
fractional shares, if any, and unpaid dividends and distributions, if any, as
provided in Section 3.1.
3.9. Effect on Treasury or Unissued Shares of PointeCom Capital Stock. As of
the Effective Time, by virtue of the Merger and without any action on the part
of the holder of any of the issued and outstanding shares of Company Common
Stock or PointeCom Common Stock, each unissued or treasury share of PointeCom
Common Stock, PointeCom Class A Preferred Stock and PointeCom Class B Preferred
Stock shall automatically be cancelled and retired and shall cease to exist, and
no consideration shall be delivered in exchange therefor.
3.10. Rule 16b-3. The Company and PointeCom shall take all steps as may be
required to cause the consummation of the transactions contemplated by this
Article III and any other disposition of PointeCom equity securities (including
derivative securities) or acquisitions of Company equity securities (including
derivative securities) in connection with this Agreement by each individual who
(x) is a director or officer of PointeCom or (y) at the Effective Time, will
become a director or officer of the Company, to be exempt under Rule 16b-3
promulgated under the 1934 Act, such steps to be taken in accordance with the
No-Action Letter dated January 12, 1999, issued by the SEC to Skadden, Arps,
Slate, Meagher & Flom LLP.
ARTICLE IV. CLOSING
The consummation of the Merger and delivery of the consideration described in
Section 3.6 hereof and the other transactions contemplated by this Agreement
(the Closing) shall take place at the offices of Gardere & Wynne, 1000
Louisiana, Suite 3400, Houston, Texas 77002, not later than the third business
day after the date all conditions in Article VIII have been satisfied or waived
in writing, which Closing shall not be later than June 30, 2000, or at such
other location, time and date as PointeCom and the Company may mutually
agree, which date is herein referred to as the Closing Date.
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND NEWCO
A. The Company, on the one hand, and Newco, on the other hand, represent and
warrant to PointeCom as follows:
5.1. Due Organization and Qualification. Each of the Company and Newco is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Texas and the NRS, respectively, and each has all corporate
power required to carry on its business as now conducted. Except as set forth
in Schedule 5.1, each of the Company and Newco is qualified to do business as a
foreign corporation in each jurisdiction where the character of the property
owned or leased by it or the nature of its activities makes such qualification
necessary, except for those jurisdictions where the failure to be so qualified
would not have a Material Adverse Effect on the Company or Newco. Each of the
Company and Newco has the requisite corporate power and corporate authority to
<PAGE>
own, lease and operate its assets and properties and to carry on its own
business as such business is currently being conducted. Correct and complete
copies of all stock records and minute books of the Company and Newco have been
made available to PointeCom.
5.2. Authorization; Non-Contravention; Approvals.
(a) Each of the Company and Newco has the corporate power and corporate
authority to enter into each of the Transaction Documents to which each is a
party, and, subject to obtaining the hereinafter described approvals, to
consummate the transactions contemplated hereby, including issuance of the
Merger Consideration. The execution, delivery and performance by the Company
and Newco of each of the Transaction Documents to which it is party is subject
to the Requisite Stockholder Approval of the Company. Other than such
stockholder approval, no additional corporate proceedings on the part of the
Company or Newco are necessary to authorize the execution and delivery of each
of the Transaction Documents to which it is a party and the consummation of the
transactions contemplated hereby. Subject to obtaining the foregoing
approvals, each of the Transaction Documents to which it is a party has been
duly and validly executed and delivered by the Company and Newco and (assuming
the due authorization, execution and delivery by PointeCom, and that each
Transaction Document to which it is a party constitutes a valid and binding
agreement of PointeCom) constitutes valid and binding agreements of the Company
and Newco in accordance with its terms, except as the same may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws
now or hereafter in effect, affecting the enforcement of creditors rights
generally and general equitable principles regardless of whether such
enforceability is considered in a proceeding at law or in equity.
(b) Subject to obtaining the foregoing approvals, the execution and delivery by
each of the Company and Newco of each of the Transaction Documents to which it
is a party does not, and the consummation by the Company and Newco of the
transactions contemplated hereby will not (i) violate or result in a breach of
any provision of the Certificate of Incorporation or Bylaws of the Company or
Newco, (ii) assuming compliance with matters referred to in paragraph (c) of
this section, violate or result in a breach of any Laws applicable to the
Company or Newco or the properties or assets of either or (iii) violate or
result in a breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
or result in the termination of, or accelerate the performance required by, or
result in a right of termination or acceleration under, or result in the
creation of any Encumbrance upon any of the properties or assets of the Company
or Newco under any of the terms, conditions or provisions of, except as set
forth in Schedule 5.2, any note, bond, mortgage, indenture, deed of trust,
license, franchise, permit, concession, lease or other instrument, obligation or
agreement of any kind to which the Company or Newco is now a party or by which
the Company or Newco or any of the properties or assets of either may be bound
or affected, except in the case of clauses (ii) and (iii), for any such
violation or breach that would not have a Material Adverse Effect on the Company
or Newco.
<PAGE>
(c) Except for obtaining the foregoing approvals, the Merger Filing and such
filings as may be required under federal or state securities Laws, no
declaration, filing or registration with, or notice to, or authorization,
consent or approval of, any Governmental Authority or third party is necessary
for the execution and delivery of each of the Transaction Documents to which it
is a party by the Company and Newco or the consummation by the Company and Newco
of the transactions contemplated hereby. Except as set forth in Schedule 5.2,
none of the agreements, licenses or permits to which the Company or Newco is a
party requires notice to, or the consent or approval of any third party for the
execution and delivery of each of the Transaction Documents to which it is a
party by each of the Company and Newco and the consummation of the transactions
contemplated hereby.
5.3. Company Common Stock. The shares of Company Common Stock, and Company
Preferred Stock to be issued to the stockholders of PointeCom pursuant to the
Merger (including upon exercise of the Surviving Securities), when authorized
and issued in accordance with the terms of this Agreement, will be validly
issued, fully paid and nonassessable and not subject to any preemptive rights.
5.4. Tax-Free Reorganization Representations.
(a) The fair market value of the Company capital stock received by each
PointeCom shareholder pursuant to this Agreement will be approximately equal to
the fair market value of the PointeCom capital stock surrendered in the
exchange.
(b) The Company has no plan or intention to cause PointeCom to issue additional
shares of PointeCom stock that would result in the Company losing control of
PointeCom within the meaning of Section 368 (c) of the Code.
(c) The Company has no plan or intention to liquidate PointeCom; to merge
PointeCom into another corporation (except as contemplated by this Agreement);
to cause PointeCom to sell or otherwise dispose of any of its assets, except for
dispositions made in the ordinary course of business; or to sell or otherwise
dispose of any of the stock acquired in the transaction, except for transfers
described in Section 368 (a)(2)(C) of the Code.
(d) The Company has no plan or intention to reacquire any of its stock issued in
the Merger.
(e) The Company, PointeCom, and the shareholders of PointeCom will pay their
respective expenses, if any, incurred in connection with the transaction.
(f) The Company will acquire PointeCom capital stock solely in exchange for
Company voting stock. (For purposes of this representation, PointeCom capital
stock redeemed for cash or other property furnished by the Company will be
considered as acquired by the Company.) Further, no liabilities of PointeCom or
the PointeCom shareholders will be assumed by the Company, nor will any of the
<PAGE>
PointeCom capital stock that is exchanged pursuant to this Agreement be subject
to any liabilities.
(g) The Company does not own, directly or indirectly, nor has it owned during
the past five years, directly or indirectly, any stock of PointeCom.
(h) Following the Merger, the Company shall cause PointeCom to continue its
historic business or use a significant portion of its historic business assets
in a business.
(i) Neither the Company nor Newco are investment companies as defined in Section
368 (a)(2)(F)(iii) and (iv) of the Code.
(j) The Company shall cause PointeCom to pay any dissenting shareholders the
value of their stock out of PointeCom funds, no funds will be supplied for that
purpose, directly or indirectly, by the Company, nor will the Company directly
or indirectly reimburse PointeCom for any payments to dissenters.
(k) There is no indebtedness between the Company and PointeCom that will be
settled at a discount.
(l) The holders of PointeCom Common Stock and PointeCom Preferred Stock will
receive voting shares of Company Common Stock and voting shares of Company
Preferred Stock having a fair market value equal to at least 50% of the value of
their PointeCom capital stock at the Effective Time. Under the terms of the
Merger, the stockholders of PointeCom will receive solely Company Common Stock
and Company Preferred Stock in exchange for such PointeCom capital stock.
However, redemptions or acquisitions of PointeCom capital stock by the Company
or PointeCom or any related party and extraordinary distributions (i.e.,
distributions with respect to stock other that regular, normal dividends), prior
to and in connection with the Merger will be taken into account for purposes of
this representation. Neither the Company nor a related party has a plan or
intention to reacquire or acquire any of the Company Common Stock or Company
Preferred Stock issued to PointeCom stockholders in the Merger. For purposes of
this representation, a related party includes any corporation (i) that is a
member of any affiliated group of which PointeCom or the Company is a member, as
defined in Section 1504 (determined without regard to Section 1504(b)), or (ii)
a corporation in which the Company owns, directly or indirectly, stock
possessing at least fifty percent (50%) of the total combined voting power of
all classes of stock entitled to vote, or at least fifty percent (50%) of the
total value of shares of all classes of stock (determined by taking into account
the constructive stock ownership rules of Section 318(a) of the Code as modified
by Section 304(c)). For purposes of the foregoing, (i) a corporation will be a
related party if either of the relationships described above exists immediately
before the Merger, immediately after the Merger, or is created in connection
with the Merger, and (ii) a related party will be considered as acquiring its
proportionate share of any Company Common Stock or Company Preferred Stock
acquired by a partnership in which it is a partner.
<PAGE>
(m) The payment of cash in lieu of fractional shares of Company Common Stock is
solely for the purpose of avoiding the expense and inconvenience to the Company
of issuing fractional shares and does not represent separately bargained-for
consideration. The total cash consideration that will be paid in the Merger to
the PointeCom stockholders instead of issuing fractional shares of Company
Common Stock will not exceed one percent (1%) of the total consideration that
will be issued in the Merger to the PointeCom stockholders in exchange for their
shares of PointeCom capital stock. The fractional shares interests of each
PointeCom stockholder will be aggregated, and no PointeCom stockholder will
receive cash in an amount greater to or greater than the value of one full share
of Company Common Stock.
(n) None of the compensation received by any shareholder-employee of PointeCom
will be separate consideration for, or allocable to, any of their shares of
PointeCom capital stock; none of the shares of Company Common Stock or Company
Preferred Stock received by any shareholder employee will be separate
consideration for, or allocable to, any employment agreement; and the
compensation paid to any shareholder-employee will be for services actually
rendered and will be commensurate with amounts paid to third parties bargaining
at arms length for similar services.
(o) Company is not under the jurisdiction of a court in a Title 11 or similar
case within the meaning of Section 368(a)(3)(A) of the Code.
5.5. SEC Filings; Disclosure. The Company has filed with the SEC all material
forms, statements, reports and documents required to be filed by it prior to the
date hereof under each of the 1933 Act, the 1934 Act, and the respective rules
and regulations thereunder, (a) all of which, as amended, if applicable,
complied when filed in all material respects with all applicable requirements of
the appropriate Act and the rules and regulations thereunder, and (b) none of
which, as amended, if applicable, contains any untrue statement of material fact
or omits to state a material fact required to be stated therein or necessary in
order to make the statements made therein, in the light of the circumstances
under which they were made and at the time they were made, not misleading. The
financial statements of the Company included in the Company's annual report on
Form 10-KSB for the fiscal year ended December 31, 1998 and Form 10-Q for the
fiscal quarter ended September 30, 1999, comply as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with GAAP, applied on a consistent basis during the period covered and fairly
represent, in all material respects, the financial position of the Company as of
the date thereof and the results of operations and changes in financial position
for the period then ended. The Company is eligible to file a registration
statement on Form S-4 covering the Merger Consideration to be issued pursuant to
this Agreement.
5.6. Interim Operations of Newco. Newco was formed solely for the purpose of
engaging in the transactions contemplated by this Agreement, has engaged, and
will engage, in no other business activities and has, and will continue to have,
no debt outstanding. The authorized capital stock of Newco consists solely of
10,000 shares of common stock, par value $0.01 per share (Newco Common Stock),
<PAGE>
of which 100 shares are issued and outstanding. All of the issued and
outstanding shares of Newco Common Stock have been duly authorized and validly
issued, are fully paid and nonassessable. All of the issued and outstanding
shares of Newco Common Stock are owned by the Company, and the Company has not
entered into any agreements or arrangements to sell or transfer such stock to a
third party.
5.7. Capitalization. The authorized, issued and outstanding capital stock of
the Company is set forth on Schedule 5.7. All of the issued and outstanding
shares of Company Common Stock have been duly authorized and validly issued, are
fully paid and nonassessable, and were offered, issued, sold and delivered by
the Company in compliance with all applicable Laws, including, without
limitation, those Laws concerning the issuance of securities. None of such
shares were issued in violation of the preemptive rights of any past or present
stockholders. Except as set forth in Schedule 5.7, no subscription, option,
warrant, call, convertible or exchangeable security, other conversion right or
commitment of any kind exists which obligates the Company to issue any of its
capital stock.
5.8. Subsidiaries. Except as set forth in Schedule 5.8, the Company owns, of
record or beneficially, or controls, directly or indirectly, no capital stock,
securities convertible into or exchangeable for capital stock or any other
equity interest in any corporation, association or other business entity.
Except as set forth in Schedule 5.8, the Company is not, directly or indirectly,
a participant in any joint venture, limited liability company, partnership or
other noncorporate entity.
5.9. Financial Statements.
(a) The Company has delivered to PointeCom complete copies of the following
financial statements:
(i) the audited balance sheets of the Company as of December 31, 1996, 1997 and
1998 and the related audited statements of income, stockholders equity and cash
flows for the three annual periods ended December 31, 1998, together with the
related notes, schedules and audit report of the Company's independent
accountants (such balance sheets and the related statements of income and the
related notes and schedules are referred to herein as the Year-End Financial
Statements); and;
(ii) the unaudited balance sheet (the Interim Balance Sheet) of the Company as
of September 30, 1999 (the Balance Sheet Date) and the related unaudited
statement of operations for the interim period ended on the Balance Sheet Date,
together with the related notes and schedules (such balance sheets, the related
statements of income and the related notes and schedules are referred to herein
as the Interim Financial Statements). The Year-End Financial Statements and the
Interim Financial Statements (collectively, the Financial Statements) are
attached as Schedule 5.9 to this Agreement.
<PAGE>
(b) Except as set forth in Schedule 5.9, the Financial Statements have been or
will be prepared from the books and records of the Company in conformity with
GAAP (except for the absence of notes in the Interim Financial Statements and
that the Interim Financial Statements are subject to year-end audit adjustments,
none of which are expected to be material) and will present fairly in all
material respects the financial position and results of operations of the
Company as of the dates of such statements and for the periods covered thereby.
The books of account of the Company have been kept accurately in all material
respects in the ordinary course of business, the transactions entered therein
represent bona fide transactions, and the revenues, expenses, assets and
liabilities of the Company have been properly recorded therein in all material
respects.
5.10. Liabilities and Obligations. Except as set forth in Schedule 5.10, as of
the Balance Sheet Date the Company did not have, nor has it incurred since that
date, any liabilities or obligations (whether absolute, accrued, contingent or
otherwise) of any nature which would have a Material Adverse Effect on the
Company, except (a) liabilities, obligations or contingencies (i) that are
accrued or reserved against in the Financial Statements or reflected in the
notes thereto or (ii) that were incurred after the Balance Sheet Date and were
incurred in the ordinary course of business, consistent with past practices, and
(b) liabilities and obligations that are of a nature not required to be
reflected in the Financial Statements prepared in accordance with GAAP and that
were incurred in the normal course of business, which material liabilities and
obligations are described in Schedule 5.10 or another Schedule hereto. Schedule
5.10 sets forth the Company's outstanding principal amount of indebtedness for
borrowed money (including overdrafts) as of November 30, 1999.
5.11. Accounts and Notes Receivable. Schedule 5.11 sets forth an accurate list
of the accounts and notes receivable of the Company as of the Balance Sheet
Date. Receivables from and advances to employees are separately identified in
Schedule 5.11. Schedule 5.11 also sets forth an accurate aging of all accounts
and notes receivable as of the Balance Sheet Date, showing amounts due in 30-day
aging categories. The trade and other accounts receivable of the Company,
including without limitation those classified as current assets on the Interim
Balance Sheet, are bona fide receivables, were acquired in the ordinary course
of business, are stated in accordance with GAAP and are collectible in the
amounts shown on Schedule 5.11, net of reserves reflected in the Interim
Financial Statements with respect to the accounts receivable as of the Balance
Sheet Date, and net of reserves reflected in the books and records of the
Company (consistent with the methods used in the Interim Financial Statements)
with respect to receivables of the Company after the Balance Sheet Date.
5.12. Assets.
(a) Schedule 5.12 sets forth an accurate list of all real and personal property
included in property and equipment on the Interim Balance Sheet and all other
tangible assets of the Company with a book value in excess of $10,000 acquired
since the Balance Sheet Date. The Company shall make available to PointeCom
true, complete and correct copies of leases for significant equipment and for
all real property leased by the Company. Schedule 5.12 indicates which assets
<PAGE>
used in the operation of the businesses of the Company are currently owned by
Affiliates of the Company. Except as specifically identified in Schedule 5.12,
all of the material tangible assets, vehicles and other significant machinery
and equipment of the Company listed in Schedule 5.12 are in sufficient condition
for the conduct of the Company's business. Except as specifically described in
Schedule 5.12, all material fixed assets used by the Company in its business are
either owned by the Company or leased under agreements identified in Schedule
5.12. All material leases set forth in Schedule 5.12 are in full force and
effect and constitute valid and binding agreements of the Company or Newco as
applicable, and to the knowledge of the Company, the other parties thereto in
accordance with their respective terms. Schedule 5.12 contains true, complete
and correct copies of all title reports and title insurance policies received or
owned by the Company.
(b) The Company has good and marketable title to, or valid leasehold interests
in, the tangible and intangible personal property owned by it and used in its
business, including the properties identified in Schedule 5.12 as owned real
property, free and clear of all Encumbrances other than Permitted Encumbrances
and those set forth in Schedule 5.12.
(c) Except as specifically described in Schedule 5.12, the tangible and
intangible assets owned or leased by the Company include all the material assets
used in the operation of the business of the Company as conducted at the Interim
Balance Sheet Date, except for dispositions of such assets since such date in
the ordinary course of business, consistent with past practices.
5.13. Material Customers and Contracts.
(a) Schedule 5.13 sets forth an accurate list of (i) all customers representing
10% or more of the Company's revenues for the fiscal year ended December 31,
1998 or the interim period ended on the Balance Sheet Date (the Material
Customers), and (ii) all material executory contracts, warranties, commitments
and similar agreements to which the Company is currently a party or by which it
or any of its properties is bound, involving, (A) customer contracts in excess
of $100,000, including, without limitation, consignment contracts, (B) contracts
with any labor organizations, (C) leases providing for annual rental payments in
excess of $100,000, (D) loan agreements, (E) pledge and security agreements, (F)
indemnity or guaranty agreements or obligations , (G) bonds, (H) notes, (I)
mortgages, (J) joint venture or partnership agreements, (K) options to purchase
real or personal property, and (L) agreements relating to the purchase or sale
by the Company of assets (other than oral agreements relating to sales of
inventory or services in the ordinary course of business, consistent with past
practices) or securities for more than $100,000, individually. Prior to the
date hereof, the Company has made available to PointeCom complete and correct
copies of all such agreements.
(b) Except to the extent set forth in Schedule 5.13, since the Balance Sheet
Date, (i) no Material Customer has canceled or substantially reduced or, to the
knowledge of the Company, intends to cancel or substantially reduce its
purchases of the Company's products or services; and (ii) the Company is in
compliance with all material commitments and obligations pertaining to it under
<PAGE>
such agreements and is not in material default under any of the agreements
described in subsection (a), no notice of default has been received by the
Company, and to the knowledge of the Company, there is no event which, with
notice or the passage of time or both, would result in a default under any of
the agreements described in subsection (a), in any case where such non
compliance or default would have a Material Adverse Effect on the Company.
(c) Except to the extent set forth in Schedule 5.13, the Company is not a party
to any governmental contracts subject to price redetermination or renegotiation.
Except to the extent set forth in Schedule 5.13, the Company is not required to
provide any bonding or other financial security arrangements in any amount in
connection with any transactions with any of its customers or suppliers, the
failure of which would have a Material Adverse Effect on the Company.
5.14. Permits. Except as set forth on Schedule 5.14, the Company has all
franchises, permits, licenses and any other governmental authority necessary for
the conduct of its business as now being conducted, the lack of which would have
a Material Adverse Effect (the "Company Permits"). The Company Permits are
valid, and the Company has not received any written notice that any Governmental
Authority intends to cancel, terminate or not renew any such Permit. The
Company Permits are all the permits that are required by Law for the operation
of the business of the Company as conducted at the Balance Sheet Date
and the ownership of the assets of the Company, except such Company Permits,
which the failure to possess would not have a Material Adverse Effect on the
Company. The Company has conducted and is conducting its business in substantial
compliance with the Company Permits and is not in violation of any of the
foregoing, except for any violations that individually or in the aggregate do
not have a Material Adverse Effect on the Company. Except as specifically
provided in Schedule 5.14, the transactions contemplated by this Agreement will
not result in a default under or a breach or violation of, or adversely affect
the rights and benefits afforded to the Company by, any Company Permits except
for breaches or violations that would not have a Material Adverse Effect on the
Company.
5.15. Environmental Matters. Except as set forth in Schedule 5.15 and except
for such matters as would not have a Material Adverse Effect on the Company,
(a) the Company has complied with and is in compliance, in all material
respects, with all Environmental, Health and Safety Laws, including, without
limitation, Environmental, Health and Safety Laws relating to air, water, land
and the generation, storage, use, handling, transportation, treatment or
disposal of Hazardous Substances; (b) the Company has obtained and complied, in
all material respects, with all necessary permits and other approvals necessary
to treat, transport, store, dispose of and otherwise handle Hazardous Substances
and has reported, to the extent required by all Environmental, Health and Safety
Laws, all past and present sites owned or operated by the Company where
Hazardous Substances have been treated, stored, disposed of or otherwise
handled; (c) to the Company's knowledge, there have been no releases or threats
of releases (as defined in any Environmental, Health and Safety Laws) at, from,
in or on any property owned or operated by the Company; (d) to the Company's
knowledge, there is no on-site or off-site location to which the Company has
<PAGE>
transported or disposed of Hazardous Substances or arranged for the
transportation or disposal of Hazardous Substances which is the subject of any
federal, state, local or foreign enforcement action or any other investigation
which could lead to any claim against the Surviving Corporation, PointeCom or
Newco for any clean-up cost, remedial work, damage to natural resources or
personal injury, including, but not limited to, any claim under (i) the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, (ii) the Resource Conservation and Recovery Act, (iii) the Hazardous
Materials Transportation Act, or (iv) comparable state and local statutes and
regulations; and (e) to the Company's knowledge, the Company has no contingent
liability in connection with any release or disposal of any Hazardous Substance
into the environment. To the Company's knowledge, none of the past or present
sites owned or operated by the Company is currently or has ever been designated
as a treatment, storage and/or disposal facility, nor has any such facility ever
applied for a Permit designating it as a treatment, storage and/or disposal
facility, under any Environmental, Health or Safety Law.
5.16. Labor and Employee Relations. Except as set forth in Schedule 5.16, the
Company is not bound by or subject to any arrangement with any labor union.
Except as set forth in Schedule 5.16, no employees of the Company are
represented by any labor union or covered by any collective bargaining agreement
nor, to the Company's knowledge, is any campaign to establish such
representation in progress. There is no pending or, to the Company's knowledge,
threatened labor dispute involving the Company and any group of its employees
nor has the Company experienced any significant labor interruptions over the
past five years.
5.17. Insurance. Schedule 5.17 sets forth an accurate list as of the Balance
Sheet Date of all insurance policies that are material to the Company. The
policies described in such Schedule 5.17 for the current policy year are
currently in full force and effect and, to the knowledge of the Company, no
defaults exist under any of them.
5.18. Compensation; Employment Agreements. The Company has provided PointeCom
with an accurate written list of all officers, directors and employees of the
Company with annual salaries of $100,000 or more, listing the rate of
compensation (and the portions thereof attributable to salary, bonus, benefits
and other compensation, respectively) of each of such persons as of (a) the
Balance Sheet Date and (b) the date hereof. The Company shall make available to
PointeCom true, complete and correct copies of each employment or consulting
agreement with any employee of the Company. Except as disclosed on Schedule
5.18, the Company is not a party to or bound by, with respect to any officer,
employee or independent contractor of the Company, any (i) employment,
termination or severance agreement, (ii) agreement (A) the benefits of which are
contingent, or the terms of which are materially altered, upon the occurrence of
a transaction involving the Company of the nature of any of the transactions
contemplated by this Agreement, (B) providing any term of employment or
compensation guarantee extending for a period of one year or longer or (C)
providing severance benefits or other benefits after the termination of
employment not comparable to benefits available to employees generally, (iii)
agreement, plan or arrangement under which any person may receive payments that
<PAGE>
may be subject to the tax imposed by Section 4999 of the Code or included in the
determination of such persons parachute payment under Section 280G of the Code
and (iv) agreement or plan, including any stock option plan or stock purchase
plan, any of the benefits of which will be increased, or the vesting or other
realization of the benefits of which will be accelerated, by the occurrence of
the transactions contemplated by this Agreement or the value of any of the
benefits of which will be calculated on the basis of or otherwise affected by
the transactions contemplated by this Agreement.
5.19. Noncompetition and Nonsolicitation Agreements. Schedule 5.19 sets forth
all agreements containing covenants not to compete or solicit employees to which
the Company is bound or under which the Company has any material rights or
obligations.
5.20. Employee Benefit Plans.
(a) Schedule 5.20 sets forth an accurate schedule of each employee benefit plan,
as defined in Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended (ERISA), and all nonqualified deferred compensation
arrangements, whether formal or informal and whether legally binding or not,
under which the Company or an ERISA Affiliate has any current or future
obligation or liability or under which any present or former employee of the
Company or an ERISA Affiliate, or such present or former employees dependents or
beneficiaries, has any current or future right to benefits (each such plan and
arrangement referred to hereinafter as a Plan), and the Company has provided or
made available to PointeCom true and complete copies of such Plans, any trusts
and other arrangements related thereto, and classifications of employees covered
thereby as of the Balance Sheet Date. Except as set forth in Schedule 5.20,
neither the Company nor any ERISA Affiliate sponsors, maintains or is obligated
to contribute currently, or at any time during the preceding five years, has
sponsored, maintained or was obligated to contribute to, any plan, program, fund
or arrangement that constitutes an employee pension benefit plan as defined in
Section 3(2) of ERISA that is subject to Title IV of ERISA. Each Plan may be
terminated by the Company, or if applicable, by an ERISA Affiliate at any time
without any liability, cost or expense, other than costs and expenses that are
customary in connection with the termination of a Plan. For purposes of this
Agreement, the term ERISA Affiliate means any corporation or trade or business
which is, or ever was, treated as a single employer with the Company under
Section 414(b), (c), (m) or (o) of the Code.
(b) Except as set forth on Schedule 5.20(b), each Plan listed in Schedule 5.20
is in compliance in all material respects with its own terms and the applicable
provisions of ERISA, the Code, and any other applicable Law. Except as set
forth in Schedule 5.20, with respect to each Plan of the Company and each ERISA
Affiliate (other than a multiemployer plan, as defined in Section 4001(a)(3) of
ERISA), all reports and other documents required under ERISA or other applicable
Law to be filed with any Governmental Authority, the failure of which to file
could reasonably be expected to result in a material liability to the Company or
any ERISA Affiliate, including all Forms 5500 or required to be distributed to
participants or beneficiaries, have been duly and timely filed or distributed.
<PAGE>
True and complete copies of all such reports and other documents with respect to
the past three years (if applicable) for each Plan have been provided to, or
made available to, PointeCom. No accumulated funding deficiency (as defined in
Section 412(a) of the Code) with respect to any Plan has been incurred (without
regard to any waiver granted under Section 412 of the Code), nor has any funding
waiver from the Internal Revenue Service been received or requested. Except as
set forth in Schedule 5.20, each Plan that is intended to be qualified within
the meaning of Section 401(a) of the Code (a Qualified Plan) is, and has been
during the period from its adoption to the date hereof, so qualified, both as to
form and operation and all necessary approvals of Governmental Authorities have
been timely obtained. Except as set forth in Schedule 5.20, all accrued
contribution obligations, and any other liability to pay benefits, of the
Company with respect to any Plan have either been fulfilled in their entirety or
are fully reflected in the Financial Statements.
(c) Except as set forth in Schedule 5.20(c), no Plan has incurred or is
reasonably likely to incur, and neither the Company nor any ERISA Affiliate has
incurred or is reasonably likely to incur with respect to any Plan, any
liability for excise tax or penalty due to the Internal Revenue Service or any
other governmental authority, and no Plan termination or discontinuance of
contributions to any Plan has resulted in or is reasonably likely to result in
the retroactive disqualification of any Plan qualified under Section 401(a) of
the Code or has resulted in or is reasonably likely to result in any liability
to the Company or any ERISA Affiliate. There have been no terminations, partial
terminations or discontinuances of contributions by the Company or any ERISA
Affiliate to any Qualified Plan during the preceding five years.
(d) Except as set forth in Schedule 5.20(d), neither the Company nor any ERISA
Affiliate has made any promises of retirement or other benefits to employees,
except as set forth in the Plans, and neither the Company nor any ERISA
Affiliate maintains or has established any arrangement for retiree medical
liabilities or any Plan that is a welfare benefit plan within the meaning of
Section 3(1) of ERISA that provides for continuing benefits or coverage for any
participant or any beneficiary of a participant after such participants
termination of employment, except as may be required by Part 6 of Subtitle B of
Title I of ERISA and Section 4980B of the Code and similar state Law provisions.
Except as set forth in Schedule 5.16(d), neither the Company nor any ERISA
Affiliate maintains, has established or has ever participated in a welfare
benefit fund as defined in Section 419(e) of the Code, a multiple employer
welfare benefit arrangement as described in Section 3(40)(A) of ERISA or a
welfare benefit plan, within said meaning, which provides benefits other than
through insurance policies. Except as set forth in Schedule 5.16, neither the
Company nor any ERISA Affiliate has any current or future obligation or
liability with respect to a Plan pursuant to the provisions of a collective
bargaining agreement.
(e) Except as set forth in Schedule 5.20(e), neither the Company nor any ERISA
Affiliate has incurred any material liability to the Pension Benefit Guaranty
Corporation in connection with any Plan. The assets of each Plan that is
subject to Title IV of ERISA are sufficient to provide the benefits under such
<PAGE>
Plan, the payment of which the Pension Benefit Guaranty Corporation would
guarantee in full if such Plan were terminated, and such assets are also
sufficient to provide all other benefits liabilities (as defined in ERISA
Section 4001(a)(16)) due under such Plan upon termination.
(f) Except as set forth in Schedule 5.20(f), no reportable event (as defined in
Section 4043 of ERISA) has occurred and is continuing with respect to any Plan.
There are no pending, or to the Company's knowledge, threatened claims, lawsuits
or actions (other than routine claims for benefits in the ordinary course)
asserted or instituted against, and the Company has no knowledge of any
threatened litigation or claims against, the assets of any Plan or its related
trust or against any fiduciary of a Plan with respect to the operation of such
Plan. To the Company's knowledge, there are no investigations or audits of any
Plan by any Governmental Authority currently pending and there have been no such
investigations or audits that have been concluded that resulted in any liability
to the Company or any ERISA Affiliate that has not been fully discharged.
Neither the Company nor any ERISA Affiliate has participated in any voluntary
compliance or closing agreement programs established with respect to the form or
operation of a Plan.
(g) Neither the Company nor any ERISA Affiliate has engaged in, and no Plan has
otherwise been involved in, any prohibited transaction, within the meaning of
Section 406 of ERISA or Section 4975 of the Code, for which exemption was not
available. No fiduciary of any Plan is in violation of any duty imposed by
ERISA. Except as set forth in Schedule 5.20(g), neither the Company nor any
ERISA Affiliate is, or ever has been, a participant in or is obligated to make
any payment to a multiemployer plan, or to a multiple employer plan described in
Section 413(c) of the Code. To the Company's knowledge, no person or entity
that was engaged by the Company or an ERISA Affiliate as an independent
contractor within the last five years reasonably can or will be characterized or
deemed to be an employee of the Company or an ERISA Affiliate under applicable
Laws for any purpose whatsoever, including, without limitation, for purposes of
federal, state and local income taxation, workers compensation and unemployment
insurance and Plan eligibility.
5.21. Litigation and Compliance with Law. Except as set forth in Schedule
5.21, there are no actions, suits or proceedings, pending (of which the Company
has received notice or with respect to which served with process) or, to the
knowledge of the Company threatened against the Company, at law or in equity, or
before or by any Governmental Authority having jurisdiction over the Company.
No written notice of any claim, action, suit or proceeding, whether pending or
threatened, has been received by the Company. Except to the extent set forth in
Schedule 5.21, the Company has conducted and is conducting its business in
compliance with all Laws applicable to the Company, its assets or the operation
of its business, except such non-compliance that would not have a Material
Adverse Effect on the Company.
5.22. Taxes. For purposes of this Agreement, the term Taxes shall mean all
taxes, charges, fees, levies or other assessments including, without limitation,
income, gross receipts, excise, property, sales, withholding, social security,
unemployment, occupation, use, service, service use, license, payroll,
franchise, transfer and recording taxes, fees and charges, imposed by the United
<PAGE>
States or any state, local or foreign government or subdivision or agency
thereof, whether computed on a separate, consolidated, unitary, combined or any
other basis; and such term shall include any interest, fines, penalties or
additional amounts attributable to or imposed with respect to any such taxes,
charges, fees, levies or other assessments. The Each of the Company and its
Subsidiaries has filed all federal, state, local and other Tax returns it was
required to file, and has duly paid in full or made adequate provision in its
books and records for the payment of all Taxes it was required to pay, except to
the extent that such failure to pay or reserve would not have a Material Adverse
Effect on the Company or its Subsidiaries. All such tax returns were correct and
complete in all material respects. Neither the Company nor its Subsidiaries is
currently the beneficiary of any extension of time within which to file any tax
return. Each of the Company and its Subsidiaries has duly withheld and paid or
remitted all Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor, creditor,
shareholder or other person or entity that required withholding under any
applicable Law, including, without limitation, any amounts required to be
withheld or collected with respect to social security, unemployment
compensation, sales or use taxes or workers compensation, except where such
failure to withhold or pay would not have a Material Adverse Effect on the
Company or its Subsidiaries. Except as set forth in Schedule 5.22, there are no
examinations in progress or material claims against the Company or its
Subsidiaries relating to Taxes for any period or periods prior to and including
the Balance Sheet Date and no written notice of any claim for Taxes, whether
pending or threatened, has been received which claim has not been finally
settled. Neither the Company nor its Subsidiaries has granted or been requested
to grant any extension of the limitation period not yet closed or agreed to any
extension of time applicable to any claim for Taxes which still is in effect or
assessments with respect to Taxes and has not executed a closing agreement
pursuant to Section 7121 of the Code, or any predecessor provision thereof or
any similar provision of state, local, foreign or other tax law that relates to
the assets or operations of the Company or its Subsidiaries which still is in
effect. Neither the Company nor its Subsidiaries is a party to any Tax
allocation or sharing agreement. The Company has never been (nor has any
liability for Taxes because it once was) a member of an affiliated group filing
a consolidated federal income tax return, other than with respect to the
consolidated federal income tax returns of the Company and its Subsidiaries, has
not incurred any liability for the Taxes of any person under Treasury
Regulations 1.1502-6 (or any similar provision of law) and has never incurred
any liability for the Taxes of any person as a transferee or successor, by
contract or otherwise. The unpaid Taxes of the Company and/or its Subsidiaries
(a) did not, as of the Balance Sheet Date, exceed any material amount the amount
shown as accrual for Taxes on the Interim Balance Sheet and (b) will not exceed
by any material amount that accrual as adjusted for operation and transactions
of the Company or its Subsidiaries through the Closing Date in accordance with
the past custom and practice of the Company in filing its tax returns. True and
complete copies of (a) any tax examinations and statements of deficiencies, (b)
extensions of statutory limitations and (c) the federal, state and local Tax
returns of the Company and its Subsidiaries for the last three fiscal years have
been previously provided to PointeCom. There are no requests for ruling in
respect of any Tax pending between the Company or its Subsidiaries and any
Taxing authority. Except with respect to MSN Communications, Inc., neither
<PAGE>
the Company nor its subsidiaries has ever been taxed under the provisions of
Subchapter S of the Code. The Company and its Subsidiaries currently utilize
the accrual method of accounting for income tax purposes; and such method of
accounting has not changed in the past three years. No written notice has been
received from any Tax authority in any jurisdiction in which the Company or its
Subsidiaries does not file tax returns that it is or may be subject to taxation
by that jurisdiction. There are no security interests or liens for Taxes on any
asset of the Company or its Subsidiaries, except for Permitted Encumbrances.
Neither the Company nor its Subsidiaries has filed a consent under section
341(f) of the Code concerning collapsible corporations and neither the Company
nor its Subsidiaries has been a United States real property holding corporation
within the meaning of Section 897(c)(2) of the Code at any time during the
applicable period set forth in Section 897(e)(1)(A)(ii) of the Code. None of the
assets and properties of the Company or its Subsidiaries secures any
indebtedness, the interest on which is tax-exempt under Section 103(a) of the
Code or is an asset or property that the Company or any of its affiliates is or
will be required to treat as being (i) owned by any other person pursuant to
the provisions of section 168(f)(8) of the Internal Revenue Code of 1954, as
amended, as in effect immediately before the enactment of the Tax Reform Act of
1986, or (ii) tax-exempt use property within the meaning of Section 168(h)(1) of
the Code. Neither the Company nor its Subsidiaries has made any payments, is
not obligated to make any payments, and is not a party to any agreement that
under certain circumstances could require it to make any payments, that would
not be deductible by reason of the application of Section 280G of the Code. The
Company has not deferred any taxable income associated with any inter-company
transactions as defined under the Regulations to Section 1502 of the Code.
5.23. Absence of Changes. Since the Balance Sheet Date, except as set forth in
Schedule 5.23, the Company has conducted, in all material respects, its
operations in the ordinary course and there has not been:
(a) any material adverse change in the business, operations, properties,
condition (financial or other), assets, liabilities (contingent or otherwise) or
results of operations of the Company, individually or in the aggregate;
(b) any damage, destruction or loss (whether or not covered by insurance)
materially adversely affecting the properties or business of the Company,
individually or in the aggregate;
(c) except as contemplated by this Agreement or the transactions contemplated
hereby, any change in the authorized capital stock of the Company or in its
outstanding securities or any grant of any options, warrants, calls, conversion
rights or commitments;
(d) except as contemplated by this Agreement or the transactions contemplated
hereby, any declaration or payment of any dividend or distribution in respect of
the capital stock or any direct or indirect redemption, purchase or other
acquisition of any of the capital stock of the Company;
<PAGE>
(e) any increase in the compensation payable or to become payable by the Company
to its stockholders or to any of its officers, directors, employees, consultants
or agents, except for ordinary and customary bonuses and salary increases for
employees in accordance with past practice, which bonuses and salary increases
are set forth in Schedule 5.18;
(f) any material labor disputes, labor grievances or labor claims filed;
(g) except for the Merger and any disposition contemplated by Section 7.1(f),
any sale or transfer, or any agreement to sell or transfer, any material assets,
properties or rights of the Company to any person;
(h) any cancellation, or agreement to cancel, any material indebtedness or other
material obligation owing to the Company;
(i) any increase in the indebtedness of the Company, other than the PointeCom
Loan and accounts payable incurred in the ordinary course of business,
consistent with past practices or incurred in connection with the transactions
contemplated by this Agreement;
(j) any plan, agreement or arrangement granting any preferential rights to
purchase or acquire any interest in any of the assets, property or rights of the
Company or requiring consent of any party to the transfer and assignment of any
such assets, property or rights;
(k) any purchase or acquisition of, or agreement, plan or arrangement to
purchase or acquire, any property, rights or assets outside of the ordinary
course of the Company's business;
(l) any waiver of any material rights or claims of the Company;
(m) any material breach, amendment or termination of any material contract,
agreement, Permit or other right to which the Company is a party or any of its
property is subject, except that which would not have a Material Adverse Effect
on the Company; or
(n) except for the transactions contemplated by this Agreement, any other
material transaction by the Company outside the ordinary course of business.
5.24. Absence of Certain Business Practices. Neither the Company nor any of
its Affiliates on behalf of the Company has given or offered to give anything of
value to any governmental official, political party or candidate for government
office that was illegal to so offer or give nor has it otherwise taken any
action which would constitute a violation of the Foreign Corrupt Practices Act
of 1977, as amended, or any similar Law.
5.25. Competing Lines of Business; Related-Party Transactions. Except as set
forth in Schedule 5.25, no officer, director or any other Affiliate of the
Company owns, directly or indirectly, any interest (other than up to five
percent (5%) of any class of securities listed on a national securities exchange
or traded publicly in the over-the-counter market) in, or is an officer,
director, employee or consultant of or otherwise receives remuneration from, any
<PAGE>
business which is in a Competitive Business or is a competitor, lessor, lessee,
customer or supplier of the Company. Except as set forth in Schedule 5.25, no
officer or director of the Company has any interest in any property, real or
personal, tangible or intangible, used in or pertaining to the business of the
Company.
5.26. Intangible Property. Schedule 5.26 sets forth an accurate list of all
patents, patent applications, trademarks, service marks, technology, licenses,
trade names, copyrights and other intellectual property or proprietary property
rights owned or used by the Company, which are material to the conduct of the
Company's business. The Company owns or possesses sufficient legal rights to
use all of such items, except where failure to own or possess such rights would
not have a Material Adverse Effect on the Company.
5.27. Disclosure. No representation or warranty of the Company or Newco to
PointeCom in this Agreement contains or will contain (at the time such
representation or warranty is repeated) any untrue statement of a material fact
or omits to state a material fact necessary in order to make the statements
herein, in light of the circumstances under which they were made, not
misleading.
5.28. Year 2000 Compliance. All devices, systems, machinery, information
technology, computer software and hardware, and other date sensitive technology
(jointly and severally its systems) owned by the Company and necessary for the
operation of the Company's business as presently conducted, will be Year 2000
Compliant within a period of time calculated to result in no material disruption
of any of its business operations, and any systems that are not compliant will
not have a Material Adverse Effect on the Company. For purposes hereof, Year
2000 Compliant means that such systems are designed to be used prior to, during
and after the Gregorian calendar year 2000 A.D. and will operate during each
such time period substantially without error relating to date data, specifically
including any error relating to, or the product of, date data which represents
or references different centuries or more than one century.
None of the representations and warranties of the Company and Newco shall
survive the Closing hereunder.
ARTICLE VI. REPRESENTATIONS AND WARRANTIES OF POINTECOM
PointeCom represents and warrants to the Company and Newco as follows:
6.1. Organization. PointeCom is a corporation duly organized, validly existing
and in good standing under the Laws of the State of Nevada, has all corporate
power required to carry on its business as now conducted and is duly authorized
and qualified under all applicable Laws to carry on its business in the places
and in the manner now conducted. Except as set forth in Schedule 6.1, PointeCom
is qualified to do business as a foreign corporation in each jurisdiction where
the character of the property owned or leased by it or the nature of its
activities makes such qualification necessary, except for jurisdiction where the
failure to qualify would not have a Material Adverse Effect on PointeCom.
PointeCom has the requisite corporate power and corporate authority to own,
lease and operate its assets and properties and to carry on its business as such
<PAGE>
business is currently being conducted. Correct and complete copies of all stock
records and minute books of PointeCom have been made available to the Company.
6.2. Authorization; Non-Contravention; Approvals.
(a) PointeCom has the corporate power and corporate authority to enter into each
of the Transaction Documents to which it is a party, and, subject to obtaining
the hereinafter described approvals, to consummate the transactions contemplated
hereby. The execution, delivery and performance of each of the Transaction
Documents to which it is party is subject to the Requisite Stockholder Approval
of PointeCom. Other than such board and shareholder approval, no additional
corporate proceedings on the part of PointeCom is necessary to authorize the
execution and delivery of each of the Transaction Documents to which it is a
party and the consummation of the transactions contemplated hereby. Subject to
obtaining the foregoing approvals, each of the Transaction Documents to which it
is a party has been duly and validly executed and delivered by PointeCom and
(assuming the due authorization, execution and delivery by the Company and
Newco, and each Transaction Document to which it is a party constitutes a valid
and binding agreement of the Company and Newco) constitutes valid and binding
agreements of PointeCom in accordance with its terms, except as the same may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar Laws now or hereafter in effect, affecting the enforcement of creditors
rights generally and general equitable principles regardless of whether such
enforceability is considered in a proceeding at law or in equity.
(b) Subject to obtaining the foregoing approvals, the execution and delivery of
each of the Transaction Documents to which it is a party by PointeCom do not,
and the consummation by PointeCom of the transactions contemplated hereby will
not (i) violate or result in a breach of any provision of the Certificate of
Incorporation or Bylaws of the PointeCom, (ii) assuming compliance with matters
referred to in paragraph (c) of this section, violate or result in a breach of
any Laws applicable to PointeCom or its properties or assets or (iii) violate or
result in a breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
or result in the termination of, or accelerate the performance required by, or
result in a right of termination or acceleration under, or result in the
creation of any Encumbrance upon any of the properties or assets of PointeCom
under any of the terms, conditions or provisions of, except as set forth in
Schedule 6.2, any note, bond, mortgage, indenture, deed of trust, license,
franchise, permit, concession, lease or other instrument, obligation or
agreement of any kind to which the PointeCom is now a party or by which any of
its properties or assets may be bound or affected, except in the case of clauses
(ii) and (iii), for any such violation or breach that would not have a Material
Adverse Effect on PointeCom.
(c) Except for obtaining the foregoing approvals, the Merger Filing and such
filings as may be required under federal or state securities Laws, no
declaration, filing or registration with, or notice to, or authorization,
consent or approval of, any Governmental Authority or third party is necessary
<PAGE>
for the execution and delivery of each of the Transaction Documents to which it
is a party by PointeCom or the consummation by PointeCom of the transactions
contemplated hereby. Except as set forth in Schedule 6.2, none of the
agreements, licenses or permits to which the PointeCom is a party requires
notice to, or the consent or approval of any third party for the execution and
delivery of each of the Transaction Documents to which it is a party by
PointeCom and the consummation of the transactions contemplated hereby.
6.3. SEC Filings; Disclosure. PointeCom has filed with the SEC all material
forms, statements, reports and documents required to be filed by it prior to the
date hereof under each of the 1933 Act, the 1934 Act, and the respective rules
and regulations thereunder, (a) except as set forth on Schedule 6.3, all of
which, as amended, if applicable, complied when filed in all material respects
with all applicable requirements of the appropriate Act and the rules and
regulations thereunder, and (b) none of which, as amended, if applicable,
contains any untrue statement of material fact or omits to state a material fact
required to be stated therein or necessary in order to make the statements made
therein, in the light of the circumstances under which they were made and at the
time they were made, not misleading. The financial statements of PointeCom
included in PointeCom's annual report on Form 10-KSB for the fiscal year ended
December 31, 1998 and Form 10-Q for the fiscal quarter ended September 30, 1999,
comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto, have been prepared in accordance with GAAP, applied on a consistent
basis during the period covered and fairly represent, in all material respects,
the financial position of PointeCom as of the date thereof and the results of
operations and changes in financial position for the period then ended.
6.4. Capitalization. The authorized, issued and outstanding capital stock of
PointeCom is set forth on Schedule 6.4. All of the issued and outstanding
shares of PointeCom Common Stock have been duly authorized and validly issued
(except as set forth on Annex J to Schedule 6.4), are fully paid and
nonassessable, and were offered, issued, sold and delivered by PointeCom in
compliance with all applicable Laws, including, without limitation, those Laws
concerning the issuance of securities. None of such shares were issued in
violation of the preemptive rights of any past or present stockholders. Except
as set forth in Schedule 6.4, no subscription, option, warrant, call,
convertible or exchangeable security, other conversion right or commitment of
any kind exists which obligates PointeCom to issue any of its capital stock.
6.5. Subsidiaries. Except as set forth in Schedule 6.5, PointeCom owns, of
record or beneficially, or controls, directly or indirectly, no capital stock,
securities convertible into or exchangeable for capital stock or any other
equity interest in any corporation, association or other business entity.
Except as set forth in Schedule 6.5, PointeCom is not, directly or indirectly, a
participant in any joint venture, limited liability company, partnership or
other noncorporate entity.
6.6. Financial Statements.
<PAGE>
(a) PointeCom has delivered to the Company complete copies of the following
financial statements:
(i) the audited balance sheets of PointeCom as of December 31, 1996, 1997 and
1998 and the related audited statements of income, stockholders equity and cash
flows for the three-year period ended December 31, 1998, together with the
related notes, schedules and audit report of PointeCom's independent accountants
(such balance sheets and the related statements of income and the related notes
and schedules are referred to herein as the PointeCom Year-End Financial
Statements); and;
(ii) the unaudited balance sheet (the PointeCom Interim Balance Sheet) of
PointeCom as of September 30, 1999 (the PointeCom Balance Sheet Date) and the
related unaudited statement of operations for the interim period ended on the
PointeCom Balance Sheet Date, together with the related notes and schedules
(such balance sheets, the related statements of income and the related notes and
schedules are referred to herein as the PointeCom Interim Financial Statements).
The PointeCom Year-End Financial Statements and the PointeCom Interim Financial
Statements (collectively, the PointeCom Financial Statements) are attached as
Schedule 6.6 to this Agreement.
(b) Except as set forth in Schedule 6.6, the PointeCom Financial Statements have
been prepared from the books and records of PointeCom in conformity with GAAP
(except for the absence of notes in the Interim PointeCom Financial Statements
and that the Interim PointeCom Financial Statements are subject to year-end
audit adjustments, none of which are expected to be material) and will present
fairly in all material respects the financial position and results of operations
of PointeCom as of the dates of such statements and for the periods covered
thereby. The books of account of PointeCom have been kept accurately in all
material respects in the ordinary course of business, the transactions entered
therein represent bona fide transactions, and the revenues, expenses, assets and
liabilities of PointeCom have been properly recorded therein in all material
respects.
6.7. Liabilities and Obligations. Except as set forth in Schedule 6.7, as of
the PointeCom Balance Sheet Date, PointeCom did not have, nor has it incurred
since that date, any liabilities or obligations (whether absolute, accrued,
contingent or otherwise) of any nature which would have a Material Adverse
Effect on PointeCom, except (a) liabilities, obligations or contingencies (i)
that are accrued or reserved against in the PointeCom Financial Statements or
reflected in the notes thereto or (ii) that were incurred after the PointeCom
Balance Sheet Date and were incurred in the ordinary course of business,
consistent with past practices, and (b) liabilities and obligations that are of
a nature not required to be reflected in the PointeCom Financial Statements
prepared in accordance with GAAP and that were incurred in the normal course of
business, which material liabilities and obligations are described in Schedule
6.7. Schedule 6.7 sets forth PointeCom's outstanding principal amount of
indebtedness for borrowed money (including overdrafts) as of November 30, 1999.
6.8. Assets.
<PAGE>
(a) Schedule 6.8 sets forth an accurate list of all real and personal property
included in property and equipment on the PointeCom Interim Balance Sheet and
all other tangible assets of PointeCom with a book value in excess of $10,000
acquired since the PointeCom Balance Sheet Date. PointeCom shall make available
to the Company true, complete and correct copies of leases for significant
equipment and for all real property leased by PointeCom. Schedule 6.8 indicates
which assets used in the operation of the businesses of PointeCom are currently
owned by Affiliates of PointeCom. Except as specifically identified in Schedule
6.8, all of the material tangible assets, vehicles and other significant
machinery and equipment of PointeCom listed in Schedule 6.8 are in sufficient
condition for the conduct of PointeCom's business. Except as specifically
described in Schedule 6.8, all fixed assets used by PointeCom in its business
are either owned by PointeCom or leased under agreements identified in Schedule
6.8. All material leases set forth in Schedule 6.8 are in full force and effect
and constitute valid and binding agreements of PointeCom, and to the knowledge
of PointeCom, the other parties thereto in accordance with their respective
terms. Schedule 6.8 contains true, complete and correct copies of all title
reports and title insurance policies received or owned by PointeCom.
(b) PointeCom has good and marketable title to, or valid leasehold interests in,
the tangible and intangible personal property owned by it and used in its
business, including the properties identified in Schedule 6.8 as owned real
property, free and clear of all Encumbrances other than Permitted Encumbrances
and those set forth in Schedule 6.8. PointeCom does not own any real property.
(c) Except as specifically described in Schedule 6.8, the tangible and
intangible assets owned or leased by PointeCom include all the material assets
used in the operation of the business of PointeCom as conducted at the PointeCom
Balance Sheet Date, except for dispositions of such assets since such date in
the ordinary course of business, consistent with past practices.
6.9. Material Customers and Contracts.
(a) Schedule 6.9 sets forth an accurate list of (i) all customers representing
10% or more of PointeCom's revenues for the fiscal year ended in 1998 or the
interim period ended on the PointeCom Balance Sheet Date, and (ii) all material
executory contracts, warranties, commitments and similar agreements to which
PointeCom is currently a party or by which it or any of its properties is bound,
including, but not limited to, (A) all customer contracts in excess of $100,000,
including, without limitation, consignment contracts, (B) contracts with any
labor organizations, (C) leases providing for annual rental payments in excess
of $100,000, (D) loan agreements, (E) pledge and security agreements, (F)
indemnity or guaranty agreements or obligations , (G) bonds, (H) notes, (I)
mortgages, (J) joint venture or partnership agreements, (K) options to purchase
real or personal property, and (L) agreements relating to the purchase or sale
by PointeCom of assets (other than oral agreements relating to sales of
inventory or services in the ordinary course of business, consistent with past
practices) or securities for more than $100,000, individually. Prior to the
<PAGE>
date hereof, PointeCom has made available to the Company complete and correct
copies of all such agreements.
(b) Except to the extent set forth in Schedule 6.9, since the PointeCom Balance
Sheet Date, (i) no material customer has canceled or substantially reduced or,
to the knowledge of PointeCom, intends to cancel or substantially reduce its
purchases of PointeCom's products or services; and (ii) PointeCom is in
compliance with all material commitments and obligations pertaining to it under
such agreements and is not in material default under any of the agreements
described in subsection (a), no notice of default has been received by
PointeCom, and to the knowledge of PointeCom, there is no event which, with
notice or the passage of time or both, would result in a default under any of
the agreements described in subsection (a), where such a default would have a
Material Adverse Effect on PointeCom.
(c) Except to the extent set forth in Schedule 6.9, PointeCom is not a party to
any governmental contracts subject to price redetermination or renegotiation.
Except to the extent set forth in Schedule 6.9, PointeCom is not required to
provide any bonding or other financial security arrangements in any amount in
connection with any transactions with any of its customers or suppliers, the
failure of which would have a Material Adverse Effect on PointeCom
6.10. Permits. Except as set forth on Schedule 6.10, PointeCom has all
franchises, permits, licenses and any other governmental authority necessary for
the conduct of its business as now being conducted, the lack of which would have
a Material Adverse Effect (the "PointeCom Permits"). The PointeCom Permits are
valid, and PointeCom has not received any written notice that any Governmental
Authority intends to cancel, terminate or not renew any such Permit. The
PointeCom Permits are all the permits that are required by Law for the operation
of the business of PointeCom as conducted at the PointeCom Balance Sheet Date
and the ownership of the assets of PointeCom, except such PointeCom Permits,
which the failure to possess would not have a Material Adverse Effect on
PointeCom. PointeCom has conducted and is conducting its business in substantial
compliance with the PointeCom Permits and is not in violation of any of the
foregoing, except for any violations that individually or in the aggregate do
not have a Material Adverse Effect on PointeCom. Except as specifically
provided in Schedule 6.10, the transactions contemplated by this Agreement will
not result in a default under or a breach or violation of, or adversely affect
the rights and benefits afforded to PointeCom by, any PointeCom Permits, except
for breaches or violations that would not have a Material Adverse Effect on
PointeCom.
6.11. Environmental Matters. Except as set forth in Schedule 6.11, and except
for such matters as would not have a Material Adverse Effect on PointeCom, (a)
PointeCom has complied with and is in compliance, in all material respects, with
all Environmental, Health and Safety Laws, including, without limitation,
Environmental, Health and Safety Laws relating to air, water, land and the
generation, storage, use, handling, transportation, treatment or disposal of
Hazardous Substances; (b) PointeCom has obtained and complied, in all material
respects, with all necessary permits and other approvals necessary to treat,
<PAGE>
transport, store, dispose of and otherwise handle Hazardous Substances and has
reported, to the extent required by all Environmental, Health and Safety Laws,
all past and present sites owned or operated by PointeCom where Hazardous
Substances have been treated, stored, disposed of or otherwise handled; (c) to
PointeCom's knowledge, there have been no releases or threats of releases (as
defined in any Environmental, Health and Safety Laws) at, from, in or on any
property owned or operated by PointeCom; (d) to PointeCom's knowledge, there is
no on-site or off-site location to which PointeCom has transported or disposed
of Hazardous Substances or arranged for the transportation or disposal of
Hazardous Substances which is the subject of any federal, state, local or
foreign enforcement action or any other investigation which could lead to any
claim against the Surviving Corporation, PointeCom or Newco for any clean-up
cost, remedial work, damage to natural resources or personal injury, including,
but not limited to, any claim under (i) the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, (ii) the Resource
Conservation and Recovery Act, (iii) the Hazardous Materials Transportation Act,
or (iv) comparable state and local statutes and regulations; and (e) to
PointeCom's knowledge, PointeCom has no contingent liability in connection with
any release or disposal of any Hazardous Substance into the environment. To
PointeCom's knowledge, none of the past or present sites owned or operated by
PointeCom is currently or has ever been designated as a treatment, storage
and/or disposal facility, nor has any such facility ever applied for a Permit
designating it as a treatment, storage and/or disposal facility, under any
Environmental, Health or Safety Law.
6.12. Labor and Employee Relations. Except as set forth in Schedule 6.12,
PointeCom is not bound by or subject to any arrangement with any labor union.
Except as set forth in Schedule 6.12, no employees of PointeCom are represented
by any labor union or covered by any collective bargaining agreement nor, to
PointeCom's knowledge, is any campaign to establish such representation in
progress. There is no pending or, to PointeCom's knowledge, threatened labor
dispute involving PointeCom and any group of its employees nor has PointeCom
experienced any significant labor interruptions over the past five years.
PointeCom has no knowledge of any significant issues or problems in connection
with the relationship of PointeCom with its employees.
6.13. Insurance. Schedule 6.13 sets forth an accurate list as of the PointeCom
Balance Sheet Date of all insurance policies that are material to PointeCom.
The policies described in such Schedule 6.13 for the current policy year are
currently in full force and effect and, to the knowledge of PointeCom, no
defaults exist under any of them.
6.14. Compensation; Employment Agreements. Schedule 6.14 sets forth an
accurate list of all officers, directors and employees of PointeCom with annual
salaries of $100,000 or more, listing the rate of compensation (and the portions
thereof attributable to salary, bonus, benefits and other compensation,
respectively) of each of such persons as of (a) the PointeCom Balance Sheet Date
and (b) the date hereof. PointeCom shall make available to the Company true,
complete and correct copies of each employment or consulting agreement with any
employee of PointeCom. Except as disclosed on Schedule 6.14, PointeCom is not a
<PAGE>
party to or bound by, with respect to any officer, employee or independent
contractor of PointeCom, any (i) employment, termination or severance agreement,
(ii) agreement (A) the benefits of which are contingent, or the terms of which
are materially altered, upon the occurrence of a transaction involving PointeCom
of the nature of any of the transactions contemplated by this Agreement, (B)
providing any term of employment or compensation guarantee extending for a
period of one year or longer or (C) providing severance benefits or other
benefits after the termination of employment not comparable to benefits
available to employees generally, (iii) agreement, plan or arrangement under
which any person may receive payments that may be subject to the tax imposed by
Section 4999 of the Code or included in the determination of such persons
parachute payment under Section 280G of the Code and (iv) agreement or plan,
including any stock option plan or stock purchase plan, any of the benefits of
which will be increased, or the vesting or other realization of the benefits of
which will be accelerated, by the occurrence of the transactions contemplated by
this Agreement or the value of any of the benefits of which will be calculated
on the basis of the transactions contemplated by this Agreement.
6.15. Noncompetition and Nonsolicitation Agreements. Schedule 6.15 sets forth
all agreements containing covenants not to compete or solicit employees to which
PointeCom is bound or under which PointeCom has any material rights or
obligations.
6.16. Litigation and Compliance with Law. Except as set forth in Schedule
6.16, there are no actions, suits or proceedings, pending (of which the
PointeCom has received notice or with respect to which served with process) or,
to the knowledge of PointeCom, threatened against PointeCom, at law or in
equity, or before or by any Governmental Authority having jurisdiction over
PointeCom. No written notice of any claim, action, suit or proceeding, whether
pending or threatened, has been received by PointeCom. Except to the extent set
forth in Schedule 6.16, PointeCom has conducted and is conducting its business
in compliance with all Laws applicable to PointeCom, its assets or the operation
of its business, except such non-compliance that would not have a Material
Adverse Effect on PointeCom.
6.17. Taxes. Each of PointeCom and its Subsidiaries has filed all federal,
state, local and other Tax returns it was required to file, and has duly paid in
full or made adequate provision in the books and records for the payment of all
Taxes it was required to pay, except to the extent that such failure to pay or
to reserve would not have a Material Adverse Effect on PointeCom or its
Subsidiaries. All such Tax returns were correct and complete in all material
respects. Neither PointeCom nor its Subsidiaries is currently the beneficiary
of any extension of time within which to file any tax return. PointeCom and its
Subsidiaries have duly withheld and paid or remitted all Taxes required to have
been withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, shareholder or other person or entity that
required withholding under any applicable Law, including, without limitation,
any amounts required to be withheld or collected with respect to social
security, unemployment compensation, sales or use taxes or workers compensation,
except where such failure would not have a Material Adverse Effect on PointeCom
or its Subsidiaries. Except as set forth in Schedule 6.17, there are no
examinations in progress or material claims against PointeCom or its
<PAGE>
Subsidiaries relating to Taxes for any period or periods prior to and including
the PointeCom Balance Sheet Date and no written notice of any claim for Taxes,
whether pending or threatened, has been received which claim has not been
finally settled. Neither PointeCom nor its Subsidiaries has granted or been
requested to grant any extension of the limitation period not yet closed or
agreed to any extension of time applicable to any claim for Taxes which is still
in effect or assessments with respect to Taxes and has not executed a closing
agreement pursuant to Section 7121 of the Code, or any predecessor provision
thereof or any similar provision of state, local, foreign or other tax law that
relates to the assets or operations of PointeCom or its Subsidiaries which is
still in effect. Neither PointeCom nor its Subsidiaries is a party to any Tax
allocation or sharing agreement. Neither PointeCom nor its Subsidiaries has
ever been (nor has any liability for Taxes because it once was) a member of an
affiliated group filing a consolidated federal income tax return, other than
with respect to the consolidated federal income tax return of PointeCom and its
Subsidiaries, has not incurred any liability for the Taxes of any person under
Treasury Regulations 1.1502-6 (or any similar provision of law) and has never
incurred any liability for the Taxes of any person as a transferee or successor,
by contract or otherwise. The unpaid Taxes of PointeCom and/or its Subsidiaries
(a) did not, as of the PointeCom Balance Sheet Date, exceed any material amount
the amount shown as accrual for Taxes on the PointeCom Interim Balance Sheet and
(b) will not exceed by any material amount that accrual as adjusted for
operation and transactions of PointeCom or its Subsidiaries through the Closing
Date in accordance with the past custom and practice of PointeCom in filing its
tax returns. True and complete copies of (a) any tax examinations and
statements of deficiencies, (b) extensions of statutory limitations and (c) the
federal, state and local Tax returns of PointeCom and its Subsidiaries for the
last three fiscal years have been previously provided to PointeCom. There are
no requests for ruling in respect of any Tax pending between PointeCom or its
Subsidiaries and any Taxing authority. Neither PointeCom nor its Subsidiaries
has ever been taxed under the provisions of Subchapter S of the Code. PointeCom
and its Subsidiaries currently utilize the accrual method of accounting for
income tax purposes; and such method of accounting has not changed in the past
three years. No written notice has been received from any Tax authority in any
jurisdiction in which PointeCom or its Subsidiaries does not file tax returns
that it is or may be subject to taxation by that jurisdiction. There are no
security interests or liens for Taxes on any asset of PointeCom or its
Subsidiaries, except for Permitted Encumbrances. Neither PointeCom nor its
Subsidiaries has filed a consent under section 341(f) of the Code concerning
collapsible corporations and neither PointeCom nor its Subsidiaries has been a
United States real property holding corporation within the meaning of Section
897(c)(2) of the Code at any time during the applicable period set forth in
Section 897(e)(1)(A)(ii) of the Code. None of the assets and properties of
PointeCom or its Subsidiaries secures any indebtedness, the interest on which is
tax-exempt under Section 103(a) of the Code or is an asset or property that
PointeCom or any of its affiliates is or will be required to treat as being (i)
owned by any other person pursuant to the provisions of section 168(f)(8) of the
Internal Revenue Code of 1954, as amended, as in effect immediately before the
enactment of the Tax Reform Act of 1986, or (ii) tax-exempt use property within
the meaning of Section 168(h)(1) of the Code. Neither PointeCom nor its
Subsidiaries has made any payments, is not obligated to make any payments, and
<PAGE>
is not a party to any agreement that under certain circumstances could require
it to make any payments, that would not be deductible by reason of the
application of Section 280G of the Code.
6.18. Absence of Changes. Since the PointeCom Balance Sheet Date, except as
set forth in Schedule 6.18, PointeCom has conducted, in all material respects,
its operations in the ordinary course and there has not been:
(a) any material adverse change in the business, operations, properties,
condition (financial or other), assets, liabilities (contingent or otherwise) or
results of operations of PointeCom, individually or in the aggregate;
(b) any damage, destruction or loss (whether or not covered by insurance)
materially adversely affecting the properties or business of PointeCom,
individually or in the aggregate;
(c) except as contemplated by this Agreement or the transactions contemplated
hereby, any change in the authorized capital stock of PointeCom or in its
outstanding securities or any grant of any options, warrants, calls, conversion
rights or commitments;
(d) except as contemplated by this Agreement or the transactions contemplated
hereby, any declaration or payment of any dividend or distribution in respect of
the capital stock or any direct or indirect redemption, purchase or other
acquisition of any of the capital stock of PointeCom;
(e) any increase in the compensation payable or to become payable by PointeCom
to its stockholders or to any of its officers, directors, employees, consultants
or agents, except for ordinary and customary bonuses and salary increases for
employees in accordance with past practice, which bonuses and salary increases
are set forth in Schedule 6.14;
(f) any material labor disputes, labor grievances or labor claims filed;
(g) except for the Merger, any sale or transfer, or any agreement to sell or
transfer, any material assets, properties or rights of PointeCom to any person;
(h) any cancellation, or agreement to cancel, any material indebtedness or other
material obligation owing to PointeCom;
(i) any increase in the indebtedness of PointeCom, other than related to the
Class B Convertible Preferred Stock and accounts payable incurred in the
ordinary course of business, consistent with past practices or incurred in
connection with the transactions contemplated by this Agreement;
(j) any plan, agreement or arrangement granting any preferential rights to
purchase or acquire any interest in any of the assets, property or rights of
PointeCom or requiring consent of any party to the transfer and assignment of
any such assets, property or rights;
<PAGE>
(k) any purchase or acquisition of, or agreement, plan or arrangement to
purchase or acquire, any property, rights or assets outside of the ordinary
course of PointeCom's business;
(l) any waiver of any material rights or claims of PointeCom;
(m) any material breach, amendment or termination of any material contract,
agreement, Permit or other right to which PointeCom is a party or any of its
property is subject, except that which would not have a Material Adverse Effect
on PointeCom; or
(n) any other material transaction by PointeCom, other than as contemplated by
this Agreement, outside the ordinary course of business.
6.19. Absence of Certain Business Practices. Neither PointeCom nor any of its
Affiliates has given or offered to give anything of value to any governmental
official, political party or candidate for government office that was illegal to
so offer or give nor has it otherwise taken any action which would constitute a
violation of the Foreign Corrupt Practices Act of 1977, as amended, or any
similar Law.
6.20. Competing Lines of Business; Related-Party Transactions. Except as set
forth in Schedule 6.20, no officer or director or any other Affiliate of
PointeCom owns, directly or indirectly, any interest (other than up to five
percent (5%) of any class of securities listed on a national securities exchange
or traded publicly in the over-the-counter market) in, or is an officer,
director, employee or consultant of or otherwise receives remuneration from, any
business which is in a Competitive Business or is a competitor, lessor, lessee,
customer or supplier of PointeCom. Except as set forth in Schedule 6.20, no
officer or director of PointeCom has any interest in any property, real or
personal, tangible or intangible, used in or pertaining to the business of
PointeCom.
6.21. Intangible Property. Schedule 6.21 sets forth an accurate list of all
patents, patent applications, trademarks, service marks, technology, licenses,
trade names, copyrights and other intellectual property or proprietary
property rights owned or used by PointeCom, which are material to the conduct of
PointeCom's business. PointeCom owns or possesses sufficient legal rights to
use all of such items, except where failure to own or possess such rights would
not have a Material Adverse Effect on PointeCom.
6.22. Disclosure. None of the information so provided nor any representation
or warranty of PointeCom to the Company or Newco in this Agreement contains or
will contain (at the time such representation or warranty is repeated) any
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements herein, in light of the circumstances under
which they were made, not misleading.
6.23. Year 2000 Compliance. All devices, systems, machinery, information
technology, computer software and hardware, and other date sensitive technology
(jointly and severally its systems) owned by PointeCom and necessary for the
operation of PointeCom's business as presently conducted will be Year 2000
<PAGE>
Compliant within a period of time calculated to result in no material disruption
of any of its business operations, and any systems that are not compliant will
not have a Material Adverse Effect on PointeCom.
6.24. Employee Benefit Plans.
(a) Schedule 6.24 sets forth an accurate schedule of each employee benefit plan,
as defined in Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended (ERISA), and all nonqualified deferred compensation
arrangements, whether formal or informal and whether legally binding or not,
under which PointeCom or an ERISA Affiliate has any current or future obligation
or liability or under which any present or former employee of PointeCom or an
ERISA Affiliate, or such present or former employees dependents or
beneficiaries, has any current or future right to benefits (each such plan and
arrangement referred to hereinafter as a PointeCom Plan), and PointeCom has
provided or made available to the Company true and complete copies of such
PointeCom Plans, any trusts and other arrangements related thereto, and
classifications of employees covered thereby as of the PointeCom Balance Sheet
Date. Except as set forth in Schedule 6.27, neither PointeCom nor any ERISA
Affiliate sponsors, maintains or is obligated to contribute currently, or at any
time during the preceding five years, has sponsored, maintained or was obligated
to contribute to, any plan, program, fund or arrangement that constitutes an
employee pension benefit plan as defined in Section 3(2) of ERISA that is
subject to Title IV of ERISA. Each PointeCom Plan may be terminated by
PointeCom, or if applicable, by an ERISA Affiliate at any time without any
liability, cost or expense, other than costs and expenses that are customary in
connection with the termination of a PointeCom Plan. For purposes of this
Agreement, the term PointeCom ERISA Affiliate means any corporation or trade or
business which is, or ever was, treated as a single employer with PointeCom
under Section 414(b), (c), (m) or (o) of the Code.
(b) Except as set forth on Schedule 6.24(b), each Plan listed in Schedule 6.24
is in compliance in all material respects with its own terms and the applicable
provisions of ERISA, the Code, and any other applicable Law. Except as set
forth in Schedule 6.24, with respect to each Plan of PointeCom and each
PointeCom ERISA Affiliate (other than a multiemployer plan, as defined in
Section 4001(a)(3) of ERISA), all reports and other documents required under
ERISA or other applicable Law to be filed with any Governmental Authority, the
failure of which to file could reasonably be expected to result in a material
liability to PointeCom or any PointeCom ERISA Affiliate, including all Forms
5500 or required to be distributed to participants or beneficiaries, have been
duly and timely filed or distributed. True and complete copies of all such
reports and other documents with respect to the past three years (if applicable)
for each Plan have been provided to, or made available to, the Company. No
accumulated funding deficiency (as defined in Section 412(a) of the Code) with
respect to any Plan has been incurred (without regard to any waiver granted
under Section 412 of the Code), nor has any funding waiver from the Internal
Revenue Service been received or requested. Except as set forth in Schedule
6.24, each Plan that is intended to be qualified within the meaning of Section
<PAGE>
401(a) of the Code (a Qualified Plan) is, and has been during the period from
its adoption to the date hereof, so qualified, both as to form and operation and
all necessary approvals of Governmental Authorities have been timely obtained.
Except as set forth in Schedule 6.24, all accrued contribution obligations, and
any other liability to pay benefits, of PointeCom with respect to any Plan have
either been fulfilled in their entirety or are fully reflected in the Financial
Statements.
(c) Except as set forth in Schedule 6.24(c), no Plan has incurred or is
reasonably likely to incur, and neither PointeCom nor any PointeCom ERISA
Affiliate has incurred or is reasonably likely to incur with respect to any
Plan, any liability for excise tax or penalty due to the Internal Revenue
Service or any other governmental authority, and no Plan termination or
discontinuance of contributions to any Plan has resulted in or is reasonably
likely to result in the retroactive disqualification of any Plan qualified under
Section 401(a) of the Code or has resulted in or is reasonably likely to result
in any liability to PointeCom or any ERISA Affiliate. There have been no
terminations, partial terminations or discontinuances of contributions by
PointeCom or any PointeCom ERISA Affiliate to any Qualified Plan during the
preceding five years.
(d) Except as set forth in Schedule 6.24(d), neither PointeCom nor any PointeCom
ERISA Affiliate has made any promises of retirement or other benefits to
employees, except as set forth in the Plans, and neither PointeCom nor any
PointeCom ERISA Affiliate maintains or has established any arrangement for
retiree medical liabilities or any Plan that is a welfare benefit plan within
the meaning of Section 3(1) of ERISA that provides for continuing benefits or
coverage for any participant or any beneficiary of a participant after such
participants termination of employment, except as may be required by Part 6 of
Subtitle B of Title I of ERISA and Section 4980B of the Code and similar state
Law provisions. Except as set forth in Schedule 6.24(d), neither PointeCom nor
any PointeCom ERISA Affiliate maintains, has established or has ever
participated in a welfare benefit fund as defined in Section 419(e) of the Code,
a multiple employer welfare benefit arrangement as described in Section 3(40)(A)
of ERISA or a welfare benefit plan, within said meaning, which provides benefits
other than through insurance policies. Except as set forth in Schedule 6.24,
neither PointeCom nor any PointeCom ERISA Affiliate has any current or future
obligation or liability with respect to a Plan pursuant to the provisions of a
collective bargaining agreement.
(e) Except as set forth in Schedule 6.24(e), neither PointeCom nor any PointeCom
ERISA Affiliate has incurred any material liability to the Pension Benefit
Guaranty Corporation in connection with any Plan. The assets of each Plan that
is subject to Title IV of ERISA are sufficient to provide the benefits under
such Plan, the payment of which the Pension Benefit Guaranty Corporation would
guarantee in full if such Plan were terminated, and such assets are also
sufficient to provide all other benefits liabilities (as defined in ERISA
Section 4001(a)(16)) due under such Plan upon termination.
(f) Except as set forth in Schedule 6.24(f), no reportable event (as defined in
Section 4043 of ERISA) has occurred and is continuing with respect to any Plan.
There are no pending, or to PointeCom's knowledge, threatened claims, lawsuits
or actions (other than routine claims for benefits in the ordinary course)
<PAGE>
asserted or instituted against, and PointeCom has no knowledge of any threatened
litigation or claims against, the assets of any Plan or its related trust or
against any fiduciary of a Plan with respect to the operation of such Plan. To
PointeCom's knowledge, there are no investigations or audits of any Plan by any
Governmental Authority currently pending and there have been no such
investigations or audits that have been concluded that resulted in any liability
to PointeCom or any PointeCom ERISA Affiliate that has not been fully
discharged. Neither PointeCom nor any PointeCom ERISA Affiliate has
participated in any voluntary compliance or closing agreement programs
established with respect to the form or operation of a Plan.
(g) Neither PointeCom nor any PointeCom ERISA Affiliate has engaged in, and no
PointeCom Plan has otherwise been involved in, any prohibited transaction,
within the meaning of Section 406 of ERISA or Section 4975 of the Code, for
which exemption was not available. No fiduciary of any PointeCom Plan is in
violation of any duty imposed by ERISA. Except as set forth in Schedule
6.24(g), neither PointeCom nor any PointeCom ERISA Affiliate is, or ever has
been, a participant in or is obligated to make any payment to a multiemployer
plan, or to a multiple employer plan described in Section 413(c) of the Code.
To PointeCom's knowledge, no person or entity that was engaged by PointeCom or
any PointeCom ERISA Affiliate as an independent contractor within the last five
years reasonably can or will be characterized or deemed to be an employee of
PointeCom or any PointeCom ERISA Affiliate under applicable Laws for any
purpose whatsoever, including, without limitation, for purposes of federal,
state and local income taxation, workers compensation and unemployment insurance
and Plan eligibility.
6.25. Tax Free Reorganization.
(a) There is no plan or intention by and to the knowledge of PointeCom, there is
no plan or intention on the part of the shareholders of PointeCom who own five
percent (5%) or more of the PointeCom capital stock, or the remaining
shareholders of PointeCom to sell, exchange or otherwise dispose of a number of
share of the Company Common Stock or Company Preferred Stock received in the
Merger that would reduce the PointeCom shareholders ownership of the Company
capital stock to a number of shares having a value as of the Effective Time, of
less than fifty percent (50%) of the value of all of the formerly outstanding
capital stock of PointeCom as of the same date. For purposes of this
representation, shares of PointeCom capital stock surrendered by dissenters or
exchanged for cash in lieu of fractional shares of Company stock will be treated
as outstanding PointeCom capital stock on the date of the transaction.
Moreover, shares of PointeCom capital stock and shares of Company capital stock
held by PointeCom shareholders and otherwise sold, redeemed or disposed of prior
to or subsequent to the transaction will be considered in making this
representation.
(b) PointeCom has no plan or intention to issue additional shares of its stock
that would result in the Company losing control of PointeCom within the meaning
of Section 368 (c) of the Code.
<PAGE>
(c) PointeCom has no plan or intention to liquidate; to merge into another
corporation (except as contemplated by this Agreement); to sell or otherwise
dispose of any of its assets, except for dispositions made in the ordinary
course of business; or to sell or otherwise dispose of any of the stock acquired
in the transaction, except for transfers described in Section 368 (a)(2)(C) of
the Code.
(d) The Company, PointeCom, and the shareholders of PointeCom will pay their
respective expenses, if any, incurred in connection with the transaction.
(e) At the time of the transaction, PointeCom will not have any outstanding
warrants, options, convertible securities, or any other type of right pursuant
to which any person could acquire stock in PointeCom that, if exercised or
converted, would affect the Company's acquisition or retention of control of
PointeCom, as defined in Section 368 (c) of the Code.
(f) The Company does not own, directly or indirectly, nor has it owned during
the past five years, directly or indirectly, any stock of PointeCom.
(g) Following the Merger, PointeCom will continue its historic business or use a
significant portion of its historic business assets in a business.
(h) PointeCom is not an investment company as defined in Section 368
(a)(2)(F)(iii) and (iv) of the Code.
(i) PointeCom will pay its dissenting shareholders the value of their stock out
of its own funds, no funds will be supplied for that purpose, directly or
indirectly, by the Company, nor will the Company directly or indirectly
reimburse PointeCom for any payments to dissenters.
(j)As of the Effective Time, the fair market value of the assets of PointeCom
will exceed the sum of its liabilities plus the liabilities, if any, to which
the assets are subject.
(k) PointeCom is not a collapsible corporation under Section 341 of the Code.
(l) The payment of cash in lieu of fractional shares of Company Common Stock is
solely for the purpose of avoiding the expense and inconvenience to the Company
of issuing fractional shares and does not represent separately bargained-for
consideration. The total cash consideration that will be paid in the Merger to
the PointeCom stockholders instead of issuing fractional shares of Company
Common Stock will not exceed one percent (1%) of the total consideration that
will be issued in the Merger to the PointeCom stockholders in exchange for their
shares of PointeCom capital stock. The fractional shares interests of each
PointeCom stockholder will be aggregated, and no PointeCom stockholder will
receive cash in an amount greater to or greater than the value of one full share
of Company Common Stock.
<PAGE>
(m) None of the compensation received by any shareholder-employee of PointeCom
will be separate consideration for, or allocable to, any of their shares of
PointeCom capital stock; none of the shares of Company Common Stock or Company
Preferred Stock received by any shareholder-employee will be separate
consideration for, or allocable to, any employment agreement; and the
compensation paid to any shareholder-employee will be for services actually
rendered and will be commensurate with amounts paid to third parties bargaining
at arms length for similar services.
(n) The holders of PointeCom Common Stock and PointeCom Preferred Stock will
receive voting shares of Company Common Stock and voting shares of Company
Preferred Stock having a fair market value equal to at least 50% of the value of
their PointeCom capital stock at the Effective Time. Under the terms of the
Merger, the stockholders of PointeCom will receive solely Company Common Stock
and Company Preferred Stock in exchange for such PointeCom capital stock.
However, redemptions or acquisitions of PointeCom capital stock by the Company
or PointeCom or any related party and extraordinary distributions (i.e.,
distributions with respect to stock other that regular, normal dividends), prior
to and in connection with the Merger will be taken into account for purposes of
this representation. Neither the Company nor a related party has a plan or
intention to reacquire or acquire any of the Company Common Stock or Company
Preferred Stock issued to PointeCom stockholders in the Merger. For purposes of
this representation, a related party includes any corporation (i) that is a
member of any affiliated group of which PointeCom or the Company is a member, as
defined in Section 1504 (determined without regard to Section 1504(b)), or (ii)
a corporation in which the Company owns, directly or indirectly, stock
possessing at least fifty percent (50%) of the total combined voting power of
all classes of stock entitled to vote, or at least fifty percent (50%) of the
total value of shares of all classes of stock (determined by taking into account
the constructive stock ownership rules of Section 318(a) of the Code as modified
by Section 304(c)). For purposes of the foregoing, (i) a corporation will be a
related party if either of the relationships described above exists immediately
before the Merger, immediately after the Merger, or is created in connection
with the Merger, and (ii) a related party will be considered as acquiring its
proportionate share of any Company Common Stock or Company Preferred Stock
acquired by a partnership in which it is a partner.
(o) PointeCom is not under the jurisdiction of a court in a Title 11 or similar
case within the meaning of Section 368(a)(3)(A) of the Code.
(p) There are no non-voting shares of PointeCom capital stock outstanding prior
to the Merger.
6.26. Accounts and Notes Receivable. Schedule 6.26 sets forth an accurate list
of the accounts and notes receivable of PointeCom as of the Balance Sheet Date.
Receivables from and advances to employees are separately identified in Schedule
6.26. Schedule 6.26 also sets forth an accurate aging of all accounts and notes
receivable as of the Balance Sheet Date, showing amounts due in 30-day aging
categories. The trade and other accounts receivable of PointeCom, including
without limitation those classified as current assets on the Interim Balance
<PAGE>
Sheet, are bona fide receivables, were acquired in the ordinary course of
business, are stated in accordance with GAAP and are collectible in the amounts
shown on Schedule 6.26, net of reserves reflected in the Interim Financial
Statements with respect to the accounts receivable as of the Balance Sheet Date,
and net of reserves reflected in the books and records of PointeCom (consistent
with the methods used in the Interim Financial Statements) with respect to
receivables of PointeCom after the Balance Sheet Date.
None of the representations and warranties of PointeCom shall survive the
Closing hereunder.
ARTICLE VII. CERTAIN COVENANTS
7.1. Conduct of Business. From the date of this Agreement until the Effective
Time, or earlier termination of this Agreement pursuant to the terms of this
Agreement, each of PointeCom, Newco and Company shall conduct its business only
in the ordinary course and, without limiting the generality of the foregoing,
each of PointeCom, Newco and the Company shall not, except as otherwise
expressly provided in this Agreement or unless the written consent of the other
parties shall have been obtained:
(a) except as expressly provided elsewhere in this Agreement or pursuant to the
terms of any outstanding securities, make or agree to make any change in its
authorized capital stock, other than, in the case of the Company, the amendment
to its Articles of Incorporation to create (x) the Company Class D Convertible
Senior Preferred Stock having in all material respects the same rights and
preferences as the PointeCom Class A Preferred Stock, (y) the Company Class E
Convertible Senior Preferred Stock having in all material respects the same
rights and preferences as the PointeCom Class B Preferred Stock (except that the
Company Preferred Stock shall be convertible into such number of shares of
Company Common Stock as would have been issued to the holders of the PointeCom
Preferred Stock if such holders had converted the PointeCom Preferred Stock into
PointeCom Common Stock prior to the Effective Time), and (z) the Class C
Convertible Senior Preferred Stock and related warrants issuable upon conversion
of the PointeCom Loan;
(b) none of the Company, Newco or PointeCom will grant any option, warrant,
purchase right, subscription right, conversion right, exchange right or other
contract, commitment or security providing for the issuance or sale of any
capital stock, or otherwise causing to become outstanding any capital stock, or
issue, sell, authorize or otherwise dispose of any of its capital stock (Stock
Rights), except (i) upon the conversion or exercise of Stock Rights outstanding
as of the date of this Agreement; (ii) for stock options issued to employees of
the Company and its Subsidiaries or PointeCom and its Subsidiaries in a manner
consistent with past practice which (I) do not provide for the issuance of more
than 200,000 shares of common stock of the Company or PointeCom in any calendar
quarter, (II) are issued at not less than the market price of the Company Stock
on the date of grant, (III) are not issued to any executive officer or director
of the Company or its Subsidiaries, and (IV) do not provide for accelerated
vesting as a result of the Merger.
<PAGE>
(c) declare or pay any dividend or distribution, other than as provided in
Section 7.1(f), in respect of its capital stock, or except as expressly provided
elsewhere in this Agreement or pursuant to the terms of any outstanding
securities, directly or indirectly redeem, combine, split, purchase or otherwise
acquire any of its capital stock;
(d) increase the compensation payable or to become payable to any of its
officers, directors, employees, consultants or agents, except in the ordinary
course of business consistent with past practices;
(e) adopt any new or materially amend any existing employee benefit plan or any
employment agreement or severance agreement, except as may be required by law;
(f) sell or transfer, or enter into any agreement to sell or transfer, any
material assets, properties or rights to any person other than sales or
transfers in the ordinary course of business consistent with past practice;
provided, however, that the Company shall have the right and option to dispose
of by sale or otherwise its subsidiary enablecommerce.com prior to the Closing
Date and PointeCom shall have the right and option to dispose of (or arrange for
the disposition subsequent to the Effective Time) its interest in Telecommute
Solutions, Inc. by distributing such interest to its shareholders, or otherwise,
prior to the Closing Date;
(g) cancel, or agree to cancel, any of its material receivables;
(h) increase indebtedness, other than accounts payable incurred in the ordinary
course of business, consistent with past practices, incurred in connection with
the construction, development, deployment and/or operation of the Company's
telecommunications network in Mexico or incurred in connection with the
transactions contemplated by this Agreement and as contemplated in Section 7.10
below;
(i) encumber any of its property or assets except for Permitted Encumbrances or
except encumbrances incurred in connection with the construction, development,
deployment and/or operation of the Company's telecommunications network in
Mexico;
(j) make any commitments for capital improvements not disclosed on Schedule 7.1;
(k) enter into, or agree to enter into, any plan, agreement or arrangement
granting any preferential rights to purchase or acquire any interest in any of
its assets, property or rights or requiring consent of any party to the transfer
and assignment of any such assets, property or rights except plans, agreements
or arrangements entered into in connection with the construction, development,
deployment and/or operation of the Company's telecommunications network in
Mexico;
(l) purchase or acquire, or enter into any agreement, plan or arrangement to
purchase or acquire, any property, rights or assets outside of the ordinary
course of business except those purchases or acquisitions made in connection
<PAGE>
with the construction, development, deployment and/or operation of the Company's
telecommunications network in Mexico;
(m) form or cause to be formed any subsidiary other than in the case of the
Company, Newco;
(n) fail to keep its material properties insured substantially to the same
extent as they are currently insured;
(o) waive any of its material rights or claims; or
(p) materially breach, materially change the terms of, materially amend or
terminate any material contract, agreement, Permit or other right to which it is
a party or any of its property is subject.
In the event either party shall request the other party to consent in writing to
an action otherwise prohibited by this Section 7.1, such other party shall use
reasonable efforts to respond in a prompt and timely fashion (but in no event
later than ten (10) business days following such request), but may otherwise
respond affirmatively or negatively in its sole discretion.
7.2. Reasonable Efforts. Each of the Company and PointeCom shall use all
commercially reasonable efforts to preserve intact its business organization and
to preserve its goodwill as to customers, suppliers and others having business
relations with it.
7.3. Inspection. The Company shall permit representatives of PointeCom, and
PointeCom shall permit representatives of the Company, during normal business
hours, to examine the other party's properties, books, contracts, Tax returns
and other records and shall furnish such representatives with all such
information in its possession or control concerning such affairs as they may
reasonably request.
7.4. Restraint on Solicitation.
(a) Company Exclusivity.
(i) The Company shall, and shall cause its Subsidiaries and Representatives to,
immediately cease and terminate any existing solicitation, initiation,
encouragement, activity, discussion or negotiation with any Persons conducted
heretofore by the Company, its Subsidiaries or any of their respective
Affiliates, officers, directors, employees, financial advisors, agents or
representatives (each a Representative) with respect to any proposed, potential
or contemplated Acquisition Proposal.
(ii) From and after the date hereof, without the prior written consent of
PointeCom, the Company will not authorize or permit any of its Subsidiaries to,
and shall cause any and all of its Representatives not to, directly or
indirectly, (A) solicit, initiate, or encourage any inquiries or proposals that
<PAGE>
constitute, or could reasonably be expected to lead to, an Acquisition Proposal,
or (B) engage in negotiations or discussions with any Company Third Party
concerning, or provide any non-public information to any person or entity
relating to, an Acquisition Proposal, or (C) enter into any letter of intent,
agreement in principle or any acquisition agreement or other similar agreement
with respect to any Acquisition Proposal; provided, however, that nothing
contained in this Section 7.4(a)(ii) shall prevent the Company or the Company
Board of Directors prior to receipt of the Requisite Stockholder Approval of the
Company stockholders, from furnishing non-public information to, or entering
into discussions or negotiations with, any Company Third Party in connection
with an unsolicited, bona fide written proposal for an Acquisition Proposal by
such Company Third Party, if and only to the extent that (1) such Company Third
Party has made a written proposal to the Company Board of Directors to
consummate an Acquisition Proposal, (2) the Company Board of Directors
determines in good faith, based upon the advice of a financial advisor of
nationally recognized reputation, that such Acquisition Proposal is reasonably
capable of being completed on substantially the terms proposed, and would, if
consummated, result in a transaction that would provide greater value to the
holders of the shares of Company Common Stock than the transaction contemplated
by this Agreement (a Superior Proposal), (3) the failure to take such action
would, in the reasonable good faith judgment of the Company Board of Directors,
based upon a written opinion of the Company's outside legal counsel, be a
violation of its fiduciary duties to the Company's stockholders under applicable
law, and (4) prior to furnishing such non-public information to, or entering
into discussions or negotiations with, such Person, the Company Board of
Directors receives from such Person an executed confidentiality agreement that
provides prior notice of its decision to take such action to PointeCom. The
Company agrees not to release any Company Third Party from, or waive any
provision of, any standstill agreement to which it is a party or any
confidentiality agreement between it and another Person who has made, or who may
reasonably be considered likely to make, an Acquisition Proposal, unless the
failure to take such action would, in the reasonable good faith judgment of the
Company Board of Directors, based upon the written opinion of the Company's
outside legal counsel, be a violation of its fiduciary duties to the Company
stockholders under applicable law and such action is taken prior to receipt of
the Requisite Stockholder Approval of the Company stockholders. Without
limiting the foregoing, it is understood that any violation of the restrictions
set forth in the preceding sentence by any Representative of the Company or any
of its Subsidiaries shall be deemed to be a breach of this Section 7.4(a) by the
Company.
(iii) The Company shall notify PointeCom promptly after receipt by the Company
or the Company's knowledge of the receipt by any of its Representatives of any
Acquisition Proposal or any request for non-public information in connection
with an Acquisition Proposal or for access to the properties, books or records
of the Company by any Person that informs such party that it is considering
making or has made an Acquisition Proposal. Such notice shall be made orally
and in writing and shall indicate the identity of the offeror and the terms and
conditions of such proposal, inquiry or contact. The Company shall keep
PointeCom informed of the status (including any change to the material terms) of
any such Acquisition Proposal or request for non-public information.
<PAGE>
(iv) The Company Board of Directors may not withdraw or modify, or propose to
withdraw or modify, in a manner adverse to PointeCom, the approval or
recommendation by the Company Board of this Agreement or the Merger unless,
following the receipt of a Superior Proposal but prior to receipt of the
Requisite Stockholder Approval of the Company stockholders, in the reasonable
good faith judgment of the Company Board of Directors, based upon the written
opinion of Company's outside legal counsel, the failure to do so would be a
violation of the Company Board of Directors fiduciary duties to the Company's
stockholders under applicable law; provided, however, that, the Company Board of
Directors shall submit this Agreement and the Merger to the Company's
stockholders for adoption and approval, whether or not the Company Board of
Directors at any time subsequent to the date hereof determines that this
Agreement is no longer advisable or recommends that the stockholders of the
Company reject it or otherwise modifies or withdraws its recommendation. Unless
the Company Board of Directors has withdrawn its recommendation of this
Agreement in compliance herewith, the Company shall use its best efforts to
solicit from the Company's stockholders proxies in favor of (a) approval of the
issuance of shares of Company Common Stock in connection with the Merger as
provided in this Agreement in accordance with the rules of NASDAQ and (b) an
amendment to the Company's articles of incorporation to increase the authorized
capital stock of the Company in accordance with the Texas Business Corporation
Act and its articles of incorporation and by-laws.
(v) In the event the Company receives a Superior Proposal, the Company shall
offer to PointeCom the right to equal such Superior Proposal or make a proposal
that is superior to the Company's stockholders than such Superior Proposal. If
PointeCom wishes to exercise such right, it must give the Company written notice
of its decision to do so within five Business Days after the Company gives
written notice to Pointe Com of such Superior Proposal.
(b) PointeCom Exclusivity.
(i) PointeCom shall, and shall cause its Subsidiaries and Representatives to,
immediately cease and terminate any existing solicitation, initiation,
encouragement, activity, discussion or negotiation with any Persons conducted
heretofore by PointeCom, its Subsidiaries or any of their Representatives with
respect to any proposed, potential or contemplated Acquisition Proposal.
(ii) From and after the date hereof, without the prior written consent of the
Company, PointeCom will not authorize or permit any of its Subsidiaries to, and
shall cause any and all of its Representatives not to, directly or indirectly,
(A) solicit, initiate, or encourage any inquiries or proposals that constitute,
or could reasonably be expected to lead to, an Acquisition Proposal, or (B)
engage in negotiations or discussions with any PointeCom Third Party concerning,
or provide any non-public information to any person or entity relating to, an
Acquisition Proposal, or (C) enter into any letter of intent, agreement in
principle or any acquisition agreement or other similar agreement with respect
to any Acquisition Proposal; provided, however, that nothing contained in this
Section 7.4(b)(ii) shall prevent PointeCom or the PointeCom Board of Directors
<PAGE>
prior to receipt of the Requisite Stockholder Approval of PointeCom
stockholders, from furnishing non-public information to, or entering into
discussions or negotiations with, any PointeCom Third Party in connection with
an unsolicited, bona fide written proposal for an Acquisition Proposal by such
PointeCom Third Party, if and only to the extent that (1) such PointeCom Third
Party has made a written proposal to the PointeCom Board of Directors to
consummate an Acquisition Proposal, (2) the PointeCom Board of Directors
determines in good faith, based upon the advice of a financial advisor of
nationally recognized reputation, that such Acquisition Proposal is reasonably
capable of being completed on substantially the terms proposed, and would, if
consummated, result in a transaction that would provide greater value to the
holders of the shares of PointeCom Common Stock than the transaction
contemplated by this Agreement (a Superior PointeCom Proposal), (3) the failure
to take such action would, in the reasonable good faith judgment of the
PointeCom Board of Directors, based upon a written opinion of PointeCom outside
legal counsel, be a violation of its fiduciary duties to PointeCom's
stockholders under applicable law, and (4) prior to furnishing such non-public
information to, or entering into discussions or negotiations with, such Person,
PointeCom's Board of Directors receives from such Person an executed
confidentiality agreement that provides prior notice of its decision to take
such action to the Company. PointeCom agrees not to release any PointeCom Third
Party from, or waive any provision of, any standstill agreement to which it is a
party or any confidentiality agreement between it and another Person who has
made, or who may reasonably be considered likely to make, an Acquisition
Proposal, unless the failure to take such action would, in the reasonable good
faith judgment of the PointeCom Board of Directors, based upon written opinion
of PointeCom outside legal counsel, be a violation of its fiduciary duties to
PointeCom stockholders under applicable law and such action is taken prior to
receipt of the Requisite Stockholder Approval of PointeCom stockholders.
Without limiting the foregoing, it is understood that any violation of the
restrictions set forth in the preceding sentence by any Representative of
PointeCom or any of its Subsidiaries shall be deemed to be a breach of this
Section 7.4(b) by PointeCom.
(iii) PointeCom shall notify the Company promptly after receipt by PointeCom or
PointeCom's knowledge of the receipt by any of its Representatives of any
Acquisition Proposal or any request for non-public information in connection
with an Acquisition Proposal or for access to the properties, books or records
of PointeCom by any Person that informs such party that it is considering making
or has made an Acquisition Proposal. Such notice shall be made orally and in
writing and shall indicate the identity of the offeror and the terms and
conditions of such proposal, inquiry or contact. PointeCom shall keep the
Company informed of the status (including any change to the material terms) of
any such Acquisition Proposal or request for nonpublic information.
(iv) The PointeCom Board of Directors may not withdraw or modify, or propose to
withdraw or modify, in a manner adverse to the Company, the approval or
recommendation by PointeCom Board of this Agreement or the Merger unless,
following the receipt of a Superior PointeCom Proposal but prior to receipt of
the Requisite Stockholder Approval of PointeCom stockholders, in the reasonable
good faith judgment of PointeCom Board of Directors, based upon the written
<PAGE>
opinion of PointeCom's outside legal counsel, the failure to do so would be a
violation of the PointeCom Board of Director's fiduciary duties to PointeCom's
stockholders under applicable law; provided, however, that, the PointeCom Board
of Directors shall submit this Agreement and the Merger to PointeCom's
stockholders for adoption and approval, whether or not PointeCom Board of
Directors at any time subsequent to the date hereof determines that this
Agreement is no longer advisable or recommends that the stockholders of
PointeCom reject it or otherwise modifies or withdraws its recommendation.
Unless the PointeCom Board of Directors has withdrawn its recommendation of this
Agreement in compliance herewith, PointeCom shall use its best efforts to
solicit from PointeCom's stockholders proxies in favor of adoption and approval
of the Merger and this Agreement in accordance with the NRS and its articles of
incorporation and by-laws.
(v) In the event PointeCom receives a Superior PointeCom Proposal, PointeCom
shall offer to the Company the right to equal such Superior PointeCom Proposal
or make a proposal that is superior to PointeCom's stockholders than such
Superior PointeCom Proposal. If the Company wishes to exercise such right, it
must give PointeCom written notice of its decision to do so within five Business
Days after PointeCom gives written notice to the Company of such Superior
PointeCom Proposal.
7.5. Update Information. Not earlier than ten days and not less than five days
before the date scheduled for Closing, each party to this Agreement shall
correct and supplement in writing any information furnished on Schedules that,
to the knowledge of such party, is incorrect or incomplete in any material
respect, and shall promptly furnish such corrected and supplemented information
to the other parties, so that such information shall be correct and complete at
the time such updated information is so provided. Thereafter, to the Closing,
such party shall notify the other parties in writing of any changes or
supplements to the updated information needed, to the knowledge of such party,
to make such information correct and complete at all times to the Closing. If
any corrected or supplemented information or schedules are not objected to in
writing by the receiving party or parties within five Business Days of receipt,
such shall be deemed accepted without objection.
7.6. Future Cooperation; Tax Matters. The Company and PointeCom shall each
deliver or cause to be delivered to the other following the Closing such
additional instruments as the other may reasonably request for the purpose of
fully carrying out this Agreement. The Company and PointeCom will cooperate and
use their commercially reasonable efforts to have the present officers,
directors and employees cooperate with each other at and after the Closing in
furnishing information, evidence, testimony and other assistance in connection
with any actions, proceedings, arrangements or disputes of any nature with
respect to matters pertaining to all periods prior to the Closing. The party
requesting cooperation, information or actions under this Section 7.6 shall
reimburse the other party for all reasonable out-of-pocket costs and expenses
paid or incurred in connection therewith.
<PAGE>
7.7. Expenses. Each party will pay the fees, expenses and disbursements of
such party and its agents, representatives, financial advisors, accountants and
counsel incurred in connection with the execution, delivery and performance of
this Agreement and any amendments hereto and the consummation of the transaction
contemplated hereby. Notwithstanding the immediately preceding sentence, in the
event this Agreement is terminated after the preparation of the Joint Proxy
Statement/Prospectus has begun, the
Company and PointeCom shall each pay 50% of the fees and expenses incurred in
connection with such Joint Proxy Statement/Prospectus; and the Company shall
reimburse PointeCom for all expenses associated with the PointeCom Loan and in
the event the Note is converted into Class C Convertible Senior Preferred Stock,
any expenses of PointeCom associated with the conversion shall be reimbursed.
7.8. Registration Statement and Proxy Statement.
(a) The Company shall promptly prepare and file a registration statement on Form
S-4 (which registration statement, in the form it is declared effective by the
SEC, together with any and all amendments and supplements thereto and all
information incorporated by reference therein, is referred to herein as the
Registration Statement) under and pursuant to the provisions of the 1933 Act for
the purpose of registering the Company Common Stock, the Company Preferred
Stock, and the Surviving Securities to be issued in the Merger, together with
any Company Common Stock issuable upon conversion of the Company Preferred Stock
or upon exercise of the Surviving Securities (the Underlying Securities).
PointeCom shall be allowed to participate in the preparation and review of the
Registration Statement prior to filing with the SEC by the Company. The Company
shall use commercially reasonable efforts to receive and respond to the comments
of the SEC and have the Registration Statement declared effective. The Company
and PointeCom shall promptly mail to their respective stockholders the proxy
statement in its definitive form contained in the Registration Statement. Such
proxy statement shall also serve as the prospectus to be included in the
Registration Statement (such proxy statement, prospectus, and any amendments or
supplements thereto, the Joint Proxy Statement/Prospectus). Each of PointeCom
and the Company agrees to provide as promptly as practical to the other, such
information concerning its business and financial statements and affairs as, in
the reasonable judgment of counsel for the other party, may be required or
appropriate for inclusion in the Registration Statement and the Joint Proxy
Statement/Prospectus and to cause its counsel and auditors to cooperate with the
other counselors and auditors in the preparation of the Registration Statement
and the Joint Proxy Statement/Prospectus. The Company shall use its
commercially reasonable efforts to have the Company Common Stock to be issued in
the Merger, or upon conversion of the Company Preferred Stock and the Surviving
Securities to be listed on NASDAQ, effective with the issuance thereof.
7.9. Company Financings. Upon execution of this Agreement, PointeCom shall
make a loan to the Company in the amount of $10,000,000 (the PointeCom Loan)
upon the terms and conditions set forth on Exhibit B attached hereto. The
outstanding $1,500,000 loan from PointeCom to the Company shall be repaid by the
Company simultaneously with PointeCom's funding of the PointeCom Loan. The net
proceeds of such loan ($8,481,500) will be held in escrow and disbursed pursuant
to the terms of the escrow agreement attached hereto as Exhibit E.
<PAGE>
7.10. Voting Agreements. The Company and PointeCom shall use their best
efforts to cause the Voting Agreement in the form attached hereto as Exhibit F
to be executed by (i) the stockholders owning a majority of the voting power of
the outstanding capital stock of PointeCom and (ii) stockholders owning37% of
the voting power of the outstanding capital stock of the Company. The Company,
as the sole stockholder of Newco, hereby consents to the adoption of this
Agreement by Newco and agrees that such consent shall be treated for all
purposes as a vote duly adopted at a meeting of the stockholders of Newco for
this purpose.
7.11. Company Board of Directors and Officers. Upon consummation of the
Merger, the Board of Directors of the Company shall be adjusted in size and
membership so that the total number of directors is nine, of which six of the
initial members shall be named by PointeCom and three of the initial members
shall be named by the Company. In connection with the next two elections of
directors of the Company by the shareholders of the Company that occur
subsequent to election of the initial Board of Directors as provided in the
preceding sentence, the then existing Board of Directors of the Company shall
determine the size of the board and a slate of nominees to be submitted to the
shareholders of the Company. Of these nominees, a majority of the members of
the then existing board who were designated by the Company (or elected to
succeed such designees pursuant the procedure described in this sentence) shall
have the right to designate three members of such slate of nominees. Prior to
Closing, the By-laws (or other appropriate governing instruments) of the Company
shall be appropriately amended to reflect these provisions for determining
nominees for election to the Board of Directors subsequent to consummation of
the Merger.
7.12. Key Managers and Employees. Prior to Closing, and subject to the
approval of the Company and PointeCom, the Boards of Directors of the Company
and PointeCom shall designate certain officers, directors, managers and
employees of the respective companies as the recipients of severance and/or
option agreements to be entered into as of the Effective Time. All accrued
bonuses shall be paid to employees of both companies for calendar year 1999.
7.13. Notices and Consents. Each of the Company, Newco and PointeCom will give
any required notices (and will cause each of their respective Subsidiaries to
give any required notices) to third parties, and will use commercially
reasonable efforts to obtain (and will cause each of their respective
Subsidiaries to use commercially reasonable efforts to obtain) any third-party
consents that may be required to consummate the Merger.
7.14. Indemnification of Directors and Officers of PointeCom.
(a) The Company agrees that, at the Effective Time, all rights to
indemnification existing in favor of the present or former directors and
officers of PointeCom (as such), or present or former officers or directors of
PointeCom serving or who served at PointeCom's request as a director, officer,
<PAGE>
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise (together with such persons heirs,
executors or administrators, a Company Indemnified Party and collectively, the
Company Indemnified Parties), as provided in the Company's Organizational
Documents and the indemnification agreements with such present and former
directors and officers as in effect as of the date hereof with respect to
matters occurring at or prior to the Effective Time, all of which agreements are
set forth on Schedule 7.14 attached hereto, shall survive the Merger and shall
continue in full force and effect and without modification (other than
modifications which would enlarge the indemnification rights) for a period of
not less than six years and the Surviving Corporation shall comply fully with
its obligations hereunder and thereunder.
(b) Any Company Indemnified Party wishing to claim indemnification under Section
7.14(a), notwithstanding anything to the contrary in the provisions set forth in
the Company's or the Surviving Corporations certificate of incorporation,
by-laws or other agreements respecting indemnification of directors or officers,
upon learning of any such claim, action, suit, proceeding or investigation,
shall promptly notify the Company thereof, but the failure to so notify shall
not relieve the Company of any liability it may have to such Indemnified Party
if such failure does not materially prejudice the Company. In the event of any
such claim, action, suit, proceeding or investigation (whether arising before or
after the Effective Time), (A) the Company or the Surviving Corporation shall
have the right following the Effective Time to assume the defense thereof and
Surviving Corporation shall not be liable to such Company Indemnified Parties
for any legal expenses of other counsel or any other expenses subsequently
incurred by such Company Indemnified Parties in connection with the defense
thereof, except that if the Company or the Surviving Corporation fails to assume
such defense or counsel for the Company Indemnified Party advises that there are
issues which raise conflicts of interest between the Company or the Surviving
Corporation, on the one hand, and the Company Indemnified Parties, on the other
hand, the Company Indemnified Parties may retain counsel satisfactory to them,
and the Company or Surviving Corporation shall pay all reasonable fees and
expenses of such counsel for the Company Indemnified Parties promptly as
statements therefor are received; provided, however, that Surviving Corporation
and the Company shall be obligated to pay for only one firm of counsel for all
Company Indemnified Parties in any jurisdiction unless the use of one counsel
for such Company Indemnified Parties would present such counsel with a conflict
of interest, in which case Surviving Corporation and the Company need only pay
for separate counsel to the extent necessary to resolve such conflict; (B) the
Company Indemnified Parties will reasonably cooperate in the defense of any such
matter; and (C) Surviving Corporation and the Company shall not be liable for
any settlement effectuated without its express prior written consent, which
consent shall not be unreasonably withheld or delayed. Surviving Corporation
and the Company shall not settle any action or claim identified in this Section
7.14(b) in any manner that would impose any liability or penalty on a Company
Indemnified Party not paid by the Company or the Surviving Corporation without
such Company Indemnified Party's prior written consent, which consent shall not
be unreasonably withheld or delayed.
<PAGE>
(c) Notwithstanding anything contained in clause (b) above, Surviving
Corporation and the Company shall not have any obligation hereunder to any
Company Indemnified Party (A) if the indemnification of such Company Indemnified
Party by Surviving Corporation or the Company in the manner contemplated hereby
is prohibited by applicable law, (B) the conduct of the Company Indemnified
Party relating to the matter for which indemnification is sought involved bad
faith, gross negligence or willful misconduct of such Company Indemnified Party,
(C) with respect to actions taken by any such Company Indemnified Party in his
or her individual capacity, including, without limitation, with respect to any
matters relating, directly or indirectly, to the purchase, sale or trading of
securities issued by the Company other than a tender or sale pursuant to a stock
tender agreement or (D) if such Company Indemnified Party shall have breached
its obligation to cooperate with Surviving Corporation or the Company in the
defense of any claim in respect of which indemnification is sought and such
breach (x) materially and adversely affects Surviving Corporations or the
Company's defense of such claim or (y) will materially and adversely affect
Surviving Corporations or the Company's defense of such claim if such breach is
not cured within ten days after notice of such breach is delivered to the
Company Indemnified Party and such breach is not cured during such period.
7.15. Regulatory Matters and Approvals. In addition to the requirements of
Section 7.8, each of the Company, Newco and PointeCom, promptly after the date
hereof, will (and the Company and PointeCom, promptly after the date hereof,
will cooperate to cause each of its Subsidiaries to) give any notices to, make
any filings with and use commercially reasonable efforts to obtain any
authorizations, consents and approvals of Governmental Authorities in connection
with the matters referred to in Section 5.2(c) and Section 6.2(c) above.
Without limiting the generality of the foregoing:
(a) State Corporation Law. The Company will take all action, to the extent
necessary in accordance with applicable law, its certificate of incorporation
and by-laws to convene a special meeting of its stockholders (the Company
Special Meeting), as soon as reasonably practicable in order that its
stockholders may consider and vote upon the adoption of this Agreement and the
approval of the Merger in accordance with the Texas Business Corporation Act,
the issuance of Company Common Stock in connection with the Merger as provided
in this Agreement as required by the rules of NASDAQ and an amendment to the
certificate of incorporation of the Company to increase the number of authorized
shares of Company Common Stock and to approve new stock option plans as required
to effectuate the terms of this transaction. PointeCom will take all action, to
the extent necessary in accordance wit h applicable law, its certificate of
incorporation and by-laws to convene a special meeting of its stockholders (the
PointeCom Special Meeting), as soon as reasonably practicable in order that its
stockholders may consider and vote upon the adoption of this Agreement and the
approval of the Merger in accordance with the NRS. The Company and PointeCom
shall mail the Joint Proxy Statement/Prospectus to their respective stockholders
simultaneously and as soon as reasonably practicable. Subject to Section 7.4,
the Joint Proxy Statement/Prospectus shall contain the affirmative unanimous
recommendations of the Company Board of Directors (i) in favor of the adoption
of this Agreement and the approval of the Merger, (ii) in favor of issuance of
<PAGE>
shares of Company Common Stock in connection with the Merger as provided in the
Agreement as required by the rules of NASDAQ and (iii) in favor of the increase
in the number of authorized shares of Company Common Stock in accordance with
the Texas Business Corporation Act; and of the PointeCom Board of Directors in
favor of the adoption of this Agreement and the approval of the Merger.
(b) Periodic Reports. Each of the Parties and its counsel shall be given an
opportunity to review each Form 10-K and Form 10-Q (and any amendments thereto)
to be filed by the other Party under the 1934 Act prior to their being filed
with the SEC and NASDAQ, and shall be provided with final copies thereof
concurrently with their filing with the SEC.
7.16. Continuity of Business Enterprise. The Company, Surviving Corporation or
any other member of the qualified group (as defined in Treasury Regulation
1.368-1(d)) shall, for the foreseeable future, continue at least one significant
historic business line of the Company or use at least a significant portion of
the Company's historic business assets in a business, in each case within the
meaning of Treasury Regulation 1.368-1(d).
ARTICLE VIII. CONDITIONS TO CLOSING
8.1. Conditions to Obligations of PointeCom. Except as may be waived by
PointeCom in writing, the obligations of PointeCom to consummate the
transactions contemplated herein are subject to satisfaction of the following
conditions:
(a) PointeCom shall have received a certificate from the Company and Newco that
(i) the representations and warranties of the Company and Newco contained in
this Agreement are true in all material respects at and as of the Closing, as
though such representations and warranties had been made at and as of the
Closing, except for such representations and warranties that are made as of an
earlier date; (ii) each of the Company and Newco has performed and complied in
all material respects with the covenants or conditions required by this
Agreement or any of the agreements, documents or instruments executed pursuant
hereto or thereto to be performed and complied with by the Company and Newco
prior to the Closing; (iii) all declarations, filings and registrations with,
notices to, and authorizations, consents and approvals of any Governmental
Authority or third party set forth in Schedule 5.2 have been made or obtained;
and (iv) there has been no material adverse change in the business, operations,
or financial condition of the Company or Newco since the date of this Agreement.
(b) PointeCom shall have received the opinion, based on representations of the
Company, Newco and PointeCom, and/or certain assumptions, of its attorneys or
independent accountants that the Merger should qualify as a reorganization under
Section 368 of the Code.
(c) No action, suit or proceeding before any Governmental Authority, to enjoin
the transactions contemplated by this Agreement, will have been instituted on or
before the Closing Date that has not been dismissed as of the Closing Date.
<PAGE>
(d) This Agreement and the transactions contemplated hereby shall have been
approved by the Requisite Stockholder Approval of PointeCom.
(e) This Agreement and the transaction contemplated hereby shall have the
Requisite Stockholder Approval of the Company.
(f) At the Effective Time, the officers, managers and employees contemplated in
Section 7.14, shall have resigned from their respective positions and executed
such documents as are mutually acceptable to the Company and PointeCom to
release PointeCom and the Company from any and all claims that any such
individual may have as a result of such employment.
(g) The shares of Merger Consideration to be issued to the PointeCom
shareholders shall have been registered under the 1933 Act.
(h) The Company's Board of Directors shall cause to be taken all necessary
actions required to cause, effective at the Closing (i) the Board of Directors
of the Company to have nine members, of which six shall be named by PointeCom.
(i) The Company shall have obtained the approval of Lucent Technologies, Inc.
and General Electric (NTFC and Newbridge) to the Merger and shall have modified
the existing senior credit facility with Lucent Technologies, Inc.,
substantially in accordance with Exhibit A to the Escrow Agreement.
(j) Any applicable waiting period under the Hart Scott Rodino Act shall have (i)
expired without action by the Department of Justice or the Federal Trade
Commission to prevent consummation of the Merger or the complete consummation of
the Merger or (ii) been earlier terminated.
(k) As a condition precedent to the disbursement of funds to the Company
pursuant to the Escrow Agreement, the Company shall cause its legal counsel,
Swidler Berlin Shereff Friedman, LLP, to deliver to PointeCom a legal opinion
with respect to the PointeCom Loan in substantially the form attached hereto
as Exhibit G.
(l) The Company shall cause one of its officers to execute and deliver a
certificate containing the representations set forth in Exhibit H attached
hereto and any other representations which may be reasonably requested in
connection with the rendering of the required federal income tax opinion.
8.2. Conditions to Obligations of the Company and Newco. Except as may be
waived by the Company and Newco in writing, the obligation of the Company and
Newco to consummate the transactions contemplated herein is subject to
satisfaction of the following conditions:
(a) The Company and Newco shall have received a certificate of PointeCom that
(i) the representations and warranties of PointeCom contained in this Agreement
<PAGE>
are true in all material respects at and as of the Closing, as though such
representations and warranties had been made at and as of the Closing, (ii)
PointeCom has performed and complied in all material respects with the covenants
or conditions required by this Agreement or any of the agreements, documents or
instruments executed pursuant hereto or thereto to be performed and complied
with by PointeCom prior to the Closing, (iii) all declarations, filings and
registrations with, notices to, and authorizations, consents and approvals of
any Governmental Authority or third party set forth in Schedule 6.2 have been
made or obtained and (iv) there has been no material adverse change in the
business, operations, or financial condition of PointeCom since the date of this
Agreement.
(b) No action, suit or proceeding before any Governmental Authority, to enjoin
the transactions contemplated by this Agreement or to its consummation, will
have been instituted on or before the Closing Date.
(c) The Agreement and the transaction contemplated hereby shall have been
approved by the Requisite Stockholder Approval of the Company.
(d) This Agreement and the transaction contemplated hereby shall have the
Requisite Stockholder Approval of PointeCom.
(e) At the Effective Time, the officers, directors, managers and employees
contemplated in Section 7.12, shall have resigned from their respective
positions and executed such documents as are mutually acceptable to the Company
and PointeCom to release PointeCom and the Company from any and all claims that
any such individual may have as a result of such employment.
(f) The Company shall have obtained the approval of Lucent Technologies, Inc.
and General Electric (NTFC and Newbridge) to the Merger and shall have modified
the existing senior credit facility with Lucent Technologies, Inc.,
substantially in accordance with Exhibit A to the Escrow Agreement.
(g) Any applicable waiting period under the Hart Scott Rodino Act shall have (i)
expired without action by the Department of Justice or the Federal Trade
Commission to prevent consummation of the Merger or the complete consummation of
the Merger or (ii) been earlier terminated.
(h) PointeCom shall cause one of its officers to execute and deliver a
certificate containing the representations set forth in Exhibit H attached
hereto and any other representations which may be reasonably requested in
connection with the rendering of the required federal income tax opinion.
(i) PointeCom shall have obtained a written waiver with regard to this
transaction of the rights of PointeCom Class A Preferred stockholders pursuant
to Section 2 of the Certificate of Designations for such PointeCom Class A
Preferred Stock.
<PAGE>
(j) The PointeCom Loan shall have been consummated and the proceeds of such loan
disbursed to the Company pursuant to the terms of the Escrow Agreement.
ARTICLE IX. NONDISCLOSURE OF CONFIDENTIAL INFORMATION
9.1. General. Each party hereto will hold, and will use its best efforts to
cause its Affiliates and their respective representatives to hold, in strict
confidence from any Person (other than any such Affiliate or representative),
unless (a) compelled to disclose by judicial or administrative process or by
other requirements of Law or (b) disclosed in an action or proceeding brought by
a party hereto in pursuit of its rights or in the exercise of its remedies
hereunder, all documents and information concerning the other party hereto or
any of its Affiliates furnished to it by such other party or such other party's
representatives in connection with this Agreement or the transactions
contemplated hereby, except to the extent that such documents or information can
be shown to have been (i) previously known by the party receiving such documents
or information, (ii) in the public domain (either prior to or after the
furnishing of such documents or information hereunder) through no fault of such
receiving party or (iii) later acquired by the receiving party from another
source if the receiving party is not aware that such source is under an
obligation to another party hereto to keep such documents and information
confidential. In the event of a breach or threatened breach by any party of the
provisions of this Section, all other parties shall be entitled to an injunction
restraining such party from disclosing, in whole or in part, such confidential
information. Nothing herein shall be construed as prohibiting any party from
pursuing any other available remedy for such breach or threatened breach,
including, without limitation, the recovery of damages.
9.2. Equitable Relief. Because of the difficulty of measuring economic losses
as a result of the breach of the foregoing covenants, because a breach of such
covenant would diminish the value of the assets and business of the Company or
PointeCom, and because of the immediate and irreparable damage that would be
caused for which the Surviving Corporation and/or PointeCom and/or the Company
would have no other adequate remedy, each party to this Agreement agrees that
the foregoing covenants may be enforced against it by injunctions, restraining
orders and other equitable actions.
ARTICLE X. INTENDED TAX TREATMENT
10.1. Tax-Free Reorganization. PointeCom and the Company are entering into
this Agreement with the intention that the Merger qualify as a tax-free
reorganization for federal income tax purposes and neither PointeCom nor the
Company will take any actions that disqualify the Merger for such treatment.
Neither PointeCom, Newco nor the Company will take or omit to take any action
that would cause the Merger not to be described as a reorganization under
Section 368(a) of the Code (or any comparable provisions of applicable state or
local law) and the parties will characterize the Merger as such a reorganization
for purposes of all tax returns and other filings.
<PAGE>
ARTICLE XI. TERMINATION
11.1. Termination. This Agreement may be terminated and the transaction
contemplated hereby abandoned:
(a) By mutual written consent of the parties at any time prior to Closing.
(b) Prior to the Closing, by written notice to the Company and Newco from
PointeCom, if (i) there is material breach of any representation, warranty or
covenant (including the failure of a party to consummate the Closing, if the
other parties are willing, ready and able to consummate the Closing in
accordance with this Agreement) on the part of the Company or Newco, or if a
representation or warranty of the Company or Newco shall be untrue in any
material respect, or (ii) if the conditions specified in Section 8.1 have not
been satisfied, and any such matter described in clauses (i) and (ii) of this
paragraph has not been cured by the Company or Newco within 10 Business Days
after written notice thereof from PointeCom.
(c) Prior to the Closing, by written notice to PointeCom from the Company and
Newco (i) if there is material breach of any representation, warranty or
covenant (including the failure of a party to consummate the Closing, if the
other parties are willing, ready and able to consummate the Closing in
accordance with this Agreement) on the part of PointeCom or if a representation
or warranty of PointeCom shall be untrue in any material respect, or (ii) if the
conditions specified in Section 8.2 have not been satisfied, and any such matter
described in clauses (i) and (ii) of this paragraph has not been cured by
PointeCom within 10 Business Days after written notice thereof from the Company.
(d) By action of the Board of Directors of either PointeCom or the Company,
before or after the approval by the Company stockholders or the PointeCom
stockholders, (A) if the Effective Time shall not have occurred by June 30, 2000
(the Outside Date) (unless the failure to consummate the Merger by such date is
due to the action or failure to act of the party seeking to terminate); or (B)
if any condition to the obligation of the terminating party to consummate the
Merger shall have become incapable of being satisfied prior to the Outside Date
as a result of a court order, stipulation or injunction that is final and
non-appealable.
(e) By PointeCom if the Company Board of Directors (i) enters into or publicly
announces its intention to enter into an agreement or agreement in principle
with respect to an Acquisition Proposal, (ii) withdraws its recommendation to
the Company stockholders of this Agreement or the Merger, or (iii) after the
receipt of an Acquisition Proposal, fails to confirm publicly, within ten
Business Days after the request of PointeCom, its recommendation to the Company
stockholders that the Company stockholders adopt and approve this Agreement and
the Merger.
(f) By the Company if the PointeCom Board of Directors (i) enters into or
publicly announces its intention to enter into an agreement or agreement in
principle with respect to an Acquisition Proposal, (ii) withdraws its
<PAGE>
recommendation to the PointeCom stockholders of this Agreement or the Merger or
(iii) after the receipt of an Acquisition Proposal, fails to confirm publicly,
within ten Business Days after the request of the Company, its recommendation to
the PointeCom stockholders that the PointeCom stockholders adopt and approve
this Agreement and the Merger.
(g) In the event any party becomes aware, and notifies the other party (the
Notified Party) in writing, of any matter, fact or circumstance which would be
required to be disclosed by any party as of the date hereof or at the Closing,
and such matter, fact or circumstance is such that the Notified Party would not
be obligated hereunder to consummate the Closing, then the Notified Party shall
have the right to terminate this Agreement within 10 Business Days after having
received such notice, such period being subject to an extension at the written
request of the Notified Party of up to five additional Business Days as
reasonably required to allow the Notified Party to evaluate the matter, fact or
circumstance of which it has been notified, or if the Notified Party does not so
terminate this Agreement, then (i) such notice shall be deemed to amend the
schedule or appropriate disclosure hereunder as of the date hereof; (ii) any
breach of any representation, warranty or covenant hereunder that could have
existed as a result of the occurrence or existence of such fact, matter or
circumstance shall be deemed cured and performed; and (iii) any condition to
such Notified Party's obligation to consummate the Closing which would otherwise
not be fulfilled as a result of the occurrence or existence of such fact, matter
or circumstance shall be deemed waived.
11.2. Effect. Any termination of this Agreement shall not release either
PointeCom on the one hand or the Company and Newco on the other from any
liability (for damages or otherwise) or other consequences arising from any
breach or violation by such party of the terms of this Agreement prior to the
effective time of such termination, nor shall any such termination release any
party from its obligations or duties under this Agreement, which, by their terms
and/or expressed intent, may require performance subsequent to any such
termination, and all provisions of this Agreement that set forth such
obligations or duties (including, without limitation Sections 7.7, and 11.3) and
such other general or procedural provisions that maybe relevant to any attempt
to enforce such obligations or duties, shall survive any such termination of
this Agreement until such obligations or duties shall have been performed or
discharged in full. Notwithstanding the foregoing, if Section 11.3 is
applicable to a termination and a party satisfies all of its obligations as set
forth in Section 11.3, no further liability or obligation shall extend to such
party, other than as set forth in Section 11.3.
11.3. Special Remedies.
(a) For purposes of the remedies available under this Section 11.3, the parties
acknowledge that it would be extremely impractical and difficult to ascertain
the actual damages that would be suffered by the parties if any party or parties
fails to consummate the transactions contemplated herein (for any reason other
than a party's failure, refusal or inability to perform any of its covenants and
agreements hereunder or the failure of any other of the conditions to the
party's obligation to consummate the transactions herein) and this Agreement is
terminated as hereinafter provided in this Section 11.3. The parties have
<PAGE>
considered carefully the loss to each non-breaching or non-defaulting party that
would result from the failure of the transactions to be consummated as a result
of such a breach or default hereunder by a party or parties; and other damages
that the non-breaching or non-defaulting party or parties will sustain but which
the parties cannot calculate with absolute certainty. Accordingly, to the
extent set forth in this Section 11.3, the parties damages under the
circumstances hereinafter described would reasonably be expected to amount to
the sum of $5,000,000 (in the aggregate), which shall be paid as full and
complete liquidated damages (the Termination Fee).
(b) In the event of any termination of this Agreement pursuant to Section
11.1(e), then the Company shall, at the option of PointeCom, promptly, but in no
event later than thirty Business Days after demand by PointeCom, pay to
PointeCom the Termination Fee, plus all amounts due (by acceleration or
otherwise) under the PointeCom Loan. Alternatively, PointeCom may, at its sole
option, convert the PointeCom Loan and the amount owed as the Termination Fee
into Class C Convertible Senior Preferred Stock (100,000 shares and 50,000
shares, respectively), which preferred stock shall automatically convert into
Company Common Stock at a conversion price of $8.20 per share as therein
provided, and Warrants. If the Company defaults in the payment of the
Termination Fee, PointeCom may, at its option, convert the Termination Fee into
50,000 shares of Class C Convertible Senior Preferred Stock (which is
convertible, at the option of PointeCom, into Company Common Stock at $8.20 per
share with regard to the Termination Fee); if the Company defaults in the
repayment of the PointeCom Loan, PointeCom may, at its option, convert the
PointeCom Loan into 100,000 shares (plus shares equal to accrued interest) of
Class C Convertible Senior Preferred Stock (which is convertible, at the option
of PointeCom, into Company Common Stock at $5.00 per share with regard to the
PointeCom Loan) and Warrants.
(c) In the event of any termination of this Agreement pursuant to Section
11.1(f), then PointeCom shall promptly, but in no event later than thirty
Business Days after written request by the Company, pay to the Company the
Termination Fee.
(d) In the event of termination of this Agreement pursuant to Section
11.1(b)(i), then the Termination Fee shall not be payable, PointeCom may pursue
its remedies at law or in equity and the Company shall, at the option of
PointeCom, promptly, but in no event later than thirty Business Days after
demand by PointeCom, pay to PointeCom all amounts due (by acceleration or
otherwise) under the PointeCom Loan. If the Company defaults in the repayment
of the PointeCom Loan, then PointeCom may, at its option, convert the PointeCom
Loan into Class C Convertible Senior Preferred Stock (which is convertible into
Company Common Stock at $5.00 per share with regard to the PointeCom Loan) and
Warrants as provided under the terms of the PointeCom Loan.
(e) In the event of termination of this Agreement pursuant to Section
11.1(c)(i), then the Termination Fee shall not be payable and the Company may
pursue its remedies at law or in equity.
<PAGE>
(f) In the event of termination of this Agreement because the conditions
specified in Sections 8.1(g), (j) or (k) have not been satisfied, then the
Termination Fee shall not be payable and the PointeCom Loan shall not be
accelerated. If the Company defaults in the repayment of the PointeCom Loan
when said loan shall become due, then PointeCom may, at its option, convert the
PointeCom Loan into Class C Convertible Senior Preferred Stock (which are
convertible into Company Common Stock at $8.20 per share) and Warrants of the
Company as provided under the terms of the PointeCom Loan.
(g) In the event of termination of this Agreement because the condition
specified in Section 8.1(e)(ii) has not been satisfied (under circumstances that
are not encompassed by paragraph 11.3(b) above), then the Termination Fee shall
not be payable and the Company shall promptly, but in no event later than thirty
Business Days after demand by PointeCom, pay to PointeCom all amounts due (by
acceleration or otherwise) under the PointeCom Loan. If the Company defaults in
the repayment of the PointeCom Loan, then PointeCom may, at its sole option,
convert the PointeCom Loan into Class C Convertible Senior Preferred Stock
(which is convertible into Company Common Stock at $8.20 per share) and Warrants
of the Company as provided under the terms of the PointeCom Loan.
(h) In the event of termination of this Agreement because the condition
specified in Section 8.2(d)(ii) has not been satisfied, then this Agreement
shall terminate, the Termination Fee shall not be payable and the PointeCom
Loan shall not be accelerated, and PointeCom may, at its sole option, convert
the PointeCom Loan into Class C Convertible Senior Preferred Stock (which is
convertible into Company Common Stock at $8.20 per share) and Warrants as
provided under the terms of the PointeCom Loan.
(i) In order for PointeCom to convert the Termination Fee into 50,000 shares of
Class C Convertible Senior Preferred Stock, PointeCom shall give the Company
written notice that PointeCom elects to convert such fee. The date of receipt
of such notice by the Company shall be the Conversion Date. The Company shall,
as soon as practicable after receipt of such notice and no later than 10 days
thereafter, issue and deliver to PointeCom a certificate for 50,000 shares of
Class C Convertible Senior Preferred Stock, together with a duly executed
Registration Rights Agreement. Such conversion shall be deemed to have been
made immediately prior to the close of business on the Conversion Date, and
PointeCom shall be regarded for all corporate purposes as the holder of the
number of shares of Class C Convertible Senior Preferred Stock to which it is
entitled upon the Conversion Date.
ARTICLE XII. MISCELLANEOUS
12.1. Successors and Assigns. This Agreement and the rights, interests and
obligations of the parties hereunder may not be assigned or delegated (by
operation of Law or otherwise) and shall be binding upon and shall inure to the
benefit of the parties hereto, the successors of PointeCom, Newco, and the
Company.
<PAGE>
12.2. Entire Agreement. This Agreement (including the Schedules, exhibits and
annexes attached hereto) and the documents delivered pursuant hereto constitute
the entire agreement and understanding among the Company, Newco and PointeCom
and supersede any prior agreement and understanding relating to the subject
matter of this Agreement, including the term sheet dated November 23, 1999.
This Agreement may be modified or amended only by a written instrument executed
by the parties hereto, acting through their respective officers, duly authorized
by their respective Boards of Directors.
12.3. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument. Facsimile
transmission of any signed original document and/or retransmission of any signed
facsimile transmission will be deemed the same as delivery of an original. At
the request of any party, the parties will confirm facsimile transmission by
signing a duplicate original document.
12.4. Brokers and Agents. Each party hereto represents and warrants that it
employed no broker or agent in connection with the transactions contemplated by
this Agreement. Each party agrees to indemnify each other party against all
loss, cost, damages or expense arising out of claims for fees or commissions of
brokers employed or alleged to have been employed by such indemnifying party in
connection with the transactions contemplated by this Agreement.
12.5. Notices. All notices and communications required or permitted hereunder
shall be in writing and may be given by facsimile or by depositing the same in
the United States mail, addressed to the party to be notified, postage prepaid
and registered or certified with return receipt requested, or by delivering the
same in person to an officer or agent of such party, as follows:
(a) If to PointeCom, addressed to them at:
Pointe Communications Corporation
1325 North Meadow Parkway, Suite 110
Roswell, GA 30076
FAX: (770) 319-2834
with a copy (which shall not constitute notice) to:
W. Robert Dyer, Jr.
Gardere & Wynne, L.L.P.
1601 Elm Street, Suite 3000
Dallas, Texas 75201-4761
FAX: (214) 999-3574
(b) If to the Company or Newco, addressed as follows:
<PAGE>
Telscape International, Inc.
2700 Post Oak Boulevard, Suite 100
Houston, Texas 77056
FAX: (713) 968-0930
with a copy (which shall not constitute notice) to:
John J.Klusaritz
Swidler Berlin Shereff Friedman, LLP
3000 K St., NW, Suite 300
Washington, DC 20007
FAX: (202) 424-7647
or such other address as any party hereto shall specify pursuant to this Section
12.5 from time to time.
12.6. Exercise of Rights and Remedies. Except as otherwise provided herein, no
delay of or omission in the exercise of any right, power or remedy accruing to
any party as a result of any breach or default by any other party under this
Agreement shall impair any such right, power or remedy, nor shall it be
construed as a waiver of or acquiescence in any such breach or default, or of
any similar breach or default occurring later; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
occurring before or after that waiver.
12.7. Reformation and Severability. In case any provision of this Agreement
shall be invalid, illegal or unenforceable, it shall, to the extent possible, be
modified in such manner as to be valid, legal and enforceable, but so as to most
nearly retain the intent of the parties, and if such modification is not
possible, such provision shall be severed from this Agreement, and in either
case, the validity, legality and enforceability of the remaining provisions of
this Agreement shall not in any way be affected or impaired thereby.
12.8. Governing Law. This Agreement shall be construed in accordance with the
laws of the State of Texas (except for its principles governing conflicts of
laws).
12.9. No Third-Party Beneficiaries. This Agreement shall not confer any rights
or remedies upon any Person other than the parties hereto and their respective
successors and permitted assigns; provided, however, that (i) the provisions in
Article III above (A) concerning payment of the Merger Consideration are
intended for the benefit of PointeCom stockholders and (B) concerning the
conversion of the stock options are intended for the benefit of the holders of
such stock options, (ii) the provisions in Section 7.14 above concerning
indemnification are intended for the benefit of the individuals specified
therein and their respective legal representatives and (iii) the provisions of
Sections 7.4, and 10.1 are intended for the benefit of the Company stockholders
and the PointeCom stockholders.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first written above.
POINTE COMMUNICATIONS CORPORATION
By:
Name:
Title:
POINTE ACQUISITION, CORP.
By:
Name:
Title:
TELSCAPE INTERNATIONAL, INC.
By:
Name:
Title:
<PAGE>
Exhibit A
Certificate of Designation
<PAGE>
Exhibit B
Form of Promissory Note
<PAGE>
Exhibit C
Registration Rights Agreement
<PAGE>
Exhibit D
Warrant Agreement
<PAGE>
Exhibit E
Escrow Agreement
<PAGE>
Exhibit F
Voting Agreement
<PAGE>
Exhibit G
Form of Legal Opinion
<PAGE>
Exhibit H
Officer's Representations
<PAGE>
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS
1.1. Definitions1
1.2. Interpretation7
ARTICLE II
THE MERGER AND THE SURVIVING CORPORATION
2.1. The Merger7
2.2. Effective Time of the Merger7
2.3. Certificate of Incorporation, Bylaws and Board of Directors of Surviving
Corporation8
ARTICLE III
CONVERSION OF SHARES
3.1. Conversion of Shares8
3.2. Fractional Shares9
3.3. Dissenting Shares10
3.4. Company Options10
3.5. Newco Shares10
3.6. Delivery of Merger Consideration11
3.7. No Effect on Capital Stock of Company11
3.8. Closing of Transfer Records11
3.9. Effect on Treasury of Unissued Shares of PointeCom Capital Stock11
3.10. Rule 166-310
ARTICLE IV
CLOSING 12
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND NEWCO
5.1. Due Organization and Qualification12
5.2. Authorization; Non-Contravention; Approvals12
5.3. Company Common Stock13
5.4. Tax Free Reorganization13
5.5. SEC Filings; Disclosure15
5.6. Interim Operations of Newco16
5.7. Capitalization.16
5.8. Subsidiaries16
5.9. Financial Statements16
5.10. Liabilities and Obligations17
5.11. Accounts and Notes Receivable.17
5.12. Assets17
<PAGE>
5.13. Material Customers and Contracts18
5.14. Permits19
5.15. Environmental Matters19
5.16. Labor and Employee Relations20
5.17. Insurance20
5.18. Compensation; Employment Agreements20
5.19. Noncompetition and Nonsolicitation Agreements20
5.20. Employee Benefit Plans20
5.21. Litigation and Compliance with Law22
5.22. Taxes23
5.23. Absence of Changes24
5.24. Absence of Certain Business Practices25
5.25. Competing Lines of Business; Related-Party Transactions25
5.26. Intangible Property25
5.27. Disclosure26
5.28. Year 2000 Compliance26
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF POINTECOM AND NEWCO
6.1. Organization26
6.2. Authorization; Non-Contravention; Approvals26
6.3. SEC Filings; Disclosure27
6.4. Capitalization28
6.5. Subsidiaries28
6.6. Financial Statements28
6.7. Liabilities and Obligations29
6.8. Assets29
6.9. Material Customers and Contracts30
6.10. Permits30
6.11. Environmental Matters31
6.12. Labor and Employee Relations31
6.13. Insurance31
6.14. Compensation; Employment Agreements31
6.15. Noncompetition and Nonsolicitation Agreements32
6.16. Litigation and Compliance with Law32
6.17. Taxes32
6.18. Absence of Changes33
6.19. Absence of Certain Business Practices34
6.20. Competing Lines of Business; Related-Party Transactions35
6.21. Intangible Property35
6.22. Disclosure35
6.23. Year 2000 Compliance35
6.24. Employee Benefit Plans35
6.25. Tax Free Reorganization37
6.26. Accounts and Notes Receivable39
<PAGE>
ARTICLE VII
CERTAIN COVENANTS
7.1. Conduct of Business40
7.2. Reasonable Efforts42
7.3. Inspection42
7.4. Restraint on Solicitation.42
7.5. Update Information45
7.6. Future Cooperation; Tax Matters45
7.7. Expenses46
7.8. Registration Statement and Proxy Statement46
7.9. Company Financings46
7.10. Voting Agreements47
7.11. Company Board of Directors and Officers47
7.12. Key Managers and Employees47
7.13. Notices and Consents47
7.14. Indemnification of Officers and Directors of PointeCom47
7.15. Regulatory Matters and Approvals49
7.16. Continuity of Business Enterprise49
ARTICLE VIII
CONDITIONS TO CLOSING
8.1. Conditions to Obligations of PointeCom50
8.2. Conditions to Obligations the Company and Newco51
ARTICLE IX
NONDISCLOSURE OF CONFIDENTIAL INFORMATION
9.1. General52
9.2. Equitable Relief52
ARTICLE X
INTENDED TAX TREATMENT
10.1. Tax-Free Reorganization53
ARTICLE XI
TERMINATION
11.1. Termination53
11.2. Effect54
11.3. Special Remedies55
ARTICLE XII
MISCELLANEOUS
12.1. Successors and Assigns56
12.2. Entire Agreement57
12.3. Counterparts57
12.4. Brokers and Agents57
<PAGE>
12.5. Notices57
12.6. Exercise of Rights and Remedies58
12.7. Reformation and Severability58
12.8. Governing Law58
12.9. No Third-Party Beneficiaries58
Schedules
Schedule 5.1 Company Organization and Qualification
Schedule 5.2 Company Authority
Schedule 5.7 Company Capitalization
Schedule 5.8 Company Subsidiaries
Schedule 5.9 Company Financial Statements
Schedule 5.10 Company Liabilities and Obligations
Schedule 5.11 Company Accounts and Notes Receivable
Schedule 5.12 Company Assets
Schedule 5.13 Company Material Customers and Contracts
Schedule 5.14 Company Permits
Schedule 5.15 Company Environmental Matters
Schedule 5.16 Company labor and Employee Relations
Schedule 5.17 Company Insurance
Schedule 5.18 Company Compensation; Employment Agreements
Schedule 5.19 Company Noncompetition, Confidentiality and Non-Solicitation
Agreements
Schedule 5.20 Company Employee Benefit Plans
Schedule 5.21 Company Litigation and Compliance with Laws
Schedule 5.22 Company Taxes
Schedule 5.23 Company Absence of Changes
Schedule 5.25 Company Competing Lines of Business; Related Party Transactions
Schedule 5.26 Company Intangible Property
Schedule 6.1 PointeCom Organization
Schedule 6.2 PointeCom Authorization
Schedule 6.3 PointeCom SEC Filings; Disclosure
Schedule 6.4 PointeCom Capitalization
Schedule 6.5 PointeCom Subsidiaries
Schedule 6.6 PointeCom Financial Statements
Schedule 6.7 PointeCom Liabilities and Obligations
Schedule 6.8 PointeCom Assets
Schedule 6.9 PointeCom Material Customers and Contracts
Schedule 6.10 PointeCom Permits
Schedule 6.11 PointeCom Environmental Matters
Schedule 6.12 PointeCom labor and Employee Relations
Schedule 6.13 PointeCom Insurance
Schedule 6.14 PointeCom Compensation; Employment Agreements
Schedule 6.15 PointeCom Noncompetition, Confidentiality and Non-Solicitation
Agreements
<PAGE>
Schedule 6.16 PointeCom Litigation and Compliance with Laws
Schedule 6.17 PointeCom Taxes
Schedule 6.18 PointeCom Absence of Changes
Schedule 6.20 PointeCom Competing Lines of Business; Related Party Transactions
Schedule 6.21 PointeCom Intangible Property
Schedule 6.24 PointeCom Employee Benefit Plans
Schedule 6.26 PointeCom Accounts and Notes Receivable
Exhibits
Exhibit A - Certificate of Designation
Exhibit B - Form of Promissory Note
Exhibit C - Registration Rights Agreement
Exhibit D - Warrant Agreement
Exhibit E - Escrow Agreement
Exhibit F - Voting Agreement
Exhibit G - Form of Legal Opinion
Exhibit H - Officers Representations
<PAGE>
CONTRATO DE COMPRA-VENTA DE FIBRAS
CONTRATO DE COMPRA-VENTA DE FIBRAS QUE CELEBRAN POR UNA PARTE IUSATEL, S.A. DE
C.V. ("IUSATEL"), REPRESENTADA POR EL SENOR FULVIO VARGAS DEL VALLE, Y POR LA
OTRA PARTE TELEREUNION, S.A. DE C.V. ("TELEREUNION") REPRESENTADA POR LOS
SENORES OSCAR GARCIA MORA Y RICARDO AGUSTIN OREA GUDINO, DE ACUERDO CON LAS
SIGUIENTES DECLARACIONES Y CLAUSULAS.
DECLARACIONES
I. DECLARA IUSATEL:
a) Que es una sociedad anonima constituida de conformidad con las leyes de los
Estados Unidos Mexicanos, en los terminos de la escritura publica numero 53,301
fechada el 10 de mayo de 1989, otorgada ante la fe del Lic. Gerardo Correa
Etchegaray Notario Publico numero 89, de la Ciudad de Mexico, Distrito Federal,
la que se encuentra inscrita en el Registro Publico de Comercio de la Ciudad de
Mexico, Distrito Federal, bajo el folio mercantil numero 195,051 de fecha 9 de
marzo de 1995.
b) Que su representante legal cuenta con las facultades legales necesarias y
suficientes para la celebracion del presente contrato, segun lo acredita con la
escritura publica numero 23, otorgada con fecha 2 de diciembre de 1999, ante la
fe del Lic. Francisco Hugues Velez, Notario Publico numero 212, en la Ciudad de
Mexico, Distrito Federal.
c) Que con fecha del 16 de octubre de 1995, la Secretaria de Comunicaciones
y Transportes le otorgo un titulo de concesion para instalar, operar y explotar
una red publica de telecomunicaciones al amparo del cual fue autorizada para
prestar, entre otros, el servicio publico de telefonia basica de larga distancia
nacional e internacional, concesion modificada el 17 de Diciembre de 1997, de
acuerdo con el cual esta terminando de construir su propia red para satisfacer
los requisitos establecidos en dicho titulo de concesion.
d) Que IUSATEL, por si o a traves de terceros, esta en el proceso de terminar la
construccion de un sistema de comunicaciones con fibra optica a lo largo de una
ruta de aproximadamente 498 kilometros de longitud. Dicho sistema incluye la
ruta Puebla, Puebla - Moras, Cd. de Mexico, Distrito Federal, denominada "Puebla
- -Mexico - Moras" y el Anillo D.F. que incluye: la ruta Moras - Central Telmex
Estrella y el Anillo Moras - central Telmex Nextengo - Central Telmex Vallejo
- -Central Telmex San Juan (en lo sucesivo, para los efectos de este contrato, el
"Sistema Uno Iusatel"), tal y como se describe en el Anexo A.2 que firmado por
ambas partes se integra a este Contrato.
<PAGE>
e) Que IUSATEL, por si o a traves de terceros, esta en proceso de terminar la
construccion de un sistema de comunicaciones con fibra optica a lo largo de una
ruta de aproximadamente 568 kilometros de longitud. Dicho sistema incluye la
ruta Jilotepec, Estado de Mexico - Queretaro, Queretaro; la ruta Queretaro,
Queretaro - Guadalajara, Jalisco; la ruta en Anillo en la Ciudad de Leon,
Guanajuato - Central Telmex Pedro Moreno y la ruta en Anillo en la Ciudad de
Guadalajara, Jalisco - Central Telmex CTG- Central Telmex Tlaquepaque, (en lo
sucesivo y para los efectos de este contrato, el "Sistema Dos Iusatel"), tal y
como se describe en el Anexo A.2, que firmado por ambas partes se integra a este
contrato.
El Sistema Uno Iusatel y el Sistema Dos Iusatel, seran denominados en forma
conjunta como el "Sistema Iusatel".
f) Que IUSATEL desea vender libre de todo gravamen y limitacion de dominio
fibra optica oscura, que en su momento se encuentre instalada en el Sistema
Iusatel, a TELEREUNION en los terminos establecidos en este Contrato.
II. DECLARA TELEREUNION:
a) Que es una sociedad anonima constituida de conformidad con las leyes de los
Estados Unidos Mexicanos, en los terminos de la escritura publica numero 71,332
de fecha 16 de julio de 1997, otorgada ante la fe del Lic. Francisco Talavera
Autrique, Notario Publico numero 221 de la Ciudad de Mexico, D.F., actuando como
asociado y en el protocolo del Lic. Joaquin Talavera Sanchez Notario Publico No.
50 del D.F., debidamente inscrita en el Registro Publico de Comercio de dicha
ciudad, bajo el folio mercantil numero 224,904, de fecha 19 de septiembre de
1997.
b) Que sus representantes legales cuentan con las facultades legales necesarias
y suficientes para la celebracion del presente contrato segun la escritura
publica numero 3,194, de fecha 7 de diciembre de 1999, otorgada ante la fe del
Lic. Victoriano Jose Gutierrez Valdez, Notario Publico numero 202 de Mexico,
Distrito Federal.
c) Que con fecha 3 de junio de 1998, la Secretaria de Comunicaciones y
Transportes otorgo un titulo de concesion para instalar, operar y explotar una
red publica de telecomunicaciones al amparo del cual fue autorizada para
prestar, entre otros, el servicio publico de telefonia basica de larga distancia
nacional e internacional, de acuerdo con el cual esta terminando de construir su
propia red para satisfacer los requisitos establecidos en dicho titulo de
concesion.
CONTRATO DE COMPRA-VENTA DE FIBRAS
CELEBRADO ENTRE IUSATEL Y TELEREUNION
PAGINA 2
<PAGE>
d) Que TELEREUNION esta en el proceso de terminar la construccion del Sistema
Telereunion, un sistema de comunicaciones con fibra optica a lo largo de una
ruta de aproximadamente 838 kilometros de longitud. Dicho sistema, corre de la
Ciudad de Puebla, Puebla, a la Ciudad de Veracruz, Veracruz, al Municipio de
Poza Rica, Veracruz y de la Ciudad de Veracruz a la Ciudad de Coatzacoalcos,
Veracruz, como se describe en el Anexo A.1 (Sistema Telereunion) que firmado por
ambas partes se integra a este Contrato.
e) Que con fecha 27 de agosto de 1999, conjuntamente con otras sociedades
mercantiles celebro con Lucent Technologies Inc. (en lo sucesivo "Lucent") un
contrato de credito, en el que Lucent actua entre otros como Agente
Administrador, (el "Credito) y que con motivo del Credito, celebro un Contrato
de Hipoteca de Concesion de Telecomunicaciones (que incluye todos los bienes,
presentes y futuros de TELEREUNION a favor de Citibank Mexico, sociedad anonima,
Institucion de Banca Multiple, Grupo Financiero Citibank (en lo sucesivo
"Citibank) (la "Hipoteca") de la misma fecha.
f) Que TELEREUNION desea vender, libre de todo gravamen y limitacion de dominio,
fibra optica oscura que en su momento se encuentre instalada en el Sistema
Telereunion a IUSATEL, en los terminos establecidos en este Contrato, y que para
ello se obliga a obtener de parte de Lucent, demas acreedores y de Citibank las
autorizaciones necesarias, suficientes y a satisfaccion de IUSATEL, a efecto de
que el presente contrato surta efectos con la eficacia juridica que la
legislacion aplicable preve, debiendo TELEREUNION llevar a cabo, entre otras
acciones, la liberacion del gravamen que existe sobre las Fibras que IUSATEL
Adquiere.
III. DECLARAN AMBAS PARTES, BAJO PROTESTA DE DECIR VERDAD:
a) Que han negociado libremente los terminos de este Contrato, y que es su
voluntad celebrar el mismo.
b) Que cuentan con todos los permisos, autorizaciones, licencias,
concesiones, convenios, contratos, acuerdos y demas documentos necesarios que
garantizan la realizacion de los trabajos de construccion y legal funcionamiento
de sus Sistemas de telecomunicaciones, mismos que se obligan a renovar y
mantener vigentes en todo momento y aun y cuando el presente contrato se hubiere
cumplido en todos y cada uno de sus terminos, a efecto de garantizarse
reciprocamente la pacifica posesion y uso de las fibras que son materia del
presente contrato, bien sea que estas se requieran tramitar y obtener de
autoridades municipales, estatales, federales y/o ante personas fisicas o
morales privadas.
CONTRATO DE COMPRA-VENTA DE FIBRAS
CELEBRADO ENTRE IUSATEL Y TELEREUNION
PAGINA 3
<PAGE>
c) Que la distancia exacta cubierta por cada una de las Rutas del Sistema
Telereunion y las Rutas del Sistema Iusatel se daran a conocer cuando ambos
Sistemas se encuentren totalmente construidos, o en la Fecha de Aceptacion
Final, sin perjuicio del cumplimiento de lo pactado en este Contrato y sus
anexos.
d) Que TELEREUNION y IUSATEL celebraran en forma simultanea al presente
contrato, un Contrato Maestro de Arrendamiento, relacionado con el arrendamiento
de los Elementos de la Red de los Sistemas, y un Contrato de Operacion referente
a las obligaciones continuas de las partes relacionadas con los Sistemas. El
Contrato de Operacion, el Contrato Maestro de Arrendamiento y este Contrato en
adelante seran denominados como los "Contratos del Sistema de Fibras". En caso
de que exista cualquier discrepancia entre este Contrato y los otros Contratos
del Sistema de Fibras: (a) el presente Contrato debera prevalecer hasta la
Fecha de Aceptacion Final; y (b) despues de la Fecha de Aceptacion Final, el
Contrato de Operacion debera prevalecer.
e) Que cada una de las partes posee las autorizaciones corporativas necesarias
para la celebracion de este Contrato, excepto la autorizacion a que se refiere
la Declaracion f) de TELEREUNION y ha realizado todas las acciones corporativas
necesarias para aprobar la firma y ejecucion de este Convenio y que este
Contrato constituye una obligacion valida y exigible.
f) Que conocen el avance de la construccion de los Sistemas Iusatel y
Telereunion a la fecha de celebracion del presente Contrato, de conformidad con
los cronogramas que se adjuntan en el Anexo F.
g) Que es su voluntad celebrar el presente Contrato, por lo que convienen en
sujetarse al tenor de las siguientes:
CONTRATO DE COMPRA-VENTA DE FIBRAS
CELEBRADO ENTRE IUSATEL Y TELEREUNION
PAGINA 4
<PAGE>
CLAUSULAS
PRIMERA: DEFINICIONES.- Ademas de los terminos definidos anteriormente, los
terminos y las definiciones que se enuncian a continuacion, tendran el
significado que se establece en este Contrato. Los terminos en mayusculas que no
se encuentren definidos de otra manera, tendran el significado establecido en el
Contrato Maestro de Arrendamiento y en el Contrato de Operacion.
1. "Aceptacion Parcial" significa la aceptacion de la Parte No Constructora
-------------------
respecto de sus Fibras, en una parte del Sistema de la Parte Constructora,
de acuerdo como se establece en la Clausula Sexta llamada Pruebas y
Aceptacion de las Fibras.
2. "Aceptar"/"Aceptacion" se refiere a la aceptacion de la Parte No
-------- ----------
Constructora de sus Fibras adquiridas e instaladas (incluyendo las Fibras
Adicionales que Telereunion Adquiere) en el Sistema de la Parte
Constructora, como se establece en la Clausula Sexta llamada Pruebas y
Aceptacion de las Fibras.
3. "Anexo/Anexos": Se refiere, segun sea el caso, a todos o alguno de los
siguientes anexos que firmados por IUSATEL y TELEREUNION forman parte del
presente contrato:
Anexo A.1. Sistema Telereunion.
Anexo A.2. Sistema Uno Iusatel y Sistema Dos Iusatel.
Anexo B.1. Caracteristicas tecnicas de las fibras y del cable que
TELEREUNION instala.
Anexo B.2. Caracteristicas tecnicas de las fibras y del cable que IUSATEL
instala.
Anexo C.1. Especificaciones y procedimientos de construccion del Sistema
Telereunion.
Anexo C.2. Especificaciones y procedimientos de construccion del Sistema
Iusatel.
Anexo D.1. Especificaciones de empalmes y mediciones del Sistema
Telereunion.
Anexo D.2. Especificaciones de empalmes y mediciones del Sistema Iusatel.
Anexo E.1. Protocolo de aceptacion de las Fibras que IUSATEL Adquiere.
Anexo E.2. Protocolo de aceptacion de las Fibras que TELEREUNION Adquieren
y de las Fibras adicionales que TELEREUNION Adquiere.
Anexo F. Cronograma de entrega y aceptacion final.
Anexo G. Rutas y precios.
Anexo H. Autorizacion de Acreedores.
4. "Fecha de Aceptacion Final" significa la fecha de aceptacion final por la
--------------------------
Parte No Constructora respecto de sus Fibras, de acuerdo a lo pactado en
las clausulas cuarta, quinta y sexta del presente Contrato.
5. "Fecha de Cumplimiento del Calendario del Sistema" debera tener el
------------------------------------------------------
significado establecido en la Clausula Tercera llamada, Terminacion del
Sistema.
CONTRATO DE COMPRA-VENTA DE FIBRAS
CELEBRADO ENTRE IUSATEL Y TELEREUNION
PAGINA 5
<PAGE>
6. "Fibras que TELEREUNION Adquiere" significan el numero de fibras opticas
---------------------------------
oscuras que cumplan con las especificaciones establecidas en el Anexo B.2
(Caracteristicas Tecnicas de las Fibras y el Cable que Iusatel instala) que
IUSATEL compra de terceros e instala en el Sistema Uno Iusatel, respecto de
las cuales IUSATEL transmitira la propiedad a Telereunion de acuerdo con
los terminos de este Contrato y a lo establecido en el Anexo A.2. Para
efectos de este Contrato, se entiende por oscuras, aquellas fibras que al
momento de la entrega no se encuentran aun conectadas a equipo electronico.
7. "Fibras Adicionales que TELEREUNION Adquiere" significan el numero de
-----------------------------------------------
fibras oscuras que cumplan con las especificaciones establecidas en el
Anexo B.2. (Caracteristica tecnicas de la fibras y el cable que Iusatel
instala) que IUSATEL compra de terceros e instala en el Sistema Dos
Iusatel, respecto de las cuales IUSATEL transmitira la propiedad a
TELEREUNION de acuerdo a los terminos de este Contrato y a lo establecido
en el Anexo A.2. Para efectos de este Contrato, se entiende por oscuras,
aquellas fibras que al momento de la entrega no se encuentran aun
conectadas a equipo electronico.
8. "Fibras que IUSATEL Adquiere" se refiere al numero de fibras oscuras que
----------------------------
cumplan con las especificaciones establecidas en el Anexo B.1
(Caracteristicas tecnicas de las fibras y el cable que Telereunion instala)
que TELEREUNION compra de terceros e instala en el Sistema Telereunion,
respecto de las cuales TELEREUNION transmitira la propiedad a IUSATEL de
acuerdo con los terminos de este Contrato y a lo establecido en el anexo
A.1. Para efectos de este Contrato, se entiende por oscura, aquellas fibras
que al momento de la entrega no se encuentran aun conectadas a equipo
electronico.
9. "Fibras" se refieren a las Fibras que IUSATEL adquiere al referirse a
------
IUSATEL, y a las Fibras que TELEREUNION adquiere al referirse a
TELEREUNION, segun se describe en los Anexos A.1 y A.2 de este Contrato.
10. "Parte Constructora" se refiere a TELEREUNION con respecto al Sistema
-------------------
Telereunion y a IUSATEL con respecto al Sistema Iusatel.
11. "Parte No Constructora" se refiere a TELEREUNION en lo que respecta al
----------------------
Sistema Iusatel y a IUSATEL en lo que respecta al Sistema Telereunion.
12. "Sistema Telereunion" se refiere al sistema de comunicaciones con fibra
--------------------
optica a lo largo de una ruta de aproximadamente 838 kilometros de
longitud. Dicho sistema, corre de la Ciudad de Puebla, Puebla, a la Ciudad
de Veracruz, Veracruz, al Municipio de Poza Rica, Veracruz y de la Ciudad
de Veracruz a la Ciudad de Coatzacoalcos, Veracruz, como se describe en el
Anexo A.1 (Sistema Telereunion) que firmado por ambas partes se integra a
este Contrato.
CONTRATO DE COMPRA-VENTA DE FIBRAS
CELEBRADO ENTRE IUSATEL Y TELEREUNION
PAGINA 6
<PAGE>
13. "Sistema Uno Iusatel" para los efectos de este Contrato, significa el
---------------------
sistema de comunicaciones con fibra optica a lo largo de una ruta de
aproximadamente 498 kilometros de longitud. Dicho sistema incluye la ruta
Puebla, Puebla - Moras, Cd. de Mexico, Distrito Federal, denominada "Puebla
- Mexico - Moras" y el Anillo D.F., que incluye: la ruta Moras - Central
Telmex Estrella y el Anillo Moras - Central Telmex Nextengo - Central
Telmex Vallejo - Central Telmex San Juan (en lo sucesivo, para los efectos
de este contrato, el "Sistema Uno Iusatel "), tal y como se describe en el
Anexo A.2 que firmado por ambas partes se integra a este Contrato.
14. "Sistema Dos Iusatel" para los efectos de este Contrato, significa el
---------------------
sistema de comunicaciones con fibra optica a lo largo de una ruta de
aproximadamente 568 kilometros de longitud. Dicho sistema incluye la ruta
Jilotepec, Estado de Mexico - Queretaro, Queretaro; la ruta Queretaro,
Queretaro - Guadalajara, Jalisco; la ruta en Anillo en la Ciudad de Leon,
Guanajuato - Central Telmex Pedro Moreno y la ruta en Anillo en la Ciudad
de Guadalajara, Jalisco - Central Telmex CTG - Central Telmex Tlaquepaque
(en lo sucesivo y para los efectos de este contrato, el "Sistema Dos
Iusatel"), tal y como se describe en el Anexo A.2, que firmado por ambas
partes se integra a este contrato.
15. "Sistema" significa el Sistema Telereunion o el Sistema Uno Iusatel y/o el
-------
Sistema Dos Iusatel y "Sistemas" se refiere al Sistema Telereunion, al
--------
Sistema Iusatel .
16. "Ruta o Rutas" significa cada uno de los tramo de los Sistema que tocan dos
------------
o mas ciudades, poblados o puntos dentro de una ciudad o poblado, que
integran cada Sistema.
17. "Accesos TELMEX". Significan aquellas partes del Sistema que en algunos
---------------
casos se especifican en el anexo A1 y A2, como "acceso a Telmex" en los que
se incluye la construccion hasta el ultimo registro mas cercano a las
instalaciones de la empresa Telefonos de Mexico, S.A. de C.V., que la Parte
Constructora entregara a la Parte No Constructora con las mismas
especificaciones de construccion, ingenieria, seguridad y normatividad.
SEGUNDA: OBLIGACIONES DE CONSTRUCCION PENDIENTES.- 2.1. La Parte Constructora
debera, directamente o a traves de terceras partes, concluir la construccion de
su Sistema, de acuerdo a sus diagramas y estructuras de rutas, que se acompanan
a este Contrato como anexos A1 y A2, asi como asegurarse de la terminacion de la
construccion, conforme a lo previsto en este Contrato. La Parte Constructora
garantiza y declara que su Sistema se disena, planea, construye, instala y/o
CONTRATO DE COMPRA-VENTA DE FIBRAS
CELEBRADO ENTRE IUSATEL Y TELEREUNION
PAGINA 7
<PAGE>
compra: i) cumpliendo con todos y cada uno de los codigos de seguridad,
construccion e ingenieria aplicables para dicha construccion e instalacion, asi
como cualquier otra ley, codigo, reglamento, orden, permiso y autorizacion
gubernamental aplicable (ya sea federal, estatal o municipal) y las aprobaciones
y/o arrendamientos de derechos de via y los Derechos Requeridos (segun se
definen en la Clausula Decimo Primera del contrato de Operacion que en su caso
sean aplicables); y (ii) cumplira este contrato de acuerdo con las
especificaciones establecidas en el anexo C.1, C.2, D.1, D.2, E.1 y E.2
(Especificaciones de Construccion y protocolos de aceptacion) . En caso de que
exista cualquier duda acerca de asuntos tecnicos que no esten previstos en
dichos anexos, los lineamientos de ingenieria, mantenimiento y construccion
usados por cada una de las partes deberan consultarse conjuntamente para acordar
la solucion adecuada al mismo.
2.2. La Parte Constructora debera, directamente o con el apoyo de terceras
partes, concluir su Sistema, en forma completa y detallada, de conformidad con
los criterios de desempeno del Sistema desarrollados y que se desarrollen y de
acuerdo a los planos de construccion, lista de materiales y especificaciones y
requisiciones de material. La Parte Constructora tambien debera cumplir
especificaciones de construccion y prueba de su Sistema, previstas en los anexos
de este Contrato.
2.3. La Parte Constructora debera, directamente o con el apoyo de terceras
partes, concluir su Sistema apegandose a todos los planos e investigaciones
necesarias, incluyendo de manera enunciativa pero no limitativa:
(1) La realizacion de una investigacion completa de la ubicacion de la
ruta del Sistema, incluyendo el punto de partida y el marcado de la
ruta, de acuerdo con los estandares de ingenieria en
telecomunicaciones.
(2) La preparacion de mapas de alineacion de campo mostrando la ruta del
Sistema y terrenos de su propiedad o arrendados de terceros,
descripcion de terrenos y derechos de via, materiales y cualquier otra
informacion del Sistema).
(3) La investigacion y punto de partida de los sitios para las estaciones
de regeneracion (para los propositos de este Contrato, no se hace
distincion entre los sitios de regeneracion, las estaciones de
regeneracion, y sitios de amplificacion de linea) y para otras
instalaciones.
(4) La preparacion de planos de permisos para cruces en carreteras,
autopistas e hidraulicos.
CONTRATO DE COMPRA-VENTA DE FIBRAS
CELEBRADO ENTRE IUSATEL Y TELEREUNION
PAGINA 8
<PAGE>
(5) La realizacion de diagramas mostrando los Accesos TELMEX, en los
tramos del Sistema que claramente se especifican en el Anexo A.1 y
A.2.
(6) La realizacion y evaluacion de planos de construccion ("as-builts")
revision de instalaciones y de registros de acuerdo a los planos de
construccion finales.
2.4. La Parte Constructora debera garantizar en todo momento a la Parte No
Constructora, mantener vigentes y sin restriccion alguna los permisos y demas
documentos a los que se refiere la declaracion b) de ambas partes. Asimismo se
obliga a sacar en paz y a salvo a la Parte No Constructora de cualquier
requerimiento, juicio, proceso o afectacion que llegare a afectar a la Parte No
Constructora por virtud de la invalidez, revocacion o nulidad de los permisos
y/o demas documentos a los que se refiere esta clausula. La Parte Constructora
se obliga, directamente o con el apoyo de terceras partes, a realizar y/o
concluir todas las acciones necesarias para la adquisicion o arrendamiento de
terrenos o propiedades y derechos de via, incluyendo de manera enunciativa y no
limitativa:
(1) Revision de los titulos de propiedad, arrendamiento o cualesquiera
otros que sean necesarios para verificar y asegurar la validez y
seguridad de la tenencia de la tierra, respecto de los actuales
titulares o arrendadores de terrenos, a lo largo de la ruta de su
Sistema, respecto de aquellos lugares en donde se instale el Sistema,
verificando que los respectivos titulos, en su caso, se encuentren
inscritos en el respectivo Registro Publico de la Propiedad.
(2) La adquisicion de propiedades, derechos de via, permisos y
autorizaciones, que deberan ser registrados al grado permitido por la
ley, asegurando la obtencion de permisos para cruces de carreteras,
vias de ferrocarril, e hidraulicos, asi como la de cualesquiera otros
permisos y autorizaciones necesarios para la construccion de su
Sistema. Las partes tendran en todo momento el derecho de solicitar
por escrito un listado que contenga el detalle de los derechos de via
y autorizaciones utilizados por la otra parte en la construccion de su
Sistema, quien debera proporcionar a la otra parte dicha informacion
dentro de los 10 (diez) primeros dias habiles siguientes a su
solicitud.
En caso de que alguno o algunos de los permisos y/o demas documentos a los que
se refiere la declaracion b) de ambas partes, se viera afectado en su validez,
duracion o alcances y se pongan en peligro alguno o algunos de los derechos de
la Parte No Constructora, la Parte Constructora debera realizar todos los actos
necesarios para restablecer o convalidar las autorizaciones, permisos o derechos
de via necesarios para restablecer la libre utilizacion de las fibras de la
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Parte No Constructora, en la inteligencia de que, en caso contrario, es
obligacion de la Parte Constructora proveer a su costo, capacidad alternativa a
la Parte No Constructora, ya sea a traves de su red o en la red de un tercer
operador, durante todo el tiempo de vigencia del presente contrato y hasta el
momento del restablecimiento pleno de dichos derechos o autorizaciones. La
capacidad que debera proveer la Parte Constructora sera la suficiente para
garantizar que la Parte No Constructora pueda cursar trafico equivalente al
promedio del trafico cursado por dicha parte durante los seis ultimos meses a la
fecha en que debio proveer dicha capacidad alternativa, basandose en E-1s (tal y
como este termino se conoce comunmente en la industria de las telecomunicaciones
(asumiendo que cada E-1 tiene capacidad para cursar hasta 250,000 minutos por
mes).
Asimismo, las partes acuerdan que en el evento de que cualquiera de las partes
no termine las rutas de su Sistema dentro de los 60 (sesenta) dias siguientes a
la fechas pactadas y a lo establecido en la clausula cuarta, debera proveer a su
costo y a eleccion de la Parte No Constructora, capacidad alternativa a la otra
parte, durante el tiempo de retraso, y siguiendo los parametros de capacidad y
trafico establecidos en el parrafo anterior.
2.5. La Parte Constructora debera realizar servicios de inspeccion y supervision
incluyendo de manera enunciativa y no limitativa:
(1) Realizar una inspeccion a la construccion antes de la terminacion de
cualquier parte o de todo su Sistema, con el fin de asegurar que toda
la construccion cumpla con las especificaciones, planos, titulos de
propiedad, clausulas de este Contrato, con la legislacion y
reglamentos aplicables, asi como con estandares prevalecientes en la
industria de las telecomunicaciones. La Parte No Constructora tendra
el derecho, pero no la obligacion, de inspeccionar todos los
documentos de derechos de via, instalacion, empalme y pruebas del
Sistema; y
(2) Preparar reportes del progreso de la ingenieria y reportes del
progreso de la construccion cada mes hasta su conclusion, que deberan
entregarse a su contraparte en los 10 (diez) primeros dias naturales
de cada mes. La Parte Constructora debera enviar a la Parte No
Constructora el ultimo reporte mensual disponible por escrito o en
diskette, con acuse de recibo.
TERCERA: TERMINACION DEL SISTEMA.- 3.1. La Fecha de Cumplimiento del Calendario
del Sistema para terminar toda la construccion, instalacion, realizacion de las
Pruebas de Aceptacion de las Fibras y de la Aceptacion de cada Sistema sera la
especificada en los Anexos E.1 y E.2 (Protocolo de aceptacion y acta de
recepcion) y F (Cronogramas de entrega). Cada una de las partes debera realizar
el mejor esfuerzo comercialmente razonable para concluir la construccion y
pruebas para tales fechas.
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CUARTA: PAGO POR CONSTRUCCION RETRASADA.- 4.1. En caso de que cualquiera de
las partes no pueda terminar su Sistema o una de las rutas correspondientes a
dicho Sistema, para la Fecha de Cumplimiento del Calendario del Sistema (dicha
parte, segun sea el caso se llamara "Parte Retrasada"); cada una de las
partes debera designar a sus representantes para reunirse y revisar el avance
del Sistema de la Parte Retrasada. En un plazo que no exceda de 30 (treinta)
dias habiles a partir del vencimiento de la fecha de cumplimiento aplicable, la
Parte Retrasada debera proporcionar un plan y calendario para completar la
construccion, instalacion y prueba de su Sistema.
En caso de que la Parte Retrasada no termine a tiempo su Sistema o ruta de
dicho sistema a los 6 (seis) meses posteriores a la fecha senalada en el Anexo
F, para la fecha de entrega, la Parte que cumple tendra opcion, a su eleccion
de: a) tomar a su cargo el diseno, ingenieria, instalacion y construccion
(incluyendo todas las actividades mencionadas en la Clausula Segunda de este
Contrato) del Sistema de la Parte Retrasada, en cuyo caso, la Parte Retrasada
debera: i) cooperar completamente con la Parte que Cumple para terminar el
Sistema de la Parte Retrasada y ii) pagar a la Parte que cumple dentro de los 60
(sesenta) dias habiles siguientes a la fecha de recepcion de la factura, todos
los costos, gastos y desembolsos directos razonables asociados, o en que incurra
en conexion con el cumplimiento del Sistema de la Parte Retrasada, b) notificar
a la Parte Retrasada que se resuelve la obligacion de ambas partes de entregarse
Fibras en la ruta incumplida, ademas de solicitar la devolucion y devolver las
cantidades que hubieren pagado y cobrado respecto a dicha ruta, o en su defecto
la parte proporcional con base en el numero de kilometros/fibra o) demandar la
rescision del presente Contrato.
Las partes acuerdan y se obligan desde ahora a que, en el caso de que
TELEREUNION se atrasara en la fecha de construccion y entrega de la ruta que
corre de la Ciudad de Veracruz, Veracruz a la Ciudad de Coatzacoalcos Veracruz,
que forma parte del Sistema Telereunion, TELEREUNION debera entregar a IUSATEL,
a mas tardar dentro de un plazo de 10 (diez) dias habiles a la fecha en que
debio haber quedado terminada dicha ruta, un plan y calendario para completar la
construccion de dicha ruta. Dentro de los 5 (cinco) dias habiles siguientes a la
fecha en que IUSATEL reciba dicho plan y calendario por escrito, debidamente
suscrito por el tecnico responsable de la red de TELEREUNION y por representante
legal de esta, IUSATEL podra a su absoluta discrecion, elegir entre aceptar el
plan y calendario propuesto por TELEREUNION para la terminacion de la
construccion de la citada ruta, o bien notificar a TELEREUNION que IUSATEL elige
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a cambio recibir de TELEREUNION 12 (doce) fibras en lugar de 8 (ocho) en la ruta
de la Ciudad de Puebla a la Ciudad de Veracruz, y 6 (seis) fibras en lugar de 4
(cuatro) en la ruta de la Ciudad de Veracruz a Poza Rica, sin costo adicional
alguno para IUSATEL. En este ultimo caso TELEREUNION debera entregar a IUSATEL,
las fibras adicionales a que se refiere este parrafo dentro de los cinco dias
habiles posteriores a la fecha en que IUSATEL le de aviso por escrito. Si
transcurridos los plazos establecidos en este parrafo TELEREUNION no ha
entregado a IUSATEL las fibras convenidas y/o las fibras adicionales a solicitud
de IUSATEL debera proveerle capacidad alternativa en los terminos del ultimo
parrafo del 2.4. de la clausula segunda del presente Contrato.
QUINTA: PRECIO Y TRANSMISION DE LA PROPIEDAD SOBRE LAS FIBRAS MATERIA DE
COMPRA-VENTA. - 5.1. La Parte Constructora sera responsable de adquirir el cable
de fibra optica que instale en su Sistema. Despues de la terminacion de cada
Sistema y de la Aceptacion de las Fibras, la Parte Constructora debera
transmitir la propiedad de las respectivas Fibras a la Parte No Constructora. Lo
anterior, en la inteligencia de que las partes podran realizar entregas
parciales por Rutas y acordar en tal caso, la transmision de la propiedad sobre
las Rutas entregadas. La transmision de la propiedad de las Fibras como se
especifica en los Anexos A.1 y A.2 de este Contrato, debera realizarse contra
entrega de las facturas respectivas que cumplan con todos los requisitos
fiscales y legales, y como evidencia de la propiedad de las fibras respectivas y
de la deduccion de los gastos respectivos de cada una de las Partes.
Cada parte se obliga a pagar, como precio de las fibras que adquiere de la otra,
las siguientes cantidades:
a) TELEREUNION pagara a IUSATEL como precio total de las Fibras que
Telereunion Adquiere la cantidad de USD${ }(
dolares 00/100 EUA), mas el Impuesto al Valor Agregado.
b) IUSATEL pagara a TELEREUNION como precio total de las Fibras que Iusatel
Adquiere, la cantidad de USD${ }( dolares
00/100 EUA), mas el Impuesto al Valor Agregado, y
c) TELEREUNION pagara a IUSATEL como precio total de las Fibras Adicionales
que Tereunion Adquiere, la cantidad de
USD${ }( dolares 00/100 EUA), mas el Impuesto
al Valor Agregado.
Los precios acordados por las partes, en lo referente a las Fibras senaladas en
los incisos a), b) y c) han sido determinados mediante la aplicacion de los
factores, definidos y aplicados de comun acuerdo por las Partes, conforme al
Anexo G.
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5.2. Las partes se obligan desde ahora a compensar en su momento, el monto del
precio de las Fibras correspondientes al Sistema Uno Iusatel y al Sistema
Telereunion ya sea por la entrega de los Sistemas completos o en forma
proporcional en los terminos que acuerden por escrito, tratandose de entregas
parciales. En cualquier caso, las partes deberan enviar a la otra las facturas
oficiales con el Impuesto al Valor Agregado aplicable para poder cumplir con las
obligaciones de acuerdo con las leyes fiscales y contables mexicanas,
independientemente de que no sea necesaria una transferencia efectiva de fondos.
5.3. TELEREUNION se obliga a pagar a IUSATEL el precio de las Fibras que
Telereunion Adquiere en el Sistema Dos Iusatel que asciende a la cantidad de
${ }( dolares 00/100 EUA) conforme al siguiente
calendario de pago, y en la forma que se describe a continuacion:
a) El dia 15 de julio de 2000, TELEREUNION pagara a IUSATEL la cantidad de
USD${ }( dolares 00/100 EUA), mas el Impuesto
al Valor Agregado (I.V.A.).
b) El dia 15 de noviembre de 2000, TELEREUNION pagara a IUSATEL la cantidad de
USD${ }( dolares 00/100 EUA), mas el Impuesto
al Valor Agregado (I.V.A).
c) El dia 15 de febrero de 2001, TELEREUNION pagara a IUSATEL la cantidad de
USD${ }( dolares 00/100 EUA), mas el Impuesto
al Valor Agregado (I.V.A.).
TELEREUNION podra pagar a IUSATEL las cantidades antes establecidas en moneda
nacional, de conformidad con la paridad cambiaria para solventar obligaciones
contraidas en moneda extranjera, que fije el Banco de Mexico, a traves de la
publicacion en el Diario Oficial de la Federacion del dia en que se tenga que
realizar el pago.
5.4. Los montos insolutos conforme a los incisos a) a c) antes descritos,
causaran intereses ordinarios a una tasa de LIBOR mas dos puntos, entendiendose
por esta, el promedio aritmetico determinado mensualmente por el Banco Nacional
de Mexico, S.A., de las tasas de interes ofrecidas por las oficinas principales
en Londres, Inglaterra, de los Bancos Siguientes: Barcklays Bank, P.L.C.; Bank
of Tokio-Mitsubishi, Ltd; el Bankers Trust Co; y el Natwest Bank PLC; en lo
sucesivo "los Bancos", segun aparezcan en la "pagina LIBO de la pantalla
Reuters" aproximadamente a las 11:00 hrs. A.M. (hora de la ciudad de Londres,
Inglaterra), 2 (dos) dias habiles antes de la fecha de vencimiento del pago
correspondiente.
Si en la fecha en que deba determinarse la tasa LIBOR en la pagina LIBO de la
pantalla "Reuters" no apareciere la cotizacion de la tasa de interes ofrecida
por todos los bancos antes senalados, la tasa LIBOR que corresponda, se
determinara en base a la cotizacion que ofrezca el o los bancos restantes.
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Los intereses ordinarios se causaran a partir del 29 de enero del 2000 y hasta
las fechas convenidas para cada uno de los pagos.
5.5. En caso de que los pagos no fueren cubiertos en tiempo, TELEREUNION pagara
a IUSATEL intereses moratorios calculados sobre la cantidad adeudada, aplicando
la tasa anual que se obtenga de multiplicar el factor de 1.5 (uno punto cinco)
por la tasa ordinaria definida en el parrafo anterior.
5.6. Para garantizar los pagos a que se refiere el programa de pagos descrito en
los incisos a) a c) arriba indicados, TELEREUNION suscribe en este acto, tres
pagares, cada uno por las cantidades y vencimientos indicados en los citados
incisos.
SEXTA: PRUEBAS Y ACEPTACION DE LAS FIBRAS.- 6.1. Dentro de los 7 (siete) dias
habiles siguientes a la fecha de terminacion del respectivo Sistema, o de cada
Ruta entregada, en caso de entregas parciales, cada una de las Partes
Constructoras debera probar las respectivas Fibras de su Sistema, de acuerdo con
los procedimientos especificados en los Anexos E.1. y E.2. para verificar que
dichas Fibras estan operando de acuerdo con las especificaciones establecidas en
tal anexo. Dentro de los 5 (cinco) dias naturales siguientes a la fecha de
conclusion de las Pruebas de Aceptacion de las Fibras respectivas de cada una de
las partes, cada parte debera proporcionar a la otra una copia de sus
resultados.
6.2. La Parte No Constructora, debera probar las Fibras entregadas por la Parte
Constructora y debera considerarse que la Parte No Constructora ha aceptado
tales Fibras, a menos que notifique a la Parte Constructora, de buena fe y
dentro de los 45 (cuarenta y cinco) dias naturales siguientes a la fecha de
recepcion de los resultados de las Pruebas de Aceptacion de las fibras de la
Parte Constructora, que dichos resultados son inaceptables, por no cumplir con
las especificaciones de los Anexos E.1 y E.2. La fecha en que se haga un aviso
de aceptacion expresa o la fecha en que se debe considerar hecha la aceptacion
de Fibras de la Parte No Constructora, segun sea el caso, sera la "Fecha de
Aceptacion de dichas Fibras".
En caso de que los resultados de las pruebas de la Parte No Constructora de las
Fibras muestren que las Fibras no estan operando dentro de los parametros
establecidos en los Anexos E.1. y E.2., la Parte No Constructora debera
notificar a la Parte Constructora, por escrito, que algunas o todas las Fibras
son inaceptables. A partir de entonces, la Parte Constructora debera
inmediatamente dar a conocer las razones tecnicas y operativas, asi como los
parametros no alcanzados o incumplidos, asi como llevar a cabo todos los actos
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necesarios con respecto a cualquier porcion de las Fibras que no opere de
acuerdo con los parametros del Anexo E.1 y E.2., para lograr que los estandares
de operacion de dicha parte de las Fibras esten dentro de los parametros, en un
plazo maximo de 30 (treinta) dias naturales contados a partir de la notificacion
escrita de la Parte No Constructora de que las fibras son inaceptables. Despues
de llevar a cabo tales actos, cada una de las Partes Constructoras debera volver
a probar las Fibras en cuestion. El ciclo de pruebas, toma de accion correctiva
y nuevas pruebas descrito anteriormente, debera realizarse tantas veces como sea
necesario para asegurar que las Fibras opera dentro de los parametros de los
Anexos E.1 y E.2., en la inteligencia de que si despues de haber realizado
cuando menos 4 (cuatro) ciclos de pruebas en presencia de la parte No
Constructora, en un plazo maximo de 60 (sesenta) dias naturales contados a
partir de la fecha de entrega del tramo respectivo, la Parte Constructora no
logra obtener las especificaciones aplicables, entonces las partes podran
acordar la entrega y aceptacion de las fibras en cuestion. En caso de que las
partes no llegaran a un acuerdo, en un plazo de 5 (cinco) dias habiles
siguientes a la conclusion de la cuarta prueba, la Parte Constructora debera
reemplazar el cable y repetir el ciclo de pruebas hasta alcanzar las
especificaciones aplicables. Sin perjuicio de lo establecido en la presente
Clausula, las Partes podran acordar llevar a cabo la prueba de las Fibras en
partes del Sistema, en cuyo caso la respectiva fecha de aceptacion de las Fibras
que se haya probado, se considerara como Fecha de Aceptacion Parcial.
SEPTIMA: NATURALEZA DE LAS OBLIGACIONES.- A partir de la terminacion de la
construccion de los Sistemas, despues de la Aceptacion de las Fibras, y una vez
que Telereunion hubiere cumplido en el pago del precio y accesorios, en su caso,
de las Fibras Adicionales que Telereunion Adquiere en el Sistema Dos Iusatel,
las partes estan de acuerdo en que el objeto de este Contrato se habra
cumplido. En consecuencia no habra obligaciones pendientes de cumplir derivadas
de este Contrato, y las partes deberan entonces quedar obligadas en terminos de
lo pactado en el Contrato de Operacion y en el Contrato Maestro de
Arrendamiento. Lo anterior, sin perjuicio de las obligaciones a cargo de las
partes, derivadas del derecho del tanto establecido y acordado en terminos de la
clausula vigesima primera de este Contrato.
OCTAVA: LIMITE DE RESPONSABILIDAD.- Sin perjuicio de lo dispuesto en este
Contrato, en ningun caso ninguna de las partes, sera responsable frente a la
otra parte por danos, indirectos, previsibles o no, que surjan de o tengan
relacion con problemas de transmision e interrupciones, incluyendo de manera
enunciativa y no limitativa y/o danos o perjuicios en propiedad o equipos,
perdida de utilidades o ingresos, costo de capital, costo de reemplazo de
servicios, o reclamaciones de clientes, ya sean ocasionadas por cualquier
reparacion o por mantenimiento realizado por, o que no haya sido realizado por
la otra parte.
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NOVENA: NINGUNA GARANTIA.- Excepto por lo que respecta al cumplimiento de las
especificaciones listadas en los Anexos respectivos de cualquier Contrato del
Sistema de Fibras, y al cumplimiento de las obligaciones establecidas en forma
expresa en las clausulas respectivas, ninguna parte otorga garantia alguna a la
otra, ni a cualquier otra persona o entidad, ya sea expresa, implicita o de
acuerdo con la legislacion, respecto a la descripcion, calidad, comerciabilidad,
totalidad o adecuacion para un uso especifico de cualquier parte de su Sistema,
incluyendo las Fibras o cualquier servicio provisto en ejecucion de este
Contrato o descrito en el mismo, o en relacion con cualquier otro asunto.
No obstante lo anterior, las partes se obligan a extender a la otra parte las
garantias que otorgan los respectivos proveedores sobre las Fibras, por el plazo
en que se encuentren vigentes.
DECIMA: CONFIDENCIALIDAD.- Las partes reconocen y aceptan que los terminos y
condiciones del presente Contrato, y todos los documentos referidos en el
presente, las comunicaciones entre las partes acerca del presente Contrato, o el
servicio que de acuerdo con el presente se prestara, asi como la informacion y
precio relevante de cualquier otro acuerdo entre las partes son confidenciales
entre TELEREUNION y IUSATEL (Informacion Confidencial").
Dicha Informacion confidencial no debera ser divulgada por ninguna de las partes
a ninguna otra persona distinta a los directores, funcionarios, consejeros y a
ninguna otra persona distinta a los directores, funcionarios, consejeros y
empleados de dicha parte, o agentes de dicha parte que hayan acordado de manera
especifica no divulgar los terminos y condiciones del mismo. Sin embargo,
ninguna de las partes estara obligada a mantener como confidencial aquella
informacion que: (i) se vuelva del dominio publico de otra manera que no sea a
traves de la parte receptora; (ii) si necesita divulgarse de acuerdo con orden o
requerimiento de autoridad competente, en cumplimiento de disposicion juridica
aplicable, o por reglas bursatiles o por contratos que las partes hayan
celebrado a la fecha; (iii) si la parte que la divulgue la desarrolla de manera
independiente; (iv) si esta a disponibilidad de la parte que la divulgue sin
restriccion alguna de una tercera parte que no este obligada por un convenio de
confidencialidad relacionado con dicha informacion; (v) si se requiere que se
proporcione a terceras partes para negociar la posible renta y/o compraventa de
las fibras de cada una de las partes, considerando que dicha parte acepta por
escrito no divulgar la Informacion Confidencial y usarla solamente en conexion
con las negociaciones respectivas.
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DECIMA PRIMERA: RELACIONES LABORALES.- Considerando que Ambas Partes por razon
de su actividad tienen diversas fuentes de ingreso y la solvencia economica
necesaria para hacer frente a sus obligaciones como patron, convienen y aceptan
que cuentan con los elementos propios en los terminos del articulo 13 de la Ley
Federal del Trabajo y que son unicos patrones de todas y cada una de las
personas que con cualquier caracter intervengan bajo sus ordenes en el
desarrollo y ejecucion de lo pactado en este contrato, asumiendo
consecuentemente toda obligacion derivada de tal hecho, como son el pago de
salarios ordinarios y extraordinarios, vacaciones, aguinaldo, prima de antig
edad, accidentes, despidos, cuotas de aportacion al IMSS, INFONAVIT y cualquier
obligacion derivada de la Ley Federal del Trabajo vigente.
Ambas partes estan de acuerdo que las unicas relaciones juridicas entre ellas
son las derivadas del presente contrato, razon por la cual cada parte sera
responsable del personal que utilice, el cual se encontrara bajo su inmediata
direccion y dependencia.
Por ello, la parte que sea responsable conforme a lo estipulado en esta clausula
se obliga a sacar en paz y a salvo a la otra parte en caso de cualquier
reclamacion que se intente en su contra, por personal que haya sido y se
encuentre contratado o subcontratado por la parte responsable.
DECIMA SEGUNDA: INCUMPLIMIENTO.- 12.1. Cualquiera de las Partes podra
demandar la rescision de este Contrato o su cumplimiento, de conformidad con lo
establecido en el articulo 1949 del Codigo Civil para el Distrito Federal en
Materia Comun y para toda la Republica en Materia Federal. La rescision de este
Contrato por incumplimiento de una obligacion, operara en terminos de lo
anteriormente establecido, si transcurrido un plazo de 30 (treinta) dias
naturales contados a partir de la fecha en que se hizo la notificacion del
incumplimiento, la parte cuyo incumplimiento se denuncia, no cumple con la
obligacion que se le reclama ("La Parte que Incumple"). No obstante lo
anterior, en el supuesto de que La Parte que Incumple hubiera actuado en forma
diligente realizando los actos necesarios para subsanar el incumplimiento en
forma inmediata a la recepcion de la notificacion del supuesto incumplimiento,
entonces el periodo para subsanar el incumplimiento se extendera por 30
(treinta) dias naturales mas. Sin perjuicio de lo establecido en este Contrato,
el plazo de gracia a que se refiere la presente clausula, no sera aplicable en
lo referente al incumplimiento de obligaciones de pago de numerario, pactadas en
este Contrato, en su caso, en las que no exista una disputa de buena fe y, en el
caso de que dicho incumplimiento ocurriera, la Parte que no incumplio a la que
se deban dichos pagos, podra demandar la rescision inmediata de este Contrato
mediante simple notificacion por escrito a la otra Parte. Conviniendo las partes
que en caso de que llegare a rescindirse el presente contrato, los activos de
ambas empresas deberan volver al estado material y juridico que tenian antes de
la celebracion del presente contrato, sin perjuicio del ejercicio de los demas
derechos que correspondan a las partes en virtud de la rescision.
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CELEBRADO ENTRE IUSATEL Y TELEREUNION
PAGINA 17
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12.2. Los casos de incumplimiento incluyen de manera enunciativa y no
limitativa: la cesion hecha en favor de acreedores de la Parte que Incumple; la
presentacion por cualquier persona de una solicitud de suspension de pagos o de
declaracion de quiebra hecha en contra de la Parte que Incumple, que no sea
desechada o dejada sin efectos, dentro de los 90 (noventa) dias naturales
siguientes a la fecha de presentacion de dicha solicitud; o bien la presentacion
por la Parte que Incumple de cualquier solicitud o contestacion que consienta,
apruebe o acepte en forma expresa o tacita dichas pretensiones.
12.3. Cualquier causal de incumplimiento puede renunciarse por la Parte que
tenga derecho a invocarla. En caso de que la Parte que Incumple no pueda
solventar la causal de incumplimiento en el plazo de gracia establecido en la
clausula 12.1, la parte que reclama el incumplimiento podra optar por rescindir
el presente contrato o exigir su cumplimiento, en los terminos de lo establecido
en la presente clausula.
12.4. Las partes estan de acuerdo en que para los casos de incumplimientos
derivados de un retraso en la construccion de alguno de los Sistemas, estaran a
lo dispuesto por la clausula cuarta.
DECIMA TERCERA: OBLIGACIONES PENDIENTES A LA TERMINACION DE ESTE CONTRATO.-
13.1. No obstante lo establecido en este Contrato, la terminacion del mismo no
afectara los derechos de cualquiera de las partes de demandar el pago debido por
servicios prestados, bienes provistos, u honorarios en que se haya incurrido en
atencion a este Contrato, con anticipacion a la fecha de terminacion o de
conformidad con lo establecido en la clausula de Arbitraje pactada en este
Contrato.
DECIMA CUARTA: NOTIFICACIONES.- 14.1. Todos los avisos y notificaciones
relacionados con este Contrato, deberan ser por escrito e ir dirigidos al
domicilio de cada una de las partes que a continuacion se senalan:
A TELEREUNION: Tlacoquemecatl 21- tercer piso
col. del Valle
Mexico, D.F., C.P. 03100
At'n. Vicepresidencia de Larga Distancia
CONTRATO DE COMPRA-VENTA DE FIBRAS
CELEBRADO ENTRE IUSATEL Y TELEREUNION
PAGINA 18
<PAGE>
con copia a: Tlacoquemecatl 21- tercer piso
col. del Valle
Mexico, D.F., C.P. 03100
At'n. Direccion juridica
A IUSATEL: Av. Prolongacion Paseo de la Reforma 1236 - Piso 4
Col. Santa Fe
Mexico, D.F. 05348
At'n: Vicepresidente de Operaciones Tecnicas.
Tel. (5) 109-53-01 / Fax. (5) 109-54-07
con copia a: Av. Prolongacion Paseo de la Reforma 1236 - Piso 12
Col. Santa Fe
Mexico, D.F. 05348
At'n: Vicepresidente de Fusiones, Adquisiciones y
Juridico.
Tel. (5) 109-5770 / Fax. (5) 109-5772
con copia a: Av. Prolongacion Paseo de la Reforma 1236 - Piso 12
Col. Santa Fe
Mexico, D.F. 05348
At'n: Vicepresidente de Operaciones.
Tel. (5) 109-5300 / Fax. (5) 109-5332
o a cualquier otra direccion o persona que la otra parte designe y notifique a
la otra parte previamente y por escrito.
14.2. Excepto pacto expreso y escrito en contrario, todas las notificaciones,
deberan ser enviadas por correo personal o por correo certificado, o por fax
(seguido de un escrito original), y se considerara recibida por su destinatario
en la fecha de acuse de recibo correspondiente.
DECIMA QUINTA: FUERZA MAYOR.- Ninguna de las partes estara en incumplimiento de
las obligaciones pactadas en este Contrato por virtud de caso fortuito o fuerza
mayor en los terminos de la legislacion comun aplicable, asi como actos de
gobierno ajenos a las partes, debiendo notificar la parte que sufra el caso
fortuito o fuerza mayor, de inmediato a la otra parte, la existencia de dicha
causa y comprometiendose a realizar a partir del momento en que cese dicha causa
esfuerzos razonables para minimizar el tiempo de cumplimiento de sus
obligaciones.
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CELEBRADO ENTRE IUSATEL Y TELEREUNION
PAGINA 19
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DECIMA SEXTA: ARBITRAJE.- 16.1. Cualquier disputa, desacuerdo o controversia
que surja entre TELEREUNION y IUSATEL en conexion con este Contrato, que no sea
resuelta de comun acuerdo entre las partes dentro de los 30 (treinta) dias
naturales siguientes a la fecha en que cualquiera de las partes informe a la
otra por escrito que dicha disputa, desacuerdo o controversia existe, debera ser
resuelto por arbitraje de estricto derecho en la Ciudad de Mexico, Distrito
Federal, de acuerdo con las Reglas de Arbitraje Comercial Internacional de la
Asociacion Americana de Arbitraje en vigor a la fecha en que se de dicha
notificacion. Si las partes no pueden llegar a un acuerdo respecto al
nombramiento de un solo arbitro dentro de los 15 (quince) dias naturales
siguientes a la fecha de notificacion del desacuerdo o disputa, cada Parte
debera elegir un arbitro y ambos arbitros elegiran a un tercero. Los
procedimientos de arbitraje deberan llevarse a cabo en el idioma espanol. El
laudo del (los) arbitro(s) sera final y obligatorio para las partes, y debera
expresar las situaciones de hecho en que se motiva, asi como los fundamentos de
derecho en que se funda, siendo el laudo ejecutable judicialmente en terminos de
la legislacion aplicable. Correran a cargo de cada una de las partes los gastos
y honorarios que se causen con motivo de la preparacion y presentacion de sus
actuaciones en el arbitraje, en la inteligencia de que los gastos y costas
derivados del arbitraje, incluyendo las cuotas y gastos del arbitro(s), deberan
ser reembolsadas por la otra parte, a la parte a quien el laudo arbitral
favorezca.
16.2. La obligacion de someterse al arbitraje no es obligatoria en lo que
respecta a los medios preparatorios o medidas cautelares u otros procedimientos
judiciales o administrativos similares, encaminados a conservar el estado que
guardan las cosas o la materia del arbitraje o para evitar danos irreparables.
DECIMA SEPTIMA: RENUNCIAS.- 17.1. El hecho de que cualquiera de las partes
omita demandar el cumplimiento inmediato de cualquiera de las obligaciones
establecidas en este Contrato, o la renuncia de derechos especificos, no
implicara el consentimiento respecto del incumplimiento ni una renuncia general
respecto de otros derechos pactados en este Contrato.
DECIMA OCTAVA: LEY Y JURISDICCION APLICABLE.- 18.1. Las partes convienen en
someterse expresamente a las leyes en vigor aplicables en la Ciudad de Mexico,
Distrito Federal, y renuncian en forma expresa a cualquier otro fuero que
pudiera corresponderles por razon de sus domicilios presentes o futuros.
CONTRATO DE COMPRA-VENTA DE FIBRAS
CELEBRADO ENTRE IUSATEL Y TELEREUNION
PAGINA 20
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DECIMA NOVENA : REGLAS DE INTERPRETACION.- 19.1. Las mayusculas o titulos del
presente Contrato son estrictamente por conveniencia y no deberan considerarse
en el momento de interpretar el presente Contrato o para extender o limitar su
contenido de ninguna manera. Las palabras en este Contrato, que importen la
connotacion singular deberan interpretarse como plural, y las palabras que
importen la connotacion plural deberan interpretarse como singular, de acuerdo
al contexto. En todo caso, las disposiciones pactadas en este Contrato, se
interpretaran de conformidad con los principios de interpretacion de los
contratos establecidos en el Codigo Civil para el Distrito Federal en materia
Comun y para toda la Republica en Materia Federal.
19.2. Este Contrato ha sido totalmente negociado y redactado de buena fe y de
comun acuerdo y en forma conjunta por ambas partes.
19.3. Las partes estan de acuerdo que en caso de conflicto o contradiccion entre
los terminos y condiciones pactados en este Contrato y aquellos terminos y
condiciones establecidos en cualquiera de sus anexos o de los demas Contratos
del Sistema de Fibras, prevaleceran las disposiciones de este Contrato, y sus
anexos o los mencionados contratos seran corregidos para adecuarse a lo pactado
en este Contrato, salvo lo pactado en el inciso g) de la Declaracion III de este
Contrato.
19.4. Toda obligacion de dar, hacer o no hacer pactada en este Contrato, debera
cumplirse de manera diligente e inspirada en la buena fe, cumpliendose de manera
razonable y a tiempo. Excepto cuando se establezca de manera expresa en
contrario, la ejecucion de este Contrato debera realizarse atendiendo a los
estandares y practicas normales de desempeno dentro la industria de las
telecomunicaciones.
VIGESIMA: CESION.- Salvo lo previsto en la presente clausula, ninguna de la
partes podra ceder los derechos u obligaciones derivadas de este Contrato, a
tercera persona, a menos que medie antes la autorizacion previa y por escrito de
la otra Parte, misma que no debera ser retenida o retrasada sin causa plenamente
justificada. Ambas partes tendran el derecho, sin necesidad del consentimiento
de la otra parte, de ceder los derechos de este Contrato en favor de cualquier
subsidiaria o afiliada o en favor de una sociedad que adquiera la totalidad o
parte substancial de sus activos, en la inteligencia, sin embargo de que
cualquier cesion estara sujeta al cumplimiento de las obligaciones asumidas
mediante la celebracion de este Contrato y de que el cesionario debera cumplir
con todas las obligaciones establecidas en el mismo a cargo de la parte que ceda
sus derechos y obligaciones.
VIGESIMA PRIMERA DERECHO DE PREFERENCIA POR EL TANTO.- Ambas partes estan de
acuerdo en que en caso de que cualquiera de ellas decidiera transmitir la
propiedad sobre las Fibras que cada una adquiere de la otra por virtud de este
Contrato, la parte que venda las Fibras debera avisar a la otra parte su
voluntad de vender las mencionadas Fibras, asi como los terminos y condiciones
CONTRATO DE COMPRA-VENTA DE FIBRAS
CELEBRADO ENTRE IUSATEL Y TELEREUNION
PAGINA 21
<PAGE>
de la venta. La otra parte gozara de un plazo de 30 (treinta) dias naturales,
prorrogable previo acuerdo por escrito entre las partes, para ejercer su derecho
del tanto para adquirir, en los terminos y condiciones determinados por la parte
oferente, las Fibras que la parte oferente vende. Lo anterior en el entendido de
que en ningun evento la parte oferente podra cambiar los terminos y condiciones
en que ofrece en venta dichas fibras a terceros, si dichos terminos y
condiciones no fueron ofrecidos a la otra parte del presente Contrato, cuando
menos en condiciones de igualdad en relacion con terceros. La obligacion aqui
establecida quedara subsistente aun despues de cumplido el objeto del presente
Contrato en los terminos de la clausula septima de este Contrato. Toda venta de
las fibras a que se refiere esta clausula en violacion de lo aqui establecido
dara lugar a eleccion de la parte afectada, al pago de una pena convencional de
EUA$1,000,000 (un millon de dolares de los Estados Unidos de America) o bien al
pago de los danos y perjuicios causados.
Ambas partes convienen en que si Lucent llegare a adquirir la propiedad y/o
posesion del Sistema Telereunion por virtud de algun incumplimiento de los
terminos del contrato de Credito al que se refiere la declaracion e) de
Telereunion, el derecho de preferencia por el tanto a favor de IUSATEL contenido
en el parrafo inmediato anterior quedara sin efecto, excepto en el caso de que
Lucent decidiera vender a Telefonos de Mexico o a alguna de sus subsidiarias o
afiliadas, las fibras materia del derecho de preferencia.
En caso de que ocurriera el incumplimiento de Telereunion al contrato de
credito, quedaran sin efecto tambien la obligacion de IUSATEL de ofrecer a
TELEREUNION, Lucent o cualquier cesionario el derecho de preferencia por el
tanto, a que se refiere esta clausula.
VIGESIMA SEGUNDA: ACUERDO INTEGRAL.- 22.1. Este Contrato, con sus respectivos
Anexos constituyen el final y total entendimiento entre las Partes en lo que
respecta al objeto materia del mismo, y mediante la firma del presente
instrumento, queda anulado cualquier acuerdo anterior que se relacione con el
objeto de este Contrato y sus Anexos forman parte del mismo. Las Partes estan de
acuerdo en que este Contrato solo puede ser modificado mediante el
correspondiente convenio celebrado por escrito entre las Partes a traves de
representantes debidamente autorizados.
CONTRATO DE COMPRA-VENTA DE FIBRAS
CELEBRADO ENTRE IUSATEL Y TELEREUNION
PAGINA 22
<PAGE>
VIGESIMA TERCERA: RENUNCIA A DEMANDAR LA DESESTIMACION DE LA PERSONALIDAD
CORPORATIVA DE LAS PARTES.- 23.1. Toda accion en contra de cualquiera de las
partes derivadas de este Contrato, debera ser promovida exclusivamente en contra
de dicha parte como persona moral y cualquier responsabilidad relativa a la
misma debera ser unicamente ejecutable en contra de los activos de cada parte
como entidad moral. Ambas partes se obligan a no demandar la desestimacion de la
personalidad corporativa o remocion del velo corporativo de la otra parte, ni a
demandar contraprestacion alguna de los accionistas, miembros del consejo de
administracion, funcionarios o empleados de la otra parte y renuncian en forma
expresa a los derechos que pudiera corresponderles en tal sentido. Cada una de
las personas antes mencionadas es beneficiaria de las obligaciones de no hacer
asumidas por ambas y cada una de dichas personas en esta clausula tendran el
derecho de invocar dicha renuncia en su favor.
VIGESIMA CUARTA: RELACION DE LAS PARTES.- 24.1. La celebracion del presente
contrato entre IUSATEL y TELEREUNION no da lugar a la creacion de vinculos
distintos a las obligaciones expresamente asumidas, por lo que la relacion de
las partes no es la de socios, agentes o asociados, y nada de lo pactado en este
instrumento debera estimarse como acto constitutivo de un contrato de sociedad o
agencia entre ellos para ningun proposito, incluyendo pero no limitandose a los
propositos del impuesto sobre la renta. Al realizar cualquiera de las
obligaciones establecidas en el presente, IUSATEL y TELEREUNION seran
contratistas independientes o partes independientes y deberan descargar sus
obligaciones contractuales bajo su propio riesgo.
VIGESIMA QUINTA: VALIDEZ DE LAS CLAUSULAS.- 25.1. Cualquier causal de nulidad o
invalidez de cualquiera de las disposiciones establecidas en este Contrato no
debera afectar a las demas disposiciones validas conforme a derecho.
VIGESIMA SEXTA: CONDICION SUSPENSIVA.- La entrada en vigor del presente
contrato, se encuentra sujeta a la condicion suspensiva de que TELEREUNION, en
un plazo que vencera el dia 5 de enero del ano 2001, obtenga de Lucent y de
Citibank y entregue a IUSATEL: (i) las autorizaciones a que se refiere la
declaracion marcada con el inciso f) de TELEREUNION; (ii) la constancia de
inscripcion en los registros publicos de la propiedad y del comercio en donde se
encuentre inscrita la Hipoteca correspondiente, de que las Fibras que IUSATEL
Adquiere han quedado libres de todo gravamen y pueden ser materia de translacion
de dominio en terminos del presente contrato y (iii) que dicha autorizacion una
vez protocolizada, sea agregada a este contrato como Anexo H. La protocolizacion
e inscripcion en registros sera realizada por TELEREUNION ante el Notario
Publico de su eleccion y a su costo, debiendo proporcionar a IUSATEL una copia
certificada de la constancia debidamente protocolizada a efecto de que sea
agregada por triplicado al presente contrato como anexo "H".
CONTRATO DE COMPRA-VENTA DE FIBRAS
CELEBRADO ENTRE IUSATEL Y TELEREUNION
PAGINA 23
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En caso de que en el plazo mencionado no se cumpla la condicion establecida en
la presente clausula, este y los demas Contratos del Sistema de Fibras, se daran
por terminados sin responsabilidad alguna para ninguna de las partes. No
obstante lo anterior, las partes si asi lo acordaren por escrito podran
prorrogar el plazo establecido mediante acuerdo por escrito suscrito por sus
respectivos representantes legales.
Confirmando la aceptacion de los terminos y condiciones contenidos en el
presente Contrato, y conscientes las Partes del alcance juridico de los derechos
y obligaciones asumidos por la celebracion del presente, lo firman por
triplicado en la Ciudad de Mexico, Distrito Federal, el dia ocho del mes de
diciembre de 1999.
"TELEREUNION". "IUSATEL"
TELEREUNION, S.A. de C.V. IUSATEL, S.A. de C.V.
______________________________________ _________________________________
Por: Ing. Oscar Garcia Mora Por: Ing. Fulvio Vargas del Valle
_____________________________________
Por: Ricardo Agustin Orea Gudino
TESTIGOS
______________________________________ _________________________________
Lic. Ricardo A. Berruecos Trujillo Ing. Rolando Stevens Avila.
CONTRATO DE COMPRA-VENTA DE FIBRAS
CELEBRADO ENTRE IUSATEL Y TELEREUNION
PAGINA 24
<PAGE>
COMMITMENT AGREEMENT
This COMMITMENT AGREEMENT (this "Agreement") dated as of August 16, 1999,
is made by and between Comercializadora Lufravic, S.A. de C.V., a Mexican
sociedad an nima de capital variable ("Lufravic"), and Telscape International
Inc., a corporation incorporated under the laws of Texas ("Telscape", and
collectively with Lufravic, the "Parties").
WHEREAS, each of the Parties is an entity duly organized and validly
existing under the laws of their respective places of incorporation.
WHEREAS, it is the intention of Recovery Equity Investors 11, L.P. a
limited partnership incorporated under the laws of the State of Delaware, U.S.A.
("Recovery"), subject to certain terms and conditions, to invest in the capital
stock of Telscape by way of subscription and payment of Series C Preferred Stock
shares to be issued by Telscape (the "Investment" and the date on which the
Investment occurs, the "Investment Date").
WHEREAS, on the Investment Date, Recovery and Telscape intend to enter into
a number of agreements and other governing documents (the "Closing").
WHEREAS, at Closing, Recovery will effectively hold an equity participation
in the capital stock of Telscape.
WHEREAS, Telscape is interested in having Lufravic participate, subject to
the terms and conditions set forth herein, in the capital stock of Telscape and
therefore become a shareholder thereof if, and to the extent that, the
Investment is made by Recovery in the capital stock of Telscape.
NOW, THEREFORE, in consideration of the foregoing premises and of the
mutual covenants and obligations hereinafter set forth, the Parties hereto,
intending to be legally bound, hereby agree as follows:
1. COMMITMENT. Subject to the terms and conditions set forth herein,
Telscape hereby commits itself to grant to Lufravic, at Closing, 400,000 (four
hundred thousand) common shares representing the capital stock of Telscape
(subject to any restrictive legend required by the Securities Act of 1993, as
amended), and issue in favor of Lufravic a warrant to purchase 100,000 shares of
common stock of Telscape International, Inc. at a strike price of U.S.$7.50
(Seven Dollars 50/100 U.S.) with an expiration date of 5 (five) years from date
of issuance. The warrant shall be issued substantially in the form attached
hereto as Exhibit 1. For the purposes hereinabove provided, Lufravic will be
entitled to attend the Closing, so as to receive at such time the shares and the
warrant.
2. ACKNOWLEDGEMENT. Lufravic acknowledges and agrees that at time of Closing
it will not hold any Series "N" shares issued by Telereunion, S.A. de C.V. 3.
<PAGE>
3. TERMINATION. The provisions of this Agreement and the rights and
obligations created thereby shall terminate in respect of all Parties if the
Investment is not made.
4. AMENDMENT AND WAIVER. Any provision of this Agreement may be altered,
supplemented, amended, or waived by the unanimous written consent of all Parties
herein. Such alteration, supplement, amendment or waiver shall be binding upon
all Parties. No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege.
5. ASSIGNMENT. Except as otherwise expressly provided herein, the terms and
conditions of this Agreement shall inure to the benefit of and be binding upon
the respective successors and permitted assigns of each of the Parties. No such
assignment shall relieve any party from its obligations hereunder.
6. NOTICES. All notices, requests and other communications to any party
shall be in writing (including telex, facsimile transmission or similar writing)
and shall be given to such party by messenger, telex, or facsimile transmission
(a) at its address, facsimile number or telex number set forth on the signature
pages hereof, or (b) such other address, facsimile number or telex number as a
party may hereafter specify for the purpose by notice to each of the other
Parties. Each such notice, request or other communication shall be effective (i)
if given by telex, when such telex is transmitted to the telex number specified
in this Section and the appropriate answer back is received, (ii) if given by
facsimile transmission, when transmitted to the facsimile number specified in or
pursuant to this Section 6 and electronic confirmation of receipt is received,
or (iii) if given by messenger or any other means, when delivered at the address
specified in or pursuant to this Section 6.
7. COUNTERPARTS. This Agreement may be executed in two or more counterparts
and each counterpart shall be deemed to be an original and which counterparts
together shall constitute one and the same agreement of the Parties hereto.
8. SECTION HEADINGS. Headings contained in this Agreement are inserted only
as a matter of convenience and in no way define, limit, or extend the scope or
intent of this Agreement or any provisions hereof.
9. GOVERNING LAW. For any and all matters concerning the interpretation and
enforcement of this Agreement, the Parties hereby expressly submit themselves to
the application of the laws of the United Mexican States.
10. ARBITRATION. The Parties agree to use their best efforts to reach an
agreement with respect to any dispute, controversy or difference between them
arising out of or relating to this Agreement. To this end, they shall consult
and negotiate with each other in good faith to reach a just and equitable
<PAGE>
solution satisfactory to all Parties. If they do not reach such a solution
within a period of twenty (20) working days, any party may refer the matter to
arbitration.
The arbitration shall be settled in accordance with the International Commercial
Arbitration Rules of the American Arbitration Association.
The disputes or controversies will be settled by one (1) arbitrator which
Lufravic and Telscape shall select. Should the arbitrator fail to be appointed
within the period of one (1) month, the American Arbitration Association,
domiciled in New York, New York, U.S.A., upon request, may choose any person
whom it deems suitable.
The arbitration, including the rendering of the decision, shall take place in
the city of Mexico and shall be administered by the American Arbitration
Association, unless otherwise agreed by the Parties. The arbitration shall be
conducted in Spanish. Any decision or arbitral award shall be based on the
provisions of this Agreement; provided, however, that to the extent that the
subject matter for the decision or award is not set forth within this Agreement,
it shall be based on the laws of the United Mexican States.
The Parties agree that the arbitration award: (i) shall be conclusive, final and
binding upon the corresponding Parties to the arbitration; (ii) shall be the
sole and exclusive remedy between the Parties regarding any and all claims and
counterclaims presented to the arbitrator, and (iii) if containing elements of
injunctive relief may be made in such interim manner (pending final resolution
of the controversy presented) as the arbitrator may deem appropriate to protect
the interests of any aggrieved or potentially aggrieved party.
The Parties further acknowledge that, according to Mexican law, prior to or
during the arbitration process any of them may request a competent court to
adopt preventive measures. To this end, the Parties expressly agree to submit
themselves to the preventive measures ("Medidas Preparatorias, de Aseguramiento
y Precautorias") contained in the Titulo Cuarto, Capitulo Unico of the Mexican
Codigo Federal de Procedimientos Civiles, and that they will abide by any such
measures so adopted by a competent court.
The Parties also agree: (i) that their decision to resolve their disputes by
arbitration as provided in this Agreement is an explicit submittance to the
enforcement and execution of the arbitration award and any judgment thereon; and
(ii) that the arbitration award and any judgment thereon, if unsatisfied, may be
entered in and shall be enforceable by the courts and governmental agencies of
any nation having jurisdiction over the person or property of the party against
whom the arbitration award has been rendered.
In the event any party to this Agreement commences legal proceedings to enforce
the arbitration award, the expenses of such litigation (including reasonable
attorney's fees and costs of court awarded by a court of competent jurisdiction)
shall be borne by the party or Parties not prevailing therein.
<PAGE>
The validity of this clause shall be governed by the United Nations Convention
on the Recognition and Enforcement of Foreign Arbitral Awards (New York, July
10, 1958), to which the United Mexican States and the United States of America
are Parties.
Notwithstanding the foregoing, the Parties will obtain the agreement of
arbitrator to the following: (i) the arbitrator shall provide a written ruling,
stating in separate sections the finding of fact and conclusions of law on which
their ruling is based, (ii) their ruling shall be due no later than ninety (90)
days after their final hearing and within twelve (12) months after commencement
of the arbitration, and (iii) any arbitration award shall include the expenses
of such arbitration (including reasonable attorney's fees, experts' fees and the
arbitrator's fees) such that all such expenses shall be borne by the party or
Parties not prevailing therein.
11. WAIVER OF IMMUNITY. To the extent that any party has or hereafter may
acquire any immunity from jurisdiction of any court or from any legal process
(whether through service or notice, attachment prior to judgment, attachment in
aid or execution, or otherwise) with respect to itself or its property, such
party hereby irrevocably -waives such immunity in respect of its obligations
under any of this Agreement to the extent permitted by applicable law and,
without limiting the generality of the foregoing, agrees that the waivers set
forth in this Section 11 shall have effect to the fullest extent permitted under
the Foreign Sovereign Immunities Act of 1976 of the United States of America and
are intended to be irrevocable for purposes of such Act.
12. LANGUAGE. This Agreement is executed in English and Spanish versions,
both of which are binding for the Parties, it being understood that in the event
of doubt as to the interpretation of the documents or any inconsistency between
both versions, the Spanish version shall prevail in all cases.
13. ENTIRE AGREEMENT. This Agreement contains the entire understanding of
the Parties hereto respecting the subject matter hereof and supersedes all prior
agreements, discussions and understandings with respect thereto.
14. CUMMULATIVE RIGHTS. The rights of each of the Parties under this
Agreement are cumulative and in addition to all similar and other rights of the
Parties under other agreements.
15. SEVERABILITY. If any provision of this Agreement is held to be illegal,
invalid, or unenforceable under any present or future law, and if the rights or
obligations of the Parties under this Agreement shall not be materially and
adversely affected thereby (a) such provision shall be fully severable, (b) this
Agreement shall be construed and enforced as if such illegal, invalid, or
unenforceable provision had never comprised a part hereof, (e) the remaining
provisions of this Agreement shall remain in full force and effect and shall not
be affected by the illegal, invalid, or unenforceable provision or by its
severance herefrom, and (d) in lieu of such illegal, invalid, or unenforceable
provision, there shall '6e added automatically as a part of this Agreement a
<PAGE>
legal, valid and enforceable provision as similar in terms to such illegal,
invalid, or unenforceable provision as may be possible.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the Parties or the duly authorized officers of each of the Parties, as
appropriate, effective as of the date first written above.
Telscape International, Inc.
By: [SIGNATURE]
Name: Todd Binet
Title: President
Address for notices:
2700 Post Oak, Blvd. Suite 1000
Houston, TX 77057
Fax:
Tel:
Comercializadora Lufravic, S.A. de C.V.
By: [SIGNATURE]
Name: Alberto Mendez Plaza
Title: President
Address for notices:
Kepler 161 Col. Nuevo Anzures
CP 11590
Fax:
Tel: 55310091
<PAGE>
THIS FIBER OPTIC TELECOMMUNICATIONS SERVICE EXCHANGE AGREEMENT DATED AS OF MAY
14, 1999 (THIS "AGREEMENT"), ENTERED INTO BY AND BETWEEN AVANTEL, S.A., A
CORPORATION ORGANIZED AND EXISTING UNDER THE LAWS OF THE UNITED MEXICAN STATES,
HAVING A PLACE OF BUSINESS AT LIVERPOOL 88 PB, COL. JUAREZ, 06600, MEXICO, D.F.
("AVANTEL"), REPRESENTED BY JOSE MARIA ZUBIRIA MAQUEO, AND TELEREUNION, S.A. DE
C.V. ("TELEREUNION"), A CORPORATION ORGANIZED AND EXISTING UNDER THE LAWS OF THE
UNITED MEXICAN STATES, HAVING A PLACE OF BUSINESS AT TLACOQUEMECATL NO. 21, COL.
DEL VALLE, 03200, MEXICO, D.F., REPRESENTED BY OSCAR GARCIA.
WITNESSETH:
WHEREAS, Avantel and Telereunion are the owners and operators of a fiber optic
telecommunications network within the United Mexican States;
WHEREAS, Telereunion and Avantel have each developed and constructed fiber
optic telecommunications network (respectively, the "Telereunion System" and the
"Avantel System" and each sometimes referred to herein as the respective Party's
"System") that are located on physically diverse routes serving different
regions; and
WHEREAS, Telereunion and Avantel wish to connect their Systems on the specific
route segment(s) from time to time identified in schedules to be attached hereto
and made a part hereof, identified below so as to exchange transmission fiber
capacity so that each carrier has fiber capacity serving the same regions via
physically diverse routes; and
WHEREAS, the Parties wish to set forth in this Agreement the terms and
conditions under which they will exchange such fiber capacity;
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants set forth in this Agreement, Telereunion and Avantel hereby agree as
follows:
ARTICLE I. DEFINITIONS
The following terms shall have the following definitions for the purposes of
this Agreement:
AFFILIATE: of Telereunion or Avantel as the case may be, means any
- --------- person or entity that directly or indirectly through one or
more intermediaries controls, is controlled by or is under
common control of Telereunion or Avantel, as the case may
be. Except for the purposes of this Agreement, Avantel shall
not be deemed to be an Affiliate of Telereunion and
Telereunion shall not be deemed to be an affiliate of
Avantel.
Page 1 of 33
<PAGE>
For purposes hereof, the term "control" shall mean the
possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of any
such entity, whether through the ownership of voting
securities or stock, by contract, or otherwise.
AGREEMENT: means this Agreement and its Exhibits.
- ---------
COLLOCATION SPACE: means space provided to the Fiber Recipient in the
- ------------------ facilities of the Fiber Provider. Fiber Recipient shall
receive 7x24 access to space under the terms and conditions
agreed upon by both Parties. Unless otherwise stated, space
is provided free of charge. Space shall be allocated on a
standard basis on a per fiber pair basis. Space standards
for POP's and regenerator sites may vary. The specification
of Collocation Space and Standards are set forth in the
attached Exhibit C.
COMMENCEMENT/
- -------------
CERTIFICATE
- -----------
OF ACCEPTANCE: means the notice on which Telereunion or Avantel, as the
- -------------- case may be, issues the Certificate of Acceptance in
accordance with Article 2.3.
CONNECTIONS: means the point at which the Fiber Exchange is spliced or
- ------------ terminated with Equipment, Fiber Recipient System, or the
equipment or fiber optic filaments of a Third Party.
DEMARCATION POINT: means the point, which defines where responsibilities such
- ------------------ as installation, maintenance, etc. of each of the Parties
begins and ends. The Demarcation Point shall be a particular
DSX cross-connect panel at the POP at both Segment ends and
both sides of a signal regenerator site, as specified in
Exhibit A.
EQUIPMENT: means the power equipment and electronic devices equipment
- ---------- including, without limitation repeaters, junctions, patch
panels, alarm monitoring equipment, and other equipment
necessary to provide a network fiber transmission capacity
located on the sides of the Demarcation Points. The word
"equipment" when not capitalized refers to equipment of any
type.
Page 2 of 33
<PAGE>
END-USER: means any person (including the Fiber Recipient, as defined
- -------- below) using for revenue bearing, communication purposes the
services, or any portion thereof, provided to the Fiber
Recipient under this Agreement, regardless of whether that
person is in private with the Fiber Recipient.
EXCHANGED FIBER: means the aggregate of Fiber Exchange pursuant to this
- ----------------- Agreement.
FIBER EXCHANGE: equivalent units being swapped for no net cost. Each
- --------------- equivalent unit is to be defined in a separate Appendix.
FIBER PROVIDER: means the Party providing the relevant Fiber Exchange.
- ---------------
FIBER RECIPIENT: means the Party receiving the relevant Fiber Exchange.
- ----------------
LAWS AND
- ---------
REGULATIONS: means all government statutes, laws, codes, ordinances,
- ------------ judgments, decrees, injunctions, permits and regulations;
NETWORK
- -------
SPECIFICATIONS
- --------------
AND OPERATING
- --------------
STANDARDS: means those specifications set forth in the attached Exhibit
- ---------- D, as well as applicable common industry standards, which
the Parties will meet and comply with in the provision of
Exchanged Fiber hereunder.
POP OR POINT
- --------------
OF PRESENCE: means a facility situated in either the Telereunion's System
- ------------- or Avantel's System at which the operator of the System can
add or drop transmission facilities. POP facilities include,
without limitation, electrical and/or optical equipment,
electrical power, air conditioning and other environmental
conditioning.
Page 3 of 33
<PAGE>
PROTOCOL OF
- ------------
ACCEPTANCE: Set as activities and events set forth in Exhibit E related
- ----------- to the test of both stand-alone and network interoperability
that warrantees the proper functionality of the Fiber
Exchange.
REGENERATOR SITE: means a facility situated between POPs were optical signal
- ----------------- is reproduced or amplified. Fiber Exchange may not be added
or dropped from that location.
RELATIONSHIP
- ------------
MANAGERS means any Management person designated either by Telereunion
- -------- or Avantel respectively, authorized to negotiate any
documentation related to any provision of this Agreement.
ROUTE: means the path on which the Fiber Exchange will be located
- ------ as set forth in Exhibit A including, the Demarcation Points.
SEGMENT: means the portion of the Fiber Provider's (as defined below)
- ------- System between any two of the Fiber Provider's POP's which
are located along the route of a Fiber Exchange. Within a
Segment there may exist regenerator sites as necessary to
propagate the optical signal.
STRUCTURES: means the structure supporting the fiber including, without
- ----------- limitations poles, conduits, risers, and associated steel
works, including without limitation lateral, located on or
in easements, street licenses, and/or right of way.
SYSTEM CONNECTION: means a fiber optic cable or other digital medium, which
- ------------------ connects a Telereunion POP and an Avantel POP at each end of
a Fiber Exchange route.
THIRD PARTY: means any person or entity that is not a Party, an Affiliate
- ------------- Party, or a successor permitted assignee of a Party.
THIRD PARTY
- ------------
CHARGES: means any charges, fees, taxes and terms and conditions of
- -------- service imposed by a Party other than the Fiber Provider,
including, but not limited to, rate fluctuations in
telephone tariffs, communications charges and access charges
that are imposed or enacted by access suppliers to a third
Party provider after the date of signing of this Agreement.
Page 4 of 33
<PAGE>
ARTICLE II. FIBER OPTIC EXCHANGE
2.1 The Fiber Optic Exchange(s) that are to be exchanged pursuant to this
Agreement shall from time to time be specified in Exhibit A (which shall be
completed for each Fiber Exchange, but which shall not be effective unless
signed by Telereunion and Avantel's respective Relationship Managers as well as
from the company's legal representative, or their successors-in-interest.) Each
Party agrees to act as a Fiber Provider and as a Fiber Recipient, subject to the
terms of this Agreement. The Parties further agree that only equivalent
(symmetrical) and mutually beneficial exchanges of fiber shall be considered as
Fiber Exchange. (Equivalency shall be determined on a case-specific basis.)
Each Exhibit A shall include the relevant Segment end points, Regenerators
Sites, time periods, exchanged capacity quantities, delivery dates, equivalency
basis statement, definition of System Connection design, delivery and financial
responsibilities, LEC or Third Party approved cross-connections or services,
collocation space and cost definitions needed to effect each exchange of Fiber
Exchange.
2.2 Promptly after the Parties have determined the scope of the work to be
performed to establish System connections and LEC cross-connections, the Parties
shall cooperate to cause such work to be performed in compliance with the
procedures set forth in the attached Exhibit B and shall share equally the cost
of such work, including the cost of any circuits leased from a third Party
(unless otherwise specified in writing). Each Party shall individually bear the
cost of adding any new equipment to its POP, Regenerator Site or the fulfillment
of collocation space obligations.
2.3 Upon completion of the work specified in Section 2.2 hereof, the Parties
shall perform an acceptance and performance test for a duration of 2 weeks or
less based upon the specification and measurement criteria stated in the Network
Specifications and Operating Standards and the Protocol of Acceptance, to
determine that the relevant Fiber Exchange is functioning properly. When the
Fiber Recipient has determined that the capacity to be received meets the
Network Specifications and Operating Standards and the Protocol of Acceptance
measurement criteria, Fiber Recipient shall complete and deliver to the other
Party a Commencement/Certificate of Acceptance in the form attached hereto as
Exhibit G.
2.4 Fiber Exchange services hereunder do not include any multiplexing/
demultiplexing; "drop and insert capabilities"; or the obtaining of any local
access service unless agreed by the Parties hereto. Such arrangements and any
associated costs will be incorporated into Exhibit A of this Agreement.
Page 5 of 33
<PAGE>
ARTICLE III. OPERATION AND CONTROL
ARTICLE III. OPERATION AND CONTROL
3.1 Telereunion and Avantel or their respective designees authorized under
their respective title concessions shall control, operate and maintain their own
systems and shall do so in a manner consistent with the Network Specifications
and Operating Standards. The Parties shall be subject to and agree to comply
with all the technical and operational requirements imposed by the other Party
upon to the End-User of the Fiber Provider's System so long as such requirements
are consistent with the Network Specifications and Operating Standards and this
Agreement.
3.2 In the event Telereunion chooses to transfer control over all or any
part of Telereunion's network assets, unless it is part of the merger,
acquisition or transfer of Telereunion's concession, Avantel will have the first
right of refusal to assume financial responsibility of the network fiber
capacity. To this extent, Telereunion will make its best efforts to assit
Avantel, within 60 days after the execution of this Agreement, in any financial
negotiation with Telereunion's lenders.
3.3 In the event that any Party decides to sell all or any portion of the
underlying Fiber Exchange asset, unless it is part of the merger, acquisition or
transfer of any Party concession, the sell shall be subject to the following
procedure:
3.3.1 No Party may sell all or any portion of the Fiber Exchange asset to a
Third Party without the prior written notification to the other Party.
3.3.2 In the event a Party (the Selling Party) desires to sell all or any
portion of the Fiber Exchange assets (the Offered Fiber Exchange) to a
Third Party, the Selling Party must do its best efforts, including any
legal action, to enforce the Buying Party to comply with and honor the
terms and conditions set forth in this Agreement.
3.4 Telereunion agrees, to the extent possible, grant the First Right of
Refusal to Avantel in case Telereunion decides to sell all or part of the Fiber
Exchange asset or the whole Telereunion's network capacity. To this extent,
Telereunion will make its best efforts to assit Avantel in any financial
negotiation with Telerunion's lenders.
3.5 In the event that any Party decides to sell all or any portion of the
underlying Fiber Exchange asset, or upon the occurrence of a change of control
of any of the Parties, the other Party will have the right to terminate this
Agreement within two years after any of these events is completed.
Page 6 of 33
<PAGE>
ARTICLE IV. POINTS OF DEMARCATION
4.1 Marking. The Demarcation Point shall be identified on Exhibit B at each
--------
Connection to the route.
4.2 Fiber Provider Responsibility. Fiber Provider shall secure rights of
-------------------------------
way and easements for and otherwise be responsible for the System Connection on
the Fiber Exchange portion provided to the Fiber Recipient. Fiber Provider
shall ensure that the System Connection provided to the Fiber Recipient shall be
designed in a manner that is consistent with the Network Specifications and
Operation Standards, and will not conflict physically or otherwise interfere
with joint users of the Fiber, Fiber Exchange accessories, structures or any
other property needed in the installation, construction, maintenance or use of
the Fiber. Fiber Provider shall also obtain any government approvals necessary
for the installation, maintenance, and ownership of Equipment installed and/or
used on the side of the Demarcation Point.
ARTICLE V. MAINTENANCE
5.1 Fiber Provider's Obligations. Fiber Provider shall, at its own expense,
-----------------------------
maintain and repair, or cause to be maintained and repaired, the Fiber Exchange
provided to the Fiber Recipient, including emergency repairs, pursuant to
Exhibit I Maintenance Specifications. Fiber Provider reserves the right, but
not the obligation, to perform such maintenance with its own crews or
contractors, or those of its Affiliates. Fiber Recipient shall have the right
to have a representative available, at Fiber Recipient's expense, to assist
Fiber Provider in any maintenance or repair of the Fiber Exchange provided to
the Fiber Recipient. At all times during this Agreement, Fiber Provider shall
take all necessary steps to ensure that the Fiber Exchange provided to the Fiber
Recipient operate in a manner consistent with the Network Specifications and
Operation Standards. It is Fiber Provider's intention, and Fiber Provider
represents and warrants, that maintenance work performed by Fiber Provider on
the Fiber Exchange provided to the Fiber Recipient will not normally result in
interruptions or defects. If Fiber Provider's routine maintenance is of the sort
that it could jeopardize any Fiber Recipient's use of the Fiber Exchange
provided by the Fiber Provider or require the interruption of all or any portion
of the use, Fiber Provider shall so notify Fiber Recipient in writing via
facsimile or e-mail at least sixty (60) days before such interruption.
5.2 Periodic Inspection. Subject to the limitations on access specified
---------------------
below, Fiber Provider shall have the right to make reasonable Periodic
Inspections of Fiber Recipient's operations occupying or affecting Fiber
Provider's or its Affiliates' property. Such Periodic Inspections shall be for
the sole purpose of facilitating Fiber Provider's maintenance obligations
hereunder, and Fiber Provider shall not have access to any property or
information which Fiber Recipient in its sole discretion deems irrelevant to
such maintenance obligations. Fiber Provider will give Fiber Recipient at least
sixty (60) advance written notice of any periodic inspections. A representative
of Fiber Recipient may accompany Fiber Provider's representative on all Periodic
Inspections, at Fiber Provider's expense. Such inspections shall be at Fiber
Provider's expense.
Page 7 of 33
<PAGE>
5.3 Fifteen (15) calendar days prior notification to the Service Recipient
is required for normal routine maintenance scheduled by the Service Provider for
its System if such maintenance will produce an outage on the Capacity Exchange.
Both parties will use their reasonable efforts to accommodate reasonable
requests and to schedule a mutually acceptable interval in which normal routine
maintenance may be performed.
5.4 Fiber Recipient's Obligations. Fiber Recipient shall be solely
--------------------------------
responsible for all aspects of the operation of the Fiber Recipient System and
the operation and maintenance of the Fiber Recipient System, Connections, and
Equipment.
5.5 Emergency Maintenance. Fiber Provider shall give Fiber Recipient as
-----------------------
much advance notice of emergency maintenance as is practically and reasonably
possible under the circumstances. For purposes of this section, "emergency
maintenance" is defined as maintenance not reasonably anticipated or preventable
by Fiber Provider, but reasonably necessary to restore lost or disrupted use of
the Fiber Exchange provided to the Fiber Recipient.
ARTICLE VI. ACCESS TO SITE
6.1 Access by Fiber Recipient. Fiber Provider agrees, upon reasonable
-----------------------------
request to allow Fiber Recipient's representative direct ingress and egress to
Fiber Provider's property or the property on which Fiber Provider has placed
Fiber Exchange provided by Fiber Provider, in connection herewith for the
purpose of facilitating the purposes of this Agreement, and to permit Fiber
Recipient to be on Fiber Provider's premises at such times as may be required to
test, repair and conduct emergency repairs to the Fiber Exchange provided to
Fiber Recipient, as specified above, or to observe Fiber Provider's testing,
maintenance and repair of the Fiber, Fiber Exchange accessories, Structures, and
other facilities and equipment. Employees and agents of Fiber Recipient shall,
while on the premises of Fiber Provider, comply with all rules and regulations,
including, without limitation, security requirements, and, where required by
government regulations, receipt of satisfactory governmental clearances.
6.2 Access by Fiber Provider.
---------------------------
(a) In no event shall Fiber Provider be permitted access to the property of
Fiber Recipient or its Affiliates without prior notice to Fiber Recipient
and agreement to a mutually acceptable time.
(b) Fiber Provider shall at all times perform its work in accordance with the
applicable provisions of local, state and federal occupational safety and
health laws. Fiber Recipient shall have the authority to suspend Fiber
Provider's work or operations in and around Fiber Recipient's property if,
in the sole judgment of Fiber Recipient, at any time hazardous conditions
arise or any unsafe practices are being followed by Fiber Provider, its
employees, agents or contractors and Fiber Provider fails to correct such
conditions. The presence of Fiber Recipient's authorized employee or
agent(s) shall not relieve Fiber Provider of its responsibility to conduct
all of its work operations in and around Fiber Recipient's property in a
safe and workmanlike manner, and in accordance with the terms and
conditions of this Agreement.
Page 8 of 33
<PAGE>
ARTICLE VII. INTERRUPTIONS
7.1 Upon receipt of telephonic notice (to the trouble reporting numbers
detailed in the Exhibit F) that the Fiber Exchange provided hereunder on any
Segment is not operating in compliance with the Network Specifications and
Operating Standards and the measurement criteria indicated in the Protocol of
Acceptance, the Parties agree to work cooperatively and with due diligence to
locate the problem and restore the service within two (2) hours after the point
of failure is exposed and fibers are ready to be spliced.
7.2 If the system Connection is not brought into compliance within two (2)
hours, then the repair needs shall be escalated to the Parties designated in
Exhibit F, Contact/ Escalation List. Restoration of the Fiber Exchange service
will be considered closed, whenever the Fiber Recipient is able to send a fiber
signal between nodes that were malfunctioning, according to the Network
Specifications and Operating Standards and the measurement criteria as indicated
in the Protocol of Acceptance certified by both parties.
7.3 Regardless of the foregoing, if a system is not brought into compliance
with the Network Specifications and Operating Standards within eight (8) hours,
the Fiber Recipient may at its option charge the Fiber Provider a service charge
for each non-compliance Fiber Exchange, measured from the telephonic notice
until the malfunction has been repaired, and calculated at the rate US$10,000
per hour. When the Segment has been repaired by the Fiber Provider, a mutual end
to end performance test will be completed to ensure the Segment is operating in
compliance with the Network Specifications and Operating Standards and an
Exhibit G form shall be executed by the Fiber Provider and signed by the Fiber
Recipient. In case the interruption is attributed to the System Connection
located in CFE facilities, or to the facilities of any other Third Party, the
eight (8) hour term will begin at the time CFE or the Third Party gives access
to Avantel's and Telereunion's personnel to such facilities.
7.4 If the Fiber Exchange has repeatedly malfunctioned an unreasonable
number of times, the Fiber Recipient of the Segment may elect to terminate its
use. In this case, the Fiber Provider will be required to discontinue the use of
the corresponding Fiber Exchange or at its option purchase from the Fiber
Recipient at 1.2 times the market effective rate for a like fiber capacity on a
monthly lease basis. The Fiber Recipient must provide this leased service for a
minimum period of 6 months.
7.5 In the case Fiber Provider cannot restore the service within 24 hours,
the Fiber Recipient may at its own cost, take any and all necessary actions to
put the Fiber Exchange back into service. The Fiber Provider must be notified
in writing of the intent to exercise these corrective actions. This notice will
be provided in writing to the Fiber Provider network operations center available
on a 7x24 hour basis as set forth in Exhibit "E".
Page 9 of 33
<PAGE>
7.4 A current list of contact numbers and escalation contacts is attached as
Exhibit F. Any material updates of this list shall be provided in writing to
the other Party.
ARTICLE VIII. ROUTE CHANGES
8.1 In the case Telereunion or Avantel substitutes, changes, eliminates or
rearranges any of its facilities which it owns in providing the service
hereunder, including, but not limited to, the substitution of different
equipment or facilities, the changing of operating or maintenance
characteristics of facilities, or the changing of its operations or procedures,
such substitution, change, elimination or rearrangement by one Party shall not
cause such Party's system to fail to comply with the Network Specifications and
Operating Standards, or will require any change to the other Party's system to
continue with the provision of the service hereunder. Notwithstanding any such
change, such Party shall continue to provide the other Party with the same Fiber
Exchange as was provided prior to the change, substitution, elimination or
rearrangement. Such Party initiating the change/rearrangement shall assume all
costs associated, if it's the case, with disconnecting or reconnecting the
Party's system in the event such Party substitutes, changes, eliminates or
rearranges any facilities used in providing service under this Agreement.
However, neither Party shall change out the System Connection facilities,
electronics, or physical routing of Fiber Exchange with prior notification to
the other Party. The notification shall detail the specifics of the proposed
change. Neither Party shall change the physical routing of Fiber Exchange
without the prior written consent of the other Party. The consent may be
withheld in the sole discretion of the Fiber Recipient if such change would
result in the loss of physical diversity by the Fiber Recipient.8.1
8.2 The characteristics and methods of operation of the circuits, facilities
or the equipment provided by the Parties under this Agreement, shall not
interfere with or impair the service over the facilities of the other Party or
its Affiliates, cause damage to their plant, impair the privacy of any
communications carried over their facilities or create hazards to their
employees, agents or the public.
8.3 Access to New Additions. Fiber Provider in its sole discretion may
---------------------------
construct one or more extensions to its Backbone Network and may offer to
provide Fiber Recipient additional fibers for its use as Fiber Exchange,
consistent with the terms of this Agreement. If Fiber Recipient seeks to use
such additional fibers, Fiber Recipient may submit to Fiber Provider a completed
form as specified in Exhibit H. Request for Route Change, with proposed
revisions to Exhibit A, and Fiber Provider shall not unreasonably withhold its
acceptance of the Request for Route Change.
Page 10 of 33
<PAGE>
(a) Upon acceptance of the Request for Route Change by Fiber Provider, Fiber
Provider will undertake to extend the Fiber Recipient fibers to Fiber
Recipient's sites or new sites in accordance with the terms of this
Agreement. Fiber Provider and Fiber Recipient shall cooperate in providing
access to such sites so as to minimize any interference with the use of the
Fiber Recipient System, the Fiber Exchange, and Structures, to the extent
reasonably possible, by either Party and to avoid conflicting physically or
otherwise interfering with joint users of the Fiber Exchange, Fiber
Exchange accessories, Structures or any other property needed in the
installation, construction, maintenance or use of the Fiber Exchange. Any
such relocation, replacement, or rebuilding shall be accomplished
consistently with the Network Specifications and Operation Standards and
the Protocol of Acceptance.
(b) Upon acceptance of the Request for Route Change by Fiber Provider, Exhibit
B shall be revised to reflect the new Demarcation Points and Route, and,
subject to the terms mutually agreed upon by the Parties in the Request for
Route Change, the terms of this Agreement shall apply to such revised
Route.
8.4 If Telerunion decides to expand its fiber network buildout, they will
build the first 300 Kilometers in the cities not on the Avantel network. On
these new routes, Avantel will receive 4 fiber up to 300 kilometers of route as
part of this initial exchange.
8.5 Relocation, Replacement, Removal or Rebuild of Fiber Exchange
--------------------------------------------------------------------
(a) In the event that Fiber Recipient requests relocation, replacement, or
rebuild of the portion of the Fiber Exchange, Fiber Recipient shall submit
to Fiber Provider a completed form as specified in Exhibit [H], Request for
Route Change, to request an acceptable new location, and Fiber Recipient
shall Exchange Fiber with or pay Fiber Provider its actual costs of any
such work, provided such costs are agreed to in advance and are reasonable.
Fiber Provider and Fiber Recipient shall cooperate in performing such
relocation, replacement, or rebuilds so as to minimize any interference
with the use of the Fiber Recipient System, the Fiber Exchange, and
Structures, to the extent reasonably possible, by either Party and to avoid
conflicting physically or otherwise interfering with joint users of the
Fiber Exchange, Fiber Exchange accessories, Structures or any other
property needed in the installation, construction, maintenance or use of
the Fiber. Any such relocation, replacement, or rebuilding, shall be
accomplished consistently with the Network Specifications and Operation
Standards and the Protocol of Acceptance.
(b) In the event that during the Term of this Agreement Fiber Provider is
required by public authorities, or lawful order or decree of a regulatory
agency or court to relocate, replace, remove or rebuild all or a portion of
the Fiber Exchange provided to the Fiber Recipient the cost of any such
work including the costs of relocation of Equipment and new Connections to
the Fiber Exchange, shall be shared on a Pro Rata basis between Fiber
Recipient and Fiber Provider. If the relocation, replacement, removal, or
rebuilding of the Fiber Exchange is requested or caused by a party who is
not a public authority, agency or court, Fiber Provider shall attempt to
obtain reimbursement of Fiber Provider's costs from said Third party. Fiber
Provider and Fiber Recipient shall cooperate in performing such relocation,
replacement, removal, or rebuilding so as to minimize any interference with
the use of the Fiber Exchange provided to Fiber Recipient, the Fiber
Exchange and Structures, to the extent reasonably possible, and to avoid
conflicting physically or otherwise interfering with joint users of the
Fiber Exchange, Fiber Exchange accessories, Structures or any other
property needed in the installation, construction, maintenance or use of
the Fiber. Any such relocation, replacement, removal, or rebuilding shall
be accomplished consistently with the Network Specification and Operation
Standards and the Protocol of Acceptance.
Page 11 of 33
<PAGE>
ARTICLE IX. INSURANCE
Throughout the term of this Agreement, Avantel and Telereunion shall insure the
portions of fiber to be exchanged, against such risks and for such amounts and
subject to such deductibles as is customary in the telecommunications industry
and is reasonably acceptable to both Parties.
ARTICLE X. PRICING STRUCTURE
10.1 As specified herein, this Agreement contemplates that Telereunion and
Avantel each, as a Fiber Provider, shall make available to the other, and
Telereunion and Avantel each, as a Fiber Recipient, shall be entitled to receive
and use the Fiber Exchange specified in Exhibit A hereto. Accordingly, except
as provided in Section 7.1 hereof, neither Party, as a Fiber Provider, shall
assess the other, as a Fiber Recipient, a charge or fee for any Fiber Exchange
used by a Fiber Recipient pursuant to this Agreement. There may be charges
associated with excess swap units, as specified in the swap Exhibit B. Unless
mutually agreed upon, there will be no charges for floor space, power,
maintenance, or environmental conditioning expenses associated with System
Connections. Responsibility for costs associated with any future System
Connections will be defined and agreed between Telereunion and Avantel prior to
installation of any such System Connection. Neither Party shall be responsible
for charges not mutually agreed to in writing, in advance, by such Party.
10.2 All the agreed-to amounts invoiced under this Agreement shall be paid
within thirty (30) business days after the date of receipt of the invoice. If a
Party shall dispute in good faith the amount of any such invoice, the disputing
Party shall pay the portion which is not being disputed in such invoice. The
disputed portion of the invoice must be attached together with a written
explanation of the reasons for the dispute. A Late Payment Charge of the Mexican
Inter Bank rate plus 5% may be imposed on undisputed past due amounts.
ARTICLE XI. OWNERSHIP AND TAXES
11.1 Each Fiber Provider will at all times have title of ownership to the
fiber, Fiber Exchange accessories, any property installed or constructed on
Structures, and Structures that are a part of its network while, each Fiber
Recipient shall be deemed to have an indefeasible right of use of such assets
needed to make use of the Fiber Exchange while this Agreement is valid. By no
means, this Agreement shall constitute an encumbrance of the assets
abovementioned.
Page 12 of 33
<PAGE>
11.2 Income Taxes. Each Party will be responsible for paying its own
-------------
existing or future Federal, state and local income, franchise and/or the similar
existing or future taxes imposed on business activities or entities.
11.3 Sales Taxes. Telereunion and Avantel agree that Fiber Recipient shall
------------
pay for all sales, use and excise taxes, if any, related to the service provided
under this Agreement and any other taxes which are by the terms of the relevant
statute or ordinance imposed upon the entity receiving the services provided
under this Agreement; provided that, where permitted, the Fiber Recipient may
provide sale or resale exemption certificates to the Fiber Provider. In no
case, shall a Fiber Recipient be responsible for any income taxes levied upon
the Fiber Provider's income, including any gross receipts taxes assessed in lieu
of income or property taxes; provided that, if the terms of the relevant statute
or ordinance imposes such tax upon the person receiving the services provided
under this Agreement, then the Fiber Recipient shall be liable for such tax.
Anything to the contrary in this Paragraph 11.3 notwithstanding, either
Telereunion or Avantel shall be entitled to protest and/or contest by
appropriate proceedings any such tax for which it may be liable hereunder;
provided, however, if either Party shall pursue any such protest and/or the
other Party suffers or incurs damages as a result thereof, THE PARTY PURSUING
THE PROTEST SHALL INDEMNIFY THE OTHER PARTY AGAINST ANY SUCH RELATED DAMAGES,
CLAIMS OR JUDGMENTS, INCLUDING, WITHOUT LIMITATION, ANY LIENS OR ATTACHMENTS.
11.4 Property and Other Taxes and Fees. Fiber Provider shall pay all
--------------------------------------
existing or future federal, state or local excise, ad valorem, property or
similar taxes or any similar fees such as license fees or user fees imposed on
Fiber Provider or its Affiliates, which are attributable to the presence of
fiber, including Fiber Exchange provided to Fiber Recipient, Fiber Exchange
accessories, or Equipment on Structures or the construction on new Structures.
11.5 Levy. Fiber Provider agrees that Fiber Provider will properly remit all
----
tax payments in a timely manner to the applicable taxing authorities or
governmental agencies and will not cause the Fiber Exchange to be levied,
attached, or otherwise encumbered by any taxing authority or governmental agency
through any failure to remit such payments.
ARTICLE XII. GOVERMENT APPROVALS, PERMITS, AND CONSENTS
12.1 In executing this Agreement Avantel and Telereunion represent that they
will obtained all approvals and consents, if necessary, that may be required
from all federal, state, and local government authorities having appropriate
jurisdiction regarding the Fiber Exchange between the Parties, and the Parties
ownership, installation, maintenance, or replacement of the facilities necessary
to provide such Fiber Exchange between Avantel and Telereunion.
Page 13 of 33
<PAGE>
12.2 Notwithstanding the foregoing, if Fiber Provider is prohibited from
furnishing the Fiber Exchange provided for in this Agreement or if any material
rate or term contained herein is substantially changed to the detriment of Fiber
Recipient by ruling, regulation, statute, or order of the highest court of
competent jurisdiction to which the matter is appealed, then Fiber Recipient and
Fiber Provider will work together in good faith to resolve or modify any rate or
term to comply with the new rules or regulations.
12.3 Fiber Provider shall indemnify Fiber Recipient, its employees,
officers, agents and assigns for any liability, claims or compliance costs
arising out of any material breach of the foregoing representations.
ARTICLE XIII. LIENS
13.1 Neither Party shall in any way encumber or cause to be encumbered the
Fiber Exchange, without the prior notice and consent of the other Party.
13.2 If, notwithstanding the above, any property of Fiber Recipient or its
Affiliates becomes encumbered by any unauthorized liens, claims, or other
encumbrance as a result of any act or omission of Fiber Provider, Fiber Provider
shall to the fullest extent permitted by law take all actions necessary to
remove such encumbrances from Fiber Provider's and its Affiliates property. If
the property of Fiber Recipient or its Affiliates becomes encumbered as a result
of the acts or omission of Fiber Provider, Fiber Provider shall, in addition to
all other available legal, equitable, and administrative rights or remedies, (i)
discharge the encumbrance as soon as possible, but not later than (30) days; and
(ii) indemnify and hold harmless Fiber Recipient and its Affiliates and their
officers, directors, employees, agents, servants, and assigns from said
encumbrance.
ARTICLE XIV. INDEMNITY
14.1 Telereunion and Avantel (the "Indemnitor") shall, to the fullest extent
permitted by law, to indemnify, defend, protect and hold harmless Telereunion or
Avantel, as the case may be, (the "Indemnitee"), its employees, officers,
directors and agents, from and against any liability for any injury to any
person (including death) or any loss or damage to any property or facilities of
any entity (including that of the Indemnitee or any other Party) arising out of
or resulting in any way from the acts or omissions, negligent or intentional, of
the Indemnitor, its officers, employees, servants, affiliates, agents or
contractors.
14.2 Telereunion and Avantel (the "Indemnitor") shall, to the fullest extent
permitted by law, assume, protect, defend, indemnify, and save harmless the
other (the "Indemnitee"), its directors, officers, employees, and agents from
and against any and all claims or suits of any kind whatsoever, and any and all
attendant expense, including attorney's fees and court costs for libel, slander
or invasion of privacy, or based on the infringement or violation of the right
of any person under any patent, trademark, trade secret, or copyright, arising
out of, occurring in, or in connection with, the manufacture, sale, combining or
use of any equipment or materials used by the Indemnitor in providing service
pursuant to this Agreement.
Page 14 of 33
<PAGE>
14.3 Telereunion and Avantel (the "Indemnitor") shall, to the fullest extent
permitted by law, indemnify, defend and hold harmless the other Party (the
"Indemnitee"), its employees, officers, directors and agents from and against
any and all losses, liabilities, damages and expenses (including without
limitation costs of judgment and attorney's fees) arising from or related to
claims, actions or proceedings of the Indemnitor's customers or the Indemnitor's
End Users for errors, omissions, delays or interruptions in the service provided
under this Agreement, and all other claims arising out of any act or omission of
the Indemnitor or any End User of the Indemnitor in the course of using services
provided pursuant to this Agreement.
14.4 The indemnification obligations of this Article IV shall survive the
termination and/or expiration of this Agreement for one (1) year for any claim
or action, which accrues during the term of this Agreement.
ARTICLE XV. BREACH
15.1 Definition. If Avantel or Telereunion shall fail to perform (whether
----------
any such failure shall arise as the result of the voluntary or involuntary
action or inaction of such Party), in any material respect, any of its
obligations set forth in this Agreement, including without limitation any
violation of law (which is material and which adversely affects either Party's
obligations under the Agreement), and such failure is not excused by any
provision of this Agreement and continues un-remedied for a period of 30 days
following written notice from the non-breaching Party or such shorter period as
may apply under law (the "Cure Period"), then such failure shall, upon and from
the expiration of the Cure Period, constitute a "Breach". Such Breach shall not
be deemed to occur where Breach is directly or primarily caused by the actions
of another Party.
15.2 Consequences and Remedies. In the event Avantel or Telereunion is in
--------------------------
Breach, Avantel or Telereunion shall have the right, after providing
Avantel/Telereunion with written notice and without prejudice to any other right
the Parties may have, to exercise all or any of the following remedies, provided
that such remedies may not be exercised earlier than 20 (twenty) days after
Avantel/Telereunion receives such written notice, and provided further that with
respect to (b), such remedy may not be exercised if Avantel/Telereunion has
either remedied the default within such 20 (twenty) day period or, if the
default is not capable of being remedied within such time, Avantel/Telereunion
has commenced to remedy the default within such time and is diligently pursuing
efforts to effect such a remedy, including submittal of a remediation plan
reasonably acceptable to Avantel/Telereunion for its review and approval: (a)
suspend any obligation in whole or in part under this Agreement until the
default has been remedied and/or (b) terminate the Agreement with no further
obligations or liability to then Parties hereunder and collect from the
breaching Party a penalty of US$10,000,000 (ten million dollars, currency of the
United States of America).
Page 15 of 33
<PAGE>
15.3 Limitation of Liability. Neither Party shall be liable to the other
-------------------------
for any indirect, special, punitive, or consequential damages, or any lost of
business damages in the nature of lost revenues or profits arising under this
Article or arising out of any act or omission of its respective employees,
agents or contractors. NOTHING IN THIS SECTION SHALL MAKE EITHER PARTY LIABLE
TO THE CUSTOMERS OR CONTRACTORS OF THE OTHER PARTY FOR ANY DAMAGES, WHETHER IN
CONTRACT, TORT, OR OTHERWISE FOR ANY OF THE PARTIES' ACTS OR OMISSIONS
ASSOCIATED WITH THIS AGREEMENT.
ARTICLE XVI. TERM
16.1 The initial term of this Agreement shall be fifteen (15) years
commencing when the Parties' Fiber Exchange (as defined herein) have been fully
installed and tested and each Party has completed and delivered to the other a
Commencement/Acceptance Notice in the form of Exhibit F hereto (the "Service
Acceptance Date"). Neither Party may commence revenue-generating use of a Fiber
Exchange received by it until the other Party accepts the Fiber Exchange that it
provides in return.
16.2 The term of service for individual Exchanges may be modified upon a
mutual written agreement. Any Party shall have the right to request to renew
this Agreement upon giving notice thereof; to the other Party not less than
three hundred sixty five (365) days prior to the expiration of the initial term
hereof. Upon agreement by both Parties this Agreement shall be extended for an
additional ten [10] year term.
ARTICLE XVII. FORCE MAJEURE
17.1 Neither Party shall be liable for any breach of this Agreement due to
any cause beyond its reasonable control ("Force Majeure") including, without
limitation, any act of God, insurrection or civil disorder, war or military
operation, national or local emergency, acts or omissions of government highway
authority or other competent authority, compliance with any statutory or
executive order, industrial disputes of any kind (whether or not involving any
Party's employees), fire, lightning, explosion, flood, earthquake, subsidence,
weather of exceptional severity, acts or omissions of persons or entities for
whom or for which neither Party is responsible including without limitations
others Mexican Public Telecommunications Operators in their capacity as such
provided that a Party shall be excused from liability under this Article VI
during the tendency of a Force Majeure event. Avantel and Telereunion shall have
the right to deem as an event of Force Majeure any failure by Avantel and
Telereunion respectively to provide to the other and its personnel any
information necessary to the performance of its obligations under this
Agreement.
Page 16 of 33
<PAGE>
17.2 Telereunion or Avantel shall promptly notify the other of the
occurrence of any Force Majeure event which has caused or is likely to cause it
to fail to perform its obligations under this Agreement
ARTICLE XVIII RESOLUTION OF DISPUTES
18.1 Any dispute arising out of or relating to this Agreement, including the
breach thereof, between the Parties, which is not settled to the mutual
satisfaction of such Parties within 30 (thirty) days (or such longer period as
may be mutually agreed upon) from the date that either Party informs the other
in writing that such a dispute or disagreement exists (the "Settlement Period")
shall be settled by arbitration in accordance with the Rules of Conciliation and
Arbitration of the International Chamber of Commerce ("ICC Rules"), as modified
by this Agreement. The arbitration shall be carried out by a panel of 3 (three)
arbitrators who shall be fluent in Spanish and English, one (1) to be designated
by Avantel, one (1) to be designated by Telereunion, and the third one to be
designated by the two Party-appointed arbitrators; provided, however, that if no
agreement is reached between the Party-appointed arbitrators within a period 15
(fifteen) days of the date the last Party-appointed arbitrator was designated,
the third arbitrator shall be designated in accordance with the ICC Rules. The
Parties shall have a period of 15 (fifteen) days from the date the Settlement
Period has expired to designate their respective arbitrators.
18.2 Any such arbitration shall be conducted in English and the location of
the arbitration hearings shall be Mexico City, Federal District, or another
location mutually agreed upon by the Parties. The final award of the arbitration
panel shall be final and binding upon Avantel and Telereunion. The cost of
arbitration, including the fees and expenses of the arbitrators shall be borne
equally by the Parties unless the arbitration award provides otherwise.
18.3 The arbitration award may be confirmed and enforced in any court of
competent jurisdiction and the Parties specifically agree that confirmation and
enforcement of an award shall be governed by the U.N. Convention on the
Recognition and Enforcement of Foreign Arbitral Awards and/or the Inter-American
Convention on International Commercial Arbitration of 1975
ARTICLE XIX. CONFIDENTIALITY
19.1 All technical information, specifications, drawings, documentation and
know-how of every kind and description identified as confidential and marked
with an appropriate legend or, if oral confirmed in writing within twenty (20)
calendar days, which is disclosed by either Party to the other under this
Agreement ("Confidential Information"), except, insofar as it may be previously
known or insofar as it may be in the public domain or be established to have
been independently developed and so documented by the other Party, or obtained
by the other Party from any person not in breach of any confidentiality
obligations to the disclosing Party, is the exclusive property of the disclosing
Party, and the other Party, except as specifically authorized in writing by the
disclosing Party, or as permitted hereunder, shall (a) not reproduce
Confidential Information except to the extent reasonably required for the
performance of this Agreement, not divulge Confidential Information in whole or
in part to any third Parties, and (b) use Confidential Information only for
purposes necessary for the performance of this Agreement or as may be required
to the performance of this Agreement. This obligation shall survive the
termination of this Agreement. Each Party shall disclose Confidential
Information only to those of its employees, subcontractors and agents who shall
have a "need to know" the Confidential Information for the purposes described
herein after first making such employees, subcontractors or agents aware of the
confidentiality obligations set forth above.
Page 17 of 33
<PAGE>
19.2 The Parties shall not make news releases, publicize or issue
advertising pertaining to the Agreement, without first obtaining the written
approval of each other.
19.3 The Parties agree not to use the Avantel/Telereunion trademarked logo
or any other intellectual property of the Parties, without first obtaining
written permission from each other.
19.4 Neither Party shall disclose to any third Party during this Agreement,
or during the three (3) year period thereafter, any of the terms and conditions
set forth in this Agreement unless such disclosure is lawfully required by any
federal governmental agency both in the United States and Mexico or is otherwise
required to be disclosed by law, including United States Securities Law or is
necessary in any proceeding establishing rights and obligations under this
Agreement; provided that, prior to such disclosure, the disclosing Party shall
notify in writing to the other Party that such request has been made and, to the
extent reasonably practicable, shall afford the other Party the opportunity (at
the other Party's expense) to interpose an objection or to take action to ensure
confidential handling of the confidential information in the event that
disclosure is lawfully required. This Agreement and all network test results or
other system performance information shall be considered proprietary and
confidential whether or not marked as such.
ARTICLE XX. RELATIONSHIP OF PARTIES
The relationship between the Parties shall not be that of partners or agents or
joint ventures for one another and nothing contained in this Agreement shall be
deemed to constitute a partnership or agency agreement between them. Each
Party, in performing any of its obligations hereunder, shall be an independent
contractor and shall discharge its contractual obligations at its own risk.
ARTICLE XXI. GOVERNING LAW
This Agreement, and all questions concerning the execution, validity or
invalidity, capacity of the Parties, and performance or breach of this
Agreement, shall be governed by and construed in all respects, without regard to
principles of conflict of laws, in accordance with the laws of Mexico.
Page 18 of 33
<PAGE>
ARTICLE XXII. GENERAL PROVISIONS
22.1 Assignment. This Agreement shall be binding on both Telereunion and
----------
Avantel and its respective successors and assigns. Neither Party will assign
this Agreement without the prior written consent of the other, except if the
assignment is given to an Affiliate, in case the consent shall not be
unreasonably withheld.
22.2 Waiver. No waiver of any provision of this Agreement in any instance
------
shall constitute a waiver of any other provision of this Agreement or of the
same provision in any other instance, and waiver of a breach of any provision of
this Agreement shall not constitute a waiver of any other breach of such
provision or breach of any other provision of this Agreement.
22.3 Neither company share swap or exchange fiber, waveguides or STM1s on
the initial 4 fibers with any other company for any reason. Beyond this
restriction of use, there shall exist no other conditions or restrictions of use
of fiber, including the sell of transmission of capacity to a Third Party, as
long as it is used in compliance with all laws and regulations of the Country of
Mexico and within the authorized scope the respective carrier concession.
22.4 No Third Party Beneficiaries. Nothing contained in this Agreement
-------------------------------
either intentionally or unintentionally creates any rights or entitlements in
any Party not a signatory to this Agreement, including affiliates of the
Parties, or any other Party claiming to be a third Party beneficiary hereto.
22.5 Entire Agreement. This Agreement constitutes the entire agreement
-----------------
between the Parties with respect to its subject matter, and as to all other
representations, understandings or agreements which are not fully expressed
herein. No amendment to this Agreement shall be valid unless in writing and
signed by both Parties.
22.6 Terminology. Words having well-known technical or trade meaning shall
-----------
be so construed. All listings of items shall not be taken to be exclusive, but
shall include other items, whether similar or dissimilar to those listed, as the
context reasonably requires.
22.7 Cumulative Remedies. Except as set forth to the contrary herein, any
--------------------
right or remedy of either Party shall be cumulative and without prejudice to any
other right or remedy, whether contained herein or not.
22.8 Headings. All headings used herein are for index and reference only,
--------
and are not to be given substantive effect.
Page 19 of 33
<PAGE>
22.9 Additional Actions and Documents. Each of the Parties hereby agrees
--------------------------------
to take or cause to be taken such further actions, to execute, acknowledge,
deliver and file or cause to be executed, acknowledged, delivered and filed,
such further documents and instruments, and to use its best efforts to obtain
such consents, as may be necessary or as may be reasonably requested in order to
fully effectuate the purposes, terms and conditions of this Agreement, whether
at or after the execution of this Agreement.
22.10 Prior Agreements; Modifications. This Agreement and the Exhibits
---------------------------------
hereto constitute the entire Agreement between the Parties with respect to the
subject matter hereof, and supersede all previous understandings, commitments,
or representations concerning the subject matter. All Exhibits form part of,
and are integral to, this Agreement, and any reference to this Agreement
includes reference to any and all Exhibits hereto. Each Party acknowledges that
the other Party has not made any representations other than those that are
contained herein. This Agreement may not be amended or modified in any way, and
none of its provisions may be waived, except by a writing signed by an
authorized officer of the Party against whom the amendment, modification or
waiver is sought to be enforced.
22.11 Conflict and Precedence. In the event of a conflict between the
-------------------------
provisions of this Agreement and those of any Exhibit, unless the provisions of
the Exhibit expressly take precedence over the provisions of this Agreement, the
provisions of the Agreement shall prevail and such Exhibits shall be corrected
accordingly. Each Exhibit to be attached to this Agreement subsequent to the
original execution of the Agreement shall be dated, subscribed to by the Parties
and identified with this Agreement.
22.12 Liability for Negligence or Willfulness. Telereunion and Avantel
-------------------------------------------
shall be liable to each other for damage or loss to any property or persons to
the extent that such damage or loss is caused by the negligent or willful act or
omission of such Party, its officers, employees, servants, agents, affiliates or
contractors. Telereunion and Avantel shall not be liable to each other for
damage or loss to any property or persons to the extent that such damage or loss
is caused by the malfunction of any equipment supplied by such Party (or that of
its representative or provider of local access service) which is connected to
the other Party's System.
22.13 Standards of Work Performance. Each Party will perform its
--------------------------------
obligations hereunder in such a manner that its performance does not violate any
Laws and Regulation.
22.14 Language. This Agreement will be executed in both Spanish and
- ----- - --------------------------------------------------------
English, and in case of any discrepancy or disagreement between such versions,
- --------------------------------------------------------------------------------
the Spanish version will prevail.
- -------------------------------------
Page 20 of 33
<PAGE>
ARTICLE XXIII. NOTICES
23.1 All notices, requests, demands and other communications required or
permitted to be given under this Agreement shall be given in writing by either
Party to the other by (a) prepaid registered air mail, return receipt requested,
(b) express mail (Federal Express, DHL or similar service) or (c) cable, telex,
telegraph or facsimile transmission, confirmed by prepaid registered air mail,
return receipt requested, or express mail, all of which shall be addressed to
the respective Parties at the address shown bellow. The address or addressee of
either Party may be changed at any time by written notice to the other of such
change. Any notice in the form of a letter deposited by either Party through any
of the means detailed herein above shall be deemed to have been given and
received by the other Party upon actual receipt thereof.
If to Avantel:
- ---------------
Ing. Jose Maria Zubiria Maqueo
Chief Financial Officer
Avantel, S.A.
Ave. Paseo de la Reforma 265-7th Floor
Col. Cuauhtemoc
06500 Mexico, D.F.
Fax (525) 242-1077
With a copy to:
Luis Mancera de Arrigunaga, Esq.
Director of Legal Affairs
Avantel, S.A.
Ave. Paseo de la Reforma 265-6th Floor
Col. Cuahtemoc
06500 Mexico, D.F.
Fax (525) 242-1060
If to Telereunion:
- -------------------
Mr. Oscar Garcia
Legal Representative
Telereunion, S.A. de C.V.
Tlacoquemecatl No. 21
Col. Del Valle 03200.
Mexico, D.F.
Phone. (525) 575-3875
Fax. (525) (525) 559-2851
With a copy to:
Telscape International, Inc.
Attention: Marco A. Castilla, Esq.
Vice-President and Corporate Counsel
Phone. (011-713) 968-0968
Fax. (011-713) 968-0928
Page 21 of 33
<PAGE>
Notices under this Agreement which are telephonic shall be made to the Parties'
respective Network Surveillance or Network Operating Control Centers at the
telephone numbers listed in Exhibit F.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the
day and year first set forth above.
Avantel, S.A.
By:
Name: Jose Maria Zubiria Maqueo
Title: Legal Representative
Telereunion, S.A. de C.V.
By:
Name: Oscar Garcia
Title: Legal Representative
Page 22 of 33
<PAGE>
E x h i b i t s
Exhibit A: Terms and Conditions for the Fiber Exchange Service/Memorandum of
Understanding signed by both Telereunion and Avantel on
March 4, 1999.
Exhibit B: Procedures for System Connection and LEC Cross-Connections
Exhibit C Specific if Collocation Space and Standards
Exhibit D: Network Specifications and Operating Standards
Exhibit E: Protocol of Acceptance
Exhibit F: Contact/Escalation List
Exhibit G: Certificate of Acceptance of Exchange Fiber
Exhibit H: Request for Route Change
Exhibit I: Maintenance Specifications
Page 23 of 33
<PAGE>
EXHIBIT A TO FIBER OPTIC TELECOMMUNICATIONS EXCHANGE AGREEMENT
This Exhibit A is made this 14 day of May, 1999 to that certain Fiber Optic
Telecommunications Exchange Agreement made by and between Telereunion and
AVANTEL, S.A. ("Avantel"), dated May 14, 1999.
Page 24 of 33
<PAGE>
MEMORANDUM OF UNDERSTANDING
Page 25 of 33
<PAGE>
EXHIBIT B
PROCEDURES FOR SYSTEM CONNECTIONS AND LEC CROSS-CONNECTIONS
Page 26 of 33
<PAGE>
EXHIBIT C
SPECIFICATION OF COLOCATION SPACE AND STANDARDS
Collocations at POPs will be done in common facilities in caged spaces. Access
will be granted on a 7x24 hour basis. Like collocation space will be provided
as part of the fiber exchange. Collocation needs in addition to the basic needs
may be provided at additional cost per a separate contractual arrangement. At
each site a Telmex telco demarc room will be provided for the Fiber Recipient to
provide for receipt of Telmex facilities for non-interconnection services. This
room will meet Telmex requirements and be in addition to the first room.
Collocations at Regenerator sites will be provided on a shared rack basis. Rack
shall be secure, enclosed and locked. Access will be granted on an escorted
7x24 hour basis. An administrative fee may be charged for access to unmanned
sites or access to sites during non-working hours. Access to unmanned sites or
sites during non-working hours must be granted on a 7x24 hour basis with a
maximum delay of 2 hours from time of request.
[SPECIFIC SITE ENGINEERING AND STANDARDS MUST BE FURTHER DEFINED IN WRITTEN AND
INCLUDED INTO THIS DOCUMENT.]
Page 27 of 33
<PAGE>
EXHIBIT D
NETWORK SPECIFICATIONS AND OPERATING STANDARDS
Page 28 of 33
<PAGE>
EXHIBIT E
PROTOCOL OF ACCEPTANCE
Page 29 of 33
<PAGE>
EXHIBIT F
CONTACT/ESCALATION LIST
Page 30 of 33
<PAGE>
EXHIBIT G
CERTIFICATE OF ACCEPTANCE OF EXCHANGED FIBER
To: Relationship Manager of Telereunion [Avantel]
From: Relationship Manager of Telereunion [Avantel]
Date:
Re: Acceptance of Exchanged Fiber
This will confirm that [specify identified exchange] has been tested and found
to be operational and to meet the Network Specifications and Operating Standards
set forth in the Fiber Optic Telecommunications Service Exchange Agreement,
dated ____________ ___, 1998 by and between Telereunion and Avantel, S.A.
Telereunion
By_________________________________
Name:
Title:
OR
Avantel, S.A.
By__________________________________
Name:
Title:
Page 31 of 33
<PAGE>
EXHIBIT H
REQUEST FOR ROUTE CHANGE
Request No.:
Date:
To: **** Communications, Inc. [Fiber Provider]
In accordance with the terms of the Agreement between **** Communications, Inc.
and [Fiber Recipient] dated ____________ request is hereby made for:
_____ Access to new additions
_____ Relocation, replacement, rebuild of Fiber Recipient Fibers
as indicated on the attachment(s) hereto.
____________________________,
[Fiber Recipient]
Name:
By:
Title:
Such change of Route as specified in the attachment(s) has been accepted and
shall be incorporated into, and subject to the terms of, the Agreement.
[Fiber Provider]
Name: __________________
By: ____________________
Title: _______________________
Page 32 of 33
<PAGE>
EXHIBIT I
MAINTENANCE SPECIFICATIONS
Page 33 of 33
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Telscape USA, Inc.
Texas Corporation
Telereunion, Inc.
Delaware Corporation
TSCP International, Inc.
Texas Corporation
MSN Communications, Inc.
California Corporation
INTERLINK Communications, Inc.
Delaware Corporation
DC Communications, Inc.
Texas Corporation
enablecommerce.com, Inc.
Delaware Corporation
Vextro de Mexico, S.A. de C.V.
Mexico Corporation
Telscape de Mexico, S.A. de C.V.
(formerly Integracion de Redes, S.A. de C.V.)
Mexico Corporation
MS Noticias, S.A. de C.V.
Mexico Corporation
N.S.I., S.A. de C.V.
Mexico Corporation
Telereunion, S.A. de C.V.
Mexico Corporation
Telereunion International, S.A. de C.V.
Mexico Corporation
Servicios de Comunicacion Popluar S. de R.L.
Mexico Corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Telscape International, Inc.
Houston, Texas
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 No. 333-66417, S-3 No. 333-91271 and S-3 No.
333-77443 of our report dated March 10, 2000, relating to the consolidated
financial statements and schedule of Telscape International, Inc. appearing
in the Company's Annual Report on Form 10-K for the year ended December 31,
1999.
BDO SEIDMAN, LLP
Houston, Texas
March 30, 2000
<PAGE>
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