POINTE NOTE AND ESCROW. In connection with the execution of the merger agreement, Pointe agreed to make a loan of $10,000,000 to Telscape which was evidenced by a note (the "Pointe Note") of which approximately $7.95 million has been funded through April 13, 2000.
The remainder of the funds under the Pointe Note remain under an escrow arrangement. The Pointe Note is convertible into shares of Telscape Class C Convertible Senior Preferred Stock in certain circumstances. The following is a summary of the Pointe Note, Telscape Convertible Senior Preferred Stock and escrow arrangement:
POINTE NOTE. Telscape has executed a 12% Convertible Promissory Note with Pointe in the principal amount of $10,000,000 to evidence Telscape's obligation to repay Pointe on June 30, 2000, the money that Pointe has lent to Telscape. The note will accrue interest at 12% per year and may be payable in shares of Telscape's common stock if the note has been converted. The note may not be prepaid prior to June 30, 2000, subject to the conversion rights of the parties.
Telscape will be in default on the note if Telscape fails to pay the principal and interest as they come due, fails to comply with the note, cannot pay the principal or interest payments because Telscape is insolvent or is in bankruptcy, or the merger agreement with Pointe is terminated.
Pointe may require full payment of the note, including unpaid interest, if Telscape is in default.
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The note will be convertible into 100,000 shares of Class C preferred stock and a warrant to purchase 500,000 shares of Telscape's common stock at $7.00 per share, unless adjusted by the terms of the warrant agreement. If Telscape declares a stock split, stock dividend, reverse split or other recapitalization, the number of shares of Class C Preferred Stock and common stock into which the warrants are convertible will be adjusted proportionately. If Telscape enters into a merger or reclassification of Telscape, Telscape will make it a condition that the note will be convertible into similar securities and in the same amounts as would have been received if the warrants were converted at the time of the merger.
If the note remains outstanding, Telscape must give Pointe notice of (1) any dividend on the Class C Preferred Stock, (2) any offer to sell any securities to holders of Telscape's Class C Preferred Stock, (3) any proposed merger, consolidation, reclassification or disposition of
substantially all Telscape's assets, or (4) any voluntary or involuntary dissolution, liquidation or winding up.
TELSCAPE CLASS C CONVERTIBLE SENIOR PREFERRED STOCK. In connection with the merger agreement and in anticipation of issuing shares of preferred stock to holders of Pointe's preferred stock, Telscape has authorized the issuance of 200,000 shares of a newly designated Class C Preferred Stock that has a stated value of $100.00 per share. The Class C Preferred Stock pays quarterly dividends at a rate of 12% per year. Telscape first must pay dividends on the Class C Preferred Stock before making any payments to any junior stock, such as Telscape's common stock. Telscape has the right to pay the dividends in additional shares of Class C Preferred Stock.
Upon any liquidation, dissolution or merger whether or not Telscape is the surviving company, Telscape must pay to the holders of Class C Preferred Stock their preferred liquidation amount, which is $100.00 per share plus all accrued but unpaid dividends, prior to paying any liquidation amounts to any junior stock, such as Telscape's common stock.
The holders of Telscape's Class C Preferred Stock will have the right to receive notice of a meeting of Telscape's shareholders and to vote the number of shares into which the Class C Preferred Stock is convertible at any meeting of Telscape's shareholders. The holders of Class C Preferred Stock vote as a separate class only on votes that affect their rights or privileges as holders of Class C Preferred Stock. Any vote of the class of the holders of Class C Preferred Stock will be approved by a two thirds ( 2/3) majority of those holders.
The holders of Telscape's Class C Preferred Stock have the right to convert their shares into Telscape's common stock at any time. The conversion ratio for each share will be the $100.00 stated value divided by $8.20 per share of common stock, except that if Telscape does not merge with Pointe and if Pointe or its shareholders receive Telscape's Class C Preferred Stock as a result of a default on Telscape's $10,000,000 12% Convertible Promissory Note issued December 31, 1999, see "Pointe Note" above, then the conversion ratio for each share will be the
$100.00 stated value divided by $5.00 per share of common stock.
If Telscape issues any new shares of common stock, other than shares issued as employees, officers, directors, or consultants exercise their options or shares issued in connection with Telscape's $10,000,000 12% Convertible Promissory Note issued December 31, 1999, see "Pointe Note" above, and if the price for the newly issued shares of common stock is lower than the conversion price of the Class C Preferred Stock, then Telscape must reduce the conversion price for the Class C Preferred Stock. Telscape will determine the new conversion price by dividing (a) the sum of (1) the conversion price times the total number of outstanding shares of common stock immediately prior to the new issuance, after taking into account all conversions and exercises of common stock, plus (2) the value of the consideration that Telscape receives for the new issuance of the common stock by (b) the total number of outstanding shares of common stock immediately after the new issuance, after taking into account the all conversions and exercises of common stock. Telscape also will adjust the conversion price proportionately for any other adjustments to the number of shares of outstanding common stock, like in a stock split, stock dividend or reverse stock split. Upon any merger or reorganization, the Class C Preferred Stock will be convertible into the number of shares of common stock of the new
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entity as if the shares of Class C Preferred Stock had been converted immediately prior to the exchange for new securities after the merger or reorganization.
Telscape has reserved the right to cause the holders of Class C Preferred Stock to convert their shares if Telscape enters into a public offering of Telscape's common stock or if after one year from issuing the Class C Preferred Stock, (1) Telscape's common stock is trading on the New York Stock Exchange, The Nasdaq National Market or the American Stock Exchange, (2) the common stock shall have traded for a period of 20 consecutive trading days at a price of $15.00 (or the adjusted figure after any stock split, stock dividend, reverse stock split or similar recapitalization event), and (3) the cumulative average daily trading volume in that period is at least $3,000,000.
Additionally, if the merger agreement is terminated and Pointe elects to convert the Telscape $10,000,000 12% Convertible Promissory Note issued on December 31, 1999, see "Pointe Note" above, into Class C Preferred Stock, the Class C Preferred Stock issued upon this conversion of the Pointe Note will convert into common stock at the $8.20 conversion price.
Telscape will not issue fractional shares upon any conversion. Telscape will pay the holders the fraction of common stock times the conversion price in effect at conversion.
REGISTRATION RIGHTS AGREEMENT. In connection with the merger agreement with Pointe and the 12% Convertible Promissory Note with Pointe, Telscape has granted to Pointe the right to register with the SEC Telscape's common stock which will be issued to Pointe or other holders assigned the common stock or the right to receive the common stock. The purpose of registering Telscape's common stock will be to allow holders of Telscape's common stock to resale to the public.
Telscape has agreed that upon the conversion of the note into shares of Class C Preferred Stock and warrants to purchase Telscape's common stock, Telscape will register the common stock underlying the Class C Preferred Stock and the warrants within 60 days of the conversion.
Telscape will use its best efforts to keep the registration statement effective until the third anniversary of the conversion of the note unless all of the shares of common stock have been sold previous to the third anniversary. If at least two thirds of the holders of Telscape's shares received in the conversion elect to require that the shares be distributed in an underwriting, Telscape will engage an underwriter pursuant to a customary underwriting agreement to distribute the shares. The underwriter may require a decrease in the number of shares offered in the underwriting if market conditions require it.
Telscape has agreed that, after the conversion of the note into Class C Preferred Stock and warrants to purchase common stock, if 80% of the holders of those securities request, Telscape will file a registration statement for at least 25% of the then outstanding shares after the
conversion. Telscape will not be required to file this registration statement if it is within 180 days of a firm commitment underwritten offering or if Telscape has filed three previous registration statements in the same manner as described in this paragraph. Telscape will engage an underwriter pursuant to a customary underwriting agreement to distribute the shares. The underwriter may require a decrease in the number of shares offered in the underwriting if market conditions require it.
In either type of registered sales as described in the previous two paragraphs, Telscape has agreed that it will not effect a public sale of Telscape's securities during a 90 day period after it receives notice of the intention to sell under a registration statement.
If Telscape decides to file a registration statement, it is required to give prompt notice to Pointe, or the current holders of Telscape's securities after conversion of the note, of the registration statement. The holders of Telscape's common stock can elect to register Telscape's common stock on the registration statement. If Telscape is selling in an underwritten offering, the underwriter may require that the holders enter an underwriting agreement to be part of the offering, and the underwriters may require a reduction in the number of shares offered on the registration statement.
In each situation where Telscape is required to prepare and file a registration statement, Telscape will bear the costs of that preparation and filing of the registration statement. Additionally, Telscape will indemnify the holders from any liability as a controlling shareholder or any other liability unless
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the liability arises from an untrue statement or omission of fact made in reliance on information furnished by the holder.
TELSCAPE KEY MANAGERS AND OFFICERS. Prior to the closing of the merger, the boards of Pointe and Telscape will jointly designate the officers of Telscape following the merger and determine the officers and key employees that will be the recipients of severance and option agreements from Telscape.
INDEMNIFICATION OF DIRECTORS AND OFFICERS OF POINTE. Telscape has agreed that the indemnification of the present and former directors and officers as provided in Pointe's organization documents or in agreements with the directors and officers will survive the merger and remain in effect for a period of not less than six years following the closing of the merger.