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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 22, 1997
REGISTRATION NO. 0-23007
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------------
AMENDMENT NO.1
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or 12(g) of the
Securities Exchange Act of 1934
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AMERICAN TELESOURCE INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ONTARIO, CANADA 74-2698095
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
12500 NETWORK BLVD., SUITE 407, SAN ANTONIO, TEXAS 78249
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (210) 558-6090
------------------------------
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NATURE OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
------------------- --------------------------------
None
- ------------------------------ ------------------------------------------
- ------------------------------ ------------------------------------------
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
(Title of Class)
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TABLE OF CONTENTS
ITEM 1. BUSINESS................................................. 1
ITEM 2. FINANCIAL INFORMATION....................................25
ITEM 3. PROPERTIES...............................................37
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT...........................................37
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.........................38
ITEM 6. EXECUTIVE COMPENSATION...................................40
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........42
ITEM 8. LEGAL PROCEEDINGS........................................43
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS...................43
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES..................45
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED..48
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS................49
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..............49
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE......................49
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS........................50
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Statements contained or incorporated by reference to this document that are not
based upon historical fact are "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995 (the safe harbor provisions of
which do not apply to the forward-looking statements contained in this
document). Forward-looking statements may be identified by the use of forward-
looking terminology such as "may," "will," "expect," "estimate," "anticipate,"
"continue" or similar terms, variations of those terms or the negative of those
terms. The "Risk Factors" set forth below in this document constitute cautionary
statements identifying important factors that could cause actual results to
differ materially from those in the forward-looking statements.
ITEM 1. BUSINESS.
American TeleSource International Inc. provides domestic and
international long distance call services, primarily between Latin America and
the United States, and network management services including international
carrier services and international network management services between Latin
America and the United States. The Company has chosen to concentrate on Latin
America because it believes that recent and anticipated privatizations of
various of the region's major telephone companies and overall trends toward
deregulation, particularly in Mexico where the Company has focused the majority
of its initial efforts, present significant opportunities to provide
international telecommunication services to, from and within this fast-growing
market. The Company is able to provide United States telecommunications
standards of reliability and connectivity to the Latin American region, where
telecommunications services remain limited and unreliable in many areas due
largely to poor local infrastructure.
The Company was originally incorporated under the laws of the Province of
Alberta, Canada on December 17, 1993, under the name Latcomm International, Inc.
("Latcomm"). On December 20, 1993, Latcomm purchased all of the outstanding
shares of Latin America Telecomm, Inc., a Texas corporation, for $25,000. On
April 22, 1994, Latin America Telecomm, Inc. changed its name to American
TeleSource International, Inc. ("ATSI-Texas"). Effective May 26, 1994, Latcomm
amalgamated under the laws of the Province of Ontario, Canada with Willingdon
Resources, Ltd. ("Willingdon"), a corporation incorporated under the laws of the
Province of Ontario, Canada. The resulting Ontario corporation was named
American TeleSource International Inc. ("ATSI-Canada"). Pursuant to the
amalgamation, the outstanding shares of Willingdon and the outstanding shares of
Latcomm were converted into shares of ATSI-Canada on a four-for-one basis and a
one-for-one basis, respectively. In connection with the amalgamation, ATSI-
Canada acquired all assets and assumed all liabilities of Latcomm; however, with
the exception of approximately $55,000 in obligations to former Willingdon
shareholders, ATSI-Canada did not acquire any assets or assume any liabilities
of Willingdon. Unless the context otherwise requires, references herein to the
"Company" mean ATSI-Canada, its predecessor, Latcomm, and its subsidiaries.
The Company commenced operations in May 1994. In June 1995, the Company
formed American TeleSource International de Mexico, S.A. de C.V. ("ATSI-Mexico")
to assist the Company in the provision of long distance and network management
services within Mexico.
The Company is reviewing the possibility of effecting a plan of
arrangement (the "Arrangement") pursuant to which shareholders of ATSI-Canada
will exchange their shares of ATSI-Canada for an equal number of shares of a
Delaware holding company ("ATSI-Delaware"). If the Arrangement is completed,
such holding company will hold all of the outstanding shares of ATSI-Canada,
and, as a result, ATSI-Canada will become a wholly owned subsidiary of ATSI-
Delaware. The Company anticipates that the Arrangement will be submitted to a
vote of shareholders in the first quarter of calendar 1998, although there can
be no assurance that such a proposal will be submitted to shareholders at that
time, or ever, or that shareholders will approve the proposal.
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The Company's objective is to become a full-service international
telecommunications carrier providing operator-assisted, direct dial and other
long distance call services and network management services between Latin
America and the United States. The operations and financial performance of the
Company are subject to substantial risks. See "Business--Risk Factors--Limited
Operating History; History of Losses; Need for Capital; Report of Independent
Public Accountants."
FOREIGN AND DOMESTIC OPERATIONS
The following table presents long distance services, network management
services, operating loss and identifiable assets by geographic area. The
identifiable assets of ATSI-Texas's parent company, ATSI-Canada, have been
included in the caption headed United States as they are immaterial in amount.
ATSI-Canada has no revenues as the Company's revenues are billed either by ATSI-
Texas or ATSI-Mexico. The table includes revenues and operating income of
Computel for the periods from May 1, 1997 to July 31, 1997 and the identifiable
assets of Computel as of July 31, 1997.
<TABLE>
<CAPTION>
For the Years ended July 31,
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1995 1996 1997
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<S> <C> <C> <C>
OPERATING REVENUES FROM
UNAFFILIATED CUSTOMERS:
Long distance services
United States $ 4,469,529 $ 10,806,586 $ 12,544,732
Mexico and other - - 1,421,249
------------ ------------ ------------
Total long distance services
$ 4,469,529 $ 10,806,586 $ 13,965,981
Network mgmt. services ============ ============ ============
United States $ 318,312 $ 1,762,971 $ 2,064,262
Mexico and other - 905,127 198,144
------------ ------------ ------------
Total network management
services $ 318,312 $ 2,668,098 $ 2,262,406
============ ============ ============
OPERATING INCOME (LOSS):
United States $ (1,950,489) $ (2,079,456) $ (3,927,977)
Mexico and other - 10,855 (273,740)
------------ ------------ ------------
Total Operating loss $ (1,950,489) $ (2,068,601) $ (4,201,717)
============ ============ ============
Identifiable Assets
United States $ 2,653,646 $ 3,790,354 $ 6,659,651
Mexico and other - 394,138 6,832,794
------------ ------------ ------------
Total Identifiable Assets $ 2,653,646 $ 4,184,492 $ 13,492,445
============ ============ ============
</TABLE>
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LONG DISTANCE CALL SERVICES
OVERVIEW
The Company provides domestic and international long distance call
services as an alternative to those services offered by AT&T, MCI, Sprint and
other call service providers. See "Business--Competition." The Company owns
and operates its own switching facility and an operator center located at its
headquarters in San Antonio, Texas ("Switching/Operator Facility"). The Company
provides live and automated operator services 24 hours per day, 365 days per
year, and features multi-lingual operators versed in English, Spanish,
Portuguese and, at times, other languages. At September 30, 1997, the Company
employed 13 full-time and 26 part-time operators. The Company utilizes its own
transmission facilities when possible or contracts to use facilities of other
long distance network providers, as necessary.
Because international long distance call services consistently provide
revenue and gross profit per minute at a substantially higher rate than
domestic long distance call services, the Company has decreased and intends to
continue to decrease its efforts to provide call services in the highly
competitive United States market, and to increase its focus on the provision of
international long distance call services, particularly between Mexico and the
United States. International long distance billed revenues between the United
States and Mexico increased from approximately $1.4 billion in 1993 to $2.4
billion in 1996. The significant increase in such billed revenue, as well as
that between the United States and other Latin American countries, is due in
part to the ties that exist between many major metropolitan areas in the United
States and Mexico and other Latin American countries, which have been
strengthened by the rapid growth of the Hispanic segment of the United States
population, and the increase in trade between Mexico and other Latin American
countries and the United States.
SERVICES
The Company generates long distance traffic, which is routed through the
Switching/Operator Facility, primarily from Charge-a-Call phones, located in
major tourist areas in Mexico; call aggregators, such as hotels, motels and
private payphones located in the United States and Mexico; casetas, which are
call facilities in Mexico utilized by travelers and local residents who do not
have personal phone access; and calling cards. Following is a more detailed
description of the Company's existing and planned long distance traffic sources.
Charge-a-Call Phones
The Company has historically provided the majority of its long distance
call services to United States citizens traveling in Mexico who desire a
convenient method of placing and billing calls to the United States. Calls have
been generated primarily from Charge-a-Call phones owned by the Company and
placed in major tourist areas of Mexico. By simply lifting the handset on such
a phone, a caller automatically accesses one of the Company's operators at the
Switching/Operator Facility. The caller provides payment instructions and the
destination phone number to a Company operator, who then assists the caller in
placing the call.
At September 30, 1997, the Company owned approximately 500 Charge-a-Call
phones, all of which are located in Mexico, and does not anticipate increasing
the number of such phones significantly in Mexico in the future. To increase
Mexico-generated call service revenue, the Company began installing advanced
Intelligent payphones in various tourist areas within Mexico in July 1997. See
"Business--Intelligent Payphones." Unlike Charge-a-Call phones, which are
capable of handling only collect, calling card and credit card billed
international calls to the United States, software-driven Intelligent payphones,
which accept
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coins or credit cards, are capable of handling international calls billed
collect, to credit cards or to calling cards, domestic long distance calls
within Mexico billed to credit cards or via coin operation, and local calls via
coin operation. By accepting coins for local and long distance, the Company
believes it will be able to expand its revenue base. There can be no assurance,
however, that Intelligent payphones will generate any increases in revenue.
Call Aggregators
The Company contracts with "call aggregators" in the United States and
Mexico, which include private payphone, hotel, motel and resort owners and
agents, to provide call services for calls made from telephones they operate or
which are located on their property. Subscribers earn commissions based on the
net billable revenue originating from the subscriber's telephones. The
commission rate is set by agreement between the subscriber and the Company or a
representative of the Company. The Company's revenue is derived from composite
charged rates for the call which is billed to the end-user.
Currently, call aggregators in the United States and Mexico can choose
the long distance company that will complete and process their customer's "0+"
("Zero Plus," automated credit or calling card) and "0-" ("Zero Minus," operator
assisted) calls. To route a call to a Company operator from a subscriber
telephone, a caller in Mexico or elsewhere generally dials "0," and the area
code and number. The call is then automatically routed to the
Switching/Operator Facility. An autodialer may also be installed at the
subscriber's premises. When an autodialer is used, it monitors the numbers
dialed and automatically redirects calls to the Company. The interception and
direction of telephone calls by the autodialer is transparent to the phone user.
Operators identify themselves as American TeleSource International and
Communications Services operators to persons placing calls from subscriber
telephones in the United States and Mexico, respectively. As Company operators
receive the incoming calls, they collect billing information from the caller and
enter it into the Company's computer system from their operator terminals.
Users of the Company's services can charge their calls to most Bell company
calling cards or commercial credit cards. Additionally, calls handled by an
operator can be person to person, collect or third party calls. All calling
information (including origination, termination and billing numbers) is recorded
for credit validation, call rating and billing to the end user. The call is
then released into the local telephone company's or long distance carrier's
system for completion. The Company selects the most cost effective and
efficient method of completing the call available to it.
At September 30, 1997, the Company provided "call aggregator" call
services to approximately 5,700 and 12,100 hotel and motel rooms in the United
States and Mexico, respectively. The Company's customers include certain Holiday
Inn, Best Western, Royal Resorts and Omni hotel franchises and Grupo Posadas, a
Latin American hotel operator. In July 1997, the Company acquired a contract
from Meridian Telecom pursuant to which it provides call services to hotels
operated by Grupo Posadas in Mexico (representing approximately 8,500 hotel
rooms), one of the largest hotel operators in Latin America. At September 30,
1997, the Company had "call aggregator" call service contracts with pay
telephone owners covering approximately 4,600 and 1,400 public telephones in the
United States and Mexico, respectively.
Casetas
In May 1997, the Company entered into an agreement to purchase up to 100%
of the outstanding shares of Sistema de Telefonia Computarizada, S.A. de C.V.
("Computel"), a Mexican company that owns and operates 134 casetas in 72 cities
throughout Mexico. Under the terms of the agreement, the Company acquired 55% of
the shares of Computel in May 1997, and the remaining shares in August 1997. The
consideration for the Computel acquisition included Company Common Stock, cash
and the forgiveness of a note receivable evidencing an obligation owed by
Computel to the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation--Overview" and Note 9 to the Company's
consolidated financial statements appearing elsewhere in this Registration
Statement on Form 10. Casetas are calling facilities strategically located in
Mexico to serve telephone needs of travelers and Mexican nationals lacking
personal telephone access. Casetas feature comfort and privacy not available on
street side telephone
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locations. A caseta typically includes three-to-four telephones serviced by
three-to-four phone lines. Casetas offer multiple services including local
telephone calls, domestic long distance calls, international long distance
calls, collect, calling card, and credit card calls, voice mail and fax
transmission and reception.
Computel is a leader in public calling stations in Mexico, employing
approximately 430 people, with annualized revenues of approximately $6 million.
The Company believes that Computel, through its standardization in logos and
trade dress, has established a highly recognized, positive corporate image in
Mexico. The anticipated integration of Computel's and the Company's operations
is expected to produce certain operating efficiencies. The Company believes
that Computel's existing management and operations team within Mexico will
facilitate the implementation of its Intelligent payphone and travel card
services in Mexico. See "Business--Travel Cards" and "Business--Intelligent
Payphones." Additionally, the Company believes that Computel's point-of-sale
distribution channels will compliment the Company's network and facilities-based
operations. Through combined call volume and utilization of the Company's
network facilities, the Company believes that it will be able to reduce the cost
per minute of certain of the Company's prospective intra-Mexico calls and
Computel's long distance calls to the United States. There can be no assurance
that any operating efficiencies or cost reductions will result from the Computel
transaction.
Travel Cards
The Company also provides call services for Latin Americans traveling
outside their countries through the issuance of pin numbers used in conjunction
with international credit cards and proprietary telephone travel cards. Latin
travelers typically do not have AT&T, MCI or Sprint travel cards, nor do their
countries' national phone companies provide them with travel cards that can be
used in the United States. However, such travelers generally carry common
international credit cards, such as Visa, MasterCard and American Express. The
issuance by the Company of TravelPlus/SM/ pin numbers in conjunction with credit
cards enable Latin travelers to use an eligible common credit card to place
domestic or international calls from virtually any phone in the United States or
in any of the other 32 countries where the Company originates service and reach
a Portuguese or Spanish speaking Company operator. By using a credit card as a
phone card, the traveler is able to avoid the high cost of collect calls and
minimize hotel and public phone surcharges. Callers using TravelPlus/SM/ pin
numbers are billed directly through their credit card companies, and the Company
is paid in U.S. dollars. The Company has contracted to provide TravelPlus/SM/
pin numbers to the Bank of Brazil for its Visa card holders. Additionally,
through a strategic alliance with ATI do Brasil, a Brazilian company
not affiliated with the Company, the Company distributes telephone travel cards
at Brazilian airports and through travel agencies located in Brazil, which cards
enable the holders to utilize TravelPlus/SM/ services.
The Company's RoamerPlus/SM/ travel cards enable Mexican travelers to use
their cellular phones while in the United States. Because of problems
associated with cellular phone fraud, United States cellular companies generally
prohibit foreign cellular users, while traveling in the United States, from
placing international calls. To avoid this problem, pin numbers are issued to
Latin Americans through their own local cellular provider. When in the United
States, the Mexican cellular user dials a special "800" number which connects
the user with a Company operator and provides the operator with an account and
pin number. The operator then completes the call, and charges are billed to the
user's local cellular account. Currently, the Company has two agreements with
Mexican cellular companies to route calls placed by such companies' customers
traveling in the United States to the Company's Switching/Operator Facility. As
relationships with other Latin American cellular companies are established, the
Company anticipates expanding access to this
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service. There can be no assurance that the Company will be able to establish
any such relationships or, if it is able to do so, that access to this service
will be expanded.
Intelligent Payphones
In February 1997, ATSI-Mexico obtained a comercializadora license from the
Mexican government's Secretaria de Comunicaciones y Transportes ("SCT") to own
and operate public payphones in Mexico and resell local and long distance
services via such payphones. There were approximately 2.6 public phones for
each 1,000 persons in Mexico at May 31, 1997. The Company believes that there
is and will continue to be a need for more public phones in Mexico. As a
result, in March 1997 the Company obtained $1.7 million in equipment financing
from IBM de Mexico to begin acquiring and installing Intelligent payphones in
Mexico. Intelligent payphones, which are software driven and equipped to handle
coins and credit cards, are able to generate revenues from international calls
billed collect, to credit cards or to calling cards; domestic long distance
within Mexico billed to credit cards or via coin operation; and local calls via
coin operation. The Company began installing Intelligent payphones in July
1997. The Company believes that its equipment financing facility with IBM de
Mexico will cover the cost of acquiring and installing approximately 450
Intelligent payphones, primarily in tourist areas. The Company has established
an overall target of installing 11,000 Intelligent payphones by the end of
fiscal 2001. There can be no assurance, however, that the Company will have
sufficient resources to install all or a significant number of Intelligent
payphones in Mexico or that it will realize increased revenue from operation of
such payphones.
Prepaid Calling Cards
The Company plans to begin selling prepaid calling cards, which are similar
to travel cards except for the billing method, in the first quarter of fiscal
1998. Because the lower costs of providing prepaid long distance (including no
bad debt, operator and billing costs) are passed on to the consumer, callers
generally purchase prepaid calling cards for the savings they provide. In
addition, businesses such as airlines, travel agencies and hotels may purchase
prepaid calling cards from time to time as promotional items for their
customers. The Company anticipates that it will begin selling prepaid calling
cards from its casetas in fiscal 1998. There can be no assurance that the
Company will sell prepaid calling cards at such locations, if at all.
OPERATIONS
The Company's revenue from international long distance call services was
$110,483 for fiscal 1994 (of which 100% was from traffic between Mexico and the
United States), $2,952,571 for fiscal 1995 (of which 98% was from traffic
between Mexico and the United States), $7,780,742 for fiscal 1996 (of which 87%
was from traffic between Mexico and the United States), and $9,554,647 for
fiscal 1997 (of which 74% was from traffic between Mexico and the United
States), which accounted for 100%, 40%, 44%, and 51%, respectively, of the
Company's minutes of use, and 100%, 66%, 72%, and 72%, respectively, of its long
distance call services revenues. The foregoing fiscal 1997 revenue and
percentage amounts do not reflect $1,421,249 of revenue attributable to
Computel's operations, the majority of which were generated from domestic
(Mexico) long distance call services. The Company's international and domestic
long distance call services generated revenues of $110,483 for fiscal 1994,
$4,469,529 for fiscal 1995, $10,806,586 for fiscal 1996, and $13,965,981 for
fiscal 1997. Long distance call services represented approximately 45.7% of
total operating revenue for fiscal 1994, 93.4% for fiscal 1995, 80.2% for fiscal
1996, and 86.1% for fiscal 1997. Seasonal variation in call volume is expected
by the Company from hospitality and payphone subscribers, reflecting the higher
occupancy rates from January through July in Mexico (when U.S. volume is at its
lowest) and lower rates during summer months in Mexico (when U.S. volume is at
its peak).
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Approximately 25% of the long distance calls handled by the Company are
billed to commercial credit cards. The Company utilizes the services of a
credit card processing company for the billing of these calls and receives cash
from these calls, net of transaction and billing fees, within seven days from
the dates the calls are made. All other calls, including calling card, collect,
person-to-person and third-party billed calls, are billed under an agreement
between the Company and Billing Information Concepts Corp. ("BIC"), one of the
largest billing and collection clearinghouses in the United States. This
agreement allows the Company to submit call detail records to BIC, which in turn
forwards these records to the local telephone companies that maintain the
addresses of the parties to be billed for the calls. The local telephone
company includes the call(s) in a billed party's home telephone bill, collects
the funds and remits those funds net of certain charges to BIC. BIC then remits
the funds net of collection fees to the Company. Because this collection
process can take up to 75 days, the Company participates in an advance funding
program offered by BIC under which BIC purchases 100% of the call records for
75% of their value within five days of presentment to BIC. The remaining 25% of
the call records is remitted to the Company net of charges as BIC collects the
funds from the local telephone companies. The Company currently pays BIC a
funding charge of prime plus 4% per annum on the 75% of the value of the calls
which is advanced to the Company.
One of the Company's primary costs of providing international call services
from Mexico to the United States is the cost of transporting calls from their
points of origin in Mexico to the Company's Switching/Operator Facility.
Although the Company contracted in the past with major U.S. carriers to provide
such services, Telefonos de Mexico ("Telmex"), the former telecommunications
monopoly in Mexico, did not have a legal obligation to allow these carriers to
provide services prior to August 10, 1996, and on occasion refused to do so.
When it permitted such services to be provided, Telmex based the rates it
charged to these carriers on retail prices charged to consumers in Mexico.
Telmex had the ability to raise these rates as well, which it did on a regular
basis. As a result, from inception through August 10, 1996 the Company
experienced high, unstable and often increasing costs in connection with its
international long distance traffic originating in Mexico. During fiscal 1996,
the Company paid as much as $1.60 per minute (with an average per minute cost of
in excess of $1.00 for fiscal 1996) to transport calls from Mexico to its
Switching/ Operator Facility.
Subsequent to August 10, 1996, at least twelve different carriers received
concessions from the Mexican government to compete against Telmex, the result of
which was a newly formed, competitive telecommunications market within Mexico.
The Company immediately began negotiations with the newly concessioned carriers
to reduce dependency on Telmex, increase the reliability of its services and
reduce the costs of providing international calls from within Mexico. In
November 1996, the Company signed an interconnection agreement with Investcom,
one of the newly concessioned carriers, which calls for a maximum per minute
price to carry the Company's long distance calls from Mexico to San Antonio of
$0.48 per minute, and provides for further discounts based on increasing call
volumes. However, Investcom did not possess the switch capacity in Mexico to
process the Company's long distance traffic until May 1997. As a result, the
Company did not begin to phase in the processing of its long distance traffic at
the lower per-minute cost until that date.
The Company has also installed a teleport facility at Investcom's switching
center in Mexico City. Investcom has contracted with the Company to transport
its long distance traffic from Mexico to the United States through this teleport
facility, and services were initiated in May 1997. Prior to May 1997, the
Company's international call services from within Mexico were still dependent
upon Telmex. The Company believes that its interconnection agreement with
Investcom and use of its Mexico teleport facility will enable it to vertically
integrate its services to reduce the cost of providing international calls from
Mexico and, as a result, increase call volume; however, there can be no
assurance that any cost reduction or increase in call volume will occur.
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SWITCHING AND OPERATOR EQUIPMENT
The Company's call center platform located in San Antonio, Texas consists
of a fully redundant digital Summa Four Switch interlinked with a Digital
Equipment Corporation VAX 4000, which utilizes Micro Dimensions software to
interconnect the computerized operator terminal work stations at the service
center. The operator center platform enables the Company to process calling
card calls, collect calls, person-to-person, third-party and credit card calls.
The Company has also installed a NACT LCX 120 switch, which will enhance its
current platform by allowing the Company to process prepaid calling cards and
direct dial calls. At September 30, 1997, the Company's switching capacity was
25% utilized at its San Antonio, Texas teleport facility, 50% utilized at its
Mexico City teleport facility, and 10% utilized at its Costa Rica teleport
facility.
SALES AND MARKETING
The Company markets its long distance call services in Mexico through the
combined effort of 12 direct sales representatives based in its corporate and
branch offices and a network of independent marketing representatives which sell
the Company's services on a commission basis. Because high commission levels
charged by the independent marketing representatives add substantially to the
Company's cost of services, the Company plans to phase out the use of
independent marketing representatives in Mexico and utilize its direct sales
representatives exclusively in Mexico. As the percentage of direct sales grows
in relation to the percentage of sales obtained through independent marketing
representatives, the Company expects that there will be a corresponding decrease
in commissions paid, and, as a result, its cost of services; however, there can
be no assurance that this will occur. Existing independent marketing
representatives must comply with the Company's licensing requirements, including
ownership by the Company of all phones and phone lines, and pricing of services.
The Company will continue to use independent marketing representatives in other
countries where it provides services such as Brazil, Jamaica and the Dominican
Republic.
The majority of the Company's direct sales efforts are concentrated in
Mexico, the Company's primary market. The Company's sales strategy targets both
corporate and government accounts, as well as individual properties. Corporate
and government accounts are managed through the Company's office in Mexico City
by a team of account executives trained specifically to handle such accounts,
which typically have a lengthy sales cycle and require presentations to
committees and executive management teams. Corporate and government accounts
include hotel chains, retail chains, travel agency chains, banks, airlines, ship
ports, airports and municipalities. Account executives responsible for selling
individual property accounts in Mexico are based out of the Company's branch
offices in Cancun, Cozumel, Acapulco, Puerto Vallarta and Mazatlan. Individual
property accounts include restaurants, hotels, bars, and retail shops.
The call services industry has primarily provided its services to call
aggregators rather than the general public. Reasons for selecting call
aggregators over residential customers include the sales volume offered by call
aggregators and the high advertising costs and customer turnover associated with
handling residential customers. The Company's customers look for call services
as an additional source of revenue. Although needs vary from market to market,
the Company generally modifies the in-house phone system of subscribers, or
installs additional equipment necessary to interface with the Company's
Switching/Operator Facility. The Company contracts with subscribers to provide
call services for calls made from telephones they operate or telephones which
are located on their property, offering them the opportunity to receive
commissions on calls made on their phones. The Company customizes its long
distance call services to provide individualized reports and to achieve, for a
given customer, the desired balance between high customer commissions and low
charges to the billed party.
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COMPETITION
Competition between the Company and other operator service providers is
based upon commission programs, quality of service, reporting, reputation and
customer service. The Company competes in the international and domestic long
distance call services market with AT&T, Sprint, MCI and others, many of which
have been in business longer than the Company and have far greater resources and
experience than the Company. The Company's primary competitors for hotel and
hospitality contracts are Teleglobal, CNSI, BBG, LCI and Ameristar. Its primary
competitor for its bank products is Sprint in conjunction with Visa. The Company
anticipates that it will compete in the public payphone segment in Mexico with
Telmex and other newly licensed companies. Some of these companies, again, have
considerably greater financial and other resources than the Company.
The Company believes it competes favorably due in part to its bilingual
operators, and a broad array of service offerings. Among them, the Company
provides call aggregators with customized, detailed and sophisticated reporting
of calling patterns and volumes from their locations. This allows such
customers to analyze their traffic and maximize telecommunication revenues by,
for example, relocating underutilized telephones. The Company's detailed
reporting also allows its customers to reconcile the accuracy or integrity of
their commissions. The Company employs a highly skilled professional staff of
customer service employees and technicians, who provide service 24 hours per
day, 365 days per year. Additionally, ATSI-Mexico provides an array of services
to support the Company in the provision of long distance call services. See
"Business-- ATSI-Mexico."
STRATEGY
The Company's mission is to become a full service international
telecommunications carrier providing operator-assisted, direct dial and other
long distance call services and network management services between and within
Latin America and the United States. The Company intends to pursue this
strategy in its long distance call services business by, among other things,
competing for licenses issued by Latin American countries, where the regulatory
environment permits, to provide expanded long distance call services and working
to increase the volume of calls which it processes. Because margins on
international calls are substantially higher than domestic (United States)
calls, and because the Company expects growth to continue in the market for
calls between the United States and Mexico, as well as other Latin American
countries, the Company intends to focus on the international long distance
market, particularly between Mexico and the United States, for the provision of
long distance call services. Within Mexico, the Company intends to utilize the
cost savings generated from its interconnection agreement with Investcom,
together with the installation of Intelligent payphones in the tourist areas of
Mexico and utilization of its casetas, to increase call volume and revenues.
There can be no assurance, however, that the Company will be able to achieve any
increase in call volume and, if so, that any increase in revenues or profits
will be realized. The Company has decreased its efforts toward providing call
services in the highly competitive United States market, offering such services
domestically on a "demand type" basis only.
The Company currently views the following target markets as ones in which
it can most profitably provide its long distance call services for the optimum
benefit of the customer:
. International Public Communications -- Includes public payphone
services in high traffic areas and transportation centers such as
airports, ship ports and marinas, as well as casetas, located
primarily in Mexico.
. International Hospitality Industry -- Includes hotels, motels and
resorts located primarily in Mexico.
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. Travel-Related Service Business -- Includes travel agencies, airlines,
banks, cellular phone companies and other businesses that service
foreign travelers.
The Company intends to continue to promote its travel card program to
credit card issuers in Latin American countries where and as the regulatory
environment permits. The Company has also initiated discussions with certain
Mexican cellular companies to route calls placed by United States citizens in
Mexico to the Company's Switching/Operator Facility. If successful in these
negotiations, of which there can be no assurance, the Company expects to expand
its travel card service to enable United States citizens to use their cellular
phones while traveling in Mexico. In addition, the Company anticipates that it
will begin selling prepaid calling cards in the first quarter of 1998. Through
these efforts, the Company hopes to further increase call volume and revenue;
however, there can be no assurance that any such program will be successful and,
if so, that the Company will realize any increased call services volume or
revenue or attain profitable operations.
NETWORK MANAGEMENT SERVICES
OVERVIEW
The Company offers international carrier services and domestic and
international private-line telecommunications services via satellite and fiber
optics between the United States and Latin America and within Latin America to
commercial customers for a number of applications. These applications generally
involve, for carrier services customers, providing transmission capacity for
United States termination of long distance call traffic and network services
traffic handled by domestic and regional communications carriers in Latin
America, and, for private network customers, creating private international
point-to-point communications links for clients who need special services, such
as heavy data and voice usage at lower cost and greater dependability. The
Company believes that as Latin American markets continue to develop and as
multinational corporations expand into the region, the demand for communications
transmissions into the United States and customized telecommunications services
between the United States and Latin America and within Latin America will
continue to grow.
The Company believes that the demand for international network management
services has the potential to grow substantially in the foreseeable future,
particularly within the Latin American region. This growth is expected to
result from continuing deregulation of telecommunications markets in Latin
America, continuing technological advancement, economic development in Latin
America, and the increasing globalization of business. There can be no
assurance that demand for international network management services will grow as
anticipated, if at all.
The Company provides modern telecommunications standards of reliability and
connectivity to the Latin American region from its San Antonio, Texas teleport
via the Hughes built, Mexican government owned and operated Solidaridad
Satellite System ("Solidaridad"). Solidaridad consists of the Solidaridad I and
II satellites, which are replacing the older Mexican Morelos Satellite System.
Solidaridad I and II were successfully launched into orbit in November 1993 and
the fourth quarter of 1994, respectively. These satellites have increased
capacity for telecommunications services (i.e., "C," "Ku" and "L" bands) and
cover the Company's market, consisting of portions of North America, all of
Mexico, the Caribbean Basin and Central America, and the western portion of
South America.
The Company entered into an agreement with Telecomunicaciones de Mexico
("Telecomm") in October 1995 to purchase transponder capacity on Solidaridad for
a period of five years (the "Solidaridad Agreement"). The Company chose
Telecomm based upon its favorable transmission rates and Solidaridad's area of
satellite coverage. Pursuant to the Solidaridad Agreement, the Company pays a
tariff to Telecomm
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based upon the amount of satellite capacity it uses. Telecomm offers a volume
discount to users of 10 Megahertz of capacity or more. As of September 30, 1997,
the Company leased 30.5 Megahertz of capacity on Solidaridad. The following
chart displays the Company's area of satellite coverage.
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SOLIDARIDAD SATELLITE SYSTEM
[MAP APPEARS HERE]
The depiction on this page illustrates Solidaridad's entire area of
satellite coverage by displaying Solidaridad's coverage "footprints" over a map
of North America, Mexico, Central America, South America and the Caribbean
Basin. Such footprints cover three separate and distinct regions, referred to
as Regions 2, 3 and 5. Solidaridad's coverage footprint of Region 2 includes
cities on the southwestern border of the United States, all of Mexico and
Central America, the Caribbean Basin and the northern portion of South America.
Its coverage footprint of Region 3 includes the western portion of South
America, and its footprint of Region 5 covers parts of the midwestern, eastern
and southern regions of the United States, as well as the San Francisco Bay
Area.
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CARRIER SERVICES
The Company offers satellite capacity to domestic and regional
telecommunications carriers in Latin America that lack transmission facilities
to locations in the United States or need more transmission capacity into the
United States. The Company began marketing such services to foreign telecom
carriers in the last quarter of fiscal 1995. The Company has entered into
agreements or understandings (each of which with the exception of the agreement
with Investcom is presently immaterial to the Company's operations), as
indicated below, with the following foreign telecommunications companies for
origination and termination of long distance and network traffic between the
United States and certain Latin American countries:
. Investcom. In November 1996, the Company signed an interconnection
agreement with Investcom, one of twelve companies to have received a
concession from the SCT to provide long distance services in
competition with Telmex. The Company also installed a teleport
facility at Investcom's switching center in Mexico City. Investcom has
contracted with the Company to transport its long distance traffic
from Mexico to the United States through this teleport facility.
Investcom has also contracted with the Company to permit the Company
to terminate its traffic into Mexico, which effectively enables the
Company to use its teleport facility as a gateway for southbound long
distance traffic from the United States to Mexico. The Company
believes that its interconnection agreement with Investcom and use of
its Mexico teleport facility will enable it to vertically integrate
its services to reduce the cost of providing international calls from
Mexico and, as a result, increase call volume; however, there can be
no assurance that any cost reduction or increase in call volume will
occur.
. RACSA. In May 1996, the Company entered into an interconnection
agreement with Radiografica Costarricense, S.A. ("RACSA"), a
subsidiary of the national telephone company in Costa Rica. Under the
terms of the agreement, the Company provides RACSA, as well as third
party private companies, with voice, fax, and data transmission
services to the United States and Mexico, and carrier long distance
services to and from Costa Rica. Under the agreement, the Company
receives a minimum long distance traffic guarantee from RACSA, and has
reseller rights for its own long distance customers. The Company has
also installed a teleport facility in Costa Rica in conjunction with
RACSA.
. TELERED. In January 1997, the Company entered into a memorandum of
understanding with TELERED, a Guatemalan consortium, which
contemplates an interconnection agreement for the provision of call
services, Internet and other network services between Guatemala and
the United States.
. SOLARES. In July 1997, the Company entered into an interconnection
agreement with Solares, S.A. de C.V., an El Salvadoran
telecommunications provider, for the provision of call services,
Internet and other network services between El Salvador and the United
States.
. TELPAN. In January 1995, the Company entered into an agreement with
TELPAN Communications, Inc., a Panamanian telecom carrier, for the
provision of network services into the United States for voice, fax
and data transmissions originating in Panama.
In July 1997, the Company entered into an agreement with Avantel S.A. de
C.V., one of twelve companies to have received a concession from the SCT to
provide long distance services, to carry and terminate traffic within Mexico.
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To date, the Company's carrier services business has generated
insignificant revenues as the Company has only recently commenced focusing its
efforts on the marketing of these services. The Company believes that, if the
regulatory environment permits, significant opportunities could continue to
arise with respect to the provision of satellite transmission capacity. The
Company intends to continue to pursue what it believes to be opportunities to
provide carrier services at favorable rates to Latin American domestic and
regional communications carriers. The Company does not, however, intend to
provide carrier services to or from what the Company considers its secondary
markets, including Brazil, Jamaica and the Dominican Republic.
PRIVATE NETWORKS
The Company also offers domestic and international private
telecommunications networks between the United States and Latin America and
within Latin America for voice and fax communications, data transmission, point-
to-point videoconferencing links and value added network services, such as
credit card processing, Internet, E-Mail and reservation networks. The
Company's fiber-optic and satellite transmission capabilities enable its
customers to bypass limited telecommunications services which remain in many
areas of Latin America. Although no longer offered to new business customers,
the Company continues to provide to existing business customers "stand alone"
end-to-end very small aperture terminal ("VSAT") private network satellite
services via Solidaridad between the United States and Latin America and within
Latin America for its business communications customers. VSAT networks consist
of very small (e.g., 1.8 to 3.8 meters) rooftop antennas and are utilized to
send communications and data transmissions at any time. Generally, the user pays
for this service based on the capacity leased regardless of volume of use.
Presently, the Company offers private telecommunications networks through its
interconnection agreements and associated foreign teleport facilities.
In addition to providing satellite capacity for private networks, the
Company's services to its business communications customers include customized
end-to-end solutions to their communications needs by providing survey and
analysis of customer needs, network design, engineering and integration,
coordination and filing of necessary permits, importation and shipping of
necessary equipment, complete installation and network testing, systems
operations training and ongoing maintenance and technical support. The Company
commits to provide its customers error-free transmission at U.S. performance
standards of 99.98% reliability. All services are provided by the Company's
personnel in San Antonio, Texas and Mexico.
The Company's business communications customers currently using its private
telecommunications network services are Reuter's de Mexico, S.A. de C.V., for
information distribution between Mexico and the United States; Banco del Centro,
for credit card processing services between Mexico and the United States; Total
Systems Services de Mexico, S.A. de C.V., for credit card authorization services
between Mexico and the United States; Operadora Corporativo Miro Reservation
Network, between Mexico and the United States, with a link to Grand Cayman;
Rooster Products International, between Mexico and the United States; Copamex
S.A. de C.V., within Mexico and between Mexico and the United States;
Evaporadora Mexicana, S.A. de C.V., for a wide area network within Mexico;
Notimex S.A. de C.V. for information distribution services between Costa Rica
and Mexico; H.E. Butt Grocery Company for data network services between Mexico
and the United States; and Servicios de Informacion Deportiva for data network
services between Costa Rica and the United States.
The Company's private network services generated revenues of approximately
$132,000 during fiscal 1994, $318,000 during fiscal 1995, $2.7 million during
fiscal 1996, and $2.3 million during fiscal 1997. Private network services
represented approximately 54.3% of total operating revenue during fiscal 1994,
6.6% during fiscal 1995, 19.8% during fiscal 1996
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and 13.9% during fiscal 1997. The Company's private network services contracts
generally last from two to five years.
SALES AND MARKETING
The Company has focused its network management sales and marketing efforts
in those regions of Latin America where it has installed teleport facilities or
has access to such facilities through interconnection agreements. The network
management sales team focuses on securing new business through direct
prospecting and sales efforts, as well as from leads supplied by Telecomm,
financing companies specializing in the telecommunications industry,
telecommunications equipment vendors and existing customers. Other direct
marketing efforts include attendance at or participation in major conventions or
expositions for targeted user groups. In addition, the Company's senior
management takes an active role in supporting the sales team and attracting new
accounts for private networks and carrier services. All of the Company's
network management sales personnel are fluent in both English and Spanish.
The Company's sales personnel are required to contact existing customers on
a monthly basis in order to ensure that such customers' current needs are being
met. The Company believes that this activity may stimulate sales growth by
increasing usage levels among its current customer base. These existing
customers may also provide the Company's sales personnel with qualified leads
for new business.
COMPETITION
In providing network management services, the Company competes with MCI,
Americatel, C-COM, AT&T, Telmex, GeoComm/SERSA and others, many of which have
significantly greater resources and more extensive domestic and international
satellite and fiber-optic communications networks than the Company. The Company
uses the Solidaridad Satellite System combined with fiber-optic networks to meet
its customers' requirements.
For most of the Company's network management communications services, the
factors critical to a customer's choice of a service provider are cost,
reliability, network quality and, in some cases, geography, network size and
telecommunications capacity. The Company believes it has the reputation as a
responsive telecommunications service provider capable of processing a variety
of network traffic, including switched long distance. The Company's San
Antonio, Texas teleport facility (and other teleport facilities), combined with
its engineering and operations capabilities, enable the Company to provide high
quality, cost-effective communications services to meet its customers'
requirements. Additionally, ATSI-Mexico provides an array of services to
support the Company in the provision of domestic (Mexico) and international
network management services. See "Business-- ATSI-Mexico."
STRATEGY
The Company's mission is to become a full service international
telecommunications carrier providing operator-assisted, direct dial and other
long distance call services and network management services between Latin
America and the United States. The Company intends to pursue this strategy in
connection with its network management services by, among other things,
attracting new Latin American telephone companies and international
telecommunications carriers requiring satellite transmission capacity for their
telecommunications traffic into the United States, attracting new private
network accounts, working to increase the usage level of current private network
clients and competing for licenses issued by Latin American countries to provide
expanded services where the regulatory environment permits. The Company's
network management services provide substantially higher profit margins than its
long distance call services. As a result, and due to the anticipated increase in
demand for international telecommunications services, the
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Company intends to continue to engage in sales and marketing efforts with
respect to this aspect of its business, with particular emphasis on carrier
services. Additionally, because many costs of providing such services are fixed
costs to the Company, the Company expects that it will realize increased margins
as carrier and network usage expand. There can be no assurance, however, that
the Company will recognize any increase in revenues or attain profitable
operations from the provision of network management services in the future.
ATSI-MEXICO
American TeleSource International de Mexico, S.A. de C.V. provides the
Company with support in connection with the Company's domestic (Mexico) and
international long distance services and network management services. ATSI-
Mexico provides an array of services to support the Company, including applying
for and obtaining telecommunications licenses, identifying and processing
potential business opportunities and planning, design, implementation and
maintenance of international telecommunications networks. For networks
requiring U.S. connectivity, the San Antonio, Texas teleport is utilized. ATSI-
Mexico also provides intra-Mexico network management services. ATSI-Mexico
technical personnel are trained by the Company's technical staff in areas such
as monitoring, diagnostics, and troubleshooting of networks and switching
equipment. The capital stock of ATSI-Mexico is 97% owned by the Company and 3%
owned by a Mexican citizen.
The Company has focused the majority of its initial efforts within Mexico
and intends to continue to concentrate primarily on the Mexican market for the
provision of domestic (Mexico) and international long distance call services.
The Company believes that significant opportunities to provide call services
within Mexico and between Mexico and the U.S. will continue to arise from the
law written into effect in June 1995 by the SCT, which provides for the methods
by which companies can apply for concessions and licenses to establish and
operate telecommunications services businesses within Mexico. This law was,
effectively, the first step in the deregulation of the telephone industry within
Mexico. It also formalized the methods by which companies may compete against
Telmex, the former telecommunications monopoly in Mexico.
ATSI-Mexico has obtained the following licenses from the SCT (the duration
of each of which is approximately 20 years), which the Company believes will
enable it to significantly expand its business in Mexico. There can be no
assurance, however, that such licenses will lead to increased revenues or
profitable operations.
. Public Payphone License. In February 1997, ATSI-Mexico received a
comercializadora license from the SCT to own and operate public
payphones, including casetas, in Mexico and resell local and long
distance services via such payphones. See "Business--Long Distance
Call Services-Intelligent Payphones."
. Shared Teleport License. In July 1997, through its acquisition of
Sinfra, S.A. de C.V., ATSI-Mexico acquired a shared teleport license
from the SCT, which qualifies the Company's Mexican teleport (and any
future teleports owned by the Company in Mexico) as a shared facility
to provide communications transport capabilities for the Company's
Mexican network clients, as well as other non-shared teleport-based
carriers and their clients. Utilizing the Company's existing Mexican
teleport facility for such a purpose should enable the Company to
reduce costs for the provision of private networks with a link in
Mexico because many private network subscribers will then be able to
connect through local fiber to this centralized satellite facility
(linked to the Mexican Solidaridad Satellite
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System), eliminating the need for a VSAT on every user's premises.
There can be no assurance, however, that this will occur.
. Network Resale License. In July 1997, through its acquisition of
Sinfra, S.A. de C.V., ATSI-Mexico acquired a network resale license
from the SCT, which permits the Company to install, operate and resell
a network integrated by nodes equipped with packet switching and data
concentrators, and a control center for links, channels and circuits
leased from concessionaires. The Company anticipates that such license
will allow it to contract for channels and terrestrial circuits from
concessionaires offering increased reliability and more favorable
rates.
. Value-Added Service License. In the third quarter of fiscal 1996,
ATSI-Mexico received a value-added service license from the SCT to
provide value added network service delivering public access (as
distinct from current private network access) to the Internet,
including e-mail, local area network interconnection and frame relay
services.
In addition, ATSI-Mexico has applied to the SCT for a long distance
reseller license, which is a comercializadora license to provide long distance
and private line services via TELMEX's or any other concessionaire's fiber optic
infrastructure and resell the existing fiber infrastructure in Mexico for
various communications services, including the provision of direct dial long
distance service. Receipt of this comercializadora license, of which there can
be no assurance, would enable the Company to offer to its existing clients and
market to potential customers a complete package of long distance services,
including private networks, 0+, 0- and direct dial capabilities, as well as
direct billing services, which, the Company believes, could have a positive
effect on its revenues due to the desire of customers to consolidate the
provision of their communications services into a single provider. The Company
anticipates that it will continue to apply for government-issued licenses which
it believes will create opportunities to expand operations in Mexico and
facilitate its becoming a full service telecommunications carrier.
ATSI-Mexico has also been instrumental in the Company's consummation of
transactions and development of infrastructure in Mexico, which the Company
believes will lead to increased call volumes and revenues in this market. See
"Business--Long Distance Call Services - Services - Casetas."
The Company believes that ATSI-Mexico gives it a competitive advantage over
other U.S. telecommunications companies attempting to enter the Mexican market.
All of ATSI-Mexico's significant employees are Mexican citizens with substantial
experience in the Mexican telecommunications industry and solid working
relationships with persons and entities in Mexico connected with such industry.
The Company believes that its success to date in Mexico has been largely the
result of, and that its future success with respect to Mexican
telecommunications licenses applied for and implementation of business
strategies in Mexico will be dependent upon, such employees' hard work and
ability to continue to understand and develop relationships within the Mexican
telecommunications industry.
TELEPORT AND NETWORK CONTROL CENTER
The Company has constructed an international teleport/satellite earth
station at its headquarters in San Antonio, Texas to serve as a
telecommunications gateway to the United States. Such teleport is one of six
facilities in the United States known by the Company to have been specifically
designed to provide international telecommunications networks between the United
States and Latin America via the Mexican Solidaridad Satellite System. Such
teleport provides fiber optic integration into U.S. based private and public
telecommunications networks via a fiber optic link to a facility in downtown San
Antonio, Texas where all major long distance carriers have a point of presence.
The Company constructed such teleport
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using advanced digital satellite communications equipment, and built the network
operating system modularly to enable it to expand telecommunications capacity
quickly, on an as-needed basis. In September 1995, the Company increased the
system's networks capacity from 20 watts to 400 watts, giving the Company the
capability to operate up to 30 T-1 circuits, or 720 64K circuits of C-band
frequency and 144 64K circuits of Ku band frequency.
The Company's San Antonio, Texas teleport facility contains a 6.1 meter "C"
and a 6.1 meter "Ku" band earth station with fully redundant electronics capable
of "seeing" across the full 500 MHZ of these two satellite bands in both
horizontal and vertical polarization schemes. The earth station electronics are
state-of-the-art in design and dependability.
The Company's network control center, also located at its San Antonio,
Texas facility, houses the converter subsystem relative to the networks, the
modem subsystem and the data equipment. Such control center serves as the
maintenance and control hub of the Company's networks and long distance call
services systems. It utilizes specialized software and hardware components to
monitor subsystem elements within the teleport. Remote facilities are equipped
with maintenance and control processors that monitor subsystem elements and dial
into the teleport facility to report fault conditions. The control center
technicians, once aware of a problem, can dial into the remote terminals to
diagnose, troubleshoot, make equipment changes or upgrade for complete system
management. The control center is protected through an uninterruptable power
supply system and has a dedicated environmental control system to maintain
optimal conditions of 68 (degrees) F, with 45% humidity.
The Company has also installed two teleport facilities in Mexico City and
Costa Rica, respectively. Generally, such facilities have capabilities similar
to the Company's San Antonio, Texas facility (although designed to handle less
capacity), including modular upgrade capabilities.
REGULATION
The Company's business operations are subject to extensive federal and
state regulation, and more limited foreign regulation. Federal laws and U.S.
Federal Communications Commission ("FCC") regulations apply to interstate
telecommunications (including international telecommunications that originate or
terminate in the United States), while particular state regulatory authorities
have jurisdiction over telecommunications originating and terminating within the
state. The laws of other countries only apply to carriers doing business in
those countries. Thus, if the Company conducts business with such countries
through settlement agreements with a foreign carrier, or otherwise by engaging
in service to such countries, it is affected indirectly by such laws insofar as
they affect the foreign carrier. There can be no assurance that future
regulatory, judicial, and legislative changes or activities will not have a
material adverse effect on the Company, that domestic or international
regulators or third parties will not raise material issues with regard to the
Company's compliance or noncompliance with applicable regulations, or that
regulatory activities will not have a material adverse effect on the Company.
In addition, changes in certain regulations may potentially preclude or
impair the Company's ability to provide call services in certain jurisdictions.
The Company does not foresee any such changes; however, it cannot predict
whether such changes may occur. Therefore, the Company cannot estimate the
impact of such changes upon its operator services in the event of any such
change.
FEDERAL.
The FCC has classified the Company as a non-dominant, interexchange
carrier. Generally, the FCC has chosen not to exercise its statutory power to
closely regulate the charges, practices, or classifications of
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non-dominant carriers. Nevertheless, the FCC acts upon complaints against such
carriers for failure to comply with statutory obligations or with the FCC's
rules, regulations, and policies. The FCC also has the power to impose more
stringent regulatory requirements on the Company and to change the Company's
regulatory classification. In the current regulatory atmosphere, the Company
believes that the FCC is unlikely to do so.
Among domestic carriers, only the local exchange carriers ("LECs") are
currently classified as dominant carriers. Thus, the FCC regulates many of the
LECs' rates, charges, and services to a greater degree than those of the
Company. Until October 1995, AT&T was classified as a dominant carrier, but
AT&T successfully petitioned the FCC for non-dominant status in the domestic
interstate and interexchange marketplaces. Therefore, certain pricing
restrictions that once applied to AT&T have been eliminated, likely making
AT&T's prices more competitive with those of the Company. Recently, AT&T was
also reclassified as a non-dominant carrier for international services.
The Company has the authority to provide domestic, interstate
telecommunications services. The Company also has been granted authority by the
FCC to provide switched international telecommunications services through the
resale of switched services of United States facilities-based carriers and to
provide certain international telecommunications services by acquiring circuits
on various undersea cables or leasing certain satellite facilities. The FCC
reserves the right to condition, modify, or remake such domestic and
international authority for violations of the Communications Act of 1934, as
amended (the "Communications Act") or the FCC's regulations, rules, or policies
promulgated thereunder. Although the Company believes the possibility to be
remote, a rescission by the FCC of the Company's domestic or international
authority or a refusal by the FCC to grant additional domestic or international
authority would have a material adverse effect on the Company.
Currently, non-dominant carriers are required to maintain international
tariffs on file with the FCC. The company believes it is in full compliance with
all international tariff regulations.
The FCC is in the process of changing its rules regarding the filing of
interstate tariffs. In December 1996 the Commission issued an order requiring
all interstate carriers to withdraw such tariffs by September 1997. However, the
order was stayed by the United States Court of Appeals. In response to this
court action, and to petitions for reconsideration that were filed with the
Commission, the FCC issued an order on August 20, 1997 modifying the earlier
order to allow for two instances when interstate tariffs can still be filed.
First, non-dominant interexchange carriers will be allowed to file tariffs
for dial around 1+ services; meaning calls made by accessing the interexchange
carrier through the use of that carrier's "carrier access code". Second, non-
dominant interexchange carriers are allowed to file tariffs for service to
customers that pre-subscribe to that carrier's service by contacting the local
exchange carrier. These tariffs will be effective only for 45 days or until a
written agreement is executed between the carrier and the customer, whichever is
shorter.
The company will incur some additional costs as it replaces its
interexchange tariff with individual contracts. However, it is impossible to
predict at this time what effect the transition will have on the company.
As a non-dominant carrier, the Company is also subject to a variety of
miscellaneous regulations that, among other things, govern the documentation and
verifications necessary to change a consumer's long distance carrier, limit the
use of "800" numbers, require certain disclosures regarding operator services,
limit foreign ownership and control, and require prior approval of transfers of
control. The Company began providing operator services in the U.S. in May 1994.
The FCC requires the filing of informational tariffs concerning such services
and requires both written and verbal identification of the operator service
provider on each call processed.
To date, the FCC has only exercised its regulatory authority to supervise
closely the rates of dominant carriers. However, the FCC has increasingly
relaxed its control in this area. As an example, the FCC is considering
repricing local transport charges (the fee for the use of the LECs' transmission
facilities
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connecting the LECs' central offices and the interexchange carrier's access
point). In addition, the LECs have been afforded a degree of pricing flexibility
in setting access charges where adequate competition exists, and the FCC is
considering certain proposals to relax further LEC access regulation. The impact
of such repricing and pricing flexibility on facilities-based interexchange
carriers, such as the Company, cannot be determined at this time.
The Telecommunications Act of 1996 (signed into law on February 8, 1996)
permits the RBOCs to immediately provide interLATA interexchange (long distance)
services outside their local exchange region. Moreover, the Act allows the RBOCs
to provide long distance services in-region with FCC approval after the FCC has
consulted with the Department of Justice and determines that such market entry
is consistent with the public interest, convenience, and necessity. In order
for a RBOC to provide in-region interLATA interexchange service, it must also
demonstrate that it has a facilities-based competitor and that it has complied
with a 14-point competitive checklist as determined by the Commission. As a
result, the Company will undoubtedly face increased competition from the RBOCs.
This new law attempts to guard against anticompetitive conduct that could result
from an RBOC having access to all customers on its existing networks as well as
its ability to cross-subsidize its services and discriminate in its favor
against its competitors.
The FCC has determined that call-back services using uncompleted call
signaling violates neither United States domestic nor international law. Call-
back services involve calls originating in a foreign country directed in such a
manner as to give the foreign caller the advantage of the lower charges for
outbound United States calls. However, United States call-back providers are
not authorized to provide service to customers in countries that expressly have
declared such call-back services to be illegal. The FCC will receive
documentation from any government that seeks to place United States carriers on
notice that call-back services using uncompleted call signaling has been
expressly declared illegal in its country. Currently, the Company does not
itself provide call-back services and it does not provide services to resellers
and other carriers that do provide such call-back services.
The microwave and satellite communications licenses held by the Company are
subject to FCC regulations. Such licenses were granted for fixed terms with an
option to renew. The majority of these licenses expire within six years and the
remainder will expire within ten years. The Company intends to seek renewal of
its licenses and anticipates that they will be renewed in the ordinary course.
Failure to obtain renewal of its licenses could have a material adverse effect
on the Company.
Except with respect to transit agreements, authorizations held under
Section 214 of the Communications Act (such as those held by the Company) for
international services are limited to providing services or using facilities
between the United States and countries specified in the authorizations. The
Company holds all necessary Section 214 authorizations for conducting its
present business, but may need additional authority in the future.
Additionally, carriers may not lease lines between the United States and an
international point for the purpose of offering switched services without first
determining that the foreign country affords opportunities to United States
carriers equivalent to those available under United States law.
The FCC also has promulgated certain rules governing the offering of
international switched telecommunications services. Such calls typically
involve a bilateral, correspondent relationship between a carrier in the United
States and a carrier in the foreign country. Until recently, the United States
was one of a few countries to allow multiple carriers to handle international
calls; almost all foreign countries authorized only a single carrier, often a
state owned monopoly, to provide telecommunications services. In light of the
disparate bargaining positions of the United Stated carriers, the FCC imposed
certain requirements to try to minimize the opportunities that dominant foreign
telecommunications providers would have to counterpoise one United States
carrier against another. These policies include the International
20
<PAGE>
Settlement Policy, which requires that rates of all carriers be uniform on
parallel routes and that traffic received by a United States carrier from a
foreign carrier must be proportional to the traffic the United States carrier
terminates to a foreign carrier. The Company currently has no agreements with
foreign carriers providing for the handling of switched calls.
On August 8, 1997 the FCC adopted an order reducing the settlement rates
paid between foreign and domestic carriers for termination of international
calls. Although the details of the order are not yet public, it is intended to
reduce the cost of international calls. This decision could have a substantial
effect on the Company's revenues, but it is impossible to guess the exact nature
of that effect until the order is actually implemented.
For more than six years, the FCC has been considering the implementation of
a system whereby a caller could make a long distance call from any publicly
available telephone and have the call automatically routed over the long
distance telephone network of the caller's choice. The concept, called Billed
Party Preference ("BPP"), would necessitate that each local telephone company
have access to a data base that could match every U.S. calling card and
telephone number to a preferred long distance company and be able to route each
long distance call accordingly. Implementation of BPP or a similar system could
potentially have a major impact on U.S. operator services companies such as
ATSI-Canada that depend on telephones presubscribed, or routed, directly to
their network. Although the FCC continues to consider the adoption of BPP, it
is not likely to be operational in the near term. Moreover, less than 25% of
the Company's revenues were generated from such calls during the year ended July
31, 1996, and this percentage is expected to decease in the future as the volume
of international calls continues to increase. The Company cannot predict when
and if any final ruling will be issued by the FCC relating to BPP, but the
Company does not expect any ruling on BPP to be implemented in the near future.
See "Notes to Consolidated Financial Statements--Note 18."
STATE.
The intrastate, long distance telecommunications operations of the Company
are also subject to various state laws, regulations, rules, and policies.
Currently, the Company is certified and tariffed to provide service in 23
states. Additionally, the Company provides service in certain states that do
not require certification or registration of any type. Many state regulatory
bodies, however, require the filing of informational tariffs concerning operator
services and require written and/or verbal identification of the operator
service provider on each call processed. The Company is currently in the
process of making the appropriate filings for these informational tariffs in
order to maintain compliance with these jurisdictional requirements.
Ultimately, the Company intends to obtain authorization in all states that
require certification or registration. The vast majority of states require the
Company to apply for certification to provide telecommunications services before
commencing intrastate service and to file and maintain detailed tariffs listing
the rates for intrastate service. Many states also impose various reporting
requirements and require prior approval for all transfers of control of
certified carriers, assignments of carrier assets, carrier stock offerings, and
the incurrence by carriers of certain debt obligations. In some states, prior
regulatory approval may be required for acquisitions of telecommunications
operations.
FOREIGN.
On June 7, 1995, the SCT, the entity responsible for governing
telecommunications services in Mexico, wrote into law the method by which
companies could apply for concessions and licenses to establish and operate
telecommunications services businesses in Mexico. This was, effectively, the
first step in the deregulation of the telephone industry in Mexico. The SCT
also formalized the methods by which companies such as ATSI-Canada may compete
against Telmex, the privately owned telecommunications
21
<PAGE>
monopoly in Mexico. ATSI-Mexico has applied for several licenses to provide
various telecommunications services in Mexico. ATSI-Mexico received certain of
such concessions and licenses during fiscal 1997, and believes that the receipt
of such concessions and licenses will enable the Company to expand its call
services in Mexico.
The Company provides international services by either reselling the
services of other carriers or by entering into direct operating or transit
agreements with PTTs. Generally, PTTs are state-owned and operated monopolies.
Although the services currently provided by the Company are not directly subject
to the laws of other countries, the foreign carriers with whom the Company
conducts business are subject to those laws. Consequently, any changes to the
laws of a country served by the Company could have a material adverse effect on
the Company.
EMPLOYEES
At September 30, 1997, the Company (excluding Computel) had 120 full-time
employees, of whom 13 are operators, 23 are sales and marketing personnel and 84
perform administrative functions, and 27 part-time employees, 26 of whom are
operators. Of the foregoing, 55 were employed by ATSI-Mexico. The Company
believes its future success will depend on its continued ability to attract and
retain highly skilled and qualified employees. The Company considers its
employee relations to be good. None of the Company's employees is represented by
unions.
At September 30, 1997, Computel had 437 full-time employees and 13 part-
time employees.
RISK FACTORS
In addition to the matters set forth in the foregoing discussion of the
Company's business, the operations and financial performance of the Company are
subject to the risks described below.
RISKS RELATING TO OWNERSHIP OF COMPANY SECURITIES
ISSUANCE OF ADDITIONAL SHARES. The Company currently has outstanding
warrants to purchase 14,459,942 shares of Common Stock and options to purchase
4,383,000 shares of Common Stock at a weighted average price of $0.58 per share.
In view of the Company's potential continuing cash needs for working capital and
capital expenditures, it may be necessary to sell additional debt or equity
securities. The sale of additional equity or convertible debt securities and the
exercise of warrants or options will result in dilution to the Company's
shareholders and could adversely affect the prevailing market price of the
Common Stock.
NO DIVIDENDS. The Company intends to retain any future earnings for use in
its business and does not anticipate paying any dividends on its Common Stock in
the near future. See "Market Price of and Dividends on the Registrant's Common
Equity and Related Stockholder Matters."
ABSENCE OF EFFICIENT PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE.
The Company's Common Stock is currently traded on the Canadian Dealing Network.
The Canadian Dealing Network may not provide for an active public market for the
Common Stock and there can be no assurance that an active trading market for the
Common Stock will develop or, if developed, that it will be sustained. The
market price of the shares of Common Stock could be subject to significant
fluctuations in response to variations in results of operations and other
factors. Developments affecting the telecommunications industry generally,
including national and international economic conditions and government
regulations, could also have a significant impact on the market for the
Company's Common Stock.
SECONDARY TRADING OF COMMON STOCK. The Company currently intends to take
all reasonable action to permit secondary trading in the United States (on the
NASDAQ Electronic Bulletin Board or, upon application and subject to meeting the
requisite criteria, the NASDAQ SmallCap Market) of the Common Stock registered
pursuant to this Registration Statement; however, there can be no assurance that
secondary trading of the Company's Common Stock registered hereby will ever be
permitted in all states or any state of the United States.
RISKS RELATING TO THE COMPANY
LIMITED OPERATING HISTORY; HISTORY OF LOSSES; NEED FOR CAPITAL; REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS. The Company has a limited operating history, has
incurred significant losses from operations since its inception and has had
working capital deficits in the past. In addition, the Company had negative cash
flows from operations during fiscal 1994, 1995, 1996 and 1997. Since its
formation, the Company has financed its operations almost exclusively through
private sales of securities. There can be no assurance that the Company will
ever attain profitable operations or will be able to generate future revenue
levels to support operations or recover its investment in property and
equipment. Financing from private sources could continue to be required to fund
the Company's capital commitments and operations and is likely to continue to be
required to fund the Company's expansion. These matters raise substantial doubt
about the Company's ability to continue as a going concern. The ability of the
Company to continue as a going concern is dependent upon the ongoing support of
its stockholders and customers and could continue to be dependent upon its
ability to obtain financing from private sources. There can be no assurance that
additional capital will be available to the Company from any source or that, if
available, it will be on terms acceptable to the Company. The unavailability of
capital could materially and adversely affect the Company's ability to implement
development plans for its operations and could result in the Company's inability
to continue as a going concern. The independent public accountant's report on
the Company's consolidated financial statements appearing elsewhere in this
Registration Statement on Form 10 contains an explanatory paragraph regarding
the Company's ability to continue as a going concern. See Report of Independent
Public Accountants contained in, and Note 2 to, the Financial Statements
appearing elsewhere in this Registration Statement on Form 10. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
22
<PAGE>
FAILURE TO ACHIEVE ANTICIPATED GROWTH. Although the Company believes that
its infrastructure relative to long distance call services and network
management services is relatively complete and capable of handling substantial
amounts of traffic, the Company's business development plans are currently in
the initial stages. The Company believes that the markets it serves with
respect to long distance call services and network management services have the
potential to grow significantly in the future. Accordingly, the Company expects
that the volume of international long distance calls handled and volume
utilization relative to its network management services will increase as its
development plans are implemented. There can be no assurance such market growth
will occur and, due to its limited liquidity and capital resources and other
matters affecting operations, there can be no assurance that such volume
increases will be realized and, if so, when.
COMPETITION. The telecommunications industry is intensely competitive.
Many of the Company's existing competitors have far more financial, marketing
and other resources and experience than the Company. In addition, new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. There can be no assurance that the Company will be
able to compete successfully with existing or new competitors or that
competitive pressures faced by the Company will not materially and adversely
affect its business, results of operations or financial condition. For a more
detailed discussion regarding competition, see "Business--Competition."
RELIANCE ON KEY PERSONNEL. The Company's success depends to a significant
extent on a small number of key technical and managerial personnel, the loss of
any one of which could have a material adverse effect on the Company's
operations. The Company believes that its future success will also depend in
part upon its ability to attract and retain highly skilled technical and
managerial personnel. Competition for such personnel is intense. On May 10,
1994, the Company purchased a $500,000 life insurance policy on Arthur L. Smith,
naming the Company as beneficiary. There can be no assurance that the Company
will be successful in attracting and retaining the personnel it requires to grow
and attain profitability.
POSSIBLE UNAVAILABILITY OF LEASED TRANSMISSION FACILITIES. The Company
believes it has ample access to leased transmission facilities at cost-effective
rates and expects to continue to have such access in the foreseeable future
because technological improvements in recent years have increased the capacity
of existing digital fiber optic and satellite-based transmission facilities.
There can be no assurance, however, that such leased facilities will be
available to the Company at cost-effective rates in the future.
RISK OF DAMAGE, LOSS OR MALFUNCTION OF SATELLITE. The loss, damage or
destruction of any of the Solidaridad satellites as a result of military actions
or acts of war, anti-satellite devices, electrostatic storm or collision with
space debris, or a temporary or permanent malfunction of any of the Solidaridad
satellites, would likely result in a short-term interruption of service which
could adversely affect the Company's operations, and possibly materially. The
Company believes that suitable arrangements could be obtained with other
satellite operators to provide satellite transmission capacity, although there
can be no assurance that the interruption of service would not have a materially
adverse effect on the Company's operations.
TECHNOLOGICAL CHANGE AND NEW SERVICES. The telecommunications industry has
been characterized by steady technological change, frequent new service
introductions and evolving industry standards. The Company believes that its
future success will depend on its ability to anticipate such changes and to
offer on a timely basis market responsive services that meet these evolving
industry standards. The Company has constructed its San Antonio, Texas network
control center/teleport using state-of-the-art digital satellite communications
equipment, and built the network operating system modularly to enable it to
expand telecommunications capacity quickly, on an as-needed basis. However,
there can be no assurance that the Company will have sufficient resources to
make the investments necessary to acquire new technology or to introduce new
services that would satisfy an expanded range of customer needs.
23
<PAGE>
SERVICE INTERRUPTIONS; EQUIPMENT FAILURES. The Company's business requires
that transmission and switching facilities and other equipment be operational 24
hours per day, 365 days per year. Long distance telephone companies such as the
Company on occasion may experience temporary service interruptions or equipment
failures, in some cases resulting from causes beyond their control. Any such
event experienced by the Company would impair the Company's ability to service
its customers and could have a material adverse effect on the Company's
operations. The Company's Control Center is, however, protected through an
uninterruptable power supply system which, upon commercial power failure,
utilizes battery back-up until an on-site generator is automatically triggered
to supply power.
INCREASED EXPENDITURES FOR ANTICIPATED EXPANSION. To facilitate and
support the growth anticipated in its business, the Company anticipates that it
will be required to spend increased amounts on personnel, equipment and
facilities. There can be no assurance that the Company will have sufficient
funds to support any such growth or expansion, which could adversely affect the
Company's operations.
CUSTOMER ATTRITION. The Company believes that a certain level of customer
attrition is common in the long distance call services industry. Although the
Company has not experienced significant attrition in its various businesses, the
Company's historical levels of customer attrition may not be indicative of
future attrition levels, and there can be no assurance that any steps taken by
the Company to counter increased customer attrition would accomplish the
Company's objectives. In addition, recent acquisitions and consolidations in
the telecommunications industry have resulted in, and may in the future result
in, the loss of customers by the Company because of the acquisition of these
customers by large companies that have existing contractual relationships with
the Company's competitors.
RISKS OF LATIN AMERICAN OPERATIONS
GENERAL. The majority of the Company's international operations are
currently being conducted in Mexico. As a result, such operations are subject
to political, economic and other uncertainties, including, among others, risk of
war, revolution, expropriation, renegotiation or modification of existing
contracts, communications regulations, standards and tariffs, taxation policies,
licensing requirements, as well as international monetary fluctuations which may
make payment in U.S. dollars more expensive for foreign customers and other
uncertainties and trade barriers. Consequently, the Company may encounter
unforeseen difficulties in conducting operations in Mexico, including but not
limited to the risks set forth below. The Company also conducts limited
operations in other countries within Latin America and, as the Company expands
further in these and other Latin American markets, all of the foregoing factors
and risks set forth below could also apply to a greater or lesser extent to
operations conducted by the Company in such other countries.
CHANGES IN EXCHANGE RATES. The Company's international operations will
subject it to various government regulations, export controls, and the normal
risks involved in international operations and sales. Substantially all of the
Company's revenue to date has been received in US dollars; however, ATSI-Mexico
conducts some limited business in Mexican pesos. Any decline in the value of
the Mexican peso against the US dollar will have the effect of decreasing the
Company's earnings when stated in US dollars. The Company currently does not
engage in any hedging transactions that might have the effect of minimizing the
consequences of currency fluctuations (which are presently immaterial) and does
not intend to do so in the immediate future.
LEGAL FRAMEWORK GOVERNING COMMUNICATIONS OPERATIONS. Since its inception,
the Company's near-term strategy has been to position itself to take advantage
of the deregulation of the Mexican telecommunications industry. In 1990, the
Mexican government established August 10, 1996 as the date on which Telmex would
lose its status as the only legal provider of long distance services within
Mexico.
24
<PAGE>
Company management believed, and continues to believe, that significant
opportunities to provide call services within Mexico and between Mexico and
other countries will arise with the demonopolization of Telmex. Until June 1995,
the Company and its competitors operated in an environment within Mexico which
had few, if any, government regulations that addressed what services could
legally be provided, and who could provide such services. However, in June 1995
the SCT, the Mexican governmental agency charged with oversight of the Mexican
telecommunications industry, wrote into law the methods by which companies could
apply for concessions and licenses to establish and operate telecommunications
services businesses within Mexico. This law was effectively the first step in
establishing the framework under which companies could compete against Telmex.
The Company believes that the entrance of newly-concessioned carriers into the
Mexican long distance market will provide for a more competitive
telecommunications market within Mexico, and will lower the cost of doing
business within Mexico for call service providers such as the Company. ASTI-
Mexico has applied for and obtained certain licenses, which the Company believes
will enable it to expand the scope of services that it currently provides in
Mexico. However, there can be no assurance that the deregulation of the Mexican
telephone industry will continue and, if so, that such deregulation will occur
to an extent that will provide the Company with sustained lower costs or
opportunities to provide additional call services within Mexico and between
Mexico and other countries, nor can there be any assurance that the licenses
obtained by ATSI-Mexico will enable the Company to expand operations within
Mexico. If future regulations promulgated by the SCT are unfavorable to the
Company's business, the Company could be materially adversely affected.
CHANGES IN LAWS. Changes in laws applicable to the Company's business,
including income tax laws, communications laws, foreign investment laws and
currency exchange laws could materially adversely affect the Company's
operations. Recently, certain changes in some laws have been implemented which
the Company believes will improve its operations and enable it to expand its
business, particularly in Mexico. There can be no assurance, however, that
subsequent changes in such laws will not have a material adverse effect on the
Company.
POLITICAL INSTABILITY. The political and economic instability in Mexico
and other countries in Latin America could result in the adoption of new
policies, lead to trade disputes or impede the access of the Company to sources
of financing for its operations in the future, any of which could materially
adversely affect the Company. The Company has no insurance against political
instability.
UNCERTAIN OPERATING CONDITIONS. The Company believes that, through its own
resources and those of potential joint venture partners and available
independent contractors, it will have adequate access to the equipment,
personnel, communications service organizations and technical expertise
necessary to conduct future operations in Mexico and other countries in Latin
America. However, if any of the Company's understandings or assumptions change
or prove inaccurate, the Company's operations could be materially adversely
affected.
ITEM 2. FINANCIAL INFORMATION.
A. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below for the period from
inception (December 17, 1993) to July 31, 1994 and the years ended July 31,
1995, 1996 and 1997 have been derived from the Company's consolidated financial
statements appearing elsewhere in this Registration Statement on Form 10.
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<PAGE>
The independent accountant's report on the Company's consolidated financial
statements appearing elsewhere in this Registration Statement on Form 10
contains an explanatory paragraph regarding the Company's ability to continue as
a going concern. See Report of Independent Public Accountants contained in, and
Note 2 to, the Financial Statements appearing elsewhere in this Registration
Statement on Form 10. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" and
"Business - Risk Factors." The selected consolidated financial data presented
below should be read in conjunction with the Company's consolidated financial
statements included elsewhere in this Registration Statement on Form 10, the
notes thereto and the information set forth under the headings "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." The Company's consolidated financial statements have been prepared
on the accrual basis of accounting in conformity with U.S. GAAP. The following
data is presented in U.S. dollars.
<TABLE>
<CAPTION>
Period from
Dec. 17, 1993 Years ended July 31,
through -------------------
July 31, 1994* 1995 1996 1997
-------------- ------- ------- --------
(In thousands of $, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
<S> <C> <C> <C> <C>
Operating revenues:
Long distance services...................... $ 110 $ 4,470 $10,807 $ 13,966
Network management services................. 132 318 2,668 2,262
------ ------- ------- --------
Total operating revenues.................. 242 4,788 13,475 16,228
------ ------- ------- --------
Operating expenses:
Cost of services............................. 201 4,061 10,833 12,792
Selling, general and administrative.......... 373 2,536 4,430 7,047
Depreciation and amortization................ 11 141 281 591
------ ------- ------- --------
Total operating expenses.................. 585 6,738 15,544 20,430
------ ------- ------- --------
Loss from operations........................... (343) (1,950) (2,069) (4,202)
------ ------- ------- --------
Net loss....................................... $ (343) $(2,004) $(2,205) (4,695)
====== ======= ======= ========
Per share information:
Net loss..................................... $(0.04) $ (0.14) $ (0.11) $ (0.18)
====== ======= ======= ========
Weighted average common shares outstanding..... 9,146 13,922 19,928 26,807
</TABLE>
<TABLE>
<CAPTION>
July 31, 1994 July 31, 1995 July 31, 1996 July 31, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)......................... $ 114 $ (446) $(592) $ 195
Current assets.................................... 344 1,088 1,789 5,989
Total assets...................................... 1,049 2,766 4,348 15,821
Long-term obligations, including current
portion....................................... 0 133 604 3,912
Total stockholders' equity........................ 819 1,231 1,629 6,936
- ----------------
</TABLE>
* Represents the period from the date of organization of Latcomm
International Inc., an Alberta, Canada corporation ("Latcomm"), which
amalgamated with Willingdon Resources Ltd., an Ontario, Canada corporation
("Willingdon"), in May 1994 (the "Amalgamation") to form American
TeleSource International Inc., through July 31, 1994, the date of the
Company's fiscal year end. The Amalgamation was accounted for as a
recapitalization of Latcomm, and, with the exception of an approximately
$55,000 liability of Willingdon (see Note 1 to the Financial Statements
appearing elsewhere in this Registration Statement on Form 10), the
financial data utilized for the period from Dec. 17, 1993 until the
Amalgamation were derived solely from Latcomm's financial statements.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Registration Statement on Form 10. The Company's historical financial statements
have been prepared on an accrual basis in accordance with U.S. GAAP, and the
financial information utilized in the following discussion and analysis is
presented in U.S. dollars.
OVERVIEW
Upon its inception in December 1993, the Company's near-term strategy was
to position itself to take advantage of business opportunities that it felt
would arise with the deregulation of the telecommunications industry within the
countries of Latin America. Because most of the Latin American countries were
served by telecommunications monopolies, the Company's management felt that such
markets were under served. Given the fact that many Latin American countries
had already scheduled the demonopolization of their telecommunications
providers, the Company believed that opportunities would become available to
provide those markets with U.S. standards of products and services in the near
future.
The Company focused the majority of its initial efforts within Mexico. The
scheduled demonopolization of Telmex, the telecommunications monopoly within
Mexico, was written into law in 1990. By law, Telmex was officially scheduled
to lose its status as a monopoly on August 10, 1996. The Company assembled a
primarily bilingual, bicultural workforce which had telecommunications
experience in order to build a customer base within Mexico prior to August 10,
1996, so that the Company could take maximum advantage of the opportunities it
felt would arise with the demonopolization of Telmex.
The Company began providing international telecommunications networks for
voice, data, fax and video transmission ("network management services") via
satellite between the United States and Mexico in April 1994, and began
providing international call services ("call services") from Mexico to the
United States in May 1994. Network management services consist of retail-priced
communication networks typically provided to large corporate customers needing a
reliable form of communications between facilities in the United States and
Mexico. These networks are provided utilizing the Company's Switching/Operator
Facility. The Company provides fiber optic integration into U.S.-based private
and public telecommunications networks from the customer's premises in Mexico
via the San Antonio, Texas Switching/Operator Facility. The Company considers
itself to be the owner of that portion of the network from the customer's
premise to the point at which the signal is integrated into a third party's
network in the United States. Network management services typically produce
less revenue than call services, but at relatively higher margins.
The Company has historically provided call services primarily to U.S.
citizens traveling in Mexico who desire a convenient method of placing and
billing a call to the United States while within Mexico. These services are
provided utilizing the Company's Switching/Operator Facility. The calls are
primarily generated from "Charge-a-Call" phones owned by the Company and placed
in major tourist or resort areas of Mexico. By simply lifting the handset on
such a phone, a tourist automatically accesses one of the Company's operators in
San Antonio, who assists the caller in placing the call. Call services typically
generate higher revenues as compared to network management services, but at
relatively lower margins. The Company's management believed (and still believes)
that, as the regulatory environment continued (and continues) to evolve in
Mexico and other Latin American countries, the Company would eventually be able
to utilize its satellite-based network infrastructure to carry its own
international long distance call services at a substantial cost savings as
compared to its competitors.
The Company has also historically provided call services domestically
within the United States, but has
27
<PAGE>
done so only on a demand basis. The Company does not maintain a direct sales
force for domestic calling within the United States. In June 1995, the Company
began providing call services to Brazilians traveling within the United States
desiring a convenient method of placing and billing a call to Brazil. In October
1995, the Company began providing international call services from within
Jamaica. In July 1997, the Company began providing services to and from Costa
Rica.
Utilizing a small direct sales force and independent marketing
representatives, the Company increased monthly revenue from approximately
$17,000 during April 1994 to approximately $1.1 million in July 1996, the month
before Telmex officially lost its status as a monopoly. The majority of this
growth came from the provision of call services domestically within the United
States and internationally from within Mexico, which together represented 80% of
total revenue for fiscal 1996. Revenue from call services originating in Mexico
accounted for 63% of total call services revenue for fiscal 1996, in spite of
the fact that the Company operated in a noncompetitive environment prior to the
demonopolization of Telmex. These revenues were produced almost exclusively
from approximately 400 Charge-a-Call phones owned by the Company and installed
in resort cities of Mexico.
One of the primary costs associated with providing international call
services from Mexico to the United States is the cost of transporting the call
from its point of origin in Mexico to the Company's Switching/Operator Facility.
Although the Company contracted with major U.S. carriers to provide this
service, Telmex did not have a legal obligation to allow those carriers to
provide such services prior to August 10, 1996, and on occasion refused to do
so. When it did allow such services to be provided, Telmex based its rates to
the carriers on retail prices charged to consumers in Mexico. Telmex had the
ability to raise these rates, and did so frequently. As a result, from
inception through August 10, 1996 the Company experienced high, unstable and
often increasing costs in connection with its international long distance
traffic. During fiscal 1996, the Company paid as much as $1.60 per minute to
transport calls from Mexico to its Switching/Operator Facility.
Subsequent to August 10, 1996, at least twelve different carriers received
concessions from the Mexican government to compete against Telmex. The result
was a newly formed, competitive telecommunications market within Mexico. In
order to reduce its dependency on Telmex, increase the reliability of its
services, and to reduce the costs of providing international calls from within
Mexico, the Company began negotiations with the newly concessioned carriers. In
November 1996, the Company signed an interconnection agreement with Investcom,
one of the newly concessioned carriers. This agreement calls for a maximum per
minute price to carry calls from Mexico to San Antonio, Texas of $0.48 per
minute, and provides for further discounts based on increasing call volumes.
However, Investcom did not possess the switch capacity in Mexico to process the
Company's long distance traffic until May 1997. As a result, the Company did
not begin processing any of its traffic at the lower per minute cost until that
date. Prior to May 1997, the Company's international call services from within
Mexico were still dependent upon Telmex.
In April 1996, GlobalSCAPE, Inc. ("GlobalSCAPE") was formed as a wholly-
owned subsidiary of ATSI-Texas. Based in San Antonio, Texas, GlobalSCAPE was
formed for the purpose of implementing Internet related strategies which may, or
may not, be complimentary to the Company's core business of telecommunications.
Since inception, GlobalSCAPE's revenues, primarily attributable to sales of
Internet productivity tools (such as CuteFTP, a copyrighted file transfer
protocol software which GlobalSCAPE has an exclusive license to sell and
distribute), have been insignificant. Although GlobalSCAPE assists the Company
with maintenance of its Web page and other Internet related activities, it is
the Company's present intention that GlobalSCAPE operate autonomously,
generating substantially all funds for its development and expansion internally
from its own operations or externally from independent third parties.
In May 1997, the Company purchased 55% of the outstanding shares of
Computel. See "Business--Services-Casetas." In late August 1997, the Company
purchased the remaining 45% of Computel's outstanding shares. The purchase price
for 100% of the shares of Computel was $3.6 million consisting of 2,715,545
shares of Company Common Stock, $1.1 million in cash, and the forgiveness of a
note receivable evidencing an obligation owed by Computel to the Company in the
amount of approximately $700,000. As the Company acquired majority ownership
effective May 1, 1997, the Company recorded 100% of the net assets and
liabilities of Computel as of that date. The Company's consolidated financial
statements for the period from May 1, 1997 to July 31, 1997 include the impact
of the 45% minority ownership interest.
28
<PAGE>
The Company's consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
losses since inception. Additionally, the Company has had recurring negative
cash flows from operations. The foregoing factors raise substantial doubt about
the Company's ability to continue as a going concern. For the reasons stated in
Liquidity and Capital Resources and subject to the risks referred to in
Liquidity and Capital Resources and elsewhere in this Registration Statement on
Form 10, the Company expects improved results of operations and liquidity in
fiscal 1998. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and "Business--Risk
Factors--Limited Operating History; History of Losses; Need for Capital; Report
of Independent Public Accountants."
RESULTS OF OPERATIONS
The following table sets forth the Company's results of operations in
dollar amounts and as a percentage of total revenues for the years ended July
31, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
Year Ended July 31,
----------------------------------------------------------
1995 1996 1997
----------------------------------------------------------
$ % $ % $ %
--------------- -------------- -------------
(In thousands of $)
<S> <C> <C> <C> <C> <C> <C>
Call services $ 4,470 93% $ 10,807 80% $13,996 86%
Network management
services 318 7% 2,668 20% 2,262 14%
-------- --------- ---------
Total operating revenues 4,788 100% 13,475 100% 16,228 100%
Cost of services 4,061 85% 10,833 80% 12,792 79%
Selling, general &
administrative 2,536 53% 4,430 33% 7,047 43%
Depreciation and
amortization 141 3% 281 2% 591 4%
-------- --------- ---------
Operating loss (1,950) (41%) (2,069) (15%) (4,202) (26%)
Minority interest - - - - (48) -
-------- --------- ---------
Other income (expense) (54) (1%) (136) (1%) (445) (3%)
-------- --------- ---------
Net loss ($2,004) (42%) ($2,205) (16%) (4,695) (29%)
======== ========= =========
</TABLE>
29
<PAGE>
Year Ended July 31, 1997 Compared to Year Ended July 31, 1996
Operating Revenues. Operating revenues increased approximately $2.8
million, or 20%, due mainly to increased revenues from call services.
Approximately $1.4 million of revenues in fiscal 1996 were attributable to the
sale and installation of a large network in Mexico to one of Mexico's largest
milk producers. Subsequent to completing the sale and installation of the
network, the Company began recognizing monthly revenues from the management of
the network. The sale and installation of such a large network is not considered
to be of a recurring nature by the Company; however, management of this and
other networks is considered to be a recurring source of revenues for the
Company. GlobalSCAPE had revenues of $500,000 in fiscal 1997, representing less
than 4% of the Company's consolidated revenues.
Operating revenues from call services increased 29%, or approximately $3.2
million, due primarily to increased call volumes from international call
services provided from hotels and resorts in Jamaica, increased call volumes
attributable to the Company's Brazilian calling card product, and the inclusion
of Computel's revenues attributable to call services provided by Computel during
the last quarter of fiscal 1997 (which represented approximately $1.4 million of
consolidated revenues in fiscal 1997). Revenues from international calls
originating in Mexico increased 5%, while call volumes and related revenues from
calls originating and terminating domestically within the U.S. remained
relatively constant between periods. Although the Company continued to install
Charge-a-Call telephones in Mexico throughout fiscal 1997, the number of calls
per phone decreased slightly. The Company believes this is due to increasing
costs to the consumer. The Company began to lower the price per call to the
consumer from certain telephones in the first quarter of fiscal 1998 based on
the decrease in the Company's cost of providing these calls through its
agreement with Investcom, and believes that it will be able to generate a higher
volume of calls per phone by doing so. However, there can be no assurance that
it will be able to do so. The increased volume of calls relating to Jamaica and
Brazil increased the number of international calls processed by the Company as
compared to domestic calls processed entirely within the United States. Because
international calls typically generate higher revenues on a per call basis than
domestic calls, the average revenue per completed call processed by the Company
increased from $14.93 for fiscal 1996 to $17.88 for fiscal 1997.
30
<PAGE>
Excluding the $1.4 million of revenues recognized in fiscal 1996,
attributable to the sale and installation of the network to the Mexican milk
producer, revenues from network management services increased approximately
$596,000, or 67%. This increase was largely due to recurring revenues from the
Mexican milk producer and Investcom commencing in the early and latter part,
respectively, of fiscal 1997.
Cost of Services. Cost of services increased approximately $2.0 million,
or 18%, resulting in an increase in the Company's overall gross margin from 20%
in fiscal 1996 to 21% in fiscal 1997. If the approximately $1.4 million in
revenues and the $960,000 in costs related to the sale and installation of the
network to the Mexican milk producer were excluded from the Company's results
for fiscal 1996, the Company's gross profit percentage would have been 18% for
fiscal 1996.
The increase in cost of services was primarily attributable to the
increased volume of calls handled by the Company from Jamaica to the U.S. and
from the U.S. to Brazil, the inclusion of Computel's cost of services for
the last quarter of fiscal 1997, and rising costs associated with transporting
calls from Mexico to the Company's Switching/Operator Facility in San Antonio,
Texas. Although Telmex officially lost its status as a monopoly on August 10,
1996, Investcom was not allowed connectivity to Telmex's local network in Mexico
until January 1997 and did not have the switch capacity in Mexico to process the
Company's traffic until May 1997. As a result, the Company was unable to
commence processing any of its traffic at lower per-minute costs until May 1997.
Subsequent to May 1997, the public phones serviced by the Company in Mexico were
frequently only able to access the Company's operator center utilizing a
cellular connection since local connectivity had not yet been provided by
Telmex. This added a per-minute air time charge to the Company's cost of
transmitting calls from Mexico, resulting in a decline in the gross profit
margin on international calls transmitted from the Company's public phones in
Mexico.
The Company expects its gross profit margin to improve (a) as it begins to
process more of its calls through Investcom; (b) as Telmex begins supplying
local connectivity for the Company's public phones in Mexico thereby eliminating
the need for cellular connection and the associated per-minute charges; (c) due
to operating efficiencies anticipated to be obtained as a result of its
acquisition of Computel (see "Business--Services-Casetas"); and (d) due to its
anticipated ability to reduce commission costs paid to independent marketing
representatives as a result of steps it has taken to obtain more business in
Mexico directly instead of through independent marketing representatives.
Selling, General and Administrative ("SG&A"). SG&A expenses rose 58%, or
approximately $2.6 million. If the revenues related to the sale and installation
of the network to the Mexican milk producer in fiscal 1996 were excluded, SG&A
expenses would have increased as a percentage of overall revenues from 37% to
43%. The increase in SG&A expense is almost entirely due to expanded operations
within Mexico and the inclusion of Computel's SG&A expense for the last quarter
of fiscal 1997. ATSI-Mexico had less than five employees at the beginning of
fiscal 1996 as compared to 36 employees at the end of fiscal 1997. Computel
operates 134 casetas in approximately 72 cities throughout Mexico, and has
approximately 430 employees. Because the Company expects the majority of its
growth in fiscal 1998 to come from the provision of call services within Mexico,
it expects SG&A expenses to continue to grow, but at a slower rate than
revenues, although there can be no assurance that such will be the case.
Depreciation and Amortization. Depreciation and amortization increased
approximately $310,000 or 110%, due primarily to approximately $2.1 million in
fixed asset additions principally for the development of the Company's teleport
facilities in San Antonio, Texas, Cancun and Mexico City, Mexico, and San Jose,
Costa Rica; the acquisition of intelligent payphones; and the inclusion
of Computel's depreciation attributable to the acquisition of Computel.
Other Income (Expense). Other income (expense) increased to a net expense
of approximately $445,000 primarily as a result of interest expense incurred on
capital lease obligations and convertible notes issued in 1997.
Year ended July 31, 1996 Compared to Year Ended July 31, 1995
Operating Revenues. Operating revenues increased approximately $8.7
million, or 181%, due largely to increased revenues from call services.
31
<PAGE>
Operating revenues attributable to call services represented approximately
$6.3 million, or 72%, of the approximate $8.7 million increase in operating
revenues. The number of operator service calls handled by the Company increased
to approximately 724,000, as compared to approximately 311,000, representing an
overall increase in call volume of 133%. The number of calls handled by the
Company which originated in Mexico and terminated in the United States and which
originated and terminated in the United States decreased slightly as a
percentage of total calls from 29% and 70%, respectively, to 26% and 66%,
respectively. These decreases were offset by growth attributable to other call
services, including call services to Brazil and from Jamaica, some of which were
offered for the first time during fiscal 1996,.
In June 1995, the Company began distributing calling cards to Visa
cardholders issued by the Bank of Brazil. These cards may be used by Brazilians
traveling outside of their native country, but primarily in the United States,
for calling within the United States or to other world-wide destinations.
Additionally, in November 1995 the Company began providing service to cellular
telephone customers of a Mexican-based cellular company with in excess of 40,000
subscribers, which service enables subscribers to access the Company's network
when traveling in the United States for the purpose of placing cellular calls
domestically within the United States or internationally to Mexico. The Company
also expanded its international operator services to locations in Jamaica in
October 1995. Collectively, the foregoing services accounted for approximately
8% of all calls handled, and 9% of all long distance operating revenue
generated, by the Company in fiscal 1996.
Due to rising retail rates charged by Telmex during the majority of fiscal
1996 in connection with the processing of calls out of Mexico, the Company
raised per minute rates charged to callers from some locations in Mexico. As a
result, the average revenue per call originating in Mexico increased from $33 to
$36.
Revenues from network management services increased $2.4 million, or 739%,
principally due to the sale and installation of two networks in Mexico and, to a
lesser extent, to services rendered under long-term maintenance contracts.
Cost of services. Cost of services increased approximately $6.8 million,
or 167%, but decreased as a percentage of operating revenues. As a result, the
Company's gross margin increased from 15% to 20%. The majority of the Company's
direct costs are variable and relate to long distance services. As a result,
costs increase as the Company processes more calls; however, as call volumes
increase the Company is able to realize certain operating efficiencies, and to
take advantage of volume discounts offered by certain carriers utilized to
transport call traffic.
Commissions paid to independent marketing representatives in Mexico, which
are based on revenues, increased significantly as a result of increased
revenues. In addition, the Company raised per minute rates at some locations in
Mexico which resulted in a higher commission cost per call. Transmission costs
are incurred on each minute of traffic carried by the Company. Although
transmission costs for transporting calls from Mexico to San Antonio varied
widely throughout fiscal 1996, the overall average transmission cost per call
paid by the Company during fiscal 1996 as compared to fiscal 1995 decreased due
to volume discounts obtained on calls regardless of their country of origin. In
addition, increased call volume resulted in a greater number of calls processed
per shift, thereby lowering the Company's operator cost per call.
In fiscal 1996, the average revenue per call increased from $14.39 to
$14.92, the average cost per call increased from $12.52 to $12.63, and the gross
margin per call increased from $1.87 to $2.29.
The Company's improved gross margin was also attributable to the sale and
installation of two networks in Mexico, which accounted for approximately 12% of
total revenues for fiscal 1996. Network management
32
<PAGE>
services typically produce a higher gross margin percentage as compared to long
distance services due to lower costs and greater efficiencies obtained through
increased service volume.
Selling, General and Administrative. SG&A expenses rose 75%, or
approximately $1.9 million; however, these expenses decreased as a percentage of
operating revenues from 53% to 33%. The increase in SG&A expenses is largely
attributable to an increase in the number of its employees and the acquisition
of equipment and additional office space.
Also contributing to the increase in SG&A expenses was the provision for
bad debts relating to the Company's long distance revenues; however, the rate at
which the Company provides for it's uncollectible long distance revenues was
decreased from 8% to approximately 6.5%. Actual historical results from the
local exchange carriers ("LECs"), which ultimately bill and collect the calls on
behalf of the Company, indicated that bad debts were being incurred at a lesser
rate than was being recorded by the Company. As a result, the rate was reduced.
Depreciation and amortization. Depreciation and amortization increased
approximately $140,000, or 99%, due to approximately $1.0 million in capital
expenditures in fiscal 1996 principally for the completion of the Company's
teleport facility in San Antonio, Texas and for telecommunications equipment
used in connection with international call services.
33
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception in December 1993, the Company has relied primarily on
private sales of debt and equity securities (often sold together with warrants
to purchase common stock) to fund its operations.
For the year ended July 31, 1997, the Company generated negative cash flow
from operations of approximately $5.5 million; however, the Company received
approximately $7.6 million in cash proceeds from private sales of debt and
equity securities and the exercise of warrants to purchase Common Stock.
Approximately $590,000 was used for the purchase of equipment and approximately
$1.5 million of fixed assets were acquired through capital lease arrangements,
including a $1.7 million financing facility with IBM de Mexico used specifically
for the acquisition and installation of intelligent payphones in Mexico. As of
July 31, 1997, approximately $957,000 had been drawn on the IBM financing
facility. The net result of the Company's consolidated cash inflows and outflows
was an improvement in working capital from a deficit of approximately $195,000
at July 31, 1996 to a positive position of approximately $520,000 at July 31,
1997. Cash on hand at July 31, 1997 was approximately $1.9 million.
Subsequent to July 31, 1997, the Company received approximately $1.1
million in cash proceeds from a private sale of equity securities and
approximately $81,000 from the exercise of warrants and options. Cash of $1.1
million was used to complete the purchase of Computel in late August 1997.
In August 1997, the Company committed to purchase approximately $1,000,000
in telecommunications equipment from a vendor. Pursuant to such commitment, the
Company is obligated to pay the total amount due within 90 days after the order
for the equipment is placed. The Company intends to finance the purchase of such
equipment with a long term lease facility. In October 1997, the Company accepted
a capital lease proposal from another company pursuant to which the Company may
enter into capital leases for the acquisition (or refinancing as to a small
portion) of up to $5 million in telecommunications related equipment to be used
in connection with anticipated expansion of the Company's business. The Company
anticipates drawing on the remaining balance available under the IBM financing
facility during October 1997 in order to install additional intelligent
payphones in Mexico in fiscal 1998.
Although the Company has shown the ability to increase revenues, it has yet
to attain profitable operations. The Company believes this is largely
attributable to its focus on the Mexican tele-communications market. An
underlying strategy of the Company since inception has been to build an
infrastructure and to secure contracts within Mexico prior to the
demonopolization of Telmex, in order to take advantage of the opportunities
anticipated to arise as a result of such demonopolization. Specifically, the
inability to attain profitable operations has largely resulted from high
commission costs in connection with the development of long distance traffic
originating in Mexico and the high cost of transmitting long distance traffic
originating in Mexico to the Company's Switching/Operator Facility, both of
which were
34
<PAGE>
principally attributable to an unfavorable regulatory environment in Mexico. The
Company is presently hiring and training a direct sales force in Mexico and
negotiating the possible acquisition of customer contracts from one of its
independent marketing representatives in order to facilitate the reduction of
commission costs paid to independent marketing representatives. The Company
anticipates that this acquisition will close during the first or second quarter
of fiscal 1998 for an approximate acquisition cost of $1.25 million to be paid
partly in cash and partly in Common Stock. There can be no assurance this
transaction will be completed. Additionally, commencing in May 1997, the per-
minute transmission cost per international call from Mexico processed under the
Company's interconnection agreement with Investcom was reduced from in excess of
$1.00 to $.48. Due to technical and other requirements necessitated by the
transition process, the number of international calls from Mexico processed
under the interconnection agreement with Investcom has been phased in during the
period from May 1997 to September 1997. At July 31, 1997, substantially all of
the Company's international calls from Mexico were being processed under the
interconnection agreement with Investcom. The Company is in negotiations with
other companies which have recently received concessions to compete with Telmex
regarding potential alternate routing for its call traffic, as well as
potentially cheaper rates. There can be no assurance that these negotiations
will be successful.
The Company believes that cash on hand, cash flows expected to be generated
by operations through the first quarter of fiscal 1998, its equipment financing
facilities, and potential exercises of warrants could be sufficient to meet its
anticipated cash needs for working capital and capital expenditures for the
first quarter of fiscal 1998, although it may be necessary to sell additional
equity or debt securities to satisfy working capital requirements. There can be
no assurance that any warrants will be exercised or that the Company will be
able to sell additional equity or debt securities. As of September 30, 1997, the
Company had approximately 14.5 million warrants outstanding (all of which were
in-the-money at September 30, 1997) which, if exercised on September 30, 1997,
would have provided approximately $9.4 million in cash proceeds. The sale of
additional equity or convertible debt securities, if any, and the exercise of
warrants will result in additional dilution to the Company's shareholders.
Based upon expected improved results in its Mexico operations, the Company
believes that cash flows expected to be generated by operations in the last
three quarters of fiscal 1998 could be sufficient to meet a substantial portion
of its anticipated cash needs during such three quarter period. The Company's
Mexico operations are expected to improve during the last three quarters of
fiscal 1998 due to anticipated reduced commission costs, resulting from the
replacement of independent marketing representatives with a direct sales force;
reduced transmission costs, resulting from the demonopolization of Telmex and
the Company's interconnection agreement with Investcom; and potential revenues
from new sources, such as the wholesale provision of services to other carriers
to and from Mexico utilizing the Company's satellite-based network
infrastructure. The foregoing statements are forward-looking statements which
are subject to certain risks and uncertainties which could cause actual results
to differ materially from those set forth, including, but not limited to,
changes in the Mexican political or economic environment; the adoption by Mexico
of new laws or regulations, or changes effected by Mexico to existing laws or
regulations affecting the communications industry generally or the Company
specifically; technology changes rendering the Company's services obsolete or
noncompetitive; increased or redirected competition efforts, targeting the
Company's services or operations, by competitors; the inability of the Company
to successfully replace its independent marketing representatives with a direct
sales force or the failure of the direct sales force to produce anticipated
results; the inability to generate new sources of revenue; and the risks and
uncertainties set forth elsewhere in this Registration Statement on Form 10.
See "Business--Risk Factors."
35
<PAGE>
Until the Company is able to generate positive cash flows from operations
or to obtain a credit facility with a financial institution, on acceptable
terms, to provide sufficient working capital to attain positive cash flows, the
Company will remain dependent upon private sales of debt and equity securities
to and/or borrowings from stockholders and others to fund its working capital
needs and cash flow deficits. There can be no assurance that the Company will
ever be able to generate positive cash flows from operations or obtain a credit
facility which would provide sufficient working capital to attain positive cash
flows or that, if the Company continues to be unable to generate positive cash
flows from operations, it will continue to be able to sell equity or debt
securities and/or obtain borrowings sufficient to fund working capital needs and
cash flow deficits. As a result, there is substantial doubt about the Company's
ability to continue as a going concern. The independent accountants report on
the Company's consolidated financial statements included elsewhere in this
Registration Statement on Form 10 contains an explanatory paragraph regarding
the Company's ability to continue as a going concern. See Report of Independent
Public Accountants contained in, and Note 2 to, the Consolidated Financial
Statements appearing elsewhere in this Registration Statement on Form 10.
INFLATION/FOREIGN CURRENCY
Inflation has not had a significant impact on the Company's operations.
With the exception of a portion of the contract entered into with the
Mexican milk producer in April 1996 and a portion of the services provided by
Computel, all of the Company's contracts to date have been denominated in, and
have called for payment in, U.S. dollars. Some expenses directly related to
certain contracts have been denominated in foreign currencies, primarily Mexican
pesos. Such expenses consist primarily of costs incurred in transmitting long
distance calls from Mexico to the Company's switching facilities in San Antonio,
Texas, and payroll and other administrative costs associated with ATSI-Mexico.
The devaluation of the Mexican peso over the past two years has not had a
material adverse effect on the Company's financial condition or operating
results. In fact, the devaluation has had certain positive effects such as
favorable conversion rates in connection with the payment of certain expenses
and stimulated tourism, which is a principal source of the Company's call
services revenues.
SEASONALITY
The Company's call services revenues are typically higher on a per phone
basis during January through July, the peak tourism months in Mexico.
36
<PAGE>
ITEM 3. PROPERTIES.
The Company's executive offices, principal teleport facility and control
center are located at its leased facility in San Antonio, Texas, consisting of
11,819 square feet. The lease expires August 2002, and has two five-year
renewal options. The Company pays annual rent of $75,287 under the lease and is
responsible for taxes and insurance. Management believes its leased facilities
are suitable and adequate for their intended use.
Computel's principal offices are located in Colina Teranova in Guadalajara,
Mexico, consisting of approximately 3,330 square feet. Computel has purchased
such premises at a price of $880,000 payable in 20 annual payments of
approximately $44,000.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 1997, by (i) each
person known by the Company to beneficially own more than 5% of such shares,
(ii) each current director of ATSI-Canada, (iii) the Named Executive Officer,
and (iv) all directors and executive officers as a group, including directors
and executive officers of ATSI-Texas.
<TABLE>
<CAPTION>
Shares
Beneficially
Name Owned(1) Percent of Class
---- ------------- -----------------
<S> <C> <C>
Arthur L. Smith(2) 2,956,949 7.92%
Murray R. Nye(3) 365,500 *
John R. Moses 100,000 *
James McCourt(4) 3,352,423 8.85
All directors and executive officers as a group
(7 persons)(5) 4,396,316 11.49
</TABLE>
- -----------------------
* Less than 1%
(1) To the knowledge of the Company, each person named in the table has sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by him. Shares of Common Stock that are not
outstanding but that may be acquired by a person upon exercise of options
or warrants within 60 are deemed outstanding for the purpose of computing
the percentage of outstanding shares beneficially owned by such person but
are not deemed outstanding for the purpose of computing the percentage of
outstanding shares beneficially owned by any other person.
(2) Includes 400,000 shares issuable upon exercise of presently exercisable
options. The address of Mr. Smith is 12500 Network Blvd., Suite 407, San
Antonio, Texas.
(3) Includes 150,000 shares issuable upon exercise of presently exercisable
options.
37
<PAGE>
(4) Includes 39,513 shares owned of record by Dr. McCourt, 2,362,910 shares
owned by DKKS, LP and 950,000 shares issuable upon exercise of presently
exercisable warrants held by DKKS, LP. As the general partner of DKKS, LP,
Dr. McCourt may be deemed to be the beneficial owner of the shares
beneficially owned by DKKS, LP. The address of Dr. McCourt and DKKS, LP is
1717 Harrison, Harlingen, Texas 78550.
(5) Includes 1,341,666 shares issuable upon exercise of presently exercisable
options.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
The following table sets forth the names, ages and positions of the
directors and executive officers of ATSI-Canada and ATSI-Texas:
<TABLE>
<CAPTION>
Name Age Position Held
---- --- -------------
<S> <C> <C>
Arthur L. Smith 33 President, Chief Operating Officer and Director of
ATSI-Canada and President, Chief Executive
Officer and Director of ATSI-Texas
Murray R. Nye 45 Chief Executive Officer and Director of ATSI-
Canada
John R. Moses 45 Director of ATSI-Canada.
H. Douglas Saathoff 35 Secretary, Treasurer and Chief Financial Officer of
ATSI-Canada and Secretary, Treasurer and Vice
President-Finance of ATSI-Texas
Craig K. Clement 39 Vice President-Corporate Development of ATSI-
Texas
Everett L. Waller 46 Senior Vice President-Operations and Technical
Services of ATSI-Texas
Charles R. Poole 53 Senior Vice President-Sales and Marketing of ATSI-
Texas
</TABLE>
Arthur L. Smith has served as President, Chief Operating Officer and a
director of ATSI-Canada since its formation in May 1994. From December 1993
until May 1994, Mr. Smith served in the same positions with Latcomm
International Inc., which company amalgamated with Willingdon Resources Ltd. to
form ATSI-Canada in May 1994. Mr. Smith has also served as President, Chief
Executive Officer and a director of ATSI-Texas since December 1993. From June
1989 to December 1993, Mr. Smith was employed by GeoComm Partners, an
international telecommunications firm, as director of international sales. Mr.
Smith has over eight years experience in the telecommunications industry.
Murray R. Nye has served as Chief Executive Officer and a director of ATSI-
Canada since its formation in May 1994. From December 1993 until May 1994, Mr.
Nye served in the same positions with Latcomm International Inc., which company
amalgamated with Willingdon Resources Ltd. to form
38
<PAGE>
ATSI-Canada in May 1994. From 1992 to 1995, Mr. Nye served as President of
Kirriemuir Oil & Gas Ltd. From 1989 until 1992, Mr. Nye was self-employed as a
consultant and Mr. Nye is again currently self-employed as a consultant. Mr. Nye
serves as a director of D.M.I. Technologies, Inc., an Alberta Stock Exchange-
traded company.
John R. Moses has served as a director of ATSI-Canada since its formation
in May 1994, and served as Secretary of ATSI-Canada from May 1994 until June
1996. Since 1982 Mr. Moses has served as President, Treasurer and a director of
Winteroad, a publicly traded Canadian company, and has been self employed as a
business consultant during the same period. Mr. Moses also served as President
of Willington Resources prior to its amalgamation with Latcomn International
Inc. to form ATSI-Canada.
H. Douglas Saathoff, C.P.A., has served as Vice President, Chief Financial
Officer and Treasurer of ATSI-Canada since February 1996, and Secretary since
June 1996. Mr. Saathoff has also served as Vice President-Finance of ATSI-Texas
since June 1994, and as Secretary and Treasurer of ATSI-Texas since October
1994. From May 1993 to May 1994, Mr. Saathoff served in the position of Chief
Accountant for Santa Rosa Healthcare Corporation, a San Antonio-based healthcare
corporation. From January 1990 to February 1993, Mr. Saathoff served as
Financial Reporting Manager for U.S. Long Distance Corp., a San Antonio-based
long distance telecommunications company. Prior to that time, Mr. Saathoff
served as an accountant with Arthur Andersen LLP for approximately five years.
Craig K. Clement has served as Vice President-Corporate Development for
ATSI-Texas since August 1994. From April 1993 to July 1994, Mr. Clement served
as Vice President of Corporate Development for LATelco, a wireless
communications company. From February 1992 until March 1993, Mr. Clement served
as Vice President of Operations for CSI Environmental, an environmental cleanup
company. From August 1983 until July 1993, Mr. Clement served as President of
Yucca Oil Company, an oil and gas exploration company. Mr. Clement served as a
director of Geocommunications, Inc., a satellite networks company, from November
1987 to November 1991. Mr. Clement also served as a director of PANACO, a
Nasdaq-traded company, from 1988 to 1993, and was a member of the compensation
committee. In July 1993, Mr. Clement became unable to satisfy the personal
guarantee made by him on the corporate bank notes of Yucca Oil Company and, as a
result, filed for relief under Chapter 7 of the Bankruptcy Code. The obligations
of Mr. Clement were discharged in the bankruptcy case.
Everett L. Waller has served as Senior Vice President-Operations and
Technical Services of ATSI-Texas since January 1997. Mr. Waller served as
Senior Vice President-Operations and Sales of ATSI-Texas from August 1993 to
January 1997. From May 1994 to August 1995, Mr. Waller served as Vice
President-Operations of ATSI-Texas. Prior to that time, Mr. Waller served as
Vice President of Technical Services of U.S. Long Distance Corp. for a period of
seven years.
Charles R. Poole has served as Senior Vice President-Sales and Marketing of
ATSI-Texas since February 1997. Mr. Poole has also served as Vice President of
ATSI-Delaware since February 1997. From February 1995 to January 1997, Mr. Poole
served as Senior Vice President for A+ Communications, a publicly traded
company, responsible for paging, cellular and telemessaging sales. From 1992 to
1994, Mr. Poole served as Division Manager, Data Documents, Inc. of Chicago,
Illinois. From 1989 to 1992, Mr. Poole served as President of GeoComm Partners,
a satellite-based telecommunications company located in San Antonio, providing
telecommunication services to Latin America. Prior to that time, Mr. Poole was
Senior Vice President of Mobilecomm, a Bell South
39
<PAGE>
company, for approximately five years. Mr. Poole has over fifteen years
experience in the telecommunications industry.
ITEM 6. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth certain
information concerning compensation earned during the Company's last three
fiscal years by the Company's Chief Executive Officer (the "Named Executive
Officer"), who represents the Company's only executive officer receiving in
excess of $100,000 in total annual salary and bonus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
($ EXCEPT AS INDICATED)
--------------------------------------------------------------------------------------
Other
Annual Restricted Securities All Other
Name and Compen- Stock Underlying LTIP Compen-
Principal Fiscal Bonus sation Award(s) Options/ Payouts sation
Position Year Salary ($) ($) ($)(1) ($) SARs(#) ($) ($)
--------- ------ --------- ----- ------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arthur L. Smith(2) 1997 91,538 - - - 800,000 - -
President and Chief 1996 96,000 - - - - - -
Operating Officer 1995 61,813 - - - - - -
</TABLE>
- ---------------
(1) Mr. Smith received personal benefits in addition to salary; however, the
Company has concluded that the aggregate amount of such personal benefits
do not exceed the lesser of $50,000 or 10% of Mr. Smith's annual salary and
bonus.
(2) Also serves as President and Chief Executive Officer of ATSI-Texas. Mr.
Smith's compensation is paid by ATSI-Texas.
EMPLOYMENT AGREEMENTS
Effective January 1, 1997, each of Messrs. Smith, Saathoff, Clement and
Waller, and effective February 4, 1997, Mr. Poole, entered into employment
agreements with ATSI-Texas, each for a period of three years (with automatic
one-year extensions) unless earlier terminated in accordance with the terms of
the respective agreements. The annual base salary under such agreements for
each of Messrs. Smith, Saathoff, Clement, Waller and Poole may not be less than
$100,000, $95,000, $92,000, $92,000 and $92,000, respectively, per annum, and is
subject to increase within the discretion of the Board. In addition, each of
Messrs. Smith, Saathoff, Clement, Waller and Poole is eligible to receive a
bonus in such amount as may be determined by the Board of Directors from time to
time. Bonuses may not exceed 50% of the executive's base salary in any fiscal
year.
40
<PAGE>
Pursuant to each of Messrs. Smith's, Saathoff's, Clement's, Waller's and
Poole's employment agreement, ATSI-Texas has agreed to various payment
obligations in the event of termination due to death, disability, without cause
or for good reason.
Each of the employment agreements also restricts each executive from
various competing and other potentially damaging activities for specified
periods of time after termination of employment.
Additionally, pursuant to and on the date each of Messrs. Smith's,
Saathoff's, Clement's, Waller's and Poole's employment agreement was entered
into, the Company granted to them, under the Company's 1997 Stock Option Plan,
nonqualified options to purchase 800,000, 900,000, 900,000, 425,000 and 300,000
shares, respectively, of the Company's Common Stock, at an exercise price of
U.S. $.58 per share, representing the fair market value of a share of Common
Stock on the date of grant. Excluding Mr. Poole's option which becomes
exercisable in three equal annual installments commencing on February 4, 1998,
as of September 30, 1997 from one-quarter to one-half of each of the remaining
options were exercisable with the balance becoming exercisable in three equal
annual installments commencing on January 1, 1998. Upon the occurrence of a
change in control, as defined in the respective governing option agreements, the
exercisability of all such options, to the extent unexercisable, will be
accelerated.
COMPENSATION OF DIRECTORS
Directors of the Company are reimbursed for all reasonable expenses
incurred in attending each Board meeting. Non-employee directors also receive
automatic annual option grants. See "EXECUTIVE COMPENSATION-1997 Stock Option
Plan."
1997 OPTION PLAN
The American TeleSource International Inc. 1997 Stock Option Plan (the
"1997 Option Plan") was adopted in February 1997 by the Board of Directors of
the Company and approved in May 1997 by the Company's shareholders. Under the
1997 Option Plan, options to purchase up to 5,000,000 shares of Common Stock may
be granted to employees and directors of, and consultants and advisors to, the
Company or any subsidiary. The 1997 Option Plan is intended to permit the
Company to retain and attract qualified individuals who will contribute to its
overall success. Shares that by reason of the expiration of an option (other
than by reason of exercise) or which are no longer subject to purchase pursuant
to an option granted under the 1997 Option Plan may be reoptioned thereunder.
The 1997 Option Plan is presently administered by the Board of Directors;
however, at such time as the Company becomes a reporting company under Section
12 of the Securities Exchange Act of 1934, as amended, the 1997 Option Plan will
be administered by a committee (the "Committee") consisting of at least two non-
employee directors. The Board of Directors or the Committee, as the case may
be, will set the specific terms and conditions of options granted under the 1997
Option Plan, except to the extent predetermined under the 1997 Option Plan in
the case of automatic grants to outside directors.
Either incentive stock options or nonqualified stock options or a
combination of both may be granted under the 1997 Option Plan. Non-employees
may be granted only nonqualified stock options. Stock options may be granted for
a term not to exceed ten years (five years with respect to a holder of 10% or
more of the Company's shares in the case of an incentive stock option) and are
not transferable
41
<PAGE>
other than by will or the laws of descent and distribution. Each option may be
exercised in accordance with the terms of the option agreement under which it is
granted.
The exercise price of all options must be at least equal to 100% of the
fair market value of a share of Common Stock on the date of grant or, in the
case of incentive options, 110% of the fair market value with respect to any
incentive option issued to a holder of 10% or more of the Company's Common
Stock. The aggregate fair market value of Common Stock for which any employee
may be granted incentive stock options which first become exercisable in any one
calendar year may not exceed $100,000. Stock options may be exercised by
payment in cash, by delivering Common Stock of the Company already owned by such
optionee with an equivalent market value, or by a method in which a concurrent
sale of the acquired stock is arranged, with the price payable in cash from such
sale proceeds.
The 1997 Option Plan will terminate in February 1998. Termination of the
1997 Option Plan will not alter or impair, without the consent of the optionee,
any of the rights or obligations pursuant to any option granted under the 1997
Option Plan.
As of September 30, 1997, options for 4,383,000 shares were outstanding
under the 1997 Option Plan at a weighted average exercise price of $.58 and
options for 1,789,663 shares were exercisable. As of September 30, 1997, 100,000
options had been exercised and 517,000 shares remained available for future
option grants.
STOCK OPTION GRANTS, EXERCISES AND HOLDINGS BY NAMED EXECUTIVE OFFICER.
Stock Option Grant Table. The following table sets forth certain
information concerning options granted to the Named Executive Officer during the
Company's fiscal year ended July 31, 1997.
<TABLE>
<CAPTION>
STOCK OPTION GRANT TABLE
Potential
Realizable
Value of
Assumed
Individual Grants Annual Rates
---------------------------------------------------- of
Number of Percent of Stock Price
Securities Total Options Exercise Appreciation for
Underlying Granted to Price Per Option Term
Options Employees in Share Expiration ($)(1)
Name Granted Fiscal Year ($) Date 5% 10%
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Arthur L. Smith 800,000(2) 17.29% %0.58 Feb. 10, 2007 $291,807 $739,497
</TABLE>
- ------------
(1) The 5% and 10% assumed annual compound rates of stock appreciation are
mandated by the rules of the Commission and do not represent the Company's
estimate or projection of future Common Stock prices. The actual value
realized may be greater or less than the potential realizable value set
forth in the table.
(2) One-half of such options are presently exercisable. The remaining options
become exercisable in three equal annual installments commencing on January
1, 1998. The exercise price represented the market price of a share of
Common Stock on February 10, 1997, the effective date of grant.
Fiscal Year End Option Value Table. The following table sets forth certain
information concerning the value of unexercised options held by the Named
Executive Officer at July 31, 1997 (no options were exercised by the Named
Executive Officer during the fiscal year ended July 31, 1997).
<TABLE>
<CAPTION>
FISCAL YEAR END OPTION TABLE
Number of Securities Underlying
Unexercised Value of Unexercised In-the-Money
Options at Fiscal Year End(#) Options at Fiscal Year End($)*
----------------------------- -----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Arthur L. Smith 400,000 400,000 $596,000 $596,000
</TABLE>
- ------------
* Values stated are based upon the U.S.$2.07 closing price per share on
July 31, 1997, as reported by the Canadian Dealing Network, and represent
the difference between the fair market value of the shares underlying the
options and the exercise price of the options at fiscal year end.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has no Compensation Committee. During fiscal 1997, Messrs.
Smith, Nye and Moses, representing all of the Company's directors and the
Company's President, Chief Operating Officer and Chief Executive Officer,
participated in deliberations of the Board of Directors concerning executive
officer compensation.
The Company believes that the abilities of the foregoing members of the
Board of Directors to make fair compensation decisions have not and will not be
compromised by the relationships referred to above.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
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<PAGE>
ITEM 8. LEGAL PROCEEDINGS.
In April 1996, the Company and Long Distance Exchange Corporation ("LDEC")
entered into a litigation settlement agreement with Capital Network Systems,
Inc. ("CNSI") and Teleplus, Inc. ("Teleplus") pursuant to which the parties
agreed not to contract with, provide service to, benefit from, derive revenues
from or solicit any customer of the other party with respect to operator-
assisted long distance services from Mexico for a period of 10 months.
Additionally, CNSI and Teleplus, on the one hand, and the Company and LDEC, on
the other hand, agreed to submit to binding arbitration to resolve any disputes
between them for a period of 22 months. There are no pending disputes between
the foregoing parties.
Neither the Company nor any subsidiary is a party to any other material
pending legal proceeding.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
Since June 7, 1994, the Company's Common Stock has been traded on the
Canadian Dealing Network under the symbol ATIL.CDN. The following table sets
forth the high and low bid prices in Canadian dollars, as reported by the
Canadian Dealing Network, for the periods indicated. The prices are also
provided in U.S. dollars determined using the exchange rates based on published
spot exchange rates for United States dollars. Bid quotations represent Canadian
interdealer quotations without adjustment for retail markups, markdowns or
commissions and do not necessarily represent actual transactions. There is no
established public trading market in the United States for the Company's Common
Stock.
<TABLE>
<CAPTION>
Price Range
--------------------------
High Low
------------ ------------
CDN$ US$ CDN$ US$
----- ----- ----- -----
<S> <C> <C> <C> <C>
FISCAL 1996:
First quarter.......................................... $1.20 $0.88 $0.65 $0.48
Second quarter......................................... 1.15 .84 .65 .48
Third quarter.......................................... 1.05 .77 .85 .62
Fourth quarter......................................... 1.25 .91 .50 .37
FISCAL 1997:
First quarter.......................................... $1.10 $0.80 $0.75 $0.55
Second quarter......................................... 0.95 .69 .80 .60
Third quarter.......................................... .95 .70 .65 .47
Fourth quarter......................................... 3.10 2.26 .85 .61
FISCAL 1998:
First quarter (through October 9, 1997)................ $5.75 $4.14 $2.50 $1.75
</TABLE>
At October 9, 1997, there were 2,823 holders of record of the Company's
Common Stock.
43
<PAGE>
The Company has never paid cash dividends on its Common Stock. The
Company's current policy is to retain earnings, if any, to finance the
anticipated growth of its business. Any further determination as to the payment
of dividends will be made at the discretion of the Board of Directors and will
depend upon the Company's operating results, financial condition, capital
requirements, general business conditions and such other factors as the Board of
Directors deems relevant. The Company may procure credit from third parties for
additional capital for expansion and business development activities. It is
likely that any credit facility procured by the Company may limit or restrict
the Company's ability to pay cash dividends on its Common Stock under certain
circumstances.
There are no restrictions enforced by Canada or the Province of Ontario,
Canada under which the Company is organized, on the export or import of capital
which affect the remittance of dividends on the Company's securities.
At September 30, 1997, there were 18,842,942 shares of Company Common Stock
subject to outstanding options and warrants; and 23,774,657 shares of Common
Stock that could be sold pursuant to Rule 144 under the Securities Act or that
the Company has agreed to register under the Securities Act.
CANADIAN TAX MATTERS
The following summary describes the principal Canadian federal income tax
considerations generally applicable to a holder of the Company's Common Stock
who, for purposes of the Income Tax Act (Canada) (the "Canadian Tax Act") and
the Convention between Canada and the United States of America with Respect to
Taxes on Income and on Capital (the "Convention") and at all relevant times, is
resident in the United States and not resident in Canada, deals at arm's length
with the Company, holds the Company's Common Stock as capital property and does
not use or hold and is not deemed to use or hold the Common Stock in the course
of carrying on business in Canada (a "United States holder").
The following summary is based upon the current provisions of the
Convention, the Canadian Tax Act, the regulations thereunder, all specific
proposals to amend the Convention, the Canadian Tax Act and the regulations
announced by the Minister of Finance (Canada) prior to the date hereof and an
understanding of the published administrative practices of Revenue Canada,
Customs, Excise and Taxation. This summary does not take into account or
anticipate any other changes in the governing law, whether by judicial,
governmental or legislative decision or action, nor does it take into account
the tax legislation or considerations of any province, territory or non-Canadian
(including U.S.) jurisdiction, which legislation or considerations may differ
significantly from those described herein.
The following summary is of a general nature only and is not intended to
be, and should not be interpreted as, legal or tax advice to any prospective
purchaser or holder of the Company's Common Stock and no representation with
respect to the Canadian federal income tax consequences to any such prospective
purchaser is made. Accordingly, prospective purchasers of Common Stock should
consult their own tax advisers with respect to their individual circumstances.
Dividends. Pursuant to the Convention, dividends and amounts deemed for
purposes of the Canadian Tax Act to be dividends, paid or credited on the
Company's Common Stock to a United States holder will be subject to Canadian
withholding tax at the rate of 15% of the gross
44
<PAGE>
amount of such dividends, unless the holder is a corporation resident in the
United States which owns at least 10% of the voting stock of the Company, in
which case the withholding tax is levied at the rate of 5% of the gross amount
of such dividends paid thereafter. Pursuant to the Convention, certain tax
exempt entities resident in the United States may be exempt from Canadian
withholding taxes levied in respect of dividends received on the Company's
Common Stock.
Disposition of Common Stock. In general, a United States holder will not
be subject to Canadian income tax on capital gains arising on the disposition of
the Company's Common Stock, provided that the value of the Common Stock at the
time of the disposition is not derived principally from real property (as
defined in the Convention) situated in Canada.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
Each of the following issuances of securities was made in reliance upon the
exemption from registration under the Securities Act of 1933, as amended (the
"Securities Act"), set forth in sections 4(2) and/or 3(b) of the Act. Such
issuances were, in each case, made to a limited number of purchasers who, based
upon representations made by the purchasers or facts known to the Company, were
either accredited (in substantially all cases) or sophisticated, were in most
cases existing stockholders, were familiar with or had access to all material
information concerning the operations and financial condition of the Company,
and acquired the securities for investment only and not with a view to a
subsequent distribution. No general solicitation was made in connection with
any such issuances.
On November 30, 1994, the Company sold 360,000 units for $180,000. The
360,000 units consisted of 360,000 shares of Common Stock and "A" warrants to
purchase an aggregate 180,000 shares of Common Stock at $0.70 per share prior to
expiration on May 31, 1996 and "B" warrants to purchase an aggregate 180,000
shares of Common Stock at $1.25 per share prior to expiration on November 29,
1996. All of the foregoing warrants expired unexercised in 1996.
On December 14, 1994, the Company sold 525,000 units for $229,950. The
units consisted of an aggregate 525,000 shares of Common Stock and warrants to
purchase an aggregate 262,500 shares of Common Stock at $0.66 per share prior to
expiration on December 14, 1995. A commission of $12,000 was paid in shares of
Common Stock to a broker/dealer in connection with the sale, along with a fee of
$45,000 paid in shares of Common Stock to the Company's then Canadian counsel.
45
<PAGE>
On January 11, 1995, the Company obtained a $100,000 loan from Robert G.
Watt at 12% interest, due October 1, 1997 (as extended). The note is
convertible into Common Stock of the Company at the per share price of Common
Stock at the time of conversion, and automatically converts into Common Stock
upon a liquidity event providing the Company with net proceeds of $5 million or
more. In connection with the loan, Mr. Watt was issued warrants to purchase
30,000 shares of Common Stock at $0.50 per share prior to expiration on the
first to occur of (i) December 31, 1999, or (ii) a liquidity event providing
the Company with net proceeds of $5 million or more.
On April 3, 1995, the Company sold 875,000 units for $350,000. The 875,000
units consisted of an aggregate 875,000 shares of Common Stock and warrants to
purchase an aggregate 875,000 shares of Common Stock at $0.50 per share prior to
expiration on April 3, 1997. All of the foregoing warrants were exercised on
March 30, 1997.
On June 23, 1995, the Company sold 2,359,375 units for $943,750. The
2,359,373 units consisted of an aggregate 2,359,375 shares of Common Stock and
warrants to purchase an aggregate 2,359,373 shares of Common Stock at $1.00 per
share prior to expiration on June 23, 1997. Warrants to purchase 2,355,125 were
exercised on June 23, 1997. In connection with the sale, warrants to purchase
342,210 shares of Common Stock at $1.00 per share prior to expiration on
November 11, 1998 were issued to two individuals as a finders' fee.
On October 25, 1995, the Company sold 100,000 units for $50,000. The
100,000 units consisted of an aggregate 100,000 shares of Common Stock and
warrants to purchase an aggregate 100,000 shares of Common Stock at $2.00 per
share prior to expiration on the first to occur of (i) October 25, 1997, or (ii)
the expiration of 10 consecutive trading days during which the Common Stock
traded at or above $3.00.
On November 14, 1995, the Company sold 875,000 units for $472,500. The
875,000 units consisted of an aggregate 875,000 shares of Common Stock and
warrants to purchase an aggregate 875,000 shares of Common Stock at $1.00 per
share prior to expiration on November 14, 1998. In connection with the sale,
75,000 shares of Common Stock were issued to broker/dealers as a commission.
On July 23, 1996, the Company sold 2,987,500 units for $1,493,750. The
2,987,500 units consisted of an aggregate 2,987,500 shares of Common Stock and
warrants to purchase an aggregate 2,987,500 shares of Common Stock at $0.70 per
share prior to expiration on the first to occur of (i) April 11, 1999, or (ii)
the expiration of any consecutive trading days during which the Common Stock
traded at or above $3.50. In connection with the sale, 241,125 shares of Common
Stock and warrants to purchase 100,000 shares of Common Stock at $0.70 per share
on or before April 11, 1999, were issued to broker/dealers as a commission.
On November 19, 1996, the Company issued convertible notes for an aggregate
$300,000, convertible into Common Stock at $0.55 per share. The notes were
converted in full on February 28, 1997. In connection with the issuances,
54,545 shares of Common Stock were issued to a broker/dealer as a commission.
46
<PAGE>
On November 21, 1996, January 6, 1997, and July 31, 1997, the Company
issued convertible notes in the principal amounts of $517,104, $177,945, and
$964,531, respectively. Each note was convertible into shares of Common Stock
at $0.55 per share. The three notes have been fully converted. The investor has
the option to fund an additional $335,469 principal amount on or prior to 30
days after the effective date of a registration statement of the Company on Form
S-4. In connection with the three notes, the Company issued warrants to
purchase 568,815, 195,740, and 1,060,400 shares of Common Stock, respectively,
at $0.85 per share prior to expiration two years from the date of issuance. In
connection with the first two convertible note issuances, 47,000 and 20,000
shares of Common Stock, respectively, and warrants to purchase 47,000 and 20,000
shares of Common Stock, respectively, at $0.85 per share prior to expiration two
years after issuance were issued to a broker/dealer as a commission. Warrants
to purchase an additional 200,000 shares of Common Stock at $1.45 per share
prior to expiration two years from issuance were issued in connection with the
third note.
On December 5, 1996, the Company issued 39,513 shares of Common Stock to an
individual as consideration for his execution of a guaranty covering a $500,000
line of credit obtained by the Company. An additional $25,000, payable in
stock, will be paid annually to such individual so long as the guaranty is
outstanding. In connection with the credit facility, the Company also issued to
the lender warrants to purchase 153,088 shares of Common Stock at $0.75 per
share prior to expiration on June 1, 1998.
On February 12, 1997, the Company sold 900,000 units for $450,000. The
900,000 units consisted of an aggregate 900,000 shares of Common Stock and
warrants to purchase an aggregate 900,000 shares of Common Stock at $0.65 per
share prior to expiration on February 27, 1998.
On February 28, 1997, the Company sold 1,000,000 units for $500,000. The
1,000,000 units consisted of an aggregate 1,000,000 shares of Common Stock and
warrants to purchase an aggregate 1,000,000 shares of Common Stock at $0.70 per
share prior to expiration on the first to occur of (i) February 28, 2000, or
(ii) the expiration of ten consecutive trading days, during which the Common
Stock traded at or above $3.50. In connection with the sale, 50,000 shares of
Common Stock and warrants to purchase 50,000 shares of Common Stock at $0.70 per
share prior to expiration on February 28, 2000 were issued to a broker/dealer as
a commission.
On February 28, 1997 and May 14, 1997, the Company issued two convertible
notes for $1,950,000 and $250,000, respectively, due three years from the date
of issuance, with interest at 10%. The notes are convertible at the Company's
option into a series of preferred stock which has not been created or
designated. For each $50,000 principal amount of convertible debt acquired, the
holder was issued warrants to purchase 108,549 shares of Common Stock at $0.27
per share prior to expiration three years from date of issuance. In connection
with the note issuances, the Company also issued warrants to purchase 250,000
shares of Common Stock at $0.85 per share to a broker/dealer as a commission.
On May 1, 1997, the Company acquired a 55% ownership interest in Computel,
a private Mexican company. In late August 1997 the Company acquired the
remaining 45% of such company. The purchase price for 100% of the shares of
Computel was $3.6 million, consisting of 2,715,545 shares of Company Common
Stock, $1.1 million in cash, and the forgiveness of a note receivable evidencing
an obligation owed by Computel to the Company in the amount of approximately
$700,000.
47
<PAGE>
On June 10, 1997, the Company sold 200,000 units for $200,000. The 200,000
units consisted of an aggregate 200,000 shares of Common Stock and warrants to
purchase an aggregate 100,000 shares of Common Stock at $2.00 per share prior to
expiration on May 30, 1999.
On July 31, 1997, the Company sold 922,558 shares of Common Stock and
warrants to purchase 200,000 shares of Common Stock at $1.45 per share on or
before July 31, 1999 for $1,100,000.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The Company's authorized capital stock consists of an unlimited number of
shares of Common Stock, no par value, and an unlimited number of shares of
Preferred Stock, no par value. At September 30, 1997, the Company had issued and
outstanding 36,918,843 shares of Common Stock. At September 30, 1997, no shares
of Preferred Stock were issued and outstanding. At September 30, 1997, there
were 18,842,942 shares of Common Stock subject to outstanding options and
warrants, and no shares of Common Stock subject to other rights or convertible
securities of the Company.
There are no limitations, either by the laws of the Province of Ontario,
Canada under which the Company is organized, or in the charter or other
constituting documents of the Company on the right of foreigners to hold or vote
securities of the Company.
Common Stock
Holders of shares of Common Stock are entitled to receive such dividends as
may from time to time be declared by the Board of Directors of the Company.
Holders of shares of Common Stock are entitled to one vote per share on all
matters submitted to a vote of shareholders, other than matters submitted to
shareholders of another specified class or series of shares that is entitled to
vote separately as a class or series. Upon liquidation, dissolution or winding
up of the Company, holders of shares of Common Stock, subject to prior rights of
holders of any class of shares ranking senior to the shares of Common Stock, are
entitled to receive the remaining property of the Company or any other
distribution of the assets of the Company for the purpose of winding up its
affairs. Holders of Common Stock have no preemptive rights.
Preferred Stock
Shares of Preferred Stock may at any time and from time to time be issued
in one or more series, to consist of such number of shares as may, before
issuance of such series, be fixed by the directors by Articles of Amendment in
accordance with the procedure set forth in the Business Corporation Act
(Ontario) (the "Act") respecting the issuance of shares in series.
The directors of the Company may (subject to limitations set forth in the
Company's Articles of Amalgamation, as amended, and in the Act) fix by Articles
of Amendment in accordance with the procedures set forth in the Act respecting
the issuance of shares in series and, prior to the issuance of any shares of a
particular series of Preferred Stock authorized to be issued, the designation,
rights, privileges, restrictions and conditions to attach to the Preferred Stock
of that particular series, including the rate of preferential dividends and
whether or not the same shall be cumulative, the dates of payment thereof, the
rights, if any, to participate in further dividends and other distributions made
by the Company, the redemption price and terms and conditions of redemption,
including the rights, if any, of the holders of the shares of Preferred Stock of
such series to require the redemption thereof, the voting rights and conversion
rights, if any, and any redemption fund, purchase fund or other provisions to be
attached to the shares of Preferred Stock of such series.
48
<PAGE>
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under the Ontario Business Corporations Act, the Company may indemnify a
present or former director or officer or a person who acts or acted at the
Company's request as a director or officer of another corporation of which the
Company is or was a stockholder or creditor, and his heirs and legal
representatives, against all costs, charges and expenses, including an amount
paid to settle an action or satisfy a judgment, reasonably incurred by him in
respect of any civil, criminal or administrative action or proceeding to which
he is made a party by reason of his position with the Company and provided that
the director or officer acted honestly and in good faith with a view to the best
interests of the Company and, in the case of a criminal or administrative action
or proceeding that is enforced by a monetary penalty, had reasonable grounds for
believing that his conduct was lawful. Such indemnification may be made in
connection with a derivative action only with court approval. A director or
officer is entitled to indemnification from the Company as a matter of right if
he was substantially successful on the merits and fulfilled the conditions set
forth above.
In accordance with the Ontario Business Corporations Act, the Bylaws of the
Company indemnify a director or officer, a former director or officer, or a
person who acts or acted at the Company's request as a director or officer of a
corporation in which the Company is or was a shareholder or creditor against any
and all losses and expenses reasonably incurred by him in respect of any civil,
criminal or administrative proceeding to which he was made a party by reason of
being or having been a director or officer of the Company or other corporation
if he acted honestly and in good faith with a view to the best interests of the
Company or, in the case of a criminal or administrative action or proceeding
that is enforced by monetary penalty, he had reasonable grounds in believing
that his conduct was lawful.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers or persons controlling the Company pursuant to
the foregoing provision, the Company has been informed that in the opinion of
the U.S. Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is therefore unenforceable.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data are set forth in this
Registration Statement on Form 10 commencing on page F-1.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
49
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS
Consolidated Balance Sheets as of July 31, 1996 and 1997
Consolidated Statements of Loss for the Years ended July 31, 1995,
1996 and 1997
Consolidated Statements of Stockholders' Equity for the Years ended
July 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the Years ended July 31,
1995, 1996 and 1997
(b) FINANCIAL STATEMENT SCHEDULES
SCHEDULE NUMBER DESCRIPTION OF SCHEDULE PAGE NUMBER
--------------- ----------------------- -----------
Report of Independent
Public Accountants S-1
II Valuation and Qualifying
Accounts S-2
(c) EXHIBITS
Exhibit
Number Description
- ------- -----------
3.1 Articles of Amalgamation, as amended, of ATSI-Canada*
3.2 Bylaws of ATSI-Canada*
4.1 Form of Private Placement Warrant*
10.1 Form of Customer Service Agreement for Private Networks*
10.2 Telecommunications Agreement between ATSI-Texas and Long Distance
Exchange Corp.*
10.3 Compensation Agreement between ATSI-Texas and James McCourt relating
to Guarantee of Equipment Line of Credit by James McCourt**
10.4 Agreement for Investment Banking Services between ATSI-Texas and
Joseph Charles & Associates, Inc.**
10.5 (1)
10.6 1997 Option Plan**
10.7 Form of Option Agreement**
10.8 (1)
10.9 Financing Agreement with Roger G. Watt and Convertible Notes issued to
Robert G. Watt*
10.10 FCC Radio Station Authorization-C Band*
50
<PAGE>
10.11 FCC Radio Station Authorization-Ku Band*
10.12 Section 214 Certification from FCC*
10.13 Carrier Termination Services Agreement between U.S. Long Distance,
Inc. and ATSI-Texas*
10.14 Office Space Lease Agreement*
10.15 Amendment to Office Lease Agreement***
10.16 Employment Agreement with Arthur L. Smith**
10.17 Employment Agreement with H. Douglas Saathoff**
10.18 Employment Agreement with Craig K. Clement**
10.19 Employment Agreement with Everett L. Waller**
10.20 Employment Agreement with Charles R. Poole**
10.21 Lease/Finance Agreements between IBM de Mexico and ATSI-Mexico***
10.22 Primary Agreement with Computel**
10.23 Agreement with Investcom***
10.24 Payphone License issued to ATSI-Mexico**
10.25 (2)
10.26 Shared Teleport/Network Resale Licenses issued to ATSI-Mexico**
10.27 Agreement with Avantel**
10.28 Registration Rights Agreement between ATSI-Canada and James R.
Leninger**
10.29 Modification Agreement with Computel***
11 Statement of Computation of Per Share Earnings***
22 Subsidiaries of Registrant**
24 Power of Attorney (included on Signature Page to the Registration
Statement on Form 10 (No. 0-23007) of the Company filed August 21,
1997)**
27 Financial Data Schedule***
- ---------------------------------------
* Contained in exhibits to Registration Statement on Form S-4 (No. 333-05557)
of the Company filed June 7, 1996.
** Contained in exhibits to Registration Statement on Form 10 (No. 0-23007) of
the Company filed August 21, 1997.
*** Filed herewith.
(1) Exhibit previously listed in exhibit list to Registration Statement on Form
10 (No. 0-23007) of the Company filed August 21, 1997 has been deemed
immaterial by the Company and eliminated.
(2) Exhibit previously listed in exhibit list to Registration Statement on Form
10 (No. 0-23007) of the Company filed August 21, 1997 is contained in
Exhibit 10.26 previously filed with such Registration Statement.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this Amendment No. 1 to this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized.
AMERICAN TELESOURCE
INTERNATIONAL INC.
DATE: October 22, 1997 BY: /s/ Arthur L. Smith
-------------------------------
Arthur L. Smith, President
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Amendment No. 1 to this Registration Statement has been signed by
the following persons in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Murray R. Nye* Chief Executive Officer and Director October 22, 1997
- -----------------------
MURRAY R. NYE
/s/ Arthur L. Smith President, Chief Operating Officer and October 22, 1997
- ----------------------- Director (Principal Executive Officer)
ARTHUR L. SMITH
/s/ H. Douglas Saathoff Chief Financial Officer, Secretary and October 22, 1997
- ----------------------- Treasurer (Principal Financial and
H. DOUGLAS SAATHOFF Accounting Officer)
/s/ John R. Moses* Director October 22, 1997
- -----------------------
JOHN R. MOSES
*By H. Douglas Saathoff,
attorney-in-fact pursuant
to a Power of Attorney previously filed.
52
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN TELESOURCE INTERNATIONAL INC.
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets as of July 31, 1996 and 1997................ F-3
Consolidated Statements of Loss for the Years ended
July 31, 1995, 1996 and 1997................................... F-4
Consolidated Statements of Stockholders' Equity for the
Years ended July 31, 1995, 1996 and 1997....................... F-5
Consolidated Statements of Cash Flows for the Years ended
July 31, 1995, 1996 and 1997................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
American TeleSource International Inc.:
We have audited the accompanying consolidated balance sheets of American
TeleSource International Inc. (an Ontario corporation) and subsidiaries as of
July 31, 1996 and 1997, and the related consolidated statements of loss,
stockholders' equity and cash flows for the years ended July 31, 1995, 1996 and
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with 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. 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 American TeleSource
International Inc. and subsidiaries as of July 31, 1996 and 1997, and the
results of their operations and their cash flows for the years ended July 31,
1995, 1996 and 1997, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company has suffered recurring losses
from operations since inception and has limited capital resources available to
support further development of its operations. These matters raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
ARTHUR ANDERSEN LLP
San Antonio, Texas
October 3, 1997
F-2
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Presented in U.S. dollars)
<TABLE>
<CAPTION>
July 31, July 31,
1996 1997
------------ -------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash $ 655,955 $ 1,921,426
Accounts receivable, net of allowance of $ 154,382 599,924 2,207,917
and $ 187,457, respectively
Stock subscriptions receivable 75,000 1,113,170
Notes receivable 101,283 -
Inventory 10,000 -
Prepaid expenses 230,673 461,920
Other 116,061 284,173
------------ ------------
Total current assets 1,788,896 5,988,606
------------ ------------
PROPERTY AND EQUIPMENT (At cost): 2,523,832 7,498,589
Less - Accumulated depreciation and amortization (376,685) (926,601)
------------ ------------
Net property and equipment 2,147,147 6,571,988
------------ ------------
OTHER ASSETS, net
Goodwill, net - 2,264,986
Organization costs, net 163,712 63,277
Other 248,449 931,851
------------ ------------
Total assets $ 4,348,204 $ 15,820,708
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,303,459 $ 1,932,174
Accrued liabilities 794,875 2,285,601
Current portion of notes payable - 316,425
Current portion of convertible long-term debt 100,000 100,000
Current portion of obligations under capital leases 182,884 695,742
Deferred revenue - 463,788
------------ ------------
Total current liabilities 2,381,218 5,793,730
------------ ------------
LONG-TERM LIABILITIES:
Obligations under capital leases, less current portion 321,575 1,005,256
Notes payable, less current portion - 498,053
Convertible long-term debt, less current portion - 1,296,560
Other long-term liabilities 16,786 597,053
------------ ------------
338,361 3,396,922
------------ ------------
MINORITY INTEREST - (305,780)
------------ ------------
COMMITMENTS AND CONTINGENCIES: (Notes 9, 18 and 20)
STOCKHOLDERS' EQUITY:
Preferred shares, no par value, unlimited shares authorized,
no shares issued and outstanding at July 31, 1996 and 1997 - -
Common shares, no par value, unlimited shares authorized,
23,849,657 issued and 23,774,657 outstanding at July 31,
1996 36,787,105 issued and outstanding at July 31, 1997 6,231,953 16,221,856
Accumulated deficit (4,607,246) (9,302,375)
Cumulative translation adjustment 3,918 16,355
------------ ------------
Total stockholders' equity 1,628,625 6,935,836
------------ ------------
Total liabilities and stockholders' equity $ 4,348,204 $ 15,820,708
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
(Presented in U.S. dollars)
<TABLE>
<CAPTION>
For the Years Ended July 31,
1995 1996 1997
------------ ------------ ------------
OPERATING REVENUES:
<S> <C> <C> <C>
Long distance services $ 4,469,529 $ 10,806,586 $ 13,965,981
Network management services 318,312 2,668,098 2,262,406
------------ ------------ ------------
Total operating revenues 4,787,841 13,474,684 16,228,387
------------ ------------ ------------
OPERATING EXPENSES:
Cost of services 4,061,091 10,832,664 12,792,338
Selling, general and administrative 2,536,441 4,430,038 7,047,020
Depreciation and amortization 140,798 280,583 590,746
------------ ------------ ------------
Total operating expenses 6,738,330 15,543,285 20,430,104
------------ ------------ ------------
OPERATING LOSS (1,950,489) (2,068,601) (4,201,717)
OTHER INCOME(EXPENSE):
Interest expense (64,778) (150,231) (512,838)
Interest income 9,858 6,669 26,839
Other income 1,242 7,436 68,223
Other expense - - (27,423)
------------ ------------ ------------
Total other expense (53,678) (136,126) (445,199)
------------ ------------ ------------
MINORITY INTEREST - - (48,213)
------------ ------------ ------------
NET LOSS $ (2,004,167) $ (2,204,727) $ (4,695,129)
============ ============ ============
NET LOSS PER SHARE $ (0.14) $ (0.11) $ (0.18)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Presented in U.S. dollars)
<TABLE>
<CAPTION>
Preferred Shares Common Shares Cumulative Total
---------------- ----------------------- Accumulated Translation Stockholders'
Shares Amount Shares Amount Deficit Adjustment Equity
------ ------ ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, July 31, 1994 - - 12,186,175 $ 1,216,902 $ (398,352) - $ 818,550
Exercise of warrants - - 1,350,423 675,211 - - 675,211
Issuances of common stock for cash - - 4,110,625 1,646,487 - - 1,646,487
Issuances of common stock for services - - 337,724 84,070 - - 84,070
Stock grants to employees - - 212,500 11,111 - - 11,111
Net loss - - - - (2,004,167) - (2,004,167)
------ ------ ----------- ----------- ----------- ----------- -----------
BALANCE, July 31, 1995 - - 18,197,447 3,633,781 (2,402,519) - 1,231,262
Issuances of common stock for cash - - 4,515,500 2,252,830 - - 2,252,830
Issuances of common stock for services - - 1,061,710 312,009 - - 312,009
Amortization of deferred compensation - - - 33,333 - - 33,333
Cumulative effect of translation adjustment - - - - - 3,918 3,918
Net loss - - - - (2,204,727) - (2,204,727)
------ ------ ----------- ----------- ----------- ----------- -----------
BALANCE, July 31, 1996 - - 23,774,657 6,231,953 (4,607,246) 3,918 1,628,625
Issuances of common stock for cash - - 5,760,355 4,737,416 - - 4,737,416
Conversion of convertible debt to common stock - - 3,611,786 1,966,531 - - 1,966,531
Issuance of common stock for acquisition - - 2,715,546 1,846,569 - - 1,846,569
Issuances of common stock for services - - 924,761 153,885 - - 153,885
Amortization of deferred compensation - - - 295,502 - - 295,502
Warrants issued with convertible long term debt - - - 990,000 - - 990,000
Cumulative effect of translation adjustment - - - - - 12,437 12,437
Net loss - - - - (4,695,129) - (4,695,129)
------ ------ ----------- ----------- ----------- ----------- -----------
BALANCE, July 31, 1997 - - 36,787,105 $16,221,856 $(9,302,375) $ 16,355 $ 6,935,836
====== ====== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Presented in U.S. dollars)
<TABLE>
<CAPTION>
For the Years Ended July 31,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $(2,004,167) $(2,204,727) $(4,695,129)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization 140,798 280,583 590,746
Amortization of debt discount - - 86,560
Deferred compensation 11,111 33,333 295,502
Provision for losses on accounts receivable 339,829 554,332 734,987
Minority interest - - 48,213
Changes in operating assets and liabilities
net of effects from acquisition of Computel
Increase in accounts receivable (657,568) (723,552) (1,983,091)
Increase in other assets-current and long-term (281,970) (9,853) (861,046)
Increase (decrease) in accounts payable 786,899 419,505 (1,024,670)
Increase in accrued liabilities 341,901 342,076 884,062
Increase (decrease) in deferred revenue 42,652 (64,987) 377,758
Other - 20,703 15,895
----------- ----------- -----------
Net cash used in operating activities (1,280,515) (1,352,587) (5,530,213)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (858,616) (475,303) (590,196)
Net cash acquired in Computel acquisition - - 73,501
Increase in note receivable (90,108) (88,107) -
Payments received on note receivable 34,277 42,655 101,283
----------- ----------- -----------
Net cash used in investing activities (914,447) (520,755) (415,412)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 175,000 - 3,912,841
Payments on debt (42,296) (32,704) -
Capital lease payments - (67,809) (400,988)
Proceeds from issuance of common stock,
net of issuance costs 2,046,698 2,527,830 3,699,243
----------- ----------- -----------
Net cash provided by financing activities 2,179,402 2,427,317 7,211,096
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (15,560) 553,975 1,265,471
CASH, beginning of period 117,540 101,980 655,955
----------- ----------- -----------
CASH, end of period $ 101,980 $ 655,955 $ 1,921,426
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1995, 1996 AND 1997
The information utilized in the following Notes is presented in U.S. dollars.
1. BUSINESS ACTIVITY
The company was originally incorporated under the laws of the province of
Alberta, Canada on December 17, 1993 (date of inception or "Inception"), under
the name Latcomm International Inc. (Latcomm). On December 20, 1993, Latcomm
purchased all of the outstanding shares of Latin America Telecomm, Inc., a Texas
corporation, for cash consideration of $25,000. On April 22, 1994, Latin
America Telecomm, Inc. changed its name to American TeleSource International,
Inc. (ATSI-Texas). Effective May 26, 1994 (Effective Date), Latcomm amalgamated
under the Business Corporations Act of Ontario, Canada with Willingdon
Resources, Ltd. (Willingdon), a corporation incorporated under the laws of the
Province of Ontario, Canada. The resulting Ontario corporation was named
American TeleSource International Inc. (ATSI-Canada). In accordance with the
amalgamation agreement between Latcomm and Willingdon, on the Effective Date
every four issued and outstanding shares of Willingdon were converted to one
issued and outstanding share of ATSI-Canada and each issued and outstanding
share of Latcomm was converted to one issued and outstanding share of ATSI-
Canada. Of the 11,963,675 shares of ATSI-Canada issued in conjunction with the
amalgamation, approximately 10% were issued to the former shareholders of
Willingdon. The remaining 90% of the shares were issued to the former
shareholders of Latcomm. The amalgamation was accounted for as a
recapitalization of Latcomm. Collectively, ATSI-Texas and ATSI-Canada are
referred to hereafter as "ATSI" or the "Company".
ATSI conducts its primary operations through ATSI-Texas. ATSI-Texas
provides long distance call services to the hospitality industry and private
payphone owners in the U.S. and Mexico. ATSI-Texas also provides a full range
of private network services via satellite to customers conducting business in
Mexico, Central and South America, and the Caribbean Basin. These services
include the purchasing, exporting, installation and maintenance of equipment as
well as providing voice, data, fax and video telecommunication transmission
services via its teleport facility in San Antonio, Texas.
On June 20, 1995, ATSI-Texas formed a foreign subsidiary based in Mexico
City, Mexico. The subsidiary, American TeleSource International de Mexico, S.A.
de C.V. (ATSI-Mexico), performs customer service and maintenance operations
within Mexico and serves as a sales office for both private network and long
distance services of ATSI. On February 20, 1997, ATSI-Mexico became one of the
first four companies to receive a comercializadora license from the Secretaria
de Comunicaciones y Transportes ("SCT"), the regulatory authority in Mexico
charged with the oversight of the telecommunications industry in Mexico. The
comercializadora license allows the Company to own and operate public telephones
within Mexico, and to resell local and long distance services within Mexico from
those telephones. The Company has applied for and obtained several additional
licenses from the SCT allowing it to further expand the services it may provide
within Mexico. However, there can be no assurances that any licenses applied
for and not received or any other licenses sought in the future will be
obtained, and if obtained, that such licenses will enable the Company to expand
operations or increase revenues in Mexico.
In April 1996, the Company formed GlobalSCAPE, Inc. (GlobalSCAPE), a
wholly-owned subsidiary of ATSI-Texas. GlobalSCAPE is a Delaware corporation
based in San Antonio, Texas which was formed by the Company for purposes of
implementing Internet related strategies. During the years ended July 31, 1996
and 1997, the operations of GlobalSCAPE were immaterial when compared to the
accompanying consolidated financial statements of ATSI.
In May 1997, the Company entered into an agreement to purchase up to 100%
of the outstanding shares of a privately owned caseta (public calling station)
operator in Mexico, Sistema de Telefonia Computarizada, S.A. de C.V.
("Computel"). Under the terms of the agreement, the Company acquired 55% of the
shares of Computel effective May 1, 1997. As the Company acquired majority
ownership effective May 1, 1997, the Company has recorded 100% of the net assets
and liabilities of Computel as of that date. The Company's consolidated
financial statements for the period from May 1, 1997 to July 31, 1997 include
the impact of the 45% minority ownership interest.
F-7
<PAGE>
2. FUTURE OPERATIONS
The accompanying consolidated financial statements of the Company have been
prepared on the basis of accounting principles applicable to a going concern.
For the period from Inception to July 31, 1997, the Company has incurred
cumulative net losses of $9,247,551. Further, the Company had a working capital
deficit of $592,322 at July 31, 1996 and a working capital balance of $194,876
at July 31, 1997. Although the Company has capital resources available to it
(Note 20), these resources are limited and may not be available to support its
ongoing operations until such time as the Company is able to generate positive
cash flow from operations. There is no assurance the Company will be able to
achieve future revenue levels sufficient to support operations or recover its
investment in property and equipment. The Company's future ability to generate
revenues is also subject to uncertainty with regards to certain regulatory
matters described in Note 19. These matters raise substantial doubt about the
Company's ability to continue as a going concern. The ability of the Company to
continue as a going concern is dependent upon the ongoing support of its
stockholders and customers, its ability to obtain capital resources to support
operations, the ultimate outcome of certain regulatory matters as described in
Note 19 and its ability to successfully market its services.
The Company is likely to require additional financial resources in the near
term and could require additional financial resources in the long-term to
support its ongoing operations. The Company has retained various financial
advisers to assist it in refining its strategic growth plan, defining its
capital needs and obtaining the funds required to meet those needs. The plan
includes securing funds through equity offerings and entering into lease or
long-term debt financing agreements to raise capital. There can be no
assurances, however, that such equity offerings or other financing arrangements
will actually be consummated or that such funds, if received, will be sufficient
to support existing operations until revenue levels are achieved sufficient to
generate positive cash flow from operations. If the Company is not successful in
completing additional equity offerings or entering into other financial
arrangements, or if the funds raised in such stock offerings or other financial
arrangements are not adequate to support the Company until a successful level of
operations is attained, the Company has limited additional sources of debt or
equity capital and would likely be unable to continue operating as a going
concern.
Effective for the fiscal year beginning August 1, 1996, the Company has
adopted Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("SFAS 121"). SFAS 121 requires an assessment of the recoverability of the
Company's investment in long-lived assets to be held and used in operations
whenever events or circumstances indicate that their carrying amounts may not be
recoverable. Such assessment requires that the future cash flows associated
with the long-lived assets be estimated over their remaining useful lives and an
impairment loss be recognized when the future cash flows are less than the
carrying value of such assets. As of July 31, 1997, the Company has determined
that the estimated future cash flows associated with its long-lived assets are
greater than the carrying value of such assets and that no impairment loss needs
to be recognized.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
-----------------------------------------------------
The accompanying consolidated financial statements include the accounts of
ATSI-Canada, ATSI-Texas, ATSI-Mexico and GlobalSCAPE. Computel has been
included in the accompanying consolidated financial statements since May 1,
1997. The consolidated financial statements have been prepared on the accrual
basis of accounting under generally accepted accounting principles of the U.S.
There are no significant differences related to the Company's financial position
or results of operations for the years ended July 31, 1995, 1996 and 1997,
between U.S. generally accepted accounting principles and those of Canada. All
significant intercompany balances and transactions have been eliminated in
consolidation. Certain prior period amounts have been reclassified for
comparative purposes.
As mentioned in Note 1, ATSI-Mexico was formed on June 20, 1995. At that
time, the Company anticipated applying for a concession from the Mexican
government in order to implement its business plan. Mexican law mandates that
any company applying for a concession from the Mexican government to build a
fiber-optic infrastructure and provide telecommunications services via that
infrastructure be majority-owned by a Mexican entity. As such, when ATSI-Mexico
was formed, ATSI-Texas purchased 49% of the shares, and the remaining shares
were purchased by an individual employed by ATSI-Mexico (hereinafter referred to
as "Mexican Partner"). However, ATSI-Texas loaned its Mexican Partner the funds
to purchase its 51% ownership, and the underlying shares were physically held by
ATSI-Texas as collateral. In addition, the share certificates owned by its
Mexican Partner stated that he may not transfer ownership of his shares without
the permission of ATSI-Texas. ATSI-Texas retained the right to purchase the
shares for their original purchase price.
F-8
<PAGE>
During fiscal 1996, as the Mexican government continued to refine its
policies concerning public telecommunications, it became clear to the Company
that it would not need to obtain a concession from the Mexican government in
order to carry out its business plan. Rather, the Company applied for and
received a comercializadora license from the SCT. Because the comercializadora
license does not require majority ownership by a Mexican entity, in March 1997,
ATSI-Texas acquired additional shares of ATSI-Mexico, thereby giving it
approximately 97% ownership. Because the aforementioned restrictions still
remain on the only other shareholder of ATSI-Mexico, 100% of the historical
financial results of ATSI-Mexico have been included in the accompanying
financial statements.
The accompanying consolidated financial statements reflect the assets,
liabilities and stockholders' equity of Latcomm, which were transferred to ATSI
on the Effective Date in connection with the amalgamation described in Note 1,
at such predecessor's historical cost basis.
Estimates in Financial Statements
---------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Revenue Recognition Policies
----------------------------
The Company recognizes revenue from its long distance services as such
services are performed, net of unbillable calls. Revenue from network
management service contracts is recognized when service commences for service
commencement fees and monthly thereafter as services are provided. The Company
recognizes revenue from equipment sales when the title for the equipment
transfers to the customer and from equipment installation projects when they are
completed.
Foreign Currency Translation
----------------------------
The financial position and results of operations of the Company's Mexican
subsidiary is measured using the local currency as the functional currency.
Assets and liabilities of operations denominated in foreign currencies are
translated into U.S. dollars at exchange rates in effect at year-end, while
revenues and expenses are translated at average exchange rates prevailing during
the year. The resulting translation gains and losses are charged directly to
cumulative translation adjustment, a component of stockholders' equity, and are
not included in net loss until realized through sale or liquidation of the
investment.
Accounts Receivable
-------------------
During fiscal 1995, the Company began utilizing the services of credit card
processing companies for the billing of commercial credit card calls. The
Company receives cash from these calls, net of transaction and billing fees,
generally within 20 days from the dates the calls are delivered. All other
calls (calling card, collect, person-to-person and third-party billed) are
billed under an agreement between the Company and a collection clearinghouse.
This agreement allows ATSI to submit call detail records to the clearinghouse,
which in turn forwards these records to the local telephone company to be
billed. The clearinghouse collects the funds from the local telephone company
and then remits the funds, net of charges, to ATSI. Because this collection
process can take up to 90 days to complete, ATSI participates in an advance
funding program offered by the clearinghouse whereby 100% of the call records
are purchased for 75% of their value within five days of presentment. The
remaining 25% value of the call records are remitted to ATSI, net of interest
and billing charges and an estimate for uncollectible calls, as the
clearinghouse collects the funds from the local telephone companies. Under the
advanced funding agreement, the collection clearinghouse has a security interest
in the unfunded portion of the receivables as well as future receivables
generated by the Company's long distance business. The allowance for doubtful
accounts reflects the Company's estimate of uncollectible calls at July 31, 1996
and 1997. ATSI currently pays a funding charge of prime plus 4 % per annum on
the 75% of the calls which are advanced to ATSI. Receivables sold with recourse
during fiscal years 1995, 1996 and 1997 were $3,620,056, $7,673,091 and
$8,530,665, respectively. At July 31, 1996 and 1997, $499,986 and $577,256 of
such receivables were uncollected, respectively.
F-9
<PAGE>
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 125 "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" in June 1996 ("SFAS
125"). This statement provides accounting and reporting standards for, among
other things, the transfer and servicing of financial assets, such as factoring
receivables with recourse. This statement is effective for transfers and
servicing of financial assets occurring after December 31, 1996 and is to be
applied prospectively. Earlier or retroactive application is not permitted. In
December 1996, the FASB issued SFAS No. 127, " Deferral of the Effective Date of
Certain Provisions of SFAS No. 125." SFAS No. 127 amends the effective date for
certain provisions of SFAS No. 125 to December 31, 1997. The Company believes
the adoption of these statements will not have a material impact on the
financial position or results of operations of the Company.
Loss Per Share
--------------
Loss per share was calculated using the weighted average number of common
shares outstanding for the years ended July 31, 1995, 1996 and 1997, which
equated to 13,922,018 shares, 19,928,372 shares and 26,806,959 shares
respectively. Common stock equivalents, which consist of the stock purchase
warrants and options described in Note 12, were excluded from the computation of
the weighted average number of common shares outstanding because their effect
was antidilutive.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," which
establishes standards for computing and presenting earning per share ("EPS") for
entities with publicly held common stock or potential common stock. SFAS No.
128 simplifies the standards for computing EPS previously found in Accounting
Principles Board Opinion No. 15, "Earnings per Share," and makes them comparable
to international EPS standards. It replaces the presentation of primary EPS
with a presentation of basic EPS, which excludes dilution. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures. SFAS No. 128 is effective
for fiscal years ending after December 15, 1997, and early adoption is not
permitted. Management of the Company does not anticipate the adoption of SFAS
No. 128 will have a material impact on the Company's loss per share.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation and amortization
are computed on a straight-line basis over the estimated useful lives of the
related assets, which range from five to fifteen years. Expenditures for
maintenance and repairs are charged to expense as incurred. Direct installation
costs and major improvements are capitalized.
Other Assets
------------
Other assets include organization costs as of July 31, 1995, 1996 and 1997,
of $141,226, $219,217,and $145,373, respectively, net of accumulated
amortization of $29,165, $55,505, and $82,096, respectively. Organization costs
have an estimated useful life of 5 years. As of the year ended July 31, 1997,
other assets also include goodwill related to the purchase of Computel of
$2,279,231, net of accumulated amortization of $14,245. The Company amortizes
goodwill over its estimated useful life of 40 years.
Income Taxes
------------
Deferred tax liabilities and assets are recorded based on enacted income
tax rates that are expected to be in effect in the period in which the deferred
tax liability or asset is expected to be settled or realized. A change in the
tax laws or rates results in adjustments to the period in which the tax laws or
rates are changed.
The Company has incurred losses in all countries since Inception for both
book and tax purposes as of July 31, 1997. Accordingly, no income taxes have
been provided for in the accompanying consolidated financial statements for the
years ended July 31, 1995, 1996 and 1997.
F-10
<PAGE>
Statements of Cash Flows
------------------------
Cash payments and non-cash activities during the periods indicated were as
follows:
<TABLE>
<CAPTION>
For the Years Ended July 31,
------------------------------
1995 1996 1997
-------- -------- ----------
<S> <C> <C> <C>
Cash payments for interest $12,791 $150,231 $ 483,089
Non-cash investing and financing activities:
Common stock issued for services rendered $84,070 $312,009 $ 153,885
Common stock issued for acquisition of Computel $ - $ - $1,846,569
Assets acquired in acquisition of Computel $ - $ - $3,418,753
Liabilities assumed in acquisition of Computel $ - $ - $4,205,404
Conversion of convertible debt to common stock $ - $ - $1,966,531
Capital lease obligations incurred $ - $572,268 $1,521,875
Common stock subscriptions sold $ - $ - $1,113,170
</TABLE>
For purposes of determining cash flows, the Company considers all temporary
cash investments with an original maturity of three months or less to be cash
equivalents.
4. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument held by the Company:
Current assets and current liabilities: The carrying value approximates
fair value due to the short maturity of these items.
Long-term debt and convertible debt: The fair value of the Company's
long-term debt and convertible debt is based on secondary market indicators.
Since the Company's debt is not quoted, estimates are based on each
obligation's characteristics, including remaining maturity, interest
rate, credit rating, collateral, amortization schedule and liquidity
(without consideration for the convertibility of the notes). The Company
believes that the carrying amount approximates fair value.
5. NOTES PAYABLE
Notes payable are comprised of the following:
<TABLE>
<CAPTION>
July 31,
-------------
1996 1997
---- ----
<S> <C> <C>
Notes payable to various banks, see terms below. - $558,112
Note payable to a company, see terms below. - 256,366
---- --------
- $814,478
==== ========
</TABLE>
During November 1996, the Company entered into an agreement with a company
under which the Company is advanced an additional 13.75% of its receivables sold
to Zero Plus Dialing, Inc. (ZPDI). These advances are typically outstanding for
periods of less than 90 days, and are repaid, including accrued interest, by
ZPDI on behalf of the Company as its receivables from long distance call
services are collected. The Company is charged 4% per month for these fundings.
The agreement expires in November 1997 and is collateralized by the Company's
general assets, rights and interests.
F-11
<PAGE>
As of July 31, 1997, the Company through its acquisition of Computel had
approximately $ 558,000 of bank notes payable to various banks in Mexico. The
notes have interest rates ranging from 8% to 15% , with monthly principal and
interest payments of approximately $7,500. The notes mature between October 1999
and December 2015 and are collaterized by the assets of Computel.
Maturities of notes payable and convertible debt as of July 31, 1997 were
as follows:
<TABLE>
<S> <C>
1998 $ 416,425
1999 90,928
2000 1,340,560
2001 44,000
2002 44,000
Thereafter 275,125
----------
Total $2,211,038
==========
</TABLE>
6. CONVERTIBLE DEBT
A subsidiary of the Company has a note payable to a shareholder, which
accrues interest monthly at an annual rate of 12%. The entire principal amount
is due at maturity on January 1, 1998. The note is secured by certain
telecommunications equipment and is guaranteed by the Company. It is
convertible upon maturity at the option of the shareholder on the basis of two
common shares for each dollar of principal and interest then outstanding on such
note. Principal outstanding at July 31, 1997 was $100,000.
In Fiscal 1997 the Company issued convertible notes totaling $1,967,000,
interest at 10%, principal and interest payable on April 30, 1998. The
principal and accrued interest converted to shares of common stock of ATSI at
the rate of $0.55 per share. On the date the notes were sold, the Company issued
to the holders of the notes warrants to purchase 2,208,604 shares of common
stock of the Company for $0.85 per share. Because the fair value of the
warrants was immaterial, no value was assigned to stockholders' equity. Such
warrants expire one year from their date of issuance. As of July 31, 1997 the
$1,967,000 of convertible notes have been converted to common stock.
Also in 1997, the Company issued $2.2 million in convertible notes,
interest at 10%. The principal and interest, which accrues quarterly, is due and
payable three years from the date of issuance. The convertible notes convert
into fully redeemable preferred stock at the Company's option. In addition, for
each $50,000 unit of convertible debt, each holder was issued 108,549 warrants
to purchase an equal number of shares of common stock at $0.27 per share. The
fair value of the warrants was determined to be $0.37 per share and the Company
assigned $990,000 to the value of the warrants in stockholders' equity. The fair
value of the warrants was based on the date of issuance using the Black-Sholes
option pricing model with the following assumptions: Dividend yield of 0.0%,
expected volatility of 62%, risk-free interest rate of 6.35%, and an expected
life of three years. The warrants expire three years from their date of
issuance, and are not exercisable for a period of one year after their initial
issuance. The Company has recorded the $990,000 as debt discount and is
amortizing the discount over the term of the debt based on the effective
interest method.
F-12
<PAGE>
7. PROPERTY AND EQUIPMENT, NET
Following is a summary of property and equipment at July 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Telecommunications equipment $1,650,772 $2,575,531
Land and buildings - 1,912,310
Furniture and fixtures 145,336 186,231
Equipment under capital leases 572,268 2,084,528
Leasehold improvements 92,140 240,137
Other 63,116 499,852
---------- ----------
2,523,832 7,498,589
Less: Accumulated depreciation and
amortization (376,685) (926,601)
---------- ----------
Total - property and equipment, net $2,147,147 $6,571,988
========== ==========
</TABLE>
8. ACQUISITION
In May 1997, the Company entered into an agreement to purchase up to 100%
of the outstanding shares of a privately owned caseta (public calling station)
operator in Mexico, Sistema de Telefonia Computarizada, S.A. de C.V.
("Computel"). Computel, based in Guadalajara, Mexico owns and operates 134
casetas in 72 cities throughout Mexico. Under the terms of the agreement, the
Company acquired 55% of the shares of Computel effective May 1, 1997, and the
remaining shares in late August 1997. The total purchase price for the
acquisition of Computel was approximately $3.6 million, of which $1.1 million
was to be paid in cash, $700,000 in a note receivable forgiven by the Company
and the balance in common stock. The Company recorded the net assets and
liabilities of Computel as of May 1, 1997, in exchange for 2,715,546 shares of
common stock valued at $ 0.68 per share or approximately $1,846,569. As Computel
had net liabilities at May 1, 1997 the Company recorded goodwill of $2,279,231
related to the acquisition. The remaining 45% ownership interest is reflected as
minority interest at July 31,1997. Per the terms of the agreement, the remaining
shares of Computel were acquired in late August 1997 for a cash payment of
approximately $1.1 million and forgiveness of the aforementioned note
receivable. The Company has accounted for this acquisition as a "purchase".
The following unaudited pro forma results of operations for the years ended
July 31, 1996 and 1997, assume the acquisition of Computel occured as of the
beginning of the respective periods.
<TABLE>
<CAPTION>
Years ended July 31,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
(Unaudited)
Operating revenues $ 19,511,000 $ 20,312,000
Net loss ($2,484,000) ($5,408,000)
Net loss per share ($0.11) ($0.19)
</TABLE>
These pro forma results have been prepared for comparative purposes only
and include certain adjustments such as additional amortization of goodwill as
a result of the acquisition, and the elimination of intercompany transactions.
The
F-13
<PAGE>
unaudited pro forma information is not necessarily indicative of the results
that would have occured had such transactions actually taken place at the
beginning of the periods specified nor does such information purport to project
the results of operations for any future date or period.
9. LEASES
The Company leases office space, furniture and minor equipment under
noncancelable operating leases and certain month-to-month leases. During fiscal
1996 and 1997, the Company also leased equipment under capital leasing
arrangements. Rental expense under the operating leases for the years ended
July 31, 1995, 1996 and 1997 was $111,397, $136,107, and $176,700, respectively.
Future minimum lease payments under the noncancelable operating leases at July
31, 1997, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 87,807
1999 93,850
2000 98,482
2001 99,262
2002 107,844
Thereafter 8,987
--------
Total minimum lease payments $496,232
========
</TABLE>
Capital Leases
--------------
Future minimum lease payments under the capital leases together with the
present value of the net minimum lease payments at July 31, 1997, are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 763,822
1999 595,920
2000 435,774
2001 25,490
----------
Total minimum lease payments 1,821,006
Less: Amount representing taxes (27,392)
----------
Net minimum lease payments 1,793,614
Less: Amount representing
interest (92,616)
----------
Present value of net minimum
lease payments $1,700,998
==========
</TABLE>
In April 1997, the Company, through ATSI-Mexico secured a capital lease
facility with IBM de Mexico to purchasing intelligent pay telephones for
installation in Mexico. The capital lease facility of approximately $1.725
million will allow the Company to begin installing U.S. standard intelligent pay
telephones in various Mexican markets. The capital lease facility calls for the
Company to draw down on the facility in three separate draws of approximately
$575,000. As of July 31, 1997, the Company has made two draws on its lease
facility. The obligation outstanding under said facility at July 31, 1997 is
approximately $1,108,000, with the balance remaining available to be drawn.
10. SHARE CAPITAL
During the year ended July 31, 1995, the Company issued 5,798,772 shares of
common stock. Of this total, 1,350,423 shares were issued for approximately
$675,000 in cash through the exercise of 1,350,423 warrants, 4,110,625 shares
were issued for approximately $1,646,000 net cash proceeds and 337,724 shares
were issued for services rendered to the Company. Additionally, 212,500 shares
previously issued and held in trust for employee benefits were distributed to
various individuals. (See Note 16).
During the year ended July 31, 1996, the Company issued 5,577,210 shares of
common stock. Of this total, 4,515,500 shares were issued for approximately
$2,250,000 of net cash proceeds and 1,061,710 shares were issued for services
rendered to the Company.
F-14
<PAGE>
During the year ended July 31, 1997, the Company issued 13,012,448 shares
of common stock. Of this total, 5,760,355 shares were issued for approximately
$4,737,000 of net cash proceeds, 924,761 shares were issued for services
rendered to the Company, 3,611,786 shares were issued for the conversion of
convertible debt to common stock, and 2,715,546 shares were issued related to
the Company's acquisition of Computel. (See Note 8).
At July 31, 1996 and 1997, stock subscription receivables of $75,000 and
$1,113,170, respectively, were outstanding related to sales of common stock.
Such amounts were collected by the Company subsequent to the related periods
ended. No dividends were paid on the Company's stock during the years ended
July 31, 1995, 1996 and 1997.
The Company's stockholders approved the creation of a class of preferred
stock at the Company's annual shareholders meeting on May 21, 1997. Effective
June 25, 1997, the class of preferred stock was authorized under the Ontario
Business Corporations Act. According to the Company's amended Articles of
Incorporation, the Company's Board of Directors may issue, in series, an
unlimited number of preferred shares, without par value. No preferred shares
have been issued as of July 31, 1997.
11. DEFERRED REVENUE
The Company records deferred revenue related to the private network
services it provides. Customers may be required to advance cash to the Company
prior to service commencement to partially cover the cost of equipment and
related installation costs. Any cash received prior to the actual commencement
of services is recorded as deferred revenue until services are provided by the
Company, at which time the Company recognizes service commencement revenue. At
July 31, 1996 and 1997, $0 and $463,788 of deferred revenue was outstanding,
respectively.
12. STOCK PURCHASE WARRANTS AND STOCK OPTIONS
Certain stockholders and holders of convertible debt of the Company were
issued warrants to purchase shares of common stock at exercise prices ranging
from $0.27 to $2.00 per share. Following is a summary of warrant activity from
July 31, 1996 through July 31, 1997:
<TABLE>
<S> <C>
Warrants outstanding, July 31, 1996 8,097,463
Warrants issued 9,931,854
Warrants expired (777,200)
Warrants exercised (2,762,175)
----------
Warrants outstanding, July 31, 1997 14,489,942
==========
</TABLE>
F-15
<PAGE>
Warrants outstanding at July 31, 1997 expire as follows:
<TABLE>
<CAPTION>
Number of Warrants Exercise Price Expiration Date
- -------------------- -------------- -----------------
<S> <C> <C>
100,000 $2.00 October 25, 1997
800,000 $0.65 February 27, 1998
153,088 $0.75 June 1, 1998
342,210 $1.00 November 14, 1998
615,815 $0.85 November 21, 1998
970,290 $1.00 December 15, 1998
223,385 $0.85 January 6, 1999
3,037,500 $0.70 April 11, 1999
100,000 $2.00 May 30, 1999
1,060,400 $0.85 July 31, 1999
400,000 $1.45 July 31, 1999
30,000 $0.50 December 31, 1999
15,000 $0.77 January 2, 2000
15,000 $0.79 January 2, 2000
558,824 $0.85 February 7, 2000
4,776,176 $0.27 February 17, 2000
1,050,000 $0.70 February 28, 2000
192,254 $0.75 April 7, 2000
50,000 $2.00 June 20, 2000
</TABLE>
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123"), was issued. FAS 123
defines a fair value based method of accounting for employee stock options or
similar equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. Under the fair
value based method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period of the award, which
is usually the vesting period. However, FAS 123 also allows entities to continue
to measure compensation costs for employee stock compensation plans using the
intrinsic value method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). The Company has adopted
FAS 123 effective August 1, 1996, and has elected to remain with the accounting
prescribed by APB 25. The Company has made the required disclosures prescribed
by FAS 123.
The Company had two fixed stock plans during 1997. As a result of the
amalgamation, the Company had a stock option plan that was in existence since
Inception (the Canadian Plan). No options were ever issued as part of the
Canadian Plan, even though the Company had the ability to issue options to
acquire approximately 2,800,000 shares of the Company's common stock. In
February 1997, the Company's Board of Directors adopted the 1997 Stock Option
Plan, which replaced the Canadian Plan. Under the 1997 Stock Option Plan,
options to purchase up to 5,000,000 shares of common stock may be granted to
employees, directors, consultants and advisers. The 1997 Stock Option Plan is
intended to permit the Company to retain and attract qualified individuals who
will contribute to the Company's overall success. The exercise price of all of
the options is equal to the market price of the shares of common stock as of the
date of grant. The options vest pursuant to the individual stock option
agreements, usually 33 percent per year beginning one year from the grant date
with unexercised options expiring ten years after the date of the grant. On
February 10, 1997 the Board of Directors granted a total of 4,488,000 options to
purchase Common Shares to directors and employees of the Company. Certain grants
were considered vested based on past service as of February 10, 1997. The 1997
Stock Option Plan was approved by a vote of the stockholders at the Company's
Annual Meeting of Shareholders on May 21, 1997.In accordance with APB 25, the
Company recorded approximately $1.4 million in deferred compensation expense
related to approximately 1.5 million of the options granted based on the
increase in the Company's stock price from February 10, 1997 when the options
were granted, to May 21, 1997, when the underlying 1997 Stock Option Plan was
approved by the Company's shareholders. As of July 31, 1997, the Company had
$1,132,000 of deferred compensation expense related to options granted.
F-16
<PAGE>
A summary of the status of the Company's 1997 Stock Option Plan for
the year ended July 31, 1997 and changes during the period is presented below:
<TABLE>
<CAPTION>
July 31, 1997
----------------------------
Weighted
Average
Shares Exercise Price
---------- --------------
<S> <C> <C>
Outstanding, beginning of period - -
Granted 4,488,000 $0.58
Exercised - -
Forfeited (5,000) $0.58
--------- -----
Outstanding, end of period 4,483,000 $0.58
========= =====
Options exercisable at end of period 1,786,332 $0.58
========= =====
Weighted average fair value of options granted
during the period
$0.58
=====
</TABLE>
The weighted averge remaining contractual life of the stock options
outstanding at July 31, 1997 is approximately 9.5 years.
Because the Company has elected to remain with the accounting prescribed by
APB 25, no compensation cost has been recognized for its fixed stock option plan
based on FAS 123. Had compensation cost for the Company's stock-based
compensation plans been determined on the fair value of the grant dates for
awards under the plan consistent with the method of FAS 123, the Company's net
loss and loss per share would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
July 31, 1997
--------------
<S> <C>
Net Loss
As reported $(4,636,972)
Pro forma $(5,176,802)
Loss per share
As reported $ (0.17)
Pro forma $ (0.19)
</TABLE>
The fair value of the option grant is estimated based on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for the grant in 1997: Dividend yield of 0.0%, expected volatility of 60%, risk-
free interest rate of 6.41%, and an expected life of ten years. No disclosure
is presented for the periods ended July 31, 1996 and 1995, as no options were
issued at those dates.
F-17
<PAGE>
13. POST EMPLOYMENT BENEFITS
In December 1991, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 106 (SFAS No. 106), "Employers' Accounting
for Postretirement Benefits Other Than Pensions." In November 1992, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 112 (SFAS No. 112), "Employers' Accounting for Postemployment
Benefits." The Company does not provide postretirement nor postemployment
benefits to its employees. Thus, SFAS Nos. 106 and 112 do not affect the
Company's results of operations or financial position.
14. INTERNATIONAL OPERATIONS
The Company focuses on providing international satellite-based private
networks and international call services between the United States, Mexico,
Central and South America, and the Caribbean Basin. With the exception of a
portion of a $1.4 million contract which was completed in April 1996 and the
cash revenues generated by Computel, all of the Company's contracts to date have
been denominated in, and have called for payment in U.S. dollars, even though
some of the contracts have been signed with foreign entities. The Company's
contracts are U.S. dollar denominated in order to reduce risks of transacting
business in foreign currencies, particularly with regard to Mexican pesos.
The Company provides long distance services for many hotels, resorts and
other properties in other countries, primarily Mexico. Although these services
pertain to calls originating in Mexico, they are limited to telephone calls
charged to billing addresses primarily within the United States, or calls billed
to U.S. dollar denominated credit cards. Because the calls are billed and
connected on behalf of the Company within the United States, the Company
considers the associated revenues to be generated within the United States.
However, a portion of the expenses associated with processing these calls is
incurred within Mexico and, as such, is paid to Mexican entities. Because calls
originating from Mexico and the United States are terminated over shared lines
within the United States, the Company has no exact method of segregating all
costs related solely to calls originating in Mexico as of July 31, 1997.
With the acquisition of Computel in May 1997, the Company began providing
domestic call services in exchange for cash payment within Mexico, through
Computel's casetas. Computel also provides international call services through
the Company.
International networks effectively establish a communications "pipe"
through which voice, data, fax messages and video signals may be sent both to
and from a customer's desired location in the United States, Mexico, Central and
South America, and the Caribbean Basin. At the customer's discretion, the
Company may contract with either the domestic (U.S.- based) or the foreign
entity in order to provide such services. As of July 31, 1997, the Company had
several contracts with foreign entities in Mexico. If a contract is signed with
a foreign entity, the Company considers the network management associated
revenues to be generated in the country where the foreign entity is domiciled.
All entities under contract for network management services, whether foreign or
domestic, are pre-billed on a monthly basis for services to be performed.
The following table presents long distance services, network management
services, operating loss and identifiable assets by geographic area. The
identifiable assets of ATSI-Texas's parent company, ATSI-Canada, have been
included in the caption headed United States as they are immaterial in amount.
ATSI-Canada has no revenues as the Company's revenues are billed either by ATSI-
Texas or ATSI-Mexico. The table includes revenues and operating income of
Computel for the period from May 1, 1997 to July 31, 1997 and the identifiable
assets of Computel as of July 31, 1997.
F-18
<PAGE>
<TABLE>
<CAPTION>
For the Years ended July 31,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Operating revenues from unaffiliated
customers:
Long distance services
- ----------------------
United States $ 4,469,529 $ 10,806,586 $ 12,544,732
Mexico and other - - 1,421,249
------------ ------------ ------------
Total long distance services $ 4,469,529 $ 10,806,586 $ 13,965,981
============ ============ ============
Network management services
- ---------------------------
United States $ 318,312 $ 1,762,971 $ 2,064,262
Mexico and other - 905,127 198,144
------------ ------------ ------------
Total network management services $ 318,312 $ 2,668,098 $ 2,262,406
============ ============ ============
Operating loss
- --------------
United States ($1,950,489) ($2,079,456) ($3,869,820)
Mexico and other - 10,855 ($273,740)
------------ ------------ ------------
Total operating loss ($1,950,489) ($2,068,601) ($4,143,560)
============ ============ ============
Identifiable assets
- -------------------
United States $ 2,653,646 $ 3,790,354 $ 6,659,651
Mexico and other - 394,138 6,832,794
------------ ------------ ------------
Total identifiable assets $ 2,653,646 $ 4,184,492 $ 13,492,445
============ ============ ============
</TABLE>
15. INCOME TAXES
As of July 31,1997, the Company had net operating loss carryforwards of
approximately $9,092,000 for U.S. federal income tax purposes which are
available to reduce future taxable income of which $320,000 will expire in 2009,
$1,930,000 will expire in 2010, $2,205,000 will expire in 2011 and $4,637,000
will expire in 2012. The availability of the net operating loss (NOL)
carryforwards to reduce U.S. federal taxable income is subject to various
limitations in the event of an ownership change as defined in Section 382 of the
Internal Revenue Code of 1986 (the "Code"). The Company experienced a change in
ownership in excess of 50 percent, as defined in the Code, during the year ended
July 31, 1997. This change in ownership limits the annual utilization of NOL
under the Code to $930,000 per year, but does not impact its ability to utilize
its NOL's because the annual limitation under the Code would allow full
utilization within the statutory carryforward period.
F-19
<PAGE>
The tax effects of significant temporary differences representing deferred
income tax assets and liabilities are as follows as of July 31, 1996 and 1997:
<TABLE>
<CAPTION>
July 31,1996 July 31, 1997
------------- --------------
<S> <C> <C>
Net operating loss carryforward $ 1,515,000 $ 3,090,000
Other tax differences, net (162,000) (315,000)
Valuation allowance (1,353,000) (2,775,000)
----------- -----------
Total deferred income tax assets $ - $ -
=========== ============
</TABLE>
The valuation allowance as of July 31, 1996 and 1997 represents tax
benefits of certain net operating loss carryforwards which were not realizable
at that date.
The Company's income tax benefit at the statutory federal income tax rate
for the years ended July 31, 1995 ,1996 and 1997 differs from the actual income
tax benefit of $0 for those periods, as the Company has provided a valuation
reserve equal to the income tax benefit amount computed at the statutory federal
tax rate.
16. SHARES HELD IN TRUST
In conjunction with the amalgamation , 300,000 of the 10,790,307 shares
issued to the former shareholders of Latcomm were issued to a trust. These
shares were to be held for future award to employees in return for services to
be rendered to the Company. Because the shares held in trust held no voting
rights, the shares were considered to be issued, but not outstanding, until
awarded and earned by specific employees. As of July 31, 1996 a total of
225,000 of these shares had been awarded to employees for services to be
provided to the Company. During fiscal 1997, the additional 75,000 shares were
awarded to employees. At July 31, 1996 and 1997, the Company had deferred
compensation expense of $55,556 and $22,232, respectively.
17. REGISTRATION STATEMENT
The Company filed a Form 10 Registration Statement ("Form 10") with the
United States Securities and Exchange Commission ("SEC") on August 21, 1997, for
the purpose of registering its shares of common stock under the Securities
Exchange Act of 1934, as amended.
The Company filed a Form S-4 Registration Statement ("S-4"), No. 333-5557,
with the SEC on June 7, 1996, Amendment No. 1 to the S-4 on November 20, 1996
and Amendment No. 2 to the S-4 on September 11, 1997. The S-4 filings are in
conjunction with the Company's plan to effect a "Plan of Arrangement." The Plan
of Arrangement calls for the Company to form a Delaware corporation ("ATSI-
Delaware") which will effect a share exchange with ATSI-Canada. This share
exchange will result in the current stockholders of ATSI-Canada exchanging their
shares on a one-for-one basis for shares of ATSI-Delaware, and ATSI-Delaware
will become the publicly-traded parent entity of the Company. The Plan of
Arrangement must be approved by the Canadian court system and the Company's
stockholders before it can be effected. The S-4 registers the shares of ATSI-
Delaware to be issued in the Plan of Arrangement.
F-20
<PAGE>
18. COMMITMENTS AND CONTINGENCIES
In January 1995, the Company was named as a defendant in a lawsuit in the
45th Judicial District Court in Bexar County, Texas (Teleplus, Inc. And Capital
Network Systems, Inc. v. American TeleSource International, Inc., et al., case
no. 95-CI-01168). The complaint, filed by a competitor of the Company, alleged,
among other things, that the Company conspired with former agents of the
plaintiffs to persuade customers of the plaintiffs' to breach their contracts so
that the Company could provide operator services to such customers. The Company
subsequently filed a counterclaim against the plaintiffs claiming that they
engaged in anticompetitive conduct.
In April 1996, all parties agreed to dismiss all claims, counterclaims and
cross-claims that had been brought or could have been brought related to the
litigation. The agreement, among other things, established current customer
lists for the parties within Mexico as of April 1996, and set forth how both the
plaintiffs and defendants may market their services against each other in the
future. The agreement does not prevent the Company from growing its customer
base within Mexico.
Effective January and February 1997, five officers of the Company entered
into employment agreements with ATSI-Texas, each for a period of three years
(with automatic one-year extensions) unless earlier terminated in accordance
with the terms of the respective agreements. The annual base salary under such
agreements for each of these five officers may not be less than $100,000,
$95,000, $92,000, $92,000 and $92,000, respectively, per annum, and is subject
to increase within the discretion of the Board. In addition, each of these
officers is eligible to receive a bonus in such amount as may be determined by
the Board of Directors from time to time. Bonuses may not exceed 50% of the
executive's base salary in any fiscal year.
In June 1997, the Company signed a letter of intent to purchase certain
customer contracts from one of its independent marketing representatives. The
acquisition of such customer contracts is estimated to cost approximately $1.25
million, and is expected to be paid for partially in cash and partially in
common stock. As of July 31, 1997, the Company has not completed said
transaction, as such transaction is contingent upon the Company completing its
due diligence and the execution of a definitive agreement of said purchase of
contracts.
The Company is involved in certain claims in the ordinary course of
business. In management's judgment, the ultimate liability, if any, from such
claims will not have a material effect on the Company's financial position and
results of operations.
19. REGULATORY MATTERS
Operator Services in Mexico
---------------------------
Since its Inception, the Company's near-term strategy has been to position
itself to take advantage of the deregulation of the Mexican telecommunications
industry. The Company believes that significant opportunities to provide call
services within Mexico and between Mexico and the U.S. have arisen and will
continue to arise from the law written into effect in June 1995 by the SCT,
which provides for the methods by which companies can apply for concessions and
licenses to establish and operate telecommunications services businesses within
Mexico. This law was, effectively, the first step in the deregulation of the
telephone industry within Mexico. It also formalized the methods by which
companies may compete against Telefonos de Mexico ("Telmex"), the privately
owned telecommunications monopoly in Mexico. On August 10, 1996, Telmex lost
its monopoly status and long distance exclusivity, thereby allowing other
concessioned carriers to begin offering domestic and international long distance
services within Mexico ; however, new carriers must still interconnect to
Telmex's local network and pay a fee per minute of usage. In January 1997,
Telmex began implementation of a plan imposed by the SCT which mandates that
Telmex offer local interconnection to other carriers in all Mexican cities by
July 1997. Alternatively, concessioned carriers with wireless local access,
such as via cellular or microwave, are currently allowed by Mexican law to
bypass Telmex's local network and connect directly into their own long distance
networks.
F-21
<PAGE>
ATSI-Mexico has applied for and obtained several licenses from the SCT
which the Company believes will enable it to expand significantly its call
services that it currently provides in Mexico. Such licenses, among other
things, will enable the Company to purchase network capacity from Telmex or
other concessioned carriers at stable, wholesale prices. On November 20, 1996,
the Company signed an interconnection agreement with Investcom, S.A. de C,V.,
one of the twelve companies that has been granted a concession by the SCT to
begin offering domestic and international long distance services within Mexico.
The Company began processing calls through Investcom's network within Mexico at
wholesale rates during May 1997, thereby lowering the Company's cost of
transporting telephone calls from their point of origin in Mexico to the
Company's switching facilities in San Antonio, Texas. On December 16, 1996, the
SCT published, and therefore adopted, the rules and regulations under which
companies may own and operate public phones within Mexico. The adoption of these
rules and regulations, in the opinion of the Company's management, served as a
precursor to the issuance of the comercializadora license that the Company
received February 20, 1997. As of July 31, 1997, the Company is one of four
companies that has received its comercializadora license to own and operate
public phones. There can be no assurance that one other pending license or any
other such licences sought in the future will be obtained, and if obtained, that
such licenses will enable the Company to expand operations or increase revenue
in Mexico.
Operator Services in the U.S.
-----------------------------
The Company began providing operator services in the U.S. in August 1994.
The Federal Communications Commission (FCC) requires the filing of informational
tariffs concerning such services and requires both written and verbal
identification of the operator service provider ("OSP") on each call processed.
The Company believes it is in full compliance with all applicable regulations
set forth by the FCC. Many state regulatory bodies have imposed similar or
identical regulations upon operator services for intrastate telecommunication.
The Company is currently in the process of making the appropriate filings for
these informational tariffs in order to maintain compliance with these
jurisdictional requirements.
Since April 1992 the FCC has been considering the implementation of a
"Billed Party Preference ("BPP") system whereby a caller could automatically
route operator assisted calls to a pre-selected carrier. If adopted BPP could
fundamentally change the operator services industry. The FCC proposed adopting
BPP in 1992 and then again in 1994, but quickly received comments from industry
representatives, suggesting that the implementation and maintenance of BPP would
be extremely difficult to implement and would not be cost-effective.
The FCC again requested comment from the industry in March 1995 on two
proposals that it had received related to BPP. The first proposal was from the
National Association of Attorneys General, which suggested that OSPs modify the
branding that is required at the beginning of a call to include more specific
information for obtaining access to alternative carriers. The second proposal
was from a group of industry members including a majority of the Regional Bell
Operating Companies and the American Public Communications Counsel (APCC). The
Company is a member of the APCC. This proposal suggested that reasonable rate
limits be established for interstate operator assisted services and that any
OSPs wanting to charge rates in excess of these limits must first be required to
justify its rates to the FCC based upon its underlying costs.
In July 1996, the FCC issued a second "Further Notice of Proposed
Rulemaking" in which it effectively endorsed the proposal from the National
Association of Attorneys General. The FCC proposed a rule which would require
OSPs to announce rates for certain calls prior to connecting the call, and
allowing the billed party to disconnect this call without incurring any charges.
Comments, which were due to the FCC in August 1996, were again heavily weighted
against adoption of the proposal.
If BPP or a similar system is adopted by the FCC the Company's domestic
operator service traffic could be materially adversely affected. Approximately
25% of the Company's long distance services revenues were generated from
F-22
<PAGE>
such calls during the year ended July 31, 1997, although this percentage is
expected to decrease in the future as the volume of international calls
continues to increase. The Company cannot predict when and if any final ruling
will be issued by the FCC related to BPP, but the Company does not expect any
ruling on BPP to be implemented in the near term.
Changes in certain regulations may potentially preclude or impair the
Company's ability to provide operator services within certain jurisdictions.
Although, the Company does not foresee any such changes, it cannot predict
whether such changes may occur. Therefore, the Company cannot estimate the
impact of such changes upon its operator services in the event of any such
change.
20. SUBSEQUENT EVENTS
In August 1997, the Company committed to purchase approximately $1,000,000
in telecommunications equipment. Per the terms of its commitment with the
vendor, the Company is obligated to pay for the total amount due over the next
90 days commencing with the order of the equipment. It is the Company's intent
to secure long-term financing for this equipment by means of a leasing facility.
In October 1997, the Company accepted a capital lease proposal with a
company to assist it in the anticipated growth of its business during fiscal
1998. Under this capital lease agreement, the Company may enter into capital
leases for the purchase of up to $5,000,000 of equipment. The leases would be
payable over a 48 month period. The monthly payments would be based on $27,850
per month for every $1,000,000 of equipments financed. No amounts are
outstanding under this arrangement.
F-23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
American TeleSource International Inc.:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of American TeleSource International Inc. and
subsidiaries included in this Registration Statement on Form 10 and have issued
our report thereon dated October 3, 1997. Our audit was made for the purpose of
forming an opinion on the basic financial statements taken as a whole. Schedule
II is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
San Antonio, Texas
October 3, 1997
S-1
<PAGE>
Schedule II
AMERICAN TELESOURCE INTERNATIONAL INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Charged to Write-offs
Balance at Costs and Charged to Balance at
Period Ended Description Beginning of Period Expenses Allowance End of Period
- ------------ ------------------------------- ------------------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
July 31, 1995 Allowance for Doubtful Accounts $ 13,490 $339,828 ($209,772) $143,546
July 31, 1996 Allowance for Doubtful Accounts $143,546 $554,333 ($543,497) $154,382
July 31, 1997 Allowance for Doubtful Accounts $154,382 $734,987 ($701,912) $187,457
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Page
- ------- ----------- ----
3.1 Articles of Amalgamation, as amended, of ATSI-Canada*
3.2 Bylaws of ATSI-Canada*
4.1 Form of Private Placement Warrant*
10.1 Form of Customer Service Agreement for Private Networks*
10.2 Telecommunications Agreement between ATSI-Texas and Long
Distance Exchange Corp.*
10.3 Compensation Agreement between ATSI-Texas and James McCourt
relating to Guarantee of Equipment Line of Credit by James
McCourt**
10.4 Agreement for Investment Banking Services between ATSI-Texas
and Joseph Charles & Associates, Inc.**
10.5 (1)
10.6 1997 Option Plan**
10.7 Form of Option Agreement**
10.8 (1)
10.9 Financing Agreement with Roger G. Watt and Convertible Notes
issued to Robert G. Watt*
10.10 FCC Radio Station Authorization-C Band*
10.11 FCC Radio Station Authorization-Ku Band*
10.12 Section 214 Certification from FCC*
10.13 Carrier Termination Services Agreement between U.S. Long
Distance, Inc. and ATSI-Texas*
10.14 Office Space Lease Agreement*
10.15 Amendment to Office Lease Agreement***
10.16 Employment Agreement with Arthur L. Smith**
10.17 Employment Agreement with H. Douglas Saathoff**
10.18 Employment Agreement with Craig K. Clement**
10.19 Employment Agreement with Everett L. Waller**
10.20 Employment Agreement with Charles R. Poole**
10.21 Lease/Finance Agreements between IBM de Mexico and
ATSI-Mexico***
10.22 Primary Agreement with Computel**
10.23 Agreement with Investcom***
10.24 Payphone License issued to ATSI-Mexico**
10.25 (2)
10.26 Shared Teleport/Network Resale Licenses issued to
ATSI-Mexico**
10.27 Agreement with Avantel**
10.28 Registration Rights Agreement between ATSI-Canada and
James R. Leninger**
10.29 Modification Agreement with Computel***
11 Statement of Computation of Per Share Earnings***
22 Subsidiaries of Registrant**
24 Power of Attorney (included on Signature Page to the
Registration Statement on Form 10 (No. 0-23007) of the
Company filed August 21, 1997)**
27 Financial Data Schedule***
- ---------------------------------------
* Contained in exhibits to Registration Statement on Form S-4 (No. 333-05557)
of the Company filed June 7, 1996.
** Contained in exhibits to Registration Statement on Form 10 (No. 0-23007) of
the Company filed August 21, 1997.
*** Filed herewith.
(1) Exhibit previously listed in exhibit list to Registration Statement on Form
10 (No. 0-23007) of the Company filed August 21, 1997 has been deemed
immaterial by the Company and eliminated.
(2) Exhibit previously listed in exhibit list to Registration Statement on Form
10 (No. 0-23007) of the Company filed August 21, 1997 is contained in
Exhibit 10.26 previously filed with such Registration Statement.
<PAGE>
Exhibit 10.15
5TH AMENDMENT TO LEASE AGREEMENT
This 5th Amendment to Lease Agreement is entered into this ________ day of
________________ 1997 by and between UBP PARTNERS LIMITED, a Texas Limited
Partnership (hereinafter referred to as "Landlord") and AMERICAN TELESOURCE
INTERNATIONAL, A Texas Corporation (hereinafter referred to as "Tenant"):
WITNESSETH:
WHEREAS, by Lease Agreement dated March 25, 1994, Landlord leased to Tenant
approximately 4,000 square feet of office space located at 12500 Network Blvd.,
Suite 407, in the University Business Park, legally described as Lot 1, Block 1,
New City Block 17386, UNIVERSITY BUSINESS PARK, UNITE 1, in the City of San
Antonio, Bexar County, Texas, according to plat thereof recorded in Volume 9506,
Page 165, Deed and Plat Records of Bexar County, Texas, and;
WHEREAS, by a 1st Amendment to Lease Agreement executed by both Landlord
and Tenant on April 11, 1994, the size of the Premises was increased from 4,000
square feet to 5,402 square feet and;
WHEREAS, by a 2nd Amendment to Lease Agreement executed by both Landlord
and Tenant on September 30, 1994, the size of the Premises was increased from
5,042 square feet to 6,350 square feet, and;
WHEREAS, by a 3rd Amendment to Lease Agreement executed by both Landlord
and Tenant on March 21, 1996, the size of the Premises was increased from 6,350
square feet to 8,219 square feet, and;
WHEREAS, by 4th Amendment to Lease Agreement executed by both Landlord and
Tenant on August 1, 1996, the size of the Premises was increased from 8,219
square feet to 11,819 square feet (hereinafter the Lease Agreement are
collectively referred to as the "Lease Agreement"), and;
WHEREAS, Landlord and Tenant desire to further amend said Lease Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual benefits to
accrue to Landlord and Tenant under and by virtue of this 5th Amendment to Lease
Agreement, Landlord and Tenant agree that Effective July 1, 1997, the following
designated article(s) of the Lease Agreement shall be, and are hereby amended as
follows:
A. TERM - ARTICLE 1(e): The term of the Lease is hereby extended to provide
for a termination date of August 30, 2002.
B. BASE RENT-AMOUNT AND PAYMENT - ARTICLE 1(f): Effective August 1, 1996,
the rent payable to Landlord under the terms of the Lease shall be
increased to conform to the following schedule:
<TABLE>
<CAPTION>
PER SQFT
--------
DATE MONTHLY ANNUALIZED
---- ------- ----------
<S> <C> <C>
07/01/97 - 08/30/97 $6,365.60 $6.46
09/01/97 - 06/30/98 $7,365.60 $7.48
07/01/98 - 06/30/99 $7,785.76 $7.90
07/01/99 - 06/30/01 $8,206.83 $8.33
07/01/01 - 08/30/02 $8,987.00 $9.12
</TABLE>
<PAGE>
C. ALTERATIONS AND IMPROVEMENTS TO THE PREMISES: Tenant shall make
alterations, additions and improvements to the premises which involve the
installation of interior partitions (framing and drywall), plumbing,
electrical wiring, air conditioning, heating or ventilation systems, or the
fire sprinkler system, according to complete and detailed and detailed sets
of plans and specifications approved by both Landlord and Tenant. The
following provisions numbered 1-12 shall govern the construction of the
alterations and improvements within the premises:
1. All work undertaken by Tenant shall be at Tenant's expense and shall not
damage the building or any part thereof, or any of Landlord's other
property.
2. Work undertaken by Tenant and at Tenant's own expense during the general
construction shall be awarded to a reputable responsible contractor of
Tenant's choosing, provided with approval not to be unreasonably
withheld, that such other contractor must be approved in advance by
Landlord in writing. All materials used shall be new and all
construction shall be done in a first class and workmanlike manner.
3. Tenant must obtain all necessary licenses and permits prior to the
commencement of Tenant's Work, unless otherwise agreed in writing by
Landlord.
4. Tenant shall give Landlord an affidavit of final waiver of lien from all
contractors, subs, materialmen, and suppliers, and delivery to Landlord
by Tenant of a Certificate of Occupancy for the premises along with the
other necessary written approvals and certifications from applicable
governmental authorities, evidencing compliance with zoning, building,
fire, health, environmental, handicapped and other pertinent laws, rules
and regulations applicable to Tenant's Work.
5. Tenant shall make application and deposit for water electricity, and
telephone to the proper agency to service. Tenant shall also procure
fire extinguishers as required by the Fire Marshall. These items should
be done as far in advance as possible to avoid unnecessary delays in
opening.
6. Landlord will pay to Tenant a finish-out allowance of $30,000.00 or the
----------
actual amount of Tenant's finish-out expense, whichever is less (if a
contractor other than Landlord's contractor performs Tenant's Work,
Tenant shall provide Landlord with bills, invoices, waivers of liens
signed by all persons performing work on or delivering materials to the
premises in a form satisfactory to Landlord, together with contracts and
other related documentation reasonably requested by Landlord necessary
to verify such items). Said allowance will be paid to Tenant at such
time as Tenant provides Landlord with all the requirements described in
"Paragraph 4" above and Landlord's management approves Tenant's Work.
7. Tenant hereby assumes any and all liability, including but not
limited to any liability arising out of statutory or common law, for any
and all injuries to or death of any and all persons and any liability
for any and all damaged property caused by, resulting from, or arising
out of any act or omission on the part of Tenant, its contractors and
its or their subcontractors or employees in the performance of Tenant's
Work. Tenant shall hold harmless and indemnify Landlord from and against
any and all loss, liability, damage and/or expenses which landlord, its
principals, agents, employees, or other tenants may incur on account of
death, bodily injury or property damage caused by, arising out of or
occurring in relation to Tenant's work and/or the acts or omissions of
Tenant, its contractors and its or their subcontractors.
8. All costs of Tenant's work shall be paid promptly so as to prevent the
assertion of any liens for labor or materials. Tenant shall hold
harmless and indemnify Landlord from and against any and all loss,
liability, damage and expenses resulting from or related to the
assertion of any liens on account of labor or materials furnished as a
part of, or in connection with, Tenant's Work. In the event any liens
are asserted against the Demised Premises or the
<PAGE>
project on account of any labor or materials furnished as a part of, or
in connection with, Tenant's Work, and such liens are not immediately
released or removed from such Demised Premises or the project within
three (3) days of the date of such assertion, Landlord, at its elect,
may require that Tenant furnish bond or other security as Landlord deems
satisfactory to protect Landlord against any such loss, liability or
damage, or Landlord may pay all such sums necessary to the obligee
asserting such lien and may thereafter charge the Tenant all such sums
paid out, along with interest at the highest legal rate, as additional
rent hereunder, to be paid upon demand therefore by Landlord.
9. Tenant shall immediately notify Landlord of the completion of Tenant's
Work, and Landlord shall review Tenant's Work to inspect its conformity
with the approved plans and specifications. In the event any part of
Tenant's Work shall be found by Landlord to be nonconforming to such
approved plans and specifications, Tenant shall promptly repair same,
and in the event Tenant fails to promptly make such repairs Landlord
shall have the right to repair same at Tenant's expense and Tenant shall
reimburse Landlord for such expense upon Landlord's demand, along with
interest thereon at the highest legal rate, as additional rent
hereunder. Tenant's work shall not be deemed complete until Landlord has
inspected it and approved its conformity with the approved plans and
specifications, and Landlord agrees to make such inspection promptly.
Any approval or consent by Landlord shall in no way obligate Landlord in
any manner whatsoever in respect to the finished product design and/or
construction by tenant. Any deficiency in design or construction,
although same had prior approval by Landlord, shall be solely the
responsibility of Tenant. Any deficiency or defect in the design or
construction of Tenant's Work shall not be waived by Landlord's
inspection of the Demised Premises whether or not such deficiency or
defect in the design or construction is objected to by Landlord.
10. All of Tenant's work shall be done in strict accordance with all
applicable governmental laws, rules, regulations, ordinances,
requirement and standards, and any particular requirements of insurance
companies which provide insurance to the Demised Promises and the
building in which the Demised Premises are located, and any other
insurance companies with applicable coverage.
11. Tenant shall cause each contractor and subcontractor doing Tenant's work
to guarantee and warrant, in writing, that the work done by it shall be
free from any defects in workmanship and materials for a period of not
less than one year from the date of its completion and acceptance by
Landlord thereof. All such warranties or guaranties with respect to
Tenant's work shall be contained in the applicable contract or
subcontract, and shall provide that such guaranties or warranties shall
inure to the benefit of both landlord and Tenant shall provide Landlord
with such contracts or other evidence of warranties or guaranties as
Landlord may desire, from time to time, Tenant covenants to give
Landlord any assignment or other assurance necessary to effect such
right of direct enforcement.
12. Tenant, its contractors and subcontractors, shall remove all trash,
debris and rubbish from the Demised Premises at least once a week, and
shall ensure that no trash, debris or rubbish is visible to the patrons
of the project. If at any time Tenant's contractors or subcontractors
shall neglect, refuse or fail to remove any such trash, debris or refuse
or fail to remove any such trash, debris or surplus materials, Landlord
may remove same at Tenant's expense, and Tenant shall reimburse Landlord
for such expenses upon demand by Landlord, together with interest
thereon at the highest legal rate.
<PAGE>
Except as herein amended, the Lease Agreement dated March 25, 1994, by and
between Landlord and Tenant and all subsequent Amendments to Lease Agreement,
shall remain in full force and effect in accordance with their respective terms
and provisions.
IN WITNESS WHEREOF, the parties herein have hereunto set their hands the
day and year first above written.
Landlord: Tenant:
UBP PARTNERS LIMITED AMERICAN TELESOURCE
INTERNATIONAL, INC.
By: /s/ Jack Braha By: /s/ H. Douglas Saathoff
------------------------------ -----------------------------
Title: General Partner Title: Chief Financial Officer
--------------------------- --------------------------
Date: August 8, 1997 Date: July 30, 1997
---------------------------- ---------------------------
<PAGE>
Exhibit 10.21
BUYING AND SELLING CONTRACT ON INSTALLMENTS WITH RESERVATION OF DOMAIN, ENTERED
INTO ON THE FIRST PART BY IBM DE MEXICO, COMERCIALIZACION Y SERVICIOS, S.A. DE
C.V., REPRESENTED BY MR. EDUARDO VELEZ RUIZ, AND ON THE SECOND PART, BY AMERICAN
TELESOURCE INTERNATIONAL DE MEXICO, S.A. DE C.V., REPRESENTED BY MR. ARTHUR L.
SMITH, WHO HENCEFORTH WILL BE CALLED "IBM" AND THE "PURCHASER", RESPECTIVELY,
AND CONJOINTLY WILL BE CALLED "THE PARTIES", IN ACCORDANCE WITH THE FOLLOWING
STATEMENTS AND CLAUSES.
S T A T E M E N T S
I. "IBM" STATES:
A. THAT IT IS A CORPORATION OF VARIABLE CAPITAL, LEGALLY CHARTERED IN
ACCORDANCE WITH THE LAWS OF MEXICO, THROUGH PUBLIC WRIT NUMBER 51602, DATED
JANUARY FIRST, 1997, GRANTED BEFORE NOTARY PUBLIC NUMBER 103 OF THE FEDERAL
DISTRICT, AND REGISTERED IN THE PUBLIC REGISTRY OF PROPERTY AND COMMERCE OF THE
SAME CITY IN THE COMMERCIAL SECTION, UNDER MERCANTILE NUMBER 218337.
B. THAT ITS LEGAL REPRESENTATIVE, MR. EDUARDO VELEZ RUIZ, HAS SUFFICIENT POWERS
TO SIGN THE PRESENT CONTRACT, AND WHICH HAVE NOT BEEN REVOKED NOR AMENDED IN ANY
MANNER WHATSOEVER, AS CAN BE SEEN IN PUBLIC WRIT NUMBER 100695, DATED MARCH 5TH,
1997, GRANTED BEFORE NOTARY PUBLIC 116 OF THE FEDERAL DISTRICT, AND THE
NECESSARY STEPS FOR ITS REGISTRY IN THE PUBLIC REGISTRY OF PROPERTY AND COMMERCE
ARE BEING TAKEN.
II. THE "PURCHASER" STATES:
A. THAT IT IS A CORPORATION OF VARIABLE CAPITAL, LEGALLY CHARTERED UNDER THE
LEGISLATION OF MEXICO THROUGH THE PUBLIC WRIT NUMBER 19,977 DATED JUNE
TWENTIETH, 1995, GRANTED BEFORE NOTARY PUBLIC NUMBER 173 OF MEXICO, F.D., AND
REGISTERED IN THE PUBLIC REGISTRY OF COMMERCE OF THE SAME CITY, UNDER THE NUMBER
202,960, DATED AUGUST FIRST, 1995.
B. THAT ITS LEGAL REPRESENTATIVE, MR. ARTHUR LOUIS SMITH, HAS THE SUFFICIENT
POWERS TO SIGN THE PRESENT CONTRACT, EMPOWERMENT
<PAGE>
2
WHICH HAS NOT BEEN REVOKED NOR MODIFIED IN ANY MANNER WHATSOEVER, AS CAN BE SEEN
IN THE PUBLIC WRIT MENTIONED IN THE PREVIOUS STATEMENT.
THEREFORE, "THE PARTIES" ACCEPT TO SUBMIT THEMSELVES TO THE FOLLOWING:
C L A U S E S
FIRST. OBJECT
THE PRESENT BUYING AND SELLING CONTRACT IN INSTALLMENTS WITH RESERVATION OF
DOMAIN, ESTABLISHES THE TERMS AND CONDITIONS FOR THE PURCHASE AND SALE OF
MACHINERY THAT IS DESCRIBED IN "ATTACHMENT A".
IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THIS CONTRACT AND ITS
ATTACHMENTS, "IBM" AGREES TO SELL THE GOODS SPECIFIED IN "ATTACHMENT A", WHICH,
ONCE SIGNED BY "THE PARTIES", FORMS AN INTEGRAL PART OF THE PRESENT INSTRUMENT.
ON ITS PART, THE "PURCHASER" AGREES TO PAY "IBM" AS A COUNTERCONSIDERATION THE
AMOUNT STIPULATED IN CLAUSE SEVENTH, "PRICE AGREED ON".
SECOND. LIST OF ATTACHMENTS
THE ATTACHMENTS THAT FORM AN INTEGRAL PART OF THE PRESENT CONTRACT ARE THE ONES
MENTIONED BELOW, AND ARE REPRODUCED SPECIFICALLY IN THE TEXT OF THE PRESENT
CONTRACT.
ATTACHMENT "A" LIST OF PRODUCTS
ATTACHMENT "B" FINANCING CONDITIONS
ATTACHMENT "C" ADDITIONAL WARRANTIES
ATTACHMENT "D" PAYMENT SCHEDULE.
THESE ATTACHMENTS CAN MAKE REFERENCE TO OTHER CONTRACTS ENTERED INTO BETWEEN THE
PARTIES, AND ARE APPLICABLE TO ANY OF THE PRODUCTS. IN CASE OF A CONTROVERSY
BETWEEN THIS CONTRACT AND THE TERMS AND CONDITIONS OF THE PURCHASE ORDERS
SPECIFIED IN CLAUSE THIRD FOLLOWING, "CONTRACTS FOR GOODS AND RELATED SERVICES",
THE PRESENT CONTRACT WILL PREVAIL.
<PAGE>
3
THIRD. CONTRACTS FOR GOODS AND RELATED SERVICES
"THE PARTIES" AGREE TO FORMALIZE SIMULTANEOUSLY PURCHASE ORDERS SPECIFIED IN
"ATTACHMENT A" THAT INTEGRATE THE PRODUCTS TO BE FURNISHED BY "IBM", IN
ACCORDANCE WITH THE TERMS AND CONDITIONS PREVIOUSLY PRESENTED TO THE
"PURCHASER", AS WELL AS THE STIPULATIONS OF THIS CONTRACT AND ITS OTHER
ATTACHMENTS.
FOURTH. SCOPE
IN VIEW OF THE PRESENT CONTRACT, "IBM" SELLS THE PRODUCT IN ACCORDANCE WITH THE
STIPULATIONS OF "ATTACHMENT A".
FOR THOSE CASES IN WHICH AS PART OF THE PRODUCTS OBJECT OF THE PRESENT CONTRACT,
NON-"IBM" PROGRAMS HAVE BEEN CONSIDERED, WHETHER OPERATIVE PROGRAMS OR COMPUTER,
AND/OR APPLICATION PROGRAMS, THESE WILL BE LISTED AND DETAILED IN "ATTACHMENT
A". NEVERTHELESS, INSPITE OF THE FACT THAT THE BUYING AND SELLING CONTRACT
INCLUDES THE PROGRAMS, THE CONTRACTS FOR THEIR USE IN VIRTUE OF THEIR
CORRESPONDING LICENSES MUST BE ENTERED INTO DIRECTLY BETWEEN THE SUPPLIER
DESIGNATED BY "IBM" AND THE "PURCHASER".
THIS CONTRACT DOES NOT INCLUDE CHARGES REGARDING ANNUAL MAINTENANCE FOR THE
SOFTWARE OFFERED BY THE SUPPLIER. IF THE "PURCHASER" DECIDES TO ACQUIRE IT, THE
"PURCHASER" MUST ENTER INTO THE RESPECTIVE CONTRACT DIRECTLY WITH THE SUPPLIER.
FIFTH. PERSONNEL
"THE PARTIES" AGREE THAT "IBM" CAN SUBCONTRACT WITH THIRD PARTIES ANY OF THE
PRODUCTS OBJECT OF THIS CONTRACT.
EACH ONE OF THE PARTIES ASSUMES THE RESPONSIBILITY OF SUPERVISION, MANAGEMENT,
AND CONTROL OF ITS OWN PERSONNEL FOR THE ACTIVITIES IT SHOULD CARRY OUT IN
ACCORDANCE WITH THE STIPULATIONS OF THIS CONTRACT.
SIXTH. RESPONSIBILITY FOR ITS USE
ONCE THE PRODUCTS HAVE BEEN DELIVERED BY "IBM", THE "PURCHASER" WILL HAVE THE
RESPONSIBILITY OF THE USE AND RESULTS THAT MAY BE
<PAGE>
4
OBTAINED FROM THE PRODUCTS THAT "IBM" FURNISHES, AS WELL AS OF OTHER EQUIPMENT,
PROGRAMS AND SERVICES USED WITH SAID PRODUCTS.
SEVENTH. PRICE AGREED ON
THE "PURCHASER" BINDS HIMSELF TO PAY "IBM" AS A COUNTERCONSIDERATION OF THE
GOODS MATTER OF THE PRESENT CONTRACT, THE AMOUNTS THAT ARE DETAILED IN
"ATTACHMENT A" AS ONLY CHARGES, IN ACCORDANCE WITH THE PAYMENTS SCHEDULE HEREIN
SPECIFIED.
ALL THE TAXES DERIVED FROM THE OPERATIONS CONTAINED IN THE PRESENT CONTRACT
SHALL BE APPLICABLE TO THE PARTY TO WHICH PAYMENT CORRESPONDS, IN ACCORDANCE
WITH THE PRESENT FISCAL LEGISLATION.
EIGHTH. INVOICES
"IBM" WILL INVOICE THE ONLY CHARGES IN ACCORDANCE WITH THE PAYMENT SCHEDULE
INDICATED IN "ATTACHMENT B". PAYMENTS TO "IBM" BY THE "PURCHASER", WILL BE MADE
IN FAVOR OF "IBM DE MEXICO, COMERCIALIZACION Y SERVICIOS, S.A. DE C.V.", IN THE
FORM, OFFICE HOURS, AND THE PLACE THAT "THE PARTIES" AGREE ON.
NINTH. CHANGES IN THE CONTRACT
ANY OF "THE PARTIES" DURING THE LIFE OF THIS CONTRACT CAN REQUEST IN WRITING
CHANGES TO THE SAME, OR TO ANY OF ITS ATTACHMENTS. IF THE CHANGE IS ACCEPTED BY
BOTH PARTIES, "IBM" WILL PREPARE A NEW LIST OF PRODUCTS OR SERVICES, AND THE
CHARGES THAT WILL DESCRIBE THE CHANGE REQUESTED AND WILL STIPULATE THE
MODIFICATIONS TO THE ORIGINAL LIST, AND "THE PARTIES" MUST SIGN IT TO MAKE IT
VALID PREVIOUS TO ITS IMPLEMENTATION.
ONCE THE CHANGES HAVE BEEN AGREED ON, "THE PARTIES" MUST SIGN THE CORRESPONDING
AMENDING DOCUMENT, WHICH WILL FORM AN INTEGRAL PART OF THE PRESENT CONTRACT.
<PAGE>
5
TENTH. CONFIDENTIAL INFORMATION
"THE PARTIES" AGREE THAT THE INFORMATION PROVIDED IN VIEW OF THIS CONTRACT WILL
BE CLASSIFIED AS CONFIDENTIAL, AND THE RECEIVER MUST HAVE THE SAME CARE AND
CONFIDENTIALITY THAT IT HAS WITH ITS OWN INFORMATION.
ELEVENTH. PATENTS AND COPYRIGHTS
"THE PARTIES" RECOGNIZE AND ACCEPT THAT THE SUPPLIER WILL BE RESPONSIBLE OF ANY
CLAIM RELATED AND DERIVED FROM ANY MACHINE OR PROGRAM FURNISHED BY THEIR
SUPPLIERS THAT MAY INFRINGE ANY PATENT OR COPYRIGHT IN MEXICO.
TWELFTH. LIMIT OF RESPONSIBILITIES
WITH THE EXCEPTION OF THE STIPULATIONS AFOREMENTIONED IN THE PREVIOUS CLAUSE,
IBM'S TOTAL RESPONSIBILITY REGARDING ANY NON COMPLIANCE WITH THE PRESENT
CONTRACT WILL BE LIMITED TO THE AMOUNT EFFECTIVELY PAID BY THE "PURCHASER" OF
THE PRODUCTS AND SERVICES DESCRIBED IN "ATTACHMENT A".
NEITHER OF "THE PARTIES" WILL BE RESPONSIBLE FOR THE NON COMPLIANCE OF ITS
OBLIGATIONS MOTIVATED BY FORCE MAJEURE.
THIRTEENTH. WARRANTIES
THE WARRANTY SPECIFICATIONS FOR ALL THE GOODS FURNISHED IN VIEW OF THE PRESENT
CONTRACT AND THAT ARE DETAILED IN "ATTACHMENT A", WILL BE THE RESPONSIBILITY OF
"IBM" THROUGH THE "SUPPLIER" SELECTED BETWEEN "IBM" AND THE "PURCHASER". THE
"PURCHASER" AGREES THAT "IBM" WILL NOT BE RESPONSIBLE FOR THE EQUIPMENT, ITS
MAINTENANCE, AND SPARE PARTS ONCE THE WARRANTY PERIOD HAS ELAPSED.
FOURTEENTH. PROPERTY
THE PROPERTY OF THE GOODS FURNISHED IN ACCORDANCE WITH THE PRESENT CONTRACT WILL
BE TRANSFERRED TO THE "PURCHASER" ONCE THE TOTAL AMOUNT OF THE PRICE AGREED ON
HAS BEEN PAID, IN ACCORDANCE WITH THE PAYMENT SCHEDULE DETAILED IN "ATTACHMENT
A".
<PAGE>
6
FIFTEENTH. ENDING AND CANCELLATION
1. THE PRESENT CONTRACT WILL GO INTO EFFECT ON THE DATE THAT BOTH PARTIES SIGN
IT AND THE DOWN PAYMENT HAS BEEN MADE, AND WILL CONTINUE IN EFFECT UNTIL THE
ENDING OF PAYMENTS BY THE "PURCHASER" ON THE DATE SPECIFIED IN THE MANNER OF
PAYMENT AS PER "ATTACHMENT B".
2. ANY OF "THE PARTIES" CAN END THE PRESENT CONTRACT IN CASE OF NON COMPLIANCE
OF THE OTHER PARTY WITH ITS OBLIGATIONS WITHOUT NEED OF JUDICIAL PROCEEDINGS, IF
SAID NON COMPLIANCE IS NOT CORRECTED WITHIN THE THIRTY (30) DAYS FOLLOWING THE
CORRESPONDING NOTICE. IN THIS CASE, AND WHEN "IBM" ENDS THIS CONTRACT, BOTH
PARTIES WILL SUBJECT THEMSELVES TO THE STIPULATIONS IN THE FOLLOWING CLAUSE
SEVENTEENTH.
3. IN CASE THE "PURCHASER" CANCELS THE ORDERS REGARDING THE GOODS SUBJECT THE
PRESENT CONTRACT, THE SAME AGREES TO PAY "IBM" AS A CONVENTIONAL PENALTY 20%
(TWENTY PER CENT) OF THE PRICE OF THE CANCELLED ITEM.
SIXTEENTH. BRAND AND COMMERCIAL NAMES USE
ANY OF "THE PARTIES" WILL USE THE NAME OF THE OTHER NOR OF ANY OF ITS ASSOCIATES
IN ADVERTISING OR PROMOTIONAL MATERIALS, WITHOUT PREVIOUS WRITTEN CONSENT BY THE
AFFECTED PARTY.
SEVENTEENTH. RESERVATION OF DOMAIN
IN ACCORDANCE WITH PROVISIONS ESTABLISHED BY ARTICLE 2312 IN THE CIVIL CODE OF
THE FEDERAL DISTRICT, IT IS EXPRESSLY AGREED BY "THE PARTIES" THAT "IBM"
WITHOLDS THE PROPERTY OF EVERY ITEM OF EQUIPMENT MENTIONED IN "ATTACHMENT A" OF
THIS CONTRACT, AS LONG AS THERE IS ANY AMOUNT PENDING OF PAYMENT BY THE
"PURCHASER" IN "IBM" FAVOR. THE LACK OF TIMELY PAYMENT OF TWO CONSECUTIVE
PROMISORY NOTES WILL GIVE "IBM" THE RIGHT TO CANCEL THE PRESENT CONTRACT, AS
WELL AS TO EXERT ITS DOMAIN OVER THE EQUIPMENTS MATTER OF THIS OPERATION,
WITHDRAWING THEM FROM THE PURCHASER'S ADDRESS OR TO DEMAND IMMEDIATELY THE
PAYMENT IN FULL OF THE AMOUNT INCLUDING INTERESTS.
<PAGE>
7
LACK OF COMPLIANCE OF ANY OF THE OBLIGATIONS OF THE "PURCHASER" WILL GIVE "IBM"
THE RIGHT TO CANCEL THE PRESENT CONTRACT, WITHOUT NEED OF JUDICIAL PROCEEDINGS,
BEING ENOUGH THE WRITTEN NOTICE THAT "IBM" DELIVERS TO THE "PURCHASER".
THE FACT THAT "THE PARTIES" DO NOT EXERT THEIR RIGHTS REGARDING ANY LACK OF
COMPLIANCE, WILL NOT BE CONSIDERED AS A WAIVER OF THEM.
"THE PARTIES" AGREE THAT "IBM" WILL PROVIDE THE "PURCHASER" WITH THE INVOICES
CORRESPONDING TO THE EQUIPMENT DESCRIBED IN "ATTACHMENT A" AT THE MOMENT PAYMENT
HAS BEEN MADE OF THE TOTAL AMOUNT OF ITS PRICES PLUS THE INTEREST AGREED ON IN
THIS CONTRACT.
THE "PURCHASER" BINDS HIMSELF TO SAFEGUARD THE EQUIPMENT IN THE ADDRESSES WHERE
THEY WERE INSTALLED. DUE TO THIS FACT, THE "PURCHASER" WITH THE SIGNATURE OF
THIS CONTRACT, ASSUMES THE ROLE OF TRUSTEE FREELY, WITHOUT ANY CHARGE, OF SAID
EQUIPMENT, WITH ALL THE OBLIGATIONES DERIVED FROM THIS ROLE.
EIGHTEENTH. ASSIGNMENT OF RIGHTS
"THE PARTIES" AGREE THAT "IBM" CAN ASSIGN TOTALLY OR PARTIALLY THE RIGHTS
DERIVED FROM THIS INSTRUMENT, SO THAT IT WILL ONLY HAVE THE OBLIGATION, IN ITS
CASE, OF ADVISING THE "PURCHASER" IN WRITING IN ACCORDANCE WITH STIPULATIONS OF
ARTICLE 2030 OF THE CIVIL CODE.
THE "PURCHASER" CANNOT ASSIGN ANY OF THE RIGHTS OF THIS CONTRACT NOR OF ITS
ACCESSORY DOCUMENTS WITHOUT IBM'S PREVIOUS
WRITTEN CONSENT.
NINETEENTH. INSURANCE
THE "PURCHASER" WILL CONTRACT ON HIS OWN, AND WITHOUT THIS BEING CONSIDERED A
PART OF THE PRICE, AN INSURANCE POLICY AGAINST ALL RISKS (FIRE, EARTHQUAKES,
FLOODS, SHORT CIRCUITS, ROBBERTY WITH OR WITHOUT VIOLENCE, ETC.), COVERING THE
EQUIPMENT DESCRIBED IN "ATTACHMENT A" FOR THE TOTAL AMOUNT ALL THE TIME THAT
THIS CONTRACT IS IN EFFECT, AND THE CORRESPONDING
<PAGE>
8
INSURANCE POLICY WILL BE ISSUED INDICATING A PREFERENTIAL ENDORSEMENT IN FAVOR
OR IBM DE MEXICO, S.A.
THIS INSURANCE POLICY WILL GO INTO EFFECT ON THE DATE WHEN THE EQUIPMENT IS
DELIVERED TO THE PURCHASER'S FACILITIES, AND WILL REMAIN IN EFFECT UNTIL THIS
CONTRACT IS FINALIZED.
THE "PURCHASER" MUST PROVIDE "IBM" EVIDENCE OF HAVING COMPLIED WITH THIS
OBLIGATION WITHIN A MAXIMUM PERIOD OF 30 (THIRTY) NATURAL DAYS STARTING ON THE
DATE OF THE SIGNATURE OF THIS INSTRUMENT.
IN CASE THE "PURCHASER" DOES NOT COMPLY WITH THE AGREEMENT IN THE PREVIOUS
PARAGRAPH, "IBM" WILL CONTRACT THE NECESSARY INSURANCE POLICY, AND THE PURCHASER
BINDS HIMSELF TO PAY "IBM" OR ITS REPRESENTATIVE THE AMOUNT OF THE SAME.
TWENTIETH. ADDRESS
"THE PARTIES" STATE AS THEIR ADDRESSES THE FOLLOWING:
I. "IBM": AVENIDA MARIANO ESCOBEDO 595, COLONIA CHAPULTEPEC MORALES, C.P. 11560,
IN MEXICO, D.F.
II. THE "PURCHASER": TORRES ADALID 7, COLONIA DEL VALLE, MEXICO, D.F., C.P.
06600.
THE "PURCHASER" AGREES THAT HE MUST NOTIFY "IBM" IN WRITING OF ANY CHANGE IN
ADDRESS; OTHERWISE, ANY JUDICIAL OR EXTRAJUDICIAL PROCEEDINGS WILL BE CARRIED
OUT IN THE ADDRESS MENTIONED IN THIS SECTION.
TWENTY FIRST. OTHER EXPENSES
THE "PURCHASER" WILL PAY "IBM" ALL THOSE AMOUNTS INCURRED IN THE REGISTRATION OF
THIS CONTRACT IN THE PUBLIC REGISTRY OF PROPERTY AND COMMERCE.
TWENTY FOURTH. LEGISLATION AND COURTS
FOR THE INTERPRETATION AND COMPLIANCE OF THIS CONTRACT, "THE PARTIES" SUBMIT
THEMSELVES TO THE APPLICABLE LEGISLATION AND JURISDICTION OF THE COURTS OF
MEXICO, D.F., WAIVING THEIR
<PAGE>
9
PRESENT OR FUTURE RIGHTS THAT THEY MAY HAVE BY REASON OF THEIR ADDRESS OR ANY
OTHER CAUSE.
PERSONAL DATA
"THE PARTIES" STATE THAT THEIR PERSONAL DATA AT PRESENT ARE THE FOLLOWING:
I. "IBM": MR. EDUARDO VELEZ RUIZ, IS A MEXICAN, FORTY ONE YEARS OLD, MARRIED,
GENERAL MANAGER OF THE FINANCING UNIT, AND CORPORATE TREASURER OF IBM DE MEXICO,
S.A.
II. THE "PURCHASER": MR. ARTHUR L. SMITH IS A UNITED STATES CITIZEN, THIRTY TWO
YEARS OLD, MARRIED, WITH POWERS OF ATTORNEY, LEGALLY ENTERED INTO THIS COUNTRY.
ONCE THE PRESENT CONTRACT WAS READ, AS WELL AS TERMS AND CONDITIONS APPLICABLE
TO THE RELATIVE PURCHASE ORDERS, "THE PARTIES" RECOGNIZE THAT THEY ARE BOUN BY
ITS DISPOSITIONS, LEAVING WITHOUT EFFECT ANY OTHER PREVIOUS COMMUNICATION,
EITHER VERBAL OR WRITTEN, AND SIGNED BY DUPLICATE AT THE BOTTOM AND ON THE
MARGIN ON THE PREVIOUS PAGES.
ACCEPTED BY ACCEPTED BY
AMERICAN TELESOURCE IBM DE MEXICO,
INTERNATIONAL DE MEXICO, S.A. COMERCIALIZACION Y SERVICIOS,
DE C.V. S.A.
(Signature) (Signature)
MR. ARTHUR L. SMITH MR. EDUARDO VELEZ PEREZ
LEGAL POWER OF ATTORNEY LEGAL POWER OF ATTORNEY
(Signature) (Signature)
MS. ELVIA SALAS DE DE STEFFANO MR. PORFIRIO VERASTEGUI HERRERA
WITNESS WITNESS
THE PREVIOUS SIGNATURES CORRESPOND TO THE BUYING AND SELLING CONTRACT IN
INSTALLMENTS WITH RESERVATION OF DOMAIN, ENTERED INTO BY AMERICAN TELESOURCE
INTERNATIONAL DE MEXICO, S.A. AND IBM, DATED MARCH 25, 1997, CONTRACT NO.
S1310397-M.
<PAGE>
10
ATTACHMENT A. LIST OF PRODUCTS
THE FOLLOWING LIST OF IBM AND NON IBM PRODUCTS REPRESENTS THE ONE AND ONLY
COMPLETE COMMITMENT BY IBM IN THIS CONTRACT.
1. TELEPHONE PRODUCTS
THE EQUIPMENT AND ACCESSORIES ARE THE ONES DETAILED BELOW, THAT WILL BE
DELIVERED IN THE SITES INDICATED BY THE PURCHASER INSIDE THE REPUBLIC OF MEXICO.
AMOUNT CONCEPT
300 XP1000 COIN/CREDIT/DEBIT SMART PHONES
17 BACKPLATES
283 PEDESTALS
300 ENCLOSURES
2 UPMS 1200 MODEMS
2 COIN COLLECTORS
2. NET MANAGEMENT PRODUCTS
AMOUNT CONCEPT
2 LICENSES SW PRONET PAYPHONE MANAGEMENT SOFTWARE
7 PC APTIVA 133 MHZ
4 INK JET IBM PRINTERS
300 WIRE KITS FOR INSTALLATION OF WALL TELEPHONES
3. SERVICES
AMOUNT CONCEPT
1 INSTALLATION SERVICES FOR 300 "MART PHONES"
TELEPHONES
1 ADJUSTMENT SERVICES FOR ELECTRICAL INSTALLATIONS
OF 300 TELEPHONES
1 PEDESTAL MOUNTING SERVICES (NON WALL MOUNTING) FOR
3OO TELEPHONES
<PAGE>
11
4. IBM SERVICES FOR PROJECT MANAGEMENT:
IBM WILL COORDINATE DELIVERY OF THE EQUIPMENT AND PROGRAMS MENTIONED ABOVE AT
CALLE TORRES ADALID 7, COLONIA DEL VALLE, MEXICO, D.F., OR IN ANY OTHER OF THE
ADDRESSES THAT THE PURCHASER EXPRESSLY INDICATES TO IBM INSIDE THE REPUBLIC OF
MEXICO.
PURCHASER'S RESPONSIBILITIES
THE PURCHASER WILL BE TOTALLY RESPONSIBLE OF RECEIPT OF THE EQUIPMENT, PROVIDING
ALL THE SUPPORT NECESSARY FOR THE INSTALLATION OF THE SAME, AS WELL AS THE FINAL
ACCEPTANCE OF THE INSTALLATION.
THE "PURCHASER WILL BE RESPONSIBLE FOR PROVIDING AN ADEQUATE ENVIRONMENT FOR THE
INSTALLATION OF THE EQUIPMENT, IN ACCORDANCE WITH IBM'S SPECIFICATIONS. THE
ACTIVITIES PROGRAMMED WILL BE AGREED ON BETWEEN THE PURCHASER AND IBM.
PRICE AGREED ON
THE TOTAL PRICE OF THE PRODUCTS AND SERVICES DESCRIBED IN THIS ATTACHMENT IS
$957 100.00 (NINE HUNDRED AND FIFTY SEVEN DOLLARS 00/100 U.S. CURRENCY), WHICH
WILL BE PAID BY THE PURCHASER IN ACCORDANCE WITH THE FINANCING PLAN SPECIFIED IN
ATTACHMENT B. THE TOTAL PRICE JUST MENTIONED DOES NOT INCLUDE THE VALUE ADDED
TAX.
ACCEPTANCE CRITERIA
THE PRESENT CONTRACT WILL BE CONCLUDED ON DELIVERY AND INSTALLATION OF THE
PRODUCTS DESCRIBED IN THE PRESENT ATTACHMENT. THE INSTALLATION OF THE PRODUCTS
WILL BE THE SUPPLIER'S RESPONSIBILITY.
WARRANTIES
THE WARRANTIES OF THE IBM PRODUCTS INCLUDED IN THE PRESENT CONTRACT WILL BE
GRANTED DIRECTLY BY "IBM", AND THE WARRANTY OF THE NON "IBM" PRODUCTS WILL BE
GRANTED BY "IBM" THROUGH "THE
<PAGE>
12
SUPPLIER" SELECTED BETWEEN "IBM" AND THE "PURCHASER", AND IS FOUND SPECIFIED IN
THIS ATTACHMENT.
ONCE THE PRESENT ATTACHMENT A WAS READ, THE PARTIES RECOGNIZE THEY ARE BOUND BY
ITS DISPOSITIONS, LEAVING WITHOUT EFFECT ANY OTHER PREVIOUS COMMUNICATION,
EITHER VERBAL OR WRITTEN, AND SIGNED BY DUPLICATE AT THE BOTTOM AND ON THE
MARGIN ON THE PREVIOUS PAGES.
ACCEPTED BY ACCEPTED BY
AMERICAN TELESOURCE IBM DE MEXICO,
INTERNATIONAL DE MEXICO, S.A. COMERCIALIZACION Y SERVICIOS,
DE C.V. S.A.
(Signature) (Signature)
MR. ARTHUR L. SMITH MR. EDUARDO VELEZ PEREZ
LEGAL POWER OF ATTORNEY LEGAL POWER OF ATTORNEY
(Signature) (Signature)
MS. ELVIA SALAS DE DE STEFFANO MR. PORFIRIO VERASTEGUI HERRERA
WITNESS WITNESS
THE PREVIOUS SIGNATURES CORRESPOND TO THE BUYING AND SELLING CONTRACT IN
INSTALLMENTS WITH RESERVATION OF DOMAIN, ENTERED INTO BY AMERICAN TELESOURCE
INTERNATIONAL DE MEXICO, S.A. AND IBM, DATED MARCH 25, 1997, CONTRACT NO.
S1310397-M.
<PAGE>
13
ATACHMENT B. FINANCING CONDITIONS
TERMS AND CONDITIONS OF FINANCING
"IBM" AND THE "PURCHASER" AGREE THAT THE FOLLOWING WILL BE THE TERMS AND
CONDITIONS OF THE BUYING AND SELLING ACTIONS REFERRED TO IN THIS CONTRACT.
<TABLE>
<CAPTION>
TERMS AND CONDITIONS U.S. DOLLARS
COLUMN A COLUMN B
<S> <C> <C>
DATE OF DISPOSAL AUGUST 01, 1997 JUNE 01, 1997
1. PRESENT SELLING PRICE 500 000.00 USD 457 100.00 USD
2. VAT ON PRESENT SELLING PRICE 75 000.00 USD 68 565.00 USD
3. DOWN PAYMENT 20%* (1) 100 000.00 USD 91 420.00 USD
4. TOTAL AMOUNT TO BE FINANCED (1+2-3) 475 000.00 USD 434 245.00 USD
5. VARIABLE INTEREST RATE (VIR) 167 857.31 USD
VIR IS THE RESULT OF ADDING THE FOLLOWING:
A. LIBOR RATE (LONDON INTERBANK OFFERED RATE)
B. POINTS AGREED ON
INITIAL VIR OF THIS CONTRACT IS:
LIBOR RATE 5.72%
POINTS AGREED ON 6.00%
INITIAL VIR 11.72%
6. COMMISSION FEE 1.00%* (1A) 1.00%* (1B) 5 000.00 USD 4 571.00 USD
7. TOTAL AMOUNT TO BE DOCUMENTED (4A+4B+5+6A+6B) 1 086 673.10 USD
8. NUMBER OF MONTHLY PAYMENTS 32 MONTHS
9. TOTAL MONTHLY PAYMENTS VARIABLE
10. VAT ON INTEREST AND COMMISSION FEE 15.00% 27 036.90 USD
OF (5)
11. TOTAL AMOUNT OF MONTHLY PAYMENT VARIABLE
</TABLE>
<PAGE>
14
<TABLE>
<CAPTION>
DEFERRED VALUE ADDED TAX PAYMENT
<S> <C> <C>
12. DEFERRED VAT ON OPERATION 76 471.99 USD 69 910.69 USD
13. DATE OF PAYMENT JUNE O1, 1997 AUGUST 01, 1997
14. TOTAL AMOUNT OF OPERATION 1 307 947.89
(3A+3B+7+10+12A+12B) USD
</TABLE>
PAYMENT
PAYMENTS WILL BE MADE IN UNITED STATES DOLLARS OR EQUIVALENT IN NATIONAL
CURRENCY AT THE EXCHANGE RATE TO PAY LIABILITIES STATED IN FOREIGN CURRENCY,
PAYABLE IN MEXICO, RATE PUBLISHED BY THE BANCO DE MEXICO IN THE DIARIO OFICIAL
DE LA FEDERACION, THAT WILL BE IN EFFECT AT THE MOMENT OF PAYMENT.
THE "PURCHASER" IS BOUND TO LIQUIDATE TOTALLY THE INSTALLMENTS PROGRAMMED IN
ACCORDANCE WITH THE PAY SCHEDULE ATTACHED TO THE PRESENT CONTRACT AS "ATTACHMENT
B".
SAID PAYMENT WILL BE DUE ON THE 10 (TENTH) DAY OF THE CORRESPONDING MONTH. WHEN
THE DATE CITED IS A NON WORKING DAY, IN ACCORDANCE WITH BANK USAGE IN EFFECT IN
MEXICO, THE PURCHASER MUST MAKE THE CORRESPONDING PAYMENT IN THE IMMEDIATELY
PRECEDING WORKING DAY.
THE "PURCHASER" MUST MAKE ALL PAYMENTS IN FAVOR OF IBM DE MEXICO,
COMERCIALIZACION Y SERVICIOS, S.A. DE C.V., IN THE FORM, WORKING HOURS, AND
PLACE THAT "THE PARTIES" AGREE ON.
COMMON INTERESTS
"IBM" AND THE "PURCHASER" AGREE THAT THE AMOUNT OUTSTANDING OF THIS CONTRACT
WILL ACCRUE COMMON INTERESTS AT THE RATE OF 11.72% (ELEVEN POINT SEVENTY TWO PER
CENT) PER ANNUM.
SAID RATE WILL BE RAISED OR LOWERED IF THERE EXISTS A VARIATION IN THE LIBOR
RATE (LONDON INTERBANK OFFERED RATE) AT SIX MONTHS, IN AT LEAST ONE PERCENTAGE
POINT. IN NO CASE THIS ADJUSTMENT WILL BE APPLIED RETROACTIVELY.
<PAGE>
15
MORATORIUM INTERESTS
IN CASE THAT THE "PURCHASER" DOES NOT COMPLY WITH ANY OF ITS OBLIGATIONS TO PAY
IN FAVOR OF "IBM", THAT ARE STATED IN THIS CONTRACT, THE "PURCHASER" WILL PAY
MORATORIUM INTERESTS AT THE RATE THAT MIGHT RESULT BY MULTIPLYING BY 1.5 (ONE
POINT FIVE) THE COMMON INTEREST RATE MENTIONED IN THE PREVIOUS SECTION DURIGN
ALL THE TIME THAT THIS SITUATION PREVAILS. THE INTERESTS THAT ARE GENERATED
WILL BE PAID MONTHLY TO "IBM" IN THE TERMS OF THE SECTION CALLED PAYMENTS OF THE
PRESENT ATTACHMENT.
DOCUMENTS
THE TOTAL AMOUNT OF THE CREDIT IS DOCUMENTED IN THIS ACT BY MEANS OF 36 (THIRTY
SIX) NOTES PAYABLE ISSUED BY THE "PURCHASER" IN FAVOR OF IBM DE MEXICO,
COMERCIALIZACION Y SERVICIOS, S.A. DE C.V., THAT WILL BE DUE SUCCESSIVELY EVERY
MONTH IN ACCORDANCE WITH THE PRESCRIPTION OF THE SECTION CALLED PAYMENTS OF THE
PRESENT ATTACHMENT. LIKEWISE, THEY CONTAIN THE AMOUNTS OF THE COMMON INTERESTS
ACCRUED, AS WELL AS THE SPECIFICATION OF THE MORATORIUM RATE THAT MIGHT ACCRUE,
IN ACCORDANCE WHAT IS FORESEEN IN THE SECTIONS CALLED COMMON INTERESTS AND
MORATORIUM INTERESTS, RESPECTIVELY.
"THE PARTIES" AGREE THAT "IBM" WILL DELIVER TO THE "PURCHASER" THE INVOICES
CORRESPONDING TO THE GOODS DESCRIBED IN "ATTACHMENT A" AT THE MOMENT OF PAYMENT
OF THE TOTAL AMOUNT OF ITS PRICE PLUS THE INTERESTS AGREED ON IN THIS CONTRACT.
ONCE THE PRESENT ATTACHMENT C WAS READ, "THE PARTIES" RECOGNIZE THAT THEY ARE
BOUND BY ITS DISPOSITIONS, LEAVING WITHOUT EFFECT ANY OTHER PREVIOUS
COMMUNICATION, EITHER VERBAL OR WRITTEN, AND SIGNED BY DUPLICATE AT THE BOTTOM
AND ON THE MARGIN OF THE PREVIOUS PAGES.
<PAGE>
16
ACCEPTED BY ACCEPTED BY
AMERICAN TELESOURCE IBM DE MEXICO,
INTERNATIONAL DE MEXICO, S.A. COMERCIALIZACION Y SERVICIOS,
DE C.V. S.A.
(Signature) (Signature)
MR. ARTHUR L. SMITH MR. EDUARDO VELEZ PEREZ
LEGAL POWER OF ATTORNEY LEGAL POWER OF ATTORNEY
(Signature) (Signature)
MS. ELVIA SALAS DE DE STEFFANO MR. PORFIRIO VERASTEGUI HERRERA
WITNESS WITNESS
THE PREVIOUS SIGNATURES CORRESPOND TO THE BUYING AND SELLING CONTRACT IN
INSTALLMENTS WITH RESERVATION OF DOMAIN, ENTERED INTO BY AMERICAN TELESOURCE
INTERNATIONAL DE MEXICO, S.A. AND IBM, DATED MARCH 25, 1997, CONTRACT NO.
S1310397-M.
<PAGE>
17
ATTACHMENT C. ADDITIONAL WARRANTIES
ONCE THE PRESENT ATTACHMENT C WAS READ, "THE PARTIES" RECOGNIZE THAT THEY ARE
BOUND BY ITS DISPOSITIONS, LEAVING WITHOUT EFFECT ANY OTHER PREVIOUS
COMMUNICATION, EITHER VERBAL OR WRITTEN, AND SIGNED BY DUPLICATE AT THE BOTTOM
AND ON THE MARGIN OF THE PREVIOUS PAGES.
ACCEPTED BY ACCEPTED BY
AMERICAN TELESOURCE IBM DE MEXICO,
INTERNATIONAL DE MEXICO, S.A. COMERCIALIZACION Y SERVICIOS,
DE C.V. S.A.
(Signature) (Signature)
MR. ARTHUR L. SMITH MR. EDUARDO VELEZ PEREZ
LEGAL POWER OF ATTORNEY LEGAL POWER OF ATTORNEY
(Signature) (Signature)
MS. ELVIA SALAS DE DE STEFFANO MR. PORFIRIO VERASTEGUI HERRERA
WITNESS WITNESS
THE PREVIOUS SIGNATURES CORRESPOND TO THE BUYING AND SELLING CONTRACT IN
INSTALLMENTS WITH RESERVATION OF DOMAIN, ENTERED INTO BY AMERICAN TELESOURCE
INTERNATIONAL DE MEXICO, S.A. AND IBM, DATED MARCH 25, 1997, CONTRACT NO.
S1310397-M.
<PAGE>
Exhibit 10.21
(con't)
CREDIT CONTRACT BETWEEN FINAL USER AND IBM DE MEXICO,
COMERCIALIZACION Y SERVICIOS, S.A. DE C.V.
CREDIT CONTRACT ENTERED INTO, ONE THE ONE HAND, BY IBM DE MEXICO,
COMERCIALIZACION Y SERVICIOS, S.A. DE C.V., REPRESENTED BY MR. EDUARDO VELEZ
RUIZ, AND ON THE OTHER BY AMERICAN TELESOURCE INTERNATIONAL DE MEXICO, S.A. DE
C.V., REPRESENTED BY MR. ARTHUR L. SMITH, WHO HENCEFORTH WILL BE CALLED "IBM",
AND THE "USER", RESPECTIVELY, IN ACCORDANCE WITH THE FOLLOWING STATEMENTS AND
CLAUSES.
S T A T E M E N T S
I. "IBM" SAYS, THROUGH ITS REPRESENTATIVE:
A. It is chartered as a corporation with variable capital, as is stated in
Public Writ number 51602, dated January first, 1997, granted before Notary
Public number 103 of the Federal District, and registered in the Public Property
and Commerce Registry of the same city, under mercantile folio number 218337.
B. Mr. Eduardo Velez Ruiz, attests his personality duly empowered through
Public Writ number 100695, dated March fifth, 1997, granted before Notary Public
number 116 of the Federal District, and the steps for its registry in the Public
Property and Commerce Registry of the same city are being taken.
D. That it is prepared to grant the "CREDIT" that the "USER" is requesting, and
that for its internal control effects, it has assigned number S1310397MC to this
CONTRACT.
E. It has acquired from the suppliers described in "ATTACHMENT A" of this
contract, the rights derived from the sale of products and services that these
last named entered into with the "USER" on the dates and invoices described in
the same "ATTACHMENT A", and that covers the price agreed on for
1
<PAGE>
said operation, so that "IBM" has a legal interest to enter into this CONTRACT
with the "USER".
II. THE "USER" STATES THROUGH ITS REPRESENTATIVE:
A. That it is a corporation of variable capital, legally chartered in
accordance with the laws of Mexico, through Public Writ number 19977, dated June
twentieth, 1995, granted before Notary Public number 173 of MEXICO, D.F., and
registered in the Public Commerce Registry of MEXICO, D.F. under number 202960,
dated August first, 1995.
B. That its legal representative, Mr. ARTHUR LOUIS SMITH, has sufficient powers
to sign the present CONTRACT, that have not been revoked nor amended in any
manner whatsoever, as can be seen in the Public Writ aforementioned in the
previous paragraph.
Once the above has been stated, both parties agree to bind themselves in
accordance with the following:
C L A U S E S
FIRST. OBJECT The present CREDIT CONTRACT establishes the terms and
conditions for payment of the products described in "ATTACHMENT A", regarding
the machines and devices, in accordance with the price and other relative
concepts detailed in the invoices, copies of which will be added to the present
instrument as "Attachment A" to form an integral part of the same.
In the amounts already mentioned, interests, expenses, and any other accessory
costs, that the "USER" must pay "IBM".
SECOND. PAYMENT TERMS AND CONDITIONS
The "USER" and "IBM" are agreed that the terms and conditions of the credit
referred to in the previous clause of this CONTRACT, will be the following:
2
<PAGE>
TERMS AND CONDITIONS DOLLARS (U.S. CY)
DATE OF DISPOSAL AUGUST 01, 1997
1. PRESENT SELLING PRICE 542 900.00 USD
2. VAT ON PRESENT SELLING PRICE 81 435.00 USD
3. DOWN PAYMENT 20%* (1) 108 580-00 USD
4. TOTAL AMOUNT TO BE FINANCED (1+2+3) 515 755.00 USD
5. VARIABLE INTEREST RATE (VIR) 90 495.46 USD
VIR IS THE RESULT OF ADDING THE FOLLOWING:
A. LIBOR RATE (LONDON INTERBANK OFFERED RATE
B. POINTS AGREED ON
INITIAL VIR OF THIS CONTRACT IS:
LIBOR RATE 5.72%
POINTS AGREED ON 6.00%
INITIAL VIR 11.72%
6. COMMISSION FEE 1.00%* (1) 5 429.00 USD
7. TOTAL AMOUNT TO BE DOCUMENTED (4+5+6) 611 679.26 USD
8. NUMBER OF MONTHLY PAYMENTS 32 MONTHS
9. TOTAL MONTHLY PAYMENTS VARIABLE
10. VAT ON INTEREST AND COMMISSION FEE 15.00% OF (5) 14 628.41 USD
11. TOTAL MONTHLY PAYMENT VARIABLE
DEFERRED VALUE ADDED TAX PAYMENT
12. DEFERRED VAT ON OPERATION 83 033.29 USD
13. DATE OF PAYMENT OCTOBER O1, 1999
14. TOTAL AMOUNT OF OPERATION (-2+3+7+10+12) 736 486.16 USD
THIRD. COMMON INTERESTS
The "USER" must pay "IBM" a common interest for the amount of the "CREDIT" at a
variable interest rate, that will be calculated and paid in the terms and
conditions mentioned in Clause Second above, and "IBM" and the "USER" agree that
the amount outstanding subject of this contract will carry common
3
<PAGE>
interest at a rate of 11.72% (ELEVEN POINT SEVENTY TWO PER CENT) PER ANNUM.
The variable interest rate will be raised or lowered, if there exists a
variation in the LIBOR rate for six months, in at least one percentage point.
In no case will this adjustment be applied retroactively.
FOURTH. MORATORIUM CHARGES
If the principal and interest are not paid when due, as of that date, the "USER"
will pay "IBM" moratorium interests at the rate that might ensue by multiplying
1.5 (ONE POINT FIVE) times the common interest rate set forth in Clause fifth
above during all the time that this situation exists. The interest that will be
generated will be paid monthly, in the terms of the following clause.
FIFTH. FORM OF PAYMENT
The "USER" undertakes to pay "IBM" the principal, interest, and other "CREDIT"
accessories in the following place and manner.
The "USER", without need of notification or previous collection, will make all
payments in IBM's address, stated in CLAUSE THIRTEENTH, in U.S. currency of
legal tender in the United States of America or its equivalent in national
currency, at the exchange rate prevailing on the date of payment, to cover
liabilities stated in foreign currency payable in Mexico, that will be published
in the Official Federation Daily on the same date of payment. In case that the
date of payment is not a working day or is a holiday, in accordance with bank
customs at the place of payment, the due date will be the working day
immediately before the date of payment.
4
<PAGE>
The "USER" undertakes to pay totally the scheduled amortizations in accordance
with the pay schedule that is attached to the present contract as
"ATTACHMENT B". Said payments can be demanded on the 10TH (TENTH) of each month,
in accordance with the pay schedule that is attached to the present contract as
"ATTACHMENT B".
"IBM" can modify the place and form of payment if there are prevailing causes
that may demand it, and it will advise the "USER" in a timely manner in order to
safeguard the interest of the same, so that "IBM" will have the power of
designating another place of payment, previous written advice that it provides
the "USER" 5 (FIVE) working days before the date when said change goes into
effect.
In case that the "USER" makes payments referred to in the previous paragraph in
a different form that the one foreseen, the payment will be considered as not
having being made, and "IBM" can demand said payment together with the interest
in accordance with Clauses THIRD and FOURTH of this contract, and other
accessory payments that may accrue.
In any case, both parties agree that "IBM" can negotiate or transfer the total
or a part of the "CREDIT", and the notes payable that may be tendered in
accordance with the "CREDIT". In case of cancellation, occasioned by non
compliance of any of the USER's obligations in accordance with this contract,
"IBM" will consider mature in advance the notes payable corresponding in the
same terms.
If "IBM" does not receive payment in accordance with what has been established,
the "USER" will be considered in moratorium. The moratorium will be considered
as non compliance of the USER's obligations, and will be cause of cancellation
of the present CONTRACT by "IBM" without need of judicial action.
5
<PAGE>
In case that "IBM" decides to cancel the present contract, the "USER" agrees to
pay "IBM" all expenses and costs that it may incurr to obtain payment or
recovery of the debt, including legal fees that it must pay.
SIXTH. ON THE SUPERVISION OF THE CREDIT
The "USER" must furnish the documents and information that "IBM" requests for
the follow up and supervision of the CREDIT.
SEVENTH. CAUSES OF EARLY MATURITY
"IBM" will have the right to declare an early maturity on the time limit for
payment of the credit, as well as interests and other accessories, through a
written notification addressed to the "USER", without need of litigation or
other judicial action, if any of the following cases occur:
A. If payment is not made when due of two or more of the payments agreed on,
whether of capital, interest or accessories.
B. If, for any length of time, for any reason, the USER's activities are
suspended, even though said suspension is due to strikes, labor stops,
etcetera.
C. If it does not comply with any other obligation agreed on, in this or in
any other CONTRACT that it may have entered into with "IBM".
The causes of early maturity established herein, are independent of those that
may be derived from law, so that they are descriptive, but no limitative.
EIGHTH. DOCUMENTS
The total amount of the credit is documented in this case through 32 (THIRTY
TWO) NOTES PAYABLE signed by the "USER", in favor of "IBM de Mexico,
Comercializacion y Servicios, S.A. de C.V.", that will be monthly and successive
maturities, in accordance with the pay schedule of "ATTACHMENT B". Likewise,
6
<PAGE>
they contain the amounts of common interests that are generated and the
specification of the moratorium rate that they might generate, in accordance
with the statements of CLAUSES THIRD AND FOURTH, respectively.
Both parties agree that "IBM" will hand over to the "USER" the invoices
corresponding to the machines described in "ATTACHMENT A" at the moment that the
total amount of their prices plus the interest agreed on in this CONTRACT has
been paid.
The "USER" cannot yield the rights of this CONTRACT nor of the accessory
documents, without the previous written agreement of "IBM".
The "USER" undertakes to have the products mentioned in "Attachment A" at its
address, stated in CLAUSE THIRTEENTH, so that it cannot take them to another
place, except by previous written consent by "IBM". In view of this, the "USER"
will become a trustee of said products with all the obligations derived from
said position.
NINTH. PLEDGE
The "USER" guarantees his compliance of the obligations undertaken through this
CONTRACT under the terms of article 334 Clause 4iv and other applicable of the
General Law of Credit Instruments and Operations; therefore, the goods listed
in "Attachment A" of this CONTRACT will be affected as a pledge.
The value of the goods that make up the pledge at no moment should be inferior
to 143% of the USER's liabilities.
This pledge will be in effect while all are part of the capital, interests and
other accessories, or any other obligation chargeable to the "USER" remain
outstanding. The "USER" cannot lease, nor in exploitation the goods that make up
the pledge GRANTED in this contract, nor encumber them in favor of third
parties.
7
<PAGE>
TENTH. INSURANCE
The "USER" will contract for its own account and without it been considered a
part of the price, an insurance policy against all risks (fire, earthquake,
floods, short circuits, violent and non violent robbery, etc.) covering the
machines described in "Attachment A" for the total value during all the time
that this CONTRACT is in effect, and the corresponding insurance policy will be
made out indicating the preferential endorsement in favor of "IBM DE MEXICO,
COMERCIALIZACION Y SERVICIOS, S.A. DE C.V."
This insurance policy will go into effect on the date that the machines are
delivered in the USER's facilities, and must be kept in effect until this
CONTRACT is finalized.
The "USER" must provide "IBM" evidence of the compliance with this obligation
within a time limit of 30 (thirty) natural days starting as of the date of the
signature of this instrument. In case that the "USER" does not comply with the
agreement of the previous paragraph, "IBM" will contract the respective
insurance policy, the "USER" binding itself to cover the amount of the same to
"IBM" or its representatives.
ELEVENTH. OTHER EXPENSES
The "USER" will pay "IBM" all amounts that may be caused by the registry of this
CONTRACT in the Public Registry of Property and Commerce.
TWELFTH. LAWS AND COURTS
For all things regarding the interpretation, execution, and compliance with the
present CONTRACT, both parties submit themselves to the jurisdiction of the laws
and courts of Mexico, Federal District, resigning expressly to the privileges
accruing to them by virtue of their present or future addresses.
8
<PAGE>
THIRTEENTH. ADDRESSES
Both parties state as their addresses, the following:
"IBM": AVENIDA MARIANO ESCOBEDO 595, COLONIA POLANCO CHAPULTEPEC, C.P. 11560
MEXICO, DISTRITO FEDERAL.
"USER": TORRES ADALID 7, COLONIA DEL VALLE, MEXICO, D.F., C.P. 06600.
Until such time as the "USER" provides a written notice to "IBM" of a change of
address, all citations and judicial or extrajudicial actions will be practiced
in the address stated in this clause.
BOTH PARTIES, HAVING READ AND APPRIZED THE CONTENTS AND LEGAL VALUE OF THE
PRESENT CONTRACT, RATIFY AND SIGN IT IN MEXICO, FEDERAL DISTRICT, ON THE 25TH
DAY OF MARCH, 1997.
ACCEPTED BY ACCEPTED BY
AMERICAN TELESOURCE IBM DE MEXICO,
INTERNATIONAL DE MEXICO, S.A. COMERCIALIZACION Y SERVICIOS,
DE C.V. S.A.
(Signature) (Signature)
MR. ARTHUR L. SMITH MR. EDUARDO VELEZ PEREZ
LEGAL POWER OF ATTORNEY LEGAL POWER OF ATTORNEY
(Signature) (Signature)
MS. ELVIA SALAS DE DE STEFFANO MR. PORFIRIO VERASTEGUI
HERRERA
WITNESS WITNESS
9
<PAGE>
Exhibit 10.23
NETWORK INTERCONNECTION AGREEMENT
This Network Interconnection Agreement is made as of (Month, Day, Year) by and
between INVESTCOM, S. A. de C. V. represented by its General DIRECTOR BENIGNO
PEREZ LIZAUR hereinafter referred to as "INVESTCOMM" a corporation organized an
existing under the laws of Mexico and with main address in Monte Elbruz No. 132,
Col. Lomas de Chapultepexc in Mexico City D. F., and AMERICAN TELESOURCE
INTERNATIONAL INCORPORATED, hereinafter referred to as "ATSI", denomination that
includes its successors and authorized cessionaries, a corporation organized and
existing under the laws of Texas, United States of America, with address in
12500 Network Boulevard, Suite 407, San Antonio, TX 78249, United States of
America.
WHEREAS
That "ATSI" has been authorized by the Government of the United States of
America to manage telecommunication installations in the United States of
America (hereinafter referred to as "the United States") which constitute a
telecommunications system in the United States;
That "INVESTCOM" has been authorized by the Government of Mexico to install,
operate and exploit telecommunications at national as well as international
level, according with the concession granted October 26, 1995;
<PAGE>
THAT "ATSI" AND "INVESTCOM" EXPRESSLY ACCEPT THAT THE PRESENT AGREEMENT,
PREVIOUSLY TO ITS FORMALIZATION MUST BE PRESENTED TO THE COMMISSION FEDERAL DE
TELECOMUNICACIONES FOR ITS AUTHORIZATION, AND BOTH PARTIES DECLARE THEIR
ACCEPTANCE TO SUBMIT TO THE REGULATIONS (AND ITS MODIFICATIONS) FOR PROVIDERS OF
INTERNATIONAL LONG DISTANCE SERVICE PUBLISHED IN THE OFFICIAL DAILY OF THE
FEDERATION IN DECEMBER 11, 1996;
That "ATSI" and "INVESTCOM" wish to interconnect their networks in order to
provide jointly telecommunication services between Mexico and the United States,
Whereas, "ATSI" and "INVESTCOM", the Parties, agree in the following
CLAUSES
1. SETTING UP THE SERVICE.
----------------------
"ATSI" and "INVESTCOM" agree in providing and maintaining direct
telecommunications services between Mexico and the United States in accordance
with the conditions and terms of this agreement.
<PAGE>
2. SERVICES TO BE PROVIDED.
-----------------------
CONSIDERING THAT ONLY THE INTERNATIONAL PORT OPERATIONS ARE AUTHORIZED TO
INTERCONNECT DIRECTLY WITH THE PUBLIC NETWORKS OF TELECOMMUNICATIONS HANDLED BY
OPERATORS FROM OTHER COUNTRIES, AND THAT THE INCOMING AND OUTGOING TRAFFIC CAN
ONLY BE THROUGH THE INTERNATIONAL PORTS PREVIOUSLY AUTHORIZED BY THE COMMISSION,
the telecommunications services or types of services that will be provided
according with the information related to them, without limiting to the
following, include: rates and charges, billing, collecting and interruptions of
applicable discounts procedures, and quality level, that are established in the
annexes of the Contract, in the "A" ("International Long Distance"), in the "B"
(Dedicated Channel), in the "C" (Transit Service), in the "D" (Quality
Contract), and in the "E" (Formula for the Proportional Devolution of the
Telephone Traffic directed to the United States) same annexes that constitute an
integral part of this contract though this reference. These services and their
different classes may be modified through and Addendum to the Agreement signed
by both Parties. The addenda that are signed will become part of the agreement.
3. CHARGES TO COLLECT.
-------------------
Each Party must establish unilaterally the charges that the users must pay
(which hereinafter are referred to as "charges to collect") applicable to the
services listed in the addenda of this contract. THE PARTIES WILL BE ABLE TO
SPECIFY THE CHARGES TO COLLECT IN DIFFERENT TYPES OF CURRENCY. AS A COURTESY,
EACH PARTY MUST ADVISE THE OTHER WHICH ARE THOSE CHARGES AND THE MODIFICATIONS
THE SUFFER. THIS GOES ONLY WHEN THE INTERNATIONAL PORT OPERATOR HAS THE
COMMISSION'S AUTHORIZATION TO MAKE ANY MODIFICATION.
<PAGE>
4. COUNTABLE RATES AND INCOME DIVISIONS.
-------------------------------------
THE PARTIES ADMIT AND ACCEPT THE PRINCIPLE OF THE RATES SYSTEMS ON UNIFORM
LIQUIDATION AND OF PROPORTIONAL RETURN ESTABLISHED IN THE REGULATIONS TO PROVIDE
THE LONG DISTANCE INTERNATIONAL SERVICES, AND ON THOSE PRINCIPLES ESTABLISH THE
BASES OF THE CHARGES TO COLLECT, UNLESS THAT SOMETHING DIFFERENT IS SPECIFIED IN
THE ADDENDA. The charges to collect (including the periods to which they are
applicable) and the income divisions derived from the application of the charges
to collect related to the important services between Mexico and the United
States provided by the Parties must be established in the addenda of the
agreement. The necessary modifications to the charges to collect agreed upon by
the Parties will form integral part of the agreement. HOWEVER, THE PONDERED
AVERAGE RATES THAT ARE CHARGED TO THE PUBLIC MAY NOT BE LOWER THAN THE PONDERED
AVERAGE LIQUIDATION THAT CORRESPONDS TO THE SERVICE PROVIDED.
In case that the Parties want to register rates or additional services other
than the already registered, they must register before the Telecommunications
Register for the Commission's opinion and its case, approval within 30 natural
days after the presentation of the request.
5. PREPARATION OF MONTHLY REPORTS AND ACCOUNTS ADJUSTMENT.
------------------------------------------------------
5.a. MONTHLY REPORTS.
<PAGE>
5.a. (1) Each Party must prepare a monthly report which includes the following
not limited information: the number of minutes billed by the Party; the
participation of the countable rate per minute of conversation accredited to
each in the previously agreed currency, or the mean of change for the
telecommunications messages service; other services or traffic according with
the other addenda of the agreement, and the total amount accredited to the other
Party. Each Party must send the other the monthly report as soon as its
possible after the calendar month referred to in the report, but in no case
after the end of the third calendar month following the month referred to in the
report. Each one of the Parties may reject and any report that does not contain
the precise information required according with this contract, including a
written statement of the reasons for rejection.
5.a. (2) No Credit discount must be made in the monthly report of
uncollectable accounts (except for uncollectable debts due to the omission of
one of the Parties to submit on time the monthly reports as established in the
paragraph a. (3) of Clause 5. Each one of the Parties will be responsible of
its uncollectable accounts. However, one of the Parties may make deductions in
the monthly reports of the customer' credits that results of a defective
service, as long as such deduction is made before the monthly report is sent to
the other Party.
5.a. (3) Each Party must prepare a monthly statement referring to the expenses
collection and the calls with credit cards that must be included in the reports
referred to in the Clause 5 (1). Those monthly statements must have the form of
collecting note or list
<PAGE>
and contain at least the following information: date of the call, national
number of the calling Party or billed number; base of the charge (complete,
reduced, personal or station); duration (minutes); time of the connection. These
statements must be transmitted quickly to the Party that will collect the
charges, but in no case after the end of the third calendar month after the one
when the on collect or credit call was made. The omission to transmit on time
the required statements according with this Clause will mean that the receptor
Party may discretionally deduces those call in the adjustment process.
5.a. (4) It is taken for granted that the Party that receives a monthly report
accepts it if it is not objected in writing in a lapse of four months beginning
in the date the report was transmitted. IN CASE OF CONTROVERSY THE PARTIES
ACCEPT, AGREE AND OBLIGE THEMSELVES TO SUBMIT THEIR DIFFERENCES TO
________________________________________________, IN THE ORDER TO AVOID A
POSSIBLE TRAFFIC INTERRUPTION BETWEEN INTERCONNECTED OPERATORS.
5.a. (5) Each one of the Parties must maintain the necessary the register to
verify all the monthly reports for a period of three (3) years. Each one of the
Parties must take care of its own accounting, as well as the adjustments of the
registers and the detailed information of calls of all the services provided
according with the Agreement, and keep them at disposition of the other Party at
any reasonable time.
<PAGE>
5.b. NET BALANCE ADJUSTMENT.
5.b. (1) THE PARTIES AGREE IN ESTABLISHING THE 5 FIRST WORKING DAYS OF EACH
MONTH AS DEAD LINE TO REALIZE CONCILIATE LIQUIDATION PAYMENTS. The monthly
amounts that one Party owes to the other must be deducted from net balance of
each one of the Parties as it is stated in the reports that the Parties have
accepted. No monthly amount owed by one Party to another will due until the
payment of the credited amount of each one of the Parties in the monthly reports
delivered by both Parties, to determine one only monthly balance owed by each
Party. The contracting Parties have the intention that no debt of a given month
will due until the net balance of that month is calculated. The net balances
that one Party owes to the other must be paid as soon as possible, but never
more than six (6) weeks after the net monthly balance is calculated.
5.b. (2) The payments that are rendered between the Parties will be made in U.
S. currency in accordance with the Agreement.
6. OMISSION OF PAYMENT OR RECTIFICATION FOR NOT FULFILLING.
-------------------------------------------------------
No matter what is foreseen in other disposition of the Agreement, if one of the
Parties does not pay the owed net balance according with paragraph b. of Clauses
5, or in some other way does not fulfill the Agreement and such omission is not
mended in a period of at least sixty (60) days, the Party that has not fulfilled
the Agreement after thirty (30) days of having sent written notice to the other
Party, will be able, at its choice, to: restrain, suspend, or cancel its
participation in the service covered by the Agreement, and the other Party
becomes liberated of its obligations as foreseen in the Agreement until the
<PAGE>
owed balances are paid or when any other lack of material fulfillment is fixed,
b) handle only the calls that are billed to its own clients, retain any income
and continue with that practice until the payment of any pending balance is made
or until the lack of fulfillment is mended, or the Agreement is canceled with no
right to any compensation.
7. DESIGNATION OF SERVICE ITINERARIES AND SUPPLY OF INSTALLATIONS.
--------------------------------------------------------------
7.a. The telecommunications services covered by this contract will be provided
by:
1) direct circuits between Mexico and the United States
2) commuted circuits between Mexico and the United States
3) combination of direct and commuted circuits, as the Parties choose.
7.b. Each one of the Parties will supply, at its expense, the necessary
telecommunications installations in its operation area to provide the service
between Mexico and the United States.
7.c. Each one of the Parties will provide, at its expense, half of the necessary
telecommunications installations to provide the services between Mexico and the
United States.
7.d. Each one of the Parties must maintain the interconnection of international
circuits with the national network of his country or territory.
<PAGE>
7.e. Each one of the Parties must advise the other Party as soon as possible
any failure in the installations or any similar problem derived from any cause
in his operation area which could originate the long interruption of one or all
the telecommunications services between Mexico and the United States.
8. TECHNICAL CHARACTERISTICS AND OPERATION METHODS.
-----------------------------------------------
8.a. The Parties will agree in the technical characteristics and the operation
methods that they will apply and use in the providing the telecommunications
services according with the Agreement, and they will normally stick to the most
relevant common recommendations of the Normalization Sector of the International
Telecommunications Union (before called Telegraph and Telephone International
Consulative Committee), and to the future revisions it performs. However, if
the Parties do not reach an agreement about the technical characteristics and
operation methods that must be applied, then they will apply the strict, more
relevant and in force at the time technical characteristics like the
Recommendations of the Normalization Sector of the International
Telecommunications Union.
8.b. English and Spanish will be used as working languages for operation,
traffic and maintenance personnel. The Parties agree in interchanging traffic
list or code, maintenance personnel and its contact numbers. Each one of the
Parties will periodically update, as a courtesy, its code list of personnel.
<PAGE>
9. RESPONSIBILITY.
--------------
None of the Parties will be held responsible for nay direct or indirect loss or
damage, due to any lack of fulfillment or damage in the telecommunications
installations or for any interruption of the service covered by this contract,
no matter the cause of the failure, damage or interruption as well as the
duration of it.
10. GOVERNMENTAL APPROVAL.
---------------------
The Agreement and all its modifications, as well as the Parties agreements are
submitted to the obtention of the authorizations, recommendations, observations,
manners foreseen in the respective legislation, licenses, permits and the
necessary Governmental authorizations and approvals. Both Parties accept
expressly that this Agreement, as well as its modifications, must be previously
authorized by the Commission.
11. ADDRESSES.
---------
All notifications (different from the monthly reports foreseen in Clause 5) must
be made in writing an sent to:
"ATSI"
Mr. Arthur L. Smith
American TeleSource International, Inc.
12500 Network Blvd. Suite 407
San Antonio, Texas 78249
USA
Fax: (210) 558-6095
<PAGE>
This address may be changed, and if it is, there must be a written advice to the
other Party thirty (30) days previously. Any notification as foreseen in the
Agreement, including the termination notification must be delivered by hand,
registered or by air mail will be considered received: (i) at the moment of
delivery or this was done by hand, (ii) after ten (10) days beginning in the
date the document was sent by registered air mail.
12. BEGINNING AND ENDING DATE.
-------------------------
It is considered that this contract will be in force beginning the date of its
signature and will CONTINUE IN FORCE UNTIL THE LAST DAY OF THE YEAR IT IS
------------------------------------------------------
SIGNED. The amounts owed to the Parties calculated according with Clauses 4, 5,
- ------
and 6 will not be affected by the termination.
13. MODIFICATIONS AND ADDITIONS.
---------------------------
The Agreement, its modifications or addenda, can only take place throng a
written agreement signed by the correctly authorized person in name of the
Parties and previous authorization from the Commission.
<PAGE>
14. AFFILIATION.
-----------
The relation between "INVESTCOM" and "ATSI" as established in the Agreement will
be correspondence in the joint providing of telecommunications services. None
of its contains must be understood as the constitution of a partnership or
association between the Parties and the common activities of the Parties must be
limited to the express disposition of the Agreement.
15. INTERCHANGE OF OWN INFORMATION.
------------------------------
The Party that receives it will consider all the oral or written information
granted or revealed by the Parties confidential, according with the Agreement or
what may be annexed in the future. The information must be used only in what
concerns interconnection and providing of services according with the Agreement,
and each one of the Parties agrees not to reveal it to others. Each one of the
Parties must make sure that those employees that become familiar with such
information will handle it confidentially and in accordance with what is
established in this Clause. This Clause dispositions will remain in force even
if the Agreement comes to an end, unless the Parties agree otherwise in writing.
16. PREVIOUS CONTRACTS.
------------------
The Agreement, including its addenda, annexed to those that are part of it, (i)
constitute the total between the Parties in relation with purpose; and (ii)
substitutes and cancels
<PAGE>
previous written or oral agreements made between the Parties and related to the
same purpose of the Agreement.
17. CESSION.
--------
No Party must cede or transfer totally or partially its rights and obligations
derived and foreseen in the Agreement, without previous written authorization of
the other Party.
However, each one of the Parties may, without authorization of the other, make a
session to a successor, affiliated, subsidiary or a controller society which
exists under the same control of such Party. Never the less, in case of any
cession, the successor must commit himself in writing with the other Party in
relation to the responsibility in the fulfillment of those obligations, works
and participation, for which it becomes a Party of the Agreement, and so, the
predecessor par will be free of that obligation, work or participation, expect
for the matters derived of events previous to the date of the commitment.
The Parties agree that if an authorization is needed from their respective
government regarding the mentioned cession, it must be PREVIOUSLY OBTAINED.
<PAGE>
18. PROPORTIONAL TRAFFIC DEVOLUTION.
-------------------------------
Each one of the Parties agrees to implement a proportional devolution of Long
Distance International traffic between the United States and Mexico in
accordance with the Parties, that is included in the Annex E of this Contract,
ESTABLISHING AS DEAD LINE DATE TO MAKE THIS ADJUSTMENT, THE FIRST DAY OF EACH
CALENDAR MONTH.
19. NOT EXCLUSIVE PRIVILEGES.
------------------------
Nothing contained in this Agreement will be considered as a restriction or
damaging to the rights of the Parties to make similar agreements with others.
20. TRAFFIC WITHOUT INTERFERENCE.
----------------------------
Each one of the Parties handles a telecommunications system in all the country
which is capable of originating, end and distribute the international traffic in
all the nation. All the Parties agree to work in a manner that does no reduce
the capacity of the other Party to originate, end and distribute all the traffic
of his clients through its own telecommunications system.
21. CLAUSES TITLES.
--------------
The titles and head lines of the Clauses are included for facility and just as a
reference so they are not of the part of the Agreement, or define, modify or
limit the meaning or interpretation of the terms and dispositions of the
Agreement.
<PAGE>
22. RESIGNATION AND NULLITY.
-----------------------
The custom in the negotiation or the omission of one of the Parties to impose
some disposition of the Agreement will not be understood as resignation of those
dispositions or any other of the rights foreseen in the Agreement.
If any of the dispositions of the Agreement is not valid or is not applicable,
this will not invalidate the whole of the Agreement, considering only that part
invalidated, and the obligations of the Parties will be interpreted and
fulfilled according to the Agreement.
23. FORMALIZATION.
-------------
The Agreement is formalized PREVIOUS THE FULFILLMENT OF THE AGREED ON IN THE
THIRD PARAGRAPH OF ITS WHEREAS CHAPTER in four copies, two in English and two in
Spanish, each one of the which will be considered as an original with identical
legal effects. The English version will prevail in case of controversy about
the Agreement's meaning.
IN WHEREOF TESTIMONY the Parties subscribe the Agreement, independently of what
is subscribed at its name and representation by the correctly authorized
officers.
"ATSI" "INVESTCOM"
<PAGE>
Exhibit 10.29
(FINAL, EXECUTED VERSION)
[ T R A N S L A T I O N ]
MODIFICATION AGREEMENT (HEREINAFTER REFERRED TO AS "THE AGREEMENT") TO THE
PRIMARY CONTRACT OF OBLIGATIONS TO GIVE, DO AND NOT DO (HEREINAFTER REFERRED TO
AS "THE PRIMARY CONTRACT") EXECUTED THE 1ST OF MAY, 1997 BY AMERICAN TELESOURCE
INTERNATIONAL INC. (HEREINAFTER REFERRED TO AS "ATSI") BY ITS LEGAL
REPRESENTATIVE ARTHUR SMITH; AND THE COMPANIES THAT THE ENTITIES THAT IT
DESIGNATES AS ITS LEGAL REPRESENTATIVES AD DULY AUTHORIZED; AND ON THE OTHER
SIDE, SISTEMA DE TELEFONIA COMPUTARIZADA, S.A. DE C.V., REPRESENTED BY ITS LEGAL
REPRESENTATIVE WILFRIDO GONZALEZ BALBOA; INGECOMP CORPORATION REPRESENTED BY
WILFRIDO GONZALEZ BALBOA; HUMANO GRUPO INMOBILIARIO, S.A. DE C.V. REPRESENTED BY
WILFRIDO GONZALEZ BALBOA; AS WELL AS CECILIA MONROY DIAZ, GERARDO ARTURO MONROY
DIAZ, MIGUEL MONROY DIAZ, JULIETA MONROY DIAZ AND GERARDO LUIS MONROY SOLORZANO
IN THEIR INDIVIDUAL CAPACITIES (HEREINAFTER REFERRED TO AS "THE SHAREHOLDERS")
AND IN CONFORMITY WITH THE FOLLOWING DECLARATIONS AND CLAUSES:
DECLARATIONS OF THE PARTIES:
---------------------------
FIRST.- The parties to THE AGREEMENT declare that they are also parties to THE
PRIMARY CONTRACT, and therefore acknowledge its existence, validity, efficiency,
acknowledging as well the parties and the standing of the parties to that
contract.
SECOND.- They acknowledge that they have made their best effort to execute all
of these acts of THE PRIMARY CONTRACT which attempted to effect performance of
all objectives no later than July 31, 1997. However, the parties acknowledge
that due to causes beyond their control it would not be possible to conclude
said activities by such date.
THIRD.- The parties acknowledge the existence, validity and effect of all the
acts that up until now have been executed in accordance with THE PRIMARY
CONTRACT.
FOURTH.- In conformity with that mentioned above it is their desire to now
execute THE AGREEMENT subject to the approval of the respective board of
directors, in accordance with the following
C L A U S E S:
-------------
FIRST.- OBJECTIVE.- By means of THE AGREEMENT the parties agree to modify
CLAUSES FOURTH, FIFTH, TENTH and ELEVENTH of THE PRIMARY CONTRACT, with
respect to the DONATION AND SUBSEQUENT TRANSFER OF THE OWNERSHIP OF THE
Page1
<PAGE>
REMAINING SHARES OF SISTECOM, THE TEMPORARY ADMINISTRATIVE ORGAN, THE PURCHASE
OF THE INGECOMP ASSETS, AND THE MERGER OF RHA AND SISTECOM, RESPECTIVELY.
The Parties agree to modify the permitted length of time for performance
of the obligations of THE PRIMARY CONTRACT to August 25, 1997.
SECOND.- MODIFICATION OF CLAUSE FOURTH OF THE PRIMARY CONTRACT REFERRING TO
THE DONATION AND SUBSEQUENT TRANSFER OF PROPERTY OF THE REST OF THE SHARES OF
SISTECOM.
The condition of suspension referred to in point 3 of the Fourth Clause of
THE PRIMARY CONTRACT shall be modified with regard to the donation of the shares
to GMS, with the following conditions remaining:
a. Formation of the association that will administer the human resources
function and the transfer of the employees to said entity;
b. Observance of the prohibitions of the administrative organs of
SISTECOM, HGI and RHA.
Cecilia, Gerardo, Miguel and Julieta Monroy Diaz, with respect to their
ownership rights in SISTECOM, HGI, and RHA shall deposit their shares with a
Notary Public, they shall designate, and donate the referenced shares at no
cost to Gerardo Luis Monroy Solorzano. This Party will at the same time will
transfer said shares to ATSI, or ATSI's designee. ATSI, or its designee, shall
pay Gerardo Monroy Solorzano the following:
a) $1,088,774.68 USD( One Million Eighty Eight Thousand Seven Hundred
Seventy Four and 68/1000 Dollars in the legal currency of the United States);
b) the assignment and transfer of the rights ATSI has in a receivable from
HGI in the amount of $696,615.12 American dollars. ( A simple copy of the
CONTRACT FOR THE OPENING OF A LINE OF CREDIT is attached.
THIRD.- MODIFICATION OF FIFTH CLAUSE OF THE PRIMARY CONTRACT REGARDING THE
TEMPORARY ADMINISTRATIVE ORGANIZATION.
The parties agree to release the SHAREHOLDERS of SISTECOM, RHA and HGI,
from the contractual obligation in the creation of a temporary administrative
organization as described in CLAUSE FIFTH of THE PRIMARY CONTRACT.
FOURTH.- MODIFICATION OF EIGHTH CLAUSE RELATED TO THE REMOVAL OF THE RISCO AND
ITS RELATION TO THE REMAINING OBLIGACIONES DISTRIBUTED BY THE CONTRACT.
The parties agree to release ATSI from the obligation to acquire the trust
rights in the RISCO TRUST.
Page2
<PAGE>
The appropriate amount to be paid by ATSI. HGI and SISTECOM for the payment
of the account payable owed by SISTECOM to Telefonos de Mexico, S.A. de C.V.
shall be documented by means of a Contract for the Opening of a Line of Credit.
The parties agree to release ATSI from having to make the payments set
forth in Point 3, Clause Eight of the PRIMARY CONTRACT.
The way that the real property, RISCO, shall be dealt with in the PRIMARY
CONTRACT shall be as follows:
a) The money paid by ATSI to HUMANO GRUPO INMOBILIARIO is part of a SIMPLE
CONTRACT FOR THE OPENING OF A LINE OF CREDIT between ATSI and HGI.
b) GMD and CMD shall donate, with a condition precedent, to GMS 45% of the
SISTECOM shares in accordance with that set forth in Second Clause of this
MODIFICATION AGREEMENT.
c) GMS, through its designee, shall enter into a buy-sell agreement for
22.5% of the shares of SISTECOM with ATSI, that, in consideration of same, shall
transfer the rights in the receivable of the contract for simple opening of a
line of credit in conformity with point a) of that clause.
d) HGI shall pay of the existing debt owed under the contract for the
simple opening of a line of credit for the real property known as RISCO.
FIFTH.- MODIFICATION OF THE TENTH CLAUSE OF THE PRIMARY CONTRACT RELATING TO
THE PURCHASE OF THE INGECOMP ASSETS.
1. The parties agree to release from the PRIMARY CONTRACT (obligations
relating to ) the INGECOMP assets, as well as INGECOMP's obligation to put forth
its best efforts to effect an assignment of the contractual rights in its name
to ATSI such as , the lease of sites, employees, and the agreements for
telephone lines for the border crossing.
2. The parties agree that any contingent liabilities related to INGECOMP,
except the costs incurred from the write-off of the account receivable owed to
SISTECOM by INGECOMP, shall be offset against the ATSI SHARES at a value of .90
(ninety cents in U.S. currency) per share.
SIXTH.- MODIFICATION OF CLAUSE ELEVEN OF THE PRIMARY CONTRACT RELATING TO THE
MERGER OF RHA AND SISTECOM
The parties agree to modify the portion that states that the registration
documents, referred to in point 2 of the ELEVENTH clause, shall be filed no
later than September 5, 1997.
SEVENTH.- GENERIC TERM FOR THE PERFORMANCE OF THE OBLIGATIONS SET FORTH IN THE
PRIMARY CONTRACT WHICH TO DATE HAVE NOT BEEN PERFORMED.
The parties agree that all of the obligations agreed to in the PRIMARY
CONTRACT shall have August 25, 1997 as the completion date unless otherwise
agreed to in writing by the parties.
EIGHTH.- PERMANENCY OF THE CLAUSE.- Except for the purposes of THE
AGREEMENT, all of the obligations contained in THE PRIMARY CONTRACT shall remain
in force by the parties and the parties shall continue to be bound to the terms
and conditions therein set forth.
Page3
<PAGE>
NINTH.- RESPONSIBILITIES.- The parties agree that the modifications to this
AGREEMENT and their corresponding legal effects are not the responsibility of
any of the parties, and it does not imply nonperformance to THE PRIMARY CONTRACT
as originally agreed to. The penalty agreed to in CLAUSE NINETEENTH of THE
PRIMARY CONTRACT shall not apply as the parties mutually release each other from
any damages by means of this AGREEMENT.
In reference to CLAUSE FIFTEENTH of THE PRIMARY CONTRACT, this AGREEMENT
shall modify the fixed term of point 2 in said clause and accordingly adjust the
dates that are set forth in the chart in said clause.
TENTH.- CONSENT.- The parties declare in THE AGREEMENT that there is no
error, fraud, violence, bad faith, injury, or any other cause that might
invalidate it; and the parties renounce their right to invoke the statute of
limitations to invoke them.
ELEVENTH.- DISPUTE RESOLUTION CLAUSE.-
1. Any litigation, controversy or claim derived from or related to this
AGREEMENT or its nonconformance, termination or nullification shall be resolved
in conformity with the Rules of Arbitration of UNCITRAL in force at the time by
the American Association of Arbitration ("AAA").
TWELFTH.- APPLICABLE LAW.-
a).- This AGREEMENT shall be governed by the applicable law that shall be
the Commercial Code of the United Mexican States as well as special and
supplementary Mexican laws as they relate to each of the subject areas regulated
by THE CONTRACT. For these transactions to take effect in the United States of
America the applicable law shall be in conformity with that of the jurisdiction.
THIRTEENTH.- DOMICILE OF THE PARTIES.-
a).- ATSI: 12500 Network Blvd., Suite 407, San Antonio, Texas, United
States of America.
b).- SISTECOM: Av. Mexico 2798, 3er. Piso, Colonia Terranova,
Guadalajara, Jalisco, United Mexican States.
c).- HGI: Av. Mexico 2798, 2 Piso, Colonia Terranova, Guadalajara,
Jalisco, United Mexican States.
d).- INGECOMP:___________________________________________________________.
e).- THE SHAREHOLDERS:
Page4
<PAGE>
Cecilia Monroy Diaz:______________________________________________________.
- -.
Gerardo Arturo Monroy Diaz:_______________________________________________.
- -.
Julieta Monroy Diaz:______________________________________________________.
- -.
Miguel Monroy Diaz:_______________________________________________________.
- -.
Gerardo Luis Monroy Solorzano:____________________________________________.
- -.
Notice of any change in domicile shall be given in writing and with proof
of receipt no later than the third day after it occurs.
THE ENTIRE TEXT OF THIS AGREEMENT WAS READ BY THE PARTIES AND WERE INFORMED OF
THE CONTENTS, REACH AND LEGAL CONSEQUENCES AND GRANT THEIR CONCURRENT CONSENT BY
SIGNING IT BELOW AND INITIALING IT IN MULTIPLE COPIES ON THE MARGINS OF ITS 5
PAGES ON JULY 16, 1997 IN THE CITY OF GUADALAJARA, JALISCO, MEXICO.
[ signed ] [ signed ]
- -------------------------------------- --------------------------------------
ATSI SISTECOM
By: Arthur Smith By: Wilfrido Gonzalez Balboa
[ signed ] [ signed ]
- -------------------------------------- --------------------------------------
INGECOMP HGI
By: Wilfrido Gonzalez Balboa By: Wilfrido Gonzalez Balboa
Page5
<PAGE>
[ signed ]
--------------------------------------
Gerardo Luis Monroy Solorzano
[ signed ] [ signed ]
- -------------------------------------- --------------------------------------
Gerardo Monroy Diaz Cecilia Monroy Diaz
[ signed ] [ signed ]
- -------------------------------------- --------------------------------------
Julieta Monroy Diaz Miguel Monroy Diaz
- -------------------------------------- --------------------------------------
Witness Witness
Page6
<PAGE>
Exhibit 11
AMERICAN TELESOURCE INTERNATIONAL INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the year ended
--------------------------------------------
July 31, 1995 July 31, 1996 July 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Primary
Net loss $ (2,004,167) $ (2,204,727) $ (4,695,129)
============ ============ ============
Shares:
Weighted average number of common shares
outstanding 13,922,018 19,928,372 26,806,959
Incremental shares assuming conversion of
warrants and options (a) - - -
------------ ------------ ------------
Weighted average number of common shares
outstanding as adjusted 13,922,018 19,928,372 26,806,959
============ ============ ============
Net loss per common share $ (0.14) $ (0.11) $ (0.18)
============ ============ ============
Fully Diluted (b)
Net loss $ (2,004,167) $ (2,204,727) $ (4,695,129)
Add: Interest expense applicable to convertible
debt (a) - - -
------------ ------------ ------------
Net loss - as adjusted $ (2,004,167) $ (2,204,727) $ (4,695,129)
============ ============ ============
Shares:
Weighted average number of common shares
outstanding 13,922,018 19,928,372 26,806,959
Incremental shares assuming conversion of
convertible debt (a) - - -
Incremental shares assuming conversion of
warrants and options (a) - - -
------------ ------------ ------------
Weighted average number of common shares
outstanding as adjusted 13,922,018 19,928,372 26,806,959
============ ============ ============
Net loss per common share $ (0.14) $ (0.11) $ (0.18)
============ ============ ============
</TABLE>
(a) Common stock equivalents related to convertible debt warrants and options
are excluded as their effect would be anti-dilutive.
(b) This calculation is submitted in accordance with paragraph 601 (b) (11) of
Regulation S-K although it is contrary to APB Opinion No. 15 because it produces
an anti-dilutive effect.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 1,921,426
<SECURITIES> 0
<RECEIVABLES> 3,508,544
<ALLOWANCES> 187,457
<INVENTORY> 0
<CURRENT-ASSETS> 5,988,606
<PP&E> 7,498,589
<DEPRECIATION> 926,601
<TOTAL-ASSETS> 15,820,708
<CURRENT-LIABILITIES> 5,793,730
<BONDS> 0
0
0
<COMMON> 16,221,856
<OTHER-SE> (9,286,020)
<TOTAL-LIABILITY-AND-EQUITY> 15,820,708
<SALES> 16,228,387
<TOTAL-REVENUES> 16,228,387
<CGS> 12,792,338
<TOTAL-COSTS> 20,430,104
<OTHER-EXPENSES> 67,639
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 512,838
<INCOME-PRETAX> (4,695,129)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,695,129)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,695,129)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
