<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 21, 1997
REGISTRATION NO. ____________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------------
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or 12(g) of the
Securities Exchange Act of 1934
------------------------------
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, $.01 par value per share
(Title of Class)
<PAGE>
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
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE LITIGATION REFORM ACT OF 1995. Statements contained or incorporated by
reference to this document that are not based upon historical fact are "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. 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.
1
<PAGE>
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.
<TABLE>
<CAPTION>
For the period For the Nine-Month
from For the Years ended Periods Ended
Inception to July 31, April 30,
-------- ---------
July 31, 1994 1995 1996 1996 1997
--------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES FROM
UNAFFILIATED CUSTOMERS:
Long distance services
United States $ 110,483 $ 4,469,529 $ 10,806,586 $ 7,503,807 $ 8,929,965
Mexico and other - - - - -
----------- ------------ ------------ ------------ ------------
Total long distance services
$ 110,483 $ 4,469,529 $ 10,806,586 $ 7,503,807 $ 8,929,965
Network mgmt. services =========== ============ ============ ============ ============
United States $ 131,186 $ 318,312 $ 1,762,971 $ 1,391,300 $ 1,398,236
Mexico and other - - 905,127 900,722 89,971
----------- ------------ ------------ ------------ ------------
Total network mgmt.
services $ 131,186 $ 318,312 $ 2,668,098 $ 2,292,022 $ 1,488,207
=========== ============ ============ ============ ============
OPERATING INCOME (LOSS):
United States ($ 343,528) ($1,950,489) ($2,079,456) ($1,614,951) ($2,529,719)
Mexico and other - - 10,855 146,429 ($262,491)
----------- ------------ ------------ ------------ ------------
Total Operating loss ($ 343,528) ($1,950,489) ($2,068,601) ($1,468,522) ($2,792,210)
=========== ============ ============ ============ ============
Identifiable Assets
United States $ 953,587 $ 2,653,646 $ 3,790,354 $ 3,087,644 $ 5,084,957
Mexico and other - - 394,138 339,027 925,999
----------- ------------ ------------ ------------ ------------
Total Identifiable Assets $ 953,587 $ 2,653,646 $ 4,184,492 $ 3,426,671 $ 6,010,956
=========== ============ ============ ============ ============
</TABLE>
2
<PAGE>
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 June 30, 1997, the Company
employed 16 full-time and 25 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 June 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
3
<PAGE>
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 June 30, 1997, the Company provided "call aggregator" call services to
approximately 5,700 and 3,600 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. In July 1997, the Company
acquired a contract from Meridian Telecom pursuant to which it will commence
providing 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 June 30, 1997, the Company had "call aggregator"
call service contracts with pay telephone owners covering approximately 2,300
and 500 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation--Liquidity and Capital Resources." 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
4
<PAGE>
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.
The Company currently owns 55% of Computel and, through Company
representatives, is actively involved in the management of Computel. The
Company intends to complete the acquisition of the remaining shares of Computel
on or before August 25, 1997.
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 a Brazilian 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
5
<PAGE>
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), $5,346,616 for the nine
months ended April 30, 1996 (of which 88% was from traffic between Mexico and
the United States) and $6,703,844 for the nine months ended April 30, 1997 (of
which 68% was from traffic between Mexico and the United States), which
accounted for 100%, 40%, 44%, 43% and 51%, respectively, of the Company's
minutes of use, and 100%, 66%, 72%, 71% and 75%, respectively, of its long
distance call services revenues. 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, $7,503,807 for the
nine months ended April 30, 1996, and $8,929,965 for the nine months ended April
30, 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, 76.6% for the nine months ended April 30, 1996, and 85.7% for the nine
months ended April 30, 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).
6
<PAGE>
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.
7
<PAGE>
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 June 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.
8
<PAGE>
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.
9
<PAGE>
. 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
10
<PAGE>
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 June 30, 1997, the
Company leased 30.5 Megahertz of capacity on Solidaridad. The following chart
displays the Company's area of satellite coverage.
11
<PAGE>
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.
12
<PAGE>
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, 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.
13
<PAGE>
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, approximately $2.7
million during fiscal 1996, approximately $2.3 million during the nine months
ended April 30, 1996, and approximately $1.5 million during the nine months
ended April 30, 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, 23.4% during the nine months ended
14
<PAGE>
April 30, 1996, and 14.3% during the nine months ended April 30, 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
15
<PAGE>
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
16
<PAGE>
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
17
<PAGE>
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
18
<PAGE>
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, the FCC requires that domestic and international non-dominant
carriers must maintain interstate and international tariffs on file with the
FCC. The Company believes it is in full compliance with all applicable FCC
tariff regulations. Prior to a recent court decision, Southwestern Bell v. FCC,
43 F.3d 1515 (D.C. Cir. 1995), domestic non-dominant carriers were permitted by
the FCC to file tariffs with a "reasonable range of rates" instead of detailed
schedules of individual charges. However, the Company must now file tariffs
containing specific rates. In reliance on the FCC's past relaxed tariff filing
requirements for non-dominant domestic carriers, the Company and most of its
competitors did not maintain such rates for domestic offerings in their tariffs.
Until the two-year statute of limitations expires, the Company could be held
liable for damages for its past failure to file tariffs containing specific
rates. The Company believes that such an outcome is remote especially in light
of the FCC's recent proposal to adopt a mandatory detariffing policy for
domestic services of non-dominant, interexchange carriers. Moreover, such an
outcome would not have a material adverse effect on the Company's financial
condition or results of operation. The Company has always been required to
include detailed rate schedules in its international tariffs.
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
19
<PAGE>
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 June 30, 1997, the Company had 99 full-time employees, of whom 16 are
operators, 20 are sales and marketing personnel and 63 perform administrative
functions, and 26 part-time employees, 25 of whom are operators. Of the
foregoing, 39 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 June 30, 1997, Computel had 395 full-time employees and 37 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.
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 and 1996 and through the
first nine months of fiscal 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, the years ended July 31, 1995
and 1996 and the nine months ended April 30, 1996 and 1997 have been derived
from the Company's consolidated financial statements appearing elsewhere in this
Registration Statement on Form 10. The results for the nine months ended April
30, 1997 are not necessarily indicative of the results to be expected for the
full year.
25
<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>
Nine months ended
Period from April 30,
Dec. 17, 1993 Years ended July 31, ---------------------------
through ------------------- (unaudited)
July 31, 1994* 1995 1996 1996 1997
-------------- ------- ------- -------- -------
(In thousands of $, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
<S> <C> <C> <C> <C> <C>
Operating revenues:
Long distance services...................... $ 110 $ 4,470 $10,807 $ 7,504 $ 8,930
Network management services................. 132 318 2,668 2,292 1,488
------ ------- ------- -------- -------
Total operating revenues.................. 242 4,788 13,475 9,796 10,418
------ ------- ------- -------- -------
Operating expenses:
Cost of services............................. 201 4,061 10,833 7,758 8,773
Selling, general and administrative.......... 373 2,536 4,430 3,300 4,004
Depreciation and amortization................ 11 141 281 206 433
------ ------- ------- -------- -------
Total operating expenses.................. 585 6,738 15,544 11,264 13,210
------ ------- ------- -------- -------
Loss from operations........................... (343) (1,950) (2,069) (1,468) (2,792)
------ ------- ------- -------- -------
Net loss....................................... $ (343) $(2,004) $(2,205) (1,561) (3,002)
====== ======= ======= ======== =======
Per share information:
Net loss..................................... $(0.04) $ (0.14) $ (0.11) $ (0.08) $ (0.12)
====== ======= ======= ======== =======
Weighted average common shares outstanding..... 9,146 13,922 19,928 19,131 24,979
</TABLE>
<TABLE>
<CAPTION>
July 31, 1994 July 31, 1995 July 31, 1996 April 30, 1997
------------- ------------- ------------- --------------
(unaudited)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)......................... $ 114 $ (446) $(592) $ 190
Current assets.................................... 344 1,088 1,789 3,396
Total assets...................................... 1,049 2,766 4,348 6,292
Long-term obligations, including current
portion....................................... 0 133 604 1,826
Total stockholders' equity........................ 819 1,231 1,629 1,733
- ----------------
</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>
B. 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 a 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 Telefonos de Mexico ("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 that, as the
regulatory environment continued to evolve in Mexico and other Latin American
countries, the Company would eventually be able to utilize its
27
<PAGE>
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 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.
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 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.
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
28
<PAGE>
Capital Resources and elsewhere in this Registration Statement on Form 10, the
Company expects improved results of operations and liquidity in fiscal 1998. See
"Managements Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Recourses" and "Business--Risk Factors."
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, 1994, 1995 and 1996 and the nine months ended April 30, 1996 and 1997.
<TABLE>
<CAPTION>
Period from
December 17, Year Ended July 31, Nine Months Ended April 30,
1993 through ------------------------------------ ------------------------------------
July 31, 1994 1995 1996 1996 1997
------------- ------------------- --------------- --------------- -------------------
$ % $ % $ % $ % $ %
------------- ------------------- --------------- --------------- -------------------
(In thousands of $) (In thousands of $)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Call services $ 110 45% $ 4,470 93% $ 10,807 80% $ 7,504 77% $ 8,930 86%
Network management
services 132 55% 318 7% 2,668 20% 2,292 23% 1,488 14%
----- -------- -------- ------- -------
Total operating revenues 242 100% 4,788 100% 13,475 100% 9,796 100% 10,418 100%
Cost of services 201 83% 4,061 85% 10,833 80% 7,758 79% 8,773 84%
Selling, general &
administrative 373 154% 2,536 53% 4,430 33% 3,300 34% 4,004 38%
Depreciation and
amortization 11 5% 141 3% 281 2% 207 2% 433 4%
----- -------- -------- ------- -------
Operating loss (343) (142%) (1,950) (41%) (2,069) (15%) (1,469) (15%) (2,792) (27%)
Other income (expense) - (54) (1%) (136) (1%) (92) (1%) (210) (2%)
----- -------- -------- ------- -------
Net loss (343) (142%) $ (2,004) (42%) $ (2,205) (16%) (1,561) (16%) (3,002) (29%)
===== ======== ======== ======= =======
</TABLE>
Nine Months Ended April 30, 1997 Compared to the Nine Months Ended April 30,
1996
Operating Revenues. Operating revenues increased approximately $622,000,
or 6%, due to increased revenues from call services. Approximately $1.4 million
of revenues in the nine months ended April 30, 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.
Operating revenues from call services increased 19%, or approximately $1.4
million, due almost entirely to increased call volumes from international call
services provided from hotels and resorts in
29
<PAGE>
Jamaica, and increased call volumes attributable to the Company's Brazilian
calling card product. Call volumes and related revenues from calls originating
in Mexico and 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 the nine
months ended April 30, 1997, the number of calls per phone decreased slightly.
The Company believes this is due to increasing costs to the consumer. The
Company intends to lower the price per call to the consumer in the future based
on the decrease in the Company's cost of providing these calls as a result of
its agreement with Investcom, and believes that it will be able to generate a
higher volume of calls per phone by doing 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 $14.86 during the nine
months ended April 30, 1996 to $17.98 for the nine months ended April 30, 1997.
Excluding the $1.4 million of revenues recognized in the nine months ended
April 30, 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 the nine months ended April 30, 1997.
Cost of Services. Cost of services increased approximately $1.0 million,
or 13%, resulting in a decrease in the Company's overall gross margin from 21%
in the 1996 period to 16% in the 1997 period. 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 the nine month period ending April 30, 1996, the Company's gross
profit percentage would have been 19% for such 1996 period.
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, and rising costs associated with transporting calls
from Mexico to the Company's switching 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 its traffic at lower per-minute costs until May 1997. In many
instances, the public phones serviced by the Company in Mexico could only access
the Company's operator center utilizing a cellular connection, which added a
per-minute air time charge to the Company's cost of transmitting calls from
Mexico. This resulted in a decline in the overall gross profit margin. As the
Company continues to process more of its call services traffic through
Investcom, it expects to realize an improvement in its gross profit margin.
Selling, General and Administrative (SG&A). SG&A expenses rose 21%, or
approximately $704,000. If the revenues related to the sale and installation of
the network to the Mexican milk producer in the prior period were excluded, SG&A
expenses would have decreased as a percentage of overall revenues from 39% to
38%. The increase in SG&A expense is almost entirely due to expanded operations
within Mexico. ATSI-Mexico had less than five employees at the beginning of the
prior period as compared to 36 employees at the end of the latter period.
Because the Company expects the majority of its growth in the 1998 fiscal year
to come from the provision of call services within Mexico,
30
<PAGE>
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 $226,000, or 109%, due primarily to approximately $757,000 in
capital expenditures in the 1997 period principally for the development of the
Company's teleport facilities in San Antonio, Texas, Cancun and Mexico City,
Mexico, and San Jose, Costa Rica.
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.
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, 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
31
<PAGE>
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 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.
Year Ended July 31, 1995 Compared to Year Ended July 31, 1994
Operating Revenues. Operating revenues increased approximately $4.7
million, or 1879%, due almost entirely to increased revenues from call services.
32
<PAGE>
The Company commenced providing call services in May 1994 for a resort
property in Cancun, Mexico. As of July 31, 1995, the Company was servicing in
excess of 5,600 rooms and 1,900 public telephones in the United States and
Mexico. Approximately 33% of the call services revenues for fiscal 1995 were
generated from calls originating in the United States. The Company gained
regulatory approval to process interstate calls originating in the United States
on September 8, 1994. During fiscal 1995, the Company gained the authority to
process intrastate calls in 15 states. As of July 31, 1995 the majority of the
Company's domestic call services revenues were being produced by payphones
located in Virginia and Michigan, hotels and payphones in Florida and Texas, and
casinos located in Mississippi and Louisiana. The remaining 67% of the call
services revenues for fiscal 1995 were produced by calls originating outside the
United States. Utilizing a bilingual and bicultural direct sales staff, as well
as independent marketing representatives, the Company was able to establish and
grow customer bases in the following major tourist destinations in Mexico:
Cancun, Cozumel, Cabo San Lucas, Guadalajara and Puerto Vallarta.
Cost of services. Cost of services increased from $201,000 to $4.1 million
but increased only slightly as a percentage of operating revenues. Although the
Company had contracted with MCI to transport its operator calls from Mexico to
its operator facility in San Antonio, Texas, Telmex began refusing services to
MCI in July 1994. As a result, during most of fiscal 1995, the Company
originated calls from Mexico through a combination of MCI's network and
utilization of Telmex's network, resulting in diminished reliability and
increased costs. MCI was unable to guarantee reliable services, and
subsequently increased prices during fiscal 1995 by more than 50%. As a result,
the Company utilized direct dial services offered by Telmex, which were less
costly due to the devaluation of the peso, but more difficult for the Company to
monitor and administer.
The Company's gross margin decreased from 17% to 15% due to the increased
percentage of operating revenues generated by call services as compared to
network management services.
Selling, General and Administrative. SG&A expenses increased approximately
$2.2 million; however, such expenses decreased as a percentage of operating
revenues from 154% to 53%. The increase in SG&A expense was in large part due
to the provision for bad debt related to operator calls. During fiscal 1995, the
Company provided for uncollectible call services revenues at the rate of 8% in
anticipation of the rates to be charged by local exchange carriers who
ultimately bill and collect on the calls processed by the Company. The LECs
charge an average rate for the initial six to eighteen months, and then "true-
up" these rates based upon actual results. The net effect of the "true-ups" has
been positive subsequent to fiscal 1995.
Depreciation and amortization. Depreciation and amortization increased
approximately $130,000 due to capital expenditures relating to the Company's
teleport in San Antonio, Texas.
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, 1996, the Company generated negative cash flow
from operations of approximately $1.4 million and received cash proceeds from
private sales of securities of approximately
33
<PAGE>
$2.5 million. Approximately $475,000 in cash was used for the purchase of
equipment, and approximately $570,000 of additional equipment was financed
through capital lease arrangements. The net result of operating, investing and
financing activities was an improvement in the Company's cash balance from
approximately $102,000 at July 31, 1995 to approximately $656,000 at July 31,
1996, but a decrease in its working capital position from a deficit of
approximately $446,000 to a deficit of approximately $592,000.
In the nine month period ended April 30, 1997, the Company continued to
suffer losses and, as a result, generated negative cash flow from operations of
$2,355,825; however, the Company received approximately $4.1 million in cash
proceeds from private sales of debt and equity securities and the exercise of
warrants, resulting in an improvement in working capital from a deficit of
approximately $592,000 at July 31, 1996 to approximately $190,000 at April 30,
1997. In March 1997, the Company obtained approximately $1.7 million in
equipment financing from IBM de Mexico. At April 30, 1997, the Company had cash
of approximately $1.4 million.
Since April 30, 1997, approximately $4.5 million in additional cash has
been provided from the exercise of warrants to purchase 2.4 million shares of
Common Stock and private sales of debt and equity securities. Cash proceeds
from private sales of securities, the exercise of warrants and the IBM equipment
financing facility have been or will be used to fund all or a portion of the
cash requirements of the transactions set forth below.
. The acquisition and installation of approximately 450 Intelligent payphones
anticipated to be completed before the end of fiscal 1998, although there can be
no assurance that such completion date will be met. The IBM equipment financing
facility has been and will be used in connection with the acquisition of such
Intelligent payphones. Although presently less, once such equipment financing
facility has been fully drawn, monthly payments of $51,408 will be required
until maturity in May 2000. At August 1, 1997, $957,000 had been drawn under
such financing facility.
. The acquisition of up to 100% of the outstanding shares of Computel. The
purchase price for 100% of the shares of Computel is $2.8 million in Common
Stock and cash. In early May 1997, the Company acquired 55% of the shares for
671,406 shares of Common Stock. At such time, an additional 2,044,139 shares of
Common Stock were placed in escrow to be released to the seller in May 1999. The
Company anticipates that it will acquire the remaining 45% of the shares on
August 25, 1997 for $1.1 million cash.
. The provision on April 30, 1997 of a secured loan to Computel in the
principal amount of $520,000 with principal and accrued interest at 10% payable
on April 30, 1998. Subsequent to the Company's acquisition of 55% of Computel,
the Company advanced an additional $1.2 million to Computel on an unsecured
basis. The aggregate loan proceeds were used by Computel to repay indebtedness.
. The acquisition of a telecommunications service contract from Meridian
Telecom. The contract covers international call services originating from
hotels operated by Grupo Posadas, one of the largest hotel operators in Latin
America. The acquisition price was $170,000, excluding related acquisition
costs.
34
<PAGE>
. The potential acquisition of certain customer contracts from one of the
Company's independent marketing representatives for an estimated acquisition
price of $1.25 million, which the Company anticipates will be paid partially in
Common Stock. No binding agreement exists and there can be no assurance this
transaction will be completed.
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 telecommunications 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 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.
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
July 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
facility from IBM de Mexico 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 liquidity 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. The sale of
additional equity or convertible debt securities 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 should be sufficient to meet its anticipated cash
needs for working capital and capital expenditures during such three quarter
period. The Company's Mexico operations are expected to significantly 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, and significantly reduced
transmission costs, resulting from the demonopolization of Telmex and the
Company's interconnection agreement with Investcom. 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
35
<PAGE>
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; and the risks
and uncertainties set forth elsewhere in this Registration Statement on Form 10.
See "Business--Risk Factors."
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 operation, it will continue to be able to sell equity or debt
securities and/or obtain borrowings sufficient to fund such 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 for the year ended July 31,1996.
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, 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 July 15, 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 8.64%
Murray R. Nye(3) 365,500 1.07
John R. Moses(4) 100,000 *
James McCourt(5) 3,352,423 9.80
All directors and executive officers as a group
(7 persons)(6) 4,396,316 12.84
</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 100,000 shares issuable upon exercise of presently exercisable
options.
(5) 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.
(6) Includes 1,441,666 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. Prior to that time, Mr. Moses served as President of Willingdon Resources
Ltd., which company amalgamated with Latcomm International Inc. to form ATSI-
Canada. Mr. Moses is currently self-employed as a business consultant.
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 ($) ($) ($)(3) ($) SARs(#) ($) ($)
--------- ------ --------- ----- ------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arthur L. Smith(1) 1996 96,000 - - - - - -
President and Chief 1995 61,813 - - - - - -
Operating Officer 1994 37,500(2) - - - 100,000(4) - -
</TABLE>
- ---------------
(1) Also serves as President and Chief Executive Officer of ATSI-Texas.
(2) Reflects salary from December 1993 (inception) through July 31, 1994.
(3) 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.
(4) The option was granted and exercised in full in fiscal 1994 at an exercise
price of $.72 per share.
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 effective date of each of Messrs.
Smith's, Saathoff's, Clement's, Waller's and Poole's employment agreement, 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 June 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 June 30, 1997, options for 4,628,000 shares were outstanding under
the 1997 Option Plan at a weighted average exercise price of $.58 and options
for 1,771,329 shares were exercisable. As of June 30, 1997, no options had been
exercised and 372,000 shares remained available for future option grants.
STOCK OPTION GRANTS, EXERCISES AND HOLDINGS BY NAMED EXECUTIVE OFFICER.
No options were granted to the Named Executive Officer during the Company's
fiscal year ended July 31, 1996 and no options were held by the Named Executive
Officer at July 31, 1996 or exercised by him during the fiscal year ended July
31, 1996.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has no Compensation Committee. During fiscal 1996, 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.
42
<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
</TABLE>
At July 15, 1997, there were 2,852 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 July 15, 1997, there were 17,827,542 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 Canadian
Tax Act, the regulations thereunder, all specific proposals to amend 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. Dividends and amounts deemed for purposes of the Canadian Tax
Act to be dividends, paid or credited on the Company's Common Stock to non-
residents of Canada will be subject to Canadian withholding tax at the rate of
25% of the gross amount of such dividends. In the case of United States
holders, under the Convention, the rate of withholding tax is reduced to 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 shares of the Company in
which case the withholding tax is levied at the rate of 6% of the gross amount
of such dividends paid before 1997 and 5% of the gross amount of 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 Shares. 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, unless: (i) at any time in the five year period
immediately preceding the disposition, not less than 25% of the issued shares of
any series or class (including any interest in, option in respect of or right of
conversion into such shares) of the capital stock of the Company belonged to the
United States holder, to persons with whom the United States holder did not deal
at arm's length or to the United States holder and persons with whom the United
States holder did not deal at arm's length; and (ii) the United States holder is
not entitled to any relief under the Convention. Under the Convention, capital
gains arising on the disposition of the Common Stock by a United States holder
will not be subject to Canadian tax 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. The Convention defines real
property situated in Canada to include rights to explore for or exploit mineral
deposits and other natural resources situated in Canada, certain other rights in
respect of natural resources situated in Canada and shares of a company the
value of whose shares is derived principally from real property 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 redeemable preferred stock having the same economic terms. 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 a private
Mexican company in exchange for 671,406 shares of Common Stock (and 2,044,139
additional shares placed in escrow for two years).
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 July 15, 1997, the Company had issued and
outstanding 34,224,031 shares of Common Stock. No shares of Preferred Stock
have been designated or issued.
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.
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>
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
constating documents of the Company on the right of foreigners to hold or vote
securities of the Company.
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, 1995 and 1996 and April 30,
1997
Consolidated Statements of Loss for the Period from December 17, 1993
(Inception) through July 31, 1994, the Years ended July 31, 1995 and
1996 and the Nine-Month Periods ended April 30, 1996 and 1997
Consolidated Statements of Stockholders' Equity for the Period from
December 17, 1993 (Inception) through July 31, 1994, the Years ended
July 31, 1995 and 1996 and the Nine-Month Period ended April 30, 1997
Consolidated Statements of Cash Flows for the Period from December 17,
1993 (Inception) through July 31, 1994, the Years ended July 31, 1995
and 1996 and the Nine-Month Periods ended April 30, 1996 and 1997
(b) 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 Zero plus-Zero minus Billing and Information Management Services
Agreement between ATSI-Texas and Billing Information Concepts Corp.***
10.6 1997 Option Plan**
10.7 Form of Option Agreement**
10.8 Credit Card Processing Agreements with TBR Transaction Billing
Resources and Card Service International*
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 Agreement with Computel**
10.23 Agreement with Investcom***
10.24 Payphone License issued to ATSI-Mexico**
10.25 Shared Teleport License issued to ATSI-Mexico***
10.26 Network Resale License issued to ATSI-Mexico**
10.27 Agreement with Avantel**
10.28 Registration Rights Agreement between ATSI-Canada and James R.
Leninger**
11 Statement of Computation of Per Share Earnings**
22 Subsidiaries of Registrant**
24 Power of Attorney (included on Signature Page to the Registration
Statement)**
27 Financial Data Schedule**
- ---------------------------------------
* Contained in exhibits to Registration Statement on Form S-4 (No. 333-05557)
of the Company filed June 7, 1996.
** Filed herewith.
*** To be filed by amendment.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
AMERICAN TELESOURCE
INTERNATIONAL, INC.
DATE: August 20, 1997 BY: Arthur L. Smith
-------------------------------
Arthur L. Smith, President
Each person whose signature appears below authorizes Arthur L. Smith and H.
Douglas Saathoff, or either of them, each of whom may act without joinder of the
other, to execute in the name of each such person who is then an officer or
director of the Registrant and to file any amendments to this Registration
Statement on Form 10 necessary or advisable to enable the Registrant to comply
with the Securities Exchange Act of 1934, as amended, and any rules, regulations
and requirements of the Securities and Exchange Commission in respect thereof,
which amendments may make such changes in such report as such attorney-in-fact
may deem appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Murray R. Nye Chief Executive Officer and Director August 20, 1997
- ---------------------
MURRAY R. NYE
Arthur L. Smith President, Chief Operating Officer and August 20, 1997
- --------------------- Director (Principal Executive Officer)
ARTHUR L. SMITH
H. Douglas Saathoff Chief Financial Officer, Secretary and August 20, 1997
- --------------------- Treasurer (Principal Financial and
H. DOUGLAS SAATHOFF Accounting Officer)
John R. Moses Director August 20, 1997
- ---------------------
JOHN R. MOSES
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, 1995 and 1996
and April 30, 1997....................................................... F-3
Consolidated Statements of Loss for the Period from
December 17, 1993 (Inception) through July 31, 1994,
the Years ended July 31, 1995 and 1996 and the Nine-Month
Periods ended April 30, 1996 and 1997.................................... F-4
Consolidated Statements of Stockholders' Equity for the
Period from December 17, 1993 (Inception) through
July 31, 1994, the Years ended July 31, 1995 and 1996 and
the Nine-Month Period ended April 30, 1997............................... F-5
Consolidated Statements of Cash Flows for the Period from
December 17, 1993 (Inception) through July 31, 1994,
the Years ended July 31, 1995 and 1996 and the Nine-Month
Periods ended April 30, 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, 1995 and 1996, and the related consolidated statements of loss,
stockholders' equity and cash flows for the period from December 17, 1993
(Inception) through July 31, 1994 and the years ended July 31, 1995 and 1996.
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, 1995 and 1996, and the
results of their operations and their cash flows for the period from
December 17, 1993 (Inception) through July 31, 1994 and the years ended
July 31, 1995 and 1996, 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, has a working capital deficit at July 31, 1996,
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.
/s/ ARTHUR ANDERSEN LLP
--------------------------------
Arthur Andersen LLP
San Antonio, Texas
October 7, 1996
F-2
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Presented in U.S. dollars)
<TABLE>
<CAPTION>
July 31, July 31, April 30,
1995 1996 1997
------------ ------------ ------------
(unaudited)
ASSETS
- ------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 101,980 $ 655,955 $ 1,355,717
Accounts receivable, net of
allowance of $143,546, $154,382
and $265,422, respectively 430,704 599,924 1,033,282
Stock subscriptions receivable 350,000 75,000 3,525
Notes receivable, current 37,251 101,283 605,785
Prepaid expenses 144,899 230,673 269,390
Other 23,241 126,061 128,463
------------ ------------ ------------
Total current assets 1,088,075 1,788,896 3,396,162
------------ ------------ ------------
PROPERTY AND EQUIPMENT (At cost): 1,476,261 2,523,832 3,151,856
Less - Accumulated depreciation and
amortization (122,442) (376,685) (790,368)
------------ ------------ ------------
Net property and equipment 1,353,819 2,147,147 2,361,488
------------ ------------ ------------
OTHER ASSETS, net
Notes receivable, long-term 18,580 - -
Organization costs, net 112,061 163,712 281,064
Other 193,172 248,449 253,306
------------ ------------ ------------
Total assets $ 2,765,707 $ 4,348,204 $ 6,292,020
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 883,955 $ 1,303,459 $ 1,858,241
Accrued liabilities 452,799 794,875 860,163
Notes payable 32,704 - 175,544
Current portion of convertible
long-term debt 100,000 100,000 100,000
Current portion of obligations under
capital leases - 182,884 211,962
Deferred revenue 64,987 - -
------------ ------------ ------------
Total current liabilities 1,534,445 2,381,218 3,205,910
------------ ------------ ------------
LONG-TERM LIABILITIES:
Obligations under capital leases, less
current portion - 321,575 250,144
Convertible long term debt, less
current portion - - 1,088,595
Customer deposits - 16,786 14,285
------------ ------------ ------------
- 338,361 1,353,024
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES: (Note 8 and 17)
STOCKHOLDERS' EQUITY:
Common shares, no par value, unlimited
shares authorized, 18,272,447 issued
and 18,197,447 outstanding at
July 31, 1995, 23,849,657 issued and 23,774,657
outstanding at July 31, 1996, 28,794,517 issued
and 28,719,517 outstanding at April 30, 1997 3,633,781 6,231,953 9,330,444
Accumulated deficit (2,402,519) (4,607,246) (7,609,567)
Cumulative translation adjustment - 3,918 12,209
------------ ------------ ------------
Total stockholders' equity 1,231,262 1,628,625 1,733,086
------------ ------------ ------------
Total liabilities and stockholders' equity $ 2,765,707 $ 4,348,204 $ 6,292,020
============ ============ ============
</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 period from For the nine month periods
December 17, 1993 (inception) For the years ended July 31, ended April 30,
through July 31, 1994 1995 1996 1996 1997
----------------------------- ------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Long distance services $ 110,483 $ 4,469,529 $ 10,806,586 $ 7,503,807 $ 8,929,965
Network management services 131,186 318,312 2,668,098 2,292,022 1,488,207
------------ ------------ ------------ ------------ ------------
Total operating revenues 241,669 4,787,841 13,474,684 9,795,829 10,418,172
------------ ------------ ------------ ------------ ------------
OPERATING EXPENSES:
Cost of services 201,258 4,061,091 10,832,664 7,758,130 8,772,830
Selling, general and administrative 373,226 2,536,441 4,430,038 3,300,065 4,003,990
Depreciation and amortization 10,713 140,798 280,583 206,156 433,562
------------ ------------ ------------ ------------ ------------
Total operating expenses 585,197 6,738,330 15,543,285 11,264,351 13,210,382
------------ ------------ ------------ ------------ ------------
Operating loss (343,528) (1,950,489) (2,068,601) (1,468,522) (2,792,210)
OTHER INCOME(EXPENSE):
Interest expense - (64,778) (150,231) (103,377) (209,976)
Interest income - 9,858 6,669 5,224 4,971
Other income - 1,242 7,436 6,045 5,208
Other expense - - - - (10,314)
------------ ------------ ------------ ------------ ------------
Total other income - (53,678) (136,126) (92,108) (210,111)
------------ ------------ ------------ ------------ ------------
NET LOSS ($ 343,528) ($ 2,004,167) ($ 2,204,727) ($ 1,560,630) ($ 3,002,321)
============ ============ ============ ============ ============
NET LOSS PER SHARE ($ 0.04) ($ 0.14) ($ 0.11) ($ 0.08) ($ 0.12)
============ ============ ============ ============ ============
</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>
Common Shares Cumulative Total
------------------------- Accumulated Translation Stockholders'
Shares Amount Deficit Adjustment Equity
----------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 17, 1993 (Inception) - $ - $ - $ - $ -
Contribution of capital - founding
stockholders 10,490,307 922,835 - - 922,835
Amalgamation 1,173,368 - (54,824) - (54,824)
Issuances of common stock, net 510,000 294,067 - - 294,067
Stock grant to employee 12,500 - - - -
Net loss - - (343,528) - (343,528)
----------- ----------- ----------- ---------- ------------
BALANCE, July 31, 1994 12,186,175 1,216,902 (398,352) - 818,550
Issuances of common stock for cash 5,461,048 2,321,698 - - 2,321,698
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 (unaudited) 4,278,943 2,104,923 - - 2,104,923
Issuances of common stock for services (unaudited) 665,917 91,068 - - 91,068
Amortization of deferred compensation (unaudited) - 25,000 - - 25,000
Convertible long term debt - common stock
warrants (unaudited) - 877,500 - - 877,500
Cumulative effect of translation adjustment
(unaudited) - - - 8,291 8,291
Net loss (unaudited) - - (3,002,321) - (3,002,321)
----------- ----------- ----------- ---------- ------------
BALANCE, April 30, 1997 (unaudited) 28,719,517 $ 9,330,444 $(7,609,567) $ 12,209 $ 1,733,086
=========== =========== =========== ========== ============
</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 period from For the nine month periods
December 17, 1993 (inception) For the years ended July 31, ended April 30,
through July 31, 1994 1995 1996 1996 1997
----------------------------- ------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 343,528) ($ 2,004,167) ($ 2,204,727) ($ 1,560,630) ($ 3,002,321)
Adjustments to reconcile net loss
to net cash used in operating
activities-
Depreciation and amortization 9,729 140,798 280,583 206,156 433,564
Amortization of debt discount - - - - 16,095
Deferred compensation - 11,111 33,333 25,000 25,000
Provision for losses on
accounts receivable 13,490 339,829 554,332 332,426 503,271
Changes in operating assets and
liabilities-
Increase in accounts receivable (126,455) (657,568) (723,552) (569,995) (936,629)
Increase in other assets-current
and long-term (211,498) (281,970) (9,853) (54,418) (108,209)
Increase (decrease) in accounts
payable 97,056 786,899 419,505 479,595 642,326
Increase (decrease) in accrued
liabilities 110,898 341,901 342,076 432,854 65,288
Increase (decrease) in deferred
revenue 22,335 42,652 (64,987) (64,987) -
Other 1,080 - 20,703 16,786 5,790
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities (426,893) (1,280,515) (1,352,587) (757,213) (2,355,825)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (617,645) (858,616) (475,303) (238,705) (531,017)
Issuance of notes receivable - (90,108) (88,107) - (517,678)
Payments received on notes receivable - 34,277 42,655 31,490 13,176
Payment to prior shareholders of
Willingdon (54,824) - - - -
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (672,469) (914,447) (520,755) (207,215) (1,035,519)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt
and detachable warrants - 175,000 - - 2,125,544
Payments on debt - (42,296) (32,704) (32,704) -
Capital lease payments - - (67,809) (33,706) (139,361)
Proceeds from issuance of common
stock, net of issuance costs 1,216,902 2,046,698 2,527,830 1,279,135 2,104,923
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities 1,216,902 2,179,402 2,427,317 1,212,725 4,091,106
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 117,540 (15,560) 553,975 248,297 699,762
CASH, beginning of period - 117,540 101,980 101,980 655,955
------------ ------------ ------------ ------------ ------------
CASH, end of period $ 117,540 $ 101,980 $ 655,955 $ 350,277 $ 1,355,717
============ ============ ============ ============ ============
</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, 1994, 1995 AND 1996 AND APRIL 30, 1996 AND 1997
Data with respect to the nine-months ended April 30, 1996 and 1997 are unaudited
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. With the exception of a $54,824 liability to
certain prior shareholders of Willingdon which was assumed by ATSI-Canada, only
the results of Latcomm and not those of Willingdon are included in the
accompanying consolidated financial statements for the period from Inception to
the Effective Date. No assets and no other liabilities of Willingdon were
assumed by ATSI-Canada. 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 expects to receive additional
licenses from the SCT allowing it to further expand the services it may provide
within Mexico. However, there can be no assurances that such additional
licenses will be obtained.
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 year ended July 31, 1996
and the nine-month period ended April 30, 1997, the operations of GlobalSCAPE
were immaterial when compared to the accompanying consolidated financial
statements of ATSI.
2. FUTURE OPERATIONS
The consolidated financial statements of the Company have been prepared on
the basis of accounting principles applicable to a going concern. For the
periods from Inception to July 31, 1996 and to April 30, 1997, the Company has
incurred cumulative net losses of $4,552,422 and $7,554,744, respectively.
Further, the Company had a working capital deficit of $592,322 at July 31, 1996
and a working capital balance of $190,251 at April 30, 1997. Although the
Company
F-7
<PAGE>
has capital resources available to it (See Note 19), these resources are
limited and may not be available to support its ongoing developmental 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 18. 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 18 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
(SFAS121). SFAS121 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, 1996 and April 30, 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. 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 periods ended July 31, 1994, 1995 and 1996, and April 30, 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.
In the opinion of management, the unaudited financial statements for the
nine month periods ended April 30, 1996 and 1997 are presented on a basis
consistent with the audited financial statements and contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation. The results of operations for interim periods are not
necessarily indicative of results of operations for the full year.
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
F-8
<PAGE>
shares without the permission of ATSI-Texas. ATSI-Texas retained the right to
purchase the shares for their original purchase price.
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. The $54,824 liability to certain
former stockholders of Willingdon which was also transferred to ATSI in
connection with the amalgamation has been charged to the accumulated deficit as
of the Effective Date in the accompanying Consolidated Statement of
Stockholders' Equity.
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 foreign 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 shareholders' equity, and are
not included in net income 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 75 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,
1995 and 1996 and April 30, 1997. ATSI currently pays a funding charge of prime
plus 4% per annum on the 75% of the calls which are advanced to ATSI.
F-9
<PAGE>
Receivables sold with recourse during fiscal year 1995 and 1996 and the nine-
month period ended April 30, 1997 were $3,620,056, $7,673,091 and $5,508,313,
respectively. At July 31, 1995 and 1996 and April 30, 1997, $396,993, $499,986
and $605,237 of such receivables were uncollected, respectively.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" in June 1996. 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 this statement will not have a material impact on the financial
condition or results of operations of the Company.
Earnings (Loss) Per Share
Earnings (Loss) per share were calculated using the weighted average number
of common shares outstanding for the period from Inception to July 31, 1994, the
years ended July 31, 1995 and 1996, and the nine month periods ended April 30,
1996 and 1997, which equated to 9,146,091 shares, 13,922,018 shares, 19,928,372
shares, 19,131,000 shares and 24,979,284 shares, respectively. Common stock
equivalents, which consist of the stock purchase warrants and options described
in Note 11, 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 financial position or
results of operations.
Property and Equipment
Property and equipment are stated at cost. Depreciation is 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 includes organization costs as of July 31, 1995 and 1996 and
April 30, 1997, of $141,226, $219,217, and $356,450, respectively, net of
accumulated amortization of $29,165, $55,505, and $75,386, respectively.
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 April 30, 1997. Accordingly, no income taxes have
been provided for in the accompanying consolidated financial statements for the
period from Inception to July 31, 1994, the years ended July 31, 1995 and 1996
and the nine-month periods ended April 30, 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 For the nine month periods
For the period ------------------- ended
from Inception July 31, April 30,
through -------- ---------
July 31, 1994 1995 1996 1996 1997
-------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash payments for interest $ - $ 12,791 $ 150,231 $ 103,377 $ 209,976
Non-cash investing and
financing activities:
Common stock issued for
services rendered $ - $ 84,070 $ 312,009 $ 187,392 $ 69,912
Capital lease obligations incurred $ - $ - $ 572,268 $ 414,818 $ 97,007
</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. NOTES RECEIVABLE
During April 1997, the Company entered into an agreement whereby it issued
a note receivable in the amount of $517,678, interest at 10%, to a company.
Principal and interest are to be paid at maturity in April 1998. Subsequent to
the end of the nine months ended April 30, 1997, the Company entered into an
agreement to purchase up to 100% of the outstanding shares of this company (See
Note 19).
5. NOTES PAYABLE
Notes payable comprises the following:
<TABLE>
<CAPTION>
July 31,
-------------------
1995 1996 April 30, 1997
---- ---- --------------
<S> <C> <C> <C>
A note payable to a company, interest at 16%, principal
and interest payable monthly ranging from $2,000 to
$6,805. Maturity in January 1996. Note is unsecured. $ 32,704 - -
A note payable to a company, see terms below. - - 175,544
--------- --------- ---------
$ 32,704 - $ 175,544
========= ========= =========
</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. As of April 30, 1997, $175,544 was
outstanding under this agreement.
In April 1997, the Company through ATSI-Mexico secured a credit facility
with IBM de Mexico to assist it in the purchase of intelligent pay telephones
for installation in Mexico. The credit facility of approximately $1.725 million
will
F-11
<PAGE>
allow the Company to begin installing U.S. standard intelligent pay telephones
in various Mexican markets. One such market is Puerto Vallarta. In May 1997, the
Company executed a municipality agreement with the city of Puerto Vallarta for
the deployment of 500 public payphones throughout the city.
6. CONVERTIBLE DEBT
A subsidiary of the Company has a note payable to a shareholder, which
accrues interest monthly at an anuual rate of 12%. The entire principal amount
is due at maturity on October 1, 1997. 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 April 30, 1997 was $100,000.
Beginning in November 1996, the Company started issuing convertible notes
totaling $1,002,000, interest at 10%, principal and interest payable in the
quarter ending April 30, 1998. The principal and accrued interest converted to
shares of common stock of ATSI at the rate of $0.55 per share in February 1997.
The holders of the notes committed to purchase additional convertible notes
totaling $1.3 million. As of July 31, 1997, approximately $965,000 of the $1.3
million had been converted. The remaining amounts are committed to be
converted within 30 days of an effective S-4 filing by the Company. In
addition to the notes, the Company issued to the holders of the notes warrants
to purchase 1,148,204 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. An additional 1,060,400 warrants to purchase common stock at $0.85
per share, were given in conjunction with the purchase by the holders of
approximately $965,000 more in convertible notes. If the remaining $335,000 of
convertible debt is sold, the Company would issue additional warrants to
purchase approximately 367,400 shares of common stock at $0.85 per share.
In March 1997, the Company issued $1.95 million in convertible notes,
interest at 10%, in anticipation of the authorization and creation of a class of
preferred stock. 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. Once
converted, the preferred stock will carry similar terms to the notes. 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 $877,500 to the value of the warrants in stockholders'
equity. The warrants expire three years from their date of issuance, and are
not exercisable for a period of one year after their initial issuance.
Subsequent to April 30, 1997, an additional $250,000 of convertible notes were
issued bringing the total issuance of convertible notes to $2.2 million. The
Company's shareholders approved the creation of a class of preferred stock at
the Company's annual shareholders meeting on May 21, 1997.
F-12
<PAGE>
7. PROPERTY AND EQUIPMENT, NET
Following is a summary of property and equipment at July 31, 1995 and 1996
and April 30, 1997:
<TABLE>
<CAPTION>
July 31,
-------
1995 1996 April 30,1997
---- ---- -------------
<S> <C> <C> <C>
Telecommunications equipment $1,255,337 $1,650,772 $2,168,600
Furniture and fixtures 111,473 145,336 164,483
Equipment under capital leases - 572,268 650,065
Leasehold improvements 71,696 92,140 92,140
Other 37,755 63,116 76,568
---------- ---------- ----------
1,476,261 2,523,832 3,151,856
Less: Accumulated depreciation and
amortization 122,442 376,685 790,368
---------- ---------- ----------
Total - property and equipment,
net $1,353,819 $2,147,147 $2,361,488
========== ========== ==========
</TABLE>
8. LEASES
The Company leases office space, furniture and minor equipment under
noncancelable operating leases and certain month-to-month leases. During fiscal
1996, the Company also leased equipment under capital leasing arrangements.
Rental expense under the operating leases for the period from Inception through
July 31, 1994,the years ended July 31, 1995 and 1996 and the nine-month periods
ended April 30, 1996 and 1997 was $3,530, $111,397, $136,107, $98,130 and
$136,519, respectively. Future minimum lease payments under the noncancelable
operating leases at July 31, 1996, are as follows:
Twelve months ending July 31,
1997 $ 95,414
1998 87,508
1999 89,524
2000 90,047
Thereafter 79,266
--------
Total minimum lease payments $441,759
========
Capital Leases
Future minimum lease payments under the capital leases together with the
present value of the net minimum lease payments at July 31, 1996, are as
follows:
Year ending July 31,
1997 $255,863
1998 204,801
1999 103,868
2000 57,478
2001 20,650
--------
Total Minimum lease payments 642,660
Less: Amount representing taxes (36,906)
--------
Net minimum lease payments 605,754
Less: Amount representing interest (101,295)
--------
Present value of net minimum lease
payments $504,459
========
F-13
<PAGE>
9. SHARE CAPITAL
During the period from Inception to July 31, 1994, a total of 12,473,675
shares of the Company's common stock was issued. Of this total, 10,790,307
shares were issued to shareholders of Latcomm in conjunction with the
amalgamation, including 300,000 shares which were originally held in trust and
were not considered to be outstanding until issued to specific individuals (See
Note 15). Another 1,173,368 shares were issued to the shareholders of Willingdon
in conjunction with the amalgamation in May 1994. Subsequent to the amalgamation
and prior to July 31, 1994, a total of 510,000 shares were issued upon the
exercise of warrants and options in exchange for cash totaling $294,067.
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 15).
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 or other nonmonetary consideration.
During the nine months ended April 30, 1997, the Company issued 4,944,860
shares of common stock. Of this total, 282,050 shares were issued for
approximately $140,000 in cash through the exercise of 282,050 warrants,
3,996,893 shares were issued for approximately $1,872,000 of net cash proceeds
and 665,917 shares were issued for services rendered to the Company.
Additionally, the Company had an increase in its total stockholders' equity of
approximately $878,000 resulting from the issuance of warrants in conjunction
with its convertible notes (See Note 11.)
At July 31, 1995 and 1996 and April 30, 1997, stock subscription
receivables of $350,000, $75,000, and $3,525, 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 period from Inception to July 31, 1994, during the years ended
July 31, 1995 and 1996 and during the nine month period ending April 30, 1997.
10. 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, 1995, $64,987 of deferred revenue was outstanding. No deferred revenue
was outstanding at July 31, 1996 or April 30, 1997.
11. STOCK PURCHASE WARRANTS AND STOCK OPTIONS
Certain shareholders of the Company were issued warrants to purchase shares
of common stock at exercise prices ranging from $0.50 to $2.00 per share.
Following is a summary of warrant activity from July 31, 1995 through
July 31, 1996:
Warrants outstanding, July 31, 1995 5,814,085
Warrants issued 4,340,878
Warrants expired (2,057,500)
Warrants exercised -
---------
Warrants outstanding, July 31, 1996 8,097,463
=========
F-14
<PAGE>
Warrants outstanding at July 31, 1996 expire as follows:
Number of Warrants Exercise Price Expiration Date
------------------ -------------- ---------------
180,000 $ 1.25 November 29, 1996
875,000 $ 0.50 March 30, 1997
2,359,375 $ 1.00 June 23, 1997
100,000 $ 2.00 October 25, 1997
153,088 $ 0.75 June 1, 1998
342,210 $ 1.00 November 14, 1998
970,290 $ 1.00 December 15, 1998
3,087,500 $ 0.70 April 11, 1999
30,000 $ 0.50 December 31, 1999
Warrants issued subsequent to July 31, 1996:
Number of Warrants Exercise Price Expiration Date
------------------ -------------- ---------------
875,000 $ 0.65 February 27, 1998
615,815 $ 0.85 November 21, 1998
223,385 $ 0.85 January 6, 1999
308,824 $ 0.85 February 7, 2000
4,776,176 $ 0.27 February 17, 2000
250,000 $ 0.85 February 17, 2000
1,050,000 $ 0.70 February 28, 2000
192,254 $ 0.75 April 7, 2000
In 1994, the Company issued options to certain individuals to purchase
210,000 shares of common stock. All the options were exercised in fiscal 1994
for a total of $138,127 and the exercise price for the options ranged from $0.50
to $0.72 per share. The exercise price on all the options issued equaled the
fair market value of the Company's common stock on the date of grant.
In February 1997, the Company's board of directors adopted the 1997 Stock
Option Plan. Under the plan, options to purchase up to 5,000,000 shares of
common stock may be granted to employees and directors of, and consultants and
advisers to, the Company or any parent or subsidiary corporation or entity. The
plan is intended to permit the Company to retain and attract qualified
individuals who will contribute to its overall success. The exercise price of
all options granted is equal to the market price of the shares of common stock
as of the date of grant. All outstanding options expire on February 10, 2007.
The stock option plan and the options granted thereunder were approved by a vote
of the shareholders at the Company's Annual Meeting of Shareholders on May 21,
1997. As of April 30, 1997, a total of 4,233,000 options to purchase Common
Shares have been granted to directors, officers and employees of the Company
pursuant to the plan.
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS 123 defines a fair value based method of accounting for
employee stock options or similar equity instruments. 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, SFAS No. 123 also allows entities to
continue to measure compensation costs using the intrinsic value method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Entities electing to remain with the accounting prescribed by ABP Opinion No. 25
must make pro
F-15
<PAGE>
forma disclosures of net income and earnings per share as if the fair value
based method of SFAS No. 123 has been applied. The accounting and disclosure
requirements of SFAS No. 123 are effective for transactions entered into fiscal
years that begin after December 15, 1995. The Company intends to measure
compensation costs in accordance with APB No. 25 and to provide pro forma
disclosures of net income and earnings per share as if the fair value based
method of accounting under SFAS No. 123 had been applied. Therefore, management
of the Company does not anticipate SFAS No. 123 will have a material impact on
the Company's financial position or results of operations.
12. 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.
13. 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, 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 April 30, 1997.
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 April 30, 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.
F-16
<PAGE>
<TABLE>
<CAPTION>
For the period For the Nine-Month
from For the Years ended Periods Ended
Inception to July 31, April 30,
July 31, 1994 1995 1996 1996 1997
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Operating Revenues from
unaffiliated customers:
Long distance services
United States $ 110,483 $ 4,469,529 $ 10,806,586 $ 7,503,807 $ 8,929,965
Mexico and other - - - - -
------------- ------------ ------------ ------------ ------------
Total long distance services $ 110,483 $ 4,469,529 $ 10,806,586 $ 7,503,807 $ 8,929,965
============= ============ ============ ============ ============
Network mgmt. services
United States $ 131,186 $ 318,312 $ 1,762,971 $ 1,391,300 $ 1,398,236
Mexico and other - - 905,127 900,722 89,971
------------- ------------ ------------ ------------ ------------
Total network mgmt. services $ 131,186 $ 318,312 $ 2,668,098 $ 2,292,022 $ 1,488,207
============= ============ ============ ============ ============
Operating loss
United States $ (343,528) $ (1,950,489) $ (2,079,456) $ (1,614,951) $ (2,529,719)
Mexico and other - - 10,855 146,429 ($262,491)
------------- ------------ ------------ ------------ ------------
Total Operating loss $ (343,528) $ (1,950,489) $ (2,068,601) $ (1,468,522) $ (2,792,210)
============= ============ ============ ============ ============
Identifiable Assets
United States $ 953,587 $ 2,653,646 $ 3,790,354 $ 3,087,644 $ 5,084,957
Mexico and Other - - 394,138 339,027 925,999
------------- ------------ ------------ ------------ ------------
Total Identifiable Assets $ 953,587 $ 2,653,646 $ 4,184,492 $ 3,426,671 $ 6,010,956
============= ============ ============ ============ ============
</TABLE>
14. INCOME TAXES
As of July 31,1996, the Company had net operating loss carryforwards of
approximately $4,455,000 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 and $2,205,000 will expire in 2011. The
availability of the net operating loss carryforwards to reduce U.S.federal
taxable income is subject to varous limitations in the event of an ownership
change as defined in Section 382 of the Internal Revenue Code of 1986 (the
"Code"). The Company is analyzing its stock records and may have experienced a
change in ownership in excess of 50 percent, as defined in the Code, during the
period ended April 30, 1997. The Company does not believe this change in
ownership significantly impacts its ability to utilize its loss carryforwards
because the annual limitation under the Code would allow full utilization within
the statutory carryforward period.
The tax effects of significant temporary differences representing deferred
income tax assets and liabilities are as follows as of July 31, 1995 and 1996:
F-17
<PAGE>
<TABLE>
<CAPTION>
July 31, 1995 July 31,1996
------------- -------------
<S> <C> <C>
Net operating loss carryforward $ 765,000 $ 1,515,000
Other tax differences, net 8,300 (162,000)
Valuation allowance (773,300) (1,353,000)
------------- -------------
Total deferred income tax assets $ - $ -
============= =============
</TABLE>
The valuation allowance as of July 31, 1995 and 1996 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 period from Inception to July 31, 1994 and the years ended July 31, 1995
and 1996 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.
15. SHARES HELD IN TRUST
As mentioned in Note 9, 300,000 of the 10,790,307 shares issued to the
former shareholders of Latcomm in conjunction with the amalgamation 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 and April 30, 1997, a total of 225,000 of these shares had been awarded to
employees for services to be provided to the Company. At July 31, 1995 and 1996
and April 30, 1997, the Company had deferred compensation expense of $72,222,
$55,556 and $30,563, respectively.
16. 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, and Amendment No. 1 to the S-4 on November
20, 1996. The Company anticipates filing Amendment No. 2 to the S-4 in the near
term. The S-4 filings are occurring 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 shareholders 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 shareholders before it can be effected. The S-4 registers the
shares of ATSI-Delaware to be issued in the Plan of Arrangement. The Company
believes that the Plan of Arrangement and the S-4 will improve the Company's
ability and flexibility to meet its future equity and debt financing needs and
will enhance the Company's profile in the U.S. and international capital
markets.
17. 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
F-18
<PAGE>
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.
18. 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.
ATSI-Mexico has applied 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 thru Investcom's network at wholesale rates in
May 1997, thereby lowering the Company's cost of transporting certain 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
April 30, 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 licenses 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.
F-19
<PAGE>
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
ABilled 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 revenues were generated from such calls during the year
ended July 31, 1996, 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.
19. SUBSEQUENT EVENTS
In May 1997, the Company entered into an agreement to purchase up to 100%
of the outstanding shares of a privately owned caseta operator (public calling
station) operating 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 in May 1997, and expects to
acquire the remaining shares on August 25, 1997.
F-20
<PAGE>
The purchase price for the Computel acquisition is $2.8 million, $1.1 million of
which will be paid in cash and the balance in Common Stock.
During the month of June 1997, the Company received approximately $2.4
million related to the exercise of 2.4 million warrants by certain shareholders.
Each warrant entitled its holder to purchase one share of the Company's common
stock at an exercise price of $1.00 per share. The warrants, had they not been
exercised, were to have expired on June 23, 1997.
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.
On July 31, 1997, the Company sold 922,558 shares of common stock in a
private transaction for approximately $1,100,000 net cash proceeds.
Additionally, as part of the transaction, the Company issued warrants to
purchase 200,000 shares of Common Stock at $1.45 per share. The warrants expire
on July 31, 1999.
F-21
<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 and have issued our report
thereon dated October 7, 1996. 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.
/s/ AURTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
San Antonio, Texas
October 7, 1996
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 End Description Beginning of Period Expenses Allowance End of Period
- ---------- ----------- ------------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
July 31, 1994 Allowance for Doubtful Accounts $ 0 $ 14,887 ($ 1,397) $ 13,490
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
</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 Zero plus-Zero minus Billing and Information Management
Services Agreement between ATSI-Texas and Billing
Information Concepts Corp.***
10.6 1997 Option Plan**
10.7 Form of Option Agreement**
10.8 Credit Card Processing Agreements with TBR Transaction
Billing Resources and Card Service International*
10.9 Financianing 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 Agreement with Computel**
10.23 Agreement with Investcom***
10.24 Payphone License issued to ATSI-Mexico**
10.25 Shares Teleport License issued to ATSI-Mexico***
10.26 Network Resale License issued to ATSI-Mexico**
10.27 Agreement with Avantel**
10.28 Registration Rights Agreement between ATSI-Canada and
James R. Leninger**
11 Statement of Computation of Per Share Earnings**
22 Subsidiaries of Registrant
24 Power of Attorney (included on Signature Page to the
Registration Statement)**
27 Financial Data Schedule**
- ----------------
* Contained in exhibits to Registrtion Statement on Form S-4 (No.
333-05557) of the Company filed June 7, 1996.
** Filed herewith.
*** To be filed by amendment.
<PAGE>
EXHIBIT 10.3
October 2, 1995
James W. McCourt
1717 E. Harrison
Harlingen, Texas 78550
RE: Compensation for $500,000 Guaranty of Equipment Line of Credit
Dear Jim:
Please allow this letter to serve as American Telesource International, Inc.'s
("ATI") agreement to compensate you, James McCourt ("McCourt"), for your
guaranty of a $500,000 line of credit to assist ATI in the acquisition of
equipment associated with its business.
ATI shall grant McCourt 5% of the value of the credit line ($25,000 U.S.) in
common stock, at 90% of the Bid price, the day said line is fully approved and
drawn upon by ATI.
ATI shall grant McCourt an additional 5% of the value of the credit line
($25,000 U.S.) in common stock, at 90% of the Bid price, on each anniversary
date that said line carries McCourt's guaranty. The anniversary date shall be
defined as the first date in which ATI draws funds.
If this meets with your approval and understanding, please so indicate in the
space provided for below, and return an executed copy to the undersigned.
Thank you.
Sincerely,
AMERICAN TELESOURCE INTERNATIONAL, INC.
Arthur L. Smith
- ---------------
Arthur L. Smith
President
ALS:cc
AGREED TO AND ACCEPTED THIS 5th DAY OF OCTOBER, 1995.
By: James W. McCourt
----------------
James W. McCourt
<PAGE>
EXHIBIT 10.4
May 12, 1997
ENGAGEMENT LETTER
Mr. Craig K. Clement
American TeleSource International, Inc.
12500 Network Blvd., Suite 407
San Antonio, TX 78249
Dear Mr. Clement:
This engagement letter shall serve to set forth the terms upon which Joseph
Charles and Associates, Inc. ("JCA") will render American TeleSource
International, Inc. (the "Company") certain investment banking services (the
"Investment Banking Engagement"). On the basis of discussions held between
representatives of JCA and the Company, subject to due diligence as described in
paragraph 9 hereafter, JCA agrees to assist the Company in an institutional
financing on a "best efforts" basis, pursuant to the following terms and
conditions.
1. Investment Banking Services. JCA shall act as the Company's
---------------------------
investment banker, on an exclusive basis, with respect to matters relating
to the Company's proposed fund raising.
JCA shall introduce institutional investors to the Company for the
purpose of providing financing (the "Financing" or the "Placement") in an
amount and under terms and conditions acceptable to the Company on a best
efforts basis. The Company proposes to issue a minimum of $3,500,000 and a
maximum of up to $5,000,000 in subordinated convertible debentures (the
"Debentures") or convertible preferred shares (the "Shares") under
Regulation D of the Securities Act of 1933. The Debentures or Shares shall
be convertible to common stock of the Company at a fixed, pre-determined
conversion price. The Company agrees to register the Debentures or Shares
after the closing of the Placement and/or to obtain a listing on a NASDAQ
exchange on a best efforts basis.
2. Term. The investment banking relationship shall commence upon the
----
execution of this engagement letter. JCA shall use its best efforts to
receive a final proposal from an institutional investor within 30 days of
the commencement of the Investment Banking Engagement. If JCA is unable to
receive a final proposal from an institutional investor within 30 days,
then the Company shall have the right to terminate the Investment Banking
Engagement.
<PAGE>
3. Termination.
-----------
(a) The Company may terminate this Investment Banking Engagement
at any time, without notice, for cause. For purposes of this
agreement, "cause" shall be defined as any breach of this Investment
Banking Engagement by JCA, which is not cured within 30 days after
written the Company gives notice of such breach to JCA. In the event
of termination, JCA shall be entitled to all items of compensation
(including any amounts deferred) payable to JCA pursuant hereto as
of the date of termination.
(b) JCA may terminate this agreement at any time, without notice,
for cause. For purposes of this agreement, "cause" shall be defined
as any breach of this Investment Banking Engagement by the Company,
which is not cured within 30 days after written notice of such
breach is given to the Company by JCA.
4. Compensation to JCA. JCA shall receive the following items of
-------------------
compensation for the investment banking services rendered hereunder.
(a) JCA shall be entitled to a fee for arranging the Financing
(the "Financing Fee") equal to eight percent (8%) of the gross
amount of the funds accepted by the Company resulting from the
financing activities hereunder, less any earnest money, due
diligence fees or commitment fees paid by the Company to
institutional investors prior to closing. Such fees deducted from
the Financing Fee shall not include closing costs such as: 1) legal
fees; 2) accounting fees; or 3) travel or other out-of-pocket
expenses incurred by the Company, JCA or institutional investors.
(b) JCA shall receive three-year warrants (the "JCA Warrants") to
purchase an amount of the Company's common stock equal to ten
percent (10%) of the number of shares of the Company's common stock
issued to investors in the Placement, exercisable at the market
closing bid price on the closing date of this Financing. The shares
underlying the JCA Warrants shall contain standard demand and
piggyback registration rights and shall contain anti-dilution
provisions for stock splits, stock dividends, recombinations and
reorganizations, but the anti-dilution provisions shall not pertain
to future stock offerings .
5. Expenses. The Company shall be responsible for all expenses
--------
incurred in connection with the Placement. The Company shall pay to JCA all
previously approved expenses reasonably incurred, such as travel expenses,
related to this Financing. The Company shall pre-approve any expenses incurred
by JCA in connection with this Financing in excess of $1,000.
6. Exclusive Agency. Unless waived in writing by JCA, JCA shall be the
----------------
Company's exclusive agent with respect to investment banking services relating
to any equity or debt financing contemplated by the Company during the term of
this Investment Banking
<PAGE>
American TeleSource International, Inc.
August 15, 1997
Page 3
Engagement. The Company hereby agrees, during the term of this
Investment Banking Engagement, not to engage another investment
banking firm or financial intermediary or to directly contact
institutions that provide financing. During the term of this
Investment Banking Engagement, if the Company accomplishes an equity
or debt financing directly or through a source not introduced to the
Company by JCA, the Company will be obligated to pay the Compensation
to JCA as set forth in paragraph in 4 above. Notwithstanding anything
contained herein to the contrary, JCA acknowledges that the Company is
presently reviewing the potential direct financing sources as listed
on Exhibit A attached hereto. JCA further acknowledges that JCA shall
not be entitled to the Compensation to JCA as set forth in paragraph
in 4 above if the Company accomplishes an equity or debt financing
with a funding source listed on Exhibit A. Any transactions completed
during the forty-eight (48) months following the termination of this
agreement between the Company and a maximum of up to six institutional
investors introduced to this transaction by JCA, will obligate the
Company to pay the Compensation to JCA in the amount set forth in
paragraph 4 above. Conditional upon a successful Financing, for a
period of 12 months after the termination of this Agreement, JCA will
have the first right of refusal for any proposed financings by any
competing broker dealers with less than 200 registered representatives
and a first right to match on any proposed financings by competing
broker dealers with more than 200 registered representatives.
7. Representations and Warranties. The Company represents and warrants
------------------------------
to JCA that:
(a) the Company will not cause or knowingly permit any action to be
taken in connection with the Placement that violates the Securities
Act of 1933 or any state securities laws.
(b) all information and statements provided by the Company in
connection with the Placement will be true and correct.
(c) current Company management, as disclosed to JCA, will continue
in place after the Placement for a reasonable period of time.
(d) the financial statements provided by the Company to JCA fairly
reflect the financial condition of the Company and the results of its
operations at the time and for the periods covered by such financial
statements.
(e) the Company is not aware of any facts adversely affecting the
financial condition of the Company.
(f) the Company has prepared and delivered to JCA its most recent
projections of sales, earnings and cash flow.
<PAGE>
American TeleSource International, Inc.
August 15, 1997
Page 4
The Company agrees to indemnify and hold JCA and its employees,
officers, directors, agents, attorneys and accountants free and
harmless from any liability, cost and expense, including attorneys'
fees, in the event of a material breach of any of the
representations and warranties contained herein.
8. Choice of Laws and Arbitration. This agreement shall be construed
------------------------------
pursuant to the laws of the state of Texas. Any controversy arising hereunder
shall be resolved by arbitration pursuant to the rules of the American
Arbitration Association.
9. Due Diligence by JCA. During the term of the Investment Banking
--------------------
Engagement, JCA shall be authorized to conduct necessary due diligence,
including, but not limited to: inspection of the Company's facilities and
operations; review of current financial statements and projections; and
interviews with the Company's senior management and other employees.
If this engagement letter correctly sets forth our agreement, please indicate
your acceptance by signing and returning the enclosed copy of this letter.
Very truly yours,
JOSEPH CHARLES AND ASSOCIATES, INC.
Richard A. Rappaport
--------------------
Richard A. Rappaport
Managing Director
Accepted and Agreed
This 12th day of May , 1997
AMERICAN TELESCOURCE INTERNATIONAL, INC.
By: Arthur L. Smith
----------------
Arthur L. Smith
<PAGE>
EXHIBIT A
DIRECT FINANCING SOURCES
<PAGE>
EXHIBIT 10.6
AMERICAN TELESOURCE INTERNATIONAL INC.
--------------------------------------
1997 STOCK OPTION PLAN
----------------------
PURPOSE. The purpose of this Plan is to promote the interest of American
-------
TeleSource International Inc. (the "Company") and its shareholders by providing
an effective means to attract, retain and increase the commitment of certain
individuals and to provide such individuals with additional incentive to
contribute to the success of the Company.
1. ELIGIBILITY. Options may be granted under the Plan to directors and
-----------
employees of, and advisors and consultants to, the Company, or of any parent or
subsidiary of the Company (if any) provided, however, in the case of consultants
or advisors, that such grant be in consideration of bona fide services rendered
by such consultant or advisor and such services not be in connection with the
offer or sale of securities in a capital-raising transaction. The Board of
Directors or the Committee (defined below), as the case may be, shall select
from such eligible class the individuals to whom Options shall be granted from
time to time.
2. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Board
--------------------------
of Directors, or, if the Board of Directors should unanimously agree, by a
committee (the "Committee") consisting of at least two "non-employee directors,"
as defined in Rule 16b-3 ("Rule 16b-3") under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). In any event, at such time as the
Company becomes a reporting company pursuant to registration of a class of its
securities under Section 12 of the Exchange Act, the Plan shall be administered
by such a Committee. A quorum of such Committee shall consist of a majority of
the members of such Committee, or as may be otherwise provided in the Company's
bylaws. The Committee shall hold meetings at such times and places and conduct
its business at such meetings as it may determine, subject to any express
provisions of the Company's bylaws. Acts of a majority of the Committee members
attending at a meeting at which a quorum is present, or such acts as are reduced
to or approved in writing by the majority of the members of the Committee, shall
be the valid acts of the Committee. The Board of Directors or the Committee, as
the case may be, shall from time to time in its discretion determine which
individuals shall be granted Options, the amount of shares covered by such
Options, and certain other specific terms and conditions of such Options subject
to the terms and conditions contained herein. Notwithstanding anything in this
Plan to the contrary, the full Board of Directors of the Company shall determine
whether any member of the Committee shall be granted Nonqualified Stock Options
(as defined below) under the Plan, the terms and provisions of the respective
agreements evidencing such options, the times at which such options shall be
granted, and the number of shares of Common Stock subject to each such option
and shall make all determinations under the Plan with respect to such options
(which determinations of the Board of Directors shall be conclusive).
The Board of Directors or the Committee, as the case may be, shall have
the sole authority and power, subject to the express provisions and conditions
hereof, to construe this Plan and the Options granted hereunder, and to adopt,
prescribe, amend, and rescind rules and regulations relating to this Plan, and
to make all determinations necessary or advisable for
<PAGE>
administering this Plan. The Board or Committee shall also have the authority
and power to modify any provision of this Plan to render the Plan consistent
with any amendments to Rule 16b-3 or Form S-8 of the Securities Act of 1933, as
amended (the "Securities Act"), including amendments which permit the grant of
Options on terms which are less restrictive than the terms set forth herein. The
interpretation by the Board or Committee of any provision of the Plan with
respect to any incentive stock option granted hereunder shall be in accordance
with section 422 of the Internal Revenue Code of 1986 and the regulations issued
thereunder, as amended from time to time (the "Internal Revenue Code"), in order
that the incentive stock options granted hereunder ("Incentive Stock Options")
shall constitute "incentive stock options" within the meaning of section 422 of
the Internal Revenue Code. Options granted under the Plan which are not intended
to be Incentive Stock Options are referred to herein as "Nonqualified Stock
Options." The term "Options" as used herein shall refer to Incentive Stock
Options and Nonqualified Stock Options, either collectively or without
distinction. The interpretation and construction by the Board or Committee, if
any, of any provisions of the Plan or of any Option granted hereunder shall be
final and conclusive. No member of the Board or the Committee shall be liable
for any action or determination made in good faith with respect to the Plan or
any Option granted hereunder.
3. SHARES SUBJECT TO THE PLAN. Subject to the provisions of Section 6,
-------------------------- ---------
the number of shares subject to Options granted hereunder shall not exceed
5,000,000 shares of the Company's authorized but unissued or reacquired Common
Stock (the "Common Stock"). Such number of shares shall be subject to
adjustment as provided in Section 5. Shares that by reason of the expiration,
----------
termination, cancellation or surrender of an Option are no longer subject to
purchase pursuant to an Option granted under the Plan (other than by reason of
exercise of such Option) may be reoptioned hereunder.
4. TERMS AND CONDITIONS.
---------------------
(A) Option Price. Each Option shall state the number of shares that
------------
may be purchased thereunder, shall expressly designate such Option as an
Incentive Stock Option or a Nonqualified Stock Option, and shall state the
option price per share (the "Option Price") which shall be paid in the manner
specified in this Section 4(A) in order to exercise such Option. The Option
------------
Price shall not be less than the lesser of (i) 100% of the fair market value of
the shares on the day the Option is granted or (ii) the 10 day moving average
of the fair market value of the shares ending on the day the Option is granted
with respect to any Nonqualified Stock Option granted under Plan. The Option
Price shall not be less than 100% of the fair market value of the shares on the
day the Option is granted with respect to any Incentive Stock Option granted
under the Plan.
For purposes of the Plan, the fair market value per share of the
Common Stock on any date shall be deemed to be the closing price of the Common
Stock on the principal national securities exchange on which the Common Stock is
then listed or admitted to trading, if the Common Stock is then listed or
admitted to trading on any national securities exchange. The closing price
shall be the last reported sale price regular way, or, in case no such sale
-------
takes place on such day, the average of the closing bid and asked prices regular
way, as reported by said exchange. If the Common Stock is not then so listed on
a national securities exchange, the fair market value per share of the Common
Stock on any date shall be deemed to be the closing price (the last reported
sale price regular way) in the over-the-counter market as reported by the NASDAQ
National Market System, if the Common Stock closing price is then reported on
the NASDAQ National Market System, or, if the Common Stock closing price of the
Common Stock is not then reported by the NASDAQ National Market System, shall be
deemed to be the mean of the highest closing bid and lowest closing asked price
of the Common Stock in the over-the-counter market as reported by the National
Association of Securities Dealers Automated
<PAGE>
Quotation System ("NASDAQ") or, if the Common Stock is not then quoted by
NASDAQ, as furnished by any member of the National Association of Securities
Dealers, Inc. selected from time to time by the Company for that purpose. If no
member of the National Association of Securities Dealers, Inc. furnishes quotes
with respect to the Common Stock of the Company, such fair market value shall be
determined by resolution of the Committee. Notwithstanding the foregoing
provisions of this Section 4(A), if the Committee shall at any time determine
------------
that it is impracticable to apply the foregoing methods of determining fair
market value, the Committee is empowered to adopt other reasonable methods for
such purpose. The Committee may, if it deems it appropriate, engage the services
of an independent qualified expert or experts to appraise the value of the
Common Stock.
Options under the Plan may be exercised by payment of the Option Price
in cash or, if the Common Stock is then registered under the Exchange Act and is
then traded on NASDAQ or one or more securities exchanges, by delivery of the
equivalent fair market value of Common Stock or by a "cashless exercise"
procedure in which an Optionee is permitted to exercise an Option by arranging
with the Company and his or her broker to deliver the appropriate Option Price
from the concurrent market sale of the acquired shares, or a combination of the
foregoing (subject to the discretion of the Committee or the Board). An
employee's withholding tax due upon exercise of a Nonqualified Stock Option may
be satisfied either by a cash payment or the retention from the exercise of a
number of shares of Common Stock with a fair market value equal to the required
withholding tax, as the Committee or the Board may permit.
In addition, with respect to the exercise of any Nonqualified Stock
Option, the Board or the Committee (or an authorized representative) shall
advise the Optionee, upon receipt of notice of intent to exercise such Option,
of the income tax withholding consequences to such Optionee of such exercise,
the amount of the appropriate withholding tax and any other payments due by
reason thereof. Such Optionee must satisfy all of the preceding payment
requirements in order to receive stock upon exercise of such Option.
(B) Option Period. Any Options granted pursuant to this Plan must be
-------------
granted within one year from the date the Plan was adopted by the Board of
Directors of the Company (February 10, 1997).
Each Option shall state the date upon which it is granted. Each option
shall be exercisable during such period as is provided under the terms of the
Option, but in no event shall an Option be exercisable after the expiration of
ten years from the date of grant. Except in the case of death or disability,
Incentive Stock Options may be exercised within three months (or for such
shorter period as may be specified in the particular Option) after termination
of employment to the extent such Options were exercisable at the date of
termination, and Nonqualified Stock Options may be exercised after termination
of employment or other service to the Company for such period as may be
specified in the particular Option. In the event of the disability of an
Optionee, Incentive Stock Options may be exercised for up to one year after
disability of the Optionee, to the extent exercisable prior to the date of
disability. Nonqualified Stock Options may be exercised following the Optionee's
death or disability and Incentive Stock Options may be exercised following the
Optionee's death by such Optionee or by his or her estate, heirs, or devisees,
as the case may be, for such period thereafter as may be specified in the
particular Option.
(C) Assignability. An Option granted pursuant to this Plan shall be
-------------
exercisable during the Optionee's lifetime only by the Optionee and shall not be
assignable or transferable by the Optionee (except with the Committee's prior
written approval, and only in any such additional circumstances as shall not
affect the Plans qualification with the requirements of the incentive
<PAGE>
stock option provisions of the Internal Revenue Code, the requirements of Rule
16b-3 under the Exchange Act or the plan eligibility requirements for the use of
Form S-8 of the Securities Act), and shall not be subject to levy, attachment or
similar process. Upon any other attempt to transfer, assign, pledge or otherwise
dispose of Options granted under this Plan, such Options shall immediately
terminate and become null and void.
(D) Limit on 10% Shareholders. No Incentive Stock Option may be granted
-------------------------
under this Plan to any individual who would, immediately after the grant of such
Incentive Stock Option directly or indirectly own more than 10% of the total
combined voting power of all classes of stock of the Company or of any parent or
subsidiary corporation unless (i) such Incentive Stock Option is granted at an
Option Price not less than 110% of the fair market value of the shares on the
date the Incentive Stock Option is granted, and (ii) such Incentive Stock Option
expires, on a date not later than five years from the date the Incentive Stock
Option is granted.
(E) Limits on Options. An individual may be granted one or more Options,
-----------------
provided that the aggregate fair market value (determined as of the time the
Option is granted) of Common Stock for which an individual may be granted
Incentive Stock Options that are first exercisable in any calendar year (under
all stock option plans of the Company and any parent or subsidiary corporations,
if any) may not exceed $100,000.
(F) Rights as Shareholder. An Optionee, or a transferee by will or
---------------------
inheritance of an Option, shall have no rights with respect to any shares
covered by an Option until the date of the issuance of a stock certificate for
such shares and the recording of such issuance upon the Company's stock ledger
by its duly appointed, regular transfer agent. No adjustment shall be made for
dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is prior to
such date, except as provided in Section 5 hereof.
---------
(G) Additional Provisions. The Options authorized under this Plan shall
---------------------
contain such other provisions as the Board or Committee shall deem advisable,
including, without limitation, further restrictions upon the exercise of the
Option. Any Incentive Stock Option shall contain such limitations and
restrictions upon the exercise of the Option as shall be necessary in order that
the Option shall be an "incentive stock option" as defined in section 422 of the
Internal Revenue Code.
(H) Compliance with Securities Laws. At the time of exercise of any
-------------------------------
Option, the Company may require the Optionee to execute any documents or take
any action which may then be necessary to comply with the Securities Act and the
rules and regulations adopted thereunder, or any other applicable federal or
state laws regulating the sale and issuance of securities, and the Company may,
if it deems necessary, include provisions in the Options to assure such
compliance. The Company may from time to time change its requirements with
respect to enforcing compliance with federal and state securities laws,
including the request for, or insistence upon, letters of investment intent,
such requirements to be determined by the Company in its judgment as necessary
to assure compliance with said securities laws. Such changes may be made with
respect to any particular Option or to any stock issued upon exercise thereof.
5. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of any change
------------------------------------------
in the number of issued and outstanding shares of Common Stock which results
from a stock split, reverse stock split, the payment of a stock dividend or any
other change in the capital structure of the Company, such as a merger,
consolidation, reorganization or recapitalization, the Board or Committee shall
appropriately adjust (a) the maximum number of shares which
<PAGE>
may be issued under this Plan (b) the number of shares subject to each
outstanding Option, and (c) the Option Price per share thereof, so that upon
exercise of the Option the Optionee shall receive the same number of shares the
Optionee would have received had the Optionee been the holder of all shares
subject to such outstanding Options immediately before the effective date of
such change in the number of issued shares of the Common Stock of the Company.
Any such adjustment shall not result in or entitle the Optionee to the issuance
of fractional shares. Instead, appropriate adjustments to any such Option and,
in the aggregate, all other options of the Company of the same class (that is,
Incentive Stock Options or Nonqualified Stock Options) held by each Optionee
shall be made so that such Option and other options of the same class, if any,
held by any such Optionee cover the greatest whole number of shares of the
Common Stock which does not exceed the number of shares which would be covered
applying such adjustments in the absence of any restriction on the issuance of
fractional shares. Any excess fractional share shall be redeemed in cash at the
then-current fair market value of the Common Stock (determined as provided in
Section 4(A) hereof) multiplied by the appropriate fraction of a share.
- ------------
6. TERMINATION OR AMENDMENT OF THE PLAN. The Board of Directors may at any
------------------------------------
time suspend, amend, or terminate this Plan, provided that, except as set forth
in Section 6 hereof, no amendment may be adopted that will change the
---------
requirement that the Option Price be at least a specified percentage of the fair
market value of the Common Stock or change the provisions required for
compliance with section 422 of the Internal Revenue Code, except to conform to a
change in the requirements of such law or regulations thereof. Except as
otherwise specifically provided herein, the Board shall not, without the
approval of the shareholders of the Company, amend this Plan so as to materially
increase the benefits accruing to Optionees under the Plan, increase the
aggregate number of shares that may be issued under this Plan or materially
modify the requirements for eligibility for participation in the Plan. No
amendment or termination of the Plan shall, without the consent of the Optionee,
alter or impair any rights or obligations under any Option previously granted
under the Plan.
<PAGE>
EXHIBIT 10.7
May 07, 1997
Name
Address 1
City, State Zip Code
Dear First Name,
On behalf of American TeleSource International Inc., an Ontario,
Canada Corporation (the "Company"), I am pleased to announce that the Company's
Board of Directors, operating under the American TeleSource International Inc.
1997 Stock Option Plan (the "Plan"), on February 10, 1997 awarded you (the
"Employee" or the "Optionee") a nonqualified stock option (the "Option") to
purchase Full Amount shares of no par value common stock of American TeleSource
International Inc. (the "Shares"), subject to the subsequent approval of the
Plan by the Company's shareholders at the Annual Shareholders Meeting to be held
on May 21, 1997. The Option to acquire the Shares is awarded and granted upon
the following terms and conditions as well as those terms, conditions, and
limitations as set forth in the Plan, which is attached hereto and incorporated
herein for all purposes. For purposes of this Option, "ATSI" refers to the
Company and any of its subsidiaries or affiliates.
Note: This Option is to be treated confidentially by you and ATSI.
Certain ATSI employees will be assigned to assist you in exercising the option.
If ATSI management determines, in its sole discretion, that you have disclosed
terms of this Option with ATSI employees, other than (i) those employees
designated to assist you, or (ii) your immediate supervisor, then
notwithstanding any other terms of this agreement, your rights to the nonvested
and vested options which have not been exercised shall in all events terminate
and become null and void.
1. The Exercise Price for each share of common stock is US$0.58 per
share.
2. For so long as you are employed by ATSI, or any of its
subsidiaries, the right to exercise such Option shall vest as follows:
(a) 33-1/3% (Amount 1 shares) on Date 1);
(b) 33-1/3% (Amount 2 shares) on Date 2);
(c) 33-1/3% (Amount 3 shares) on Date 3);
<PAGE>
3. Subject to Paragraphs 5, 6 and 11 herein, the options which have
vested in accordance with the schedule set forth in Paragraph 2 above may be
exercised at any time on or before February 10, 2007 (the "Expiration Date").
No partial exercise of such Option may be for less than 100 full shares. In no
event shall ATSI be required to transfer fractional shares to the Employee.
4. Optionee may exercise the Option from time to time, to the extent
then exercisable, upon the following terms:
(a) Optionee shall deliver written notice to the Secretary of the
Company at the company's principal corporate offices, specifying the number of
Shares which Optionee is purchasing hereunder and the method of payment for such
shares. Such notice shall be accompanied by the original of this Option so that
an appropriate endorsement can be made hereto to reflect the Shares so purchased
and to reduce accordingly the number of Shares thereafter to be subject to the
terms hereof. If required by the Company, such notice shall also be accompanied
by such other instruments or agreements duly signed by Optionee as deemed
necessary or advisable by counsel for the Company in order that the issuance of
the Shares complies with applicable federal and state securities laws and
regulations and applicable requirements of any national securities exchange or
other market on which the common stock is then traded.
(b) The Exercise Price for the number of Shares being purchased shall
be payable upon exercise as follows: (i) by delivery of a cashier's check
payable to the Company or such other form of immediate funds as the Company
shall permit, (ii) if there is an established public market for the common
stock, by delivery of certificates representing shares of common stock having an
equivalent Fair Market Value (as defined in the Plan), (iii) if there is an
established public market for the common stock, by arranging with the Company
and Optionee's broker to deliver the Exercise Price for the number of Shares
being purchased from the concurrent market sale of the purchased shares, or (iv)
a combination of any of the foregoing.
(c) Upon the valid exercise of the Option in accordance with the
terms hereof, the Company shall deliver to Optionee a certificate representing
the number of whole Shares purchased, bearing any legends as may be deemed
necessary or advisable by counsel to the Company to satisfy applicable
securities laws or regulations; provided, however, that if any law or regulation
requires the Company to take any action with respect to such Shares before the
issuance thereof, then the sale, issuance and delivery of such shares shall be
deferred for the period necessary to take such action. Optionee hereby
represents and agrees that, unless the Shares issued upon exercise of the Option
are duly registered under applicable securities laws, the purchase by Optionee
of such shares shall be solely for investment purposes and not with a view to
the distribution thereof.
<PAGE>
(d) Optionee's federal withholding tax (if any) due upon exercise of
the Option shall be satisfied in cash by Optionee at the time of exercise or, if
permitted by the Board of Directors or its designee(s) through the retention by
the Company from the Shares purchased the number of shares of common stock
having a Fair Market Value equal to the required withholding tax.
ATSI does not attempt to advise you on tax or other consequences
arising from your acquisition of the common stock through the exercise of the
Option. However, attached you will find a memorandum which explains certain tax
matters with reference to nonqualified stock options. For specific tax
consequences to you, please consult with your tax advisor.
5. This nonqualified Option, even to the extent it may have vested,
cannot be exercised during the six-month period following its date of grant
(February 10, 1997).
6. Subject to the limitations imposed pursuant to Section 4.(B) of
the Plan, once the Option becomes exercisable as provided herein, the Option
shall remain exercisable until the Expiration Date, except that:
(a) If Optionee voluntarily terminates Optionee's employment with
ATSI at any time without the consent of ATSI, or if Optionee's employment is
terminated by ATSI for cause (of which the Board of Directors or its
designee(s), in both cases, shall be the sole judge), then the Option may be
exercised only during the four-month period following such termination to the
extent exercisable immediately prior to such termination, but in no event later
than the Expiration Date.
(b) If (i) Optionee voluntarily terminates Optionee's employment with
ATSI and with ATSI's consent, (ii) Optionee's employment with ATSI is terminated
by ATSI without cause, or (iii) Optionee's employment is terminated by reason of
Optionee's "permanent and total disability" within the meaning of section
22(e)(3) of the Internal Revenue Code (of which the Board of Directors or it's
designee(s), in each of such three cases, shall be the sole judge), then the
Option may be exercised only during the four-month period following such
termination to the extent exercisable immediately prior to such termination, but
in no event later than the Expiration Date.
(c) If (i) Optionee dies during Optionee's employment with the
Company or (ii) Optionee dies during the four-month period under the conditions
set forth in paragraph 6(b) immediately above (during which the Optionee was
entitled to exercise the Option), then the Option may be exercised only during
the one-year
<PAGE>
period following Optionee's death, but in no event later than the Expiration
Date, by the person to whom Optionee's rights under the Option shall pass by
Optionee's will or the laws of descent and distribution, as applicable.
Notwithstanding the above, the Employee's rights to the nonvested and
vested options which have not been exercised, and all rights granted by this
Agreement shall in all events terminate and become null and void if the Employee
is employed either as an employee or consultant by any company, joint venture,
partnership or individual which the Board of Directors or its designee(s),
determines, in its sole discretion, is in competition with ATSI.
7. During the lifetime of the Employee, the Option and all rights
granted in this agreement shall be exercisable only by the Employee, and except
as Paragraph 6 otherwise provides, the Option and all rights granted under this
contract shall not be transferred, assigned, pledged or hypothecated in any way
(whether by operation of law or otherwise), and shall not be subject to
execution, attachment or similar process. Upon any attempt to transfer, assign,
pledge, hypothecate or otherwise dispose of such Option or of such rights
contrary to the provisions in this agreement, or upon the levy of any attachment
or similar process upon such Option or such rights, such Option and such rights
shall immediately become null and void.
8. Notwithstanding the foregoing, upon the occurrence of a Change in
Control, all nonvested options shall immediately vest. For purposes of this
Agreement, a "Change in Control" shall be deemed to have occurred if (i) any
"person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended), becomes the "beneficial owner" (as such term
is defined in Rule 13d-3 under the Act), directly or indirectly, of outstanding
securities of the Company representing 40% or more of the combined voting power
of the outstanding securities of the Company, or (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the shareholders of the Company
was approved by a vote of at least two-thirds (2/3) of the directors then still
in office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for any
reason to constitute a majority thereof, or (iii) the shareholders of the
Company approve (A) a merger or consolidation of the Company with any other
entity (other than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least 60% of the combined voting power of
the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation), (B) a plan of complete
liquidation of the Company or (C) an agreement or agreements for the sale or
disposition, in a single transaction or series of related
<PAGE>
transactions, by the Company of all or substantially all of the property and
assets of the Company. Notwithstanding the foregoing, events otherwise
constituting a Change in Control in accordance with the foregoing shall not
constitute a Change in Control if such events are solicited by the Company.
9. In the event of any change in the common shares of ATSI subject to
the Option granted hereunder, through merger, consolidation, reorganization,
recapitalization, stock split, stock dividend or other change in the corporate
structure, without consideration, appropriate adjustment shall be made by ATSI
in the number or kind of shares subject to such Option and the price per share.
Upon the dissolution or liquidation of ATSI, the Option granted under this
agreement shall terminate and become null and void, but the Employee shall have
the right immediately prior to such dissolution or liquidation to exercise the
Option granted hereunder to the full extent not before exercised.
10. Neither the Employee nor his/her executor, administrator, heirs
or legatees shall be or have any rights or privileges of a shareholder of ATSI
in respect of the shares transferable upon exercise of the Option granted under
this agreement, unless and until certificates representing such shares shall
have been endorsed, transferred and delivered and the transferee has caused
his/her name to be entered as the shareholder of record on the books of ATSI.
Nothing contained in the Plan or this Option shall confer upon the Employee any
right to continue in the employ of ATSI or any of its subsidiaries or interfere
in any way with the right of ATSI (subject to the terms of any separate
agreement to the contrary) to terminate the Employee's employment or to increase
or decrease the Employee's compensation at any time.
11. The Plan has been approved by ATSI's Board of Directors, but has
not yet been approved by ATSI's shareholders. The Plan will be included with a
list of other items to be discussed, presented and approved by ATSI shareholders
at the Annual Shareholders Meeting to be held on May 21, 1997. ATSI's Board of
Directors expects the Plan to be approved in its entirety. However, until the
Plan is approved by the ATSI shareholders, the Option cannot be exercised, even
to the extent that it has vested. You will receive notice immediately after the
Plan has been voted on by the shareholders, informing you of the status of the
Plan and the Option awarded to you in this agreement.
The shares underlying the Option will be tradeable on the Canadian
Dealing Network. The Secretary of the Company, or his designee(s), will be
given the responsibility of assisting you in the exercise of your Option. The
Company is currently in the process of filing a Registration Statement with the
United States Securities and Exchange Commission in anticipation of eventually
trading its common stock on a U.S.-based market or exchange. Although complete
assurance
<PAGE>
cannot be given at this time, ATSI anticipates registering the underlying shares
beneath your Option so that they will be freely tradeable if and when ATSI's
common stock is trading in the United States.
12. The terms and conditions of the Plan, unless expressly
supplemented by this Agreement, shall continue unchanged and in full force and
effect. To the extent that any terms or provisions of the Option are or may be
deemed expressly inconsistent with any terms or conditions of the Plan, the
terms of this agreement shall control. To the extent that any terms or
provisions of the Option are or may be deemed expressly inconsistent with any
terms or conditions of any separate employment contract, if any, signed by ATSI
and Optionee, the terms of the employment contract shall control.
13. The Employee hereby agrees to take whatever additional actions
and execute whatever additional documents ATSI may in its reasonable judgment
deem necessary or advisable in order to carry out or effect one or more of the
obligations or restrictions imposed on the Employee pursuant to the express
provisions of this Option.
14. The rights of the Employee are subject to modification and
termination in certain events as provided in this Option and the Plan.
15. This agreement shall be governed by, and construed in accordance
with, the substantive laws of the Province of Ontario, Canada applicable to
contracts made and to be wholly performed therein.
16. This Option may be executed in one or more counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
17. This Option and the Plan shall constitute the entire agreement
between the parties with respect to the subject matter hereof, and supersede all
previously written or oral negotiations, commitments, representations and
agreements with respect thereto.
If the foregoing represents your understanding of the terms and
conditions upon which your options have been granted, please execute in the
space provided below, returning an executed copy to the undersigned.
Sincerely,
AMERICAN TELESOURCE
INTERNATIONAL INC. AGREED:
<PAGE>
H. Douglas Saathoff -------------------------
Chief Financial Officer Name
<PAGE>
EXHIBIT 10.16
Updated as of 2/28/97
EXECUTIVE EMPLOYMENT AGREEMENT
Agreement made as of January 1, 1997, between AMERICAN TELESOURCE
INTERNATIONAL., Inc., a Texas corporation (the "Company"), and Arthur L. Smith
("Executive").
The Company and the Executive desire to enter into certain agreements
providing for Executive's employment with the Company.
The parties hereto agree as follows:
1. Employment. The Company agrees to employ Executive and Executive
----------
accepts such employment for the period beginning January 1, 1997 (the "Start
Date") and ending upon termination pursuant to paragraph 1 (D) hereof (the
---------------
"Employment Period").
(A) Services. During the Employment Period, Executive will be the President
--------
and Chief Executive Officer of the Company, and in connection therewith will
render such services of an executive and administrative character to the Company
and its affiliates as are customarily rendered by persons holding such position
with similarly situated companies, as the Board of Directors of American
TeleSource International Inc., an Ontario, Canada corporation (the "Board") may
from time to time direct. Executive will devote his best efforts and
substantially all of his business time and attention (except as otherwise
specifically permitted herein and except for vacation periods and reasonable
periods of illness or other incapacity) to the business of the Company and its
affiliates and will faithfully and diligently carry out such duties and have
such responsibilities as are customary among persons employed in substantially
similar capacities for similar companies. Executive will report to the Board and
shall faithfully and diligently comply with all of its reasonable and lawful
directives. For purposes of this Agreement, the term "affiliates" means any
corporation, limited partnership, limited liability company or other entity
engaged in the same business as the Company or a related business, which
controls, is controlled by or is under common control with the Company.
(B) Salary. During the Employment Period and thereafter as provided in
------
paragraph (D) below, the Company will pay Executive a base salary at the rate of
- -------------
not less than $100,000 per annum (or such higher amount as the Board may
establish from time to time), and will be payable in accordance with the
Company's regular payroll practices.
(C) Benefits. In addition to the compensation described above in this
--------
paragraph 1, Executive will be entitled during the Employment Period to the
- ------------
following benefits:
(1) such bonus as the Board in its sole discretion may from time to time
authorize, but in no event shall bonuses paid during a year exceed 50% of
Executive's base salary for such year;
(2) such health insurance and other benefits as are available from time to
time to the Company's salaried employees generally;
(3) in accordance with the Company's vacation and absence paid as in
effect from time to time, sick leave, personal time provided that Executive
shall have no less than three weeks vacation each year, with salary;
(4) reimbursement, upon submission of documentation in accordance with the
Company's regular expense policies, for reasonable business expenses incurred on
the Company's behalf by Executive;
(5) participation in any savings plan, 401(k) plan, profit sharing plan or
pension plan as is
1
<PAGE>
available from time to time to the Company's salaried employees generally; and
(6) opportunity to participate in any and all employee benefit plans from
time to time in effect for executives or salaried employees of the Company
generally (subject to any contribution therefore generally required by such
employees and except to the extent such plans are in a category of benefit
otherwise provided to Executive).
(D) Termination. Unless earlier terminated by termination of Executive's
-----------
employment pursuant to any of the provisions immediately below, Executive's
employment with the Company will continue until the third anniversary of the
Start Date, and Executive's employment shall be renewed automatically for one-
year periods thereafter unless either party hereto gives written notice to the
other party, at least 120 days prior to the next anniversary date, that such
employment shall not be renewed:
(1) Death. In the event of Executive's death during the term hereof,
------
Executive's employment hereunder shall immediately and automatically terminate.
Notwithstanding such event, the Company shall pay to Executive's designated
beneficiary or, if no beneficiary has been designated by Executive, to his
estate, the base salary at the rate in effect on the date of death for a period
of 6 months. The Company shall also pay to Executive's designated beneficiary
or, if no beneficiary has been designated by Executive, to his estate, any
incentive compensation that is earned but unpaid, based on the operations of the
Company for the whole year, prorated through the date of death.
(2) Disability.
----------
(a) The Company may terminate Executive's employment hereunder, upon
notice to Executive, in the event that Executive becomes disabled during his
employment hereunder through any illness, injury, accident or condition of
either a physical or psychological nature and, as a result, is unable to perform
substantially all of his duties and responsibilities hereunder for 90 days
during any period of 365 consecutive calendar days. In the event of such
termination, until the earliest of (i) the conclusion of the then-current term
of this Agreement and (ii) the conclusion of a period of 6 months following the
date of termination, the Company shall continue to pay Executive the base salary
at the Rate in effect on the date of termination and shall continue to
contribute to the cost of Executive's participation in the Company's group
medical and dental insurance plan, if any, provided that Executive is entitled
to continue such participation under applicable law and plan terms. The Company
will also pay Executive, in the case of such termination, any incentive
compensation that is earned but unpaid, based on the operations of the Company
for the whole year, prorated through the date of such termination;
(b) While receiving disability income payments under the Company's
disability income plan, if any, Executive shall be entitled to receive the
excess, if any, of base salary under paragraph I (B) hereof over such disability
---------------
income payments, and shall be entitled to receive such bonus and other benefits
as are described in paragraph 1(C), until the termination of his employment and
---------------
except to the extent a longer period is specified in paragraph 1(D)(2)(a).
--------------------
(3) Termination by the Company without Cause. The Company may at any time
------------------------------------------
terminate Executive's employment without Cause (as defined below) by giving
Executive written notice of the effective date of termination. In the event of
such termination, the Company shall have the continuing obligation to make
payments of base salary in accordance with paragraph (B) above at the rate in
-------------
effect on the effective date of such termination until the third anniversary of
the Start Date or until 12 months after the effective date of such termination,
whichever period is longer. Additionally, during such period following
termination as the Company shall have the continuing obligation to make payments
of base salary, the Company shall continue to contribute to the cost of
Executive's participation in the Company's group medical and insurance plans, if
any, provided that Executive is entitled to continue such participation under
applicable law and plan. The Company will also pay Executive, in the event of
such termination, any incentive compensation that is earned but unpaid, based on
operations of the Company for the whole year, prorated through the date of his
termination.
2
<PAGE>
(4) Termination by the Company for Cause. The Company shall have the right
------------------------------------
to terminate the Executive's employment at any time for any of the following
reasons (each of which is referred to herein as "Cause") by giving Executive
written notice of the effective date of termination (which effective date may be
the date of such notice):
(a) the willful breach of any provision of paragraphs 1(A), 2, 3, 4 or
---------------------------
5 (including, but not limited to, a refusal to follow reasonable and lawful
- -
directives of the Board; provided, however, that to the extent that such breach
is curable, the Board will give Executive written notice of such breach and
Executive will have 30 days from the receipt of such notice to cure such breach;
(b) any act of fraud, embezzlement or other material dishonesty with
respect to any aspect of the Company's business;
(c) continued use of illegal drugs;
(d) substantial failure of performance, repeated or continued after
written notice of such failure and explanation of such failure of performance,
which is reasonably determined by the Board of Directors to be materially
injurious to the business or interests of the Company; or
(e) conviction of a felony or of a crime involving moral turpitude.
If the Company terminates Executive's employment for any of the reasons
set forth above in this paragraph 1(D)4 , the Company shall have no other
---------------
obligations hereunder (including the obligation to continue to make payments of
base salary as provided in paragraph 1(D)3 from and after the effective date of
---------------
termination and shall have all other rights and remedies available under this or
any other agreement and at law or in equity.
(5) By the Executive for Good Reason. Executive may terminate his
--------------------------------
employment hereunder for Good Reason, upon written notice to the Company setting
forth the nature of such Good Reason in reasonable detail. "Good Reason" shall
mean:
(a) the material failure of the Company to provide Executive the base
salary and incentive compensation and benefits in accordance with the terms of
paragraph 1 and paragraph 6 hereof;
- ---------------------------
(b) the material diminution in the nature or scope of Executive's
responsibilities, duties or authority; or
(c) the occurrence of a Change in Control (as defined herein).
In the event of termination in accordance with this paragraph 1(D)(5), the
-----------------
Company shall continue to pay Executive the base salary at the rate in effect on
the effective date of such termination until the third anniversary of the Start
Date or, in the event this Agreement has been automatically extended thereafter
in accordance with paragraph 1(D) hereof, until next anniversary of the Start
--------------
Date. Additionally, during such period following termination as the Company
shall have the continuing obligation to make payments of base salary, the
Company shall continue to contribute to the cost of Executive's participation in
the Company's group medical and insurance plans, if any, provided that Executive
is entitled to continue such participation under applicable law and plan. The
Company will also pay Executive, in the event of such termination, any incentive
compensation that is earned but unpaid, based on operations of the Company for
the whole year, prorated through the date of his termination.
A "Change in Control" shall be deemed to have occurred if (i) any "person"
(as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934, as amended), becomes the "beneficial owner" (as such term is defined in
Rule 13d-3 under the Act), directly or indirectly, of outstanding securities of
the Company representing 40% or more of the combined voting power of the
outstanding securities of the Company, or (ii) during any period of two
consecutive years, individuals who
3
<PAGE>
at the beginning of such period constitute the Board of Directors of the Company
and any new director whose election by the Board of Directors or nomination for
election by the shareholders of the Company was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof,
or (iii) the shareholders of the Company approve (A) a merger or consolidation
of the Company with any other entity (other than a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) at least 60% of
the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation),
(B) a plan of complete liquidation of the Company or (C) an agreement or
agreements for the sale or disposition, in a single transaction or series of
related transactions, by the Company of all or substantially all of the property
and assets of the Company. Notwithstanding the foregoing, events otherwise
constituting a Change in Control in accordance with the foregoing shall not
constitute a Change in Control if such events are solicited by the Company and
are, if Executive is then a member of the Board, approved, recommended or
supported by Executive in his capacity as a member of the Board of the Company
in actions taken prior to, and with respect to, such events.
(6) Voluntary Termination by Executive. Except as provided in paragraph
----------------------------------- ---------
1(D)(5), in the event that Executive's employment with the Company is terminated
- -------
by Executive, such termination shall be a breach of this Agreement and the
Company shall have no further obligations hereunder from and after the date of
such termination.
2. Nondisclosure. Executive acknowledges that during the course of his
--------------
performance of services for the Company he has acquired and will acquire
technical knowledge with respect to the Company's business operations,
including, by way of illustration, the Company's existing and contemplated
services, trade secrets, patents and selling techniques and information,
customer lists, supplier lists, and confidential information relating to the
Company's policy and/or business strategy (all of such information herein
referenced to as the "Confidential Information"); provided, however, that the
term "Confidential Information" shall not include (a) any information which is
or becomes publicly available otherwise than through breach of this Agreement,
or (b) any information which is or becomes known or available to Executive on a
non-confidential basis and not in contravention of applicable law from a source
which is entitled to disclose such information to Executive. Executive agrees
that he will not, while he is employed by the Company, divulge to any person,
directly or indirectly, except to the Company or its officers and agents or as
reasonably required in connection with his duties on behalf of the Company, or
use, except on behalf of the Company, any Confidential Information acquired by
Executive during the term of his employment. Executive agrees that he will not,
at any time after his employment with the Company has ended, divulge to any
person directly or indirectly any Confidential Information. Executive further
agrees that if his relationship with the Company is terminated (for whatever
reason) he shall not take with him but will leave with the Company all records,
papers and computer data and any copies thereof relating to the Confidential
Information (or if such papers, records, computer data or copies are not on the
premises of the Company, Executive agrees to return such papers, records and
computer data immediately upon his termination). Executive acknowledges that
all such papers, records, computer data or copies thereof are and remain the
property of the Company.
3. Inventions and Patents. Executive agrees that all inventions,
----------------------
innovations or improvements relating to the Company's business or method of
conducting business (including new contributions, improvements, ideas and
discoveries, whether patentable or not) conceived or made by him during his
employment with the Company belong to the Company. Executive will promptly
disclose such inventions, innovations or improvements to the Board and perform
all actions reasonably requested by the Board to establish and confirm such
ownership.
4. Other Businesses. During the Employment Period, Executive agrees
----------------
that he will not, directly or indirectly except with the express written consent
of the Board, become engaged in, render material services for, or permit his
name to be used in connection with, or directly or indirectly counsel or consult
4
<PAGE>
with, any business other than the business of the Company and its affiliates;
provided, however, that Executive may be a passive investor in any such business
(subject to the limitations set forth in paragraph 5 below).
-----------
5. Noncompetition. Executive agrees that:
--------------
(A) During the term he performs services for the Company and during
the Post-Employment Period (as defined below), Executive will not interfere with
the relationship between the Company or any affiliate and any employee, agent or
representative of the Company or any such affiliate.
(B) During the term he performs services for the Company and during
the Post-Employment Period, Executive will not directly or indirectly divert or
attempt to divert from the Company or any affiliate any business which provides
telecommunications services in the United States or Latin America, including,
without limitation, domestic and international call services or domestic and
international telecommunications networks for voice, data, fax and/or video
transmission between the United States and Latin America or within Latin
America, or any related business in which the Company has been actively engaged
during the term Executive performed services for the Company, nor interfere with
the relationships of the Company with customers, dealers, distributors,
franchisees or sources of supply.
(C) During the term he performs services for the Company and during
the Post-Employment Period, Executive will not directly or indirectly own,
manage, operate control, be employed by, participate in, or be connected in any
manner with the ownership, management, operation or control of, any business or
enterprise which provides telecommunications services in the United States or
Latin America, including, without limitation, domestic and international call
services or domestic and international telecommunication networks for voice,
data, fax and/or video transmission between the United States and Latin America
or within Latin America, or any related business in which the Company has been
actively engaged during the then Executive performed services for the Company.
(D) For purposes hereof, the "Post-Employment Period" shall mean: (i)
in the event Executive's employment with the Company is terminated for Cause
pursuant to paragraph 1(D)(4), the 12-month period following Executive's
-----------------
termination of employment with the Company, or (ii) in the event Executive's
employment with the Company is terminated for any reason other reason, the
period during which the Company continues to make payments of base salary.
6. Stock Option. Effective as of the date hereof (the "Effective
------------
Date"), under the terms of the American TeleSource International, Inc. (ATSI)
1997 Stock Option Plan (the "Plan"), ATSI, an Ontario corporation ("ATSI"),
hereby grants to Executive the option (the "Option") to purchase shares (the
"Option Shares") of Common Stock, no par value per share, of ATSI, subject to
the requisite approval of the Plan by ATSI's Board of Directors and ATSI's
shareholders. The number of Option Shares, the purchase price per Option Share
and the installments and dates in which the Executive shall have the right to
exercise the Option are attached to this Agreement as Exhibit "B". The Plan is
attached to this Agreement as Exhibit "A". Beginning on the Effective Date,
such installments shall be cumulative (i.e. once the right to purchase the
number of shares of an installment has accrued, such shares may be purchased at
any time thereafter, or in part from time to time, until the business day
immediately preceding the tenth anniversary of the Effective Date (the
"Expiration Date") or until such earlier date as set forth in the following
paragraph. Notwithstanding the preceding sentence, upon the occurrence of a
Change in Control, Executive's right to exercise the Option shall become fully
vested (i.e., all unissued Option Shares may be purchased at any time
thereafter, or in part from time to time, until the Expiration Date or until
such earlier date as set forth in the following paragraph).
Upon termination of Executive's employment pursuant to Paragraph 1(D)(4)
-----------------
(Termination by the Company for Cause) or paragraph 1(D)(6) (Voluntary
-----------------
Termination by Executive), the Option shall remain exercisable for the four
month period following such termination, but only to the extent such option was
exercisable at termination. Upon termination of Executive's employment pursuant
to
5
<PAGE>
paragraph 1(D)(1) (Death) or paragraph 1(D)(2) (Disability), the Option, to
- ----------------- -----------------
the extent then exercisable, shall remain exercisable for the one-year period
following such termination. Upon termination of Executive's employment
pursuant to paragraph (D)(3) (Termination by the Company without Cause) or
-----------------
paragraph 1(D)(5) (By the Executive for Good Reason), Executive's right to
- -----------------
exercise the Option shall become fully vested and the Option shall remain
exercisable for the four-month period following such termination.
7. General Provisions.
------------------
(A) Notices. Any notice provided for in this Agreement must be in
-------
writing and must be either personally delivered, or mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable overnight
courier service, to the recipient at the address below indicated:
To the Company: Attn.: Board of Directors
12500 Network Boulevard, Suite 407
San Antonio, Texas 78249
To Executive: At Executive's last known address as listed
with the Company
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or sent or if mailed, five days after so mailed.
(B) Severability. Whenever possible, each provision of this
------------
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to Be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision in such jurisdiction or any other jurisdiction, or the
legality or enforceability of such provision in any other jurisdiction, but this
Agreement will be reformed, construed and enforced in such jurisdiction as if
such invalid, illegal or unenforceable provision had never been contained herein
except that any court having jurisdiction shall have the power to reduce the
duration, area or scope of such invalid, illegal or unenforceable provision and,
in its reduced form it shall be enforceable.
(C) Complete Agreement. This Agreement embodies the complete
------------------
agreement and understanding between the parties and supersedes and preempts any
prior understandings, agreements or representations by or between the parties,
written or oral, which may have been related to the subject matter hereof in any
way.
(D) Successors and Assigns. This Agreement is a personal service
----------------------
contract and is not assignable by the Executive. Subject to the Executive's
rights under paragraph 1(D)(5)(d), this Agreement may be assigned from time to
--------------------
time by the Company. This Agreement shall be binding on and inure to the
benefit of the parties hereto and such parties' respective successors, personal
representatives and permitted assigns.
(E) Choice of Law. All questions concerning the construction,
-------------
validity and interpretation of this Agreement will be governed by the internal
law, and not the law of conflicts, of the State of Texas.
(F) Remedies. Each of the parties to this Agreement will be
--------
entitled to enforce his or its rights under this Agreement specifically, to
recover damages (including, without limitation, reasonable fees and expenses of
counsel) by reason of any breach of any provision of this Agreement and to
exercise all other rights existing in his or its favor. The parties hereto
agree and acknowledge that money damages may not be an adequate remedy for any
breach or threatened breach of the provisions of this Agreement and that any
party may in his or its sole discretion apply to any court of law or equity of
competent
6
<PAGE>
jurisdiction for specific performance and/or injunctive relief in order to
enforce or prevent any violations of the provisions of this Agreement. Such
injunction or decree shall be available without the posting of any bond or other
security.
(G) Amendments and Waivers. Any provision of this Agreement may he
----------------------
amended or waived only with the prior written consent of Executive and a
majority of the Board.
(H) Absence of Conflicting Agreements. Executive hereby warrants
---------------------------------
and covenants that his employment by the Company does not result in a breach of
the terms, conditions or provisions of any agreement to which Executive is
subject.
(I) Survival. No termination of Executive's employment by either or
--------
both parties shall reduce or terminate Executive's covenants and agreements in
paragraphs 2, 3 and 5.
- ---------------------
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered on the day and year first above written.
"Company" AMERICAN TELESOURCE INTERNATIONAL, INC.
By: H. Douglas Saathoff
-------------------
Name: H. Douglas Saathoff
--------------------
Title: Chief Financial Officer
"Executive"
Arthur L. Smith
-----------------
Arthur L. Smith
7
<PAGE>
Updated as of 2/28/97
EXHIBIT 10.17
EXECUTIVE EMPLOYMENT AGREEMENT
Agreement made as of January 1, 1997, between AMERICAN TELESOURCE
INTERNATIONAL., Inc., a Texas corporation (the "Company"), and H. Douglas
Saathoff ("Executive").
The Company and the Executive desire to enter into certain agreements
providing for Executive's employment with the Company.
The parties hereto agree as follows:
1. Employment. The Company agrees to employ Executive and Executive accepts
-----------
such employment for the period beginning January 1, 1997 (the "Start Date") and
ending upon termination pursuant to paragraph 1 (D) hereof (the "Employment
---------------
Period").
(A) Services. During the Employment Period, Executive will be the Chief
---------
Financial Officer, Treasurer and Secretary of the Company, and in connection
therewith will render such services of an executive and administrative character
to the Company and its affiliates as are customarily rendered by persons holding
such position with similarly situated companies, as the Board of Directors of
American TeleSource International Inc., an Ontario, Canada corporation (the
"Board") may from time to time direct. Executive will devote his best efforts
and substantially all of his business time and attention (except as otherwise
specifically permitted herein and except for vacation periods and reasonable
periods of illness or other incapacity) to the business of the Company and its
affiliates and will faithfully and diligently carry out such duties and have
such responsibilities as are customary among persons employed in substantially
similar capacities for similar companies. Executive will report to the President
and shall faithfully and diligently comply with all of its reasonable and lawful
directives. For purposes of this Agreement, the term "affiliates" means any
corporation, limited partnership, limited liability company or other entity
engaged in the same business as the Company or a related business, which
controls, is controlled by or is under common control with the Company.
(B) Salary. During the Employment Period and thereafter as provided in
------
paragraph (D) below, the Company will pay Executive a base salary at the rate of
- -------------
not less than $95,000 per annum (or such higher amount as the Board may
establish from time to time), and will be payable in accordance with the
Company's regular payroll practices.
(C) Benefits. In addition to the compensation described above in this
---------
paragraph 1, Executive will be entitled during the Employment Period to the
- ------------
following benefits:
(1) such bonus as the Board in its sole discretion may from time to time
authorize, but in no event shall bonuses paid during a year exceed 50% of
Executive's base salary for such year;
(2) such health insurance and other benefits as are available from time to
time to the Company's salaried employees generally;
(3) in accordance with the Company's vacation and absence paid as in
effect from time to time, sick leave, personal time provided that Executive
shall have no less than three weeks vacation each year, with salary;
(4) reimbursement, upon submission of documentation in accordance with the
Company's regular expense policies, for reasonable business expenses incurred on
the Company's behalf by Executive;
1
<PAGE>
(5) participation in any savings plan, 401(k) plan, profit sharing plan or
pension plan as is available from time to time to the Company's salaried
employees generally; and
(6) opportunity to participate in any and all employee benefit plans from
time to time in effect for executives or salaried employees of the Company
generally (subject to any contribution therefore generally required by such
employees and except to the extent such plans are in a category of benefit
otherwise provided to Executive).
(D) Termination. Unless earlier terminated by termination of Executive's
-----------
employment pursuant to any of the provisions immediately below, Executive's
employment with the Company will continue until the third anniversary of the
Start Date, and Executive's employment shall be renewed automatically for one-
year periods thereafter unless either party hereto gives written notice to the
other party, at least 120 days prior to the next anniversary date, that such
employment shall not be renewed:
(1) Death. In the event of Executive's death during the term hereof,
------
Executive's employment hereunder shall immediately and automatically terminate.
Notwithstanding such event, the Company shall pay to Executive's designated
beneficiary or, if no beneficiary has been designated by Executive, to his
estate, the base salary at the rate in effect on the date of death for a period
of 6 months. The Company shall also pay to Executive's designated beneficiary
or, if no beneficiary has been designated by Executive, to his estate, any
incentive compensation that is earned but unpaid, based on the operations of the
Company for the whole year, prorated through the date of death.
(2) Disability.
----------
(a) The Company may terminate Executive's employment hereunder,
upon notice to Executive, in the event that Executive becomes disabled during
his employment hereunder through any illness, injury, accident or condition of
either a physical or psychological nature and, as a result, is unable to perform
substantially all of his duties and responsibilities hereunder for 90 days
during any period of 365 consecutive calendar days. In the event of such
termination, until the earliest of (i) the conclusion of the then-current term
of this Agreement and (ii) the conclusion of a period of 6 months following the
date of termination, the Company shall continue to pay Executive the base salary
at the Rate in effect on the date of termination and shall continue to
contribute to the cost of Executive's participation in the Company's group
medical and dental insurance plan, if any, provided that Executive is entitled
to continue such participation under applicable law and plan terms. The Company
will also pay Executive, in the case of such termination, any incentive
compensation that is earned but unpaid, based on the operations of the Company
for the whole year, prorated through the date of such termination;
(b) While receiving disability income payments under the
Company's disability income plan, if any, Executive shall be entitled to
receive the excess, if any, of base salary under paragraph I (B) hereof over
---------------
such disability income payments, and shall be entitled to receive such bonus
and other benefits as are described in paragraph 1(C), until the termination of
--------------
his employment andexcept to the extent a longer period is specified in paragraph
---------
1(D)(2)(a).
- ----------
(3) Termination by the Company without Cause. The Company may at any time
------------------------------------------
terminate Executive's employment without Cause (as defined below) by giving
Executive written notice of the effective date of termination. In the event of
such termination, the Company shall have the continuing obligation to make
payments of base salary in accordance with paragraph (B) above at the rate in
-------------
effect on the effective date of such termination until the third anniversary of
the Start Date or until 12 months after the effective date of such termination,
whichever period is longer. Additionally, during such period following
termination as the Company shall have the continuing obligation to make payments
of base salary, the Company shall continue to contribute to the cost of
Executive's participation in the Company's group medical and insurance plans, if
any, provided that Executive is entitled to continue such participation under
applicable law and plan. The Company will also pay Executive, in the event of
such termination, any incentive compensation that is earned but unpaid, based on
operations of the Company for the whole year, prorated through the date of his
termination.
2
<PAGE>
(4) Termination by the Company for Cause. The Company shall have the right
------------------------------------
to terminate the Executive's employment at any time for any of the following
reasons (each of which is referred to herein as "Cause") by giving Executive
written notice of the effective date of termination (which effective date may be
the date of such notice):
(a) the willful breach of any provision of paragraphs 1(A), 2, 3, 4 or
---------------------------
5 (including, but not limited to, a refusal to follow reasonable and lawful
- -
directives of the President; provided, however, that to the extent that such
breach is curable, the President will give Executive written notice of such
breach and Executive will have 30 days from the receipt of such notice to cure
such breach;
(b) any act of fraud, embezzlement or other material dishonesty with
respect to any aspect of the Company's business;
(c) continued use of illegal drugs;
(d) substantial failure of performance, repeated or continued after
written notice of such failure and explanation of such failure of performance,
which is reasonably determined by the Board of Directors to be materially
injurious to the business or interests of the Company; or
(e) conviction of a felony or of a crime involving moral turpitude.
If the Company terminates Executive's employment for any of the reasons
set forth above in this paragraph 1(D)4 , the Company shall have no other
---------------
obligations hereunder (including the obligation to continue to make payments of
base salary as provided in paragraph 1(D)3 from and after the effective date of
---------------
termination and shall have all other rights and remedies available under this or
any other agreement and at law or in equity.
(5) By the Executive for Good Reason. Executive may terminate his
--------------------------------
employment hereunder for Good Reason, upon written notice to the Company setting
forth the nature of such Good Reason in reasonable detail. "Good Reason" shall
mean:
(a) the material failure of the Company to provide Executive the
base salary and incentive compensation and benefits in accordance with the terms
of paragraph 1 and paragraph 6 hereof;
---------------------------
(b) the material diminution in the nature or scope of Executive's
responsibilities, duties or authority; or
(c) the occurrence of a Change in Control (as defined herein).
In the event of termination in accordance with this paragraph 1(D)(5), the
-----------------
Company shall continue to pay Executive the base salary at the rate in effect on
the effective date of such termination until the third anniversary of the Start
Date or, in the event this Agreement has been automatically extended thereafter
in accordance with paragraph 1(D) hereof, until next anniversary of the Start
--------------
Date. Additionally, during such period following termination as the Company
shall have the continuing obligation to make payments of base salary, the
Company shall continue to contribute to the cost of Executive's participation in
the Company's group medical and insurance plans, if any, provided that Executive
is entitled to continue such participation under applicable law and plan. The
Company will also pay Executive, in the event of such termination, any incentive
compensation that is earned but unpaid, based on operations of the Company for
the whole year, prorated through the date of his termination.
A "Change in Control" shall be deemed to have occurred if (i) any "person"
(as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934, as amended), becomes the "beneficial owner" (as such term is defined in
Rule 13d-3 under the Act), directly or indirectly, of outstanding securities of
the Company representing 40% or more of the combined voting power of the
3
<PAGE>
outstanding securities of the Company, or (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the shareholders of the Company
was approved by a vote of at least two-thirds (2/3) of the directors then still
in office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for any
reason to constitute a majority thereof, or (iii) the shareholders of the
Company approve (A) a merger or consolidation of the Company with any other
entity (other than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least 60% of the combined voting power of
the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation), (B) a plan of complete
liquidation of the Company or (C) an agreement or agreements for the sale or
disposition, in a single transaction or series of related transactions, by the
Company of all or substantially all of the property and assets of the Company.
Notwithstanding the foregoing, events otherwise constituting a Change in Control
in accordance with the foregoing shall not constitute a Change in Control if
such events are solicited by the Company and are, if Executive is then a member
of the Board, approved, recommended or supported by Executive in his capacity as
a member of the Board of the Company in actions taken prior to, and with respect
to, such events.
(6) Voluntary Termination by Executive. Except as provided in paragraph
----------------------------------- ---------
1(D)(5), in the event that Executive's employment with the Company is terminated
- -------
by Executive, such termination shall be a breach of this Agreement and the
Company shall have no further obligations hereunder from and after the date of
such termination.
2. Nondisclosure. Executive acknowledges that during the course of his
--------------
performance of services for the Company he has acquired and will acquire
technical knowledge with respect to the Company's business operations,
including, by way of illustration, the Company's existing and contemplated
services, trade secrets, patents and selling techniques and information,
customer lists, supplier lists, and confidential information relating to the
Company's policy and/or business strategy (all of such information herein
referenced to as the "Confidential Information"); provided, however, that the
term "Confidential Information" shall not include (a) any information which is
or becomes publicly available otherwise than through breach of this Agreement,
or (b) any information which is or becomes known or available to Executive on a
non-confidential basis and not in contravention of applicable law from a source
which is entitled to disclose such information to Executive. Executive agrees
that he will not, while he is employed by the Company, divulge to any person,
directly or indirectly, except to the Company or its officers and agents or as
reasonably required in connection with his duties on behalf of the Company, or
use, except on behalf of the Company, any Confidential Information acquired by
Executive during the term of his employment. Executive agrees that he will not,
at any time after his employment with the Company has ended, divulge to any
person directly or indirectly any Confidential Information. Executive further
agrees that if his relationship with the Company is terminated (for whatever
reason) he shall not take with him but will leave with the Company all records,
papers and computer data and any copies thereof relating to the Confidential
Information (or if such papers, records, computer data or copies are not on the
premises of the Company, Executive agrees to return such papers, records and
computer data immediately upon his termination). Executive acknowledges that
all such papers, records, computer data or copies thereof are and remain the
property of the Company.
3. Inventions and Patents. Executive agrees that all inventions,
----------------------
innovations or improvements relating to the Company's business or method of
conducting business (including new contributions, improvements, ideas and
discoveries, whether patentable or not) conceived or made by him during his
employment with the Company belong to the Company. Executive will promptly
disclose such inventions, innovations or improvements to the Board and perform
all actions reasonably requested by the Board to establish and confirm such
ownership.
4. Other Businesses. During the Employment Period, Executive agrees
----------------
that he will not, directly or indirectly except with the express written consent
of the Board, become engaged in, render material
4
<PAGE>
services for, or permit his name to be used in connection with, or directly or
indirectly counsel or consult with, any business other than the business of the
Company and its affiliates; provided, however, that Executive may be a passive
investor in any such business (subject to the limitations set forth in
paragraph 5 below).
- --------- -
5. Noncompetition. Executive agrees that:
--------------
(A) During the term he performs services for the Company and
during the Post-Employment Period (as defined below), Executive will not
interfere with the relationship between the Company or any affiliate and any
employee, agent or representative of the Company or any such affiliate.
(B) During the term he performs services for the Company and
during the Post-Employment Period, Executive will not directly or indirectly
divert or attempt to divert from the Company or any affiliate any business which
provides telecommunications services in the United States or Latin America,
including, without limitation, domestic and international call services or
domestic and international telecommunications networks for voice, data, fax
and/or video transmission between the United States and Latin America or within
Latin America, or any related business in which the Company has been actively
engaged during the term Executive performed services for the Company, nor
interfere with the relationships of the Company with customers, dealers,
distributors, franchisees or sources of supply.
(C) During the term he performs services for the Company and
during the Post-Employment Period, Executive will not directly or indirectly
own, manage, operate control, be employed by, participate in, or be connected in
any manner with the ownership, management, operation or control of, any business
or enterprise which provides telecommunications services in the United States or
Latin America, including, without limitation, domestic and international call
services or domestic and international telecommunication networks for voice,
data, fax and/or video transmission between the United States and Latin America
or within Latin America, or any related business in which the Company has been
actively engaged during the then Executive performed services for the Company.
(D) For purposes hereof, the "Post-Employment Period" shall mean:
(i) in the event Executive's employment with the Company is terminated for Cause
pursuant to paragraph 1(D)(4), the 12-month period following Executive's
------------------
termination of employment with the Company, or (ii) in the event Executive's
employment with the Company is terminated for any reason other reason, the
period during which the Company continues to make payments of base salary.
6. Stock Option. Effective as of the date hereof (the "Effective
------------
Date"), under the terms of the American TeleSource International, Inc. (ATSI)
1997 Stock Option Plan (the "Plan"), ATSI, an Ontario corporation ("ATSI"),
hereby grants to Executive the option (the "Option") to purchase shares (the
"Option Shares") of Common Stock, no par value per share, of ATSI, subject to
the requisite approval of the Plan by ATSI's Board of Directors and ATSI's
shareholders. The number of Option Shares, the purchase price per Option Share
and the installments and dates in which the Executive shall have the right to
exercise the Option are attached to this Agreement as Exhibit "B". The Plan is
attached to this Agreement as Exhibit "A". Beginning on the Effective Date,
such installments shall be cumulative (i.e. once the right to purchase the
number of shares of an installment has accrued, such shares may be purchased at
any time thereafter, or in part from time to time, until the business day
immediately preceding the tenth anniversary of the Effective Date (the
"Expiration Date") or until such earlier date as set forth in the following
paragraph. Notwithstanding the preceding sentence, upon the occurrence of a
Change in Control, Executive's right to exercise the Option shall become fully
vested (i.e., all unissued Option Shares may be purchased at any time
thereafter, or in part from time to time, until the Expiration Date or until
such earlier date as set forth in the following paragraph).
Upon termination of Executive's employment pursuant to Paragraph 1(D)(4)
-----------------
(Termination by the Company for Cause) or paragraph 1(D)(6) (Voluntary
-----------------
Termination by Executive), the Option shall remain exercisable for the four
month period following such termination, but only to the extent
5
<PAGE>
such option was exercisable at termination. Upon termination of Executive's
employment pursuant to paragraph 1(D)(1) (Death) or paragraph 1(D)(2)
----------------- -----------------
(Disability), the Option, to the extent then exercisable, shall remain
exercisable for the one-year period following such termination. Upon
termination of Executive's employment pursuant to paragraph (D)(3) (Termination
----------------
by the Company without Cause) or paragraph 1(D)(5) (By the Executive for Good
-----------------
Reason), Executive's right to exercise the Option shall become fully vested and
the Option shall remain exercisable for the four-month period following such
termination.
7. General Provisions.
------------------
(A) Notices. Any notice provided for in this Agreement must be in
-------
writing and must be either personally delivered, or mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable overnight
courier service, to the recipient at the address below indicated:
To the Company: Attn.: Board of Directors
12500 Network Boulevard, Suite 407
San Antonio, Texas 78249
To Executive: At Executive's last known address as listed
with the Company
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or sent or if mailed, five days after so mailed.
(B) Severability. Whenever possible, each provision of this
-------------
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to he invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision in such jurisdiction or any other jurisdiction, or the
legality or enforceability of such provision in any other jurisdiction, but this
Agreement will be reformed, construed and enforced in such jurisdiction as if
such invalid, illegal or unenforceable provision had never been contained herein
except that any court having jurisdiction shall have the power to reduce the
duration, area or scope of such invalid, illegal or unenforceable provision and,
in its reduced form it shall be enforceable.
(C) Complete Agreement. This Agreement embodies the complete
------------------
agreement and understanding between the parties and supersedes and preempts any
prior understandings, agreements or representations by or between the
parties, written or oral, which may have been related to the subject
matter hereof in any way.
(D) Successors and Assigns. This Agreement is a personal service
-------------------------
contract and is not assignable by the Executive. Subject to the Executive's
rights under paragraph 1(D)(5)(d), this Agreement may be assigned from time to
--------------------
time by the Company. This Agreement shall be binding on and inure to the
benefit of the parties hereto and such parties' respective successors, personal
representatives and permitted assigns.
(E) Choice of Law. All questions concerning the construction,
-------------
validity and interpretation of this Agreement will be governed by the internal
law, and not the law of conflicts, of the State of Texas.
(F) Remedies. Each of the parties to this Agreement will be
----------
entitled to enforce his or its rights under this Agreement specifically, to
recover damages (including, without limitation, reasonable fees and expenses of
counsel) by reason of any breach of any provision of this Agreement and to
exercise all other rights existing in his or its favor. The parties hereto
agree and acknowledge that money damages may not be an adequate remedy for any
breach or threatened breach of the provisions of this Agreement
6
<PAGE>
and that any party may in his or its sole discretion apply to any court of law
or equity of competent jurisdiction for specific performance and/or injunctive
relief in order to enforce or prevent any violations of the provisions of this
Agreement. Such injunction or decree shall be available without the posting of
any bond or other security.
(G) Amendments and Waivers. Any provision of this Agreement may be
----------------------
amended or waived only with the prior written consent of Executive and a
majority of the Board.
(H) Absence of Conflicting Agreements. Executive hereby warrants
----------------------------------
and covenants that his employment by the Company does not result in a breach of
the terms, conditions or provisions of any agreement to which Executive is
subject.
(I) Survival. No termination of Executive's employment by either or
---------
both parties shall reduce or terminate Executive's covenants and agreements in
paragraphs 2, 3 and 5.
- ---------------------
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered on the day and year first above written.
"Company" AMERICAN TELESOURCE INTERNATIONAL, INC.
By: Arthur L. Smith
----------------
Name: Arthur L. Smith
Title: President
"Executive"
H. Douglas Saathoff
---------------------
H. Douglas Saathoff
7
<PAGE>
Exhibit 10.18
Updated as of 2/28/97
EXECUTIVE EMPLOYMENT AGREEMENT
Agreement made as of January 1, 1997, between AMERICAN TELESOURCE
INTERNATIONAL., Inc., a Texas corporation (the "Company"), and Craig K. Clement
("Executive").
The Company and the Executive desire to enter into certain agreements
providing for Executive's employment with the Company.
The parties hereto agree as follows:
1. Employment. The Company agrees to employ Executive and Executive accepts
-----------
such employment for the period beginning January 1, 1997 (the "Start Date") and
ending upon termination pursuant to paragraph 1 (D) hereof (the "Employment
---------------
Period").
(A) Services. During the Employment Period, Executive will be the Vice
--------
President - Corporate Development of the Company, and in connection therewith
will render such services of an executive and administrative character to the
Company and its affiliates as are customarily rendered by persons holding such
position with similarly situated companies, as the Board of Directors of
American TeleSource International Inc., an Ontario, Canada corporation (the
"Board") may from time to time direct. Executive will devote his best efforts
and substantially all of his business time and attention (except as otherwise
specifically permitted herein and except for vacation periods and reasonable
periods of illness or other incapacity) to the business of the Company and its
affiliates and will faithfully and diligently carry out such duties and have
such responsibilities as are customary among persons employed in substantially
similar capacities for similar companies. Executive will report to the President
and shall faithfully and diligently comply with all of its reasonable and lawful
directives. For purposes of this Agreement, the term "affiliates" means any
corporation, limited partnership, limited liability company or other entity
engaged in the same business as the Company or a related business, which
controls, is controlled by or is under common control with the Company.
(B) Salary. During the Employment Period and thereafter as provided in
------
paragraph (D) below, the Company will pay Executive a base salary at the rate of
- -------------
not less than $92,000 per annum (or such higher amount as the Board may
establish from time to time), and will be payable in accordance with the
Company's regular payroll practices.
(C) Benefits. In addition to the compensation described above in this
---------
paragraph 1, Executive will be entitled during the Employment Period to the
- ------------
following benefits:
(1) such bonus as the Board in its sole discretion may from time to time
authorize, but in no event shall bonuses paid during a year exceed 50% of
Executive's base salary for such year;
(2) such health insurance and other benefits as are available from time to
time to the Company's salaried employees generally;
(3) in accordance with the Company's vacation and absence paid as in
effect from time to time, sick leave, personal time provided that Executive
shall have no less than three weeks vacation each year, with salary;
(4) reimbursement, upon submission of documentation in accordance with the
Company's regular expense policies, for reasonable business expenses incurred on
the Company's behalf by Executive;
1
<PAGE>
(5) participation in any savings plan, 401(k) plan, profit sharing plan or
pension plan as is available from time to time to the Company's salaried
employees generally; and
(6) opportunity to participate in any and all employee benefit plans from
time to time in effect for executives or salaried employees of the Company
generally (subject to any contribution therefore generally required by such
employees and except to the extent such plans are in a category of benefit
otherwise provided to Executive).
(D) Termination. Unless earlier terminated by termination of Executive's
-----------
employment pursuant to any of the provisions immediately below, Executive's
employment with the Company will continue until the third anniversary of the
Start Date, and Executive's employment shall be renewed automatically for one-
year periods thereafter unless either party hereto gives written notice to the
other party, at least 120 days prior to the next anniversary date, that such
employment shall not be renewed:
(1) Death. In the event of Executive's death during the term hereof,
------
Executive's employment hereunder shall immediately and automatically terminate.
Notwithstanding such event, the Company shall pay to Executive's designated
beneficiary or, if no beneficiary has been designated by Executive, to his
estate, the base salary at the rate in effect on the date of death for a period
of 6 months. The Company shall also pay to Executive's designated beneficiary
or, if no beneficiary has been designated by Executive, to his estate, any
incentive compensation that is earned but unpaid, based on the operations of the
Company for the whole year, prorated through the date of death.
(2) Disability.
----------
(a) The Company may terminate Executive's employment hereunder, upon
notice to Executive, in the event that Executive becomes disabled during his
employment hereunder through any illness, injury, accident or condition of
either a physical or psychological nature and, as a result, is unable to perform
substantially all of his duties and responsibilities hereunder for 90 days
during any period of 365 consecutive calendar days. In the event of such
termination, until the earliest of (i) the conclusion of the then-current term
of this Agreement and (ii) the conclusion of a period of 6 months following the
date of termination, the Company shall continue to pay Executive the base salary
at the Rate in effect on the date of termination and shall continue to
contribute to the cost of Executive's participation in the Company's group
medical and dental insurance plan, if any, provided that Executive is entitled
to continue such participation under applicable law and plan terms. The Company
will also pay Executive, in the case of such termination, any incentive
compensation that is earned but unpaid, based on the operations of the Company
for the whole year, prorated through the date of such termination;
(b) While receiving disability income payments under the Company's
disability income plan, if any, Executive shall be entitled to receive the
excess, if any, of base salary under paragraph I (B) hereof over such disability
---------------
income payments, and shall be entitled to receive such bonus and other benefits
as are described in paragraph 1(C), until the termination of his employment and
---------------
except to the extent a longer period is specified in paragraph 1(D)(2)(a).
--------------------
(3) Termination by the Company without Cause. The Company may at any time
------------------------------------------
terminate Executive's employment without Cause (as defined below) by giving
Executive written notice of the effective date of termination. In the event of
such termination, the Company shall have the continuing obligation to make
payments of base salary in accordance with paragraph (B) above at the rate in
-------------
effect on the effective date of such termination until the third anniversary of
the Start Date or until 12 months after the effective date of such termination,
whichever period is longer. Additionally, during such period following
termination as the Company shall have the continuing obligation to make payments
of base salary, the Company shall continue to contribute to the cost of
Executive's participation in the Company's group medical and insurance plans, if
any, provided that Executive is entitled to continue such participation under
applicable law and plan. The Company will also pay Executive, in the event of
such termination, any incentive compensation that is earned but unpaid, based on
operations of the Company for the whole year, prorated through the date of his
termination.
2
<PAGE>
(4) Termination by the Company for Cause. The Company shall have the right
------------------------------------
to terminate the Executive's employment at any time for any of the following
reasons (each of which is referred to herein as "Cause") by giving Executive
written notice of the effective date of termination (which effective date may be
the date of such notice):
(a) the willful breach of any provision of paragraphs 1(A), 2, 3, 4 or
---------------------------
5 (including, but not limited to, a refusal to follow reasonable and lawful
- -
directives of the President; provided, however, that to the extent that such
breach is curable, the President will give Executive written notice of such
breach and Executive will have 30 days from the receipt of such notice to cure
such breach;
(b) any act of fraud, embezzlement or other material dishonesty with
respect to any aspect of the Company's business;
(c) continued use of illegal drugs;
(d) substantial failure of performance, repeated or continued after
written notice of such failure and explanation of such failure of performance,
which is reasonably determined by the Board of Directors to be materially
injurious to the business or interests of the Company; or
(e) conviction of a felony or of a crime involving moral turpitude.
If the Company terminates Executive's employment for any of the reasons
set forth above in this paragraph 1(D)4 , the Company shall have no other
---------------
obligations hereunder (including the obligation to continue to make payments of
base salary as provided in paragraph 1(D)3 from and after the effective date of
---------------
termination and shall have all other rights and remedies available under this or
any other agreement and at law or in equity.
(5) By the Executive for Good Reason. Executive may terminate his
--------------------------------
employment hereunder for Good Reason, upon written notice to the Company setting
forth the nature of such Good Reason in reasonable detail. "Good Reason" shall
mean:
(a) the material failure of the Company to provide Executive the base
salary and incentive compensation and benefits in accordance with the terms of
paragraph 1 and paragraph 6 hereof;
- ---------------------------
(b) the material diminution in the nature or scope of Executive's
responsibilities, duties or authority; or
(c) the occurrence of a Change in Control (as defined herein).
In the event of termination in accordance with this paragraph 1(D)(5), the
-----------------
Company shall continue to pay Executive the base salary at the rate in effect on
the effective date of such termination until the third anniversary of the Start
Date or, in the event this Agreement has been automatically extended thereafter
in accordance with paragraph 1(D) hereof, until next anniversary of the Start
--------------
Date. Additionally, during such period following termination as the Company
shall have the continuing obligation to make payments of base salary, the
Company shall continue to contribute to the cost of Executive's participation in
the Company's group medical and insurance plans, if any, provided that Executive
is entitled to continue such participation under applicable law and plan. The
Company will also pay Executive, in the event of such termination, any incentive
compensation that is earned but unpaid, based on operations of the Company for
the whole year, prorated through the date of his termination.
A "Change in Control" shall be deemed to have occurred if (i) any "person"
(as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934, as amended), becomes the "beneficial owner" (as such term is defined in
Rule 13d-3 under the Act), directly or indirectly, of outstanding securities of
the Company representing 40% or more of the combined voting power of the
3
<PAGE>
outstanding securities of the Company, or (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the shareholders of the Company
was approved by a vote of at least two-thirds (2/3) of the directors then still
in office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for any
reason to constitute a majority thereof, or (iii) the shareholders of the
Company approve (A) a merger or consolidation of the Company with any other
entity (other than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least 60% of the combined voting power of
the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation), (B) a plan of complete
liquidation of the Company or (C) an agreement or agreements for the sale or
disposition, in a single transaction or series of related transactions, by the
Company of all or substantially all of the property and assets of the Company.
Notwithstanding the foregoing, events otherwise constituting a Change in Control
in accordance with the foregoing shall not constitute a Change in Control if
such events are solicited by the Company and are, if Executive is then a member
of the Board, approved, recommended or supported by Executive in his capacity as
a member of the Board of the Company in actions taken prior to, and with respect
to, such events.
(6) Voluntary Termination by Executive. Except as provided in paragraph
----------------------------------- ---------
1(D)(5), in the event that Executive's employment with the Company is terminated
- -------
by Executive, such termination shall be a breach of this Agreement and the
Company shall have no further obligations hereunder from and after the date of
such termination.
2. Nondisclosure. Executive acknowledges that during the course of his
--------------
performance of services for the Company he has acquired and will acquire
technical knowledge with respect to the Company's business operations,
including, by way of illustration, the Company's existing and contemplated
services, trade secrets, patents and selling techniques and information,
customer lists, supplier lists, and confidential information relating to the
Company's policy and/or business strategy (all of such information herein
referenced to as the "Confidential Information"); provided, however, that the
term "Confidential Information" shall not include (a) any information which is
or becomes publicly available otherwise than through breach of this Agreement,
or (b) any information which is or becomes known or available to Executive on a
non-confidential basis and not in contravention of applicable law from a source
which is entitled to disclose such information to Executive. Executive agrees
that he will not, while he is employed by the Company, divulge to any person,
directly or indirectly, except to the Company or its officers and agents or as
reasonably required in connection with his duties on behalf of the Company, or
use, except on behalf of the Company, any Confidential Information acquired by
Executive during the term of his employment. Executive agrees that he will not,
at any time after his employment with the Company has ended, divulge to any
person directly or indirectly any Confidential Information. Executive further
agrees that if his relationship with the Company is terminated (for whatever
reason) he shall not take with him but will leave with the Company all records,
papers and computer data and any copies thereof relating to the Confidential
Information (or if such papers, records, computer data or copies are not on the
premises of the Company, Executive agrees to return such papers, records and
computer data immediately upon his termination). Executive acknowledges that
all such papers, records, computer data or copies thereof are and remain the
property of the Company.
3. Inventions and Patents. Executive agrees that all inventions,
----------------------
innovations or improvements relating to the Company's business or method of
conducting business (including new contributions, improvements, ideas and
discoveries, whether patentable or not) conceived or made by him during his
employment with the Company belong to the Company. Executive will promptly
disclose such inventions, innovations or improvements to the Board and perform
all actions reasonably requested by the Board to establish and confirm such
ownership.
4. Other Businesses. During the Employment Period, Executive agrees
----------------
that he will not, directly or indirectly except with the express written consent
of the Board, become engaged in, render material
4
<PAGE>
services for, or permit his name to be used in connection with, or directly or
indirectly counsel or consult with, any business other than the business of the
Company and its affiliates; provided, however, that Executive may be a passive
investor in any such business (subject to the limitations set forth in paragraph
5 below).
5. Noncompetition. Executive agrees that:
--------------
(A) During the term he performs services for the Company and
during the Post-Employment Period (as defined below), Executive will not
interfere with the relationship between the Company or any affiliate and any
employee, agent or representative of the Company or any such affiliate.
(B) During the term he performs services for the Company and during
the Post-Employment Period, Executive will not directly or indirectly divert or
attempt to divert from the Company or any affiliate any business which provides
telecommunications services in the United States or Latin America, including,
without limitation, domestic and international call services or domestic and
international telecommunications networks for voice, data, fax and/or video
transmission between the United States and Latin America or within Latin
America, or any related business in which the Company has been actively engaged
during the term Executive performed services for the Company, nor interfere with
the relationships of the Company with customers, dealers, distributors,
franchisees or sources of supply.
(C) During the term he performs services for the Company and during
the Post-Employment Period, Executive will not directly or indirectly own,
manage, operate control, be employed by, participate in, or be connected in any
manner with the ownership, management, operation or control of, any business or
enterprise which provides telecommunications services in the United States or
Latin America, including, without limitation, domestic and international call
services or domestic and international telecommunication networks for voice,
data, fax and/or video transmission between the United States and Latin America
or within Latin America, or any related business in which the Company has been
actively engaged during the then Executive performed services for the Company.
(D) For purposes hereof, the "Post-Employment Period" shall mean:
(i) in the event Executive's employment with the Company is terminated for Cause
pursuant to paragraph 1(D)(4), the 12-month period following Executive's
-----------------
termination of employment with the Company, or (ii) in the event Executive's
employment with the Company is terminated for any reason other reason, the
period during which the Company continues to make payments of base salary.
6. Stock Option. Effective as of the date hereof (the "Effective
------------
Date"), under the terms of the American TeleSource International, Inc. (ATSI)
1997 Stock Option Plan (the "Plan"), ATSI, an Ontario corporation ("ATSI"),
hereby grants to Executive the option (the "Option") to purchase shares (the
"Option Shares") of Common Stock, no par value per share, of ATSI, subject to
the requisite approval of the Plan by ATSI's Board of Directors and ATSI's
shareholders. The number of Option Shares, the purchase price per Option Share
and the installments and dates in which the Executive shall have the right to
exercise the Option are attached to this Agreement as Exhibit "B". The Plan is
attached to this Agreement as Exhibit "A". Beginning on the Effective Date,
such installments shall be cumulative (i.e. once the right to purchase the
number of shares of an installment has accrued, such shares may be purchased at
any time thereafter, or in part from time to time, until the business day
immediately preceding the tenth anniversary of the Effective Date (the
"Expiration Date") or until such earlier date as set forth in the following
paragraph. Notwithstanding the preceding sentence, upon the occurrence of a
Change in Control, Executive's right to exercise the Option shall become fully
vested (i.e., all unissued Option Shares may be purchased at any time
thereafter, or in part from time to time, until the Expiration Date or until
such earlier date as set forth in the following paragraph).
Upon termination of Executive's employment pursuant to Paragraph 1(D)(4)
-----------------
(Termination by the Company for Cause) or paragraph 1(D)(6) (Voluntary
-----------------
Termination by Executive), the Option shall remain exercisable for the four
month period following such termination, but only to the extent
5
<PAGE>
such option was exercisable at termination. Upon termination of Executive's
employment pursuant to paragraph 1(D)(1) (Death) or paragraph 1(D)(2)
----------------- -----------------
(Disability), the Option, to the extent then exercisable, shall remain
exercisable for the one-year period following such termination. Upon termination
of Executive's employment pursuant to paragraph (D)(3) (Termination by the
----------------
Company without Cause) or paragraph 1(D)(5) (By the Executive for Good Reason),
-----------------
Executive's right to exercise the Option shall become fully vested and the
Option shall remain exercisable for the four-month period following such
termination.
7. General Provisions.
------------------
(A) Notices. Any notice provided for in this Agreement must be in
-------
writing and must be either personally delivered, or mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable overnight
courier service, to the recipient at the address below indicated:
To the Company: Attn.: Board of Directors
12500 Network Boulevard, Suite 407
San Antonio, Texas 78249
To Executive: At Executive's last known address as listed
with the Company
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or sent or if mailed, five days after so mailed.
(B) Severability. Whenever possible, each provision of this
------------
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to he invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision in such jurisdiction or any other jurisdiction, or the
legality or enforceability of such provision in any other jurisdiction, but this
Agreement will be reformed, construed and enforced in such jurisdiction as if
such invalid, illegal or unenforceable provision had never been contained herein
except that any court having jurisdiction shall have the power to reduce the
duration, area or scope of such invalid, illegal or unenforceable provision and,
in its reduced form it shall be enforceable.
(C) Complete Agreement. This Agreement embodies the complete
------------------
agreement and understanding between the parties and supersedes and preempts any
prior understandings, agreements or representations by or between the parties,
written or oral, which may have been related to the subject matter hereof in any
way.
(D) Successors and Assigns. This Agreement is a personal service
----------------------
contract and is not assignable by the Executive. Subject to the Executive's
rights under paragraph 1(D)(5)(d), this Agreement may be assigned from time to
--------------------
time by the Company. This Agreement shall be binding on and inure to the
benefit of the parties hereto and such parties' respective successors, personal
representatives and permitted assigns.
(E) Choice of Law. All questions concerning the construction,
-------------
validity and interpretation of this Agreement will be governed by the internal
law, and not the law of conflicts, of the State of Texas.
(F) Remedies. Each of the parties to this Agreement will be
---------
entitled to enforce his or its rights under this Agreement specifically, to
recover damages (including, without limitation, reasonable fees and expenses of
counsel) by reason of any breach of any provision of this Agreement and to
exercise all other rights existing in his or its favor. The parties hereto
agree and acknowledge that money damages may not be an adequate remedy for any
breach or threatened breach of the provisions of this Agreement
6
<PAGE>
and that any party may in his or its sole discretion apply to any court of law
or equity of competent jurisdiction for specific performance and/or injunctive
relief in order to enforce or prevent any violations of the provisions of this
Agreement. Such injunction or decree shall be available without the posting of
any bond or other security.
(G) Amendments and Waivers. Any provision of this Agreement may he
----------------------
amended or waived only with the prior written consent of Executive and a
majority of the Board.
(H) Absence of Conflicting Agreements. Executive hereby warrants
----------------------------------
and covenants that his employment by the Company does not result in a breach of
the terms, conditions or provisions of any agreement to which Executive is
subject.
(I) Survival. No termination of Executive's employment by either or
--------
both parties shall reduce or terminate Executive's covenants and agreements in
paragraphs 2, 3 and 5.
- ---------------------
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered on the day and year first above written.
"Company" AMERICAN TELESOURCE INTERNATIONAL, INC.
By: H. Douglas Saathoff
-------------------
Name: H. Douglas Saathoff
Title: Chief Financial Officer
"Executive"
Craig K. Clement
------------------
Craig K. Clement
7
<PAGE>
EXHIBIT 10.19
Updated as of 2/28/97
EXECUTIVE EMPLOYMENT AGREEMENT
Agreement made as of January 1, 1997, between AMERICAN TELESOURCE
INTERNATIONAL., Inc., a Texas corporation (the "Company"), and Everett L. Waller
("Executive").
The Company and the Executive desire to enter into certain agreements
providing for Executive's employment with the Company.
The parties hereto agree as follows:
1. Employment. The Company agrees to employ Executive and Executive accepts
-----------
such employment for the period beginning January 1, 1997 (the "Start Date") and
ending upon termination pursuant to paragraph 1 (D) hereof (the "Employment
---------------
Period").
(A) Services. During the Employment Period, Executive will be the Senior Vice
--------
President - Operations and Technical Services of the Company, and in connection
therewith will render such services of an executive and administrative character
to the Company and its affiliates as are customarily rendered by persons holding
such position with similarly situated companies, as the Board of Directors of
American TeleSource International Inc., an Ontario, Canada corporation (the
"Board") may from time to time direct. Executive will devote his best efforts
and substantially all of his business time and attention (except as otherwise
specifically permitted herein and except for vacation periods and reasonable
periods of illness or other incapacity) to the business of the Company and its
affiliates and will faithfully and diligently carry out such duties and have
such responsibilities as are customary among persons employed in substantially
similar capacities for similar companies. Executive will report to the President
and shall faithfully and diligently comply with all of its reasonable and lawful
directives. For purposes of this Agreement, the term "affiliates" means any
corporation, limited partnership, limited liability company or other entity
engaged in the same business as the Company or a related business, which
controls, is controlled by or is under common control with the Company.
(B) Salary. During the Employment Period and thereafter as provided in
------
paragraph (D) below, the Company will pay Executive a base salary at the rate of
- -------------
not less than $92,000 per annum (or such higher amount as the Board may
establish from time to time), and will be payable in accordance with the
Company's regular payroll practices.
(C) Benefits. In addition to the compensation described above in this
---------
paragraph 1, Executive will be entitled during the Employment Period to the
- ------------
following benefits:
(1) such bonus as the Board in its sole discretion may from time to time
authorize, but in no event shall bonuses paid during a year exceed 50% of
Executive's base salary for such year;
(2) such health insurance and other benefits as are available from time to
time to the Company's salaried employees generally;
(3) in accordance with the Company's vacation and absence paid as in
effect from time to time, sick leave, personal time provided that Executive
shall have no less than three weeks vacation each year, with salary;
(4) reimbursement, upon submission of documentation in accordance with the
Company's regular expense policies, for reasonable business expenses incurred on
the Company's behalf by Executive;
1
<PAGE>
(5) participation in any savings plan, 401(k) plan, profit sharing plan or
pension plan as is available from time to time to the Company's salaried
employees generally; and
(6) opportunity to participate in any and all employee benefit plans from
time to time in effect for executives or salaried employees of the Company
generally (subject to any contribution therefore generally required by such
employees and except to the extent such plans are in a category of benefit
otherwise provided to Executive).
(D) Termination. Unless earlier terminated by termination of Executive's
-----------
employment pursuant to any of the provisions immediately below, Executive's
employment with the Company will continue until the third anniversary of the
Start Date, and Executive's employment shall be renewed automatically for one-
year periods thereafter unless either party hereto gives written notice to the
other party, at least 120 days prior to the next anniversary date, that such
employment shall not be renewed:
(1) Death. In the event of Executive's death during the term hereof,
------
Executive's employment hereunder shall immediately and automatically terminate.
Notwithstanding such event, the Company shall pay to Executive's designated
beneficiary or, if no beneficiary has been designated by Executive, to his
estate, the base salary at the rate in effect on the date of death for a period
of 6 months. The Company shall also pay to Executive's designated beneficiary
or, if no beneficiary has been designated by Executive, to his estate, any
incentive compensation that is earned but unpaid, based on the operations of the
Company for the whole year, prorated through the date of death.
(2) Disability.
----------
(a) The Company may terminate Executive's employment hereunder, upon
notice to Executive, in the event that Executive becomes disabled during his
employment hereunder through any illness, injury, accident or condition of
either a physical or psychological nature and, as a result, is unable to perform
substantially all of his duties and responsibilities hereunder for 90 days
during any period of 365 consecutive calendar days. In the event of such
termination, until the earliest of (i) the conclusion of the then-current term
of this Agreement and (ii) the conclusion of a period of 6 months following the
date of termination, the Company shall continue to pay Executive the base salary
at the Rate in effect on the date of termination and shall continue to
contribute to the cost of Executive's participation in the Company's group
medical and dental insurance plan, if any, provided that Executive is entitled
to continue such participation under applicable law and plan terms. The Company
will also pay Executive, in the case of such termination, any incentive
compensation that is earned but unpaid, based on the operations of the Company
for the whole year, prorated through the date of such termination;
(b) While receiving disability income payments under the Company's
disability income plan, if any, Executive shall be entitled to receive the
excess, if any, of base salary under paragraph I (B) hereof over such disability
---------------
income payments, and shall be entitled to receive such bonus and other benefits
as are described in paragraph 1(C), until the termination of his employment and
---------------
except to the extent a longer period is specified in paragraph 1(D)(2)(a).
--------------------
(3) Termination by the Company without Cause. The Company may at any time
------------------------------------------
terminate Executive's employment without Cause (as defined below) by giving
Executive written notice of the effective date of termination. In the event of
such termination, the Company shall have the continuing obligation to make
payments of base salary in accordance with paragraph (B) above at the rate in
-------------
effect on the effective date of such termination until the third anniversary of
the Start Date or until 12 months after the effective date of such termination,
whichever period is longer. Additionally, during such period following
termination as the Company shall have the continuing obligation to make payments
of base salary, the Company shall continue to contribute to the cost of
Executive's participation in the Company's group medical and insurance plans, if
any, provided that Executive is entitled to continue such participation under
applicable law and plan. The Company will also pay Executive, in the event of
such termination, any incentive compensation that is earned but unpaid, based on
operations of the Company for the whole year, prorated through the date of his
termination.
2
<PAGE>
(4) Termination by the Company for Cause. The Company shall have the right
------------------------------------
to terminate the Executive's employment at any time for any of the following
reasons (each of which is referred to herein as "Cause") by giving Executive
written notice of the effective date of termination (which effective date may be
the date of such notice):
(a) the willful breach of any provision of paragraphs 1(A), 2, 3, 4 or
---------------------------
5 (including, but not limited to, a refusal to follow reasonable and lawful
- -
directives of the President; provided, however, that to the extent that such
breach is curable, the President will give Executive written notice of such
breach and Executive will have 30 days from the receipt of such notice to cure
such breach;
(b) any act of fraud, embezzlement or other material dishonesty with
respect to any aspect of the Company's business;
(c) continued use of illegal drugs;
(d) substantial failure of performance, repeated or continued after
written notice of such failure and explanation of such failure of performance,
which is reasonably determined by the Board of Directors to be materially
injurious to the business or interests of the Company; or
(e) conviction of a felony or of a crime involving moral turpitude.
If the Company terminates Executive's employment for any of the reasons
set forth above in this paragraph 1(D)4, the Company shall have no other
---------------
obligations hereunder (including the obligation to continue to make payments of
base salary as provided in paragraph 1(D)3 from and after the effective date of
---------------
termination and shall have all other rights and remedies available under this or
any other agreement and at law or in equity.
(5) By the Executive for Good Reason. Executive may terminate his
--------------------------------
employment hereunder for Good Reason, upon written notice to the Company setting
forth the nature of such Good Reason in reasonable detail. "Good Reason" shall
mean:
(a) the material failure of the Company to provide Executive the
base salary and incentive compensation and benefits in accordance with the terms
of Paragraph 1 and paragraph 6 hereof;
---------------------------
(b) the material diminution in the nature or scope of Executive's
responsibilities, duties or authority; or
(c) the occurrence of a Change in Control (as defined herein).
In the event of termination in accordance with this paragraph 1(D)(5), the
-----------------
Company shall continue to pay Executive the base salary at the rate in effect on
the effective date of such termination until the third anniversary of the Start
Date or, in the event this Agreement has been automatically extended thereafter
in accordance with paragraph 1(D) hereof, until next anniversary of the Start
--------------
Date. Additionally, during such period following termination as the Company
shall have the continuing obligation to make payments of base salary, the
Company shall continue to contribute to the cost of Executive's participation in
the Company's group medical and insurance plans, if any, provided that Executive
is entitled to continue such participation under applicable law and plan. The
Company will also pay Executive, in the event of such termination, any incentive
compensation that is earned but unpaid, based on operations of the Company for
the whole year, prorated through the date of his termination.
A "Change in Control" shall be deemed to have occurred if (i) any "person"
(as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934, as amended), becomes the "beneficial owner" (as such term is defined in
Rule 13d-3 under the Act), directly or indirectly, of outstanding securities of
the Company representing 40% or more of the combined voting power of the
3
<PAGE>
outstanding securities of the Company, or (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the shareholders of the Company
was approved by a vote of at least two-thirds (2/3) of the directors then still
in office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for any
reason to constitute a majority thereof, or (iii) the shareholders of the
Company approve (A) a merger or consolidation of the Company with any other
entity (other than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least 60% of the combined voting power of
the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation), (B) a plan of complete
liquidation of the Company or (C) an agreement or agreements for the sale or
disposition, in a single transaction or series of related transactions, by the
Company of all or substantially all of the property and assets of the Company.
Notwithstanding the foregoing, events otherwise constituting a Change in Control
in accordance with the foregoing shall not constitute a Change in Control if
such events are solicited by the Company and are, if Executive is then a member
of the Board, approved, recommended or supported by Executive in his capacity as
a member of the Board of the Company in actions taken prior to, and with respect
to, such events.
(6) Voluntary Termination by Executive. Except as provided in paragraph
----------------------------------- ---------
1(D)(5), in the event that Executive's employment with the Company is terminated
- -------
by Executive, such termination shall be a breach of this Agreement and the
Company shall have no further obligations hereunder from and after the date of
such termination.
2. Nondisclosure. Executive acknowledges that during the course of his
--------------
performance of services for the Company he has acquired and will acquire
technical knowledge with respect to the Company's business operations,
including, by way of illustration, the Company's existing and contemplated
services, trade secrets, patents and selling techniques and information,
customer lists, supplier lists, and confidential information relating to the
Company's policy and/or business strategy (all of such information herein
referenced to as the "Confidential Information"); provided, however, that the
term "Confidential Information" shall not include (a) any information which is
or becomes publicly available otherwise than through breach of this Agreement,
or (b) any information which is or becomes known or available to Executive on a
non-confidential basis and not in contravention of applicable law from a source
which is entitled to disclose such information to Executive. Executive agrees
that he will not, while he is employed by the Company, divulge to any person,
directly or indirectly, except to the Company or its officers and agents or as
reasonably required in connection with his duties on behalf of the Company, or
use, except on behalf of the Company, any Confidential Information acquired by
Executive during the term of his employment. Executive agrees that he will not,
at any time after his employment with the Company has ended, divulge to any
person directly or indirectly any Confidential Information. Executive further
agrees that if his relationship with the Company is terminated (for whatever
reason) he shall not take with him but will leave with the Company all records,
papers and computer data and any copies thereof relating to the Confidential
Information (or if such papers, records, computer data or copies are not on the
premises of the Company, Executive agrees to return such papers, records and
computer data immediately upon his termination). Executive acknowledges that
all such papers, records, computer data or copies thereof are and remain the
property of the Company.
3. Inventions and Patents. Executive agrees that all inventions,
----------------------
innovations or improvements relating to the Company's business or method of
conducting business (including new contributions, improvements, ideas and
discoveries, whether patentable or not) conceived or made by him during his
employment with the Company belong to the Company. Executive will promptly
disclose such inventions, innovations or improvements to the Board and perform
all actions reasonably requested by the Board to establish and confirm such
ownership.
4. Other Businesses. During the Employment Period, Executive agrees
----------------
that he will not, directly or indirectly except with the express written consent
of the Board, become engaged in, render material
4
<PAGE>
services for, or permit his name to be used in connection with, or directly or
indirectly counsel or consult with, any business other than the business of the
Company and its affiliates; provided, however, that Executive may be a passive
investor in any such business (subject to the limitations set forth in
paragraph 5 below).
- -----------
5. Noncompetition. Executive agrees that:
--------------
(A) During the term he performs services for the Company and during
the Post-Employment Period (as defined below), Executive will not interfere with
the relationship between the Company or any affiliate and any employee, agent or
representative of the Company or any such affiliate.
(B) During the term he performs services for the Company and during
the Post-Employment Period, Executive will not directly or indirectly divert or
attempt to divert from the Company or any affiliate any business which provides
telecommunications services in the United States or Latin America, including,
without limitation, domestic and international call services or domestic and
international telecommunications networks for voice, data, fax and/or video
transmission between the United States and Latin America or within Latin
America, or any related business in which the Company has been actively engaged
during the term Executive performed services for the Company, nor interfere with
the relationships of the Company with customers, dealers, distributors,
franchisees or sources of supply.
(C) During the term he performs services for the Company and during
the Post-Employment Period, Executive will not directly or indirectly own,
manage, operate control, be employed by, participate in, or be connected in any
manner with the ownership, management, operation or control of, any business or
enterprise which provides telecommunications services in the United States or
Latin America, including, without limitation, domestic and international call
services or domestic and international telecommunication networks for voice,
data, fax and/or video transmission between the United States and Latin America
or within Latin America, or any related business in which the Company has been
actively engaged during the then Executive performed services for the Company.
(D) For purposes hereof, the "Post-Employment Period" shall mean: (i)
in the event Executive's employment with the Company is terminated for Cause
pursuant to paragraph 1(D)(4), the 12-month period following Executive's
-----------------
termination of employment with the Company, or (ii) in the event Executive's
employment with the Company is terminated for any reason other reason, the
period during which the Company continues to make payments of base salary.
6. Stock Option. Effective as of the date hereof (the "Effective
------------
Date"), under the terms of the American TeleSource International, Inc. (ATSI)
1997 Stock Option Plan (the "Plan"), ATSI, an Ontario corporation ("ATSI"),
hereby grants to Executive the option (the "Option") to purchase shares (the
"Option Shares") of Common Stock, no par value per share, of ATSI, subject to
the requisite approval of the Plan by ATSI's Board of Directors and ATSI's
shareholders. The number of Option Shares, the purchase price per Option Share
and the installments and dates in which the Executive shall have the right to
exercise the Option are attached to this Agreement as Exhibit "B". The Plan is
attached to this Agreement as Exhibit "A". Beginning on the Effective Date,
such installments shall be cumulative (i.e. once the right to purchase the
number of shares of an installment has accrued, such shares may be purchased at
any time thereafter, or in part from time to time, until the business day
immediately preceding the tenth anniversary of the Effective Date (the
"Expiration Date") or until such earlier date as set forth in the following
paragraph. Notwithstanding the preceding sentence, upon the occurrence of a
Change in Control, Executive's right to exercise the Option shall become fully
vested (i.e., all unissued Option Shares may be purchased at any time
thereafter, or in part from time to time, until the Expiration Date or until
such earlier date as set forth in the following paragraph).
Upon termination of Executive's employment pursuant to Paragraph 1(D)(4)
-----------------
(Termination by the Company for Cause) or paragraph 1(D)(6) (Voluntary
-----------------
Termination by Executive), the Option shall remain exercisable for the four
month period following such termination, but only to the extent
5
<PAGE>
such option was exercisable at termination. Upon termination of Executive's
employment pursuant to paragraph 1(D)(1) (Death) or paragraph 1(D)(2)
----------------- -----------------
(Disability), the Option, to the extent then exercisable, shall remain
exercisable for the one-year period following such termination. Upon termination
of Executive's employment pursuant to paragraph (D)(3) (Termination by the
----------------
Company without Cause) or paragraph 1(D)(5) (By the Executive for Good Reason),
-----------------
Executive's right to exercise the Option shall become fully vested and the
Option shall remain exercisable for the four-month period following such
termination.
7. General Provisions.
------------------
(A) Notices. Any notice provided for in this Agreement must be in
-------
writing and must be either personally delivered, or mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable overnight
courier service, to the recipient at the address below indicated:
To the Company: Attn.: Board of Directors
12500 Network Boulevard, Suite 407
San Antonio, Texas 78249
To Executive: At Executive's last known address as
listed with the Company
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or sent or if mailed, five days after so mailed.
(B) Severability. Whenever possible, each provision of this
-------------
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision in such jurisdiction or any other jurisdiction, or the
legality or enforceability of such provision in any other jurisdiction, but this
Agreement will be reformed, construed and enforced in such jurisdiction as if
such invalid, illegal or unenforceable provision had never been contained herein
except that any court having jurisdiction shall have the power to reduce the
duration, area or scope of such invalid, illegal or unenforceable provision and,
in its reduced form it shall be enforceable.
(C) Complete Agreement. This Agreement embodies the complete
------------------
agreement and understanding between the parties and supersedes and preempts any
prior understandings, agreements or representations by or between the parties,
written or oral, which may have been related to the subject matter hereof in any
way.
(D) Successors and Assigns. This Agreement is a personal service
----------------------
contract and is not assignable by the Executive. Subject to the Executive's
rights under paragraph 1(D)(5)(d), this Agreement may be assigned from time to
--------------------
time by the Company. This Agreement shall be binding on and inure to the
benefit of the parties hereto and such parties' respective successors, personal
representatives and permitted assigns.
(E) Choice of Law. All questions concerning the construction,
-------------
validity and interpretation of this Agreement will be governed by the internal
law, and not the law of conflicts, of the State of Texas.
(F) Remedies. Each of the parties to this Agreement will be
----------
entitled to enforce his or its rights under this Agreement specifically, to
recover damages (including, without limitation, reasonable fees and expenses of
counsel) by reason of any breach of any provision of this Agreement and to
exercise all other rights existing in his or its favor. The parties hereto
agree and acknowledge that money damages may not be an adequate remedy for any
breach or threatened breach of the provisions of this Agreement
6
<PAGE>
and that any party may in his or its sole discretion apply to any court of law
or equity of competent jurisdiction for specific performance and/or injunctive
relief in order to enforce or prevent any violations of the provisions of this
Agreement. Such injunction or decree shall be available without the posting of
any bond or other security.
(G) Amendments and Waivers. Any provision of this Agreement may be
----------------------
amended or waived only with the prior written consent of Executive and a
majority of the Board.
(H) Absence of Conflicting Agreements. Executive hereby warrants
----------------------------------
and covenants that his employment by the Company does not result in a breach of
the terms, conditions or provisions of any agreement to which Executive is
subject.
(I) Survival. No termination of Executive's employment by either or
---------
both parties shall reduce or terminate Executive's covenants and agreements in
paragraphs 2, 3 and 5.
- ---------------------
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered on the day and year first above written.
"Company" AMERICAN TELESOURCE INTERNATIONAL, INC.
By: H. Douglas Saathoff
-------------------
Name: H. Douglas Saathoff
Title: Chief Financial Officer
"Executive"
Everett L. Waller
---------------------
Everett L. Waller
7
<PAGE>
EXHIBIT 10.20
Updated as of 2/28/97
EXECUTIVE EMPLOYMENT AGREEMENT
Agreement made as of February 4, 1997, between AMERICAN TELESOURCE
INTERNATIONAL., Inc., a Texas corporation (the "Company"), and Charles R. Poole
("Executive").
The Company and the Executive desire to enter into certain agreements
providing for Executive's employment with the Company.
The parties hereto agree as follows:
1. Employment. The Company agrees to employ Executive and Executive accepts
-----------
such employment for the period beginning February 4, 1997 (the "Start Date") and
ending upon termination pursuant to paragraph 1 (D) hereof (the "Employment
---------------
Period").
(A) Services. During the Employment Period, Executive will be the Senior Vice
--------
President - Sales and Marketing of the Company, and in connection therewith will
render such services of an executive and administrative character to the Company
and its affiliates as are customarily rendered by persons holding such position
with similarly situated companies, as the Board of Directors of American
TeleSource International Inc., an Ontario, Canada corporation (the "Board") may
from time to time direct. Executive will devote his best efforts and
substantially all of his business time and attention (except as otherwise
specifically permitted herein and except for vacation periods and reasonable
periods of illness or other incapacity) to the business of the Company and its
affiliates and will faithfully and diligently carry out such duties and have
such responsibilities as are customary among persons employed in substantially
similar capacities for similar companies. Executive will report to the President
and shall faithfully and diligently comply with all of its reasonable and lawful
directives. For purposes of this Agreement, the term "affiliates" means any
corporation, limited partnership, limited liability company or other entity
engaged in the same business as the Company or a related business, which
controls, is controlled by or is under common control with the Company.
(B) Salary. During the Employment Period and thereafter as provided in
------
paragraph (D) below, the Company will pay Executive a base salary at the rate of
- -------------
not less than $92,000 per annum (or such higher amount as the Board may
establish from time to time), and will be payable in accordance with the
Company's regular payroll practices.
(C) Benefits. In addition to the compensation described above in this
--------
paragraph 1, Executive will be entitled during the Employment Period to the
- ------------
following benefits:
(1) such bonus as the Board in its sole discretion may from time to time
authorize, but in no event shall bonuses paid during a year exceed 50% of
Executive's base salary for such year;
(2) such health insurance and other benefits as are available from time to
time to the Company's salaried employees generally;
(3) in accordance with the Company's vacation and absence paid as in
effect from time to time, sick leave, personal time provided that Executive
shall have no less than three weeks vacation each year, with salary;
(4) reimbursement, upon submission of documentation in accordance with the
Company's regular expense policies, for reasonable business expenses incurred on
the Company's behalf by Executive;
1
<PAGE>
(5) participation in any savings plan, 401(k) plan, profit sharing plan or
pension plan as is available from time to time to the Company's salaried
employees generally; and
(6) opportunity to participate in any and all employee benefit plans from
time to time in effect for executives or salaried employees of the Company
generally (subject to any contribution therefore generally required by such
employees and except to the extent such plans are in a category of benefit
otherwise provided to Executive).
(D) Termination. Unless earlier terminated by termination of Executive's
-----------
employment pursuant to any of the provisions immediately below, Executive's
employment with the Company will continue until the third anniversary of the
Start Date, and Executive's employment shall be renewed automatically for one-
year periods thereafter unless either party hereto gives written notice to the
other party, at least 120 days prior to the next anniversary date, that such
employment shall not be renewed:
(1) Death. In the event of Executive's death during the term hereof,
------
Executive's employment hereunder shall immediately and automatically terminate.
Notwithstanding such event, the Company shall pay to Executive's designated
beneficiary or, if no beneficiary has been designated by Executive, to his
estate, the base salary at the rate in effect on the date of death for a period
of 6 months. The Company shall also pay to Executive's designated beneficiary
or, if no beneficiary has been designated by Executive, to his estate, any
incentive compensation that is earned but unpaid, based on the operations of the
Company for the whole year, prorated through the date of death.
(2) Disability.
----------
(a) The Company may terminate Executive's employment hereunder, upon
notice to Executive, in the event that Executive becomes disabled during his
employment hereunder through any illness, injury, accident or condition of
either a physical or psychological nature and, as a result, is unable to perform
substantially all of his duties and responsibilities hereunder for 90 days
during any period of 365 consecutive calendar days. In the event of such
termination, until the earliest of (i) the conclusion of the then-current term
of this Agreement and (ii) the conclusion of a period of 6 months following the
date of termination, the Company shall continue to pay Executive the base salary
at the Rate in effect on the date of termination and shall continue to
contribute to the cost of Executive's participation in the Company's group
medical and dental insurance plan, if any, provided that Executive is entitled
to continue such participation under applicable law and plan terms. The Company
will also pay Executive, in the case of such termination, any incentive
compensation that is earned but unpaid, based on the operations of the Company
for the whole year, prorated through the date of such termination;
(b) While receiving disability income payments under the Company's
disability income plan, if any, Executive shall be entitled to receive the
excess, if any, of base salary under paragraph I (B) hereof over such disability
---------------
income payments, and shall be entitled to receive such bonus and other benefits
as are described in paragraph 1(C), until the termination of his employment and
---------------
except to the extent a longer period is specified in paragraph 1(D)(2)(a).
--------------------
(3) Termination by the Company without Cause. The Company may at any time
----------------------------------------
terminate Executive's employment without Cause (as defined below) by giving
Executive written notice of the effective date of termination. In the event of
such termination, the Company shall have the continuing obligation to make
payments of base salary in accordance with paragraph (B) above at the rate in
-------------
effect on the effective date of such termination until the third anniversary of
the Start Date or until 12 months after the effective date of such termination,
whichever period is longer. Additionally, during such period following
termination as the Company shall have the continuing obligation to make payments
of base salary, the Company shall continue to contribute to the cost of
Executive's participation in the Company's group medical and insurance plans, if
any, provided that Executive is entitled to continue such participation under
applicable law and plan. The Company will also pay Executive, in the event of
such termination, any incentive compensation that is earned but unpaid, based on
operations of the Company for the whole year, prorated through the date of his
termination.
2
<PAGE>
(4) Termination by the Company for Cause. The Company shall have the right
------------------------------------
to terminate the Executive's employment at any time for any of the following
reasons (each of which is referred to herein as "Cause") by giving Executive
written notice of the effective date of termination (which effective date may be
the date of such notice):
(a) the willful breach of any provision of paragraphs 1(A), 2, 3, 4 or
---------------------------
5 (including, but not limited to, a refusal to follow reasonable and lawful
- -
directives of the President; provided, however, that to the extent that such
breach is curable, the President will give Executive written notice of such
breach and Executive will have 30 days from the receipt of such notice to cure
such breach;
(b) any act of fraud, embezzlement or other material dishonesty with
respect to any aspect of the Company's business;
(c) continued use of illegal drugs;
(d) substantial failure of performance, repeated or continued after
written notice of such failure and explanation of such failure of performance,
which is reasonably determined by the Board of Directors to be materially
injurious to the business or interests of the Company; or
(e) conviction of a felony or of a crime involving moral turpitude.
If the Company terminates Executive's employment for any of the
reasons set forth above in this paragraph 1(D)4 , the Company shall have no
---------------
other obligations hereunder (including the obligation to continue to make
payments of base salary as provided in paragraph 1(D)3 from and after the
---------------
effective date of termination and shall have all other rights and remedies
available under this or any other agreement and at law or in equity.
(5) By the Executive for Good Reason. Executive may terminate his
--------------------------------
employment hereunder for Good Reason, upon written notice to the Company setting
forth the nature of such Good Reason in reasonable detail. "Good Reason" shall
mean:
(a) the material failure of the Company to provide Executive the base
salary and incentive compensation and benefits in accordance with the terms of
paragraph 1 and paragraph 6 hereof;
- ---------------------------
(b) the material diminution in the nature or scope of Executive's
responsibilities, duties or authority; or
(c) the occurrence of a Change in Control (as defined herein).
In the event of termination in accordance with this paragraph 1(D)(5), the
-----------------
Company shall continue to pay Executive the base salary at the rate in effect on
the effective date of such termination until the third anniversary of the Start
Date or, in the event this Agreement has been automatically extended thereafter
in accordance with paragraph 1(D) hereof, until next anniversary of the Start
--------------
Date. Additionally, during such period following termination as the Company
shall have the continuing obligation to make payments of base salary, the
Company shall continue to contribute to the cost of Executive's participation in
the Company's group medical and insurance plans, if any, provided that Executive
is entitled to continue such participation under applicable law and plan. The
Company will also pay Executive, in the event of such termination, any incentive
compensation that is earned but unpaid, based on operations of the Company for
the whole year, prorated through the date of his termination.
A "Change in Control" shall be deemed to have occurred if (i) any "person"
(as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934, as amended), becomes the "beneficial owner" (as such term is defined in
Rule 13d-3 under the Act), directly or indirectly, of outstanding securities of
the Company representing 40% or more of the combined voting power of the
3
<PAGE>
outstanding securities of the Company, or (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the shareholders of the Company
was approved by a vote of at least two-thirds (2/3) of the directors then still
in office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for any
reason to constitute a majority thereof, or (iii) the shareholders of the
Company approve (A) a merger or consolidation of the Company with any other
entity (other than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least 60% of the combined voting power of
the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation), (B) a plan of complete
liquidation of the Company or (C) an agreement or agreements for the sale or
disposition, in a single transaction or series of related transactions, by the
Company of all or substantially all of the property and assets of the Company.
Notwithstanding the foregoing, events otherwise constituting a Change in Control
in accordance with the foregoing shall not constitute a Change in Control if
such events are solicited by the Company and are, if Executive is then a member
of the Board, approved, recommended or supported by Executive in his capacity as
a member of the Board of the Company in actions taken prior to, and with respect
to, such events.
(6) Voluntary Termination by Executive. Except as provided in paragraph
----------------------------------- ---------
1(D)(5), in the event that Executive's employment with the Company is terminated
- -------
by Executive, such termination shall be a breach of this Agreement and the
Company shall have no further obligations hereunder from and after the date of
such termination.
2. Nondisclosure. Executive acknowledges that during the course of his
--------------
performance of services for the Company he has acquired and will acquire
technical knowledge with respect to the Company's business operations,
including, by way of illustration, the Company's existing and contemplated
services, trade secrets, patents and selling techniques and information,
customer lists, supplier lists, and confidential information relating to the
Company's policy and/or business strategy (all of such information herein
referenced to as the "Confidential Information"); provided, however, that the
term "Confidential Information" shall not include (a) any information which is
or becomes publicly available otherwise than through breach of this Agreement,
or (b) any information which is or becomes known or available to Executive on a
non-confidential basis and not in contravention of applicable law from a source
which is entitled to disclose such information to Executive. Executive agrees
that he will not, while he is employed by the Company, divulge to any person,
directly or indirectly, except to the Company or its officers and agents or as
reasonably required in connection with his duties on behalf of the Company, or
use, except on behalf of the Company, any Confidential Information acquired by
Executive during the term of his employment. Executive agrees that he will not,
at any time after his employment with the Company has ended, divulge to any
person directly or indirectly any Confidential Information. Executive further
agrees that if his relationship with the Company is terminated (for whatever
reason) he shall not take with him but will leave with the Company all records,
papers and computer data and any copies thereof relating to the Confidential
Information (or if such papers, records, computer data or copies are not on the
premises of the Company, Executive agrees to return such papers, records and
computer data immediately upon his termination). Executive acknowledges that
all such papers, records, computer data or copies thereof are and remain the
property of the Company.
3. Inventions and Patents. Executive agrees that all inventions,
----------------------
innovations or improvements relating to the Company's business or method of
conducting business (including new contributions, improvements, ideas and
discoveries, whether patentable or not) conceived or made by him during his
employment with the Company belong to the Company. Executive will promptly
disclose such inventions, innovations or improvements to the Board and perform
all actions reasonably requested by the Board to establish and confirm such
ownership.
4. Other Businesses. During the Employment Period, Executive agrees
----------------
that he will not, directly or indirectly except with the express written consent
of the Board, become engaged in, render material
4
<PAGE>
services for, or permit his name to be used in connection with, or directly or
indirectly counsel or consult with, any business other than the business of the
Company and its affiliates; provided, however, that Executive may be a passive
investor in any such business (subject to the limitations set forth in paragraph
---------
5 below).
- -
5. Noncompetition. Executive agrees that:
--------------
(A) During the term he performs services for the Company and during
the Post-Employment Period (as defined below), Executive will not interfere with
the relationship between the Company or any affiliate and any employee, agent or
representative of the Company or any such affiliate.
(B) During the term he performs services for the Company and during
the Post-Employment Period, Executive will not directly or indirectly divert or
attempt to divert from the Company or any affiliate any business which provides
telecommunications services in the United States or Latin America, including,
without limitation, domestic and international call services or domestic and
international telecommunications networks for voice, data, fax and/or video
transmission between the United States and Latin America or within Latin
America, or any related business in which the Company has been actively engaged
during the term Executive performed services for the Company, nor interfere with
the relationships of the Company with customers, dealers, distributors,
franchisees or sources of supply.
(C) During the term he performs services for the Company and during
the Post-Employment Period, Executive will not directly or indirectly own,
manage, operate control, be employed by, participate in, or be connected in any
manner with the ownership, management, operation or control of, any business or
enterprise which provides telecommunications services in the United States or
Latin America, including, without limitation, domestic and international call
services or domestic and international telecommunication networks for voice,
data, fax and/or video transmission between the United States and Latin America
or within Latin America, or any related business in which the Company has been
actively engaged during the then Executive performed services for the Company.
(D) For purposes hereof, the "Post-Employment Period" shall mean: (i)
in the event Executive's employment with the Company is terminated for Cause
pursuant to paragraph 1(D)(4), the 12-month period following Executive's
-----------------
termination of employment with the Company, or (ii) in the event Executive's
employment with the Company is terminated for any reason other reason, the
period during which the Company continues to make payments of base salary.
6. Stock Option. Effective as of the date hereof (the "Effective
------------
Date"), under the terms of the American TeleSource International, Inc. (ATSI)
1997 Stock Option Plan (the "Plan"), ATSI, an Ontario corporation ("ATSI"),
hereby grants to Executive the option (the "Option") to purchase shares (the
"Option Shares") of Common Stock, no par value per share, of ATSI, subject to
the requisite approval of the Plan by ATSI's Board of Directors and ATSI's
shareholders. The number of Option Shares, the purchase price per Option Share
and the installments and dates in which the Executive shall have the right to
exercise the Option are attached to this Agreement as Exhibit "B". The Plan is
attached to this Agreement as Exhibit "A". Beginning on the Effective Date,
such installments shall be cumulative (i.e. once the right to purchase the
number of shares of an installment has accrued, such shares may be purchased at
any time thereafter, or in part from time to time, until the business day
immediately preceding the tenth anniversary of the Effective Date (the
"Expiration Date") or until such earlier date as set forth in the following
paragraph. Notwithstanding the preceding sentence, upon the occurrence of a
Change in Control, Executive's right to exercise the Option shall become fully
vested (i.e., all unissued Option Shares may be purchased at any time
thereafter, or in part from time to time, until the Expiration Date or until
such earlier date as set forth in the following paragraph).
Upon termination of Executive's employment pursuant to Paragraph 1(D)(4)
-----------------
(Termination by the Company for Cause) or paragraph 1(D)(6) (Voluntary
-----------------
Termination by Executive), the Option shall remain exercisable for the four
month period following such termination, but only to the extent
5
<PAGE>
such option was exercisable at termination. Upon termination of Executive's
employment pursuant to paragraph 1(D)(1) (Death) or paragraph 1(D)(2)
----------------- -----------------
(Disability), the Option, to the extent then exercisable, shall remain
exercisable for the one-year period following such termination. Upon termination
of Executive's employment pursuant to paragraph (D)(3) (Termination by the
----------------
Company without Cause) or paragraph 1(D)(5) (By the Executive for Good Reason),
-----------------
Executive's right to exercise the Option shall become fully vested and the
Option shall remain exercisable for the four-month period following such
termination.
7. General Provisions.
------------------
(A) Notices. Any notice provided for in this Agreement must be in
-------
writing and must be either personally delivered, or mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable overnight
courier service, to the recipient at the address below indicated:
To the Company: Attn.: Board of Directors
12500 Network Boulevard, Suite 407
San Antonio, Texas 78249
To Executive: At Executive's last known address as listed
with the Company
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or sent or if mailed, five days after so mailed.
(B) Severability. Whenever possible, each provision of this Agreement will
------------
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to he invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision in such jurisdiction or any other jurisdiction, or the
legality or enforceability of such provision in any other jurisdiction, but this
Agreement will be reformed, construed and enforced in such jurisdiction as if
such invalid, illegal or unenforceable provision had never been contained herein
except that any court having jurisdiction shall have the power to reduce the
duration, area or scope of such invalid, illegal or unenforceable provision and,
in its reduced form it shall be enforceable.
(C) Complete Agreement. This Agreement embodies the complete agreement and
------------------
understanding between the parties and supersedes and preempts any prior
understandings, agreements or representations by or between the parties, written
or oral, which may have been related to the subject matter hereof in any way.
(D) Successors and Assigns. This Agreement is a personal service
-------------------------
contract and is not assignable by the Executive. Subject to the Executive's
rights under paragraph 1(D)(5)(d), this Agreement may be assigned from time to
--------------------
time by the Company. This Agreement shall be binding on and inure to the
benefit of the parties hereto and such parties' respective successors, personal
representatives and permitted assigns.
(E) Choice of Law. All questions concerning the construction, validity and
-------------
interpretation of this Agreement will be governed by the internal law, and not
the law of conflicts, of the State of Texas.
(F) Remedies. Each of the parties to this Agreement will be entitled to
--------
enforce his or its rights under this Agreement specifically, to recover damages
(including, without limitation, reasonable fees and expenses of counsel) by
reason of any breach of any provision of this Agreement and to exercise all
other rights existing in his or its favor. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach or
threatened breach of the provisions of this Agreement
6
<PAGE>
and that any party may in his or its sole discretion apply to any court of law
or equity of competent jurisdiction for specific performance and/or injunctive
relief in order to enforce or prevent any violations of the provisions of this
Agreement. Such injunction or decree shall be available without the posting of
any bond or other security.
(G) Amendments and Waivers. Any provision of this Agreement may be
----------------------
amended or waived only with the prior written consent of Executive and a
majority of the Board.
(H) Absence of Conflicting Agreements. Executive hereby warrants
---------------------------------
and covenants that his employment by the Company does not result in a breach of
the terms, conditions or provisions of any agreement to which Executive is
subject.
(I) Survival. No termination of Executive's employment by either or
--------
both parties shall reduce or terminate Executive's covenants and agreements in
paragraphs 2, 3 and 5.
- ---------------------
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered on the day and year first above written.
"Company" AMERICAN TELESOURCE INTERNATIONAL, INC.
By: H. Douglas Saathoff
--------------------------
Name: H. Douglas Saathoff
Title: Chief Financial Officer
"Executive"
Charles R. Poole
------------------------------
Charles R. Poole
7
<PAGE>
EXHIBIT 10.22
[TRANSLATION OF CONTRACT AS EXECUTED ON MAY 16, 1997, EFFECTIVE MAY 1, 1997,
BY WILFREDO GONZALEZ BALBOA AND ARTHUR SMITH. NO EXHIBITS WERE INCLUDED]
CONTRACT OUTLINING OBLIGATIONS TO GIVE, TO DO AND TO NOT DO (HEREINAFTER
REFERRED TO AS "THE CONTRACT") ENTERED INTO BY AMERICAN TELESOURCE INTERNATIONAL
INC. (HEREINAFTER "ATSI") REPRESENTED BY ARTHUR SMITH; AND THOSE ENTITIES
DESIGNATED BY ITS AUTHORIZED REPRESENTATIVES; AND BETWEEN SISTEMA DE TELEFONIA
COMPUTARIZADA, S.A. DE C.V. (HEREINAFTER REFERRED TO AS "SISTECOM") LEGALLY
REPRESENTED BY WILFRIDO GONZALEZ BALBOA; INGECOMP CORPORATION (HEREINAFTER
REFERRED TO AS "INGECOMP") REPRESENTED BY WILFRIDO GONZALEZ BALBOA; HUMANO GRUPO
INMOBILIARIO, S.A. DE C.V. (HEREINAFTER REFERRED TO AS "HGI") 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 "THE SHAREHOLDERS") IN CONFORMITY
WITH THE FOLLOWING DEFINITIONS, ACKNOWLEDGMENTS AND CLAUSES:
D E F I N I T I O N S :
1. For purposes of THE CONTRACT and with the understanding that other terms
will be defined in the rest of the content of the declarations or in the section
delineating duties, the following are the principal terms:
ATSI: AMERICAN TELESOURCE INTERNATIONAL, INC. and its
designees
(A copy of the Bylaws are attached as Exhibit _____);
ATSI
CANADA:
----------------------------------------------------------
(A copy of the Bylaws are attached as Exhibit _____);Also known to the
Parties as ATSI Canada
THE
SHAREHOLDERS: Gerardo Luis Monroy Solorzano; Cecilia, Gerardo, Miguel and
Julieta, all with the last name Monroy Diaz (A copy of their
identification documents is attached as Exhibit _____);
SISTECOM: SISTEMA DE TELEFONIA COMPUTARIZADA, S.A. DE C.V. (A copy of the
charter of incorporation is attached as Exhibit _____);
HGI: HUMANO GRUPO INMOBILIARIO, S.A. DE C.V. (A copy of the charter
of incorporation is attached as Exhibit ______);
RHA: RECURSOS HUMANOS Y ADMINISTRATIVOS, S.A. DE C.V.
<PAGE>
(A copy of the charter of incorporation is attached as
Exhibit ______);
IH: INTEGRACION HUMANA, S.C. (A copy of the charter of
incorporation is attached as Exhibit ______);
INGECOMP: INGECOMP CORPORATION (A copy of its Bylaws is attached as
Exhibit ______);
TEMPORARY The entity described in Fifth Clause of the CONTRACT.
ADMINISTRATIVE
ORGANIZATION
(BOARD)
ATSI SHARES: 2,715,545 shares of Series "___" of the Canadian Corporation
______________. (A copy of the Bylaws is attached as Exhibit
_____);
EL RISCO: Real estate located in the State of Colima (A copy of the
property deed is attached as Exhibit _____);
EL ANCLA: Real estate located in the State of Colima (A copy of the
property deed is attached as Exhibit _____);
A C K N O W L E D G M E N T S :
I. ATSI ACKNOWLEDGES:
a) That it is a foreign commercial corporation with the name AMERICAN
TELESOURCE INTERNATIONAL, INC., legally incorporated and registered under the
applicable laws of the country in which it was formed.
b) That in conformity of __________ Clause of the Bylaws, the principal
business purpose of the commercial corporation is the following:
c) On this date it is not in a state of suspension of operations, dissolution,
liquidation, bankruptcy or any other state or legal situation that would show
lack of capacity of restriction in entering into this CONTRACT.
<PAGE>
d) That Arthur Smith, who represents it in the execution of this CONTRACT, has
the authority to represent the company and these powers have not been revoked as
set forth in document ______________ dated ___________________, 19___. (Attached
is a copy of said proof as Exhibit _____).
e) That for purposes of entering into this CONTRACT, is familiar and has
analyzed the complete situation of SISTECOM, RHA, HGI, IH and INGECOMP.
II. SISTECOM ACKNOWLEDGES:
a) That it is a commercial corporation named SISTEMA DE TELEFONIA
COMPUTARIZADA, SOCIEDAD ANONIMA DE CAPITAL VARIABLE, legally formed in Public
Document 45,443 dated MARCH 8, 1994, as authorized by Notary Public Number 64
Sergio Lopez Rivera of Guadalajara, Jalisco, and said document which is
registered in the Public Registry of Property, Commercial Section of
Guadalajara, Jalisco. (A copy of said Public Document is attached as Exhibit
_____).
b) That in conformity with the Fourth Clause of its Bylaws, the principal
purpose of the commercial corporation as set forth is:
To participate directly in all types of activities, contracts and operations
which directly or indirectly relate to the establishment, operation or
exploitation of a marketer of telecommunications services without being
characterized as a public network in conformity with legislation and regulations
on the subject of telecommunications and permits from the Secretary of
Communications and Transportation.
c) That the term of life is 99 years; and that to date it is not in a state of
suspension of operations, dissolution, liquidation, bankruptcy or any other
legal state or situation that would render it lacking in capacity or restricted
from entering into this CONTRACT.
d) That Wilfrido Gonzalez Balboa, its representative in the execution of THE
CONTRACT, has unreserved legal authority to do so. (A copy of said proof is
attached as Exhibit _____).
III. HGI ACKNOWLEDGES:
a) That it is a foreign Commercial Corporation with the name HUMANO GROUP
INMOBILIARIO, SOCIEDAD ANONIMA DE CAPITAL VARIABLE, legally formed by Public
Deed No. 28, 785 on June 4, 1992, finalized before Rogelio Rodrigo Orozco Perez,
Notary Public No. 53 of the Federal District, which said corporation is legally
incorporated and registered in the
<PAGE>
Public Registry of Commerce in the Federal District. (A copy of the Bylaws are
attached as Exhibit _____).
b) That in conformity with the Second Article of its Bylaws, the principal
business purpose of the Commercial Corporation is as follows:
To perform all types of projects, be they public or private, related to the
construction, conservation, repair or demolition of real property, planning of
projects, design, exploration, locating and perforating conductors, as well as
the acquisition, sale, administration, rental, promotion, project, design and
subdivision of the same.
c) The term is of 99 years and on this date it is not in state of suspension of
operation, dissolution, liquidation, bankruptcy or any other state or legal
situation which would indicate a lack of capacity or restriction in entering
into this CONTRACT.
d) That Wilfrido Gonzalez Balboa, who represents it in the execution of this
CONTRACT, has the authority to represent the COMPANY and these representation
powers have not been revoked. (Attached is a copy of said proof as Exhibit
_____).
IV. INGECOMP ACKNOWLEDGES:
a) That it is a Foreign Commercial Corporation named INGECOMP CORPORATION,
legally incorporated and registered under the applicable laws of the country in
which it was formed.
b) That on this date it is not in a state of suspension of operations,
dissolution, liquidation, bankruptcy or any other state or legal situation that
would indicate a lack of capacity or restriction in entering into this CONTRACT.
c) That Wilfrido Gonzalez Balboa, who represents it in the execution of this
CONTRACT, has the authority to represent the COMPANY and that these
representation powers have not been revoked. (Attached is a copy of said proof
as Exhibit _____).
V. THE SHAREHOLDERS ACKNOWLEDGE:
1. That they are individuals, of legal age, not minors, and competent to enter
into this CONTRACT.
<PAGE>
2. That they are shareholders in the following entities, and that among all of
them they own 100% of the capital stock of same. (Copies of the shareholders'
meeting minutes and share certificates as proof of this, are attache as Exhibit
_____):
SISTECOM
HGI
RHA
INGECOMP
VI. THE PARTIES ACKNOWLEDGE:
a) That on February 17, 1997, ATSI and SISTECOM executed a Letter Agreement
called "Memorandum of Understanding" whose validity is ratified (hereinafter
referred to as "MOU," a copy of which is attached as Exhibit _____).
b) That on April 17, 1997, ATSI and SISTECOM and Cecilia and Gerardo Monroy
Diaz in their individual capacities, entered into a simple credit agreement,
whose validity is ratified. (A copy of such is attached as Exhibit _____).
c) That in accordance with Acknowledgments I through VI, it is desire to enter
into this CONTRACT subject to the following:
C L A U S E S :
FIRST. OBJECTIVE.By means of this CONTRACT, THE PARTIES agree to perform all
oral, legal and necessary acts as further described.
SECOND. TERM.The term to perform the objectives of THE CONTRACT shall expire
on July 31, 1997, except where otherwise indicated in this CONTRACT or as set
forth in a Modification Agreement.
THIRD. THE SALE OF A PORTION OF SISTECOM'S SHARES AND A PORTION OF ATSI'S
SHARES.
1. By means of this CONTRACT Cecilia and Gerardo Monroy Diaz sell in equal
parts 1,868 of the shares representative of SISTECOM's Capital Stock of which
each is the owner or ( the equivalent of) 55% of their shares, to ATSI or its
designees, who will acquire them for the price indicated in point 2. of this
Clause. At the same time, ATSI or its designees will sell to Cecilia and
<PAGE>
Gerardo Monroy in equal parts 702,319 of the ATSI SHARES which it owns and these
will be acquired at the price indicated in point 3. of this Clause. Both
purchases and sale of the shares shall be governed by the terms of this CONTRACT
and specifically by that which is set forth in this Clause.
2. The consideration that ATSI or its designee will pay Cecilia and Gerardo
Monroy Diaz for the acquisition of the above-referenced shares of SISTECOM is
the amount of $456,556.19 U.S. Dollars (Four Hundred Fifty Six Thousand Five
Hundred Fifty Six and 19/100 U.S. Dollars, legal currency of the United States
of America) represented by 671,406 shares with a value of $.68 U.S. Dollars
(68/100 U.S. Dollar, legal currency of the United States of America) the sum
which has been paid by both parts from the moment of execution of this CONTRACT
in accordance with Point 4. of this Clause.
3. The consideration of Cecilia and Gerardo Monroy Diaz in equal parts shall
pay for the acquisition of the ATSI SHARES referenced-above is the amount of
$456,556.19 U.S. Dollars (Four Hundred Fifty Six Thousand Five Hundred Fifty Six
and 19/100 U.S. Dollars, legal currency of the United States of America)
represented by 1,868 shares with a value of $244.4091 U.S. Dollars (Two Hundred
Forty-Four and 4091/10,000 U.S. Dollars, legal currency of the United States of
America), a sum which shall be considered as paid between the parties upon
execution of this CONTRACT and in accordance with Point 4 of this Clause.
4. The above-referenced PARTIES in this Clause acknowledge that the sums paid
for the transfer (sale) of their respective shares is equal and they agree to
compensate their respective credits and will consider that payment has been
satisfied. Such payment shall be based on the following calculations:
1,868 shares of SISTECOM's capital stock (equivalent to 55% of the total)
for the value of $244.4091 (Two Hundred Forty-Four and decimal four zero
nine one cents U.S. currency) per share;
671,406 ATSI SHARES at $0.68 (Sixty-Eight cents U.S. currency) per share;
The price indicated in the preceding point is the unit value of the ATSI
SHARES on the stock exchange on which it is traded on the day of the
execution of the CONTRACT;
<PAGE>
The rate of exchange U.S. dollars to Mexican peso used in the calculations
for this Clause is $7.9480 (Seven Point Nine Four Eight Zero pesos, legal
currency of the Mexican United States) per U.S. dollar (legal currency of
the United States of America).
5. The agreed price of the SISTECOM shares and ATSI SHARES, and herein
indicated in the present Clause is the market value and the real sales price
successively, so that there is no possibility of error, unjust enrichment nor
harm in the present transaction, extending mutually to THE PARTIES and providing
the most broad indemnification of same.
6. The SISTECOM shares as well as the ATSI SHARES herein referred to will be
transferred to their respective transferees, free of all obligation before third
parties; for which the said transferees commencing on the day of execution of
the CONTRACT will be able to freely exercise their inherent rights in their
capacity of shareholders according to the terms and conditions set forth in the
respective laws and applicable bylaws.
7. None of the transferring PARTIES reserve any corporate right whatsoever over
the shares sold which are the subject of this Clause.
8. In accordance with the respective laws and the applicable bylaws, a copy of
the CONTRACT will be given to each of the corporations issuing shares so that
they can make the necessary notations in the shareholders' registry in
accordance with their respective rules.
9. Each of the PARTIES shall pay any taxes owed as a result of this transfer of
shares regulated by the present Clause, and as indicated by the applicable laws.
FOURTH. DONATION (GIFTING) AND LATER TRANSFER OF THE REST OF THE SISTECOM
SHARES.
1. In accordance with this Clause, ATSI or its designee shall make final
acquisition of the remaining 45% of the shares representative of SISTECOM's
capital stock plus the shares of HGI that are not the property of SISTECOM, plus
the 100% of the shares of RHA. This will take place after the transfer (sale) of
55% as per the terms of this CONTRACT and the prior Clause. The transfer of the
SISTECOM shares, those of HGI and those of RHA as previously described, shall
take place in accordance with the rules set forth in this Clause.
<PAGE>
2. Cecilia, Gerardo, Miguel and Julieta Monroy Diaz with respect to their
shareholder rights in SISTECOM, HGI and RHA shall deposit the stock certificates
with a Notary Public designated by them and shall donate (gift) the above-
referenced shares gratuitously to Gerardo Luis Monroy Solorzano. Mr. Monroy
shall transfer (alienate/sell) to ATSI or its designees, said shares. The
consideration that ATSI or its designee will pay Gerardo Luis Monroy Solorzno
is:
$1,000,000.00 Dollars (One Million Dollars, legal currency of the United
States of America);
The transfer of the beneficial trust interest in the TRUST known as RISCO.
3. The obligations described in the previous point of this Clause shall be
subject to suspension consistent with performance in conformity with the
specific clauses of the CONTRACT, including each and every one of the following
acts:
a. Formation of the administrative organizations (board of directors) of
SISTECOM, HGI and RHA;
b. Formation of the corporation that will administer the personnel/Human
Resources function, and the transfer of the employees to said corporation;
c. Modification of the lease agreements;
d. Acquisition of the trust rights in the RISCO TRUST on behalf of ATSI or
its designee, and the subsequent payment of the total debt that SISTECOM owes
Telefonos de Mexico, S.A. de C.V.;
e. The merger of SISTECOM and RHA; and
f. Observance of the prohibitions in the formation of the administrative
organizations of SISTECOM, HGI and RHA.
4. The Notary Public designated shall have a sample copy of the CONTRACT and
shall be obligated upon its completion as described. He will abstain from
delivering the stock certificates to ATSI or its designee unless he has been
informed that the obligations referred to in point 3. of this Clause have been
performed. In the event of nonperformance, the shares shall be donated (gifted)
gratuitously from Gerardo Luis Monroy Solorzano to Cecilio, Gerardo, Miguel and
Julieta Monroy Diaz as they were before the performance of point 2. of this
Clause.
<PAGE>
FIFTH. ADMINISTRATIVE ORGANIZATION (Board of Directors).
1. The SHAREHOLDERS of SISTECOM, RHA and HGI agree to change the composition of
the Board of Directors of each of the corporations. For this purpose, the
referenced Boards will be made up of four (4) Board members with the
understanding that half will be designated by ATSI and the other half by Cecilia
and Gerardo Monroy Diaz acting jointly.
2. Until such time as the CONTRACT is fully performed or has been terminated,
the Board of Directors of each of the corporations shall have the obligation to
inform the SHAREHOLDERS no later than seven (7) calendar days upon a written
request, return receipt requested, by any of them for information.
3. If the CONTRACT is terminated or if on July 31 and the contractual
obligations are not satisfied and without having to expressly acknowledge this,
the Board positions of all of the designees of ATSI and the SHAREHOLDERS shall
be free to be filled by whatever means is provided for by the Board of Directors
of the respective corporations.
4. On August 1, 1997, after execution of the CONTRACT, ATSI shall designate a
new Board of Directors to the above-referenced corporation in this Clause.
SIXTH. PROHIBITIONS IN ADMINISTRATION.
1. THE PARTIES of the CONTRACT and the members of the Board of Directors of
SISTECOM, RHA and HGI, throughout the term of this CONTRACT, shall be prohibited
from the following:
Dividend distribution;
Incurring debt by any means for purposes different than ordinary business
operations;
Increase in equity;
To enter into any type of association or affiliation with third parties to
the CONTRACT;
To perform any act, directly or indirectly, that is in contravention of the
CONTRACT.
2. The only permitted exception to the above-referenced prohibitions shall be
upon a unanimous resolution by the Board of Directors of the corporations in
questions ratifying any of the above acts.
<PAGE>
3. Those who do not perform the obligations herein set forth shall be subject
to the conventional penalties that are provided for in the CONTRACT.
SEVENTH. OBLIGATION OF DEBT PAYMENT.
1. The debts that SISTECOM has with Telefonos de Mexico, S.A. de C.V. shall be
paid off in accordance with that set forth in the Ninth Clause of the CONTRACT.
2. Besides that set forth in the previous point, ATSI shall be severally liable
for the payment of all of the liabilities of whatever nature of SISTECOM, HGI
and RHA so long as they are listed on Exhibit _____, ______________________
April 30, 1997 and approved by ATSI. With respect to IH, it shall adhere to the
terms of the Twelfth Clause of the CONTRACT.
3. Based on that which has been agreed to in the previous points, once there
has been complete performance of the CONTRACT, the SHAREHOLDERS shall be free of
any further liability with the respect to their former ownership of the shares
for each of the respective corporations except for any currently existing
contingent liabilities of whatever nature and that were not disclosed at the
time of execution of the CONTRACT in which case ATSI shall be authorized to
discount the difference in an equivalent sum of ATSI SHARES but no later than 6
months from the date of performance of each and every one of the obligations set
forth in the CONTRACT.
4. On July 31, 1997, any obligation for the liabilities of the above-
referenced corporations that is not expressly provided for in Exhibit _____, and
that was incurred by the same before April 30, 1997, shall be discounted from
the number of ATSI SHARES using as reference value $0.90 (Ninety U.S. cents,
legal currency of the United States of America) per share.
EIGHTH. DISINCORPORATION (TRANSFER, ALIENATION) OF RISCO AND ITS RELATION TO THE
REST OF THE OBLIGATIONS SET FORTH IN THE CONTRACT.
The real property known as EL RISCO shall be included in THE CONTRACT in
conformity with the procedures that will be set forth below. Its impact on THE
CONTRACT shall be governed by the following terms:
1. Before June 1, 1997, HGI as trustor and beneficiary shall form a trust with
a trustee that it shall designate (hereinafter referred to as "THE RISCO
TRUST"). The corpus of this trust shall be
<PAGE>
EL RISCO and whatever else HGI considers necessary so that the beneficial
interests in THE RISCO TRUST can be acquired by a foreign corporation.
2. ATSI or its designee shall acquire trust rights in THE RISCO TRUST as
transmitted by HGI.
In exchange for the assignment of its beneficial interest in the RISCO trust
for an amount equal to the bank appraisal that shall be obtained before May
31, 1997, HGI shall receive payment from ATSI. This payment shall not exceed
$1,063,000 U.S. Dollars (One Million Sixty Three Thousand dollars in the
legal currency of the United States of America) an amount which is equal to
SISTECOM's total debt to Telefonos de Mexico, S.A. de C.V. ("TELMEX").
In addition to the above referenced amount, ATSI shall pay the taxes and
expenses necessary for the assignment of the trust beneficial interests
which shall be: 2% of the Real Property Tax; the Value Added Tax (IVA) on
the sale; as well as all notarial fees incurred.
Any shortfall in meeting the total SISTECOM debt to TELMEX shall be paid to
SISTECOM by ATSI under the terms of a Simple Credit Agreement.
The above referenced consideration that HGI shall receive for assignment of
the trust interests shall be delivered to SISTECOM by means of a Simple
Credit Agreement, the sum of which together with what is received from ATSI,
shall cover the total SISTECOM debt to TELMEX (Copies of the debt
instruments are attached as Exhibit ___).
SISTECOM shall pay off its debt to TELMEX no later than June 30, 1997 in
accordance with the contractual obligations it has with said entity.
3. ATSI shall pay all taxes and expenses of whatever nature that the above-
referenced transaction gives rise to but not in excess of $102,000U.S. Dollars
(One Hundred Thousand Two dollars in legal currency of the United States of
America).
4. In accordance with that set forth in point 2. of this Clause, HGI shall
transfer the total consideration received (in exchange) for the assignment of
the beneficial interests in THE RISCO TRUST by means of a simple credit
agreement to SISTECOM so that SISTECOM can pay the above referenced debts to
TELMEX.
<PAGE>
5. In the event that a discount is obtained for the early payment of the TELMEX
debt, this amount shall be divided in equal parts between ATSI or its designee,
and Cecilia and Gerardo Monroy Diaz. The manner of distributing such discount
shall be based on an allocation in the form of salaries and wages to Cecilia
Monroy Diaz and Gerardo Monroy Diaz, or whoever they designate.
6. From the time of the execution of the CONTRACT and until such time as the
beneficial trust interests of THE RISCO TRUST are transferred to Gerardo Luis
Monroy Solorzano, he shall waive all rights he may have as a lessee under the
Civil Codes of the respective states, however, he may reside at EL RISCO.
7. In the event that after having transferred the beneficial interests in the
trust to ATSI or its designee, the SHAREHOLDERS do not voluntarily comply with
the necessary legal and material acts of the CONTRACT, the SHAREHOLDERS shall be
obligated to transfer 22.5% of the shares of SISTECOM to ATSI in exchange for
ATSI's transfer of its beneficial interests in THE RISCO TRUST to its tenant.
NINTH. THE EFFECTS OF THE VALUE OF THE REAL PROPERTY IDENTIFIED AS EL ANCLA.
1. THE PARTIES agree that the value assigned to the real property known as "EL
ANCLA" is $500,000.00 (Five Hundred Thousand U.S. Dollars, legal currency of the
United States of America).
2. It is agreed that if at the time of the transfer to a third party there is a
difference in the value previously designated, be it less or more, it shall be
divided in equal parts between the PARTIES.
3. If the difference in the value is negative, such a difference shall be
applied in accordance with the prior point in a quantity equivalent to the
number of ATSI shares.
TENTH. PURCHASE OF INGECOMP ASSETS.
1. The assets of INGECOMP shall also be included in the CONTRACT so that
INGECOMP will make payment to SISTECOM in accordance with the debt that it owes
it. In the event that this cannot be done, INGECOMP and SISTECOM will implement
another mechanism that will give same legal and accounting result. (After the
execution of this CONTRACT and in conformity with
<PAGE>
the PARTIES of this CONTRACT, attached as Exhibit _____ is a copy of the
schedule of assets and liabilities of INGECOMP.)
2. Despite that which is mentioned in the prior point, in the event that the
assets of INGECOMP are less than the debt that is owed to SISTECOM, this
situation shall not affect the number of ATSI shares to be acquired by Cecilia
and Gerardo Monroy Diaz.
3. Besides the transfer of the INGECOMP assets to SISTECOM, INGECOMP shall make
its best effort so that all contractual rights to which it is a party shall be
transferred or assigned to ATSI, such as the lease agreement, the employees, and
the cross border agreements with telephone carriers.
ELEVENTH. MERGER OF RHA AND SISTECOM.
1. THE SHAREHOLDERS of RHA and SISTECOM agree to perform the following during
the term of this CONTRACT, all corporate acts necessary for the merger of the
corporation in which SISTECOM will be the one merging and RHA will be the one
merged.
2. Even though THE SHAREHOLDERS may have performed all legal, material and
necessary acts for the merger, this CONTRACT will not be deemed incomplete
(breached) if THE SHAREHOLDERS have not met all the registration requirements in
conformity of Article 222 of the General Law of Mercantile Corporations, but
will present proof of having filed with the Registry by July 31, 1997.
TWELFTH. FORMATION OF THE NEW CORPORATION FOR THE ADMINISTRATION OF HUMAN
RESOURCES.
1. SISTECOM, through its legal representatives and in conformity with the
Mexican laws on the subject, shall form a new corporation (sociedad anonima de
capital variable) that shall have as its principal purpose the administration of
human resources in conformity with those legal and material acts agreed to in
the CONTRACT. THE SHAREHOLDERS of the shares of the new corporation shall be
SISTECOM and ATSI or its designee (for) only one share.
2. Once the new corporation is formed, all of the employees of IH at the time
of such incorporation, shall be transferred to the new corporation, which will
operate as the "substitute employer" so that in such manner IH will be the
substituted corporation and the new corporation shall be the one substituting.
Based on the prior statement, and in conformity with the applicable labor
<PAGE>
and social security laws it shall be understood that it will not be necessary to
liquidate the personnel of IH.
3. In accordance with the Seventh Clause of the CONTRACT, SISTECOM shall
execute a contract with IH for several liability for the performance of all of
the existing tax obligations commencing on May 1, 1997.
4. When ATSI so determines, SISTECOM and ATSI's designee, both in their
capacities as shareholders of the new corporation shall transfer 100% of those
shares to ATSI or its designee.
THIRTEENTH. LEASE AGREEMENTS.
1. THE SHAREHOLDERS, HGI, INGECOMP and SISTECOM acknowledge that they have
various lease agreements throughout the Republic of Mexico for the purpose of
providing SISTECOM's service. (The list of leased properties is attached as
Exhibit _____).
2. THE SHAREHOLDERS, HGI, INGECOMP and SISTECOM agree to exert their best
efforts to have signed those contracts which are not signed, and to renew those
that expire before July 31, 1997. In the case of the real property in the United
States of America that obligation shall rest with INGECOMP.
3. However, if after making diligent efforts to bring about such changes, the
landlords refuse to do so, it will not be considered as a breach of the CONTRACT
and in no case shall the conventional penalty or any other type of damage or
harm be levied.
FOURTEENTH. INTEGRATION OF THE BOARD OF DIRECTORS OF ATSI DELAWARE.
If a vacancy occurs on the above-referenced Board of Directors known as ATSI
DELAWARE, consisting of five (5) directors, Arthur Smith, so long as he is
Chairman of the Board, agrees to nominate Wilfrido Gonzalez Balboa (as a
candidate) for the approval of the Executive Committee, the Board of Directors,
and the shareholders.
<PAGE>
FIFTEENTH. TERMS OF EXECUTION FOR THE MATERIALS AND LEGAL ACTS NECESSARY TO
EFFECT PERFORMANCE OF THE CONTRACT.
1. In addition to those acts that will be executed at the time of signing of
the CONTRACT, and for the purpose of assigning a time for performance of each
one of the material and legal acts, in the present Clause we include a framework
of suggested completion dates, acts to be performed but in no case does it
create additional obligations in the CONTRACT.
2. However, the parties to THE CONTRACT shall be able to mutually modify the
dates without any formality, as allowed, keeping in mind that THE CONTRACT
expires on July 31, 1997.
3. The framework referred to in point 1. above is:
Term Act to be Performed Clause
July 1 Execute THE RISCO TRUST AGREEMENT and necessary Fifth and Eighth
meetings to conform the new Boards of Directors of SISTECOM, RHA, HGI.
July 7 Payment of the debt to TELMEX. Formation of a new human Eighth,
Tenth, resources corporation. Hold meetings and executed merger Eleventh,
Twelfth contract for SISTECOM-RHA, as well as its registration in the and
Thirteenth Public Registry of Commerce. Make payment for the assets of
INGECOMP. Change lease agreements. Pay debts of IH.
July 31 Performance of all obligations in the CONTRACT. General
SIXTEENTH. DEFECTS IN CONSENT.
THE PARTIES acknowledge that in THE CONTRACT there is no error, fraud, violence,
bad faith, harm, or other cause that may invalidate it; and THE PARTIES renounce
their right to invoke them (defenses) and the statute of limitations to invoke
them.
SEVENTEENTH. CONGRUENCE BETWEEN THE CONTRACT AND THE ACTS DERIVED FROM IT.
All of the material and legal acts that must be performed by virtue of THE
CONTRACT shall be congruent with the meaning and expected finality of this
CONTRACT. Before executing these acts, THE SHAREHOLDERS and SISTECOM, HGI, RHA
and INGECOMP may ask for ATSI's opinion, and ATSI may suggest the pertinent
changes so long as they adhere to
<PAGE>
THE CONTRACT.
EIGHTEENTH. EXHIBITS.
1. THE PARTIES to THE CONTRACT ratify the content of all the Exhibits referred
to in such; same which are incorporated by reference herein.
2. The following exhibits shall be incorporated into the CONTRACT at the moment
of its execution but they shall be delivered by the PARTIES that should present
them, but in all cases before the expiration of the term of this CONTRACT. Such
exhibits shall be:
NINETEENTH. PENALTY CLAUSE.
THE PARTIES to THE CONTRACT agree that the penalty for grave and intentional
nonperformance of one of the Parties shall be $350,000.00 (Three Hundred Fifty
Thousand and 00/100 Dollars, United States Currency), as shall be determined in
accordance with the procedure provided in the Twentieth Clause.
TWENTIETH. EXPRESS FORFEITURE PACT AND GROUNDS FOR RESCISSION OF THE CONTRACT.
1. THE CONTRACT shall be rescinded automatically for failure to perform the
obligations contained in it or for grounds as described in this Clause, and it
will not be necessary to take arbitrary or jurisdictional intervention to effect
decision.
2. THE CONTRACT is central to the material and legal acts that emanate from it
for which its resolution will have as a consequence the resolution of those
acts.
3. In addition to termination of THE CONTRACT by its terms, that is, when the
performance of all the obligations provided in same; THE CONTRACT shall be
determined in the following circumstances:
Upon expiration of the term in conformity with the Second Clause of THE
CONTRACT; Should SISTECOM, HGI, RHA, IH or INGECOMP, ATSI or the issuer of
the ATSI SHARES declare bankruptcy or suspension of payment during the term
of THE
<PAGE>
CONTRACT;
By mutual consent of THE PARTIES;
If the circumstances in the Sixth Clause of THE CONTRACT materialize.
4. As indicated in the prior Clause, the classification of grave and culpable
nonperformance shall be classified in accordance with the procedure provided.
The execution of the penalty set forth in the Sixteenth Clause can only be
imposed if the required procedure has been performed and the nonperformance
confirmed by the competent court.
TWENTY-FIRST. DISPUTE RESOLUTION CLAUSE.
1. Any litigation controversy or claims arising from or related to this
CONTRACT, or the nonperformance, termination or nullification of same, shall be
resolved in accordance with the Rules of Arbitration UNCITRAL in existence at
the time by the American Association of Arbitration ("AAA").
TWENTY-SECOND. APPLICABLE LAW.
a) This CONTRACT shall be governed by the applicable law which 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 those transactions that take place in the United States,
the applicable law shall be in conformity with that of the jurisdiction.
TWENTY-THIRD. DOMICILE OF THE PARTIES.
a) ATSI's: 12500 Network Blvd., Suite 407, San Antonio, Texas, United States of
America.
b) SISTECOM's: Av. Mexico 2798, 3er. Piso, Colonia Terranova, Guadalajara,
Jalisco, Estados Unidos Mexicanos.
c) HGI: Av. Mexico 2798, 2(degree) Piso, Colonia Terranova, Guadalajara,
Jalisco, Estados Unidos Mexicanos.
d) INGECOMP:
e) THE SHAREHOLDERS's:
Cecilia Monroy Diaz:
Gerardo Arturo Monroy Diaz:
<PAGE>
Julieta Monroy Diaz:
Miguel Monroy Diaz:
Gerardo Luis Monroy Solorzano:
Notification shall be given, in writing with return receipt requested, of any
change of address no later than the third calendar day after it has occurred.
The entire text of this CONTRACT has been read by THE PARTIES and they are
informed of its content, reach and legal consequences, and give their concurrent
consent by signing it below and initialing it in multiple copies (six) on the
margins of its 13 pages on April 30, 1997, in the City of San Antonio, State of
Texas, United States of America.
ATSISISTECOM
By: Arthur Smith By: Wilfrido Gonzalez Balboa
Gerardo Luis Monroy Solorzano
Gerardo Monroy Diaz Cecilia Monroy Diaz
Julieta Monroy Diaz Miguel Monroy Diaz
Witness Witness
<PAGE>
EXHIBIT 10.24
LICENSE TO ESTABLISH, OPERATE AND EXPLOIT A COMMERCIAL CORPORATION FOR PUBLIC
TELEPHONE SERVICES GRANTED BY THE FEDERAL GOVERNMENT THROUGH THE SECRETARIAT OF
COMMUNICATIONS AND TRANSPORTATION, IN FAVOR OF AMERICAN TELESOURCE INTERNATIONAL
DE MEXICO, S.A. DE C.V.
<PAGE>
BACKGROUND
I. American Telesource International de Mexico, S.A. de C.V., the Licensee, has
submitted an application to the Secretariat of Communications and
Transportation, hereinafter referred to as the Secretariat, to obtain a License
to establish, operate and exploit a commercial corporation for public telephone
services pursuant to that set forth in article 31 fraction I and in article 32
of the Federal Telecommunications Law, ratified on December 16, 1996, in terms
of Provisional Article THIRD of the Public Telephone Service Regulation,
published in the Official Gazette on December 16, 1996.
II. The documentation referred to the License was analyzed and evaluated by the
Secretariat, previous advise of the Telecommunications Federal Commission, and
decided that the Licensee has complied satisfactorily with the legal
requirements provided by the Federal Telecommunications Law and the Public
Telephone Service Regulation, therefore, based on articles 36 of the Federal
Public Administration Organic Law; 31, fraction I, 32, 37, 54, 60, and 67 of the
Federal Telecommunications Law; 13 of the Public Telephone Service Regulation;
6, fraction VIII, 23, fraction II and 37 Bis of the Bylaws of the Secretariat of
Communications and Transportation, the Secretariat grants American Telesource
International de Mexico, S.A de C.V.:
License to establish, operate and exploit a commercial corporation
<PAGE>
for public telephone services, subject to the following:
TERMS
1. General Provisions.
1.1. Definitions. In addition to those terms defined in the Federal
Telecommunications Law, and in the Public Telephone Services Regulation, for
purposes of this License to establish, operate and exploit a commercial
corporation for public telephone services, the following shall be understood:
1.1.1 Law: the Federal telecommunications Law.
1.1.2 Regulation: Public Telephone Service Regulation.
1.2 Services. Licensee agrees to establish, operate and exploit a commercial
corporation for public telephone services, under the terms and conditions of
this License and the applicable legal provisions.
1.2.1 Included Services. The public telephone service consists in the
access to services provided by public telecommunications networks, which shall
be provided to the public through installation, operation and exploitation of
public telephones.
1.3 Terms to commence the provision of services. The Licensee is obliged to
commence the provision of services hereunder within a
<PAGE>
180 calendar day maximum term, as of the date the License is granted, and to
inform it to the Secretariat within 15 calendar days following the performance
thereof.
1.4 Authorized Installations. The provision of public telephone service shall
solely be performed through the connection of public telephones to switched
telephone lines furnished by the public telecommunication networks licensees
authorized to provide the local telephone service.
In order to be able to use other connections than those indicated in the
preceding paragraph, Licensee must obtain prior authorization from the
Secretariat, and said Secretariat shall resolve within ninety calendar days
starting from the date the request is received, provided the Licensee has duly
fulfilled the obligations arising out of this License, as well as other
applicable legal and administrative provisions.
1.5 Coverage. The Licensee is obliged to provide the service mentioned
hereunder, in conformity with the coverage, installation and maintenance program
included in the submitted application, in the following States: Baja California,
Baja California Sur, Campeche, Coahuila, Colima, Chihuahua, Distrito Federal,
Durango, Guanajuato, Guerrero, Jalisco, Nuevo Leon, Oaxaca, Quintana Roo,
Sonora, Sinaloa, Tamaulipas, Veracruz and Yucatan.
1.6 Coverage Modification. For the Licensee to extend or reduce
<PAGE>
coverage, prior authorization of the Secretariat will be needed.
Extension or reduction of the coverage will be authorized by the Secretariat to
the Licensee in a period no longer of 90 calendar days as of the date the
application is received, provided that the Licensee has complied with all the
applications hereunder, as well as other applicable legal and administrative
provisions.
1.7 Duration. The license will be effective from the date it is granted and
shall remain in full force and effect for a period of 20 (twenty) years, and
might be extended for another twenty years provided that the Licensee has
complied satisfactorily with all obligations set forth; it is requested 5 (five)
years before the License is terminated, and Licensee accepts new terms and
conditions set forth, for the public interest, by the Secretariat to establish,
operate and exploit the commercial corporation for public telephone services,
and that the Licensee subjects itself to the administrative provisions the
Commission may establish in order to provide a better public telephone service.
1.8 Applicable Law. The establishment, operation and exploitation of the
commercial corporation for public telephone services hereunder shall subject to
the Law, the Regulation, General Means of Communications Act, main technical
plans, treaties, laws, regulations, decrees, Mexican official standards, rules
and other applicable administrative provisions, as well as the conditions set
forth herein.
<PAGE>
If legal and administrative provisions above are repealed, modified or amended,
the Licensee accepts that he shall be subject to the new applicable law and
administrative provisions as of the effective date thereof.
1.9 Exclusivity. This License does not grant the Licensee exclusivity rights;
therefore, the Secretariat, within the same authorized coverage may grant other
licenses in favor of third parties so they may be able to establish, operate and
exploit public telephones commercial corporations, and so they may provide
services which are identical or similar to the services subject matter
hereunder.
1.10 Assignment of rights. Licensee may assign rights and obligations hereunder,
partially or completely, as per terms and conditions of article 35 of the Law.
(*)
(*) Section VI - Transfer of Rights.
Article 35. The Secretariat will authorize the partial or total transfer of the
rights and obligations established in the concessions or licenses within a
period of 90 natural days, as of the date of application, always that the
licensee agrees to comply with the obligations that remain pending and agree to
the conditions established by the Secretariat for said effect.
In those cases where the assignment has the purpose of transferring the rights
to operate and exploit a public telecommunication network or a frequency band to
another concessionary or licensee which rends similar services in the same
geographic zone, the Secretariat will authorize the respective assign, always
and when the Federal Competition Commission
<PAGE>
provides a favorable opinion.
The assignment referred to in this article may be requested, always and when a
period of three years is elapsed as of the date of the granting of the
respective concession or license.
1.11 General powers of attorney. By no means, the Licensee may grant general
powers of attorney for irrevocable administrative or ownership acts having as
purpose or giving the attorney-in-fact the possibility to exercise rights and
obligations of this License.
1.12 Encumbrances. When the Licensee establishes any encumbrance of the License
or rights derived thereof, the Licensee shall carry out the registration
referred to in article 64 of the Law within 30 calendar days following the date
of the encumbrance was established.
The document containing the guarantee provided shall expressly set forth that
the enforcement of said guarantee will in no case give the creditor the
character of a Licensee.
The License might be assigned to the creditor or to a third party if the
Secretariat authorize the assignment of rights in terms of article 35 of the
Law.
1.13 Nationality. The Licensee shall only have the rights granted
<PAGE>
to the Mexican people by the Mexican Laws, and, therefore, the corporation and
its alien parties, if any, agree not to accept or ask for diplomatic
intervention from any foreign country, under penalty to forfeit, to the benefit
of the Mexican nation, all properties and rights acquired to establish, operate
and exploit the commercial corporation for public telephone services.
1.14 Termination of the License. When the Licensee, at its election, decides to
terminate in advance this License, shall submit to the Secretariat a 60 calendar
day prior notice justifying such request.
The termination of this License does not extinguish the obligation incurred by
the Licensee when it was in full force and effect.
The License might be revoked due to causes established in article 38 of the Law
(**), the Licensee therefore shall subject to that set forth in article 74 of
the same Law.
(**) Article 38. The concessions and licenses can be revoked for any of the
following causes:
I. To not exercise the rights conferred in the concessions or licenses during a
period more than 180 natural days, as of the date of the granting of the
concession or license, except when the Secretariat authorizes for justified
cause;
II. Interruption to the general communication channels or the total or partial
provision of service, without a justified reason or without authorization of the
Secretariat;
III. To execute acts that impede the activities of other concessionaries or
licensees with right to said activities;
IV. To not fulfill the obligations or conditions established in the concessions
or licenses;
<PAGE>
V. To deny to interconnect to other telecommunication service concessionaries or
licensees, without justified cause;
VI. Change of nationality;
VII. To assign, encumber or transfer the concessions or licenses, the rights
conferred in the same or related property in violation of that set forth in this
Law, and
VIII. To not pay the established fees to the Federal Government.
In the cases set forth in fractions, I, V, VI and VII previously described, the
Secretariat will proceed to revoke the concessions and licenses immediately.
In the cases indicated in fractions II, III, IV and VIII, the Secretariat can
only revoke the concession or license when the respective concessionary or
licensee has been previously sanctioned, on at least three occasions for the
causes foreseen in said fractions.
1.15 Training and technological development. The Licensee will develop training
programs for its personnel.
Likewise, the Licensee shall carry out research and development programs in the
country. To that purpose, the Licensee shall work with the Commission or with
other technological research and development institutions.
1.16 Subscription of shares. The Licensee undertakes to present before the
Commission each year before April 30 a list containing the names of the ten (10)
main shareholders, and their corresponding participation percentage, attaching
thereto the information the Commission may determine.
2. Provisions applicable to services.
<PAGE>
2.1 Services quality. The Licensee is obliged to perform continuously and
efficiently, the services comprised herein pursuant to the applicable law and
subject to the technical characteristics to be established in his commercial
practices code.
2.2 Equipment. Telecommunications equipment used for the provisions of services
hereunder shall comply with the official provisions regarding standarization,
certification and homologation prior the operation thereof. Operation of such
equipment will, in no case, affect the provision of other services furnished
through the public telecommunications networks.
2.3 Complaints and repairs. The Licensee shall monthly write a report including
the incidence of each type of faults, as well as the corrections adopted. Said
report will be available to the Secretariat. The Secretariat shall make known to
the public such information together with information regarding other licensees
providing similar services in the country in the same region.
2.4 Emergency services. The Licensee must make available to the Secretariat,
within six months following the granting of this License, an action plan to
prevent the interruption of services, as well as to provide emergency services
in the case of any Acts of God, according to article 14, subparagraph III of the
Regulation.
<PAGE>
In the case of an emergency and within its coverage area, the Licensee will
provide the necessary services which the Secretariat indicates, for free, only
for the time and in the proportion which the emergency requires.
2.5 Commercial Practices Code. The Licensee must develop a commercial practices
code in which the different services that it provides, the corresponding tariff
application methodology and quality norms, ensuring continuous and efficient
rending, are described clearly and concisely, in a period not to exceed 60
natural days from the date the license is granted. Once the code is developed,
the Licensee must register the Code in the Telecommunications Register and make
the same available to the public in their commercial offices.
In the case that the Licensee does not develop said code or does not submit the
commercial practices established in it, the Licensee will be subject to the
sanctions proposed by the Secretariat for said purpose.
2.6 Authorizations for the installation of public telephones. The Licensee must
arrange itself for the necessary authorizations, licenses or agreements for the
installation of public telephones before the corresponding authorities or
particulars. In the case of public route installations, the Licensee must also
comply with the provisions in urban development, ecological equilibrium and
environmental protection.
<PAGE>
2.7 Appointment of a responsible technician. The Licensee is obliged to
designate before the Secretariat a responsible party with the necessary
administrative capabilities to represent the Licensee, regarding the obligations
established in this license, related to the technical functioning of the
installations and services, before the Secretariat within a period of 30 natural
days following the date on which the present license was granted.
2.8 Registration of contracts. Contracts for the provision or permitted services
held by the licensees or concessionaries of public telecommunication networks
must be registered in the telecommunications registration.
3. Rates and Commercial Aspects.
3.1 Rates. Rates of services hereunder may be established freely by the Licensee
in terms which allow the provision thereof on satisfactorily quality,
competitive, safety and continuance conditions. Such rates shall be
registered before the Commission.
The Licensee must place the applicable tariffs registered before the Commission
in a visible place in the public telephone apparatus, in conformity with article
12 of the Regulation.
3.2 Accounting. The Licensee must carry out independing accounting of costs and
income for the service which is the object of the
<PAGE>
present license, in conformity with the legal and administrative provisions,
which in that case, are issued by the Secretariat.
4. Information and Verification.
4.1 Information. The Licensee is obligated to provide the Commission a report on
the location of their public telephone apparatus, which includes the telephone
number, brand and model of said apparatus, in conformity with article 7 of the
Regulation. For each apparatus, the number of minutes of local service and long
distance calls made in each period must be indicated. This information will be
of public character.
Furthermore, for the great understanding of the operation of the service, as
required by the Commission, in the form and terms which the same determines,
said information can be consulted by the public in general, save that which, by
its nature, is considered legally confidential.
4.2 Verification. The licensee is obligated to allow property credited
inspectors or verifiers from the Commission access to their installations on
those occasions necessary to carry out inspections of the same and to
technically and administratively verify their operation.
5. Jurisdiction and Competence.
<PAGE>
5.1 For everything related to the construance and compliance of this License,
unless that to be solved administratively by the Secretariat, the Licensee
hereby submits to the jurisdiction and competence of federal courts seated in
Mexico City, Federal District, and therefore waives to any other jurisdiction.
Mexico, Federal District, February 20, 1997.
UNDERSECRETARY OF COMMUNICATIONS
(Signature)
LICENSEE
(Signature)
JESUS ENRIQUEZ PEREZ
<PAGE>
EXHIBIT 10.26
TRANSLATION FROM SPANISH
(National coat of arms which is read as follows: UNITED MEXICAN STATES
COMMUNICATION AND TRANSPORTATION SECRETARIAT)
Seal: 4991 (stamped in all pages)
PERMIT GRANTED BY THE COMMUNICATION AND TRANSPORTATION SECRETARIAT, HEREINAFTER
"THE SECRETARIAT" TO SERVICIOS DE INFRAESTRUCTURA, S.A. DE C.V. TO PROVIDE
PACKAGE SWITCHING DATA TRANSMISSION SERVICES.
ANTECEDENTS
1. Servicios de Infraestructura, S.A. de C.V. hereinafter "THE LICENSEE" is a
business company duly constituted under the Mexican laws, same that has
credited its legal status by means of the public document No. 6929
authenticated before the faith of the Notary Public No. 40 in and for the
City of Naucalpan de Juarez, State of Mexico.
2. The legal representative of "THE LICENSEE" credited his legal status by the
Notarized Testimony No. 6929 issued on March 31, 1992 before the faith of
the Notary Public No. 40 in and for the City of Naucalpan de Juarez, State
of Mexico.
3. On July 29 of 1994, "THE LICENSEE" requested in writing to "THE SECRETARIAT"
a permit to provide package switching data transmission services.
According to the antecedents and based on the provisions of Articles 3, 8, 9,
40, 41, 48 and other related articles of the Communication General Thoroughfare
Law; 3, 6, 8, 30, 32, 34, 35 and 38 of the Telecommunication Regulations and 22
of the Transportation and Communication Secretariat By-Laws, it is hereby
granted the following
PERMIT
The Federal Government by means of "THE SECRETARIAT" grants a permit to
Servicios de Infraestructura, S.A. de C.V. so that the latter renders, at
national level, the package switching data transmission services using as
support for the sending of signals, telecommunication public networks duly
authorized by "THE SECRETARIAT", same that is described below:
PACKAGE SWITCHING DATA TRANSMISSION SERVICES.- The service consists of
providing users the communication of data by means of a system configured
by a set of nodes equipped with package switches and data concentrators, a
system control center and by means of the links, channels and
telecommunication circuits necessary for the interconnection of nodes
between each other as well as to allow users to have access to the system.
<PAGE>
This permit is hereby granted according to the following
CONDITIONS
1. The present permit is ruled by the Communication General Thoroughfare Law,
by the Telecommunication Regulations, by the Federal Rights Law and by every
legislation that may be issued and applicable to the subject; by the
subscribed Agreements, Covenants and Treaties and by any related instruments
that may be subscribed and ratified in future by the Mexican Government and
by the conditions stipulated in this permit.
2. The present permit only covers the provision of the package switching data
transmission service with the characteristics stated in the approved
technical memory same that is an integral part of the same. "THE LICENSEE"
may provide, previous specific permit, direct value added telecommunication
services by means of a separate accountancy or throughout filials or
subsidiaries when "THE SECRETARIAT" may indicate it.
3. "THE LICENSEE" shall initially provide the data transmission service subject
matter of the present permit by means of 2 nodes located in Mexico city,
Federal District and Monterrey, N. L. The system's center of control in
Mexico City and the initial total capacity shall be 144 ports.
The system shall support protocols from the Telecommunication
Standardization Sector (previously CCITT) X.3, X.28, X.29 for asynchronous
terminals; X.25 for synchronous terminal; X.32 for switched telephone public
network access; X.75 for interconnection with similar networks and other
protocols that may be defined in order to ensure the rendering of the
service under open network architecture criteria.
4. Any amendment to the above stated shall be previously submitted to "THE
SECRETARIAT", same that shall resolve everything related to the requested
amendments. "THE LICENSEE" shall previously obtain the corresponding permits
from "THE SECRETARIAT" for the installation and operation of supplementary
local networks of telecommunications or national links via satellite it
intends to operate for the rendering of the services object of this permit.
5. "THE LICENSEE" shall submit, to get the approval, within a 6 month period
following the issuance of this permit, its network numbering plan same that
shall conform to the specified in the national standards and in the
international recommendation applicable to the subject.
6. "THE LICENSEE" shall continuously and efficiently provide the package
switching data transmission service complying with the quality operating
standards stated by "THE SECRETARIAT".
7. "THE LICENSEE" shall install and start the rendering of the service subject
matter of this permit within the next six month period from the date of the
present permit and
2
<PAGE>
notify it to "THE SECRETARIAT" within the 15 day period following the
starting of its operation.
8. For the rendering of the telecommunication service herein licensed, only
telecommunication public networks duly authorized by "THE SECRETARIAT" shall
be used both for the communications required by "THE LICENSEE" as well as
for those needed for the access of users to the system.
9. "THE SECRETARIAT" reserves the right to grant other permit or permits in
favor of third parties so that the latter are able to exploit, within the
same geographic area or in a different area, services that are identical or
similar to the services subject matter of this permit.
10. The operation of the services and the permit related installations shall not
interfere with other authorized telecommunication services or networks, nor
affect their quality; otherwise, "THE LICENSEE" shall make any amendment
that may be necessary at satisfaction of "THE SECRETARIAT" in order to avoid
or eliminate them.
11. The telecommunication equipment used in the rendering of the services object
of this permit shall be homologated by "THE SECRETARIAT". Also, "THE
LICENSEE" shall connect to the system any terminal equipment of user that is
homologated by "THE SECRETARIAT", therefore it shall not oblige the user to
acquire any equipment together with it, nor other goods or services as a
condition to have the service provided.
12. "THE LICENSEE" shall use the most advanced technology that is available for
the installation of its system and shall carry out any extension and
modification according to the technological breakthroughs allowing the
rendering of an efficient service in terms of quality and coverage.
13. If the service is suspended for a period over 72 consecutive hours, "THE
LICENSEE" shall grant an allowance to the users for the part of the fee
corresponding to the time that such shutoff may last even when the
suspension results from acts of God or force majeure and without prejudice
of the administrative sanction that may be applicable.
14. "THE LICENSEE" shall submit to "THE SECRETARIAT" within the following 60
natural day period from the term of this permit, the basis and criteria of
commercialization used with users for the services provided by the latter.
The amendments to such basis and criteria shall be notified to "THE
SECRETARIAT" within the following 30 natural day period from their
execution.
15. "THE LICENSEE" shall be the only responsible before users for the rendering
of the licensed services, therefore, "THE SECRETARIAT" is released from any
liability that may emerge.
16. As conditions of this permit the stipulations provided in the
Telecommunication bylaws related to the inspection, surveillance,
warranties, rights, obligations, sanctions, supply of information, economic
competence, operation of subsidiaries or filial corporations,
3
<PAGE>
subsidies to service, accountancy, fees, interconnection and those
applicable to the specific service being authorized are considered.
17. If it may be necessary to agree with some foreign government the
interconnection of the system, "THE LICENSEE" shall carry out before the
Mexican Government, by means of "THE SECRETARIAT" any transaction that may
be necessary for the celebration of the respective agreement. The
interconnection contracts celebrated with national or foreign companies
shall be previously sanctioned by "THE SECRETARIAT" same that may amend them
when it deems that they damage the interests of other network operators, of
the user of the service or of the country as a whole.
18. "THE LICENSEE" shall cover the fees stipulated in the Federal Rights Law in
relation to its permit.
19. "THE LICENSEE" shall pay to the Federal Government, as a contribution, in
accordance with Article 110 of the Communication General Thoroughfare Law 5%
of the fee income obtained from the licensed services.
"THE LICENSEE" shall cover such contribution every three month period within
the first month after the end of the respective quarter, in national
currency, in the offices of "THE SECRETARIAT" and by a document issued to
the latter. Likewise, it shall submit before "THE SECRETARIAT" a copy of the
evidences of the quarterly payment as well as the financial statements
evidencing the correct sum of their contribution to the Federal Government.
20. In no case "THE LICENSEE" may directly or indirectly transfer nor assess,
alienate or grant as a trust the present permit and the rights derived from
it to third parties, without the previous approval of "THE SECRETARIAT".
21. "THE LICENSEE" shall allow the inspecting officers from "THE SECRETARIAT"
who are duly credited, the access to its facilities all the times that may
be necessary in order to examine them and verify them both, technically and
administratively.
22. "THE LICENSEE" shall submit to "THE SECRETARIAT" for the latter's approval,
the fee that it may apply to the rendering of the services object of this
permit as well as the modifications made to the same.
23. "THE LICENSEE", in no case, may apply preferential practices preventing the
equitably in the rendering of the service object of this permit or of any
other it may support on.
24. "THE LICENSEE" shall submit to "THE SECRETARIAT", every year, the
configuration of its installations object of the present permit, including
the amount of subscribers and the way to link the nodes to have access to
the network, as well as the number and location of the switching nodes,
concentrators and ports for each population where the service is operated,
as well as the investments that may be made.
4
<PAGE>
25. "THE LICENSEE" shall provide to "THE SECRETARIAT" the reports and data that
may be requested by the latter such as statistics of service, user reports,
technical and financial documents or any other that may be requested and
related to the rendering of the service.
26. "THE LICENSEE" shall participate in the elaboration of the national
technical standards related to the service subject matter of this permit
when "THE SECRETARIAT" may request it.
27. When "THE LICENSEE", because it may deem that it is convenient for its
interests, does not wish to continue providing the services object of this
permit or allow the reduction of the coverage or amount of the same, it
shall notify it to "THE SECRETARIAT" within a 30 day period in advance so
that the latter issues the related resolution according to the provisions of
law.
28. In order to ensure the compliance with the obligations derived from this
permit, "THE LICENSEE" shall constitute a bond within a 30 natural day
period, with an authorized bonding company for the sum of N$1,000,000.00
(One Million New Pesos 00/100 Nat. Cy.) before the Federation Treasury, in
favor of "THE SECRETARIAT". This bond shall be in force during the term of
the permit. "THE LICENSEE" shall increase it within a period not exceeding
10 working days from the day following the date of reception of the
respective notice, when "THE SECRETARIAT" may deem it necessary.
The policy issued of the related bond shall be contracted according to the
form of bond approved by the Federation Treasury and according to the
provisions of the applicable laws.
29. The exercise of the rights of the present permit implies the unconditional
acceptance of all its term by "THE LICENSEE".
30. The present permit shall be in force for 20 years from the date of the same
and shall be extended for period of another 20 years, provided that "THE
LICENSEE" may have met the conditions imposed by this permit and that it
requests it within a 5 year period previous to its expiration and that it
accepts the new conditions for the rendering of the service that "THE
SECRETARIAT" may impose taking into consideration the public interest.
31. This permit may be revoked in case of noncompliance with the stipulations
comprised in the Telecommunication By-Laws or as a result of any of the
causes indicated below:
I. Failure to efficiently and regularly render the services subject
matter of this permit, in spite of the related warning by "THE
SECRETARIAT".
II. In case of total or partial suspension of the services without the
previous authorization from "THE SECRETARIAT" and without a justified
cause.
5
<PAGE>
III. In case of a reiterated noncompliance with the obligations imposed in
this permit previous warning in writing by "THE SECRETARIAT".
IV. Due to the non conformance to the technical parameters that "THE
SECRETARIAT" may state for the operation of the services subject
matter of this permit.
V. Due to the rendering of telecommunication services not comprised in
this permit without the previous authorization of "THE SECRETARIAT".
VI. Due to the lack of notice to "THE SECRETARIAT" on the modifications
made to its authorized installations or in relation to the conditions
in which services are operated.
VII. In case of assignment, transfer, mortgage, assessment or alienation of
any nature of all or part of this permit or the rights derived from
the same to a third party without the previous approval by "THE
SECRETARIAT".
VIII. Due to declared bankruptcy or as a result of a judicial resolution.
The revocation of this permit shall be subject to the procedure provided under
Article 34 of the Communication General Thoroughfare Law.
In Mexico City, Federal District on this _______________________ of 1994.
EFFECTIVE SUFFRAGE NOT REELECTION
THE C.E.O.
ILLEGIBLE SIGNATURE
JOSE MARIA RIVAS MONCAYO, ESQ.
INITIALS.
On the left margin of this page a first rectangular seal is stamped same that is
read as follows:
CTS
OCT/11/1994
On the left margin of this page a second rectangular seal is stamped same that
is read as follows:
CPSHO
COMMUNICATON POLICIES AND STANDARDS HEAD OFFICE
OCTOBER 11, 1994
MAIL
ILLEGIBLE
6
<PAGE>
EXHIBIT 10.27
TELECOMMUNICATION SERVICE CONTRACT, ENTERED INTO, ON THE ONE HAND, BY AMERICAN
TELESOURCE INTERNATIONAL DE MEXICO, S.A. DE C.V., HEREINAFTER CALLED THE
"CLIENT", REPRESENTED BY MR. JESUS ENRIQUEZ PEREZ, AND ON THE OTHER PART, BY
AVANTEL, S.A., AS SERVICE RENDERER, HEREINAFTER CALLED "AVANTEL", REPRESENTED BY
MR. JORGE L. RODRIGUEZ.
1. Through its legal representative, the CLIENT states:
a. That the party he represents, is a limited responsibility corporation with
variable capital, chartered in accordance with the legislation of Mexico as set
forth in Public Writ number 19,977, dated June 20th, 1995, sworn before lawyer
Francisco Xavier Arredondo Galvan, Notary Public number 173 of Mexico, D.F., and
registered in the Property and Commercial Public Registry of Mexico, D.F., under
the merchandising number 202960, dated August 1st, 1995.
b. That he has been sufficiently empowered to enter into the present Contract
on behalf of his CLIENT, as is stated in the same Public Writ referred to in the
previous paragraph, that the same empowerment has not been revoked, limited nor
modified in any manner as of this date.
c. That his CLIENT has the necessary permit to establish, operate, and exploit,
a public telephone service marketer enterprise, granted by the Federal
Government through the Department of Communications and Transportation dated
February 20th, 1997, in the following states: Baja California, Baja California
Sur, Campeche, Coahuila, Colima, Chihuahua, Federal
1
<PAGE>
District, Durango, Guanajuato, Guerrero, Jalisco, Nuevo Leon, Oaxaca, Quintana
Roo, Sonora, Sinaloa, Tamaulipas, Veracruz and Yucatan.
d. That his CLIENT wants to contract with AVANTEL oral long distance telephone
services for the CLIENT's TELEPHONE APPARATUS OF PUBLIC USE that he may install
in Mexico.
e. That his CLIENT is aware that the services AVANTEL offers are subject to the
conditions of the concession granted AVANTEL dated September 15th, 1995, to the
regulations of the Federal Telecommunications Law, and other legal regulations
applicable, as well as AVANTEL's Rates, CFT no. 1, and AVANTEL's Commercial
Practices Code, in effect at present, all of them with the corresponding
authorization and registry before the appropriate authorities, and in accordance
with applicable legislation.
f. That his CLIENT entered into a service contract with American Telesource
International, Inc., an American company authorized by the FCC to render long
distance national and international service in the United States of America.
II. AVANTEL states through its legal representative:
a. That the party he represents is a corporation chartered in accordance with
Mexican laws, as is shown in Public Writ no. 33868, dated October 11th, 1994,
sworn before lic. Roberto Nunez y Banderas, Notary Public no. 1, of Mexico,
Federal District, and registered in the Property and Commercial Public Registry
of Mexico, D.F., under the merchandising number 193800.
2
<PAGE>
b. That he has been sufficiently empowered to enter into the present Contract
on behalf of AVANTEL, and that the same empowerment has not been revoked,
limited nor modified in any manner as of this date.
c. That, on September 15th, 1995, it received, from the Federal Government
through the Department of Communications and Transportation, a concession to
install, operate, and exploit, a Public Telecommunication Network; and that it
has the necessary permits, authorizations, and/or registrations, to render the
telecommunication services that is the subject of this contract.
d. That it has the necessary technical capacity, technology, and the knowledge,
technical support and personnel to comply with the duties derived from this
contract of telecommunication services.
e. That it has entered into an interconnection contract with MCI International
Telecommunications Corporation.
III. Both parties declare:
a. That they are in accord with the technical and economic specifications that
accompany the present contract as attached documents "A" and "B", respectively,
that are considered an integral part of the present Contract, and their
stipulations apply to AVANTEL's services that will be rendered in accordance
with the present document.
Based in the previous statements, both parties agree to enter into the
following:
CLAUSES
3
<PAGE>
FIRST. DEFINITIONS
Both parties agree, that for the effect of this contract and attachments, the
following terms will have the meaning stated as follows:
LOCAL ACCESS. The necessary means and equipment to connect the CLIENT's
TELEPHONE APPARATUS OF PUBLIC USE to AVANTEL's Public Telecommunication Network
will be understood as such.
SELFDIALER. External equipment, property of the CLIENT, that connects in the
public line of the TELEPHONE APPARATUS OF PUBLIC USE through which the automatic
sequence signaling of several prerecorded numbers, without the user's
involvement, for his communication with AVANTEL centrals.
CLIENT's TELEPHONE APPARATUS OF PUBLIC USE. The CLIENT's telecommunication
terminal equipment connected through or without wires to a public
telecomunication network, to render public telephone service, and where the
national and international long distance calls that are given to AVANTEL for
transmission will originate. The list of the locations of said telephone
apparatus are specified in Attachment "C", which has been signed by both parties
as an integral part of the present Contract.
COMMERCIAL PRACTICES CODE. AVANTEL has registered the Commercial Practices Code
before the appropriate authorities, and which can be modified by AVANTEL.
AVANTEL'S PUBLIC TELECOMMUNICATION NETWORK. The infrastructure of equipment,
devices, and apparatus, as well as the linkages for the transmission of
telecomunication signals through which
4
<PAGE>
AVANTEL renders telecomunication services, will be understood as such, in
accordance with the concession referred to in the above statements.
RATES. AVANTEL's Rates CFT no. 1, registered before the competent authorities
and which can be modified by AVANTEL.
SECOND. OBJECTIVE OF THIS CONTRACT
Through the present contract, AVANTEL undertakes to render to the CLIENT a long
distance telephone service for the CLIENT's TELEPHONE APPARATUS OF PUBLIC USE
according to the following stipulations:
. All international long distance calls made through the CLIENT's TELEPHONE
APPARATUS OF PUBLIC USE will be rendered by the international carrier to which
AVANTEL delivers the call in the corresponding international port, to the long
distance international operator American Telesource International, Inc.
at San Antonio, Texas, United States of America.
. All national long distance calls performed directly by users, will be
delivered in the destination points through AVANTEL's Public Telecommunication
Network, and delivered through the local operator according to the number
signaled by the user.
AVANTEL's long distance network in cities wherein there is interconnection with
local operators, will be accessed through presubscription of the CLIENT's
TELEPHONE APPARATUS OF PUBLIC USE lines to AVANTEL, by means of presubscription
applications, and in cities wherein there is no interconnection, access will
5
<PAGE>
be granted through alternative means. Ways of access and services to be rendered
are specified in Attachment "A". Both parties agree that the services referred
to in the present Contract, will be provided according to the presubscription
schedule defined by competent authorities in view of the existence of
interconnection between AVANTEL and the local operator, and will only be
provided in the Federal States mentioned in the CLIENT's authorization referred
to in paragraph C in chapter I of the statements of this document.
THIRD. SERVICE DEFINITION
Both parties agree that the telecommunication services furnished by AVANTEL to
the CLIENT under the present Contract are services subject service rates, and
are, therefore, subject to register before a competent authority and changes
made by AVANTEL.
AVANTEL undertakes, under the present Contract, to furnish the services referred
to in this Contract, with the understanding that if the CLIENT requires any
other additional service or a substitution of those agreed upon, both parties
will define and approve said services previously and by writing.
FOURTH. COUNTERCONSIDERATION
The counterconsideration and form of payment for the services that are the
subject of the present Contract, will be covered by the CLIENT in accordance
with the stipulations established in the present paragraph and Attachment "B";
prices and discounts included in said Attachment are based on AVANTEL's rates
for authorized Public Telephone marketers.
6
<PAGE>
Both parties agree that the counterconsideration agreed upon is based in a
minimum monthly consumption on the part of the CLIENT of $2 000 000.00 (Two
million pesos 00/100 Mexican currency), which must be reached in a time limit no
longer than three (3) months after the signature of the present Contract.
In case of non compliance with the minimum monthly consumption, the CLIENT will
reimburse AVANTEL the difference resulting from the discount granted and earned
during the three (3) initial months and the discount accrued in accordance with
his real volume as per AVANTEL's rate CFT no. 1, registered with the competent
authorities.
In case that the CLIENT continues with the non compliance mentioned in the
previous paragraph, for each 5% (five per cent) less as regards the required
minimum volume 3 (three) percentage points will be deducted from the applicable
discount.
Rates and discounts agreed on are conditions by the fact that 80% (eighty per
cent) of the total volume of traffic will be generated by the CLIENT's TELEPHONE
APPARATUS OF PUBLIC USE connected by wire and originated in the cities opened to
presubscription in accordance with the schedule established by competent
authorities and that there is interconnection between AVANTEL and the local
carrier, and that the traffic in the cities wherein there is no interconnection
between AVANTEL and the local carrier, together with the total traffic generated
by cellular telephones does not exceed 20% (twenty per cent) of the total
traffic handled by the CLIENT.
7
<PAGE>
For each 5 (five) percentage points of reduction in traffic as mentioned in the
previous paragraph, as regards the total traffic generated by the CLIENT's
TELEPHONE APPARATUS OF PUBLIC USE connected by wire in the cities opened to
presubscription in accordance with the schedule established by competent
authorities and there is interconnection between AVANTEL and the local carrier,
3 (three) percentage points will be discounted from the "Discount Table D 1.5"
set forth in Attachment "B", with the limit of the relationship permitted being
70% (seventy per cent) of the total traffic volume.
FIFTH. PROCEDURE FOR TRAFFIC EVALUATION
Quarterly, starting with the end of the grace period, AVANTEL will review the
list of the total traffic carried by its web, and will apply the criterion set
forth in the last two paragraphs of clause fourth to determine the applicable
discount. Likewise, it will determine the difference in money between the
discount resulting from this mechanism and the discount the CLIENT had at the
start of the quarter. The difference will be credited to the CLIENT or to
AVANTEL, as may be the case in the next invoice period.
In case the traffic is less than 70% (seventy per cent) of the total traffic
volume generated by the CLIENT's TELEPHONE APPARATUS OF PUBLIC USE connected by
wire to the cities opened to presubscription, and that there is interconnection
between AVANTEL and the local carrier, a general discount will be applied the
following quarter as follows:
8
<PAGE>
a. 32% (thirty-two per cent) if and when the total traffic generated by the
CLIENT's TELEPHONE APPARATUS OF PUBLIC USE connected by wire to the cities
opened to presubscription, and that there is interconnection between AVANTEL and
the local carrier during the quarter, is not less than 60% (sixty per cent).
The maximum period in which the CLIENT can remain in non compliance of the
traffic volumes, as set forth in the previous paragraph, will be two consecutive
quarterly periods (the period of grace and the first quarter for the first six
months after the signature of the present Contract).
Both parties agree that the rates and special discounts applied are subject
to change in case AVANTEL's rate CFT no. 1 is modified.
Payment will be made by the CLIENT within the 20 (twenty) natural days after
the corresponding invoice date of issuance or the date that the invoice
establishes as due date.
All the invoices will be paid in national currency in accordance with
following guidelines:
TELLERS PAYMENT
Banks where this payment will be received:
All national branches of the following banks:
BANAMEX
BANCOMER
SERFIN
The client will receive one of the two invoice forms and pay slip authorized by
AVANTEL:
9
<PAGE>
One of the forms (IBM) has the invoice and pay slip in the same page, and the
last one can be detached.
The other form contains on separate pages the invoice and pay slip, the last
page with the heading "Pay Slip".
The pay slip features are the following:
Three lines of information, corresponding to each bank.
There is a box where the client must specify the amount to be paid, as well as
the manner of payment (cash or cheque).
In case payment is made with cheque, the client must include the cheque number
and the amount of the same.
It is important to take into consideration the fact that one cheque must be used
for each pay slip, that is, one cheque cannot be used to pay different client or
pay slip numbers.
In case payment is made in cash, only the amount must be included.
Procedure:
The client goes to any of the bank branches mentioned above, taking into
consideration the following restrictions:
BANAMEX and SERFIN: They will accept payment in cash and cheques from any
bank, but these must be from the same city of the branch where the cheque is
presented.
BANCOMER: Will accept cash and only BANCOMER cheques from the same city where
the branch is located.
The client fills out his pay slip and pays in any of the cashiers available.
The cashier will detach the lower part of the pay slip, or the pay slip itself
and will stamp the upper part as being
10
<PAGE>
received. This will be the client's receipt for any explanation that may be
required, and it is important that the client keeps it.
The pay slip has no due date, has no restriction whatsoever as regarding minimum
or maximum amounts, and the client can pay amounts that are different from those
set forth in the invoice.
The branches can receive payment with a photocopy of the pay slip.
In case the client has no pay slip, he must call Client Services and request
Bancomer's info line, with which he can go to any of the bank branches and fill
out Form CIE (Concentracion Inmediata Empresarial) with which he can pay.
In no case can the banks charge the client any commission fee for the reception
of payment, and they cannot condition the payment to the fact that the client
has an account with the bank.
AVANTEL reserves the right that in case the client makes payments with a cheque
that is returned for any cause, will charge 20% of the cheque's amount plus IVA
as a commission fee for the cheque returned.
CHARGES TO VISA, MASTERCARD AND AMERICAN EXPRESS CARD
The client that desires this service must request it in two ways.
The client will receive with his invoice a letter authorizing this service,
which must be filled out and returned to AVANTEL via fax or mail (prepaid). It
is important that the client
11
<PAGE>
checks reception of this letter via telephone with his bank services advisor.
He can also request this service via telephone through his service to client
executive (for GB and NA) or through a telephone call to the telecollection
group, telephone number 91-800-01318 (massive markets), which will request from
the client the data contained in said letter, as follows:
Client number
Name
Address
Telephone
Card no.
Issuing institution
Due date
IRS number
With this information, the client may be registered for the service, that will
begin starting with the next invoice cycle that corresponds to the client.
The charge will always be made on the payment deadline of each invoice.
The card's balance wherein the charge will appear, will serve as a receipt for
the client.
If the card is rejected by the bank, the client will receive a notice from the
collection department, and must make his payment in another manner and furnish
another card in case he wishes to continue with the service, which will be
applied on the following invoice.
12
<PAGE>
When the client wishes to cancel the service or make any change in the card
number, it will be necessary for him to advise (preferably) in writing or by
telephone to his AVANTEL's service to client advisor. The changes will go into
effect with the next invoice.
ELECTRONIC FUND TRANSFERS
This service is available only to clients that have electronic bank service in
their company or home previously contracted with the following banks:
CITIBANK
ATLANTICO
BITAL
SERFIN
The client must enter into his bank electronic services, in the screen
corresponding to transfers to third parties, filling the data requested in each
case and furnishing as reference his AVANTEL client number, which is necessary
for identification and application of the same in our system.
The client must communicate with his service to client advisor to notify his
payment.
The electronic bank will furnish the transaction receipt, which the client must
keep for future reference.
It is important to take into consideration that, when this method is used, the
banks do charge a commission fee for the transaction.
AUDIOMATICO BANAMEX
Available for BANAMEX's clients having this service.
13
<PAGE>
The client must dial the audiomatico Banamex telephone service number 725-2525
or 725-3333, therein the client must follow the directions related to service
payments, furnishing the following information:
Original account
Capture line
Amount payable.
Audiomatico will provide a confirmation code number, which should be kept for
future reference.
In case the CLIENT disagrees with the invoice, he should address his
inconformity to AVANTEL within the 30 (thirty) day period after the invoice
cycle. The CLIENT will be required to pay the amount under dispute once AVANTEL
and the CLIENT both agree to determine that said charges are applicable to the
CLIENT, in which case the full amount will be considered due.
In case that any of the payments is not received by AVANTEL, for any causes
under the CLIENT's liability, the CLIENT agrees to pay to AVANTEL as interest,
4% (four per cent) monthly on the pending balance, from the maturity of the
agreed upon period and until the date the payment is made, besides the right
that AVANTEL will hold to cancel the service for lack of payment.
SIXTH. TAXES
Any charges specified in Attachment "B" are derived from the services rendered
in accordance with the present Contract, does not include the taxes accrued for
the rendering of the services. These taxes must be paid by the CLIENT, except
those
14
<PAGE>
that in accordance with applicable legislation will be for AVANTEL's account.
SEVENTH. GENERAL CONDITIONS FOR SERVICE RENDERING
The services to be rendered will be in accordance with the following guidelines:
SERVICE AVAILABILITY AND ATTENTION TO FAILURES. Services will be offered and
charged on a monthly basis of 24 (twenty-four) hours a day and will be available
24 (twenty four) hours a day, 7 (seven) days of the week.
AVANTEL will supervise the rendering of service 7 (seven) days a week, 24
(twenty-four) hours a day, so that in case of interruption, the CLIENT can call
AVANTEL so that a telephone report is filed to the effect that the necessary
repairs are made to renew the services in accordance with the Contract
stipulations and AVANTEL's Commercial Practices Code.
ALTERNATE ENTRY. In those cases that AVANTEL determines, and it is technically
and legally feasible, and in accordance with the stipulations in Attachment "A",
AVANTEL will offer the entry to its long distance network by means of
Autodialers, which will be furnished by the CLIENT.
INTERRUPTION BONUSES. In case of a service interruption for more than 72
(seventy-two) consecutive hours, and the cause is directly chargeable to
breakdowns in AVANTEL's Public Telecomunication Network, AVANTEL will grant the
CLIENT a bonus for the time the service was interrupted, equivalent to the
average per hour invoiced in the three (3) months previous to the interruption
multiplied by the number of hours of
15
<PAGE>
interruption. The CLIENT agrees that AVANTEL will not be responsible for losses
resulting from unauthorized entry, or alteration, theft, destruction, equipment
used, software, data or systems used in connection with AVANTEL services.
WORKSITE OF THE SERVICES. The services subject to the present Contract will be
rendered only in the authorized cities to the CLIENT, in accordance with his
permission, and specifically, in the CLIENT's TELEPHONE APPARATUS OF PUBLIC USE.
LOCAL ENTRY CHARGES. The CLIENT is responsible of the Contracts and payment of
all charges derived from local entries and local telephone calls that he must
pay to the corresponding telephone company.
SERVICE PLATFORM. The platform that AVANTEL uses to provide the service, can be
modified by AVANTEL if and when it does no affect the services rendered to the
CLIENT.
EIGHTH. SECURITY MEASURES
The CLIENT is liable for undertaking all the measures needed to obtain security
systems in order to protect its equipment and its TELEPHONE APPARATUS OF PUBLIC
USE.
The CLIENT agrees that AVANTEL will not be responsible for losses incurred by an
unauthorized entry, alteration, theft, destruction, or use of equipment, data or
systems wherever they may be that are used in connection with AVANTEL's
services.
NINTH. RESPONSIBILITIES OF THE PARTIES
The CLIENT is responsible for the acquisition of the CLIENT'S TELEPHONE
APPARATUS OF PUBLIC USE as well as the monthly payment of the local entry of the
telephone lines, so that he
16
<PAGE>
frees AVANTEL from any responsibility regarding any question related to said
equipment including, without this meaning a limitation, maintenance, damages,
deaths, etc.
Likewise, the CLIENT will be responsible for the acquisition, instalation,
management, programming, operation, and maintenance of Autodialers, and of any
activity related to their operation.
The CLIENT will pay AVANTEL the cost of all the national and international long
distance calls generated in the CLIENT's TELEPHONE APPARATUS OF PUBLIC USE, and
carried by AVANTEL, so that AVANTEL will not condone any debt to the CLIENT for
problems of fraud or collection on the part of the same to the final users.
AVANTEL is nor responsible for the problems that the CLIENT may have in
collecting the money from the CLIENT's TELEPHONE APPARATUS OF PUBLIC USE.
TENTH. INDUSTRIAL AND INTELLECTUAL PROPERTY
Both parties recognize that, through the signature of this Contract, they
acquire no right whatsoever on the industrial and intellectual property rights
of the other party, stating, without this meaning a limitation, of patents,
trademarks, commercial names, author rights, etc., as well as licenses, permits,
authorization of industrial and intellectual property use derived from the
compliance of the present Contract.
In the same manner, both parties recognize that all the industrial and
intellectual property rights, including without this meaning a limitation, of
trade marks, patents, author's
17
<PAGE>
rights, among others, that may be found in any software, and/or documents
tendered by AVANTEL to the CLIENT, or used by AVANTEL for service rendering,
will remain exclusively an AVANTEL's property of its licensees.
ELEVENTH. CONFIDENTIALITY.
For the aims of this Contract, "Confidential Information" means the information
revealed by one of the parties ("Owner") to the other party ("receiver")
regarding with the fundamental theme of this Contract, including, without this
being a limitation, information or data regarding the client, the business,
and/or technical information, and, even though it is not related with said
theme, was revealed as a result of a conversation between both parties; that in
any case was revealed to the receiver by the owner or by an affiliate of the
owner, in the form of a document or other tangible form that showed an adequate
legend showing its confidential or proprietary nature; or that it was revealed
initially verbally or visually, and that was identified as confidential at the
moment of its revelation and the receiver had been provided with a written
resume with said contents, and marked with said legend within the time lapse of
15 (fifteen) natural days after the initial revelation.
During the life of this Contract, the receiver can use the owner's confidential
information only for the aims of this Contract, and must protect said
confidential information so that it is not revealed to other parties, applying
the same care he uses to protect its own information of similar importance, but
in no case using less than reasonable care.
18
<PAGE>
The receiver can reveal confidential information received according to this
Contract to (i) his affiliates that agree beforehand and in writing that they
will be constrained by this Contract and (ii) and their employees and advisors,
and the employees and advisors of the affiliates, that may have need of knowing
it, for the aims of this Contract, and that there are required to protect the
confidential information against unauthorized use and revelation.
The restrictions of this Contract regarding the use and revelation of
confidential information will not be applicable to information that:
(i) Was in the receiver's possession or control at the moment of being
revealed, in accordance with this Contract, by means of an unintentional act of
the receiver and not required by the owner not to reveal it.
(ii) Is or becomes public domain by means of an unintentional act on the
part of the receiver, and that occurs after the moment when the owner
communicated it to the receiver.
(iii) Was received by the receiver from a third party with liberty to
reveal it, and that was not required by the owner or
(iv) Was developed independently by the receiver, without reference to
any confidential information of the owner or any other information that the
owner may reveal as confidential to a third party, or
19
<PAGE>
(v) Was identified by the owner as information that no longer is his
property nor is confidential.
Confidential information revealed in accordance with this Contract, including
information contained in computer programs or stored in electronic devices, is
and will be the owner's property. Said information, existing in tangible form,
must be returned promptly to the owner, if he requests it in writing.
Both parties cannot reveal any of the terms or conditions of this Contract
without the previous written consent of the other party, unless they be required
by any competent authority, in which case they must advise the other party of
this requirement.
All specifications, plans, drawings, technical or commercial data or information
with a confidential nature, as well as any other confidential material
("information") furnished or revealed to the CLIENT by AVANTEL will be
considered as AVANTEL's exclusive property.
During the life of the present Contract and during a period of five (5) years
starting on the date of the ending of this contract, neither party can reveal,
disclose, let other know, sell, interchange, rent, or in any other manner,
transfer any information related to the present Contract to a third party.
The terms and conditions of this clause will persist at the ending of this
Contract, during a period of five (5) years.
Any non compliance of the terms and conditions of this clause, during the life
of this Contract, by any of the parties, will cause the immediate ending of the
Contract by the
20
<PAGE>
untransgressing party, without injury to the legal actions that may accrue.
TWELFTH. MARKETING AND ADVERTISING
Neither party can issue advertising that may involve the other party without its
previous consent. Notwithstanding, AVANTEL can disclose the name of the CLIENT
and services rendered for curricular ends.
In case that the CLIENT desires to make any advertising, including AVANTEL's
name, its trademarks, designs, etc., the CLIENT must request a previous written
approval by AVANTEL of said materials.
THIRTEENTH. LABOR RELATIONS
Both parties recognize that there is no labor relation between AVANTEL and the
CLIENT's employees, nor between the CLIENT and AVANTEL's employees.
Both parties expressly stipulate that they recognize the labor relations they
have with their respective employees, as they are employers that satisfy the
requirements referred to in article 13th of the Federal Labor Law, freeing the
other party of any worker responsibility in the terms indicated by articles 13
and 15 of said law, as well as by any regulations that may be applicable.
In no case, and under no concept, will AVANTEL be considered a direct or
substitute employer of the CLIENT's personnel, nor can the CLIENT be considered
as a direct or substitute employer of AVANTEL's personnel.
21
<PAGE>
Both parties agree that during the life of the present Contract, they cannot
contract any employee of the other party without its previous written
authorization.
FOURTEENTH. DURATION
The present Contract will be valid for one (1) year, starting of the date of
signature and can be renewed by written agreement of both parties.
FIFTEENTH. CANCELLATION
The CLIENT can cancel the present Contract without need of a judicial statement,
by means of a notice given to AVANTEL with at least 30 (thirty) days beforehand
in case that AVANTEL does not comply with any of the obligations as established
in the present Contract, and it is not corrected within the 30 (thirty) days
after the notice.
AVANTEL can cancel the present Contract without need of a judicial statement by
means of a notice given to the CLIENT with at least 30 (thirty) days beforehand
in the following stipulated cases, and said non compliance is not corrected
within the 30 (thirty) days after the notice:
(a) In case that the CLIENT does not pay the amounts owed AVANTEL in the terms
agreed on.
(b) In case that the CLIENT uses the services offered through the present
Contract for telephone lines different to those established in Attachment "C" of
the present Contract, and that they are not CLIENT's TELEPHONE APPARATUS OF
PUBLIC USE.
22
<PAGE>
(c) In case of any non compliance with the rest of the CLIENT's obligations in
accordance with this Contract and its Attachments.
SIXTEENTH. ACTS OF GOD AND FORCE MAJEURE
Neither party is bound to comply with the obligations of the present Contract in
case of force majeure or acts of God, in which case the party that incurs in
non compliance because of these causes, must notify the other party of the
situation, and must renew the compliance of its obligations at the moment that
the cause that originated the non compliance, ceases.
Market fluctuations and a drop in the business volume of the CLIENT are not
considered force majeure.
SEVENTEENTH. ASSIGNMENT OF RIGHTS
Neither party can assign their rights or obligations derived from the present
Contract without the previous written consent of the other party.
Any assignment carried out without the previous consent of the other party will
be considered null and void.
EIGHTEENTH. RENOUNCEMENT OF RIGHTS
No omission of the parties to exert any right contained in the present Contract
at any time, can be considered as a renouncement of the exercise of said rights,
or a renouncement to exercise all and each of the stipulations of the present
Contract in the future.
In case that one or more clauses contained in the present Contract become null
and void because of the applicable legislation, the rest of the clauses will
keep all their legal
23
<PAGE>
force, and those that have been annulled will be replaced by mutual consent,
with the intention of coming as near as possible to the stipulations of the
annulled clauses.
NINETEENTH. ATTACHMENTS
The Attachments that form an integral part of the present Contract are the
following:
Attachment "A" --SERVICE SPECIFICATIONS
Attachment "B" --COUNTERCONSIDERATIONS
Attachment "C" --SITE SPECIFICATION OF THE CLIENT's TELEPHONE APPARATUS OF
PUBLIC USE
TWENTIETH. ADDRESSES
For any communication that the parties must tender due to the present Contract
or its Attachments, the parties state the following conventional addresses:
AVANTEL, S.A.
Av. Paseo de la Reforma 265
Col. Cuauhtemoc
06500 Mexico, D.F.
Attention:
Lic. Fernanda Cesarman Mateos
Subdirectora de Asuntos Juridicos
Av. Paseo de la Reforma 265 -5o. piso
Col. Cuauhtemoc
06500 Mexico, D.F.
THE CLIENT
Torres Adalid # 7
Col. del Valle
24
<PAGE>
03100 Mexico, D.F.
TWENTY-FIRST. INTEGRAL AGREEMENT
Both parties agree to abide by the terms and conditions of the present Contracts
and Attachments to the same. For all unforeseen issues in this Contract, the
parties will abide by the stipulations of AVANTEL's rate and Commercial
Practices Code in effect.
TWENTY-SECOND. APPLICABLE JURISDICTION
For the interpretation and compliance of the present Contract, both parties
expressly submit themselves to the applicable legislation and Federal Courts in
Mexico, Federal District, renouncing both parties expressly to the privileges
that may accrue to them because of the present or future addresses or for any
other cause.
This present Contract was read in the presence of both parties, who having
understood its content and legal scope, are in accordance to bind themselves to
the terms and conditions contained in the present instrument, in witness
thereof, both parties sign it in Mexico, D.F., on the sixth day of the month of
June, 1997.
AVANTEL, S.A. AMERICAN TELESOURCE INTERNATIONAL
DE MEXICO, S.A. DE C.V.
(Signature) (Signature)
MR. JORGE L. RODRIGUEZ MR. JESUS ENRIQUEZ PEREZ
25
<PAGE>
EXHIBIT 10.28
AMERICAN TELESOURCE INTERNATIONAL, INC.
REGISTRATION RIGHTS AGREEMENT
-----------------------------
July 31, 1997
James R. Leininger, M.D.
8122 Datapoint Drive, Suite 900
San Antonio, Texas 78229
Dear Dr. Leininger:
This will confirm that in consideration of your agreement on the date
hereof to purchase an aggregate of 922,558 shares (the "Shares") of Common
Stock, no par value (the " Common Stock"), of American TeleSource International
Inc., an Ontario, Canada corporation (the "Company"), and warrants to purchase
an aggregate of 200,000 shares of Common Stock (the "Warrant Shares") pursuant
to that certain Investment Agreement of even date herewith (the "Investment
Agreement") by and between the Company and you, and as an inducement to you to
consummate the transactions contemplated by the Investment Agreement, the
Company covenants and agrees with you as follows:
1. Certain Definitions. As used in this Agreement, the following
-------------------
terms shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission,
----------
or any other federal agency at the time administering the Securities Act.
"Common Stock" shall mean the Common Stock, no par value, of the
------------
Company, as constituted as of the date of this Agreement.
"Common Shares" shall mean the shares of Common Stock purchased
-------------
by you.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Registration Expenses" shall mean the expenses so described in
---------------------
Section 8.
"Restricted Stock" shall mean (i) the Common Shares; (ii) any
----------------
other shares of the Common Shares issued in respect of the foregoing because of
stock splits, stock dividends, reclassifications, recapitalizations, or similar
events and (iii) the Warrant Shares; however, excluding Common Shares or Warrant
Shares which have been (a) registered under the Securities Act pursuant to an
effective registration statement
<PAGE>
filed thereunder and disposed of in accordance with the registration statement
covering them or (b) publicly sold pursuant to Rule 144.
"Rule 144" shall mean Rule 144 promulgated by the Commission
--------
under the Securities Act.
"Securities Act" shall mean the Securities Act of 1933, as
--------------
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean the expenses so described in
----------------
Section 8.
"Warrant Shares" shall mean the shares of Common Stock issuable
--------------
upon exercise of the Warrant.
2. Restrictive Legend. Each certificate representing any Restricted
------------------
Stock shall, except as otherwise provided in this Section 2 or in Section 3, be
stamped or otherwise imprinted with a legend substantially in the following
form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS IT
HAS BEEN REGISTERED UNDER THAT ACT OR AN EXEMPTION FROM REGISTRATION IS
AVAILABLE."
A certificate shall not bear such legend if in the opinion of counsel
satisfactory to the Company the securities being sold thereby may be publicly
sold without registration under the Securities Act, provided that the form of
the opinion shall be reasonably satisfactory to the Company and its legal
counsel.
3. Notice of Proposed Transfer. Prior to any proposed transfer of
---------------------------
any Restricted Stock (other than under the circumstances described in Sections
4, 5 or 6), the holder thereof shall give written notice to the Company of its
intention to effect such transfer. Each such notice shall describe the manner
of the proposed transfer and, if requested by the Company, shall be accompanied
by an opinion of counsel satisfactory to the Company to the effect that the
proposed transfer may be effected without registration under the Securities Act,
whereupon the holder of such stock shall be entitled to transfer such stock in
accordance with the terms of its notice, provided that the form of the opinion
shall be reasonably satisfactory to the Company and its legal counsel. Each
certificate for Restricted Stock transferred as above provided shall bear the
legend set forth in Section 2, except that such certificate shall not bear such
legend if (i) such transfer is in accordance with the provisions of Rule 144 (or
any other rule permitting public sale without registration under the Securities
Act) or (ii) the opinion of counsel referred to above is to the further effect
that the transferee and any subsequent transferee (other than an affiliate of
the Company) would be entitled to transfer such securities in a public sale
without registration under the Securities Act. The restrictions provided for in
this Section 3 shall not apply to securities which are not required to bear the
legend prescribed by Section 2 in accordance with the provisions of that
Section.
2
<PAGE>
4. Required Registration.
---------------------
(a) At any time after December 31, 1997, you may request the
Company to register under the Securities Act all or any portion of the shares of
Restricted Stock held by you for sale in the manner specified in such notice.
The only securities which the Company shall be required to register pursuant
hereto shall be shares of Common Stock. Notwithstanding anything to the contrary
contained herein, no request may be made under this Section 4 within 180 days
after the effective date of a registration statement filed by the Company
covering a firm commitment underwritten public offering in which the holders of
Restricted Stock shall have been entitled to join pursuant to Sections 5 or 6
and in which there shall have been effectively registered all shares of
Restricted Stock as to which registration shall have been requested.
(b) Following receipt of any notice under this Section 4, the
Company shall use its best efforts to register under the Securities Act, for
public sale in accordance with the method of disposition specified in such
notice from you, the number of shares of Restricted Stock specified in such
notice. The Company shall be obligated to register Restricted Stock pursuant to
this Section 4 on two occasions only, provided, however, that such obligation
-------- -------
shall be deemed satisfied only when a registration statement covering all shares
of Restricted Stock specified in notices received as aforesaid, for sale in
accordance with the method of disposition specified by the requesting holders,
shall have become effective and, if such method of disposition is a firm
commitment underwritten public offering, all such shares shall have been sold
pursuant thereto.
(c) The Company shall be entitled to include in any registration
statement referred to in this Section 4, for sale in accordance with the method
of disposition specified by the requesting holders, shares of Common Stock to be
sold by the Company for its own account, except as and to the extent that, in
the opinion of the managing underwriter (if such method of disposition shall be
an underwritten public offering), such inclusion would adversely affect the
marketing of the Restricted Stock to be sold. Except for registration
statements on Form S-4, S-8 or any successor thereto, the Company will not file
with the Commission any other registration statement with respect to the Common
Shares, whether for its own account or that of other stockholders, from the date
of receipt of a notice from requesting holders pursuant to this Section 4 until
the completion of the period of distribution of the registration contemplated
thereby.
(d) The Company proposes to effect a plan of arrangement (the
"Arrangement") under the laws of the Province of Ontario, Canada, pursuant to
which the Common Stock of the Company will be exchanged for the common stock
(the "Delaware Common Stock") of a Delaware corporation formed for such purpose.
In connection with the Arrangement, the Company will file a registration
statement on Form S-4 under the Securities Act for the purpose of registering
the Delaware Common Stock. Notwithstanding Section 4(a), the Company shall use
its best efforts to register the shares of the Delaware Common Stock issuable in
exchange for the Common Shares
3
<PAGE>
pursuant to the Arrangement and the shares of the Delaware Common Stock issuable
upon exercise of the Warrant pursuant to such registration statement on Form
S-4.
5. Incidental Registration. If the Company at any time (other than
-----------------------
pursuant to Section 4 or Section 6) proposes to register any of its securities
under the Securities Act for sale to the public, whether for its own account or
for the account of other security holders or both (except with respect to
registration statements on Forms S-4, S-8 or another form not available for
registering the Restricted Stock for sale to the public), each such time it will
give written notice to you of its intention so to do. Upon the written request
from you, received by the Company within 30 days after the giving of any such
notice by the Company, to register any of your Restricted Stock (which request
shall state the number of shares of Restricted Stock to be registered and the
intended method of disposition thereof), the Company will use its best efforts
to cause the Restricted Stock as to which registration shall have been so
requested to be included in the securities to be covered by the registration
statement proposed to be filed by the Company, all to the extent requisite to
permit the sale or other disposition by the holder (in accordance with its
written request) of such Restricted Stock so registered. In the event that any
registration pursuant to this Section 5 shall be, in whole or in part, an
underwritten public offering of Common Stock, only shares of Restricted Stock
which the requesting holders agree to include in the underwriting may be
included in the registration, and the number of shares of Restricted Stock to be
included in such an underwriting may be reduced if and to the extent that the
managing underwriter shall be of the opinion that such inclusion would adversely
affect the marketing of the securities to be sold by the Company therein,
provided, however, that such number of shares of Restricted Stock shall not be
- -------- -------
reduced unless the number of shares proposed to be included in such underwriting
for the account of any person other than the Company or you is subject to a
similar pro rata reduction.
6. Registration on Form S-3. If at any time after December 31, 1998
------------------------
the Company is a registrant entitled to use Form S-3 or any successor thereto to
register such shares, then you may request that the Company use its best efforts
to register under the Securities Act on Form S-3 or any successor thereto, for
public sale in accordance with the method of disposition specified by you, the
number of shares of Restricted Stock specified by you. Whenever the Company is
required by this Section 6 to use its best efforts to effect the registration of
Restricted Stock, each of the procedures and requirements of Section 4 shall
apply to such registration, provided, however, that there shall be no limitation
-------- -------
on the number of registrations on Form S-3 which may be requested and obtained
under this Section 6.
7. Registration Procedures. If and whenever the Company is required
-----------------------
by the provisions of Sections 4, 5 or 6 to use its best efforts to effect the
registration of any shares of Restricted Stock under the Securities Act, the
Company will, as expeditiously as possible:
(a) prepare and file with the Commission a registration
statement (which, in the case of an underwritten public offering pursuant to
Section 4, shall be on Form S-1 or other form of general applicability
satisfactory to the managing underwriter
4
<PAGE>
selected as therein provided) with respect to such securities and use its best
efforts to cause such registration statement to become and remain effective for
the period of the distribution contemplated thereby (determined as hereinafter
provided);
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
the period specified in paragraph (a) above and comply with the provisions of
the Securities Act with respect to the disposition of all Restricted Stock
covered by such registration statement in accordance with the sellers' intended
method of disposition set forth in such registration statement for such period;
(c) furnish to you and to each underwriter such number of copies
of the registration statement and the prospectus included therein (including
each preliminary prospectus) as such persons reasonably may request in order to
facilitate the public sale or other disposition of the Restricted Stock covered
by such registration statement;
(d) use its best efforts to register or qualify the Restricted
Stock covered by such registration statement under the securities or "blue sky"
laws of such jurisdictions as the sellers of Restricted Stock or, in the case of
an underwritten public offering, the managing underwriter reasonably shall
request, provided, however, that the Company shall not for any such purpose be
-------- -------
required to qualify generally to transact business as a foreign corporation in
any jurisdiction where it is not so qualified or to consent to general service
of process in any such jurisdiction;
(e) use its best efforts to list the Restricted Stock covered by
such registration statement with any securities exchange on which the Common
Stock of the Company is then listed;
(f) immediately notify you and each underwriter under such
registration statement, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the happening of any event
of which the Company has knowledge as a result of which the prospectus contained
in such registration statement, as then in effect, includes an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances then existing;
(g) if the offering is underwritten and at your request, use its
best efforts to furnish on the date that Restricted Stock is delivered to the
underwriters for sale pursuant to such registration: (i) an opinion dated such
date of counsel representing the Company for the purposes of such registration,
addressed to the underwriters and to you, stating that such registration
statement has become effective under the Securities Act and that (A) to the best
knowledge of such counsel, no stop order suspending the effectiveness thereof
has been issued and no proceedings for that purpose have been instituted or are
pending or contemplated under the Securities Act, (B) the registration
statement, the related prospectus and each amendment or supplement thereto
comply as to form in all material respects with the requirements of the
Securities Act (except that such counsel need not express any opinion as to
financial statements contained
5
<PAGE>
therein) and (C) to such other effects as reasonably may be requested by counsel
for the underwriters or by you or your counsel and (ii) a letter dated such date
from the independent public accountants retained by the Company, addressed to
the underwriters and to you, stating that they are independent public
accountants within the meaning of the Securities Act and that, in the opinion of
such accountants, the financial statements of the Company included in the
registration statement or the prospectus, or any amendment or supplement
thereof, comply as to form in all material respects with the applicable
accounting requirements of the Securities Act, and such letter shall
additionally cover such other financial matters (including information as to the
period ending no more than five business days prior to the date of such letter)
with respect to such registration as such underwriters reasonably may request;
and
(h) make available for inspection by you, any underwriter
participating in any distribution pursuant to such registration statement, and
any attorney, accountant or other agent retained by you or by such underwriter,
all financial and other records, pertinent corporate documents and properties of
the Company, and cause the Company's officers, directors and employees to supply
all information reasonably requested by you, any such underwriter, attorney,
accountant or agent in connection with such registration statement.
For purposes of Section 7(a) and 7(b) and of Section 4(c), the period
of distribution of Restricted Stock in a firm commitment underwritten public
offering shall be deemed to extend until each underwriter has completed the
distribution of all securities purchased by it, and the period of distribution
of Restricted Stock in any other registration shall be deemed to extend until
the earlier of the sale of all Restricted Stock covered thereby and 120 days
after the effective date thereof.
In connection with each registration hereunder, you will furnish to
the Company in writing such information with respect to yourself and the
proposed distribution by them as reasonably shall be necessary in order to
assure compliance with federal and applicable state securities laws.
In connection with each registration pursuant to Sections 4, 5 or 6
covering an underwritten public offering, the Company and you agree to enter
into a written agreement with the managing underwriter in such form and
containing such provisions as are customary in the securities business for such
an arrangement between such underwriter and companies of the Company's size and
investment stature, including your agreement not to sell or dispose of any
Common Shares, other than pursuant to the offering, for 180 days following the
effective date.
8. Expenses. All expenses incurred by the Company in complying with
--------
Sections 4, 5 and 6, including, without limitation, all registration and filing
fees, printing expenses, fees and disbursements of counsel and independent
public accountants for the Company, fees and expenses (including counsel fees)
incurred in connection with complying with state securities or "blue sky" laws,
fees of the National Association of Securities Dealers, Inc., transfer taxes,
fees of transfer agents and registrars, costs of insurance and fees and
disbursements of one counsel for you, but excluding any Selling Expenses, are
called "Registration Expenses." All underwriting discounts and selling
6
<PAGE>
commissions applicable to the sale of Restricted Stock are called "Selling
Expenses."
The Company will pay all Registration Expenses in connection with each
registration statement under Sections 4, 5 or 6. All Selling Expenses in
connection with each registration statement under Sections 4, 5 or 6 shall be
borne by you in proportion to the number of shares sold by you.
9. Indemnification and Contribution.
--------------------------------
(a) In the event of a registration of any of the Restricted
Stock under the Securities Act pursuant to Sections 4, 5 or 6, the Company will
indemnify and hold harmless you, each underwriter of such Restricted Stock
thereunder and each other person, if any, who controls such underwriter within
the meaning of the Securities Act or who renders services to you or such
underwriter as an accountant or legal counsel, against any losses, claims,
damages or liabilities, joint or several, to which you, such underwriter,
controlling person, accountant or legal counsel may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any registration statement under which such Restricted Stock was registered
under the Securities Act pursuant to Sections 4, 5 or 6, any preliminary
prospectus or final prospectus contained therein, or any amendment or supplement
thereof, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse you, each such
underwriter, each such controlling person and each such accountant and legal
counsel for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action as such are incurred, provided, however, that the Company
-------- -------
will not be liable in any such case if and to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission so made in conformity
with information furnished by you, any such underwriter, any such controlling
person or any such accountant or legal counsel in writing specifically for use
in such registration statement or prospectus.
(b) In the event of a registration of any of the Restricted
Stock under the Securities Act pursuant to Sections 4, 5 or 6, you will
indemnify and hold harmless the Company, each person, if any, who controls the
Company within the meaning of the Securities Act, each officer of the Company
who signs the registration statement, each director of the Company, the
Company's independent public accountants, the Company's legal counsel, each
underwriter and each person who controls any underwriter within the meaning of
the Securities Act, against all losses, claims, damages or liabilities, joint or
several, to which the Company or such officer, director, underwriter or
controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the registration statement under
which such Restricted Stock was registered under the Securities Act pursuant to
Sections 4, 5 or 6, any preliminary
7
<PAGE>
prospectus or final prospectus contained therein, or any amendment or supplement
thereof, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse the Company and each
such officer, director, underwriter and controlling person for any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action, provided, however,
-------- -------
that you will be liable hereunder in any such case if and only to the extent
that any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in reliance upon and in conformity with information pertaining to you
furnished in writing to the Company by you specifically for use in such
registration statement or prospectus, and provided, further, however, that your
-------- ------- -------
liability hereunder shall be limited to the proportion of any such loss, claim,
damage, liability or expense which is equal to the proportion that the public
offering price of the shares sold by you under such registration statement bears
to the total public offering price of all securities sold thereunder, but not in
any event to exceed the proceeds received by you from the sale of your
Restricted Stock covered by such registration statement.
(c) Promptly after receipt by an indemnified party hereunder of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party hereunder,
notify the indemnifying party in writing thereof, but the omission so to notify
the indemnifying party shall not relieve it from any liability which it may have
to such indemnified party other than under this Section 9 and shall only relieve
it from any liability which it may have to such indemnified party under this
Section 9 if and to the extent the indemnifying party is prejudiced by such
omission. In case any such action shall be brought against any indemnified party
and it shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in and, to the extent it
shall wish, to assume and undertake the defense thereof with counsel
satisfactory to such indemnified party, and, after notice from the indemnifying
party to such indemnified party of its election so to assume and undertake the
defense thereof, the indemnifying party shall not be liable to such indemnified
party under this Section 9 for any legal expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation and of liaison with counsel so selected, provided,
--------
however, that, if the defendants in any such action include both the indemnified
- -------
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be reasonable defenses available to it which are
different from or additional to those available to the indemnifying party or if
the interests of the indemnified party reasonably may be deemed to conflict with
the interests of the indemnifying party, the indemnified party shall have the
right to select separate counsel and to assume such legal defenses and otherwise
to participate in the defense of such action, with the expenses and fees of such
separate counsel and other expenses related to such participation to be
reimbursed by the indemnifying party as incurred.
(d) In order to provide for just and equitable contribution to
joint liability under the Securities Act in any case in which either (i) you, or
any of your agents, makes a claim for indemnification pursuant to this Section 9
but it is judicially determined (by
8
<PAGE>
the entry of a final judgment or decree by a court of competent jurisdiction and
the expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that this Section 9 provides for indemnification in such case, or (ii)
contribution under the Securities Act may be required on your part or any of
your controlling persons in circumstances for which indemnification is provided
under this Section 9; then, and in each such case, the Company and you will
contribute to the aggregate losses, claims, damages or liabilities to which they
may be subject (after contribution from others) in such proportion so that you
are responsible for the portion represented by the percentage that the public
offering price of your Restricted Stock offered by the registration statement
bears to the public offering price of all securities offered by such
registration statement, and the Company is responsible for the remaining
portion; provided, however, that, in any such case, (A) you will not be required
-------- -------
to contribute any amount in excess of the public offering price of all such
Restricted Stock offered by you pursuant to such registration statement; and (B)
no person or entity guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) will be entitled to contribution from
any person or entity who was not guilty of such fraudulent misrepresentation.
10. Changes in Common Stock. If, and as often as, there is any
-----------------------
change in the Common Stock by way of a stock split, stock dividend, combination
or reclassification, or through a merger, consolidation, reorganization or
recapitalization, or by any other means, appropriate adjustment shall be made in
the provisions hereof so that the rights and privileges granted hereby shall
continue with respect to the Common Stock as so changed.
11. Rule 144 Reporting. With a view to making available the benefits
------------------
of certain rules and regulations of the Commission which may at any time permit
the sale of the Restricted Stock to the public without registration, at all
times after 90 days after any registration statement covering a public offering
of securities of the Company under the Securities Act shall have become
effective, the Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144;
(b) use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act; and
(c) furnish to you forthwith upon request a written statement by
the Company as to its compliance with the reporting requirements of Rule 144 and
of the Securities Act and the Exchange Act, a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents so filed
by the Company as such holder may reasonably request in availing itself of any
rule or regulation of the Commission allowing such holder to sell any Restricted
Stock without registration.
12. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants to you as follows:
9
<PAGE>
(a) The execution, delivery and performance of this Agreement by
the Company have been duly authorized by all requisite corporate action and will
not violate any provision of law, any order of any court or other agency of
government, the Articles of Incorporation or By-laws of the Company or any
provision of any indenture, agreement or other instrument to which it or any or
its properties or assets is bound, conflict with, result in a breach of or
constitute (with due notice or lapse of time or both) a default under any such
indenture, agreement or other instrument or result in the creation or imposition
of any lien, charge or encumbrance of any nature whatsoever upon any of the
properties or assets of the Company.
(b) This Agreement has been duly executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the Company,
enforceable in accordance with its terms.
13. Miscellaneous.
-------------
(a) All covenants and agreements contained in this Agreement by
or on behalf of any of the parties hereto shall bind and inure to the benefit of
the respective successors and assigns of the parties hereto (including without
limitation, transferees of any Restricted Stock), whether so expressed or not.
(b) All notices, requests, consents and other communications
hereunder shall be in writing and shall be mailed by certified or registered
mail, return receipt requested, or postage prepaid, addressed as follows:
(i) if to the Company or any other party hereto, at the
address of such party set forth in the Investment Agreement;
(ii) if to any subsequent holder of Restricted Stock, to it
at such address as may have been furnished to the Company in writing by such
holder;
(iii) or, in any case, at such other address or addresses as
shall have been furnished in writing to the Company (in the case of a holder of
Restricted Stock) or to the holders of Restricted Stock (in the case of the
Company) in accordance with the provisions of this paragraph.
(c) This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, without giving effect to
conflict of law or choice of law rules.
(d) This Agreement may not be amended or modified, and no
provision hereof may be waived, without the written consent of the Company and
the holders of at least two-thirds of the outstanding shares of Restricted
Stock.
(e) This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, and all of which together shall
constitute one and the same instrument.
10
<PAGE>
(f) References to an "article," "section" or a "subsection" when
used without further attribution shall refer to the particular articles,
sections or subsections of this Agreement.
(g) The obligations of the Company to register shares of
Restricted Stock under Sections 4, 5 or 6 shall terminate on the second
anniversary of the date of this Agreement.
(h) The Company shall not grant to any third party any
registration rights more favorable than any of those contained herein, so long
as any of the registration rights under this Agreement remains in effect.
(i) If any provision of this Agreement shall be held to be
illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall attach only to such provision and shall not in any manner
affect or render illegal, invalid or unenforceable any other provision of this
Agreement, and this Agreement shall be carried out as if any such illegal,
invalid or unenforceable provision were not contained herein.
11
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the day and year first above written.
AMERICAN TELESOURCE INTERNATIONAL INC.
By:
----------------------------------
Title:
-------------------------------
/s/ JAMES R. LEININGER, M.D.
--------------------------------------
James R. Leininger, M.D.
12
<PAGE>
EXHIBIT 11
AMERICAN TELESOURCE INTERNATIONAL INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the period from
December 17, 1993 (Inception) For the year ended For the year ended
through July 31, 1994 July 31, 1995 July 31, 1996
---------------------------- ------------------ ------------------
<S> <C> <C> <C>
Primary
Earnings:
Net loss ($343,528) ($2,004,167) ($ 2,204,727)
============================ ================== ==================
Shares:
Weighted average number of common shares
outstanding 9,146,091 13,922,018 19,928,372
Incremental shares assuming conversion of
warrants ERR 162,360 175,539
---------------------------- ------------------ ------------------
Weighted average number of common shares
outstanding as adjusted ERR 14,084,378 20,103,911
============================ ================== ==================
Primary earnings per common share
Net loss ERR ($0.14) ($0.11)
============================ ================== ==================
Fully Diluted
Earnings:
Net loss ($343,528) ($2,004,167) ($ 2,204,727)
Add: Interest expense applicable to
convertible debt 0 6,000 12,000
---------------------------- ------------------ ------------------
Net loss - as adjusted ($343,528) ($1,998,167) ($2,192,727)
============================ ================== ==================
Shares:
Weighted average number of common shares
outstanding 9,146,091 13,922,018 19,928,372
Incremental shares assuming conversion of
convertible debt 0 100,000 200,000
Incremental shares assuming conversion of
warrants ERR 202,229 240,513
---------------------------- ------------------ ------------------
Weighted average number of common shares
outstanding as adjusted ERR 14,224,247 20,368,885
---------------------------- ------------------ ------------------
Fully diluted earnings per common share
Net loss, as adjusted ERR ($0.14)(a) ($0.11)
---------------------------- ------------------ ------------------
<CAPTION>
For the nine month periods ended April 30,
1996 1997
-------------- --------------
<S> <C> <C>
Primary
Earnings:
Net loss ($ 1,560,630) ($ 3,002,321)
============== ==============
Shares:
Weighted average number of common shares
outstanding 19,131,000 24,979,284
Incremental shares assuming conversion of
warrants 192,443 166,653
-------------- --------------
Weighted average number of common shares
outstanding as adjusted 19,323,443 25,145,937
============== ==============
Primary earnings per common share
Net loss ($ 0.08) ($ 0.12)
============== ==============
Fully Diluted
Earnings:
Net loss ($ 1,560,630) ($ 3,002,321)
Add: Interest expense applicable to
convertible debt 9,000 9,000
-------------- --------------
Net loss - as adjusted ($ 1,551,630) ($ 2,993,321)
============== ==============
Shares:
Weighted average number of common shares
outstanding 19,131,000 24,979,284
Incremental shares assuming conversion of
convertible debt 200,000 200,000
Incremental shares assuming conversion of
warrants 202,961 196,699
-------------- --------------
Weighted average number of common shares
outstanding as adjusted 19,533,961 25,375,983
============== ==============
Fully diluted earnings per common share
Net loss, as adjusted ($0.08) ($0.12)
============== ==============
</TABLE>
(a) 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 antidilutive effect.
<PAGE>
Exhibit 22
SUBSIDIARIES OF THE COMPANY
The subsidiaries of American TeleSource International Inc. are as follows:
<TABLE>
<CAPTION>
State or other
Company Jurisdiction of Incorporation
------- -----------------------------
<S> <C>
American Telesource International, Inc. Texas
American Telesource International de Mexico,
S.A. de C.V. Mexico
GlobalSCAPE, Inc. Delaware
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> JUL-31-1996 JUL-31-1997
<PERIOD-START> AUG-01-1995 AUG-01-1996
<PERIOD-END> APR-30-1996 APR-30-1997
<CASH> 0 1,355,717
<SECURITIES> 0 0
<RECEIVABLES> 0 1,908,014
<ALLOWANCES> 0 265,422
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 3,396,162
<PP&E> 0 3,151,856
<DEPRECIATION> 0 790,368
<TOTAL-ASSETS> 0 6,292,020
<CURRENT-LIABILITIES> 0 3,205,910
<BONDS> 0 1,353,024
0 0
0 0
<COMMON> 0 9,330,444
<OTHER-SE> 0 (7,597,358)
<TOTAL-LIABILITY-AND-EQUITY> 0 6,292,020
<SALES> 9,795,829 10,418,172
<TOTAL-REVENUES> 9,795,829 10,418,172
<CGS> 7,758,130 8,772,830
<TOTAL-COSTS> 11,264,351 13,210,382
<OTHER-EXPENSES> 0 135
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 103,377 209,976
<INCOME-PRETAX> (1,560,630) (3,002,321)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,560,630) (3,002,321)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,560,630) (3,002,321)
<EPS-PRIMARY> (.08) (.12)
<EPS-DILUTED> (.08) (.12)
</TABLE>
