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SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended July 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER:
AMERICAN TELESOURCE
INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 74-2849995
(State of Incorporation) (I.R.S. Employer
Identification No.)
12500 NETWORK BLVD. SUITE 407,
SAN ANTONIO, TEXAS
(Address of Principal 78249
Executive Office) (Zip Code)
(210) 558-6090
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
(Title of Class)
_______________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
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The aggregate market value of the Registrant's outstanding Common Stock
held by non-affiliates of the Registrant at October 27, 1998, was approximately
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$52,300,000. There were 45,637,316 shares of Common Stock outstanding at
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October 27, 1998, and the closing sales price on the NASDAQ/OTCB for the
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Company's Common Stock was $1.23 on such date.
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DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders to be held in December 1998, are incorporated by reference in Part
III hereof.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business...................................................... 2
Overview..................................................... 2
Strategy and Competitive Conditions.......................... 3
Direct Dial Services......................................... 3
Call Services................................................ 5
Network Management Services.................................. 7
Electronic Commerce Via Internet............................. 8
Network...................................................... 8
Licenses/Regulatory.......................................... 10
Employees.................................................... 12
Financial Information About Foreign and Domestic Operations.. 12
Additional Risk Factors...................................... 12
Item 2. Properties.................................................... 16
Item 3. Legal Proceedings............................................. 16
Item 4. Submission of Matters to a Vote of Security Holders........... 16
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................... 16
Item 6. Selected Financial and Operating Data......................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 18
General..................................................... 18
Liquidity and Capital Resources............................. 22
Inflation/Foreign Currency.................................. 23
Seasonality................................................. 23
Item 8. Financial Statements and Supplementary Data................... 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures......................... 46
PART III
Item 10. Directors and Officers of the Registrant...................... 46
Item 11. Executive Compensation........................................ 46
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................... 46
Item 13. Certain Relationships and Related Transactions................ 46
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.......................................... 46
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This Annual Report on Form 10-K contains certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act") and Section 21E of the Securities and Exchange
Act of 1934, as amended (the "Exchange Act"). Specifically, all statements
other than statements of historical facts included in this Annual Report on Form
10-K regarding the Company's financial position, business strategy and plans
and objectives of management of the Company for future operations are forward-
looking statements and based on the beliefs of the Company's management, as well
as assumptions made by and information currently available to the Company's
management. If used in this report, the words "anticipate," "believe," "could,"
"estimate," "expect," "intend," and words or phrases of similar import, as they
relate to the Company or Company's management, are intended to identify forward-
looking statements. Such statements reflect the current view of the Company
with respect to future events and are subject to certain risks, uncertainties
and assumptions related to certain facts including, without limitation, the
inability to obtain capital, 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 affecting the communications industry
generally or the Company specifically, increased or redirected competition
efforts, targeting of the Company's services or operation by competitors,
general U.S., Mexican and International economic conditions, customer relations,
relationships with vendors, the interest rate environment, seasonality, the
operation of the Company's network, damage, loss or malfunction of satellites,
the service interruptions or equipment failures, the failure of the Company's
sales force to produce anticipated results, transmission costs, product
introductions and acceptance, the inability to continue to generate new sources
of revenue, technological change, unavailability of leased transmission
facilities, changes in industry practices, one time events, failure to achieve
anticipated growth, loss of key personnel, technological changes, and other
factors described herein ("cautionary statements"). Reference is made to the
risks and uncertainties contained in Additional Risk Factors on page 12 of
this Annual Report on Form 10-K. Although the Company believes that the
expectations are reasonable, it can give no assurance that such expectations
will prove to be correct. Based upon changing conditions, any one or more of
these events described herein as anticipated, believed, estimated, expected or
intended may not occur. All prior and subsequent written and oral forward-
looking statements attributable to the Company or persons acting on its behalf
are expressly qualified in their entirety by this cautionary statement.
PART I.
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ITEM I. BUSINESS
OVERVIEW
The Company is a telecommunications provider, focusing on the market for
direct dial long distance, call services, and network management services
between the United States and Latin America, and within Latin America. Most of
the Company's current operations involve services between the U.S. and Mexico or
within Mexico. The Company owns various transmission facilities, including
teleports and switching facilities, and leases facilities of other providers as
necessary to complete its network. The Company's subsidiary GlobalSCAPE, Inc.,
("GlobalSCAPE") distributes software via the Internet.
The Company was formed on June 6, 1996 as a Delaware corporation under the
name of ATSI Merger Corp. The Company completed a Plan of Arrangement on May 11,
1998, by which the outstanding common shares of American TeleSource
International Inc., an Ontario, Canada, corporation were exchanged on a one-
for-one basis for the shares of the Company, resulting in ATSI-Canada becoming
the wholly-owned subsidiary of the Company.
The Company commenced operations in December 1993. The Company has six
principal operating subsidiaries, American TeleSource International, Inc., a
Texas corporation ("ATSI-Texas") and American TeleSource International de
Mexico, S.A. de C.V., a Mexican corporation ("ATSI-Mexico"), Sistema de
Telefonia Computarizada, S.A. de C.V., a Mexican corporation ("Computel"),
Servicios de Infraestructura, S.A. de C.V., a Mexican Corporation ("Sinfra"),
TeleSpan, Inc., a Texas corporation ("TeleSpan"), and GlobalSCAPE, a Texas
corporation.
Recent Developments
In August 1997, the Company completed the acquisition of Computel, thereby
significantly expanding its retail distribution channels in Mexico (see
Casetas). In May 1998, the Company signed an interconnection agreement with
Miditel S.A. de C.V. ("Miditel") pursuant to which Miditel will provide
transmission services for the Company's Mexico-originated calls. The Company's
teleport facility in Costa Rica began operations in September 1997. The
facility was constructed through a joint agreement between the Company and
Radiografica Costarricense, S.A. ("RACSA"), a telecommunications company owned
by the Costa Rican government. The Company signed a new satellite agreement
with Satelites Mexicanos, S.A. de C.V. ("SATMEX") in July 1998, which secured
the Company's current and planned satellite transmission needs for at least the
next two fiscal years.
During fiscal year 1999, the Company intends to consolidate operations of
Computel and ATSI-Mexico.
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STRATEGY AND COMPETITIVE CONDITIONS
The Company's mission is to become a full service international
telecommunications provider between niche markets in the United States and Latin
America and within Latin America. The Company has positioned itself to take
advantage of the deregulation and de-monopolization of the Latin American
telecommunications market, as well as the increasing demand for services in this
market. The Company has focused most of its initial efforts in Mexico, and from
inception through fiscal year 1997 has focused on a positioning strategy.
Fiscal year 1998 was the Company's first full year of operations in a de-
monopolized market in Mexico, and the first year of focusing on a growth (rather
than a positioning) strategy. The Company has some operations in Central
America as well, and intends to expand its operations in that region and the
rest of Latin America as the regulatory environment permits.
Less than a decade ago, all Latin American telecommunications services were
provided by state-run companies operating with large numbers of employees,
poorly developed infrastructures, and long lists of individuals waiting to
obtain services. Many of the Latin American countries have now revamped and are
in various stages of migration toward competitive, multi-carrier markets. Prior
to June 1995, Telefonos de Mexico ("Telmex") had a legal franchise to control
the entire market for local and long distance communications in Mexico. Any
foreign carrier desiring to terminate or originate traffic in Mexico was faced
with regulatory and competitive conditions that worked overwhelmingly in favor
of Telmex. As a result, the Company experienced high and unstable rates for
transmission services in Mexico from inception through fiscal 1997. Mexico has
made significant progress toward telecom liberalization since new laws began to
open the market to competition in June 1995. Since August 1996, at least
thirteen concessions for long distance services have been granted to Mexican
companies, creating conditions for long distance competition for the first time.
Recently concluded auctions resulted in eight new concessionaires for local
service which could begin operating as early as the fourth quarter of 1998.
At the same time that Latin American markets have been opening up, the
demand for telecommunications services between the United States and Latin
America (particularly Mexico) has been strengthened by the rapid growth of the
Hispanic segment of the United States population and the increase in trade
between Latin America and the United States. Mexico is the second ranking
country for all U.S. international outbound calls, and the U.S. is home to
several large Hispanic markets with ties to Mexico.
The Company has positioned itself to take advantage of these changing
market conditions. In 1994, the Company established its San Antonio
International Teleport and began providing telecommunications services between
the U.S. and Mexico via satellite. ATSI-Mexico was established in June 1995 to
support the Company's operations in Mexico and performs regulatory, sales,
marketing, planning, and technical maintenance services. The Company has also
obtained key licenses in Mexico during its positioning phase (see Licenses), and
believes that the significant time involved in obtaining these licenses is an
effective entry barrier to new competition. The Company has acquired additional
facilities and has contracted with three of the new long distance providers or
"Concesionarios" to complete its network in Mexico (see Network). The Company
believes that its owned network facilities give it an advantage over those
competitors who rely solely on leased transmission facilities in that it
provides the Company greater pricing flexibility. Increased competition among
long distance Concesionarios has resulted in lower costs to the Company, and as
the Company obtains additional interconnection agreements it should gain
leverage from a pricing standpoint. The Company has expanded its retail
distribution outlets through the acquisition of Computel and by adding pay
telephones (See Casetas, Pay Telephones). The Company is now focused on a
growth strategy in Mexico. During fiscal year 1999, the Company will apply for
its own concession which, if obtained, will give it the opportunity to
interconnect directly with local providers, and transport its own traffic at a
lower cost.
There is a similar trend toward deregulation in other Latin American
countries. Many commitments by Latin American governments, if fulfilled, will
likely lead to a substantially liberalized set of markets offering multiple
opportunities. Implementation dates for improved market access are being
challenged and renegotiated. The Company expects progress to continue unevenly
among various countries. The Company has established some operations in Costa
Rica, El Salvador, and Guatamala with the goal of expanding its services as
regulatory and market conditions permit. Ultimately the Company would like to
provide services throughout Latin America. (See Business -- Direct Dial
Services-Competitive Conditions, Business-Call Services-Competitive Conditions,
Business-Network Management Services-Competitive Conditions)
DIRECT DIAL SERVICES
During fiscal 1998, Company's direct dial services (calls not requiring
live or automated operator assistance) catered to Mexican citizens and tourists
in Mexico who needed access to telephones for making local and long distance
calls, and who also desired the convenience of paying for such calls with cash.
Utilizing its comercializadora license (see Licenses), ATSI-Mexico was one of
the first companies to install and operate pay telephones (see Call Services --
Pay Telephones) in
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Mexico. With its purchase of Computel, the Company owns and operates
approximately 134 casetas (see Call Services -- Casetas) in Mexico which allow
callers to place local, long distance or international calls in exchange for a
cash payment.
During the latter portion of fiscal 1998, the Company developed the
following direct dial long distance services in an effort to cater to the
Hispanic/Latino community in the U.S., and to further utilize available capacity
on its own international network infrastructure.
MEXICOnnect/(SM)/
MEXICOnnect (10-10-624) is offered to residential and business customers
allowing them to dial-around their presubscribed carrier by dialing 10-10-624 +
the area code + the telephone number. MEXICOnnect service is currently being
offered in the San Antonio metropolitan area with plans for expansion into
several other major Texas markets during fiscal year 1999.
1+Residential and Business
The Company began offering 1+ residential long distance service in October
1998, and intends to offer business service in fiscal year 1999. Under the 1+
program, customers presubscribe to the Company's network for all long distance
calls (domestic and international) made from their telephone number, eliminating
the need to dial any extra digits to reach the Company's network. The Company
is entering the market as a "switchless" reseller of 1+ service, but is
evaluating the purchase or partitioning of a tandem/gateway switch.
Competitive Conditions
Other telecommunications companies have paved the way for MEXICOnnect and
all other dial-around services. Currently, Telecom* USA and VarTec Telecom Inc.
("VarTec") are the Company's primary competitors in its target markets.
Americatel, S.A. de C.V. ("Americatel") and Telmex/Sprint Communications L.L.C.
("TSC") have announced that they plan to enter the major Hispanic markets in the
U.S. with long distance services. However, only Americatel has operational
services in a limited number of cities. Although TSC has been granted approval
to operate in the U.S. by the FCC, both AT&T and MCI/Worldcom have launched
efforts to have such approval set aside. TSC has been classified "dominant" on
its U.S.-Mexico route, and certain market entry conditions have been imposed by
the FCC which may inhibit TSC's ability to buy the market through pricing.
Telmex also has a negative public image to overcome with those Hispanics who
have immigrated to the U.S. In time, TSC will likely become ATSI's most
significant competitor. Many dial-around products are directed to high volume
users exceeding 20 minutes of usage per call. FCC statistics indicate the
average international call does not meet this minimum. Currently, the Company's
MEXICOnnect traffic to Mexico averages approximately 4 minutes per call. There
are numerous dial-around products on the market, offered by small and large
companies, and by long distance resellers as well as facilities-based carriers.
MEXICOnnect's competitive advantage is its focus on the Hispanic market, and the
elimination of per call minimums, monthly access fees, surcharges, and other
types of restrictions and small print that make dial-around discounts deceiving.
In comparison to long distance resellers, the Company has greater flexibility in
adjusting rates, as it has greater control over its own network.
The Company competes with the large carriers American Telephone & Telegraph
("AT&T"), MCI/WorldCom, and Sprint Communications Company, L.P. ("Sprint") as
well as numerous smaller companies for presubscribed long distance. In order to
capture and retain 1+customers, the Company is entering the market with a
reduced rate to Mexico. Price remains a primary concern for many consumers since
the technology is not distinguishable from one provider to another. The
Company's strengths include competitive domestic rates, as well as aggressive
international rates to Mexico. The Company is able to offer these rates and
still maintain profitability on this product as a result of its owned
facilities. Unlike some other providers, the Company's charges are included on
the customer's bill from the local phone company. The Company also offers the
convenience of bilingual customer service.
Sales and Marketing
Direct dial sales are supervised by the Senior Vice President, Sales and
Marketing based in San Antonio. The Company uses public media advertising to
market MEXICOnnect. The 1+ services are offered through outbound telemarketing
and direct sales.
Operations
Although the marketing for 1+ services is targeted to customers with a
higher demand for international direct dial calls, the customers' telephones are
presubscribed to the Company for all long distance services, including domestic
direct dial and operator-assisted long distance. The Company's call center (see
Call Center) provides operator-assisted calling for these customers.
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The Company bills MEXICOnnect and 1+ customers through a billing
clearinghouse that arranges for the Company's calls to be included on the
customer's bill from the local phone company. The billing clearinghouse
collects the payments due the Company as the local company collects the payments
from the customers.
CALL SERVICES
The Company's principal call service product is operator-assisted calling
for international calls originating in Mexico. The Company also owns pay
telephones and casetas in Mexico which the Company views primarily as
distribution channels for its direct dial and operator-assisted calling
products. The Company's services to Latin American travelers in the U.S.
generate additional revenue.
As of July 16, 1998, the Company ceased providing operator services for
domestic U.S. calls and international calls originating in Jamaica and the
Dominican Republic in order to focus on more profitable services.
Operator-Assisted Calling
The Company operates a call services center in San Antonio, Texas, 24 hours
a day, 365 days per year capable of processing collect, person-to-person, third-
party, calling card, and credit card calls. The operators speak English,
Spanish, and Portuguese. As of August 1, 1998, the Company employed 10 full-
time and 11 part-time operators. The primary sources of demand for call center
services are pay telephones and casetas in Mexico, hotel and resort operators,
and other call aggregators in Mexico, including independent marketing
representatives (see Hospitality and Other Call Aggregators).
In May 1998, the Company executed a facilities-based interconnection
agreement with Miditel S.A. de C.V., which, among other things, allows the
Company to use its teleport facilities to provide operator services for calls
made from Miditel payphones installed in rural communities. The Company
anticipates that as many as 5000 telephones could be connected to its network
under this agreement; however the number of phones that will actually be
connected and the timing of connections are uncertain at this time.
Pay Telephones
The Company owns pay telephones in various Mexican cities and resort areas,
including Cancun, Cozumel, Mazatlan, Puerto Vallarta, Acapulco, and Cabo San
Lucas. All of the Company's pay telephones are "intelligent" phones, meaning
that certain features are fully automated, reducing operating costs. The
Company's telephones accept pesos and U.S. quarters. Customers may also access a
Company operator for assistance in placing collect, third party, person-to-
person calls or credit card calls. Some of the Company's telephones are also
equipped with card readers, which will allow calls to be made with Mexican
credit cards, as well as Company-provided calling cards. However, such services
are not yet being offered.
During fiscal year 1998, the Company executed agreements with several
Mexican municipalities and resort communities for the installation of pay
telephones in public areas, including Puerto Vallarta, Acapulco, Cancun,
Tijuana, Cabo San Lucas, Huatulco, Puerto Escondido, and Puerto Angel in Oaxaca.
In May 1997, the Company signed an agreement to install pay telephones in the
Mexico City airport, and in November 1997, the Company completed the acquisition
of 300 pay telephones in Mexico from an independent marketing representative
that had been under contract with the Company for operator services,
Communicaciones del Caribe, S.A. de C.V. The Company is currently installing
payphones in Mexico City's mass transit metro system transfer stations pursuant
to an agreement with the transit authority.
In October 1998, the Company signed an agreement with AT&T under which the
Company's public pay telephones and casetas in Mexico will be programmed with a
"hot button" allowing callers to quickly access certain AT&T services. The
Company will receive a commission from each call processed by AT&T.
Payphones also generate some direct dial long distance revenue (users who
pay the entire cost of the call with coins) (see Direct Dial Services).
As of January 1997, the Company owned approximately 500 "charge-a-call"
telephones. These phones accessed a Company operator when the handset was
lifted, and permitted customers to place calls only through the Company's call
center. To increase revenue, the Company began replacing these telephones with
"intelligent" phones in July 1997. Intelligent phones are software driven
phones which are less expensive to operate and permit payment through a variety
of means. In June 1998 the Company was required to immediately decommission its
300 remaining "charge-a-call" pay telephones in response to charges made by the
Comision Federal de Telecomunicaciones ("COFETEL") that the charge-a-
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call phones were not authorized. Although the Company has completed the
replacement of these phones, the Company suffered lost revenue during the
replacement period, both from the immediate decommissioning of the 300 charge-a-
call phones and the diversion of pay telephone equipment that would have
generated new revenue if it had been installed at new sites.
Casetas
The Company's subsidiary Computel operates approximately 134 casetas in 70
cities in Mexico. Casetas are indoor calling centers strategically located to
serve travelers and the large population of the country who do not have personal
telephones. The Caseta utilizes an average of four telephone lines, with six to
eight telephones. Every location employs at least one attendant, who processes
calls, monitors call duration, collects money and runs daily reports on call
activity. In addition to local telephone call services, casetas offer domestic
Mexico and international long distance calling. Casetas also serve as a point-
of-sale for additional services such as fax and Internet.
Computel has established a highly recognized, positive corporate image in
Mexico, and is a leader in caseta-based services in Mexico.
Hospitality and Other Call Aggregators
The Company contracts for call services for international calls with hotel
and resort owners and other call "aggregators" (persons who control the rights
to direct operator-assisted calling from groups of telephones) in Mexico. The
Company pays the hospitality providers and aggregators a commission based on the
revenue generated by the telephones they control.
Other Services
The Company also provides certain call services for Latin Americans
traveling in the U.S. The Company offers a service by which pin numbers are
issued to Latin American travelers which enable them to use their credit cards
to place calls through the Company's Call Services Center. (Latin Americans
frequently do not have travel calling cards.) The Company also offers travel
cards which enable Mexican travelers to use their cellular phones to place
international calls to Mexico while in the United States.
Competitive Conditions
As of August 1998, there were 26 authorized payphone providers in Mexico,
of which Telmex is the largest. The Company believes it is the second largest
provider after Telmex in the tourist markets, where it has focused its efforts.
The Company's multi-pay payphones give it a significant advantage over its
largest competitor, Telmex, which accepts only pre-paid Telmex calling cards.
Vendors of the cards are often difficult to locate and denominations tend to be
higher than needed by consumers. Although other companies have plans to install
pay telephones, the Company believes that it will be one of the few providers
with its own network, allowing it to maintain flexibility with respect to rates.
Computel is the largest private caseta operator in Mexico with
approximately 134 casetas in 70 cities. As of August 1998, there were twelve
other caseta operators, with the next largest operator having 70 casetas. Key
factors favoring the Company's Casetas are the well recognized "Computel" name,
a reliable platform and billing system, and the provision of fax services which
are not offered by most competitors. As compared to pay telephones, casetas
offer privacy and comfort, as well as personalized attention needed by customers
who are not accustomed to using a telephone.
Competition in the hospitality/aggregator market revolves largely around
the amount of commission the telecommunications provider is willing to pay the
hotel or resort owner. The Company is currently focusing more on improving its
profitability rather than simply generating additional revenues, and it has
therefore lost ground to competitors willing to accept lower profit margins by
paying higher commissions. However, the Company believes it has a reputation as
a reliable provider, and it is also able to offer the value-added service of
intelligent pay telephones in hotel lobbies.
Seasonal variation in call volume is expected for hospitality and payphone
traffic, with peak months during the "tourist" season from January through July.
Sales and Marketing
The Company markets its pay telephone services in Mexico through direct
sales efforts as well as some independent marketing representatives working on a
commission basis. The Company has targeted a significant portion of its pay
telephone marketing efforts toward various resort areas in Mexico, specifically
on locations with high tourist-traffic such
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as airports, ship ports and marinas, restaurants and bars. Approximately 16
million U.S. tourists visit Mexico each year, and the country's vacation
destinations are major hubs for northern visitors via major U.S. airline
carriers, and cruise ships. These destinations are visited by students during
school vacations, are retirement homes for many North Americans, and are
becoming more popular as convention sites. Although the Company targets the
tourist market for payphones and operator-assisted calling, these services are
available for Mexican nationals as well.
Casetas are marketed through public media advertising such as billboards
and radio.
Payphone, hospitality and aggregator sales are managed from ATSI-Mexico
with supervision from the Senior Vice President, Sales and Marketing in San
Antonio. Caseta sales efforts are managed from Computel's offices in
Guadalajara with oversight from ATSI-Mexico in Mexico City, and ultimate
supervision from the Senior Vice President of Sales and Marketing in San
Antonio.
Operations
Installation and maintenance of pay telephones as well as customer service
are performed at the local level with support from ATSI-Mexico and ATSI-Texas.
The number of personnel required to maintain phones and collect coins on pay
telephone routes is dependent on the number of telephones, frequency of use and
geographical dispersion. The Company bills collect, third-party and person-to-
person calls made to the U.S. and Canada through a billing clearinghouse that
arranges for the Company's calls to be included on the customer's bill from the
local phone company. The billing clearinghouse collects the payments due the
Company as the local company collects the payments from the customers. Calls
billed to U.S. dollar-denominated credit cards are billed for the Company by a
credit card processing company.
NETWORK MANAGEMENT SERVICES
The Company offers international and domestic private network
telecommunications services between the United States and Latin America and
within Latin America.
Carrier Services
In October 1997, the Company began offering wholesale network services to
U.S. and Latin American carriers who lack transmission facilities or require
additional capacity. Growth from this service has been substantial, and
accounted for approximately 29% of overall Company revenues in fiscal 1998.
Revenues in fiscal 1998 were generated predominantly by U.S. carriers seeking
capacity from the U.S. to Mexico.
Private Networks
The Company offers private communications links for multi-national and
Latin American customers who use a high volume of telecommunications services
and need greater dependability than is available through public networks. These
services include data, voice, and fax transmission as well as videoconferencing
and Internet.
During fiscal year 1998, the Company executed an agreement to provide the
Canadian government with a private network connecting Mexico City with embassies
in eight Central and South American countries.
In fiscal 1999, the Company will only add new private network customers
where it is able to provide the service through its existing network, or as an
entry into new markets in preparation for long distance competition and the
introduction of its retail services. The Company will continue to service its
current customer base operating with VSAT antennas.
Competitive Conditions
The Company competes with numerous large and small companies in the carrier
market. The Company has focused its carrier services sales efforts on traffic
to Mexico and Central America where it has installed teleport facilities or has
access to such facilities through interconnection agreements with long distance
carriers. Price and quality of service are the primary competitive factors in
this market. Although many of the Company's competitors (e.g. AT&T, Sprint,
MCIWorldcom) have much more extensive networks, the Company's network of owned
facilities and favorable interconnection agreements allow it to offer
competitive rates.
The Company competes with MCI/Worldcom, Americatel, Pointe Communications
Corporation, and Telscape International Inc., among others, in providing network
management services. Factors contributing to the Company's
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competitiveness in the private network business include reliability, network
quality, speed of installation, and in some cases, geography, network size, and
hauling capacity. The Company believes it has the reputation as being a
responsive service provider capable of processing all types of network traffic.
Sales and Marketing
U.S. domestic carrier sales are supervised by the Senior Vice President,
Sales and Marketing in San Antonio. Mexican carrier sales are supervised by the
Director General (President) of ATSI-Mexico. The Director of Central American
operations, based in San Jose, Costa Rica, manages the Central American carrier
and private network accounts under the supervision of the Senior Vice President,
Sales and Marketing in San Antonio.
ELECTRONIC COMMERCE VIA INTERNET
GlobalSCAPE was formed in April 1996 to implement Internet related
strategies which may or may not be complementary to the Company's core business
of telecommunications. GlobalSCAPE's revenues are primarily attributable to
electronic software distribution, primarily sales of Internet productivity tools
(such as CuteFTP, a copyrighted file transfer protocol software). Although
GlobalSCAPE assists the Company with maintenance of its Web page and other
Internet related activities, it is the Company's present intention that
GlobalSCAPE operate autonomously, generating substantially all funds for its
development and expansion internally from its own operations or externally from
independent third parties.
NETWORK
The Company owns various transmission facilities, including teleports and
switching facilities, and contracts to use facilities of other providers as
necessary to complete its network.
Teleports and Network Control Centers
The Company has established international teleports and earth stations in
various countries for transporting telecommunication services, including voice
and data, between Mexico, Central America, and the U.S. The U.S. gateway is the
San Antonio International Teleport, located in San Antonio, Texas. The Company
also owns and/or has rights to facilities in 1) Mexico City, Monterrey, and
Cancun, Mexico, 2) Guatemala City, Guatemala, 3) San Salvador, El Salvador, and
4) San Jose, Costa Rica. The teleports utilize single carrier per channel
("SCPC") satellite technology and were engineered and designed modularly,
providing for simple and straightforward expansion.
The San Antonio International Teleport provides network integration into
U.S. based private and public telecommunication networks via direct SONET Fiber
Ring from SBC Communications, Inc., MCI/WorldCom, and Time Warner, Inc. Stratum-
1 timing is provided to all networks from San Antonio. The Company uses Telecom
Solutions equipment, which incorporates the U.S. Government's Global Positioning
System.
During the design phase, special emphasis was placed on the architecture of
Mexico's Solidaridad Satellite System ("Solidaridad"). The Solidaridad System is
of the latest technological design and has twice the capacity of its
predecessor, the Morelos System. Being a hybrid satellite, Solidaridad's
transponders are divided among 3 operating frequency bands, L, C, & Ku. The
Company's San Antonio Teleport facility contains a 6.1M C and a 6.1M Ku band
earth station with fully redundant electronics capable of "seeing" across the
full 500 MHz of the C and Ku satellite bands in both horizontal and vertical
polarization schemes.
All of the Company's major Network Control Centers have uninterruptible
power systems.
Planned Network Enhancements
The Company is currently in the process of enhancing its network to allow
for packet-switching capabilities (i.e. IP Telephony). The heart of the network
will utilize Frame Relay and Asynchronous Transfer Mode ("ATM") architecture.
Frame Relay is developed on an international scale and allows for immediate
application using packet technology, and the Company is currently testing Frame
Relay configurations for network expansion. ATM is closely associated with SONET
and both are being used by major carriers to support high-speed transmission
systems. ATM can emulate circuit-switched connections at a DS-1 or DS-3 level,
given the proper bandwidth, and can transmit and switch constant length cells
with highly variable frame alignment. This is unlike older Public Switched
Telephone Networks that used dedicated switched circuits. The Company's goal is
to attain peak efficiency and use packet oriented protocols to transmit voice
and data over emerging IP-based networks.
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The Company plans to lease a fiber optic backbone between San Antonio and
major cities in Mexico to serve as a redundant route to the Company's primary
network. The Company's expects this alternate fiber route to be operational
during fiscal year 1999.
Switching and Operator Equipment
The Company's call center platform 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. The call center platform enables the Company to
process calling card calls, collect calls, person-to-person, third party and
credit card calls.
The Company has installed an Intellicall switching platform in San Antonio,
Monterrey, and Mexico City. Intellicall's "INP" technology provides enhanced
public access services to network operators. Platform applications include
prepaid cellular service and enhanced public phone management, in addition to
prepaid calling services. The platform can also provide automated credit card
validation, calling card and voice recognition validation in conjunction with
the public access services.
Caseta Call Accounting Platform
The caseta call accounting platform uses proprietary software developed
specifically for the Company's casetas. The program is currently being upgraded
to automate the transfer of data from all casetas to the central office in
Guadalajara. The Company has a patent application pending in Mexico for its
proprietary software.
Intelligent Pay Telephones
The Company is using intelligent pay telephones with prepaid, credit card,
calling card, and coin acceptance technology. Hardware for these locations
typically includes pedestals, enclosures and specialized phone booths.
Intelligent phones utilize PC based reporting software which enable the Company
to perform daily monitoring from the corporate office of the amount of coins in
the cash box, the number and type of calls made, the service condition of the
phone, and communication of audit information on demand from the corporate
office. Each telephone also contains a programmable chip for on-site or remote
programming of various options, updated rates, free and emergency telephone
numbers, and detection and reporting of various out-of-service conditions.
Service and Maintenance
As of October 1, 1998 the Company employed 5 Network Control Center
technicians that maintained the Company's teleport facilities, including network
and switching equipment in the U.S., Mexico, and Costa Rica. The Company
employed 18 field service technicians based in the Company's primary retail
markets, which include Cancun, Cozumel, Puerto Vallarta, Cabo San Lucas, and
Mexico City. Field technicians are dispatched to correct technical problems with
pay telephones, and are also responsible for daily routine maintenance including
cleaning, keypad repair, and touch-up painting.
Leased Transmission Facilities and Interconnection Agreements
Through its agreements with SATMEX, the Company offers services on the new
Mexican satellites, Solidaridad I and II, which replaced the older Mexican
Morelos Satellite system. Solidaridad I was successfully launched in November
1993, and Solidaridad II was launched during the fourth quarter of 1994. SATMEX
has reserved additional capacity for the Company on the upcoming SATMEX V.
SATMEX V is more advanced and will offer a host of new telecommunication
services beginning in early 1999. The Mexican satellites have increased capacity
for services ("C", "Ku", and "L" bands), and enhance the Company's market size
by covering the Southern United States, Mexico, Central and South America, and
the Carribean Basin.
The Company purchases local line access in Mexico from Telmex, and various
cellular companies including SOS Telecomunicaciones, S.A. de C.V., Portatel del
Sureste, S.A. de C.V., Movitel del Noreste, S.A. de C.V, and Baja Celular
Mexicana, S.A. de C.V.
The Company's traffic is carried to and from locations in Mexico to the
Company's teleports in Mexico pursuant to interconnection and service agreements
with three Concesionarios: Operadora Protel, S.A. de C.V., Avantel, S.A. de
C.V., and Miditel, S.A. de C.V. The Company intends to pursue licensing as a
Concesionario on its own behalf in fiscal 1999,
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which will allow it to interconnect directly with Telmex and other local
carriers, thereby lowering its transmission costs. The Company also has
interconnection agreements with Radiografica Costarricense, S.A., FT&T, S.A. ,
and Solares, S.A. de C.V. for transmission services in Costa Rica, Guatemala
and El Salvador, respectively. The Company purchases long distance service in
the U.S. from various companies, including MCI/Worldcom, CapRock Communications
Corp., Qwest Communications Corp., and VarTec.
Year 2000 Issue
The Company recognizes the serious nature of the Year 2000 Issue ("Y2K")
and the negative impact any non-compliant hardware or software could impose on
its customers. The Company has developed a comprehensive plan to address ongoing
Y2K issues.
Based on the nature of its business, the Company relies heavily on outside
vendors for hardware and software solutions performing day-to-day functions for
its core operations. Numerous vendors have provided Y2K compliance for off-the-
shelf hardware and software applied by the Company. Certain customized
applications are currently under evaluation and testing for Y2K compliance. All
of the Company's vendors are committed to finish all testing and provide full
Y2K compliance no later than June 1999.
All of the Company's corporate information system (IS) infrastructure is
currently under a rigorous evaluation and testing program. Due to the fact that
all of the Company's corporate computing hardware and software is not older than
4 years, all Y2K non-compliant hardware and software will be a) fixed to be
fully Y2K compliant via software patches and upgrades, or b) phased out
completely prior to December 31, 1999.
In certain instances, the Company is faced with the external depiction of
time. These include the use of two digit year fields in communicating with other
organizations, such as billing companies through the use of the industry wide
"EMI" standard record format. As of the most recent EMI specifications, the year
field continues to be two fields and the Company's responsibility simply lies in
the proper population of these fields.
The Company will continue to monitor and test all of its hardware and
software, including servers, routers, switches, HUB's, workstations and other
peripherals on an ongoing basis to ensure full Y2K compliance.
LICENSES/REGULATORY
The Company's operations are subject to federal, state and foreign laws and
regulations. Federal laws and regulations apply to the Company's provisions of
interstate service (including international service that originates or
terminates in the U.S.). State laws and regulations govern telecommunications
services originating or terminating in that state. The laws of Mexico and other
foreign countries govern the Company's provision of services within those
countries as well as international service originating or terminating within
those countries.
Federal
Pursuant to Section 214 of the Communications Act of 1934, the Federal
Trade Commission ("FCC") has granted the Company licenses to provide switched
international telecommunications services between the U.S. and certain other
countries through the resale of switched services of U.S. facilities-based
carriers and to provide certain international telecommunications services by
acquiring circuits on various undersea cables or leasing certain satellite
facilities. The majority of these licenses have a term of six years with an
option to renew, and the remainder have a term of ten years. The Company
intends to seek renewal of the licenses and anticipates that the renewals will
be granted in the ordinary course.
The Company is not required to have a license to provide U.S. domestic
interstate service. Under FCC rules, the Company is a "non-dominant
interexchange carrier" and is therefore required to maintain informational
tariffs on file with the FCC. In October 1996, the FCC issued an order that
non-dominant interexchange carriers will no longer be required to file tariffs
for interstate domestic long distance services. Under the terms of the FCC
order, detariffing would be mandatory after a nine-month transition period.
Interexchange carriers would still be required to retain and make available
information as to the rates and terms of the services they offer. The FCC's
order was appealed by several parties and, in February 1997, the D.C. Circuit
issued a stay preventing the rules from taking effect pending judicial review.
The Company is currently unable to predict what impact the FCC's order will have
on the Company.
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The Telecommunications Act of 1996 ("Telecom Act"), which became law in
February 1996, was designed to promote competition in all aspects of
telecommunications. The FCC has promulgated and continues to promulgate major
changes to their telecommunications regulations, many of which will have an
impact on the Company. The Company cannot predict the ultimate effect of these
various changes. One aspect of the Telecom Act that is of particular importance
to the Company is that it allows Bell Operating Companies (BOCs) to offer in-
region long distance service once they meet certain requirements. The rules for
competition are still being decided by regulators and the courts, and at this
time no BOCs have been permitted to provide in-region long distance service.
However, given their extensive resources and established customer bases, the
entry of the BOCs into the long distance market, specifically the international
market, will create increased competition for the Company.
The International Settlements Policy (the "ISP") governs settlements
between U.S. carriers and foreign carriers of the cost of terminating traffic
over each others' networks. The FCC recently enacted certain changes in its
rules designed to allow U.S. carriers to propose methods to pay for
international call termination that deviate from traditional accounting rates
and the ISP. The FCC has also established lower benchmarks for the rates that
U.S. carriers can pay foreign carriers for the termination of international
services. To the extent that these rule changes lower the costs of the
Company's competitors whose Mexico-terminated traffic has been subject to the
ISP, the Company will face increased price competition.
The Company issues 800 numbers to customers who participate in its travel
card program. (See Call Services-Other Services.) In connection with the
Telecom Act, the FCC has established rules by which providers of 800 numbers
must compensate payphone providers for toll free calls made from their
telephones. The FCC has established a rate of .284 per call for the period
October 7, 1997 through October 6, 1999. After October 6, 1999, the rate will
be the market-based local coin rate. The Company does not believe the amount of
compensation it will be required to pay to payphone providers will be
substantial.
State
Many states require providers of operator-assisted calling services to
maintain certificates and tariffs with the state regulatory agencies, and to
meet various other requirements (e.g. reporting, consumer protection,
notification of corporate events). The Company currently provides only a small
volume of U.S. domestic operator-assisted calling as an incidental service in
connection with its other products, and believes it is in compliance with all
applicable State laws and regulations governing this service.
Mexico
The Secretaria de Comunicaciones y Transportes ("SCT") and COFETEL have
issued the Company's Mexican subsidiaries the following licenses:
Comercializadora License - a 20-year license allowing for nationwide resale
of local calling and long distance services from public pay telephones and
casetas.
Teleport and Satellite Network License - a 20-year license allowing for
transport of voice, data, and video services domestically and internationally.
The license allows for the operation of a network utilizing stand-alone VSAT
terminals and/or teleport facilities, and interconnection to the public switched
network via other licensed carriers. A shared teleport facility enables the
Company to provide services to multiple users/customers through a single
centralized satellite earth station.
Packet Switching Network License - a 15-year license allowing for the
installation and operation of a network interconnecting packet switching nodes
via the Company's proprietary network or circuits leased from other licensed
carriers. The license supports any type of packet switching technology, and can
be utilized in conjunction with the Teleport and Satellite Network License to
build a hybrid nationwide network with international access to the U.S.
Value-Added Service License - an indefinite license allowing the Company to
provide a value added network service, such as delivering public access to the
Internet.
Mexico has undergone substantial liberalization in its telecommunications
market since June 7, 1995 (see Strategy). Various technical and pricing issues
related to interconnections between carriers are the subject of regulatory
actions which will effect the competitive environment in ways the Company is not
able to determine at this time.
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Other Foreign Countries
The Company currently has operations in Costa Rica, El Salvador, and
Guatemala. The telecommunications markets in these countries are in transition
from monopolies to functioning, competitive markets. The Company has
established a presence in those countries by providing a limited range of
services, and intends to expand the services it offers as regulatory conditions
permit. The Company does not believe that any of its current operations in
those countries requires licensing, and it believes it is in compliance with
applicable laws and regulations governing its operations in those countries.
EMPLOYEES
At October 1, 1998, the Company (excluding Computel) had 142 full-time
employees, of whom 10 were operators, 33 were sales and marketing personnel, and
99 performed operational, technical and administrative functions, and 10 part-
time employees, all of whom were operators. Of the foregoing, 43 were employed
by ATSI-Mexico, 18 were employed by GlobalSCAPE, and 5 were employed by Sinfra.
The Company believes its future success will depend to a large extent 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
aforementioned employees belong to labor unions.
At October 1, 1998, Computel had 425 full-time employees of whom 228 were
operators. A portion of Computel's employees, chiefly operators, belong to a
union.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
Information about revenue, operating losses, and identifiable assets
attributable to the U.S. and Latin America is included in footnote 11 of the
Notes to Consolidated Financial Statements.
ADDITIONAL RISK FACTORS
Risks Relating to the Company:
Limited Operating History; History of Losses; Need for Capital; Report of
Independent Public Accountants.
The Company has a limited operating history, has incurred significant
losses from operations since its inception and has a working capital deficit as
of July 31, 1998. In addition, the Company had negative cash flows from
operations during fiscal 1994, 1995, 1996, 1997, and 1998. 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 will 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
Report 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 for the year ended July
31, 1998. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Failure to Achieve Anticipated Growth.
Although the Company believes that its infrastructure relative to direct
dial services, 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 these services have the
potential to grow significantly in the future. Accordingly, the Company expects
that the volume of international long distance calls handled, the volume
utilization relative to its network management services, and the volume of local
direct dial calls handled within Mexico and the United States 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.
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Competition.
The direct dial and call services market is intensely competitive and is
significantly affected by new service introductions and the market activities of
major industry participants. Competition in this market is based upon pricing,
customer service, network quality and value-added services. The Company
competes in the United States with AT&T, MCI/Worldcom, Sprint and others, many
of which have been in business longer than the Company, have greater name
recognition, more extensive transmission networks and greater engineering and
marketing capabilities than the Company and have, or have access to,
substantially greater financial and personnel resources than those available to
the Company. The Company anticipates that it will compete in the direct dial and
call services market in Mexico with Telmex and newly licensed companies. Some of
these companies, again, have considerably greater financial and other resources
than the Company. The ability of the Company to compete effectively in the
telecommunications industry will depend upon its continued ability to maintain
quality services at prices generally equal to or below those charged by its
competitors. There can be no assurance that the Company will be able to compete
successfully with existing or future competitors.
The Company competes with MCI/Worldcom, Americatel, Pointe Communications
Corporation, and Telscape International Inc., among others, in providing network
management services. As the Company's network management services expand to
serve a broader range of users, the Company expects to encounter increasing
competition from major domestic and international communications companies,
including the foregoing carriers, most of which have significantly greater
resources and more extensive domestic and international satellite and fiber
optic communications networks 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. See "Business--Direct Dial
Services--Competition," "Business-Call Services - Competition" and "Business--
Network Management-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 owns only a portion of the transmission facilities needed to
complete long distance calls. Therefore, the Company's direct dial, call
services and network management business is dependent upon contractual
arrangements, both long and short-term, with carriers for the transmission of
calls. 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 effect the Company's operations,
possibly materially. The Company believes that suitable arrangements could be
obtained with other satellite or fiber optic operators to provide 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 International 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.
Service Interruptions; Equipment Failures.
The Company's business requires that transmission and switching facilities
and other equipment be operational
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24 hours per day, 365 days per year. The Company may experience service
interruptions, equipment failures or other problems that affect the quality of
voice and data transmission, in many cases resulting from causes beyond its
control. The Company's ability to achieve planned expansion depends on its
ability to expand its network and integrate new technologies into its network,
which is likely to increase the risk of such events. 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.
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 direct dial and 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.
Pricing Pressure.
Since the AT&T Corp. divestiture in 1984, the long distance
transmission industry has generally been characterized by over-capacity and
declining prices. The Company anticipates that prices for its services will
continue to decline as its competitors create additional capacity by
constructing new networks using fiber optic cable. If industry capacity exceeds
demand in the United States and Latin America (or if capacity along the
Company's routes exceeds demand along those routes) severe pricing pressure
could develop which could have a material adverse effect on the Company.
Regulations.
Changes in the federal, state or foreign laws and regulations governing the
Company's telecommunications operations can have positive or negative effects on
the Company by increasing or decreasing the Company's costs, placing the Company
at a cost advantage or disadvantage in relative terms with respect to larger or
smaller providers, permitting competition from new sources, or restricting or
enhancing the Company's ability to expand its operations (see Business,
Regulatory). There can be no assurance that future judicial and legislative
changes will not have a material adverse effect on the Company, that regulators
or third parties will not raise material issues with regard to the Company's
compliance with applicable regulations, or that regulatory activities will not
have a material adverse effect on the Company.
The Company believes it has all federal, state and foreign licenses
necessary to operate its current business, but there can be no assurance that
the Company will receive all licenses necessary for new services or that delays
in the licensing process will not adversely affect the Company's business. In
addition, there can be no assurance that such authorizations will not be
rescinded, although such action is unlikely.
The Company's transmitting equipment must comply with FCC technical
standards, which are subject to change and can result in the premature
obsolescence of equipment. The Company monitors its compliance with federal,
state, and local regulations governing the discharge and disposal of hazardous
and environmentally sensitive materials including, but not limited to, the
emission of electromagnetic radiation. Although the Company believes it is in
compliance with such regulations, there can be no assurance that any such
discharge, disposal or emission will not expose the Company to claims or actions
that could have a material adverse effect on the Company's financial results.
As a result of the passage of the Telecommunications Act of 1996 and the
resultant growth in competition, the FCC has issued, and continues to issue
major changes to their telecommunications regulations. Many of these regulatory
changes may substantially impact the Company's service offerings. At this time,
however, the Company cannot predict the ultimate effect of these changes on its
revenues or expenses.
Agreements with foreign carriers are also subject to FCC regulations,
foreign laws, and the terms of international treaties. If these regulations,
laws or treaties are construed in such fashion to require changes to the
Company's current agreements, such changes could have a material adverse effect
on the Company.
Year 2000 Compliance
The Company has initiated a program to identify and address issues
associated with the ability of its date-sensitive information, telephony and
business systems to properly recognize the year 2000 in order to avoid
interruption of the operation of these systems at the turn of the century. This
program is being conducted by the Company's
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Engineering/Management Information Systems group, which is coordinating the
efforts of internal resources as well as third party vendors in making all
necessary changes to the Company's systems. The Company plans to have completed
all necessary testing and deployment by mid-1999. Some of these changes are
being made as a part of larger systems upgrades. The Company expects to avoid
disruption of its information, telephony and business systems as a result of
these efforts.
Risks of Latin American Operations:
General.
Government enforcement and interpretation of the laws and agreements which
govern the Company's foreign operations can be unpredictable and are often
subject to informal views of government officials and ministries that regulate
telecommunications in each country. In certain countries, including Mexico and
certain of the Company's target Latin American markets, such government
officials and ministries may be subject to influence by the former monopoly
(e.g. Telmex). The Company has pursued and expects to continue to pursue a
strategy of providing its services to the maximum extent it believes to be
permissible under applicable laws and regulations. To the extent that the
interpretation or enforcement of applicable laws and regulations is uncertain,
the Company may be found to be in violation of the laws or regulations of those
countries where it operates. There can be no assurance that the Company will
not be subject to fines, penalties or other sanctions, including being denied
the ability to offer its services, as a result of violations, regardless of
whether such violations are knowing or willful and regardless of whether such
violations are corrected. To the Company's knowledge, it is not currently
subject to any regulatory inquiry or investigation.
The majority of the Company's foreign and international operations are
currently being conducted in Mexico. These operations are subject to political,
economic and other uncertainties, including, among others, risk of war,
revolution, expropriation, renegotiation or modification of existing contracts,
licenses, communications regulations, standards and tariffs, trade disputes,
taxation policies, licensing requirements, and other uncertainties and trade
barriers. In particular, the Mexican government has exercised and continues to
exercise significant influence over many aspects of the Mexican economy.
Actions taken or policies established by legislative, executive or judicial
authorities in Mexico that effect the economy of Mexico could have material
adverse effects on private sector entities in general and on the Company in
particular, including impairing the Company's access to needed financing. The
Company also conducts limited operations in other countries within Latin
American and, as the Company expands further in these and other Latin American
markets, all of the foregoing factors and risks set forth above could also apply
to a greater or lesser extent to operations conducted by the Company in such
other countries.
Exchange Rates.
The Company's international operations will subject it to various
government regulations, export controls, and the normal risk involved in
international operations and sales. Approximately 82% of the Company's revenue
during fiscal 1998 was billed in U.S. dollars. ATSI-Mexico conducts some
limited business in Mexican pesos and Computel conducts substantially all of its
direct dial business in Mexican pesos. Any decline in the value of the Mexican
peso against the U.S. dollar will have the effect of decreasing the Company's
earnings when stated in U.S. 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.
Exchange Controls.
The Mexican government does not currently restrict the ability of Mexican
or foreign persons or entities to convert pesos to dollars or to transfer
dollars outside Mexico. If the Mexican government institutes a restrictive
exchange control policy in the future, it could have a material adverse affect
on the Company's financial condition.
Legal Framework Governing Communications Operations.
There can be no assurance that the deregulation of the Mexican
telecommunications 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 telecommunications services within Mexico
and between Mexico and other countries.
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.
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
15
<PAGE>
of the Company's understandings or assumptions change or prove inaccurate, the
Company's operations could be materially adversely affected.
ITEM 2. 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. GlobalSCAPE, Inc.'s offices are located at
its leased facility in San Antonio, Texas, consisting of 5,401 square feet. The
lease expires January 31, 2001. GlobalSCAPE, Inc. pays annual rent of $77,774
(increasing to $87,496 per year for the last two years of the three year 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, and consist of approximately 3,330 square feet. Computel
has purchased the premises at a price of $880,000 payable in 20 annual payments
of approximately $44,000.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any subsidiary is a party to any material pending legal
proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The shareholders approved a Plan of Arrangement (the "Arrangement") under
the Business Corporations Act (Ontario) at a special meeting held on April 30,
1998. The Arrangement became effective on May 11, 1998. Pursuant to the
Arrangement, the outstanding common shares of American TeleSource International,
Inc., an Ontario, Canada corporation (ATSI-Canada) were exchanged on a one-for-
one basis for the shares of the Company, resulting in ATSI-Canada becoming the
wholly-owned subsidiary of the Company.
PART II.
--------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the NASD: OTCBB under the symbol
"AMTI". Prior to December 1997, the Company's Common Stock was traded on the
Canadian Dealing Network under the symbol ATIL.CDN. The table below sets forth
the high and low bid prices for the Common Stock from August 1, 1996 through
December 21, 1997 as reported by the Canadian Dealing Network and from December
22, 1997 through October 26, 1998 as reported by NASD: OTCBB. These price
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission, and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
FISCAL 1997 HIGH LOW
--------------------------------------------------------
<S> <C> <C>
FIRST - ................................$0.80 $0.55
SECOND - .............................. $ .69 $ .60
THIRD - ................................$ .70 $ .47
FOURTH - ...............................$2.26 $ .61
FISCAL 1998 HIGH LOW
--------------------------------------------------------
FIRST - ................................$3 1/4 $1 3/8
SECOND - .............................. $3 7/16 $2
THIRD - ................................$3 1/2 $1 5/7
FOURTH - ...............................$2 1/4 $ 3/4
FISCAL 1999 HIGH LOW
--------------------------------------------------------
FIRST - (through October 27, 1998)..... $ 1.23 $0.39
</TABLE>
16
<PAGE>
At October 27, 1998, the closing price of the Company's Common Stock as
reported by NSD:OTCBB was $1.23 per share. As of October 27, 1998, the Company
had approximately 3,000 stockholders, including both beneficial and registered
owners. ATSI has not paid dividends on its common stock the past three years
and does not expect to do so in the foreseeable future. There have been no sales
of unregistered securities since the registration of the Company's securities on
Form S-4, declared effective March 13, 1998.
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA.
The following selected financial and operating data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial Statements
and the Notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
Years ended July 31,
-------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(In thousands of $, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Operating revenues:
Call services $110 $4,470 $10,807 $12,545 $13,547
Direct dial services - - - 1,421 6,085
Network management services 132 318 2,614 1,698 13,362
Internet e-commerce - - 54 564 1,526
------ ------- ------- ------- -------
Total operating revenues 242 4,788 13,475 16,228 34,520
Operating expenses:
Cost of services 201 4,061 10,833 12,792 22,287
Selling, general and administrative 373 2,536 4,430 7,047 13,877
Depreciation and amortization 11 141 281 591 1,822
------ ------- ------- ------- -------
Total operating expenses 585 6,738 15,544 20,430 37,986
------ ------- ------- ------- -------
Loss from operations (343) (1,950) (2,069) (4,202) (3,466)
------ ------- ------- ------- -------
Net loss $(343) $(2,004) $(2,205) $(4,695) $(5,094)
------ ------- ------- ------- -------
Per share information:
Net loss $(0.04) $ (0.14) $ (0.11) $ (0.18) $ (0.12)
------ ------- ------- ------- -------
Weighted average common shares outstanding 9,146 13,922 19,928 26,807 41,093
------ ------- ------- ------- -------
Consolidated Balance Sheet Data:
Working capital (deficit) $ 114 $ (446) $ (592) $ 195 $(5,687)
Current assets 344 1,088 1,789 5,989 5,683
Total assets 1,049 2,766 4,348 15,821 24,251
Long-term obligations, including current portion 0 133 604 3,912 8,303
Total stockholders' equity 819 1,231 1,629 6,936 7,087
</TABLE>
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE: Certain Statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Securities Act. See
page 2 for additional factors relating to such statements.
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the three fiscal years ended July 31,
1996, 1997, and 1998. It should be read in conjunction with the Consolidated
Financial Statements of the Company, the Notes thereto and the other financial
information included elsewhere in this annual report on Form 10-K. For purposes
of the following discussion, references to year periods refer to the Company's
fiscal year ended July 31.
GENERAL
The Company is principally engaged in providing retail and wholesale
communications services within and between the United States and select markets
within Latin America. In December of 1993, utilizing a bilingual and bicultural
team, the Company began assembling a framework of licenses, interconnection and
service agreements, network facilities, and distribution channels (collectively
referred to hereinafter as "framework") in Mexico and the United States. The
Company feels that this framework will allow it to provide domestic and
international communications services with U.S. standards of reliability to the
Mexican market which has historically been underserved by the national telephone
monopoly, Telefonos de Mexico ("Telmex"). The Company also plans to establish a
framework in other Latin American countries as the regulatory environments in
those countries allow. In addition to the United States and Mexico, the Company
currently has rights to use facilities and has strategic relationships with
domestic carriers in Costa Rica, El Salvador and Guatemala.
Utilizing the framework described above, the Company provides local,
domestic long distance and international calls from its own public telephones
and casetas within Mexico, and provides similar services to the third party-
owned casetas, public telephones and hotels in Mexico as well. Consumers
visiting a Company-owned caseta or public telephone may dial directly to the
desired party in exchange for cash payment, or can charge the call to a U.S.
address (collect, person-to-person, etc.) or calling card, or to a U.S. dollar-
denominated credit card with the assistance of an operator. In July 1998, the
Company began providing domestic U.S. and international call services to Mexico
to residential customers in the U.S., and intends to provide services to
business customers in the U.S. in fiscal 1999. Callers may either pre-subscribe
to the Company's one-plus residential service, or dial around their pre-
subscribed carrier by dialing 10-10-624, plus the area code and desired number.
Where possible, these retail calls are transported over the Company's own
network infrastructure.
Utilizing the same framework described above, the Company also serves as a
retail and wholesale facilities-based provider of network services for corporate
clients and U.S. and Latin American telecommunications carriers. These customers
typically lack transmission facilities into certain markets, or require
additional capacity into certain markets. The Company currently provides these
services to and from the United States, Mexico, Costa Rica, El Salvador and
Guatemala.
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 and has a working capital deficit as of July 31, 1998.
Additionally, the Company has had recurring negative cash flows from operations
with the exception of a three month period ended January 31, 1998. For the
reasons stated in Liquidity and Capital Resources and subject to the risks
referred to in Liquidity and Capital, the Company expects improved results of
operations and liquidity in fiscal 1999.
18
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items included in the Company's
results of operations in dollar amounts and as a percentage of total revenues
for the years ended July 31, 1996, 1997 and 1998.
1996 1997 1998
-------------- -------------- --------------
$ % $ % $ %
OPERATING REVENUES
Call services $ 10,807 80% $ 12,545 77% $ 13,547 39%
Direct dial services $ -- 0% $ 1,421 9% $ 6,085 18%
Network management services $ 2,614 20% $ 1,698 11% $ 13,362 39%
Internet e-commerce $ 54 0% $ 564 3% $ 1,526 4%
-------- -------- --------
Total operating revenues $ 13,475 100% $ 16,228 100% $ 34,520 100%
Cost of services $ 10,833 80% $ 12,792 79% $ 22,287 65%
-------- -------- --------
Gross margin $ 2,642 20% $ 3,436 21% $ 12,233 35%
Selling, general and
administrative expenses $ 4,430 33% $ 7,047 43% $ 13,877 40%
Depreciation and amortization $ 281 2% $ 591 4% $ 1,822 5%
-------- -------- --------
Operating loss $ (2,069) -15% $ (4,202) -26% $ (3,466) -10%
Other, net $ (136) -1% $ (493) -3% $ (1,628) -5%
-------- -------- --------
Net loss $ (2,205) -16% $ (4,695) -29% $ (5,094) -15%
======== ======== ========
YEAR ENDED JULY 31, 1998 COMPARED TO YEAR ENDED JULY 31, 1997
Operating Revenues. Operating revenues increased approximately $18.3
million, or 113%, as the Company experienced growth in each service category.
Call services revenue increased approximately $1.0 million, or 8%,
primarily due to growth in the Company's customer base in Mexico that produces
calls to the United States from hotels, public telephones and casetas. As a
result of the installation of public telephones, the implementation of a direct
sales strategy, and the purchase of Computel in August 1997, the Company
processed approximately 314,000 international calls originating in Mexico during
fiscal 1998. This compares to approximately 200,000 calls processed the year
before. This increase in international calls from Mexico was offset to a large
extent by a decrease in domestic and international operator-assisted calls
originating in the United States and Jamaica. During 1998, the Company de-
emphasized these services due to relatively lower profit margins on this
business. On July 16, 1998, the Company ceased providing these services
altogether. Revenues from these services decreased from approximately $3.9
million in 1997 to approximately $2.9 million in 1998. The Company does not
anticipate producing significant revenues from such services, if any, during
fiscal 1999.
Direct dial services, calls processed in exchange for cash without
utilizing the company's operator center in San Antonio, Texas, increased 328%
from approximately $1.4 million in fiscal 1997 to approximately $6.1 million in
fiscal 1998. This increase was primarily due to the acquisition in May and
August 1997 of Computel, the largest private caseta operator in Mexico. The
Company also began processing local and domestic long distance calls within
Mexico during the latter half of 1997 from its own intelligent payphones
installed in resort areas of Mexico. These calls are made by depositing coins
(pesos or quarters) in the Company's phones to initiate service.
Network management services increased 687% from $1.7 million in 1997 to
$13.4 million in 1998. The majority of this growth was due to the amount of
wholesale network services provided to other carriers seeking transmission
facilities or
19
<PAGE>
additional capacity for their services. The Company began providing these
services in October 1997, and produced approximately $10 million in revenues
from this service during 1998.
Cost of Services. Cost of services increased approximately $9.5 million,
or 74% between years, but decreased as a percentage of revenues from 79% to 65%.
The increase in cost of services is attributable to the increased volume of
business handled by the Company during 1998, as discussed above. The
improvement in the Company's gross profit margin resulted from the change in the
mix of services it provided during 1998 as described above, and its continuing
efforts to decrease costs subsequent to the demonopolization of Telmex, which
took place January 1, 1997. Subsequent to Telmex's demonopolization, the
Company was able to negotiate with newly concessioned carriers in Mexico to
transport its calls originating and terminating in Mexico, which has lowered the
associated per minute rate to carry those calls. Additionally, the Company was
one of the first four companies to receive a public payphone comercializadora
license from the SCT in February 1997, which has allowed the Company to provide
local, domestic and international calls from public telephones in Mexico. In
November 1997, the Company purchased the customer base of Comunicaciones del
Caribe, S.A. de C.V., an independent marketing representative in the
Cancun/Cozumel area of Mexico which did not have a comercializadora license, and
which had been utilizing the Company's operator center for processing
international calls. By purchasing the customer base, the Company was able to
eliminate a layer of expense associated with the traffic and effectively lower
its overall commission rate paid to public telephone location owners in Mexico.
The Company has also improved its gross margin by utilizing its own existing
satellite network infrastructure and licenses to provide network services to
other carriers seeking transmission facilities or extra capacity for their own
services.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses rose
97%, or approximately $6.8 million, from 1997 to 1998. As a percentage of
revenue, these expenses decreased from 43% to 40% between years. The growth in
dollars between years was caused by the acquisition of Computel, the continued
growth of the Company's ATSI-Mexico operations, the expenseing of costs related
to the Company's planned acquisition of additional concessions from the Mexican
regulatory authorities, and the expensing of costs related to the Company's
reincorporation from Canada to Delaware. Approximately $890,000 of the increase
was due to the acquisition of Computel, which operates approximately 134 retail-
based casetas in approximately sixty cities throughout Mexico, and employs in
excess of 400 people. In August 1997, ATSI-Mexico expanded its operations and
began procuring, installing, operating and maintaining coin-operated,
intelligent payphones. During 1998, the Company expensed $631,000 in costs
incurred relative to the Company's reincorporation. Approximately $268,000 in
expenses were incurred during 1997 relative to the reincorporation.
Depreciation and Amortization. Depreciation and amortization rose
approximately $1.2 millon, or 208%, and rose as a percentage of revenues from 4%
to 5% between years. From July 31, 1997 through July 31, 1998, the Company
acquired approximately $7.9 million in equipment. Approximately $4.6 million of
these assets were acquired through capital lease arrangements. The majority of
the assets consisted of equipment which added capacity to the Company's existing
international network infrastructure, and intelligent coin telephones which were
installed in Mexico. Approximately $1.4 million in fixed assets were acquired
subsequent to July 31, 1997 with the acquisition of Computel. The Company also
recognized $2.8 million of goodwill during 1998 associated with the purchase of
Computel, which is being amortized over a forty year period.
Operating Loss. The Company's operating loss improved $736,000 to
approximately $3.5 million for 1998. Increased revenue levels and improved
gross margins more than offset increases in selling, general and administrative
expenses and depreciation and amortization, allowing for the improvement.
Other Income (expense). Other income (expense) rose approximately 230%, or
$1.1 million, between years. This increase was due almost exclusively to
increased interest expense levels. During 1998, the Company incurred capital
lease obligations of approximately $4.6 million related to the purchase of
equipment mentioned above, and issued notes payable in the amount of
approximately $3.1 million.
YEAR ENDED JULY 31, 1997 COMPARED TO YEAR ENDED JULY 31, 1996
Operating Revenues. Operating revenues increased approximately $2.8
million or 20%, due mainly to increased revenues from call services.
Approximately $1.4 million of revenues in fiscal 1996 were attributable to the
sale and installation of a large network in Mexico to one of Mexico's largest
milk producers. Subsequent to completing the sale and installation of the
network, the Company began recognizing monthly revenues from the management of
the network. The sale and installation of such a large network is not considered
to be of a recurring nature by the Company; however, management of this and
other networks is considered to be a recurring source of revenues for the
Company. GlobalSCAPE had revenue of $500,000 in fiscal 1997, representing less
than 4% of the Company's consolidated revenue.
Operating revenues from call services increased 29%, or approximately $3.2
million, due almost entirely to increased call volumes from international call
services provided from hotels and resorts in Jamaica, increased call volumes
20
<PAGE>
attributable to the Company's Brazilian calling card product, and the inclusion
of Computel's revenues attributable to call services provided by Computel during
the last quarter of fiscal 1997 (which represented approximately $1.4 million of
consolidated revenues in fiscal 1997). Revenues from international calls
originating in Mexico increased 5%, while call volumes and related revenues from
calls originating 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 fiscal 1997, the number of calls per phone decreased slightly. The
Company believes this was due to increasing costs to the consumer. The Company
began to lower the price per call to the consumer from certain telephones in the
first quarter of fiscal 1998 based on the decrease in the Company's cost of
providing these calls through its agreement with Investcom. The increased volume
of calls relating to Jamaica and Brazil increased the number of international
calls processed by the Company as compared to domestic calls processed entirely
within the United States. Because international calls typically generate higher
revenues on a per call basis than domestic calls, the average revenue per
completed call processed by the Company increased from $14.93 for fiscal 1996 to
$17.88 for fiscal 1997.
Excluding the $1.4 million of revenues recognized in fiscal 1996
attributable to the sale and installation of the network to the Mexican milk
producer, revenues from network management services increased approximately
$596,000, or 67%. This increase was largely due to recurring revenues from the
Mexican milk producer and Investcom commencing in the early and latter part,
respectively, of fiscal 1997.
Cost of Services. Cost of services increased approximately $2.0 million,
or 18%, resulting in an increase in the Company's overall gross margin from 20%
in fiscal 1996 to 21% in fiscal 1997. If the approximately $1.4 million in
revenues and the $960,000 in costs related to the sale and installation of the
network to the Mexican milk producer were excluded from the Company's results
for fiscal 1996, the Company's gross profit percentage would have been 18% for
fiscal 1996. The increase in cost of services was primarily attributable to the
increased volume of calls handled by the Company from Jamaica to the U.S. and
from the U.S. to Brazil, the inclusion of Computel's cost of services for the
last quarter of fiscal 1997, and rising costs associated with transporting calls
from Mexico to the Company's Switching/Operator Facility in San Antonio, Texas.
Although Telmex officially lost its status as a monopoly on August 10, 1996,
Investcom was not allowed connectivity to Telmex's local network in Mexico until
January 1997 and did not have the switch capacity in Mexico to process the
Company's traffic until May 1997. As a result, the Company was unable to
commence processing any of its traffic at lower per-minute costs until May 1997.
Subsequent to May 1997, the public phones serviced by the Company in Mexico were
frequently only able to access the Company's operator center utilizing a
cellular connection, since local connectivity had not yet been provided by
Telmex. This added a per-minute air time charge to the Company's cost of
transmitting calls from Mexico, resulting in a decline in the gross profit
margin on international calls transmitted from the Company's public phones in
Mexico.
Selling, General and Administrative Expenses. SG&A expenses rose 58%, or
approximately $2.6 million. If the revenues related to the sale and installation
of the network to the Mexican milk producer in fiscal 1996 were excluded, SG&A
expenses would have increased as a percentage of overall revenues from 37% to
43%. The increase in SG&A expense is almost entirely due to expanded operations
within Mexico and the inclusion of Computel's SG&A expense for the last quarter
of fiscal 1997. ATSI-Mexico had less than five employees at the beginning of
fiscal 1996 as compared to 36 employees at the end of fiscal 1997. Computel
operates 134 casetas in approximately 72 cities throughout Mexico, and has
approximately 430 employees.
Depreciation and Amortization. Depreciation and amortization increased
approximately $310,000, or 110%, due primarily to approximately $2.1 million in
fixed asset additions principally for the development of the Company's teleport
facilities in San Antonio, Texas, Cancun and Mexico City, Mexico, and San Jose,
Costa Rica; the acquisition of intelligent payphones; and the inclusion of
Computel's depreciation attributable to the acquisition of Computel.
Other income (expense). Other income (expense) increased to a net expense
of approximately $445,000 primarily as a result of interest expense incurred on
capital lease obligations and convertible notes issued in 1997.
YEAR ENDED JULY 31, 1996 COMPARED TO YEAR ENDED JULY 31, 1995
Operating revenues. Operating revenues increased approximately $8.7
million, or 181%, due largely to increased revenues from call services.
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%,
21
<PAGE>
respectively, to 26% and 66%, respectively. These decreases were offset by
growth attributable to other call services, including call services to Brazil
and from Jamaica, some of which were offered for the first time during fiscal
1996.
In June 1995, the Company began distributing calling cards to Visa
cardholders issued by the Bank of Brazil. These cards may be used by Brazilians
traveling outside of their native country, but primarily in the United States,
for calling within the United States or to other world-wide destinations.
Additionally, in November 1995 the Company began providing service to cellular
telephone customers of a Mexican-based cellular company with in excess of 40,000
subscribers, which service enables subscribers to access the Company's network
when traveling in the United States for the purpose of placing cellular calls
domestically within the United States or internationally to Mexico. The Company
also expanded its international operator services to locations in Jamaica in
October 1995. Collectively, the foregoing services accounted for approximately
8% of all calls handled, and 9% of all long distance operating revenue
generated, by the Company in fiscal 1996.
Due to rising retail rates charged by Telmex during the majority of fiscal
1996 in connection with the processing of calls out of Mexico, the Company
raised per minute rates charged to callers from some locations in Mexico. As a
result, the average revenue per call originating in Mexico increased from $33 to
$36.
Revenues from network management services increased $2.4 million, or 739%,
principally due to the sale and installation of two networks in Mexico and, to a
lesser extent, to services rendered under long-term maintenance contracts.
Cost of services. Cost of services increased approximately $6.8 million,
or 167%, but decreased as a percentage of operating revenues. As a result, the
Company's gross margin increased from 15% to 20%.
Commissions paid to independent marketing representatives in Mexico, which
were 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
were 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.
Selling, General and Administrative Expenses. 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 was 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.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended July 31, 1998, the Company generated negative cash
flows from operations of approximately $622,000. This compares favorably to the
negative cash flows from operations of $5.5 million generated during the prior
year. The improvement is partially the result of higher revenues and improved
margins, but also due to an increase in days' payables outstanding between July
31, 1997 and 1998.
The Company purchased approximately $3.3 million in equipment during 1998,
and added approximately $4.6 million more under capital lease arrangements,
allowing the Company to further implement its growth strategy in Mexico.
22
<PAGE>
The equipment obtained consisted primarily of equipment to support the Company's
network management services business and coin operated intelligent payphones.
The Company used proceeds of approximately $3.5 million from the exercise
of warrants and options for the purchase of the aforementioned equipment, and to
fund working capital needs. In August 1997, the Company used $1.1 million in
proceeds from an equity offering that was subscribed to on July 31, 1997 to
complete the purchase of Computel. To fund the acquisition of Comunicaciones
del Caribe, S.A. de C.V. in November 1997, the Company issued a $1.0 million
long-term note to a shareholder. The note accrues interest at an annual rate of
13%, and is payable in equal quarterly installments of principal and interest
over a seven year period. In connection with this note, the shareholder
received warrants to purchase 250,000 shares of common stock of the Company at a
price of $3.56 per share. In February 1998, the shareholder converted
approximately $490,000 in outstanding principal under this note to equity by
exercising warrants which had been issued previously.
The net result of the Company's operating, financing and investing
activities during the year was a working capital deficit of approximately $5.7
million as of July 31, 1998. In order to meet its debt and capital lease
obligations during the year, the Company has had to extend payment terms to some
vendors and to develop payment plans with some vendors.
Although the Company has continued to use more cash in its operations that
it has produced from its operations, it has reduced the rate at which it is
doing so. Although no assurance can be given, the Company expects that this
positive trend will continue. For this to happen, management must be able to
continue to increase revenue levels, maintain or improve gross margins, and
maintain or reduce selling, general and administrative expenses as a percentage
of revenues.
Management believes that revenues will continue to grow as the Company
continues to offer new direct dial and wholesale services during fiscal 1999,
but that such growth may be at slower annual rates than have been experienced in
the past. In July 1998, the Company stopped processing of domestic and
international operator-assisted calls originating in the United States and
Jamaica in an effort to increase overall company margins. Depending upon the
mix of retail and wholesale business processed by the Company in fiscal 1999,
management anticipates that gross margins on its business will remain relatively
stable throughout the year. In an effort to control selling, general and
administrative expenses and produce better cash flows from operations, in July
1998 management developed a cost reduction program. Among other things, the
program analyzes personnel-related costs and duties among all of the Company's
subsidiaries. No assurance may be given, however, that the Company's revenues
will increase, that gross margins will remain stable, or that selling, general
and administrative costs will decrease during fiscal 1999.
The Company currently has the infrastructure and capacity available to
increase revenues, but will need to continue to find additional sources of funds
in order to produce additional revenue growth rates. In order to meet it
current obligations and debt service requirements, the Company will need to find
additional long-term sources of working capital, or will need to produce enough
positive cash flow from its operations to satisfy those obligations. As of July
31, 1998, the Company has approximately 3.4 million warrants outstanding which
expire on or prior to July 31, 1999. If exercised, these warrants would provide
approximately $3.4 million in cash proceeds to the Company during fiscal 1999.
In July 1998, the Company engaged the investment banking firm of Houlihan Lokey
Howard & Zukin Capital to assist it in, among other things, arranging financing
to support the Company's current and future operations. However, there can be
no assurance that such financing will be arranged, that the Company will be able
to achieve and warrant exercises will take place in an amount sufficient for the
Company to meet its working capital and expansion needs.
INFLATION/FOREIGN CURRENCY
Inflation has not had a significant impact on the Company's operations.
With the exception of a portion of the contract entered into with the Mexican
milk producer in April 1996 and direct dial services from the Company's casetas
and coin operated public telephones, almost 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 calls via Mexican carriers, 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. Although the Company
maintains several bank accounts in Mexico which are denominated in Mexican
pesos, balances in such accounts are kept at minimum levels.
SEASONALITY
The Company's call service revenues are typically higher on a per phone
basis during January through July, the peak tourism months in Mexico.
23
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN TELESOURCE INTERNATIONAL, INC.,
AND SUBSIDIARIES
Report of Independent Public Accountant................................ 25
Consolidated Balance Sheets as of July 31, 1997 and 1998............... 26
Consolidated Statements of Operations for the Years Ended
July 31, 1996, 1997 and 1998........................................... 27
Consolidated Statements of Stockholders' Equity for the Years
Ended July 31, 1996, 1997 and 1998..................................... 28
Consolidated Statements of Cash Flows for the Years Ended
July 31, 1996, 1997 and 1998........................................... 29
Notes to Consolidated Financial Statements............................. 30
24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American TeleSource International, Inc.:
We have audited the accompanying consolidated balance sheets of American
TeleSource International, Inc. (a Delaware corporation) and subsidiaries (the
Company) as of July 31, 1997 and 1998, and the related consolidated statements
of operations, stockholders' equity and cash flows for the years ended July 31,
1996, 1997 and 1998. 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 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, 1997 and 1998, and the
results of their operations and their cash flows for the years ended July 31,
1996, 1997 and 1998, 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 a working capital
deficit, has suffered recurring losses from operations since inception, has
negative cash flows from operations 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.
The Company'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 including
goodwill and other intangibles 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
San Antonio, Texas
October 2, 1998
25
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
<TABLE>
<CAPTION>
July 31, July 31,
1997 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,921 $ 1,091
Accounts receivable, net of allowance of $187 and $209, respectively 2,208 3,748
Stock subscriptions receivable 1,113 --
Prepaid expenses and other assets 747 844
-------- --------
Total current assets 5,989 5,683
-------- --------
PROPERTY AND EQUIPMENT (At cost): 7,499 14,233
Less - Accumulated depreciation and amortization (927) (2,418)
-------- --------
Net property and equipment 6,572 11,815
-------- --------
OTHER ASSETS, net
Goodwill, net 2,265 5,091
Contracts, net -- 1,173
Other assets 995 489
-------- --------
Total assets $ 15,821 $ 24,251
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,932 $ 5,683
Accrued liabilities 2,286 2,113
Current portion of notes payable 316 688
Current portion of convertible long-term debt 100 --
Current portion of obligations under capital leases 696 2,351
Deferred revenue 464 535
-------- --------
Total current liabilities 5,794 11,370
-------- --------
LONG-TERM LIABILITIES:
Notes payable, less current portion 498 719
Convertible long-term debt, less current portion 1,297 1,604
Obligations under capital leases, less current portion 1,005 2,941
Other 597 530
-------- --------
Total long-term liabilities 3,397 5,794
-------- --------
MINORITY INTEREST (306) --
-------- --------
COMMITMENTS AND CONTINGENCIES: (Note 6, 14, 15)
STOCKHOLDERS' EQUITY:
Preferred shares, no par value, unlimited shares authorized, no shares
issued and outstanding at July 31, 1997 -- --
Preferred stock, $0.001par value, 10,000,000 shares authorized, no shares
issued and outstanding at July 31, 1998 -- --
Common shares, no par value, unlimited shares authorized,
36,787,105 issued and outstanding at July 31, 1997 17,376 --
Common stock, $0.001 par value, 100,000,000 shares authorized,
45,603,566 issued and outstanding at July 31, 1998 -- 46
Additional paid in capital -- 22,248
Accumulated deficit (9,302) (14,396)
Deferred compensation (1,154) (667)
Cumulative translation adjustment 16 (144)
-------- --------
Total stockholders' equity 6,936 7,087
-------- --------
Total liabilities and stockholders' equity $ 15,821 $ 24,251
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Years Ended July 31,
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
OPERATING REVENUES:
Call services $ 10,807 $ 12,545 $ 13,547
Direct dial services -- 1,421 6,085
Network management services 2,614 1,698 13,362
Internet e-commerce 54 564 1,526
-------- -------- --------
Total operating revenues 13,475 16,228 34,520
-------- -------- --------
OPERATING EXPENSES:
Cost of services 10,833 12,792 22,287
Selling, general and administrative 4,430 7,047 13,877
Depreciation and amortization 281 591 1,822
-------- -------- --------
Total operating expenses 15,544 20,430 37,986
-------- -------- --------
OPERATING LOSS (2,069) (4,202) (3,466)
OTHER INCOME (EXPENSE):
Interest income 7 27 76
Other income 7 68 32
Other expense -- (27) (24)
Interest expense (150) (513) (1,573)
-------- -------- --------
Total other income (expense) (136) (445) (1,489)
-------- -------- --------
LOSS BEFORE INCOME TAX EXPENSE
AND MINORITY INTEREST (2,205) (4,647) (4,955)
FOREIGN INCOME TAX EXPENSE -- -- (139)
MINORITY INTEREST -- (48) --
-------- -------- --------
NET LOSS ($2,205) ($4,695) ($5,094)
======== ======== ========
BASIC AND DILUTED LOSS PER SHARE ($0.11) ($0.18) ($0.12)
======== ======== ========
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 19,928 26,807 41,093
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Preferred Shares Common Stock
------------------ ------------------ Additional
Shares Amount Shares Amount Paid In Capital
------ ------ ------ ------ ---------------
<S> <C> <C> <C> <C> <C>
BALANCE, July 31, 1995 - - 18,197 $3,723 -
Issuances of common shares
for cash - - 4,516 2,253 -
Issuances of common shares
for services - - 1,062 312 -
Compensation expense - - - - -
Cumulative effect of translation
adjustment - - - - -
Net loss - - - -
------ ------ ------ ------ ---------------
BALANCE, July 31, 1996 - - 23,775 6,288 -
Issuances of common shares
for cash - - 5,760 4,736 -
Conversion of convertible debt
to common shares - - 3,612 1,967 -
Issuance of common shares for
acquisition - - 2,716 1,847 -
Issuances of common shares
for services - - 925 154 -
Deferred compensation - - - 1,394 -
Compensation expense - - - - -
Warrants issued with
convertible long term debt - - - 990 -
Cumulative effect of
translation adjustment - - - - -
Net loss - - - - -
------ ------ ------ ------ ---------------
BALANCE, July 31, 1997 - - 36,788 $17,376 -
Issuances of common shares
for cash - - 5,500 3,496 -
Issuances of common shares
for reduction in indebtedness - - 2,871 1,076 -
Conversion of convertible debt
to common shares - - 200 100 -
Issuances of common shares for
services - - 245 246 -
Compensation expense - - - - -
Cumulative effect of
translation adjustment - - - - -
Exchange of common shares
for common stock - - - (22,248) 22,248
Net loss - - - -
------ ------ ------ ------ ---------------
BALANCE, July 31, 1998 - - 45,604 $46 $22,248
====== ====== ====== ====== ===============
<CAPTION>
Cumulative Total
Accumulated Translation Deferred Stockholders'
Deficit Adjustment Compensation Equity
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, July 31, 1995 ($2,402) - ($89) $1,232
Issuances of common shares
for cash - - - 2,253
Issuances of common shares
for services - - - 312
Compensation expense - - 34 34
Cumulative effect of translation
adjustment - 4 - 4
Net loss (2,205) - - (2,205)
----------- ----------- ------------ ------------
BALANCE, July 31, 1996 (4,607) 4 (55) 1,630
Issuances of common shares
for cash - - - 4,736
Conversion of convertible debt
to common shares - - - 1,967
Issuance of common shares for
acquisition - - - 1,847
Issuances of common shares
for services - - - 154
Deferred compensation - - (1,394) 0
Compensation expense - - 295 295
Warrants issued with
convertible long term debt - - - 990
Cumulative effect of
translation adjustment - 12 - 12
Net loss (4,695) - - (4,695)
----------- ----------- ------------ ------------
BALANCE, July 31, 1997 ($9,302) $16 ($1,154) $6,936
Issuances of common shares
for cash - - - 3,496
Issuances of common shares
for reduction in indebtedness - - - 1,076
Conversion of convertible debt
to common shares - - - 100
Issuances of common shares for
services - - - 246
Compensation expense - - 487 487
Cumulative effect of
translation adjustment - (160) - (160)
Exchange of common shares
for common stock - - - 0
Net loss (5,094) - - (5,094)
----------- ----------- ------------ ------------
BALANCE, July 31, 1998 ($14,396) ($144) ($667) $ 7,087
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended July 31,
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($2,205) ($4,695) ($5,094)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization 281 591 1,822
Amortization of debt discount -- 87 307
Deferred compensation 33 295 487
Cumulative translation adjustment -- 12 (160)
Provision for losses on accounts receivable 554 735 1,024
Minority interest -- 48 --
Changes in operating assets and liabilities-
Increase in accounts receivable (724) (1,983) (2,723)
(Increase) decrease in prepaid expenses and other assets (10) (861) 357
Increase (decrease) in accounts payable 420 (1,025) 3,479
Increase (decrease) in accrued liabilities 342 884 (192)
Increase (decrease) in deferred revenue (65) 378 71
Other 22 4 --
------- ------- -------
Net cash used in operating activities (1,352) (5,530) (622)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (475) (590) (3,297)
Acquisition of business, net of cash acquired -- 73 (2,112)
Issuance of notes receivable (88) -- --
Payments received on notes receivable 42 101 --
------- ------- -------
Net cash used in investing activities (521) (416) (5,409)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt -- 3,913 2,547
Payments on debt (33) -- (788)
Capital lease payments (68) (401) (1,044)
Payments on long-term liabilities -- -- (67)
Proceeds from issuance of common stock,
net of issuance costs 2,528 3,699 4,553
------- ------- -------
Net cash provided by financing activities 2,427 7,211 5,201
------- ------- -------
NET INCREASE (DECREASE) IN CASH 554 1,265 (830)
CASH AND CASH EQUIVALENTS, beginning of period 102 656 1,921
------- ------- -------
CASH AND CASH EQUIVALENTS, end of period $ 656 $ 1,921 $ 1,091
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The accompanying consolidated financial statements are those of American
TeleSource International, Inc. ("ATSI" or the "Company"). The Company was
formed on June 6, 1996 under the laws of the state of Delaware for the express
purpose of effecting a "Plan of Arrangement" with American TeleSource
International, Inc., which was incorporated under the laws of the province of
Ontario, Canada (hereinafter referred to as "ATSI-Canada"). The Plan of
Arrangement called for the stockholders of ATSI-Canada to exchange their shares
on a one-for-one basis for shares of the Company. On April 30, 1998,
shareholders of ATSI-Canada approved the Plan of Arrangement, and on May 11,
1998, ATSI-Canada became a wholly owned subsidiary of the Company. The Company
is publicly traded on the OTC Bulletin Board under the symbol "AMTI".
The accompanying consolidated financial statements reflect the financial
position of ATSI-Canada and subsidiaries as of July 31, 1997, and the results of
their operations and cash flows for the years ended July 31, 1996 and 1997. The
accompanying consolidated balance sheet dated July 31, 1998 includes the assets,
liabilities and shareholders' equity of ATSI-Canada which were transferred to
the Company on May 11, 1998, and the accompanying statement of operations for
the year ended July 31, 1998 includes the consolidated operations of ATSI-Canada
through May 11, 1998.
In May 1997, ATSI-Canada entered into an agreement to purchase up to 100%
of the outstanding shares of Sistema de Telefonia Computarizada, S.A. de C.V.
("Computel"), the largest privately-owned operator of casetas (public calling
stations) in Mexico. Under the terms of the agreement, ATSI-Canada acquired 55%
of the shares of Computel effective May 1, 1997 and the remaining 45% effective
August 28, 1997. As ATSI-Canada acquired majority ownership effective May 1,
1997, the Company has recorded 100% of the net assets and liabilities of
Computel as of that date. The Company's consolidated financial statements for
the period May 1, 1997 to July 31, 1997 include the impact of the 45% minority
ownership interest. For the year ended July 31, 1998, the Company's consolidated
financial statements include 100% of the activities of Computel.
In July 1997, American TeleSource International de Mexico, S.A. de C.V.
("ATSI-Mexico") acquired 100% of the outstanding stock of Servicios de
Infraestructura, S.A. de C.V. ("Sinfra"). In April 1998, TeleSpan purchased
100% of the outstanding stock of Sinfra from ATSI-Mexico.
Through its subsidiaries, the Company provides retail and wholesale
communications services within and between the United States and select markets
within Latin America. Utilizing a framework of licenses, interconnection and
service agreements, network facilities and distribution channels, the Company
aims to provide U.S standards of reliability to Mexico and other markets within
Latin America which have historically been underserved by telecommunications
monopolies. As of July 31, 1998, the Company's operating subsidiaries are as
follows:
American TeleSource International, Inc. ("ATSI-Texas" a Texas corporation)
ATSI-Texas owns and operates a switching facility and multilingual call
center in San Antonio, Texas. This facility provides U.S. based call services
to public telephones owned by ATSI-Mexico and casetas owned by Computel in
Mexico, as well as to third party-owned public telephones, casetas and hotels in
Mexico. Although these calls originate in Mexico, they are terminated and
billed in the United States and Mexico by ATSI-Texas. In July 1998, ATSI-Texas
also began providing domestic U.S. and international call services to
residential customers in the U.S.
American TeleSource International de Mexico, S.A. de C.V.
("ATSI-Mexico" a Mexican corporation)
ATSI-Mexico owns and operates coin-operated public telephones in Mexico.
Utilizing its 20-year comercializadora license, ATSI purchases telephone lines
and resells local, long distance and international calls from public telephones
connected to the lines. Direct dial calls may be made from the telephones using
pesos or quarters, and users may use the services of ATSI-Texas to place calls
to the U.S. by billing calls to valid third parties, credit cards or calling
cards.
30
<PAGE>
Computel (a Mexican corporation)
Computel is the largest private operator of casetas in Mexico, operating
approximately 134 casetas in 70 cities. Direct dial calls may be made from the
casetas using cash or credit cards, and users may use the services of ATSI-Texas
to place calls to the U.S. by billing calls to valid third parties, credit cards
or calling cards. Computel utilizes telephone lines owned by ATSI-Mexico.
Sinfra (a Mexican corporation)
Utilizing its 20-year Teleport and Satellite Network license, Sinfra owns
and operates the Company's teleport facilities in Cancun, Monterrey and Mexico
City, Mexico. These facilities are used for the provision of international
private network services. Sinfra also owns a 15-year Packet Switching Network
license which is not currently being utilized by the Company. However, the
Company's business plan calls this license to be utilized in fiscal 1999.
TeleSpan, Inc.("TeleSpan" a Texas corporation)
TeleSpan owns and operates the Company's teleport facilities in the United
States and Costa Rica. TeleSpan contracts with U.S.-based entities and carriers
seeking facilities or increased capacity into Mexico, Costa Rica, El Salvador
and Guatemala. For network services into Mexico, TeleSpan utilizes facilities
owned by Sinfra.
GlobalScape, Inc. ("GlobalSCAPE" a Texas corporation)
GlobalSCAPE markets CuteFTP and other digitally downloadable software
products and distributes them over the Internet utilizing electronic software
distribution ("ESD").
2. FUTURE OPERATIONS, LIQUIDITY, CAPITAL RESOURCES AND VULNERABILITY DUE
TO CERTAIN CONDITIONS
The accompanying consolidated financial statements of the Company have been
prepared on the basis of accounting principles applicable to a going concern.
For the period from December 17, 1993 to July 31, 1998, the Company has incurred
cumulative net losses of $14.3 million. Further, the Company had a working
capital balance of $194,876 at July 31, 1997 and a working capital deficit of
$5.7 million at July 31, 1998. Further, the Company had negative cash flows
from operations of $1.4 million, $5.5 million and $.6 million for the years
ended July 31, 1996, 1997 and 1998, respectively. The Company has limited
capital resources available to it, and these resources may not be available to
support its ongoing operations until such time as the Company is able to
generate positive cash flow from operations. There is no assurance the Company
will be able to achieve future revenue levels sufficient to support operations
or recover its investment in property and equipment, goodwill and other
intangible assets. 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 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.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared on the accrual
basis of accounting under generally accepted accounting principles of the U.S.
All significant intercompany balances and transactions have been eliminated in
consolidation. Certain prior period amounts have been reclassified for
comparative purposes.
31
<PAGE>
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 call services and direct dial
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. Revenues related to the Company's Internet product are recognized at
the point of sale, as the Company bears no additional obligation beyond the
provision of its software product.
Foreign Currency Translation
Mexico's economy has been designated as highly inflationary. GAAP requires
the functional currency of highly inflationary economies to be the same as the
reporting currency. Accordingly, the consolidated financial statements of ATSI-
Mexico and Computel, whose functional currency is the peso, are remeasured from
the peso into the U.S. dollar for consolidation. Monetary and nonmonetary
assets and liabilities are remeasured into U.S. dollars using current and
historical exchange rates, respectively. The operating activities of ATSI-Mexico
and Computel are remeasured into U.S. dollars using a weighted-average exchange
rate. The resulting translation gains and losses are charged directly to
cumulative translation adjustment, a component of shareholders' equity, and are
not included in net loss until realized through sale or liquidation of the
investment.
ACCOUNTS RECEIVABLE
The Company utilizes 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 billing clearinghouse. This agreement allows ATSI to submit
call detail records to the clearinghouse, which in turn forwards these records
to the local telephone company to be billed. The clearinghouse collects the
funds from the local telephone company and then remits the funds, net of
charges, to ATSI. Because this collection process can take up to 90 days to
complete, ATSI participates in an advance funding program offered by the
clearinghouse whereby 100% of the call records are purchased for 75% of their
value within five days of presentment. The remaining 25% value of the call
records are remitted to ATSI, net of interest and billing charges and an
estimate for uncollectible calls, as the clearinghouse collects the funds from
the local telephone companies. Under the advanced funding agreement, the
collection clearinghouse has a security interest in the unfunded portion of the
receivables as well as future receivables generated by the Company's long
distance business. The allowance for doubtful accounts reflects the Company's
estimate of uncollectible calls at July 31, 1997 and 1998. ATSI currently pays
a funding charge of prime plus 4% per annum on the amounts which are advanced to
ATSI. Receivables sold with recourse during fiscal years 1996, 1997, and 1998
were $7,673,091, $8,530,665 and $11,127,221 respectively. At July 31, 1996,
1997 and 1998, $499,986, $577,256 and $484,381 of such receivables were
uncollected, respectively. See Note 5 for additional disclosure regarding
advanced funding.
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 125 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". This statement provides accounting
and reporting standards for, among other things, the transfer and servicing of
financial assets, such as factoring receivables with recourse. The adoption of
these statements has not had a material impact on the financial position or
results of operations of the Company.
Loss Per Share
Loss per share was calculated using the weighted average number of common
shares outstanding for the years ended July 31, 1996, 1997 and 1998. Common
stock equivalents, which consist of the stock purchase warrants and options
described in Note 9, were excluded from the computation of the weighted average
number of common shares outstanding because their effect was antidilutive.
In Fiscal 1998, the Company adopted 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,
32
<PAGE>
"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 a complex capital
structure.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are computed on a straight-line basis over the estimated useful lives of the
related assets, which range from five to fifteen years. Expenditures for
maintenance and repairs are charged to expense as incurred. Direct installation
costs and major improvements are capitalized.
Effective for the fiscal years beginning after July 31, 1996, the Company
follows as prescribed under Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of ("SFAS 121"). SFAS 121 requires an assessment of the
recoverability of the Company's investment in long-lived assets to be held and
used in operations whenever events or circumstances indicate that their carrying
amounts may not be recoverable. Such assessment requires that the future cash
flows associated with the long-lived assets be estimated over their remaining
useful lives and an impairment loss be recognized when the future cash flows are
less than the carrying value of such assets. As of July 31, 1998, 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.
GOODWILL, CONTRACTS AND OTHER ASSETS
Other assets include organization costs as of July 31, 1996, 1997, and 1998
of $219,217, $145,373 and $146,597, respectively, net of accumulated
amortization of $55,505, $82,096 and $108,895, respectively. Organization costs
have an estimated useful life of 5 years. As of the years ended July 31, 1997
and July 31, 1998, other assets also include goodwill related to the purchase of
Computel of $2,279,231 and $5,216,646, respectively, net of accumulated
amortization of $14,245 and $126,668, respectively. Goodwill is amortized over
40 years. As of July 31, 1997 and 1998 other assets include acquisition costs
of $399,596, and $1,417,870, respectively, related to the Company's acquisitions
of several of its independent marketing representatives, net of accumulated
amortization of $14,655, and $244,652, respectively. These acquisition costs
are being amortized over the life of the contracts, which approximates three
years. Additionally, as it relates to SFAS 121, as of July 31, 1998, the Company
has determined that the estimated future cash flows associated with its goodwill
and other intangible assets are greater than the carrying value of such assets
and that no impairment loss needs to be recognized.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", ("SFAS
109"). Under the provisions of SFAS 109, the Company recognizes deferred tax
liabilities and assets 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 in the period in which the tax laws or rates are changed.
33
<PAGE>
Statements of Cash Flows
Cash payments and non-cash investing and financing activities during the
periods indicated were as follows:
For the Years Ended July 31,
----------------------------------
1996 1997 1998
---------- ---------- ----------
Cash payments for interest $ 150,231 $ 416,756 $1,349,679
Cash payments for taxes $ - $ - $ 148,097
Common shares issued for services $ 312,009 $ 153,885 $ 246,591
Common shares issued for acquisition of
Computel $ - $1,846,569 $ -
Assets acquired in acquisition of Computel
$ - $3,418,753 $ -
Liabilities assumed in acquisition of
Computel $ - $4,205,404 $ -
Conversion of convertible debt to common
shares $ - $1,966,531 $ 100,000
Capital lease obligations incurred $ 572,268 $1,521,875 $4,635,693
One-for-one exchange of shares of
ATSI-Canada for stock of ATSI-Delaware $ - $ - $ -
Common share subscriptions sold $ - $1,113,170 $ -
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
and cash equivalents.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and disclosure of comprehensive income and its components in a full
set of financial statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997, and requires reclassification of comparative
financial statements for earlier periods. Management of the Company believes
that the adoption of SFAS No. 130 will result in the presentation of
comprehensive income (loss) that differs from net income (loss) as presented in
the accompanying financial statements to the extent of foreign currency
translation adjustments as shown in the accompanying consolidated statements of
stockholders' equity.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which establishes standards for
reporting information about operating segments in annual and interim financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise." Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. SFAS No. 131 need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application. While the exact impact is not readily discernible, management of
the Company believes that the adoption of SFAS No. 131 may effect its segment
disclosures.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument held by the Company:
34
<PAGE>
Current assets and current liabilities: The carrying value
approximates fair value due to the short maturity of these items.
Long-term debt and convertible debt: Since the Company's debt is not
quoted, estimates are based on each obligations' characteristics, including
remaining maturity, interest rate, credit rating, collateral, amortization
schedule and liquidity (without consideration for the convertibility of the
notes). The Company believes that the carrying amount does not differ
materially from the fair value.
4. PROPERTY AND EQUIPMENT, NET (at cost)
Following is a summary of property and equipment at July 31, 1997 and 1998:
July 31,
-------
1997 1998
---- ----
Telecommunications equipment $2,575,531 $ 6,084,771
Land and buildings 1,912,310 892,507
Furniture and fixtures 186,231 882,449
Equipment under capital leases 2,084,528 5,585,291
Leasehold improvements 240,137 281,014
Other 499,852 517,192
---------- -----------
7,498,589 14,233,224
Less: accumulated depreciation and
amortization (926,601) (2,418,514)
---------- -----------
Total property and equipment, net $6,571,988 $11,814,710
========== ===========
Depreciation expense as reported in the Company's consolidated statements
of operations includes depreciation expense related to the Company's capital
leases.
5. NOTES PAYABLE AND CONVERTIBLE DEBT
NOTES PAYABLE
Notes payable are comprised of the following:
July 31,
-------
1997 1998
---- ----
Note payable to a company, see terms below. $ 256,366 $ 625,320
Notes payable to various banks, see terms below. 558,112 416,846
Note payable to a company, net of discount, see terms
below. - 364,803
-------- ----------
$814,478 $1,406,969
======== ==========
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 a billing clearinghouse, as discussed in Note 3. These advances are
typically outstanding for periods of less than 90 days, and are repaid,
including accrued interest, by the clearinghouse on behalf of the Company as its
receivables from long distance call services are collected. The
35
<PAGE>
Company is charged 4% per month for these fundings. The agreement expires in
November 1998 and is collateralized by the Company's general assets, rights and
interests.
As of July 31, 1997 and July 31, 1998, the Company through its acquisition
of Computel had approximately $558,000 and $417,000, respectively, of bank notes
payable to various banks in Mexico. The notes have interest rates ranging from
8% to 15%, with monthly principal and interest payments of approximately $7,500.
The notes mature between October 1999 and December 2015 and are collaterized by
the assets of Computel.
During October 1997, the Company entered into a note payable with a company
in the amount of $1,000,000. The note calls for quarterly payments of principal
and interest beginning in January 1998 and continuing until October 2004.
Interest accrues on the unpaid principal at the rate of 13% per year. The
Company also issued 250,000 warrants to the note holder which carry an exercise
price of $3.56. These warrants expire in October 2000. The amount of debt
discount recorded by the Company related to the issuance of these warrants was
$103,333. The fair value of the warrants was based on the date of issuance using
an option pricing model with the following assumptions: Dividend yield of 0.0%,
expected volatility of 30%, risk-free interest rate of 6.00%, and an expected
life of three years. The warrants expire three years from their date of
issuance, and are not exercisable for a period of one year after their initial
issuance.
In January 1998, the noteholder exercised 700,000 warrants at an exercise
price of $0.70, unrelated to the warrants noted above, called by the Company, in
consideration of an approximate $500,000 reduction of the Company's debt due the
noteholder.
CONVERTIBLE DEBT
In March and May 1997, the Company issued $2.2 million in convertible
notes, interest at 10%. The principal and interest, which accrues quarterly, is
due and payable three years from the date of issuance. The convertible notes
convert into fully redeemable preferred stock at the Company's option. In
addition, for each $50,000 unit of convertible debt, each holder was issued
108,549 warrants to purchase an equal number of shares of common stock at $0.27
per share. The fair value of the warrants was determined to be $0.37 per share
and the Company assigned $990,000 to the value of the warrants in stockholders'
equity. The fair value of the warrants was based on the date of issuance using
an option pricing model with the following assumptions: Dividend yield of 0.0%,
expected volatility of 62%, risk-free interest rate of 6.35%, and an expected
life of three years. The warrants expire three years from their date of
issuance, and are not exercisable for a period of one year after their initial
issuance. The Company has recorded the $990,000 as debt discount and is
amortizing the discount over the term of the debt based on the effective
interest method. Principal outstanding as of July 31, 1997 and July 31, 1998,
net of debt discount, was $1,296,560 and $1,603,802, respectively.
Maturities of notes payable and convertible debt as of July 31, 1998 were
as follows:
1999 $ 688,005
2000 1,710,398
2001 101,806
2002 109,695
2003 118,661
Thereafter 282,206
----------
Total $3,010,771
==========
36
<PAGE>
6. LEASES
Operating Leases
The Company leases office space, furniture, equipment and network capacity
under noncancelable operating leases and certain month-to-month leases. During
fiscal 1997 and 1998, the Company also leased equipment under capital leasing
arrangements. Rental expense under the operating leases for the years ended
July 31, 1996, 1997 and 1998, was $136,107, $176,700 and $942,750, respectively.
Future minimum lease payments under the noncancelable operating leases at July
31, 1998, are as follows:
1999 $2,645,522
2000 2,646,057
2001 2,007,262
2002 107,844
2003 8,987
Thereafter 0
----------
Total minimum lease payments $7,415,672
==========
Capital Leases
Future minimum lease payments under the capital leases together with the
present value of the net minimum lease payments at July 31, 1998, are as
follows:
1999 $2,415,339
2000 2,099,153
2001 1,086,644
2002 25,152
2003 2,096
----------
Total minimum lease payments 5,628,384
Less: Amount representing taxes (69,731)
----------
Net minimum lease payments 5,558,653
Less: Amount representing interest (266,257)
----------
Present value of net minimum lease payments $5,292,396
==========
In April 1997, the Company, through ATSI-Mexico secured a capital lease
facility with IBM de Mexico to purchase intelligent pay telephones for
installation in Mexico. The capital lease facility of approximately $1.725
million has allowed the Company to install U.S. standard intelligent pay
telephones in various Mexican markets. In April 1998, the Company through ATSI-
Mexico secured an additional capital lease facility with IBM de Mexico for
approximately $2.9 million to increase network capacity and to fund the purchase
and installation of public telephones in Mexico. The lease facility calls for
monthly principal and interest payments of approximately $100,000 beginning in
April 1998 and continuing through March 2001. Interest accrues on the facility
at an interest rate of approximately 11% per year. The obligation outstanding
under said facilities at July 31, 1997 and July 31, 1998 was approximately
$1,108,000, and $4,272,000, respectively. The Company's capital leases have
interest rates ranging from approximately 11% to 14%.
7. 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.
37
<PAGE>
8. SHARE CAPITAL
As discussed in Note 1, in May 1998, the Company completed its Plan of
Arrangement whereby the shareholders of ATSI-Canada exchanged their shares on a
one-for-one basis for shares of ATSI-Delaware stock. The exchange of shares
resulted in the recording on the Company's books of $0.001 par value stock and
additional paid-in capital.
During the year ended July 31, 1996, the Company issued 5,577,210 Common
shares. 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.
During the year ended July 31, 1997, the Company issued 13,012,448 Common
shares. Of this total, 5,760,355 shares were issued for approximately
$4,737,000 of net cash proceeds, 924,761 shares were issued for services
rendered to the Company, 3,611,786 shares were issued for the conversion of
convertible debt to common shares, and 2,715,546 shares were issued related to
the Company's acquisition of Computel. (See Note 10).
During the year ended July 31, 1998, the Company issued 8,816,461 of its
common shares. Of this total, 7,765,174 shares were issued for approximately
$3.2 million of net cash proceeds and reductions in indebtedness of
approximately $1.1 million through the exercise of 7,765,174 warrants and
options, 245,016 shares were issued for services rendered to the Company,
200,000 were issued resulting from the conversion of a $100,000 convertible note
and 606,271 shares were issued for approximately $333,000 in net cash proceeds.
At July 31, 1997 and 1998, stock subscription receivables of $1,113,170 and
$0, respectively, were outstanding related to sales of common stock. Such
amounts were collected by the Company subsequent to the related periods ended.
No dividends were paid on the Company's stock during the years ended July 31,
1997 and 1998.
The shareholders of ATSI-Canada approved the creation of a class of
preferred stock at the Company's annual shareholders meeting on May 21, 1997.
Effective June 25, 1997, the class of preferred stock was authorized under the
Ontario Business Corporations Act. According to the Company's amended Articles
of Incorporation, the Company's Board of Directors may issue, in series, an
unlimited number of preferred shares, without par value. No preferred shares
have been issued as of July 31, 1998.
Pursuant to ATSI-Delaware's Certificate of Incorporation, the Company's Board
of Directors may issue, in series, an unlimited number of preferred shares, with
a par value of $0.001. No preferred shares have been issued as of July 31,
1998.
9. STOCK PURCHASE WARRANTS AND STOCK OPTIONS
For the period ending July 31, 1998, certain shareholders and holders of
convertible debt of the Company were issued warrants to purchase shares of
common stock at exercise prices ranging from $0.75 to $3.56 per share.
Following is a summary of warrant activity from July 31, 1996 through July 31,
1998:
JULY 31, 1997 JULY 31, 1998
Warrants outstanding, beginning 8,097,463 14,489,942
Warrants issued 9,931,854 667,400
Warrants expired (777,200) -
Warrants exercised (2,762,175) (7,595,174)
---------- ----------
Warrants outstanding, ending 14,489,942 7,562,168
========== ==========
38
<PAGE>
Warrants outstanding at July 31, 1998 expire as follows:
NUMBER OF WARRANTS Exercise Price EXPIRATION DATE
- ------------------ -------------- ---------------
342,210 $1.00 November 14, 1998
518,815 $0.85 November 21, 1998
47,000 $0.85 November 21, 1998
895,290 $1.00 December 15, 1998
50,000 $3.09 March 9, 1999
100,000 $2.00 May 30, 1999
1,060,400 $0.85 July 31, 1999
200,000 $1.45 July 31, 1999
200,000 $1.45 July 31, 1999
30,000 $0.50 December 31, 1999
367,400 $0.85 January 1, 2000
558,824 $0.85 February 7, 2000
1,050,000 $0.70 February 28, 2000
1,649,975 $0.27 February 17, 2000
192,254 $0.75 April 7, 2000
50,000 $2.00 June 20, 2000
250,000 $3.56 October 14, 2000
The Company had two fixed stock plans during 1997. The Company had a stock
option plan that was in existence since May 1994 (the Canadian Plan). No
options were ever issued as part of the Canadian Plan, even though the Company
had the ability to issue options to acquire approximately 2,800,000 shares of
the Company's common stock. In February 1997, the Company's Board of Directors
adopted the 1997 Stock Option Plan, which replaced the Canadian Plan. Under the
1997 Stock Option Plan, options to purchase up to 5,000,000 shares of common
stock may be granted to employees, directors, consultants and advisers. The
1997 Stock Option Plan is intended to permit the Company to retain and attract
qualified individuals who will contribute to the Company's overall success. The
exercise price of all of the options is equal to the market price of the shares
of common stock as of the date of grant. The options vest pursuant to the
individual stock option agreements, usually 33 percent per year beginning one
year from the grant date with unexercised options expiring ten years after the
date of the grant. On February 10, 1997, the Board of Directors granted a total
of 4,488,000 options to purchase Common Shares to directors and employees of the
Company. Certain grants were considered vested based on past service as of
February 10, 1997. The 1997 Stock Option Plan was approved by a vote of the
stockholders at the Company's Annual Meeting of Shareholders on May 21, 1997.
39
<PAGE>
A summary of the status of the Company's 1997 Stock Option Plan for the
years ended July 31, 1997 and 1998 and changes during the periods are presented
below:
July 31, 1997
-------------
Weighted Average
Shares Exercise Price
Outstanding, beginning of year - -
Granted 4,488,000 $0.58
Exercised - -
Forfeited (5,000) $0.58
Outstanding, end of year 4,483,000 $0.58
========= =====
Options exercisable at end of year 1,786,332 $0.58
========= =====
Weighted average fair value of options granted
during the year $0.45
=====
July 31, 1997
-------------
Weighted Average
Shares Exercise Price
Outstanding, beginning of year 4,483,000 $0.58
Granted 429,000 $2.33
Exercised (245,000) $0.58
Forfeited (11,667) $1.28
Outstanding, end of year 4,655,333 $0.74
========= =====
Options exercisable at end of year 2,571,332 $0.58
========= =====
Weighted average fair value of options granted
during the year $1.50
=====
The weighted average remaining contractual life of the stock options
outstanding at July 31, 1998 is approximately 8.5 years.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), was issued. SFAS 123
defines a fair value based method of accounting for employee stock options or
similar equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. Under the fair
value based method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period of the award, which
is usually the vesting period. However, SFAS 123 also allows entities to
continue to measure compensation costs for employee stock compensation plans
using the intrinsic value method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). The Company has adopted
SFAS 123
40
<PAGE>
effective August 1, 1996, and has elected to remain with the accounting
prescribed by APB 25. The Company has made the required disclosures prescribed
by SFAS 123.
In accordance with APB 25, the Company recorded approximately $1.4 million
in deferred compensation expense related to approximately 1.5 million of the
options granted based on the increase in the Company's stock price from February
10, 1997 when the options were granted, to May 21, 1997, when the underlying
1997 Stock Option Plan was approved by the Company's shareholders. As of July
31, 1997 and July 31, 1998, the Company had $1,132,000 and $666,899,
respectively, of deferred compensation expense related to options granted.
Because the Company has elected to remain with the accounting prescribed by
APB 25, no compensation cost has been recognized for its fixed stock option plan
based on SFAS 123. Had compensation cost for the Company's stock-based
compensation plans been determined on the fair value of the grant dates for
awards under the fixed stock option plans consistent with the method of SFAS
123, the Company's net loss (in thousands) and loss per share would have been
increased to the pro forma amounts indicated below:
Year Ended Year Ended
July 31, 1997 July 31, 1998
------------- -------------
Net Loss
As reported $(4,695) $(5,094)
Pro forma $(5,235) $(5,936)
Loss per share
As reported $ (0.18) $ (0.12)
Pro forma $ (0.20) $ (0.14)
The fair value of the option grant is estimated based on the date of grant
using an option pricing model with the following assumptions used for the
grants in 1997 and 1998: Dividend yield of 0.0%, expected volatility of 60% and
46%, respectively, risk-free interest rate of 6.41% and 5.10%, respectively,
and an expected life of ten years. No disclosure is presented for the period
ended July 31, 1996, as no options were issued at that date.
10. ACQUISITION
As discussed in Note 1, the Company acquired 55% of Computel in May 1997
and acquired the remaining shares in August 1997. The total purchase price for
the acquisition of Computel was approximately $3.6 million, of which $1.1
million was paid in cash, $700,000 in a note receivable forgiven by the Company
and approximately $1.8 million in common stock, representing 2,715,546 shares.
The Company recorded the assets and liabilities of Computel as of May 1, 1997.
As Computel had net liabilities at May 1, 1997, the Company recorded goodwill of
$2,279,231 related to the acquisition. The remaining 45% ownership interest is
reflected as minority interest at July 31, 1997. Per the terms of the
agreement, the remaining shares of Computel were acquired in August 1997 for the
previously mentioned cash payment of approximately $1.1 million and forgiveness
of the aforementioned note receivable. The Company recorded additional goodwill
of $2,329,075. The Company has accounted for this acquisition as a "purchase".
The following unaudited pro forma results of operations for the year ended
July 31, 1997, assumes the acquisition of Computel occurred as of the beginning
of the period. Such pro forma information is not necessarily indicative of the
results of future operations.
Pro forma results of operations for the year ended July 31, 1998 have been
omitted, as pro forma results would not materially differ from actual results of
operations for the period ended.
41
<PAGE>
Year Ended July 31, 1997
------------------------
(Unaudited)
Operating revenues $ 20,312,000
Net loss ($5,408,000)
Net loss per share ($0.19)
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments such as additional amortization of
goodwill as a result of the acquisition, and the elimination of intercompany
transactions. The unaudited pro forma information is not necessarily indicative
of the results that would have occurred had such transactions actually taken
place at the beginning of the period specified nor does such information purport
to project the results of operations for any future date or period.
11. 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, the cash
revenues generated by Computel, and the revenues generated by the Company's coin
operated public telephones, 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. However, a portion of the expenses
associated with processing these calls is incurred within Mexico and, as such,
is paid to Mexican entities. Because calls originating from Mexico and the
United States are terminated over shared lines within the United States, the
Company has no exact method of segregating all costs related solely to calls
originating in Mexico as of July 31, 1997 and 1998. Because the calls are
billed and collected on behalf of the Company within the United States, the
Company considers the associated revenues to be generated within the United
States and has reported them as such below.
With the acquisition of Computel in May 1997, the Company began providing
domestic call services in exchange for cash payment within Mexico, through
Computel's casetas. Computel also provides international call services through
ATSI-Texas. In fiscal 1998, the Company also began providing direct dial
services in Mexico through its coin operated public telephones.
International networks effectively establish a communications "pipe"
through which voice, data, fax messages and video signals may be sent both to
and from a customer's desired location in the United States, Mexico, Central and
South America, and the Caribbean Basin. At the customer's discretion, the
Company may contract with either the domestic (U.S.- based) or the foreign
entity in order to provide such services. As of July 31, 1998, 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 parent company, ATSI-Canada, have
42
<PAGE>
been included in the caption headed United States as they are immaterial in
amount. The table includes revenues and operating income of Computel since May
1, 1997 and the identifiable assets of Computel as of July 31, 1997:
<TABLE>
<CAPTION>
For the Years Ended July 31,
----------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Operating revenues from unaffiliated
customers:
Long distance services
United States $ 10,806,586 $ 12,544,732 $ 13,530,771
Mexico and other - 1,421,249 6,101,669
------------ ------------ ------------
Total long distance services $ 10,806,586 $ 13,965,981 $ 19,632,440
============ ============ ============
Network management services
United States $ 1,762,971 $ 2,064,262 $ 14,715,436
Mexico and other 905,127 198,144 196,951
------------ ------------ ------------
Total network management services $ 2,668,098 $ 2,262,406 $ 14,912,387
============ ============ ============
Operating income (loss)
United States ($2,079,456) ($3,927,977) ($1,539,062)
Mexico and other 10,855 (273,740) (1,927,928)
------------ ------------ ------------
Total operating loss ($2,068,601) ($4,201,717) ($3,466,990)
============ ============ ============
Property, Plant and Equipment (net of
Accumulated Depreciation and Amortization)
United States $ 1,915,401 $ 2,513,186 $ 3,790,975
Mexico and other 231,746 4,058,802 8,023,735
------------ ------------ ------------
Total property, plant and equipment $ 2,147,147 $ 6,571,988 $ 11,814,710
============ ============ ============
Identifiable assets
United States $ 3,790,354 $ 6,659,651 $ 6,953,113
Mexico and other 394,138 6,832,794 12,169,799
------------ ------------ ------------
Total identifiable assets $ 4,184,492 $ 13,492,445 $ 19,122,912
============ ============ ============
</TABLE>
43
<PAGE>
12. INCOME TAXES
As of July 31,1998, the Company had net operating loss carryforwards of
approximately $8,584,000 for U.S. federal income tax purposes which are
available to reduce future taxable income of which $767,000 will expire in 2009,
$2,385,000 will expire in 2010, $2,083,000 will expire in 2011, $2,894,000 will
expire in 2012 and $455,000 will expire in 2018. The availability of the net
operating loss (NOL) carryforwards to reduce U.S. federal taxable income is
subject to various limitations in the event of an ownership change as defined in
Section 382 of the Internal Revenue Code of 1986 (the "Code"). The Company
experienced a change in ownership in excess of 50 percent, as defined in the
Code, during the year ended July 31, 1998. This change in ownership limits the
annual utilization of NOL under the Code to $1,284,000 per year, but does not
impact its ability to utilize its NOL's because the annual limitation under the
Code would allow full utilization within the statutory carryforward period.
The tax effects of significant temporary differences representing deferred
income tax assets and liabilities are as follows as of July 31, 1997 and 1998:
<TABLE>
<CAPTION>
July 31, 1997 July 31,1998
<S> <C> <C>
Net operating loss carryforward $ 2,764,000 $ 2,919,000
Other tax differences, net (315,000) 628,000
Valuation allowance (2,449,000) (3,547,000)
----------- -----------
Total deferred income tax assets $ - $ -
=========== ===========
</TABLE>
Income tax expense (all foreign) for the fiscal year ended July 31, 1998,
was approximately $139,000 and relates to the Company's Computel subsidiary
since the date of acquisition.
A valuation reserve of $2,449,000 and $3,547,000, as of July 31, 1997 and
1998, respectively, representing the total of net deferred tax assets has been
recognized by the Company as it cannot determine that it is more likely than not
that all of the deferred tax assets will be realized.
Additionally, the Company's effective tax rate differs from the statutory rate
as the tax benefits have not been recorded on the losses incurred for the years
ended July 31, 1996, 1997 and 1998.
13. SHARES HELD IN TRUST
In May 1994, 300,000 of ATSI-Canada's shares were issued to a trust. These
shares were to be held for future award to employees in return for services to
be rendered to the Company. Because the shares held in trust held no voting
rights, the shares were considered to be issued, but not outstanding, until
awarded and earned by specific employees. As of July 31, 1996 a total of
225,000 of these shares had been awarded to employees for services to be
provided to the Company. During fiscal 1997, the additional 75,000 shares were
awarded to employees. At July 31, 1997 and 1998, the Company had deferred
compensation expense of $22,232 and $0, respectively, associated with the
shares.
14. COMMITMENTS AND CONTINGENCIES
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.
44
<PAGE>
The Company is also a party to additional claims and legal proceedings
arising in the ordinary course of business. The Company believes it is unlikely
that the final outcome of any of the claims or proceedings to which the Company
is a party, including those described above, would have a material adverse
effect on the Company's financial statements; however, due to the inherent
uncertainty of litigation, the range of possible loss, if any, cannot be
estimated with a reasonable degree of precision and there can be no assurance
that the resolution of any particular claim or proceeding would not have an
adverse effect on the Company's results of operations.
15. RISKS AND UNCERTAINTIES
The Company's business is dependent upon key pieces of equipment, switching
and transmission facilities and the Solaridad satellites. Should the Company
experience service interruptions from its underlying carriers, equipment
failures or should there be damage or destruction to the Solaridad satellites
there would likely be a temporary interruption of the Company's services which
could adversely or materially affect the Company's operations. The Company
believes that suitable arrangements could be obtained with other satellite or
fiber optic network operators to provide transmission capacity. Additionally,
the Company's Network Control Center is protected through an uninterruptible
power supply system which, upon commercial power failure, utlilizes battery
back-up until an on-site generator is automatically triggered to supply power.
16. RELATED PARTY TRANSACTIONS
In January 1997, ATSI-Canada entered into an agreement with an
international consulting firm, of which ATSI-Delaware director Carlos K. Kauachi
is president, for international business development support. Under the terms of
the agreement, the Company paid the consulting firm $8,000 per month for a
period of twelve months. In January 1998, the agreement was renewed at $10,000
per month for a period of twelve months.
In April 1998, the Company engaged two companies for billing and
administrative services related to network management services it provides. The
companies, which are owned by Tomas Revesz, an ATSI-Delaware director, were paid
approximately $140,000 for their services during fiscal 1998. Subsequent to
year-end, the Company entered into an agreement with the two companies capping
their combined monthly fees at $18,500 per month.
45
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
--------
ITEM 10. DIRECTORS AND EXEUCTIVE OFFICERS OF THE REGISTRANT
The information called for by item 10 of Form 10-K is incorporated herein by
reference to such information included in the Company' Proxy Statement of the
1998 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by item 11 of Form 10-K is incorporated herein by
reference to such information included in the Company's Proxy Statement for the
1998 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by item 11 of Form 10-K is incorporated herein by
reference to such information included in the Company's Proxy Statement for the
1998 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by item 11 of Form 10-K is incorporated herein by
reference to such information included in the Company's Proxy Statement for the
1998 Annual Meeting of Stockholders.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
Index to Financial Statements appears on Page 24
(b) Reports on Form 8-K
Form 8-K submitted on May 22, 1998 regarding the Company's Plan of
Arrangement.
(c) Exhibits
2 Plan of Arrangement between ATSI-Canada and ATSI-Delaware***
3.1 Articles of Amalgamation of ATSI-Canada*
3.2 Bylaws of ATSI-Canada*
3.3 Amended and restated Certificate of Incorporation of ATSI-Delaware***
3.4 Bylaws of ATSI-Delaware*
4 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.**
10.6 1997 Option Plan**
10.7 Form of Option Agreement**
46
<PAGE>
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*
10.11 FCC Radio Station Authorization-Ku Band*
10.12 Section 214 Certification from FCC*
10.13 Carrier Termination Services Agreement between U.S. Long Distance, Inc.
and ATSI-Texas*
10.14 Office Space Lease Agreement*
10.15 Amendment to Office Lease Agreement****
10.16 Employment Agreement with Arthur L. Smith**
10.17 Employment Agreement with H. Douglas Saathoff**
10.18 Employment Agreement with Craig K. Clement**
10.19 Employment Agreement with Everett L. Waller**
10.20 Employment Agreement with Charles R. Poole**
10.21 Lease/Finance Agreements between IBM de Mexico and ATSI-Mexico****
10.22 Primary Agreement with Computel**
10.23 Agreement with Investcom****
10.24 Payphone License issued to ATSI-Mexico**
10.25 Shared Teleport/Network Resale License issued to ATSI-Mexico**
10.26 Agreement with Avantel**
10.27 Registration Rights Agreement between ATSI-Canada and James R.
Leininger, M.D.**
10.28 Modification Agreement with Computel****
10.29 Office Space Lease Agreement of GlobalSCAPE*****
10.30 Amended and Restated 1997 Option Plan*****
10.31 Agreement with SATMEX (Agreement #095-1)****** CONFIDENTIAL TREATMENT HAS
BEEN REQUESTED FOR SPECIFIC PORTIONS OF THE AGREEMENT.
10.32 Agreement with SATMEX (Agreement #094-1) CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED FOR SPECIFIC PORTIONS OF THE AGREEMENT.
11 Statement of Computation of Per Share Earnings******
22 Subsidiaries of the Company******
23 Consent of Arthur Andersen LLP******
24 Power of Attorney (included on Signature Page to the Registration
Statement)*****
27 Financial Data Schedule******
99.1 Ruling issued by Ontario Securities Commission*****
* Contained in exhibits to Registration Statement on Form S-4 (No. 333-
05557) of the Company filed June 7, 1996.
** Contained in exhibits to Registration Statement on Form 10 (No. 000-
23007) of the Company filed on August 22, 1997.
*** Contained in exhibits to Amendment No. 2 to Registration Statement on
FormS-4 (No. 333-05557) of the Company filed September 11, 1997.
**** Contained in exhibits to Amendment No. 1 to Registration Statement on
Form 10 (No. 023007) of the Company filed October 22, 1997.
***** Contained in exhibits to Registration Statement on Form S-4 (No. 333-
47511) of the Company filed March 6, 1998.
****** filed herewith
47
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto authorized., in San Antonio, Texas on
October 29, 1998.
AMERICAN TELESOURCE INTERNATIONAL, INC.
By:/s/ Arthur L. Smith
---------------------------------
Arthur L. Smith
Chief Executive Officer
By:/s/ H. Douglas Saathoff
---------------------------------
H. Douglas Saathoff
Senior Vice President, Chief
Financial Officer and
Corporate Secretary
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, this report has been signed below by the following persons in the
capacities indicated on October 29, 1998.
SIGNATURE TITLE
--------- -----
/s/ ARTHUR L. SMITH Chairman of the Board, Chief Executive
- ---------------------------------- Officer, Director
Arthur L. Smith
/s/ H. DOUGLAS SAATHOFF Chief Financial Officer, Senior Vice
- ---------------------------------- President, and Corporate Secretary
H. Douglas Saathoff
/s/ RICHARD C. BENKENDORF Director
- ----------------------------------
Richard C. Benkendorf
/s/ CARLOS K. KAUACHI Director
- ----------------------------------
Carlos K. Kauachi
/s/ MURRAY R. NYE Director
- ----------------------------------
Murray R. Nye
/s/ TOMAS REVESZ Director
- ----------------------------------
Tomas Revesz
/s/ ROBERT B. WERNER Director
- ----------------------------------
Robert B. Werner
48
<PAGE>
EXHIBIT INDEX
3 Plan of Arrangement between ATSI-Canada and ATSI-Delaware***
3.1 Articles of Amalgamation of ATSI-Canada*
3.2 Bylaws of ATSI-Canada*
3.3 Amended and restated Certificate of Incorporation of ATSI-Delaware***
3.4 Bylaws of ATSI-Delaware*
4 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.**
10.6 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*
10.11 FCC Radio Station Authorization-Ku Band*
10.12 Section 214 Certification from FCC*
10.13 Carrier Termination Services Agreement between U.S. Long Distance, Inc.
and ATSI-Texas*
10.14 Office Space Lease Agreement*
10.15 Amendment to Office Lease Agreement****
10.16 Employment Agreement with Arthur L. Smith**
10.17 Employment Agreement with H. Douglas Saathoff**
10.18 Employment Agreement with Craig K. Clement**
10.19 Employment Agreement with Everett L. Waller**
10.20 Employment Agreement with Charles R. Poole**
10.21 Lease/Finance Agreements between IBM de Mexico and ATSI-Mexico****
10.22 Primary Agreement with Computel**
10.23 Agreement with Investcom****
10.24 Payphone License issued to ATSI-Mexico**
10.25 Shared Teleport/Network Resale License issued to ATSI-Mexico**
10.26 Agreement with Avantel**
10.27 Registration Rights Agreement between ATSI-Canada and James R.
Leininger, M.D.**
10.28 Modification Agreement with Computel****
10.29 Office Space Lease Agreement of GlobalSCAPE*****
10.30 Amended and Restated 1997 Option Plan*****
10.31 Agreement with SATMEX (Agreement #095-1)****** CONFIDENTIAL TREATMENT HAS
BEEN REQUESTED FOR SPECIFIC PORTIONS OF THE AGREEMENT.
10.32 Agreement with SATMEX (Agreement #094-1) CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED FOR SPECIFIC PORTIONS OF THE AGREEMENT.
11 Statement of Computation of Per Share Earnings******
22 Subsidiaries of the Company******
23 Consent of Arthur Andersen LLP******
24 Power of Attorney (included on Signature Page to the Registration
Statement)*****
27 Financial Data Schedule******
99.1 Ruling issued by Ontario Securities Commission*****
* Contained in exhibits to Registration Statement on Form S-4 (No. 333-
05557) of the Company filed June 7, 1996.
** Contained in exhibits to Registration Statement on Form 10 (No. 000-
23007) of the Company filed on August 22, 1997.
49
<PAGE>
*** Contained in exhibits to Amendment No. 2 to Registration Statement on
FormS-4 (No. 333-05557) of the Company filed September 11, 1997.
**** Contained in exhibits to Amendment No. 1 to Registration Statement on
Form 10 (No. 023007) of the Company filed October 22, 1997.
***** Contained in exhibits to Registration Statement on Form S-4 (No. 333-
47511) of the Company filed March 6, 1998.
****** filed herewith
50
<PAGE>
EXHIBIT 10.31
SATELITES MEXICANOS, S.A. DE C.V.
AGREEMENT NUMBER 095-1
INTERNATIONAL LEASE OF SATELLITE CAPACITY AGREEMENT OF THE MEXICAN SATELLITE
SYSTEM, EXECUTED BY AND BETWEEN SATELITES MEXICANOS, S.A. DE C.V., HEREINAFTER
REFERRED TO AS "SATMEX", HEREIN REPRESENTED BY ENGINEER LAURO ANDRES GONZALEZ
MORENO AS ITS DIRECTOR GENERAL, AND TELESPAN, INC , HEREINAFTER REFERRED TO AS
THE "CUSTOMER", REPRESENTED BY CHARLES RANDY POOLE, ITS LEGAL REPRESENTATIVE, IN
ACCORDANCE WITH THE FOLLOWING RECITALS AND CLAUSES:
RECITALS
1. "SATMEX" STATES:
.1 That it is a corporation incorporated under Mexican Law as recorded in
Public Instrument number 51,371 dated June 26, 1997 executed before Lic.
Miguel Alessio Robles, Notary Public number 19 of Mexico City, and recorded
in the Public Registry of Property and Commerce under file number 226,109;
it's primary corporate purpose is the installation, operation, control and
exploitation of the Mexican Satellite System, via the occupancy and
exploitation of geostationary orbital positions and satellite orbits
assigned to the country, with their respective frequency bands and rights
to transmit and receive signals in the terms of the Federal
Telecommunications Law and the Communications Via Satellite Regulations.
.1 That pursuant to articles 11, section III, 29, second paragraph and
transitory fourth of the Federal Telecommunications Law and 7 of the
Communications Via Satellite Regulations, through concessions dated October
23, 1997 granted by the Minister of the Ministry of Communications and
Transportation a concession was granted to Satelites Mexicanos, S.A. de
C.V. to occupy geostationary orbital positions 109.2 degrees, 113.0 degrees
and 116.8 degrees longitude west for the exclusive exploitation of "C" and
"Ku" frequency bands and the rights to transmit and receive signals.
.1 That Engineer Lauro Andres Gonzalez Moreno, as the Director General, is
sufficiently qualified to execute this agreement, as evidenced by the
Transcript of Public Instrument No. 19258 dated November 26, 1997, granted
before Notary Public No. 102, of Mexico City, Lic. Jose Maria Morera
Gonzalez.
.1 That pursuant to Article 2 section VIII of the Regulations of
Communications Via Satellite, it has the status of a satellite operator,
which is defined as the person who, by a concession or assignment to occupy
geostationary positions or satellite orbits assigned to the country, with
their respective associated frequency bands, operates and exploits a
satellite system allowing it only to provide its satellite capacity to
third parties.
.1 That it satisfies the technical and economic conditions to undertake in
order to provide the service, subject matter of this agreement.
.1 That its Federal Taxpayers Registration number is SME 970626 MK5.
.1 That to exercise and comply with its rights and obligations hereunder, it
shows its domicile as Blvd. M. Avila Camacho 40, 23rd floor, Colonia Lomas
de Chapultepec, 11000, Mexico, D.F.
II "THE CUSTOMER" STATES:
II.1 That it is a corporation duly incorporated under the laws of the
state of Texas, U.S.A. as shown by its Corporate Charter 01481013 dated
February 26, 1998 granted by the Secretary of the
<PAGE>
* CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE
COMMISSION.
State of Texas Alberto R. Gonzales and duly certified with certificate
number N 147451 dated March 9, 1998 acting as Notary Public for the State of
Texas, Kathleen Keller and translated into Spanish by an authorized translator
designated by the Superior Court of Justice of the Federal District.
II.2 That Charles Randy Poole as its legal representative has sufficient
faculty to execute this agreement, as evidenced by a Unanimous Board of
Directors Resolution of Telespan, Inc. dated April 21, 1998 granted
before Notary Public Rubby E. Santiago of the State of Texas and
translated into Spanish by an authorized translator designated by the
Superior Court of Justice of the Federal District. .
II.3 That it presents a certified copy of the documents mentioned in the
preceding recital to allow "SATMEX" to verify their authenticity.
II.4 That it will timely notify "SATMEX" in writing of any modifications of
its corporate name and/or of the power of attorney granted to its legal
representative.
II.5 That it satisfies the applicable laws of the countries of within the
coverage of Solidaridad 2 for Region 2 in which it will operated the
service and has obtained from the respective Regulatory Entities the
authorization(s) required to install, operate or exploit the transmitting
and/or receiving earth station(s).
II.6 That it accepts the General Conditions for Provision of Signal Conduction
via Satellite through the Mexican Satellite System issued by "SATMEX"
(Addendum 1) as well as the Technical Addendum (Addendum II), which duly
signed by the parties, are attached hereto and form an integral part
hereof.
II.7 That it is familiar with the established legal framework both on the
national and international levels to which the provision of services,
subject hereof, are subject, and acknowledges to use said services and
abide by said legal framework, and undertakes to use the services
provided to it by "SATMEX" within the established legal framework in
order to satisfy its communication requirements.
II.8 That it desires to contract the rights and obligations hereunder in the
terms and conditions of the Clauses and Addenda of this agreement.
II.9 For the purposes of this agreement, it shows its domicile 12500 Network
Blvd., Suite 407, San Antonio, Texas USA.
Having stated the above, the parties agree to execute this agreement and comply
with the following.
CLAUSES
FIRST. "SATMEX" agrees to provide THE CUSTOMER with the
* CONFIDENTIAL lease of satellite capacity by assigning the space
PORTIONS HAVE segment on C Band Transponders *, in accordance with
BEEN OMITTED the terms, conditions, technical, legal and rate
AND FILED specifications contained in this agreement and its
SEPARATELY Addenda..
WITH THE
COMMISSION SECOND. "SATMEX" shall assign "THE CUSTOMER" the satellite
access frequencies and their respective operating
parameters based on the link budgets presented by "THE
CUSTOMER" to "SATMEX" for each receiving and/or
transmitting carrier that will accessed by its earth
stations forming its network.
<PAGE>
"SATMEX" may modify the frequencies assigned to THE CUSTOMER, for justified
reasons or optimization of space segment on the satellite, by written
notice to "THE CUSTOMER" "THE CUSTOMER" agrees to make any changes within
an agreed time frame thereby freeing up the prior frequencies.
The satellite, band, coverage region, transponder, polarization, hook-
up points, satellite frequencies, operation parameters, location of
the earth stations, and antenna diameters are described in the Exhibit
II of this agreement. The Exhibit II will be updated when "THE
CUSTOMER" requests modifications or expansion of the contracted
service from "SATMEX", which must first be signed by both parties.
THIRD. "THE CUSTOMER" agrees to notify "SATMEX" in writing any changes and/or
modification of the names, titles, addresses, telephone number(s) and
fax number(s) of the technician(s) responsible for its satellite
network within five (5) days after such change and/or modification.
FOURTH "SATMEX" shall deliver to "THE CUSTOMER" in writing upon execution of
this agreement the frequencies and operating parameters.
FIFTH "THE CUSTOMER" will access and occupy the space segment contracted
with "SATMEX", with its own earth stations or a third party stations
that are part of this network and agrees to use it exclusively to
establish the public telecommunication network described in Addendum
II.
SIXTH The earth stations through which the services are to be provided must
satisfy the specifications and technical characteristics established
by "SATMEX" to operate with the Mexican satellite system having
fulfilled recommendation 580-2 of the CCIR (29-25 log) and operate
with frequency synthesizers and fractional ones. The above is
described in the technical memory of the network delivered by "THE
CUSTOMER" to "SATMEX"
SEVENTH For billing purposes, this agreement shall be in effect three (3) days
after the execution of the agreement even if "THE CUSTOMER" does not
have the necessary equipment to utilize the space segment.
EIGHTH. "SATMEX" will send the monthly billing for the contracted service to
the domicile shown by "THE CUSTOMER" within the first five (5)
business days of each month, which will be in advance. Billing will
be calculated by applying the corresponding tariff for the type of
service.
If "THE CUSTOMER" does not timely receive the invoice at its domicile,
it shall notify "SATMEX's" collection department in order to obtain
the data it needs to timely pay the bill. However, said situation
does not release "THE CUSTOMER" of its payment obligation.
NINTH. If "THE CUSTOMER" objects to any bill issued by "SATMEX", it shall
send a request for verification and/or adjustment in writing, stating
the reasons and causes for its objection, no later than within five
(5) working days following the date of receipt thereof. If its
objection is found to be correct, "SATMEX" will proceed to correct its
bill, extending the payment due date for the equal number of days that
elapsed between the original issued date and the corrected date.
In order to correct the said bill as soon as possible, "THE CUSTOMER"
agrees to provide all the necessary help to "SATMEX".
<PAGE>
* CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION.
TENTH. "THE CUSTOMER" agrees to provide a bond to "SATMEX" to
guarantee payment for the service for * that is equal to three
(3) times the monthly invoice. Said bond shall be issued by a
* duly authorized Mexican institution with "SATMEX" as loss
CONFIDENTIAL payee.
PORTIONS
HAVE BEEN "THE CUSTOMER" agrees to deliver the said guarantee, within
OMITTED AND five (5) business days of execution of this agreement.
FILED
SEPARATELY The bond must contain the following written conditions by the
WITH THE institution providing the bond.
COMMISSION.
-That the bond be granted in the terms of this agreement.
-That in the event Addendum II is modified, "THE CUSTOMER"
shall make any adjustments necessary regarding the bond ,
within three (3) business days of any modification(s).
-That the bond will be in full force until "SATMEX" authorizes
in writing its cancellation.
-That it expressly submits to the jurisdiction and competency
of the Federal Courts of Mexico City, resigning to the forum
that would correspond due to its present or future domicile or
to other causes.
-That it expressly submits to the execution procedure foreseen
in Articles, 95bis and 118 of the "Federal Law of Bond
Institutions".
ELEVENTH. "THE CUSTOMER" agrees to pay "SATMEX", in advance, for the
service tariff number *
* CONFIDENTIAL
PORTIONS HAVE "THE CUSTOMER" agrees to pay by the fifteenth (15) day of each
BEEN OMITTED month. If "THE CUSTOMER" fails to make two (2) consecutive
AND FILED monthly payments, the service will be suspended. In order to
SEPARATELY WITH reactivate "THE CUSTOMER" must pay all outstanding invoices,
THE COMMISSION late payment fees and reconnections charges.
When "THE CUSTOMER" fails to pay two (2) or more monthly
payments, "SATMEX" may assign the capacity to another party.
TWELFTH. Late payment fees are calculated based on the rate resulting
from the sum of the Interbank Rate "TIE" issued by Banco of
Mexico, plus fifty percent (50%), in proportion to the number
of days of delay, divided between twelve (12) months on unpaid
balances of the monthly amounts owed.
Said fees shall apply from the day following payment due date
up to the day payment is received by "SATMEX".
THIRTEENTH. "SATMEX" shall only be responsible, for purposes of
compensation, for service interruptions for space segment or
of its own equipment, except for causes indicated in Paragraph
TWENTY.
In the event of a service interruption, "THE CUSTOMER" shall
immediately notify the "SATMEX" Satellite Control Center so
that it can determine the cause, correct the failure and
reestablish service; it shall also give written notice to
"SATMEX" so that, if applicable, and on the basis of the
technical report of the Control Center, the respective
compensation can be made as established in Addendum I.
<PAGE>
"SATMEX" may interrupt the service whenever necessary to provide
maintenance to its installation or equipment, among others, in
coordination with "THE CUSTOMER" with no compensation due. In any
event, "SATMEX" will attempt to make the least interruptions in order
to cause the least damage possible to "THE CUSTOMER".
"SATMEX" will not be required to pay compensation for interruptions in
the service derived from the operation of earth stations not
authorized or technically approved and that cause interference.
FOURTEENTH. The effective term of this agreement shall be for three (3) years
from the date of execution of this agreement.
FIFTEENTH. "SATMEX" may at any time terminate the present agreement, without
liability, for justified causes or reasons duly justified and proven,
notifying "THE CUSTOMER" thirty (30) business days in advance.
"THE CUSTOMER" may cancel portion of its satellite capacity or
terminate this agreement, by notifying "SATMEX" in writing ninety (90)
business days in advance
In the event "THE CUSTOMER" cancels a portion of its satellite
capacity or terminates this agreement before the term has expired as
stated in Paragraph Fourteen, "THE CUSTOMER" shall pay "SATMEX" a one-
time payment before the date requested by "THE CUSTOMER" an amount
equal to the difference between the already paid and the tariff
corresponding to one year agreements for each month in which the
service was provided; in addition, at the same time "THE CUSTOMER"
shall pay an amount whichever is greater:
a) Twenty percent (20%) of the total payments unpaid from the date of
termination of this agreement up to the end of the original agreed
term. In the event the notification is given during the last third of
the original agreed term, the percentage shall be reduced to 15%, or
b) The monthly tariff applicable to one year agreements, for each
month remaining to conclude the original agreed term not exceeding
twelve (12) months.
In the event of partial cancellation the above mentioned payment shall
apply only to the capacity affected.
The termination date must be referenced as a calendar month (last day
of month).
The premature cancellation or termination of a service does not
release "THE CUSTOMER" from its obligation to pay outstanding amounts
or late payment fees.
"SATMEX" reserves the right to assign to another party the satellite
capacity released by premature termination the day following the
termination or cancellation date.
SIXTEENTH "SATMEX" may terminate this agreement for any of the following causes:
I. If "THE CUSTOMER" assigns this agreement to a third party without
previous consent in writing from "SATMEX".
II. If "THE CUSTOMER" fails to pay two (2) consecutive monthly
invoices or three (3) service interruptions during a one (1) year
period.
III. If "THE CUSTOMER" does not comply to the satellite access
parameters indicated by SATMEX.
<PAGE>
IV. If "THE CUSTOMER" does not deliver in time and form the guarantee
stated in Paragraph Ten.
V. If "THE CUSTOMER" becomes the subject of bankruptcy, insolvency,
reorganization or liquidation proceeding or finds itself under any of
the conditions found in Article 2 of the Bankruptcy and Reorganization
Law.
VI. If "THE CUSTOMER" does not accept any relocation that "SATMEX" may
assign on its satellites.
VII. In general if "THE CUSTOMER" does not fulfill any of its
obligations of this agreements as well as its Addenda.
SEVENTEENTH. If "SATMEX" considers that "THE CUSTOMER" has incurred in any of
the causes of termination mentioned in the previous paragraph,
`SATMEX" shall notify `THE CUSTOMER" in writing. "THE CUSTOMER" shall
have fifteen (15) business days to respond. If "THE CUSTOMER" does not
respond or if after "SATMEX" has reviewed "THE CUSTOMER's" response
and "SATMEX" believes "THE CUSTOMER's" response is not satisfactory,
"SATMEX" shall issue its resolution.
In the event that "SATMEX" terminates this agreement, "THE CUSTOMER"
agrees to make the payment referred to in Paragraph FIFTEEN.
EIGHTEENTH. "SATMEX" shall have the option of applying a conventional penalty
in addition to the mentioned in Paragraph Fifteen in the event "THE
CUSTOMER" does not fulfill any of its responsibilities under this
agreement which shall not exceed 10% of the total monthly payment or
request that "THE CUSTOMER" because of its nonfulfillment payment for
damages resulted to "SATMEX".
NINETEENTH. In the event the parties do not agree, the representative elected
by "SATMEX" shall notify in writing "THE CUSTOMER's" representative
its objections immediately following detection so that both parties
may reach an agreement to resolve the dispute.
In the event the parties do not reach an agreement within ten (10)
calendar days, the parties may request the intervention of the legal
representatives of each party to reach an definite agreement regarding
the nonfulfillment or disagreement. In the event the legal
representatives do not reach an agreement, the parties shall proceed
to the established in Paragraph 23.
TWENTIETH. "SATMEX" shall not be responsible for specific but not unlimited
damages suffered by "THE CUSTOMER" or by third parties because of a
delay in delivery of the service, deficient operation that could occur
of the space segment as well as interruptions of service of the space
segment or equipment due to fortuitous events or force majeure.
TWENTY-FIRST. The parties agree to conserve all information and documentation
exchanged by the parties as strictly confidential except for (i) if
requested by the legal or administrative authorities or (ii) if such
information is considered to be public knowledge.
The parties may only utilize the confidential information only through
previous written consent from the other party.
TWENTY-SECOND. This agreement only covers the service provided by "SATMEX".
"THE CUSTOMER" agrees to obtain authorization or a license from the
proper authorities wherever the earth station(s) are located.
<PAGE>
TWENTY THIRD. In the event of controversy regarding the fulfillment, contents,
interpretation and scope of this agreement as well as anything not
specifically stated herein, the parties agree to submit to the Federal
District civil court and the jurisdiction and enforcement of the
Federal Courts of Mexico City, waiving any other jurisdiction which
may correspond to them for reason of their present or future domiciles
or for any other reason whatsoever.
This agreement is executed in duplicate with each party receiving any original
in Mexico City on April 28, 1998.
SATMEX CUSTOMER
(SIGNATURE) (SIGNATURE)
ING. LAURO GONZALEZ MORENO CHARLES RANDY POOLE
PRESIDENT LEGAL REPRESENTATIVE
<PAGE>
ADDENDUM I
SATELITES MEXICANOS, S.A. de C.V.
GENERAL CONDITIONS FOR THE PROVISION OF SATELLITE SIGNAL CONDUCTION VIA THE
MEXICAN SATELLITE SYSTEM.
General Conditions for the Provision of Satellite Signal Conduction via Mexican
Satellite System, in which Satelites Mexicanos, S.A. de C.V. hereinafter SATMEX,
shall provide the service via the satellites for which it has been granted a
Concession by the Mexican Federal Government.
CHAPTER I
GENERAL PROVISIONS
1st ARTICLE The purpose of this document is to set forth the general conditions
which will govern the service provided by SATMEX.
2nd ARTICLE The service which SATMEX will provide, consists of signal
conduction via satellite, on C and KU Bands of the Mexican
Satellite System, observing the provisions of its Concession
Certificate, the Federal Telecommunications Law, the Communication
Via Satellite Regulation, the Federal Law of Radio and Television
and its Regulation, the UIT Consitution and Agreement, the
International Telecommunications Regulation, International Treaties
on the subject matter approved by the Senate of the Republic, and
other administrative provisions on the subject matter.
3rd ARTICLE The definitions of the technical terms used in the contracts,
agreements or accords, shall be understood according to the
definitions contained in the documents indicated in above 2nd
Article, and any definitions issued by the Telecommunications
Standardization, Radio Communications sectors and the Development
of Telecommunications of UIT, as well as the Glossary of Terms used
in Telecommunications published by the Ministry of Communications
and Transportation through the Federal Telecommunications
Commission and/or Telecommunications of Mexico.
4th ARTICLE SATMEX will provide the service to establish a communication link
in national or international territory for customers who so
require. Customers have the responsibility to obtain the necessary
concessions, permits or authorizations from the Federal Mexican
Government or the authorities on the subject matter of each
country.
5th ARTICLE The earth stations and equipment to establish satellite links must
be authorized by the Ministry of Communications and Transportation,
must comply with Mexican Official Standards of technical
specifications for services related to the conduction of signals
between fixed points via the use of the Mexican Satellites. For the
case of earth stations located abroad, Recommendation 580-2 of CCIR
(29-25 log of 6) must be complied with.
CHAPTER II
PROVISION
6th ARTICLE The services will be provided under the following conditions:
Permanent - 24 hours a day, every day of the month or, less than 24
hours by the hour or fraction thereof, at the same time, during
every day of the month.
Occasional. For a determined time(s) of day and date(s) previously
established for that occasion(s).
For each of the foregoing, tariffs and regulations will be
established.
<PAGE>
7th ARTICLE Permanent service will be provided based on three categories
according to continuity priority in the event of a contingency or
partial or complete breakdown of the assigned satellite, as
follows:
FULLY PROTECTED SERVICE. The service which has a total backup on
the same satellite or on another SATMEX satellite, except when the
failure is caused by the actions or failure of the customer to
fulfill SATMEX's conditions.
NON-INTERRUPTED SERVICE. The service whose transponder has backup
amplifiers and is not interrupted to give priority to a protected
service, but does not have in the event of failure immediate
protection on another transponder or satellite.
INTERRUPTED SERVICE. The service subject to interruption as
required at any time to give immediate protection to a protected
service and to a non-interrupted service since these are
priorities. In its normal operation the transponders has backup
amplifiers.
Each category of permanent service has a different tariff defined
in the Tariff Manual and Technical Addendum (Addendum II of the
corresponding agreement)
When requesting the service, the customer shall indicate to SATMEX
the band and the category of service it wishes to contract;
however,, each service category is subject to the availability of
the capacity of the space segment determined for each category at
the time of contracting. SATMEX will indicate to future customers
the availability of the space segment by category, tariffs and
conditions for the provision of the service.
The space segment for national security and social welfare has
maximum priority over any service category in the event of a
emergency.
Occasional service will be provided subject to availability of the
capacity to provide this type of service, for the dates and time
requested. SATMEX will attend to the demand for the space segment
for occasional services through the International Center for
Reserve and Programming of Occasional Services (Booking) .
8th ARTICLE. The space segment will be assigned based on information carriers
and standard transmission speeds, by complete transponder or by
fractions of bandwidth and/or transponder power, measured in
megahertz (MHz) and watt decibels (dBw), respectively.
9th ARTICLE. When contracting for the service, the client shall deliver a
technical memory describing the network, its topology, the earth
stations and equipment, access means to the satellite, the
required capacity and link budget for each carrier, according to
the format previously delivered by SATMEX. As well, SATMEX will
publish a technical manual of its satellites, with the technical
information, coverages, transponder parameters, sites, etc.,
required for customers to develop their network and calculate the
antenna diameter and link requirements.
10th ARTICLE. SATMEX, based on the requested capacity and the technical
information presented by the customer, shall assign the satellite,
transponder for each carrier contracted for, the transmission and
reception frequencies, polarization and operating parameters, such
as modulation, forward error correction (FEC), bandwidth (MHz),
and earth station power requirements (dBw).
The frequency receivers of the customers earth station must be
efficient and for kilohertz. The operation of equipment with
adjustable frequencies via crystals or with tuning limitations is
not recommended because this does not allow the relocation of
service in the event of interference and can also result in
greater consumption of the bandwidth chargeable to the customer.
<PAGE>
11th ARTICLE. The technicians responsible designated by the customer to operate
its earth stations of its satellite network may not exceed the
normal parameters for access to the satellite assigned to each
carrier. The personnel of SATMEX Center for Primary of Alternate
Satellite Control of SATMEX, on detecting excesses, will
immediately coordinate with the persons responsible for the earth
station or the network, to make the necessary corrections. If the
customer does not make the required correction, the customer shall
be subject to fines for the use of excessive bandwidth or power or
for damages caused to other customers.
The fines will be for an amount resulting from applying the
highest rate for the affected bandwidth and/or power affected, in
addition to, if applicable, any compensation which SATMEX must pay
the affected customer or customers. Payment of fines does not
imply authorization to continue operating the service outside of
the assigned parameters for access to the satellite.
If the customer finds it necessary to operate with a higher level
of satellite power, it may request SATMEX to authorize (with link
budgets, and if authorized apply any adjustments to their invoice.
The customer will include in the technical memory of its satellite
network for each one of the earth stations that access the
satellite assigned to SATMEX, the domicile(s), responsible
technicians, telephone number(s) and facsimile (fax).
SATMEX, shall deliver to customer in writing upon execution of the
agreement, the access frequencies to the satellite and its
operation parameters.
12th ARTICLE. Prior to accessing the satellite, customer shall coordinate with
the Primary or Alternate Control Center the required technical
tests of their earth stations consistently with the procedure and
protocol established by SATMEX.
SATMEX will grant its customers a maximum period of three (3)
calendar days, at no cost, starting from the date on which they
are notified of the assignment of the space segment contracted
for, with the frequency and operating parameters, to allow them to
conduct the tests of their earth station(s) and adjustments, in
coordination with the Primary or Alternate Control Center.
At the conclusion of this period, irregardless of whether the
tests have been conducted, it will be understood that the service
has been made available to the customer and the billing period
will commence.
13th ARTICLE. The earth stations that do not satisfy the isolation, radiation
pattern tests or any other parameters that affect or can affect
other signals or satellites will not be authorized to operate with
the satellites until corrected without any liability for SATMEX.
As well, if an already approved earth station during its operation
produces interference to other signals will suspend its access until corrected.
In this case the customer must give the Primary or Alternate Control Center
assistance to eliminate such interference.
In the event the responsible party for the earth station(s) does
not fulfill the indications of the Primary or Alternate Control Center to
correct or deactivate the earth station producing the interference, the
customers shall pay SATMEX a fine in an amount equal to 1% of the monthly tariff
for each hour or portion thereof of delay.
In the event of earth stations that access a satellite for
occasional service, these earth stations must always coordinate testing and
power adjustments at least fifteen (15) minutes before the
<PAGE>
hour indicated for the event. If this testing is not done, the Primary or
Alternate Control Center shall not allow access to the earth station.
The customer agrees to oversee the operating state of the earth stations
and that these do not produce interferences to its own signals, other customer's
signals o to other satellites.
ARTICLE 14. When a customer is affected in its signals by an unknown or
undetermined interference and that cannot be corrected
immediately, the customer shall have the option of being relocated
immediately to a free space to continue its communications.
This should be immediately reported to the monitoring area of the
Primary or Alternate Control Center so that they can coordinate with the
assignment area, and support any relocation activities. In this event, SATMEX
shall give the customer new frequencies and operating parameters either
temporary or definite.
Expenses implied by any relocation of frequencies shall be the
customer's responsibility.
ARTICLE 15. Any modification in service or relocation must be requested thirty
(30) days in advance and the corresponding technical memory and
link budget shall be included for the modified carriers or new
sites.
The customer must not make any changes without previous
coordination with SATMEX.
CHAPTER III.
AGREEMENTS
ARTICLE 16. To contract the service the customers must have a public network
concession or license as stated in articles 24 and 31 of the
Federal Telecommunications Law and in accordance with the
established in the Regulations for Satellite Communications. Any
concession or license shall be the customer's responsibility. A
copy of this document must be presented to SATMEX so that it
becomes an integral part of the agreement as an Addendum.
ARTICLE 17. Terms of the agreements will be specified in each document
executed by the customers in accordance with the following:
I. The minimum term shall be determined by the type of service
requested by the customer and shown in the corresponding
tariff.
II. The agreement for permanent services offered by SATMEX shall
have a 1 year minimum and three (3), five (5) and ten (10)
years for long term agreements. The agreements can be
terminated in the event of satellite failure and as long as
there is no replacement capacity.
For periods shorter that one (1) year, the rule indicated in the
respective tariff will apply.
III To calculate the term of the Permanent Service agreement, it
will be understood that it begins as of the day following the
date on which the agreement is signed.
IV Occasional services must be contracted at least six (6) hours
in advance on business days, except in the cases, indicated
in paragraph VI of this article.
V Customers may cancel any occasional service contracted, or
they may expand the time requested. In both cases, they will
be subject to the minimum payment or the surcharge indicated
by corresponding tariff.
VI Urgent occasional services will be provided if contracted
with less advance notice that indicated in paragraph IV,
provided that it is technically possible to supply
<PAGE>
them, in which case a surcharge will apply of up to fifty
percent (50%) of the respective tariff.
In this case, the mere receipt of written communication from the
customer through its legal representative or technical
representative requesting the service will suffice to confirm the
provision of the service.
If SATMEX is technically unable to provide the requested service,
it will notify the customer by the most convenient method.
18th ARTICLE. The rights and obligations under the agreements may be assigned to
third parties by the customer with the prior express written
consent of SATMEX. For this, the new interested party must
subscribe and execute the relevant agreement.
19th ARTICLE. Customers are required to give written notice to SATMEX at least
thirty (30) business days in advance of any modification they are
going to make of its corporate name, change of domicile, legal
representative(s), telephone and facsimile (fax) number(s).
CHAPTER IV.
GUARANTEES
20th ARTICLE. SATMEX may, at its discretion, demand payment guarantees, which
will be specified in form and amount of each agreement.
CHAPTER V.
BILLING.
21st ARTICLE. The amounts that result from applying the contracted service rate
will be notified to customers monthly, indicating the amount,
form, place and date of payment, by an official invoice which will
be valid when it shows bank payment validation or SATMEX's stamp
evidencing payment. The invoice, with and exhibit itemizing the
charges applied, will be sent to the customer's domicile shown by
customer in the agreement. Invoices issued to customers with a
domicile in Mexican territory will be stated in domestic currency
and will include the value added tax (IVA). Invoices to customers
with domicile outside of Mexico will be stated in dollars, United
States of America currency, excluding Mexican taxes.
22nd ARTICLE. The amount stated in the monthly invoice for services provided
will be the result of applying the respective tariff to the class
of service contracted, pursuant to the provisions of SATMEX
Addendum II of the respective agreement.
When the rate is stated in United States of America dollars, for
its national currency billing, the exchange rate that is published
by "Banco de Mexico' at the closure of the last working day of the
prior month in which the service is provided shall apply.
23rd ARTICLE. When the magnitude of some of the concepts used to apply the
tariffs reflect fraction higher that those established in the
tariff, they will be converted to unit values, to the 10th or
100th, rounding them out upward to the immediately higher number,
as needed.
24th ARTICLE. As to the concepts used for applying the tariff that are in terms
of time (hours or part of and hour), they will be considered in
the form stated in the tariff applicable to the service
contracted.
25th ARTICLE. Invoices for the supply of permanent services will cover periods
of one calendar month, except when the service commences on a day
other than the first day of the month, in
<PAGE>
which case the first invoice will cover the amount corresponding
to the number of days still remaining in said month in which the
service is provided.
26th ARTICLE. Public or private natural or corporate persons shall pay the
amounts shown in their monthly invoice no later than the fifteenth
(15) day of each month, at the places and times indicated by
SATMEX and/or stated on the invoice.
27th ARTICLE. If the customer does not timely receive the invoice at its
domicile in the first five (5) working days of each month, it
shall notify SATMEX's collection department in order to obtain the
data it needs to timely pay the bill. However, said situation does
not release it of its payment obligation, particularly in the case
of a monthly fixed charge. In every case, customer shall ask for
its outstanding balance from SATMEX's collection office.
CHAPTER VI.
PAYMENTS.
28th ARTICLE. SATMEX will publish a manual containing the tariffs and general
provisions authorized by the Ministry of Communications and
Transportation which are to be applied to the various public
satellite services, and will deliver a copy to the customer of the
tariff for the service contracted.
29th ARTICLE. Customers will make their payments to SATMEX for satellite
services provided at the banks authorized by SATMEX or directly to
SATMEX's cashier, within the following periods:
I Permanent services at a fixed monthly charge are to be paid by the
fifteenth (15) day of each month that the service is provided.
II Occasional services are to be paid before provided.
III Foreign-resident customers are to pay their invoices during the
period indicated in the first paragraph of this article and in the
same currency in which the invoice is presented.
Customers may arrange with SATMEX for other forms for making monthly
payments, such as an electronic bank transfer.
30th ARTICLE. If customer does not promptly pay its invoices, SATMEX will notify
the customer its outstanding invoices and apply late payment fees
beginning the next day following due date.
31st ARTICLE. SATMEX will at all times have the right to suspend the service in
the event of a failure to pay two months' bills. In the event of a
suspension, customer will have ten (10) business days to pay its
outstanding invoices; in order to reactivate the service, the
customer must first pay its outstanding amount, reconnection
charges and late payment fees.
CHAPTER VII.
COMPENSATIONS.
32nd ARTICLE. For purposes of compensation, SATMEX will be liable only for
service interruptions for space segment, except for acts of God or
force majeure.
SATMEX shall not have any responsibility for harm and damages
caused by interruptions of the service to the customer or third
parties.
<PAGE>
33rd ARTICLE SATMEX will not be required to pay compensation for interruptions
of service caused by the operation of earth station(s), owned by
customer, for lack of authorization or not technically approved
that causes interference, as well as for the partial or total
suspension of a interruptible service for giving immediate
protection to a fully protected or non interrupted service which
has priority.
34th ARTICLE. In the event of an interruption in the provision of the service,
the customer shall immediately notify the SATMEX Control Center in
order to determine the cause, correct the failure and reestablish
the service; customer also agrees to give written notice to SATMEX
so that it may make the respective compensation if applicable
based on the Control Center's technical report.
The compensations will be considered from the date in which SATMEX
Control Center issues the confirmation report of the causes that
originated the interruption.
35th ARTICLE. Interruptions of the service provision imputable on SATMEX will be
compensated as follows:
I. In case of permanent services supplied during the 24 hours
of the day, only interruptions of three (3) continual hours
will be compensated. The compensation will be equal to one-
eighth of the billing for one (1) day. Part of an hour will
be computed as a full hour.
I. Occasional or periodic services provided for periods of
hours, half-hours or minutes: for each minute of
interruption, the compensation will be equal to the rate per
minute, applied to the number of minutes during which the
interruption persisted.
I. SATMEX will not consider requests for compensation when
the interruption results from negligence of the customer or a
breakdown of its apparatus and equipment, the maintenance and
operation whereof correspond to the customer.
I. Compensation, when applicable, will be credited to the
customer in the invoice payable of the second and third month
subsequent to the month in which the interruption occurred.
I. As to occasional services, if the customer requests a
suspension of already initiated service prior to the
conclusion of the contracted schedule, customer will not be
entitled to any compensation.
I. Refunds will proceed only when it is not possible to apply
the compensation to other periods or services of the
customer.
CHAPTER VIII.
PREMATURE TERMINATION.
36th ARTICLE. SATMEX may at any time terminate the agreement with no liability
on its part, for justified causes or for reasons duly motivated
and justified giving notice to customer thirty (30) business days
in advance.
<PAGE>
37th ARTICLE. Customer may terminate the respective agreement, notifying SATMEX
in writing at least thirty (30) business days in advance for
short-term services, and ninety (90) business days in advance for
long-term services.
In the case of permanent services, if customer terminates the
service prematurely - that is, before the conclusion of the agreed
term, it shall pay, except where termination results from a
failure of the satellite and/or replacement capacity is not
available, the following penalties:
The amount resulting of the difference between the amount paid and
the monthly rate corresponding to one (1) year agreements for each
month that the service has been provided; and in addition the
customer shall pay in the same date the highest amount that
results from:
a) Twenty percent (20%) of the total payments unpaid from the date
of the termination until the end of the originally agreed term of
the respective agreement. If the termination occurs during the
second third of the term of the agreement, the percentage will be
reduced to fifteen percent (15%).
b) The monthly tariff corresponding to one year agreements for
each month until the conclusion of the original period of the
agreement, not to exceed twelve (12) months. Failure to give
notice referred to in the first paragraph of this article will
allow SATMEX to continue providing the service in the implied
manner, and charge the accounts in full for the ensuing months
until customer gives notice of renewal or termination, as the case
may be.
The cancellation or premature termination of a service does not
release the customer from prior debts or late payment fees.
SATMEX reserves the right to assign to other customers the
released satellite capacity on the next day following the
termination date.
38th ARTICLE. Agreements for occasional or periodic services may be terminated
in advance when the customer timely gives the termination notice
with the following periods:
1. If the service is canceled before ten (10) calendar days prior
to the date of the event, no charge will apply.
2. If the service is canceled between ten (10) calendar days and
forty-eight (48) hours prior to the event, a charge for the
equivalent of sixty percent (60%) of the price of the requested
service will be imposed.
3. If the service is canceled forty-eight (48) hours prior to the
event, or the service is not used, one hundred percent (100%) of
the price of the requested service will apply.
CHAPTER IX
CAUSES FOR TERMINATION
39th ARTICLE SATMEX may terminate a service agreement in the following events:
I. If customer assigns in any way the rights and/or obligation
derived of the corresponding agreement to third parties, without
the previous written consent by SATMEX.
<PAGE>
II. If customer fails to pay two (2) consecutive bills for the
service provided or three (3) suspensions of said bills in a one
(1) year period.
III. If customer does not comply with the satellite access
parameters indicated by SATMEX.
IV. If customer does not provide the guarantee stated in article
20.
V. If customer becomes the subject of bankruptcy, insolvency,
reorganization or liquidation proceeding or finds itself under any
of the conditions found in Article 2 of the Bankruptcy and
Reorganization Law.
VI. If customer does not accept the relocation that SATMEX should
assign.
VII. In general, if customer fails to comply with any of the
obligations under the respective agreement, or its addenda.
40th ARTICLE. If SATMEX has elements to prove that customer has incurred in any
of the causes for termination, it will give written notice to
customer to such effect within fifteen (15) business days to allow
customer to assert its rights.
SATMEX THE CUSTOMER
(Signature) (Signature)
ING. LAURO ANDRES GONZALEZ MORENO CHARLES RANDY POOLE
PRESIDENT PRESIDENT
<PAGE>
* CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION.
ADDENDUM II
INTERNATIONAL SERVICE OF
SIGNAL CONDUCTION VIA SATELLITE
GENERAL INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Customer: TELESPAN, INC. R.F.C.
Address: 12500 NETWORK BOULEVARD, SUITE 407
City: SAN ANTONIO TEXAS USA Zip Code: 78249
Contract No. 095-I Date: Term: 3 years
Legal Rep: CHARLES RANDY POOLE
Telephone: (210) 558 60 90 Fax: (210) 558 60 95
TECHNICAL INFORMATION OF ASSIGNED CAPACITY
Type of Network: POINT TO POINT Bandwidth: * *
Type: PUBLIC Transponder Power CONFIDENTIAL
Satellite: * Band: C Service Category: Uninterrupted PORTIONS
Orbital Position: 113 degrees 0" Transponder: * Ranges: HAVE BEEN
Region: R1 Polarization: H/V Connectivity: R1/R1 OMITTED AND
No. of Carriers Freq. Speed (Kbps) Modulation FEC Access FILED
SEPARATELY
WITH THE
COMMISSION
Teleport: SAN ANTONIO TEXAS
TARIFF
Tariff No: 3
Term: * Monthly Charge: * USD * CONFIDENTIAL
Commencement Date: May 1, 1998 Termination Date: April 31, 2001 PORTIONS HAVE
BEEN OMITTED
Observations: Nominal bandwidth in accordance with applicable rules AND FILED
SEPARATELY
WITH THE
COMMISSION.
Mexico, D.F. April 28, 1998
</TABLE>
SATMEX THE CUSTOMER
(Signature) (Signature)
ING. LAURO ANDRES GONZALEZ MORENO CHARLES RANDY POOLE
PRESIDENT PRESIDENT
<PAGE>
EXHIBIT 10.32
SATELITES MEXICANOS, S.A. DE C.V.
AGREEMENT NUMBER 094-1
INTERNATIONAL LEASE OF SATELLITE CAPACITY AGREEMENT OF THE MEXICAN SATELLITE
SYSTEM, EXECUTED BY AND BETWEEN SATELITES MEXICANOS, S.A. DE C.V., HEREINAFTER
REFERRED TO AS "SATMEX", HEREIN REPRESENTED BY ENGINEER LAURO ANDRES GONZALEZ
MORENO AS ITS DIRECTOR GENERAL, AND TELESPAN, INC , HEREINAFTER REFERRED TO AS
THE "CUSTOMER", REPRESENTED BY CHARLES RANDY POOLE, ITS LEGAL REPRESENTATIVE, IN
ACCORDANCE WITH THE FOLLOWING RECITALS AND CLAUSES:
RECITALS
2. "SATMEX" STATES:
.2 That it is a corporation incorporated under Mexican Law as recorded in
Public Instrument number 51,371 dated June 26, 1997 executed before Lic.
Miguel Alessio Robles, Notary Public number 19 of Mexico City, and recorded
in the Public Registry of Property and Commerce under file number 226,109;
it's primary corporate purpose is the installation, operation, control and
exploitation of the Mexican Satellite System, via the occupancy and
exploitation of geostationary orbital positions and satellite orbits
assigned to the country, with their respective frequency bands and rights
to transmit and receive signals in the terms of the Federal
Telecommunications Law and the Communications Via Satellite Regulations.
.2 That pursuant to articles 11, section III, 29, second paragraph and
transitory fourth of the Federal Telecommunications Law and 7 of the
Communications Via Satellite Regulations, through concessions dated October
23, 1997 granted by the Minister of the Ministry of Communications and
Transportation a concession was granted to Satelites Mexicanos, S.A. de
C.V. to occupy geostationary orbital positions 109.2 degrees, 113.0 degrees
and 116.8 degrees longitude west for the exclusive exploitation of "C" and
"Ku" frequency bands and the rights to transmit and receive signals.
.2 That Engineer Lauro Andres Gonzalez Moreno, as the Director General, is
sufficiently qualified to execute this agreement, as evidenced by the
Transcript of Public Instrument No. 19258 dated November 26, 1997, granted
before Notary Public No. 102, of Mexico City, Lic. Jose Maria Morera
Gonzalez.
.2 That pursuant to Article 2 section VIII of the Regulations of
Communications Via Satellite, it has the status of a satellite operator,
which is defined as the person who, by a concession or assignment to occupy
geostationary positions or satellite orbits assigned to the country, with
their respective associated frequency bands, operates and exploits a
satellite system allowing it only to provide its satellite capacity to
third parties.
.2 That it satisfies the technical and economic conditions to undertake in
order to provide the service, subject matter of this agreement.
.2 That its Federal Taxpayers Registration number is SME 970626 MK5.
.2 That to exercise and comply with its rights and obligations hereunder, it
shows its domicile as Blvd. M. Avila Camacho 40, 23rd floor, Colonia Lomas
de Chapultepec, 11000, Mexico, D.F.
II "THE CUSTOMER" STATES:
<PAGE>
II.1 That it is a corporation duly incorporated under the laws of the
state of Texas, U.S.A. as shown by its Corporate Charter 01481013 dated
February 26, 1998 granted by the Secretary of the
* CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE
COMMISSION.
State of Texas Alberto R. Gonzales and duly certified with certificate
number N 147451 dated March 9, 1998 acting as Notary Public for the State of
Texas, Kathleen Keller and translated into Spanish by an authorized translator
designated by the Superior Court of Justice of the Federal District.
II.2 That Charles Randy Poole as its legal representative has sufficient
faculty to execute this agreement, as evidenced by a Unanimous Board of
Directors Resolution of Telespan, Inc. dated April 21, 1998 granted
before Notary Public Rubby E. Santiago of the State of Texas and
translated into Spanish by an authorized translator designated by the
Superior Court of Justice of the Federal District. .
II.3 That it presents a certified copy of the documents mentioned in the
preceding recital to allow "SATMEX" to verify their authenticity.
II.4 That it will timely notify "SATMEX" in writing of any modifications of
its corporate name and/or of the power of attorney granted to its legal
representative.
II.5 That it satisfies the applicable laws of the countries of within the
coverage of Solidaridad 2 for Region 2 in which it will operated the
service and has obtained from the respective Regulatory Entities the
authorization(s) required to install, operate or exploit the transmitting
and/or receiving earth station(s).
II.6 That it accepts the General Conditions for Provision of Signal Conduction
via Satellite through the Mexican Satellite System issued by "SATMEX"
(Addendum 1) as well as the Technical Addendum (Addendum II), which duly
signed by the parties, are attached hereto and form an integral part
hereof.
II.7 That it is familiar with the established legal framework both on the
national and international levels to which the provision of services,
subject hereof, are subject, and acknowledges to use said services and
abide by said legal framework, and undertakes to use the services
provided to it by "SATMEX" within the established legal framework in
order to satisfy its communication requirements.
II.8 That it desires to contract the rights and obligations hereunder in the
terms and conditions of the Clauses and Addenda of this agreement.
II.9 For the purposes of this agreement, it shows its domicile 12500 Network
Blvd., Suite 407, San Antonio, Texas USA.
Having stated the above, the parties agree to execute this agreement and comply
with the following.
CLAUSES
FIRST. "SATMEX" agrees to provide THE CUSTOMER with the
* CONFIDENTIAL lease of satellite capacity by assigning the space segment
PORTIONS HAVE on C Band Transponders *, in accordance with the terms,
BEEN OMITTED conditions, technical, legal and rate specifications
AND FILED contained in this agreement and its Addenda.
SEPARATELY
WITH THE
COMMISSION
<PAGE>
SECOND. "SATMEX" shall assign "THE CUSTOMER" the satellite access
frequencies and their respective operating parameters based on the
link budgets presented by "THE CUSTOMER" to "SATMEX" for each
receiving and/or transmitting carrier that will accessed by its
earth stations forming its network.
"SATMEX" may modify the frequencies assigned to THE CUSTOMER, for
justified reasons or optimization of space segment on the
satellite, by written notice to "THE CUSTOMER" "THE CUSTOMER"
agrees to make any changes within an agreed time frame thereby
freeing up the prior frequencies.
The satellite, band, coverage region, transponder, polarization,
hook-up points, satellite frequencies, operation parameters,
location of the earth stations, and antenna diameters are
described in the Exhibit II of this agreement. The Exhibit II will
be updated when "THE CUSTOMER" requests modifications or expansion
of the contracted service from "SATMEX", which must first be
signed by both parties.
THIRD. "THE CUSTOMER" agrees to notify "SATMEX" in writing any changes
and/or modification of the names, titles, addresses, telephone
number(s) and fax number(s) of the technician(s) responsible for
its satellite network within five (5) days after such change
and/or modification.
FOURTH "SATMEX" shall deliver to "THE CUSTOMER" in writing upon execution
of this agreement the frequencies and operating parameters.
FIFTH "THE CUSTOMER" will access and occupy the space segment contracted
with "SATMEX", with its own earth stations or a third party
stations that are part of this network and agrees to use it
exclusively to establish the public telecommunication network
described in Addendum II.
SIXTH The earth stations through which the services are to be provided
must satisfy the specifications and technical characteristics
established by "SATMEX" to operate with the Mexican satellite
system having fulfilled recommendation 580-2 of the CCIR (29-25
log) and operate with frequency synthesizers and fractional ones.
The above is described in the technical memory of the network
delivered by "THE CUSTOMER" to "SATMEX"
SEVENTH For billing purposes, this agreement shall be in effect three (3)
days after the execution of the agreement even if "THE CUSTOMER"
does not have the necessary equipment to utilize the space
segment.
EIGHTH. "SATMEX" will send the monthly billing for the contracted service
to the domicile shown by "THE CUSTOMER" within the first five (5)
business days of each month, which will be in advance. Billing
will be calculated by applying the corresponding tariff for the
type of service.
If "THE CUSTOMER" does not timely receive the invoice at its
domicile, it shall notify "SATMEX's" collection department in
order to obtain the data it needs to timely pay the bill. However,
said situation does not release "THE CUSTOMER" of its payment
obligation.
NINTH. If "THE CUSTOMER" objects to any bill issued by "SATMEX", it shall
send a request for verification and/or adjustment in writing,
stating the reasons and causes for its objection, no later than
within five (5) working days following the date of receipt
thereof. If its objection is found to be correct, "SATMEX" will
proceed to correct its bill, extending the
<PAGE>
payment due date for the equal number of days that elapsed between
the original issued date and the corrected date.
In order to correct the said bill as soon as possible, "THE
CUSTOMER" agrees to provide all the necessary help to "SATMEX".
* CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION.
TENTH. "THE CUSTOMER" agrees to provide a bond to "SATMEX" to guarantee
payment for the service for * that is equal to three (3) times the
*CONFIDENTIAL monthly invoice. Said bond shall be issued by a duly authorized
PORTIONS Mexican institution with "SATMEX" as loss payee.
HAVE BEEN
OMITTED "THE CUSTOMER" agrees to deliver the said guarantee, within five
AND FILED (5) business days of execution of this agreement.
SEPARATELY
WITH THE The bond must contain the following written conditions by the
COMMISSION institution providing the bond.
-That the bond be granted in the terms of this agreement.
-That in the event Addendum II is modified, "THE CUSTOMER" shall
make any adjustments necessary regarding the bond , within three
(3) business days of any modification(s).
-That the bond will be in full force until "SATMEX" authorizes in
writing its cancellation.
-That it expressly submits to the jurisdiction and competency of
the Federal Courts of Mexico City, resigning to the forum that
would correspond due to its present or future domicile or to other
causes.
-That it expressly submits to the execution procedure foreseen in
Articles, 95bis and 118 of the "Federal Law of Bond Institutions".
ELEVENTH. "THE CUSTOMER" agrees to pay "SATMEX", in advance, for the service
tariff number *
*CONFIDENTIAL
PORTIONS "THE CUSTOMER" agrees to pay by the fifteenth (15) day of each
HAVE BEEN month. If "THE CUSTOMER" fails to make two (2) consecutive monthly
OMITTED payments, the service will be suspended. In order to reactivate
AND FILED "THE CUSTOMER" must pay all outstanding invoices, late payment
SEPARATELY fees and reconnections charges.
WITH THE
COMMISSION When "THE CUSTOMER" fails to pay two (2) or more monthly payments,
"SATMEX" may assign the capacity to another party.
TWELFTH. Late payment fees are calculated based on the rate resulting from
the sum of the Interbank Rate "TIE" issued by Banco of Mexico,
plus fifty percent (50%), in proportion to the number of days of
delay, divided between twelve (12) months on unpaid balances of
the monthly amounts owed.
Said fees shall apply from the day following payment due date up
to the day payment is received by "SATMEX".
THIRTEENTH. "SATMEX" shall only be responsible, for purposes of compensation,
for service interruptions for space segment or of its own
equipment, except for causes indicated in Paragraph TWENTY.
<PAGE>
In the event of a service interruption, "THE CUSTOMER" shall
immediately notify the "SATMEX" Satellite Control Center so that
it can determine the cause, correct the failure and reestablish
service; it shall also give written notice to "SATMEX" so that, if
applicable, and on the basis of the technical report of the
Control Center, the respective compensation can be made as
established in Addendum I.
"SATMEX" may interrupt the service whenever necessary to provide
maintenance to its installation or equipment, among others, in
coordination with "THE CUSTOMER" with no compensation due. In any
event, "SATMEX" will attempt to make the least interruptions in
order to cause the least damage possible to "THE CUSTOMER".
"SATMEX" will not be required to pay compensation for
interruptions in the service derived from the operation of earth
stations not authorized or technically approved and that cause
interference.
FOURTEENTH. The effective term of this agreement shall be for three (3) years
from the date of execution of this agreement.
FIFTEENTH. "SATMEX" may at any time terminate the present agreement, without
liability, for justified causes or reasons duly justified and
proven, notifying "THE CUSTOMER" thirty (30) business days in
advance.
"THE CUSTOMER" may cancel portion of its satellite capacity or
terminate this agreement, by notifying "SATMEX" in writing ninety
(90) business days in advance
In the event "THE CUSTOMER" cancels a portion of its satellite
capacity or terminates this agreement before the term has expired
as stated in Paragraph Fourteen, "THE CUSTOMER" shall pay "SATMEX"
a one-time payment before the date requested by "THE CUSTOMER" an
amount equal to the difference between the already paid and the
tariff corresponding to one year agreements for each month in
which the service was provided; in addition, at the same time "THE
CUSTOMER" shall pay an amount whichever is greater:
a) Twenty percent (20%) of the total payments unpaid from the date
of termination of this agreement up to the end of the original
agreed term. In the event the notification is given during the
last third of the original agreed term, the percentage shall be
reduced to 15%, or
b) The monthly tariff applicable to one year agreements, for each
month remaining to conclude the original agreed term not exceeding
twelve (12) months.
In the event of partial cancellation the above mentioned payment
shall apply only to the capacity affected.
The termination date must be referenced as a calendar month (last
day of month).
The premature cancellation or termination of a service does not
release "THE CUSTOMER" from its obligation to pay outstanding
amounts or late payment fees.
"SATMEX" reserves the right to assign to another party the
satellite capacity released by premature termination the day
following the termination or cancellation date.
SIXTEENTH "SATMEX" may terminate this agreement for any of the following
causes:
I. If "THE CUSTOMER" assigns this agreement to a third party
without previous consent in writing from "SATMEX".
<PAGE>
II. If "THE CUSTOMER" fails to pay two (2) consecutive monthly
invoices or three (3) service interruptions during a one (1) year
period.
III. If "THE CUSTOMER" does not comply to the satellite access
parameters indicated by SATMEX.
IV. If "THE CUSTOMER" does not deliver in time and form the
guarantee stated in Paragraph Ten.
V. If "THE CUSTOMER" becomes the subject of bankruptcy,
insolvency, reorganization or liquidation proceeding or finds
itself under any of the conditions found in Article 2 of the
Bankruptcy and Reorganization Law.
VI. If "THE CUSTOMER" does not accept any relocation that
"SATMEX" may assign on its satellites.
VII. In general if "THE CUSTOMER" does not fulfill any of its
obligations of this agreements as well as its Addenda.
SEVENTEENTH. If "SATMEX" considers that "THE CUSTOMER" has incurred in any of
the causes of termination mentioned in the previous paragraph,
`SATMEX" shall notify `THE CUSTOMER" in writing . "THE CUSTOMER"
shall have fifteen (15) business days to respond. If "THE
CUSTOMER" does not respond or if after "SATMEX" has reviewed "THE
CUSTOMER's" response and "SATMEX" believes "THE CUSTOMER's"
response is not satisfactory, "SATMEX" shall issue its resolution.
In the event that "SATMEX" terminates this agreement, "THE
CUSTOMER" agrees to make the payment referred to in Paragraph
FIFTEEN.
EIGHTEENTH. "SATMEX" shall have the option of applying a conventional penalty
in addition to the mentioned in Paragraph Fifteen in the event
"THE CUSTOMER" does not fulfill any of its responsibilities under
this agreement which shall not exceed 10% of the total monthly
payment or request that "THE CUSTOMER" because of its
nonfulfillment payment for damages resulted to "SATMEX".
NINETEENTH. In the event the parties do not agree, the representative elected
by "SATMEX" shall notify in writing "THE CUSTOMER's"
representative its objections immediately following detection so
that both parties may reach an agreement to resolve the dispute.
In the event the parties do not reach an agreement within ten (10)
calendar days, the parties may request the intervention of the
legal representatives of each party to reach an definite agreement
regarding the nonfulfillment or disagreement. In the event the
legal representatives do not reach an agreement, the parties shall
proceed to the established in Paragraph 23.
TWENTIETH. "SATMEX" shall not be responsible for specific but not unlimited
damages suffered by "THE CUSTOMER" or by third parties because of
a delay in delivery of the service, deficient operation that could
occur of the space segment as well as interruptions of service of
the space segment or equipment due to fortuitous events or force
majeure.
TWENTY-FIRST. The parties agree to conserve all information and documentation
exchanged by the parties as strictly confidential except for (i)
if requested by the legal or administrative authorities or (ii) if
such information is considered to be public knowledge.
<PAGE>
The parties may only utilize the confidential information only
through previous written consent from the other party.
TWENTY-SECOND. This agreement only covers the service provided by "SATMEX". "THE
CUSTOMER" agrees to obtain authorization or a license from the
proper authorities wherever the earth station(s) are located.
TWENTY THIRD. In the event of controversy regarding the fulfillment, contents,
interpretation and scope of this agreement as well as anything not
specifically stated herein, the parties agree to submit to the
Federal District civil court and the jurisdiction and enforcement
of the Federal Courts of Mexico City, waiving any other
jurisdiction which may correspond to them for reason of their
present or future domiciles or for any other reason whatsoever.
This agreement is executed in duplicate with each party receiving any original
in Mexico City on April 28, 1998.
SATMEX CUSTOMER
(SIGNATURE) (SIGNATURE)
ING. LAURO GONZALEZ MORENO CHARLES RANDY POOLE
PRESIDENT LEGAL REPRESENTATIVE
<PAGE>
ADDENDUM I
SATELITES MEXICANOS, S.A. de C.V.
GENERAL CONDITIONS FOR THE PROVISION OF SATELLITE SIGNAL CONDUCTION VIA THE
MEXICAN SATELLITE SYSTEM.
General Conditions for the Provision of Satellite Signal Conduction via Mexican
Satellite System, in which Satelites Mexicanos, S.A. de C.V. hereinafter SATMEX,
shall provide the service via the satellites for which it has been granted a
Concession by the Mexican Federal Government.
CHAPTER I
GENERAL PROVISIONS
1st ARTICLE The purpose of this document is to set forth the general
conditions which will govern the service provided by SATMEX.
2nd ARTICLE The service which SATMEX will provide, consists of signal
conduction via satellite, on C and KU Bands of the Mexican
Satellite System, observing the provisions of its Concession
Certificate, the Federal Telecommunications Law, the Communication
Via Satellite Regulation, the Federal Law of Radio and Television
and its Regulation, the UIT Consitution and Agreement, the
International Telecommunications Regulation, International
Treaties on the subject matter approved by the Senate of the
Republic, and other administrative provisions on the subject
matter.
3rd ARTICLE The definitions of the technical terms used in the contracts,
agreements or accords, shall be understood according to the
definitions contained in the documents indicated in above 2nd
Article, and any definitions issued by the Telecommunications
Standardization, Radio Communications sectors and the Development
of Telecommunications of UIT, as well as the Glossary of Terms
used in Telecommunications published by the Ministry of
Communications and Transportation through the Federal
Telecommunications Commission and/or Telecommunications of Mexico.
4th ARTICLE SATMEX will provide the service to establish a communication link
in national or international territory for customers who so
require. Customers have the responsibility to obtain the necessary
concessions, permits or authorizations from the Federal Mexican
Government or the authorities on the subject matter of each
country.
5th ARTICLE The earth stations and equipment to establish satellite links must
be authorized by the Ministry of Communications and
Transportation, must comply with Mexican Official Standards of
technical specifications for services related to the conduction of
signals between fixed points via the use of the Mexican
Satellites. For the case of earth stations located abroad,
Recommendation 580-2 of CCIR (29-25 log of 6) must be complied
with.
CHAPTER II
PROVISION
6th ARTICLE The services will be provided under the following conditions:
Permanent - 24 hours a day, every day of the month or, less than
24 hours by the hour or fraction thereof, at the same time, during
every day of the month.
Occasional. For a determined time(s) of day and date(s) previously
established for that occasion(s).
For each of the foregoing, tariffs and regulations will be
established.
<PAGE>
7th ARTICLE Permanent service will be provided based on three categories
according to continuity priority in the event of a contingency or
partial or complete breakdown of the assigned satellite, as
follows:
FULLY PROTECTED SERVICE. The service which has a total backup on
the same satellite or on another SATMEX satellite, except when the
failure is caused by the actions or failure of the customer to
fulfill SATMEX's conditions.
NON-INTERRUPTED SERVICE. The service whose transponder has backup
amplifiers and is not interrupted to give priority to a protected
service, but does not have in the event of failure immediate
protection on another transponder or satellite.
INTERRUPTED SERVICE. The service subject to interruption as
required at any time to give immediate protection to a protected
service and to a non-interrupted service since these are
priorities. In its normal operation the transponders has backup
amplifiers.
Each category of permanent service has a different tariff defined
in the Tariff Manual and Technical Addendum (Addendum II of the
corresponding agreement)
When requesting the service, the customer shall indicate to SATMEX
the band and the category of service it wishes to contract;
however,, each service category is subject to the availability of
the capacity of the space segment determined for each category at
the time of contracting. SATMEX will indicate to future customers
the availability of the space segment by category, tariffs and
conditions for the provision of the service.
The space segment for national security and social welfare has
maximum priority over any service category in the event of a
emergency.
Occasional service will be provided subject to availability of the
capacity to provide this type of service, for the dates and time
requested. SATMEX will attend to the demand for the space segment
for occasional services through the International Center for
Reserve and Programming of Occasional Services (Booking).
8th ARTICLE. The space segment will be assigned based on information carriers
and standard transmission speeds, by complete transponder or by
fractions of bandwidth and/or transponder power, measured in
megahertz (MHz) and watt decibels (dBw), respectively.
9th ARTICLE. When contracting for the service, the client shall deliver a
technical memory describing the network, its topology, the earth
stations and equipment, access means to the satellite, the
required capacity and link budget for each carrier, according to
the format previously delivered by SATMEX. As well, SATMEX will
publish a technical manual of its satellites, with the technical
information, coverages, transponder parameters, sites, etc.,
required for customers to develop their network and calculate the
antenna diameter and link requirements.
10th ARTICLE. SATMEX, based on the requested capacity and the technical
information presented by the customer, shall assign the satellite,
transponder for each carrier contracted for, the transmission and
reception frequencies, polarization and operating parameters, such
as modulation, forward error correction (FEC), bandwidth (MHz),
and earth station power requirements (dBw).
The frequency receivers of the customers earth station must be
efficient and for kilohertz. The operation of equipment with
adjustable frequencies via crystals or with tuning limitations is
not recommended because this does not allow the relocation of
service in the event of interference and can also result in
greater consumption of the bandwidth chargeable to the customer.
<PAGE>
11th ARTICLE. The technicians responsible designated by the customer to operate
its earth stations of its satellite network may not exceed the
normal parameters for access to the satellite assigned to each
carrier. The personnel of SATMEX Center for Primary of Alternate
Satellite Control of SATMEX, on detecting excesses, will
immediately coordinate with the persons responsible for the earth
station or the network, to make the necessary corrections. If the
customer does not make the required correction, the customer shall
be subject to fines for the use of excessive bandwidth or power or
for damages caused to other customers.
The fines will be for an amount resulting from applying the
highest rate for the affected bandwidth and/or power affected, in
addition to, if applicable, any compensation which SATMEX must pay
the affected customer or customers. Payment of fines does not
imply authorization to continue operating the service outside of
the assigned parameters for access to the satellite.
If the customer finds it necessary to operate with a higher level
of satellite power, it may request SATMEX to authorize (with link
budgets, and if authorized apply any adjustments to their invoice.
The customer will include in the technical memory of its satellite
network for each one of the earth stations that access the
satellite assigned to SATMEX, the domicile(s), responsible
technicians, telephone number(s) and facsimile (fax).
SATMEX, shall deliver to customer in writing upon execution of the
agreement, the access frequencies to the satellite and its
operation parameters.
12th ARTICLE. Prior to accessing the satellite, customer shall coordinate with
the Primary or Alternate Control Center the required technical
tests of their earth stations consistently with the procedure and
protocol established by SATMEX.
SATMEX will grant its customers a maximum period of three (3)
calendar days, at no cost, starting from the date on which they
are notified of the assignment of the space segment contracted
for, with the frequency and operating parameters, to allow them to
conduct the tests of their earth station(s) and adjustments, in
coordination with the Primary or Alternate Control Center.
At the conclusion of this period, irregardless of whether the
tests have been conducted, it will be understood that the service
has been made available to the customer and the billing period
will commence.
13th ARTICLE. The earth stations that do not satisfy the isolation, radiation
pattern tests or any other parameters that affect or can affect
other signals or satellites will not be authorized to operate with
the satellites until corrected without any liability for SATMEX.
As well, if an already approved earth station during its operation
produces interference to other signals will suspend its access until corrected.
In this case the customer must give the Primary or Alternate Control Center
assistance to eliminate such interference.
In the event the responsible party for the earth station(s) does
not fulfill the indications of the Primary or Alternate Control Center to
correct or deactivate the earth station producing the interference, the
customers shall pay SATMEX a fine in an amount equal to 1% of the monthly tariff
for each hour or portion thereof of delay.
In the event of earth stations that access a satellite for
occasional service, these earth stations must always coordinate testing and
power adjustments at least fifteen (15) minutes before the
<PAGE>
hour indicated for the event. If this testing is not done, the Primary or
Alternate Control Center shall not allow access to the earth station.
The customer agrees to oversee the operating state of the earth stations
and that these do not produce interferences to its own signals, other customer's
signals o to other satellites.
ARTICLE 14. When a customer is affected in its signals by an unknown or
undetermined interference and that cannot be corrected
immediately, the customer shall have the option of being relocated
immediately to a free space to continue its communications.
This should be immediately reported to the monitoring area of the
Primary or Alternate Control Center so that they can coordinate with the
assignment area, and support any relocation activities. In this event, SATMEX
shall give the customer new frequencies and operating parameters either
temporary or definite.
Expenses implied by any relocation of frequencies shall be the
customer's responsibility.
ARTICLE 15. Any modification in service or relocation must be requested thirty
(30) days in advance and the corresponding technical memory and
link budget shall be included for the modified carriers or new
sites.
The customer must not make any changes without previous
coordination with SATMEX.
CHAPTER III.
AGREEMENTS
ARTICLE 16. To contract the service the customers must have a public network
concession or license as stated in articles 24 and 31 of the
Federal Telecommunications Law and in accordance with the
established in the Regulations for Satellite Communications. Any
concession or license shall be the customer's responsibility. A
copy of this document must be presented to SATMEX so that it
becomes an integral part of the agreement as an Addendum.
ARTICLE 17. Terms of the agreements will be specified in each document
executed by the customers in accordance with the following:
III. The minimum term shall be determined by the type of service
requested by the customer and shown in the corresponding
tariff.
IV. The agreement for permanent services offered by SATMEX shall
have a 1 year minimum and three (3), five (5) and ten (10)
years for long term agreements. The agreements can be
terminated in the event of satellite failure and as long as
there is no replacement capacity.
For periods shorter that one (1) year, the rule indicated in the
respective tariff will apply.
III To calculate the term of the Permanent Service agreement, it
will be understood that it begins as of the day following the
date on which the agreement is signed.
IV Occasional services must be contracted at least six (6) hours
in advance on business days, except in the cases, indicated
in paragraph VI of this article.
V Customers may cancel any occasional service contracted, or
they may expand the time requested. In both cases, they will
be subject to the minimum payment or the surcharge indicated
by corresponding tariff.
VI Urgent occasional services will be provided if contracted
with less advance notice that indicated in paragraph IV,
provided that it is technically possible to supply
<PAGE>
them, in which case a surcharge will apply of up to fifty
percent (50%) of the respective tariff.
In this case, the mere receipt of written communication from the
customer through its legal representative or technical
representative requesting the service will suffice to confirm the
provision of the service.
If SATMEX is technically unable to provide the requested service,
it will notify the customer by the most convenient method.
18th ARTICLE. The rights and obligations under the agreements may be assigned to
third parties by the customer with the prior express written
consent of SATMEX. For this, the new interested party must
subscribe and execute the relevant agreement.
19th ARTICLE. Customers are required to give written notice to SATMEX at least
thirty (30) business days in advance of any modification they are
going to make of its corporate name, change of domicile, legal
representative(s), telephone and facsimile (fax) number(s).
CHAPTER IV.
GUARANTEES
20th ARTICLE. SATMEX may, at its discretion, demand payment guarantees, which
will be specified in form and amount of each agreement.
CHAPTER V.
BILLING.
21st ARTICLE. The amounts that result from applying the contracted service rate
will be notified to customers monthly, indicating the amount,
form, place and date of payment, by an official invoice which will
be valid when it shows bank payment validation or SATMEX's stamp
evidencing payment. The invoice, with and exhibit itemizing the
charges applied, will be sent to the customer's domicile shown by
customer in the agreement. Invoices issued to customers with a
domicile in Mexican territory will be stated in domestic currency
and will include the value added tax (IVA). Invoices to customers
with domicile outside of Mexico will be stated in dollars, United
States of America currency, excluding Mexican taxes.
22nd ARTICLE. The amount stated in the monthly invoice for services provided
will be the result of applying the respective tariff to the class
of service contracted, pursuant to the provisions of SATMEX
Addendum II of the respective agreement.
When the rate is stated in United States of America dollars, for
its national currency billing, the exchange rate that is published
by "Banco de Mexico' at the closure of the last working day of the
prior month in which the service is provided shall apply.
23rd ARTICLE. When the magnitude of some of the concepts used to apply the
tariffs reflect fraction higher that those established in the
tariff, they will be converted to unit values, to the 10th or
100th, rounding them out upward to the immediately higher number,
as needed.
24th ARTICLE. As to the concepts used for applying the tariff that are in terms
of time (hours or part of and hour), they will be considered in
the form stated in the tariff applicable to the service
contracted.
25th ARTICLE. Invoices for the supply of permanent services will cover periods
of one calendar month, except when the service commences on a day
other than the first day of the month, in
<PAGE>
which case the first invoice will cover the amount corresponding
to the number of days still remaining in said month in which the
service is provided.
26th ARTICLE. Public or private natural or corporate persons shall pay the
amounts shown in their monthly invoice no later than the fifteenth
(15) day of each month, at the places and times indicated by
SATMEX and/or stated on the invoice.
27th ARTICLE. If the customer does not timely receive the invoice at its
domicile in the first five (5) working days of each month, it
shall notify SATMEX's collection department in order to obtain the
data it needs to timely pay the bill. However, said situation does
not release it of its payment obligation, particularly in the case
of a monthly fixed charge. In every case, customer shall ask for
its outstanding balance from SATMEX's collection office.
CHAPTER VI.
PAYMENTS.
28th ARTICLE. SATMEX will publish a manual containing the tariffs and general
provisions authorized by the Ministry of Communications and
Transportation which are to be applied to the various public
satellite services, and will deliver a copy to the customer of the
tariff for the service contracted.
29th ARTICLE. Customers will make their payments to SATMEX for satellite
services provided at the banks authorized by SATMEX or directly to
SATMEX's cashier, within the following periods:
I Permanent services at a fixed monthly charge are to be paid by the
fifteenth (15) day of each month that the service is provided.
<PAGE>
II Occasional services are to be paid before provided.
III Foreign-resident customers are to pay their invoices during the
period indicated in the first paragraph of this article and in the
same currency in which the invoice is presented.
Customers may arrange with SATMEX for other forms for making monthly
payments, such as an electronic bank transfer.
30th ARTICLE. If customer does not promptly pay its invoices, SATMEX will
notify the customer its outstanding invoices and apply late
payment fees beginning the next day following due date.
31st ARTICLE. SATMEX will at all times have the right to suspend the service in
the event of a failure to pay two months' bills. In the event of a
suspension, customer will have ten (10) business days to pay its
outstanding invoices; in order to reactivate the service, the
customer must first pay its outstanding amount, reconnection
charges and late payment fees.
CHAPTER VII.
COMPENSATIONS.
32nd ARTICLE. For purposes of compensation, SATMEX will be liable only for
service interruptions for space segment, except for acts of God or
force majeure.
SATMEX shall not have any responsibility for harm and damages
caused by interruptions of the service to the customer or third
parties.
33rd ARTICLE SATMEX will not be required to pay compensation for interruptions
of service caused by the operation of earth station(s), owned by
customer, for lack of authorization or not technically approved
that causes interference, as well as for the partial or total
suspension of a interruptible service for giving immediate
protection to a fully protected or non interrupted service which
has priority.
34th ARTICLE. In the event of an interruption in the provision of the service,
the customer shall immediately notify the SATMEX Control Center in
order to determine the cause, correct the failure and reestablish
the service; customer also agrees to give written notice to SATMEX
so that it may make the respective compensation if applicable
based on the Control Center's technical report.
The compensations will be considered from the date in which SATMEX
Control Center issues the confirmation report of the causes that
originated the interruption.
35th ARTICLE. Interruptions of the service provision imputable on SATMEX will
be compensated as follows:
II. In case of permanent services supplied during the 24
hours of the day, only interruptions of three (3) continual
hours will be compensated. The compensation will be equal to
one-eighth of the billing for one (1) day. Part of an hour
will be computed as a full hour.
II. Occasional or periodic services provided for periods of
hours, half-hours or minutes: for each minute of
interruption, the compensation
<PAGE>
will be equal to the rate per minute, applied to the number
of minutes during which the interruption persisted.
II. SATMEX will not consider requests for compensation when
the interruption results from negligence of the customer or a
breakdown of its apparatus and equipment, the maintenance and
operation whereof correspond to the customer.
II. Compensation, when applicable, will be credited to the
customer in the invoice payable of the second and third month
subsequent to the month in which the interruption occurred.
II. As to occasional services, if the customer requests a
suspension of already initiated service prior to the
conclusion of the contracted schedule, customer will not be
entitled to any compensation.
II. Refunds will proceed only when it is not possible to
apply the compensation to other periods or services of the
customer.
CHAPTER VIII.
PREMATURE TERMINATION.
36th ARTICLE. SATMEX may at any time terminate the agreement with no liability
on its part, for justified causes or for reasons duly motivated
and justified giving notice to customer thirty (30) business days
in advance.
37th ARTICLE. Customer may terminate the respective agreement, notifying SATMEX
in writing at least thirty (30) business days in advance for
short-term services, and ninety (90) business days in advance for
long-term services.
In the case of permanent services, if customer terminates the
service prematurely - that is, before the conclusion of the agreed
term, it shall pay, except where termination results from a
failure of the satellite and/or replacement capacity is not
available, the following penalties:
The amount resulting of the difference between the amount paid and
the monthly rate corresponding to one (1) year agreements for each
month that the service has been provided; and in addition the
customer shall pay in the same date the highest amount that
results from:
a) Twenty percent (20%) of the total payments unpaid from the date
of the termination until the end of the originally
agreed term of the respective agreement. If the termination occurs
during the second third of the term of the agreement, the
percentage will be reduced to fifteen percent (15%).
b) The monthly tariff corresponding to one year agreements for
each month until the conclusion of the original period of the
agreement, not to exceed twelve (12) months. Failure to give
notice referred to in the first paragraph of this article will
allow SATMEX to continue providing the service in the implied
manner, and charge the accounts in full for the ensuing months
until customer gives notice of renewal or termination, as the case
may be.
The cancellation or premature termination of a service does not
release the customer from prior debts or late payment fees.
<PAGE>
SATMEX reserves the right to assign to other customers the
released satellite capacity on the next day following the
termination date.
38th ARTICLE. Agreements for occasional or periodic services may be terminated
in advance when the customer timely gives the termination notice
with the following periods:
1. If the service is canceled before ten (10) calendar days
prior to the date of the event, no charge will apply.
2. If the service is canceled between ten (10) calendar days and
forty-eight (48) hours prior to the event, a charge for the
equivalent of sixty percent (60%) of the price of the requested
service will be imposed.
3. If the service is canceled forty-eight (48) hours prior to
the event, or the service is not used, one hundred percent (100%)
of the price of the requested service will apply.
CHAPTER IX
CAUSES FOR TERMINATION
39th ARTICLE SATMEX may terminate a service agreement in the following events:
I. If customer assigns in any way the rights and/or obligation
derived of the corresponding agreement to third
parties, without the previous written consent by SATMEX.
II. If customer fails to pay two (2) consecutive bills for the
service provided or three (3) suspensions of said bills in a one
(1) year period.
III. If customer does not comply with the satellite access
parameters indicated by SATMEX.
IV. If customer does not provide the guarantee stated in article
20.
V. If customer becomes the subject of bankruptcy, insolvency,
reorganization or liquidation proceeding or finds itself under any
of the conditions found in Article 2 of the Bankruptcy and
Reorganization Law.
VI. If customer does not accept the relocation that SATMEX should
assign.
VII. In general, if customer fails to comply with any of the
obligations under the respective agreement, or its addenda.
40th ARTICLE. If SATMEX has elements to prove that customer has incurred in any
of the causes for termination, it will give written notice to
customer to such effect within fifteen (15) business days to allow
customer to asse rt its rights.
SATMEX THE CUSTOMER
(Signature) (Signature)
<PAGE>
ING. LAURO ANDRES GONZALEZ MORENO CHARLES RANDY POOLE
PRESIDENT PRESIDENT
<PAGE>
* CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION.
ADDENDUM II
INTERNATIONAL SERVICE OF
SIGNAL CONDUCTION VIA SATELLITE
GENERAL INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Customer: TELESPAN, INC. R.F.C.
Address: 12500 NETWORK BOULEVARD, SUITE 407
City: SAN ANTONIO TEXAS USA Zip Code: 78249
Contract No. 094-I Date: Term: 3 years
Legal Rep: CHARLES RANDY POOLE
Telephone: (210) 558 60 90 Fax: (210) 558 60 95
TECHNICAL INFORMATION OF ASSIGNED CAPACITY
Type of Network: POINT TO POINT Bandwidth: * *
Type: PUBLIC Transponder Power CONFIDENTIAL
Satellite: * Band: C Service Category: Uninterrupted PORTIONS
Orbital Position: 113 degrees 0" Transponder: * Ranges: HAVE BEEN
Region: R2 Polarization: H/V Connectivity: R1/R2, R1/R3 OMITTED AND
No. of Carriers Freq. Speed (Kbps) Modulation FEC Access FILED
SEPARATELY
WITH THE
COMMISSION
Teleport: SAN ANTONIO TEXAS
TARIFF
Tariff No: 3
Term: * Monthly Charge: * USD * CONFIDENTIAL
Commencement Date: May 1, 1998 Termination Date: April 31, 2001 PORTIONS HAVE
BEEN OMITTED
Observations: Nominal bandwidth in accordance with applicable rules AND FILED
SEPARATELY
WITH THE
Mexico, D.F. April 28, 1998 COMMISSION.
SATMEX THE CUSTOMER
(Signature) (Signature)
ING. LAURO ANDRES GONZALEZ MORENO CHARLES RANDY POOLE
PRESIDENT PRESIDENT
</TABLE>
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL INC. AND SUBSIDIARIES Exhibit 11
COMPUTATION OF LOSS PER SHARE
(In thousands)
<TABLE>
<CAPTION>
For the Year Ended
---------------------------------------------
July 31, 1996 July 31, 1997 July 31, 1998
------------- ------------- -------------
<S> <C> <C> <C>
COMPUTATION OF BASIC LOSS PER SHARE
Net loss ($ 2,205) ($ 4,695) ($ 5,094)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 19,928 26,807 41,093
============ ============ ============
BASIC LOSS PER COMMON SHARE ($ 0.11) ($ 0.18) ($ 0.12)
============ ============ ============
COMPUTATION OF DILUTED LOSS PER SHARE
Net loss ($ 2,205) ($ 4,695) ($ 5,094)
Interest not incurred upon assumed conversion
of convertible note 9 9 0
------------ ------------ ------------
Net loss applicable to common stockholders
used for computation ($ 2,196) ($ 4,686) ($ 5,094)
============ ============ ============
Weighted average number of shares of common
stock outstanding 19,928 26,807 41,093
Weighted average incremental shares outstanding
upon assumed conversion of options and warrants 198 3,061 10,228
Weighted average incremental shares outstanding
upon assumed conversion of convertible note 200 200 0
------------ ------------ ------------
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS USED FOR
COMPUTATION 20,326 30,068 51,321
============ ============ ============
DILUTED LOSS PER COMMON SHARE AND
COMMON SHARE EQUIVALENT ($ 0.11) ($ 0.16) ($ 0.10)
============ ============ ============
</TABLE>
(a) This calculation is submitted in accordance with Item 601(b)(11) of
Regulation S-K although it is not required by SFAS No. 128 because it is
antidilutive.
<PAGE>
EXHIBIT 22
The subsidiaries of American TeleSource International, Inc. are as follows:
State or other Company Jurisdiction of Incorporation
---------------------- -----------------------------
American TeleSource International, Inc. Canada
American TeleSource International, Inc. Texas
American TeleSource International de Mexico, S.A. de C.V. Mexico
GlobalSCAPE, Inc. Delaware
Sistema de Telefonia Computarizada, S.A. de C.V. ("Computel") Mexico
TeleSpan, Inc. ("TeleSpan") Texas
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement on Form S-8 (File No. 333-50259).
San Antonio, Texas /s/ ARTHUR ANDERSEN LLP
October 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 1,091
<SECURITIES> 0
<RECEIVABLES> 3,957
<ALLOWANCES> 209
<INVENTORY> 0
<CURRENT-ASSETS> 5,683
<PP&E> 14,233
<DEPRECIATION> 2,418
<TOTAL-ASSETS> 24,251
<CURRENT-LIABILITIES> 11,370
<BONDS> 0
0
0
<COMMON> 46
<OTHER-SE> 7,041
<TOTAL-LIABILITY-AND-EQUITY> 24,251
<SALES> 34,520
<TOTAL-REVENUES> 34,520
<CGS> 22,287
<TOTAL-COSTS> 37,986
<OTHER-EXPENSES> (84)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,573
<INCOME-PRETAX> (4,955)
<INCOME-TAX> 139
<INCOME-CONTINUING> (5,094)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,094)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
