<PAGE>
As filed with the Securities and Exchange Commission on March 6, 1998
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------------------
AMERICAN TELESOURCE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 4813 74-2849995
(state or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification
No.)
12500 Network Blvd., Suite 407
San Antonio, Texas 78249
(210) 558-6090
(Address, including zip code, and telephone
number, including area code, of each registrant's
principal executive offices)
---------------------------
Arthur L. Smith, President
12500 Network Blvd., Suite 407
San Antonio, Texas 78249
(210) 558-6090
(Name, address including zip code, and telephone
number, including area code, of agent for
service for each registrant)
---------------------------
with a copy to:
Matthew R. Bair, Esq.
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
300 Convent Street, Suite 1500
San Antonio, Texas 78205
Telephone: (210) 270-0800
- --------------------------------------------------------------------------------
Pursuant to Rule 429(b) under the Securities Act of 1933, as amended, this
Registration Statement contains a combined prospectus that also relates to the
Registration Statement on Form S-4 (Registration No. 333-05557) as amended by
Amendment Nos. 1,2,3 and 4 thereto, previously declared effective on December
11, 1997.
<PAGE>
---------------------------
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If any securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box [ ].
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
Proposed
maximum Proposed maximum Amount of
Title of each class of Amount to offering price aggregate offering registration
securities to be registered be registered/(1)/ per share/(2)/ price/(2)/ fee
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock
$0.001 par value 856,362 $2.91 $2,492,013.42 $ 755.16
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock
$0.001 par value 367,400(3) $2.91 $1,069,134.00 $ 323.98
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock
$0.001 par value 642,795(4) $2.91 $1,870,533.45 $ 566.83
- --------------------------------------------------------------------------------------------------------------------------------
Total Registration Fee Due $1,645.97
================================================================================================================================
</TABLE>
/(1)/ Pursuant to Rule 429 under the Securities Act of 1933, as amended, the
Prospectus contained in this Registration Statement also relates to
51,639,177 shares of the Registrant's common stock, par value $0.001 per
share, covered by the Registrant's Registration Statement on Form S-4
(Registration No. 333-05557), as amended by Amendment Nos. 1, 2, 3, and 4
thereto, previously declared effective on December 11, 1997. No shares
have been sold in connection with the prior effective Registration
Statement. Registration Fees of $29,350.11 were previously paid with
respect to such shares.
/(2)/ Pursuant to Rule 457(c) under the Securities Act of 1933, as amended, the
proposed maximum offering price per share has been calculated as the
average of the bid and asked price on March 2, 1998.
/(3)/ Represents shares of common stock issuable after the effective date of
the Arrangement upon exercise of warrants or upon the effective date of
the Arrangement in the case of warrants exercised prior to the effective
date of the Arrangement.
/(4)/ Represents shares of common stock which will or may be issued prior to
the effective date of the Arrangement in connection with existing
contractual obligations and the exercise of outstanding stock options. As
provided in Item 22 of this Registration Statement, the Registrant
undertakes to deregister such shares which are not issued.
---------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
---------------------------
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K
<TABLE>
<CAPTION>
Form S-4 Item Number and Caption Location in Prospectus
-------------------------------- ----------------------
<S> <C>
A. Information About the Transaction
2. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................ Cover Page
3. Inside Front and Outside Back Cover Pages of
Prospectus.................................... Inside Front and Outside Back Cover Pages;
Available Information
4. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information................. Summary; Risk Factors; General Proxy
Information; Capitalization; Selected
Financial Data; Management; Principal
Shareholders
5. Terms of the Transaction........................... Summary; Arrangement; Effect of
Arrangement on Shareholder Rights; Dissent
Rights of ATSI-Canada Shareholders;
Description of ATSI-Delaware Securities;
Canadian and United States Income Tax
Considerations
6. Pro Forma Financial Information.................... *
7. Material Contracts with the Company Being
Acquired...................................... *
8. Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters............................ *
9. Interests of Named Experts and Counsel............. *
10. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................... *
B. Information About the Registrant
11. Information with Respect to S-3 *
Registrants...................................
12. Incorporation of Certain Information by
Reference..................................... *
13. Information with Respect to S-2 or S-3
Registrants................................... *
14. Incorporation of Certain Information by
Reference..................................... *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Form S-4 Item Number and Caption Location in Prospectus
- -------------------------------- ----------------------
<S> <C>
15. Information with Respect to Registrants
Other Than S-2 or S-3 Registrants......... Summary; Risk Factors; Price Range of
Common Shares; Capitalization; Selected
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results
of Operations; Business; Management;
Certain Transactions; Principal Shareholders;
Description of ATSI-Delaware Securities
C. Information About the Company Being
Acquired
16. Information with Respect to S-3 *
Companies.................................
17. Information with Respect to S-2 or S-3
Companies................................. *
18. Information with Respect to Companies
Other Than S-2 or S-3 Companies........... Price Range of Common Shares; Summary;
Risk Factors; Capitalization; Selected
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results
of Operations; Business; Management;
Certain Transactions; Principal Shareholders;
Description of ATSI-Delaware Securities
D. Voting and Management Information
19. Information if Proxies, Consents or
Authorizations Are to be Solicited........ Available Information; Summary; General
Proxy Information; Articles of Arrangement;
Arrangement; Dissent Rights of ATSI-
Canada Shareholders; Management; Certain
Transactions; Principal Shareholders;
Shareholder Proposals; Other Business at
Special Meeting; Approval of Proxy
20. Information if Proxies, Consents or
Authorizations Are Not to be Solicited
or in an Exchange Offer................... *
</TABLE>
- -----------
*Not applicable
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL INC.
12500 Network Blvd., Suite 407
San Antonio, Texas 78249
Dear Shareholders:
Your approval is requested for the following transaction which American
TeleSource International Inc. (the "Company" or "ATSI-Canada") is proposing to
its shareholders to be voted upon at a special meeting of shareholders.
The Board of Directors is submitting a proposal to effect a plan of arrangement
(the "Arrangement") under the Business Corporations Act (Ontario) (the "OBCA")
pursuant to which shares of Common Stock, $0.001 par value per share ("Common
Stock"), of American TeleSource International, Inc. ("ATSI-Delaware"), a
Delaware corporation formed for the purpose of effecting the Arrangement, will
be issued to the holders of Common Shares, without par value ("Common Shares"),
of ATSI-Canada, an Ontario corporation, in exchange for the Common Shares of
ATSI-Canada held by such shareholders on the basis of one share of Common Stock
for each Common Share. If approved by at least two-thirds of the votes cast by
holders of the Common Shares represented in person or by proxy at the meeting,
the Arrangement will result in ATSI-Canada becoming a wholly owned subsidiary of
ATSI-Delaware. If approved by the shareholders, and subject to requisite
regulatory and court approval, it is anticipated that the Arrangement will
become effective on or about ________ __, 1998, or as soon as practicable after
the special meeting of shareholders.
The Board of Directors has reserved the right to terminate or abandon the
Arrangement at any time prior to its effectiveness, notwithstanding shareholder
approval, if the Board of Directors determines for any reason that the
consummation of the Arrangement would be inadvisable or not in the best
interests of the Company or its shareholders.
For a summary of the principal income tax consequences of the Arrangement
to certain United States and Canadian security holders and the Company, see
"Canadian and United States Income Tax Considerations" contained in the Circular
and Proxy Statement/Prospectus (the "Prospectus").
IF THE ARRANGEMENT IS COMPLETED, SHAREHOLDERS WILL BE REQUESTED TO
SURRENDER THEIR CURRENT CERTIFICATES REPRESENTING COMMON SHARES IN EXCHANGE FOR
CERTIFICATES REPRESENTING AN EQUAL NUMBER OF SHARES OF ATSI-DELAWARE COMMON
STOCK. After the Arrangement occurs but before a stock certificate for Common
Shares of ATSI-Canada is surrendered, such certificate will represent an equal
number of shares of Common Stock of ATSI-Delaware. Appropriate transmittal forms
will be sent to shareholders for this purpose.
THE PROSPECTUS PROVIDES A DETAILED DESCRIPTION OF THE ARRANGEMENT AND OTHER
INFORMATION TO ASSIST YOU IN CONSIDERING THE MATTER TO BE VOTED ON. WE URGE YOU
TO REVIEW THIS INFORMATION CAREFULLY AND, IF YOU REQUIRE ASSISTANCE, TO CONSULT
WITH YOUR FINANCIAL, TAX OR OTHER PROFESSIONAL ADVISORS.
FOR THE REASONS SET FORTH IN THE PROSPECTUS, YOUR BOARD OF DIRECTORS
UNANIMOUSLY BELIEVES THAT THE PROPOSED ARRANGEMENT IS IN THE BEST INTERESTS OF
THE COMPANY AND ALL OF ITS SHAREHOLDERS. WE THEREFORE STRONGLY URGE YOU TO VOTE
"FOR" THE ARRANGEMENT.
Very truly yours,
/s/ ARTHUR L. SMITH
Arthur L. Smith
President, Chief Operating Officer and Director
ON BEHALF OF THE BOARD OF DIRECTORS
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TAKE NOTICE THAT a Special Meeting (the "Meeting") of the shareholders of
American TeleSource International Inc. (the "Company" or "ATSI-Canada") will be
held at Macleod Dixon, 181 Bay Street, BCE Place, Suite 4220, Toronto, Ontario,
Canada M5J 2T3 on ________ __, 1998, at the hour of 10:00 A.M. (Eastern Standard
Time) to consider and pass, with or without variation, a special resolution
authorizing and approving a plan of arrangement (the "Arrangement") under the
Business Corporations Act (Ontario) pursuant to which shares of Common Stock,
$0.001 per share ("Common Stock"), of American TeleSource International, Inc.
("ATSI-Delaware"), a Delaware corporation formed for the purpose of effecting
the Arrangement, will be issued to the holders of Common Shares, without par
value ("Common Shares"), of ATSI-Canada, an Ontario corporation, in exchange for
the Common Shares of ATSI-Canada held by such shareholders on the basis of one
share of Common Stock for each Common Share, and to transact such other business
as may properly come before the Meeting or any adjournments thereof. If approved
by at least two-thirds of the votes cast by holders of the Common Shares
represented in person or by proxy at the Meeting, and subject to requisite
regulatory and court approval, the Arrangement will result in ATSI-Canada
becoming a wholly owned subsidiary of ATSI-Delaware.
FOR FULL INFORMATION, THIS NOTICE MUST BE READ IN CONJUNCTION WITH THE
PROSPECTUS ACCOMPANYING THIS NOTICE.
Shareholders registered as holders of the Company's Common Shares as of the
close of business on _________ __, 1998, are entitled to Notice of the Meeting
and are entitled to vote on all matters to be considered at the Meeting, except
that if such person transfers his or her shares after said date and the
transferee, at least 48 hours prior to the Meeting, produces properly endorsed
share certificates to the Secretary or transfer agent of the Company, or
otherwise establishes ownership of the shares, the transferee may vote those
shares. The transfer register will not be closed at any time prior to the
Meeting.
The Board of Directors has by resolution fixed the close of business on the
second business day preceding the day of the Meeting (excluding Saturdays,
Sundays and holidays) and any adjournments thereof as the time before which
proxies to be used or acted upon at the Meeting or any adjournments thereof
shall be deposited with the Company or its transfer agent. The Company may,
however, at its discretion accept proxies up until and during the meeting.
A Shareholder who dissents in respect of the Arrangement in accordance with
the requirements of applicable law is entitled to be paid the fair value of its
Common Shares, as determined in accordance with applicable law. A description
of the procedure to be followed by shareholders dissenting from the Arrangement
is set out in the Prospectus under the heading "Dissent Rights of ATSI-Canada
Shareholders" and the text of the special resolution to be submitted to the
Meeting is set out in Exhibit B (with respect to the Arrangement) to the
Prospectus.
Dated ________ __, 1998.
By order of the Board of Directors
/s/ H. DOUGLAS SAATHOFF
--------------------------
Secretary
<PAGE>
Shareholders, whether or not able to attend the Meeting in person, are
requested to date and sign the enclosed form of proxy and to return it to the
Company's Transfer Agent, CIBC Mellon Trust Company, 393 University Avenue,
Fifth Floor, Toronto, Ontario, M5G 2M7, by not later than 5:00 P.M. (Eastern
Standard Time) on _______ __, 1998.
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL INC.
an Ontario corporation
AMERICAN TELESOURCE INTERNATIONAL, INC.
a Delaware corporation
---------------------------
Special Meeting of Shareholders
to be held on ________ __, 1998
---------------------------
PROSPECTUS FOR 53,505,734 SHARES OF COMMON STOCK
OF
AMERICAN TELESOURCE INTERNATIONAL, INC.
---------------------------
This Circular and Proxy Statement/Prospectus (this "Prospectus") is
being furnished as a management proxy circular in connection with the
solicitation by the Board of Directors and management of American TeleSource
International Inc., an Ontario corporation (the "Company" or "ATSI-Canada"), of
proxies for use at the Special Meeting of Common Shareholders (the "Meeting") or
any adjournment(s) thereof. The Meeting will be held on _______ __, 1998 at
the time, place and for the purposes set forth in the Notice of Meeting.
This Prospectus constitutes the Prospectus of American TeleSource
International, Inc. ("ATSI-Delaware"), a Delaware corporation formed for the
purpose of effecting the transaction described herein under the Securities Act
of 1933, as amended (the "Securities Act"), with respect to (i) shares of Common
Stock, par value $0.001 per share ("Common Stock"), of ATSI-Delaware to be
issued to holders of Common Shares, no par value per share ("Common Shares") of
ATSI-Canada as a result of the plan of arrangement (the "Arrangement") under the
Business Corporations Act (Ontario) ("OBCA"), pursuant to which shares of Common
Stock of ATSI-Delaware will be issued to the holders of Common Shares of ATSI-
Canada in exchange for the Common Shares of ATSI-Canada held by such
shareholders on the basis of one share of Common Stock for each Common Share,
and (ii) shares of Common Stock of ATSI-Delaware issuable upon the exercise of
warrants of ATSI-Canada ("Warrants"), which Warrants are exercisable, prior to
the Arrangement, for Common Shares of ATSI-Canada and, in accordance with their
terms, are exercisable, after the Arrangement, for shares of Common Stock of
ATSI-Delaware. As a result of the Arrangement, ATSI-Canada will become a wholly
owned subsidiary of ATSI-Delaware. As of (insert record date) there were _______
Common Shares of ATSI-Canada outstanding and _______ Common Shares of ATSI-
Canada issuable upon exercise of outstanding exercisable warrants. Prior to the
effective date of the Arrangement, up to an additional _______ Common Shares of
ATSI-Canada will or may be issued in connection with existing contractual
obligations and the exercise of outstanding options. The number of shares
covered by this Prospectus represents the aggregate of (i) the maximum number of
ATSI-Canada Common Shares to be outstanding on the effective date of and
immediately prior to the effective time of the Arrangement, and (ii) the number
of ATSI-Canada Common Shares issuable upon exercise of exercisable warrants to
be outstanding on the effective date of and immediately prior to the effective
time of the Arrangement. This Prospectus will not be filed with the Ontario
Securities Commission pursuant to a ruling obtained from the Ontario Securities
Commission to the effect that certain first trades in securities of ATSI-
Delaware issued in connection with the Arrangement will, subject to certain
conditions, be exempt from Section 53 of the Ontario Securities Act.
Subject to certain conditions and applicable law, holders of at least
66 2/3% of the Common Shares voting in person or by proxy at the Meeting, must
approve the Arrangement. If the Arrangement is approved and becomes effective,
all holders of Common Shares, except those who have properly exercised their
dissenter's rights under applicable law, will be deemed to be stockholders of
ATSI-Delaware as of the date when the Articles of Arrangement have been
properly executed and duly filed with the Ministry of Consumer and Commercial
Relations (Ontario) and the Director appointed under the OBCA has endorsed a
certificate thereon (the "Effective Date"). See "Dissent Rights of ATSI-Canada
Shareholders." The Board of Directors of ATSI-Canada has reserved the right to
terminate or abandon the Arrangement at any time prior to its effectiveness,
notwithstanding shareholder approval, if the Board of Directors determines for
any reason that the consummation of the Arrangement would be inadvisable or not
in the best interests of the Company or its shareholders. See "Arrangement" and
"Canadian and United States Income Tax Consequences."
The Securities offered hereby involve a high degree of risk. See "Risk
Factors" beginning on page 10.
------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS CIRCULAR AND PROXY STATEMENT/PROSPECTUS. ANY REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------------------
The date of this Circular and Proxy Statement/Prospectus is
________ __, 1998.
<PAGE>
AVAILABLE INFORMATION
ATSI-Delaware has filed with the United States Securities and
Exchange Commission (the "Commission") a Registration Statement (which term
shall include any amendment thereto) on Form S-4 under the Securities Act for
the registration of the securities offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain items of which are
omitted as permitted by the rules and regulations of the Commission. For further
information with respect to ATSI-Delaware and such securities, reference is
hereby made to the Registration Statement, including the exhibits and schedules
thereto. Statements made in this Prospectus concerning the contents of any
contract, agreement or other document referred to herein are not necessarily
complete. With respect to each such contract, agreement or other document filed
with the Commission as an exhibit to the Registration Statement, reference is
hereby made to the exhibit for a more complete description of the matter
involved, and each statement shall be deemed qualified in its entirety by such
reference. The Registration Statement and the exhibits and schedules thereto
filed by ATSI-Delaware with the Commission may be inspected at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549.
The Company is subject to certain periodic reporting and other
information requirements of the United States Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Reports, proxy and information statements filed
by the Company with the Commission pursuant to the information requirements of
the Exchange Act may be inspected at the public reference facilities maintained
by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices located at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade
Center, 14th Floor, New York, New York 10048. Copies of such material may be
obtained by mail from the Public Reference Branch of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such
material may also be accessed electronically by means of the Commission's home
page on the Internet (http://www.sec.gov).
ATSI-Canada's Common Shares are quoted on the Canadian Dealing Network
and the bid and ask prices are reported on the National Association of
Securities Dealers ("NASD") Electronic Bulletin Board. Upon or before completion
of the Arrangement, it is expected that the Common Stock will cease to be quoted
on the Canadian Dealing Network.
No person has been authorized to give any information or to make any
representations other than those included in this Prospectus in connection with
the offer contained in this Prospectus and, if given or made, any such
information or representations must not be relied upon as having been authorized
by either ATSI-Canada or ATSI-Delaware. This Prospectus does not constitute an
offer within any jurisdiction to any person to whom it is unlawful to make such
offer within such jurisdiction. The delivery of this Prospectus at any time does
not imply that the information herein is correct as of any time subsequent to
its date.
THIS PROSPECTUS MAKES REFERENCE TO CERTAIN DOCUMENTS WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON
REQUEST FROM H. DOUGLAS SAATHOFF, CHIEF FINANCIAL OFFICER, 12500 NETWORK BLVD.,
SUITE 407, SAN ANTONIO, TEXAS 78249 (210-558-6090). TO ENSURE TIMELY DELIVERY OF
THE DOCUMENTS, ANY REQUEST SHOULD BE MADE AT LEAST FIVE DAYS PRIOR TO THE
SHAREHOLDERS MEETING REFERRED TO IN THIS PROSPECTUS.
The date on which this Prospectus was first mailed to shareholders was on or
about ________ __, 1998.
(i)
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
AVAILABLE INFORMATION...................................................................... (i)
SUMMARY.................................................................................... 1
RISK FACTORS............................................................................... 10
GENERAL PROXY INFORMATION.................................................................. 16
Solicitation of Proxies................................................................. 16
Appointment and Revocation of Proxies................................................... 16
Voting of Shares Represented by Management Proxies...................................... 16
Voting Shares and Record Date........................................................... 17
Arrangements between the Participating Companies and their Shareholders................. 17
ARRANGEMENT................................................................................ 18
General................................................................................. 18
Intentions of Significant Shareholders.................................................. 18
The Arrangement Agreement............................................................... 18
Conduct of Meeting and Shareholder Approval............................................. 19
Court Approval.......................................................................... 19
Canadian Securities Legislation......................................................... 20
United States Securities Act of 1933.................................................... 20
Officers and Directors.................................................................. 20
Exchange of Share Certificates.......................................................... 20
Principal Reasons for the Arrangement................................................... 21
EFFECT OF ARRANGEMENT ON SHAREHOLDER RIGHTS................................................ 21
Differences Between Ontario and Delaware Corporate Law.................................. 22
Differences Between the ATSI-Canada Articles and the ATSI-Delaware Certificate.......... 24
DISSENT RIGHTS OF ATSI-CANADA SHAREHOLDERS................................................. 27
Dissent to Arrangement under Section 185 of the OBCA.................................... 27
Addresses for Notices................................................................... 27
PRICE RANGE OF COMMON SHARES............................................................... 28
CAPITALIZATION............................................................................. 29
SELECTED CONSOLIDATED FINANCIAL DATA....................................................... 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS OF OPERATIONS.................... 32
BUSINESS................................................................................... 42
MANAGEMENT................................................................................. 65
CERTAIN TRANSACTIONS....................................................................... 73
PRINCIPAL SHAREHOLDERS..................................................................... 74
DESCRIPTION OF ATSI-DELAWARE SECURITIES.................................................... 75
General................................................................................ 75
Common Stock........................................................................... 75
Preferred Stock........................................................................ 75
Warrants............................................................................... 76
Provisions Having Possible Anti-Takeover Effects....................................... 77
Canadian Dealing Network............................................................... 78
Exchange Agent, Transfer Agent and Registrar........................................... 78
Dividend Policy........................................................................ 78
Registration Rights.................................................................... 78
CANADIAN AND UNITED STATES INCOME TAX CONSIDERATIONS....................................... 79
LEGAL OPINIONS............................................................................. 89
SHAREHOLDER PROPOSALS...................................................................... 89
OTHER BUSINESS AT SPECIAL MEETING.......................................................... 89
INDEX TO FINANCIAL STATEMENTS.............................................................. F-1
EXHIBIT A
ARRANGEMENT AGREEMENT BETWEEN ATSI-CANADA AND ATSI-DELAWARE...................... EXHIBIT A-1
</TABLE>
(ii)
<PAGE>
EXHIBIT B
SPECIAL RESOLUTION-ARRANGEMENT...................................Exhibit B-1
EXHIBIT C
INTERIM ORDER APPROVING THE ARRANGEMENT..........................Exhibit C-1
EXHIBIT D
FORM OF NOTICE OF APPLICATION OF FINAL ORDER APPROVING
THE ARRANGEMENT..................................................Exhibit D-1
EXHIBIT E
ARTICLES OF AMALGAMATION OF ATSI-CANADA..........................Exhibit E-1
EXHIBIT F
BYLAWS OF ATSI-CANADA............................................Exhibit F-1
EXHIBIT G
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF
ATSI-DELAWARE....................................................Exhibit G-1
EXHIBIT H
BYLAWS OF ATSI-DELAWARE..........................................Exhibit H-1
EXHIBIT I
TEXT OF ONTARIO BUSINESS CORPORATIONS ACT SECTION 185............Exhibit I-1
(iii)
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus, which should be
read in its entirety. All dollar amounts stated in this Prospectus are in U.S.
dollars unless otherwise indicated.
The Company
General Upon successful completion of the
Arrangement, ATSI-Canada will become a
wholly owned subsidiary of ATSI
-Delaware. The principal executive
offices of ATSI-Delaware after the
Arrangement will be located at 12500
Network Blvd., Suite 407, San Antonio,
Texas 78249 and its telephone number
will continue to be (210) 558-6090.
ATSI-Canada The Company provides domestic and
international long distance call
services, primarily between Latin
America and the United States, network
management services including
international carrier services and
international network management
services between Latin America and the
United States, and local direct dial
services within Mexico. The Company has
chosen to concentrate on Latin America
because it believes that recent and
anticipated privatizations of various of
the region's major telephone companies
and overall trends toward deregulation,
particularly in Mexico where the Company
has focused the majority of its initial
efforts, present significant
opportunities to provide international
telecommunication services to, from and
within this fast-growing market. The
Company is able to provide United States
telecommunications standards of
reliability and connectivity to the
Latin American region, where
telecommunications services remain
limited and unreliable in many areas due
largely to poor local infrastructure.
ATSI-Delaware ATSI-Delaware was formed on June 7, 1996
for the
1
<PAGE>
purpose of effecting the Arrangement.
ATSI-Delaware currently has no business
or assets and has 1,000 shares of Common
Stock outstanding, all of which are
owned by an officer of ATSI-Canada. Upon
the completion of the Arrangement,
ATSI-Delaware will succeed to all of the
outstanding shares of ATSI-Canada, and,
as a result, ATSI-Canada will become a
wholly owned subsidiary of ATSI
-Delaware.
Time, Date and Place of the Meeting The Meeting is scheduled to be held on
__________, 1998 at 10:00 A.M. (Eastern
Standard Time) at Macleod Dixon, 181 Bay
Street, BCE Place, Suite 4220, Toronto,
Ontario, Canada M5J 2T3. The Meeting
will be called pursuant to and governed
by the requirements of the OBCA and the
Interim Order. See "Summary-Court
Approval" and "Arrangement-Court
Approval."
Purpose The Meeting will be convened to
authorize the Arrangement and to
transact such other business as may
properly come before the Meeting or any
adjournment(s) thereof.
Who May Vote Holders of Common Shares as of the close
of business on ___________, 1998,
will be entitled to Notice of Meeting
and, subject to the rights of certain
transferees thereof as described under
"General Proxy Information," to vote in
person or by proxy.
Approval of Shareholders The Arrangement must be approved by the
affirmative vote of not less than
two-thirds of the votes cast in respect
thereof at the Meeting. See "The
Arrangement--Conduct of Meeting and
Shareholder Approval" and "--Intentions
of Significant Shareholders."
Recommendation of the Board ATSI-Canada's Board of Directors
of Directors recommends that the holders of Common
Shares vote FOR the Arrangement.
Effect of the Arrangement At the effective time of the
Arrangement, which is expected to occur
on or about ___________, 1998, Common
Shares of ATSI-Canada will be exchanged
for Common Stock of ATSI-Delaware on the
basis of one share of Common Stock for
every Common Share. As a result of the
Arrangement, ATSI-Canada will become a
wholly owned subsidiary of
ATSI-Delaware. See "The Arrangement--
General."
Once the Arrangement has been effected,
each holder of
2
<PAGE>
certificates formerly representing
Common Shares will be requested to
surrender such certificates for a
certificate representing an equal number
of shares of Common Stock of ATSI-
Delaware, subject to certain appraisal
and other statutory rights afforded by
applicable law. After the Arrangement
occurs but before a stock certificate
for Common Shares is surrendered, such
certificate will represent an equal
number of shares of Common Stock of
ATSI-Delaware. Holders of warrants and
options to purchase Common Shares of
ATSI-Canada will continue to hold such
securities which , as a result of the
Arrangement will, by their terms,
represent the right to purchase shares
of Common Stock of ATSI-Delaware on the
same terms. See "Description of the
ATSI-Delaware Securities."
Directors and Officers The ATSI-Canada Board currently consists
of three members, Arthur L. Smith,
Murray R. Nye and John R. Moses. The
ATSI-Delaware Board of Directors
currently consists of five members, two
of whom are Class A directors, two of
whom are Class B directors and one of
whom is a Class C director. One of the
three classes of ATSI-Delaware directors
is to be elected each year to hold
office for a three-year term and until
successors are elected and qualified.
The terms of the initial Class A, Class
B and Class C directors of the Company
will expire at the 1998, 1999 and 2000
annual meetings of shareholders,
respectively. Tomas Revesz and Carlos K.
Kauachi serve as the Class A directors,
Richard C. Benkendorf and Murray R. Nye
serve as Class B directors, and Arthur
L. Smith as Class C director.
Additionally, Arthur L. Smith has been
elected to the offices of President and
Chief Executive Officer of
ATSI-Delaware, H. Douglas Saathoff has
been elected to the offices of
Secretary, Treasurer and Chief Financial
Officer of ATSI-Delaware, and Craig K.
Clement, Everett L. Waller and Charles
R. Poole have each been elected a Vice
President of ATSI-Delaware, all to serve
in such capacities until the next annual
meeting of the Board of Directors, or
until their respective successors have
been duly elected and have been
qualified, or until their earlier death,
resignation, disqualification or removal
from office. See "Management-- Executive
Officers and Directors" for more
information concerning such individuals.
Principal Reasons for the Arrangement The Arrangement is intended to enhance
shareholder value over the long-term by,
among other things, improving the
Company's ability and flexibility to
meet its future equity and debt
financing needs and enhancing the
marketability of the
3
<PAGE>
Company's capital stock by raising the
Company's profile in the U.S. and
international capital markets.
ATSI-Delaware was incorporated in the
State of Delaware because Delaware has a
modern and flexible corporate code. In
particular, ATSI-Delaware believes that
the various indemnity and exculpation
provisions of the Delaware General
Corporation Laws (the "DGCL") will help
it to attract and retain competent
directors at a time when escalating
risks and claims and resultant high cost
of director liability insurance have
made it increasingly difficult for
corporations to find and retain
competent directors. In addition, the
State of Delaware has an active bar
which is continually assessing and
recommending improvements to the DGCL,
and the substantial body of settled case
law under the DGCL adds greater
certainty in assessing risks associated
with conducting business.
Conditions to the Arrangement The Arrangement is subject to a number
of specified conditions, including the
approval of the Arrangement by the
shareholders of ATSI-Canada, and the
approval of the Arrangement by the
Ontario Court of Justice (General
Division) (the "Court"). The Arrangement
Agreement entered into between
ATSI-Canada and ATSI-Delaware (the
"Arrangement Agreement") also provides
that the Arrangement may be terminated
in certain circumstances by the
directors of ATSI-Canada or
ATSI-Delaware and by the Court before
the effective date of the Arrangement
notwithstanding the approval of the
Arrangement by the shareholders of ATSI-
Canada. The Arrangement may also be
terminated by either ATSI-Canada or
ATSI-Delaware in the event that holders
of more than .05% of the outstanding
Common Shares exercise their rights to
dissent in respect of the Arrangement.
See "Arrangement--The Arrangement
Agreement."
Court Approval The Arrangement requires the approval of
the Court in accordance with section 182
of the OBCA. Prior to the mailing of
this Proxy Statement/Prospectus, ATSI-
Canada and ATSI-Delaware filed an
application for a Final Order to approve
the Arrangement. Pursuant to such
application, the Court issued an Interim
Order providing, among other matters,
for the calling of the meeting of
shareholders of ATSI-Canada. ATSI-Canada
and ATSI-Delaware shall apply to the
Court for the Final Order at 10:00 a.m.
(Eastern Standard Time) on ___________,
1998, or as soon thereafter as counsel
may be heard. The Interim Order does not
constitute approval of the Arrangement
or the contents of this Proxy Statement/
Prospectus by the Court. The application
for the Final Order is subject to the
approval of the Arrangement by the
shareholders of ATSI-Canada. At the
hearing to consider the Final Order, all
holders of shares of ATSI-Canada, among
others, are entitled to appear and
comment on the Arrangement.
4
<PAGE>
The authority of the Court is very broad
under the OBCA. The Court may make any
inquiries it considers appropriate and
may make any order it considers
appropriate with respect to the
Arrangement. The Court will consider,
among other things, the fairness and
reasonableness of the Arrangement to the
shareholders of ATSI-Canada. The Court
may approve the Arrangement either as
proposed or as amended in any manner the
Court may direct, subject to compliance
with such terms and conditions, if any,
as the Court thinks fit. See
"Arrangement--Court Approval."
Effect of Transactions on Consolidated Because ATSI-Canada currently prepares
Financial Statements its consolidated financial statements in
U.S. dollars using U.S. generally
accepted accounting principles ("U.S.
GAAP") and, after the Arrangement, the
consolidated financial statements of the
Company will continue to be presented in
U.S. dollars and prepared in accordance
with U.S. GAAP, the Arrangement will
have no accounting implications with
respect to the consolidated financial
statements of the Company.
Certain Differences Between ATSI-Delaware's authorized capital
ATSI-Canada Common Shares and stock consists of 110,000,000 shares
ATSI-Delaware Common Stock (100,000,000 shares of Common Stock and
10,000,000 shares of Preferred Stock) as
compared to an unlimited number of
authorized Common Shares and Preferred
Shares of ATSI-Canada. The par value per
share of ATSI-Delaware Common Stock and
Preferred Stock is $0.001 per share,
while the Common Shares and Preferred
Shares of ATSI-Canada are without par
value.
Certain Differences Between Rights As a result of the Arrangement, the
Of Shareholders Before And After shareholders of ATSI-Canada will become
The Arrangement stockholders of ATSI-Delaware and their
rights as stockholders will be subject
to the provisions of the DGCL. The DGCL
and OBCA are similar in many respects,
but do differ from each other in certain
areas. These differences include, among
other things, the percentage and basis
for calculating the number of shares
needed to approve extraordinary matters
submitted to a shareholder vote, the
obligation of a corporation to indemnify
its officers and directors for
liabilities, losses or claims incurred
while acting on behalf of the
corporation, restrictions on business
combinations with related parties, the
percentage of shareholders needed to act
by written consent without a meeting,
the right to appoint more than one class
of directors, the manner of setting the
number of directors, the types of
transactions for which statutory
appraisal rights are available, calling
a shareholders meeting, the availability
of a corporation's shareholder list for
inspection, the liability and
qualification of corporate directors,
the parties that may bring a derivative
action, and the remedies for oppression
with
5
<PAGE>
respect to corporate security holders.
See "Effect of Arrangement on
Shareholder Rights."
In addition to the differences embodied
in the applicable governing statutes,
there are also differences between the
ATSI-Canada Articles of Amalgamation
and the ATSI-Delaware certificate of
Incorporation . These include the
capitalization of the two corporations,
the directors' power to adopt bylaws
without shareholder approval, the
indemnification of directors and
officers, the expanded limitations on
director liability, the notice and
calling of a shareholders meeting, the
ability of the shareholders to take
action without a meeting, the power to
effect certain business combinations
with related parties, the power of the
shareholders to remove directors and the
establishment of the number of directors
that will comprise the Board of
Directors. See "Effect of Arrangement on
Shareholder Rights" and "Description of
ATSI-Delaware Securities."
Right to Dissent Pursuant to the Interim Order, holders
of Common Shares have the right to
dissent in respect of the Arrangement as
provided by section 185 of the OBCA.
Upon the Arrangement becoming effective,
each such dissenting shareholder will be
entitled to be paid the fair value of
the shares in respect of which such
shareholders dissent in accordance with
the provisions of the OBCA. See "Dissent
Rights of ATSI-Canada Shareholders."
Timing of the Effective Date Assuming that the Arrangement is
approved by the requisite shareholder
vote and all other conditions thereto
are satisfied, it is currently expected
that the Arrangement will be completed
on or about ___________, 1998 subject
to receipt of requisite regulatory
approval or as soon thereafter as
practicable.
Trading Market The Common Shares are quoted on the
Canadian Dealing Network and reported on
the NASD Electronic Bulletin Board.
Following the Arrangement, the Company
anticipates that ATSI-Delaware Common
Stock will cease to be quoted on the
Canadian Dealing Network.
Recent Market Prices for The closing sale price of the Common
ATSI-Canada Common Stock Shares on the Canadian Dealing Network
and the NASD Electronic Bulletin Board on
March 2, 1998 was CDN$4.00/U.S.$3.00. For
additional information see "Price Range
of Common Shares."
Future Dividend Policy ATSI-Delaware does not expect to pay
dividends on its Common Stock in the
foreseeable future. See "Description of
ATSI-Delaware Securities - Dividend
Policy."
6
<PAGE>
Tax Consequences of Arrangement
Canadian Income Tax Consequences A Canadian resident shareholder who
exchanges Common Shares of the Company
for Common Stock of ATSI-Delaware
pursuant to the Arrangement will realize
a capital gain (or a capital loss) to
the extent that the fair market value of
the Common Stock of ATSI-Delaware
received on the exchange exceeds (or is
less than) the adjusted cost base to the
Canadian Holder of the Common Shares of
the Company so exchanged. Canadian
resident holders of Warrants of the
Company will realize a capital gain (or
a capital loss) to the extent that the
fair market value, on the effective date
of the Arrangement, of the Warrants
(which will then be exercisable for
ATSI-Delaware Common Stock) exceeds (or
is less than) the adjusted cost base to
the holder of such Warrants. U.S.
resident holders will not be subject to
Canadian income tax on capital gains
arising on the disposition of Common
Shares and Warrants of the Company
pursuant to the Arrangement.
United States Federal Income
Tax Consequences
Akin, Gump, Strauss, Hauer & Feld,
L.L.P. is of the opinion that the
Arrangement should qualify as a
reorganization under Section
368(a)(1)(B) of the Internal Revenue
Code of 1986 (the "Code"). The Company
and ATSI-Delaware have provided Akin,
Gump, Strauss, Hauer & Feld, L.L.P. with
the facts, representations and
assumptions on which Akin, Gump,
Strauss, Hauer & Feld, L.L.P. has relied
in rendering its opinion as to certain
United States federal income tax
consequences, which information is
consistent with the state of the facts
that the Company and ATSI-Delaware
believe will be existing on the
effective date of the Arrangement. If
the requirements of such a
reorganization are satisfied, then no
gain or loss will be recognized by ATSI-
Canada, ATSI Delaware, or the
shareholders of ATSI-Canada upon the
transfer of the ATSI-Canada Common
Shares to ATSI-Delaware in exchange for
ATSI-Delaware Common Stock. The tax
basis and holding period of the ATSI-
Delaware Common Stock received by ATSI-
Canada shareholders will be the same as
the tax basis and holding period in
their ATSI-Canada Common Shares. If the
Arrangement does not qualify as a
reorganization under Section
368(a)(1)(B) of the Code, Akin, Gump,
Strauss, Hauer & Feld, L.L.P. is of the
opinion that the Arrangement should
still qualify for the same
nonrecognition treatment under Section
351 of the Code. Holders of Warrants of
ATSI-Canada should not recognize gain or
loss in connection with such Warrants as
a result of the Arrangement, but the
United States Internal Revenue Service
or courts could disagree with such
characterization.
All Company shareholders should read
carefully the more detailed discussions
under "Canadian and United States Income
Tax Considerations" and should consult
with their own tax advisors.
7
<PAGE>
Summary Historical Consolidated Financial Data
The summary historical financial data set forth below for the period from
December 17, 1993 (inception) through July 31, 1994, the years ended July 31,
1995, 1996 and 1997 and the three months ended October 31, 1996 and 1997 have
been derived from the Company's consolidated financial statements appearing
elsewhere in this Proxy Statement/Prospectus.
The Company has a limited operating history, has incurred significant
losses from operations since its inception and has a working capital deficit as
of October 31, 1997. There is no assurance that the Company will become
profitable or will be able to generate future revenue levels sufficient to
support operations or recover its investment in property and equipment. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. The independent accountant's report on the Company's consolidated
financial statements included elsewhere in this Proxy Statement/Prospectus
contains an explanatory paragraph regarding the Company's ability to continue as
a going concern. See Report of Independent Public Accountants contained in, and
Note 2 to, the Consolidated Financial Statements for the year ended July 31,
1997. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources;" and "Risk Factors--
Risks Relating to the Company --Limited Operating History; History of Losses;
Need for Capital; Report of Independent Accountants. " The summary historical
financial data presented below should be read in conjunction with the Company's
historical financial statements included elsewhere in this Proxy
Statement/Prospectus, the notes thereto and the information set forth under the
headings "Selected Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business." The
Company's consolidated financial statements have been prepared on the accrual
basis of accounting in conformity with U.S. GAAP. The following data is
presented in U.S. dollars.
<TABLE>
<CAPTION>
Period from
Dec. 17, 1993 Three months ended
(Inception) Years ended July 31, October 31,
--------------- ------------------------------------- -----------------------
through (unaudited)
July 31, 1994/(1)/ 1995 1996 1997 1996 1997
------------------ -------- -------- -------- -------- --------
(In thousands of $, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Operating revenues:
Long distance services................. $110 $4,470 $10,807 $13,966 $ 2,581 $ 4,433
Network management services............ 132 318 2,668 2,262 387 1,598
------- -------- -------- -------- ------- -------
Total operating revenues.................. 242 4,788 13,475 16,228 2,968 6,031
------ ------ -------- -------- ------- -------
Operating expenses:
Cost of services.......................... 201 4,061 10,833 12,792 2,594 3,876
Selling, general and administrative....... 373 2,536 4,430 7,047 1,155 2,792
Depreciation and amortization............. 11 141 281 591 129 339
------- ------- ------- -------- ------- -------
Total operating expenses............... 585 6,738 15,544 20,430 3,878 7,007
------ ------- -------- ------- ------- -------
Loss from operations........................ (343) (1,950) (2,069) (4,202) (910) (976)
------- ------- -------- --------- ------- -------
Net loss.................................... $(343) $(2,004) $(2,205) $(4,695) $ (951) $(1,298)
======== ======== ======== ======== ======= =======
Per share information:
Net loss.................................. $(0.04) $(0.14) $(0.11) $(0.18) $ (0.04) $ (0.04)
======== ======== ======== ======== ======= =======
Weighted average common shares outstanding.. 9,146 13,922 19,928 26,807 23,779 37,068
======== ======== ======== ======== ======= =======
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
July 31, 1994 July 31, 1995 July 31, 1996 July 31, 1997 October 31, 1997
------------- ------------- ------------- ------------- ----------------
(In thousands of $, except per share data) (unaudited)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital (deficit)................... $114 $(446) $(592) $195 $(2,523)
Current assets.............................. 344 1,088 1,789 5,989 3,885
Total assets................................ 1,049 2,766 4,348 15,821 17,500
Long-term obligations, including current
portion..................................... 0 133 604 3,912 5,101
Total stockholders' equity /(2)/............ 819 1,231 1,629 6,936 6,888
</TABLE>
- -------------
/(1)/ Represents the period from the date of organization of Latcomm
International Inc., an Alberta, Canada corporation ("Latcomm"), which
company amalgamated with Willingdon Resources Ltd., an Ontario, Canada
corporation ("Willingdon"), in May 1994 (the "Amalgamation") to form
American TeleSource International Inc., through July 31, 1994, the date of
the Company's fiscal year end. The Amalgamation was accounted for as a
recapitalization of Latcomm, and, with the exception of an approximately
$55,000 liability of Willingdon (see Note 1 to the Financial Statements
for the year ended July 31, 1997), the financial data utilized for the
period from Dec. 17, 1993 until the Amalgamation were derived solely from
Latcomm's financial statements.
/(2)/ The Arrangement has no pro forma effect on total stockholders'
equity.
9
<PAGE>
RISK FACTORS
The Company's operations and the transactions described herein are subject
to certain significant risks, including the following:
Risks Relating to Ownership of Company Securities and this Offering
Anti-Takeover Protections. ATSI-Delaware's Certificate of Incorporation and
Bylaws contain certain provisions, including a classified board of directors,
prohibitions on stockholder actions by written consent in certain circumstances,
"blank check" preferred stock, advance notice requirements for director
nominations and actions to be taken at annual meetings and the protections
afforded by Section 203 of the DGCL and certain super-majority voting
requirements. Such provisions could impede any merger, consolidation, takeover
or other business combination involving the Company or discourage a potential
acquiror from making a tender offer or otherwise attempting to obtain control of
the Company. See "Description of ATSI-Delaware Securities--Provisions Having
Anti-Takeover Effects" and "Management--Executive Officers and Directors."
Issuance of Additional Shares. At February 18, 1998, the Company had
outstanding warrants to purchase 10,476,362 Common Shares and options to
purchase 4,882,000 Common Shares at a weighted average price of $.61 per share.
See "Description of ATSI-Delaware Securities" and Note 2 to the consolidated
financial statements appearing elsewhere in this Proxy Statement/Prospectus. In
view of the Company's potential continuing cash needs for working capital and
capital expenditures, it may be necessary to sell additional debt or equity
securities. The sale of additional equity or convertible debt securities and the
exercise of warrants or options will result in dilution to the Company's
shareholders and could adversely affect the prevailing market price of the
Common Shares.
No Dividends. The Company intends to retain any future earnings for use in
its business and does not anticipate paying any dividends on its Common Stock in
the near future. See "Dividend Policy."
Need for Effective Prospectus in connection with Sale of Warrant Shares.
Upon the effective date of the Arrangement, each ATSI-Canada warrant will under
its terms and as a result of the Arrangement represent a warrant to acquire
ATSI-Delaware Common Stock upon the same terms and conditions. Any Common Shares
issued to holders of presently exercisable ATSI-Canada warrants pursuant to the
exercise of such warrants prior to the effective date of the Arrangement will be
registered under the Securities Act pursuant to this Prospectus. Any shares of
Common Stock issued to holders of ATSI-Delaware warrants pursuant to the
exercise of such warrants after the effective date of the Arrangement will not
be registered unless this Prospectus or another prospectus is then in effect
with respect to such shares of Common Stock. ATSI-Delaware currently intends to
maintain the effectiveness of this Prospectus under the Securities Act for six
months or such longer period as ATSI-Delaware deems advisable, in its sole
discretion, although there can be no assurance that this Prospectus will be
maintained by ATSI-Delaware for any period of time. So long as this Prospectus
is effective under the Securities Act, holders of warrants outstanding as of the
date of this Prospectus will upon exercise of their warrants receive registered
shares of Common Stock which may be freely sold in accordance with United States
federal securities laws provided such shares of Common Stock are registered or
otherwise exempt from registration under applicable U.S. blue sky and Canadian
securities laws and provided that an active market exists for ATSI-Delaware's
Common Stock. See "Absence of Efficient Public Market; Possible Volatility of
Stock" and "State Securities Laws." To the extent that a prospectus, covering
the shares of Common Stock issuable upon exercise of the warrants outstanding as
of the date of this Prospectus, is not in effect under the Securities Act upon
exercise of any such warrant, then the shares of Common Stock received upon
exercise will not be registered under federal securities laws and may not be
sold unless registered or otherwise exempt from registration pursuant to federal
and applicable state securities laws. In addition, shares of Common Stock issued
pursuant to the exercise of Warrants by Canadian Warrant holders after the
effective date of the Arrangement may be subject to restrictions on resale under
applicable Canadian provincial securities laws. Canadian Warrant holders are
urged to consult their own advisors in this regard.
Absence of Efficient Public Market; Possible Volatility of Stock Price. The
Company's Common Shares are currently traded on the Canadian Dealing Network and
in the over-the-counter market (with prices reported on the NASD Electronic
Bulletin Board). It is expected that the Company's Common Shares will cease to
be traded on the Canadian Dealing Network upon or before completion of the
Arrangement. There can be no assurance that an active market for ATSI-Delaware's
Common Stock will exist and there can be no assurance that an active market for
the Common Stock will develop or, if developed, that it will be sustained. The
market price of the shares of Common Stock could be subject to significant
fluctuations in response to variations in results of operations, potential sales
after the Arrangement of Common Stock as a result of the elimination of
applicable holding periods for restricted stock by virtue of the registration of
such shares in connection with the Arrangement, and other factors. Developments
affecting the telecommunications industry generally, including national and
international economic conditions and government regulations, could also have a
significant impact on the market price of the shares of Common Stock. In
addition, the equity markets in recent years have experienced price and volume
fluctuations that often have been unrelated or disproportionate to the operating
performance of companies; the price of the shares of Common Stock could be
affected by such fluctuations.
State Securities Laws. The Company has taken or will take all reasonable
action to ensure that the Common Stock covered by this Prospectus is registered
or otherwise exempt from registration under all applicable U.S. blue sky laws
and that secondary trading of the Common Stock covered by this Prospectus will
be permitted; however, there can be no assurance that the Common Stock covered
hereby will be registered or otherwise exempt from registration under applicable
U.S. blue sky laws or that the Common Stock may be subsequently traded in any or
all states.
Tax Consequences of the Arrangement on Holders of Common Shares and
Warrants. The Arrangement will result in certain income tax consequences in both
the United States and Canada. As a result of the Arrangement, under certain
circumstances material adverse tax consequences could result to security holders
of the Company. Certain tax consequences of the Arrangement are summarized
elsewhere in this Proxy Statement/Prospectus. See "Canadian and United States
Income Tax Consequences". Shareholders and warrant holders of the Company should
consult their own tax advisors for advice with respect to the income tax
consequences to them of the proposed Arrangement.
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 October 31, 1997. In addition, the Company had
negative cash flows from operations during fiscal 1994, 1995, 1996 and 1997 and
the three months ended October 31, 1997. Since its formation, the Company has
financed its operations almost exclusively through private sales of securities.
There can be no assurance that the Company will ever attain profitable
operations or will be able to generate future revenue levels to support
operations or recover its investment in property and equipment. Financing from
private sources could continue to be required to fund the Company's capital
commitments and operations and is likely to continue to be required to fund the
Company's expansion. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The ability of the Company to continue
as a going concern is dependent upon the ongoing support of its stockholders and
customers and could continue to be dependent upon its ability to obtain
financing from private sources. There can be no assurance that additional
capital will be available to the Company from any source or that, if available,
it will be on terms acceptable to the Company. The unavailability of capital
could materially and adversely affect the Company's ability to implement
development plans for its operations and could result in the Company's inability
to continue as a going concern. The independent public accountant's report on
the Company's consolidated financial statements appearing elsewhere in this
Proxy Statement/Prospectus 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, 1997. 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 long distance call services, network management
services and local direct dial services within Mexico is relatively complete and
capable of handling substantial amounts of traffic, the Company's business
development plans are currently in the initial stages. The Company believes that
the markets it serves with respect to long distance call services, network
management services, and local direct dial services within Mexico 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 will increase as its development plans
are implemented. There can be no assurance such market growth will occur and,
due to its limited liquidity and capital resources and other matters affecting
operations, there can be no assurance that such volume increases will be
realized and, if so, when.
Competition. The long distance 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 with American Telephone and Telegraph Company ("AT&T"), MCI
Communications Corporation ("MCI"), Sprint Communications Company, L.P.
("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 public payphone segment in Mexico with Telefonos de Mexico ("Telmex") and
other new 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, market
10
<PAGE>
driven 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, Americatel, C-COM, AT&T, Telmex and
GeoComm/SERSA, 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, many
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--Long Distance 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 long distance call services 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 affect the Company's operations, and possibly materially. The
Company believes that suitable arrangements could be obtained with other
satellite operators to provide satellite transmission capacity, although there
can be no assurance that the interruption of service would not have a materially
adverse effect on the Company's operations.
Technological Change and New Services. The telecommunications industry has
been characterized by steady technological change, frequent new service
introductions and evolving industry standards. The Company believes that its
future success will depend on its ability to anticipate such changes and to
offer on a timely basis market responsive services that meet these evolving
industry standards. The Company has constructed its San Antonio, Texas network
control center/teleport using state-of-the-art digital satellite communications
equipment, and built the network operating system modularly to enable it to
expand telecommunications capacity quickly, on an as-needed basis. However,
there can be no assurance that the Company will have sufficient resources to
make the investments necessary to acquire new technology or to introduce new
services that would satisfy an expanded range of customer needs.
Service Interruptions; Equipment Failures. The Company's business requires
that transmission and switching facilities and other equipment be operational 24
hours per day, 365 days per year. Long distance
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telephone companies such as the Company on occasion may experience temporary
service interruptions or equipment failures, in some cases resulting from causes
beyond their control. Any such event experienced by the Company would impair the
Company's ability to service its customers and could have a material adverse
effect on the Company's operations. The Company's San Antonio, Texas control
center/teleport is, however, protected through an uninterruptible power supply
system which, upon commercial power failure, utilizes battery back-up until an
on-site generator is automatically triggered to supply power.
Increased Expenditures for Anticipated Expansion. To facilitate and support
the growth anticipated in its business, the Company anticipates that it will be
required to spend increased amounts on personnel, equipment and facilities.
There can be no assurance that the Company will have sufficient funds to support
any such growth or expansion, which could adversely affect the Company's
operations.
Customer Attrition. The Company believes that a certain level of customer
attrition is common in the long distance call services industry. Although the
Company has not experienced significant attrition in its various businesses, the
Company's historical levels of customer attrition may not be indicative of
future attrition levels, and there can be no assurance that any steps taken by
the Company to counter increased customer attrition would accomplish the
Company's objectives. In addition, recent acquisitions and consolidations in the
telecommunications industry have resulted in, and may in the future result in,
the loss of customers by the Company because of the acquisition of these
customers by large companies that have existing contractual relationships with
the Company's competitors.
Regulations. The Company's domestic long distance call services activities
are subject to the regulations of the U.S. Federal Communications Commission
("FCC") and the public utility commissions of the various states in which the
Company operates. These regulatory agencies are governed by respective federal
or state legislation and, therefore, any change or modification to such
regulation or legislation can result in positive or negative effects upon the
Company. Decisions by the state or federal legislative or regulatory bodies with
respect to the permissible business activities or pricing practices of the
Company's competitors, such as AT&T and the Regional Bell Operating Companies
("RBOCs"), may also have an adverse impact on the Company's operations.
Moreover, any significant change in regulations by federal or state governmental
agencies could significantly increase the Company's costs or otherwise have an
adverse effect on the Company's activities and on its expansion efforts.
Federal. The Company is subject to regulation by the FCC, and the
regulations promulgated by the FCC are subject to change in the future. 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 has been granted requisite authorization from the FCC to
operate its San Antonio, Texas-based satellite teleport (the "Teleport"), which
transmits and receives signals from the Hughes built, Mexican government owned
and operated Solidaridad Satellite System ("Solidaridad"). FCC licensing
decisions or changes in U.S. government policies increasing or decreasing access
to non-Intelsat satellites or other network components could adversely affect
the Company, particularly if such decisions or changes were to result in a
reallocation of access rights among the Company and its competitors. There can
be no assurance that the Company will receive all authorizations or licenses
necessary for new communications 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
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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.
To originate and terminate calls in connection with providing their
services, long distance carriers such as the Company must purchase "access" from
the local exchange carriers ("LECs"). Access charges represent a portion of the
Company's cost of services and, generally, such access charges are regulated by
the FCC. The FCC issued an order reforming its regulation of these access
charges. The new regulations are intended to create a system that is more
economically efficient, fair, and compatible with growing competition.
Implementation of a new access charge structure could place many interexchange
carriers, including the Company, at a cost disadvantage, either in absolute
terms or in relative terms, to the larger competitors.
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 will impact substantially the Company's business groups. 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. Additionally, if a concept proposed by the FCC whereby a caller
could make a long distance call from any publicly available telephone and have
the call automatically routed over the long distance telephone network of the
caller's choice, called Billed Party Preference ("BPP"), is implemented, such
implementation could have a material adverse effect on the Company. See
"Business-Regulation."
State. The Company is subject to state regulation that varies by
jurisdiction and is subject to change. Generally, the Company must obtain and
maintain certificates of public convenience and necessity from many state
regulatory authorities where it offers intrastate long distance services. In
most cases, it must also file tariffs for its intrastate offerings. To date, the
Company has experienced no unusual difficulties or delays in obtaining necessary
state authorizations. However, there can be no assurance that the Company will
not experience difficulties or delays in the future or that any such
difficulties or delays will not adversely affect the Company's business.
Additionally, many states are relaxing the regulatory restrictions currently
imposed on the LECs. There can also be no assurance that future judicial and
legislative changes will not have a material adverse effect on the Company. See
"Business-Regulation."
Foreign. On May 1, 1997, the Company acquired 100% of the outstanding
shares of Sistema de Telefonia Computarizada, S.A. de C.V. ("Computel").
Computel provides various call services from its 134 casetas (public calling
stations) including local telephone calls, domestic long distance calls,
international long distance calls, collect, calling card and credit card calls,
voice mail and fax transmission and reception. The Company intends to continue
to utilize Computel's casetas, representing substantially all of Computel's
assets, to provide the foregoing services to Computel's customers, which include
travelers and Mexican nationals lacking personal telephone access. These
operations are subject to the General Routes of Communications Law, the Rules
for Long Distance Service, and the International Long Distance Service
Regulations, as well as other relevant regulations promulgated from time to time
by the Secretaria de Comunicaciones y Transportes ("SCT"). The SCT is
responsible for granting telecommunications licenses and enforcing the
conditions on those licenses. As of the date of this Proxy Statement/Prospectus,
the Company believes it has all necessary licenses and is in full compliance
with applicable laws and regulations. The loss of any such license or the
refusal to grant additional licenses if needed could have a material adverse
effect on the Company's Mexican operations. See "Business-Regulation."
Various Mexican telecommunications licenses are held by Computel and
certain other affiliates of the Company. These entities are subject to the
federal laws and promulgated regulations of the SCT, changes to which could have
a material adverse affect on the business fortunes of such entities. With the
exception of Mexico operations conducted through use of such licenses, the
services currently provided by the Company are not directly subject to laws of
other countries, but the foreign carriers with which the Company conducts
business are subject to those laws. Certain countries are considering opening
their markets to competition. In the process, they may impose regulatory
requirements that could have a material adverse effect on the Company. See
"Business-Regulation."
Seasonal Variations in Revenues. The Company's call service revenues are
typically higher on a per phone basis during January through July, the peak
tourism months in Mexico.
Risks of Latin American Operations
General. The majority of the Company's international operations are
currently being conducted in Mexico. As a result, such operations are subject to
political, economic and other uncertainties, including, among others, risk of
war, revolution, expropriation, renegotiation or modification of existing
contracts, licenses, communications regulations, standards and tariffs, taxation
policies, licensing requirements, as well as international monetary
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fluctuations which may make payment in U.S. dollars more expensive for foreign
customers and other uncertainties and trade barriers. Consequently, the Company
may encounter unforeseen difficulties in conducting operations in Mexico,
including but not limited to the risks set forth below. The Company also
conducts limited operations in other countries within Latin America and , as the
Company expands further in these and other Latin American markets, all of the
foregoing factors and risks set forth below could also apply to a greater or
lesser extent to operations conducted by the Company in such other
countries.
Changes in Exchange Rates. The Company's international operations will
subject it to various government regulations, export controls, and the normal
risks involved in international operations and sales. Substantially all of the
Company's revenue to date has been received in US dollars; however, American
TeleSource International de Mexico, S.A. de C.V. ("ATSI-Mexico") conducts some
limited business in Mexican pesos and Computel conducts substantially all
business in Mexican pesos. Any decline in the value of the Mexican peso against
the US dollar will have the effect of decreasing the Company's earnings when
stated in US dollars. The Company currently does not engage in any hedging
transactions that might have the effect of minimizing the consequences of
currency fluctuations (which are presently immaterial) and does not intend to do
so in the immediate future.
Legal Framework Governing Communications Operations. Since its inception,
the Company's near-term strategy has been to position itself to take advantage
of the deregulation of the Mexican telecommunications industry. In 1990, the
Mexican government established August 10, 1996 as the date on which Telmex would
lose its status as the only legal provider of long distance services within
Mexico. Company management believed, and continues to believe, that significant
opportunities to provide call services within Mexico and between Mexico and
other countries will arise with the demonopolization of Telmex. Until June 1995,
the Company and its competitors operated in an environment within Mexico which
had few, if any, government regulations that addressed what services could
legally be provided, and who could provide such services. However, in June 1995
the SCT, the Mexican governmental agency charged with oversight of the Mexican
telecommunications industry, wrote into law the methods by which companies could
apply for concessions and licenses to establish and operate telecommunications
services businesses within Mexico. This law was effectively the first step in
establishing the framework under which companies could compete against Telmex.
The Company believes that the entrance of newly-concessioned carriers into the
Mexican long distance market will provide for a more competitive
telecommunications market within Mexico, and will lower the cost of doing
business within Mexico for call service providers such as the Company.
ASTI-Mexico has applied for and obtained certain licenses, which the Company
believes will enable it to expand the scope of services that it currently
provides in Mexico. However, there can be no assurance that the deregulation of
the Mexican telephone industry will continue and, if so, that such deregulation
will occur to an extent that will provide the Company with sustained lower costs
or opportunities to provide additional call services within Mexico and between
Mexico and other countries, nor can there be any assurance that the licenses
obtained by ATSI-Mexico will enable the Company to expand operations within
Mexico. If future regulations promulgated by the SCT are unfavorable to the
Company's business, the Company could be materially adversely affected.
Changes in Laws. Changes in laws applicable to the Company's business,
including income tax laws, communications laws, foreign investment laws and
currency exchange laws could materially adversely affect the Company's
operations. Recently, certain changes in some laws have been implemented which
the Company believes will improve its operations and enable it to expand its
business, particularly in Mexico. There can be no assurance, however, that
subsequent changes in such laws will not have a material adverse effect on the
Company.
Political Instability. The political and economic instability in Mexico and
other countries in Latin America could result in the adoption of new policies,
lead to trade disputes or impede the access of the Company to sources of
financing for its operations in the future, any of which could materially
adversely affect the Company. The Company has no insurance against political
instability.
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Uncertain Operating Conditions. The Company believes that, through its own
resources and those of potential joint venture partners and available
independent contractors, it will have adequate access to the equipment,
personnel, communications service organizations and technical expertise
necessary to conduct future operations in Mexico and other countries in Latin
America. However, if any of the Company's understandings or assumptions change
or prove inaccurate, the Company's operations could be materially adversely
affected.
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GENERAL PROXY INFORMATION
Solicitation of Proxies
Proxies are being solicited by and on behalf of the management of
ATSI-Canada. All expenses in connection with the solicitation of proxies will be
borne by ATSI-Canada, including charges made by brokers and other persons
holding stock in their names or in the names of nominees for reasonable expenses
incurred in sending proxy material to beneficial owners and obtaining their
proxies. Solicitation will be by mail or by regular employees of ATSI-Canada. No
arrangement has been entered into with any other party for the solicitation of
proxies for a fee. No person is authorized to give any information or to make
any representations other than those contained in this Prospectus and, if given
or made, such information or representations should not be relied upon as having
been authorized.
Appointment and Revocation of Proxies
The persons named in the enclosed forms of proxy (the "Proxy") are members
of management of ATSI-Canada. The form of Proxy being solicited through this
Prospectus seeks to appoint the persons named therein to represent the holder at
the Meeting to vote on a special resolution to authorize the Arrangement and to
transact such other business as may properly come before the Meeting or any
adjournment(s) thereof.
The holder of or a person deemed to be the holder of Common Shares has the
right to appoint a person to represent him or her at the Meeting other than the
persons designated in the respective form of Proxy. Such right may be exercised
by striking out the names of the persons named in that form of Proxy and
inserting the name of the shareholder's nominee in the space provided, or by
completing another proper form of Proxy. To be effective, proxies for the
Meeting must be received before 5:00 P.M. (Eastern Standard Time) on
______________, 1998 by CIBC Mellon Trust Company, 393 University Avenue, Fifth
Floor, Toronto, Ontario, M5G 2M7, Attention: Corporate Trust Services or be
received by the Chairman of the Meeting on or before the commencement of such
Meeting.
A shareholder forwarding the Proxy may indicate the manner in which the
appointee is to vote with respect to any specific item by checking the
appropriate space. If the shareholder giving the Proxy wishes to confer a
discretionary authority with respect to any item of business then the space
opposite the item is to be left blank. The shares represented by the Proxy
submitted by a shareholder will be voted in accordance with the directions, if
any, given in the Proxy. An automated system administered by CIBC Mellon Trust
Company, the Company's transfer agent, is used to tabulate the votes.
A shareholder who has given a Proxy may revoke it at any time in so far as
it has not been exercised. A Proxy may be revoked, as to any matter on which a
vote shall not already have been cast pursuant to the authority conferred by
such Proxy, by depositing an instrument in writing executed by the shareholder
or by his attorney authorized in writing or, if the shareholder is a body
corporate, by an officer or attorney thereof duly authorized, at the registered
office of ATSI-Canada at any time up to 5:00 p.m. (Eastern Standard Time) on the
last business day preceding the day of the Meeting or any adjournment(s) thereof
at which the Proxy is to be used or with the Chairman of such Meeting on the
date of the Meeting or any adjournment(s) thereof. A Proxy may also be revoked
in any manner permitted by law.
Voting of Shares Represented by Management Proxies
General
As of _________________, 1998, Common Shares were issued and outstanding.
Each such Common Share entitles the holder thereof to one vote on all matters to
be acted upon at the Meeting. All holders of Common Shares of record as of the
record date for the Meeting are entitled either to attend and vote thereat
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in person the Common Shares held by them or, provided an executed Proxy shall
have been delivered to ATSI-Canada within the time specified in the attached
Notice of Meeting, to attend and vote thereat by Proxy the Common Shares held by
them. See "Description of ATSI-Delaware Securities."
Meeting
A shareholder forwarding the Proxy may indicate the manner in which the
appointee is to vote with respect to any specific item by checking the
appropriate space. The persons named in the form of Proxy will vote the shares
in respect of which they are appointed in accordance with the direction of the
shareholders appointing them. However, in the absence of such direction, THE
NOMINEES INTEND TO VOTE THE SHARES REPRESENTED BY THE PROXY FOR THE SPECIAL
RESOLUTION AUTHORIZING THE ARRANGEMENT (See "Arrangement -- The Arrangement").
The enclosed form of Proxy, when properly signed, confers discretionary
authority upon the persons named therein with respect to amendments or
variations to the matter identified in the Notice of Meeting and with respect to
other matters which may properly come before the Meeting or any adjournment(s)
thereof. At the time of the printing of this Proxy Statement/Prospectus,
management knows of no such amendments, variations or other matters to come
before the Meeting other than the matter referred to in the Notice of Meeting.
However, if any other matters which are not now known to management should
properly come before the Meeting or any adjournment(s) thereof, the Proxy will
be voted on such matters in accordance with the best judgment of the proxies
named therein.
Voting Shares and Record Date
Meeting
The Board of Directors has fixed _______________, 1998 as the record date,
being the date for the determination of the registered holders of securities
entitled to receive Notice of the Meeting pursuant to National Policy No. 41, as
amended, issued by the securities commissions and comparable regulatory bodies
of the Provinces of Canada. Any non-registered shareholder that has requested or
requests to be registered as a shareholder in the time allotted pursuant to such
Policy will be listed on the list of shareholders referred to below.
In accordance with the provisions of the OBCA, ATSI-Canada will prepare a
list of holders of Common Shares at the close of business on a date not later
than 10 days after the record date. Each holder of Common Shares named in the
list will be entitled to vote the Common Shares shown opposite his or her name
except to the extent that: (i) the shareholder has transferred any of his or her
shares after the record date and (ii) the transferee of those shares produces
properly endorsed share certificates or otherwise establishes that he or she
owns such shares and demands not later than 48 hours before the Meeting that his
or her name be included in the list before the Meeting, in which case the
transferee is entitled to vote his shares at the Meeting.
Arrangements between the Participating Companies and their Shareholders
Except as set out herein, there are no contracts, arrangements or formal or
informal understandings between ATSI-Canada and any of its shareholders with
respect to the Arrangement.
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ARRANGEMENT
General
Pursuant to the Plan of Arrangement, Common Shares of ATSI-Canada will be
exchanged for Common Stock of ATSI-Delaware on the basis of one share of Common
Stock for every Common Share. As a result of the Arrangement, ATSI-Canada will
become a wholly owned subsidiary of ATSI-Delaware. Full particulars of the
Arrangement are contained in the Arrangement Agreement, a copy of which is
reproduced in full in Exhibit A to this Prospectus and is incorporated herein
by reference.
For a summary of certain of the rights of shareholders of the Company
before and after the Arrangement, see "Effects of Arrangement on Shareholder
Rights."
Intentions of Significant Shareholders
As at the close of business on _______________, 1998, the directors and
officers of ATSI-Canada and ATSI-Delaware owned approximately _____% of the
Common Shares outstanding. Each of the directors and officers of the Company has
indicated that he intends to vote such shares in favor of the transactions
described herein. Subject to applicable law, the directors and officers of the
Company may purchase additional Common Shares in the open market or otherwise
prior to the Meeting.
The Arrangement Agreement
The following description of the Arrangement Agreement is qualified in its
entirety by reference to the text of the Arrangement Agreement which is attached
as Exhibit A to this Proxy Statement/Prospectus and is hereby incorporated by
reference in this Prospectus.
Each of ATSI-Canada and ATSI-Delaware has executed the Arrangement
Agreement which sets forth certain covenants of each of them, contemplates the
Arrangement on the terms and conditions set forth in the Arrangement Agreement
and provides that the Arrangement will be subject to a number of conditions
having been met, including, among others, the following:
(a) the Arrangement shall have been approved by the shareholders of each of
ATSI-Canada and ATSI-Delaware in the manner referred to under "Conduct
of Meeting and Shareholder Approval";
(b) the Arrangement must be approved by the Court in the manner referred to
under "Court Approval";
(c) all other consents, orders, regulations and approvals, including
regulatory approvals and orders, required, necessary or desirable for
the completion of the Arrangement shall have been obtained or received,
each in a form acceptable to ATSI-Canada and ATSI-Delaware;
(d) there shall not be in force any order or decree restraining or
enjoining the consummation of the transactions contemplated by the
Arrangement Agreement; and
(e) the Arrangement Agreement shall not have been terminated as provided
for therein.
If any of the conditions set out in the Arrangement Agreement are not
fulfilled or performed, the corporation entitled to the benefit of such
condition may terminate the Arrangement Agreement or waive the condition in
whole or in part. Upon fulfillment of the foregoing conditions, the directors of
ATSI-Canada intend to cause articles of arrangement to be filed with the
Director under the OBCA together with
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such other material as may be required by the Director in order that a
certificate of arrangement giving effect to the Arrangement may be issued.
Filing of the articles of arrangement will be subject to obtaining the Final
Order. Notice of the application for such order is attached as Exhibit D hereto.
If the Final Order is granted on ________ __, 1998, it is expected that the
Effective Date will be on or about ________ __, 1998. The Effective Date will be
announced through the media following receipt of the Final Order.
Notwithstanding the foregoing, the Arrangement Agreement provides that it
may be terminated by the mutual agreement of ATSI-Canada and ATSI-Delaware (and
consequently the Arrangement not proceeded with) at any time before or after the
holding of the Meeting, but no later than the Effective Date, without any
further action on the part of shareholders of ATSI-Canada or ATSI-Delaware.
The Arrangement may also be terminated by either ATSI-Canada or ATSI-Delaware in
the event that holders of more than .05% of outstanding Common Shares (or such
greater or lesser amount as ATSI-Canada and ATSI-Delaware may mutually agree)
exercise their rights to dissent in respect of the Arrangement. If the Effective
Date does not occur on or before April 30, 1998, either of ATSI-Canada and ATSI-
Delaware may terminate the Arrangement Agreement.
Conduct of Meeting and Shareholder Approval
At the Meeting, the shareholders of ATSI-Canada will be asked to consider
and approve the Arrangement.
As provided in the Interim Order, the Arrangement must be authorized by a
special resolution passed by holders of voting securities of ATSI-Canada, the
text of which is set forth in Exhibit B to this Proxy Statement/Prospectus. The
special resolution in respect of the Arrangement must therefore be approved by
the affirmative vote of not less than two-thirds of the votes cast in respect
thereof at the Meeting.
If the approval of the shareholders of ATSI-Canada with respect to the
Arrangement is obtained, the approval of the shareholders of ATSI-Delaware to
the entering into of the Arrangement Agreement and the issuance of Common Stock
of ATSI-Delaware pursuant to the Arrangement Agreement are obtained, the Court
approves the Arrangement and the other conditions to the completion of the
Arrangement set forth in the Arrangement Agreement are fulfilled or waived, the
Arrangement will be effected by ATSI-Canada filing articles of arrangement with
the Director. The Arrangement will become effective on the Effective Date. It is
currently anticipated that this date will be on or about ________ __, 1998.
Court Approval
An arrangement under the OBCA requires Court approval. Prior to the mailing
of this Proxy Statement/Prospectus, ATSI-Canada and ATSI-Delaware obtained the
Interim Order which appears as Exhibit C hereto. The Interim Order, among other
things, provides for the calling and holding of the Meeting and causes to be
issued a notice of application for the Final Order. The Interim Order does not
constitute approval of the Arrangement or the contents of the Proxy
Statement/Prospectus by the Court. The notice of application for the Final Order
is attached as Exhibit D hereto. As set forth in such notice of application, the
hearing in respect of the Final Order is scheduled to take place before the
Court on _________ __, 1998 at 10:00 a.m., Toronto time, at 145 Queen Street
West, Toronto, Ontario, subject to the approval of the Arrangement by the
shareholders of ATSI-Canada and ATSI-Delaware as set forth under "Conduct of
Meeting and Shareholder Approval." At this hearing, all holders of shares of
ATSI-Canada have the right to appear, provided that such person, or an Ontario
lawyer acting for such person, prepares a notice of appearance in the proper
form, serves such notice of appearance on the solicitors for ATSI-Canada and
ATSI-Delaware and files such notice of appearance, with proof of service, with
the Court, and may present evidence and examine witnesses, provided that such
person, or an Ontario lawyer acting for such person, in addition to serving a
notice of appearance, serves a copy of such evidence on the solicitors for ATSI-
Canada and ATSI-Delaware and files such evidence, with proof of service, with
the Court as soon as possible, but in any event not later than 2:00 p.m. on the
day before the hearing for the Final Order.
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The authority of the Court is very broad under the OBCA. ATSI-Canada and
ATSI-Delaware have been advised by their counsel that the Court may make an
inquiry it considers appropriate and may make any order it considers appropriate
with respect to the Arrangement. The Court will consider, among other things,
the fairness and reasonableness of the Arrangement to the shareholders of
ATSI-Canada. The Court may approve the Arrangement either as proposed or as
amended in any manner the Court may direct, subject to compliance with such
terms and conditions, if any, as the Court deems appropriate.
Canadian Securities Legislation
ATSI-Delaware and ATSI-Canada have obtained a ruling from the Ontario
Securities Commission which provides that the shares of Common Stock of ATSI-
Delaware issued to shareholders of ATSI-Canada resident in the province of
Ontario in connection with or pursuant to the Arrangement may be freely resold
through the services of the NASD Electronic Bulletin Board, provided, among
other things, that such shares are sold in accordance with the rules of the NASD
and applicable United States securities laws. The shareholders of ATSI-Canada
resident in the provinces of Canada other than Ontario should consult their own
advisors with respect to the resale of their shares of Common Stock of ATSI-
Delaware.
United States Securities Act of 1933
The issuance of shares of Common Stock of ATSI-Delaware pursuant to the
Arrangement will be registered under the provisions of the 1933 Act and, upon
the effectiveness of such registration, will be freely transferable provided
such shares of Common Stock are registered or otherwise exempt from registration
under applicable blue sky laws and provided that an active market exists for the
Common Stock, for which there can be no assurance. See "Risk Factors--Absence of
Efficient Public Market; Possible Volatility of Stock" and "Risk Factors--State
Securities Laws."
Officers and Directors
The ATSI-Canada Board currently consists of three members, Arthur L. Smith,
Murray R. Nye and John R. Moses. The ATSI-Delaware Board of Directors currently
consists of five members, two of whom are Class A directors, two of whom are
Class B directors and one of whom is a Class C director. One of the three
classes of ATSI-Delaware directors is to be elected each year to hold office for
a three-year term and until successors are elected and qualified. The terms of
the initial Class A, Class B and Class C directors of the Company will expire at
the 1998, 1999 and 2000 annual meetings, respectively. Tomas Revesz and Carlos
K. Kauachi serve as the Class A directors, Richard C. Benkendorf and Murray R.
Nye serve as Class B directors and Arthur L. Smith as Class C director.
Additionally, Arthur L. Smith has been elected to the offices of President and
Chief Executive Officer of ATSI-Delaware, H. Douglas Saathoff has been elected
to the offices of Secretary, Treasurer and Chief Financial Officer of
ATSI-Delaware, and Craig K. Clement, Everett L. Waller and Charles R. Poole have
each been elected a Vice President of ATSI-Delaware, all to serve in such
capacities until the next annual meeting of the Board of Directors, or until
their respective successors have been duly elected and have been qualified, or
until their earlier death, resignation, disqualification or removal from office.
See "Management--Executive Officers and Directors" for more information
concerning such individuals.
Exchange of Share Certificates
As soon as practicable after the effective date of the Arrangement, ATSI-
Canada shareholders of record immediately prior to the effective date of the
Arrangement will be sent detailed instructions concerning the procedures to be
followed for submission of certificates representing Common Shares to CIBC
Mellon Trust Company (the "Exchange Agent"), together with a form of transmittal
letter to be sent to the Exchange Agent at the time such certificates are
submitted.
20
<PAGE>
After the Arrangement, the Exchange Agent will deliver to any holder who
has previously submitted a duly completed and executed transmittal letter and a
certificate representing Common Shares, a certificate issued by ATSI-Delaware
representing an equal number of shares of Common Stock into which such Common
Shares were converted.
After the Arrangement but before a certificate representing Common Shares
is surrendered, certificates representing Common Shares will represent the
number of shares of Common Stock into which such Common Shares were converted
pursuant to the terms of the Arrangement. The transfer agent for the Company
will be instructed to forward to the Exchange Agent any certificates for shares
of capital stock of ATSI-Canada otherwise delivered by the shareholder. The
Exchange Agent will deliver certificates representing the appropriate amount and
type of ATSI-Delaware Common Stock in accordance with the stockholder's
instructions for transfer or exchange.
Failure by a shareholder to return appropriate transmittal letter(s) or to
surrender certificate(s) representing Common Shares will not affect such
person's rights as a shareholder, as such shareholder's certificate(s)
representing Common Shares following the Arrangement will represent the number
of shares of Common Stock into which such Common Shares were converted pursuant
to the terms of the Arrangement, and will present no material consequences to
the Company.
Principal Reasons for the Arrangement
The Arrangement will result in ATSI-Canada, an Ontario corporation,
becoming a wholly owned subsidiary of ATSI-Delaware, a Delaware corporation. The
Board of Directors believes that by establishing a United States corporation as
the parent company of ATSI-Canada, the marketability of its capital stock will
be enhanced by raising the Company's profile in various capital markets, thereby
enhancing shareholder value over the long term. Furthermore, in the experience
of management, potential debt and equity capital sources and strategic partners
in the United States are more comfortable dealing with a United States
corporation than a foreign corporation. Management believes this may be because
U.S. entities are likely to be more familiar with U.S. standards of accounting,
U.S. securities law disclosure requirements and U.S. legal principles.
ATSI-Delaware was incorporated in the State of Delaware because Delaware
has a modern and flexible corporate code. The escalating risks and claims and
resultant high costs of director liability insurance have made it increasingly
difficult for corporations to find and retain competent directors, and the
Company believes the various indemnity and exculpation provisions of the DGCL
will help it to attract and retain competent directors. Delaware has an active
bar which is continually assessing and recommending improvements to the DGCL,
and the substantial body of settled case law under the DGCL adds greater
certainty in assessing risks associated with conducting business.
EFFECT OF ARRANGEMENT ON SHAREHOLDER RIGHTS
On the effective date of the Arrangement , the shareholders of ATSI-Canada
will become stockholders of ATSI-Delaware. Differences between the OBCA and the
DGCL and between the ATSI-Canada Articles and the ATSI-Delaware Certificate will
result in various changes in the rights of shareholders of ATSI-Canada . The
following is a summary of the rights of the Company's stockholders after the
21
<PAGE>
Arrangement, as compared with those of shareholders prior to the Arrangement.
This summary does not purport to be complete and is qualified in its entirety by
reference to the ATSI-Canada Articles, ATSI-Canada Bylaws, ATSI-Delaware
Certificate and ATSI-Delaware Bylaws, the texts of which are included in this
Prospectus as Exhibits E, F, G and H, respectively. For further discussion of
certain provisions of the ATSI-Delaware Certificate, see "Description of ATSI
- -Delaware Securities."
Differences Between Ontario and Delaware Corporate Law
Upon the consummation of the Arrangement, the shareholders will be subject
to the provisions of the DGCL. Set forth below is a comparison of certain
material provisions of the DGCL and the OBCA.
Vote on Extraordinary Corporate Transactions. Under the OBCA,
amalgamations, continuances, sales or leases or exchanges of all or
substantially all of the assets of a company and other extraordinary corporate
actions require the approval of the holders of two-thirds of the shares being
voted thereon in person or by proxy. Under the DGCL, mergers or consolidations
require the approval of the holders of a majority of the outstanding stock of
the corporation entitled to vote thereon except: (i) for a corporation that
survives the merger where the merger requires the issuance of Common Stock not
exceeding 20% of such corporation's shares outstanding immediately prior to the
merger, the merger agreement does not amend in any respect the survivor's
certificate of incorporation and shareholder approval is not specifically
mandated in the survivor's certificate of incorporation; and (ii) for both
corporations where the corporation surviving the merger was a 90% or greater
parent of the other corporation. Unless a greater percentage is required by the
charter, a sale, lease or exchange of all or substantially all the property or
assets of a corporation or an amendment to the certificate of incorporation also
require the approval of the holders of a majority of the outstanding stock
entitled to vote thereon.
Bylaw Amendments. Under the OBCA, either shareholders or directors may
make, amend or repeal bylaws, but director bylaws are subject to later
confirmation by the shareholders. Under the DGCL, stockholders may adopt, amend
or repeal bylaws. In addition, directors of a corporation, if authorized by the
certificate of incorporation, may adopt, amend or repeal bylaws, such action not
being subject to later shareholder confirmation.
Amendments to the Charter. Under the OBCA, an amendment to a corporation's
articles of incorporation requires the affirmative vote of at least two-thirds
of the votes cast by shareholders entitled to vote thereon represented in person
or by proxy and in most instances, the affirmative vote of at least two-thirds
of the votes cast within each class or series of outstanding shares by
shareholders represented in person or by proxy. Under the DGCL, an amendment to
a corporation's certificate of incorporation requires the approval of a majority
of the outstanding stock entitled to vote, unless such level of approval is
increased by the certificate of incorporation. In addition, under the DGCL, if
the amendment to the certificate of incorporation adversely affects the rights
of a particular class of stock, that class is entitled to vote separately on the
amendment whether or not it is designated as voting stock.
Removal of Directors. Under both the OBCA and the DGCL, directors may
generally be removed, with or without cause, by a vote of the holders of a
majority of the shares being voted; however,the ATSI-Delaware Certificate
provides that directors may be removed from office only by the affirmative vote
of the holders of 66 2/3% or more of the shares being voted. In addition, under
the DGCL, if the board is classified, which the Board of ATSI-Delaware is,
directors may be removed only for cause, unless the certificate of incorporation
provides otherwise, which the ATSI-Delaware Certificate does not. Further, if a
director is elected by holders of a class or series of shares, the OBCA provides
that only the shareholders of that class or series can vote to remove that
director, with or without cause, whereas the DGCL provides that only the
shareholders of that class or series can vote to remove that director without
cause. Finally, in the case of a corporation having cumulative voting, under
both the OBCA and the DGCL a director may not be removed from office if the
votes cast against the director's removal would be sufficient to elect such
director and such votes could be voted cumulatively at an election at which the
same total number of votes were cast and, (i) in the case of the OBCA, the
number of directors required by the articles were then being elected, or (ii) in
the case of DGCL, the entire board is being elected or, if there are classes of
directors, the class of directors of which such director is a part is being
elected.
22
<PAGE>
Quorum of Shareholders. Under the OBCA, a quorum for shareholders' meetings
consists of the holders of a majority of the outstanding shares, present in
person or represented by proxy, unless the bylaws otherwise provide. Under the
DGCL, a quorum consists of a majority of shares entitled to vote, present in
person or represented by proxy, unless the charter or bylaws provide otherwise,
but in no event may a quorum consist of less than one-third of the shares
entitled to vote at the meeting.
Notice and Calling of Shareholder Meetings. Under the OBCA, shareholders'
meetings may be called by the board of directors who must call a meeting when so
requested by the holders of not less than 5% of the voting shares, on a minimum
of 21 days' notice. Under the DGCL, unless the certificate of incorporation or
bylaws authorize additional persons, only the board of directors may call a
shareholders' meeting, on ten days' notice.
Shareholder Consent in Lieu of Meeting. Under the OBCA, shareholder action
without a meeting may only be taken by unanimous written consent of all
shareholders. Under the DGCL, unless otherwise provided in the charter,
shareholders may act by written consent without a meeting if holders of
outstanding stock representing not less than the minimum number of votes that
would be necessary to take such action at an annual or special meeting execute a
written consent providing for such action.
Appraisal Rights. The DGCL does not give appraisal rights in a merger or
consolidation to holders of stock listed on a national securities exchange (such
as the Nasdaq National Market) or held of record by more than 2,000
shareholders, provided that such holders receive shares of stock of the company
surviving the merger or consolidation or shares of stock of any other company
which is either listed on a national securities exchange or held of record by
more than 2,000 shareholders. The OBCA does not contain any similar exemption
from its provisions relating to dissenter's rights of appraisal for
amalgamations. In addition, appraisal rights are available under the DGCL for
sales of all or substantially all of the Corporation's assets or charter
amendments only if the charter so provides. Shareholders are entitled to
appraisal rights under the OBCA in connection with the sale, lease or exchange
of all or substantially all the assets of a company and for charter amendments
which affect share issuance or transferability or corporate purposes or which
would require a separate class vote.
Shareholder Register. A Delaware company's stock ledger showing the names,
addresses and security ownership of its shareholders may be inspected only by
directors and shareholders of record for a purpose reasonably related to their
respective interests as directors or shareholders. Shareholders and certain
other persons may inspect the shareholder list of an Ontario company that is an
offering corporation.
Dividends and Distributions. The DGCL and OBCA treat dividends similarly.
The DGCL permits a company, unless otherwise restricted by the certificate of
incorporation, to pay dividends out of surplus or, if there is no surplus, out
of net profits for the current and preceding fiscal year (provided that the
amount of capital of the company is not less than the aggregate amount of the
capital represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets). In addition, the DGCL generally
provides that a company may redeem or repurchase its shares only if such
redemption or repurchase would not impair the capital of the corporation. The
ability of a Delaware company to pay dividends on, or to make repurchases or
redemptions of, its shares is dependent on the financial status of the company
standing alone and not on a consolidated basis. In determining the amount of
surplus of a Delaware company, the assets of the company, including stock of
subsidiaries owned by the company, must be valued at their fair market value as
determined by the board of directors if fair market value is less than
historical book value and may be valued at their fair market value if fair
market value is greater than historical book value. Under the OBCA, a company
may not declare or pay a dividend if there are reasonable grounds for believing
that the company is or after the payment would be, unable to pay its liabilities
as they become due, or if the realizable value of the company's assets would
thereby be less than the aggregate of its liabilities and stated capital of all
classes.
Director Qualification and Number. A majority of the directors of an
Ontario company must be Canadian residents. The DGCL has no similar requirement.
The number of directors of a Delaware company may be changed by resolution of
the directors if the charter or bylaws so provide (as is the case with the
ATSI-
23
<PAGE>
Delaware Certificate and Bylaws) while the charter of an Ontario company must
specify the number or a range for the number of directors and if authorized by a
special shareholders' resolution, in between shareholders' meetings, the
directors may increase the number of directors within the minimum and maximum
range provided that they may not do so if after such appointment, the total
number of directors would be one and one-third times greater than the number of
directors required to have been elected at the last annual meeting of
shareholders.
Director Liability. Under the DGCL, the charter of a Delaware company may
limit the personal liability of a director to the shareholders of the company
for monetary damages for breach of fiduciary duty, except for: (i) any breach of
a director's duty of loyalty to the company or its shareholders; (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) paying a dividend or approving a stock repurchase in
violation of statutory limitations; or (iv) any transaction from which a
director derived an improper personal benefit. The OBCA has no comparable
provision. Such a charter provision under the DGCL does not affect the right of
a company or its shareholders to pursue equitable remedies such as an action to
enjoin or rescind a transaction involving a breach of a director's duty of care
(although such equitable remedies may not always be available) and in no way
affects a director's liability under United States federal securities laws.
Oppression Relief and Equitable Remedies. The OBCA creates a cause of
action for "oppression" and "unfairness" with respect to shareholders,
creditors, directors and officers and vests the court with broad remedial powers
in connection therewith. The DGCL contains no comparable provision and the scope
of the equitable powers of the Delaware courts as defined by existing case law
is less certain than the scope of the powers of Ontario courts.
In addition, certain differences between the powers granted to companies
under the DGCL and the powers granted to companies under the OBCA may make a
Delaware company less vulnerable than an Ontario company to hostile takeover
attempts. These differences include the absence of power of shareholders to call
special meetings unless expressly granted as discussed above. On the other hand,
because of such provisions as the power of shareholders to take action without a
meeting by less than unanimous consent, the DGCL may, under some circumstances,
facilitate a hostile takeover attempt.
Differences Between the ATSI-Canada Articles and the ATSI-Delaware Certificate
The ATSI-Delaware Certificate differs substantially from the ATSI-Canada
Articles. Differences include, but are not limited to, the following:
Capital Structure. Under the ATSI-Delaware Certificate, the total number
of shares of capital stock that the Company has the authority to issue is
110,000,000, $0.001 par value per share, consisting of 100,000,000 shares of
ATSI-Delaware Common Stock and 10,000,000 shares of ATSI-Delaware Preferred
Stock. Under the ATSI-Canada Articles, the Company has the authority to issue
unlimited amounts of no par value stock for common shares and unlimited amounts
of no par value stock for preferred shares.
Board of Director Size. The ATSI-Delaware Certificate (i) contains no
restrictions on the minimum or maximum number of directors except as provided by
Delaware law and (ii) divides the Board of Directors into three classes, one of
which is elected each year to hold office for a three-year term and until
successors are elected and qualified. ATSI-Delaware currently has five
directors. The ATSI-Canada Articles provide for a minimum of three and a maximum
of ten directors. ATSI-Canada currently has three directors. See "Management."
Liability of Directors. The ATSI-Delaware Certificate provides that
directors of the corporation shall not be personally liable to the corporation
or its shareholders for monetary damages for breach of fiduciary duty as a
director, except that a director may be personally liable to the extent provided
by applicable Delaware law which currently prohibits limitation of director
liability for: (i) any breach of the director's duty of loyalty to the
corporation or its shareholders; (ii) acts or omissions not in good faith or
which involve intentional misconduct
24
<PAGE>
or knowing violation of law; (iii) authorizing the payment of a dividend or
repurchase of stock; or (iv) any transaction from which the director derived an
improper personal benefit. The ATSI-Canada Articles contain no similar
provision.
Indemnification. The ATSI-Delaware Certificate provides that ATSI
- -Delaware will indemnify each director and officer of ATSI-Delaware who may be
indemnified, to the fullest extent permitted by Section 145 of the Delaware
General Corporation Law ("Section 145"), as it may be amended from time to time,
in each and every situation where ATSI-Delaware is obligated to make such
indemnification pursuant to Section 145. In addition, ATSI-Delaware will
indemnify each of ATSI-Canada 's directors and officers in each and every
situation where, under Section 145, ATSI-Delaware is not obligated, but is
permitted or empowered, to make such indemnification. ATSI-Delaware may, in the
sole discretion of the Board, indemnify any other person who may be indemnified
pursuant to Section 145 to the extent the Board deems advisable, as permitted by
such section. ATSI-Delaware will promptly make or cause to be made any
determination which Section 145 requires. The ATSI-Canada Articles contain no
similar provision.
Shareholder Consent in Lieu of Meeting. As noted previously, under the
OBCA, the shareholders of a corporation may take action without a meeting only
by unanimous consent of all shareholders. Under Section 141 of the DGCL, unless
otherwise provided in the certificate of incorporation, any action required to
be taken at any annual or special meeting of stockholders of a corporation, or
any action which may be taken at any annual or special meeting of such
stockholders, may be taken without a meeting, without prior notice and without a
vote, if a consent or consents in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Under the ATSI-Delaware Certificate, the shareholders of the Company
will not be permitted to take action without a meeting unless the board of
directors shall have previously approved the taking of such action by written
consent.
Shareholder Nomination of Directors. The ATSI-Delaware Certificate
requires shareholder nominations of directors for an election to be held at an
annual meeting or special meeting of shareholders to meet certain procedural
requirements including disclosure of such information regarding the proposed
nominees as would be required to be included in a proxy statement filed pursuant
to the proxy rules of the Commission, a description of all arrangements or any
affiliation between the shareholder and the proposed nominee and the consent of
the nominee to serve as a director of the Corporation if so elected. Although
such provision is not explicitly provided for in the ATSI-Canada Articles , the
OBCA contains similar provisions.
Business Combinations. ATSI-Delaware is subject to the provisions of
Section 203 of the DGCL ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person, or an affiliate or associate of such
person, who is an "interested stockholder" for three years from the date that
such person became an interested stockholder unless: (i) the transaction
resulting in a person becoming an interested stockholder, or the business
combination, is approved by the Board of Directors of the corporation before the
person becomes an interested stockholder, (ii) the interested stockholder
acquired 85% or more of the outstanding voting stock of the corporation in the
same transaction that makes such person an interested stockholder (excluding
shares owned by persons who are both officers and directors of the corporation,
and shares held by certain employee stock ownership plans), or (iii) on or after
the date the person becomes an interested stockholder, the business combination
is approved by the corporation's board of directors and by the holders of at
least 662/3% of the corporation's outstanding voting stock at an annual or
special meeting, excluding shares owned by the interested stockholder. Under
Section 203, an "interested stockholder" is defined as any person who is (i) the
owner of 15% or more of the outstanding voting stock of the corporation or (ii)
an affiliate or associate of the corporation and who was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three years immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
25
<PAGE>
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws by action of
its stockholders to exempt itself from coverage. The Company has not adopted
such an amendment to its Certificate of Incorporation or Bylaws. There is no
comparable provision under the OBCA. For further discussion of the ATSI
- -Delaware Certificate of Incorporation, see "Description of ATSI-Delaware
Securities."
26
<PAGE>
DISSENT RIGHTS OF ATSI-CANADA SHAREHOLDERS
A holder of Common Shares is entitled to be paid the fair value of such
shares in accordance with section 185 of the OBCA if the shareholder dissents to
the Arrangement and the Arrangement becomes effective. The rights of dissent in
accordance with the OBCA are being granted pursuant to the Interim Order. A
holder of Common Shares is not entitled to dissent with respect to the
Arrangement if he votes any of such shares in favor of the required resolution
authorizing the Arrangement. The execution or exercise of a proxy does not
constitute a written objection for purposes of the OBCA.
A brief summary of the provisions of section 185 of the OBCA is set out
below and the text of such section is set out in full as Exhibit I to the
Prospectus. The following summary does not purport to provide a comprehensive
statement of the procedures to be followed by a dissenting shareholder who seeks
payment of the fair value of his Common Shares. Section 185 of the OBCA requires
strict adherence to the procedures established therein and failure to do so may
result in the loss of all dissenters' rights. Accordingly, each shareholder who
might desire to exercise dissenters' rights should carefully consider and comply
with the provisions of section 185 of the OBCA, the full text of which is set
out in Exhibit I to this Prospectus, and consult his legal adviser.
Dissent to Arrangement under Section 185 of the OBCA
Under section 185 of the OBCA, a shareholder of ATSI-Canada who exercises
his right to dissent respecting the Arrangement is required to send a written
objection to the special resolution of ATSI- Canada at the address hereafter set
out under "Addresses for Notices" prior to 12 noon on the day prior to the
Meeting. The written objection may also be delivered to the Chairman of the
Meeting at or before the Meeting. A vote against a special resolution or
withholding votes does not constitute a written objection. Within 10 days after
the special resolution is approved by shareholders, the Company must so notify
the dissenting shareholder who is then required, within 20 days after receipt of
such notice (or if he does not receive such notice, within 20 days after he
learns of the approval of the special resolution), to send to the Company a
written notice containing his name and address, the number of shares in respect
of which he dissents and a demand for payment of the fair value of such shares
and, within 30 days after sending such written notice, to send the Company the
appropriate share certificate or certificates. If the Arrangement becomes
effective, the Company is required to determine the fair value of the shares and
to make a written offer to pay such amount to the dissenting shareholder. If
such offer is not made or not accepted within 50 days after the Arrangement
becomes effective, the Company may apply to the Court to fix the fair value of
such shares. There is no obligation on the Company to apply to the Court. If the
Company fails to make such an application, a dissenting shareholder has the
right to so apply within a further 20 days. If an application is made by either
party, the dissenting shareholder will be entitled to be paid the amount fixed
by the Court. The fair value of the Common Shares as determined for such
purposes by a Court will not necessarily be the same as and could vary
significantly from the fair value of such shares as determined by the board of
directors of the Company for the purposes of determining the terms of the
Arrangement.
Addresses for Notices
All notices to the Company pursuant to section 185 of the OBCA should be
addressed to H. Douglas Saathoff, Secretary, 12500 Network Blvd., Suite 407, San
Antonio, Texas 78249.
27
<PAGE>
PRICE RANGE OF COMMON SHARES
Since June 7, 1994, the Company's Common Stock has been traded on the
Canadian Dealing Network under the symbol ATIL.CDN. The following table sets
forth the high and low bid prices in Canadian dollars, as reported by the
Canadian Dealing Network, for the periods indicated. The prices are also
provided in U.S. dollars determined using the exchange rates based on published
spot exchange rates for United States dollars. Since December 22, 1997, the
Company's Common Stock has also been traded over-the-counter (with prices
reported on the NASD Electronic Bulletin Board) under the symbol AMTI. The bid
prices reported below in U.S. dollars for the last period indicated also
represent the high and low bid prices reported by the NASD Electronic Bulletin
Board. Bid quotations represent interdealer quotations without adjustment for
retail markups, markdowns or commissions and do not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
Price Range
------------------------------------------------------------------
High Low
------------------------------ -----------------------------
CDN$ US$ CDN$ US$
------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
Fiscal 1996:
First quarter....................... $1.20 $0.88 $0.65 $0.48
Second quarter...................... 1.15 .84 .65 .48
Third quarter....................... 1.05 .77 .85 .62
Fourth quarter...................... 1.25 .91 .50 .37
Fiscal 1997:
First quarter....................... $1.10 $0.80 $0.75 $0.55
Second quarter...................... 0.95 .69 .80 .60
Third quarter....................... .95 .70 .65 .47
Fourth quarter ..................... 3.10 2.26 .85 .61
Fiscal 1998:
First quarter ...................... $5.75 $4.14 $2.50 $1.79
Second quarter...................... 5.38 3.82 2.25 1.58
Third quarter
(through March 2, 1998)............. 4.00 3.00 2.75 1.88
</TABLE>
At March 2, 1998, the closing price of the Common Shares, as reported
by the Canadian Dealing Network, was CDN$4.00 (US$2.80) and, as reported by the
NASD Electronic Bulletin Board, was US$3.00. At March 4, 1998, there were 2,718
holders of record of the Company's Common Stock. See "Description of ATSI-
Delaware Securities--Dividend Policy" for a description of the Company's current
dividend policy.
28
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
October 31, 1997. This table should be read in conjunction with the Company's
consolidated financial statements and the related notes thereto included
elsewhere in this Proxy Statement/Prospectus. The following table reflects U.S.
dollar amounts included in the Company's consolidated financial statements.
<TABLE>
<CAPTION>
October 31, 1997
---------------------------------------
As Adjusted for the
Actual Arrangement
--------------- --------------------
<S> <C> <C>
Notes payable, including current portion.... $ 1,489,565 $ 1,489,565
Capital leases, including current portion... $ 2,140,814 $ 2,140,814
Convertible long-term debt, including
current maturities.......................... $ 1,470,459 $ 1,470,459
------------ ------------
Total long-term obligations............... $ 5,100,838 $ 5,100,838
------------ ------------
Stockholders' equity:
Common Stock of American TeleSource
International Inc., an Ontario corporation,
no par value, an unlimited number of shares
authorized, 38,258,315 shares issued and
outstanding as of October 31, 1997 and as
adjusted.................................. $ 17,465,538 $ -
Preferred Stock of American TeleSource
International Inc., an Ontario corporation,
no par value, an unlimited number of shares
authorized, none issued and outstanding... - -
Common Stock of American TeleSource
International, Inc., a Delaware corporation,
par value $0.001, 100,000,000 shares
authorized, none issued and outstanding as of
October 31, 1997, 38,258,315 issued and
outstanding as adjusted................... - $ 38,258
Preferred Stock of American TeleSource
International, Inc., a Delaware corporation,
par value $0.001, 10,000,000 shares
authorized, none issued and outstanding... - -
Additional paid in capital.................. - $ 17,427,280
Accumulated deficit......................... $(10,599,924) $(10,599,924)
Cumulative translation adjustment........... $ 22,045 $ 22,045
------------ ------------
Total stockholders' equity.................. $ 6,887,659 $ 6,887,659
------------ ------------
Total capitalization........................ $ 11,988,497 $ 11,988,497
============ ============
</TABLE>
29
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below for the period
from December 17, 1993 (inception) to July 31, 1994, the years ended July 31,
1995, 1996 and 1997 and the three months ended October 31, 1996 and 1997 have
been derived from the Company's consolidated financial statements appearing
elsewhere in this Proxy Statement/Prospectus.
The independent accountant's report on the Company's consolidated
financial statements appearing elsewhere in this Proxy Statement/Prospectus
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, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -Liquidity and Capital Resources " and "Risk Factors - Risks Relating
to the Company -Limited Operating History; History of Losses; Need For Capital;
Report of Independent Public Accountants. " The selected consolidated financial
data presented below should be read in conjunction with the Company's
consolidated financial statements included elsewhere in this Prospectus, the
notes thereto and the information set forth under the headings "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." The Company's consolidated financial statements have been prepared
on the accrual basis of accounting in conformity with U.S. GAAP. The following
data is presented in U.S. dollars.
<TABLE>
<CAPTION>
Period from Three months ended
Dec. 17, 1993 October 31,
(Inception) Years ended July 31, -----------------------
through ---------------------------------- (unaudited)
July 31, 1994(1) 1995 1996 1997 1996 1997
------------------ ------ ------ ------ -------- --------
(In thousands of $, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Operating revenues:
Long distance services................... $110 $4,470 $10,807 $13,966 $ 2,581 $ 4,433
Network management services.............. 132 318 2,668 2,262 387 1,598
------- -------- -------- -------- ------- -------
Total operating revenues.............. 242 4,788 13,475 16,228 2,968 6,031
------- -------- -------- -------- ------- -------
Operating expenses:
Cost of services......................... 201 4,061 10,833 12,792 2,594 3,876
Selling, general and administrative...... 373 2,536 4,430 7,047 1,155 2,792
Depreciation and amortization............ 11 141 281 591 129 339
------- -------- -------- -------- ------- -------
Total operating expenses.............. 585 6,738 15,544 20,430 3,878 7,007
------- -------- -------- -------- ------- -------
Loss from operations....................... (343) (1,950) (2,069) (4,202) (910) (976)
------- -------- -------- -------- ------- -------
Net loss................................... $(343) $(2,004) $(2,205) (4,695) $ (951) $(1,298)
======= ======== ======== ======== ======= =======
Per share information:
Net loss................................. $(0.04) $(0.14) $(0.11) $(0.18) $ (0.04) $ (0.04)
======= ======== ======== ======== ======= =======
Weighted average common shares
outstanding................................ 9,146 13,922 19,928 26,807 23,779 37,068
======= ======== ======== ======== ======= =======
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
July 31, 1994 July 31, 1995 July 31, 1996 July 31, 1997 October 31, 1997
------------- ------------- ------------- --------------- ----------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital (deficit)................... $114 $(446) $(592) $195 $(2,523)
Current assets.............................. 344 1,088 1,789 5,989 3,885
Total assets................................ 1,049 2,766 4,348 15,821 17,500
Long-term obligations, including current
portion................................. 0 133 604 3,912 5,101
Total stockholders' equity ................. 819 1,231 1,629 6,936 6,888
</TABLE>
- ----------------
(1) Represents the period from the date of organization of Latcomm
International Inc., an Alberta, Canada corporation ("Latcomm"), which
amalgamated with Willingdon Resources Ltd., an Ontario, Canada corporation
("Willingdon"), in May 1994 (the "Amalgamation") to form American
TeleSource International Inc., through July 31, 1994, the date of the
Company's fiscal year end. The Amalgamation was accounted for as a
recapitalization of Latcomm, and, with the exception of an approximately
$55,000 liability of Willingdon (see Note 1 to the Financial Statements
appearing elsewhere in this Prospectus), the financial data utilized for
the period from Dec. 17, 1993 until the Amalgamation were derived solely
from Latcomm's financial statements.
(2) The Arrangement has no pro forma effect on total stockholders' equity.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto included elsewhere in
this Proxy Statement/Prospectus. The Company's historical financial statements
have been prepared on a accrual basis in accordance with U.S. GAAP, and the
financial information utilized in the following discussion and analysis is
presented in U.S. dollars.
Overview
Upon its inception in December 1993, the Company's near-term strategy was
to position itself to take advantage of business opportunities that it felt
would arise with the deregulation of the telecommunications industry within the
countries of Latin America. Because most of the Latin American countries were
served by telecommunications monopolies, the Company's management felt that such
markets were under served. Given the fact that many Latin American countries had
already scheduled the demonopolization of their telecommunications providers,
the Company believed that opportunities would become available to provide those
markets with U.S. standards of products and services in the near future.
The Company focused the majority of its initial efforts within Mexico. The
scheduled demonopolization of Telmex, the telecommunications monopoly within
Mexico, was written into law in 1990. By law, Telmex was officially scheduled to
lose its status as a monopoly on August 10, 1996. The Company assembled a
primarily bilingual, bicultural workforce which had telecommunications
experience in order to build a retail telecommunications customer base within
Mexico prior to August 10, 1996, so that the Company could take maximum
advantage of the opportunities it felt would arise with the demonopolization of
Telmex.
The Company began providing international telecommunications networks for
voice, data, fax and video transmission ("network management services") via
satellite between the United States and Mexico in April 1994, and began
providing international call services ("call services") from Mexico to the
United States in May 1994. Network management services consist of retail-priced
communication networks typically provided to large corporate customers needing a
reliable form of communications between facilities in the United States and
Mexico. These networks are provided utilizing the Company's Switching/Operator
Facility. The Company provides fiber optic integration into U.S.-based private
and public telecommunications networks from the customer's premises in Mexico
via the San Antonio, Texas Switching/Operator Facility. The Company considers
itself to be the owner of that portion of the network from the customer's
premise to the point at which the signal is integrated into a third party's
network in the United States. Network management services typically produce less
revenue than call services, but at relatively higher margins.
The Company has historically provided call services primarily to U.S.
citizens traveling in Mexico who desire a convenient method of placing and
billing a call to the United States while within Mexico. These services are
provided utilizing the Company's Switching/Operator Facility. The calls are
primarily generated from "Charge-a-Call" phones owned by the Company and placed
in major tourist or resort areas of Mexico. By simply lifting the handset on
such a phone, a tourist automatically accesses one of the Company's operators in
San Antonio, who assists the caller in placing the call. Call services typically
generate higher revenues as compared to network management services, but at
relatively lower margins. The Company's management believed (and still believes)
that, as the regulatory environment continued (and continues) to evolve in
Mexico and other Latin American countries, the Company would eventually be
32
<PAGE>
able to utilize its satellite-based network infrastructure to carry its own
international long distance call services at a substantial cost savings as
compared to its competitors.
The Company has also historically provided call services domestically
within the United States, but has done so only on a demand basis. The Company
does not maintain a direct sales force for domestic calling within the United
States. In June 1995, the Company began providing call services to Brazilians
traveling within the United States desiring a convenient method of placing and
billing a call to Brazil. In October 1995, the Company began providing
international call services from within Jamaica. In July 1997, the Company
began providing services to and from Costa Rica.
Utilizing a small direct sales force and independent marketing
representatives, the Company increased monthly revenue from approximately
$17,000 during April 1994 to approximately $1.1 million in July 1996, the month
before Telmex officially lost its status as a monopoly. The majority of this
growth came from the provision of call services domestically within the United
States and internationally from within Mexico, which together represented 80% of
total revenue for fiscal 1996. Revenue from call services originating in Mexico
accounted for 63% of total call services revenue for fiscal 1996, in spite of
the fact that the Company operated in a noncompetitive environment prior to the
demonopolization of Telmex. These revenues were produced almost exclusively from
approximately 400 Charge-a-Call phones owned by the Company and installed in
resort cities of Mexico.
One of the primary costs associated with providing international call
services from Mexico to the United States is the cost of transporting the call
from its point of origin in Mexico to the Company's Switching/Operator Facility.
Although the Company contracted with major U.S. carriers to provide this
service, Telmex did not have a legal obligation to allow those carriers to
provide such services prior to August 10, 1996, and on occasion refused to do
so. When it did allow such services to be provided, Telmex based its rates to
the carriers on retail prices charged to consumers in Mexico. Telmex had the
ability to raise these rates, and did so frequently. As a result, from inception
through August 10, 1996 the Company experienced high, unstable and often
increasing costs in connection with its international long distance traffic.
During fiscal 1996, the Company paid as much as $1.60 per minute to transport
calls from Mexico to its Switching/Operator Facility.
Subsequent to August 10, 1996, at least twelve different carriers received
concessions from the Mexican government to compete against Telmex. The result
was a newly formed, competitive telecommunications market within Mexico. In
order to reduce its dependency on Telmex, increase the reliability of its
services, and to reduce the costs of providing international calls from within
Mexico, the Company began negotiations with the newly concessioned carriers. In
November 1996, the Company signed an interconnection agreement with Investcom,
one of the newly concessioned carriers. This agreement calls for a maximum per
minute price to carry calls from Mexico to San Antonio, Texas of $0.48 per
minute, and provides for further discounts based on increasing call volumes.
However, Investcom did not possess the switch capacity in Mexico to process the
Company's long distance traffic until May 1997. As a result, the Company did not
begin processing any of its traffic at the lower per minute cost until that
date. Prior to May 1997, the Company's international call services from within
Mexico were still dependent upon Telmex.
In April 1996, GlobalSCAPE, Inc. ("GlobalSCAPE") was formed as a wholly-
owned subsidiary of ATSI-Texas. Based in San Antonio, Texas, GlobalSCAPE was
formed for the purpose of implementing Internet related strategies which may, or
may not, be complementary to the Company's core business of telecommunications.
Since inception, GlobalSCAPE's revenues, primarily attributable to sales of
Internet productivity tools (such as CuteFTP, a copyrighted file transfer
protocol software which GlobalSCAPE has an exclusive license to sell and
distribute), have been insignificant. Although GlobalSCAPE assists the Company
with maintenance of its Web page and other Internet related activities, it is
the Company's present intention that GlobalSCAPE operate autonomously,
generating substantially all funds for its development and expansion internally
from its own operations or externally from independent third parties.
In May 1997, the Company purchased 55% of the outstanding shares of
Computel. See "Business--Services-Casetas." In late August 1997, the Company
purchased the remaining 45% of Computel's outstanding shares. The purchase
price for 100% of the shares of Computel was $3.6 million consisting of
2,715,545 shares of Company Common Stock, $1.1 million in cash, and the
forgiveness of a note receivable evidencing an obligation owed by Computel to
the Company in the amount of approximately $700,000. As the Company acquired
majority ownership effective May 1, 1997, the Company recorded 100% of the net
assets and liabilities of Computel as of that date. The Company's consolidated
financial statements for the period from May 1, 1997 to July 31, 1997 include
the impact of the 45% minority ownership interest.
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 October 31, 1997.
Additionally, the Company has had recurring negative cash flows from operations.
The foregoing factors raise substantial doubt about the Company's ability to
continue as a going concern. For the reasons stated in Liquidity and Capital
Resources and subject to the risks referred to in Liquidity and Capital
Resources and elsewhere in this Proxy Statement/Prospectus, the Company expects
improved results of operations
33
<PAGE>
and liquidity in fiscal 1998. See "--Liquidity and Capital Resources" and "Risk
Factors--Limited Operating History; History of Losses; Need for Capital; Report
of Independent Public Accountants."
Results of Operations
The following table sets forth the Company's results of operations in
dollar amounts and as a percentage of total revenues for the years ended July
31, 1995, 1996 and 1997, and the three month periods ended October 31, 1996
and 1997.
<TABLE>
<CAPTION>
Year Ended July 31,
-------------------------------------------------------------
1995 1996 1997
----------------- ------------------ --------------------
$ % $ % $ %
-------- -------- -------- -------- ------------ -------
(In thousands of $)
<S> <C> <C> <C> <C> <C> <C>
Operator services $4,470 93% $10,807 80% $12,545 77%
Direct dial services - - - - 1,421 9%
Network management
services 318 7% 2,668 20% 2,262 14%
-------- -------- -------
Total operating
revenues 4,788 100% 13,475 100% 16,228 100%
Cost of services 4,061 85% 10,833 80% 12,792 79%
-------- -------- -------
Gross margin 727 15% 2,642 20% 3,436 21%
Selling, general &
administrative 2,536 53% 4,430 33% 7,047 43%
Depreciation and
amortization 141 3% 281 2% 591 4%
-------- -------- -------
Operating loss (1,950) (41%) (2,069) (15%) (4,202) (26%)
Minority interest - - - - (48) -
Other income (expense) (54) (1%) (136) (1%) (445) (3%)
-------- -------- -------
Net loss ($2,004) (42%) ($ 2,205) (16%) (4,695) (29%)
======== ======== =======
<CAPTION>
Three Months Ended October 31,
-----------------------------------------
1996 1997
------------------ --------------------
$ % $ %
-------- -------- ------------ -------
<S> <C> <C> <C> <C>
Operator services $ 2,581 87% $ 2,862 47%
Direct dial services - - 1,571 26%
Network management
services 387 13% 1,598 26%
-------- -------
Total operating
revenues 2,968 100% 6,031 100%
Cost of services 2,594 87% 3,876 64%
-------- -------
Gross margin 374 13% 2,155 36%
Selling, general &
administrative 1,155 39% 2,792 46%
Depreciation and
amortization 129 4% 339 6%
-------- -------
Operating loss (910) (31%) (976) (16%)
Minority interest - - - -
Other income (expense) (41) (1%) (322) (5%)
-------- -------
Net loss ($951) (32%) ($1,298) (22%)
======== =======
</TABLE>
Three Months ended October 31, 1997 Compared to the Three Months ended October
31, 1996
Operating Revenues. Operating revenues increased approximately $3.0
million or 103%, due mainly to increased revenues from direct dial services and
network management services.
Direct dial services increased to $1.6 million, due almost entirely to the
purchase of Computel, which was completed on August 28, 1997. Computel, which
provides direct dial services from casetas, generated approximately $1.4 million
of direct dial service revenues in the quarter ended October 31, 1997.
Operator service revenues increased approximately 11%, or $282,000, as the
Company's mix of calls changed significantly. The Company experienced an
increase in the number of international calls which originated in Mexico and
were terminated and billed in the United States from approximately 34,500 calls
to approximately 57,000 calls. These additional calls were attributable to new
public telephones installed by the Company in resort areas of Mexico, as well as
from the casetas owned by Computel.
Network management service revenues increased approximately $1.2 million,
or 312% due to an increase in the number of private network customers from 10 to
18, the sale of approximately $200,000 of equipment to a customer in October
1997, and the commencement of the provision of network management services to
other telecommunications companies during the first quarter of fiscal 1998
(accounting for approximately $380,000 in additional revenues).
Cost of Services. Cost of services increased approximately $1.3 million,
or 49%, but decreased as a percentage of revenues from 87% to 64%. The increase
in cost of services was attributable to the increased volume of business handled
by the Company. The Company's improved gross profit margin resulted from a
change in mix of the Company's revenues, and a lower cost of providing call
services from within Mexico. The Company's direct dial services, which it
provides from Computel's casetas and from its coin-operated public telephones,
generate higher margins than its operator service revenues. The recent changes
in the regulatory environment in Mexico and the receipt of a public payphone
comercializadora license have allowed the Company to enter into agreements with
newly formed carriers within Mexico which agreements enable the Company to
transmit its calls made from within Mexico at lower per minute costs. The
Company was also able to take advantage of volume related discounts as a result
of the large volume of calls generated by Computel within Mexico. The Company's
utilization of its own network infrastructure in the production of network
management service revenues, rather than networks owned by third parties,
further improved margins.
Selling, General and Administrative (SG&A). SG&A expenses increased
approximately $1.6 million, or 142%. Approximately half of this increase was
due to the acquisition of Computel. Computel operates approximately 134 retail-
based casetas in approximately 72 cities throughout Mexico, and employs in
excess of 400 people. With the receipt of a public payphone comercializadora
license in February 1997, the Company extended its operations to include the
procuring of contracts to install and operate public telephones within Mexico.
The Company also began installing coin-operated public telephones in August
1997. New employees were hired to procure the contracts, and to assist in the
installation and maintenance of the telephones, thus increasing personnel and
related costs.
Depreciation and Amortization. Depreciation and amortization increased
approximately $210,000, or 163%, and rose slightly as a percentage of revenues
from 4% to 6%. This increase was caused by the addition of approximately $6.1
million in equipment between October 31, 1996 and October 31, 1997, of which
approximately $1.7 million was added with the acquisition of Computel.
Operating Loss. The Company's operating loss increased approximately 7%
due primarily to increased SG&A expenses. With the acquisition of Computel in
August 1997, these expenses increased at a faster rate than revenues. However,
the effect of these additional expenses on the Company's earnings is magnified
during the first quarter of fiscal 1998 because the Company's revenue levels are
affected by seasonality factors. The Company's revenues are at their lowest
levels in the months of August, September and October because fewer tourists are
visiting the resort areas of Mexico during these months.
Other Income (Expense). Other income (expense) increased approximately
$280,000. This was primarily attributable to an increase in interest expense as
a result of increased indebtedness.
Year Ended July 31, 1997 Compared to the 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
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
34
<PAGE>
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 (SG&A). SG&A expenses rose 58%, or
approximately $2.6 million. If the revenues related to the sale and installation
of the network to the Mexican milk producer in fiscal 1996 were excluded, SG&A
expenses would have increased as a percentage of overall revenues from 37% to
43%. The increase in SG&A expense is almost entirely due to expanded operations
within Mexico and the inclusion of Computel's SG&A expense for the last quarter
of fiscal 1997. ATSI-Mexico had less than five employees at the beginning of
fiscal 1996 as compared to 36 employees at the end of fiscal 1997. Computel
operates 134 casetas in approximately 72 cities throughout Mexico, and has
approximately 430 employees.
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.
35
<PAGE>
Year ended July 31, 1996 Compared to Year Ended July 31, 1995
Operating Revenues. Operating revenues increased approximately $8.7
million, or 181%, due largely to increased revenues from call services.
Operating revenues attributable to call services represented approximately
$6.3 million, or 72%, of the approximate $8.7 million increase in operating
revenues. The number of operator service calls handled by the Company increased
to approximately 724,000, as compared to approximately 311,000, representing an
overall increase in call volume of 133%. The number of calls handled by the
Company which originated in Mexico and terminated in the United States and which
originated and terminated in the United States decreased slightly as a
percentage of total calls from 29% and 70%, respectively, to 26% and 66%,
respectively. These decreases were offset by growth attributable to other call
services, 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,
36
<PAGE>
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. 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.
37
<PAGE>
Liquidity and Capital Resources
Since inception in December 1993, the Company has relied primarily on
private sales of debt and equity securities (often sold together with warrants
to purchase Common Stock) to fund its operations.
For the year ended July 31, 1997, the Company generated negative cash flow
from operations of approximately $5.5 million; however, the Company received
approximately $7.6 million in cash proceeds from private sales of debt and
equity securities and the exercise of warrants to purchase Common Stock.
Approximately $590,000 was used for the purchase of equipment and approximately
$1.5 million of fixed assets were acquired through capital lease arrangements
including a $1.7 million financing facility with IBM de Mexico used specifically
for the acquisition and installation of intelligent payphones in Mexico. As of
July 31, 1997, approximately $957,000 had been drawn on the IBM financing
facility. The net result of the Company's consolidated cash inflows and outflows
was an improvement in working capital from a deficit of approximately $592,000
at July 31, 1996 to a positive position of approximately $195,000 at July 31,
1997. Cash on hand at July 31, 1997 was approximately $1.9 million.
For the three months ended October 31, 1997, the Company generated negative
cash flow from operations of approximately $220,000; however, the Company
received approximately $1.1 million from a private sale of equity securities and
approximately $1.1 million from the exercise of warrants and options. In
addition, the Company obtained a $1.0 million loan in late October from a
corporate shareholder, which loan was advanced in two payments of $450,000 (in
October) and $550,000 (in November), respectively. The loan is payable over
seven years in equal quarterly payments of principal and interest and accrues
interest at an annual rate of 13%. In connection with the loan, the corporate
shareholder was issued a warrant to purchase 250,000 shares of Common Stock at a
price of U.S. $3.56 per share. Approximately $1.1 million was used to acquire
the remaining 45% of the outstanding shares of Computel. Additionally, the
Company acquired approximately $1,500,000 in telecommunications equipment under
short-term vendor financing arrangements, which financing arrangements were paid
during the quarter. The Company drew down the remaining balance available under
the IBM financing facility to acquire and install additional intelligent
payphones in Mexico. The net result of the Company's consolidated cash inflows
and outflows was a decrease in working capital from a positive position of
approximately $195,000 at July 31, 1997 to a deficit of approximately $2.5
million at October 31, 1997. Cash on hand at October 31, 1997 was approximately
$1.5 million.
Subsequent to October 31, 1997, the Company has received approximately
$334,000 in cash proceeds from a private sale of equity securities and
approximately $1,650,000 from the exercise of warrants and options. On November
1, 1997, the Company acquired certain contracts from one of its independent
marketing representatives. The purchase price was $600,000 in cash paid on
November 1, 1997 and $450,000 payable in twelve equal monthly installments, with
each installment to be paid in Common Stock based on the stock price on the date
of payment.
In February 1998, the Company committed to acquire and install
approximately 500 public pay phones, at a cost of approximately $1.1 million,
during the remainder of fiscal 1998 in Mexico City's mass transit metro system
transfer stations pursuant to an agreement with the transit authority. The
Company also anticipates expending approximately $2.2 million for the
installation of a teleport facility in Monterrey, Mexico during the remainder of
fiscal 1998. The Company intends to finance the acquisition of a substantial
portion of the foregoing equipment through anticipated capital lease
arrangements. There can be no assurance that the Company will be able to obtain
the requisite capital lease financing.
38
<PAGE>
Although the Company has shown the ability to increase revenues, it has yet
to attain profitable operations. The Company believes this is largely
attributable to its focus on the Mexican telecommunications market. An
underlying strategy of the Company since inception has been to build an
infrastructure and to secure contracts within Mexico prior to the
demonopolization of Telmex, in order to take advantage of the opportunities
anticipated to arise as a result of such demonopolization. Specifically, the
inability to attain profitable operations has largely resulted from high
commission costs in connection with the development of long distance traffic
originating in Mexico and the high cost of transmitting long distance traffic
originating in Mexico to the Company's Switching/Operator Facility, both of
which were principally attributable to an unfavorable regulatory environment in
Mexico. The Company is presently hiring and training a direct sales force in
Mexico and has acquired certain customer contracts from one of its independent
marketing representatives in order to facilitate the reduction of commission
costs paid to independent marketing representatives. Additionally, commencing in
May 1997, the per minute transmission cost per international call from
39
<PAGE>
Mexico processed under the Company's interconnection agreement with Investcom
was reduced from in excess of $1.00 to $.48. Due to technical and other
requirements necessitated by the transition process, the number of international
calls from Mexico processed under the interconnection agreement with Investcom
has been phased in during the period from May 1997 to November 1997. At January
30, 1998, substantially all of the Company's international calls from Mexico
were being processed under the interconnection agreement with Investcom. The
Company is in negotiations with other companies which have recently received
concessions to compete with Telmex regarding potential alternate routing for its
call traffic, as well as potentially cheaper rates. There can be no assurance
that these negotiations will be successful.
The Company believes that cash on hand, cash flows expected to be generated
by operations, anticipated equipment financing facilities (although there can be
no assurance the Company will be able to obtain any equipment financing
facilities), and potential exercises of warrants could be sufficient to meet a
substantial portion of its anticipated cash needs for the remainder of fiscal
1998. This expectation is based upon expected improved results in the Company's
Mexico operations. The Company's Mexico operations are expected to improve
during the remainder of fiscal 1998 due to anticipated reduced commission costs,
resulting from the replacement of independent marketing representatives with a
direct sales force; reduced transmission costs, resulting from the
demonopolization of Telmex and the Company's interconnection agreement with
Investcom; and continuing and potential revenues from new sources, such as the
wholesale provision of services to other carriers to and from Mexico utilizing
the Company's satellite-based network infrastructure. The foregoing statements
are forward-looking statements which are subject to certain risks and
uncertainties which could cause actual results to differ materially from those
set forth, including, but not limited to, changes in the Mexican political or
economic environment; the adoption by Mexico of new laws or regulations, or
changes effected by Mexico to existing laws or regulations affecting the
communications industry generally or the Company specifically; technology
changes rendering the Company's services obsolete or noncompetitive; increased
or redirected competition efforts, targeting the Company's services or
operations, by competitors; the inability of the Company to continue to
successfully replace its independent marketing representatives with a direct
sales force or the failure of the direct sales force to produce anticipated
results; the inability to generate new sources of revenue; and the risks and
uncertainties set forth elsewhere in this Proxy Statement/Prospectus, including
in the "Risk Factors" section of this Proxy Statement/Prospectus. It is likely
that the Company will be required to sell additional equity and/or debt
securities to meet a portion of its anticipated cash needs for the remainder of
fiscal 1998. There can be no assurance that any warrants will be exercised or
that the Company will be able to sell additional equity or debt securities. In
November 1997 the Company called for redemption warrants to purchase
approximately 2.8 million shares of Common Stock, all of which were exercised
prior to March 1, 1998. The Company received approximately $1.5 million in cash
proceeds and an approximate $500,000 in reduction of indebtedness. As of March
2, 1998, the Company had approximately 8.62 million warrants outstanding (8.37
million of which were in-the-money at March 2, 1998) which, if exercised on
March 2, 1998, would have provided approximately $6.9 million in cash proceeds.
The sale of additional equity or convertible debt securities, if any, and the
exercise of warrants will result in additional dilution to the Company's
shareholders.
Until the Company is able to generate positive cash flows from operations
or to obtain a credit facility with a financial institution, on acceptable
terms, to provide sufficient working capital to attain positive cash flows, the
Company will remain dependent upon private sales of debt and equity securities
to and/or borrowings from stockholders and others to fund its working capital
needs and cash flow deficits. There can be no assurance that the Company will
ever be able to generate positive cash flows from operations or obtain a credit
facility which would provide sufficient working capital to attain positive cash
flows or that, if the Company continues to be unable to generate positive cash
flows from operations, it will continue to be able to sell equity or debt
securities and/or obtain borrowings sufficient to fund such working capital
needs and cash flow deficits. As a result, there is substantial doubt about the
Company's ability to continue as a going concern. The independent accountants
report on the Company's consolidated financial statements included elsewhere in
this Proxy Statement/Prospectus contains an explanatory paragraph regarding the
Company's ability to continue as a going concern. See Report of
40
<PAGE>
Independent Public Accountants contained in, and Note 2 to, the Consolidated
Financial Statements appearing elsewhere in this Proxy Statement/Prospectus.
Inflation/Foreign Currency
Inflation has not had a significant impact on the Company's operations.
With the exception of a portion of the contract entered into with the
Mexican milk producer in April 1996 and a portion of the services provided by
Computel, all of the Company's contracts to date have been denominated in, and
have called for payment in , U.S. dollars. Some expenses directly related to
certain contracts have been denominated in foreign currencies, primarily Mexican
pesos. Such expenses consist primarily of costs incurred in transmitting long
distance calls from Mexico to the Company's switching facilities in San Antonio,
Texas, and payroll and other administrative costs associated with ATSI-Mexico.
The devaluation of the Mexican peso over the past two years has not had a
material adverse effect on the Company's financial condition or operating
results. In fact, the devaluation has had certain positive effects such as
favorable conversion rates in connection with the payment of certain expenses
and stimulated tourism, which is a principal source of the Company's call
services revenues.
Seasonality
The Company's call service revenues are typically higher on a per phone
basis during January through July, the peak tourism months in Mexico.
41
<PAGE>
BUSINESS
The Company provides domestic and international long distance call
services, primarily between Latin America and the United States, network
management services including international carrier services and international
network management services between Latin America and the United States, and
local direct dial services within Mexico. The Company has chosen to concentrate
on Latin America because it believes that recent and anticipated privatizations
of various of the region's major telephone companies and overall trends toward
deregulation, particularly in Mexico where the Company has focused the majority
of its initial efforts, present significant opportunities to provide
international telecommunication services to, from and within this fast-growing
market. The Company is able to provide United States telecommunications
standards of reliability and connectivity to the Latin American region, where
telecommunications services remain limited and unreliable in many areas due
largely to poor local infrastructure.
The Company was originally incorporated under the laws of the Province of
Alberta, Canada on December 17, 1993, under the name Latcomm International, Inc.
("Latcomm"). On December 20, 1993, Latcomm purchased all of the outstanding
shares of Latin America Telecomm, Inc., a Texas corporation , for $25,000. On
April 22, 1994, Latin America Telecomm, Inc. changed its name to American
TeleSource International, Inc. ("ATSI-Texas"). Effective May 26, 1994, Latcomm
amalgamated under the laws of the Province of Ontario, Canada with Willingdon
Resources, Ltd. ("Willingdon"), a corporation incorporated under the laws of the
Province of Ontario, Canada. The resulting Ontario corporation was named
American TeleSource International Inc. ("ATSI-Canada"). Pursuant to the
amalgamation, the outstanding shares of Willingdon and the outstanding shares of
Latcomm were converted into shares of ATSI-Canada on a four-for-one basis and a
one-for-one basis, respectively. In connection with the amalgamation, ATSI-
Canada acquired all assets and assumed all liabilities of Latcomm; however, with
the exception of approximately $55,000 in obligations to former Willingdon
shareholders, ATSI-Canada did not acquire any assets or assume any liabilities
of Willingdon.
The Company commenced operations in May 1994. In June 1995, the Company
formed ATSI-Mexico to support the Company in the provision of long distance and
network management services within Mexico.
The Company's objective is to become a full-service international
telecommunications carrier providing operator-assisted, direct dial and other
long distance call services and network management services between Latin
America and the United States. The operations and financial performance of the
Company are subject to substantial risks. See "Risk Factors--Limited Operating
History; History of Losses; Need for Capital; Report of Independent Public
Accountants."
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<PAGE>
Foreign and Domestic Operations
The following table presents long distance services, network management
services, operating loss and identifiable assets by geographic area. The
identifiable assets of ATSI-Texas's parent company, ATSI-Canada, have been
included in the caption headed United States as they are immaterial in amount.
ATSI-Canada has no revenues as the Company's revenues are billed either by ATSI-
Texas or ATSI-Mexico. The table includes revenues and operating income of
Computel for the period from May 1, 1997 to October 31, 1997 and the
indentifiable assets of Computel as of July 31, 1997 and October 31, 1997.
<TABLE>
<CAPTION>
For the Years ended July 31, For the Three-Month
Periods ended
October 31,
1995 1996 1997 1996 1997
----------------------------------------- ----------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating Revenues from
unaffiliated customers:
Long distance services
- ---------------------
United States $4,469,529 $10,806,586 $12,544,732 $2,580,929 $ 3,285,859
Mexico and other - - 1,421,249 - 1,147,576
---------- ---------- ----------- ---------- -----------
Total long distance services $4,469,529 $10,806,586 $13,965,981 $2,580,929 $ 4,433,435
========== ========== =========== ========== ===========
Network management services
- ---------------------------
United States $ 318,312 $ 1,762,971 $ 2,064,262 $ 387,521 $ 1,079,882
Mexico and other - 905,127 198,144 - 518,002
---------- ---------- ----------- ---------- -----------
Total network management
services $ 318,312 $ 2,668,098 $ 2,262,406 $ 387,521 $ 1,597,884
========== ========== =========== ========== ===========
Operating income (loss):
- ----------------------
United States ($1,950,489) ($2,079,456) ($ 3,927,977) ($ 721,788) ($ 1,048,431)
Mexico and other - 10,855 (273,740) ($ 187,560) 72,585
---------- ---------- ----------- ---------- -----------
Total Operating loss ($1,950,489) ($2,068,601) ($ 4,201,717) ($ 909,348) ($ 975,846)
========== ========== =========== ========== ===========
Identifiable Assets
- -------------------
United States $2,653,646 $3,790,354 $ 6,659,651 $3,292,913 $ 7,302,330
Mexico and other - 394,138 6,832,794 526,518 5,571,468
---------- ---------- ----------- ---------- -----------
Total Identifiable Assets $2,653,646 $4,184,492 $13,492,445 $3,819,431 $12,873,798
========== ========== =========== ========== ===========
</TABLE>
43
<PAGE>
Long Distance Call Services
Overview
The Company provides domestic and international long distance call services
as an alternative to those services offered by AT&T, MCI, Sprint and other call
service providers. See "--Competition." The Company owns and operates its own
switching facility and an operator center located at its headquarters in San
Antonio, Texas ("Switching/Operator Facility"). The Company provides live and
automated operator services 24 hours per day, 365 days per year, and features
multi-lingual operators versed in English, Spanish, Portuguese and, at times,
other languages. At January 30, 1998, the Company employed 16 full-time and 34
part-time operators. The Company utilizes its own transmission facilities when
possible or contracts to use facilities of other long distance network
providers, as necessary.
Because international long distance call services consistently provide
revenue and gross profit per minute at a substantially higher rate than domestic
long distance call services, the Company has decreased and intends to continue
to decrease its efforts to provide call services in the highly competitive
United States market, and to increase its focus on the provision of
international long distance call services, particularly between Mexico and the
United States. International long distance billed revenues between the United
States and Mexico increased from approximately $1.4 billion in 1993 to $2.4
billion in 1996. The significant increase in such billed revenue, as well as
that between the United States and other Latin American countries, is due in
part to the ties that exist between many major metropolitan areas in the United
States and Mexico and other Latin American countries, which have been
strengthened by the rapid growth of the Hispanic segment of the United States
population, and the increase in trade between Mexico and other Latin American
countries and the United States.
Services
The Company generates long distance traffic, which is routed through the
Switching/Operator Facility, primarily from Charge-a-Call phones, located in
major tourist areas in Mexico; call aggregators, such as hotels, motels and
private payphones located in the United States and Mexico; casetas, which are
call facilities in Mexico utilized by travelers and local residents who do not
have personal phone access; and calling cards. Following is a more detailed
description of the Company's existing and planned long distance traffic sources.
Charge-a-Call Phones
The Company has historically provided the majority of its long distance
call services to United States citizens traveling in Mexico who desire a
convenient method of placing and billing calls to the United States. Calls have
been generated primarily from Charge-a-Call phones owned by the Company and
placed in major tourist areas of Mexico. By simply lifting the handset on such a
phone, a caller automatically accesses one of the Company's operators at the
Switching/Operator Facility. The caller provides payment instructions and the
destination phone number to a Company operator, who then assists the caller in
placing the call.
At January 30, 1998, the Company owned approximately 500 Charge-a-Call
phones, all of which are located in Mexico, and does not anticipate increasing
the number of such phones significantly in Mexico in the future. To increase
Mexico-generated call service revenue, the Company began installing advanced
Intelligent payphones in various tourist areas within Mexico in July 1997.
See "--Intelligent
44
<PAGE>
Payphones." Unlike Charge-a-Call phones, which are capable of handling only
collect, calling card and credit card billed international calls to the United
States, software-driven Intelligent payphones, which accept coins or credit
cards, are capable of handling international calls billed collect, to credit
cards or to calling cards, domestic long distance calls within Mexico billed to
credit cards or via coin operation, and local calls via coin operation. By
accepting coins for local and long distance, the Company believes it will be
able to expand its revenue base. There can be no assurance, however, that
Intelligent payphones will generate any increases in revenue.
Call Aggregators
The Company contracts with "call aggregators" in the United States and
Mexico, which include private payphone, hotel, motel and resort owners and
agents, to provide call services for calls made from telephones they operate or
which are located on their property. Subscribers earn commissions based on the
net billable revenue originating from the subscriber's telephones. The
commission rate is set by agreement between the subscriber and the Company or a
representative of the Company. The Company's revenue is derived from composite
charged rates for the call which is billed to the end-user.
Currently, call aggregators in the United States and Mexico can choose the
long distance company that will complete and process their customer's "0+"
("Zero Plus," automated credit or calling card) and "0-"("Zero Minus," operator
assisted) calls. To route a call to a Company operator from a subscriber
telephone, a caller in Mexico or elsewhere generally dials "0," and the area
code and number. The call is then automatically routed to the Switching/Operator
Facility. An autodialer may also be installed at the subscriber's premises. When
an autodialer is used, it monitors the numbers dialed and automatically
redirects calls to the Company. The interception and direction of telephone
calls by the autodialer is transparent to the phone user. Operators identify
themselves as American TeleSource International and Communications Services
operators to persons placing calls from subscriber telephones in the United
States and Mexico, respectively. As Company operators receive the incoming
calls, they collect billing information from the caller and enter it into the
Company's computer system from their operator terminals. Users of the Company's
services can charge their calls to most Bell company calling cards or commercial
credit cards. Additionally, calls handled by an operator can be person to
person, collect or third party calls. All calling information (including
origination, termination and billing numbers) is recorded for credit validation,
call rating and billing to the end user. The call is then released into the
local telephone company's or long distance carrier's system for completion. The
Company selects the most cost effective and efficient method of completing the
call available to it.
At January 30, 1998, the Company provided "call aggregator" call services
to approximately 5,700 and 12,100 hotel and motel rooms in the United States and
Mexico, respectively. The Company's customers include certain Holiday Inn, Best
Western, Royal Resorts and Omni hotel franchises and Grupo Posadas, a Latin
American hotel operator. In July 1997, the Company acquired a contract from
Meridian Telecom pursuant to which it provides call services to hotels operated
by Grupo Posadas in Mexico (representing approximately 8,500 hotel rooms), one
of the largest hotel operators in Latin America. At January 30, 1998, the
Company had "call aggregator" call service contracts with pay telephone owners
covering approximately 4,600 and 1,400 public telephones in the United States
and Mexico, respectively.
45
<PAGE>
Casetas
In May 1997, the Company entered into an agreement to purchase up to 100%
of the outstanding shares of Sistema de Telefonia Computarizada, S.A. de C.V.
("Computel"), a Mexican company that owns and operates 134 casetas in 72 cities
throughout Mexico. Under the terms of the Agreement, the Company acquired 55% of
the shares of Computel in May 1997, and the remaining shares in August 1997. The
consideration for the Computel acquisition included Company Common Stock, cash
and the forgiveness of a note receivable evidencing an obligation owed by
Computel to the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation--Overview" and Note 9 to the Company's
consolidated financial statements appearing elsewhere in this Prospectus.
Casetas are calling facilities strategically located in Mexico to serve
telephone needs of travelers and Mexican nationals lacking personal telephone
access. Casetas feature comfort and privacy not available on street side
telephone locations. A caseta typically includes three-to-four telephones
serviced by three-to-four phone lines. Casetas offer multiple services including
local telephone calls, domestic long distance calls, international long distance
calls, collect, calling card, and credit card calls, voice mail and fax
transmission and reception.
Computel is a leader in public calling stations in Mexico, employing
approximately 430 people, with annualized revenues of approximately $6 million.
The Company believes that Computel, through its standardization in logos and
trade dress, has established a highly recognized, positive corporate image in
Mexico. The anticipated integration of Computel's and the Company's operations
is expected to produce certain operating efficiencies. The Company believes that
Computel's existing management and operations team within Mexico will facilitate
the implementation of its Intelligent payphone and travel card services in
Mexico. See "--Travel Cards" and "--Intelligent Payphones." Additionally, the
Company believes that Computel's point-of-sale distribution channels will
compliment the Company's network and facilities-based operations. Through
combined call volume and utilization of the Company's network facilities, the
Company has begun to and believes that it will continue to be able to reduce the
cost per minute of certain of the Company's existing and prospective intra-
Mexico calls and Computel's long distance calls to the United States. There can
be no assurance that any further operating efficiencies or cost reductions will
result from the Computel transaction.
Travel Cards
The Company also provides call services for Latin Americans traveling
outside their countries through the issuance of pin numbers used in conjunction
with international credit cards and proprietary telephone travel cards. Latin
travelers typically do not have AT&T, MCI or Sprint travel cards, nor do their
countries' national phone companies provide them with travel cards that can be
used in the United States. However, such travelers generally carry common
international credit cards, such as Visa, MasterCard and American Express. The
issuance by the Company of TravelPlus(SM) pin numbers in conjunction with credit
cards enable Latin travelers to use an eligible common credit card to place
domestic or international calls from virtually any phone in the United States or
in any of the other 32 countries where the Company originates service and reach
a Portuguese or Spanish speaking Company operator. By using a credit card as a
phone card, the traveler is able to avoid the high cost of collect calls and
minimize hotel and public phone surcharges. Callers using TravelPlus(SM) pin
numbers are billed directly through their credit card companies, and the Company
is paid in U.S. dollars. The Company has contracted to provide TravelPlus(SM)
pin numbers to the Bank of Brazil for its Visa card holders. Additionally,
through a strategic alliance with ATI do Brazil, a Brazilian company not
affiliated with the Company, the Company distributes telephone travel cards at
Brazilian airports and through travel agencies located in Brazil, which cards
enable the holders to utilize TravelPlus(SM) services.
46
<PAGE>
The Company's RoamerPlus(SM) travel cards enable Mexican travelers to use
their cellular phones while in the United States. Because of problems associated
with cellular phone fraud, United States cellular companies generally prohibit
foreign cellular users, while traveling in the United States, from placing
international calls. To avoid this problem, pin numbers are issued to Latin
Americans through their own local cellular provider. When in the United States,
the Mexican cellular user dials a special "800" number which connects the user
with a Company operator and provides the operator with an account and pin
number. The operator then completes the call, and charges are billed to the
user's local cellular account. Currently, the Company has two agreements with
Mexican cellular companies to route calls placed by such companies' customers
traveling in the United States to the Company's Switching/Operator Facility. As
relationships with other Latin American cellular companies are established, the
Company anticipates expanding access to this service. There can be no assurance
that the Company will be able to establish any such relationships or, if it is
able to do so, that access to this service will be expanded.
Payphones
In February 1997, ATSI-Mexico obtained a comercializadora license from the
Mexican government's Secretaria de Comunicaciones y Transportes ("SCT") to own
and operate public payphones in Mexico and resell local and long distance
services via such payphones. There were approximately 2.6 public phones for each
1,000 persons in Mexico at May 31, 1997. The Company believes that there is and
will continue to be a need for more public phones in Mexico. As a result, in
March 1997 the Company obtained $1.7 million in equipment financing from IBM de
Mexico to begin acquiring and installing Intelligent payphones in Mexico.
Intelligent payphones, which are software driven and equipped to handle coins
and credit cards, are able to generate revenues from international calls billed
collect, to credit cards or to calling cards; domestic long distance within
Mexico billed to credit cards or via coin operation; and local calls via coin
operation. The Company began installing Intelligent payphones in July 1997.
The cash proceeds made available under its equipment financing facility with IBM
de Mexico will cover the cost of acquiring and installing approximately 450
Intelligent payphones, primarily in tourist areas. At March 2, 1998, the Company
had installed approximately 250 of such payphones. The Company has established
an overall target of installing 11,000 Intelligent payphones by the end of
fiscal 2001. There can be no assurance, however, that the Company will have
sufficient resources to install all 11,000 or a significant number of additional
Intelligent payphones in Mexico or that it will realize increased revenue from
operation of such payphones.
In February 1998, the Company commenced acquiring and installing coin-
operated payphones in Mexico City's mass transit metro system transfer stations
pursuant to an agreement with the transit authority. The Company has committed
to complete the acquisition and installation of 500 of such coin-operated
payphones during the remainder of fiscal 1998.
Prepaid Calling Cards
The Company plans to begin selling prepaid calling cards, which are similar
to travel cards except for the billing method, in the second half of fiscal
1998. Because the lower costs of providing prepaid long distance (including no
bad debt, operator and billing costs) are passed on to the consumer, callers
generally purchase prepaid calling cards for the savings they provide. In
addition, businesses such as airlines, travel agencies and hotels may purchase
prepaid calling cards from time to time as promotional items for their
customers. The Company anticipates that it will begin selling prepaid calling
cards from its casetas in the second half of fiscal 1998. There can be no
assurance that the Company will sell prepaid calling cards at such locations, if
at all.
Operations
The Company's revenue from international long distance call services was
$110,483 for fiscal 1994 (of which 100% was from traffic between Mexico and the
United States), $2,952,571 for fiscal 1995
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<PAGE>
(of which 98% was from traffic between Mexico and the United States), $7,780,742
for fiscal 1996 (of which 87% was from traffic between Mexico and the United
States), $9,554,647 for fiscal 1997 (of which 74% was from traffic between
Mexico and the United States), $1,700,204 for the three months ended October 31,
1996 (of which 68% was from traffic between Mexico and the United States), and
$2,036,725 for the three months ended October 31, 1997 (of which 86% was from
the traffic between Mexico and the United States), which accounted for 100%,
40%, 44%, 51%, 38% and 39%, respectively, of the Company's minutes of use, and
100%, 66%, 72%, 72%, 66% and 71%, respectively, of its long distance call
services revenues. The foregoing fiscal 1997 and first quarter fiscal 1998
revenue and percentage amounts do not reflect $1,421,249 and $1,571,133,
respectively, of revenue attributable to Computel's operations, the majority of
which were generated from domestic (Mexico) long distance call services. The
Company's international and domestic long distance call services generated
revenues of $110,483 for fiscal 1994, $4,469,529 for fiscal 1995, $10,806,586
for fiscal 1996, $13,965,981 for fiscal 1997, $2,580,929 for the three months
ended October 31, 1996 and $4,433,435 for the three months ended October 31,
1997. Long distance call services represented approximately 45.7% of total
operating revenue for fiscal 1994, 93.4% for fiscal 1995, 80.2% for fiscal 1996,
86.1% for fiscal 1997, 86.9% for the three months ended October 31, 1996 and
73.5% for the three months ended October 31, 1997. Seasonal variation in call
volume is expected by the Company from hospitality and payphone subscribers,
reflecting the higher occupancy rates from January through July in Mexico (when
U.S. volume is at its lowest) and lower rates during summer months in Mexico
(when U.S. volume is at its peak).
Approximately 25% of the long distance calls handled by the Company are
billed to commercial credit cards. The Company utilizes the services of a credit
card processing company for the billing of these calls and receives cash from
these calls, net of transaction and billing fees, within seven days from the
dates the calls are made. All other calls, including calling card, collect,
person-to-person and third-party billed calls, are billed under an agreement
between the Company and Billing Information Concepts Corp. ("BIC"), one of the
largest billing and collection clearinghouses in the United States. This
agreement allows the Company to submit call detail records to BIC, which in turn
forwards these records to the local telephone companies that maintain the
addresses of the parties to be billed for the calls. The local telephone company
includes the call(s) in a billed party's home telephone bill, collects the funds
and remits those funds net of certain charges to BIC. BIC then remits the funds
net of collection fees to the Company. Because this collection process can take
up to 75 days, the Company participates in an advance funding program offered by
BIC under which BIC purchases 100% of the call records for 75% of their value
within five days of presentment to BIC. The remaining 25% of the call records is
remitted to the Company net of charges as BIC collects the funds from the local
telephone companies. The Company currently pays BIC a funding charge of prime
plus 4% per annum on the 75% of the value of the calls which is advanced to the
Company.
One of the Company's primary costs of providing international call services
from Mexico to the United States is the cost of transporting calls from their
points of origin in Mexico to the Company's Switching/Operator Facility.
Although the Company contracted in the past with major U.S. carriers to provide
such services, Telefonos de Mexico ("Telmex"), the former telecommunications
monopoly in Mexico, did not have a legal obligation to allow these carriers to
provide services prior to August 10, 1996, and on occasion refused to do so.
When it permitted such services to be provided, Telmex based the rates it
charged to these carriers on retail prices charged to consumers in Mexico.
Telmex had the ability to raise these rates as well, which it did on a regular
basis. As a result, from inception through August 10, 1996 the Company
experienced high, unstable and often increasing costs in connection with its
international long distance traffic originating in Mexico. During fiscal 1996,
the Company paid as much as $1.60 per minute (with an average per minute cost of
in excess of $1.00 for fiscal 1996) to transport calls from Mexico to its
Switching/ Operator Facility.
Subsequent to August 10, 1996, at least twelve different carriers received
concessions from the Mexican government to compete against Telmex, the result of
which was a newly formed, competitive telecommunications market within Mexico.
The Company immediately began negotiations with the
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<PAGE>
newly concessioned carriers to reduce dependency on Telmex, increase the
reliability of its services and reduce the costs of providing international
calls from within Mexico. In November 1996, the Company signed an
interconnection agreement with Investcom, one of the newly concessioned
carriers, which calls for a maximum per minute price to carry the Company's long
distance calls from Mexico to San Antonio of $0.48 per minute, and provides for
further discounts based on increasing call volumes. However, Investcom did not
possess the switch capacity in Mexico to process the Company's long distance
traffic until May 1997. As a result, the Company did not begin to phase in the
processing of its long distance traffic at the lower per-minute cost until that
date.
The Company has also installed a teleport facility at Investcom's switching
center in Mexico City. Investcom has contracted with the Company to transport
its long distance traffic from Mexico to the United States through this teleport
facility, and services were initiated in May 1997. Prior to May 1997, the
Company's international call services from within Mexico were still dependent
upon Telmex. The Company's interconnection agreement with Investcom and use of
its Mexico teleport facility has enabled it to begin to, and the Company
believes that they will continue to enable it to, vertically integrate its
services to reduce the cost of providing international calls from Mexico and, as
a result, increase call volume; however, there can be no assurance that any
further cost reductions or further increases in call volume will continue to
occur.
Switching and Operator Equipment
The Company's call center platform located in San Antonio, Texas consists
of a fully redundant digital Summa Four Switch interlinked with a Digital
Equipment Corporation VAX 4000, which utilizes Micro Dimensions software to
interconnect the computerized operator terminal work stations at the service
center. The operator center platform enables the Company to process calling card
calls, collect calls, person-to-person, third-party and credit card calls. The
Company has also installed a NACT LCX 120 switch, which will enhance its current
platform by allowing the Company to process prepaid calling cards and direct
dial calls. At January 30, 1998, the Company's switching capacity was 25%
utilized at its San Antonio, Texas teleport facility, 50% utilized at its Mexico
City teleport facility, and 10% utilized at its Costa Rica teleport facility.
Sales and Marketing
The Company markets its long distance call services in Mexico through the
combined effort of 12 direct sales representatives based in its corporate and
branch offices and a network of independent marketing representatives which sell
the Company's services on a commission basis. Because high commission levels
charged by the independent marketing representatives add substantially to the
Company's cost of services, the Company plans to phase out the use of
independent marketing representatives in Mexico and utilize its direct sales
representatives exclusively in Mexico. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources" regarding the acquisition of certain customer contracts from one of
the Company's independent marketing representatives. As the percentage of direct
sales grows in relation to the percentage of sales obtained through independent
marketing representatives, the Company expects that there will be a
corresponding decrease in commissions paid, and, as a result, its cost of
services; however, there can be no assurance that this will occur. Existing
independent marketing representatives must comply with the Company's licensing
requirements, including ownership by the Company of all phones and phone lines,
and pricing of services. The Company will continue to use independent marketing
representatives in other countries where it provides services such as Brazil,
Jamaica and the Dominican Republic.
The majority of the Company's direct sales efforts are concentrated in
Mexico, the Company's primary market. The Company's sales strategy targets both
corporate and government accounts, as
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well as individual properties. Corporate and government accounts are managed
through the Company's office in Mexico City by a team of account executives
trained specifically to handle such accounts, which typically have a lengthy
sales cycle and require presentations to committees and executive management
teams. Corporate and government accounts include hotel chains, retail chains,
travel agency chains, banks, airlines, ship ports, airports and municipalities.
Account executives responsible for selling individual property accounts in
Mexico are based out of the Company's branch offices in Cancun, Cozumel,
Acapulco, Puerto Vallarta and Mazatlan. Individual property accounts include
restaurants, hotels, bars, and retail shops.
The call services industry has primarily provided its services to call
aggregators rather than the general public. Reasons for selecting call
aggregators over residential customers include the sales volume offered by call
aggregators and the high advertising costs and customer turnover associated with
handling residential customers. The Company's customers look for call services
as an additional source of revenue. Although needs vary from market to market,
the Company generally modifies the in-house phone system of subscribers, or
installs additional equipment necessary to interface with the Company's
Switching/Operator Facility. The Company contracts with subscribers to provide
call services for calls made from telephones they operate or telephones which
are located on their property, offering them the opportunity to receive
commissions on calls made on their phones. The Company customizes its long
distance call services to provide individualized reports and to achieve, for a
given customer, the desired balance between high customer commissions and low
charges to the billed party.
Competition
Competition between the Company and other operator service providers is
based upon commission programs, quality of service, reporting, reputation and
customer service. The Company competes in the international and domestic long
distance call services market with AT&T, Sprint, MCI and others, many of which
have been in business longer than the Company and have far greater resources and
experience than the Company. The Company's primary competitors for hotel and
hospitality contracts are Teleglobal, CNSI, BBG, LCI and Ameristar. Its primary
competitor for its bank products is Sprint in conjunction with Visa. The Company
anticipates that it will compete in the public payphone segment in Mexico with
Telmex and other newly licensed companies. Some of these companies, again, have
considerably greater financial and other resources than the Company.
The Company believes it competes favorably due in part to its bilingual
operators, and a broad array of service offerings. Among them, the Company
provides call aggregators with customized, detailed and sophisticated reporting
of calling patterns and volumes from their locations. This allows such customers
to analyze their traffic and maximize telecommunication revenues by, for
example, relocating underutilized telephones. The Company's detailed reporting
also allows its customers to reconcile the accuracy or integrity of their
commissions. The Company employs a highly skilled professional staff of customer
service employees and technicians, who provide service 24 hours per day, 365
days per year. Additionally, ATSI-Mexico provides an array of services to
support the Company in the provision of long distance call services. See
"--ATSI-Mexico."
Strategy
The Company's mission is to become a full service international
telecommunications carrier providing operator-assisted, direct dial and other
long distance call services and network management services between and within
Latin America and the United States. The Company intends to pursue this strategy
in
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its long distance call services business by, among other things, competing for
licenses issued by Latin American countries, where the regulatory environment
permits, to provide expanded long distance call services and working to increase
the volume of calls which it processes . Because margins on international calls
are substantially higher than domestic (United States) calls, and because the
Company expects growth to continue in the market for calls between the United
States and Mexico, as well as other Latin American countries, the Company
intends to focus on the international long distance market, particularly between
Mexico and the United States, for the provision of long distance call services.
Within Mexico, the Company has begun to and intends to continue to utilize the
cost savings generated from its interconnection agreement with Investcom,
together with the installation of Intelligent payphones in the tourist areas of
Mexico and utilization of its casetas, to increase call volume and revenues.
There can be no assurance, however, that the Company will be able to achieve any
continued increase in call volume and, if so, that any continuing increase in
revenues or any profits will be realized. The Company has decreased its efforts
toward providing call services in the highly competitive United States market,
offering such services domestically on a "demand type" basis only.
The Company currently views the following target markets as ones in which
it can most profitably provide its long distance call services for the optimum
benefit of the customer:
. International Public Communications-- Includes public payphone
services in high traffic areas and transportation centers such as
airports, ship ports and marinas, as well as casetas, located
primarily in Mexico.
. International Hospitality Industry -- Includes hotels, motels and
resorts located primarily in Mexico.
. Travel-Related Service Business -- Includes travel agencies, airlines,
banks, cellular phone companies and other businesses that service
foreign travelers.
The Company intends to continue to promote its travel card program to
credit card issuers in Latin American countries where and as the regulatory
environment permits. The Company is also continuing discussions with certain
Mexican cellular companies to route calls placed by United States citizens in
Mexico to the Company's Switching/Operator Facility. If successful in these
negotiations, of which there can be no assurance, the Company expects to expand
its travel card service to enable United States citizens to use their cellular
phones while traveling in Mexico. In addition, the Company anticipates that it
will begin selling prepaid calling cards in the second half of fiscal 1998.
Through these efforts, the Company hopes to further increase call volume and
revenue; however, there can be no assurance that any such program will be
successful and, if so, that the Company will realize any increased call services
volume or revenue or attain profitable operations.
Network Management Services
Overview
The Company offers international carrier services and domestic and
international private-line telecommunications services via satellite and fiber
optics between the United States and Latin America and within Latin America to
commercial customers for a number of applications. These applications generally
involve, for carrier services customers, providing transmission capacity for
United States termination of long distance call traffic and network services
traffic handled by domestic and regional
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communications carriers in Latin America, and, for private network customers,
creating private international point-to-point communications links for clients
who need special services, such as heavy data and voice usage at lower cost and
greater dependability. The Company believes that as Latin American markets
continue to develop and as multinational corporations expand into the region,
the demand for communications transmissions into the United States and
customized telecommunications services between the United States and Latin
America and within Latin America will continue to grow.
The Company believes that the demand for international network management
services has the potential to grow substantially in the foreseeable future,
particularly within the Latin American region. This growth is expected to result
from continuing deregulation of telecommunications markets in Latin America,
continuing technological advancement, economic development in Latin America, and
the increasing globalization of business. There can be no assurance that demand
for international network management services will grow as anticipated, if at
all.
The Company provides modern telecommunications standards of reliability and
connectivity to the Latin American region from its San Antonio, Texas teleport
via the Hughes built, Mexican government owned and operated Solidaridad
Satellite System ("Solidaridad"). Solidaridad consists of the Solidaridad I and
II satellites, which are replacing the older Mexican Morelos Satellite System.
Solidaridad I and II were successfully launched into orbit in November 1993 and
the fourth quarter of 1994, respectively. These satellites have increased
capacity for telecommunications services (i.e., "C," "Ku" and "L" bands) and
cover the Company's market, consisting of portions of North America, all of
Mexico, the Caribbean Basin and Central America, and the western portion of
South America.
The Company entered into an agreement with Telecomunicaciones de Mexico
("Telecomm") in October 1995 to purchase transponder capacity on Solidaridad for
a period of five years (the "Solidaridad Agreement"). The Company chose Telecomm
based upon its favorable transmission rates and Solidaridad's area of satellite
coverage. Pursuant to the Solidaridad Agreement, the Company pays a tariff to
Telecomm based upon the amount of satellite capacity it uses. Telecomm offers a
volume discount to users of 10 Megahertz of capacity or more. As of January 30,
1998, the Company leased 30.5 Megahertz of capacity on Solidaridad. The
following chart displays the Company's area of satellite coverage.
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SOLIDARIDAD SATELLITE SYSTEM
[GRAPHIC OF SOLIDARIDAD'S ENTIRE AREA OF SATELLITE COVERAGE APPEARS HERE]
The depiction on this page illustrates Solidaridad's entire area of
satellite coverage by displaying Solidaridad's coverage "footprints" over a map
of North America, Mexico, Central America, South America and the Caribbean
Basin. Such footprints cover three separate and distinct regions, referred to as
Regions 2, 3 and 5. Solidaridad's coverage footprint of Region 2 includes cities
on the southwestern border of the United States, all of Mexico and Central
America, the Caribbean Basin and the northern portion of South America. Its
coverage footprint of Region 3 includes the western portion of South America,
and its footprint of Region 5 covers parts of the midwestern, eastern and
southern regions of the United States, as well as the San Francisco Bay Area.
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Carrier Services
The Company offers satellite capacity to domestic and regional
telecommunications carriers in Latin America that lack transmission facilities
to locations in the United States or need more transmission capacity into the
United States. The Company began marketing such services to foreign telecom
carriers in the last quarter of fiscal 1995. The Company has entered into
agreements or understandings (each of which with the exception of the Agreement
with Investcom is presently immaterial to the Company's operations), as
indicated below, with the following foreign telecommunications companies for
origination and termination of long distance and network traffic between the
United States and certain Latin American countries:
. Investcom. In November 1996, the Company signed an interconnection
agreement with Investcom, one of twelve companies to have received a
concession from the SCT to provide long distance services in
competition with Telmex. The Company also installed a teleport
facility at Investcom's switching center in Mexico City. Investcom has
contracted with the Company to transport its long distance traffic
from Mexico to the United States through this teleport facility.
Investcom has also contracted with the Company to permit the Company
to terminate its traffic into Mexico, which effectively enables the
Company to use its teleport facility as a gateway for southbound long
distance traffic from the United States to Mexico. The Company's
interconnection agreement with Investcom and use of its Mexico
teleport facility has enabled it to begin to, and the Company believes
they will continue to enable it to, vertically integrate its services
to reduce the cost of providing international calls from Mexico and,
as a result, increase call volume; however, there can be no assurance
that any further cost reductions or further increases in call volume
will occur.
. RACSA. In May 1996, the Company entered into an interconnection
agreement with Radiografica Costarricense, S.A. ("RACSA"), a
subsidiary of the national telephone company in Costa Rica. Under the
terms of the agreement, the Company provides RACSA, as well as third
party private companies, with voice, fax, and data transmission
services to the United States and Mexico, and carrier long distance
services to and from Costa Rica. Under the agreement, the Company
receives a minimum long distance traffic guarantee from RACSA, and has
reseller rights for its own long distance customers. The Company has
also installed a teleport facility in Costa Rica in conjunction with
RACSA.
. TELERED. In January 1997, the Company entered into a memorandum of
understanding with TELERED, a Guatemalan consortium, which
contemplates an interconnection agreement for the provision of call
services, Internet and other network services between Guatemala and
the United States.
. SOLARES. In July 1997, the Company entered into an interconnection
agreement with Solares, S.A. de C.V., an El Salvadoran
telecommunications provider, for the provision of call services,
Internet and other network services between El Salvador and the United
States.
. TELPAN. In January 1995, the Company entered into an agreement with
TELPAN Communications, Inc., a Panamanian telecom carrier, for the
provision of network services into the United States for voice, fax
and data transmissions originating in Panama.
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In July 1997, the Company entered into an agreement with Avantel S.A. de
C.V., one of twelve companies to have received a concession from the SCT to
provide long distance services, to carry and terminate traffic within Mexico.
The Company believes that, if the regulatory environment permits,
opportunities could continue to arise with respect to the provision of satellite
transmission capacity. The Company intends to continue to pursue what it
believes to be opportunities to provide carrier services at favorable rates to
Latin American domestic and regional communications carriers. The Company does
not, however, intend to provide carrier services to or from what the Company
considers its secondary markets, including Brazil, Jamaica and the Dominican
Republic.
In the first quarter of fiscal 1998 the Company commenced providing to U.S.
carriers long distance carrier services between the United States and Mexico.
Revenues from these services were approximatey $380,000 in the first quarter of
fiscal 1998 and approximately $2.6 million in the second quarter of fiscal 1998.
The Company ceased provision of such services for approximately three weeks in
February 1998 as the Company took steps to ensure that such services were in
compliance with Mexican law. Such services were resumed after the expiration of
the three week period utilizing the Company's existing SCT licenses.
Private Networks
The Company also offers domestic and international private
telecommunications networks between the United States and Latin America and
within Latin America for voice and fax communications, data transmission, point-
to-point videoconferencing links and value added network services, such as
credit card processing, Internet, E-Mail and reservation networks. The Company's
fiber-optic and satellite transmission capabilities enable its customers to
bypass limited telecommunications services which remain in many areas of Latin
America. Although no longer offered to new business customers, the Company
continues to provide to existing business customers "stand alone" end-to-end
very small aperture terminal ("VSAT") private network satellite services via
Solidaridad between the United States and Latin America and within Latin America
for its business communications customers. VSAT networks consist of very small
(e.g., 1.8 to 3.8 meters) rooftop antennas and are utilized to send
communications and data transmissions at any time. Generally, the user pays for
this service based on the capacity leased regardless of volume of use.
Presently, the Company offers private telecommunications networks through its
interconnection agreements and associated foreign teleport facilities.
In addition to providing satellite capacity for private networks, the
Company's services to its business communications customers include customized
end-to-end solutions to their communications needs by providing survey and
analysis of customer needs, network design, engineering and integration,
coordination and filing of necessary permits, importation and shipping of
necessary equipment, complete installation and network testing, systems
operations training and ongoing maintenance and technical support. The Company
commits to provide its customers error-free transmission at U.S. performance
standards of 99.98% reliability. All services are provided by the Company's
personnel in San Antonio, Texas and Mexico.
The Company's business communications customers currently using its private
telecommunications network services are Reuter's de Mexico, S.A. de C.V., for
information distribution between Mexico and the United States; Banco del Centro,
for credit card processing services between Mexico and the United States; Total
Systems Services de Mexico, S.A. de C.V., for credit card authorization services
between Mexico and the United States; Operadora Corporativo Miro Reservation
Network, between Mexico and the United States, with a link to Grand Cayman;
Rooster Products International, between Mexico and the United States; Copamex
S.A. de C.V., within Mexico and between Mexico and the United States;
Evaporadora Mexicana, S.A. de C.V., for a wide area network within Mexico;
Notimex S.A. de C.V. for information distribution services between Costa Rica
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and Mexico; H.E. Butt Grocery Company for data network services between Mexico
and the United States; and Servicios de Informacion Deportiva for data network
services between Costa Rica and the United States.
The Company's private network services generated revenues of approximately
$132,000 during fiscal 1994, $318,000 during fiscal 1995, $2.7 million during
fiscal 1996, $2.3 million during fiscal 1997, $388,000 during the three months
ended October 31, 1996 and $1.6 million during the three months ended October
31, 1997. Private network services represented approximately 54.3% of total
operating revenue during fiscal 1994, 6.6% during fiscal 1995, 19.8% during
fiscal 1996, 13.9% during fiscal 1997, 13.1% during the three months ended
October 31, 1996 and 26.5% during the three months ended October 31, 1997. The
Company's private network services contracts generally last from two to five
years.
Sales and Marketing
The Company has focused its network management sales and marketing efforts
in those regions of Latin America where it has installed teleport facilities or
has access to such facilities through interconnection agreements. The network
management sales team focuses on securing new business through direct
prospecting and sales efforts, as well as from leads supplied by Telecomm,
financing companies specializing in the telecommunications industry,
telecommunications equipment vendors and existing customers. Other direct
marketing efforts include attendance at or participation in major conventions or
expositions for targeted user groups. In addition, the Company's senior
management takes an active role in supporting the sales team and attracting new
accounts for private networks and carrier services. All of the Company's network
management sales personnel are fluent in both English and Spanish.
The Company's sales personnel are required to contact existing customers on
a monthly basis in order to ensure that such customers' current needs are being
met. The Company believes that this activity may stimulate sales growth by
increasing usage levels among its current customer base. These existing
customers may also provide the Company's sales personnel with qualified leads
for new business.
Competition
In providing network management services, the Company competes with MCI,
Americatel, C-COM, AT&T, Telmex, GeoComm/SERSA and others, many of which have
significantly greater resources and more extensive domestic and international
satellite and fiber-optic communications networks than the Company. The Company
uses the Solidaridad Satellite System combined with fiber-optic networks to meet
its customers' requirements.
For most of the Company's network management communications services, the
factors critical to a customer's choice of a service provider are cost,
reliability, network quality and, in some cases, geography, network size and
telecommunications capacity. The Company believes it has the reputation as a
responsive telecommunications service provider capable of processing a variety
of network traffic, including switched long distance. The Company's San Antonio,
Texas teleport facility (and other teleport facilities), combined with its
engineering and operations capabilities, enable the Company to provide high
quality, cost-effective communications services to meet its customers'
requirements. Additionally, ATSI-Mexico provides an array of services to support
the Company in the provision of domestic (Mexico) and international network
management services. See "--ATSI-Mexico."
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Strategy
The Company's mission is to become a full service international
telecommunications carrier providing operator-assisted, direct dial and other
long distance call services and network management services between Latin
America and the United States. The Company intends to pursue this strategy in
connection with its network management services by, among other things,
attracting new Latin American telephone companies and international
telecommunications carriers requiring satellite transmission capacity for their
telecommunications traffic into the United States, attracting new private
network accounts, working to increase the usage level of current private network
clients and competing for licenses issued by Latin American countries to provide
expanded services where the regulatory environment permits. The Company's
network management services provide substantially higher profit margins than its
long distance call services. As a result, and due to the anticipated increase in
demand for international telecommunications services, the Company intends to
continue to engage in sales and marketing efforts with respect to this aspect of
its business, with particular emphasis on carrier services. Additionally,
because many costs of providing such services are fixed costs to the Company,
the Company expects that it will realize increased margins as carrier and
network usage expand. There can be no assurance, however, that the Company will
recognize any continued increase in revenues or attain profitable operations
from the provision of network management services in the future.
ATSI-Mexico
American TeleSource International de Mexico, S.A. de C.V. provides the
Company with support in connection with the Company's domestic (Mexico) and
international long distance services and network management services. ATSI-
Mexico provides an array of services to support the Company, including applying
for and obtaining telecommunications licenses, identifying and processing
potential business opportunities and planning, design, implementation and
maintenance of international telecommunications networks. For networks requiring
U.S. connectivity, the San Antonio, Texas teleport is utilized. ATSI-Mexico also
provides intra-Mexico network management services. ATSI-Mexico technical
personnel are trained by the Company's technical staff in areas such as
monitoring, diagnostics, and troubleshooting of networks and switching
equipment. The capital stock of ATSI-Mexico is 97% owned by the Company and 3%
owned by a Mexican citizen.
The Company has focused the majority of its initial efforts within Mexico
and intends to continue to concentrate primarily on the Mexican market for the
provision of domestic (Mexico) and international long distance call services.
The Company believes that significant opportunities to provide call services
within Mexico and between Mexico and the U.S. will continue to arise from the
law written into effect in June 1995 by the SCT, which provides for the methods
by which companies can apply for concessions and licenses to establish and
operate telecommunications services businesses within Mexico. This law was,
effectively, the first step in the deregulation of the telephone industry within
Mexico. It also formalized the methods by which companies may compete against
Telmex, the former telecommunications monopoly in Mexico.
ATSI-Mexico has obtained the following licenses from the SCT (the duration
of each of which is approximately 20 years), which the Company believes will
enable it to significantly expand its business in Mexico. There can be no
assurance, however, that such licenses will lead to continuing increased
revenues or profitable operations.
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. Public Payphone License. In February 1997, ATSI-Mexico received a
comercializadora license from the SCT to own and operate public
payphones, including casetas, in Mexico and resell local and long
distance services via such payphones. See "Business--Long Distance
Call Services-Intelligent Payphones."
. Shared Teleport License. In July 1997, through its acquisition of
Sinfra, S.A. de C.V., ATSI-Mexico acquired a shared teleport license
from the SCT, which qualifies the Company's Mexican teleport (and any
future teleports owned by the Company in Mexico) as a shared facility
to provide communications transport capabilities for the Company's
Mexican network clients, as well as other non-shared teleport-based
carriers and their clients. Utilizing the Company's existing Mexican
teleport facility for such a purpose should enable the Company to
reduce costs for the provision of private networks with a link in
Mexico because many private network subscribers will then be able to
connect through local fiber to this centralized satellite facility
(linked to the Mexican Solidaridad Satellite System), eliminating the
need for a VSAT on every user's premises. There can be no assurance,
however, that this will occur.
. Network Resale License. In July 1997, through its acquisition of
Sinfra, S.A. de C.V., ATSI-Mexico acquired a network resale license
from the SCT, which permits the Company to install, operate and resell
a network integrated by nodes equipped with packet switching and data
concentrators, and a control center for links, channels and circuits
leased from concessionaires. The Company anticipates that such license
will allow it to contract for channels and terrestrial circuits from
concessionaires offering increased reliability and more favorable
rates.
. Value-Added Service License. In the third quarter of fiscal 1996,
ATSI-Mexico received a value-added service license from the SCT to
provide value added network service delivering public access (as
distinct from current private network access) to the Internet,
including e-mail, local area network interconnection and frame relay
services.
In addition, ATSI-Mexico has applied to the SCT for a long distance
reseller license, which is a comercializadora license to provide long distance
and private line services via TELMEX's or any other concessionaire's fiber optic
infrastructure and resell the existing fiber infrastructure in Mexico for
various communications services, including the provision of direct dial long
distance service . Receipt of this comercializadora license, of which there can
be no assurance, would enable the Company to offer to its existing clients and
market to potential customers a complete package of long distance services,
including private networks, 0+, 0- and direct dial capabilities, as well as
direct billing services, which, the Company believes, could have a positive
effect on its revenues due to the desire of customers to consolidate the
provision of their communications services into a single provider. The Company
anticipates that it will continue to apply for government-issued licenses which
it believes will create opportunities to expand operations in Mexico and
facilitate its becoming a full service telecommunications carrier.
ATSI-Mexico has also been instrumental in the Company's consummation of
transactions and development of infrastructure in Mexico, which the Company
believes will lead to increased call volumes and revenues in this market. See
"--Long Distance Call Services - Services - Casetas."
The Company believes that ATSI-Mexico gives it a competitive advantage over
other U.S. telecommunications companies attempting to enter the Mexican market.
All of ATSI-Mexico's significant
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employees are Mexican citizens with substantial experience in the Mexican
telecommunications industry and solid working relationships with persons and
entities in Mexico connected with such industry. The Company believes that its
success to date in Mexico has been largely the result of, and that its future
success with respect to Mexican telecommunications licenses applied for and
implementation of business strategies in Mexico will be dependent upon, such
employees' hard work and ability to continue to understand and develop
relationships within the Mexican telecommunications industry.
Teleport and Network Control Center
The Company has constructed an international teleport/satellite earth
station at its headquarters in San Antonio, Texas to serve as a
telecommunications gateway to the United States. Such teleport is one of six
facilities in the United States known by the Company to have been specifically
designed to provide international telecommunications networks between the United
States and Latin America via the Mexican Solidaridad Satellite System. Such
teleport provides fiber optic integration into U.S. based private and public
telecommunications networks via a fiber optic link to a facility in downtown San
Antonio, Texas where all major long distance carriers have a point of presence.
The Company constructed such teleport using advanced digital satellite
communications equipment, and built the network operating system modularly to
enable it to expand telecommunications capacity quickly, on an as-needed basis.
In September 1995, the Company increased the system's networks capacity from 20
watts to 400 watts, giving the Company the capability to operate up to 30 T-1
circuits, or 720 64K circuits of C-band frequency and 144 64K circuits of Ku
band frequency.
The Company's San Antonio, Texas teleport facility contains a 6.1 meter "C"
and a 6.1 meter "Ku" band earth station with fully redundant electronics capable
of "seeing" across the full 500 MHZ of these two satellite bands in both
horizontal and vertical polarization schemes. The earth station electronics are
state-of-the-art in design and dependability.
The Company's network control center, also located at its San Antonio,
Texas facility, houses the converter subsystem relative to the networks, the
modem subsystem and the data equipment. Such control center serves as the
maintenance and control hub of the Company's networks and long distance call
services systems. It utilizes specialized software and hardware components to
monitor subsystem elements within the teleport. Remote facilities are equipped
with maintenance and control processors that monitor subsystem elements and dial
into the teleport facility to report fault conditions. The control center
technicians, once aware of a problem, can dial into the remote terminals to
diagnose, troubleshoot, make equipment changes or upgrade for complete system
management. The control center is protected through an uninterruptable power
supply system and has a dedicated environmental control system to maintain
optimal conditions of 68(degrees) F, with 45% humidity.
The Company has also installed two teleport facilities in Mexico City and
Costa Rica, respectively. Generally, such facilities have capabilities similar
to the Company's San Antonio, Texas facility (although designed to handle less
capacity), including modular upgrade capabilities. In order to terminate calls
into and transmit calls from northern Mexico more effectively and increase
overall call capacity to and from Mexico, the Company commenced the installation
of a teleport facility in Monterrey, Mexico in February 1998.
Regulation
The Company's business operations are subject to extensive federal and
state regulation, and more limited foreign regulation. Federal laws and U.S.
Federal Communications Commission ("FCC") regulations apply to interstate
telecommunications (including international telecommunications that originate or
terminate in the United States), while particular state regulatory authorities
have jurisdiction over telecommunications
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originating and terminating within the state. The laws of other countries only
apply to carriers doing business in those countries. Thus, if the Company
conducts business with such countries through settlement agreements with a
foreign carrier, or otherwise by engaging in service to such countries, it is
affected indirectly by such laws insofar as they affect the foreign carrier.
There can be no assurance that future regulatory, judicial, and legislative
changes or activities will not have a material adverse effect on the Company,
that domestic or international regulators or third parties will not raise
material issues with regard to the Company's compliance or noncompliance with
applicable regulations, or that regulatory activities will not have a material
adverse effect on the Company.
In addition, changes in certain regulations may potentially preclude or
impair the Company's ability to provide call services in certain jurisdictions.
The Company does not foresee any such changes; however, it cannot predict
whether such changes may occur. Therefore, the Company cannot estimate the
impact of such changes upon its operator services in the event of any such
change.
Federal.
The FCC has classified the Company as a non-dominant, interexchange
carrier. Generally, the FCC has chosen not to exercise its statutory power to
closely regulate the charges, practices, or classifications of non-dominant
carriers. Nevertheless, the FCC acts upon complaints against such carriers for
failure to comply with statutory obligations or with the FCC's rules,
regulations, and policies. The FCC also has the power to impose more stringent
regulatory requirements on the Company and to change the Company's regulatory
classification. In the current regulatory atmosphere, the Company believes that
the FCC is unlikely to do so.
Among domestic carriers, only the local exchange carriers ("LECs") are
currently classified as dominant carriers. Thus, the FCC regulates many of the
LECs' rates, charges, and services to a greater degree than those of the
Company. Until October 1995, AT&T was classified as a dominant carrier, but AT&T
successfully petitioned the FCC for non-dominant status in the domestic
interstate and interexchange marketplaces. Therefore, certain pricing
restrictions that once applied to AT&T have been eliminated, likely making
AT&T's prices more competitive with those of the Company. Recently, AT&T was
also reclassified as a non-dominant carrier for international services.
The Company has the authority to provide domestic, interstate
telecommunications services. The Company also has been granted authority by the
FCC to provide switched international telecommunications services through the
resale of switched services of United States facilities-based carriers and to
provide certain international telecommunications services by acquiring circuits
on various undersea cables or leasing certain satellite facilities. The FCC
reserves the right to condition, modify, or remake such domestic and
international authority for violations of the Communications Act of 1934, as
amended (the "Communications Act") or the FCC's regulations, rules, or policies
promulgated thereunder. Although the Company believes the possibility to be
remote, a rescission by the FCC of the Company's domestic or international
authority or a refusal by the FCC to grant additional domestic or international
authority would have a material adverse effect on the Company.
Currently, non-dominant carriers are required to maintain international
tariffs on file with the FCC. The company believes it is in full compliance with
all applicable FCC tariff regulations.
The FCC is in the process of changing its rules regarding the filing of
interstate tariffs. In December 1996 the FCC issued an order requiring all
interstate carriers to withdraw such tariffs by September 1997. However, the
order was stayed by the United States Court of Appeals. In response to this
court action, and to petitions for reconsideration that were filed with the FCC,
the FCC issued an order on August 20, 1997 modifying the earlier order to allow
for two instances when interstate tariffs can still be filed.
First, non-dominant interexchange carriers will be allowed to file tariffs
for dial around 1+ services: meaning calls made by accessing the interexchange
carrier through the use of that carrier's "carrier access code." Second,
non-dominant interexchange carriers are allowed to file tariffs for service to
customers that pre-subscribe to that carrier's service by contacting the local
exchange carrier. These tariffs will be effective only for 45 days or until a
written agreement is executed between the carrier and the customer, whichever is
shorter. Based on this modification, the FCC petitioned the court to lift its
stay, however, the court has not yet ruled on this request. At this time it
seems likely that there will be some form of de-tariffing of these rates by the
FCC, but the Company cannot say what the effect of that action will be.
60
<PAGE>
As a non-dominant carrier, the Company is also subject to a variety of
miscellaneous regulations that, among other things, govern the documentation and
verifications necessary to change a consumer's long distance carrier, limit the
use of "800" numbers, require certain disclosures regarding operator services,
limit foreign ownership and control, and require prior approval of transfers of
control. The Company began providing operator services in the U.S. in May 1994.
The FCC requires the filing of informational tariffs concerning such services
and requires both written and verbal identification of the operator service
provider on each call processed.
To date, the FCC has only exercised its regulatory authority to supervise
closely the rates of dominant carriers. However, the FCC has increasingly
relaxed its control in this area. As an example, the FCC is considering
repricing local transport charges (the fee for the use of the LECs' transmission
facilities connecting the LECs' central offices and the interexchange carrier's
access point). In addition, the LECs have been afforded a degree of pricing
flexibility in setting access charges where adequate competition exists, and the
FCC is considering certain proposals to relax further LEC access regulation. The
impact of such repricing and pricing flexibility on facilities-based
interexchange carriers, such as the Company, cannot be determined at this time.
The Telecommunications Act of 1996 (signed into law on February 8, 1996)
permits the RBOCs to immediately provide interLATA interexchange (long distance)
services outside their local exchange region. Moreover, the Act allows the RBOCs
to provide long distance services in-region with FCC approval after the FCC has
consulted with the Department of Justice and determines that such market entry
is consistent with the public interest, convenience, and necessity. In order for
a RBOC to provide in-region interLATA interexchange service, it must also
demonstrate that it has a facilities-based competitor and that it has complied
with a 14-point competitive checklist as determined by the Commission. As a
result, the Company will undoubtedly face increased competition from the RBOCs.
This new law attempts to guard against anticompetitive conduct that could result
from an RBOC having access to all customers on its existing networks as well as
its ability to cross-subsidize its services and discriminate in its favor
against its competitors.
The FCC has determined that call-back services using uncompleted call
signaling violates neither United States domestic nor international law. Call-
back services involve calls originating in a foreign country directed in such a
manner as to give the foreign caller the advantage of the lower charges for
outbound United States calls. However, United States call-back providers are not
authorized to provide service to customers in countries that expressly have
declared such call-back services to be illegal. The FCC will receive
documentation from any government that seeks to place United States carriers on
notice that call-back services using uncompleted call signaling has been
expressly declared illegal in its country. Currently, the Company does not
itself provide call-back services and it does not provide services to resellers
and other carriers that do provide such call-back services.
61
<PAGE>
The microwave and satellite communications licenses held by the Company are
subject to FCC regulations. Such licenses were granted for fixed terms with an
option to renew. The majority of these licenses expire within six years and the
remainder will expire within ten years. The Company intends to seek renewal of
its licenses and anticipates that they will be renewed in the ordinary course.
Failure to obtain renewal of its licenses could have a material adverse effect
on the Company.
Except with respect to transit agreements, authorizations held under
Section 214 of the Communications Act (such as those held by the Company) for
international services are limited to providing services or using facilities
between the United States and countries specified in the authorizations. The
Company holds all necessary Section 214 authorizations for conducting its
present business, but may need additional authority in the future. Additionally,
carriers may not lease lines between the United States and an international
point for the purpose of offering switched services without first determining
that the foreign country affords opportunities to United States carriers
equivalent to those available under United States law.
The FCC also has promulgated certain rules governing the offering of
international switched telecommunications services. Such calls typically involve
a bilateral, correspondent relationship between a carrier in the United States
and a carrier in the foreign country. Until recently, the United States was one
of a few countries to allow multiple carriers to handle international calls;
almost all foreign countries authorized only a single carrier, often a state
owned monopoly, to provide telecommunications services. In light of the
disparate bargaining positions of the United Stated carriers, the FCC imposed
certain requirements to try to minimize the opportunities that dominant foreign
telecommunications providers would have to counterpoise one United States
carrier against another. These policies include the International Settlement
Policy, which requires that rates of all carriers be uniform on parallel routes
and that traffic received by a United States carrier from a foreign carrier must
be proportional to the traffic the United States carrier terminates to a foreign
carrier. The Company currently has no agreements with foreign carriers providing
for the handling of switched calls.
On August 8, 1997 the FCC adopted an order reducing the settlement rates
paid between foreign and domestic carriers for termination of international
calls. The goal of this decision was to set the settlement rates closer to the
cost of international calls. This decision could have a substantial effect on
the Company's revenues, but it is impossible to guess the exact nature of that
effect until the order is actually implemented.
For more than six years, the FCC has been considering the implementation of
a system whereby a caller could make a long distance call from any publicly
available telephone and have the call automatically routed over the long
distance telephone network of the caller's choice. The concept, called Billed
Party Preference ("BPP"), would necessitate that each local telephone company
have access to a data base that could match every U.S. calling card and
telephone number to a preferred long distance company and be able to route each
long distance call accordingly. Implementation of BPP or a similar system could
potentially have a major impact on U.S. operator services companies such as
ATSI-Canada that depend on telephones presubscribed, or routed, directly to
their network. Although the FCC continues to consider the adoption of BPP, it is
not likely to be operational in the near term. Moreover, less than 25% of the
Company's revenues were generated from such calls during the year ended July 31,
1997, and this percentage is expected to decrease in the future as the volume of
international calls continues to increase. The Company cannot predict when and
if any final ruling will be issued by the FCC relating to BPP, but the Company
does not expect any ruling on BPP to be implemented in the near future. See
"Notes to Consolidated Financial Statements--Note 18."
62
<PAGE>
State.
The intrastate, long distance telecommunications operations of the Company
are also subject to various state laws, regulations, rules, and policies.
Currently, the Company is certified and tariffed to provide service in 23
states. Additionally, the Company provides service in certain states that do not
require certification or registration of any type. Many state regulatory bodies,
however, require the filing of informational tariffs concerning operator
services and require written and/or verbal identification of the operator
service provider on each call processed. The Company is currently in the process
of making the appropriate filings for these informational tariffs in order to
maintain compliance with these jurisdictional requirements. Ultimately, the
Company intends to obtain authorization in all states that require certification
or registration. The vast majority of states require the Company to apply for
certification to provide telecommunications services before commencing
intrastate service and to file and maintain detailed tariffs listing the rates
for intrastate service. Many states also impose various reporting requirements
and require prior approval for all transfers of control of certified carriers,
assignments of carrier assets, carrier stock offerings, and the incurrence by
carriers of certain debt obligations. In some states, prior regulatory approval
may be required for acquisitions of telecommunications operations.
Foreign.
On May 1, 1997, American Telesource International Inc. (the Company)
entered into an agreement with Sistema de Telefonia Computarizada, S.A. de C.V.
("Computel") and the shareholders of Computel to purchase up to 100% of the
outstanding shares of Computel. Computel provides various call services from its
134 casetas (public calling stations) including local telephone calls, domestic
long distance calls, international long distance calls, collect, calling card
and credit card calls, voice mail and fax transmission and reception. The
Company intends to continue to utilize Computel's casetas, representing
substantially all of Computel's assets, to provide the foregoing services to
Computel's customers, which include travelers and Mexican nationals lacking
personal telephone access. As such, it will be directly subject to Mexican laws
and regulations.
On June 7, 1995, the SCT, the entity responsible for governing
telecommunications services in Mexico, wrote into law the method by which
companies could apply for concessions and licenses to establish and operate
telecommunications services businesses in Mexico. This was, effectively, the
first step in the deregulation of the telephone industry in Mexico. The SCT also
formalized the methods by which companies such as ATSI-Canada may compete
against Telmex, the privately owned telecommunications monopoly in Mexico. ATSI-
Mexico has applied for several licenses to provide various telecommunications
services in Mexico. ATSI-Mexico received certain of such concessions and
licenses during fiscal 1997. The receipt of such concessions and licenses has
enabled, and the Company believes such receipt will continue to enable, the
Company to expand its call services in Mexico.
Because Computel will constitute such a large portion of the Company's
revenues, however, any change in the regulatory climate could have a material
adverse effect on the Company's financial condition. Such changes could occur at
any time and cannot be predicted by the Company at this time.
The Company provides international services by either reselling the
services of other carriers or by entering into direct operating or transit
agreements with PTTs. Generally, PTTs are state-owned and operated monopolies.
Various Mexican telecommunications licenses are held by Computel and certain
other affiliates of the Company. These entities are subject to the federal laws
and promulgated regulations of the SCT, changes to which could have a material
adverse affect on the business fortunes of such entities. With the exception of
Mexico operations conducted through use of such licenses, the services currently
provided by the Company are not directly subject to the laws of other countries;
however, the foreign carriers with whom the Company conducts business are
subject to those laws. Consequently, any changes to the laws of a country served
by the Company could have a material adverse effect on the Company.
Employees
At January 30, 1998, the Company (excluding Computel) had 140 full-time
employees, of whom 16 are operators, 23 are sales and marketing personnel and
101 perform administrative functions, and 34 part-time employees, all of whom
are operators. Of the foregoing, 58 were employed by ATSI-Mexico. The Company
believes its future success will depend on its continued ability to attract and
retain highly skilled and qualified employees. The Company considers its
employee relations to be good. None of the Company's employees is represented by
unions.
At January 30, 1998, Computel had 426 full-time employees and 13 part-time
employees.
63
<PAGE>
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, consisting of approximately 3,330 square feet. Computel has purchased
such premises at a price of $880,000 payable in 20 annual payments of
approximately $44,000.
Legal Proceedings
Neither the Company nor any subsidiary is a party to any material pending
legal proceeding.
64
<PAGE>
MANAGEMENT
Executive Officers and Directors
The ATSI-Canada Board currently consists of three members, Messrs. Smith,
Nye and Moses. The ATSI-Delaware Board of Directors currently consists of five
members, two of whom are Class A directors, two of whom are Class B directors
and one of whom is a Class C director. One of the three classes of ATSI-Delaware
directors is elected each year to hold office for a three-year term and until
successors are elected and qualified. The terms of the initial Class A, Class B
and Class C directors of the Company will expire at the 1998 , 1999 and 2000
annual meetings, respectively. Tomas Revesz and Carlos K. Kauachi serve as the
Class A directors, Richard C. Benkendorf and Murray R. Nye serve as Class B
directors and Arthur L. Smith as Class C director . Successors to those
directors whose terms have expired are required to be elected by stockholder
vote while vacancies in unexpired terms and any additional positions created by
board action are filled by action of the existing Board of Directors.
Additionally, Arthur L. Smith has been elected to the offices of President and
Chief Executive Officer of ATSI-Delaware, H. Douglas Saathoff has been elected
to the offices of Secretary, Treasurer and Chief Financial Officer of ATSI-
Delaware, Charles R. Poole has been elected to the office of Chief Operating
Officer of ATSI-Delaware, and Craig K. Clement and Everett L. Waller have each
been elected a Vice President of ATSI-Delaware, all to serve in such capacities
until the next annual meeting of the Board of Directors, or until their
respective successors have been duly elected and have been qualified, or until
their earlier death, resignation, disqualification or removal from office. There
is no family relationship among any of the directors and executive officers of
the Company or ATSI-Delaware.
The following table sets forth the names, ages and positions of the
directors and executive officers of ATSI-Canada and ATSI-Delaware:
<TABLE>
<CAPTION>
Name Age Position Held
- ---- --- -------------
<S> <C> <C>
Arthur L. Smith 33 President, Chief Operating Officer and
Director of ATSI-Canada and President, Chief
Executive Officer and Director of ATSI-
Delaware
Murray R. Nye 45 Chief Executive Officer and Director of ATSI-
Canada and Director of ATSI-Delaware
John R. Moses 45 Director of ATSI-Canada.
H. Douglas Saathoff 36 Secretary, Treasurer and Chief Financial
Officer of ATSI-Canada and Secretary,
Treasurer and Chief Financial Officer of
ATSI-Delaware
Craig K. Clement 39 Vice President of ATSI-Delaware
Everett L. Waller 46 Vice President of ATSI-Delaware
Charles R. Poole 54 Chief Operating Officer of ATSI-Delaware
Tomas Revesz 60 Director of ATSI-Delaware
Richard C. Benkendorf 59 Director of ATSI-Delaware
Carlos K. Kauachi 59 Director of ATSI-Delaware
</TABLE>
65
<PAGE>
Arthur L. Smith has served as President, Chief Operating Officer and a
director of ATSI-Canada since its formation in May 1994. From December 1993
until May 1994, Mr. Smith served in the same positions with Latcomm
International Inc., which company amalgamated with Willingdon Resources Ltd. to
form ATSI-Canada in May 1994. Mr. Smith has also served as President, Chief
Executive Officer and a director of ATSI-Delaware since June 1996, and has
served as President and Chief Executive Officer of ATSI-Texas since December
1993. From June 1989 to December 1993, Mr. Smith was employed by GeoComm
Partners, an international telecommunications firm, as director of international
sales. Mr. Smith has over eight years experience in the telecommunications
industry. It is anticipated that upon completion of the Arrangement, Mr. Smith
will be appointed to ATSI-Delaware's Audit Committee.
Murray R. Nye has served as Chief Executive Officer and a director of
ATSI-Canada since its formation in May 1994. From December 1993 until May 1994,
Mr. Nye served in the same positions with Latcomm International Inc., which
company amalgamated with Willingdon Resources Ltd. to form ATSI-Canada in May
1994. Mr. Nye has also served as a director of ATSI-Delaware since June 1996.
From 1992 to 1995, Mr. Nye served as President of Kirriemuir Oil & Gas Ltd. From
1989 until 1992, Mr. Nye was self-employed as a consultant and Mr. Nye is again
currently self-employed as a consultant. Mr. Nye serves as a director of D.M.I.
Technologies, Inc., an Alberta Stock Exchange-traded company. It is anticipated
that upon completion of the Arrangement, Mr. Nye will be appointed to
ATSI-Delaware's Audit Committee and Compensation Committee.
John R. Moses has served as a director of ATSI-Canada since its formation
in May 1994, and served as Secretary of ATSI-Canada from May 1994 until June
1996. Since 1982 Mr. Moses has served as President, Treasurer and a director of
Winteroad, a publicly traded Canadian company, and has been self employed as a
business consultant during the same period. Mr. Moses also served as President
of Willingdon Resources prior to its amalgamation with Latcomm International
Inc. to form ATSI-Canada.
H. Douglas Saathoff, C.P.A., has served as Vice President, Chief Financial
Officer and Treasurer of ATSI-Canada since February 1996, and Secretary since
June 1996, and has served as Secretary, Treasurer and Chief Financial Officer of
ATSI-Delaware since June 1996. Mr. Saathoff has also served as Vice
President-Finance of ATSI-Texas since June 1994, and as Secretary and Treasurer
of ATSI-Texas since October 1994. From May 1993 to May 1994, Mr. Saathoff served
in the position of Chief Accountant for Santa Rosa Healthcare Corporation, a San
Antonio-based healthcare corporation. From January 1990 to February 1993, Mr.
Saathoff served as Financial Reporting Manager for U.S. Long Distance Corp., a
San Antonio-based long distance telecommunications company. Prior to that time,
Mr. Saathoff served as an accountant with Arthur Andersen LLP for approximately
five years.
Craig K. Clement has served as Vice President-Corporate Development for
ATSI-Texas since August 1994. Mr. Clement has also served as Vice President of
ATSI-Delaware since June 1996. From April 1993 to July 1994, Mr. Clement served
as Vice President of Corporate Development for LATelco, a wireless
communications company. From February 1992 until March 1993, Mr. Clement served
as Vice President of Operations for CSI Environmental, an environmental cleanup
company. From August 1983 until July 1993, Mr. Clement served as President of
Yucca Oil Company, an oil and gas exploration company. Mr. Clement served as a
director of Geocommunications, Inc., a satellite networks company, from November
1987 to November 1991. Mr. Clement also served as a director of PANACO, a
Nasdaq-traded company, from 1988 to 1993, and was a member of the compensation
committee. In July 1993, Mr. Clement became unable to satisfy the personal
guarantee made by him on the corporate bank notes of Yucca Oil Company and, as a
result, filed for relief under Chapter 7 of the Bankruptcy Code. The obligations
of Mr. Clement were discharged in the bankruptcy case.
66
<PAGE>
Everett L. Waller has served as Senior Vice President-Operations and
Technical Services of ATSI-Texas since January 1997. Mr. Waller served as Senior
Vice President-Operations and Sales of ATSI-Texas from August 1993 to January
1997. Mr. Waller has also served as Vice President of ATSI-Delaware since June
1996. From May 1994 to August 1995, Mr. Waller served as Vice
President-Operations of ATSI-Texas. Prior to that time, Mr. Waller served as
Vice President of Technical Services of U.S. Long Distance Corp. for a period of
seven years.
Charles R. Poole has served as Senior Vice President-Sales and Marketing of
ATSI-Texas since February 1997. Mr. Poole also served as Vice President of ATSI-
Delaware from February 1997 to December 1997, and has served as Chief Operating
Officer of ATSI-Delaware since December 1997. From February 1995 to January
1997, Mr. Poole served as Senior Vice President for A+ Communications, a
publicly traded company, responsible for paging, cellular and telemessaging
sales. From 1992 to 1994, Mr. Poole served as Division Manager, Data Documents,
Inc. of Chicago, Illinois. From 1989 to 1992, Mr. Poole served as President of
GeoComm Partners, a satellite-based telecommunications company located in San
Antonio, providing telecommunication services to Latin America. Prior to that
time, Mr. Poole was Senior Vice President of Mobilecomm, a Bell South company,
for approximately five years. Mr. Poole has over fifteen years experience in the
telecommunications industry.
Tomas Revesz has served as a director of ATSI-Delaware since June 1996. Mr.
Revesz has served as President of Long Distance International, Inc., a long
distance reseller, since October 1993. From 1983 to June 1993, Mr. Revesz served
as President of Star Long Distance, Inc., also a long distance reseller. From
January 1990 until August 1993, Mr. Revesz served as Vice President of
Operations of AAA Telephone & Communications, Inc., a telephone interconnection
company.
Richard C. Benkendorf has served as a director of ATSI-Delaware since
October 1996. From 1991 to present, Mr. Benkendorf has been a principal of
Technology Impact Partners, which provides advisory and investment services.
From 1989-1991, Mr. Benkendorf served as Senior Vice President Investments,
Planning, Mergers & Acquisitions and Venture Capital for Ameritech, a
communications services company. It is anticipated that upon completion of the
Arrangement, Mr. Benkendorf will be appointed to ATSI-Delaware's Compensation
Committee.
Carlos K. Kauachi has served as a director of ATSI-Delaware since October
1996. From 1962 until 1996, Mr. Kauachi served in various positions with
Telefonos de Mexico, the then privately owned telecommunications monopoly in
Mexico, including Vice President-Telephone Business Development, Vice
President-Marketing and Sales and, most recently, Vice President-International
Business Development.
Compensation of Directors
Except for reimbursement of their reasonable out-of-pocket expenses in
connection with their travel to and attendance at meetings of the Board of
Directors , none of the directors of ATSI-Canada receive compensation from
ATSI-Canada in their capacity as a director pursuant to any other arrangement or
in lieu of any standard arrangement. It is anticipated that upon the completion
of the Arrangement each outside director of ATSI-Delaware will receive $1,000
per meeting attended.
67
<PAGE>
Executive Compensation
Summary Compensation Table. The following table sets forth certain
information concerning compensation earned during the Company's last three
fiscal years by the Company's Chief Executive Officer (the "Named Executive
Officer"). No executive officer of the Company received in excess of $100,000 in
total annual salary and bonus in fiscal 1997. Although the executive officers of
ATSI-Delaware have been appointed, no compensation was paid to any such
executive officer in fiscal 1997 since ATSI-Delaware was formed for the purpose
of effecting the Arrangement.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
-----------------------------------------------
Annual Compensation Awards Payouts
($ except as indicated)
---------------------------------- ------------------------ ---------------------
Other
Annual Restricted Securities All Other
Name and Compen- Stock Underlying LTIP Compen-
Principal Fiscal Bonus sation Award(s) Options/ Payouts sation
Position Year Salary ($) ($) ($)(1) ($) SARs(#) ($) ($)
-------- ---- ---------- ------- ---------- ------- ------- ------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arthur L. Smith(2)............. 1997 91,538 - - - 800,000 - -
President and Chief 1996 96,000 - - - - - -
Operating Officer 1995 61,813 - - - - - -
</TABLE>
- -----------
(1) Mr. Smith received personal benefits in addition to salary; however, the
Company has concluded that the aggregate amount of such personal benefits
do not exceed the lesser of $50,000 or 10% of Mr. Smith's annual salary and
bonus.
(2) Also serves as President and Chief Executive Officer of ATSI-Texas, the
Company's principal operating subsidiary. Mr. Smith's compensation is paid
by ATSI-Texas.
Employment Agreements
Effective January 1, 1997, each of Messrs. Smith, Saathoff, Clement and
Waller, and effective February 4, 1997, Mr. Poole, entered into employment
agreements with ATSI-Texas, each for a period of three years (with automatic
one-year extensions ) unless earlier terminated in accordance with the terms of
the respective agreements. The annual base salary under such agreements for each
of Messrs. Smith, Saathoff, Clement , Waller and Poole may not be less than
$100,000, $95,000, $92,000, $92,000 and $92,000, respectively, per annum, and is
subject to increase within the discretion of the Board. In addition, each of
Messrs. Smith, Saathoff, Clement , Waller and Poole is eligible to receive a
bonus in such amount as may be determined by the Board of Directors from time to
time. Bonuses may not exceed 50% of the executive's base salary in any fiscal
year.
Pursuant to each of Messrs. Smith's, Saathoff's, Clement's , Waller's and
Poole's employment agreement, ATSI-Texas has agreed to various payment
obligations in the event of termination due to death, disability, without cause
or for good reason.
68
<PAGE>
Each of the employment agreements also restricts each executive from
various competing and other potentially damaging activities for specified
periods of time after termination of employment.
Additionally, pursuant to and on the date each of Messrs. Smith's,
Saathoff's, Clement's, Waller's and Poole's employment agreement was entered
into, the Company granted to them, under the Company's 1997 Stock Option Plan,
nonqualified options to purchase 800,000, 900,000, 900,000, 425,000 and 300,000
shares, respectively, of the Company's Common Stock, at an exercise price of
U.S. $.58 per share, representing the fair market value of a share of Common
Stock on the date of grant. Excluding Mr. Poole's option which becomes
exercisable in three equal annual installments commencing on February 4, 1998,
as of October 31, 1997 from one-quarter to one-half of each of the remaining
options were exercisable with the balance becoming exercisable in three equal
annual installments commencing on January 1, 1998. Upon the occurrence of a
change in control, as defined in the respective governing option agreements, the
exercisability of all such options, to the extent unexercisable, will be
accelerated.
1997 Option Plan
The American TeleSource International Inc. 1997 Stock Option Plan (the
"1997 Option Plan") was adopted in February 1997 by the Board of Directors of
the Company and approved in May 1997 by the Company's shareholders.
69
<PAGE>
The 1997 Option Plan terminated on February 10, 1998. No further options
will be granted under the 1997 Option Plan. All options outstanding under the
1997 Option Plan on the date of termination will remain outstanding under the
Plan in accordance with their respective terms and conditions.
As of March 2, 1998, options for 4,882,000 shares were outstanding under
the 1997 Option Plan at a weighted average exercise price of $.61 and Options
for 2,566,334 shares were exercisable. As of January 30, 1998, 115,000 options
had been exercised.
Stock Option Grant Table. The following table sets forth certain
information concerning options granted to the Named Executive Officer during the
Company's fiscal year ended July 31, 1997.
Stock Option Grant Table
<TABLE>
<CAPTION>
Potential
Realizable
Value of
Assumed
Individual Grants Annual Rates
------------------------------------------------------------------ of
Number of Percent of Stock Price
Securities Total Options Exercise Appreciation for
Underlying Granted to Price Per Option Term
Options Employees in Share Expiration ($)(1)
Name Granted Fiscal Year ($) Date 5% 10%
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Arthur L. Smith 800,000(2) 17.29% $0.58 February 10, 2007 $291,807 $739,497
</TABLE>
- ---------------
(1) The 5% and 10% assumed annual compound rates of stock appreciation are
mandated by the rules of the Commission and do not represent the Company's
estimate or projection of future Common Stock prices. The actual value
realized may be greater or less than the potential realizable value set
forth in the table.
(2) One-half of such options are presently exercisable. The remaining options
become exercisable in three equal annual installments commencing on January
1, 1998. The exercise price represented the market price of a Common Share
on February 10, 1997, the effective date of grant.
Fiscal Year End Option Value Table. The following table sets forth certain
information concerning the value of unexercised options held by the Named
Executive Officer at July 31, 1997 (no options were exercised by the Named
Executive Officer during the fiscal year ended July 31, 1997).
Fiscal Year End Option Table
Number of Securities Underlying Value of Unexercised In-the-
Unexercised Money
Options at Fiscal Year End(#) Options at Fiscal Year End($)
70
<PAGE>
<TABLE>
<CAPTION>
Name Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
Arthur L. Smith 400,000 400,000 $596,000 $596,000
</TABLE>
- ---------------
(1) Values stated are based upon the U.S. $2.07 closing price per share on July
31, 1997, as reported by the Canadian Dealing Network, and represent the
difference between the fair market value of the shares underlying the
options and the exercise price of the options at fiscal year end.
Compensation Committee Interlocks and Insider Participation
During its fiscal year ended July 31, 1997, the Company had no compensation
committee. During fiscal 1997, Messrs. Smith, Nye and Moses, representing all of
the Company's directors and the Company's President, Chief Operating Officer and
Chief Executive Officer, participated in deliberations of the Board of Directors
concerning executive officer compensation. The Company believes that the
abilities of the foregoing members of the Board of Directors to make fair
compensation decisions have not been compromised by the relationships referred
to above.
It is contemplated that upon completion of the Arrangement, the Board of
Directors of ATSI-Delaware will establish a compensation committee, and appoint
Messrs. Nye and Benkendorf to serve on such committee.
Exculpatory Charter Provision
ATSI-Delaware has included in its Delaware Certificate of Incorporation
provisions to eliminate the personal liability of its directors for monetary
damages resulting from breaches of their fiduciary duty; provided, however, that
such provisions do not eliminate liability for breaches of the duty of loyalty;
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, violations under Section 174 of the DGCL concerning
the unlawful payment of dividends or stock redemptions or repurchases or for any
transactions from which the director derived an improper personal benefit. The
ATSI Articles of Amalgamation contain no similar provision.
Additionally, ATSI-Delaware has included in its Delaware Certificate of
Incorporation provisions to indemnify each director and officer of such company
who may be indemnified, to the fullest extent permitted by Section 145 of the
Delaware General Corporation Law ("Section 145"), as it may be amended from time
to time, in each and every situation where such company is obligated to make
such indemnification pursuant to Section 145. In addition, ATSI-Delaware will
indemnify each of its directors and officers in each and every situation where,
under Section 145, such company is not obligated, but is permitted or empowered,
to make such indemnification. ATSI-Delaware may, in the sole discretion of the
Board, indemnify any other person who may be indemnified pursuant to Section 145
to the extent the Board deems advisable, as permitted by such section. ATSI
- -Delaware will promptly make or cause to be made any determination which Section
145 requires. ATSI-Delaware believes that these provisions are necessary to
attract and retain qualified persons to serve as directors and officers. The
ATSI Articles of Amalgamation contain no similar provision.
71
<PAGE>
ATSI-Delaware intends to enter into indemnification agreements with each of
its directors and its executive officers. The indemnification agreements will
provide that the company shall indemnify these individuals against certain
liabilities (including settlements) and expenses actually and reasonably
incurred by them in connection with any threatened or pending legal action,
proceeding or investigation (other than actions brought by or in the right of
the company) to which any of them is, or is threatened to be, made a party by
reason of their status as a director, officer or agent of ATSI-Delaware,
provided that such individual acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of
ATSI-Delaware, and with respect to any criminal proceedings, had no reasonable
cause to believe his or her conduct was unlawful. With respect to any action
brought by or in the right of ATSI-Delaware, such individuals may also be
indemnified, to the extent not prohibited by applicable laws or as determined by
a court of competent jurisdiction, against expenses actually and reasonably
incurred by them in connection with such action if they acted in good faith and
in a manner they reasonably believed to be in or not opposed to the best
interests of the company. The agreements also require indemnification of such
individuals for all reasonable expenses incurred in connection with the
successful defense of any action or claim and provide for partial
indemnification in the case of any partially successful defense.
72
<PAGE>
CERTAIN TRANSACTIONS
In January 1997, ATSI-Canada entered into an agreement with KAWA
Consultores, S.A. de C.V., an international consulting firm of which
ATSI-Delaware director Carlos K. Kauachi is president, for international
business development support. The agreement calls for Mr. Kauachi to be
compensated $8,000 per month for a period of twelve months.
73
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Shares as of February 18, 1998, by (i) each
person known by the Company to beneficially own more than 5% of such shares,
(ii) each current director of ATSI-Canada and ATSI-Delaware, (iii) the Named
Executive Officer, and (iv) all directors and executive officers as a
group.
<TABLE>
<CAPTION>
Shares
Beneficially
Name(1) Owned(1) Percent of Class
- ---- -------------------- --------------------
<S> <C> <C>
Arthur L. Smith(2)(3)(4) 3,090,282 7.20%
Murray R. Nye(2)(3)(5) 415,500 *
John R. Moses(2) 100,000 *
Tomas Revesz(3) - *
Richard C. Benkendorf(3) 5,000 *
Carlos K. Kauachi(3) 32,480 *
Four Holdings Ltd. 2,870,980 6.45%
P.O. Box 150
Design House
Leeward Highway
Providenciales
Turks and Caicos Islands
British West Indies
All directors and executive officers as a group
(10 persons) (6) 5,243,063 11.77%
</TABLE>
- -----------------------
* Less than 1%
(1) To the knowledge of the Company, each person named in the table has sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by him. Shares of Common Stock that are not
outstanding but that may be acquired by a person upon exercise of options
or warrants within 60 are deemed outstanding for the purpose of computing
the percentage of outstanding shares beneficially owned by such person but
are not deemed outstanding for the purpose of computing the percentage of
outstanding shares beneficially owned by any other person.
(2) Director of ATSI-Canada.
(3) Director of ATSI-Delaware.
(4) Includes 533,333 shares issuable upon exercise of presently exercisable
options.
(5) Includes 150,000 shares issuable upon exercise of presently exercisable
options.
(6) Includes 2,141,667 shares issuable upon exercise of presently exercisable
options.
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<PAGE>
DESCRIPTION OF ATSI-DELAWARE SECURITIES
On the effective date of the Arrangement, the shareholders of ATSI-Canada
will become stockholders of ATSI-Delaware. The following summary description of
the securities of ATSI-Delaware does not purport to be complete and is
qualified in its entirety by reference to the ATSI-Delaware Certificate and
Bylaws, copies of which are attached as Exhibit G and Exhibit H, respectively.
Currently, the authorized capital stock of ATSI-Canada consists of an unlimited
number of Common Shares, no par value per share, and an unlimited number of
Preferred Shares, no par value per share.
General
The authorized capital stock of ATSI-Delaware consists of 100,000,000
shares of Common Stock, $0.001 par value per share, 42,386,577 of which would be
issued and outstanding immediately following the Arrangement (giving pro forma
effect to the Arrangement as of February 18, 1998), and 10,000,000 shares of
Preferred Stock, par value $0.001 per share, none of which will be issued and
outstanding immediately following the Arrangement.
Common Stock
Subject to the rights of holders of Preferred Stock then outstanding,
holders of Common Stock are entitled to receive such dividends as may from time
to time be declared by the Board of Directors of ATSI-Delaware. Holders of
Common Stock are entitled to one vote per share on all matters on which the
holders of Common Stock are entitled to vote. Because holders of Common Stock do
not have cumulative voting rights, the holders of a majority of the shares of
Common Stock represented at a meeting can select all of the directors. In
addition, super majority voting requirements apply in respect of certain
stockholder actions.
Holders of Common Stock have no preemptive rights to subscribe for any
additional securities that ATSI-Delaware may issue and there are no redemption
provisions or sinking fund provisions applicable to the Common Stock, nor is the
Common Stock subject to calls or assessments by ATSI-Delaware. All shares of
Common Stock to be outstanding upon completion of the Arrangement will be
legally issued, fully paid and nonassessable. Upon the liquidation, dissolution
or winding up of ATSI -Delaware, holders of the shares of Common Stock are
entitled to share equally, share-for-share, in the assets available for
distribution after payment to all creditors of ATSI-Delaware, subject to the
rights, if any, of the holders of any outstanding shares of Preferred Stock.
Preferred Stock
Pursuant to the ATSI-Delaware Certificate, the Board of Directors of ATSI
- -Delaware is authorized, subject to any limitations prescribed by law, to
provide for the issuance of shares of Preferred Stock from time to time in one
or more series and to establish the number of shares to be included in each such
series and to fix the designation, powers, preferences and relative,
participating, optional and other special rights of the shares of each such
series and any qualifications, limitations or restrictions thereof. Because the
Board of Directors has such power to establish the powers, preferences and
rights of each series, it may afford the holders of Preferred Stock preferences,
powers and rights (including voting rights) senior to the rights of the holders
of Common Stock. The issuance of shares of Preferred Stock, or the issuance of
rights to purchase such shares, could be used to discourage an unsolicited
acquisition proposal.
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<PAGE>
Warrants
The following table describes certain terms of ATSI-Canada Warrants
outstanding at February 18, 1998. Upon the effective date of the Arrangement,
each ATSI-Canada warrant will under its terms and as a result of the Arrangement
represent a warrant to acquire ATSI-Delaware Common Stock upon the same terms
and conditions. Any Common Shares issued to holders of presently exercisable
ATSI-Canada warrants pursuant to the exercise of such warrants prior to the
effective date of the Arrangement will be registered pursuant to this
Prospectus. Any shares of Common Stock issued to holders of ATSI-Delaware
warrants pursuant to the exercise of such warrants after the effective date of
the Arrangement will not be registered unless this Prospectus or another
prospectus is then in effect with respect to such shares of Common Stock. ATSI-
Delaware currently intends to maintain the effectiveness of this Prospectus
under the Securities Act for six months or such longer period as ATSI-Delaware
deems advisable, in its sole discretion, although there can be no assurance that
this Prospectus will be maintained by ATSI-Delaware for any period of time. So
long as this Prospectus is effective under the Securities Act, holders of
warrants outstanding as of the date of this Prospectus will upon exercise of
their warrants receive registered shares of Common Stock which may be freely
sold in accordance with United States federal securities laws provided such
shares of Common Stock are registered or otherwise exempt from registration
under applicable U.S. blue sky and Canadian securities laws and provided that an
active market exists for ATSI-Delaware's Common Stock. See "Risk Factors--
Absence of Efficient Public Market; Possible Volatility of Stock" and "Risk
Factors --State Securities Laws." To the extent that a prospectus, covering the
shares of Common Stock issuable upon exercise of the warrants outstanding as of
the date of this Proxy Statement/Prospectus, is not in effect under the
Securities Act upon exercise of any such warrant, then the shares of Common
Stock received upon exercise will not be registered under federal securities
laws and may not be sold unless registered or otherwise exempt from registration
pursuant to federal and applicable state and Canadian securities laws.
-------------------
<TABLE>
<CAPTION>
Number of Exercise
Underlying Shares Price($) Expiration Date
--------------------- -------------- -----------------------
<S> <C> <C>
40,000 $0.65 February 27, 1998
153,088 $0.75 June 1, 1998
267,210 $1.00 November 14, 1998
518,815 $0.85 November 21, 1998
47,000 $0.85 November 21, 1998
970,290 $1.00 December 15, 1998
223,385 $0.85 January 6, 1999
1,592,500 $0.70 April 11, 1999
30,000 $0.50 December 31, 1999
558,824 $0.85 February 7, 2000
1,050,000 $0.70 February 28, 2000
2,605,196 $0.27 February 17, 2000
1,060,400 $0.85 July 31, 1999
200,000 $1.45 July 31, 1999
200,000 $1.45 July 31, 1999
192,254 $0.75 April 7, 2000
100,000 $2.00 May 30, 1999
367,400 $0.85 January 1, 2000
50,000 $2.00 June 20, 2000
250,000 $3.56 October 14, 2000
Total 10,476,362
</TABLE>
76
<PAGE>
Provisions Having Possible Anti-Takeover Effects
The Certificate of Incorporation (the "Certificate") and the Bylaws of ATSI
- -Delaware contain provisions that could have an anti-takeover effect. These
provisions are intended to enhance the likelihood of continuity and stability in
the composition of the Board of Directors and in the policies formulated by the
Board of Directors and to discourage certain types of transactions which may
involve an actual or threatened change of control of ATSI-Delaware. The
provisions are designed to reduce the vulnerability of ATSI-Delaware to an
unsolicited proposal for a takeover of ATSI-Delaware that does not contemplate
the acquisition of all of its outstanding shares or an unsolicited proposal for
the restructuring or sale of all or part of ATSI-Delaware. The provisions are
also intended to discourage certain tactics that may be used in proxy contests.
Set forth below is a description of such provisions in the Certificate and the
Bylaws. The Board of Directors has no current plan to formulate or effect
additional measures that could have an anti-takeover effect.
Pursuant to the Certificate, directors, other than those, if any, elected
by the holders of Preferred Stock, can be removed from office by the affirmative
vote of the holders of 66 2/3% of the voting power of the then outstanding
shares of capital stock entitled to vote thereon ("Voting Stock"). Vacancies on
the Board of Directors may be filled by the remaining directors without
stockholder approval.
The Certificate provides for the Board of Directors to be divided into
three classes, with staggered three-year terms. As a result, only one class of
directors will be elected at each annual meeting of stockholders of ATSI
- -Delaware, with the other classes continuing for the remainder of their
respective three-year term. The classification of the Board of Directors makes
it more difficult to replace the Board of Directors as well as for another party
to obtain control of ATSI-Delaware by replacing the Board of Directors. Since
the Board of Directors has the power to retain and discharge officers of ATSI
- -Delaware, these provisions could also make it more difficult for existing
stockholders or another party to effect a change in management.
ATSI-Delaware is subject to the provisions of Section 203 of the DGCL. In
general, Section 203 prohibits a publicly-held Delaware corporation from
engaging in a "business transaction" with an "interested stockholder" for a
period of three years after the date that the person became an interested
stockholder unless (with certain exceptions) the business combination or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. A "business combination" generally includes, without
limitation, a merger, assets or stock sale, or a transaction resulting in a
financial benefit to the interested stockholder. An "interested stockholder"
generally is a person who, together with affiliates and associates, owns (or
within three years prior, did own) 15% or more of a corporation's outstanding
voting stock.
The Certificate provides that except as otherwise provided for with respect
to the rights of holders of Preferred Stock, no action that is required or
permitted to be taken by the stockholders of ATSI-Delaware at any annual or
special meeting of the stockholders may be effected by written consent of the
stockholders in lieu of a meeting of stockholders, unless the actions to be
effected by written consent of the stockholders and the taking of such action by
such written consent has been expressly approved in advance by the Board of
Directors. This provision makes it difficult for stockholders to initiate or
effect an action by written consent, and thereby effect an action opposed by the
Board of Directors. The Certificate and Bylaws also provide that special
meetings of stockholders may be called only by the President or a majority of
the Board of Directors of ATSI-Delaware. In addition, the Bylaws set forth an
advance notice procedure with regard to business to be brought before an annual
meeting of stockholders of ATSI-Delaware.
The Certificate further provides that the Board of Directors, by a majority
vote, may adopt, alter, amend or repeal provisions of the Bylaws. However,
stockholders may only adopt, alter, amend or repeal provisions of
the Bylaws by a vote of 66 2/3% or more of the combined voting power of the then
outstanding Voting Stock.
77
<PAGE>
In addition, the Certificate provides that whenever any vote of Voting Stock is
required by law to amend, alter, repeal or rescind ("Change") any provision
thereof, then, in addition to any affirmative vote required by law the
affirmative vote of 662/3% or more of the combined voting power of the then
outstanding shares of Voting Stock is required to Change certain provisions of
the Certificate, including the provisions referred to above relating to
interested stockholder transactions, the filling of vacancies on the Board of
Directors, the removal of directors, the limitations on stockholder action by
written consent, the calling of special meetings by stockholders and the
approval of amendments to the ATSI-Delaware's Bylaws.
Pursuant to the Certificate, the Board of Directors is also authorized to
issue shares of "blank check" preferred stock that may have the effect of
discouraging an unsolicited acquisition proposal. See "--Preferred Stock."
Canadian Dealing Network
The Company's Common Shares are currently traded on the Canadian Dealing
Network under the symbol ATIL.CDN and are traded in the over-the-counter
market on the NASD Electronic Bulletin Board under the symbol AMTI. ATSI-Canada
expects that the ATSI-Delaware Common Stock will cease to be traded on the
Canadian Dealing Network upon or before the effectiveness of the Arrangement.
Exchange Agent, Transfer Agent and Registrar
The Exchange Agent for exchange of stock certificates following the Merger
will be CIBC Mellon Trust Company, at its principal offices at 393 University
Avenue, Fifth Floor, Toronto, Ontario, M5G 2M7. The Transfer Agent and Registrar
for the Common Shares is CIBC Mellon Trust Company.
Dividend Policy
The Company has never paid cash dividends on its Common Shares. The
Company's current policy is to retain earnings, if any, to finance the
anticipated growth of its business. Any further determination as to the
payment of dividends will be made at the discretion of the Board of Directors
and will depend upon the Company's operating results, financial condition,
capital requirements, general business conditions and such other factors as the
Board of Directors deems relevant. The Company may procure credit from third
parties for additional capital for expansion and business development
activities. It is likely that any credit facility procured by the Company may
limit or restrict the Company's ability to pay cash dividends on the Common
Shares under certain circumstances.
Registration Rights
In connection with a private placement in July 1997 of 922,558 Common
Shares and warrants to purchase 200,000 Common Shares, the Company granted to
the purchaser certain demand and piggy-back registration rights to register both
the shares issued and the shares issuable upon exercise of the warrants for
resale under the 1933 Act. In addition, the Company has granted a warrant holder
piggy-back registration rights with respect to the 30,000 Common Shares issuable
upon exercise of such holder's warrants. The Company is registering all such
shares pursuant to this Proxy Statement/Prospectus.
78
<PAGE>
CANADIAN AND UNITED STATES INCOME TAX CONSIDERATIONS
The Arrangement will result in certain income tax consequences in both the
United States and Canada. Certain tax consequences of the Arrangement are
summarized below.
THE FOLLOWING SUMMARY IS OF A GENERAL NATURE ONLY AND IT IS NOT INTENDED TO BE,
NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY SHAREHOLDER OR
HOLDER OF WARRANTS OF THE COMPANY. ACCORDINGLY, SHAREHOLDERS AND HOLDERS OF
WARRANTS OF THE COMPANY SHOULD CONSULT THEIR OWN TAX ADVISORS FOR ADVICE WITH
RESPECT TO THE FEDERAL INCOME TAX CONSEQUENCES TO THEM OF THE PROPOSED
ARRANGEMENT.
United States Federal Income Tax Consequences
General
The following is a summary of the material United States federal income tax
consequences of the Arrangement and the material United States federal income
and estate tax consequences to Non-U.S. Holders (as defined below) of holding
and disposing of the Common Stock (as defined below) of ATSI-Delaware.
The summary is based on current law, which is subject to change (possibly
retroactively). The summary does not discuss all aspects of United States
taxation that may be relevant to security holders in light of their personal
investment circumstances or to certain security holders subject to special
treatment under United States tax laws (such as securities dealers, tax-exempt
entities (including qualified retirement plans) and insurance companies) and
does not discuss the tax consequences under state, local, or foreign laws. In
particular, this summary does not discuss the tax consequences to holders of
Warrants who have received their Warrants in connection with services rendered
to the Company. Security holders are urged to consult their own tax advisors
regarding the federal, state, local, and other tax considerations of
participating in the Arrangement and of holding and disposing of shares of ATSI
- -Delaware and Warrants.
The term "U.S. Holder" means a beneficial owner of the stock of the Company
that is for United States federal income tax purposes (i) a citizen or resident
of the United States, (ii) a corporation or partnership created or organized in
the United States or under the laws of the United States or of any State
thereof, other than a partnership that is not treated as a U.S. person under any
applicable Treasury Regulations, or (iii) an estate or trust whose income is
includable in gross income for United States federal income tax purposes
regardless of its source. For taxable years beginning after December 31, 1996, a
trust will be a U.S. person only if a U.S. court is able to exercise primary
supervision over the trust's administration and one or more U.S. persons have
authority to control all substantial decisions of the trust. Notwithstanding the
preceding sentence, to the extent provided in Treasury Regulations, certain
trusts in existence on August 20, 1996, and treated as U.S. persons prior to
such date, which elect to continue to be treated as U.S. persons, will also be
considered U.S. Holders. The term "Non-U.S. Holder" means a beneficial owner of
the stock of the Company that is not a U.S. Holder.
Akin, Gump, Strauss, Hauer & Feld, L.L.P. ("Akin, Gump") has rendered an
opinion to the Company regarding certain United States federal income tax
consequences of the Arrangement which opinion is described below. That opinion
is based upon laws, regulations, rulings and judicial decisions as they now
exist. These authorities are all subject to change and such change may be made
with retroactive effect. Akin, Gump cannot give any assurance that, after any
such change, its opinion would not be different, and does not undertake any
responsibility to update or supplement its opinion. Moreover, Akin, Gump's
opinion does not address the tax consequences of the Arrangement under state,
local or foreign tax law.
Tax Treatment of the Arrangement
Neither the Company nor ATSI-Delaware has requested a ruling from the
Internal Revenue Service in connection with the Arrangement. The Company and
ATSI-Delaware have provided Akin, Gump with the facts, representations and
assumptions on which Akin, Gump has relied in rendering its opinion as to
certain United States federal income tax consequences, which information is
consistent with the state of facts the Company and ATSI-Delaware believe will be
existing on the effective date of the Arrangement (determined in accordance with
the Arrangement Agreement and certain related documents). Based on such facts
representations and assumptions, Akin, Gump, has opined that the Arrangement
should qualify as a reorganization under Section 368(a)(1)(B) of the Code or
qualify for nonrecognition treatment under Section 351 of the Code. Code Section
368(a)(1)(B) generally provides that the acquisition by one corporation of stock
of another corporation, in exchange
79
<PAGE>
solely for all or part of the acquiring corporation's voting stock, will be a
nontaxable transaction if, immediately after the acquisition, the acquiring
corporation has control of such other corporation (whether or not such acquiring
corporation had control immediately before the acquisition). For this purpose,
control means the ownership of stock possessing at least 80% of the total
combined voting power of all classes of stock entitled to vote and at least 80%
of the total number of shares of all other classes of stock of the acquired
corporation.
Qualification of the Arrangement as a reorganization under Code Section
368(a)(1)(B) also depends on compliance with certain technical requirements of
federal income tax law, including, among others, the requirements that
ATSI-Delaware continue the business enterprise of ATSI-Canada, the requirement
that a continuity of proprietary interest be maintained by the shareholders of
ATSI-Canada, and the requirement that a valid business purpose exist for the
transaction.
Even if the Arrangement does not qualify as a reorganization under Section
368(a)(1)(B) of the Code, the Arrangement should qualify for nonrecognition
treatment under Section 351 of the Code. Under such section, gain or loss is not
recognized if property is transferred to a corporation by one or more persons
solely in exchange for stock of the acquiring corporation if, immediately after
the exchange, such person or persons are in control of the corporation. For this
purpose, control is also defined as the ownership of stock possessing at least
80% of the total combined voting power of all classes of stock entitled to vote
and at least 80% of the total number of shares of all other classes of stock of
the corporation. An additional requirement is that there be a business purpose
for the transaction. With respect to the requirement that persons be in control
of the acquiring corporation stock immediately after the exchange, generally
such persons must have no plan or intent at the time of the exchange to sell or
otherwise dispose of the stock of the acquiring corporation received in the
exchange.
ATSI-Delaware will not recognize gain or loss on the transfer of its shares
of Common Stock to ATSI-Canada shareholders in exchange for their Common Shares.
In addition, the Company will not recognize gain or loss in connection with the
Arrangement.
If any of the requirements under Section 368(a)(1)(B) of the Code,
including the continuity of business enterprise requirement, the continuity of
proprietary interest requirement, and any other requirement for reorganization
treatment under the Code, is not satisfied, and if any of the requirements under
Section 351 are not satisfied, the Arrangement will be treated as a taxable
transaction and material adverse tax consequences will result to the
shareholders of the Company.
Tax Consequences to Company Shareholders
General Consequences Under Sections 368 and 351 of the Code. Assuming the
Arrangement is treated as a reorganization within the meaning of Section 368 of
the Code, or qualifies as an exchange of property for ATSI-Delaware Common Stock
under Section 351 of the Code, the following federal income tax consequences
will apply to the shareholders of the Company, subject to the rules provided in
"Tax Consequences to Company Shareholders - Inbound Transfer Rules":
(i) No gain or loss will be recognized by the holders of Common Shares
with respect to the transfer to them of ATSI-Delaware Common Stock in
exchange for their Common Shares pursuant to the Arrangement.
(ii) The tax basis of ATSI-Delaware Common Stock received by each Company
shareholder will be the same as the tax basis of the Common Shares
exchanged therefor.
(iii) The holding period of the ATSI-Delaware Common Stock received by each
shareholder of ATSI-Canada will include the period for which ATSI-Canada
Common Shares were held, provided that such Common Shares were held
as a capital asset at the effective date of the Arrangement.
80
<PAGE>
(iv) A holder of ATSI-Canada Common Shares who exercises dissenters' rights
with respect to such shares and receives payment for such shares in cash
generally will recognize capital gain or loss measured by the difference
between the amount of cash received and such holder's basis in the
dissenting shares, provided that such shares are held as a capital asset at
the effective date of the Arrangement. However, different tax consequences,
including treatment of the payment as the equivalent of a dividend
distribution or the treatment of all or a portion of any such gain as
ordinary income, could apply depending upon the shareholder's particular
circumstances, such as whether the shareholder exercises dissenters' rights
with respect to all or only a portion of the shareholder's ATSI-Canada
Common Shares, whether the shareholder is deemed under applicable
attribution rules to own Common Shares held by related parties and whether
any of the shares with respect to which the shareholder exercises
dissenters' rights were acquired pursuant to an incentive stock option
within the meaning of Section 422 of the Code. Accordingly, shareholders
should consult their tax advisors with respect to the income tax
consequences of exercising dissenters' rights under their particular
circumstances.
Characterization of Arrangement as Inversion Transaction. In Notice 94-43,
1994-2 C.B. 563, the Internal Revenue Service announced its intention to issue
Treasury Regulations pursuant to which "inversion transactions" would in certain
circumstances be denied nonrecognition treatment. An "inversion transaction" is
an arrangement by which the positions of related corporations are wholly or
partly inverted or reversed. The stated concern of the IRS is the improper
creation of losses or the avoidance of income or gain in circumvention of the
repeal of the General Utilities doctrine or similar applicable laws. In
particular, the IRS' concern in Notice 94-43 is focused on whether or not, as a
result of the issuance or transfer of stock (or stock rights), "there would be a
reduction in the amount a third party would pay for the stock of one or more
corporations involved in an inversion transaction." Any Treasury Regulations
promulgated with respect to inversion transactions are to apply to any such
dilutive transaction occurring after September 22, 1994, and such Regulations
are to provide for (i) the recognition of gain or loss at the time of such
transaction or (ii) the reduction of basis (or increase in gain on the sale or
other disposition) of stock on one or more corporations involved in such
inversion transaction. In Notice 96-6, 1996-1 C.B. 358, the IRS announced that
it would not issue guidance at this time regarding such inversion transactions.
Because the shareholders of ATSI-Delaware after the Arrangement will be the same
as the shareholders of ATSI-Canada prior to the Arrangement, and because the
fair market value (without regard to certain minority discounts or control
premiums arising solely as a result of the inversion transaction) of the Common
Stock of ATSI-Delaware and Common Shares of ATSI-Canada will not be diluted as a
result of the Arrangement, Akin, Gump does not believe that the Arrangement
will constitute a dilutive inversion transaction.
Inbound Transfer Rules. Pursuant to Temporary Treasury regulation Section
7.367(b)-7(c), exchanging U.S. Holders in a reorganization qualifying under
Section 368(a)(1)(B) of the Code who have held 10%, directly or by
attribution, or more of the total voting power of all classes of stock of the
Company (if at such time the Company was a controlled foreign corporation)
entitled to vote at any time during the five-year period ending on the effective
date of the Arrangement would include in income (as dividend income) their pro
rata portion of the Company's earnings and profits attributable to the stock
exchanged to the extent that the fair market value of the stock exchanged
exceeds its basis. The basis of the Common Stock received by certain foreign
corporations treated as U.S. Holders pursuant to Temporary Treasury regulation
Section 7.367(b)-2(b) would then be increased by such amount. However,
management has determined that the Company has no earnings and profits for this
purpose.
Each exchanging U.S. Holder must file with his District Director of the
Internal Revenue Service on or before the last day for filing his federal income
tax return (determined by taking into account any extensions of time therefor)
for the year in which the Arrangement is consummated, the notice required by
Temporary Treasury regulation Section 7.367(b)-1(c). Any such U.S. Holder who
fails to file the necessary notice and
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who fails to establish reasonable cause for such failure may be denied the
benefit of the federal income tax consequences specified above.
If the Arrangement does not qualify as a reorganization under Section
368(a)(1)(B) of the Code, but instead qualifies under Section 351 of the Code,
then an exchanging shareholder will not recognize gain, if any, pursuant to the
Treasury regulations under Section 367(b) of the Code and will not be required
to file the notice required when Section 367(b) is applicable.
Consequences of the Arrangement to Non-U.S. Holders
A Non-U.S. Holder who dissents and receives cash in exchange of his Common
Shares will recognize gain or loss in the manner described above for U.S.
Holders. A Non-U.S. Holder will not be subject to United States federal income
tax with respect to capital gains unless (i) such gain is effectively connected
with the conduct of a trade or business within the United States by such holder,
(ii) such holder is an individual who has been present in the United States for
at least 183 days during the taxable year of the disposition, the stock is a
capital asset and either (a) such individual's "tax home" for federal income tax
purposes is in the United States or (b) the gain is attributable to an office or
other fixed place of business maintained in the United States by such
individual, or (iii) the Company is or has been a "United States real property
holding corporation" for federal income tax purposes and the Non-U.S. Holder
owned directly or pursuant to certain attribution rules at any time during the
five-year period ending on the date of disposition more than 5% of the Common
Shares (assuming that Common Shares are regularly traded on an established
securities market). The Company believes that it is not presently a United
States real property holding corporation.
Consequences of the Arrangement on Holders of Warrants
Although the matter is not free from doubt, for United States federal
income tax purposes, the Arrangement should not result in the recognition of
gain or loss under Section 1001 of the Code to the holders of Warrants. The IRS
or the courts could disagree with this characterization of the results to
Warrant holders and instead treat the transaction in connection with the
Warrants as a taxable exchange. In such event, each U.S. Holder of Warrants will
recognize gain or loss on the exchange equal to the difference between the fair
market value of its Warrants after the Arrangement and the adjusted tax basis of
its Warrants prior to the Arrangement. Any such gain or loss recognized by a
holder of Warrants generally will be long-term capital gain or loss if the U.S.
holder has held its Warrants for more than one year at the time of disposition.
The distinction between capital gain or loss and ordinary income or loss is
important for purposes of the limitations on a U.S. holder's ability to offset
capital losses against ordinary income and for purposes of determining whether
individuals may be entitled to a preferential tax rate on long-term capital
gains. In particular, the Taxpayer Relief Act of 1997 further reduces tax rates
on capital gains recognized by individuals in respect of assets held for more
than 18 months. U.S. Holders are advised to consult their own tax advisors as to
the consequences of the Taxpayer Relief Act of 1997 in their particular
circumstances. Non-U.S. Holders of Warrants will not be subject to United States
federal income tax with respect to capital gains (resulting from the
Arrangement) unless (i) such gain is effectively connected with the conduct of a
trade or business within the United States by such holder, (ii) such holder is
an individual who has been present in the United States for at least 183 days
during the taxable year of the disposition, the Warrants are capital assets and
either (a) such individual's "tax home" for federal income tax purposes is in
the United States or (b) the gain is attributable to an office or other fixed
place of business maintained in the United States by such individual, or (iii)
the Company is or has been a "United States real property holding corporation"
for federal income tax purposes and the Non-U.S. Holder of Warrants is treated
as owning directly or indirectly or pursuant to certain attribution rules at any
time during the five-year period ending on the date of disposition more than 5%
of the Common Shares (assuming that the Common Shares are regularly traded on an
established securities market). The Company believes that it is not presently a
United States real property holding corporation.
Each holder of Warrants is urged to consult its own tax advisor regarding
the tax consequences of the Arrangement on its particular circumstances."
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Consequences to Non-U.S. Holders of Owning and Disposing of ATSI-Delaware
Common Stock
Dividends. Generally, dividends paid to a Non-U.S. Holder of Common Stock
will be subject to United States withholding tax at the rate of 30% of the
amount of the dividend, or at a lower applicable treaty rate. Under the income
tax treaty between the United States and Canada, the withholding tax rate on
dividends paid to most shareholders who are resident in Canada will be 15%. In
the case of Canadian corporations that beneficially own 10% or more of the
voting stock of ATSI-Delaware, such withholding rate will be 5%. Under current
Treasury regulations, dividends paid to an address outside the United States are
presumed to be paid to a resident of such country for purposes of determining
the applicability of a treaty rate. Under proposed Treasury regulations not
currently in effect, however, a holder of Common Stock who wished to claim the
benefit of an applicable treaty rate would be required to file certain forms
with the Company or its agent. Such Forms would contain the holder's name and
address and other pertinent information certified by such holder under penalties
of perjury.
If, however, the dividend is effectively connected with the conduct of a
trade or business within the United States by a Non-U.S. Holder, the dividend
will be subject to regular United States federal income tax, which is not
collected by withholding, provided the Non-U.S. Holder files an Internal Revenue
Service Form 4224 with the Company or its agent in accordance with current
Treasury regulations. Moreover, in the case of a Non-U.S. Holder that is a
corporation, a branch profits tax at the rate of 30% (or a lower applicable
treaty rate) may be imposed on such corporation on its earnings (including
dividends) effectively connected with a United States trade or business to the
extent that such earnings are considered to be repatriated away from the United
States trade or business.
Sale of Common Stock. A Non-U.S. Holder will not be subject to United
States federal income tax on any gain recognized upon the sale (or other
disposition) of Common Stock unless (i) such gain is effectively connected with
the conduct of a trade or business within the United States by such holder, (ii)
such holder is an individual who has been present in the United States for at
least 183 days during the taxable year of the disposition, the Common Stock is a
capital asset and either (a) such individual's "tax home" for federal income tax
purposes is in the United States or (b) the gain is attributable to an office or
other fixed place of business maintained in the United States by such
individual, or (iii) the Company is or has been a "United States real property
holding corporation" for federal income tax purposes and the Non-U.S. Holder
owned directly or pursuant to certain attribution rules at any time during the
five-year period ending on the date of disposition more than 5% of the Company's
Common Stock (assuming that Common Stock is regularly traded on an established
securities market). The Company believes that it is not presently a United
States real property holding corporation.
Estate Tax. Common Stock owned (or treated as owned) by an individual who,
at the time of death, is neither a citizen or a domiciliary of the United States
will be includable in his gross estate for United States federal estate tax
purposes and thus may be subject to United States estate tax, unless an
applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding
The Company must report annually to the Internal Revenue Service and to
each shareholder the amount of cash proceeds, if any, paid as a result of the
Arrangement and dividends paid to, and the tax withheld with respect to, each
shareholder. These reporting requirements apply regardless of whether
withholding was reduced by an applicable tax treaty or not required. Copies of
these information returns may also be made available under the provisions of a
specific treaty or agreement with the tax authorities in the country in which a
Non-U.S. Holder resides.
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Shareholders may be subject to backup withholding at the rate of 31% with
respect to cash proceeds, if any, from the Arrangement, gross proceeds from the
sale of the Common Stock, or dividends paid on the Common Stock, unless such
holder (a) is a corporation or comes within certain other exempt categories or
(b) provides a correct taxpayer identification number, certifies as to no loss
of exemption from backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. A shareholder who does not provide
the Company with his correct taxpayer identification number may be subject to
penalties imposed by the Internal Revenue Service. United States backup
withholding tax will generally not apply to payments to a payee at an address
outside the United States unless the payor has knowledge that the payee is a
United States person.
Payment to a Non-U.S. Holder of the proceeds of a sale of Common Stock to
or through a United States office of a broker will be subject to information
reporting and backup withholding unless the holder certifies as to its status as
a Non-U.S. Holder under penalties of perjury or otherwise establishes an
exemption. Payment of the proceeds of a sale of Common Stock to or through a
non-U.S. office of a broker generally will not be subject to backup withholding
or information reporting; however, if such holder is (i) a United States person,
(ii) a "controlled foreign corporation," or (iii) a foreign person that derives
50% or more of its gross income from the conduct of a trade or business in the
United States, such payment will be subject to information reporting (but
currently not backup withholding) unless such broker has documentary evidence in
its records that the holder is a Non-U.S. Holder and certain other conditions
are met or the holder otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules will be credited
against the shareholder's federal income tax liability, if any, or refunded,
provided the required information is furnished to the Internal Revenue Service.
Canadian Federal Income Tax Consequences
The following is a general summary of the principal Canadian federal income
tax consequences under the Income Tax Act (Canada) (the "Canadian Act") and the
Canada-US Tax Convention (the "U.S. Treaty") of the Arrangement and the exercise
of dissent rights as described herein to holders of Common Shares or Warrants of
the Company.
This summary is based upon and takes into account the current provisions of
the U.S. Treaty, the Canadian Act and the current regulations thereunder (the
"Regulations"), all specific proposals to amend the Canadian Act and the
Regulations publicly announced by the Minister of Finance prior to the date
hereof (the "Amendments"), and the Company's understanding of the current
administrative practices published by Revenue Canada ("RCT"). This summary does
not otherwise take into account or anticipate any changes in law, whether by
judicial, governmental or legislative decision or action, nor, except as
specifically noted herein, does it take into account tax laws or consequences of
any province or territory of Canada or any jurisdiction outside Canada.
Moreover, there can be no assurance that the Amendments will be enacted as
proposed or that the Canadian Act, the Regulations thereunder or the
administrative practices of RCT, respectively, will not change, in a manner
which will affect the tax consequences described herein.
This summary is based on the facts and agreements described herein and is
also based on the assurances of management of the Company that no other
transactions have been undertaken or are contemplated that would affect the
matters dealt with herein.
This summary is of a general nature only, is not exhaustive of all
potentially relevant Canadian federal income tax consequences and is not
intended to be, nor should it be construed to be, legal or tax advice to any
particular shareholder or warrantholder of the Company. Therefore, shareholders
and warrantholders should consult their own tax advisers with respect to their
particular circumstances.
Canadian Residents
This portion of the summary is restricted to those holders of Common Shares
or Warrants of the Company who, for purposes of the Canadian Act, and at all
relevant times, are resident in Canada, deal at arm's length with the Company
and hold Common Shares and Warrants, as the case may be, of the Company as
capital property (a "Canadian Holder"). A Common Share or Warrant of the Company
will generally be capital property to a Canadian Holder unless it is held in the
course of carrying on a business of trading or dealing in securities, has been
acquired in a transaction or transactions considered to be an adventure in the
nature of trade, or is a mark-to-market property of certain financial
institutions.
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The Arrangement
Common Shares
A Canadian Holder who exchanges Common Shares of the Company for Common
Stock of ATSI-Delaware pursuant to the Arrangement, will realize a capital gain
(or a capital loss) to the extent that the fair market value, at the date of
exchange, of the Common Stock of ATSI-Delaware received in exchange therefor
exceeds (or is less than) the adjusted cost base to the Canadian Holder of the
Common Shares of the Company so exchanged.
In the case of a Canadian Holder that is a corporation, the amount of any
capital loss otherwise determined resulting from the disposition of Common
Shares of the Company may be reduced by the amount of dividends previously
received or deemed to have been received thereon to the extent and under the
circumstances described in the Canadian Act. Analogous rules apply to a
partnership or trust of which a corporation is a member or beneficiary. The
Amendments will extend these rules to apply where a trust or partnership is a
member of a partnership or a beneficiary of a trust that owns Common Shares of
the Company.
Dissenting Shareholders
The consequences under the Canadian Act to a Canadian Holder who dissents
from the Arrangement described herein and who receives a payment for his or her
Common Shares are discussed below.
The receipt by a dissenting Canadian Holder of a cash payment from the
Company equal to the fair value of his or her Common Shares will generally be
treated as a dividend to the Canadian Holder to the extent that such payment
exceeds the paid-up capital for purposes of the Canadian Act of such Common
Shares. The balance of the fair value paid (i.e. the amount equal to the
paid-up capital of such Common Shares) will generally be treated as proceeds of
disposition of such Common Shares for capital gains purposes. Consequently, a
dissenting Canadian Holder would realize a capital gain (or capital loss) to the
extent that the proceeds of disposition for such Common Shares exceed (are
exceeded by) the Canadian Holder's adjusted cost base thereof. Notwithstanding
the foregoing, if the dissenting Canadian Holder is a corporation resident in
Canada, the full amount of the redemption proceeds received may be treated under
the Canadian Act as proceeds of disposition, with the result that no dividend
will be deemed to have been paid to the Canadian Holder and any gain or loss
realized by it on the disposition will be determined by reference to the full
amount of the redemption proceeds. Corporate Canadian Holders should consult
their own tax advisor with respect to the applicability of these provisions.
Any capital loss arising on the exercise of dissent rights by a corporate
Canadian Holder will be reduced by dividends received or deemed to be received,
including any deemed dividend arising from the exercise of dissent rights, on
the subject Common Shares to the extent and under the circumstances prescribed
in the Canadian Act. Similar rules apply where a corporation is a member of a
partnership or a beneficiary of a trust that owns Common Shares of the Company.
Under the Amendments, these rules will be extended to apply where a trust or
partnership is a member of a partnership or a beneficiary of a trust that owns
Common Shares of the Company.
Warrants
As a consequence of the Arrangement, Canadian Holders of Warrants of the
Company will, upon the effective date of the Arrangement, be deemed to hold
Warrants to acquire ATSI-
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Delaware Common Stock upon the same terms and conditions. As a consequence of
this change in the terms and conditions of the Warrants, Canadian Holders
thereof will realize a capital gain (or a capital loss) to the extent that the
fair market value, upon the effective date of the Arrangement, of the Warrants
(which will then be exercisable for ATSI-Delaware Common Stock) exceeds (or is
less than) adjusted cost base to the holder of such Warrants.
ATSI-Delaware Common Stock
Dividends
Any dividends paid by ATSI-Delaware on its Common Stock to a Canadian
Holder must be included in computing the Canadian Holder's income for Canadian
income tax purposes. In the case of Canadian Holders who are individuals,
dividends so received, being dividends on shares of a foreign corporation, will
not be entitled to the benefit of the gross-up and dividend tax credits rules in
the Canadian Act. In the case of corporate Canadian Holders of which
ATSI-Delaware is not a foreign affiliate for purposes of the Canadian Act,
dividends so received will not be deductible in computing taxable income.
Under the U.S. Treaty, the U.S. withholding tax on dividends paid by
ATSI-Delaware will be 15% in most cases, and 5% in the case of a Canadian Holder
that is a Canadian corporation that beneficially owns at least 10% of the voting
stock of ATSI-Delaware at the time the dividend is paid.
U.S. withholding taxes imposed on such dividends may either be credited
against Canadian income taxes payable by the Canadian Holder, or deducted by
such Canadian Holder in computing income for Canadian tax purposes, at the
Canadian Holder's option, subject to the detailed rules in the Canadian Act in
that regard.
Special rules apply to corporate shareholders that receive dividends from a
foreign affiliate and such Canadian Holders are advised to consult their own tax
advisers with respect thereto.
Disposition
The adjusted cost base of Common Stock of ATSI-Delaware acquired pursuant
to the Arrangement will be the fair market value thereof on the effective date
of the Arrangement. A Canadian Holder who disposes of ATSI-Delaware Common Stock
will realize a capital gain (or a capital loss) to the extent that the proceeds
of disposition for such stock, net of any reasonable costs of disposition,
exceed (or are less than) the adjusted cost base of such stock to the Canadian
Holder.
Warrants
Exercise
No gain or loss will be realized by a Canadian Holder on the exercise of
Warrants. The cost of Common Stock of ATSI-Delaware acquired upon the exercise
of Warrants will be the aggregate of the adjusted cost base of the Warrants so
exercised and the exercise price paid for the ATSI-Delaware Common Stock. For
purposes of determining the adjusted cost base to a Canadian Holder of
ATSI-Delaware Common Stock so acquired, the cost of such ATSI-Delaware Common
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Stock will be averaged with the adjusted cost base of all other ATSI-Delaware
Common Stock held by the Canadian Holder as capital property immediately prior
to such acquisition.
Expiry
Upon the expiry of an unexercised Warrant, the Canadian Holder will realize
a capital loss equal to the adjusted cost base, if any, of the Warrant to the
Canadian Holder immediately prior to the time of expiry.
Disposition
A Canadian Holder who disposes of Warrants will realize a capital gain (or
a capital loss) to the extent that the proceeds of disposition thereof, net of
any reasonable costs of disposition, exceed (or are less than) the adjusted cost
base thereof to the Canadian Holder.
Capital Gains and Losses
A Canadian Holder will be required to include in income three-quarters of
the amount of any capital gain (a "taxable capital gain") and may deduct
three-quarters of the amount of any capital loss (an "allowable capital loss")
against taxable capital gains realized by the Canadian Holder in the year of the
disposition. Allowable capital losses in excess of taxable capital gains may be
carried back and deducted in any of the three preceding years or carried forward
and deducted in any following year against taxable capital gains realized in
such years to the extent and under the circumstances described in the Canadian
Act.
Individuals may be subject to the alternative minimum tax provisions of the
Canadian Act in respect of realized capital gains.
The Canadian Act levies an additional refundable tax of 6-2/3% on
investment income (other than dividends deductible in computing taxable income)
earned by a Canadian-controlled private corporation (as defined in the Canadian
Act) that will be refunded when the corporation pays taxable dividends (at a
rate of $1 for every $3 of taxable dividends paid). For this purpose,
investment income will include taxable capital gains.
Eligibility for Investment Under the Canadian Act
The Common Stock of ATSI-Delaware will not be a qualified investment under
the Canadian Act for trusts governed by registered retirement savings plans,
registered retirement income funds and deferred profit sharing plans ("Deferred
Plans") until the Common Stock of ATSI-Delaware is listed on a prescribed stock
exchange. The Warrants will not be qualified investments for such Deferred Plans
until the Common Stock of ATSI-Delaware for which the Warrants may be exercised
is listed on a prescribed stock exchange. The Warrants and the ATSI-Delaware
Common Stock will be considered foreign property for the purposes of the foreign
property limitations under the Canadian Act.
United States Residents
This portion of the summary is restricted to those holders of Common Shares
or Warrants of the Company who, for purposes of the Canadian Act and the U.S.
Treaty, and at all relevant times, are not resident in Canada, are resident in
the U.S., deal at arm's length with the Company,
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hold Common Shares and Warrants, as the case may be, of the Company as capital
property and do not use or hold and are not deemed to use or hold Common Shares
or Warrants of the Company in carrying on business in Canada (a "U.S. Holder").
Special rules, which are not discussed in this description, may apply to a
non-resident that is an insurer that carries on business in Canada and
elsewhere.
THE ARRANGEMENT
Common Shares and Warrants
A U.S. Holder will not be subject to Canadian income tax on capital gains
arising on the disposition of Common Shares and Warrants of the Company pursuant
to the Arrangement. In order to alleviate the administrative burden of each U.S.
Holder applying for a clearance certificate pursuant to section 116 of the
Canadian Act in respect of the disposition of Common Shares or Warrants of the
Company pursuant to the Arrangement, the Company is negotiating with RCT to
obtain a blanket clearance certificate on behalf of all U.S. Holders. It is not
yet known what information regarding each U.S. Holder will be required by RCT
for it to issue such a blanket certificate.
Dissenting Shareholders
The consequences under the Canadian Act to a U.S. Holder who dissents from
the Arrangement described herein and who receives a payment for his or her
Common Shares are as discussed above under the heading "CANADIAN RESIDENTS --
Dissenting Shareholders". Pursuant to the U.S. Treaty, any capital gain realized
by a dissenting U.S. Holder as a consequence of the exercise of his or her
dissent rights will not be subject to Canadian income tax and any dividends
deemed to have been received by such dissenting U.S. Holder as a consequence of
the exercise of his or her dissent rights will be subject to Canadian
withholding tax at the rate of 15% in most cases, and 5% in the case of a U.S.
Holder that is a U.S. corporation that beneficially owns at least 10% of the
voting stock of the Company at the time the dividend is deemed to have been
paid.
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LEGAL OPINIONS
Certain legal matters relating to the Arrangement have been passed upon for
the Company by Akin, Gump, Strauss, Hauer & Feld, L.L.P., San Antonio,
Texas.
SHAREHOLDER PROPOSALS
Assuming the Arrangement is approved and effected, stockholders wishing to
invoke the provisions to the rules of the Commission regarding the inclusion of
a proposal in ATSI -Delaware's proxy material for its next Annual Meeting of
Stockholders anticipated to be held in January or February 1999 must submit such
proposals to ATSI-Delaware, in accordance with these rules, for receipt not
later than September 15, 1998. Such stockholders must also comply with the
provisions of the ATSI-Delaware Certificate described under the caption "Effects
of the Arrangement on Shareholders Rights."
OTHER BUSINESS AT SPECIAL MEETING
While there is no business other than that mentioned in the Notice of
Meeting to be presented for action by the shareholders at the Meeting, it is
intended that the proxies for the Meeting solicited hereby will be exercised
upon any other matters and proposals that may properly come before the Meeting
in accordance with the discretion of the person authorized to act thereunder.
APPROVAL OF PROSPECTUS
This Prospectus and the enclosed forms of proxy, and the sending thereof to
the shareholders of the Company, have been approved by the Board of Directors of
the Company.
By Order of the Board of Directors
/s/ H. Douglas Saathoff
------------------------------------
Secretary
Dated ________ __, 1998
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INDEX TO FINANCIAL STATEMENTS
Page
----
CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN TELESOURCE INTERNATIONAL INC.
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of July 31, 1996 and 1997 and
October 31, 1997........................................................ F-3
Consolidated Statements of Loss for the Years ended July 31, 1995, 1996
and 1997 and the Three-Month Periods ended October 31, 1996 and 1997.... F-4
Consolidated Statements of Shareholders' Equity for the Years ended
July 31, 1995, 1996 and 1997 and the Three-Month Period ended
October 31, 1997....................................................... F-5
Consolidated Statements of Cash Flows for the Years ended
July 31, 1995, 1996 and 1997 and the Three-Month Periods ended
October 31, 1996 and 1997.............................................. F-6
Notes to Consolidated Financial Statements............................... F-7
CONSOLIDATED BALANCE SHEET OF AMERICAN TELESOURCE INTERNATIONAL, INC.
Report of Independent Public Accountants............................... F-25
Balance Sheet as of December 1, 1997................................... F-26
Notes to Balance Sheet................................................. F-27
CONSOLIDATED FINANCIAL STATEMENTS OF SISTEMA DE TELEFONIA
COMPUTARIZADA, S.A. DE C.V.
Report of Independent Public Accountants............................... F-28
Consolidated Statements of Operations for the Year ended December 31,
1996 and the Six Months ended June 30, 1996 and 1997................... F-29
Consolidated Statements of Stockholders' Equity for the Year ended
December 31, 1996 and the Six Months ended June 30, 1997............... F-30
Consolidated Statements of Cash Flows for the Year ended December 31,
1996 and the Six Months ended June 30, 1996 and 1997................... F-31
Notes to Consolidated Financial Statements............................. F-32
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Introduction to Pro Forma Consolidated Statement of Loss............... F-36
Pro Forma Consolidated Statement of Loss for the Year ended July 31,
1997................................................................... F-37
Notes to Pro Forma Consolidated Financial Statements................... F-38
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders' of
American TeleSource International Inc.:
We have audited the accompanying consolidated balance sheets of American
TeleSource International Inc. (an Ontario corporation) and subsidiaries as of
July 31, 1996 and 1997, and the related consolidated statements of loss,
shareholders' equity and cash flows for the years ended July 31, 1995, 1996 and
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American TeleSource
International Inc. and subsidiaries as of July 31, 1996 and 1997, and the
results of their operations and their cash flows for the years ended July 31,
1995, 1996 and 1997, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company has suffered recurring losses
from operations since inception and has limited capital resources available to
support further development of its operations. These matters raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
ARTHUR ANDERSEN LLP
San Antonio, Texas
October 3, 1997
F-2
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Presented in U.S. dollars)
<TABLE>
<CAPTION>
July 31, July 31, October 31,
1996 1997 1997
------------ ------------ ------------
ASSETS (unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 655,955 $ 1,921,426 $ 1,497,965
Accounts receivable, net of allowance of $ 154,382, $ 187,457
and $ 162,017, respectively 599,924 2,207,917 1,617,033
Stock subscriptions receivable 75,000 1,113,170 21,025
Notes receivable 101,283 -- --
Inventory 10,000 -- --
Prepaid expenses 230,673 461,920 418,094
Other 116,061 284,173 330,596
------------ ------------ ------------
Total current assets 1,788,896 5,988,606 3,884,713
------------ ------------ ------------
PROPERTY AND EQUIPMENT (At cost): 2,523,832 7,498,589 8,867,923
Less - Accumulated depreciation and amortization (376,685) (926,601) (1,215,790)
------------ ------------ ------------
Net property and equipment 2,147,147 6,571,988 7,652,133
------------ ------------ ------------
OTHER ASSETS, net
Goodwill, net -- 2,264,986 4,569,839
Organization costs, net 163,712 63,277 56,567
Other 248,449 931,851 1,336,952
------------ ------------ ------------
Total assets $ 4,348,204 $ 15,820,708 $ 17,500,204
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,303,459 $ 1,932,174 $ 2,909,910
Accrued liabilities 794,875 2,285,601 1,910,223
Current portion of notes payable -- 316,425 516,532
Current portion of convertible long-term debt 100,000 100,000 100,000
Current portion of obligations under capital leases 182,884 695,742 858,494
Deferred revenue -- 463,788 112,258
------------ ------------ ------------
Total current liabilities 2,381,218 5,793,730 6,407,417
------------ ------------ ------------
LONG-TERM LIABILITIES:
Obligations under capital leases, less current portion 321,575 1,005,256 1,282,320
Notes payable, less current portion -- 498,053 973,033
Convertible long-term debt, less current portion -- 1,296,560 1,370,459
Other long-term liabilities 16,786 597,053 579,316
------------ ------------ ------------
338,361 3,396,922 4,205,128
------------ ------------ ------------
MINORITY INTEREST -- (305,780) --
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES: (Notes 9,17 and 19)
STOCKHOLDERS' EQUITY:
Preferred shares, no par value, unlimited shares authorized,
no shares issued and outstanding at July 31, 1996 and 1997 -- -- --
Common shares, no par value, unlimited shares authorized,
23,849,657 issued and 23,774,657 outstanding at July 31, 1996
36,787,105 issued and outstanding at July 31, 1997 and
38,258,315 issued and outstanding at October 31, 1997 6,231,953 16,221,856 17,465,538
Accumulated deficit (4,607,246) (9,302,375) (10,599,924)
Cumulative translation adjustment 3,918 16,355 22,045
------------ ------------ ------------
Total stockholders' equity 1,628,625 6,935,836 6,887,659
------------ ------------ ------------
Total liabilities and stockholders' equity $ 4,348,204 $ 15,820,708 $ 17,500,204
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
(Presented in U.S. dollars)
<TABLE>
<CAPTION>
For the Three Month Periods
For the Years Ended July 31, Ended October 31,
--------------------------------------------- -----------------------------
1995 1996 1997 1996 1997
------------- ------------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Long distance services $ 4,469,529 $ 10,806,586 $ 13,965,981 $ 2,580,929 $ 4,433,435
Network management services 318,312 2,668,098 2,262,406 387,521 1,597,884
------------ ------------ ------------ ------------ ------------
Total operating revenues 4,787,841 13,474,684 16,228,387 2,968,450 6,031,319
------------ ------------ ------------ ------------ ------------
OPERATING EXPENSES:
Cost of services 4,061,091 10,832,664 12,792,338 2,594,083 3,876,081
Selling, general and administrative 2,536,441 4,430,038 7,047,020 1,155,086 2,792,532
Depreciation and amortization 140,798 280,583 590,746 128,629 338,552
------------ ------------ ------------ ------------ ------------
Total operating expenses 6,738,330 15,543,285 20,430,104 3,877,798 7,007,165
------------ ------------ ------------ ------------ ------------
OPERATING LOSS (1,950,489) (2,068,601) (4,201,717) (909,348) (975,846)
OTHER INCOME(EXPENSE):
Interest expense (64,778) (150,231) (512,838) (43,697) (364,960)
Interest income 9,858 6,669 26,839 729 15,975
Other income 1,242 7,436 68,223 1,349 27,282
Other expense -- -- (27,423) -- --
------------ ------------ ------------ ------------ ------------
Total other expense (53,678) (136,126) (445,199) (41,619) (321,703)
------------ ------------ ------------ ------------ ------------
MINORITY INTEREST -- -- (48,213) -- --
------------ ------------ ------------ ------------ ------------
NET LOSS ($ 2,004,167) ($ 2,204,727) ($ 4,695,129) ($ 950,967) ($ 1,297,549)
============ ============ ============ ============ ============
NET LOSS PER SHARE ($ 0.14) ($ 0.11) ($ 0.18) ($ 0.04) ($ 0.04)
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an
integral part of these consolidated financial statements.
F-4
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Presented in U.S. dollars)
<TABLE>
<CAPTION>
Preferred Shares Common Shares
-------------------------- --------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, July 31, 1994 -- -- 12,186,175 $ 1,216,902
Exercise of warrants -- -- 1,350,423 675,211
Issuances of common stock for cash -- -- 4,110,625 1,646,487
Issuances of common stock for services -- -- 337,724 84,070
Stock grants to employees -- -- 212,500 11,111
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, July 31, 1995 -- -- 18,197,447 3,633,781
Issuances of common stock for cash -- -- 4,515,500 2,252,830
Issuances of common stock for services -- -- 1,061,710 312,009
Amortization of deferred compensation -- -- -- 33,333
Cumulative effect of translation adjustment -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, July 31, 1996 -- -- 23,774,657 6,231,953
Issuances of common stock for cash -- -- 5,760,355 4,737,416
Conversion of convertible debt to common stock -- -- 3,611,786 1,966,531
Issuance of common stock for acquisition -- -- 2,715,546 1,846,569
Issuances of common stock for services -- -- 924,761 153,885
Amortization of deferred compensation -- -- -- 295,502
Warrants issued with convertible long term debt -- -- -- 990,000
Cumulative effect of translation adjustment -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, July 31, 1997 -- -- 36,787,105 $ 16,221,856
Issuances of common stock for cash (unaudited) -- -- 1,460,000 1,084,618
Issuances of common stock for services (unaudited) -- -- 11,210 34,600
Amortization of deferred compensation (unaudited) -- -- -- 124,464
Cumulative effect of translation adjustment (unaudited) -- -- -- --
Net loss (unaudited) -- -- -- --
------------ ------------ ------------ ------------
BALANCE, October 31, 1997 (unaudited) -- -- 38,258,315 $ 17,465,538
============ ============ ============ ============
<CAPTION>
Cumulative Total
Accumulated Translation Shareholders'
Deficit Adjustment Equity
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE, July 31, 1994 ($ 398,352) -- $ 818,550
Exercise of warrants -- -- 675,211
Issuances of common stock for cash -- -- 1,646,487
Issuances of common stock for services -- -- 84,070
Stock grants to employees -- -- 11,111
Net loss (2,004,167) -- (2,004,167)
------------ ------------ ------------
BALANCE, July 31, 1995 (2,402,519) -- 1,231,262
Issuances of common stock for cash -- -- 2,252,830
Issuances of common stock for services -- -- 312,009
Amortization of deferred compensation -- -- 33,333
Cumulative effect of translation adjustment -- 3,918 3,918
Net loss (2,204,727) -- (2,204,727)
------------ ------------ ------------
BALANCE, July 31, 1996 (4,607,246) 3,918 1,628,625
Issuances of common stock for cash -- -- 4,737,416
Conversion of convertible debt to common stock -- -- 1,966,531
Issuance of common stock for acquisition -- -- 1,846,569
Issuances of common stock for services -- -- 153,885
Amortization of deferred compensation -- -- 295,502
Warrants issued with convertible long term debt -- -- 990,000
Cumulative effect of translation adjustment -- 12,437 12,437
Net loss (4,695,129) -- (4,695,129)
------------ ------------ ------------
BALANCE, July 31, 1997 ($ 9,302,375) $ 16,355 $ 6,935,836
Issuances of common stock for cash (unaudited) -- -- 1,084,618
Issuances of common stock for services (unaudited) -- -- 34,600
Amortization of deferred compensation (unaudited) -- -- 124,464
Cumulative effect of translation adjustment (unaudited) -- 5,690 5,690
Net loss (unaudited) (1,297,549) -- (1,297,549)
------------ ------------ ------------
BALANCE, October 31, 1997 (unaudited) ($10,599,924) $ 22,045 $ 6,887,659
============ ============ ============
</TABLE>
The accompanying
notes are an integral part of these consolidated financial statements.
F-5
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Presented in U.S. dollars)
<TABLE>
<CAPTION>
For the Three Month Period
For the Years Ended July 31, Ended October 31,
----------------------------------------- --------------------------
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($2,004,167) ($2,204,727) ($4,695,129) ($ 950,967) ($1,297,549)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization 140,798 280,583 590,746 128,630 338,552
Amortization of debt discount -- -- 86,560 -- 73,899
Deferred compensation 11,111 33,333 295,502 8,334 124,464
Provision for losses on accounts receivable 339,829 554,332 734,987 136,007 187,251
Minority interest -- -- 48,213 -- --
Changes in operating assets and liabilities
net of effects from acquisition of Computel
Increase (decrease) in accounts receivable (657,568) (723,552) (1,983,091) (103,032) 403,633
Increase in other assets-current and long-term (281,970) (9,853) (861,046) (43,877) (433,990)
Increase (decrease) in accounts payable 786,899 419,505 (1,024,670) 735,117 1,104,519
Increase (decrease) in accrued liabilities 341,901 342,076 884,062 (106,265) (375,378)
Increase (decrease) in deferred revenue 42,652 (64,987) 377,758 1,930 (351,530)
Other -- 20,703 15,895 9,370 5,690
----------- ----------- ----------- ----------- -----------
Net cash used in operating activities (1,280,515) (1,352,587) (5,530,213) (184,753) (220,439)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (858,616) (475,303) (590,196) (154,840) (1,619,540)
Net cash acquired (paid) in Computel acquisition -- -- 73,501 -- (1,088,775)
Increase in note receivable (90,108) (88,107) -- -- --
Payments received on note receivable 34,277 42,655 101,283 11,516 --
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities (914,447) (520,755) (415,412) (143,324) (2,708,315)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 175,000 -- 3,912,841 -- 675,087
Payments on debt (42,296) (32,704) -- -- --
Capital lease payments -- (67,809) (400,988) (45,741) (360,812)
Proceeds from issuance of common stock,
net of issuance costs 2,046,698 2,527,830 3,699,243 117,450 2,191,018
----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities 2,179,402 2,427,317 7,211,096 71,709 2,505,293
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (15,560) 553,975 1,265,471 (256,368) (423,461)
CASH, beginning of period 117,540 101,980 655,955 655,955 1,921,426
----------- ----------- ----------- ----------- -----------
CASH, end of period $ 101,980 $ 655,955 $ 1,921,426 $ 399,587 $ 1,497,965
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an
integral part of these consolidated financial statements.
F-6
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1995, 1996 AND 1997 AND OCTOBER 31, 1996 AND 1997
Data with respect to the three-month periods ended October 31, 1996 and 1997 are
unaudited
The information utilized in the following Notes is presented in U.S. dollars.
1. BUSINESS ACTIVITY
The company was originally incorporated under the laws of the province of
Alberta, Canada on December 17, 1993 (date of inception or "Inception"), under
the name Latcomm International Inc. (Latcomm). On December 20, 1993, Latcomm
purchased all of the outstanding shares of Latin America Telecomm, Inc., a Texas
corporation, for cash consideration of $25,000. On April 22, 1994, Latin
America Telecomm, Inc. changed its name to American TeleSource International,
Inc. (ATSI-Texas). Effective May 26, 1994 (Effective Date), Latcomm amalgamated
under the Business Corporations Act of Ontario, Canada with Willingdon
Resources, Ltd. (Willingdon), a corporation incorporated under the laws of the
Province of Ontario, Canada. The resulting Ontario corporation was named
American TeleSource International Inc. (ATSI-Canada). In accordance with the
amalgamation agreement between Latcomm and Willingdon, on the Effective Date
every four issued and outstanding shares of Willingdon were converted to one
issued and outstanding share of ATSI-Canada and each issued and outstanding
share of Latcomm was converted to one issued and outstanding share of ATSI-
Canada. Of the 11,963,675 shares of ATSI-Canada issued in conjunction with the
amalgamation, approximately 10% were issued to the former shareholders of
Willingdon. The remaining 90% of the shares were issued to the former
shareholders of Latcomm. The amalgamation was accounted for as a
recapitalization of Latcomm. The assets and liabilities of Latcomm and
Willingdon were transferred to ATSI-Canada on the Effective Date at such
predecessor's historical cost basis. Collectively, ATSI-Texas and ATSI-Canada
are referred to hereafter as "ATSI" or the "Company".
ATSI conducts its primary operations through ATSI-Texas. ATSI-Texas
provides long distance call services to the hospitality industry and private
payphone owners in the U.S. and Mexico. ATSI-Texas also provides a full range
of private network services via satellite to customers conducting business in
Mexico, Central and South America, and the Caribbean Basin. These services
include the purchasing, exporting, installation and maintenance of equipment as
well as providing voice, data, fax and video telecommunication transmission
services via its teleport facility in San Antonio, Texas.
On June 20, 1995, ATSI-Texas formed a foreign subsidiary based in Mexico
City, Mexico. The subsidiary, American TeleSource International de Mexico, S.A.
de C.V. (ATSI-Mexico), performs customer service and maintenance operations
within Mexico and serves as a sales office for both private network and long
distance services of ATSI. On February 20, 1997, ATSI-Mexico became one of the
first four companies to receive a comercializadora license from the Secretaria
de Comunicaciones y Transportes ("SCT"), the regulatory authority in Mexico
charged with the oversight of the telecommunications industry in Mexico. The
comercializadora license allows the Company to own and operate public telephones
within Mexico, and to resell local and long distance services within Mexico from
those telephones. The Company has applied for and obtained several additional
licenses from the SCT allowing it to further expand the services it may provide
within Mexico. However, there can be no assurances that any licenses applied
for and not received or any other licenses sought in the future will be
obtained, and if obtained, that such licenses will enable the Company to expand
operations or increase revenues in Mexico.
In April 1996, the Company formed GlobalSCAPE, Inc. (GlobalSCAPE), a
wholly-owned subsidiary of ATSI-Texas. GlobalSCAPE is a Delaware corporation
based in San Antonio, Texas which was formed by the Company for purposes of
implementing Internet related strategies. During the years ended July 31, 1996
and 1997 and the three-month period ended October 31, 1997, the operations of
GlobalSCAPE were immaterial when compared to the accompanying consolidated
financial statements of ATSI.
In May 1997, the Company entered into an agreement to purchase up to 100%
of the outstanding shares of a privately owned caseta (public calling station)
operator in Mexico, Sistema de Telefonia Computarizada, S.A. de C.V.
("Computel"). Under the terms of the agreement, the Company acquired 55% of the
shares of Computel effective May 1, 1997. As the Company acquired majority
ownership effective May 1, 1997, the Company has recorded 100% of the net assets
and liabilities of Computel as of that date. The Company's consolidated
financial statements for the period from
F-7
<PAGE>
May 1, 1997 to July 31, 1997 include the impact of the 45% minority ownership
interest. For the three months ended October 31, 1997, the Company's
consolidated financial statements include 100% of the activities of Computel.
2. FUTURE OPERATIONS
The accompanying consolidated financial statements of the Company have been
prepared on the basis of accounting principles applicable to a going concern.
For the period from Inception to July 31, 1997 and to October 31, 1997, the
Company has incurred cumulative net losses of $9,247,551 and $10,545,100,
respectively. Further, the Company had a working capital deficit of $592,322 at
July 31, 1996, a working capital balance of $194,876 at July 31, 1997 and a
working capital deficit of $2,522,704 at October 31, 1997. Although the Company
has capital resources available to it, these resources are limited and may not
be available to support its ongoing operations until such time as the Company is
able to generate positive cash flow from operations. There is no assurance the
Company will be able to achieve future revenue levels sufficient to support
operations or recover its investment in property and equipment. The Company's
future ability to generate revenues is also subject to uncertainty with regards
to certain regulatory matters described in Note 18. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent upon the
ongoing support of its stockholders and customers, its ability to obtain capital
resources to support operations, the ultimate outcome of certain regulatory
matters as described in Note 18 and its ability to successfully market its
services.
The Company is likely to require additional financial resources in the near
term and could require additional financial resources in the long-term to
support its ongoing operations. The Company has retained various financial
advisers to assist it in refining its strategic growth plan, defining its
capital needs and obtaining the funds required to meet those needs. The plan
includes securing funds through equity offerings and entering into lease or
long-term debt financing agreements to raise capital. There can be no
assurances, however, that such equity offerings or other financing arrangements
will actually be consummated or that such funds, if received, will be sufficient
to support existing operations until revenue levels are achieved sufficient to
generate positive cash flow from operations. If the Company is not successful
in completing additional equity offerings or entering into other financial
arrangements, or if the funds raised in such stock offerings or other financial
arrangements are not adequate to support the Company until a successful level of
operations is attained, the Company has limited additional sources of debt or
equity capital and would likely be unable to continue operating as a going
concern.
Effective for the fiscal year beginning August 1, 1996, the Company has
adopted Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("SFAS 121"). SFAS 121 requires an assessment of the recoverability of the
Company's investment in long-lived assets to be held and used in operations
whenever events or circumstances indicate that their carrying amounts may not be
recoverable. Such assessment requires that the future cash flows associated
with the long-lived assets be estimated over their remaining useful lives and an
impairment loss be recognized when the future cash flows are less than the
carrying value of such assets. As of July 31, 1997 and October 31, 1997, the
Company has determined that the estimated future cash flows associated with its
long-lived assets are greater than the carrying value of such assets and that no
impairment loss needs to be recognized.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
-----------------------------------------------------
The accompanying consolidated financial statements include the accounts of
ATSI-Canada, ATSI-Texas, ATSI-Mexico and GlobalSCAPE. Computel has been
included in the accompanying consolidated financial statements since May 1,
1997. The consolidated financial statements have been prepared on the accrual
basis of accounting under generally accepted accounting principles of the U.S.
There are no material differences related to the Company's financial position or
results of operations for the years ended July 31, 1995, 1996 and 1997, and the
three-month periods ended October 31, 1996 and 1997 as determined under U.S.
generally accepted accounting principles and those of Canada. All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain prior period amounts have been reclassified for comparative purposes.
F-8
<PAGE>
The accompanying unaudited consolidated financial statements for the
quarters ended October 31, 1996 and 1997 have been prepared in accordance with
the U.S. Securities Exchange Commissions Rule 10-01 of Regulation S-X and
accordingly do not include all information and footnote disclosures required
under the accounting principles generally accepted in the U.S. for complete
financial statements. In the opinion of management, these interim financial
statements contain all adjustments, without audit, necessary to present fairly
the consolidated financial position of ATSI and its subsidiaries as of October
31, 1997 and the results of their operations and cash flows for the three months
ended October 31, 1996 and 1997. All adjustments are of a normal recurring
nature. The results of operations for any interim period are not necessarily
indicative of the results to be expected for the full year.
As mentioned in Note 1, ATSI-Mexico was formed on June 20, 1995. At that
time, the Company anticipated applying for a concession from the Mexican
government in order to implement its business plan. Mexican law mandates that
any company applying for a concession from the Mexican government for the
purpose of building a fiber-optic infrastructure and providing
telecommunications services via that infrastructure be majority-owned by a
Mexican entity. As such, when ATSI-Mexico was formed, ATSI-Texas purchased 49%
of the shares, and the remaining shares were purchased by an individual employed
by ATSI-Mexico (hereinafter referred to as "Mexican Partner"). However, ATSI-
Texas loaned its Mexican Partner the funds to purchase its 51% ownership, and
the underlying shares were physically held by ATSI-Texas as collateral. In
addition, the share certificates owned by its Mexican Partner stated that he may
not transfer ownership of his shares without the permission of ATSI-Texas.
ATSI-Texas retained the right to purchase the shares for their original purchase
price.
During fiscal 1996, as the Mexican government continued to refine its
policies concerning public telecommunications, it became clear to the Company
that it would not need to obtain a concession from the Mexican government in
order to carry out its business plan. Rather, the Company applied for and
received a comercializadora license from the SCT. Because the comercializadora
license does not require majority ownership by a Mexican entity, in March 1997,
ATSI-Texas acquired additional shares of ATSI-Mexico, thereby giving it
approximately 97% ownership. Because the aforementioned restrictions still
remain on the only other shareholder of ATSI-Mexico, 100% of the historical
financial results of ATSI-Mexico have been included in the accompanying
financial statements.
The accompanying consolidated financial statements reflect the assets,
liabilities and stockholders' equity of Latcomm, which were transferred to ATSI
on the Effective Date in connection with the amalgamation described in Note 1,
at such predecessor's historical cost basis.
Estimates in Financial Statements
---------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Revenue Recognition Policies
----------------------------
The Company recognizes revenue from its long distance services as such
services are performed, net of unbillable calls. Revenue from network
management service contracts is recognized when service commences for service
commencement fees and monthly thereafter as services are provided. The Company
recognizes revenue from equipment sales when the title for the equipment
transfers to the customer and from equipment installation projects when they are
completed.
Foreign Currency Translation
----------------------------
The financial position and results of operations of the Company's Mexican
subsidiary is measured using the local currency as the functional currency.
Assets and liabilities of operations denominated in foreign currencies are
translated into U.S. dollars at exchange rates in effect at year-end, while
revenues and expenses are translated at average exchange rates prevailing during
the year. The resulting translation gains and losses are charged directly to
cumulative translation adjustment, a component of stockholders' equity, and are
not included in net loss until realized through sale or liquidation of the
investment.
F-9
<PAGE>
Accounts Receivable
-------------------
During fiscal 1995, the Company began utilizing the services of credit card
processing companies for the billing of commercial credit card calls. The
Company receives cash from these calls, net of transaction and billing fees,
generally within 20 days from the dates the calls are delivered. All other
calls (calling card, collect, person-to-person and third-party billed) are
billed under an agreement between the Company and a collection clearinghouse.
This agreement allows ATSI to submit call detail records to the clearinghouse,
which in turn forwards these records to the local telephone company to be
billed. The clearinghouse collects the funds from the local telephone company
and then remits the funds, net of charges, to ATSI. Because this collection
process can take up to 90 days to complete, ATSI participates in an advance
funding program offered by the clearinghouse whereby 100% of the call records
are purchased for 75% of their value within five days of presentment. The
remaining 25% value of the call records are remitted to ATSI, net of interest
and billing charges and an estimate for uncollectible calls, as the
clearinghouse collects the funds from the local telephone companies. Under the
advanced funding agreement, the collection clearinghouse has a security interest
in the unfunded portion of the receivables as well as future receivables
generated by the Company's long distance business. The allowance for doubtful
accounts reflects the Company's estimate of uncollectible calls at July 31, 1996
and 1997 and October 31, 1997. ATSI currently pays a funding charge of prime
plus 4% per annum on the 75% of the calls which are advanced to ATSI.
Receivables sold with recourse during fiscal years 1995, 1996, 1997 and the
three-month period ended October 31, 1997 were $3,620,056, $7,673,091,
$8,530,665 and $2,399,447 respectively. At July 31, 1996 and 1997 and October
31, 1997, $499,986, $577,256 and $509,155 of such receivables were uncollected,
respectively.
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 125 "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" in June 1996 ("SFAS
125"). This statement provides accounting and reporting standards for, among
other things, the transfer and servicing of financial assets, such as factoring
receivables with recourse. This statement is effective for transfers and
servicing of financial assets occurring after December 31, 1996 and is to be
applied prospectively. Earlier or retroactive application is not permitted. In
December 1996, the FASB issued SFAS No. 127, " Deferral of the Effective Date of
Certain Provisions of SFAS No. 125." SFAS No. 127 amends the effective date for
certain provisions of SFAS No. 125 to December 31, 1997. The Company believes
the adoption of these statements will not have a material impact on the
financial position or results of operations of the Company.
Loss Per Share
--------------
Loss per share was calculated using the weighted average number of common
shares outstanding for the years ended July 31, 1995, 1996 and 1997, and the
three month periods ended October 31, 1996 and 1997, which equated to 13,922,018
shares, 19,928,372 shares, 26,806,959 shares, 23,779,005 shares and 37,068,013
shares, respectively. Common stock equivalents, which consist of the stock
purchase warrants and options described in Note 12, were excluded from the
computation of the weighted average number of common shares outstanding because
their effect was antidilutive.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," which
establishes standards for computing and presenting earning per share ("EPS") for
entities with publicly held common stock or potential common stock. SFAS No.
128 simplifies the standards for computing EPS previously found in Accounting
Principles Board Opinion No. 15, "Earnings per Share," and makes them comparable
to international EPS standards. It replaces the presentation of primary EPS
with a presentation of basic EPS, which excludes dilution. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures. SFAS No. 128 is effective
for fiscal years ending after December 15, 1997, and early adoption is not
permitted. Management of the Company does not anticipate the adoption of SFAS
No. 128 will have a material impact on the Company's loss per share.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation and amortization
are computed on a straight-line basis over the estimated useful lives of the
related assets, which range from five to fifteen years. Expenditures for
maintenance and repairs are charged to expense as incurred. Direct installation
costs and major improvements are capitalized.
Other Assets
------------
Other assets include organization costs as of July 31, 1995, 1996, 1997 and
October 31, 1997, of $141,226, $219,217, $145,373 and $145,373, respectively,
net of accumulated amortization of $29,165, $55,505, $82,096 and
F-10
<PAGE>
$88,806, respectively. Organization costs have an estimated useful life of 5
years. As of the year ended July 31, 1997 and the three month period ended
October 31, 1997, other assets also include goodwill related to the purchase of
Computel of $2,279,231 and $4,608,306, respectively, net of accumulated
amortization of $14,245 and $38,467, respectively. While the Company believes
the estimated useful life resulting from its Computel purchase may well extend
beyond 40 years, the Company amortizes goodwill over 40 years. As of the year
ended July 31, 1997 and the three month period ended October 31, 1997 other
assets include acquisition costs of $150,000 and $399,596, respectively, related
to the Company's acquisitions of several of its independent marketing
representatives, net of accumulated amortization of $0 and $14,655,
respectively.
Income Taxes
------------
Deferred tax liabilities and assets are recorded based on enacted income
tax rates that are expected to be in effect in the period in which the deferred
tax liability or asset is expected to be in effect in the period in which the
deferred tax liability or asset is expected to be settled or realized. A change
in the tax laws or rates results in adjustments to the period in which the tax
laws or rates are changed.
The Company has incurred losses in all countries since Inception for both
book and tax purposes as of October 31, 1997. Accordingly, no income taxes have
been provided for in the accompanying consolidated financial statements for the
years ended July 31, 1995, 1996 and 1997 and the three-month periods ended
October 31, 1996 and 1997.
Statements of Cash Flows
------------------------
Cash payments and non-cash activities during the periods indicated were as
follows:
<TABLE>
<CAPTION>
For the three month
-------------------
For the Years Ended July 31, periods ended October 31,
------------------------------ -------------------------
(unaudited)
1995 1996 1997 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash payments for interest $12,791 $150,231 $ 483,089 $43,697 $364,960
Common stock issued for services $84,070 $312,009 $ 153,885 $ 7,500 $ 34,600
Common stock issued for acquisition of $ -
Computel $ - $ - $1,846,569 $ -
Assets acquired in acquisition of $ -
Computel $ - $ - $3,418,753 $ -
Liabilities assumed in acquisition of $ -
Computel $ - $ - $4,205,404 $ -
Conversion of convertible debt to $ -
common stock $ - $ - $1,966,531 $ -
Capital lease obligations incurred $ - $572,268 $1,521,875 $ - $800,628
Common stock subscriptions sold $ - $ - $1,113,170 $ - $ -
</TABLE>
For purposes of determining cash flows, the Company considers all temporary
cash investments with an original maturity of three months or less to be cash
equivalents.
4. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument held by the Company:
Current assets and current liabilities: The carrying value
approximates fair value due to the short maturity of these items.
F-11
<PAGE>
Long-term debt and convertible debt: The fair value of the Company's
long-term debt and convertible debt is based on secondary market
indicators. Since the Company's debt is not quoted, estimates are based on
each obligation's characteristics, including remaining maturity, interest
rate, credit rating, collateral, amortization schedule and liquidity
(without consideration for the convertibility of the notes). The Company
believes that the carrying amount approximates fair value.
5. NOTES PAYABLE
Notes payable are comprised of the following:
<TABLE>
<CAPTION>
July 31, October 31,
--------------- -----------
(unaudited)
1996 1997 1997
---- ---- ----
<S> <C> <C> <C>
Note payable to a company, see terms below. - $256,366 $ 286,532
Notes payable to various banks, see terms below. - 558,112 553,033
Note payable to a shareholder, see terms below. - - 200,000
Note payable to a company, see terms below. - - 450,000
-------- -------- ----------
- $814,478 $1,489,565
======== ======== ==========
</TABLE>
During November 1996, the Company entered into an agreement with a company
under which the Company is advanced an additional 13.75% of its receivables sold
to Zero Plus Dialing, Inc. (ZPDI). These advances are typically outstanding for
periods of less than 90 days, and are repaid, including accrued interest, by
ZPDI on behalf of the Company as its receivables from long distance call
services are collected. The Company is charged 4% per month for these fundings.
The agreement expires in November 1998 and is collateralized by the Company's
general assets, rights and interests.
As of July 31, 1997, the Company through its acquisition of Computel had
approximately $ 558,000 of bank notes payable to various banks in Mexico. The
notes have interest rates ranging from 8% to 15%, with monthly principal and
interest payments of approximately $7,500. The notes mature between October
1999 and December 2015 and are collaterized by the assets of Computel. As of
October 31, 1997, the Company had approximately $553,000 of notes payable to
various banks in Mexico.
F-12
<PAGE>
Maturities of notes payable and convertible debt as of July 31, 1997 were
as follows:
1998 $ 416,425
1999 90,928
2000 1,340,560
2001 44,000
2002 44,000
Thereafter 275,125
----------
Total $2,211,038
==========
6. CONVERTIBLE DEBT
A subsidiary of the Company has a note payable to a shareholder, which
accrues interest monthly at an annual rate of 12%. The entire principal amount
is due at maturity on January 1, 1998. The note is secured by certain
telecommunications equipment and is guaranteed by the Company. It is
convertible upon maturity at the option of the shareholder on the basis of two
common shares for each dollar of principal and interest then outstanding on such
note. Because the fair value of the convertible instrument was immaterial upon
the date of grant, no value was assigned to stockholders' equity. Principal
outstanding at July 31, 1997 and October 31, 1997 was $100,000. In January
1998, the shareholder exercised his option to convert the note into common stock
at the aforementioned basis of two common shares for each dollar of principal
and interest then outstanding, resulting in the issuance of 200,000 shares of
common stock to the shareholder.
In fiscal 1997 the Company issued convertible notes totaling $1,967,000,
interest at 10%, principal and interest payable on April 30, 1998. The
principal and accrued interest converted to shares of common stock of ATSI at
the rate of $0.55 per share. On the date the notes were sold, the Company issued
to the holders of the notes warrants to purchase 2,208,604 shares of common
stock of the Company for $0.85 per share. Because the fair value of the
warrants was immaterial, no value was assigned to stockholders' equity. Such
warrants expire one year from their date of issuance. As of July 31, 1997, the
$1,967,000 of convertible notes have been converted to common stock.
Also in 1997, the Company issued $2.2 million in convertible notes,
interest at 10%. The principal and interest, which accrues quarterly, is due
and payable three years from the date of issuance. The convertible notes
convert into fully redeemable preferred stock at the Company's option. In
addition, for each $50,000 unit of convertible debt, each holder was issued
108,549 warrants to purchase an equal number of shares of common stock at $0.27
per share. The fair value of the warrants was determined to be $0.37 per share
and the Company assigned $990,000 to the value of the warrants in stockholders'
equity. The fair value of the warrants was based on the date of issuance using
the Black-Scholes 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 October 31,
1997, net of debt discount, was $1,296,560 and $1,370,459, respectively.
F-13
<PAGE>
7. PROPERTY AND EQUIPMENT, NET
Following is a summary of property and equipment at July 31, 1996 and 1997
and October 31, 1997:
July 31,
--------
1996 1997 October 31, 1997
---- ---- -----------------
(unaudited)
Telecommunications equipment $1,650,972 $2,575,531 $ 4,565,472
Land and buildings - 1,912,310 792,056
Furniture and fixtures 145,336 186,231 272,178
Equipment under capital leases 572,268 2,084,528 2,391,952
Leasehold improvements 92,140 240,137 268,756
Other 63,116 499,852 577,509
---------- ---------- -----------
2,523,832 7,498,589 8,867,923
Less: Accumulated depreciation and
amortization (376,685) (926,601) (1,215,790)
---------- ---------- -----------
Total - property and equipment, net $2,147,147 $6,571,988 $ 7,652,133
========== ========== ===========
8. ACQUISITION
In May 1997, the Company entered into an agreement to purchase up to 100%
of the outstanding shares of a privately owned caseta (public calling station)
operator in Mexico, Sistema de Telefonia Computarizada, S.A. de C.V.
("Computel"). Computel, based in Guadalajara, Mexico owns and operates 134
casetas in 72 cities throughout Mexico. Under the terms of the agreement, the
Company acquired 55% of the shares of Computel effective May 1, 1997, and the
remaining shares in late August 1997. The total purchase price for the
acquisition of Computel was approximately $3.6 million, of which $1.1 million
was to be paid in cash, $700,000 in a note receivable forgiven by the Company
and the balance in common stock. The Company recorded the 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 late August 1997 for a 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 years ended
July 31, 1996 and 1997 and the three months ended October 31, 1996, assumes the
acquisition of Computel occurred as of the beginning of the respective periods.
Such pro forma information is not necessarily indicative of the results of
future operations. Pro forma results of operations for the three month period
ended October 31, 1997, have been omitted as pro forma results would not
materially differ from actual results of operations for the period ended.
Years ended July 31, Three Months Ended
-------------------- ------------------
1996 1997 October 31, 1996
---- ---- ----------------
(Unaudited) (Unaudited) (Unaudited)
Operating revenues $19,511,000 $20,312,000 $4,799,000
Net loss ($2,484,000) ($5,408,000) ($1,294,000)
Net loss per share ($0.11) ($0.19) ($0.05)
F-14
<PAGE>
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 periods specified nor does such information
purport to project the results of operations for any future date or period.
9. LEASES
Operating Leases
----------------
The Company leases office space, furniture and minor equipment under
noncancelable operating leases and certain month-to-month leases. During fiscal
1996 and 1997, the Company also leased equipment under capital leasing
arrangements. Rental expense under the operating leases for the years ended July
31, 1995, 1996 and 1997 and the three-month periods ended October 31, 1996 and
1997, was $111,397, $136,107, $176,700, $32,736 and $58,588 respectively. Future
minimum lease payments under the noncancelable operating leases at July 31,
1997, are as follows:
1998 $ 87,807
1999 93,850
2000 98,482
2001 99,262
2002 107,844
Thereafter 8,987
----------
Total minimum lease payments $ 496,232
==========
Capital Leases
--------------
Future minimum lease payments under the capital leases together with the
present value of the net minimum lease payments at July 31, 1997, are as
follows:
1998 $ 763,822
1999 595,920
2000 435,774
2001 25,490
Total minimum lease payments 1,821,006
Less: Amount representing taxes (27,392)
Net minimum lease payments 1,793,614
Less: Amount representing interest (92,616)
----------
Present value of net minimum lease payments $1,700,998
==========
In April 1997, the Company, through ATSI-Mexico secured a capital lease
facility with IBM de Mexico to purchasing intelligent pay telephones for
installation in Mexico. The capital lease facility of approximately $1.725
million will allow the Company to begin installing U.S. standard intelligent pay
telephones in various Mexican markets. The capital lease facility calls for the
Company to draw down on the facility in three separate draws of approximately
$575,000. As of July 31, 1997, the Company had made two draws on its lease
facility, the third draw was made in the three month period ended October 31,
1997. The obligation outstanding under said facility at July 31, 1997 and
October 31, 1997 was approximately $1,108,000, and $1,493,000, respectively.
10. SHARE CAPITAL
During the year ended July 31, 1995, the Company issued 5,798,772 shares of
common stock. Of this total, 1,350,423 shares were issued for approximately
$675,000 in cash through the exercise of 1,350,423 warrants, 4,110,625 shares
were issued for approximately $1,646,000 net cash proceeds and 337,724 shares
were issued for services rendered to the Company. Additionally, 212,500 shares
previously issued and held in trust for employee benefits were distributed to
various individuals. (See Note 15).
F-15
<PAGE>
During the year ended July 31, 1996, the Company issued 5,577,210 shares of
common stock. Of this total, 4,515,500 shares were issued for approximately
$2,250,000 of net cash proceeds and 1,061,710 shares were issued for services
rendered to the Company.
During the year ended July 31, 1997, the Company issued 13,012,448 shares
of common stock. Of this total, 5,760,355 shares were issued for approximately
$4,737,000 of net cash proceeds, 924,761 shares were issued for services
rendered to the Company, 3,611,786 shares were issued for the conversion of
convertible debt to common stock, and 2,715,546 shares were issued related to
the Company's acquisition of Computel. (See Note 8).
During the three months ended October 31, 1997, the Company issued
1,571,210 shares of common stock. Of this total, 1,460,000 were issued for
approximately $1.1 million in cash through the exercise of 1,460,000 warrants
and 11,210 were issued for services rendered to the Company.
At July 31, 1996 and 1997 and October 31, 1997, stock subscription
receivables of $75,000, $1,113,170 and $21,025, respectively, were outstanding
related to sales of common stock. Such amounts were collected by the Company
subsequent to the related periods ended. No dividends were paid on the Company's
stock during the years ended July 31, 1995, 1996 and 1997 or the three month
period ended October 31, 1997.
The Company's shareholders 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 October 31, 1997.
11. DEFERRED REVENUE
The Company records deferred revenue related to the private network
services it provides. Customers may be required to advance cash to the Company
prior to service commencement to partially cover the cost of equipment and
related installation costs. Any cash received prior to the actual commencement
of services is recorded as deferred revenue until services are provided by the
Company, at which time the Company recognizes service commencement revenue. At
July 31, 1996 and 1997 and October 31, 1997, $0, $463,788 and $112,258 of
deferred revenue was outstanding, respectively.
12. STOCK PURCHASE WARRANTS AND STOCK OPTIONS
For the period ending July 31, 1997 certain shareholders and holders of
convertible debt of the Company were issued warrants to purchase shares of
common stock at exercise prices ranging from $0.27 to $2.00 per share. Following
is a summary of warrant activity from July 31, 1996 through July 31, 1997:
Warrants outstanding, July 31, 1996 8,097,463
Warrants issued 9,931,854
Warrants expired (777,200)
Warrants exercised (2,762,175)
----------
Warrants outstanding, July 31, 1997 14,489,942
==========
F-16
<PAGE>
Warrants outstanding at July 31, 1997 expire as follows:
Number of Warrants Exercise Price Expiration Date
100,000 $2.00 October 25, 1997
800,000 $0.65 February 27, 1998
153,088 $0.75 June 1, 1998
342,210 $1.00 November 14, 1998
615,815 $0.85 November 21, 1998
970,290 $1.00 December 15, 1998
223,385 $0.85 January 6, 1999
3,037,500 $0.70 April 11, 1999
100,000 $2.00 May 30, 1999
1,060,400 $0.85 July 31, 1999
400,000 $1.45 July 31, 1999
30,000 $0.50 December 31, 1999
15,000 $0.77 January 2, 2000
15,000 $0.79 January 2, 2000
558,824 $0.85 February 7, 2000
4,776,176 $0.27 February 17, 2000
1,050,000 $0.70 February 28, 2000
192,254 $0.75 April 7, 2000
50,000 $2.00 June 20, 2000
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123"), was issued. FAS 123
defines a fair value based method of accounting for employee stock options or
similar equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. Under the fair
value based method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period of the award, which
is usually the vesting period. However, FAS 123 also allows entities to continue
to measure compensation costs for employee stock compensation plans using the
intrinsic value method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). The Company has adopted
FAS 123 effective August 1, 1996, and has elected to remain with the accounting
prescribed by APB 25. The Company has made the required disclosures prescribed
by FAS 123.
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 October 31, 1997, the Company had $1,132,000 and $1,016,000,
respectively, of deferred compensation expense related to options granted.
The Company had two fixed stock plans during 1997. As a result of the
amalgamation, the Company had a stock option plan that was in existence since
Inception (the Canadian Plan). No options were ever issued as part of the
Canadian Plan, even though the Company had the ability to issue options to
acquire approximately 2,800,000 shares of the Company's common stock. In
February 1997, the Company's Board of Directors adopted the 1997 Stock Option
Plan, which replaced the Canadian Plan. Under the 1997 Stock Option Plan,
options to purchase up to 5,000,000 shares of common stock may be granted to
employees, directors, consultants and advisers. The 1997 Stock Option Plan is
intended to permit the Company to retain and attract qualified individuals who
will contribute to the Company's overall success. The exercise price of all of
the options is equal to the market price of the shares of common stock as of the
date of grant. The options vest pursuant to the individual stock option
agreements, usually 33 percent per year beginning one year from the grant date
with unexercised options expiring ten years after the date of the grant. On
February 10, 1997 the Board of Directors granted a total of 4,488,000 options to
purchase Common Shares to directors and employees of the Company. Certain grants
were considered vested based on past service as of February 10, 1997. The 1997
Stock Option Plan was
F-17
<PAGE>
approved by a vote of the stockholders at the Company's Annual Meeting of
Shareholders on May 21, 1997. to options granted.
A summary of the status of the Company's 1997 Stock Option Plan for the
year ended July 31, 1997 and changes during the period is presented below:
July 31, 1997
----------------------------
Weighted Average
Shares Exercise Price
Outstanding, beginning of period - -
Granted 4,488,000 $0.58
Exercised - -
Forfeited (5,000) $0.58
Outstanding, end of period 4,483,000 $0.58
========= =====
Options exercisable at end of period 1,786,332 $0.58
========= =====
Weighted average fair value of options granted
during the period $0.58
=====
The weighted average remaining contractual life of the stock options
outstanding at July 31, 1997 is approximately 9.5 years.
Because the Company has elected to remain with the accounting prescribed by
APB 25, no compensation cost has been recognized for its fixed stock option plan
based on FAS 123. Had compensation cost for the Company's stock-based
compensation plans been determined on the fair value of the grant dates for
awards under plan consistent with the method of FAS 123, the Company's net loss
and loss per share would have been increased to the pro forma amounts indicated
below:
July 31, 1997
-------------
Net Loss
As reported $(4,695,129)
Pro forma $(5,234,959)
Loss per share
As reported $ (0.18)
Pro forma $ (0.20)
The fair value of the option grant is estimated based on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for the grant in 1997: Dividend yield of 0.0%, expected volatility of 60%, risk-
free interest rate of 6.41%, and an expected life of ten years. No disclosure
is presented for the periods ended July 31, 1996 and 1995, as no options were
issued at those dates.
13. INTERNATIONAL OPERATIONS
The Company focuses on providing international satellite-based private
networks and international call services between the United States, Mexico,
Central and South America, and the Caribbean Basin. With the exception of a
portion of a $1.4 million contract which was completed in April 1996 and the
cash revenues generated by Computel, all of the
F-18
<PAGE>
Company's contracts to date have been denominated in, and have called for
payment in U.S. dollars, even though some of the contracts have been signed with
foreign entities. The Company's contracts are U.S. dollar denominated in order
to reduce risks of transacting business in foreign currencies, particularly with
regard to Mexican pesos.
The Company provides long distance services for many hotels, resorts and
other properties in other countries, primarily Mexico. Although these services
pertain to calls originating in Mexico, they are limited to telephone calls
charged to billing addresses primarily within the United States, or calls billed
to U.S. dollar denominated credit cards. Because the calls are billed and
connected on behalf of the Company within the United States, the Company
considers the associated revenues to be generated within the United States.
However, a portion of the expenses associated with processing these calls is
incurred within Mexico and, as such, is paid to Mexican entities. Because calls
originating from Mexico and the United States are terminated over shared lines
within the United States, the Company has no exact method of segregating all
costs related solely to calls originating in Mexico as of July 31, 1997.
With the acquisition of Computel in May 1997, the Company began providing
domestic call services in exchange for cash payment within Mexico, through
Computel's casetas. Computel also provides international call services through
the Company.
International networks effectively establish a communications "pipe"
through which voice, data, fax messages and video signals may be sent both to
and from a customer's desired location in the United States, Mexico, Central and
South America, and the Caribbean Basin. At the customer's discretion, the
Company may contract with either the domestic (U.S.-based) or the foreign entity
in order to provide such services. As of July 31, 1997, the Company had several
contracts with foreign entities in Mexico. If a contract is signed with a
foreign entity, the Company considers the network management associated revenues
to be generated in the country where the foreign entity is domiciled. All
entities under contract for network management services, whether foreign or
domestic, are pre-billed on a monthly basis for services to be performed.
The following table presents long distance services, network management
services, operating loss and identifiable assets by geographic area. The
identifiable assets of ATSI-Texas's parent company, ATSI-Canada, have been
included in the caption headed United States as they are immaterial in amount.
ATSI-Canada has no revenues as the Company's revenues are billed either by ATSI-
Texas or ATSI-Mexico. The table includes revenues and operating income of
Computel from May 1, 1997 to October 31, 1997 and the identifiable assets of
Computel as of July 31, 1997 and October 31, 1997.
F-19
<PAGE>
<TABLE>
<CAPTION>
For the Years ended July 31, For the Three-Month
---------------------------- -------------------
Periods ended
-------------
October 31,
-----------
(unaudited)
1995 1996 1997 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating revenues from unaffiliated
customers:
Long distance services
- ----------------------
United States $ 4,469,529 $ 10,806,586 $ 12,544,732 $2,580,929 $ 3,285,859
Mexico and other - - 1,421,249 - 1,147,576
------------ ------------ ------------ ---------- ------------
Total long distance services $ 4,469,529 $ 10,806,586 $ 13,965,981 $2,580,929 $ 4,433,435
============ ============ ============ ========== ============
Network management services
- ---------------------------
United States $ 318,312 $ 1,762,971 $ 2,064,262 $ 387,521 $ 1,079,882
Mexico and other - 905,127 198,144 - 518,002
------------ ------------ ------------ ---------- ------------
Total network management services $ 318,312 $ 2,668,098 $ 2,262,406 $ 387,521 $ 1,597,884
============ ============ ============ ========== ============
Operating loss
- --------------
United States ($1,950,489) ($2,079,456) ($3,927,977) ($721,788) ($1,048,431)
Mexico and other - 10,855 (273,740) (187,560) 72,585
------------ ------------ ------------ ---------- ------------
Total operating loss ($1,950,489) ($2,068,601) ($4,201,717) ($909,348) ($975,846)
============ ============ ============ ========== ============
Property, Plant and Equipment net of
- ------------------------------------
Accumulated Depreciation and
- ----------------------------
Amortization
- ------------
United States $ 1,353,819 $ 1,915,401 $ 2,513,186 $1,839,699 $ 4,067,020
Mexico and other - 231,746 4,058,802 340,243 3,585,113
------------ ------------ ------------ ---------- ------------
Total Property, Plant and Equipment $ 1,353,819 $ 2,147,147 $ 6,571,988 $2,179,942 $ 7,652,133
============ ============ ============ ========== ============
Identifiable assets
- -------------------
United States $ 2,653,646 $ 3,790,354 $ 6,659,651 $3,292,913 $ 7,302,330
Mexico and other - 394,138 6,832,794 526,518 5,571,468
------------ ------------ ------------ ---------- ------------
Total identifiable assets $ 2,653,646 $ 4,184,492 $ 13,492,445 $3,819,431 $ 12,873,798
============ ============ ============ ========== ============
</TABLE>
F-20
<PAGE>
14. INCOME TAXES
As of July 31,1997, the Company had net operating loss carryforwards of
approximately $9,092,000 for U.S. federal income tax purposes which are
available to reduce future taxable income of which $320,000 will expire in 2009,
$1,930,000 will expire in 2010, $2,205,000 will expire in 2011 and $4,637,000
will expire in 2012. The availability of the net operating loss (NOL)
carryforwards to reduce U.S. federal taxable income is subject to various
limitations in the event of an ownership change as defined in Section 382 of the
Internal Revenue Code of 1986 (the "Code"). The Company experienced a change in
ownership in excess of 50 percent, as defined in the Code, during the year ended
July 31, 1997. This change in ownership limits the annual utilization of NOL
under the Code to $930,000 per year, but does not impact its ability to utilize
its NOL's because the annual limitation under the Code would allow full
utilization within the statutory carryforward period.
The tax effects of significant temporary differences representing deferred
income tax assets and liabilities are as follows as of July 31, 1996 and 1997:
July 31,1996 July 31, 1997
Net operating loss carryforward $ 1,515,000 $ 3,090,000
Other tax differences, net (162,000) (315,000)
Valuation allowance (1,353,000) (2,775,000)
----------- ------------
Total deferred income tax assets $ - $ -
=========== ============
The valuation allowance as of July 31, 1996 and 1997 represents tax
benefits of certain net operating loss carryforwards which were not realizable
at that date.
The Company's income tax benefit at the statutory federal income tax rate
for the years ended July 31, 1995 ,1996 and 1997 differs from the actual income
tax benefit of $0 for those periods, as the Company has provided a valuation
reserve equal to the income tax benefit amount computed at the statutory federal
tax rate.
15. SHARES HELD IN TRUST
In conjunction with the amalgamation, 300,000 of the 10,790,307 shares
issued to the former shareholders of Latcomm were issued to a trust. These
shares were to be held for future award to employees in return for services to
be rendered to the Company. Because the shares held in trust held no voting
rights, the shares were considered to be issued, but not outstanding, until
awarded and earned by specific employees. As of July 31, 1996 a total of
225,000 of these shares had been awarded to employees for services to be
provided to the Company. During fiscal 1997, the additional 75,000 shares were
awarded to employees. At July 31, 1996 and 1997 and October 31, 1997, the
Company had deferred compensation expense of $55,556, $22,232 and 13,901,
respectively.
16. REGISTRATION STATEMENT
The Company filed a Form 10 Registration Statement ("Form 10") with the
United States Securities and Exchange Commission ("SEC") on August 21, 1997 for
the purpose of registering its shares of common stock under the Securities
Exchange Act of 1934, as amended. (See Note 19)
F-21
<PAGE>
The Company filed a Form S-4 Registration Statement ("S-4"), No. 333-05557,
with the SEC on June 7, 1996, Amendment No. 1 to the S-4 on November 20, 1996,
and Amendment No. 2 to the S-4 on September 11, 1997. The S-4 filings are in
conjunction with a proposed "Plan of Arrangement." The Plan of Arrangement
contemplates a share exchange with ATSI-Canada. If all requisite approvals are
obtained, this share exchange will result in the stockholders of ATSI-Canada
exchanging their shares on a one-for-one basis for shares of ATSI-Delaware, and
ATSI-Delaware will become the publicly-traded parent entity of the Company. The
Plan of Arrangement must be approved by the Canadian court system and the
Company's stockholders before it can be effected. The shares of ATSI-Delaware to
be issued in the Plan of Arrangement will be registered pursuant to the Form S-
4. (See Note 19)
17. COMMITMENTS AND CONTINGENCIES
In January 1995, the Company was named as a defendant in a lawsuit in the
45th Judicial District Court in Bexar County, Texas (Teleplus, Inc. And Capital
Network Systems, Inc. v. American TeleSource International, Inc., et al., case
no. 95-CI-01168). The complaint, filed by a competitor of the Company, alleged,
among other things, that the Company conspired with former agents of the
plaintiffs to persuade customers of the plaintiffs' to breach their contracts so
that the Company could provide operator services to such customers. The Company
subsequently filed a counterclaim against the plaintiffs claiming that they
engaged in anticompetitive conduct. In April 1996, all parties agreed to
dismiss all claims, counterclaims and cross-claims that had been brought or
could have been brought related to the litigation. The agreement, among other
things, established current customer lists for the parties within Mexico as of
April 1996, and set forth how both the plaintiffs and defendants may market
their services against each other in the future. The agreement does not prevent
the Company from growing its customer base within Mexico.
Effective January and February 1997, five officers of the Company entered
into employment agreements with ATSI-Texas, each for a period of three years
(with automatic one-year extensions) unless earlier terminated in accordance
with the terms of the respective agreements. The annual base salary under such
agreements for each of these five officers may not be less than $100,000,
$95,000, $92,000, $92,000 and $92,000, respectively, per annum, and is subject
to increase within the discretion of the Board. In addition, each of these
officers is eligible to receive a bonus in such amount as may be determined by
the Board of Directors from time to time. Bonuses may not exceed 50% of the
executive's base salary in any fiscal year.
The Company is involved in certain claims in the ordinary course of
business. In management's judgment, the ultimate liability, if any, from such
claims will not have a material effect on the Company's financial position and
results of operations.
18. REGULATORY MATTERS
Operator Services in Mexico
---------------------------
Since its Inception, the Company's near-term strategy has been to position
itself to take advantage of the deregulation of the Mexican telecommunications
industry. The Company believes that significant opportunities to provide call
services within Mexico and between Mexico and the U.S. have arisen and will
continue to arise from the law written into effect in June 1995 by the SCT,
which provides for the methods by which companies can apply for concessions and
licenses to establish and operate telecommunications services businesses within
Mexico. This law was, effectively, the first step in the deregulation of the
telephone industry within Mexico. It also formalized the methods by which
companies
F-22
<PAGE>
may compete against Telefonos de Mexico ("Telmex"), the privately owned
telecommunications monopoly in Mexico. On August 10, 1996, Telmex lost its
monopoly status and long distance exclusivity, thereby allowing other
concessioned carriers to begin offering domestic and international long distance
services within Mexico ; however, new carriers must still interconnect to
Telmex's local network and pay a fee per minute of usage. In January 1997,
Telmex began implementation of a plan imposed by the SCT which mandates that
Telmex offer local interconnection to other carriers in all Mexican cities by
July 1997. Alternatively, concessioned carriers with wireless local access, such
as via cellular or microwave, are currently allowed by Mexican law to bypass
Telmex's local network and connect directly into their own long distance
networks.
ATSI-Mexico has applied for and obtained several licenses from the SCT
which the Company believes will enable it to expand significantly its call
services that it currently provides in Mexico. Such licenses, among other
things, will enable the Company to purchase network capacity from Telmex or
other concessioned carriers at stable, wholesale prices. On November 20, 1996,
the Company signed an interconnection agreement with Investcom, S.A. de C,V.,
one of the twelve companies that has been granted a concession by the SCT to
begin offering domestic and international long distance services within Mexico.
The Company began processing calls through Investcom's network within Mexico at
wholesale rates during May 1997, thereby lowering the Company's cost of
transporting telephone calls from their point of origin in Mexico to the
Company's switching facilities in San Antonio, Texas. On December 16, 1996, the
SCT published, and therefore adopted, the rules and regulations under which
companies may own and operate public phones within Mexico. The adoption of these
rules and regulations, in the opinion of the Company's management, served as a
precursor to the issuance of the comercializadora license that the Company
received February 20, 1997. As of July 31, 1997, the Company is one of four
companies that has received its comercializadora license to own and operate
public phones. There can be no assurance that one other pending license or any
other such licences sought in the future will be obtained, and if obtained, that
such licenses will enable the Company to expand operations or increase revenue
in Mexico.
Operator Services in the U.S.
-----------------------------
The Company began providing operator services in the U.S. in August 1994.
The Federal Communications Commission (FCC) requires the filing of informational
tariffs concerning such services and requires both written and verbal
identification of the operator service provider ("OSP") on each call processed.
The Company believes it is in full compliance with all applicable regulations
set forth by the FCC. Many state regulatory bodies have imposed similar or
identical regulations upon operator services for intrastate telecommunication.
The Company is currently in the process of making the appropriate filings for
these informational tariffs in order to maintain compliance with these
jurisdictional requirements.
Since April 1992 the FCC has been considering the implementation of a
"Billed Party Preference ("BPP") system whereby a caller could automatically
route operator assisted calls to a pre-selected carrier. If adopted BPP could
fundamentally change the operator services industry. The FCC proposed adopting
BPP in 1992 and then again in 1994, but quickly received comments from industry
representatives, suggesting that the implementation and maintenance of BPP would
be extremely difficult to implement and would not be cost-effective.
The FCC again requested comment from the industry in March 1995 on two
proposals that it had received related to BPP. The first proposal was from the
National Association of Attorneys General, which suggested that OSPs modify the
branding that is required at the beginning of a call to include more specific
information for obtaining access to alternative carriers. The second proposal
was from a group of industry members including a majority of the Regional Bell
Operating Companies and the American Public Communications Counsel (APCC). The
Company is a member of the APCC. This proposal suggested that reasonable rate
limits be established for interstate operator assisted services and that any
OSPs wanting to charge rates in excess of these limits must first be required to
justify its rates to the FCC based upon its underlying costs.
In July 1996, the FCC issued a second "Further Notice of Proposed
Rulemaking" in which it effectively endorsed the proposal from the National
Association of Attorneys General. The FCC proposed a rule which would require
OSPs to
F-23
<PAGE>
announce rates for certain calls prior to connecting the call, and allowing the
billed party to disconnect this call without incurring any charges. Comments,
which were due to the FCC in August 1996, were again heavily weighted against
adoption of the proposal.
If BPP or a similar system is adopted by the FCC the Company's domestic
operator service traffic could be materially adversely affected. Approximately
25% of the Company's long distance services revenues were generated from such
calls during the year ended July 31, 1997, although this percentage is expected
to decrease in the future as the volume of international calls continues to
increase. The Company cannot predict when and if any final ruling will be
issued by the FCC related to BPP, but the Company does not expect any ruling on
BPP to be implemented in the near term.
Changes in certain regulations may potentially preclude or impair the
Company's ability to provide operator services within certain jurisdictions.
Although, the Company does not foresee any such changes, it cannot predict
whether such changes may occur. Therefore, the Company cannot estimate the
impact of such changes upon its operator services in the event of any such
change.
19. SUBSEQUENT EVENTS - EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF AUDITOR'S
REPORT
During October 1997, the Company entered into a short-term note payable
with one of its shareholders in the amount of $200,000. Interest accrues at the
rate of 12% per year. During the month of November, the Company paid the note in
full, including accrued interest of approximately $2,800.
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. At
October 31, 1997, the Company had received approximately $450,000 related to
said note. Subsequent to the end of the quarter, the Company received the
additional balance consisting of $550,000. 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 is immaterial. In January
1998, the noteholder exercised warrants called by the Company, in consideration
of an approximate $500,000 reduction of the Company's debt due the noteholder.
In November 1997, the Company purchased certain assets of Comunicaciones
del Caribe, S.A. de C.V. (CDC), one of the Company's independent marketing
representatives in the Cancun/Cozumel area of Mexico. Under the purchase
agreement, the Company paid $600,000 in cash and agreed to pay another $450,000
to CDC in equal monthly installments over a twelve-month period. The Company
will make the monthly payments with shares of the Company's Common Stock. The
number of shares issued will equal the monthly payment divided by the fair
market value of the Company's stock on the date of payment. The assets
purchased consist primarily of contracts with private property owners under
which ATSI will provide call services over a three year period. The cost of
these contracts will be amortized over their contract period.
In November 1997, the Company exercised the call feature on approximately
2.8 million warrants which were outstanding. As of February 28, 1998, all such
warrants had been exercised, resulting in cash proceeds of approximately $1.5
million and an approximate $500,000 reduction of indebtedness.
The Company filed Amendment No. 1 to the Form 10 Registration Statement
with the SEC on October 22, 1997. Such Registration Statement became effective
on October 20, 1997.
The Company filed Amendment No. 3 to the S-4 Registration Statement on
December 3, 1997 and Amendment No. 4 to the S-4 Registration Statement on
December 11, 1997. Such Registration Statement, as amended, became effective on
December 11, 1997. On or about March 5, 1998, the Company anticipates filing a
new Registration Statement on Form S-4 containing a combined Prospectus,
pursuant to Rule 429(b) under the Securities Act of 1933, as amended, which also
relates to the Registration Statement identified in Note 16 (No. 333-05557). At
the time of filing such new Registration Statement, no shares will have been
sold under Registration Statement No. 333-05557.
F-24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
American TeleSource International, Inc.:
We have audited the accompanying balance sheet of American TeleSource
International, Inc. (a Delaware corporation) as of December 1, 1997. This
financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of American TeleSource
International, Inc. as of December 1,1997 in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
December 1, 1997
F-25
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC. - DELAWARE
BALANCE SHEET
(Presented in U.S. dollars)
<TABLE>
<CAPTION>
December 1,
1997
----------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $1,000
------
Total current assets 1,000
------
Total assets $1,000
======
STOCKHOLDERS' EQUITY:
Common shares, $0.001 par value, 1,000
authorized, issued and outstanding
at December 1, 1997 $ 1
Additional paid in capital $ 999
------
Total stockholders' equity 1,000
------
Total liabilities and stockholders' equity $1,000
======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-26
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC. - DELAWARE
NOTES TO BALANCE SHEET
DECEMBER 1, 1997
1. BASIS OF PRESENTATION
This balance sheet has been prepared on the accrual basis of accounting
under accounting principles generally accepted in Canada.
The accompanying balance sheet is presented for the purposes of the rules
of the Ontario Securities Commission as it relates to the Plan of Arrangement as
described in the prospectus.
See the Consolidated Financial Statements of American TeleSource
International Inc. and Notes thereto for the year ended July 31, 1997 for
accounting policies of the Company.
F-27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Sistema de Telefonia Computarizada, S.A. de C.V.:
We have audited the accompanying consolidated statement of operations,
stockholders' equity and cash flows of Sistema de Telefonia Computarizada, S.A.
de C.V. ( a Mexican corporation) and subsidiaries for the year ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations of Sistema de
Telefonia Computarizada, S.A. de C.V. and subsidiaries for the year ended
December 31, 1996 and their cash flows for the year ended December 31, 1996 , in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company has suffered recurring losses
from operations since inception and has limited capital resources available to
support further development of its operations. These matters raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
ARTHUR ANDERSEN LLP
San Antonio, Texas
October 24, 1997
F-28
<PAGE>
SISTEMA DE TELEFONIA COMPUTARIZADA, S.A. DE C.V.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Presented in Mexican pesos)
<TABLE>
<CAPTION>
For the
Year ended For the six months ended
December 31, June 30, June 30,
1996 1996 1997
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
OPERATING REVENUES:
Long distance services $46,627,009 $22,423,658 $27,813,778
------------ ------------ ------------
Total operating revenues 46,627,009 22,423,658 27,813,778
------------ ------------ ------------
OPERATING EXPENSES:
Cost of services 26,677,524 10,921,409 11,872,312
Selling, general and administrative 25,793,348 14,604,640 14,814,993
Depreciation and amortization 1,072,101 654,104 299,529
------------ ------------ ------------
Total operating expenses 53,542,973 26,180,153 26,986,834
------------ ------------ ------------
OPERATING INCOME (LOSS) (6,915,964) (3,756,495) 826,944
OTHER INCOME (EXPENSE):
Interest expense (1,075,360) (254,408) (652,542)
Other expense (44,771) - -
------------ ------------ ------------
Total other expense (1,120,131) (254,408) (652,542)
------------ ------------ ------------
NET INCOME (LOSS) ($8,036,095) ($4,010,903) $174,402
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-29
<PAGE>
SISTEMA DE TELEFONIA COMPUTARIZADA, S.A. DE C.V.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Presented in Mexican pesos)
<TABLE>
<CAPTION>
Common Shares Total
--------------------- Accumulated Stockholders'
Shares Amount Deficit Equity
------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995 3,396 3,396,862 ($4,902,678) ($1,505,816)
Net loss - - (8,036,095) (8,036,095)
------ ----------- ------------ ------------
BALANCE, December 31, 1996 3,396 3,396,862 (12,938,773) (9,541,911)
Net income (unaudited) - - 174,402 174,402
====== =========== ============= ============
BALANCE, June 30, 1997 (unaudited) 3,396 3,396,862 ($12,764,371) ($9,367,509)
====== =========== ============= ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-30
<PAGE>
SISTEMA DE TELEFONIA COMPUTARIZADA, S.A. DE C.V.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Presented in Mexican pesos)
<TABLE>
<CAPTION>
For the
Year ended For the six months ended
December 31, June 30, June 30,
1996 1996 1997
----------- ----------- ----------
(unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($8,036,095) ($4,010,903) $174,402
Adjustments to reconcile net income (loss) to net
cash provided by operating activities-
Depreciation and amortization 1,072,101 654,104 299,529
Changes in operating assets and liabilities
Increase in accounts receivable (947,229) (11,012) (2,215,978)
Increase in accounts payable 3,667,056 2,420,381 1,208,992
Increase in accrued liabilities 952,186 1,744,817 689,949
Increase in deferred revenue - 107,051 778,165
Increase in other long-term liabilities 4,536,407 - 251,698
------------ ------------ ----------
Net cash provided by operating activities 1,244,426 904,438 1,186,757
------------ ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,142,746) (382,132) (317,282)
------------ ------------ ----------
Net cash used in investing activities (1,142,746) (382,132) (317,282)
------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 432,600 138,696 -
Payments on debt (80,153) - (270,207)
------------ ------------ ----------
Net cash provided by (used in) financing activities 352,447 138,696 (270,207)
------------ ------------ ----------
NET INCREASE IN CASH 454,127 661,002 599,268
CASH, beginning of period 140,691 140,691 594,818
------------ ------------ ----------
CASH, end of period $594,818 $801,693 $1,194,086
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-31
<PAGE>
SISTEMA DE TELEFONIA COMPUTARIZADA, S.A. DE C.V.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND JUNE 30, 1997
The information utilized in the following Notes is presented in Mexican pesos
unless otherwise noted.
1. BUSINESS ACTIVITY
The company was originally incorporated under the laws of Guadalajara, Mexico
on March 9, 1994, under the name Sistema de Telefonia Computarizada, S.A. de
C.V. (Sistema). Collectively, Sistema and its related subsidiaries are referred
to as "Computel" or the "Company".
Computel conducts its primary operations through Sistema. Sistema provides
various call services from its 134 casetas (public calling stations) located in
approximately 72 cities throughout Mexico. Casetas are calling facilities
strategically located in Mexico to serve telephone needs of travelers and
Mexican nationals lacking personal telephone access. Casetas feature comfort
and privacy not available on street side telephone locations. A caseta
typically includes three-to-four telephones serviced by three-to-four phone
lines. Casetas offer multiple services including local telephone calls,
domestic long distance calls, international long distance calls, collect,
calling card, and credit card calls, voice mail and fax transmission and
reception.
In May 1997, the Company and its shareholders entered into an agreement to
sell up to 100% of its outstanding shares to American TeleSource International
Inc., a long distance call service provider in the United States. Under the
terms of the agreement, the Company's shareholders relinquished 55% of their
shares effective May 1, 1997, and the remaining 45% on August 28, 1997, when
the transaction was completed.
2. FUTURE OPERATIONS
The accompanying consolidated financial statements of the Company have been
prepared on the basis of accounting principles applicable to a going concern.
For the periods through December 31, 1996 and June 30, 1997, respectively, the
Company has incurred cumulative net losses of $12,938,773 and $12,764,371,
respectively. Further, the Company had working capital deficits of $21,178,887
at December 31, 1996 and $20,643,733 at June 30, 1997. 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. 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 stockholder 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. If the Company is not successful in obtaining
additional financial resources, 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
Principles of Consolidation and Basis of Presentation
-----------------------------------------------------
The consolidated financial statements were originally prepared in accordance
with the generally accepted accounting principles of Mexico. All adjustments
necessary to present the consolidated financial statements in accordance with
U.S. generally accepted accounting principles have been recorded. All
significant intercompany balances and transactions have been eliminated in
consolidation.
In the opinion of management, the unaudited financial statements for the six
month periods ended June 30, 1996 and June 30, 1997 are presented on a basis
consistent with the audited financial statements and contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation. The results of operations for interim periods are not necessarily
indicative of results of operations for the full year.
F-32
<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 casetas as such services are
performed.
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 three to twenty years. Expenditures for maintenance
and repairs are charged to expense as incurred. Direct installation costs and
major improvements are capitalized.
Income Taxes
------------
The Company has incurred losses since its incorporation for both book and tax
purposes as of December 31, 1996. Accordingly, no income taxes have been
provided for in the accompanying consolidated financial statements for the year
ended December 31, 1996.
Statements of Cash Flows
------------------------
Cash payments and non-cash activities during the periods indicated were as
follows:
<TABLE>
<CAPTION>
For the year ended For the six months For the six months
December 31, 1996 ended June 30, 1996 ended June 30, 1997
----------------- ------------------- -------------------
<S> <C> <C> <C>
Cash payments
for interest $165,086 $74,633 $259,568
</TABLE>
For purposes of determining cash flows, the Company considers all temporary
cash investments with an original maturity of three months or less to be cash
equivalents.
<TABLE>
<CAPTION>
<S> <C>
4. NOTES PAYABLE
</TABLE>
Maturities of notes payable as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $ 959,575
1998 $ 446,167
1999 $ 204,804
2000 $ 118,286
2001 $ 118,286
Thereafter $ 1,773,989
-----------
Total $ 3,621,107
===========
</TABLE>
F-33
<PAGE>
5. LEASES
The Company leases office space under certain noncancelable operating
leases and certain month-to-month leases. Rental expense under the operating
leases for the year ended December 31, 1996 was $ 3,151,873. Future minimum
lease payments under the noncancelable operating leases at December 31, 1996,
are as follows:
<TABLE>
<S> <C>
1997 $ 986,340
1998 $ 200,292
1999 $ 104,904
Thereafter $ -
----------
Total minimum lease payments $1,291,536
==========
</TABLE>
Capital Leases
--------------
Future minimum lease payments under the capital leases as of December 31,
1996, are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1997 $ 328,417
1998 $ 346,764
1999 $ 346,764
2000 $ 346,764
2001 $ 346,764
Thereafter $4,507,932
----------
Total Minimum lease payments $6,223,405
==========
</TABLE>
6. SALE OF COMPUTEL
In May 1997, the Company and its shareholders entered into an agreement to
sell up to 100% of its outstanding shares to American TeleSource International
Inc., (ATSI) a long distance call services provider located in the United
States. Under the terms of the agreement, the Company's shareholders
relinquished 55% of the shares of Computel effective May 1, 1997, and the
remaining shares in late August 1997. The total sale price was approximately
US$3.6 million, of which US$1.1 million was to be received in cash, US$700,000
in a note payable forgiven by ATSI and the balance in common stock of ATSI. The
Company's shareholders received 2,715,546 shares of ATSI common stock in
exchange for 55% of their shares and the remaining shares were acquired on
August 28, 1997 for a cash payment of approximately US$1.1 million and
forgiveness of the US$700,000 note payable.
7. INCOME TAXES
As of December 31, 1996, the Company had net operating loss carryforwards of
approximately $3,455,050 for Mexican federal income tax purposes which are
available to reduce future taxable income of which $840,526 will expire in 2004,
$307,809 will expire in 2005 and $2,306,715 will expire in 2006.
F-34
<PAGE>
The Company's income tax benefit at the statutory federal income tax rate for
the year ended December 31, 1996 differs from the actual income tax benefit of
$0 for those periods, as the Company has provided a valuation reserve equal to
the income tax benefit amount computed at the statutory federal tax rate.
The Company is subject to asset tax, which is computed at an annual rate of
1.8% of the average of certain assets less certain liabilities, and the tax is
paid only to the extent that it exceeds the income taxes of the period. The
Company must compute asset taxes beginning in 1998.
F-35
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL INC. AND SUBSIDIARIES
INTRODUCTION TO
PRO FORMA CONSOLIDATED STATEMENT OF LOSS
FOR THE YEAR ENDED JULY 31, 1997
(UNAUDITED)
The following unaudited pro forma consolidated statement of loss for the year
ended July 31, 1997, gives effect to the following:
- The acquisition of Sistema de Telefonia Computarizada, S.A. de C.V. and
subsidiaries (Computel), which was effective as of August 28, 1997, is assumed
to have occurred as of August 1, 1996.
The unaudited pro forma consolidated statement of loss for the year ended July
31, 1997, reflects the audited historical income statement of the Company for
the year ended July 31, 1997, and the unaudited historical income statement of
Computel for the twelve-month period ended June 30, 1997.
The pro forma financial information does not reflect the effects of any of the
anticipated changes to be made by the Company in Computel operations.
The pro forma statements are provided for informational purposes only and
should not be construed to be indicative of the Company's results of operations
had the transactions actually been consummated on the date assumed and do not
project the Company's results of operations for any future period. The
significant assumptions and adjustments are disclosed in the accompanying notes
to the unaudited pro forma consolidated statement of loss.
The following unaudited pro forma consolidated statement of loss and
accompanying notes should be read in conjunction with the audited financial
statements and other financial information pertaining to the Company and
Computel.
F-36
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL INC.
AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF LOSS
(Presented in U.S. dollars)
<TABLE>
<CAPTION>
ATSI Computel
Year Ending Year Ending Pro Forma Pro Forma
July 31, 1997 June 30, 1997 Adjustments Consolidated
------------- ------------- ----------- ------------
(audited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Long distance services $13,965,981 $6,675,710 ($1,929,348)(a)(b) $18,712,343
Network management services 2,262,406 - - 2,262,406
----------- ---------- ----------- -----------
Total operating revenues 16,228,387 6,675,710 (1,929,348) 20,974,749
----------- ---------- ----------- -----------
OPERATING EXPENSES:
Cost of services 12,792,338 3,439,867 (847,583)(a)(b) 15,384,622
Selling, general and administrative 7,047,020 3,437,143 (889,102)(a) 9,595,061
Depreciation and amortization 590,746 98,048 77,109 (a)(c) 765,903
----------- ---------- ----------- -----------
Total operating expenses 20,430,104 6,975,058 (1,659,576) 25,745,586
----------- ---------- ----------- -----------
OPERATING LOSS (4,201,717) (299,348) (269,772) (4,770,837)
OTHER INCOME (EXPENSE):
Interest expense (512,838) (189,103) 66,108 (a) (635,833)
Interest income 26,839 - (7,996)(a) 18,843
Other income (expense) 40,800 (5,746) - 35,054
----------- ---------- ----------- -----------
Total other income (expense) (445,199) (194,849) 58,112 (581,936)
----------- ---------- ----------- -----------
MINORITY INTEREST (48,213) - 48,213 (d) -
NET LOSS ($4,695,129) ($494,197) ($163,447) ($5,352,773)
=========== ========= ========== ===========
NET LOSS PER SHARE ($0.18) ($0.19)
AVERAGE COMMON SHARES OUTSTANDING 26,807 2,031 (e) 28,838
=========== ========= ========== ===========
</TABLE>
The accompanying notes are an integral part of these
pro forma consolidated financial statements.
F-37
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The information utilized in the following Notes is presented in U.S. dollars.
1. PRO FORMA ADJUSTMENTS
The following pro forma adjustments have been made to the financial statements
of ATSI and Computel to reflect the acquisition as of the beginning of the year
ended July 31, 1997 for the pro forma consolidated statements of loss:
a) To eliminate Computel's operations for May, June and July - which are
already consolidated in ATSI's results as of July 31, 1997.
b) To eliminate intercompany revenues and cost of sales between ATSI and
Computel on long distance call services for the periods January 1997 through
April 1997, in the amount of $143,527.
c) To record amortization of goodwill for the period August 1996 through April
1997 in the amount of $104,519. Amortization of $14,245 has already been
reflected in ATSI's consolidated operations for the year ended July 31, 1997.
Goodwill is being amortized over its estimated useful life of 40 years.
d) To eliminate the minority interest reflected in ATSI's statement of loss
for the year ending July 31, 1997, in the amount of $48,213, assuming that ATSI
acquired 100% of the outstanding shares of Computel as of August 1, 1996.
e) To record the increase in average common shares outstanding for the
2,715,546 shares issued to Computel's shareholders, as if the acquisition had
occured as of August 1, 1996. The incremental difference is 2,031,00 shares as
ATSI has already included the 2,715,546 shares in its shares outstanding
beginning May 1, 1997.
The pro forma results of operations for the twelve months ended July 31, 1997
are not necessarily indicative of the results of operations that would have been
achieved had the acquisition occurred prior to the periods indicated.
F-38
<PAGE>
EXHIBIT A
ARRANGEMENT AGREEMENT BETWEEN ATSI-CANADA AND ATSI-DELAWARE
EXHIBIT - A-1
<PAGE>
EXHIBIT A
ARRANGEMENT AGREEMENT
THIS ARRANGEMENT AGREEMENT is dated as of the 16th day of February, 1998.
BETWEEN:
AMERICAN TELESOURCE INTERNATIONAL
INC., a corporation amalgamated pursuant to the provisions
of the Business Corporations Act (Ontario)
(hereinafter referred to as "ATSI-Canada")
-- and --
AMERICAN TELESOURCE INTERNATIONAL, INC., a corporation incorporated
pursuant to the provisions of the Delaware General Corporation Laws
(hereinafter referred to as "ATSI-Delaware")
WHEREAS ATSI-Canada wishes to propose an arrangement with ATSI-Delaware and with
the shareholders of ATSI-Canada in order to reorganize its affairs and therefore
wishes to carry out certain transactions on the basis hereinafter set forth;
AND WHEREAS ATSI-Canada proposes to convene a meeting of its shareholders to,
among other things, approve the transactions contemplated herein by way of an
arrangement (the "Arrangement") under the provisions of the Business
Corporations Act (Ontario);
AND WHEREAS, upon the Arrangement becoming effective, the ATSI-Canada Common
Shares will be exchanged for ATSI-Delaware Common Shares in accordance with the
provisions of this agreement and the Plan of Arrangement (as defined herein);
AND WHEREAS the parties hereto have entered into this agreement to provide for
the matters referred to in the foregoing recitals and for other matters relating
to such arrangement;
NOW THEREFORE, in consideration of the promises and the respective covenants and
agreements herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by each of the parties
hereto, the parties hereto hereby covenant and agree as follows:
A-1
<PAGE>
ARTICLE ONE
DEFINITIONS AND INTERPRETATION
Section 1.01 Definitions: In this Agreement, unless there is something in the
subject matter or context inconsistent therewith, the following capitalized
words and terms shall have the following meanings:
"ATSI-Canada" means American TeleSource International Inc., a corporation
amalgamated under the OBCA;
"ATSI-Canada Common Shares" means the common shares in the capital of ATSI-
Canada, as the same are constituted on the date hereof;
"ATSI-Canada Financial Statements" means the audited consolidated financial
statements of ATSI-Canada for the years ended July 31, 1995, 1996 and 1997 and
the unaudited consolidated financial statements of ATSI-Canada for the three
month periods ended October 31, 1996 and 1997;
"ATSI-Canada Meeting" means the special meeting of shareholders of ATSI-Canada
to be held to consider, among other things, the Arrangement, and any adjournment
thereof;
"ATSI-Delaware" means American TeleSource International, Inc., a corporation
incorporated under the DGCL;
"ATSI-Delaware Common Shares" means the shares of common stock in the capital of
ATSI-Delaware, as the same are constituted on the date hereof;
"ATSI-Texas" means American TeleSource International, Inc., a corporation
incorporated under the laws of the state of Texas and a wholly-owned subsidiary
of ATSI-Canada.
"Agreement" means this arrangement agreement as the same may be supplemented or
amended from time to time;
"Arrangement" means the arrangement pursuant to section 182 of the OBCA, on the
terms and conditions set forth herein and in the Plan of Arrangement;
"Business Day" means a day which is not a Saturday, Sunday or statutory holiday
in Canada;
"CDN" means the Canadian Dealing Network;
"Charter Documents" means articles and by-laws;
"Court" means the Ontario Court of Justice (General Division);
A-2
<PAGE>
"DGCL" means the Delaware General Corporation Laws;
"Director" means the Director under the OBCA;
"Dissenting Shareholders" means holders of ATSI-Canada Common Shares who
exercise in accordance with applicable statutory provisions the right of dissent
available to such holders in respect of the Arrangement, and do not withdraw
such dissent;
"Effective Date" means the date set forth in the certificate of arrangement
issued by the Director under the OBCA giving effect to the Arrangement;
"Final Order" means the final order of the Court approving the Arrangement;
"Interim Order" means the interim order of the Court concerning the Arrangement
pursuant to the application therefor contemplated by section 2.01 hereof as such
Interim Order may be amended;
"OBCA" means the Business Corporations Act, R.S.O. 1990, c. B.16, as amended;
"OSC" means the Ontario Securities Commission;
"Person" includes an individual, sole proprietorship, partnership,
unincorporated association, unincorporated syndicate, unincorporated
organization, trust, body corporate, trustee, executor, administrator or other
legal representative of the Crown or any agency or instrumentality thereof,
"Plan of Arrangement" means the plan of arrangement attached to this Agreement
as Exhibit 1, as amended from time to time;
"Proxy Circular" means the Circular of ATSI-Canada and Proxy
Statement/Prospectus of ATSI-Delaware forming part of the Registration
Statement, which Proxy Circular is to be sent to the shareholders of ATSI-Canada
in connection with the ATSI-Canada Meeting;
"Registration Statement" means the Form S-4 Registration Statement of ATSI-
Delaware to be filed with the SEC on or about March __, 1998, as the same may be
amended from time to time;
"SEC" means the United States Securities and Exchange Commission;
"Subsidiary" means a subsidiary as defined in the OBCA.
Section 1.02 Currency: All amounts of money which are referred to in this
Agreement are expressed in lawful money of the United States of America unless
otherwise specified.
Section 1.03 Interpretation Not Affected by Heading: The division of this
Agreement into articles, sections, subsections, paragraphs and subparagraphs and
the insertion of headings are for convenience of reference only and shall not
affect the construction or interpretation of the
A-3
<PAGE>
provisions of this Agreement. The terms "this Agreement", "hereof'", "herein",
"hereunder" and similar expressions refer to this Agreement and the exhibit
hereto as a whole and not to any particular article, section, subsection,
paragraph or subparagraph hereof and include any agreement or instrument
supplementary or ancillary hereto.
Section 1.04 Number and Gender: Unless the context otherwise requires, words
importing the singular number only shall include the plural and vice versa and
words importing the use of either gender shall include both genders and neuter.
Section 1.05 Date for Any Action: In the evens that any date on which any
action is required to be taken hereunder by any of the parties hereto is not a
Business Day in the place where the action is required to be taken, such action
shall be required to be taken on the next succeeding day which is a Business Day
in such place.
Section 1.06 Meaning Words and phrases used herein and defined in the OBCA
shall have the same meaning herein as in the OBCA unless the context otherwise
requires.
ARTICLE TWO
ARRANGEMENT
Section 2.01 Arrangement: As soon as reasonably practicable, ATSI-Canada shall
apply to the Court pursuant to section 182 of the OBCA for an order approving
the Arrangement and in connection with such application shall:
A. forthwith file, proceed with and diligently prosecute an application
for an Interim Order under section 182 of the OBCA providing for,
among other things, the calling and holding of the ATSI-Canada
Meeting; and
B. subject to obtaining such approval of the shareholders of ATSI-Canada
as contemplated in the Interim Order as may be directed by the Court
in the Interim Order, take the steps necessary to submit the
Arrangement to the Court and apply for the Final Order,
and, subject to the fulfillment of the conditions set forth in Article Five,
ATSI-Canada shall deliver to the Director articles of arrangement and such other
documents as may be required to give effect to the Arrangement.
Section 2.02 Effective Date: The Arrangement shall become effective on the
Effective Date, which shall not be later than April 30, 1998 unless otherwise
agreed to in writing by ATSI-Canada and ATSI-Delaware.
A-4
<PAGE>
ARTICLE THREE
REPRESENTATIONS AND WARRANTIES
Section 3.01 Representations and Warranties of ATSI-Delaware: ATSI-Delaware
hereby represents and warrants to and in favour of ATSI-Canada and acknowledges
that ATSI-Canada is relying upon such representations and warranties in
connection with the matters contemplated by this Agreement, that:
A. ATSI-Delaware has been duly incorporated and is a valid and subsisting
corporation under the provisions of the DGCL;
B. ATSI-Delaware does not carry on any business and has no material
assets or liabilities;
C. ATSI-Delaware has no Subsidiaries;
D. the authorized capital of ATSI-Delaware consists of 100,000,000 shares
of Common Stock, $0.001 par value per share and 10,000,000 shares of
Preferred Stock, $0.001 par value per share, of which as of the date
hereof, 1,000 shares of Common Stock were issued and outstanding;
E. the execution, delivery and performance of this Agreement and the
agreements, documents and transactions contemplated herein are within
the corporate power and authority of ATSI-Delaware and have been duly
authorized by all necessary corporate action and this Agreement
constitutes a valid and binding obligation of ATSI-Delaware
enforceable in accordance with its terms;
F. ATSI-Delaware does not have any outstanding agreements, subscriptions,
warrants, options or commitments, nor has it granted any rights or
privileges capable of becoming an agreement, subscription, warrant,
option or commitment, obligating ATSI-Delaware to issue any additional
shares or other securities;
G. there are no actions, suits, proceedings, investigations or
outstanding claims or demands, whether or not purportedly on behalf of
ATSI-Delaware, pending, or, to the knowledge of ATSI-Delaware,
threatened against or affecting ATSI-Delaware at law or in equity or
before or by any governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or before any
arbitrator, nor is there any judgment, order, decree or award of any
court or other governmental authority having jurisdiction, obtained,
pending or to the knowledge of ATSI-Delaware, threatened, against
ATSI-Delaware, which would prevent or materially hinder the
consummation of the Arrangement or the other transactions contemplated
by this Agreement or which would involve the reasonable possibility of
any material judgment or liability, whether or not covered by
insurance, which could prevent or materially hinder the consummation
of the
A-5
<PAGE>
Arrangement and the timely completion of ATSI-Delaware's obligations
pursuant to the Arrangement or which in the aggregate would have a
material adverse effect on the business, operations, properties,
assets or condition, financial or otherwise, of ATSI-Delaware;
H. ATSI-Delaware has not declared or paid any dividends or made any
distribution of its properties or assets to its shareholders and ATSI-
Delaware has not disposed of any of its properties or assets or
incurred any material indebtedness;
I. ATSI-Delaware has not entered into any contract or agreement which is
material to it other than this Agreement;
J. none of the execution and delivery of this Agreement, the consummation
of the transactions contemplated hereby or the fulfillment of or
compliance with the terms and provisions hereof do or will, nor will
they with the giving of notice or the lapse of time or both:
1. violate any provision of any law or administrative
regulation or any judicial or administrative order, award,
judgment or decree applicable to ATSI-Delaware,
2. conflict with any of the terms, conditions or provisions of
the Charter Documents of ATSI-Delaware,
3. conflict with, result in a breach of, constitute a default
under, or accelerate or permit the acceleration of the
performance required by, any material agreement, covenant,
undertaking, commitment, instrument, judgment, order, decree
or award to which ATSI-Delaware is a party or by which it is
bound or to which its property is subject, all as of the
Effective Date, or
4. result in the cancellation, suspension or material
alteration in the terms of any material license, permit or
authority held by ATSI-Delaware or in the creation of any
lien, charge, security interest or encumbrance upon any of
the material assets of ATSI-Delaware under any such material
agreement, covenant, undertaking, commitment, instrument,
judgment, order, decree or award or give to any other Person
any material interest or rights, including rights of
purchase, termination, cancellation or acceleration, under
any such material agreement, covenant, undertaking,
commitment, instrument, judgment, order, decree or award;
and
K. the Proxy Circular constitutes full, true and plain disclosure of all
material facts relating to the current and proposed business,
operations and capital of ATSI-Delaware and the other matters therein
and do not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or
A-6
<PAGE>
necessary in order to make the statements made therein not misleading
in light of the circumstances under which they were made.
Section 3.02 Representations and Warranties of ATSI-Canada: ATSI-Canada hereby
represents and warrants to and in favour of ATSI-Delaware and acknowledges that
ATSI-Delaware is relying upon such representations and warranties in connection
with the matters contemplated by this Agreement, that:
A. ATSI-Canada has been duly amalgamated and is a valid and subsisting
corporation under the provisions of the OBCA and ATSI-Canada has all
requisite corporate power and authority to carry on its business as
now being carried on by it and owns or leases and operates its
properties and assets and is duly licensed or otherwise qualified to
carry on business in each jurisdiction in which a material amount of
its business is conducted or wherein the character of the properties
and assets now owned by it makes such qualification necessary;
B. The capital stock of all Subsidiaries of ATSI-Canada which are
material to its business or operations are beneficially owned by ATSI-
Canada, except for American Telesource International de Mexico, S.A.
de C.V., a subsidiary of ATSI-Canada of which less than two percent of
the capital stock is owned by a Mexican citizen and the remainder is
beneficially owned by ATSI-Canada;
C. the authorized capital of ATSI-Canada consists of an unlimited number
of common shares and an unlimited number of preferred shares, of which
as of the date hereof, 40,115,597 common shares were issued and
outstanding;
D. the execution, delivery and performance of this Agreement and the
agreements, documents and transactions contemplated herein are within
the corporate power and authority of ATSI-Canada and have been duly
authorized by all necessary corporate action and this Agreement
constitutes a valid and binding obligation of ATSI-Canada enforceable
in accordance with its terms;
E. ATSI-Canada does not have any outstanding agreements, subscriptions,
warrants, options or commitments, nor has it granted any rights or
privileges capable of becoming an agreement, subscription, warrant,
option or commitment, obligating ATSI-Canada to issue any additional
shares or other securities, except as set forth in the Proxy Circular;
F. the ATSI-Canada Financial Statements as set out in the Proxy Circular
present fairly the consolidated financial condition and results of
operations of ATSI-Canada as at the respective dates and for the
respective periods indicated in such consolidated financial statements
and have been prepared in accordance with United States generally
accepted accounting principles applied on a consistent basis, except
as otherwise stated in the notes to such consolidated financial
statements;
A-7
<PAGE>
G. since October 31, 1997, there has been no material adverse change in
the business, operations, properties, assets or condition, financial
or otherwise, of ATSI-Canada on a consolidated basis from that shown
in the unaudited financial statements of ATSI-Canada as at and for the
three months ended October 31, 1997;
H. ATSI-Canada is the beneficial owner of the properties and assets
described as being owned by it in the ATSI-Canada Financial Statements
free and clear of material encumbrances, except as disclosed in the
ATSI-Canada Financial Statements;
I. ATSI-Canada does not have any liability or obligation including,
without limitation, tax liabilities, whether accrued, absolute,
contingent or otherwise, not reflected in the ATSI-Canada Financial
Statements, except liabilities and obligations incurred in the
ordinary course of business since October 31, 1997, which liabilities
and obligations are not materially adverse in the aggregate;
J. except as described in the ATSI-Canada Financial Statements or the
Proxy Circular, there are no actions, suits, proceedings,
investigations or outstanding claims or demands, whether or not
purportedly on behalf of ATSI-Canada, pending, or, to the knowledge of
ATSI-Canada, threatened against or affecting ATSI-Canada at law or in
equity or before or by any governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, or before any
arbitrator, nor is there any judgment, order, decree or award of any
court or other governmental authority having jurisdiction, obtained,
pending or to the knowledge of ATSI-Canada, threatened, against ATSI-
Canada, which would prevent or materially hinder the consummation of
the Arrangement or the other transactions contemplated by this
Agreement or which would involve the reasonable possibility of any
material judgment or liability, whether or not covered by insurance,
which could prevent or materially hinder the consummation of the
Arrangement and the timely completion of ATSI-Canada's obligations
pursuant to the Arrangement or which in the aggregate would have a
material adverse effect on the business, operations, properties,
assets or condition, financial or otherwise, of ATSI-Canada and its
Subsidiaries on a consolidated basis;
K. since October 31, 1997, ATSI-Canada has not declared or paid any
dividends or made any distribution of its properties or assets to its
shareholders as a group;
L. the business of ATSI-Canada is being conducted in all material
respects in compliance with all applicable laws, regulations and
ordinances of all authorities having jurisdiction;
M. each contract or agreement with ATSI-Canada, and any other Person
which is material to the ownership, use or operation of a material
portion of the business, properties or assets of ATSI-Canada and its
Subsidiaries on a consolidated basis is in full force and effect and,
to the best of the knowledge and belief of ATSI-
A-8
<PAGE>
Canada, is valid, binding and enforceable against each of the parties
thereto in accordance with its terms and no material breach or default
exists in respect thereof on the part of any party thereto and no
event has occurred which, with the giving of notice or the lapse of
time or both, would constitute such a material breach or default;
N. none of the execution and delivery of this Agreement, the consummation
of the transactions contemplated hereby or the fulfillment of or
compliance with the terms and provisions hereof do or will, nor will
they with the giving of notice or the lapse of time or both:
1. violate any provision of any law or administrative regulation or
any judicial or administrative order, award, judgment or decree
applicable to ATSI-Canada,
2. conflict with any of the terms, conditions or provisions of the
Charter Documents of ATSI-Canada,
3. conflict with, result in a breach of, constitute a default under,
or accelerate or permit the acceleration of the performance
required by, any material agreement, covenant, undertaking,
commitment, instrument, judgment, order, decree or award to which
ATSI-Canada is a party or by which it is bound or to which its
property is subject, all as of the Effective Date, or
4. result in the cancellation, suspension or material alteration in
the terms of any material license, permit or authority held by
ATSI-Canada or in the creation of any lien, charge, security
interest or encumbrance upon any of the material assets of ATSI-
Canada under any such material agreement, covenant, undertaking,
commitment, instrument, judgment, order, decree or award or give
to any other Person any material interest or rights, including
rights of purchase, termination, cancellation or acceleration,
under any such material agreement, covenant, undertaking,
commitment, instrument, judgment, order, decree or award; and
O. the Proxy Circular constitutes full, true and plain disclosure of all
material facts relating to the business, operations and capital of
ATSI-Canada on a consolidated basis and the other matters therein and
do not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in
order to make the statements made therein not misleading in light of
the circumstances under which they were made and, in particular, no
material fact exists on the date hereof which was not disclosed in
such public filings and which if publicly disclosed would reflect that
a material adverse change (or an event, condition or state of facts
which might reasonably have been expected to give rise to any such
change) had occurred in the assets, liabilities, business, operations
or capital of ATSI-Canada on a consolidated basis.
A-9
<PAGE>
ARTICLE FOUR
COVENANTS
Section 4.01 Covenants of ATSI-Delaware: ATSI-Delaware hereby covenants and
agrees with ATSI-Canada that prior to the Effective Date, it shall take or
perform or refrain from doing, taking and performing such actions and steps as
may be necessary or advisable to ensure compliance with the following:
A. ATSI-Delaware will not carry on business and will not, without the
prior written consent of ATSI-Canada, enter into any transaction or
incur any obligation or liability out of the ordinary course of
business, except as contemplated in this Agreement;
B. ATSI-Delaware will not merge into or with, or amalgamate or
consolidate with, or enter into any other corporate reorganization
with, any other Person or perform any act or enter into any
transaction or negotiation which interferes or is inconsistent with
the completion of the transactions contemplated hereby or would
render inaccurate in any material way any of the representations and
warranties set forth in section 3.01 hereof as if such representations
and warranties were made at a date subsequent to such act, negotiation
or transaction and all references to the date of this Agreement were
deemed to be such later date, except as contemplated in this
Agreement, and, without limiting the generality of the foregoing,
ATSI-Delaware will not:
1. make any distribution by way of dividend, return of capital or
otherwise to or for the benefit of its shareholders;
2. without the prior written consent of ATSI-Canada, issue any
shares or other securities convertible into or exchangeable for
shares except pursuant to agreements existing at the date hereof
or enter into any commitment or agreement therefor; or
3. decrease its paid-up capital;
C. ATSI-Delaware will use all reasonable efforts to do all acts and
things as may be necessary or desirable to ensure the successful
implementation of the Arrangement and, without limiting the generality
of the foregoing:
1. ATSI-Delaware will co-operate in obtaining the Interim Order and
the Final Order;
2. ATSI-Delaware will use all reasonable efforts to, as soon as
practicable, complete jointly with ATSI-Canada the preparation of
the Proxy Circular,
A-10
<PAGE>
to cause the Registration Statement to be declared effective by
the SEC;
3. ATSI-Delaware will use all reasonable efforts to cause the
ATSI-Delaware Common Shares to be reported on the National
Association of Securities Dealers Electronic Bulletin Board; and
4. ATSI-Delaware will use all reasonable efforts to cause each of
the conditions precedent set forth in Article Five to be complied
with;
D. ATSI-Delaware will ensure that the Proxy Circular, insofar as it
contains disclosure with respect to ATSI-Delaware, complies with all
applicable disclosure laws and, without limiting the generality of the
foregoing, provides ATSI-Canada shareholders to which such Proxy
Circular is sent, with information in sufficient detail to permit them
to form a reasoned judgment concerning the matters before them;
E. ATSI-Delaware will validly issue ATSI-Delaware Common Shares, in
accordance with the terms of the Arrangement, as fully paid and non-
assessable shares to those holders of shares of ATSI-Canada who are
entitled to receive ATSI-Delaware Common Shares pursuant to the
Arrangement;
F. ATSI-Delaware acknowledges that, pursuant to the existing terms of
all outstanding warrants and options to purchase ATSI-Canada Common
Shares, and without the need for any action or assumption by ATSI-
Delaware, all such outstanding warrants and options will, upon the
Arrangement becoming effective, represent the right to purchase ATSI-
Delaware Common Shares rather than ATSI-Canada Common Shares; and
G. All ATSI-Delaware Common Shares outstanding immediately prior to the
Effective Date willl be cancelled.
Section 4.02 Covenants of ATSI-Canada: ATSI-Canada hereby covenants and agrees
with ATSI-Delaware that prior to the Effective Date, it shall take or perform or
refrain from doing, taking and performing such actions and steps as may be
necessary or advisable to ensure compliance with the following:
A. Except for transactions which would not have a material adverse effect
on its assets or business, ATSI-Canada will carry on business in the
ordinary course and will not, without the prior written consent of
ATSI-Delaware, enter into any transaction or incur any obligation or
liability out of the ordinary course of business, except as
contemplated in this Agreement;
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B. ATSI-Canada will not merge into or with, or amalgamate or consolidate
with, or enter into any other corporate reorganization with, any other
Person or perform any act or enter into any transaction or negotiation
which interferes or is inconsistent with the completion of the
transactions contemplated hereby or would render inaccurate in any
material way any of the representations and warranties set forth in
section 3.02 hereof as if such representations and warranties were
made at a date subsequent to such act, negotiation or transaction and
all references to the date of this Agreement were deemed to be such
later date, except as contemplated in this Agreement, and, without
limiting the generality of the foregoing, ATSI-Canada will not:
1. make any distribution by way of dividend, return of capital or
otherwise to or for the benefit of its shareholders as a group;
2. without the prior written consent of ATSI-Delaware, issue any
shares or other securities convertible into or exchangeable for
shares or enter into any commitment or agreement therefor except
pursuant to agreements existing at the date hereof or enter into
any commitment or agreement therefor; or
3. decrease its paid-up capital;
C. ATSI-Canada will use all reasonable efforts to do all acts and things
as may be necessary or desirable to ensure the successful
implementation of the Arrangement and, without limiting the generality
of the foregoing:
1. ATSI-Canada will use all reasonable efforts, as soon as
practicable, to obtain the Interim Order;
2. subject to the granting of the Interim Order, ATSI-Canada will
use all reasonable efforts to complete jointly with ATSI-Delaware
the preparation of the Proxy Circular, to cause the Registration
Statement to be filed and declared effective by the SEC and to
mail to its shareholders and file in all jurisdictions where
required for the Proxy Circular and other documentation required
in connection with the ATSI-Canada Meeting, all in accordance
with National Policy No. 41 of the Canadian Securities
Administrators, the Interim Order and applicable law, and ATSI-
Canada will use all reasonable efforts to, as soon as practicable
and in any event on or before April 23, 1998 convene the ATSI-
Canada Meeting for the purpose of approving the Arrangement in
accordance with the Interim Order; and
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3. ATSI-Canada will use all reasonable efforts to cause each of the
conditions precedent set forth in Article Five which is within
its control to be complied with;
E. ATSI-Canada will ensure that the Proxy Circular, insofar as it
contains disclosure with respect to ATSI-Canada and the Arrangement,
complies with all applicable disclosure laws and, without limiting the
generality of the foregoing, provides ATSI-Canada shareholders to
which such Proxy Circular is sent with information in sufficient
detail to permit them to form a reasoned judgment concerning the
matters before them;
F. after the Effective Date, ATSI-Canada will satisfy any obligations
which it may have to Dissenting Shareholders; and
G. after the Effective Date, ATSI-Canada will cause the ATSI-Canada
Common Shares to cease to be quoted on CDN and will apply to the OSC
for an order deeming it to no longer be a reporting issuer under the
OBCA.
Section 4.03 Mutual Covenants of ATSI-Delaware and ATSI-Canada: Each of ATSI-
Delaware and ATSI-Canada covenants in favour of the other that prior to the
Effective Date, it shall take or perform or refrain from doing, taking and
performing such actions and steps as may be necessary or advisable to ensure
compliance with the following:
A. Each of ATSI-Delaware and ATSI-Canada will use all reasonable efforts
to satisfy (or cause the satisfaction of) the conditions precedent to
its obligations hereunder and to take, or cause to be taken, all other
action and to do, or cause to be done, all other things necessary,
proper or advisable under applicable laws and regulations to complete
the Arrangement, including using all reasonable efforts to:
1. obtain all necessary waivers, consents and approvals required to
be obtained by it from other parties to loan agreements, leases
and other contracts;
2. obtain all necessary consents, approvals and authorizations as
are required to be obtained by it under any Canadian or United
States or other foreign law or regulation; and
3. effect all necessary registrations and filing and submissions of
information requested by governmental authorizations required to
be effected by it in connection with the Arrangement; and each of
ATSI-Delaware and ATSI-Canada will use all reasonable efforts to
cooperate with the other in connection with the performance by
the others of their obligations under this Agreement including,
without limitation, the preparation and mailing of the Proxy
Circular and continuing to provide reasonable access to
information and to maintain ongoing communications as between
representatives of ATSI-Delaware and ATSI-Canada.
ARTICLE FIVE
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CONDITIONS
Section 5.01 Mutual Conditions Precedent: The respective obligations of ATSI-
Delaware and ATSI-Canada to complete the transactions contemplated by this
Agreement shall be subject to the satisfaction of the following conditions:
(a) the Registration Statement shall have been declared effective by the
SEC;
(b) the entering into of this Agreement and the issuance of ATSI-Delaware
Common Shares pursuant to the Arrangement and the Arrangement, with or
without amendment, shall have been approved at the ATSI-Canada
Meeting, in accordance with the Interim Order and the Arrangement
shall have otherwise been approved and adopted by the requisite
majorities of the shares entitled or required to vote thereon as
determined by the Court;
(c) the Interim Order and Final Order shall have been obtained in form and
substance satisfactory to ATSI-Delaware and ATSI-Canada;
(d) all other consents, orders, regulations and approvals, including
regulatory and judicial approvals and orders required or necessary or
desirable for the completion of the transactions provided for in this
Agreement and the Arrangement shall have been obtained or received
from the persons, authorities or bodies having jurisdiction in the
circumstances;
(e) there shall not be in force any order or decree restraining or
enjoining the consummation of the transactions contemplated by this
Agreement and the Arrangement;
(f) none of the consents, orders, regulations or approvals contemplated
herein shall contain terms or conditions or require undertakings or
security deemed unsatisfactory or unacceptable by any of the parties
hereto; and
(g) this Agreement shall not have been terminated under Article Six. The
foregoing conditions are for the mutual benefit of the parties hereto
and may be waived, in whole or in part, by either of them at any time.
(h) holders of not more than .05% of the issued and outstanding ATSI-
Canada Common Shares (or such greater or lesser amount as ATSI-Canada
and ATSI-Delaware may mutually agree) shall have exercised their
rights of dissent in respect of the matters to be dealt with at the
ATSI-Canada Meeting.
If any of the said conditions precedent shall not be complied with or waived as
aforesaid on or before the date required for the performance thereof, either of
the parties hereto may, in addition
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to the other remedies it may have at law or in equity, rescind and terminate
this Agreement by written notice to the other parties.
Section 5.02 ATSI-Delaware Conditions: The obligation of ATSI-Delaware to
complete the transactions contemplated herein is subject to the fulfillment of
the following conditions on or before the Effective Date or such other time as
specified below:
A. the representations and warranties made by ATSI-Canada in this
Agreement shall be true as of the Effective Date as if made on and as
of such date and ATSI-Canada shall have provided to ATSI-Delaware
certificates of two officers of ATSI-Canada certifying such accuracy
on the Effective Date and ATSI-Delaware shall have no knowledge to the
contrary;
B. on or before the Effective Date, ATSI-Canada shall have furnished
ATSI-Delaware with:
1. a certified copy of the resolutions duly passed by the board of
directors of ATSI-Canada approving this Agreement and the
completion of the transactions contemplated hereby, approving the
Proxy Circular and directing the submission of the Arrangement
for approval at the ATSI-Canada Meeting; and
2. a certified copy of the resolutions duly passed at the ATSI-
Canada Meeting approving the Arrangement;
C. ATSI-Canada shall have complied in all material respects with its
covenants herein and shall have provided to ATSI-Delaware certificates
of two officers of ATSI-Canada certifying that ATSI-Canada has
complied in all material respects with its respective covenants herein
and ATSI-Delaware shall have no knowledge to the contrary;
D. before giving effect to the transactions contemplated by this
Agreement, there shall have been no material adverse change, financial
or otherwise, in the business, financial condition, operations,
prospects, properties, assets or affairs, of ATSI-Canada and its
Subsidiaries on a consolidated basis or any occurrences or
circumstances which have resulted or might reasonably be expected to
result in a material adverse change thereto (other than changes
attributable to general economic conditions); and
The foregoing conditions are for the benefit of ATSI-Delaware and may be waived,
in whole or in part, by ATSI-Delaware in writing at any time. If any of the
said conditions precedent shall not be complied with or waived by ATSI-Delaware
on or before the date required for their performance then ATSI-Delaware may, in
addition to the other remedies it may have at law or in equity, rescind and
terminate this Agreement by written notice to ATSI-Canada.
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<PAGE>
Section 5.03 ATSI-Canada Conditions: The obligation of ATSI-Canada to complete
the transactions contemplated herein is subject to the fulfillment of the
following conditions on or before the Effective Date or such other time as
specified below:
A. the representations and warranties made by ATSI-Delaware in this
Agreement shall be true as of the Effective Date as if made on and as
of such date and ATSI-Delaware shall have provided to ATSI-Canada
certificates of two officers of ATSI-Delaware certifying such accuracy
on the Effective Date and ATSI-Canada shall have no knowledge to the
contrary;
B. on or before the Effective Date, ATSI-Delaware shall have furnished
ATSI-Canada with:
1. a certified copy of the resolutions duly passed by the board of
directors of ATSI-Delaware approving this Agreement and the
completion of the transactions contemplated hereby and approving
the Proxy Circular and directing the submission of the issuance
of ATSI-Delaware Common Shares pursuant to the Arrangement for
approval to the sole shareholder of ATSI-Delaware; and
C. ATSI-Delaware shall have complied in all material respects with its
covenants herein and shall have provided to ATSI-Canada certificates
of two officers of ATSI-Delaware certifying that ATSI-Delaware has
complied in all material respects with its respective covenants herein
and ATSI-Canada shall have no knowledge to the contrary.
The foregoing conditions are for the benefit of ATSI-Canada and may be waived,
in whole or in part, by ATSI-Canada in writing at any time. If any of the said
conditions precedent shall not be complied with or waived by ATSI-Canada on or
before the date required for their performance then ATSI-Canada may, in addition
to the other remedies it may have at law or in equity, rescind and terminate
this Agreement by written notice to ATSI-Delaware.
Section 5.04 Merger of Conditions: The conditions set out in sections 5.01,
5.02 and 5.03 shall be conclusively deemed to have been satisfied, waived or
released on the filing by ATSI-Canada of articles of arrangement under
subsection 183(1) of the OBCA.
ARTICLE SIX
AMENDMENT AND TERMINATION
Section 6.01 Amendment: This Agreement may, at any time and from time to time
before and after the holding of the Meeting, but not later than the Effective
Date, be amended by written agreement of the parties hereto without, subject to
applicable law, further notice to or
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<PAGE>
authorization on the part of the shareholders of ATSI-Delaware and ATSI-Canada.
Without limiting the generality of the foregoing, any such amendment may:
A. change the time for the performance of any of the obligations or acts
of the parties hereto;
B. waive any inaccuracies or modify any representation or warranty
contained herein or in any document to be delivered pursuant hereto;
or
C. waive compliance with or modify any of the covenants contained herein
or waive or modify the performance of any of the obligations of the
parties hereto;
provided that no such amendment shall decrease the consideration to be received
by the shareholders of ATSI-Canada in exchange for their shares pursuant to the
Arrangement without the approval of such shareholders in the same manner as
required for the approval of the Arrangement or in such other mariner as may be
ordered by the Court. This Agreement including the Plan of the Arrangement, may
be amended in accordance with the Final Order but if the terms of the Final
Order require any such amendment, the rights of the parties hereto under Article
Five and Section 6.02 shall remain unaffected.
Section 6.02 Termination: Notwithstanding any other rights contained herein,
any party to this Agreement may terminate this Agreement at any time prior to
the Effective Date, upon notice to the other parties but without further notice
to, or action on the part of, its shareholders:
A. if, notwithstanding the best efforts of the parties hereto, the
Interim Order has been refused or has been granted in form or
substance not satisfactory to any party hereto, or has not been
granted by March 20, 1998 or, if issued, has been set aside or
modified in a manner unacceptable to any party on appeal or otherwise;
B. if, notwithstanding the best efforts of ATSI-Canada, the shareholders
of such corporation do not approve the Arrangement in accordance with
the terms of the Interim Order; or
C. if, notwithstanding the best efforts of the parties hereto, the
Arrangement has not become effective on or before April 30, 1998
unless otherwise agreed to in writing by ATSI-Canada and ATSI-
Delaware.
Section 6.03 Effect of Termination: Upon the termination of this Agreement
pursuant to this Article Six, and except as otherwise specifically provided
herein, no party shall have any liability or further obligation to the other
party hereunder provided that nothing herein shall in any way limit or negate
the liability of any party hereto to any other party hereto pursuant to any
other agreement which pertains to or contemplates the Arrangement.
ARTICLE SEVEN
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<PAGE>
GENERAL
Section 7.01 Notices: All notices which may or are required to be given
pursuant to any provision of this Agreement shall be given or made in writing
and shall be served personally or by telecopy, in each case addressed to:
A. in the case of ATSI-Delaware:
12500 Network Blvd., Suite 407
San Antonio, Texas
78249
Telecopy number: (210) 558-6095
Attention: President
B. in the case of ATSI-Canada:
12500 Network Blvd., Suite 407
San Antonio, Texas
78249
Telecopy number: (210) 558-6095
Attention: President
or such other address or telecopier number as the parties may, from to time,
advise the other party hereto by notice in writing. The date of receipt of any
such notice shall be deemed to be the date of delivery thereof or, in the case
of notice sent by telecopy, the date of successful transmission thereof (unless
transmission is received after normal business hours, in which case the date of
receipt shall be deemed to be the next Business Day).
Section 7.02 Assignment: No party hereto may assign its rights or obligations
under this Agreement or the Arrangement without the prior written consent of the
other parties hereto.
Section 7.03 Binding Effect: This Agreement and the Arrangement shall be
binding upon and shall enure to the benefit of the parties hereto and their
respective successors and permitted assigns.
Section 7.04 Waiver: Any waiver or release of any of the provisions of this
Agreement, to be effective must be in writing and executed by the party granting
such waiver or release. Waivers may only be granted upon compliance with the
terms governing amendments set forth in Section 6.01 hereof.
Section 7.05 Governing Law: This Agreement shall be governed by and be
construed in accordance with the laws of the Province of Ontario and the laws of
Canada applicable therein
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and shall be treated in all respects as an Ontario contract. Each party hereby
attorns to the non-exclusive jurisdiction of the Courts of the Province of
Ontario.
Section 7.06 Counterparts: This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
Section 7.07 Entire Agreement: This Agreement, together with the agreements and
other documents herein or therein referred to, constitutes the entire agreement
among the parties hereto pertaining to the subject matter hereof and supersedes
all prior agreements, understandings, negotiations and discussions, whether oral
or written, among the parties hereto with respect to the subject matter hereof.
Section 7.08 Expenses: All expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the party incurring
such expenses. The provisions of this Section 7.08 shall survive the termination
of this Agreement.
Section 7.09 Time of Essence: Time is of the essence of this Agreement.
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<PAGE>
IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the
date hereinbefore written.
AMERICAN TELESOURCE AMERICAN TELESOURCE
INTERNATIONAL INC. INTERNATIONAL, INC.
AN ONTARIO CORPORATION A DELAWARE CORPORATION
Per:/s/ ARTHUR L. SMITH Per:/s/ ARTHUR L. SMITH
-------------------------------- ----------------------------------
(Signed) (Signed)
[Name] Arthur L. Smith [Name] Arthur L. Smith
------------------------------ ---------------------------------
[Title] President [Title] President
----------------------------- --------------------------------
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<PAGE>
EXHIBIT 1
TO THE ARRANGEMENT AGREEMENT MADE AS OF FEBRUARY 16, 1998
BETWEEN AMERICAN TELESOURCE INTERNATIONAL INC. (AN ONTARIO CORPORATION)
AND
AMERICAN TELESOURCE INTERNATIONAL, INC. (A DELAWARE CORPORATION)
PLAN OF ARRANGEMENT UNDER SECTION 182
OF THE BUSINESS CORPORATIONS ACT (ONTARIO)
1.1 DEFINITIONS
In this Plan, unless the context otherwise requires, defined terms shall have
the following meanings:
"ATSI-CANADA" means American TeleSource International Inc., a corporation
amalgamated under the OBCA;
"ATSI-CANADA COMMON SHARES" means the common shares in the capital of ATSI-
Canada, as the same are constituted on the date hereof;
"ATSI-CANADA DISSENTING SHARES" means all ATSI-Canada Common Shares which are
deemed to have been cancelled on the Effective Date in accordance with the
provisions of clause 5.1(A);
"ATSI-DELAWARE" means American TeleSource International, Inc., a corporation
incorporated under the DGCL;
"ATSI-DELAWARE COMMON SHARES" means the common shares in the capital of ATSI-
Delaware, as the same are constituted on the date hereof;
"ARRANGEMENT" means the arrangement contemplated by this Plan;
"ARTICLES OF ARRANGEMENT" means the articles of arrangement in respect of the
Arrangement required by the OBCA to be sent to the Director by ATSI-Canada after
the Final Order is made;
"BUSINESS DAY" means a day which is not a Saturday, Sunday or a statutory
holiday in Canada;
"COURT" means the Ontario Court of Justice (General Division);
"DGCL" means the Delaware General Corporation Laws;
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"DEPOSITORY" means CIBC Mellon Trust Company, as the registrar and transfer
agent of the ATSI-Delaware Common Shares;
"DIRECTOR" means the Director appointed pursuant to section 278 of the OBCA;
"EFFECTIVE DATE" means the date set forth in the certificate of arrangement
issued by the Director under the OBCA giving effect to the Arrangement;
"FINAL ORDER" means an order of the Court approving the Arrangement, as such
order may be amended or modified by the highest court to which appeal may be
applied for;
"INTERIM ORDER" means an order of the Court containing declarations and
directions under the OBCA with respect to the Arrangement as such may be
amended;
"LETTER OF TRANSMITTAL" shall have the meaning ascribed thereto in section 4.2
hereof;
"OBCA" means the Business Corporations Act, R.S.O. 1990 c. B. 16, as amended;
"PLAN" means this plan, as amended or supplemented for time to time, and
"hereby", "hereof", "hereunder", "herewith" and similar terms refer to this Plan
and not to any particular provision of this Plan;
"SHAREHOLDERS" means the registered holders of ATSI-Canada Common Shares as of
the Effective Date; and
"SUBSIDIARY" means a subsidiary as defined in the OBCA.
1.2 INTERPRETATION NOT AFFECTED BY HEADINGS
The division of this Plan into articles, sections, subsections and paragraphs
and the insertion of headings are for convenience of reference only and shall
not affect in any way the meaning or interpretation of this Plan.
1.3 ARTICLE REFERENCES
Unless the contrary intention appears, references in this Plan to an article,
section, subsection, paragraph, exhibit or schedule by number or letter or both
refer to the article, section, subsection, paragraph, exhibit or schedule,
respectively, bearing that designation in this Plan.
1.4 NUMBER
In this Plan, unless the contrary intention appears, words importing the
singular include the plural and vice versa, words importing gender shall include
all genders, and words importing persons shall include a natural person, firm,
trust, partnership, association, corporation, joint venture or government
(including any governmental board, agency or instrumentality thereof).
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<PAGE>
1.5 DATE FOR ANY ACTION
In the event that the date on which any action is required to be taken hereunder
is not a Business Day, such action shall be required to be taken on the next
succeeding day which is a Business Day.
1.6 CURRENCY
Unless otherwise stated, all references in this Plan to sums of money are
expressed in lawful money of the United States of America unless otherwise
specified.
ARTICLE 2
PURPOSE AND EFFECT OF THE PLAN
2.1 The following is only intended to be a general statement of the purpose of
the Plan and is qualified in its entirety by the specific provisions of the
Plan. The purpose of the Plan is to effect a reorganization and restructuring of
the share capital of ATSI-Canada in a manner that is equitable to the
Shareholders, maintains the business and goodwill of ATSI-Canada as a going
concern and results in ATSI-Canada becoming a wholly-owned subsidiary of ATSI-
Delaware.
2.2 The Plan shall be binding on all Shareholders, on ATSI-Canada and on ATSI-
Delaware upon the filing of the Articles of Arrangement with the Director.
ARTICLE 3
ARRANGEMENT
3.l On the Effective Date, each of the events set out below shall occur and be
deemed to occur without further act or formality:
A. all issued and outstanding ATSI-Canada Common Shares (other than the
ATSI-Canada Dissenting Shares) shall be and be deemed to be
transferred to ATSI-Delaware (free of any claims) and the registered
holders thereof shall be entitled to receive from ATSI-Delaware in
exchange for each such share, subject to section 4.6, one (1) ATSI-
Delaware Common Share;
B. with respect to each ATSI-Canada Common Share, to which clause 3.1(A)
applies:
1. the registered holder thereof shall cease to be a holder of such
share and such holder's name shall be removed from the register of
shares of ATSI-Canada as of the Effective Date; and
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2. ATSI-Delaware shall be and be deemed to be the transferee of such
share (free of any claims) and shall be entered in the register of
such shares as the holder thereof.
ARTICLE 4
OUTSTANDING CERTIFICATES AND PAYMENTS
4.1 After the Effective Date and subject to Article 5, certificates formerly
representing ATSI-Canada Common Shares (other than ATSI-Canada Common Shares
beneficially owned by ATSI-Delaware) shall represent only the right to receive
the consideration therefor specified in section 3.1, subject to compliance with
the requirements set forth in this Article 4.
4.2 As soon as practicable after the Effective Date, ATSI-Delaware shall
forward or cause to be forwarded to each Shareholder (other than those
Shareholders who have exercised their dissent rights), at the address of such
holder as it appears in the relevant share register, a letter of transmittal
(the "Letter of Transmittal") containing, among other things, instructions for
obtaining delivery of ATSI-Delaware Common Shares pursuant to this Plan. Subject
to section 4.5, such Shareholders shall be entitled to receive certificates
representing the ATSI-Delaware Common Shares specified in section 3.1 upon
delivering the certificate or certificates formerly representing such holder's
ATSI-Canada Common Shares, to the Depository or as the Depository may otherwise
direct in accordance with the instructions contained in the Letter of
Transmittal. Such certificate or certificates shall be accompanied by the Letter
of Transmittal, duly completed, and such other documents as the Depository may
reasonably require.
4.3 Subject to Article 5, the Depository shall register the ATSI-Delaware
Common Shares to which each Shareholder of ATSI-Canada is entitled in the name
of such Shareholder or as otherwise instructed in the Letters of Transmittal,
and shall deliver such ATSI-Delaware Common Shares as each such holder may
direct in such Letter of Transmittal, as soon as practicable after receipt by
the Depository thereof.
4.4 After the Effective Date, and subject to Article 5, the Shareholders shall
not be entitled to any interest, dividend, premium or other payment on or with
respect to ATSI-Canada Common Shares other than the ATSI-Delaware Common Shares
which they are entitled to receive for such shares pursuant to section 3.1.
4.5 Any certificate formerly representing ATSI-Canada Common Shares that is not
deposited with the Letters of Transmittal and other required documents as
provided in section 4.2 on or before the sixth anniversary of the Effective Date
shall cease to represent a right or claim of any kind or nature against ATSI-
Delaware or ATSI-Canada and the right of the holder of such shares to receive
ATSI-Delaware Common Shares shall be deemed to be surrendered to ATSI-Delaware
together with all dividends, distributions and any interest thereon held for
such holder.
ARTICLE 5
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<PAGE>
SHAREHOLDER DISSENT RIGHTS
5.1 Shareholders who have given a demand for payment which remains outstanding
on the Effective Date in accordance with the rights of dissent in respect of the
Plan granted by the Interim Order and who:
A. are ultimately entitled to be paid by ATSI-Canada for the ATSI-Canada
Common Shares in respect of which they dissent in accordance with the
provisions of such Interim Order whether by order of a Court (as
defined in the OBCA) or by acceptance of an offer made pursuant to
such Interim Order, shall be deemed to have transferred such shares to
ATSI-Canada for cancellation immediately after the Effective Date; or
B. are ultimately not so entitled to be paid by ATSI-Canada for the ATSI-
Canada Common Shares in respect of which they dissent for any reason,
shall be reinstated as shareholders of ATSI-Canada but for purposes of
receipt of consideration shall be treated as if they had participated
in this Plan on the same basis as a non-dissenting holder of shares
and such holders shall accordingly be entitled to receive ATSI-
Delaware Common Shares as such non-dissenting holders are entitled to
receive on the basis determined in accordance with Section 3.1 and
shall be deemed to have transferred such shares to ATSI-Delaware.
In no case shall ATSI-Delaware or ATSI-Canada be entitled or required to
recognize Shareholders as holders of ATSI-Canada Common Shares, after the
Effective Date.
ARTICLE 6
AMENDMENTS
6.1 ATSI-Delaware and ATSI-Canada may at any time and from time to time before
the Effective Date, vary, amend, modify or supplement this Plan if the Court and
each of ATSI-Delaware and ATSI-Canada determine that such variation, amendment,
modification or supplement would not be prejudicial to the interests of
Shareholders under this Plan.
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<PAGE>
EXHIBIT B
SPECIAL RESOLUTION - ARRANGEMENT
Exhibit B - 1
<PAGE>
EXHIBIT B
SPECIAL RESOLUTION OF THE SHAREHOLDERS OF
AMERICAN TELESOURCE INTERNATIONAL INC.
ARRANGEMENT UNDER SECTION 182 OF THE BUSINESS CORPORATIONS ACT (ONTARIO)
BE IT RESOLVED AS A SPECIAL RESOLUTION THAT:
1. the arrangement (the "Arrangement") involving American Telesource
International Inc. (the "Corporation") and American Telesource
International, Inc. pursuant to section 182 of the Business Corporations
Act (Ontario) (the "OBCA") and the Arrangement Agreement attached as
Appendix A to the management proxy circular accompanying the notice of
special meeting of shareholders of which the Arrangement is to be
considered be, and they are hereby, authorized and approved;
2. notwithstanding that this resolution has been duly passed by the
shareholders of the Corporation, the directors of the Corporation be, and
they are authorized and empowered to revoke this resolution at any time
prior to the issue of a Certificate of Arrangement giving effect to the
Arrangement and to determine not to proceed with the Arrangement without
further approval of the shareholders of the Corporation;
3. any one director or any one officer of the Corporation be and is hereby
authorized and empowered, acting for, in the name of and on behalf of the
Corporation, to execute, under the seal of the Corporation or otherwise,
and to deliver Articles of Arrangement, in duplicate, to the Director under
the OBCA; and
4. any one director or any one officer of the Corporation be and is hereby
authorized and empowered, acting for, in the name of and on behalf of the
Corporation, to execute or to cause to be executed, under the seal of the
Corporation or otherwise, and to deliver or to cause to be delivered, all
such other documents and instruments, and to do or to cause to be done,
such other acts and things as in the opinion of such director or officer
may be necessary or desirable in order to carry out the intent of this
resolution.
B-1
<PAGE>
EXHIBIT C
INTERIM ORDER APPROVING THE ARRANGEMENT
Exhibit C - 1
<PAGE>
Court File No.: 98-BK-2094
ONTARIO COURT OF JUSTICE
(GENERAL DIVISION)
COMMERCIAL LIST
THE HONOURABLE MR. ) _______, the _____
JUSTICE ) day of March, 1998
ON BEHALF OF:
AMERICAN TELESOURCE INTERNATIONAL INC. and
AMERICAN TELESOURCE INTERNATIONAL, INC.
Applicants
APPLICATION UNDER Section 182 of the Business Corporations Act, R.S.O. 1990,
c.B. 16, as amended, in respect of a Plan of Arrangement involving American
TeleSource International Inc. and American TeleSource International, Inc.
O R D E R
THIS MOTION made by the applicants for an order that the shareholders of
American TeleSource International Inc. ("ATSI-Canada") shall have a right of
dissent as provided by section 185 of the Business Corporations Act, R.S.O. 1990
c.B.16 (the "OBCA"), in respect of an arrangement (the "Arrangement") involving
American TeleSource International, Inc. and ATSI-Canada ("ATSI-Delaware") to be
considered by the shareholders of ATSI-Canada at a special meeting called for
that purpose and to be held on April __, 1998, and directing the manner by which
notice of this court application will be given to the shareholders of ATSI-
Canada, made without notice, was heard this day, at Toronto.
ON READING the Notice of Motion, the Affidavit of David A. Knight sworn
_____________, 1998 in support of this motion, and on hearing the submissions of
counsel for the applicants;
C-1
<PAGE>
1. THIS COURT ORDERS THAT the shareholders of ATSI-Canada shall have a
right of dissent as provided by section 185 of the OBCA, in respect of
the Arrangement involving ATSI-Canada to be considered by the
shareholders of ATSI-Canada at a special meeting, called for that
purpose and to be held on April __, 1998.
2. THIS COURT ORDERS THAT ATSI-Canada shall be permitted to call, hold
and conduct a special meeting of its shareholders to, among other
things, consider and, if deemed advisable, to pass, with or without
variation, special resolutions to adopt the Arrangement.
3. THIS COURT ORDERS THAT Notice of the within application for an Order
approving the Arrangement may be provided to all of the shareholders
of record of ATSI-Canada as of _______________, 1998 by inserting the
following form of notice in the management information circular to be
mailed to all such shareholders:
"NOTICE OF APPLICATION TO THE
ONTARIO COURT (GENERAL DIVISION)
COMMERCIAL LIST
NOTICE IS HEREBY GIVEN that an application for an order approving the
proposed arrangement (the "Arrangement") involving American TeleSource
International Inc. ("ATSI-Canada") and American TeleSource
International, Inc. ("ATSI-Delaware"), described in the management
information circular attached hereto, the form of which order is
attached hereto, will be heard by a judge presiding over the
Commercial List of the Ontario Court (General Division) at 393
University Avenue, Toronto, Ontario, at 10:00 a.m. (Toronto time), on
_______________, 1998, or as soon thereafter as counsel may be heard.
At the hearing any shareholder of
C-2
<PAGE>
ATSI-Canada may appear, be heard and submit evidence or argument
concerning the fairness of the terms and conditions of the Arrangement
and whether the Court shall approve it.
At the hearing of the application the Court may approve the
Arrangement as presented, or may approve it subject to such terms and
conditions as the Court thinks fit.
A copy of the Notice of Application and other documents in the Court
proceedings will be furnished to any shareholder of ATSI-Canada upon
request in writing addressed to ATSI-Canada at its address for
delivery set out below:
The address for delivery for ATSI-Canada is: c/o Lang Michener, BCE
Place, Suite 2500, 181 Bay Street, Toronto, Ontario M5J 2T7,
"Attention: D. Brent McPherson."
------------------------
Registrar
ENTERED AT/INSCRIT A TORONTO
ON/BOOK NO:
LE/DANS LE REGISTRE NO:
__________ 1998
PER/PAR:
C-3
<PAGE>
EXHIBIT D
FORM OF NOTICE OF APPLICATION OF FINAL ORDER
APPROVING THE ARRANGEMENT
Exhibit D - 1
<PAGE>
EXHIBIT D
NOTICE OF APPLICATION
TO THE ONTARIO COURT (GENERAL DIVISION)
COMMERCIAL LIST
NOTICE IS HEREBY GIVEN that an application for an order approving the proposed
arrangement (the "Arrangement") involving American Telesource International Inc.
("ATSI - Canada") and American Telesource International, Inc. ("ATSI -
Delaware"), described in the management proxy circular attached hereto, the form
of which order is attached hereto, will be heard by a judge presiding over the
Commercial List of the Ontario Court (General Division) at 393 University
Avenue, Toronto, Ontario, at 10:00 a.m. (Toronto time), on ____________, 1998,
or as soon thereafter as counsel may be heard. At the hearing any shareholder of
ATSI - Canada may appear, be heard and submit evidence or argument concerning
the fairness of the terms and conditions of the Arrangement and whether the
Court should approve it. At the hearing of the application the Court may approve
the Arrangement as presented, or may approve it subject to such terms and
conditions as the court thinks fit.
A copy of the Notice of Application and other documents in the Court proceedings
will be furnished to any shareholder of ATSI-Canada upon request in writing
addressed to any of the companies at their respective addresses for delivery set
out below:
The address for delivery for each of the companies is: c/o Lang Michener, BCE
Place, Suite 2500, 181 Bay Street, Toronto, Ontario, M5J2T7, Attention: D. Brent
McPherson.
__________________________________
Registrar
D-1
<PAGE>
Court File No:
ONTARIO COURT OF JUSTICE
(GENERAL DIVISION)
COMMERCIAL LIST
THE HONOURABLE M ) day,
JUSTICE ) the ___ day of __________, 1998
AMERICAN TELESOURCE INTERNATIONAL INC. and AMERICAN TELESOURCE INTERNATIONAL,
INC.
Applicants
APPLICATION UNDER Section 182 of the Business Corporations Act, R.S.O. 1990,
c.B.16, as amended, in respect of a Plan of Arrangement involving American
Telesource International Inc., and American Telesource International, Inc.
JUDGMENT
This APPLICATION was heard this day in the presence of counsel for the
Applicants,
ON READING THE NOTICE OF APPLICATION AND THE EVIDENCE FILED BY THE
APPLICANTS, and on hearing the submissions of counsel,
AND UPON this Court being of the opinion that the terms and conditions
of the arrangement are fair and reasonable and ought therefore to be approved,
1. THIS COURT ORDERS that the Arrangement (the "Arrangement") as set
forth in the Plan of Arrangement, a copy of which is annexed hereto, be and the
same is hereby approved.
__________________________________
Registrar
D-2
<PAGE>
EXHIBIT E
ARTICLES OF AMALGAMATION OF ATSI-CANADA
Exhibit E - 1
<PAGE>
EXHIBIT E
ARTICLE OF AMALGAMATION OF ASTI-CANADA
(ONTARIO CORPORATION)
-----------
[ILLEGIBLE]
1082734
----------
For Ministry Use Only
a Passage excused du Ministere
[LOGO APPEARS HERE] Ministry of Ministere de
Consumer and
Commercial la Consommation
???? et du Commerce
CERTIFICATE CERTIFICAT
This is to certify that these Ceci certifie qun los presents
articles are effective on status entrent on vigueur le
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
??? ??? ??? ??? ??? ???
- - - - - -
MAY 26 MAI, 1994 [ A ] [ D ] [ O ] [ A ] [ 3 ] [ 5 ]
--------------------------- - - - - - -
18 20 28 28 55 31-
???? ????
- -------------------- -
[ N ] [ONTARIO ] [ A ]
-------------------- -
32 33 37 37
[SIGNATURE ILLEGIBLE]
Director/Directeur
Business Corporations ACI/Lot de sur los compagnies
- --------------------------------------------------------------------------------------------------------------------
ARTICLES OF AMALGAMATION
STATUS DE FUSION
1. The name of the amalgamted corporation is: Denamination sociale os la compagnie issue de la
Form fusion
Business
Corporations ----------------------------------------------------------------------------------------------------
Act A M E R I C A N T E L E S O U R C E
----------------------------------------------------------------------------------------------------
Formule I N T E R N A T I O N A L I N C .
Numero 4 ----------------------------------------------------------------------------------------------------
Los ----------------------------------------------------------------------------------------------------
sur les ----------------------------------------------------------------------------------------------------
compagnies 2. The address of the registered office is: Adresse au siege sociale:
c/o JOHN F. O' DONNELL, 95 WELLINGTON STREET WEST, SUITE 906
------------------------------------------------------------------------------------------------------------
(Street & Number ???? ???? ???? ???? ???? ??? ??? ??? ?? ??? ??? ???.)
Rue et ???? ???? ??? ????. ???? ???? ??? ??? ??? ??? ??? ??? ???? ???? ?????
---------------------
TORONTO, ONTARIO M 5 J 2 N 7
-----------------------------------------------------------------------------------------------------------
???? ???? ??? ???? ??? ??? (???? ???
???? ??? ??? ??? ??? ??? ??? ??? ???? ??? ??? ???)
MUNCIPALITY OF
CITY OF TORONTO in METROPOLITAN TORONTO
---------------------------------------------- ---------------------------------------
(???? ???? ??? ??? ???) (???? ??? ??? ??? ???)
(???? ???? ???? ???? ???? ????) ???? ????/???? (???? ???? ???? ????)
3. Number for minimum and maximum number?? of Nombre (ou nombres minimal el maxima)
directors ??: d'administrateurs:
minimum: three
maximum: ten
4. The director(s) is/are Administrateur(s): Resident
Canadian
Residence address, giving Street & No. or R.R. No., State
First name, initials and last name Municipality and Postal Code Yes or No
Prenom, initales et nom de familie Adresse personnelle y compria la rue et ie numero, le Canadian
postal Out/Non
------------------------------------------------------------------------------------------------------------
MURRAY R. NYE 280 McLEAN STREET YES
WINNIPEG, MANITOBA R3R 0V7
JOHN R. MOSES R.R. # 1, YES
PORT CARLING, ONTARIO POB 1JO
ARTHUR L. SMITH 7710 CROOKED BROOK NO
SAN ANTONIO, TEXAS 78250
</TABLE>
Exhibit E - 1
<PAGE>
5. A) The amalgamation agreement has been A) Les actionnaires de chaque
duly adopted by the shareholders compagnie qui fusions ont
of each of the amalgamating dument adopte la convention
corporations as required by de fusion conformement au
subsection 176 (a) of the Business [X] paragrahe 176 (a) de la Loi
Corporations Act on the date set sur les compagnies e la date
out below. mentionnee ci-dessous.
------------------
Check Cocher
A or B A ou B
------------------
B) The amalgamation has been approved B) Les administrateurs de chaque
by the directors of each compagnie qui fusionne ont
amalgamating corporation by a [_] approuve la fusion par voie
resolution as required by section de resolution conformement a
177 of the Business Corporations l'article 177 de la Loi sur
Act on the date set out below. les compagnies a la date
The articles of amalgamation in mentionnee ci-dessous. Les
substance contain the provisions status de fusion reprennent
of the articles of incorporation of essentiellement les
dispositions des status
????? de
- --------------------------------------------------------------------------------
and are more particularly set out - et sont enonces
in these articles. textuellement aux presents
status.
<TABLE>
<CAPTION>
Names of amalgamating Ontario Corporation Number Date of Adoption/Approval
corporations Numero de la compagnie en Date d'adoption ou d'approbation
Denomination socials des Ontario
compagnies qui fusionnent
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
WILLINGDON RESOURCES 293491 April 19, 1994
LIMITED
LATCOM INTERNATIONAL 1082560 April 19, 1994
INC.
</TABLE>
Exhibit E - 2
<PAGE>
5. Restrictions, if any, on business Limites s'il y a lieu, imposees aux
the corporation may carry on or on activities commerciales on aux pouvoirs
powers the corporation exercise. de la compagnie.
None.
7. The classes and any maximum number Categories et nombre maximal, s'il y
of shares that the corporation is a lieu, d'actions que la compagnie est
authorized to issue: autionees a amettre:
The Corporation is authorized to issue an unlimited number of Common shares.
Exhibit E - 3
<PAGE>
8. Rights, privileges, restrictions and Droits, privileges, restrictions et
conditions (if any) attaching to each conditions, s'il y s lieu rattaches a
class of shares and directors a chaque categorie o'actions et
authority with respect to any class pouvoirs des administrateurs ??? a
of shares which may be issued in chaque categorie d'actions qui peut
series: etra ????? en series:
NOT APPLICABLE.
Exhibit E - 4
<PAGE>
9. The issue, transfer or ownership L'emission, le transfort ou la propriete
of shares is/is not restricted d'actions est/n'est pas restreinte. Les
and the restrictions (if any are restrictions, s'il y a lieu, sont les
as follows: suivantes:
Not applicable.
10. Other provisions (if any): Autres dispositions, s'il y a lieu:
Not applicable.
11. The statements required by Les declarations exigees aux termes du
subsection 178(2) of the Business paragraphe 178(2) de le Loi sur les
Corporations Act are attached as compagnies constituent l'annexe "A".
Schedule "A".
12. A copy of the amalgamation Une copie de le convention de fusion ou
agreement or directors les resolutions des administrateurs
resolutions (as the case may be) (selon le cas) constitute(nt l'annexe
is/are attached as Schedule "B". "B".
Exhibit E - 5
<PAGE>
These article are signed in duplicate. Les presents statuts sont signee en
double exampisire.
Names of the amalgamating corporations Denomination sociale des compagnies qui
and signatures and descriptions of fusionnent, signature et fonction de
office of their proper officers leurs dirigeants regulierement designee.
WILLINGDON RESOURCES LIMITED LATCOMM INTERNATIONAL INC.
By:/s/ JOHN R. MOSES By:/s/ MURRAY R. NYE
--------------------- ----------------------
JOHN R. MOSES MURRAY R. NYE
President President
Exhibit E - 6
<PAGE>
EXHIBIT F
BYLAWS OF ATSI-CANADA
Exhibit F - 1
<PAGE>
EXHIBIT F
BYLAWS OF ATSI-CANADA
(ONTARIO CORPORATION)
BY-LAW 1
--------
ARTICLE ONE
INTERPRETATION
1.01 Definitions: In this by-law and all other by-laws of the Corporation,
-----------
unless the context otherwise requires:
(a) "Act" means the Business Corporations Act, 1982 (Ontario) or any
successor statute, as amended from time to time, and the regulations
thereunder;
(b) "Corporation" means American Telesource International Inc;
(c) "holiday" means Sunday and any other day that is a holiday as defined
in the Interpretation Act (Ontario) or any successor statute, as
amended from time to time;
(d) "person" includes individuals, bodies corporate, sole proprietorships,
partnerships, syndicates, unincorporated associations and
organizations, joint ventures, trusts, employee benefit plans,
governments or agencies or political subdivisions thereof, and a
natural person acting as trustee, executor, administrator or other
legal representative;
(e) "recorded address" means, with respect to a single shareholder, his
latest address as recorded in the securities register of the
Corporation; with respect to joint shareholders, the first address
appearing in the securities register in respect of their joint
holding; and with respect to any other person, but subject to the Act,
his latest address as recorded in the records of the Corporation or
otherwise known to the secretary;
(f) subject to the foregoing, words and expressions that are defined in
the Act have the same meanings when used in the by-laws; and
(g) words importing the singular include the plural and vice-versa, words
importing any gender include the masculine, feminine and neuter
genders, and headings are for convenience of reference only and shall
not, affect the interpretation of the by-laws.
ARTICLE TWO
MEETINGS OF SHAREHOLDERS
2.01 Annual Meeting: The annual meeting (of the shareholders shall be held
--------------
on such day and such time as the)
Exhibit F - 1
<PAGE>
Act, determine from time to time, for the purpose of receiving the annual
financial statements of the Corporation and the auditor's report thereon,
electing directors, appointing the auditor and authorizing the board to fix his
remuneration, and transacting such other business as may properly be brought
before the meeting.
2.02. Special Meeting: From time to time the board may call a special
---------------
meeting of the shareholders to be held on such day and at such time as the board
may determine. The holders of not less than 5% of the issued shares of the
Corporation carrying the right to vote at the meeting sought to be held may
requisition a special meeting of shareholders. Any special meeting of
shareholders may be combined with an annual meeting.
2.03. Place of Meetinqs: Meetings of shareholders shall be held at the
-----------------
registered office of the Corporation or at such other place within Canada as the
board may determine from time to time.
2.04. Record Date: The board may fix in advance a record date, preceding
-----------
the date of any meeting of shareholders by not more than 50 clear days nor less
than 21 clear days, for the determination of the shareholders entitled to notice
of the meeting, and where no such record date for notice is fixed by the board,
the record date for notice shall be the close of business on the day immediately
preceding the day on which notice is given, or if no notice is given, shall be
the day on which the meeting is held. Notice of any such record date fixed by
the board shall be given in the manner required by the Act.
2.05. Shareholder List: For each meeting of shareholders the secretary
----------------
shall prepare an alphabetical list of shareholders entitled to receive notice of
the meeting showing the number of shares entitled to be voted at the meeting and
held by each such shareholder. The list shall be prepared (i) if a record date
for such notice is fixed by the board, not later than 10 clear days thereafter,
or (ii) if no such record date is fixed by the board, at the close of business
on the day immediately preceding the day on which notice of the meeting is
given.
2.06. Notice: Notice in writing of the time, place and purpose for holding
------
each meeting of shareholders shall be sent not less than 21 clear days nor more
than 50 clear days before the date on which the meeting is to be held, to each
director, the auditor of the Corporation and each person who on the record date
for notice appears in the securities register of the Corporation as the holder
of one or more shares carrying the right to vote at the meeting or as the holder
of one or more shares the holders of which are otherwise entitled to receive
notice of the meeting. Notice of a meeting of shareholders shall state or be
accompanied by the text of any special resolution or by-law to be submitted to
the meeting and a statement in accordance with the Act of the nature of all
special business to be transacted at the meeting. Reference is made to sections
6.07 to 6.11.
- ---- ----
2.07. Proxy and Management Information Circular: The secretary shall,
-----------------------------------------
concurrently with sending notice of a meeting of shareholders, (i) send a form
of proxy and management information circular in accordance
Exhibit F - 2
<PAGE>
with the Act to each shareholder who is entitled to receive notice of and
appears entitled to vote at the meeting,(ii) send such management information
circular to any other shareholder who is entitled to receive notice of the
meeting, to any director who is not a shareholder entitled thereto and to the
auditor, and (iii) file with the Ontario Securities Commission and any other
agencies entitled thereto a copy of all documents sent in connection with the
meeting.
2.08 Financial Statements: Not less than 21 clear days before each annual
--------------------
meeting of shareholders the secretary shall send to each shareholder a copy of
the annual financial statements of the Corporation and the auditor's report
thereon.
2.09 Persons Entitled to be Present: The only persons entitled to attend a
------------------------------
meeting of shareholders shall be those persons entitled to notice thereof and
others who although not entitled to notice are entitled or required under any
provision of the Act or the by-laws to be present at the meeting. Any other
person may be admitted only on the invitation of the chairman of the meeting or
with the consent of the meeting.
2.10 Chairman, Secretary, and Scrutineer: The chairman of the board or in
-----------------------------------
his absence a person designated by the board shall be chairman of any meeting of
shareholders. If no such person is present within 15 minutes after the time
appointed for the holding of the meeting, the persons present and entitled to
vote shall choose one of their number to be chairman. If the secretary is
absent, the chairman shall appoint some person, who need not be a shareholder,
to act as secretary of the meeting. One or more scrutineers, who need not be
shareholders, may be appointed by the chairman or by a resolution of the
shareholders.
2.11 Ouorum: The quorum for the transaction of business at any meeting of
------
shareholders shall be two (2) persons present at the opening of the meeting each
being a shareholder entitled to vote at the meeting or a duly appointed
proxyholder or representative for a shareholder so entitled. If a quorum is
present at the opening of any meeting of shareholders, the shareholders present
or represented may proceed with the business of the meeting even though a quorum
is not present throughout the meeting.
2.12 Persons Entitled to Vote: Without prejudice to any other right to
------------------------
vote, every shareholder recorded on the shareholder list prepared in accordance
with section 2.05 is entitled, at the meeting to which the list relates, to vote
----
the shares shown thereon opposite his name, except to the extent that the
shareholder transfers ownership of any such shares after the record date for
notice of the meeting and the transferee establishes that he owns the shares and
requests not later than 48 hours (excluding Saturdays and holidays) before the
meeting that his name be included in the list, in which case the transferee is
entitled to vote such shares at the meeting. However, where two or more persons
hold the same shares jointly, any one of them may in the absence of the others
vote in respect of such shares but if more than one of such persons are
Exhibit F - 3
<PAGE>
present or represented and vote, they shall vote together as one on the shares
Jointly held by them or not at all.
2.13. Proxies: Every shareholder, including a shareholder that is a body
-------
corporate, entitled to vote at a meeting of shareholders may by means of a proxy
appoint a proxyholder or alternate proxyholders, who need not be shareholders,
as his nominee to attend and act at the meeting in the manner, to the extent and
with the authority conferred by the proxy. The board may specify in the notice
calling a meeting of shareholders a time, not exceeding 48 hours (excluding
Saturdays and holidays) preceding the meeting or any adjournment thereof, before
which proxies must be deposited with the Corporation or its agent. A proxy shall
be acted upon only if, prior to the time so specified, it shall have been
deposited with the Corporation or an agent thereof specified in such notice or,
where no such time is specified in such notice, if it has been received by the
secretary of the Corporation or the chairman of the meeting or any adjournment
thereof before the time of voting.
2.14. Voting: At each meeting of shareholders every question proposed for
------
consideration by the shareholders shall be decided by a majority of the votes
duly cast thereon, unless otherwise required by the articles or by-laws of the
Corporation or by law. In case of an equality of votes the chairman of the
meeting shall be entitled to a casting vote.
2.15 Show of Hands: At each meeting of shareholders voting shall be by
-------------
show of hands unless a ballot is required or demanded as hereinafter provided.
Upon a show of hands every person present and entitled to vote on the show of
hands shall have one vote. Whenever a vote by show of hands has been taken upon
a question, unless a ballot thereon be so required or demanded and such
requirement or demand is not withdrawn, a declaration by the chairman of the
meeting that the vote upon the question was carried or carried by a particular
majority or carried, and an entry to that effect in the minutes of the meeting,
shall be prima facie evidence of the result of the vote without proof of the
number or proportion of votes cast for or against.
2.16 Ballots: On any question proposed for consideration at a meeting of
-------
shareholders a ballot may be required by the chairman or demanded by any person
present and entitled to vote, either before or after any vote by show of hands.
If a ballot is so required or demanded and such requirement or demand is not
withdrawn, a poll upon the question shall be taken in such manner as the
chairman of the meeting shall direct. Subject to the articles, upon a ballot
each person present shall be entitled to one vote in respect of each share which
he is entitled to vote at the meeting on the question.
Exhibit F - 4
<PAGE>
ARTICLE THREE
DIRECTORS
3.01. Powers of the Board of Directors: The board of directors shall manage
--------------------------------
or supervise the management of the business and affairs of the Corporation.
3.02. Qualifications: A majority of the directors shall be resident
--------------
Canadians, at least one-third of the directors shall not be officers or
employees of the Corporation or of any affiliate of the Corporation, and no
person may be a director who is disqualified under the Act.
3.03. Number and Quorum of Directors: The shareholders shall by
------------------------------
special resolution determine from time to time or authorize the board to so
determine the number of directors, including the number to be elected at the
annual meeting, within the minimum and maximum number of directors from time to
time provided for in the articles. The number of directors required from time to
time to constitute a quorum for the transaction of business at a meeting of the
board shall be 51% of the number of directors so determined at that time (or, if
that is a fraction,the next larger whole number of directors). However, in no
case shall the quorum be less than 40% of the minimum number of directors then
provided for in the articles, or two directors, whichever is greater. Reference
is made to section 3.10.
----
3.04. Election and Term: The directors shall be elected to hold office for
-----------------
a term expiring not later than the close of the third annual meeting of
shareholders following their election or when their successors are duly
elected.
3.05. Vacancies: Notwithstanding vacancies, the remaining directors
---------
may exercise all the powers of the board as long as a quorum of the
board remains in office. Vacancies in the board may be filled in accordance
with the Act.
3.06. Calling Meetings: Meetings of the board shall be held from time to
----------------
time at such places within or outside Ontario on such days and at such times as
any two directors or the chief executive officer or any other officer
designated by the board may determine. In any financial year of the Corporation
a majority of the meetings of the board may be held within or outside Canada.
3.07. Notice: Notice of the time and place of every meeting of the board
------
shall be sent to each director not less than 48 hours (excluding Saturdays and
holidays) if the meeting is held in Ontario, or 96 hours (excluding Saturdays
and holidays) otherwise, before the time of the meeting. Reference is made to
sections 6.07 to 6.11.
---- ----
3.08. First Meeting of New Board: Each newly constituted board may hold its
--------------------------
first meeting without notice on the same day as the meeting of shareholders at
which such board is elected.
Exhibit F - 5
<PAGE>
3.09 Regular Meetings: The board may appoint a day or days in any months
----------------
for regular meetings of the board at a place and hour to be named. A copy of any
resolution of the board fixing the place and time of such regular meetings shall
be sent to each director forthwith after being passed and to each director
elected or appointed thereafter, but no other notice shall be required for any
such regular meeting.
3.10. Canadian Majority: No business other than the filling of a vacancy on
-----------------
the board shall be transacted at a meeting of the board unless a majority of the
directors present are resident Canadians, except where a resident Canadian
director who is unable to be present approves in writing or by telephone or
other communication facilities the business transacted at the meeting and a
majority of resident Canadian directors would have been present had that
director been present at the meeting.
3.11. Meetinqs by Telephone: If all the directors present at or
---------------------
participating in the meeting consent (which consent may be given at any time) a
meeting of the board may be held by means of such telephone, electronic or other
communication facilities as permit all persons participating in the meeting to
communicate with each other simultaneously and instantaneously, and each
director participating in such a meeting by such means shall be deemed to be
present at the meeting.
3.12 Chairman: The chairman of the board or in his absence a director
--------
designated by the board or in his absence a director designated by the meeting
shall be chairman of any meeting of the board.
3.13. Voting: At all meetings of the board every question shall be decided
------
by a majority of the votes cast on the question. In case of an equality of votes
the chairman of the meeting shall be entitled to a casting vote.
3.14. Signed Resolutions: When there is a quorum of directors in office, a
-------------------
resolution in writing signed by all the directors entitled to vote thereon at a
meeting of the board or any committee thereof is as valid as if passed at such
meeting. Any such resolution may be signed in counterparts and if signed as of
any date shall be deemed to have been passed on such date.
3.15. Remuneration: Directors may be paid such remuneration for acting as
-------------
directors and such sums in respect of their out-of-pocket expenses incurred in
performing their duties as the board may determine from time to time. Any
remuneration or expenses so payable shall be in addition to any other amount
payable to any director acting in another capacity.
3.16. Committees: The board shall appoint an audit committee and from time
----------
to time may appoint other committees of directors. The composition of each
committee shall meet the requirements of the Act. Each committee shall have
those powers and duties lawfully delegated to it by the board or provided by the
Act. Unless otherwise determined by the board, each committee may fix its
quorum, elect its chairman and
Exhibit F - 6
<PAGE>
adopt rules to regulate its procedure. Subject to the foregoing, the procedure
of each committee shall be governed by the provisions of this by-law, which
govern proceedings of the board so far as the same can, apply except that a
meeting of a committee may be called by any member thereof (or by any member or
the auditor, in the case of the audit committee)notice of any such meeting shall
be given to each member of the committee (or each member and the auditor, in the
case of the audit committee) and the meeting shall be chaired by the chairman of
the committee or, in his absence, some other member of the committee. Each
committee shall keep records of its proceedings and transactions and shall
report all such proceedings and transactions to the board in a timely manner.
ARTICLE FOUR
OFFICERS AND EMPLOYEES
4.01. Appointment of Officers: The board may from time to time appoint a
-----------------------
chairman of the board, a vice-chairman of the board, a president, one or more
senior vice-presidents and vice-presidents, a treasurer, a secretary, a
controller and such other officers as the board may determine, including one or
more assistants to any of the officers so appointed. One person may hold more
than one office. Except for the chairman of the board and the vice-chairman of
the board, the officers so appointed need not be directors.
4.02. Appointment of Non-Officers: The board may also appoint+ other
---------------------------
persons to serve the Corporation in such other positions and with such titles,
powers and duties as the board may determine from time to time.
4.03. Terms of Employment: The board may settle from time to time the
-------------------
terms of employment of the officers and other persons appointed by it and may
remove at its pleasure any such person without prejudice to his rights under any
employment contract.
4.04. Powers and Duties of Officers: The board may from time to time
-----------------------------
specify the duties of each officer, delegate to him powers to manage the
business and affairs of the Corporation (including the power to sub-delegate)
and change such duties and powers, all insofar as not prohibited by the Act. To
the extent not otherwise so specified or delegated, and subject to the Act, the
duties and powers of the officers of the Corporation shall be those usually
pertaining to their respective offices.
4.05. Incentive Plans: For the purposes of enabling key officers and
---------------
employees of the Corporation and its affiliates to participate in the growth of
the Corporation and of providing effective incentives to such officers and
employees, the board may establish such plans (including stock option plans and
stock purchase plans) and make such rules and regulations with respect thereto,
and such changes in such plans, rules
Exhibit F - 7
<PAGE>
and regulations, as the board may deem advisable from time to time. From time
to time the board may designate the key officers and employees entitled to
participate in any such plan. For the purposes of any such plan the Corporation
may provide such financial assistance by means of loan, guarantee or otherwise
to key officers and employees as is Permitted by the Act.
ARTICLE FIVE
CONDUCT OF DIRECTORS AND OFFICERS AND INDEMNITY
5.01. Standard of Care: Every director and officer of the Corporation in
----------------
exercising his powers and discharging his duties shall act honestly and in good
faith with a view to the best interests of the Corporation and shall exercise
the care, diligence and skill that a reasonable prudent person would exercise in
comparable circumstances.
5.02. Disclosure of Interest: A director or officer who now or in future is
----------------------
a party to, or is a director or officer of or has a material interest in another
person who is a party to, any existing or proposed material contract or
transaction with the Corporation shall in accordance with the Act disclose in
writing to the Corporation or request to have entered in the minutes of meetings
of the board the nature and extent of his interest. Except as permitted by the
Act a director so interested shall not vote on any resolution to approve such
contract or transaction. A general notice to the board by a director or officer
that he is a director or officer of or has a material interest in a person and
is to be regarded as interested in any contract made or transaction entered into
with that person is a sufficient disclosure of interest in relation to any
contract or transaction so made or entered into.
5.03. Indemnity: Every person who at any time is or has been a director or
---------
officer of the Corporation or who at any time acts or has acted at the
Corporation's request as a director or officer of a body corporate of which the
Corporation is or was a shareholder or creditor, and the heirs and legal
representatives of every such person, shall at all times be indemnified by the
Corporation in every circumstance where the Act so permits or requires. In
addition and without prejudice to the foregoing and subject to the limitations
in the Act regarding indemnities in respect of derivative actions, every person
who at any time is or has been a director, officer or employee of the
Corporation or properly incurs or has properly incurred any liability on behalf
of the Corporation or who at any time acts or has acted at the Corporation's
request (in respect of the Corporation or any other person), and his heirs and
legal representatives, shall at all times be indemnified by the Corporation
against all costs, charges and expenses, including an amount paid to settle an
action or satisfy a fine or judgment, reasonably incurred by him in respect of
or in connection with any civil, criminal or administrative action, proceeding
or investigation (apprehended, threatened, pending, under way or completed) to
which he is or may be made a party or in which he is or may become otherwise
involved by
Exhibit F - 8
<PAGE>
reason of being or having been such a director, officer or employee or by
reason of so incurring or having so incurred such liability or by reason of so
acting or having so acted (or by reason of anything alleged to have been done,
omitted or acquiesced in by him in any such capacity or otherwise in respect of
any of the foregoing), and all appeals therefrom, if:
(a) he acted honestly and in good faith with a view to the best interests
of the Corporation; and
(b) in the case of a criminal or administrative action or proceeding that
is enforced by a monetary penalty, he had reasonable grounds for
believing his conduct was lawful.
Nothing in this section shall affect any other right to indemnity to which any
person may be or become entitled by contract or otherwise, and no settlement or
plea of guilty in any action or proceeding shall alone constitute evidence that
a person did not meet a condition set out in clause (a) or (b) of this section
or any corresponding condition in the Act.
5.04. Limitation of Liability: So long as he acts honestly and in good
-----------------------
faith with a view to the best interests of the Corporation, no person referred
to in the preceding section shall be liable for any damage, loss, cost or
liability sustained or incurred by the Corporation. However, nothing in this
section shall relieve any director or officer of the Corporation from the duty
to act in accordance with the Act and the regulations thereunder or from
liability for any breach of such duty.
5.05. Insurance: Subject to the Act, the Corporation may purchase insurance
---------
or the benefit of any person referred to in section 5.03 against such
----
liabilities and in such amounts as the board may determine from time to time.
ARTICLE SIX
MISCELLANEOUS
6.01. Execution of Documents: Any contracts and documents to be executed by
----------------------
the Corporation may be signed by any two of the chairman of the board, the vice-
chairman of the board, the president, a senior vice-president, a vice-president,
the secretary, the treasurer or the controller or by any one of the foregoing
persons and a director, an assistant secretary, an assistant treasurer or an
assistant controller. In addition, the board may from time to time indicate who
may or shall sign any particular contract or document or class of contracts or
documents. Any officer of the Corporation may affix the corporate seal to any
contract or document and may certify a copy of any resolution or of any by-law
or contract or document of the Corporation to be a true copy thereof. Subject to
the Act, and if authorized by the board, the corporate seal of the Corporation
and the signature of any signing
Exhibit F - 9
<PAGE>
officer may be mechanically or electronically reproduced upon any contracts or
documents of the Corporation. Any such facsimile signature shall bind the
Corporation notwithstanding that any signing officer whose signature is so
reproduced may have ceased to hold office at the date of delivery or issue of
such contracts or documents.
6.02. Share Certificates: Every shareholder is entitled at his option to a
------------------
share certificate stating the number, class and series designation, if any, of
shares held by him as appears on the records of the Corporation, or a non-
transferable written acknowledgement of his right to obtain such a share
certificate. However, the Corporation is not bound to issue more than one share
certificate or acknowledgement in respect of shares held jointly by several
persons, and delivery of such certificate or acknowledgment to one of such
persons is sufficient delivery to all of them. Share certificates and
acknowledgements shall be in such forms as the board shall approve from time to
time and, unless otherwise ordered by the board, shall be signed in accordance
with section 6.01 and need not be under corporate seal. However, certificates
----
representing shares in respect of which a transfer agent has been appointed
shall be signed manually by or on behalf of such transfer agent and other share
certificates and acknowledgements shall be signed manually by at least one
signing officer.
6.03. Replacement of Share Certificates: The board may prescribe either
---------------------------------
generally or in a particular case the conditions, in addition to those provided
in the Act, upon which a new share certificate may be issued in place of any
share certificate which is claimed to have been lost, destroyed or wrongfully
taken, or which has become defaced.
6.04. Registration of Transfer: No transfer of shares need be recorded in
------------------------
tie register of transfers except upon presentation of the certificate
representing such shares endorsed by the appropriate person under the Act,
together with reasonable assurance that the endorsement is genuine and
effective, and upon compliance with all other conditions set out in the Act.
6.05. Dividends: Subject to the Act and the articles the board may from
---------
time to time declare dividends payable to the shareholders according to their
respective rights and interests in the Corporation. A dividend payable to any
shareholder in money may be paid by cheque payable to the order of the
shareholder and shall be mailed to the shareholder by prepaid mail addressed to
him at his recorded address unless he @irects otherwise. In the case of joint
holders the cheque shall be made payable to the order of all of them, unless
such joint holders direct otherwise in writing. The mailing of a cheque as
aforesaid, unless it is not paid on due presentation, shall discharge the
Corporation's liability for the dividend to the extent of the amount of the
cheque plus the amount of any tax thereon which the Corporation has properly
withheld. If any dividend cheque sent is not received by the payee, the
Corporation shall issue to such person a replacement cheque for a like amount on
such reasonable terms as to indemnity, reimbursement of expenses and evidence of
non-receipt and of title as the board or any person designated by it may
require.
Exhibit F - 10
<PAGE>
6.06. Dealings with Registered Shareholder: Subject to the Act, the
------------------------------------
Corporation may treat the registered owner of a share as the person exclusively
entitled to vote, to receive notices, to receive any dividend or other payment
in respect of the share and otherwise to exercise all the rights and powers of a
holder of the share. The Corporation may, however, treat as the registered
shareholder any executor, administrator, heir, legal representative, guardian,
committee, trustee, curator, tutor, liquidator or trustee in bankruptcy who
furnishes appropriate evidence to the Corporation establishing his authority to
exercise the rights relating to a share of the Corporation.
6.07. Method of Giving Notice: Any notice or document required or permitted
-----------------------
to be sent by the Corporation to any person, may be mailed by prepaid Canadian
mail in' a sealed envelope addressed to, or may be delivered personally to, such
person at his recorded address, or may be sent by any other means permitted
under the Act. If so mailed, the notice or document shall be deemed to have been
received by the addressee on the fifth clear day after mailing. The secretary
may change the recorded address of any person in accordance with any information
the secretary believes to be reliable.
6.08. Undelivered Notices: If notices or documents mailed to a shareholder
-------------------
pursuant to section 6.07 are returned on three consecutive occasions because he
----
cannot be found, the Corporation need not send any further notices or documents
to such shareholder until he informs the Corporation in writing of his new
address.
6.09. Computation of Days: In computing any period of days or clear days
-----------
under the articles or by-laws or the Act, the period shall be deemed to commence
on the day following the event that begins the period and shall be deemed to end
at midnight on the last day of the period except that if the last day of the
period falls on a holiday, the period shall and at midnight of the day next
following that is not a holiday.
6.10. Omissions and Errors: The accidental omission to give any notice to
--------------------
any person, or the non-receipt of any notice by any person or any immaterial
error in any notice shall not invalidate any action taken at any meeting held
pursuant to such notice or otherwise founded thereon.
6.11. Waiver of Notice: Any person entitled to attend a meeting of
----------------
shareholders or directors or a committee thereof may in any manner and at any
time waive notice thereof, and attendance of any shareholder or his proxyholder
or authorized representative or of any other person at any meeting is a waiver
of notice thereof by such shareholder or other person except where the
attendance is for the express purpose of objecting to the transaction of any
business on the grounds that the meeting is not lawfully called. In addition,
where any notice or document is required to be given under the articles or by-
laws or the Act, the notice may be waived or the time for sending the notice or
document may be waived or abridged at any time with the consent in writing of
the person entitled thereto. Any meeting may be held without
Exhibit F - 11
<PAGE>
notice or on shorter notice than that provided for in the by-laws if all persons
not receiving the notice to which they are entitled waive notice of or accept
short notice of the holding of such meeting.
ARTICLE SEVEN
TRANSITIONAL
7.01. Repeal of By-laws: By-law Nos. 1-6 are repealed without affecting
-----------------
their operation to date or the validity of any act done. Contract made, right or
privilege acquired or liability or obligation incurred thereunder and without
prejudice to any authority exercisable by the board of directors hereafter. All
directors, officers and other persons holding office or appointment under such
repealed by-laws immediately prior to the coming into force of this by-law shall
continue to act as if appointed under this by-law by the board or any committee
thereof or by the shareholders or the holders of any class or series of shares
and having continuing effect immediately prior to the coming into force of this
by-law shall continue in effect except to the extent inconsistent with this by-
law and until amended or repealed.
7.02. Effective Date: This by-law shall come into force as soon as
--------------
the articles of amendment removing the private company restrictions are obtained
by the Corporation.
Exhibit F - 12
<PAGE>
EXHIBIT G
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF ATSI-DELAWARE
Exhibit G - 1
<PAGE>
EXHIBIT G
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ATSI MERGER CORP.
(HEREINAFTER TO BE KNOWN AS
AMERICAN TELESOURCE INTERNATIONAL, INC.)
THE UNDERSIGNED, Arthur L. Smith, President and Chief Executive
Officer of ATSI Merger Corp., a corporation organized and existing under the
laws of the State of Delaware (the "Company"), does hereby certify as follows:
1. The name of the Company is ATSI Merger Corp. The Certificate of
Incorporation of ATSI Merger Corp. was originally filed with the Secretary of
State of Delaware on June 7, 1996, as ATSI Merger Corp.
2. This Amended and Restated Certificate of Incorporation has been
duly adopted in accordance with Sections 242 and 245 of the General Corporation
Law of the State of Delaware and written notice of the adoption of this Amended
and Restated Certificate of Incorporation has been given as provided by Section
228 of the General Corporation Law of the State of Delaware to the stockholders
entitled to such notice.
3. This Amended and Restated Certificate of Incorporation restates
and integrates and further amends the provisions of the Certificate of
Incorporation, as amended, of this Company. The text of the Certificate of
Incorporation, as amended, of the Company is hereby amended and restated to read
in its entirety as follows:
ARTICLE I.
NAME
The name of the Company is American TeleSource International, Inc.
ARTICLE II.
BUSINESS
The purpose of the Company is to engage in any lawful act or activity
for which corporations may be organized under the Delaware General Corporation
Law.
G-1
<PAGE>
ARTICLE III.
AUTHORIZED CAPITAL STOCK
A. Authorization of Shares
-----------------------
The total number of shares of capital stock which the Company shall
have the authority to issue is 110,000,000 shares, consisting of 100,000,000
shares of common stock, par value $0.001 per share ("Common Stock"), and
10,000,000 shares of preferred stock, par value $0.001 per share ("Preferred
Stock").
B. Common Stock
------------
(1) Dividends. The holders of shares of Common Stock shall be
---------
entitled to receive such dividends as from time to time may be declared by
the Board of Directors of the Company, subject to any preferential payments
to which the holders of shares of any series of Preferred Stock shall be
entitled as may be stated and expressed pursuant to the resolution
establishing any such series of Preferred Stock.
(2) Liquidation. In the event of any liquidation, dissolution or
-----------
winding up of the Company, whether voluntary or involuntary, after payment
shall have been made to any holders of shares of any series of Preferred
Stock then outstanding of the full amounts of preferential payments to
which they shall respectively be entitled as may be stated and expressed
pursuant to the resolution establishing any such series of Preferred Stock,
the holders of shares of Common Stock then outstanding shall be entitled to
share ratably based upon the number of shares of Common Stock held by them
in all remaining assets of the Company available for distribution to its
shareholders.
(3) Voting Rights. All shares of Common Stock shall be identical
-------------
with each other in every respect. The shares of Common Stock shall entitle
the holders thereof to one vote for each share upon all matters upon which
shareholders have the right to vote.
C. Preferred Stock
---------------
The Board of Directors is authorized to establish, from time to time,
one or more series of any class of shares, to increase or decrease the number
within each series, and to fix the designations, powers, preferences and
relative, participating, optional or other rights of such series and any
qualifications, limitations or restrictions thereof.
ARTICLE IV.
REGISTERED OFFICE
The street address of the Company's registered office in the State of
Delaware is 1013 Centre Road, Wilmington, New Castle County, Delaware 19805, and
the name of its registered agent at such address is Corporation Service Company.
G-2
<PAGE>
ARTICLE V.
ELECTION OF DIRECTORS
A. The business and affairs of the Company shall be conducted and managed
by, or under the direction of, the Company's Board of Directors (the "Board").
The total number of directors constituting the entire Board shall be fixed and
may be altered from time to time by or pursuant to a resolution passed by the
Board.
B. The Board shall be divided into three classes, Class A, Class B and
Class C. Such classes shall be as nearly equal in number of directors as
possible. Each director shall serve for a term expiring at the third annual
meeting following the annual meeting at which such director was elected;
provided, however, that the directors first elected to Class A shall serve for
an initial term expiring at the annual meeting following the end of the
Company's 1997 fiscal year, the directors first elected to Class B shall serve
for an initial term expiring at the second annual meeting next following the end
of the Company's 1997 fiscal year, and the directors first elected to Class C
shall serve for an initial term expiring at the third annual meeting next
following the end of the Company's 1997 fiscal year. The foregoing
notwithstanding, except as otherwise provided in this Certificate or any
resolution or resolutions of the Board designating a series of Preferred Stock,
directors who are elected at an annual meeting of stockholders, and directors
elected in the interim to fill vacancies and newly created directorships, shall
hold office for the term for which elected and until their successors are
elected and qualified or until their earlier death, resignation or removal.
Whenever the holders of any class or classes of stock or any series thereof
shall be entitled to elect one or more directors pursuant to any resolution or
resolutions of the Board designating a series of Preferred Stock, and except as
otherwise provided herein or therein, vacancies and newly created directorships
of such class or classes or series thereof may be filled by a majority of the
directors elected by such class or classes or series thereof then in office, by
a sole remaining director so elected or by the unanimous written consent or the
affirmative vote of a majority of the outstanding shares of such class or
classes or series entitled to elect such director or directors.
C. Except as otherwise provided for herein, newly created directorships
resulting from any increase in the authorized number of directors, and any
vacancies on the Board resulting from death, resignation, disqualification,
removal or other cause, may be filled only by the affirmative vote of a majority
of the remaining directors then in office, even though less than a quorum of the
Board. Any director elected in accordance with the preceding sentence shall
hold office for the remainder of the full term of the newly created directorship
or for the directorship in which the vacancy occurred, and until such director's
successor shall have been duly elected and qualified, subject to his earlier
death, disqualification, resignation or removal. Subject to the provisions of
this Certificate, no decrease in the number of directors constituting the Board
shall shorten the term of any incumbent director.
D. Except as otherwise provided in any resolution or resolutions of the
Board designating a series of Preferred Stock, any director may be removed from
office only by the affirmative vote of the holders of 66 2/3% or more of the
combined voting power of the then-
G-3
<PAGE>
outstanding shares of capital stock of the Company entitled to vote at a meeting
of stockholders called for that purpose, voting together as a single class.
ARTICLE VI.
MEETINGS OF STOCKHOLDERS
A. Meetings of stockholders of the Company ("Stockholder Meetings") may
be held within or without the State of Delaware, as the Bylaws may provide.
Except as otherwise provided in any resolution or resolutions of the Board
designating a series of Preferred Stock, special Stockholder Meetings may be
called only by (i) the President of the Company or (ii) the Board pursuant to a
resolution adopted by a majority of the then-authorized number of directors of
the Company. Special Stockholder Meetings may not be called by any other person
or persons or in any other manner. Elections of directors need not be by
written ballot unless the Bylaws of the Company (the "Bylaws") shall so provide.
B. In addition to the powers conferred on the Board by this Certificate
and by the Delaware General Corporation Law, and without limiting the generality
thereof, the Board is specifically authorized from time to time, by resolution
of the Board without additional authorization by the stockholders of the
Company, to adopt, amend or repeal the Bylaws, in such form and with such terms
as the Board may determine, including, without limiting the generality of the
foregoing, Bylaws relating to (i) regulation of the procedure for submission by
stockholders of nominations of persons to be elected to the Board, (ii)
regulation of the attendance at annual or special Stockholder Meetings by
persons other than holders of record or their proxies, and (iii) regulation of
the business that may properly be brought by a stockholder of the Company before
an annual or special meeting of stockholders of the Company.
ARTICLE VII.
STOCKHOLDER CONSENT
Except as otherwise provided in any resolution or resolutions of the Board
designating a series of Preferred Stock, no action that is required or permitted
to be taken by the stockholders of the Company at any annual or special meeting
of stockholders may be effected by written consent of stockholders in lieu of a
meeting of stockholders, unless the action to be effected by written consent of
stockholders and the taking of such action by such written consent have
expressly been approved in advance by the Board.
ARTICLE VIII.
LIMITATION OF LIABILITY
A director of the Company shall not be personally liable to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a
director; provided, however, that this Article shall not eliminate or limit the
liability of a director: (i) for any breach of the director's duty of loyalty to
the Company or stockholders, (ii) for acts or
G-4
<PAGE>
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit.
If the Delaware General Corporation Law is amended after the date of filing
of this Certificate to authorize corporate action further limiting or
eliminating the personal liability of a director, then the liability of the
directors of the Company shall be limited or eliminated to the fullest extent
permitted by the Delaware General Corporation Law, as so amended. Any repeal or
modification of this Article by the stockholders of the Company or otherwise
shall not adversely affect any right or protection of a director of the Company
existing at the time of such repeal or modification.
ARTICLE IX.
SECTION 203
The Company shall be governed by Section 203 of the Delaware General
Corporation Law.
ARTICLE X.
INDEMNIFICATION
The Company shall indemnify each director and officer of the Company who
may be indemnified, to the fullest extent permitted by Section 145 of the
Delaware General Corporation Law ("Section 145"), as it may be amended from time
to time, in each and every situation where the Company is obligated to make such
indemnification pursuant to Section 145. In addition, the Company shall
indemnify each of the Company's directors and officers in each and every
situation where, under Section 145, the Company is not obligated, but is
permitted or empowered, to make such indemnification. The Company may, in the
sole discretion of the Board, indemnify any other person who may be indemnified
pursuant to Section 145 to the extent the Board deems advisable, as permitted by
such section. The Company shall promptly make or cause to be made any
determination which Section 145 requires.
ARTICLE XI.
AMENDMENT OF CORPORATE DOCUMENTS
A. Certificate. Whenever any vote of the holders of voting shares of
-----------
capital stock of the Company is required by law to amend, alter, repeal or
rescind any provision of this Certificate, then in addition to any affirmative
vote required by applicable law and in addition to any vote of the holders of
any series of Preferred Stock, as provided in any resolution or resolutions of
the Board designating a series of Preferred Stock, such alteration, amendment,
repeal or rescission (a "Change") of any provision of this Certificate must be
approved by at least a majority of the then-authorized number of directors and
by the affirmative vote of the holders of at least a majority of the combined
voting power of the then-outstanding voting
G-5
<PAGE>
shares of capital stock of the Company, voting together as a single class;
provided, however, that if any such Change relates to Articles III, V, VI, VII,
VIII, IX, X or to this Article XI, such Change must also be approved by the
affirmative vote of the holders of at least 66 2/3% of the combined voting power
of the then-outstanding voting shares of capital stock of the Company, voting
together as a single class; provided further, however, that the vote(s) required
by the immediately preceding clause shall not be required if such Change has
been first approved by at least two-thirds of the then-authorized number of
directors.
Subject to the provisions hereof, the Company reserves the right at
any time, and from time to time, to amend, alter, repeal or rescind any
provision contained in this Certificate in the manner now or hereafter
prescribed by law, and other provisions authorized by the laws of the State of
Delaware at the time in force may be added or inserted, in the manner now or
hereafter prescribed by law; and all rights, preferences and privileges of
whatsoever nature conferred upon stockholders, directors or any other persons
whomsoever by and pursuant to this Certificate in its present form or as
hereafter amended are granted subject to the rights reserved in this article.
B. Bylaws. In addition to any affirmative vote required by law, any
------
Change of the Bylaws may be adopted either (i) by the Board by the affirmative
vote of at least a majority of the then-authorized number of directors, or (ii)
by the stockholders by the affirmative vote of the holders of at least 662/3% of
the combined voting power of the then-outstanding voting shares of capital stock
of the Company, voting together as a single class.
ARTICLE XII.
EXISTENCE
The Company is to have perpetual existence.
ARTICLE XIII.
RELATED PARTIES
A. No contract or transaction between the Company and one or more of its
directors or officers, or between the Company and any other corporation,
partnership, association, or other organization in which one or more of its
directors or officers, are directors or officers, or have a financial interest,
shall be void or voidable solely for this reason, or solely because the director
or officer is present at or participates in the meeting of the Board or
committee which authorizes the contract or transaction, or solely because his or
their votes are counted for such purpose, if:
(1) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the Board or the
committee, and the Board or committee in good faith authorizes the contract
or transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum;
or
G-6
<PAGE>
(2) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by a vote of the stockholders; or
(3) The contract or transaction is fair as to the Company as of the
time it is authorized, approved or ratified, by the Board, a committee or
the stockholders.
B. Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board or of a committee which
authorizes the contract or transaction.
SIGNED this 10th day of September, 1997.
/s/ ARTHUR L. SMITH
--------------------------------------
President and Chief Executive Officer
G-7
<PAGE>
EXHIBIT H
BYLAWS OF ATSI-DELAWARE.
BYLAWS
OF
AMERICAN TELESOURCE
INTERNATIONAL, INC.
EXHIBIT H - 1
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C> <C>
ARTICLE I. OFFICES ............................................................. 1
Section 1.1. Registered Office ................................................... 1
-----------------
Section 1.2. Additional Offices .................................................. 1
------------------
ARTICLE II. STOCKHOLDERS MEETINGS ............................................... 1
Section 2.1. Annual Meetings ..................................................... 1
---------------
Section 2.2. Special Meetings .................................................... 1
----------------
Section 2.3. Notices ............................................................. 1
-------
Section 2.4. Quorum .............................................................. 1
------
Section 2.5. Organization and Conduct of Meetings ................................ 2
------------------------------------
Section 2.6. Notification of Stockholder Business ................................ 2
------------------------------------
Section 2.7. Voting of Shares .................................................... 3
----------------
2.7.1. Voting Lists ............................................... 3
------------
2.7.2. Votes Per Share ............................................ 3
---------------
2.7.3. Proxies .................................................... 4
-------
2.7.4. Required Vote .............................................. 4
-------------
2.7.5. Consents in Lieu of Meeting ................................ 4
---------------------------
Section 2.8. Inspectors of Election .............................................. 4
----------------------
ARTICLE III. DIRECTORS ........................................................... 5
Section 3.1. Purpose ............................................................. 5
-------
Section 3.2. Number and Class .................................................... 5
----------------
Section 3.3. Election ............................................................ 5
--------
Section 3.4. Notification of Nominations ......................................... 5
---------------------------
Section 3.5. Vacancies and Newly Created Directorships ........................... 6
-----------------------------------------
3.5.1. Vacancies .................................................. 6
---------
3.5.2. Newly Created Directorships ................................ 6
---------------------------
Section 3.6. Removal ............................................................. 7
-------
Section 3.7. Compensation ........................................................ 7
------------
ARTICLE IV. BOARD MEETINGS ...................................................... 7
Section 4.1. Regular Meetings .................................................... 7
----------------
Section 4.2. Special Meetings .................................................... 7
----------------
Section 4.3. Organization, Conduct of Meetings ................................... 7
---------------------------------
Section 4.4. Quorum, Required Vote ............................................... 7
---------------------
Section 4.5. Consent In Lieu of Meeting .......................................... 8
--------------------------
ARTICLE V. COMMITTEES OF DIRECTORS ............................................. 8
Section 5.1. Establishment; Standing Committees .................................. 8
----------------------------------
5.1.1. Executive Committee ........................................ 8
-------------------
5.1.2. Finance Committee .......................................... 8
-----------------
5.1.3. Conflicts and Audit Committee .............................. 8
-----------------------------
</TABLE>
Exhibit H-i
<PAGE>
<TABLE>
<S> <C> <C>
5.1.4. Compensation Committee ..................................... 9
----------------------
Section 5.2. Available Powers .................................................... 9
----------------
Section 5.3. Unavailable Powers .................................................. 9
------------------
Section 5.4. Alternate Members ................................................... 10
-----------------
Section 5.5. Procedures .......................................................... 10
----------
ARTICLE VI. OFFICERS ............................................................ 10
Section 6.1. Executive Officers; Term of Office .................................. 10
----------------------------------
Section 6.2. Powers and Duties ................................................... 11
-----------------
6.2.1. President .................................................. 11
---------
6.2.2. Vice Presidents ............................................ 11
---------------
6.2.3. Secretary .................................................. 11
---------
6.2.4. Treasurer .................................................. 11
---------
6.2.5. Assistant Secretary ........................................ 11
-------------------
6.2.6. Assistant Treasurer ........................................ 12
-------------------
Section 6.3. Resignations and Removal ............................................ 12
------------------------
Section 6.4. Vacancies ........................................................... 12
---------
Section 6.5. Compensation, Vacancies ............................................. 12
-----------------------
Section 6.6. Additional Powers and Duties ........................................ 12
----------------------------
Section 6.7. Voting Upon Stocks .................................................. 12
------------------
ARTICLE VII. SHARE CERTIFICATES................................................... 13
Section 7.1. Entitlement to Certificates ......................................... 13
---------------------------
Section 7.2. Multiple Classes of Stock ........................................... 13
-------------------------
Section 7.3. Signatures .......................................................... 13
----------
Section 7.4. Issuance and Payment ................................................ 13
--------------------
Section 7.5. Lost, Stolen or Destroyed Certificates .............................. 13
--------------------------------------
Section 7.6. Transfer of Stock ................................................... 14
-----------------
Section 7.7. Registered Stockholders ............................................. 14
-----------------------
ARTICLE VIII. INDEMNIFICATION ..................................................... 14
Section 8.1. General ............................................................. 14
-------
Section 8.2. Actions by or in the Right of the Company ........................... 14
-----------------------------------------
Section 8.3. Board Determinations ................................................ 15
--------------------
Section 8.4. Advancement of Expenses ............................................. 15
-----------------------
Section 8.5. Nonexclusive ........................................................ 15
------------
Section 8.6 Indemnification of Employees and Agents of the Company .............. 15
------------------------------------------------------
Section 8.7. Insurance ........................................................... 16
---------
Section 8.8. Certain Definitions ................................................. 16
-------------------
Section 8.9. Change in Governing Law ............................................. 16
-----------------------
ARTICLE IX. INTERESTED DIRECTORS, OFFICERS AND
STOCKHOLDERS ........................................................ 16
Section 9.1. Validity ............................................................ 16
--------
Section 9.2. Disclosure, Approval ................................................ 17
--------------------
Section 9.3. Nonexclusive ........................................................ 17
------------
</TABLE>
Exhibit H-ii
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE X. MISCELLANEOUS 17
Section 10.1 Place of Meetings ................................................... 17
-----------------
Section 10.2. Fixing Record Dates ................................................. 17
-------------------
Section 10.3. Means of Giving Notice .............................................. 18
----------------------
Section 10.4. Waiver of Notice .................................................... 18
----------------
Section 10.5. Attendance via Communications Equipment ............................. 18
---------------------------------------
Section 10.6. Dividends ........................................................... 18
---------
Section 10.7. Reserves ............................................................ 18
--------
Section 10.8. Reports to Stockholders ............................................. 18
-----------------------
Section 10.9. Checks, Notes and Contracts ......................................... 18
---------------------------
Section 10.10. Loans ............................................................... 19
-----
Section 10.11. Fiscal Year ......................................................... 19
----------
Section 10.12. Seal ................................................................ 19
----
Section 10.13. Books and Records ................................................... 19
-----------------
Section 10.14. Resignation ......................................................... 19
-----------
Section 10.15. Surety Bonds ........................................................ 19
------------
Section 10.16. Amendments .......................................................... 20
---------
</TABLE>
Exhibit H-iii
<PAGE>
BYLAWS
OF
AMERICAN TELESOURCE
INTERNATIONAL, INC.
ARTICLE I.
OFFICES
Section 1.1. Registered Office. The registered office of the Company
-----------------
within the State of Delaware shall be located at the principal place of business
in said state of such Company or individual acting as the Company's registered
agent in Delaware.
Section 1.2. Additional Offices. The Company may, in addition to its
------------------
registered office in the State of Delaware, have such other offices and places
of business, both within and without the State of Delaware, as the Board of
Directors of the Company (the Board) may from time to time determine or as the
business and affairs of the Company may require.
ARTICLE II.
STOCKHOLDERS MEETINGS
Section 2.1. Annual Meetings. Annual meetings of stockholders shall be
---------------
held at a place and time on any weekday which is not a holiday as shall be
designated by the Board and stated in the notice of the meeting, at which
meeting the stockholders shall elect the directors of the Company and transact
such other business as may properly be brought before the meeting.
Section 2.2. Special Meetings. Special meetings of the stockholders, for
----------------
any purpose or purposes, shall be called in the manner prescribed by Article VI
of the Certificate of Incorporation (the Certificate).
Section 2.3. Notices. Written notices of each stockholders meeting
-------
stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote thereat at the address of such stockholder as
reflected in the records of the Company. Such notice shall be given by or at the
direction of the party calling such meeting not less than 10 nor more than 60
days before the date of the meeting. If said notice is for a stockholders
meeting other than an annual meeting, it shall in addition state the purpose or
purposes for which said meeting is being called, and the business transacted at
such meeting shall be limited to the matters so stated in said notice and any
matters reasonably related thereto.
Section 2.4. Quorum. At any stockholders meeting, the holders present in
------
person or by proxy of a majority of the voting power of the shares of capital
stock of the Company entitled to vote thereat shall constitute a quorum of the
stockholders for all purposes (unless the representation of a larger number of
shares shall be required by law or by the Certificate, in which case the
representation of the number of shares so required shall constitute a quorum).
Exhibit H - 1
<PAGE>
The holders of a majority of the voting power of the Shares of capital
stock of the Company entitled to vote which are present in person or by proxy at
any meeting (whether or not constituting a quorum of the outstanding shares) may
adjourn the meeting from time to time without notice other than by announcement
thereat; and at any adjourned meeting at which a quorum shall be present, any
business may be transacted which might have been transacted at the meeting as
originally called, but only those stockholders entitled to vote at the meeting
originally noticed shall be entitled to vote at any adjournment or adjournments
thereof. However, if the adjournment is for more than 30 days, or if after the
adjournment a new record date is fixed, notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
Section 2.5. Organization and Conduct of Meetings. Such person as the
------------------------------------
Board of Directors may have designated or, in the absence of such a person, the
President of the Corporation or, in his absence, such person as may be chosen by
the holders of shares representing a majority of the votes which could be cast
by those present, in person or by proxy and entitled to vote, shall call to
order any meeting of the stockholders and act as chairman of the meeting.
The Secretary shall act as secretary of all stockholders meetings; but, in
the absence of the Secretary, the Chairman may appoint any person to act as
secretary of the meeting.
The date and time of the opening and the closing of the polls for each
matter upon which the stockholders will vote at a meeting shall be announced at
the meeting by the chairman of the meeting. The Board may, to the extent not
prohibited by law, adopt by resolution such rules and regulations for the
conduct of the meeting of stockholders as it shall deem appropriate. Except to
the extent inconsistent with such rules and regulations as adopted by the Board,
the chairman of any meeting of stockholders shall have the right and authority
to prescribe such rules, regulations and procedures and to do all such acts as,
in the judgment of such chairman, are appropriate for the proper conduct of the
meeting. Such rules, regulations or procedures, whether adopted by the Board or
prescribed by the chairman of the meeting, may to the extent not prohibited by
law include, without limitation, the following: (i) the establishment of an
agenda or order of business for the meeting; (ii) rules and procedures for
maintaining order at the meeting and for the safety of those present; (iii)
limitations on attendance at or participation in the meeting to stockholders of
record of the Company, their duly authorized and constituted proxies or such
other persons as the chairman of the meeting shall determine; (iv) restrictions
on entry to the meeting after the time fixed for the commencement thereof; and
(v) limitation on the time allotted to questions or comments by participants.
Unless and to the extent determined by the Board or the chairman of the meeting,
meetings of stockholders shall not be required to be held in accordance with the
rules of parliamentary procedure.
Proceedings at every stockholders meeting shall, at the election of the
chairman, comply with Robert's Rules of Order (latest published edition).
Section 2.6. Notification of Stockholder Business. All business properly
------------------------------------
brought before an annual meeting shall be transacted at such meeting. Subject to
the right of stockholders to elect a chairman of the meeting, as set forth in
Section 2.5, business shall be deemed properly brought only if it is (i)
specified in the notice of meeting (or any supplement thereto) given by
Exhibit H - 2
<PAGE>
or at the direction of the Board, (ii) otherwise properly brought before the
meeting by or at the direction of the Board or (iii) brought before the meeting
by a stockholder of record entitled to vote at such meeting if written notice of
such stockholder's intent to bring such business before such meeting is
delivered to, or mailed, postage prepaid, and received by, the Secretary at the
principal executive offices of the Company not later than the close of business
on the tenth day following the date on which the Company first makes public
disclosure of the date of the annual meeting; provided, however, that if the
annual meeting is adjourned, and the Company is required by Delaware law to give
notice to stockholders of the adjourned meeting date, written notice of such
stockholder's intent to bring such business before the meeting must be delivered
to or received by the Secretary no later than the close of business on the fifth
day following the earlier of (1) the date the Company makes public, disclosure
of the date of the adjourned meeting or (2) the date on which notice of such
adjourned meeting is first given to stockholders. Each notice given by such
stockholder shall set forth: (A) a brief description of the business desired to
be brought before the meeting and the reasons for conducting such business at
the meeting; (B) the name and address of the stockholder who intends to propose
such business; (C) a representation that the stockholder is a holder of record
of stock of the Company entitled to vote at such meeting (or if the record date
for such meeting is subsequent to the date required for such stockholder notice,
a representation that the stockholder is a holder of record at the time of such
notice and intends to be a holder of record on the record date for such meeting)
and intends to appear in person or by proxy at such meeting to propose such
business; and (D) any material interest of the stockholder, if any, in such
business. The chairman of the meeting may refuse to transact any business at any
meeting made without compliance with the foregoing procedure. For this Section
2.6, public disclosure shall be deemed to first be given to stockholders when
disclosure of such date of the meeting of stockholders is first made in a press
release reported by the Dow Jones News Services, Associated Press or comparable
national news service, or in a document publicly filed by the Company with the
Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the
Securities Exchange Act of 1934, as amended.
Section 2.7. Voting of Shares.
----------------
Section 2.7.1. Voting Lists. The officer or agent who has charge of
------------
the stock ledger of the Company shall prepare, at least 10 days before every
meeting of stockholders, a complete list of the stockholders entitled to vote
thereat arranged in alphabetical order and showing the address and the number of
shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours for a period of at least 10 days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present. The original
stock transfer books shall be prima facie evidence as to who are the
stockholders entitled to examine such list or transfer books or to vote at any
meeting of stockholders. Failure to comply with the requirements of this Section
shall not affect the validity of any action taken at said meeting.
Section 2.7.2. Votes Per Share. Each outstanding share of capital
---------------
stock shall be entitled to vote in accordance with the provisions for voting
included in the Certificate. In determining the number of shares of stock
required by law, by the Certificate or by the Bylaws
Exhibit H - 3
<PAGE>
to be represented for any purpose, or to determine the outcome of any matter
submitted to stockholders for approval or consent, the number of shares
represented or voted shall be weighted in accordance with the provisions of the
Certificate regarding voting powers of each class of stock. Any reference in
these Bylaws to a majority or a particular percentage of the voting stock or a
majority or a particular percentage of the capital stock shall be deemed to
refer to a majority or a particular percentage, respectively, of the voting
power of such stock. Issues shall be determined by a class vote only when a
class vote is required by law or the Certificate.
Section 2.7.3. Proxies. Every Stockholder entitled to vote at a
-------
meeting or to express consent or dissent without a meeting or a stockholder's
duly authorized attorney-in-fact may authorize another person or persons to act
for him by proxy. Each proxy shall be in writing, executed by the stockholder
giving the proxy or by his duly authorized attorney. No proxy shall be voted on
or after three years from its date, unless the proxy provides for a longer
period. Unless and until voted, every proxy shall be revocable at the pleasure
of the person who executed it, or his legal representatives or assigns, except
in those cases where an irrevocable proxy permitted by statute has been given.
Section 2.7.4. Required Vote. When a quorum is present at any
-------------
meeting, the vote of the holders, present in person or represented by proxy, of
capital stock of the Company representing a majority of the votes of all capital
stock of the Company entitled to vote thereat shall decide any question brought
before such meeting, unless the question is one upon which, by express provision
of law or the Certificate or these Bylaws, a different vote is required, in
which case such express provision shall govern and control the decision of such
question.
Section 2.7.5. Consents in Lieu of Meeting. Pursuant to Article VII
---------------------------
of the Company's Certificate, no action that is required or permitted to be
taken by the stockholders of the Company at any annual or special meeting of
stockholders may be effected by written consent of stockholders in lieu of a
meeting of stockholders, unless, subject to certain exceptions contained in the
Certificate, the action to be effected by written consent of stockholders and
the taking of such action by such written consent have expressly been approved
in advance by the Board.
Section 2.8. Inspectors of Election. The Company shall, in advance of any
----------------------
meeting of stockholders, appoint one or more inspectors of election, who may be
employees of the Company, to act at the meeting or any adjournment thereof and
to make a written report thereof. The Company may designate one or more persons
as alternate inspectors to replace any inspector who fails to act. If no
inspector so appointed or designated is able to act at a meeting of
stockholders, the chairman or the person presiding at the meeting shall appoint
one or more inspectors to act at the meeting. Each inspector, before entering
upon the discharge of his or her duties, shall take and sign an oath to execute
faithfully the duties of inspector with strict impartiality and according to the
best of his or her ability.
The inspector or inspectors so appointed or designated shall: (a) ascertain
the number of shares of capital stock of the Company outstanding and the voting
power of each such share; (b) determine the shares of capital stock of the
Company represented at the meeting and the validity of proxies and ballots; (c)
count all votes and ballots; (d) determine and retain for a reasonable period a
record of the disposition of any challenges made to any determination by the
inspectors;
Exhibit H - 4
<PAGE>
and (e) certify their determination of the number of shares of capital stock of
the Company represented at the meeting and such inspectors' count of all votes
and ballots. Such certification and report shall specify such other information
as may be required by law. In determining the validity and counting of proxies
and ballots cast at any meeting of stockholders of the Company, the inspectors
may consider such information as is permitted by applicable law. No person who
is a candidate for an office at an election may serve as an inspector at such
election.
ARTICLE III.
DIRECTORS
Section 3.1. Purpose. The business and affairs of the Company shall be
-------
managed by or under the direction of the Board acting by not less than a
majority of the directors then in office. The Board shall exercise all such
powers of the Company and do all such lawful acts and things as are not by law,
the Certificate or these Bylaws directed or required to be exercised or done by
the stockholders. Directors need not be stockholders or residents of the State
of Delaware.
Section 3.2. Number and Class. The number of directors constituting the
----------------
Board shall never be less than one (1), and shall be determined by resolution of
the Board. At each election held after the initial elections, directors elected
to succeed such directors whose terms expire shall be elected for a term of
office which shall expire at the third succeeding annual meeting of stockholders
after their election. The foregoing notwithstanding, except as otherwise
provided in the Certificate or any resolution or resolutions of the Board
designating a series of preferred stock of the Company, directors who are
elected at an annual meeting of stockholders, and directors elected in the
interim to fill vacancies and newly created directorships, shall hold office for
the term for which elected and until their successors are elected and qualified
or until their earlier death, resignation or removal. Whenever the holders of
any class or classes of stock or any series thereof shall be entitled to elect
one or more directors pursuant to the provisions of the Certificate or any
resolution or resolutions of the Board designating a series of preferred stock
of the Company, and except as otherwise provided herein or therein, vacancies
and newly created directorships of such class or classes or series thereof may
be filled by a majority of the directors elected by such class or classes or
series thereof then in office, by a sole remaining director so elected or by the
unanimous written consent or the affirmative vote of a majority of the
outstanding shares of such class or classes or series entitled to elect such
director or directors. Except as otherwise provided in the Certificate,
directors need not be stockholders.
Section 3.3. Election. Directors shall be elected by the stockholders by
--------
plurality vote at a stockholders meeting as provided in the Certificate and
these Bylaws, and each director shall hold office until his successor has been
duly elected and qualified or until the earlier of his death, resignation or
removal from office.
Section 3.4. Notification of Nominations. Subject to the rights of the
---------------------------
holders of any one or more series of Preferred Stock then outstanding,
nominations for the election of directors may be made by the Board or by any
stockholder entitled to vote for the election of directors. Any stockholder
entitled to vote for the election of directors at an annual meeting or a special
Exhibit H - 5
<PAGE>
meeting called for the purpose of electing directors may nominate persons for
election as directors at such meeting only if written notice of such
stockholder's intent to make such nomination is delivered to, or mailed, postage
prepaid, and received by, the Secretary at the principal executive offices of
the Company not later than the close of business on the tenth day following the
date on which the Company first makes public disclosure of the date of the
meeting; provided, however,that if the meeting is adjourned, and the Company is
required by Delaware law to give notice to stockholders of the adjourned meeting
date, written notice of such stockholder's intent to make such nomination at
such adjourned meeting must be delivered to or received by the Secretary no
later than the close of business on the fifth day following the earlier of (1)
the date the Company makes public disclosure of the date of the adjourned
meeting or (2) the date on which notice of such adjourned meeting is first given
to stockholders. Each notice given by such stockholder shall set forth: (A) the
name and address of the stockholder who intends to make the nomination and of
the person or persons to be nominated; (B) a representation that the stockholder
is a holder of record of stock of the Company entitled to vote at such meeting
(or if the record date for such meeting is subsequent to the date required for
such stockholder notice, a representation that the stockholder is a holder of
record at the time of such notice and intends to be a holder of record on the
record date for such meeting) and intends to appear in person or by proxy at the
meeting to nominate the person or persons specified in the notice; (C) a
description of all arrangements or understandings between the stockholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
stockholder; (D) such other information regarding each nominee proposed by such
stockholder as would have been required to be included in a proxy statement
filed pursuant to the proxy rules of the Securities and Exchange Commission had
each nominee been nominated, or intended to be nominated, by the Board; and (E)
the written consent of each nominee to serve as a director of the Company if so
elected. The chairman of the meeting may refuse to acknowledge the nomination of
any person made without compliance with the foregoing procedure. For this
Section 3.4, public disclosure shall be deemed to be first given to stockholders
when disclosure of such date of the meeting of stockholders is first made in a
press release reported by the Dow Jones News Services, Associated Press or
comparable national news service, or in a document publicly filed by the Company
with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d)
of the Securities Exchange Act of 1934, as amended.
Section 3.5. Vacancies and Newly Created Directorships.
-----------------------------------------
Section 3.5.1. Vacancies. Any vacancy occurring in the Board shall
---------
be filled in accordance with Article V of the Certificate. A director elected to
fill a vacancy shall hold office until his successor has been duly elected and
qualified or until his earlier death, resignation or removal from office.
Section 3.5.2. Newly Created Directorships. A directorship to be
---------------------------
filled because an increase in the number of directors shall be filled in
accordance with Article V of the Certificate. A director elected to fill a
newly-created directorship shall hold office until his successor has been duly
elected and qualified or until his earlier death, resignation or removal from
office.
Exhibit H - 6
<PAGE>
Section 3.6. Removal. Any director or the entire Board may be removed in
-------
accordance with the procedures set forth in Article V of the Certificate.
Section 3.7. Compensation. Unless otherwise restricted by law, the
------------
Certificate or these Bylaws, the Board shall have the authority to fix
compensation of directors. The directors may be reimbursed for their expenses,
if any, of attendance at each meeting of the Board and may be paid either a
fixed sum for attendance at each meeting of the Board and/or a stated salary as
director. No such payment shall preclude any director from serving the Company
in any other capacity and receiving compensation therefor. Members of committees
of the Board may be allowed like compensation.
ARTICLE IV.
BOARD MEETINGS
Section 4.1. Regular Meetings. Regular meetings of the Board shall be
----------------
held at such times and places as the Board shall determine. No notice shall be
required for any regular meeting of the Board; but a notice of the fixing or
changing of the time or place of regular meetings shall be mailed to every
director at least five days before the first meeting held pursuant to the
notice.
Section 4.2. Special Meetings. Special meetings of the Board (i) may be
----------------
called by the President and (ii) shall be called by the President or Secretary
on the written request of two or more directors. Notice of each special meeting
of the Board shall be given to each director at least 24 hours before the
meeting if such notice is delivered personally or by means of telephone,
telegram, telex or facsimile transmission and delivery; two days before the
meeting if such notice is delivered by a recognized express delivery service;
and three days before the meeting if such notice is delivered through the United
States mail. Any and all business may be transacted at a special meeting which
may be transacted at a regular meeting of the Board. Except as may be otherwise
expressly provided by law, the Certificate or these Bylaws, neither the business
to be transacted at, nor the purpose of, any special meeting need be specified
in the notice or waiver of notice of such meeting.
Section 4.3. Organization, Conduct of Meetings. The Board of Directors
---------------------------------
may, if it chooses, elect a Chairman of the Board and a Vice Chairman of the
Board from its members. Meetings of the Board of Directors shall be presided
over by the Chairman of the Board, if any, or in his absence the Vice Chairman
of the Board, if any, or in his absence by the President, or in their absence by
a chairman chosen at the meeting. The Secretary of the Corporation, if present,
shall act as secretary of the meeting; but in his absence the secretary of the
meeting shall be such person as the chairman of the meeting appoints.
Section 4.4. Quorum, Required Vote. A majority of the directors shall
---------------------
constitute a quorum for the transaction of business at any meeting of the Board,
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the Board, except as may be otherwise
specifically provided by law, the Certificate or these Bylaws. If a quorum shall
not be present at any meeting, a majority of the directors present may adjourn
the
Exhibit H - 7
<PAGE>
meeting from time to time, without notice other than announcement at the
meeting, until a quorum is present.
Section 4.5. Consent In Lieu of Meeting. Unless otherwise restricted by
--------------------------
the Certificate or these Bylaws, any action required or permitted to be taken at
any meeting of the Board or any committee thereof may be taken by written
consent in lieu of a meeting in accordance with applicable provisions of law.
ARTICLE V.
COMMITTEES OF DIRECTORS
Section 5.1. Establishment; Standing Committees. The Board may by
----------------------------------
resolution establish, name or dissolve one or more committees, each committee to
consist of one or more of the directors. Each committee shall keep regular
minutes of its meetings and report the same to the Board when required. Such
committees may include the following standing committees, which committees, if
established, shall have and may exercise the following powers and authority.
Section 5.1.1. Executive Committee. The Executive Committee shall
-------------------
have and may exercise all the powers of the Board delegable, by law in the
management of the business and affairs of the Company, unless the resolution
creating such committee or further defining its powers provides otherwise, in
which case the Executive Committee shall have and exercise the powers so
provided in such resolution or resolutions. The Executive Committee shall be
comprised of the Chairman of the Board and such other director or directors as
the Board by resolution shall appoint thereto. In addition to the foregoing, the
Executive Committee shall have such other powers and duties as shall be
specified by the Board in a resolution or resolutions.
Section 5.1.2. Finance Committee. The Finance Committee shall, from
-----------------
time to time, meet to review the Company's consolidated operating and financial
affairs, both with respect to the Company and its subsidiaries, if any, and to
report its findings and recommendations to the Board for final action. The
Finance Committee shall not be empowered to approve any corporate action, of
whatever kind or nature, and the recommendations of the Finance Committee shall
not be binding on the Board, except when, pursuant to Section 5.2, such power
and authority have been specifically delegated to such committee by the Board by
resolution. In addition to the foregoing, the specific duties of the Finance
Committee shall be determined by the Board by resolution.
Section 5.1.3. Conflicts and Audit Committee. The Conflicts and
-----------------------------
Audit Committee shall, from time to time, but no less than two times per year,
meet to review and monitor the financial and cost accounting practices and
procedures of the Company and its subsidiaries, if any, and to report its
findings and recommendations to the Board for final action. In addition, the
Conflicts and Audit Committee shall recommend an independent public accountant
to audit the Company's financial statements and perform other accounting
services for the Company to the Board for submission to the stockholders for
approval. Furthermore, the Conflicts and Audit Committee will, at the request of
the Board by resolution, review specific matters as to which the Board believes
there may be a conflict of interest between the Company
Exhibit H - 8
<PAGE>
and an affiliate, officer and/or director of the Company to determine if the
resolution of such conflict proposed by the Board or management of the Company,
as the case may be, is fair and reasonable. The composition of the Conflicts and
Audit Committee shall meet the requirements of any national securities exchange
or national market system on which the Company lists any of its capital stock.
The Conflicts and Audit Committee shall not be empowered to approve any
corporate action, of whatever kind or nature, and the recommendations of the
Conflicts and Audit Committee shall not be binding on the Board, except when,
pursuant to Section 5.2, such power and authority have been specifically
delegated to such committee by the Board by resolution. In addition to the
foregoing, the specific duties of the Conflicts and Audit Committee shall be
determined by the Board by resolution. In addition to the foregoing, the
specific duties of the Conflicts and Audit Committee shall be determined by the
Board by resolution. For this Section, "affiliate" shall include (i) any entity
that is an "affiliate" within the meaning set forth in Section 12b-2 of
Regulation 12B promulgated under the Securities Exchange Act of 1934, as
amended, and (ii) any officer or director of an "affiliate" as defined therein.
Section 5.1.4. Compensation Committee. The Compensation Committee
----------------------
shall, from time to time, meet to review the various compensation plans,
policies and practices of the Company and its subsidiaries, if any, and to
report its findings and recommendations to the Board for final action. The
Compensation Committee shall not be empowered to approve any corporate action,
of whatever kind or nature, and the recommendations of the Compensation
Committee shall not be binding on the Board, except when, pursuant to Section
5.2, such power and authority have been specifically delegated to such committee
by the Board by resolution. In addition to the foregoing, the specific duties of
the Compensation Committee shall be determined by the Board by resolution.
Section 5.2. Available Powers. Any committee established pursuant to
----------------
Section 5.1, including the Executive Committee, the Finance Committee, the
Conflicts and Audit Committee and the Compensation Committee, but only to the
extent provided in the resolution of the Board establishing such committee or
otherwise delegating specific power and authority to such committee, and as
limited by law, the Certificate, and these Bylaws, shall have and may exercise
all the powers and authority of the Board in the management of the business and
affairs of the Company, and may authorize the seal of the Company to be affixed
to all papers which may require it. Without limiting the foregoing, such
committee may, but only to the extent authorized in the resolution or
resolutions providing for the issuance of shares of stock adopted by the Board
as provided in Section 151(a) of the General Corporation Law of Delaware (the
DGCL), fix any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the Company or
the conversion into, or the exchange of such shares for, shares of any other
class or classes or any other series of the same or any other class or classes
of stock of the company.
Section 5.3. Unavailable Powers. No committee of the Board shall have the
------------------
power or authority to amend the Certificate (except in connection with the
issuance of capital stock as provided in the previous Section); adopt an
agreement of merger or consolidation; recommend to the stockholders the sale,
lease or exchange of all or substantially all of the Company's property gad
assets, a dissolution of the Company or a revocation of such a dissolution;
amend the Bylaws of the Company; or, unless the resolution establishing such
committee or the
Exhibit H - 9
<PAGE>
Certificate expressly so provides, declare a dividend, authorize the issuance of
stock or adopt a certificate of ownership and merger.
Section 5.4. Alternate Members. In the absence or disqualification of a
-----------------
member of a committee, (i) the Board may designate one or more directors as
alternate members of any such committee or (ii) the member or members of the
committee present at any meeting and not disqualified from voting, whether or
not he or they constitute a quorum may unanimously appoint another member of the
Board to act at the meeting in the place of any such absent or disqualified
member; provided, however, that any person or persons appointed pursuant to
subparagraph (i) or (ii) are qualified to serve on such committee in accordance
with these Bylaws and/or the resolutions establishing the same.
Section 5.5. Procedures. Time, place and notice, if any, of meetings of a
----------
committee shall be determined by such committee. At meetings of a committee, a
majority of the number of members designated by the Board to serve on such
committee shall constitute a quorum for the transaction of business. The act of
a majority of the members present at any meeting at which a quorum is present
shall be the act of the committee, except as otherwise specifically provided by
law, the Certificate, these Bylaws or the resolution or resolutions establishing
such committee. If a quorum is not present at a meeting of a committee, the
members present may adjourn the meeting from time to time, without notice other
than an announcement at the meeting, until a quorum is present. Any member of
any committee established pursuant to Section 5.1 shall serve until his
successor is duly elected by the Board and qualified or until the earlier of his
death or his resignation or removal from such committee or the Board. The Board
by resolution shall have at any time and from time to time the power to change
the membership of, fill any vacancies in, or dissolve any, committee established
pursuant to Section 5.1; provided, however, that in no event shall the Audit and
Conflicts Committee be dissolved once it is established nor shall the membership
of any committee, including, without limitations the Audit and Conflicts
Committee and the Executive Committee, be altered in any way if such alteration
would cause such committee to fail to meet its membership standards as set forth
in the resolutions or resolutions of the Board creating such committee.
ARTICLE VI.
OFFICERS
Section 6.1. Executive Officers; Term of Office. The Board shall elect a
----------------------------------
President, Secretary and Treasurer. The Board may elect one or more Vice
Presidents (with such descriptive titles, if any, as the Board shall deem
appropriate), one or more Assistant Secretaries, one or more Assistant
Treasurers, and such other officers as the Board may determine. Vice Presidents,
Assistant Secretaries and Assistant Treasurers may also be appointed by the
President as provided in Section 6.2.1. Each officer shall hold office until his
-------------
successor is elected and qualified or until his earlier death, resignation or
removal in the manner provided in these Bylaws. Any number of offices may be
held by the same person. The Board may require any officer to give bond or other
security for the faithful performance of his duties, in such amount and with
such sureties as the Board may determine.
Exhibit H - 10
<PAGE>
Section 6.2. Powers and Duties. The officers of the Company shall have
-----------------
such powers and duties in the management of the Company as may be provided by
applicable laws, the Certificate and these Bylaws, and as may be prescribed by
the Board and, to the extent not so provided, as generally pertain and are
incident to their respective offices, subject to the control of the Board.
Without limiting the generality of the foregoing, the following officers shall
have the respective duties and powers enumerated below:
Section 6.2.1. President. The President shall be the chief executive
---------
officer of the Company. He shall have the responsibility for the general
management and control of the business and affairs of the Company and shall
perform all duties and have all powers which are commonly incident to the office
of chief executive. The President may sign and execute, in the name of the
Company, stock certificates, deeds, mortgages, bonds, contracts or other
instruments authorized by the Board, except when signing and execution thereof
shall be expressly and exclusively delegated by the Board or the Bylaws to some
other person, or shall be required by law to be signed otherwise. The President
shall also have the power to appoint Vice Presidents, Assistant Secretaries and
Assistant Treasurers as he deems necessary from time to time. The President may
remove such appointed officers at any time for or without cause. The President
shall have general supervision and direction of all other officers, employees
and agents of the Company.
Section 6.2.2. Vice Presidents. The Vice President, or if there be
---------------
more than one, the Vice Presidents in the order determined by the Board (or if
there be no such determination, then in the order of their election or
appointment) shall, in the absence of the President or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
President and shall perform such other duties and have such other powers as the
President or the Board may from time to time prescribe. The Vice President may
sign certificates evidencing shares of stock of the Company.
Section 6.2.3. Secretary. The Secretary shall issue all authorized
---------
notices for, and shall keep minutes of, all meetings of stockholders and the
Board. He may sign certificates evidencing shares of stock of the Company. He
shall have custody of the corporate seal and shall have authority to affix the
seal to any instrument requiring it, and when so affixed, it may be attested by
his signature or by the signature of an Assistant Secretary. The Secretary shall
keep and account for all books, documents, papers and records of the Company
except those for which some other officer or agent is properly accountable.
Section 6.2.4. Treasurer. The Treasurer shall be the chief
---------
accounting and financial officer of the Company. He shall have the custody of
the corporate funds and securities, and shall disburse the funds of the Company
as are authorized. He shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Company, and, when requested by the
President or Board, shall render from time to time an accounting of all such
transactions and of the financial condition of the Company. The Treasurer may
sign certificates evidencing shares of stock of the Company.
Section 6.2.5. Assistant Secretary. The Assistant Secretary, or if
-------------------
there be more than one, the Assistant Secretaries in the order determined by the
Board (or if there be no such determination, then in the order of their election
or appointment) shall, in the absence of the
Exhibit H - 11
<PAGE>
Secretary or in the event of his inability or refusal to act, perform the duties
and exercise the powers of the Secretary and shall perform such other duties and
have such other powers as the President, Secretary or Board may from time to
time prescribe.
Section 6.2.6. Assistant Treasurer. The Assistant Treasurer, or if
-------------------
there be more than one, the Assistant Treasurers in the order determined by the
Board (or if there be no such determination, then in the order of their election
or appointment) shall, in the absence of the Treasurer or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
Treasurer and shall perform such other duties and have such other powers as the
President, Treasurer or Board may from time to time prescribe.
Section 6.3. Resignations and Removal. Any officer may resign at any time
------------------------
by giving written notice to the Board or, if the President is not resigning, to
the President of the Company. Such resignation shall take effect at the time
therein specified, or if no time is specified, upon receipt. Unless otherwise
specified, the acceptance of such resignation shall not be necessary to make it
effective. All officers serve at the pleasure of the Board; any elected or
appointed officer may be removed at any time for or without cause by the Board.
Officers appointed by the President may also be removed at any time for or
without cause by the President.
Section 6.4. Vacancies. Any vacancy in any office because of death,
---------
resignation, removal, disqualification or any other cause shall be filled for
the unexpired term in the manner prescribed in these Bylaws for the regular
election or appointment to such office.
Section 6.5. Compensation, Vacancies. The Board shall have the power to
-----------------------
establish the compensation of officers of the Company or authorize the Company
to enter into an agreement with an affiliate whereby the services of such
officers, along with certain other services specified therein, are provided to
the Company for a fee. To the extent not governed by such an agreement, the
Board shall fill any vacancy in an office. Any of the powers granted in this
Section may be delegated to a committee established pursuant to Section 5.1. No
officer shall be prevented from receiving a salary or other compensation by
reason of the fact that he is also a director. For this Section, "affiliate"
shall include (i) any entity that is an "affiliate" within the meaning set forth
in Section 12b-2 of Regulation 12B promulgated under the Securities Exchange Act
of 1934, as amended, and (ii) any officer or director of an "affiliate" as
defined therein.
Section 6.6. Additional Powers and Duties. In addition to the foregoing
----------------------------
especially enumerated powers and duties, the several officers of the Company
shall perform such other duties and exercise such further powers as may be
provided by law, the Certificate or these Bylaws or as the Board may from time
to time determine or as may be assigned to them by any competent committee or
superior officer.
Section 6.7. Voting Upon Stocks. Unless otherwise ordered by the Board,
------------------
the President or any other officer of the Company designated by the President
shall have full power and authority on behalf of the Company to attend and to
act and to vote in person or by proxy at any meeting of the holders of
securities of any corporation or entity in which the Company may own or hold
stock or other securities, and at any such meeting shall possess and may
exercise in person or by proxy any and all rights, powers and privileges
incident to the ownership of such stock or other securities which the Company,
as the owner or holder thereof, might have
Exhibit H - 12
<PAGE>
possessed and exercised if present. The President or any other officer of the
Company designated by the President may also execute and deliver on behalf of
the Company powers of attorney, proxies, waivers of notice and other instruments
relating to the stocks or securities owned or held by the Company. The Board
may, from time to time, by resolution confer like powers upon any other person
or persons.
ARTICLE VII.
SHARE CERTIFICATES
Section 7.1. Entitlement to Certificates. Every holder of the capital
---------------------------
stock of the Company, unless and to the extent the Board by resolution provides
that any or all classes or series of stock shall be uncertificated, shall be
entitled to have a certificate, in such form as is approved by the Board and
conforms with applicable law, certifying the number of shares owned by him.
Section 7.2. Multiple Classes of Stock. If the Company shall be
-------------------------
authorized to issue more than one class of capital stock or more than one series
of any class, a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualification, limitations or restrictions of such preferences
and/or rights shall, unless the Board shall by resolution provide that such
class or series of stock shall be uncertificated, be set forth in full or
summarized on the face or back of the certificate which the Company shall issue
to represent such class or series of stock; provided that, to the extent allowed
by law, in lieu of such statement, the face or back of such certificate may
state that the Company will furnish a copy of such statement without charge to
each requesting stockholder.
Section 7.3. Signatures. Each certificate representing capital stock of
----------
the Company shall be signed by or in the name of, the Company by (1) the
President or a Vice President; and (2) the Treasurer, an Assistant Treasurer,
the Secretary or an Assistant Secretary. The signatures of the officers of the
Company may be facsimiles. In case any officer who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to hold such
office before such certificate is issued, it may be issued by the Company with
the same effect as if he held such office on the date of issue.
Section 7.4. Issuance and Payment. Subject to any provision of applicable
--------------------
law, the Certificate or these Bylaws, shares of capital stock of the Company may
be issued for such consideration and to such persons as the Board may determine
from time to time. Shares may not be issued until the full amount of the
consideration has been paid, unless upon the face or back of each certificate
issued to represent any partly paid shares of capital stock there shall have
been set forth the total amount of the consideration to be paid.
Section 7.5. Lost, Stolen or Destroyed Certificates. The Board may direct
--------------------------------------
a new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Company alleged to have been lost, stolen
or destroyed upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When
Exhibit H - 13
<PAGE>
authorizing such issue of a new certificate or certificates, the Board may, in
its discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or to give the Company a bond in such sum as it may direct as indemnity
against any claim that may be made against the Company with respect to the
certificate alleged to have been lost, stolen or destroyed.
Section 7.6. Transfer of Stock. Upon surrender to the Company or its
-----------------
transfer agent, if any, of a certificate for shares duly endorsed or accompanied
by proper evidence of succession, assignation or authority to transfer and of
the payment of all taxes applicable to the transfer of said shares, the Company
shall be obligated to issue a new certificate to the person entitled thereto,
cancel the old certificate and record the transaction upon its books; provided,
however, that the Company shall not be so obligated unless such transfer was
made in compliance with applicable state and federal securities laws.
Section 7.7. Registered Stockholders. The Company shall be entitled to
-----------------------
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, vote and be held liable for calls and
assessments and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any person other than such
registered owner, whether or not it shall have express or other notice thereof,
except as otherwise provided by law.
ARTICLE VIII.
INDEMNIFICATION
Section 8.1. General. The Company shall indemnify any person who was or
-------
is party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Company), because
he is or was a director or officer of the Company, or, while a director or
officer of the Company, is or was serving at the written request of the Company
as a director, officer, trustee, employee or agent of or in any other capacity
with another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys, fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, have reasonable
cause to believe that his conduct was unlawful.
Section 8.2. Actions by or in the Right of the Company. The Company shall
-----------------------------------------
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
Company to procure a judgment in its favor
Exhibit H - 14
<PAGE>
because he is or was a director or officer of the Company, or, while a director
or officer of the Company, is or was serving at the written request of the
Company as a director, officer, trustee, employee or agent of or in any other
capacity with another corporation, partnership, joint venture or trust or other
enterprise, against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Company and except that no
indemnification shall be made in respect to any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Company unless
and only to the extent that the Court of Chancery or the court in which such
action or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
the Court of Chancery or such other court shall deem proper.
Section 8.3. Board Determinations. Any indemnification under Sections 8.1
--------------------
and 8.2 (unless ordered by a court) shall be made by the Company only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in Sections 8.1 and 8.2.
Such determination shall be made (1) by the Board by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or proceeding,
or (2) if such a quorum is not obtainable, or, even if obtainable, a quorum of
disinterested directors so directs, by independent legal counsel (which may be
counsel ordinarily used by, the Company) in a written opinion, or (3) by the
holders of a majority of the outstanding shares of capital stock of the Company
entitled to vote thereon.
Section 8.4. Advancement of Expenses. Expenses incurred by a director or
-----------------------
officer of the Company in defending a civil or criminal action, suit or
proceeding shall (in the case of any action, suit or proceeding against a
director of the Company) or may (in the case of any pending threatened action,
suit or proceeding against an officer) be paid by the Company in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Company as authorized by law or in this Article VIII.
Section 8.5. Nonexclusive. The indemnification and advancement of
------------
expenses provided by, or granted pursuant to, this Article VIII shall not be
deemed exclusive of any other rights to which any director, officer, employee or
agent of the Company seeking indemnification or advancement of expenses may be
entitled under any other provision of there Bylaws or by the Certificate, an
agreement, a vote of stockholders or disinterested directors or otherwise, both
as to action in his official capacity and as to action in another capacity while
holding such office, and shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent of the Company and shall inure to the benefit of the heirs,
executors and administrators of such a person.
Section 8.6 Indemnification of Employees and Agents of the Company. The
------------------------------------------------------
Company may, to the extent authorized from time to time by the Board, grant
rights to indemnification and to the advancement of expenses, to any employee or
agent of the Company to the fullest extent of the provisions of this section
with respect to the indemnification and advancement of expenses of directors and
officers of the Company.
Exhibit H - 15
<PAGE>
Section 8.7. Insurance. The Company may purchase and maintain insurance
---------
on behalf of any person who is or was a director, officer, employee or agent of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, or other enterprise, against any liability asserted against him and
incurred by him in any such capacity or arising out of his status as such,
whether or not the Company would have the power to indemnify him against such
liability under provisions of applicable law, the Certificate or this Article
VIII.
Section 8.8. Certain Definitions. For this Article VIII, (a) references
-------------------
to the "Company" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger, which, if its separate existence had continued, would
have the power and authority to indemnify its directors, officers, employees or
agents, so that any person who is or was a director, officer, employee, or agent
of such constituent corporation, or is serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall stand
in the same position under this Article VIII with respect to the resulting or
surviving corporation as he would have with respect to such constituent
corporation if its separate existence had continued; (b) references to "other
enterprises" shall include employee benefit plans; (c) references to "fines"
shall include any excise taxes assessed on a person with, respect to an employee
benefit plan; and (d) references to "serving at the request of the Company"
shall include any service as a director, officer, employee or agent of the
Company which imposes duties on, or involves services by, such director,
officer, employee, or agent with respect to any employee benefit plan, its
participants, or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Company" as referred to in this
Article VIII.
Section 8.9. Change in Governing Law. Upon any amendment or addition to
-----------------------
Section 145 of the DGCL or the addition of any other section to such law which
shall limit indemnification rights thereunder, the Company shall, to the extent
permitted by the DGCL, indemnify to the fullest extent authorized or permitted
hereunder, any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (including an action by or in
the right of the Company) because he is or was a director or officer of the
Company or, while a director or officer of the Company, is or was serving at the
request of the Company as a director, officer, employee, trustee or agent of
another corporation, partnership, joint venture, trust, or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding.
ARTICLE IX.
INTERESTED DIRECTORS, OFFICERS AND STOCKHOLDERS
Section 9.1. Validity. Any contract or other transaction between the
--------
Company and any of its directors, officers or stockholders (or any corporation
or firm in which any of them are
Exhibit H - 16
<PAGE>
directly or indirectly interested) shall be valid for all purposes
notwithstanding the presence of such director, officer, or stockholder at the
meeting authorizing such contract or transaction, or his participation or vote
in such meeting or authorization.
Section 9.2. Disclosure, Approval. The foregoing shall, however, apply
--------------------
only if the material facts of the relationship or the interest of each such
director, officer or stockholder is known or disclosed:
(1) to the Board and it nevertheless in good faith authorizes or
ratifies the contract or transaction by a majority of the directors
present, each such interested director to be counted in determining whether
a quorum is present but not in calculating the majority to carry the vote;
or
(2) to the stockholders and they nevertheless in good faith authorize
or ratify the contract or transaction by a majority of the shares present,
each such interested stockholder to be counted for quorum and voting
purposes.
Section 9.3. Nonexclusive. This provision shall not be construed to
------------
invalidate any contract or transaction which would be valid in the absence of
this provision.
ARTICLE X.
MISCELLANEOUS
Section 10.1 Place of Meetings. All stockholders, directors and committee
-----------------
meetings shall be held at such place or places, within or without the State of
Delaware, as shall be designated from time to time by the Board or such
committee and stated in the notices thereof. If no such place is so designated,
said meetings shall be held at the principal business office of the Company.
Section 10.2. Fixing Record Dates. So that the Company may determine the
-------------------
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, to receive payment of any dividend or other
distribution or allotment of any rights, to exercise any rights in respect of
any change, conversion or exchange of stock or to effect any other lawful
action, or to make a determination of stockholders for any other proper purpose,
the Board may fix, in advance, a record date for any such determination of
stockholders, which shall not be more than 60 nor less than 10 days prior to the
date on which the particular action requiring such determination of stockholders
is to be taken. In the absence of any action by the Board, the date on which a
notice of meeting is given, or the date the Board adopts the resolution
declaring a dividend or other distribution or allotment or approving any change,
conversion or exchange, as the case may be, shall be the record date. A record
date validly fixed for any meeting of stockholders and the determination of
stockholders entitled to vote at such meeting shall be valid for any adjournment
of said meeting except where such determination has been made through the
closing of stock transfer books and the stated period of closing has expired.
Exhibit H - 17
<PAGE>
Section 10.3. Means of Giving Notice. Except as expressly provided
----------------------
elsewhere herein, whenever under law, the Certificate or these Bylaws, notice is
required to be given to any director or stockholder, such notice may be given in
writing and delivered personally, through the United States mail, by a
recognized express delivery service (such as Federal Express) or by means of
telegraph, telex, or facsimile transmission, addressed to such director or
stockholder at his address, telex or facsimile transmission number, as the case
may be, appearing on the records of the Company, with postage and fees thereon
prepaid. Such notice shall be deemed to be given at the time when the same shall
be deposited in the United States mail or with an express delivery service or
when transmitted, as the case may be.
Section 10.4. Waiver of Notice. Whenever notice is required to be given
----------------
under any provision of law or of the Certificate or of these Bylaws, a written
waiver thereof, signed by the person entitled to notice, whether before or after
the time stated therein, shall be deemed equivalent to notice. Attendance of a
person at a meeting of stockholders or of directors or of a committee shall
constitute waiver of notice of such meeting, except where otherwise provided by
law.
Section 10.5. Attendance via Communications Equipment. Unless otherwise
---------------------------------------
restricted by law, the Certificate or these Bylaws, members of the Board or any
committee thereof or the stockholders may hold a meeting by means of conference
telephone or other communications equipment by means of which all persons
participating in the meeting can effectively communicate with each other. Such
participation in a meeting shall constitute presence in person at the meeting,
except where a person participates in the meeting for the express purpose of
objecting to the transaction of any business on the ground that the meeting is
not lawfully called or convened.
Section 10.6. Dividends. Dividends on the capital stock of the Company,
---------
paid in cash, property, or securities of the Company and as may be limited by
applicable law and applicable provisions of the Certificate (if any), may be
declared by the Board at any regular or special meeting.
Section 10.7. Reserves. Before payment of any dividends, there may be set
--------
aside out of any funds of the Company available for dividends such sum or sums
as the Board from time to time, in its absolute discretion, think proper as a
reserve or reserves to meet contingencies, for equalizing dividends, for
repairing or maintaining any property of the Company to be distributed to
stockholders, or for such other purpose as the Board shall determine to be in
the best interest of the Company; and the Board may modify or abolish any such
reserve in the manner in which it was created.
Section 10.8. Reports to Stockholders. The Board shall present at each
-----------------------
annual meeting of stockholders, and at any special meeting of stockholders when
called for by vote of the stockholders, a statement of the business and
condition of the Company.
Section 10.9. Checks, Notes and Contracts. Checks and other orders for
---------------------------
the payment of money shall be signed by such person or persons as the Board
shall from time to time by resolution determine. Contracts and other instruments
or documents may be signed in the name of the Company by the President or by any
other officer authorized to sign such contract,
Exhibit H - 18
<PAGE>
instrument or document by the Board, and such authority may be general or
confined to specific instances.
Checks and other orders for the payment of money made payable to the
Company may be endorsed for deposit to the credit of the Company, with a
depositary authorized by resolution of the Board, by the President or Treasurer
or such other persons as the Board may from time to time by resolution
determine.
Section 10.10. Loans. No loans and no renewals of any loans shall be
-----
contracted on behalf of the Company except as authorized by the Board. When
authorized so to do by the Board, any officer or agent of the Company may effect
loans and advances for the Company from any bank, trust company or other
institution or from any firm, corporation or individual, and for such loans and
advances may make, execute and deliver promissory notes, bonds or other
evidences of indebtedness of the Company. When authorized so to do by the Board,
any officer or agent of the Company may pledge, hypothecate or transfer, as
security for the payment of any and all loans, advances, indebtedness and
liabilities of the Company, any and all stocks, securities and other personal
property at any time held by the Company, and to that end may endorse, assign
and deliver the same. Such authority may be general or confined to specific
instances.
Section 10.11. Fiscal Year. The fiscal year of the Company shall begin on
-----------
the first day of August in each year and terminate on the final day of July in
the succeeding calendar year.
Section 10.12. Seal. The seal of the Company shall be in such form as
----
shall from time to time be adopted by the Board. The seal may be used by causing
it or a facsimile thereof to be impressed, affixed or otherwise reproduced.
Section 10.13. Books and Records. The Company shall keep correct and
-----------------
complete books and records of account and shall keep minutes of the proceedings
of its stockholders, Board and committees and shall keep at its registered
office or principal place of business, or at the office of its transfer agent or
registrar, a record of its stockholders, giving the names and addresses of all
stockholders and the number and class of the shares held by each.
Section 10.14. Resignation. Any director, committee member, officer or
-----------
agent may resign by giving written notice to the President or the Secretary. The
resignation shall take effect at the time specified therein, or immediately if
no time is specified. Unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
Section 10.15. Surety Bonds. Such officers and agents of the Company (if
------------
any) as the President or the Board may direct, from time to time, shall be
bonded for the faithful performance of their duties and for the restoration to
the Company, in case of their death, resignation, retirement, disqualification
or removal from office, of all books, papers, vouchers, money and other property
of whatever kind in their possession or under their control belonging to the
Company, in such amounts and by such surety companies as the President or the
Board may determine. The premiums on such bonds shall be paid by the Company and
the bonds so furnished shall be in the custody of the Secretary.
Exhibit H - 19
<PAGE>
Section 10.16. Amendments. These Bylaws may from time to time be altered,
----------
amended or repealed and new Bylaws may be adopted, as provided in the
Certificate.
Exhibit H - 20
<PAGE>
EXHIBIT I
TEXT OF ONTARIO BUSINESS CORPORATIONS ACT SECTION 185
<PAGE>
EXHIBIT I
TEXT OF ONTARIO BUSINESS CORPORATION ACT SECTION 185
(1) RIGHTS OF DISSENTING SHAREHOLDERS. Subject to subsection (3) and to
sections 186 and 248, if a corporation resolves to,
(a) amend its articles under section 168 to add, remove or change
restrictions on the issue, transfer or ownership of shares of a
class or series of the shares of the corporation;
(b) amend its articles under section 168 to add, remove or change any
restriction upon the business or businesses that the corporation
may carry on or upon the powers that the corporation may
exercise;
(c) amalgamate with another corporation under sections 175 and 176;
(d) be continued under the laws of another jurisdiction under section
181; or
(e) sell, lease or exchange all or substantially all its property
under subsection 184(3),
a holder of shares of any class or series entitled to vote on the resolution may
dissent.
(2) IDEM. If a corporation resolves to amend its articles in a manner
referred to in subsection 170(1), a holder of shares of any class or series
entitled to vote on the amendment under section 168 or 170 may dissent, except
in respect of an amendment referred to in,
(a) clause 170(1)(a), (b) or (e) where the articles provide that the
holders of shares of such class or series are not entitled to
dissent; or
(b) subsection 170(5) or (6).
(3) EXCEPTION. A shareholder of a corporation incorporated before the
29th day of July, 1983 is not entitled to dissent under this section in respect
of an amendment of the articles of the corporation to the extent that the
amendment,
(a) amends the express terms of any provision of the articles of the
corporation to conform to the terms of the provision as deemed to
be amended by section 277; or
(b) deletes from the articles of the corporation all of the objects
of the corporation set out in its articles, provided that the
deletion is made by the 29th day of July, 1986.
(4) SHAREHOLDER'S RIGHT TO BE PAID FAIR VALUE. In addition to any other
right the shareholder may have, but subject to subsection (30), a shareholder
who complies with this section is entitled, when the action approved by the
resolution from which the shareholder dissents becomes effective, to be paid by
the corporation the fair value of the shares held by the shareholder in respect
of which the shareholder dissents, determined as of the close of business on the
day before the resolution was adopted.
(5) NO PARTIAL DISSENT. A dissenting shareholder may only claim under
this section with respect to all the shares of a class held by the dissenting
shareholder on behalf of any one beneficial owner and registered in the name of
the dissenting shareholder.
Exhibit I - 1
<PAGE>
(6) OBJECTION. A dissenting shareholder shall send to the corporation, at
or before any meeting of shareholders at which a resolution referred to in
subsection (1) or (2) is to be voted on, a written objection to the resolution,
unless the corporation did not give notice to the shareholder of the purpose of
the meeting or of the shareholder's right to dissent.
(7) IDEM. The execution or exercise of a proxy does not constitute a
written objection for purposes of subsection (6).
(8) NOTICE OF ADOPTION OR RESOLUTION. The corporation shall, within ten
days after the shareholders adopt the resolution, send to each shareholder who
has filed the objection referred to in subsection (6) notice that the resolution
has been adopted, but such notice is not required to be sent to any shareholder
who voted for the resolution or who has withdrawn the objection.
(9) IDEM. A notice sent under subsection (8) shall set out the rights of
the dissenting shareholder and the procedures to be followed to exercise those
rights.
(10) DEMAND FOR PAYMENT OF FAIR VALUE. A dissenting shareholder entitled
to receive notice under subsection (8) shall, within twenty days after receiving
such notice, or, if the shareholder does not receive such notice, within twenty
days after learning that the resolution has been adopted, send to the
corporation a written notice containing,
(a) the shareholder's name and address;
(b) the number and class of shares in respect of which the
shareholder dissents; and
(c) a demand for payment of the fair value of such shares.
(11) CERTIFICATES TO BE SENT IN. Not later than the thirtieth day after
the sending of a notice under subsection (10), a dissenting shareholder shall
send the certificates representing the shares in respect of which the
shareholder dissents to the corporation or its transfer agent.
(12) IDEM. A dissenting shareholder who fails to comply with subsections
(6), (10) and (11) has no right to make a claim under this section.
(13) ENDORSEMENT ON CERTIFICATE. A corporation or its transfer agent shall
endorse on any share certificate received under subsection (11) a notice that
the holder is a dissenting shareholder under this section and shall return
forthwith the share certificates to the dissenting shareholder.
(14) RIGHTS OF DISSENTING SHAREHOLDER. On sending a notice under
subsection (10), a dissenting shareholder ceases to have any rights as a
shareholder other than the right to be paid the fair value of the shares as
determined under this section except where,
(a) the dissenting shareholder withdraws notice before the
corporation makes an offer under subsection (15);
(b) the corporation fails to make an offer in accordance with
subsection (15) and the dissenting shareholder withdraws notice;
or
(c) the directors revoke a resolution to amend the articles under
subsection 168(3), terminate an amalgamation agreement under
subsection 176(5) or an application for continuance under
subsection 181(5), or abandon a sale, lease or exchange under
subsection 184(8),
Exhibit I - 2
<PAGE>
in which case the dissenting shareholder's rights are reinstated as of the date
the dissenting shareholder sent the notice referred to in subsection (10), and
the dissenting shareholder is entitled, upon presentation and surrender to the
corporation or its transfer agent of any certificate representing the shares
that has been endorsed in accordance with subsection (13), to be issued a new
certificate representing the same number of shares as the certificate so
presented, without payment of any fee.
(15) OFFER TO PAY. A corporation shall, not later than seven days after
the later of the day on which the action approved by the resolution is effective
or the day the corporation received the notice referred to in subsection (10),
send to each dissenting shareholder who has sent such notice,
(a) a written offer to pay for the dissenting shareholder's shares in
an amount considered by the directors of the corporation to be
the fair value thereof, accompanied by a statement showing how
the fair value was determined; or
(b) if subsection (30) applies, a notification that it is unable
lawfully to pay dissenting shareholders for their shares.
(16) IDEM. Every offer made under subsection (15) for shares of the same
class or series shall be on the same terms.
(17) IDEM. Subject to subsection (30), a corporation shall pay for the
shares of a dissenting shareholder within ten days after an offer made under
subsection (15) has been accepted, but any such offer lapses if the corporation
does not receive an acceptance thereof within thirty days after the offer has
been made.
(18) APPLICATION TO COURT TO FIX FAIR VALUE. Where a corporation fails to
make an offer under subsection (15) or if a dissenting shareholder fails to
accept an offer, the corporation may, within fifty days after the action
approved by the resolution is effective or within such further period as the
court may allow, apply to the court to fix a fair value for the shares of any
dissenting shareholder.
(19) IDEM. If a corporation fails to apply to the court under subsection
(18), a dissenting shareholder may apply to the court for the same purpose
within a further period of twenty days or within such further period as the
court may allow.
(20) IDEM. A dissenting shareholder is not required to give security for
costs in an application made under subsection (18) or (19).
(21) COSTS. If a corporation fails to comply with subsection (15), then
the costs of a shareholder application under subsection (19) are to borne by the
corporation unless the court otherwise orders.
(22) NOTICE TO SHAREHOLDERS. Before making application to the court under
subsection (18) or not later than seven days after receiving notice of an
application to the court under subsection (19), as the case may be, a
corporation shall give notice to each dissenting shareholder who, at the date
upon which the notice is given,
(a) has sent to the corporation the notice referred to in subsection
(10); and
(b) has not accepted an offer made by the corporation under
subsection (15), if such an offer was made,
of the date, place and consequences of the application and of the dissenting
shareholder's right to appear and be heard in person or by counsel, and a
similar notice shall be given to each dissenting shareholder who, after the date
of such first mentioned notice and before termination of the proceedings
commenced by the
Exhibit I - 3
<PAGE>
application, satisfies the conditions set out in clauses (a) and (b) within
three days after the dissenting shareholder satisfies such conditions.
(23) PARTIES JOINED. All dissenting shareholders who satisfy the
conditions set out in clauses (22)(a) and (b) shall be deemed to be joined as
parties to an application under subsection (18) or (19) on the later of the date
upon which the application is brought and the date upon which they satisfy the
conditions, and shall be bound by the decision rendered by the court in the
proceedings commenced by the application.
(24) IDEM. Upon an application to the court under subsection (18) or (19),
the court may determine whether any other person is a dissenting shareholder who
should be joined as a party, and the court shall fix a fair value for the shares
of all dissenting shareholders.
(25) APPRAISERS. The court may in it discretion appoint one or more
appraisers to assist the court to fix a fair value for the shares of the
dissenting shareholders.
(26) FINAL ORDER. The final order of the court in the proceedings
commenced by an application under subsection (18) or (19) shall be rendered
against the corporation and in favor of each dissenting shareholder who, whether
before or after the date of the order, complies with the conditions set out in
clauses (22)(a) and (b).
(27) INTEREST. The court may in its discretion allow a reasonable rate of
interest on the amount payable to each dissenting shareholder from the date the
action approved by the resolution is effective until the date of payment.
(28) WHERE CORPORATION UNABLE TO PAY. Where subsection (30) applies, the
corporation shall, within ten days after the pronouncement of an order under
subsection (26), notify each dissenting shareholder that is unable lawfully to
pay dissenting shareholders for their shares.
(29) IDEM. Where subsection (30) applies, a dissenting shareholder, by
written notice sent to the corporation within thirty days after receiving a
notice under subsection (28), may,
(a) withdraw a notice of dissent, in which case the corporation is
deemed to consent to the withdrawal and the shareholder's full
rights are reinstated; or
(b) retain a status as a claimant against the corporation, to be paid
as soon as the corporation is lawfully able to do so or, in a
liquidation, to be ranked subordinate to the rights of creditors
of the corporation but in priority to its shareholders.
(30) IDEM. A corporation shall not make a payment to a dissenting
shareholder under this section if there are reasonable grounds for believing
that,
(a) the corporation is or, after the payment, would be unable to pay
its liabilities as they become due; or
(b) the realizable value of the corporation's assets would thereby be
less than the aggregate of its liabilities.
(31) COURT ORDER. Upon application by a corporation that proposed to take
any of the actions referred to in subsection (1) or (2), the court may, if
satisfied that the proposed action is not in all the circumstances one that
should give rise to the rights arising under subsection (4), by order declare
that those rights will not arise upon the taking of the proposed action, and the
order may be subject to compliance upon such terms and conditions as the court
thinks fit and, if the corporation is an offering corporation, notice of
Exhibit I - 4
<PAGE>
any such application and a copy of any order made by the court upon such
application shall be served upon the Commission.
(32) COMMISSION MAY APPEAR. The Commission may appoint counsel to assist
the court upon the hearing of an application under subsection (31) if the
corporation is an offering corporation.
Exhibit I - 5
<PAGE>
================================================================================
-----------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information...................................................(i)
Summary................................................................. 1
Risk Factors ........................................................... 10
General Proxy Information............................................... 16
Arrangement............................................................. 18
Effect of Arrangement on Shareholder Right.............................. 21
Dissent Rights of ATSI Shareholders..................................... 27
Price Range of Common Shares............................................ 28
Capitalization.......................................................... 29
Selected Consolidated Financial Data.................................... 30
Management's Discussion and Analysis of
Financial Condition and Results of Operations......................... 32
Business................................................................ 42
Management.............................................................. 65
Certain Transactions.................................................... 73
Principal Shareholders.................................................. 74
Description of ATSI-Delaware Securities................................. 75
Canadian and United States Income Tax
Considerations........................................................ 79
Legal Opinions.......................................................... 89
Shareholder Proposals................................................... 89
Other Business at Special Meeting....................................... 89
Index to Financial Statements...........................................F-1
Exhibits.................................................... Exhibits A - I
</TABLE>
-----------------------------------
This Proxy Statement/Prospectus does not constitute an offer to sell any of the
securities offered hereby in any jurisdiction where, or to any person to whom,
it is unlawful to make such an offer. Neither the delivery of this Proxy
Statement/Prospectus nor any sale made hereunder shall, under any circumstances,
create an implication that there has been no change in the information set forth
herein or in the business of the Company since the date hereof.
AMERICAN TELESOURCE
INTERNATIONAL, INC.
53,505,734 Shares of
Common Stock
-----------------------------
PROXY STATEMENT/PROSPECTUS
-----------------------------
MARCH __, 1998
================================================================================
<PAGE>
PART II TO FORM S-4
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law ("DGCL") authorizes a
corporation to indemnify any person ("indemnitee") who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (other than an action by or in the right of the corporation)
because such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation, in a
similar position with another corporation or entity, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. With respect to actions or suits by or in the right of the
corporation, however, an indemnitee who acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation is generally limited to attorneys' fees and other expenses, and no
indemnification shall be made if such person is adjudged liable to the
corporation unless and only to the extent that a court of competent jurisdiction
determines that indemnification is appropriate. Section 145 further provides
that any indemnification shall be made by the corporation only as authorized in
each specific case upon a determination by the (i) board of directors by a
majority vote of directors who were not parties to such action, suit or
proceeding even though less than a quorum, (ii) independent counsel if there are
no such disinterested directors or if such directors so direct, or (iii)
stockholders, that indemnification of the indemnitee is proper because he has
met the applicable standard of conduct. Section 145 provides that
indemnification pursuant to its provisions is not exclusive of other rights of
indemnification to which a person may be entitled under any bylaw, agreement,
vote of stockholders or disinterested directors of otherwise.
ATSI-Delaware's Certificate of Incorporation and Bylaws, copies of which
are filed as Exhibits to this Registration Statement, provide, in substance,
that directors and officers shall be indemnified to the fullest extent permitted
by Section 145 of the DGCL.
ATSI-Delaware's Certificate of Incorporation, a copy of which is filed as
an Exhibit to this Registration Statement, limits the liability of directors of
the Company to the Company or its stockholders (in their capacity as directors
but not in their capacity as officers) to the fullest extent permitted by the
DGCL. Specifically, directors of the Company will not be personally liable for
monetary damages for breach of a director's fiduciary duty as a director, except
for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the DGCL or (iv) for any transaction from which the
director derived an improper personal benefit. The Certificate of Incorporation
also provides that if the DGCL is amended to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Company will be eliminated or limited to the full extent
permitted by the DGCL, as so amended.
ATSI-Delaware intends to enter into indemnification agreements with each of
its directors and its executive officers. The indemnification agreements provide
that the Company shall indemnify these individuals against certain liabilities
(including settlements) and expenses actually and reasonably incurred by them in
connection with any threatened or pending legal action, proceeding or
investigation (other than actions brought by or in the right of the Company) to
which any of them is, or is threatened to be, made a party by reason of their
status as a director, officer or agent of the Company, provided that such
individual acted in
II-1
<PAGE>
good faith and in a manner he or she reasonably believed to be in or not opposed
to the best interests of the Company, and with respect to any criminal
proceedings, had no reasonable cause to believe his or her conduct was unlawful.
With respect to any action brought by or in the right of the Company, such
individuals may also be indemnified, to the extent not prohibited by applicable
laws or as determined by a court of competent jurisdiction, against expenses
actually and reasonably incurred by them in connection with such action if they
acted in good faith and in a manner they reasonably believed to be in or not
opposed to the best interests of the Company. The agreements also require
indemnification of such individuals for all reasonable expenses incurred in
connection with the successful defense of any action or claim and provide for
partial indemnification in the case of any partially successful defense.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits.
<TABLE>
<CAPTION>
<S> <C>
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*
5 Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. covering
legality*****
8 Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. covering certain
tax matters*****
10.1 Form of Customer Service Agreement for Private Networks*
10.2 Telecommunications Agreement between ATSI-Texas and Long Distance
Exchange Corp.*
10.3 Compensation Agreement between ATSI-Texas and James McCourt relating
to Guarantee of Equipment Line of Credit by James McCourt**
10.4 Agreement for Investment Banking Services between ATSI-Texas and Joseph
Charles & Associates, Inc.**
10.5 (1)
10.6 1997 Option Plan**
10.7 Form of Option Agreement**
10.8 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**
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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*****
11 Statement of Computation of Per Share Earnings*****
22 Subsidiaries of Registrant**
23.1 Consent of Arthur Andersen LLP*****
23.2 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in
Exhibit 5)*****
23.3 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in
Exhibit 8)*****
24 Power of Attorney (included on Signature Page to the Registration
Statement)*****
27 Financial Data Schedule*****
99.1 Ruling issued by Ontario Securities Commission*****
99.2. Form of Proxy*****
</TABLE>
* 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 Form
S-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.
*****Filed herewith.
(1) Exhibit previously listed in exhibit list to Amendment No. 2 to
Registration Statement on S-4 (No. 333-05557) of the Company filed
September 11, 1997 has been deemed immaterial by the Company and
eliminated.
(b) Financial Statement Schedules
<TABLE>
<CAPTION>
Schedule Number Description of Schedule Page Number
--------------- ----------------------- -----------
<S> <C> <C>
Report of Independent Public Accountants S-1
II Valuation and Qualifying Accounts S-2
</TABLE>
Item 22. Undertakings
The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no
II-3
<PAGE>
more than a 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(b) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(d) If the registrant is a foreign private issuer, to file a post-effective
amendment to the registration statement to include any financial statements
required by Rule 3-19 of this chapter at the start of any delayed offering or
throughout a continuous offering. Financial statements and information otherwise
required by Section 10(a)(3) of the Act need not be furnished, provided, that
the registrant includes in the prospectus, by means of a post-effective
amendment, financial statements required pursuant to this paragraph (d) and
other information necessary to ensure that all other information in the
prospectus is at least as current as the date of those financial statements.
Notwithstanding the foregoing, with respect to registration statements on
Form F-3, a post-effective amendment need not be filed to include financial
statements and information required by Section 10(a)(3) of the Act or Rule 3-19
of this chapter if such financial statements and information are contained in
periodic reports filed with or furnished to the Commission by the registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the Form F-3.
(e) to respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to the
request.
(f) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
(g) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other Items of the applicable form.
(h) that every prospectus (i) that is filed pursuant to paragraph (g)
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Act and is used in connection with an offering of securities
subject to Rule 415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
II-4
<PAGE>
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being offered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Securities Act, and will be governed by the final adjudication
of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, AMERICAN
TELESOURCE INTERNATIONAL, INC. has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Antonio and State of Texas on March 5, 1998.
AMERICAN TELESOURCE INTERNATIONAL, INC.,
a Delaware corporation
By: /s/ ARTHUR L. SMITH
--------------------------------------------
Arthur L. Smith
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, hereby
constitutes and appoints Arthur L. Smith and H. Douglas Saathoff, and each of
them, his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement for filing with the Securities and
Exchange Commission, and to file the same with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting such attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises,as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ ARTHUR L. SMITH President, Chief Executive Officer March 5, 1998
- --------------------------------------- and Director (Principal Executive
Arthur L. Smith Officer)
/s/ H. DOUGLAS SAATHOFF Secretary, Treasurer and Chief March 5, 1998
- --------------------------------------- Financial Officer (Principal
H. Douglas Saathoff Financial and Accounting Officer)
/s/ MURRAY R. NYE Director March 5, 1998
- ---------------------------------------
Murray R. Nye
/s/ TOMAS REVESZ Director March 5, 1998
- ---------------------------------------
Tomas Revesz
/s/ RICHARD C. BENKENDORF Director March 5, 1998
- ---------------------------------------
Richard C. Benkendorf
/s/ CARLOS K. KAUACHI Director March 5, 1998
- ---------------------------------------
Carlos K. Kauachi
</TABLE>
II-6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
American TeleSource International Inc.:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of American TeleSource International Inc. and
subsidiaries included in this Registration Statement on Form S-4 and have issued
our report thereon dated October 3, 1997. Our audit was made for the purpose of
forming an opinion on the basic financial statements taken as a whole. Schedule
II is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
San Antonio, Texas
October 3, 1997
S-1
<PAGE>
Schedule II
AMERICAN TELESOURCE INTERNATIONAL INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Charged to Write-offs
Balance at Costs and Charged to Balance at
Period Ended Description Beginning of Period Expenses Allowance End of Period
- ------------ ------------------------------- ------------------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
July 31, 1995 Allowance for Doubtful Accounts $ 13,490 $339,828 ($209,772) $143,546
July 31, 1996 Allowance for Doubtful Accounts $143,546 $554,333 ($543,497) $154,382
July 31, 1997 Allowance for Doubtful Accounts $154,382 $734,987 ($701,912) $187,457
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
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*
5 Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. covering
legality*****
8 Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. covering certain
tax matters*****
10.1 Form of Customer Service Agreement for Private Networks*
10.2 Telecommunications Agreement between ATSI-Texas and Long Distance
Exchange Corp.*
10.3 Compensation Agreement between ATSI-Texas and James McCourt relating
to Guarantee of Equipment Line of Credit by James McCourt**
10.4 Agreement for Investment Banking Services between ATSI-Texas and Joseph
Charles & Associates, Inc.**
10.5 (1)
10.6 1997 Option Plan**
10.7 Form of Option Agreement**
10.8 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*****
11 Statement of Computation of Per Share Earnings*****
22 Subsidiaries of Registrant**
23.1 Consent of Arthur Andersen LLP*****
23.2 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in
Exhibit 5)*****
23.3 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in
Exhibit 8)*****
24 Power of Attorney (included on Signature Page to the Registration
Statement)*****
27 Financial Data Schedule*****
99.1 Ruling issued by Ontario Securities Commission*****
99.2 Form of Proxy*****
* 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 Form
S-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.
***** Filed herewith.
(1) Exhibit previously listed in exhibit list to Amendment No. 2 to
Registration Statement on S-4 (No. 333-05557) of the Company filed
September 11, 1997 has been deemed immaterial by the Company and
eliminated.
<PAGE>
EXHIBIT 5
[LETTERHEAD OF AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. APPEARS HERE]
March 6, 1998
American Telesource International, Inc.
12500 Network Blvd., Suite 407
San Antonio, Texas 78249
Gentlemen:
We have acted as counsel to American Telesource International, Inc., a
Delaware corporation (the "Company"), in connection with the registration under
the Securities Act of 1933, as amended, of an aggregate 53,505,734 shares of the
Company's $.001 par value common stock (the "Common Stock") issuable in
connection with (a) the Arrangement (the "Arrangement Shares"), as defined and
described in the Proxy Statement-Prospectus included in the Registration
Statement (herein defined), and (b) warrants of American Telesource
International Inc., an Ontario corporation ("ATSI-Canada") (the "Warrant
Shares"), which warrants, in accordance with their terms, are exercisable after
the effective date of the Arrangement for shares of Common Stock of the Company;
the Arrangement Shares and Warrant Shares are to be offered upon the terms and
subject to the conditions set forth in the Registration Statement on Form S-4
(the Registration Statement, as amended at the time it becomes effective, being
herein referred to as the "Registration Statement") relating thereto filed with
the Securities and Exchange Commission on the date hereof. The 53,505,734 shares
of Common Stock covered by the Registration Statement represent the aggregate of
(y) the maximium number of ATSI-Canada common shares to be outstanding on the
effective date of and immediately prior to the effective time of the
Arrangement, and (z) the number of ATSI-Canada common shares issuable upon
exercise of exercisable warrants to be outstanding on the effective date of and
immediately prior to the effective time of the Arrangement.
In connection therewith, we have examined originals or copies certified or
otherwise identified to our satisfaction of such documents and instruments as we
have deemed necessary or appropriate for the expression of the opinions
contained herein.
We have assumed the authenticity and completeness of all records,
certificates and other instruments submitted to us as originals, the conformity
to original documents of all records, certificates and other instruments
submitted to us as copies, the authenticity and completeness of the originals of
these records, certificates and other instruments submitted to
<PAGE>
[SECOND PAGE LETTERHEAD OF AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. APPEARS
HERE]
American Telesource International, Inc.
March 6, 1998 - Page 2
- ---------------------------------------
us as copies and the correctness of all statements of fact contained in all
records, certificates and other instruments that we have examined.
Based on the foregoing, and having regard for such legal considerations as
we have deemed relevant, we are of the opinion that the Arrangement Shares and
Warrant Shares are duly and validly authorized, and, (a) assuming the
Arrangement has become effective, in accordance with the terms of the
Arrangement Agreement and the Registration Statement, when issued, delivered and
paid for in accordance with the terms of the Registration Statement, the
Arrangement Shares will be duly and validly issued, fully paid and
nonassessable, and, (b) assuming the Arrangement has become effective, in
accordance with the terms of the Arrangement Agreement and the Registration
Statement, when issued, delivered and paid for upon due exercise in accordance
with the terms of the Registration Statement and agreements governing the
warrants, the Warrant Shares will be duly and validly issued, fully paid and
nonassessable. For purposes of the opinions expressed above, we have assumed
the validity of the Arrangement under Canadian law and that the Arrangement
Shares and Warrant Shares will be evidenced by appropriate certificates properly
executed and delivered. For purposes of the opinion expressed in (b) above, we
have assumed (i) that the warrant agreements relating to the Warrant Shares were
duly authorized in accordance with applicable law and represent valid and
binding obligations of ATSI-Canada enforceable against ATSI-Canada in accordance
with their respective terms, (ii) that after the effective date of the
Arrangement the warrant agreements will represent valid and binding obligations
of the Company enforceable against the Company in accordance with their
respective terms, and (iii) that, at the time of issuance of the Warrant Shares,
the Company will have sufficient authorized and unissued shares of Common Stock
available for issuance.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Opinions" in the Proxy Statement-Prospectus included as part of the Registration
Statement. This opinion supercedes and replaces the opinion filed as an exhibit
to Amendment No. 3 to the related Registration Statement (No. 333-0557) filed
with the Securities and Exchange Commission on December 3, 1997.
Very truly yours,
/s/ AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
--------------------------------------------
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
<PAGE>
[LETTERHEAD OF AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P APPEARS HERE]
March 6, 1998
American Telesource International, Inc.
12500 Network Blvd., Suite 407
San Antonio, Texas 78249
Ladies and Gentlemen:
Reference is made to the information set forth under the heading "Canadian
and United States Income Tax Considerations - United States Federal Income Tax
Consequences" contained in the Proxy Statement/Prospectus, which is included in
the Registration Statement on Form S-4 (the "Registration Statement"), filed on
March 6, 1998 by American Telesource International, Inc., a Delaware
corporation ("ATSI-Delaware") with the Securities and Exchange Commission (the
"SEC") in connection with the Arrangement among American Telesource
International Inc., an Ontario corporation (the "Company") and ATSI-Delaware.
Subject to the representations, assumptions and other conditions described or
referenced therein, the description of anticipated material United States
federal income tax consequences contained in the sections entitled "Tax
Treatment of the Arrangement," "Tax Consequences to Company Shareholders,"
"Consequences of the Arrangement to Non-U.S. Holders," "Consequences of the
Arrangement on Holders of Warrants," and "Consequences to Non-U.S. Holders of
Owning and Disposing of ATSI-Delaware Common Stock" (all of which sections are
set forth under the above-referenced heading) accurately set forth our opinion.
Our opinion is based on the case law, Internal Revenue Code, Treasury
Regulations and Internal Revenue Service rulings as they exist at the date
hereof. These authorities are all subject to change, and any such change may be
made with retroactive effect. We can give no assurance that, after such change,
our opinion would not be different. We undertake no responsibility to update or
supplement our opinion following the effective date of the Registration
Statement.
We hereby consent to the filing with the SEC of this opinion as an exhibit
to the Registration Statement and to the reference to our firm under the
headings "Canadian and United States Income Tax Considerations - United States
Federal Income Tax Consequences" and "Legal Opinions" contained therein. In
giving such consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of 1933.
This opinion supercedes and replaces our opinion filed as an exhibit to
Amendment No. 3 to
<PAGE>
[SECOND PAGE LETTERHEAD OF AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. APPEARS
HERE]
American Telesource International, Inc.
March 6, 1998 - Page 2
- ---------------------------------------
the Registration Statement on Form S-4 (No. 333-0557) filed on
December 3, 1997 by ATSI-Delaware with the Securities and Exchange Commission.
Very truly yours,
/s/ AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
---------------------------------------------
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
<PAGE>
EXHIBIT 10.29
STATE OF TEXAS
COUNTY OF BEXAR
800 ISOM ROAD BUILDING
LEASE AGREEMENT
LANDLORD TENANT: THIS LEASE AGREEMENT, made and entered into as of the
7th day of January, 1998, between John H. White and Associates, as Agent for the
Owners of Circle Bar - 800 Isom Road Building, hereinafter referred to as
"Landlord", and Globalscape Inc. hereinafter referred to as "Tenant".
1. LEASED PREMISES: In consideration of the mutual covenants as set
forth herein, Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord, for the rental and on the terms and conditions hereinafter set forth,
approximately 5,401 square feet of usable space on the 4th floor (known as Suite
400) of The 800 Isom Road Building (herein called the "Building") located at 800
Isom Road, San Antonio, Bexar County, Texas (herein called "Leased Premises"),
such leased Premises being outlined on the floor plan attached hereto as Exhibit
"A" and made a part hereof. Pro-rated rental for January ___, 1998 until
January 31, 1998 is $__________ (____ days x $209.07/day).
2. TERMS:
(a) Subject to and upon the terms and conditions set forth herein, or
in any exhibit or addendum hereto, this lease shall continue in force and
for a term of 36 months beginning on the 1st day of February, 1998, and
ending on the 31st day of January, 2001, unless sooner terminated or
extended to a later date under any other terms or provisions hereof.
(b) If for any reason the Leased Premises are not ready for occupancy
by Tenant on the commencement date specified in Paragraph 2(a) Landlord
shall not be liable or responsible for any claims, damages, or liabilities
in connection therewith or by reason thereof, and this Lease and the
obligations of Tenant shall commence on a revised commencement date (as
hereinafter provided) and continue in full force and effect; provided,
however, if the Lease Premises are not ready for occupancy for any reason
other than omission, delay, or default on the part of Tenant or anyone
acting under or for Tenant, the rent herein provided shall not commence
until the Leased Premises are ready for occupancy by Tenant. Such
abatement of rent shall constitute full settlement of all claims that
Tenant might otherwise have against Landlord by reason of the Leased
Premises not being ready for occupancy by Tenant on the date of
commencement of the term hereof. Should the term of this Lease commence on
a date other than that specified in Paragraph 2(a) above, rental under this
Lease
<PAGE>
shall commence on such revised commencement date, and the stated term
in this Lease shall thereupon commence so as to give effect to the full
stated term. The Leased Premises shall be deemed to be ready for occupancy
on the first to occur of (i) the date that there is delivered to Tenant a
certificate of substantial completion from Landlord's architect, or (ii)
upon the date on which Tenant begins occupancy of the Leased Premises.
3. USE: The Leased Premises are to be used and occupied by Tenant solely
for office purposes and for no other purpose or use without the prior written
consent of Landlord.
4. BASE RENT: Tenant agrees to pay to John H. White and Associates for
the account of Landlord rent for said premises at the rate of Six Thousand Four
Hundred Eighty-One Dollars and Twenty Cents ($6,481.20) per month in advance.
One such monthly installment shall be due and payable on or before the beginning
date of this Lease, and a like monthly installment shall be due and payable on
or before the same day of each succeeding calendar month during the first year
of this Lease. The renewal rate for years 2 and 3 of this Lease Agreement (Feb.
1, 1999 through Jan. 31, 2001) will be $7,291.35 per month. Tenant has
deposited with Landlord, upon delivery of this Lease Agreement, $12,962.40 to be
applied as follows: $6,481.20 to be applied as first month's rent and $6,481.20
to be applied as security deposit, said security deposit to be co-mingled with
Landlord's regular account and refunded to Tenant upon termination of this Lease
provided the Tenant is not in default of this Lease Agreement.
In addition to the foregoing rental, Tenant agrees to pay to Landlord
as additional rental all charges for any services, goods, or materials furnished
by Landlord at Tenant's request which are not required to be furnished by
Landlord under this Lease Agreement, as well as all other sums payable by Tenant
hereunder, within thirty (30) days after Landlord renders a statement thereof to
Tenant. All past due installments shall bear interest at the rate of 10% per
annum from date due until paid.
5. RENEWAL OPTION: Provided that at the end of the primary term of this
Lease Tenant not be in default of any term, condition or covenant contained in
this Lease, Tenant (but not any assignee or subtenant) shall have the right and
option to renew this Lease, by written notice delivered to Landlord with copy to
Principal Realtor no later than 120 days prior to the expiration date of the
primary term, for the additional term of three (3) years, under the same terms,
conditions, and covenants contained herein, except:
(a) Tenant shall have no further renewal options unless expressly
granted by Landlord in writing; and
(b) The monthly rental shall be adjusted in the proportion which the
consumer price index for all urban consumers (CPI-U) (U. S. City Average)
of the United States Bureau of Labor Statistics for the month of July 1997
bears to the consumer price index for all urban consumers (CPI-U) (U. S.
City Average)
2
<PAGE>
for the month of July 2000. However, in no event, shall such
monthly rental for the extended term be less than the monthly rental of the
final year of the primary lease term.
6. ADDITIONAL RENT - BUILDING OPERATING EXPENSES: The total rentable
area of the Building is 29,672 square feet. For purposes of this section of
Lease Agreement, it is agreed that Tenant's pro-rata share of the rentable area
of the Building is 18.2% and that this percent will be Tenant's pro-rata share
of Building Operating Expenses.
(a) Prior to January 1 of each calendar year, Landlord will prepare and
provide to Tenant an estimate of the total Building Operating Expenses
(said Building Operating Expenses being described as Basic Costs on Exhibit
"B") for the forthcoming calendar year. To the extent and only to the
extent that the estimated Building Operating Expenses for the year in
question exceed the Building Operating Expenses for the year 1997 (Base
Year) per square foot, then Tenant agrees to pay monthly, along with the
Base Rent, an additional rent equal to one-twelfth (1/12) of Tenant's pro-
rata (18.2)% share of such excess. If this paragraph 6 becomes applicable
on any day other than January 1, then Tenant agrees to pay each month for
the balance of the calendar year in which this paragraph 6 becomes
applicable, one-twelfth (1/12) of Tenant's pro-rata share of such excess of
estimated Building Operating Expenses as prepared by Landlord prior to the
preceding January 1.
(b) By June 1 of each calendar year, or as soon thereafter as possible,
Landlord shall furnish Tenant a statement of the actual Building Operating
Expenses for the previous calendar year. A lump sum payment or credit will
be made from Tenant to Landlord, in the case of a payment, and from
Landlord to Tenant, in the case of a credit, within 30 days of the delivery
of such statement. The effect of this reconciliation payment/credit is
that Tenant will pay no more or less than Tenant's pro-rata 18.2% share of
any excess over the Building Operating Expenses for the year 1997 (Base
Year) per usable square foot of the actual Building Operating Expenses for
any calendar year.
(c) Tenant shall have the right, at its expense and at a reasonable
time, to examine Landlord's books relevant to additional rentals due
under this section.
7. SERVICE & UTILITIES: Landlord, at its own cost and expense, will pay
for all charges for gas, water and electricity used by Tenant while occupying
the Leased Premises, with electricity for ordinary office use (not to include,
however, data processing machines, including air conditioning costs therefor,
large business machines and similar equipment of high electrical consumption
characteristics); ballast and lamp replacement for the building's standard
fluorescent lighting fixtures located in the demised premises, elevator service;
janitorial service on a five-day week basis, in the
3
<PAGE>
manner and to the extent deemed standard by Landlord during the periods and
hours as such services are normally furnished to all Tenants. Tenant will pay
all telephone charges; Landlord agrees to furnish Tenant with tempered and
refrigerated water at those points of supply provided for general use of those
tenants in the building; heated and refrigerated air conditioning in season, at
temperatures and in amounts which Landlord considers standard. Landlord shall
not be liable in damages or otherwise for failure, stoppage or interruption of
any such service, nor shall the same be construed as an eviction of Tenant, work
an abatement of rent, or relieve Tenant from the operation of any covenant or
agreement; but in the event of any failure, stoppage or interruption thereof,
Landlord shall use reasonable diligence to resume service promptly. The work of
the building janitor shall not be hindered by Tenant.
8. MAINTENANCE REPAIRS AND USE: Landlord shall, at its own cost and
expense, provide for the cleaning and maintenance of the public portions of the
building, including painting and landscaping surrounding the building. Unless
otherwise expressly stipulated herein, Landlord shall not be required to make
any improvements or repairs of any kind or character on the Leased Premises
during the term of this Lease, except such repairs as may be required by normal
maintenance operations, which shall include repairs to the exterior walls,
corridors, windows, roof and other structural elements and equipment of the
building, and such additional maintenance as may be necessary because of damages
by persons other than Tenant, its agents, employees, invitees or visitors.
Landlord shall have sole control over the parking of automobiles and other
vehicles and shall designate parking areas and building service areas.
Landlord, its officers, agents and representatives, subject to any
security regulations imposed by any governmental authority, shall have the right
to enter all parts of the Premises at all reasonable hours to inspect, clean,
make repairs, alterations and additions to the building or Premises which it may
deem necessary or desirable, or to provide any service which it is obligated to
furnish to Tenant, and Tenant shall not be entitled to any abatement or
reduction of rent by reason thereof.
Landlord may at its option and at the cost and expense of Tenant,
repair or replace any damage or injury done to the building or any part thereof,
caused by Tenant, Tenant's agents, employees, licensees, invitees or visitors;
Tenant shall pay the cost thereof to Landlord on demand. Tenant further agrees
to maintain and keep the interior of the Leased Premises in good repair and
condition at Tenant's expense. Tenant agrees not to commit or allow any waste or
damage to be committed on any portion of the Leased Premises, and at the
termination of this Lease, by lapse of time or otherwise, to deliver up the
Leased Premises to Landlord in as good condition as on date of possession by
Tenant, ordinary wear and tear alone excepted, and upon such termination of
Lease, Landlord shall have the right to re-enter and resume possession of the
Leased Premises.
4
<PAGE>
Tenant will not use, occupy or permit the use or occupancy of the
Leased Premises for any purpose which is, directly or indirectly, forbidden by
law, ordinance, or governmental or municipal, regulation or order, or which may
be dangerous to life, limb, or property; or permit the maintenance of any public
or private nuisance; or do or permit any other thing which may disturb the quiet
enjoyment of any other tenant of the building; or keep any substance or carry on
or permit any operation which might emit offensive odors or conditions into
other portions of the building; or use any apparatus which might make undue
noise or set up vibrations in the building; or permit anything to be done which
would increase the fire and extended coverage insurance rate on the building or
contents, and if there is any increase in such rates by reason of acts of
Tenant, then Tenant agrees to pay such increase promptly upon demand therefor by
Landlord.
9. QUIET ENJOYMENT: Tenant, on paying the said rent and performing the
covenants herein agreed to be by it performed, shall and may peaceably and
quietly have, hold and enjoy the Lease Premises for the said term.
10. ALTERATIONS: Tenant covenants and agrees to keep the Premises free
of all liens for improvements or otherwise and that it will make no structural
change or major alteration without Landlord's written consent in advance, and
without first furnishing the Landlord fifteen (15) days advance notice outlining
in detail the proposed changes or alterations.
11. SUBLETTING: Tenant shall not assign this Lease or allow it to be
assigned, in whole or in part, by operation of law or otherwise, or mortgage or
pledge the same, or sublet the Leased Premises, or any part thereof, without the
prior written consent of Landlord (which consent shall not be unreasonable
withheld) and in no event shall any such assignment of sublease ever release
Tenant from any obligation or liability hereunder, except that Tenant shall be
allowed to sublease space to American Telesource International, its parent
company.
12. CASUALTY DAMAGE: The parties hereto mutually agree that if the
Leased Premises are partially or totally destroyed by fire or other casualty
covered by the fire and extended coverage insurance to be carried by Landlord
under the terms hereof, the Landlord may, after thirty (30) days written notice
to Tenant, at its option, repair and restore the Leased Premises as soon as it
is reasonably practicable, to substantially the same condition in which the
Leased Premises were before such damage, or it may terminate the Lease;
provided, however, that in the event the Leased Premises are completely
destroyed or so badly damaged that repairs cannot be commenced within thirty
(30) days and completed within six (6) months thereafter, then this Lease shall
be terminable as of the date of the occurrence of the damage or destruction, by
either party hereto by serving written notice upon the other; and provided
further, that in any event if repairs have not been commenced within thirty (30)
days from the date of said damage and thereafter completed within a reasonable
time, in no case to exceed six (6) months, this Lease may be immediately
terminated by
5
<PAGE>
Tenant as of the date of occurrence of the damage or destruction by serving
notice upon the Landlord.
In the event the Leased Premises are completely destroyed or so
damaged by fire or other casualty covered by the fire and extended coverage
insurance to be carried by Landlord under the terms hereof that it cannot
reasonably be used by Tenant for the purposes herein provided and this Lease is
not terminated as above provided, then there shall be a total abatement of rent
until said Premises are made usable. In the event the Leased Premises are
partially destroyed or damaged by fire or other hazard so that such Premises can
be only partially used by Tenant for the purposes herein provided, then there
shall be a partial abatement in the rent corresponding to the time and extent
which such Premises cannot be used by Tenant.
If the Premises shall be damaged by fire or other casualty resulting
from the fault or negligence of Tenant, or the agents, employees, licensees,
invitees of Tenant, such damage shall be repaired by and at the expense of
Tenant under the direction and supervision of Landlord, and rent shall continue
without abatement.
13. DEFAULT BY TENANT: If Tenant shall make default in any covenant or
agreement to be performed by it and if after written notice from Landlord to
Tenant (except for a default caused by the nonpayment of rent as set forth in
Paragraph 4 hereof, for which no notice is required) such default shall continue
for a period of ten (10) days or if the leasehold interest of Tenant shall be
taken on execution or other process of law or if Tenant shall petition under any
provision of the Bankruptcy Act of the United States or be declared to be
insolvent according to law, then and in any of said cases, the Landlord may
immediately or at any time thereafter, without further notice or demand, enter
upon and into said premises or any part thereof and take absolute possession of
the same fully and absolutely without such re-entry automatically working a
forfeiture of the rents to be paid and the covenants to be performed by Tenant
for the full term of this Lease and at the Landlord's election, Landlord may
either lease or sublet such premises or any part thereof on such terms and
conditions and for such rents and for such time as the Landlord may reasonably
elect and, after crediting the proceeds of any rent actually collected by
Landlord from such reletting on the rentals stipulated to be paid under this
Lease by Tenant, collect from Tenant any balance remaining due on the rent
reserved under this Lease, or Landlord may declare this Lease forfeited and may
take full and absolute possession of said Premises free from any subsequent
rights or obligations of Tenant, or at the option of Landlord, the entire rent
for the balance of the term shall at once become due and payable, as if by the
terms of this Lease it were all payable in advance. In the event of such
default and reletting by Landlord, Tenant agrees to pay all costs of refinishing
and all costs of reletting the Premises.
All remedies herein given Landlord, including all those not set forth
but provided by law, shall be cumulative, and the exercise of one or more of
such remedies by Landlord shall not exclude the exercise of any other consistent
remedy, nor shall
6
<PAGE>
any waiver by Landlord, express or implied, of any breach of any term, covenant
or condition hereof be deemed a waiver of such term, condition or covenant, or
of any subsequent breach of the same or any other term, covenant or condition
hereof. Acceptance of rent by Landlord from Tenant or any assignee, sub-essee or
other successor in interest to Tenant, with or without notice, shall never be
construed as a waiver of any breach of any term, condition or covenant of this
Lease. Failure of Landlord to declare any default upon occurrence thereof or
delay in taking action with respect thereto shall not waive such default, but
Landlord shall have the right to declare such default at any time and take such
action as may be authorized hereunder, in law or equity, or otherwise.
In addition to the payment of the rentals and the late payment charge
as provided herein, Tenant agrees to reimburse Landlord for all expenses
incurred by Landlord in effecting enforcement of these Lease provisions, Lease
termination, or re-entry and in securing possession of the Premises, including
attorney's fees (whether suit is filed or not) and court costs. In the event of
a money judgment, attorney's fees shall be a minimum of 10% of recovery and a
maximum of 15% thereof.
14. PERSONAL LIABILITY: Neither the shareholders, officers, directors,
trustees, individuals or partners comprising Landlord, nor the shareholders (nor
any of the partners comprising same), directors, trustees, officers or partners
of any of the foregoing (collectively, the "Parties") shall be liable for the
performance of Landlord's obligations under this Lease. Tenant shall look
solely to Landlord to enforce Landlord's obligations hereunder and shall not
seek any damages against any of the Parties. The liability of Landlord for
Landlord's obligations under this Lease shall not exceed and shall be limited to
the value of Landlord's interest in the Building and the land on which the
Building and the land is situated and Tenant shall not look to the property or
assets of any of the Parties in seeking either to enforce Landlord's obligations
under this Lease or to satisfy a judgment for Landlord's failure to perform such
obligations.
15. HAZARD INSURANCE: Landlord shall maintain fire and extended coverage
insurance on the portion of the Building constructed by Landlord, including
additions and improvements by Tenant which are required to be made by Tenant by
this Lease and which have become or are to become the property of Landlord upon
vacation of the Leased Premises by Tenant. Said insurance shall be maintained
with an insurance company authorized to do business in Texas, in amounts desired
by Landlord and at the expense of Landlord and payments for losses thereunder
shall be made solely to Landlord. Tenant shall maintain, at its expense, fire
and extended coverage insurance on all of its personal property, including
removable trade fixtures, located in the leased Premises, and on all additions
and improvements made by Tenant and not required to be insured by Landlord
above. If the annual premiums to be paid by Landlord shall exceed the standard
rates because Tenant's operations, contents of the Leased Premises, or
improvements with respect to the Leased Premises are beyond
7
<PAGE>
building standard, result in extra-hazardous exposure, Tenant shall promptly pay
the excess amount of the premium upon request by Landlord.
Anything in this Paragraph to the contrary notwithstanding, Landlord
and Tenant each hereby waives any and all rights of recovery, claim, action or
cause of action, against the other, its agents, officers, or employees, for any
loss or damage that may occur to the Leased Premises or any improvements
thereto, or any personal property of such party therein, by reason of fire, the
elements, or any other cause which could be insured against under the terms of
standard fire and extended coverage insurance policies, regardless of cause or
origin, including negligence of the other party hereto, its agents, officers, or
employees, and covenants that no insurer shall hold any right of subrogation
against such other party.
16. LIABILITY INSURANCE: Landlord shall, at its expense, maintain a
policy or policies of comprehensive general liability insurance with the
premiums thereon fully paid on or before due date, issued by and binding upon
some solvent insurance company, such insurance to afford minimum protection of
not less than Five Hundred Thousand Dollars ($500,000.00) combined single limit
in respect to any one occurrence. Tenant shall, at its expense, provide for its
own public liability insurance in a minimum amount of Five Hundred Thousand
Dollars ($500,000.00) combined single limit in respect to any one occurrence.
Such policy of public liability insurance shall provide Contractual Liability
Insurance in favor of Landlord, and Landlord shall be provided with a
certificate indicating that such policy (1) is in force and (2) may not be
cancelled unless Landlord has received not less than thirty (30) days prior
written notice.
17. NON-WAIVER: Neither acceptance of rent by Landlord nor failure by
Landlord to complain of any action, non-action or default by Tenant, whether
singular or repetitive, shall constitute a waiver of any of Landlord's rights
hereunder. Waiver by Landlord of any right for any default of Tenant shall not
constitute a waiver of any right for either a subsequent default of the same
obligation or any other default. No act or things done by Landlord or its agent
shall be deemed to be acceptance of surrender of the Leased Premises and no
agreement to accept a surrender of the Leased Premises shall be valid unless it
is in writing and signed by a duly authorized officer or agent of Landlord.
18. HOLD HARMLESS: The Tenant will indemnify Landlord for, and hold
Landlord harmless from and against all fines, suits, claims, demands,
liabilities and actions (including costs and expenses of defending against such
claims) resulting or alleged to result from any breach, violation or non-
performance of any covenant or condition hereof or from the use or occupancy of
the Leased Premises, by Tenant or Tenant's agents, employees, licensees, or
invitees. Landlord shall not be liable to Tenant or Tenant's agents, employees,
licensees, or invitees, for any damage to person or property resulting from any
act or omission or negligence of any co-tenant, visitor or
8
<PAGE>
other occupant of the building except as Landlord's own negligence may
contribute thereto.
19. CONDEMNATION: In the event the building, Leased Premises, or any
portion thereof shall be taken or condemned in whole or in part for public
purposes, then the term of this Lease shall, at the option of the Landlord,
forthwith cease and terminate, and the Landlord shall receive the entire award
for land and building. In the event Landlord does not terminate as herein
provided, there shall be a proportionate reduction in rent.
20. RULES AND REGULATIONS: Such reasonable rules and regulations
applying to all tenants in the building as may be hereafter adopted by Landlord
for the safety, care and cleanliness of the Premises and the preservation of
good order thereon, are hereby made a part hereof and attached as Exhibit "C"
and Tenant agrees to comply with all such rules and regulations. Landlord shall
have the right at all times to change such rules and regulations or to amend
them in any reasonable manner as may be deemed advisable by Landlord, all of
which changes and amendments will be sent by Landlord to Tenant in writing and
shall be thereafter carried out and observed by Tenant.
21. ASSIGNMENT BY LANDLORD: Landlord shall have the right to assign or
transfer, in whole or in part, every feature of its right and obligations
hereunder and in the building and Leased Premises. Such assignments or
transfers may be made to a corporation, trust, trust company, individual or
group of individuals, and howsoever made shall be in all things respected and
recognized by Tenant.
22. SEVERABILITY: This Lease Agreement shall be construed in accordance
with the laws of the State of Texas. If any clause or provision of this Lease
is illegal, invalid, or unenforceable, under present or future laws effective
during the term hereof, then it is the intention of the parties hereto that the
remainder of this Lease shall not be affected thereby, and it is also the
intention of both parties that in lieu of each clause or provision that is
illegal, invalid or unenforceable, thereby added as part of this Lease a clause
or provision as similar in terms to such illegal, invalid or unenforceable
clause or provision as may be possible and be legal, valid and enforceable.
23. SIGNS: No signs of any kind or nature, symbol or identifying mark
shall be put on the building, in the halls, elevators, staircases, entrances,
parking areas or upon the doors or walls, whether plate glass or otherwise, of
the Leased Premises nor within the Leased Premises so as to be visible from the
public areas or exterior of the building, without prior written approval of
Landlord. All signs or lettering shall conform in all respects to the sign
and/or lettering criteria established by Landlord. Tenant's name shall be
placed on Tenant's door and on the Building directory. (See paragraph 4 on page
10.)
9
<PAGE>
24. SUCCESSORS AND ASSIGNS: The Landlord and Tenant agree that all
provisions hereof are to be construed as covenants and agreements as though the
words imparting such covenants were used in each separate paragraph hereof, and
that, except as restricted by the provisions of the section entitled "Subletting
and Assigning" hereof, this Lease Agreement and all the covenants herein
contained shall be binding upon the parties hereto, their respective heirs,
legal representatives, successors, and assigns.
25. HOLDING OVER: In the event of holding over by Tenant after the
expiration or termination of this Lease, such hold over shall be as a Tenant at
will and all of the terms and provisions of this Lease shall be applicable
during such period, except that Tenant shall pay Landlord as rental for the
period of such hold over an amount equal to twice the rent which would have been
payable by Tenant had such hold over period been a part of the original term of
this Lease, and Tenant's receipt of notice from Landlord to vacate said
Premises. The rental payable during such hold over period shall be payable to
Landlord on demand. No holding over by Tenant, whether with or without consent
of Landlord, shall operate to extend this Lease except as herein provided.
26. ENTIRE AGREEMENT: This instrument and any attached addenda or
exhibits by the parties constitute the entire agreement between Landlord and
Tenant; no prior written or prior contemporaneous oral promises or
representations shall be binding. This Lease shall not be amended, changed or
extended except by written instrument signed by both parties hereto. Paragraph
captions herein are for Landlord's and Tenant's convenience only, and neither
limit nor amplify the provisions of this instrument. Tenant agrees, at
Landlord's request, to execute a recordable Memorandum of the Lease Agreement.
27. NOTICES: Whenever in this Lease it shall be required or permitted
that notice or demand be given or served by either party to this Lease to or on
the other, such notice or demand shall be given or served and shall not be
deemed to have been given or served unless in writing and delivered personally
or forwarded by Certified or Registered Mail, postage prepaid, addressed as
follows:
To the Landlord: John H. White and Associates
800 Isom Road - Suite 200
San Antonio, Texas 78216
To the Tenant: Globalscape Inc.
800 Isom Road - Suite 400
San Antonio, Texas 78216
Such addresses may be changed from time to time by either party by
serving notices as above provided.
10
<PAGE>
28. PARKING: For no rental in addition to that provided elsewhere in
this Lease, Landlord also hereby leases to Tenant and Tenant also hereby leases
from Landlord for the term of this Lease Agreement, covered parking spaces in
the parking lot for the subject office building, which parking spaces shall be
reserved and assigned to Tenant by number designations (or some other system)
clearly visible to the public.
29. TENANT IMPROVEMENTS: Tenant may remove its trade fixtures, office
supplies and movable office furniture and equipment not attached to the building
provided: (a) such removal is made prior to the termination of the term of this
Lease; (b) Tenant is not in default of any obligation or covenant under this
Lease at the time of such removal; and (c) Tenant promptly repairs all damage
caused by such removal. All other property at the Leased Premises and any
alterations or additions to the Leased Premises (including wall-to-wall
carpeting, paneling or other wall covering) and any other article attached or
affixed to the floor, wall or ceiling of the Leased Premises shall become the
property of Landlord and shall remain upon and be surrendered with the Leased
Premises as a part thereof at the termination of this Lease by lapse of time or
otherwise, Tenant hereby waiving all rights to any payment or compensation
therefor. If, however, Landlord so requests in writing, Tenant will, prior to
termination of this Lease, remove any and all alterations, additions, fixtures,
equipment and property placed or installed by it in the Leased Premises and will
repair any damage caused by such removal.
Notwithstanding anything herein contained in this Lease Agreement to
the contrary, Tenant shall be permitted to remove any and all furniture, ceiling
fans, draperies, file and storage cabinets and shelves which he installs and/or
attaches to the Leased Premises (excepting those that may be provided by
Landlord). It is agreed, however, that Tenant shall be responsible for repairing
all damages caused by any such removal.
30. BROKER'S COMMISSION: Landlord agrees to pay to undersigned Principal
Broker a brokerage fee for negotiating this Lease Agreement of six percent (6%)
of the total gross rental. The brokerage fee shall be paid 50% at the time the
written Lease Agreement is executed by both the Owner and Tenant and the
remaining 50% shall be paid when Tenant occupies the property.
31. BUILDING IMPROVEMENTS: Landlord agrees to provide, at Landlord's
cost, the following:
(a) New carpet of Building Standard Quality throughout the Leased
Premises;
(b) Blinds of Building Standard Quality for each exterior window
opening;
(c) Repaint textured walls and wallpaper walls selected throughout the
Leased Premises.
11
<PAGE>
32. EXHIBITS: The following numbered exhibits are attached hereto and
incorporated herein and made a part of this Lease for all purposes:
(a) Exhibit "A," Floor Plan of Suite
(b) Exhibit "B," Basic Costs
(c) Exhibit "C," Building Rules and Regulations
(d) Exhibit "D," Legal Description of Lease Premises
(e) Exhibit "E," Reserved Parking Site Plan
12
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this lease in
multiple original counterparts as of the 7th day of January, 1998.
LANDLORD: John H. White and Associates
Agent for the Owners of the Circle Bar
800 Isom Road Building
By: /s/ JOHN S. WHITE
-----------------------------------------
Title: OWNER
--------------------------------------
TENANT: Globalscape Inc.
By: /s/ SANDRA POOLE-CHRISTAL
-----------------------------------------
Title: PRESIDENT
--------------------------------------
REALTORS: Aegis Realty Group, Inc.
Principal Broker
By:
-----------------------------------------
Title:
--------------------------------------
CO-OPERATING BROKER:
Providence Commercial
Real Estate Services
By:
-----------------------------------------
Title:
--------------------------------------
*NOTE: If this Lease Agreement is negotiated by Principal Broker in
cooperation with another Broker, Landlord shall be liable for payment of all
commissions to Principal Broker only, whereupon it shall be protected from any
claims from said Cooperating Broker.
THIS IS A LEGALLY BINDING CONTRACT, AND BROKER ADVISES LANDLORD AND TENANT TO
SEEK LEGAL ADVICE.
13
<PAGE>
EXHIBIT 10.30
AMENDED AND RESTATED
--------------------
AMERICAN TELESOURCE INTERNATIONAL INC.
--------------------------------------
1997 STOCK OPTION PLAN
----------------------
PURPOSE. The purpose of this Plan is to promote the interest of American
-------
TeleSource International Inc. (the "Company") and its shareholders by providing
an effective means to attract, retain and increase the commitment of certain
individuals and to provide such individuals with additional incentive to
contribute to the success of the Company.
1. ELIGIBILITY. Options may be granted under the Plan to directors and
-----------
employees of, and advisors and consultants to, the Company, or of any parent or
subsidiary of the Company (if any) provided, however, in the case of consultants
or advisors, that such grant be in consideration of bona fide services rendered
by such consultant or advisor and such services not be in connection with the
offer or sale of securities in a capital-raising transaction. The Board of
Directors or the Committee (defined below), as the case may be, shall select
from such eligible class the individuals to whom Options shall be granted from
time to time.
2. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Board
--------------------------
of Directors, or, if the Board of Directors should unanimously agree, by a
committee (the "Committee") consisting of at least two "non-employee directors,"
as defined in Rule 16b-3 ("Rule 16b-3") under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). A quorum of such Committee shall consist
of a majority of the members of such Committee, or as may be otherwise provided
in the Company's bylaws. The Committee shall hold meetings at such times and
places and conduct its business at such meetings as it may determine, subject to
any express provisions of the Company's bylaws. Acts of a majority of the
Committee members attending at a meeting at which a quorum is present, or such
acts as are reduced to or approved in writing by the majority of the members of
the Committee, shall be the valid acts of the Committee. The Board of Directors
or the Committee, as the case may be, shall from time to time in its discretion
determine which individuals shall be granted Options, the amount of shares
covered by such Options, and certain other specific terms and conditions of such
Options subject to the terms and conditions contained herein. Notwithstanding
anything in this Plan to the contrary, the full Board of Directors of the
Company shall determine whether any member of the Committee shall be granted
Nonqualified Stock Options (as defined below) under the Plan, the terms and
provisions of the respective agreements evidencing such options, the times at
which such options shall be granted, and the number of shares of Common Stock
subject to each such option and shall make all determinations under the Plan
with respect to such options (which determinations of the Board of Directors
shall be conclusive).
The Board of Directors or the Committee, as the case may be, shall have
the sole authority and power, subject to the express provisions and conditions
hereof, to construe this Plan and the Options granted hereunder, and to adopt,
prescribe, amend, and rescind rules and regulations relating to this Plan, and
to make all determinations necessary or advisable for
<PAGE>
administering this Plan. The Board or Committee shall also have the authority
and power to modify any provision of this Plan to render the Plan consistent
with any amendments to Rule 16b-3 or Form S-8 of the Securities Act of 1933, as
amended (the "Securities Act"), including amendments which permit the grant of
Options on terms which are less restrictive than the terms set forth herein. The
interpretation by the Board or Committee of any provision of the Plan with
respect to any incentive stock option granted hereunder shall be in accordance
with section 422 of the Internal Revenue Code of 1986 and the regulations issued
thereunder, as amended from time to time (the "Internal Revenue Code"), in order
that the incentive stock options granted hereunder ("Incentive Stock Options")
shall constitute "incentive stock options" within the meaning of section 422 of
the Internal Revenue Code. Options granted under the Plan which are not intended
to be Incentive Stock Options are referred to herein as "Nonqualified Stock
Options." The term "Options" as used herein shall refer to Incentive Stock
Options and Nonqualified Stock Options, either collectively or without
distinction. The interpretation and construction by the Board or Committee, if
any, of any provisions of the Plan or of any Option granted hereunder shall be
final and conclusive. No member of the Board or the Committee shall be liable
for any action or determination made in good faith with respect to the Plan or
any Option granted hereunder.
3. SHARES SUBJECT TO THE PLAN. Subject to the provisions of Section 6,
-------------------------- ---------
the number of shares subject to Options granted hereunder shall not exceed
5,000,000 shares of the Company's authorized but unissued or reacquired Common
Stock (the "Common Stock"). Such number of shares shall be subject to
adjustment as provided in Section 5. Shares that by reason of the expiration,
----------
termination, cancellation or surrender of an Option are no longer subject to
purchase pursuant to an Option granted under the Plan (other than by reason of
exercise of such Option) may be reoptioned hereunder.
4. TERMS AND CONDITIONS.
---------------------
(A) Option Price. Each Option shall state the number of shares that
------------
may be purchased thereunder, shall expressly designate such Option as an
Incentive Stock Option or a Nonqualified Stock Option, and shall state the
option price per share (the "Option Price") which shall be paid in the manner
specified in this Section 4(A) in order to exercise such Option. The Option
------------
Price shall not be less than the lesser of (i) 100% of the fair market value of
the shares on the day the Option is granted or (ii) the 10 day moving average
of the fair market value of the shares ending on the day the Option is granted
with respect to any Nonqualified Stock Option granted under Plan. The Option
Price shall not be less than 100% of the fair market value of the shares on the
day the Option is granted with respect to any Incentive Stock Option granted
under the Plan.
For purposes of the Plan, the fair market value per share of the
Common Stock on any date shall be deemed to be the closing price of the Common
Stock on the principal national securities exchange on which the Common Stock is
then listed or admitted to trading, if the Common Stock is then listed or
admitted to trading on any national securities exchange. The closing price
shall be the last reported sale price regular way, or, in case no such sale
-------
takes place on such day, the average of the closing bid and asked prices regular
way, as reported by said exchange. If the Common Stock is not then so listed on
a national securities exchange, the fair market value per share of the Common
Stock on any date shall be deemed to be the closing price (the last reported
sale price regular way) in the over-the-counter market as reported by the NASDAQ
National Market System, if the Common Stock closing price is then reported on
the NASDAQ National Market System, or, if the Common Stock closing price of the
Common Stock is not then reported by the NASDAQ National Market System, shall be
deemed to be the mean of the highest closing bid and lowest closing asked price
of the Common Stock in the over-the-counter market as reported by the National
Association of Securities Dealers Automated
<PAGE>
Quotation System ("NASDAQ") or, if the Common Stock is not then quoted by
NASDAQ, as furnished by any member of the National Association of Securities
Dealers, Inc. selected from time to time by the Company for that purpose. If no
member of the National Association of Securities Dealers, Inc. furnishes quotes
with respect to the Common Stock of the Company, such fair market value shall be
determined by resolution of the Committee. Notwithstanding the foregoing
provisions of this Section 4(A), if the Committee shall at any time determine
------------
that it is impracticable to apply the foregoing methods of determining fair
market value, the Committee is empowered to adopt other reasonable methods for
such purpose. The Committee may, if it deems it appropriate, engage the services
of an independent qualified expert or experts to appraise the value of the
Common Stock.
Options under the Plan may be exercised by payment of the Option Price
in cash or, if the Common Stock is then registered under the Exchange Act and is
then traded on NASDAQ or one or more securities exchanges, by delivery of the
equivalent fair market value of Common Stock or by a "cashless exercise"
procedure in which an Optionee is permitted to exercise an Option by arranging
with the Company and his or her broker to deliver the appropriate Option Price
from the concurrent market sale of the acquired shares, or a combination of the
foregoing (subject to the discretion of the Committee or the Board). An
employee's withholding tax due upon exercise of a Nonqualified Stock Option may
be satisfied either by a cash payment or the retention from the exercise of a
number of shares of Common Stock with a fair market value equal to the required
withholding tax, as the Committee or the Board may permit.
In addition, with respect to the exercise of any Nonqualified Stock
Option, the Board or the Committee (or an authorized representative) shall
advise the Optionee, upon receipt of notice of intent to exercise such Option,
of the income tax withholding consequences to such Optionee of such exercise,
the amount of the appropriate withholding tax and any other payments due by
reason thereof. Such Optionee must satisfy all of the preceding payment
requirements in order to receive stock upon exercise of such Option.
(B) Option Period. Any Options granted pursuant to this Plan must be
-------------
granted within one year from the date the Plan was adopted by the Board of
Directors of the Company (February 10, 1997).
Each Option shall state the date upon which it is granted. Each option
shall be exercisable during such period as is provided under the terms of the
Option, but in no event shall an Option be exercisable after the expiration of
ten years from the date of grant. Except in the case of death or disability,
Incentive Stock Options may be exercised within three months (or for such
shorter period as may be specified in the particular Option) after termination
of employment to the extent such Options were exercisable at the date of
termination, and Nonqualified Stock Options may be exercised after termination
of employment or other service to the Company for such period as may be
specified in the particular Option. In the event of the disability of an
Optionee, Incentive Stock Options may be exercised for up to one year after
disability of the Optionee, to the extent exercisable prior to the date of
disability. Nonqualified Stock Options may be exercised following the Optionee's
death or disability and Incentive Stock Options may be exercised following the
Optionee's death by such Optionee or by his or her estate, heirs, or devisees,
as the case may be, for such period thereafter as may be specified in the
particular Option.
(C) Assignability. An Option granted pursuant to this Plan shall be
-------------
exercisable during the Optionee's lifetime only by the Optionee and shall not be
assignable or transferable by the Optionee (except with the Board's or
Committee's prior written approval, and only in any such additional
circumstances as shall not affect the Plans qualification with the requirements
of the incentive
<PAGE>
stock option provisions of the Internal Revenue Code, the requirements of Rule
16b-3 under the Exchange Act or the plan eligibility requirements for the use of
Form S-8 of the Securities Act), and shall not be subject to levy, attachment or
similar process. Upon any other attempt to transfer, assign, pledge or otherwise
dispose of Options granted under this Plan, such Options shall immediately
terminate and become null and void.
(D) Limit on 10% Shareholders. No Incentive Stock Option may be granted
-------------------------
under this Plan to any individual who would, immediately after the grant of such
Incentive Stock Option directly or indirectly own more than 10% of the total
combined voting power of all classes of stock of the Company or of any parent or
subsidiary corporation unless (i) such Incentive Stock Option is granted at an
Option Price not less than 110% of the fair market value of the shares on the
date the Incentive Stock Option is granted, and (ii) such Incentive Stock Option
expires, on a date not later than five years from the date the Incentive Stock
Option is granted.
(E) Limits on Options. An individual may be granted one or more Options,
-----------------
provided that the aggregate fair market value (determined as of the time the
Option is granted) of Common Stock for which an individual may be granted
Incentive Stock Options that are first exercisable in any calendar year (under
all stock option plans of the Company and any parent or subsidiary corporations,
if any) may not exceed $100,000.
(F) Rights as Shareholder. An Optionee, or a transferee by will or
---------------------
inheritance of an Option, shall have no rights with respect to any shares
covered by an Option until the date of the issuance of a stock certificate for
such shares and the recording of such issuance upon the Company's stock ledger
by its duly appointed, regular transfer agent. No adjustment shall be made for
dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is prior to
such date, except as provided in Section 5 hereof.
---------
(G) Additional Provisions. The Options authorized under this Plan shall
---------------------
contain such other provisions as the Board or Committee shall deem advisable,
including, without limitation, further restrictions upon the exercise of the
Option. Any Incentive Stock Option shall contain such limitations and
restrictions upon the exercise of the Option as shall be necessary in order that
the Option shall be an "incentive stock option" as defined in section 422 of the
Internal Revenue Code.
(H) Compliance with Securities Laws. At the time of exercise of any
-------------------------------
Option, the Company may require the Optionee to execute any documents or take
any action which may then be necessary to comply with the Securities Act and the
rules and regulations adopted thereunder, or any other applicable federal or
state laws regulating the sale and issuance of securities, and the Company may,
if it deems necessary, include provisions in the Options to assure such
compliance. The Company may from time to time change its requirements with
respect to enforcing compliance with federal and state securities laws,
including the request for, or insistence upon, letters of investment intent,
such requirements to be determined by the Company in its judgment as necessary
to assure compliance with said securities laws. Such changes may be made with
respect to any particular Option or to any stock issued upon exercise thereof.
5. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of any change
------------------------------------------
in the number of issued and outstanding shares of Common Stock which results
from a stock split, reverse stock split, the payment of a stock dividend or any
other change in the capital structure of the Company, such as a merger,
consolidation, reorganization or recapitalization, the Board or Committee shall
appropriately adjust (a) the maximum number of shares which
<PAGE>
may be issued under this Plan (b) the number of shares subject to each
outstanding Option, and (c) the Option Price per share thereof, so that upon
exercise of the Option the Optionee shall receive the same number of shares the
Optionee would have received had the Optionee been the holder of all shares
subject to such outstanding Options immediately before the effective date of
such change in the number of issued shares of the Common Stock of the Company.
Any such adjustment shall not result in or entitle the Optionee to the issuance
of fractional shares. Instead, appropriate adjustments to any such Option and,
in the aggregate, all other options of the Company of the same class (that is,
Incentive Stock Options or Nonqualified Stock Options) held by each Optionee
shall be made so that such Option and other options of the same class, if any,
held by any such Optionee cover the greatest whole number of shares of the
Common Stock which does not exceed the number of shares which would be covered
applying such adjustments in the absence of any restriction on the issuance of
fractional shares. Any excess fractional share shall be redeemed in cash at the
then-current fair market value of the Common Stock (determined as provided in
Section 4(A) hereof) multiplied by the appropriate fraction of a share.
- ------------
6. TERMINATION OR AMENDMENT OF THE PLAN. The Board of Directors may at any
------------------------------------
time suspend, amend, or terminate this Plan, provided that, except as set forth
in Section 6 hereof, no amendment may be adopted that will change the
---------
requirement that the Option Price be at least a specified percentage of the fair
market value of the Common Stock or change the provisions required for
compliance with section 422 of the Internal Revenue Code, except to conform to a
change in the requirements of such law or regulations thereof. Except as
otherwise specifically provided herein, the Board shall not, without the
approval of the shareholders of the Company, amend this Plan so as to materially
increase the benefits accruing to Optionees under the Plan, increase the
aggregate number of shares that may be issued under this Plan or materially
modify the requirements for eligibility for participation in the Plan. No
amendment or termination of the Plan shall, without the consent of the Optionee,
alter or impair any rights or obligations under any Option previously granted
under the Plan.
<PAGE>
Exhibit 11
AMERICAN TELESOURCE INTERNATIONAL INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the Year Ended For the Three Month Periods Ended
--------------------------------------------------- ---------------------------------
July 31, 1995 July 31, 1996 July 31, 1997 October 31,1996 October 31,1997
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Primary
Net loss $ (2,004,167) $ (2,204,727) $ (4,695,129) $ (950,967) $ (1,297,549)
=============== =============== =============== =============== ===============
Shares:
Weighted average number
of common shares
outstanding 13,922,018 19,928,372 26,806,959 23,779,005 37,068,013
Incremental shares
assuming conversion
of warrants and options (a) -- -- -- -- --
--------------- --------------- --------------- --------------- ---------------
Weighted average number of
common shares outstanding
as adjusted 13,922,018 19,928,372 26,806,959 23,779,005 37,068,013
=============== =============== =============== =============== ===============
Net loss per common share $ (0.14) $ (0.11) $ (0.18) $ (0.04) $ (0.04)
=============== =============== =============== =============== ===============
Fully Diluted
Net loss $ (2,004,167) $ (2,204,727) $ (4,695,129) $ (950,967) $ (1,297,549)
Add: Interest expense applicable
to convertible debt (a) -- -- -- -- --
--------------- --------------- --------------- --------------- ---------------
Net loss - as adjusted $ (2,004,167) $ (2,204,727) $ (4,695,129) $ (950,967) $ (1,297,549)
=============== =============== =============== =============== ===============
Shares:
Weighted average number of
common shares outstanding 13,922,018 19,928,372 26,806,959 23,779,005 37,068,013
Incremental shares assuming
conversion of convertible
debt (a) -- -- -- -- --
Incremental shares assuming
conversion of warrants and
options (a) -- -- -- -- --
--------------- --------------- --------------- --------------- ---------------
Weighted average number of
common shares outstanding
as adjusted 13,922,018 19,928,372 26,806,959 23,779,005 37,068,013
=============== =============== =============== =============== ===============
Net loss per common share $ (0.14) $ (0.11) $ (0.18) $ (0.04) $ (0.04)
=============== =============== =============== =============== ===============
</TABLE>
(a) Common stock equivalents related to convertible debt warrants and options
are excluded as their effect would be anti-dilutive.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our firm included in or made a part of this
Registration Statement.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas ARTHUR ANDERSEN LLP
March 5, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JUL-31-1997 JUL-31-1998
<PERIOD-START> AUG-01-1996 AUG-01-1997
<PERIOD-END> OCT-31-1996 OCT-31-1997
<CASH> 0 1,497,965
<SECURITIES> 0 0
<RECEIVABLES> 0 1,800,075
<ALLOWANCES> 0 162,017
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 3,884,713
<PP&E> 0 8,867,923
<DEPRECIATION> 0 1,215,790
<TOTAL-ASSETS> 0 17,500,204
<CURRENT-LIABILITIES> 0 6,407,417
<BONDS> 0 5,101,838
0 0
0 0
<COMMON> 0 17,465,538
<OTHER-SE> 0 (10,577,879)
<TOTAL-LIABILITY-AND-EQUITY> 0 17,500,204
<SALES> 2,968,450 6,031,319
<TOTAL-REVENUES> 2,968,450 6,031,319
<CGS> 2,594,083 3,876,081
<TOTAL-COSTS> 3,877,798 7,007,165
<OTHER-EXPENSES> 2,078 43,257
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 43,697 364,960
<INCOME-PRETAX> (950,967) (1,297,549)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (950,967) (1,297,549)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (950,967) (1,297,549)
<EPS-PRIMARY> (0.04) (0.04)
<EPS-DILUTED> (0.04) (0.04)
</TABLE>
<PAGE>
EXHIBIT 99.1
IN THE MATTER OF THE SECURITIES ACT,
R.S.O. 1990, CHAPTER S.5, AS AMENDED (THE "ACT")
AND
IN THE MATTER OF
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND
AMERICAN TELESOURCE INTERNATIONAL INC.
RULING
(SUBSECTION 74(1))
UPON the application of American TeleSource International, Inc., a Delaware
corporation ("ATSI Delaware") and American TeleSource International Inc., an
Ontario corporation ("ATSI Canada") (collectively "ATSI"), to the Ontario
Securities Commission (the "Commission") for a ruling pursuant to subsection
74(1) of the Act that certain first trades in securities of ATSI Delaware issued
in connection with a plan of arrangement (the "Arrangement") involving ATSI
Canada and its shareholders will not be subject to section 53 of the Act,
subject to certain conditions;
AND UPON considering the application and the recommendation of the staff of
the Commission;
AND UPON it being represented by ATSI to the Commission that:
1. ATSI Canada is an Ontario corporation which was formed in May 1994
from the amalgamation of two companies.
2. ATSI Canada is a reporting issuer under the Act, is not in default of
any requirements of the Act or the regulations made under the Act and
is subject to the reporting requirements of the United States
Securities Exchange Act of 1934, as amended.
3. The common shares of ATSI Canada are quoted on the Canadian Dealing
Network ("CDN") and trade on the OTC Bulletin Board Service operated
by the National Association of Securities Dealers, Inc. (the "NASD")
in the United States.
4. ATSI Canada serves primarily as a holding company for its wholly-owned
subsidiary, American TeleSource International, Inc., a Texas
corporation ("ATSI Texas"). The principal executive offices of ATSI
Canada and ATSI
<PAGE>
Texas are located in San Antonio, Texas and neither ATSI Canada nor
ATSI Texas carries on any business operations in Canada.
5. The authorized capital of ATSI Canada consists of an unlimited number
of common shares of ("ATSI Canada Shares") and an unlimited number of
Preferred Shares, of which 39,203,0987 ATSI Canada Shares and no
Preferred Shares were issued and outstanding as at January 27, 1998.
6. As of January 27, 1998, approximately 89% of the outstanding ATSI
Canada Shares are held by approximately 2500 beneficial shareholders
with registered addresses in the United States and approximately 7% of
the outstanding ATSI Canada Shares are held by shareholders with
registered addresses in Ontario.
7. No person or company beneficially owns more than 8% of the outstanding
ATSI Canada Shares.
8. Approximately 89% of the registered holders of ATSI Canada Shares are
resident in Ontario.
9. For various business and tax reasons, management of ATSI believes that
it would be in the best interests of ATSI and its shareholders to
change ATSI's domicile from Canada to the United States.
10. It is proposed to proceed with the Arrangement under the Business
Corporations Act (Ontario) (the "OBCA") pursuant to which all of the
outstanding ATSI Canada Shares will be transferred to ATSI Delaware, a
new Delaware corporation incorporated for the purpose, in exchange for
which shareholders of ATSI Canada will receive an equal number of
shares of common stock of ATSI Delaware ("ATSI Delaware Shares").
11. As a result of the Arrangement ATSI Delaware will own all of the
outstanding ATSI Canada Shares and the current shareholders of ATSI
Canada will become the shareholders of ATSI Delaware.
12. Before the Arrangement can be effected, it will require approval by
the Ontario Court of Justice (General Division), as well as the
affirmative vote of not less than two-thirds of the votes cast in
respect thereof at a meeting of shareholders of ATSI Canada convened
for the purpose.
13. The issuance of ATSI Delaware Shares in connection with the
Arrangement also requires the filing of a Registration statement under
the United States Securities Act of 1933.
14. The proxy statement to be mailed to shareholders will contain
prospectus-level disclosure with respect to ATSI Delaware, ATSI Canada
and the Arrangement.
2
<PAGE>
15. The NASD has advised that the ATSI Delaware Shares will trade on the
OTC Bulletin Board Service upon completion of the Arrangement.
16. Upon completion of the Arrangement the ATSI Canada Shares will cease
to be quoted on CDN and ATSI Canada will apply to the Commission for
an order deeming it to no longer be a reporting issuer under the Act.
17. ATSI Delaware has no intention of becoming a reporting issuer under
the Act.
18. First trades of ATSI Delaware Shares by Ontario resident shareholders
who receive such shares pursuant to the Arrangement would qualify for
the exemption from the prospectus requirements of the Act pursuant to
the rule entitled In the Matter of the First Trade in Securities
Acquired Pursuant to Certain Exemptions (1997) 20 OSCB 1220, except
that:
a. the number of Ontario residents holding ATSI Delaware Shares
immediately after giving effect to the Arrangement will be more
than 10% (i.e., 89%) of the total number of holders of ATSI
Delaware Shares; and
b. such first trades may be executed through the services of the OTC
Bulletin Board Service operated by the NASD, rather than through
a stock exchange or The NASDAQ Stock Market.
19. ATSI believes that there is no active market for ATSI Canada Shares in
Ontario and none is expected to develop for the ATSI Delaware Shares
and ATSI does not expect that the number of beneficial holders of ATSI
Delaware Shares resident in Ontario will increase following completion
of the Arrangement.
20. Upon completion of the Arrangement, approximately only 7% (and
certainly no more than 10%) of outstanding ATSI Delaware Shares will
be held by Ontario residents and approximately 89% of outstanding ATSI
Delaware Shares will be held by U.S. residents.
AND UPON the Commission being satisfied that to so rule would not be
prejudicial to the public interest;
IT IS RULED pursuant to subsection 74(1) of the Act that section 53 of the
Act shall not apply to a first trade in any ATSI Delaware Shares received by
former holders of ATSI Canada Shares in connection with or pursuant to the
Arrangement, provided that:
A. such trade is made in accordance with the rule entitled In the Matter
of the First Trade in Securities Acquired Pursuant to Certain
Exemptions (1997), 20 OSCB 1220 (the "Rule"), as if each such share
was a "Restricted Security" as defined in the Rule, except
3
<PAGE>
a. for the requirement pursuant to paragraph (b) of the Rule that
the number of Ontario residents holding ATSI Delaware Shares is
not more than 10% of the total number of holders of ATSI Delaware
Shares; and
b. that in addition to the requirement of paragraph (c) of the Rule,
such trade may also be executed through the services of the OTC
Bulletin Board Service operated by the NASD in the United States;
or
B. such trade is made in accordance with subsection 72(5) of the Act and
section 21 of the Regulation, as if the securities had been issued
pursuant to an exemption referred to in subsection 72(5) of the Act.
DATED at Toronto this 18th day of February, 1998.
- ------------------------------------- -------------------------------------
4
<PAGE>
HEADNOTE
- --------
First trade relief - Arrangement whereby U.S. company acquires all shares of
Ontario reporting issuer in exchange for shares of U.S. company. First trades
to be made in accordance with the deemed rule In the Matter of the First Trade
in Securities Acquired Pursuant to Certain Exemptions, except that, as a direct
result of the Arrangement, Ontario residents will constitute much more than 10%
(89%) of the total number of shareholders of U.S. company. Ontario residents
will hold less than 10% of the shares. There is no market in Ontario for shares
of the U.S. company and none is expected to develop.
STATUTES CITED
- --------------
Securities Act, R.S.O. 1990, c.S.5, as am., ss 53, 72(5), 74(l).
Business Corporations Act (Ontario), s.182.
United States Securities Exchange Act of 1934.
REGULATIONS CITED
- -----------------
Regulation made under the Securities Act, R.R.O. 1990, Reg. 1015, as am., s.21.
RULES CITED
- -----------
In the Matter of the First Trade in Securities Acquired Pursuant to Certain
Exemptions (1997), 20 OSCB 1220 (effective March 1, 1997).
5
<PAGE>
EXHIBIT 99.2
PROXY SOLICITED BY THE BOARD OF DIRECTORS
OF AMERICAN TELESOURCE INTERNATIONAL INC.
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD _______ __, 1998
I, the undersigned holder of Common Shares of American TeleSource International
Inc. (the "Company" or "ATSI-Canada"), hereby appoint Arthur L. Smith,
President, and H. Douglas Saathoff, Secretary and Treasurer, or
, acting individually or together, as my
proxy to vote for me and on my behalf at the Special Meeting of the Shareholders
of American TeleSource International Inc., to be held _______ __, 1998 at ten
o'clock in the morning (E.S.T.) at Macleod Dixon, 181 Bay Street, Suite 4220,
Toronto, Ontario, Canada M5J 2T3 and at any adjournment thereof and at every
poll which may take place in consequence thereof. The said proxy is directed to
vote the shares represented by this form of proxy:
1. VOTE FOR [_] or AGAINST [_] passing with or without variation, a special
resolution authorizing a plan of arrangement under the Business
Corporations Act (Ontario) pursuant to which ATSI-Delaware Common Stock
will be issued to the holders of Common Shares of ATSI-Canada in exchange
for the Common Shares held by such shareholders on the basis of one share
of Common Stock for each Common Share, the complete text of which is
reproduced in Exhibit A to the accompanying Information Circular and Proxy
Statement/Prospectus.
2. In his discretion upon any amendments or variations to the above matter and
such other business as may properly come before the Meeting.
THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED BY THE UNDERSIGNED SHAREHOLDER.
IF NO DIRECTION IS MADE, THE PROXY WILL BE VOTED FOR EACH MATTER AND AT THE
PROXY'S BEST JUDGMENT UPON OTHER BUSINESS THAT MAY COME BEFORE THE MEETING.
DATED , 1998.
---------------
----------------------------------------------
(Signature of Shareholder(s))
----------------------------------------------
(Print Name Plainly)
<PAGE>
The above-signed holder hereby revokes any proxy heretofore given and ratifies
all things said proxy may do by virtue hereof.
Please sign exactly as your shares are registered and return in the enclosed
envelope. Indicate your full title if signing as attorney, executor,
administrator, trustee or guardian. When shares are held by joint tenants, both
should sign. If the shareholder is a partnership, sign partnership name by
authorized person. If the shareholder is a corporation, this proxy must be
executed by an authorized officer who must sign the full corporate name.
To be valid, this form of proxy and the power of attorney, if any, under which
it is signed must arrive duly signed at the office of the registrar and transfer
agent of the corporation, CIBC Mellon Trust Company, 393 University Avenue,
Fifth Floor, Toronto, Ontario, M5G 2M7, not later than 5:00 p.m. (Eastern
Standard Time) on _______ __, 1998 or, in the case of any adjournment of the
Special Meeting, on the second business day immediately preceding the date of
such adjournment.
If this proxy is not dated in the designated space, it is deemed to bear the
date on which it is mailed by the Company to the shareholder.
*NOTE: If the Shareholder desires to appoint a proxy other than Arthur L. Smith
and H. Douglas Saathoff, he should cross out their names and print the name of
his proxy in the space provided for that purpose. A person so designated need
not be a shareholder.
