-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PD3dtvW0M2BEGyjecNygNVCMGhtKsI6HBfTAHx11h2QnMxGtYwPzJAwDxwV9ux6X hYzC7mEDSVC0hpKGxbK2Bw== 0000930661-00-000954.txt : 20000417 0000930661-00-000954.hdr.sgml : 20000417 ACCESSION NUMBER: 0000930661-00-000954 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 24 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 20000414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN TELESOURCE INTERNATIONAL INC CENTRAL INDEX KEY: 0001014052 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 742698095 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-15687 FILM NUMBER: 600844 BUSINESS ADDRESS: STREET 1: 12500 NETWORK BLVD STREET 2: SUITE 407 CITY: SAN ANTONIO STATE: TX ZIP: 78249 BUSINESS PHONE: 2105586090 10-K/A 1 FORM 10-K/A ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _______________________ FORM 10-KA [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended July 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to Commission File Number: AMERICAN TELESOURCE INTERNATIONAL, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 74-2849995 (State of Incorporation) (I.R.S. Employer Identification No.) 12500 Network Blvd. Suite 407, San Antonio, Texas (Address of Principal 78249 Executive Office) (Zip Code) (210) 558-6090 (Registrant's Telephone Number, Including Area Code) Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, Par Value $0.001 Per Share (Title of Class) _______________________ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the Registrant's outstanding Common Stock held by non-affiliates of the Registrant at October 25, 1999, was approximately $41,558,696. There were 48,685,287 shares of Common Stock outstanding at October 25, 1999, and the closing sales price on the NASDAQ/OTCB for the Company's Common Stock was $0.92 on such date. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders to be held in December 1999, are incorporated by reference in Part III hereof. 1 TABLE OF CONTENTS
Page ---- PART I Item 1. Business.................................................................. 3 Overview and Recent Developments........................................ 3 Strategy and Competitive Conditions..................................... 5 Retail Distribution Network............................................... 7 Services and Products..................................................... 8 Network Management Services............................................. 8 Call Services......................................................... 9 Direct Dial Services.................................................. 10 Sales................................................................. 11 Electronic Commerce Via Internet...................................... 11 Network................................................................... 12 Year 2000 Issue......................................................... 13 Licenses/Regulatory..................................................... 13 Employees............................................................... 15 Additional Risk Factors................................................. 16 Item 2. Properties................................................................ 25 Item 3. Legal Proceedings......................................................... 26 Item 4. Submission of Matters to a Vote of Security Holders....................... 26 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..... 27 Item 6. Selected Financial and Operating Data..................................... 28 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................... 28 General................................................................. 29 Results of Operations................................................... 30 Liquidity and Capital Resources......................................... 36 Inflation/Foreign Currency.............................................. 38 Seasonality............................................................. 38 Year 2000 Compliance.................................................... 38 Item 8. Financial Statements and Supplementary Data............................... 40 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures..................................................... 71 PART III Item 10. Directors and Officers of the Registrant.................................. 71 Item 11. Executive Compensation.................................................... 71 Item 12. Security Ownership of Certain Beneficial Owners and Management............ 71 Item 13. Certain Relationships and Related Transactions............................ 71 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 72
2 This Annual Report on Form 10-K and the documents incorporated by reference in this Annual Report contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities and Exchange Act of 1934, as amended. "Forward looking statements" are those statements that describe management's beliefs and expectations about the future. We have identified forward-looking statements by using words such as "anticipate," "believe," "could," "estimate," "may," "expect," and "intend." Although we believe these expectations are reasonable, our operations involve a number of risks and uncertainties, including those described in the Additional Risk Factors section of this Annual Report and other documents filed with the Securities and Exchange Commission. Therefore, these types of statements may prove to be incorrect. PART I. ------- ITEM I. BUSINESS Overview and Recent Developments The Company is a telecommunications provider, focusing on the market for wholesale and retail services between the United States and Latin America, and within Latin America. Most of the Company's current operations involve services between the U.S. and Mexico or within Mexico. The Company owns various transmission facilities and leases facilities of other providers as necessary to complete its network. Specifically, the Company owns teleports, which are the earth stations where satellite transmission and receiving equipment are located, and switches, which are computers which route calls to their intended destination by opening and closing appropriate circuits. The Company leases fiber optic cable and satellite capacity to connect its teleports and switches in the United States to its teleports and switches in Mexico, and relies on other carriers to complete the long distance portion of its traffic within the U.S. and Mexico. The Company's subsidiary GlobalSCAPE, Inc. distributes Internet productivity software. The Company began operations in 1994 as a Canadian holding company, Latcomm International, Inc. with a Texas operating subsidiary, Latin America Telecomm, Inc. Both corporations were renamed "American TeleSource International, Inc." in 1994. In May 1998, the Canadian corporation completed a share exchange with a newly formed Delaware corporation, also called American TeleSource International, Inc., which resulted in the Canadian corporation becoming the wholly owned subsidiary of the Delaware corporation. The Company has had operating losses for almost every quarter since it began operations in 1994. The auditor's opinion on the Company's financial statements as of July 31, 1999 calls attention to substantial doubts about the Company's ability to continue as a going concern. This means that they question whether the Company can continue in business. The Company has experienced difficulty in paying our vendors and lenders on time in the past, and may experience difficulty in the future. If the Company is unable to pay its vendors and lenders on time, they may stop providing critical services or repossess critical equipment that the Company needs to stay in business. The Company's principal operating subsidiaries are: 3 . American TeleSource International de Mexico, S.A. de C.V. or ATSI Mexico, which was formed in 1995 to support the Company's operations in Mexico, and performs regulatory, sales, marketing, planning, and technical maintenance services. . Sistema de Telefonia Computarizada, S.A. de C.V. or Sistecom, which the Company acquired in August, 1997; this subsidiary owns 126 casetas in 66 cities in Mexico; . Servicios de Infraestructura, S.A. de C.V. or Sinfra, which the Company acquired in June, 1997; this subsidiary owns certain transmission equipment and valuable long term licenses in Mexico; . TeleSpan, Inc. which was formed in February1998 to carry the Company's wholesale and private network services traffic between the U.S. and Latin America; and . GlobalSCAPE, Inc. which was formed in April 1996 to implement Internet strategies which are not currently consistent with the Company's core business. Recent Developments During its fiscal year ending July 31, 1999, the Company: . executed a Marketing Agreement with AT&T providing for the Company's pay telephones in Mexico to be programmed with an AT&T "hot button." The Company receives a commission each time a pay telephone customer uses the hot button to access the AT&T network; . signed a reciprocal services agreement with Bestel S.A. de C.V., further diversifying the Company's route choices in Mexico for intra-Mexico long distance; . secured a three year lease of fiber optic cable from Bestel S.A. de C.V. and began transporting increased wholesale volume over this route; . commissioned its new Nortel(TM) International Gateway DMS 300/250 switch located in Dallas; . executed a reciprocal services agreement with Radiografica Costarricense, S.A. or RACSA), a division of Instituto Costarricense de Electricidad, the Costa Rican telephone company enabling the Company to connect to the RACSA network in Costa Rica, and provide high quality, low cost transmission services throughout Central America, Mexico and the United States . applied for a long distance license from the Mexican government which, if granted, will permit the Company to carry its own intra-Mexico long distance traffic and interconnect directly with the local Mexican network, thereby substantially reducing costs In fiscal year 1999 GlobalSCAPE acquired the ownership of its flagship software product, CuteFTP(R)/1/ from its original author, and subsequently executed an agreement with Tech Data Corporation for distribution of CuteFTP in 209 CompUSA stores nationwide. GlobalSCAPE also released two new Internet productivity software products, CuteHTML(R) and CuteMAP(R). Subsequent to 4 July 31, 1999, GloblaSCAPE signed an agreement with Lycos, Inc. to distribute CuteFTP over the Lycos network. Strategy and Competitive Conditions The Company's strategy is to position itself to take advantage of the de- monopolization of the Latin American telecommunications market, as well as the increasing demand for services in this market. Historically, telecommunications services in Latin America have been provided by state-run companies operating as a legal or de facto monopoly. Although these companies failed to satisfy the demand for services in their countries, the regulatory scheme effectively precluded competition by foreign carriers. Currently, there is a trend toward demonopolization of the telecommunications industry in Latin America, and many of these countries are in various stages of migration toward a competitive, multi-carrier market. At the same time that Latin American markets have been opening up, the demand for telecommunications services between the United States and Latin America (particularly Mexico) has been strengthened by: . rapid growth of the Latino segment of the United States population . increase in trade and travel between Latin America and the United States . the build out of local networks and corresponding increase in the number of telephones in homes and businesses in Latin countries . proliferation of communications devices such as faxes, mobile phones, pagers, and personal computers . declining rates for services as a result of increased competition. In addition, technological advances have provided emerging carriers with the means to provide high quality transmission on a cost-effective basis. Most notably, the Company and other emerging carriers now use packet switching technology, which is a method of transmitting telecommunications traffic by breaking the information into packets. The packets can then be organized in a way that permits the information to be transmitted over long distances more quickly and with less capacity than traditional methods. The packets are reassembled at the receiving end to re-create the message. The Company has also incorporated asynchronous transfer mode or "ATM" technology into its network. ATM is a high-speed, packet-switching technology that allows voice, facsimile, video and data packets to be carried simultaneously on the same network. The Company has focused most of its efforts on Mexico, but has some operations in Costa Rica, El Salvador, and Guatemala and intends to expand its services as regulatory and market conditions permit. Ultimately the Company would like to provide services throughout Latin America. Strategy and Competitive Conditions - Mexican Market. Telefonos de Mexico (or Telmex) had a legal franchise to control the entire market for local and long distance telecommunications in Mexico until June of 1995, when new laws began to open the market to effective competition. This means that Telmex owned or controlled all of the physical infrastructure needed to transport telecommunications traffic, including the local network of telephone lines to homes and business in a given area, and the long distance network of lines between the local networks. In January 1997, the Mexican government began granting licenses to provide long distance service to competing companies, and has licensed at least 15 new long distance providers. Two l of these new license holders are Mexican based affiliates of top tier U.S. carriers MCI/Worldcom and AT&T. Although the Mexican government has also licensed nine new local competitors, the build out of additional local infrastructure is just beginning, and the local 5 network in Mexico is still dominated by Telmex. The Company began assembling a framework of licenses, reciprocal services agreements with other carriers, other service agreements, network facilities, and distribution channels in Mexico in 1994 in anticipation of the demonoplization of this market. In 1994, the Company began providing private network services between the U.S. and Mexico via satellite. Since then, the Company has established a retail distribution network in Mexico through the acquisition of public payphones and casetas, has entered the U.S. wholesale market for termination services to Mexico, and has begun implementation of a U.S. retail strategy through the introduction of its presubscribed and dial around services targeted to the Latino market in the U.S. The Company has also invested in its own transmission facilities, beginning in 1994 with satellite teleport equipment, and most recently with the acquisition of a new Nortel International Gateway Switch and the deployment of packet switching technology in its network. As true competition has emerged, the Company has been able to negotiate increasingly more favorable rates for local network access and long distance services with the newly licensed long distance carriers. In fiscal year 1999 the Company applied for its own long distance license, which, if granted, will permit the Company to interconnect directly with the local network and build out its own long distance network, thereby reducing costs further. The Company believes that its establishment of a solid framework of licenses, proprietary network and favorable reciprocal services agreements has positioned it to take advantage of the benefits to be reaped as the Mexican telecommunications industry enters a truly competitive phase. The Company believes that it has a clear competitive advantage over pure resellers, and that it has overcome significant hurdles that are a barrier to entry in this market even for large carriers. The Company intends to use its framework to capture increased amounts of the communications traffic in the Mexican market. Retail. Although Telmex and the Mexican affiliates of several large U.S. based carriers are active participants in the Mexican retail market, the Company believes that these carriers will focus on the most lucrative sectors of the market, leaving many opportunities to further develop the large portion of the market that continues to be underserved, both in the U.S. and Mexico. The Company will devote most of its new resources on deploying innovative new public and prepaid services that will function in the same manner regardless of the consumer's location north or south of the U.S./Mexico border, such as enhanced prepaid calling services. Our marketing term for these types of services is "borderless." The Company will use its existing retail distribution network, and may pursue acquisitions of established distribution channels from others. The Company believes that its focus on a retail strategy, combined with the cost reductions that will follow the grant of a Mexican long distance license, will permit it to improve overall corporate profit margins and secure a stable customer base. Wholesale. The U.S. wholesale market for termination to Mexico has become increasingly dynamic as competition, call volumes and industry capacity along U.S. -Mexico routes have all increased. Although the Company increased the volume of wholesale minutes it transmitted to Mexico during fiscal year 1999, downward pricing pressure in this market resulted in little additional revenue for these minutes. The Company expects its wholesale volume of traffic transported to increase during the upcoming year as a result of the inauguration of its high quality ATM based fiber route to Mexico in July, 1999. In addition, the Company plans to explore ways to exploit its wholesale operation without the investment of significant new resources (see Network Management Services - Carrier Services). Although the Company has succeeded in obtaining reciprocal services agreements with various Mexican-based providers that permit the Company to terminate northbound traffic in the U.S., it has not realized substantial revenue from these arrangements. The Company believes that the long distance license, if obtained, will permit it to lower costs significantly, improving its competitive position in the wholesale market for both north and southbound services. 6 Retail Distribution Network The Company's Mexican retail distribution network consists of communication centers, formerly referred to as casetas, and public pay telephones. Casetas. Casetas are indoor calling centers strategically located to serve travelers and the large population of the country who do not have personal telephones. Casetas are a widely recognized and utilized medium in Mexico, but do not currently have a real equivalent in the U.S. The Company's casetas offer local, domestic Mexico and international long distance calling, as well as facsimile service. The Company is the largest caseta operator in Mexico with approximately 126 casetas in 66 cities operating under the trade name "Computel(TM)". Each location employs at least one attendant, who processes calls, monitors call duration, collects money and runs daily reports on call activity. As compared to public pay telephones, casetas offer privacy and comfort as well as the personalized attention needed by customers who are not accustomed to using a telephone. Key factors favoring the Company over competing caseta operators are the well-recognized Computel name, a reliable platform and billing system, the provision of facsimile services (which are not offered by many other operators) and a larger distribution network. The next largest competitor in Mexico has only 70 locations. Using these casetas as the cornerstone, the Company intends to further increase its retail presence in Mexico and the U.S. The next generation caseta will be a "Communication Center" and will offer additional services, such as Internet access and prepaid services. The Company intends to bring the Communication Center concept to strategic markets in the U.S., targeting Mexican nationals and U.S. citizens of Mexican origin who are familiar with the caseta concept and the Computel(TM)name. The Communication Centers will be used to distribute "borderless" products that function in the same manner regardless of the users location north or south of the U.S./Mexico border. ATSI will target these products to established Latino households, and on a prepaid basis to recent immigrants and transient Latinos who may have acculturation issues, or identity, credit or economic challenges. ATSI believes it will capture customer loyalty by serving these challenged consumers, and will keep their business as they establish households in the U.S. The main source of competition for Communication Centers on both sides of the border will be prepaid card services, payphone and prepaid cellular, which are essentially designed for the same target market. There is already a robust market for prepaid calling cards in the U.S. Regulations in Mexico have only recently permitted the use of dial around products from payphones, and the Company expects many more prepaid card vendors to enter that market. The Company is aware of only a limited number of caseta-style call centers in the U.S. located on the East Coast, in Miami and Los Angeles. Pay Telephones. The Company also owns and operates approximately 574 pay telephones in various Mexican cities and resort areas, including Acapulco, Cancun, Cozumel, Mazatlan, Puerto Vallarta, Tijuana, Huatulco, Puerto Escondido, Cabo San Lucas, and Puerto Angel. The Company also has pay telephones in the Mexico City airport and Mexico City's mass transit metro system transfer stations. All of the Company's pay telephones are "intelligent" phones, meaning that certain features are fully automated, reducing operating costs. The Company's telephones accept pesos and U.S. quarters. Customers may also access a Company operator for assistance in placing collect, third party, person-to person calls or credit card calls. The Company markets its pay telephone services in Mexico through direct sales efforts as well as some independent marketing representatives working on a commission basis. The Company has targeted a significant portion of its pay telephone marketing efforts toward various resort areas in Mexico, specifically on locations with high tourist-traffic such as airports, ship ports and marinas, 7 restaurants and bars. Approximately 16 million U.S. tourists visit Mexico each year, and the country's vacation destinations are major hubs for northern visitors via major U.S. airline carriers, and cruise ships. Although the Company targets the tourist market for payphones and operator-assisted calling, these services are available for Mexican nationals as well. As of October 1, 1999, there were 31 authorized payphone providers in Mexico, of which Telmex is the largest. The Company believes it is the second largest provider after Telmex in the tourist markets, where it has focused its efforts. The Company's multi-pay payphones give it a significant advantage over its largest competitor, Telmex, which accepts only pre-paid Telmex calling cards. Vendors of the cards are often difficult to locate and denominations tend to be higher than needed by consumers. Although other companies have plans to install pay telephones, the Company believes that it will be one of the few providers with its own network, allowing it to maintain flexibility with respect to rates. Services and Products In the presentation of its financial results, the Company divides its revenues into four categories: Network Management Services, Call Services, Direct Dial Services and Electronic Commerce. Network Management Services The Company offers private network telecommunications services between the United States and Latin America and within Latin America. Carrier Services The Company offers wholesale termination services to U.S. and Latin American carriers who lack transmission facilities or require additional capacity. Revenues from this service accounted for approximately 41% of overall Company revenues in fiscal 1999. This market experienced tremendous downward pricing pressure during fiscal year 1999 due to a combination of several factors, most notably an increase in the activation of fiber optic cable along U.S.-Mexico routes and regulatory changes which permitted the top tier carriers to lower their international wholesale rates. Therefore, although the Company experienced increased volumes in this line of business during the year, it realized little additional revenue. The Company has seen a substantial increase in volume since it activated its high-quality fiber route in July, 1999, and believes this fiber network will continue to attract increased volumes from top tier carriers. In addition, the Company believes it will generate opportunities to transport traffic for Mexican carriers. The Company should be able to use the increased volumes to negotiate more favorable termination costs in Mexico, and if the Company receives a Mexican long distance license, it will be able to substantially cut its costs for carrying this traffic. The Company occupies a unique position in the market for wholesale services. Its unique licenses from the Mexican government allow it to transport traffic from the United States to Mexico outside of the International Settlement Policy, which is the international accounting and settlements policy governing the methods that U.S. and foreign carriers use to settle the cost of carrying traffic over each other's network. The International Settlements Policy causes MCI/Worldcom and AT&T to charge higher rates than they might otherwise charge. However, the Company is at a disadvantage with respect to these large carriers because it does not currently have a Mexican license to carry its own long distance traffic within Mexico and must pay a licensed carrier, such as the Mexican affiliate of MCI/Worldcom or AT&T, to carry its traffic from its Mexican teleports to its final destination. At the other end of the spectrum, the Company competes with numerous small companies who illegally carry traffic into and 8 within Mexico. These companies do not pay the fees charged by Mexican-licensed carriers and are therefore able to offer very competitive prices. However, these companies do not typically own their own transmission facilities, and are not able to control costs effectively as the Company. They are also subject to regulatory action shutting down their operations in Mexico. The Company believes that it has less than 1% of the market for wholesale termination services. See our Risk Factor captioned "The Company may not successfully compete with others in the industry" for additional description of the competition in this market. Private Networks The Company offers private communications links for multi-national and Latin American customers who use a high volume of telecommunications services and need greater dependability than is available through public networks. These services include data, voice, and fax transmission as well as videoconferencing and Internet. During fiscal 1999, the Company did not devote significant resources toward the development of this business in Mexico. However, expansion of this line of business is consistent with the Company's plans to build out its network in Mexico, since many of the same facilities that would be used for delivery of retail consumer products could be used for private network services as well. The Company has and will continue to use the provision of private network services as an entry into new Latin markets that are in the process of migrating from state-run systems to competitive systems. The Company competes with MCI/Worldcom, Americatel, Pointe Communications Corporation, and Telscape International Inc., as well as the former telecommunication monopolies in the Latin American countries in providing private network services. Factors contributing to the Company's competitiveness include reliability, network quality, speed of installation, and in some cases, geography, network size, and hauling capacity. The Company believes it has a reputation as a responsive service provider capable of processing all types of network traffic. The Company is at a competitive disadvantage with respect to larger carriers who are able to provide networks for countries for corporations that encompass more countries in Latin America, as well as Europe, Asia and other parts of the globe. Prices in this market are also generally declining as fiber optic cable is activated. The Company believes that it has less than 1% of the market for private network services. Call Services The Company's principal Call Service is operator-assistance for international collect, person-to-person, third party, calling card and credit card calls originating in Mexico. The primary sources of demand for operator assistance are the Company's pay telephones and casetas in Mexico. The Company also provides operator services for calls originating from payphones and casetas owned by others, hotel and resort operators, and others who control the right to direct operator-assisted calling from groups of telephones. The Company pays these third parties a commission based on the revenue generated by the call traffic they send. During the year ended July 31, 1999the Company offered a service by which pin numbers are issued to Latin American travelers that enable them to use their credit cards to place calls through the Company's Call Services Center. (Latin Americans frequently do not have travel calling cards.) The Company also offered travel cards that enable Mexican travelers to use their cellular phones to place 9 international calls to Mexico while in the United States. The Company has ceased providing these services in order to devote more resources to higher margin products. As part of its ongoing efforts to minimize costs, the Company began outsourcing its live operator services in July 1999, and executed an agreement with another operator service provider to handle the Company's call services traffic on a transaction basis. The vendor will continue the Company's practice of providing bilingual service 24 hours per day, 7 days per week. As of July 16, 1998, the Company ceased providing operator services for domestic U.S. calls and international calls originating in Jamaica and the Dominican Republic in order to focus on the more profitable Mexican market. The Company's owned retail distribution network will continue to generate call services traffic. Competition for traffic from third parties in this market revolves largely around the amount of commissions the operator services provider is willing to pay. The Company is currently focusing more on improving its profitability rather than simply generating additional revenues, and it has therefore lost ground to competitors willing to accept lower profit margins by paying higher commissions. However, the Company believes it has a reputation as a reliable provider, and it is also able to offer the value-added service of intelligent pay telephones in hotel lobbies. Direct Dial Services During fiscal 1999, the Company provided direct dial services (long distance calls which do not require live or automated operator assistance) in both Mexico and, to a lesser extent, the United States. Direct dial calls were generated in Mexico from the Company's own Communications Centers and pay telephones. Consumers visiting these locations can make calls on a "sent paid" basis by making a cash payment at the time the call is placed. In the U.S., the Company provided 1+ and MEXICOnnect (SM) service to residential and business customers in the San Antonio metropolitan area. MEXICOnnect allows customer to dial-around their presubscribed carrier by dialing 10-10-624 + the area code + the telephone number. Under the 1+ program, customers presubscribe to the Company's network for all long distance calls made from their telephone number, eliminating the need to dial any extra digits to reach the Company's network. In Mexico, the Company competes with other companies who have a comercializadora license for sent paid traffic. The comercializadora allows companies to interconnect with the local telecommunications infrastructure in order to resell local and long distance services from public telephones. In the U.S., the Company competes with large carriers such as AT&T, MCI/Worldcom, and Sprint as well as numerous smaller companies for presubscribed long distance. Price remains a primary concern for many consumers since the technology is not distinguishable from one provider to another. The Company is focused on the Latino market and offers an aggressive international rate to Mexico as well as competitive domestic rates. Unlike many other long distance providers, the Company's charges are included on the customer's bill from the local phone company. The Company also offers the convenience of bilingual customer service. The Company believes that it will be able to expand its presubscribed customer base by using U.S. Communication Centers as magnets to attract underserved Latino customers to the Company's products. There are numerous dial-around products on the market, offered by small and large companies, and by long distance resellers as well as facilities-based carriers. MEXICOnnect's competitive advantage is its focus on the Latino market, and the elimination of per call minimums, monthly access fees, surcharges, and other types of restrictions and small print that make dial- around discounts 10 deceiving. In comparison to long distance resellers, the Company has greater flexibility in adjusting rates, as it has greater control over its own network. Sales Direct dial sales are supervised by the Senior Vice President, Sales and Marketing based in San Antonio. U.S. domestic carrier sales are supervised by the Senior Vice President, Sales and Marketing in San Antonio. Mexican carrier sales are also supervised by the Senior Vice President, Sales and Marketing in San Antonio, who is assisted by the Director General (President) of ATSI-Mexico. The Director of Central American operations, based in San Jose, Costa Rica, manages the Central American carrier and private network accounts under the supervision of the Senior Vice President, Sales and Marketing in San Antonio. Payphone, hospitality and aggregator sales are managed from ATSI-Mexico with supervision from the Senior Vice President, Sales and Marketing in San Antonio. Communication center's sales efforts are managed from Computel's offices in Guadalajara with oversight from ATSI-Mexico in Mexico City. The Company is in the process of consolidating the operations of Computel and ATSI-Mexico. Electronic Commerce via Internet GlobalSCAPE was formed in April 1996 to implement Internet related strategies that are not complementary to the Company's core business. GlobalSCAPE's revenues are attributable to sales of Internet productivity software, primarily its flagship product CuteFTP(TM)which it has historically distributed via its web site. GlobalSCAPE operates autonomously, generating substantially all funds for its development and expansion internally from its own operations. In January 1999 GlobalSCAPE acquired ownership of CuteFTP from its original author, and subsequently released an enhanced new version. GlobalSCAPE also released two new products, CuteHTML(TM) and CuteMAP(TM). Also in fiscal 1999, GlobalSCAPE began distributing CuteFTP in CompUSA stores, and began realizing revenue from advertisements placed in its software. Subsequent to July 31, 1999, GlobalSCAPE has executed an agreement with Lycos to distribute a branded version of CuteFTP over the Lycos network. The Company announced in February, 1999 that it was considering a spin off or public offering of GlobalSCAPE's stock, and the Company has retained an investment banking firm to assist it in evaluating these options and other options to finance GlobalSCAPE's continued growth. GlobalSCAPE's market includes all computer users on the Internet. GlobalSCAPE's products are distributed as shareware, meaning that users may download and use the products for free on a trial basis for a limited time. After the expiration of the trial period, the user must register the product to be in compliance with the license and to obtain product support. GlobalSCAPE's primary source of revenue is generated through product registration, with additional revenues generated by advertising in the form of ad banners and sponsorships in its "live" software products and on its web site. On a monthly basis, GlobalSCAPE receives approximately 1.2 million unique visitors to its web site and displays more than 15 million in-product and web site ad banners. For the year ended July 31, 1999, approximately 4,000,000 copies of software products were downloaded from GlobalSCAPE's servers, of which approximately 92,000 copies were registered (including approximately 7,000 upgrades of previously registered products). The Company's flagship product, CuteFTP(R), is a Windows(R)-based file transfer protocol (FTP) utility allowing users the ability to transfer and manage files via the Internet, including MP3's, web pages, software, videos and graphics. The Company believes that CuteFTP(R) has 30% of the U.S. market share for FTP programs. The Company's portfolio of products also includes CuteHTML(R), an 11 advanced HTML editor for developing web sites, and CuteMAP(R), an image mapping utility for graphic navigation through web sites, and others in various stages of alpha and beta testing. GlobalSCAPE intends to leverage its strong brand recognition into a full suite of "Cute" products, and to use its products in order to attract advertising revenue and to market products of other on-line retailers and service providers on a revenue sharing basis. GlobalSCAPE operates in a highly competitive environment with respect to all its products. CuteFTP's primary competitors are WS_FTP, FTP Voyager and Bulletproof FTP. While many FTP products have mimicked CuteFTP's features, they are not commercially successful due to their late arrival to the marketplace and lack of support infrastructure. CuteHTML and CuteMAP, although relatively new to the market, have the advantage of being able to piggyback on the success of CuteFTP through product integration and cross-marketing efforts. Network The Company has established a technologically advanced network which uses both satellite and fiber optic cable to transmit telecommunications traffic between the U.S. and Mexico. The Company's network incorporates ATM technology, which is compatible with other transmission technologies such as frame relay and Internet protocols, permitting the Company to explore even more cost-effective transmission methods in the future. See page 5, "Strategy and Competitive Conditions" for a description of ATM technology. Frame relay is a method of allocating capacity on demand so that a customer's needs may be filled with less capacity than the traditional system of dedicating a certain amount of capacity to a particular purpose. Internet protocol refers to a method of organizing information such that it may be carried on the Internet. The Company's network also employs compression technology to carry greater volumes on the same facilities. Generally, the Company's strategy is to use the fiber optic arm to access major metropolitan areas in Mexico and the satellite arm to access semi-rural and smaller metropolitan areas. If there is a problem in either the satellite portion of the network, the Company will be able to minimize service interruptions by transferring traffic to the other portion until the problem is resolved. The Company's fiber route runs from its facility at the Infomart in Dallas, Texas to Mexico City, Mexico. The Company has satellite transmission and receiving equipment in 1) San Antonio, Texas, 2) Mexico City, Monterrey, and Cancun, Mexico, 3) Guatemala City, Guatemala, 4) San Salvador, El Salvador, and 5) San Jose, Costa Rica. The Company leases fiber capacity from third parties, primarily Bestel USA, Inc. with whom it has a 3-year lease for fiber optic cable from San Antonio, Texas to Laredo, Texas until March 2002. The Company leases satellite capacity on the Mexican satellites Solidaridad I and II, from Satelites Mexicanos, S.A. de C.V. or "SATMEX, with whom it has an agreement for capacity through April 2001. ATSI has leased a fixed amount of capacity from each of these vendors for a fixed monthly price. Each of these vendors has the right to terminate service for non-payment. During 1999, ATSI was unable to make payments to SATMEX on time. SATMEX agreed not to suspend service under the terms of a payment plan calling for ATSI to bring its account current by December 15, 1999. ATSI has met the terms of the payment plan, and is now current in its payments to both of these vendors. The Company owns switching and other equipment in the U.S. and Mexico. In April 1999, the Company began using its new Nortel DMS 300/250 International Gateway Switch in its Dallas location. This advanced switch will permit the Company to deploy the new retail and wholesale products that are key to its competitive strategy. 12 All aspects of the Company's owned network facilities are designed to allow for modular expansion, permitting the Company to increase capacity as needed. The Company must contract with others to complete the intra-Mexico and domestic U.S. portions of its network. The Company has reciprocal services agreements in place with four Mexican long distance license holders, Operadora Protel, S.A. de C.V., Avantel, S.A. de C.V., Miditel, S.A. de C.V. and Bestel, S.A. de C.V. The Company has applied for its own Mexican long distance license, which will allow it to build out its network in Mexico and to interconnect directly with Telmex and other local carriers, thereby lowering its transmission costs. The Company has reciprocal services agreements with Radiografica Costarricense, S.A., FT&T, S.A., and Corporacion Solares, S.A. de C.V. for transmission services in Costa Rica, Guatemala and El Salvador, respectively. In the U.S., the Company purchases long distance capacity from various companies. The Company purchases local line access in Mexico for its payphones and casetas from Telmex, and various cellular companies including SOS Telecomunicaciones, S.A. de C.V., Portatel del Sureste, S.A. de C.V., Movitel del Noreste, S.A. de C.V, and Baja Celular Mexicana, S.A. de C.V. Year 2000 Issue The Company initiated a program to identify and address issues associated with the ability of its date-sensitive information, telephony and business systems to properly recognize the year 2000 in order to avoid interruption of the operation of these systems at the turn of the century. This program is being conducted by the Company's Management Information Systems group, which is coordinating the efforts of internal resources as well as third party vendors in making all of the necessary changes for all management systems and product related infrastructure for the Company's divisions and subsidiaries. The Company believes it is 96% complete in achieving Year 2000 readiness, and will be Year 2000 ready by November 30, 1999. The only significant remaining item is an outstanding issue related to the payroll systems of the Company's Mexican subsidiaries. The Company expects to avoid disruption of its owned information, telephony and business systems as a result of these efforts. However, the Company must rely on the representations and warranties of third parties, including domestic U.S. and foreign carriers of its traffic, in testing for readiness for year 2000 issues and cannot ensure compliance by these parties. The Company has developed contingency plans in areas where it believes there is any significant risk or where a third party has not adequately responded to the Company's inquiries, which includes transitions to other providers. The Company believes that a worst case scenario resulting from a Year 2000 related failure would be a temporary disruption of normal business operations. Based upon the work completed to date, the Company believes that such an occurrence is unlikely. However, as stated above, the Company is relying on representations and warranties of third parties that are beyond the Company's control. A disruption of business operations could have a material adverse effect on the Company's financial performance. The Company has expended approximately $100,000 in its Year 2000 program to date, and does not expect to experience any material additional cost. Licenses/Regulatory The Company's operations are subject to federal, state and foreign laws and regulations. 13 Federal Pursuant to Section 214 of the Communications Act of 1934, the Federal Communications Commission ("FCC") has granted the Company global authority to provide switched international telecommunications services between the U.S. and certain other countries. The Company maintains informational tariffs on file with the FCC for its international retail rates and charges. In October 1996, the FCC issued an order that non-dominant interexchange carriers will no longer be required to file tariffs for interstate domestic long distance services. Under the terms of the FCC order, detariffing would be mandatory after a nine-month transition period. Interexchange carriers would still be required to retain and make available information as to the rates and terms of the services they offer. The FCC's order was appealed by several parties and, in February 1997, the D.C. Circuit issued a stay preventing the rules from taking effect pending judicial review. The Company is currently unable to predict what impact the FCC's order will have on the Company. The Telecommunications Act of 1996 , which became law in February 1996, was designed to dismantle the monopoly system and promote competition in all aspects of telecommunications. The FCC has promulgated and continues to promulgate major changes to their telecommunications regulations. One aspect of the Telecom Act that is of particular importance to the Company is that it allows Bell Operating Companies or BOCs to offer in-region long distance service once they have taken certain steps to open their local service monopoly to competition. Given their extensive resources and established customer bases, the entry of the BOCs into the long distance market, specifically the international market, will create increased competition for the Company. Southwestern Bell's application to offer in region long distance is expected to be approved in April 2000. Although the Company does not know of any other specific new or proposed regulations that will affect its business directly, the regulatory scheme for competitive telecommunications market is still evolving and there could be unanticipated changes in the competitive environment for communications in general. For example, the FCC is currently considering rules that govern how Internet providers share telephone lines with local telephone companies and compensate local telephone companies. These rules could affect the role that the Internet ultimately plays in the telecommunications market. The International Settlements Policy governs settlements between top tier U.S. carriers and foreign carriers of the cost of terminating traffic over each other's networks. The FCC recently enacted certain changes in its rules designed to allow U.S. carriers to propose methods to pay for international call termination that deviate from traditional accounting rates and the International Settlement Policy. The FCC has also established lower benchmarks for the rates that U.S. carriers can pay foreign carriers for the termination of international services and these benchmarks may continue to decline. These rule changes have lowered the costs of the Company's top tier competitors and are contributing to the substantial downward pricing pressure facing the Company in the wholesale carrier market. State Many states require telecommunications providers operating within the state to maintain certificates and tariffs with the state regulatory agencies, and to meet various other requirements (e.g. reporting, consumer protection, notification of corporate events). The Company believes it is in compliance with all applicable State laws and regulations governing its services. 14 Mexico The Secretaria de Comunicaciones y Transportes or the SCT and COFETEL have issued the Company's Mexican subsidiaries the following licenses: Comercializadora License - a 20-year license issued in February 1997allowing for nationwide resale of local calling and long distance services from public pay telephones and casetas. Teleport and Satellite Network License - a 15-year license issued in May 1994 allowing for transport of voice, data, and video services domestically and internationally. The license allows for the operation of a network utilizing stand-alone VSAT terminals and/or teleport facilities, and connection to the local network via carriers having a long distance license. A shared teleport facility enables the Company to provide services to multiple customers through a single teleport. Packet Switching Network License - a 20-year license issued in October 1994 allowing for the installation and operation of a network interconnecting packet switching nodes via the Company's proprietary network or circuits leased from other licensed carriers. The license supports any type of packet switching technology, and can be utilized in conjunction with the Teleport and Satellite Network License to build a hybrid nationwide network with international access to the U.S. Value-Added Service License - an indefinite license allowing the Company to provide a value added network service, such as delivering public access to the Internet. Like the United States, Mexico is in the process of revising its regulatory scheme consistent with its new competitive market. Various technical and pricing issues related to connections between carriers are the subject of regulatory actions which will effect the competitive environment in ways the Company is not able to determine at this time. Other Foreign Countries In addition to Mexico, the Company currently has operations in Costa Rica, El Salvador, and Guatemala. The telecommunications markets in these countries are in transition from monopolies to functioning, competitive markets. The Company has established a presence in those countries by providing a limited range of services, and intends to expand the services it offers as regulatory conditions permit. The Company does not believe that any of its current operations in those countries requires licensing, and it believes it is in compliance with applicable laws and regulations governing its operations in those countries. Employees At September 1, 1999, the Company (excluding ATSI-Mexico) had 85 full-time employees, of whom 10 were operators, 11 were sales and marketing personnel, and 64 performed operational, technical and administrative functions, and 9 part- time employees, 5 of whom were operators. Of the foregoing, 22 were employed by GlobalSCAPE, and 5 were employed by Sinfra. The Company believes its future success will depend to a large extent on its continued ability to attract and retain highly skilled and qualified employees. The Company considers its employee relations to be good. None of these aforementioned employees belong to labor unions. 15 At September 1, 1999, ATSI-Mexico had 465 full-time employees of whom 375 were operators and 90 performed sales, marketing, operational, technical and administrative functions. A portion of ATSI-Mexico's employees, chiefly operators, belong to a union. ADDITIONAL RISK FACTORS The purchase of our common stock is very risky. You should not invest any money that you cannot afford to lose. Before you buy our stock, you should carefully read this entire prospectus. We have highlighted for you below all of the material risks to our business that we are aware of. RISKS RELATED TO OPERATIONS . Our auditors have questioned our viability Our auditors' opinion on our financial statements as of July 31, 1999 calls attention to substantial doubts as to our ability to continue as a going concern. This means that they question whether we can continue in business. If we cannot continue in business, our common stockholders would likely lose their entire investment. Our financial statements are prepared on the assumption that we will continue in business. They do not contain any adjustments to reflect the uncertainty over our continuing in business. . We expect to incur losses, so if we do not raise additional capital we may go out of business We have never been profitable and do not expect to become profitable in the near future. We have invested and will continue to invest significant amounts of money in our network and personnel in order to maintain and develop the infrastructure we need to compete in the markets for our services and achieve profitability. In the past we have financed our operations almost exclusively through the private sales of securities. Since we are losing money, we must raise the money we need to continue operations and expand our network either by selling more securities or borrowing money. We are not able to sell additional securities or borrow money on terms as desirable as those available to profitable companies, and may not be able to raise money on any acceptable terms. If we are not able to raise additional money, we will not be able to implement our strategy for the future, and we will either have to scale back our operations or stop operations. In the near term we expect to sell additional common stock or securities convertible into common stock, which will dilute our existing shareholders' percentage ownership of ATSI and depress the price of our common stock. See the risk factors below under the heading "Risks Related to Market for Common Stock." If we sell more common stock our existing shareholders will be diluted, meaning that their percentage of ownership of ATSI will be reduced, and the price of our common stock may go down. . It is difficult for us to compete with much larger companies such as AT&T, Sprint, MCI-Worldcom and Telmex The large carriers such as AT&T, Sprint and MCI/Worldcom in the U.S., and Telmex in Mexico, have more extensive owned networks than we do, which enables them to control costs more easily than we can. They are also able to take advantage of their large customer base to generate economies of scale, substantially lowering their per-call costs. Therefore, they are better able than we are to lower their prices as needed to retain customers. In addition, these companies have 16 stronger name recognition and brand loyalty, as well as a broader portfolio of services, making it difficult for us to attract new customers. Our competitive strategy in the U.S. revolves around targeting markets that are largely underserved by the big carriers. However, some larger companies are beginning efforts or have announced that they plan to begin efforts to capture these markets. Mergers, acquisitions and joint ventures in our industry have created and may continue to create more large and well-positioned competitors. . The market for wholesale services is extremely price sensitive and there is downward pricing pressure in this market making it difficult for us to retain customers and generate adequate profit from this service Industry capacity along the routes serviced by ATSI is generally growing as fiber optic cable is activated. There have also been changes in the international regulatory scheme that have permitted large carriers such as AT&T and MCI/WorldCom to reduce the amount they may charge for international services. These factors, along with intense competition among carriers in this market, have created severe downward pricing pressure. For example, from October 1998 to October 1999, the prevailing price per minute to carry traffic from the U.S. to Mexico declined by approximately 45%. Although we carried almost twice as much wholesale traffic in fiscal year 1999 than in fiscal year 1998, we recognized about the same amount of revenue. If these pricing pressures continue, the Company must continue to lower its costs in order to maintain sufficient profits to continue in this market. . We may not be able to collect large receivables, which could create serious cash flow problems Our wholesale network customers generate large receivable balances, often over $500,000 for a two week period. We incur substantial direct costs to provide this service since we must pay our carriers in Mexico to terminate these calls. If a customer fails to pay a large balance on time, we will have difficulty paying our carriers in Mexico on time. If our carriers suspend services to us, it may affect all our customers. . We may not be able to pay our suppliers on time, causing them to discontinue critical services We have not always paid all of our suppliers on time due to temporary cash shortfalls. Our critical suppliers are SATMEX for satellite transmission capacity and Bestel for fiber optic cable. We also rely on various Mexican and U.S. long distance companies to complete the intra-Mexico and intra-U.S. long distance portion of our calls. For the first two quarters of fiscal 2000, the monthly average amount due to these suppliers as a group was approximately $1,722,000. We currently have overdue outstanding balances with long distance carriers for the first two quarters of fiscal 2000 of approximately $2,135,800 on which we are making payments. During the third quarter we began paying the current portion of our long distance needs on a weekly basis, so do not expect to accrue a large overdue balance as we did in the first and second quarters. Although these suppliers have given us payment extensions in the past, critical suppliers may discontinue service if we are not able to make payments on time in the future. In addition, equipment vendors may refuse to provide critical technical support for their products if they are not paid on time under the terms of support arrangements. Our ability to make payments on time depends on our ability to raise additional capital or improve our cash flow from operations. . We may not be able to make our debt payments on time or meet financial covenants in our loan agreements, causing our lenders to repossess critical equipment 17 We purchased some of our significant equipment with borrowed money, including a substantial number of our payphones located in Mexico, our DMS 250/350 International gateway switch from Nortel, and packet-switching equipment from Network Equipment Technologies. We pay these three lenders approximately $171,165 on a monthly basis. Our amended 10-K, which is incorporated by reference in this prospectus, includes more information about our equipment, equipment debt and capital lease obligations - see footnote 6 to financial statements. The lenders have a security interest in the equipment to secure repayment of the debt. This means that the lenders may take possession of the equipment and sell it to repay the debt if we do not make our payments on time. We are currently up to date in our payments to our lenders, but we have not always paid all of our equipment lenders on time due to temporary cash shortfalls. These lenders have given us payment extensions in the past, but they may exercise their right to take possession of certain critical equipment if we are not able to make payments on time in the future. Our ability to make our payments on time depends on our ability to raise additional capital or improve our cash flow from operations. We are not currently in compliance with the financial covenants in our Nortel switch loan agreement. Footnote 3 of our financial statements in our amended 10-Q for the period ended January 31, 2000 contains more detail on our non- compliance with those financial covenants, and footnotes 4 and 5 of our financial statements in our amended 10-K for the year ended July 31, 1999 contains more information on our secured loans and capital leases. . A large portion of our revenue is concentrated among a few customers, making us vulnerable to sudden revenue declines. Our revenues from wholesale services currently comprise about 60% of our total revenues. The volume of business sent by each customer fluctuates, but this traffic is often heavily concentrated among three or four customers. During some periods in the past, two of these customers have been responsible for 50% of this traffic. Generally, our wholesale customers are able to re- route their traffic to other carriers very quickly in response to price changes. If we are not able to continue to offer competitive prices, these customers will find some other supplier and we will lose a substantial portion of our revenue very quickly. In addition, mergers and acquisitions in our industry may reduce the already limited number of customers for our wholesale services. . The telecommunications industry has been characterized by steady technological change. We may not be able to raise the money we need to acquire the new technology necessary to keep our services competitive. To compete successfully in the wholesale and retail markets, we must maintain the highest quality of service. Therefore, we must continually upgrade our network to keep pace with technological change. This is expensive, and we do not have the substantial resources that our large competitors have. . We may not be able to attract and retain qualified personnel We compete for technical and managerial personnel with other telecommunications companies. Many of these have greater resources than we do and are able to offer more attractive compensation packages, as well as the security of working for an established company. . We may not be able to generate the sales volume we need to recover our substantial capital investment in our infrastructure. 18 We have made a substantial investment in our network and personnel to position the company in our target markets and will continue to do so. Therefore, we must achieve a high volume of sales to make this investment worth while. We compete for wholesale and retail customers with larger, and better known companies making it relatively more difficult for us to attract new customers for our services. . We may not be able to lease transmission facilities we need at cost-effective rates We do not own all of the transmission facilities we need to complete calls. Therefore, we depend on contractual arrangements with other telecommunications companies to complete our network. For example, although we own the switching and transport equipment needed to receive and transmit calls via satellite and fiber optic lines, we do not own a satellite or any fiber optic lines and must therefore lease transmission capacity from other companies. We may not be able to lease facilities at cost-effective rates in the future or enter into contractual arrangements necessary to expand our network or improve our network as necessary to keep up with technological change. In 1999 we experienced difficulty in obtaining fiber optic cable due to a supplier's default under the terms of a lease agreement. This difficulty was central to our failure to meet our revenue goals for 1999 since our goals were based on implementing a new fiber optic route in January of 1999. We were required to lease fiber optic lines from a different supplier at a higher price, with the alternative fiber becoming operational in June 1999 - delaying the new revenues by six months. This difficulty is described in more detail in Legal Proceedings. . The carriers on whom we rely for intra-Mexico long distance may not stay in business leaving us fewer and more expensive options to complete calls There are only 15 licensed Mexican long distance companies, and we currently have agreements with four of them. One of these, Avantel, S.A. de C.V. has said publicly that it may not continue in the business because of its difficulty in achieving a desired profit margin. If the number of carriers who provide intra-Mexico long distance is reduced, we will have fewer route choices and may have to pay more for this service. . We may have service interruptions and problems with the quality of transmission, causing us to lose call volumes and customers To retain and attract customers, we must keep our network operational 24 hours per day, 365 days per year. We have experienced service interruptions and other problems that affect the quality of voice and data transmission. To date, these problems have been temporary. We may experience more serious problems. In addition to the normal risks that any telecommunications company faces (such as fire, flood, power failure, equipment failure), we may have a serious problem if a meteor or space debris strikes the satellite that transmits our traffic, or a volcanic eruption or earthquake interferes with our operations in Mexico City. We have the ability to transmit calls via either the satellite or fiber optic portion of our network, and this redundancy should protect us if there is a problem with one portion of our network. However, a significant amount of time could pass before we could re- route traffic from one portion of our network to the other, and there may not be sufficient capacity on only one portion of the network to carry all of our traffic at any given time. To stay competitive, we will attempt to integrate the latest technologies into our network. We are currently implementing "packet switching" transport capabilities such as Asynchronous Transfer Mode and we will continue to explore new technologies as they are developed. The risk of network 19 problems increases during periods of expansion and transition to new technologies. . Changes in telecommunications regulations may harm our competitive position Historically, telecommunications in the U.S. and Mexico have been closely regulated under a monopoly system. As a result of the Telecommunications Act of 1996 in the U.S. and new Mexican laws enacted in the 1990's, the telecommunications industry in the U.S. and Mexico are in the process of a revolutionary change to a fully competitive system. U.S. and Mexican regulations governing competition are evolving as the market evolves. For example, FCC regulations now permit the regional Bell operating companies (former local telephone monopolies such as Southwestern Bell) to enter the long distance market if certain conditions are met. The entry of these formidable competitors into the long distance market will make it more difficult for us to establish a retail customer base. There may be significant regulatory changes that we cannot even predict at this time. We cannot be sure that the governments of the U.S. and Mexico will even continue to support a migration toward a competitive telecommunications market. . Regulators may challenge our compliance with laws and regulations causing us considerable expense and possibly leading to a temporary or permanent shut down of some operations We believe that we are in compliance with all domestic and foreign telecommunications laws that govern our current business. However, government enforcement and interpretation of the telecommunications laws and licenses is unpredictable and is often based on informal views of government officials and ministries. This is particularly true in Mexico and certain of our target Latin American markets, where government officials and ministries may be subject to influence by the former telecommunications monopoly, such as Telmex. This means that our compliance with the laws may be challenged. It could be very expensive to defend this type of challenge and we might not win. If we were found to have violated the laws that govern our business, we could be fined or denied the right to offer services. To our knowledge, we are not currently subject to any regulatory inquiry or investigation. . If we are not able to obtain a long distance license from the Mexican government, we may not be able to achieve profitability The ultimate fulfillment of our strategy for the future depends on obtaining a long distance license from the Mexican government so that we no longer have to pay other companies who have a Mexican long distance license to complete our calls in Mexico. If we do not obtain this license, we may not be able to reduce our costs sufficiently that we earn a profit. We have applied for a long distance license and we are also in negotiations to acquire a Mexican company, which holds a long distance license. We have obtained preliminary regulatory approval from the Mexican government to acquire this company, but we may not be able to acquire this company or obtain this license in some other manner. . Our operations may be affected by political changes in Mexico and other Latin American countries The majority of our foreign operations are in Mexico. The political and economic climate in Mexico is more uncertain than in the United States and unfavorable changes could have a direct impact on our operations in Mexico. For example, a newly elected set of government officials could decide to quickly reverse the deregulation of the Mexican telecommunications industry economy and take steps such as seizing our property, revoking our licenses, or modifying our contracts with Mexican 20 suppliers. The next elections in Mexico are scheduled for August 2000. A period of poor economic performance could reduce the demand for our services in Mexico. There might be trade disputes between the United States and Mexico which result in trade barriers such as additional taxes on our services. The Mexican government might also decide to restrict the conversion of pesos into dollars or restrict the transfer of dollars out of Mexico. These types of changes, whether they occur or are only threatened, would also make it more difficult for us to obtain financing in the United States. . If the value of the Mexican Peso declines relative to the Dollar, we will have decreased earnings as stated Dollars Approximately 20% of ATSI's revenue is collected in Mexican Pesos. If the value of the Peso relative to the Dollar declines, that is, if Pesos are convertible into fewer Dollars, then our earnings, which are stated in dollars, will decline. We do not engage in any type of hedging transactions to minimize this risk and do not intend to do so. RISKS RELATED TO FINANCING . If we do not raise additional capital we may go out of business In the past we have financed our operations almost exclusively through the private sales of securities. In the near term we expect to sell additional common stock or securities convertible into common stock, which will dilute our existing shareholders' percentage ownership of ATSI and depress the price of our common stock. See the risk factors in the section captioned "Risk Related to Market for Common Stock," below. Since we are not a profitable company, it is difficult for us to raise money on terms we find acceptable. The terms we are able to arrange may be more costly than the terms that profitable companies could obtain, and may place significant restrictions on our operations. . We owe $160,000 to the holder of our series D preferred stock for taking too long to obtain an effective registration statement, and we will owe it even more money if the registration statement is not declared effective soon. Under the terms of registration rights agreements we signed with The Shaar Fund at the time we issued our series C preferred stock on September 24, 1999 we are required to pay liquidated damages to The Shaar Fund of $25,000 for failing to file a registration statement for the underlying common stock by October 24, 2000 or failing to obtain effectiveness by December 23, 2000, and an additional $25,000 for each subsequent 30 day period that we fail to meet those targets. We initially filed our registration statement for the common stock underlying the series C preferred stock on October 26, 2000, 2 days late. The Shaar Fund has waived the penalty resulting from that late filing. As of April 1, 2000, we have not obtained effectiveness of the registration statement, resulting in liquidated damages owing to The Shaar Fund of $100,000, with another $25,000 to accrue if the registration statement is not effective by April 21, 2000. Under the terms of registration rights agreements we signed with The Shaar Fund at the time we issued our series D preferred stock on February 22, 2000 we are required to pay liquidated damages to The Shaar Fund of $60,000 for failing to file a registration statement for the underlying common stock by April 1, 2000 or failing to obtain effectiveness by June 1, 2000 and an additional $60,000 for each subsequent 30 day period that we fail to meet those targets. We filed the registration statement late, and if we fail to obtain effectiveness, we may incur substantial additional liquidated damages. 21 . The terms of our preferred stock includes disincentives to a merger or other change of control of the company, which could discourage a transaction that would otherwise be in the interest of our stockholders. In the event of a change of control of ATSI, the terms of the series D preferred stock permit The Shaar Fund to choose either to receive whatever cash or stock the common stockholders receive in the change of control as if the series D stock had been converted, or to require us to redeem the series D preferred stock at $1560 per share. If all 3,000 shares of the series D preferred stock were outstanding at the time of a change of control, this could result in a payment to The Shaar Fund of $4,680,000. The possibility that we might have to pay this large amount of cash would make it more difficult for us to agree to a merger or other opportunity that might arise even though it would otherwise be in the best interest of the shareholders. . We may have to redeem the series D preferred stock for a substantial amount of cash, which would severely restrict the amount of cash available for our operations. The terms of the series D preferred stock require us to redeem the stock for cash in two circumstances in addition to the change of control situation described in the immediately preceding risk factor. First, the terms of the series D preferred stock prohibits The Shaar Fund from acquiring more than 11,509,944 shares of our common stock, which is 20% of the amount of shares of common stock outstanding at the time we issued the series D preferred stock. The terms of the series D preferred stock also prohibit The Shaar Fund from holding more than 5% of our common stock at any given time. Due to the floating conversion rate, the number of shares of common stock that may be issued on the conversion of the series D stock increases as the price of our common stock decreases, so we do not know the actual number of shares of common stock that the series D preferred stock will be convertible into. On the second anniversary of the issuance of the series D preferred stock we are required to convert all remaining unconverted series D preferred stock. If this conversion would cause The Shaar Fund to exceed these limits, then we must redeem the excess shares of Series D preferred stock for cash equal to $1270 per share, plus accrued but unpaid dividends. Second, if we refuse to honor a conversion notice or a third party challenges our right to honor a conversion notice by filing a lawsuit, The Shaar fund may require us to redeem any shares it then holds for $1270 per share. If all 3,000 shares were outstanding at the time of a redemption, this would result in a cash payment of $3,810,000 plus accrued and unpaid dividends. If we were required to make a cash payment of this size, it would severely restrict our ability to fund our operations. . We may redeem our preferred stock only under certain circumstances, and redemption requires us to pay a significant amount of cash and issue additional warrants; therefore we are limited as to what steps we may take to prevent further dilution to the common stock if we find alternative forms of financing We may redeem the series A preferred stock only after the first anniversary of the issue date, and only if the market price for our common stock is 200% or more of conversion price for the series A preferred stock. The redemption price for the series A stock is $100 per share plus accrued and unpaid dividends. We may redeem the series D preferred stock only if the price of our common stock falls below $9.00, the price on the date of closing the series D preferred stock. The redemption 22 price is $1270 per share, plus accrued but unpaid dividends, plus an additional warrant for the purchase of 150,000 shares of common stock. In the event that we are able to find replacement financing that does not require dilution of the common stock, these restrictions would make it difficult for us to "refinance" the preferred stock and prevent dilution to the common stock. . The partial spin-off and public offering of shares of our subsidiary GlobalSCAPE will have a negative impact on our operating results and cash flows Because GlobalSCAPE currently contributes significantly to the Company's consolidated EBITDA results, the Company expects its consolidated operating and cash flow results to decline after the spin-off and offering. RISKS RELATING TO MARKET FOR OUR COMMON STOCK . We expect the holders of our preferred stock and warrants and our employees who have stock options to convert their stock and exercise their warrants and options, which will result in significant dilution to the common stock The Potential Dilution Chart included as Exhibit 99.10 in this registration statement shows all of the outstanding securities that are convertible into or exercisable for ATSI's common stock. The table included as Exhibit 99.11 describes the features of the preferred stock in more detail. Given the current market price of our stock, the holders of each of most of these securities will realize a financial benefit by converting or exercising their securities, so we expect that almost all of the common stock that may be issued under the terms of each of these securities will be issued. Even if the holders of the preferred stock do not elect to convert, the terms of the preferred stock require conversion after a certain time. Since the conversion price of our preferred stock floats at a discount to market price, we do not know how many shares will ultimately be issued. . The sale of the common stock issued upon conversion of preferred stock and exercise of the warrants will put downward pricing pressure on ATSI's common stock; any potential short sales by those converting will also put downward pressure on ATSI's common stock Most of the common stock that is included in the Potential Dilution Chart has been or will be registered with the SEC, meaning that the common stock will be freely tradeable in the near term. We expect many of the stockholders will sell their holdings in the near term, and in particular we expect The Shaar Fund to sell its shares of common stock resulting from the conversion of the series C stock very shortly after the effectiveness of the registration statement of which this prospectus is a part, and its shares of common stock resulting from the conversion of the series D preferred stock very shortly after it is issued to them. The addition of this substantial number of shares of common stock to the market will put downward pricing pressure on out stock. . We will likely continue to issue common stock or securities convertible into common stock to raise funds we need, which will further dilute your ownership of ATSI and may put additional downward pricing pressure on the common stock Since we continue to operate at a loss, we will continue to need additional funds to stay in business. At this time, we are not likely to be able to borrow enough money to continue operations on terms we find acceptable so we expect to have to sell more shares of common stock or more securities convertible in common stock. Convertible securities will likely have similar features to our existing 23 preferred stock, including conversion at a discount to market. The sale of additional securities will further dilute your ownership of ATSI and put additional downward pricing pressure on the stock. . The potential dilution of your ownership of ATSI will increase as our stock price goes down, since our preferred stock is convertible at a floating rate that is a discount to the market price. Our series A and D preferred stock is convertible into common stock based on a conversion price that is a discount to the market price for ATSI's common stock. The conversion price for the series A stock is reset each year on the anniversary of the issuance of the stock, and the conversion price for the series D preferred stock floats with the market on a day-to-day basis. For each series, the number of shares of common stock that will be issued on conversion increases as the price of our common stock decreases. Therefore, as our stock price falls, the potential dilution to the common stock increases, and the amount of pricing pressure on the stock resulting from the entry of the new common stock into the market increases. . Sales of common stock by the preferred holders may cause the stock price to decrease, allowing the preferred stock holders to convert their preferred stock into even greater amounts of common stock, the sales of which would further depress the stock price. The terms of the preferred stock may amplify a decline in the price of our common stock since sales of the common stock by the preferred holders may cause the stock price to fall, allowing them to convert into even more shares of common stock, the sales of which would further depress the stock price. . The potential dilution of your ownership of ATSI resulting from our series D preferred stock will increase if we sell additional common stock for less than the conversion price applicable to the series D preferred stock. The terms of the series D preferred stock require us to adjust the conversion price if we sell common stock or securities convertible into common stock at a greater discount to market than provided for the series D preferred stock. Therefore, if we sell common stock or securities convertible into common stock in the future on more favorable terms than the discounted terms, we will have to issue even more shares of common stock to The Shaar Fund than initially agreed on. . We expect to issue additional shares of common stock to pay dividends on the preferred stock, further diluting your ownership of ATSI and putting additional downward pricing pressure on the common stock. The series A stock requires quarterly dividends of 10% per annum, and the series D stock requires quarterly dividends of 6% per annum. We have the option of paying these dividends in shares of common stock instead of cash and we expect to use that option. The issuance of these additional shares of common stock will further dilute your ownership of ATSI and put additional downward pricing pressure on the common stock. . We have agreed to register additional unregistered shares of common stock, which will put further pressure on the price of the common stock. We have agreed to register 3,003,532 shares of common stock in addition to the shares covered by this prospectus, which includes 506,330 shares for the conversion of the 10,000 shares of series A preferred stock issued on February 4, 2000 as described in our potential dilution chart on page 3 of 24 this prospectus, and 2,632,929 shares of common stock that were issued to holders of convertible debt in exchange for their shares of convertible debt in January 2000 as described in footnote 4 to our financial statements appearing in our Quarterly Report on Form 10-Q for the quarter ended January 31, 2000. We expect that much of this stock will be sold upon registration, which will put downward pressure on the price of our stock. . You will almost certainly not receive any cash dividends on the common stock in the foreseeable future. Sometimes investors buy common stock of companies with the goal of generating periodic income in the form of dividends. You may receive dividends from time to time on stock you own in other companies. We have no plan to pay dividends in the near future. . Our common stock price is volatile. Our stock price has historically been volatile. Volatility makes it more difficult for you to sell shares when you choose, at prices you find attractive. The risk factors described above relating to the probable dilution of the common stock will tend to increase volatility in the price of our common stock. . The partial spin-off and public offering of shares of our subsidiary GlobalSCAPE will tend to decrease the price of our stock. On February 17, 2000 we announced that the Board of Directors had approved a partial spin of GlobalSCAPE and a public offering of those shares to our shareholders and GlobalSCAPE's customers. Completion of these transactions separates the value of GlobalSCAPE that is currently inherent in our common stock and tend to reduce the price of our stock. ITEM 2. PROPERTIES The Company's executive offices, principal teleport facility and control center are located at its leased facility in San Antonio, Texas, consisting of 11,819 square feet. The lease expires August 2002, and has two five-year renewal options. The Company pays annual rent of $98,452 (increasing to $107,789 per year for the last year) 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 $87,496 per year and is responsible for taxes and insurance. Subsequent to year-end, the Company and GlobalSCAPE entered into agreements for new office space beginning in December of 1999. Both agreements are for a period of eight and a half-years with rent deferred for the first six months of the agreement. The Company's facility will consist of 26,250 square feet with annual rent of $311,850 per year while GlobalSCAPE's facility will consist of 14,553 square feet with annual rent of $174,636 per year. Management believes its leased facilities are suitable and adequate for their intended use. 25 ITEM 3. LEGAL PROCEEDINGS On January 29, 1999, one of the Company's customers, Twister Communications, Inc. filed a Demand for Arbitration seeking damages for breach of contract before the American Arbitration Association. The customer claims that the Company wrongfully terminated an International Carrier Services Agreement executed by the parties in June 1998 under which the Company provided wholesale carrier services from June 1998 to January 1999. The customer's claims for damages represent amounts that it claims it had to pay in order to replace the service provided by the Company. The Company disputes that it terminated the contract wrongfully and asserts that the customer breached the agreement by failing to pay for services rendered and by intentionally making false representation regarding its traffic patterns and on March 3, 1999 filed a Demand for Arbitration seeking damages for breach of contract in an amount equal to the amounts due to the Company for services rendered plus interest, plus additional damages for fraud. An arbitration panel was selected and the parties are now completing written discovery. While the Company believes that it has a justifiable basis for its arbitration demand and that it will be able to resolve the dispute without a material adverse effect on the Company's financial condition; until the arbitration proceedings take place, the Company can not reasonably estimate the possible loss, if any, and there can be no assurance that the resolution of this dispute would not have an adverse effect on the Company's results of operations. On June 16, 1999, the Company's subsidiary, ATSI Texas initiated a lawsuit in District Court, Bexar County, Texas against PrimeTEC International, Inc., Mike Moehle and Vartec Telecom, Inc. claiming misrepresentation and breach of conduct. Under an agreement the Company signed in late 1998, PrimeTEC was to provide quality fiber optic capacity in January 1999. Mike Moehle is PrimeTEC's former president who negotiated the fiber lease and Vartec is PrimeTEC's parent. The delivery of the route in early 1999 was a significant component of the Company's operational and sales goal for the year and the failure of its vendor to provide the capacity led to the Company negotiating an alternative agreement with Bestel, S.A. de C.V. at a higher cost. While the total economic impact is still being assessed, the Company believes lost revenues and incremental costs are in excess of $15 million. While the Company's contract contains certain limitations regarding the type and amounts of damages that can be pursued, the Company has authorized its attorneys to pursue all relief to which it is entitled under law. As such, the Company can not reasonably estimate the ultimate outcome of neither this lawsuit nor the additional costs that may be incurred in the pursuit of its case. The Company is also a party to additional claims and legal proceedings arising in the ordinary course of business. The Company believes it is unlikely that the final outcome of any of the claims or proceedings to which the Company is a party would have a material adverse effect on the Company's financial statements; however, due to the inherent uncertainty of litigation, the range of possible loss, if any, cannot be estimated with a reasonable degree of precision and there can be no assurance that the resolution of any particular claim or proceeding would not have an adverse effect on the Company's results of operations in the period in which it occurred. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no submissions of matters to a vote of security holders during the fourth quarter of the Company's fiscal year. 26 PART II. -------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is quoted on the AMEX under the symbol "AI". From December 1997 to February 14, 2000 the Company's Common Stock was traded on the NASD: OTCBB under the symbol "AMTI". Prior to December 1997, the Company's Common Stock was traded on the Canadian Dealing Network under the symbol ATIL.CDN. The table below sets forth the high and low bid prices for the Common Stock from August 1, 1997 through December 21, 1997 as reported by the Canadian Dealing Network, from December 22, 1997 through February 14, 2000 as reported by NASD: OTCBB and from February 15, 2000 through April 10, 2000. These price quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions. Fiscal 1998 High Low --------------------------------------------------- First - ......................... $ 3 1/4 $ 1 3/8 Second - ........................ $ 3 7/16 $ 2 Third - ......................... $ 3 1/2 $ 1 5/7 Fourth - ........................ $ 2 1/4 $ 3/4 Fiscal 1999 High Low --------------------------------------------------- First - ......................... $ 1 1/8 $ 15/32 Second - ........................ $ 1 9/32 $ 3/4 Third - ......................... $ 1 13/64 $ 5/8 Fourth - ........................ $ 1 53/64 $ 1 1/32 Fiscal 2000 High Low --------------------------------------------------- First - ......................... $ 1 11/32 $ 45/64 Second - ........................ $ 2 29/32 $ 45/64 Third - (through April 10, 2000). $ 9 7/16 $ 2 1/2 At April 10, 2000 the closing price of the Company's Common Stock as reported by AMEX was $6.0625 per share. As of April 10, 2000, the Company had approximately 5,000 stockholders, including both beneficial and registered owners. The terms of the Company's Series A, Series B, Series C and Series D Preferred Stock restrict the Company from paying dividends on its Common Stock until such time as all outstanding dividends have been fulfilled related to the Preferred Stock. ATSI has not paid dividends on its common stock the past three years and does not expect to do so in the foreseeable future. 27 ITEM 6. SELECTED FINANCIAL AND OPERATING DATA. The following selected financial and operating data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and the Notes thereto included elsewhere herein.
Years ended July 31, -------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (In thousands of $, except per share data) Consolidated Statement of Operations Data: Operating revenues: Call services $ 4,470 $10,807 $12,545 $13,547 $ 6,602 Direct dial services - - 1,421 6,085 6,024 Network management services 318 2,614 1,698 13,362 19,250 Internet e-commerce - 54 564 1,526 2,642 Total operating revenues 4,788 13,475 16,228 34,520 34,518 Operating expenses: Cost of services 4,061 10,833 12,792 22,287 21,312 Selling, general and administrative 2,196 3,876 6,312 12,853 12,652 Bad debt 340 554 735 1,024 2,346 Depreciation and amortization 141 281 591 1,822 3,248 Total operating expenses 6,738 15,544 20,430 37,986 39,558 Loss from operations (1,950) (2,069) (4,202) (3,466) (5,040) Net loss $(2,004) $(2,205) $(4,695) $(5,094) $(7,591) Per share information: Net loss $ (0.14) $ (0.11) $ (0.18) $ (0.12) $ (0.16) Weighted average common shares 13,922 19,928 26,807 41,093 47,467 outstanding Consolidated Balance Sheet Data: Working capital (deficit) $ (446) $ (592) $ 195 $(5,687) $(6,910) Current assets 1,088 1,789 5,989 5,683 5,059 Total assets 2,766 4,348 15,821 24,251 24,154 Long-term obligations, including 133 604 3,912 8,303 10,168 current portion Total stockholders' equity 1,231 1,629 6,936 7,087 6,137
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SPECIAL NOTE: Certain Statements set forth below under this caption constitute "forward-looking statements" within the meaning of the Securities Act. See page 2 for additional factors relating to such statements. The following is a discussion of the consolidated financial condition and results of operations of the Company for the three fiscal years ended July 31, 1997, 1998, and 1999. It should be read in conjunction with the Consolidated Financial Statements of the Company, the Notes thereto and the other financial information included elsewhere in this annual report on Form 10-K. For purposes of the following discussion, references to year periods refer to the Company's fiscal year ended July 31. 28 General The Company's mission is to employ leading-edge technologies for delivery of exceptional telecommunication services to underserved Latino markets in the U.S. and Latin America emphasizing convenience, accessibility, quality, reliability, and affordability, while continually seeking to add value through new and innovative products and services. Utilizing a framework of licenses, interconnection and service agreements, network facilities and retail distribution channels (hereinafter collectively referred to as the "framework"), the Company is primarily focused on capturing market share in the international telecommunications corridor between the United States and Mexico. Even with poor phone-line penetration, the Company's research indicates that Mexico may exchange more international traffic with the U.S. than any other country in the world within the next two years. As the regulatory environments allow, the Company also plans to establish framework in other Latin American countries as well. In addition to the U.S. and Mexico, the Company currently owns or has rights to use facilities in and has strategic relationships with carriers in Costa Rica, El Salvador, and Guatemala. Utilizing the framework described above, the Company provides local, domestic long distance and international calls from its own public telephones and casetas within Mexico, and provides similar services to some third party- owned casetas, public telephones and hotels in Mexico. Consumers visiting a Company-owned communication center or public telephone may dial directly to the desired party in exchange for cash payment, or can charge the call to a U.S. address (collect, person-to-person, etc.) or calling card, or to a U.S. dollar- denominated credit card with the assistance of an operator. In July 1998, the Company began providing domestic U.S. and international call services to Mexico to residential customers on a limited basis in the U.S. Callers may either pre- subscribe to the Company's one-plus residential service, or dial around their pre-subscribed carrier by dialing 10-10-624, plus the area code and desired number. Where possible, these retail calls are transported over the Company's own network infrastructure. Utilizing the same framework described above, the Company also serves as a retail and wholesale facilities-based provider of network services for corporate clients and U.S. and Latin American telecommunications carriers. These customers typically lack transmission facilities into certain markets, or require additional capacity into certain markets. The Company currently provides these services to and from the United States, Mexico, Costa Rica, El Salvador and Guatemala. The Company is also the sole owner of GlobalSCAPE, Inc., which is rapidly becoming a leader in electronic commerce of top Internet-based software, utilizing the Web as an integral component of its development, marketing, distribution and customer relationship strategies. Utilizing CuteFTP as its flagship product, GlobalSCAPE has a user base of approximately 7.5 million users as of July 31, 1999. The Company's consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred losses since inception and has a working capital deficit as of July 31, 1999. Additionally, the Company has had recurring negative cash flows from operations with the exception of a three month period ended January 31, 1998. For the reasons stated in Liquidity and Capital Resources and subject to the risks referred to in Liquidity and Capital Resources, the Company expects improved results of operations and liquidity in fiscal 2000. However, no assurance may be given that this will be the case. 29 Results of Operations The following table sets forth certain items included in the Company's results of operations in thousands of dollar amounts and as a percentage of total revenues for the years ended July 31, 1997, 1998 and 1999.
Year Ended July 31, ---------------------------------------------------------------- 1997 1998 1999 ------------------- ----------------- -------------------- $ % $ % $ % - - - - - - Operating revenues - ------------------ Network management services $ 1,698 11% $13,362 39% $19,250 56% Call services $12,545 77% $13,547 39% $ 6,602 19% Direct dial services $ 1,421 9% $ 6,085 18% $ 6,024 17% Internet e-commerce $ 564 3% $ 1,526 4% $ 2,642 8% ------- ------- ------- Total operating revenues $16,228 100% $34,520 100% $34,518 100% Cost of services $12,792 79% $22,287 65% $21,312 62% ------- ------- ------- Gross margin $ 3,436 21% $12,233 35% $13,206 38% Selling, general and Administrative expenses $ 6,312 39% $12,853 37% $12,652 37% Bad debt expenses $ 735 4% $ 1,024 3% $ 2,346 6% Depreciation and amortization $ 591 4% $ 1,822 5% $ 3,248 10% ------- ------- ------- Operating loss $(4,202) -26% $(3,466) -10% $(5,040) -15% Other, net $ (493) -3% $(1,628) -5% $(1,696) -5% ------- ------- ------- Net loss $(4,695) -29% $(5,094) -15% $(6,736) -20% Less: preferred stock dividends $ - 0% $ - 0% $ (855) -2% ------- ------- ------- Net loss to common shareholders $(4,695) -29% $(5,094) -15% $(7,591) -22% ======= ======= =======
Year ended July 31, 1999 Compared to Year Ended July 31, 1998 Operating Revenues. Operating revenues were flat between years, due primarily to declines in the Company's call services revenues offset by the growth in the Company's network management and Internet e-commerce services. Network management services, which includes both retail and wholesale transport services increased 44%, or $5.9 million from 1998 to 1999. Revenues from the wholesale transport of traffic for U.S.-based carriers increased as the Company processed approximately 78.6 million minutes in 1999 as compared to 46.1 million minutes in 1998. The 70% increase in minutes did not result in a corresponding increase in revenues as competitive and other market factors caused the Company's revenue per minute to decline from period to period. The Company's agreement with Satelites 30 Mexicanos, S.A. de C.V. ("SATMEX"), secured in the fourth quarter of fiscal 1998 allowed the Company to secure and resell additional bandwidth capacity. This increased capacity and flexibility allowed the Company to increase billings to existing corporate clients who previously dealt with SATMEX directly and to add additional retail, corporate clients more quickly. Call services revenue decreased approximately $6.9 million, or 51%, between years. This decline is principally attributable to the Company's strategy to focus on providing international call services from its own payphones and communication centers (casetas). In July 1998, the Company ceased providing call services for third-party owned payphones and hotels in the U.S., Jamaica and the Dominican Republic and decreased the level of services provided to third-party owned telephones and hotels in Mexico, as these services did not utilize the Company's core business and the costs associated with further provision of services did not justify keeping the business. For the year ended July 31, 1999, the Company processed approximately 160,000 calls from Mexico as compared to approximately 314,000 for the same period in 1998 and no calls for third-party owned telephones and hotels in the U.S., Jamaica and the Dominican Republic as compared to approximately 350,000 calls in 1998. Direct dial service revenues, which are generated by calls processed by the Company without live or automated operator assistance, declined slightly between years. A majority of these revenues, stated in U.S. dollars in the accompanying consolidated financial statements are generated by calls processed by the Company's public telephones and casetas in Mexico in exchange for immediate cash payment in pesos, the local Mexican currency. While the number of these calls and consequently the pesos collected increased between years, those pesos converted into fewer U.S. dollars as the average exchange rate between years went from 8.33 pesos to the dollar for fiscal 1998 to 9.77 pesos to the dollar for fiscal 1999. Revenues from GlobalSCAPE, Inc., the Company's e-commerce subsidiary increased approximately $1.1 million or 73% between years. GlobalSCAPE's purchase of the rights to the source code of CuteFTP, its flagship product in January 1999, resulted in an enhanced version of CuteFTP which increased the number of downloads and subsequent purchases. Additionally, GlobalSCAPE began using its Internet presence to produce ad revenues in the fourth quarter of 1999. Cost of Services. Cost of services decreased approximately $975,000, or 4% between years, and decreased as a percentage of revenues from 65% to 62%. The decline in cost of services between years was primarily a result of the contributions of GlobalSCAPE. Prior to GlobalSCAPE's purchase of CuteFTP, it was obligated to pay royalties to CuteFTP's original author for the right to sell and distribute CuteFTP. The purchase of the source code eliminated such royalty fees and improved GlobalSCAPE's and the Company's gross margins. Gross margins for the Company's telco operations remained flat at 34% between years, in spite of intense market pressures in the Company's wholesale network transport services. By eliminating and reducing certain call services, such as those offered to third-party owned payphones and hotels in the U.S., Jamaica, the Dominican Republic and Mexico, which did not fully utilize the Company's own network infrastructure, the Company was able to move toward vertical integration of its services and operations and maximize its gross margins using its own network where possible. Selling, General and Administrative (SG&A) Expenses. SG&A expenses decreased 2%, or approximately $200,000 between year, as the Company did not incur expenses incurred in the prior year associated with its Plan of Arrangement. As a percentage of revenue, these expenses remained flat at 37%. The Company had anticipated that these expenses would decline as a percentage of revenues, but they did not do so in light of the circumstances surrounding the delay of fiber capacity available to the Company. In the fourth quarter of 1999, the Company began to further integrate its two primary 31 operating subsidiaries in Mexico, Computel and ATSI-Mexico as the Company continues to seek ways to lower its SG&A expense levels. Net of non-cash expenses, related to the Company's option plans, SG&A expenses decreased approximately $300,000. Bad Debt Expense. Bad Debt Expense increased $1.3 million from fiscal 1998 to fiscal 1999. During the fourth quarter of 1999, the Company established specific bad debt reserves of approximately $1.5 million related to retail and wholesale transport of network management services. While the Company has reserved for these customers, it is actively pursuing collection of amounts owed including legal proceedings specifically related to approximately $1.2 million of the accounts reserved. Excluding these specific reserves, bad debt expense declined both as a % of revenues and in actual dollars between years. Depreciation and Amortization. Depreciation and amortization rose approximately $1.4 million, or 78%, and rose as a percentage of revenues from 5% to 10% between years. The increased depreciation and amortization is attributable to an approximate $2.4 million increase in fixed assets between years as well as increased amortization related to acquisition costs, trademarks and goodwill. The majority of the assets purchased consisted of equipment which added capacity to the Company's existing international network infrastructure including the Network Technologies (N.E.T.) equipment purchased in December 1998 and the Company's new Nortel DMS 250/300 International Gateway switch purchased in January 1999. Operating Loss. The Company's operating loss increased $1.6 million from 1998 primarily due to increased depreciation and amortization and increased bad debt expense which more than offset the improvements in gross margin dollars produced from 1998 to 1999. Other Income(expense). Other income (expense) decreased approximately $70,000 between years. This decrease was principally attributable to the increase in interest expense from approximately $1.6 million for 1998 to approximately $1.7 million for 1999. Preferred Stock Dividends. During fiscal 1999, the Company recorded approximately $855,000 of expense related to cumulative convertible preferred stock. In addition to cumulative dividends on its Series A and Series B Preferred Stock, which are accrued at 10% and 6%, respectively per month, the Company has recorded a discount or "beneficial conversion feature" associated with the issuance of its preferred stock of approximately $1.6 million related to Series A Preferred Stock, which is being amortized over a twelve-month period and $1.1 million related to Series B Preferred Stock, which is being amortized over a three-month period. Net income (loss.) Net loss increased from approximately $5.1 million to $7.6 million between years. The increase in net loss was due primarily to increased bad debt expense, depreciation and amortization and preferred stock dividends between the year ended July 31, 1998 and the year ended July 31, 1999. Year ended July 31, 1998 Compared to Year Ended July 31, 1997 Operating Revenues. Operating revenues increased approximately $18.3 million, or 113%, as the Company experienced growth in each service category. Network management services increased 687% from $1.7 million in 1997 to $13.4 million in 1998. The majority of this growth was due to the amount of wholesale network services provided to other carriers seeking transmission facilities or additional capacity for their services. The Company 32 began providing these services in October 1997, and produced approximately $10 million in revenues from this service during 1998. Call services revenue increased approximately $1.0 million, or 8%, primarily due to growth in the Company's customer base in Mexico that produces calls to the United States from hotels, public telephones and casetas. As a result of the installation of public telephones, the implementation of a direct sales strategy, and the purchase of Computel in August 1997, the Company processed approximately 314,000 international calls originating in Mexico during fiscal 1998. This compares to approximately 200,000 calls processed the year before. This increase in international calls from Mexico was offset to a large extent by a decrease in domestic and international operator-assisted calls originating in the United States and Jamaica. During 1998, the Company de- emphasized these services due to relatively lower profit margins on this business. On July 16, 1998, the Company ceased providing these services altogether. Revenues from these services decreased from approximately $3.9 million in 1997 to approximately $2.9 million in 1998. The Company does not anticipate producing significant revenues from such services, if any, during fiscal 1999. Direct dial services, calls processed in exchange for cash without utilizing the company's operator center in San Antonio, Texas, increased 328% from approximately $1.4 million in fiscal 1997 to approximately $6.1 million in fiscal 1998. This increase was primarily due to the acquisition in May and August 1997 of Computel, the largest private caseta operator in Mexico. The Company also began processing local and domestic long distance calls within Mexico during the latter half of 1997 from its own intelligent payphones installed in resort areas of Mexico. These calls are made by depositing coins (pesos or quarters) in the Company's phones to initiate service. Cost of Services. Cost of services increased approximately $9.5 million, or 74% between years, but decreased as a percentage of revenues from 79% to 65%. The increase in cost of services is attributable to the increased volume of business handled by the Company during 1998, as discussed above. The improvement in the Company's gross profit margin resulted from the change in the mix of services it provided during 1998 as described above, and its continuing efforts to decrease costs subsequent to the demonopolization of Telmex, which took place January 1, 1997. Subsequent to Telmex's demonopolization, the Company was able to negotiate with newly concessioned carriers in Mexico to transport its calls originating and terminating in Mexico, which has lowered the associated per minute rate to carry those calls. Additionally, the Company was one of the first four companies to receive a public payphone comercializadora license from the SCT in February 1997, which has allowed the Company to provide local, domestic and international calls from public telephones in Mexico. In November 1997, the Company purchased the customer base of Comunicaciones del Caribe, S.A. de C.V., an independent marketing representative in the Cancun/Cozumel area of Mexico which did not have a comercializadora license, and which had been utilizing the Company's operator center for processing international calls. By purchasing the customer base, the Company was able to eliminate a layer of expense associated with the traffic and effectively lower its overall commission rate paid to public telephone location owners in Mexico. The Company has also improved its gross margin by utilizing its own existing satellite network infrastructure and licenses to provide network services to other carriers seeking transmission facilities or extra capacity for their own services. Selling, General and Administrative (SG&A) Expenses. SG&A expenses rose 104%, or approximately $6.5 million, from 1997 to 1998. As a percentage of revenue, these expenses decreased from 39% to 37% between years. The growth in dollars between years was caused by the acquisition of Computel, the continued growth of the Company's ATSI-Mexico operations, the expensing of costs related to the Company's planned acquisition of additional concessions from the Mexican regulatory authorities, and the expensing of costs related to the Company's reincorporation from Canada to 33 Delaware. Approximately $890,000 of the increase was due to the acquisition of Computel, which operates approximately 134 retail-based casetas in approximately sixty cities throughout Mexico, and employs in excess of 400 people. In August 1997, ATSI-Mexico expanded its operations and began procuring, installing, operating and maintaining coin-operated, intelligent payphones. During 1998, the Company expensed $631,000 in costs incurred relative to the Company's reincorporation. Approximately $268,000 in expenses were incurred during 1997 relative to the reincorporation. Bad Debt Expense. Bad Debt expense increased approximately $300,000 between years but decreased as a % of revenues from 4% to 3%. The principal reason for the improved bad debt expense as a percentage of revenues was the increase in network management services revenues between years. Depreciation and Amortization. Depreciation and amortization rose approximately $1.2 million, or 208%, and rose as a percentage of revenues from 4% to 5% between years. From July 31, 1997 through July 31, 1998, the Company acquired approximately $7.9 million in equipment. Approximately $4.6 million of these assets were acquired through capital lease arrangements. The majority of the assets consisted of equipment that added capacity to the Company's existing international network infrastructure, and intelligent coin telephones that were installed in Mexico. Approximately $1.4 million in fixed assets were acquired subsequent to July 31, 1997 with the acquisition of Computel. The Company also recorded $2.8 million of goodwill during 1998 associated with the purchase of Computel, which is being amortized over a forty-year period. Operating Loss. The Company's operating loss improved $736,000 to approximately $3.5 million for 1998. Increased revenue levels and improved gross margins more than offset increases in selling, general and administrative expenses and depreciation and amortization, allowing for the improvement. Other Income (expense). Other income (expense) rose approximately 230%, or $1.1 million, between years. This increase was due almost exclusively to increased interest expense levels. During 1998, the Company incurred capital lease obligations of approximately $4.6 million related to the purchase of equipment mentioned above, and issued notes payable in the amount of approximately $3.1 million. Net income (loss). Net loss increased from approximately $4.7 million to approximately $5.1 million due primarily to increased depreciation and amortization and increased interest expenses, offset to some extent by increased revenues, increased gross margin dollars and improved SG&A as a % of revenues. Year Ended July 31, 1997 Compared to Year Ended July 31, 1996 Operating Revenues. Operating revenues increased approximately $2.8 million or 20%, due mainly to increased revenues from call services. Approximately $1.4 million of revenues in fiscal 1996 were attributable to the sale and installation of a large network in Mexico to one of Mexico's largest milk producers. Subsequent to completing the sale and installation of the network, the Company began recognizing monthly revenues from the management of the network. The sale and installation of such a large network is not considered to be of a recurring nature by the Company; however, management of this and other networks is considered to be a recurring source of revenues for the Company. GlobalSCAPE had revenue of $500,000 in fiscal 1997, representing less than 4% of the Company's consolidated revenue. 34 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 from certain telephones in the first quarter of fiscal 1998 based on the decrease in the Company's cost of providing these calls through its agreement with Investcom. The increased volume of calls relating to Jamaica and Brazil increased the number of international calls processed by the Company as compared to domestic calls processed entirely within the United States. Because international calls typically generate higher revenues on a per call basis than domestic calls, the average revenue per completed call processed by the Company increased from $14.93 for fiscal 1996 to $17.88 for fiscal 1997. Excluding the $1.4 million of revenues recognized in fiscal 1996 attributable to the sale and installation of the network to the Mexican milk producer, revenues from network management services increased approximately $596,000, or 67%. This increase was largely due to recurring revenues from the Mexican milk producer and Investcom commencing in the early and latter part, respectively, of fiscal 1997. Cost of Services. Cost of services increased approximately $2.0 million, or 18%, resulting in an increase in the Company's overall gross margin from 20% in fiscal 1996 to 21% in fiscal 1997. If the approximately $1.4 million in revenues and the $960,000 in costs related to the sale and installation of the network to the Mexican milk producer were excluded from the Company's results for fiscal 1996, the Company's gross profit percentage would have been 18% for fiscal 1996. The increase in cost of services was primarily attributable to the increased volume of calls handled by the Company from Jamaica to the U.S. and from the U.S. to Brazil, the inclusion of Computel's cost of services for the last quarter of fiscal 1997, and rising costs associated with transporting calls from Mexico to the Company's Switching/Operator Facility in San Antonio, Texas. Although Telmex officially lost its status as a monopoly on August 10, 1996, Investcom was not allowed connectivity to Telmex's local network in Mexico until January 1997 and did not have the switch capacity in Mexico to process the Company's traffic until May 1997. As a result, the Company was unable to commence processing any of its traffic at lower per-minute costs until May 1997. Subsequent to May 1997, the public phones serviced by the Company in Mexico were frequently only able to access the Company's operator center utilizing a cellular connection, since local connectivity had not yet been provided by Telmex. This added a per-minute air time charge to the Company's cost of transmitting calls from Mexico, resulting in a decline in the gross profit margin on international calls transmitted from the Company's public phones in Mexico. Selling, General and Administrative Expenses. SG&A expenses rose 63%, or approximately $2.4 million between years. 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 29% to 32%. 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. 35 Bad Debt Expense. Bad debt expense increased approximately $180,000 between years and remained flat as a percentage of revenues at 4%. The Company incurred greater bad debt expense due to the higher revenue levels between years. 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. Net income (loss). The net loss increased from approximately $2.2 million for the year ended July 31, 1996 to approximately $4.7 million for the year ended July 31, 1997 primarily as a result of increased SG&A expense and increased interest expense between years. Liquidity and Capital Resources Because the Company did not produce sufficient gross margin dollars to cover its selling, general and administrative costs, the Company generated negative cash flows from operations during the year ended July 31, 1999 of approximately $3.6 million. This shortfall includes the $1.5 million provision for specific accounts receivable generated during the year for which the Company may not receive any funds. The Company's payable and accrued liability position increased from July 31, 1998 to July 31, 1999 as the Company often utilized cash flows produced from financing activities to pay down debt and capital lease obligations before paying vendors or suppliers of services to the Company. When possible, the Company arranged capital lease obligations in order to obtain equipment necessary to expand or maintain its operations. During fiscal 1999, the Company was able to secure long-term capital lease arrangements of $2.0 million from NTFC Capital Corporation to cover the acquisition of its Nortel DMS 250/300 switch and $900,000 from Bank Boston Leasing to cover the cost of ATM equipment needed to upgrade its network to a packet-switching environment. As of July 31, 1999 the Company has only utilized approximately $500,000 of the Bank Boston Leasing facility. During the year ended July 31, 1999 the Company acquired approximately $1.0 million in equipment which was not financed. The majority of this equipment was used to maintain or upgrade its network between the U.S. and Mexico. In January 1999, GlobalSCAPE purchased the rights to the source code for CuteFTP, its flagship product. Terms of the purchase called for a cash payment of approximately $171,000, which the Company financed through a bank note of $180,000 at an interest rate of prime plus 1%, and twelve monthly payments of principal and interest of $63,000 beginning February 1999. The terms of the note called for principal and interest payments over a two-year period, comprised initially of twelve monthly principal payments of $5,000 plus interest to be followed by twelve monthly principal payments of $10,000 plus interest. GlobalSCAPE paid the monthly amounts owed for these obligations out of recurring cash flows produced from its operations during fiscal 1999, and management anticipates that it will continue to be able to do so during the next fiscal year. 36 In addition to the financing by GlobalSCAPE, the Company borrowed $250,000 from officers and directors of the Company that was used for working capital purposes. As of July 31, 1999, a total of $100,000 remained outstanding to two officers of the Company. During 1999, the Company stopped factoring a portion of its receivables. At that point, the Company had accumulated an approximate $319,000 balance due to the factoring company. As of July 31, 1999 approximately $137,000 remains outstanding on this balance, which is being paid monthly from cash generated by the Company's call services business. The Company paid approximately $941,000 toward its capital lease obligations during fiscal 1999. In an effort to reduce its cash outflows, in May 1999 the Company restructured its capital lease obligation with IBM de Mexico, extending payment of the total obligation over a forty-eight (48) month period. Monthly payments due under the facility with NTFC Capital Corporation are deferred until January 2000. In an effort to improve its working capital position, the Company raised approximately $4.2 million from March 1999 through July 1999, net of issuance costs, in private placements of preferred stock, and another $302,000 in a private placement of common stock. Exercises of warrants and options during fiscal 1999 generated an additional approximate $1.3 million in cash proceeds during the year. The majority of the proceeds from these private placements and warrant and option exercises were used to pay vendors and suppliers of services to the Company. The net result of the Company's operating, investing and financing activities during the year was a working capital deficit at July 31, 1999 of approximately $6.9 million and cash on hand of approximately $379,000. Included in the Company's current obligations, net of the associated debt discount, are notes payable of $2.2 million which will be due and payable, along with accrued interest of approximately $760,000 in March 2000. Although the Company generated cash flows from financings in excess of $6.2 million during fiscal 1999, these proceeds were not sufficient to cover the net cash used in operations, capital expenditures and debt service requirements of approximately $6.9 million incurred during the year. As planned, the Company shifted its focus during the year away from traffic generated outside of its core market of Mexico, and focused on generating and transporting traffic over its own international network infrastructure in order to produce better cash flow results. The result was an increase in wholesale network transport traffic flowing over the Company's network. Overall, network services contributed approximately 56% of overall corporate revenues during the year, as opposed to approximately 39% in fiscal 1998. However, market pressures caused the price at which wholesale network transport services could be sold to decline approximately 40% during fiscal 1999. Although the Company was able to reduce its costs associated with transporting the traffic, the Company produced less dollars of gross margin on a per minute basis than it had in fiscal 1998. GlobalSCAPE's gross margins increased during the year with the purchase of the source code to CuteFTP, but on a consolidated basis the Company was unable to generate the gross margin dollars necessary to cover SG&A costs and all of its debt service requirements. As of October 1999, the Company is continuing to experience market pressures on its wholesale network transport services business. In order to produce better cash flows, the Company must focus on keeping its international network between Mexico and the U.S. optimally utilized with a blend of retail and wholesale traffic. Because the Company upgraded its network during fiscal 1999 to an ATM packet-switching environment, the Company feels that it can transport traffic as efficiently as possible in 37 an effort to minimize costs. However, the Company anticipates that pricing pressures will continue in its wholesale transport market, so it will focus its efforts on implementing a retail strategy which targets the growing and underserved Latino markets in both the U.S. and Mexico. Although management does not expect improved results from this effort until the latter stages of fiscal 2000, it believes that its retail strategy combined with the deployment of leading edge technology for communications transport will ultimately bring about improved profitability and sustainable growth in the future. In the near term, the Company must continue to manage its costs of providing services and overhead costs as it begins focusing on optimizing use of its network. The Company has applied for a long distance concession in Mexico which, if obtained, the Company believes will eventually allow it to significantly reduce its cost of transporting services. In order for it to significantly reduce costs with the concession, the Company would need to purchase a significant amount of hardware and software, allowing it to expand and operate its own network in Mexico. Until the Company is able to produce positive cash flows from operations in an amount sufficient to meet its debt service and capital expenditure requirements, it must be able to access debt and/or equity capital to assist it in doing so, although no assurance may be given that it will be able to do so. In September 1999, the Company issued approximately $500,000 of 6% Series C Preferred Stock on terms substantially similar to those of the Series B Preferred Stock. In an effort to meet its financial needs going forward, the Company has engaged the investment banking firm of Gerard, Klauer Mattison & Co. ("GKM"). GKM will assist the Company in finding and securing financial and strategic relationships. The Company has also engaged the investment banking firm of SunTrust Equitable Securities to assist it in, among other things, raising private or public funds for GlobalSCAPE. However, there can be no assurance that such funds will be raised. Inflation/Foreign Currency Inflation has not had a significant impact on the Company's operations. With the exception of direct dial services from the Company's casetas and coin operated public telephones, almost all of the Company's revenues are generated and collected in U.S. dollars. Direct dial services from the Company's casetas and public telephones are generally provided on a "sent-paid" basis at the time of the call in exchange for cash payment, so the Company does not maintain receivables on its books that are denominated in pesos. In an effort to reduce foreign currency risk, the Company attempts to convert pesos collected to U.S. dollars quickly and attempts to maintain minimal cash balances denominated in pesos. Some expenses related to certain services provided by the Company are incurred in foreign currencies, primarily Mexican pesos. The devaluation of the Mexican peso over the past several years has not had a material adverse effect on the Company's financial condition or operating results. 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. Year 2000 Compliance The Company initiated a program to identify and address issues associated with the ability of its date-sensitive information, telephony and business systems to properly recognize the year 2000 in order to avoid interruption of the operation of these systems at the turn of the century. This program is being conducted by the Company's Management Information Systems group, which is coordinating the efforts of internal resources as well as third party vendors in making all of the necessary changes for all 38 management systems and product related infrastructure for the Company's divisions and subsidiaries. The Company believes it is 96% complete in achieving Year 2000 readiness, and will be Year 2000 ready by November 30, 1999. The only significant remaining item is an outstanding issue related to the payroll systems of the Company's Mexican subsidiaries. The Company expects to avoid disruption of its owned information, telephony and business systems as a result of these efforts. However, the Company must rely on the representations and warranties of third parties, including domestic U.S. and foreign carriers of its traffic, in testing for readiness for year 2000 issues and cannot ensure compliance by these parties. The Company has developed contingency plans in areas where it believes there is any significant risk or where a third party has not adequately responded to the Company's inquiries, which includes transitions to other providers. The Company believes that a worst case scenario resulting from a Year 2000 related failure would be a temporary disruption of normal business operations. Based upon the work completed to date, the Company believes that such an occurrence is unlikely. However, as stated above, the Company is relying on representations and warranties of third parties that are beyond the Company's control. A disruption of business operations could have a material adverse effect on the Company's financial performance. The Company has expended approximately $100,000 in its Year 2000 program to date, and does not expect to experience any material additional cost. 39 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Consolidated Financial Statements of American TeleSource International, Inc. and Subsidiaries Report of Independent Public Accountants............................................................. 41 Consolidated Balance Sheets as of July 31, 1998 and 1999............................................. 42 Consolidated Statements of Operations for the Years Ended July 31, 1997, 1998 and 1999............... 43 Consolidated Statements of Comprehensive Income (Loss) for the Years Ended July 31, 1997, 1998 and 1999........................................................................................ 44 Consolidated Statements of Stockholders' Equity for the Years Ended July 31, 1997, 1998 and 1999..... 45 Consolidated Statements of Cash Flows for the Years Ended July 31, 1997, 1998 and 1999............... 46 Notes to Consolidated Financial Statements........................................................... 47
40 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of American TeleSource International, Inc.: We have audited the accompanying consolidated balance sheets of American TeleSource International, Inc. (a Delaware corporation) and subsidiaries (the Company) as of July 31, 1998 and 1999, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for the years ended July 31, 1997, 1998 and 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American TeleSource International, Inc. and subsidiaries as of July 31, 1998 and 1999, and the results of their operations and their cash flows for the years ended July 31, 1997, 1998 and 1999, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has a working capital deficit, has suffered recurring losses from operations since inception, has negative cash flows from operations and has limited capital resources available to support further development of its operations. These matters raise substantial doubt about the Company's ability to continue as a going concern. 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 including goodwill and other intangibles or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. /s/ ARTHUR ANDERSEN LLP San Antonio, Texas October 5, 1999 41 AMERICAN TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share information)
July 31, ------------------------------------- 1998 1999 ----------- ------------ ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents $ 1,091 $ 379 Accounts receivable, net of allowance of $209 and $1,600, respectively 3,748 3,693 Prepaid expenses and other 844 987 ----------- ------------ Total current assets 5,683 5,059 ----------- ------------ PROPERTY AND EQUIPMENT (At cost): 14,233 16,669 Less - Accumulated depreciation and amortization (2,418) (4,713) ----------- ------------ Net property and equipment 11,815 11,956 ----------- ------------ OTHER ASSETS, net Goodwill, net 5,091 5,032 Contracts, net 1,173 703 Trademarks, net - 789 Other assets 489 615 ----------- ------------ Total assets $ 24,251 $ 24,154 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Accounts payable $ 5,683 $ 4,164 Accrued liabilities 2,113 3,239 Current portion of notes payable 688 961 Current portion of convertible long-term debt - 1,942 Current portion of obligations under capital leases 2,351 1,430 Deferred revenue 535 233 ----------- ------------ Total current liabilities 11,370 11,969 ----------- ------------ LONG-TERM LIABILITIES: Notes payable, less current portion 719 312 Convertible long-term debt, less current portion 1,604 - Obligations under capital leases, less current portion 2,941 5,523 Other 530 213 ----------- ------------ Total long-term liabilities 5,794 6,048 ----------- ------------ COMMITMENTS AND CONTINGENCIES: (See Note 13) STOCKHOLDERS' EQUITY: Preferred stock, $0.001 par value, 10,000,000 shares authorized, Series A Cumulative Convertible Preferred Stock, 50,000 authorized, no shares issued and outstanding at July 31, 24,145 shares issued and outstanding at July 31, 1999 - - Series B Cumulative Convertible Preferred Stock, 2,000 authorized, no shares issued and outstanding at July 31, 2,000 shares issued and outstanding at July 31, 1999 - - Common stock, $0.001 par value, 100,000,000 shares authorized, 45,603,566 issued and outstanding at July 31, 1998 48,685,287 issued and outstanding at July 31, 1999 46 49 Additional paid in capital 22,248 29,399 Accumulated deficit (14,396) (21,987) Deferred compensation (667) (466) Other comprehensive income (144) (858) ----------- ------------ Total stockholders' equity 7,087 6,137 ----------- ------------ Total liabilities and stockholders' equity $ 24,251 $ 24,154 =========== ============
The accompanying notes are an integral part of these consolidated financial statements. 42 AMERICAN TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
For the Years Ended July 31, 1997 1998 1999 ------------ ------------ ------------ OPERATING REVENUES: Network management services $ 1,698 $ 13,362 $ 19,250 Call services 12,545 13,547 6,602 Direct dial services 1,421 6,085 6,024 Internet e-commerce 564 1,526 2,642 ------------ ------------ ------------ Total operating revenues 16,228 34,520 34,518 ------------ ------------ ------------ OPERATING EXPENSES: Cost of services 12,792 22,287 21,312 Selling, general and administrative 6,312 12,853 12,652 Bad debt expense 735 1,024 2,346 Depreciation and amortization 591 1,822 3,248 ------------ ------------ ------------ Total operating expenses 20,430 37,986 39,558 ------------ ------------ ------------ OPERATING LOSS (4,202) (3,466) (5,040) OTHER INCOME (EXPENSE): Interest income 27 76 59 Other income 68 32 Other expense (27) (24) (10) Interest expense (513) (1,573) (1,745) ------------ ------------ ------------ Total other income (expense) (445) (1,489) (1,696) ------------ ------------ ------------ LOSS BEFORE INCOME TAX EXPENSE AND MINORITY INTEREST (4,647) (4,955) (6,736) FOREIGN INCOME TAX EXPENSE - (139) - MINORITY INTEREST (48) - - ------------ ------------ ------------ NET LOSS ($4,695) ($5,094) ($6,736) LESS: PREFERRED STOCK DIVIDENDS - - (855) ------------ ------------ ------------ NET LOSS TO COMMON SHAREHOLDERS ($4,695) ($5,094) ($7,591) ============ ============ ============ BASIC AND DILUTED LOSS PER SHARE ($0.18) ($0.12) ($0.16) ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 26,807 41,093 47,467 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 43 AMERICAN TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands)
For the Years Ended July 31, ---------------------------------------- 1997 1998 1999 ----------- ------------ ----------- Net loss ($4,695) ($5,094) ($7,591) Other comprehensive income (loss), net of tax: Foreign currency translation adjustments $ 12 ($160) ($714) ----------- ----------- ----------- Comprehensive loss to common stockholders ($4,683) ($5,254) ($8,305) =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 44 AMERICAN TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
Preferred Shares Common Stock Cumulative ---------------- -------------------- Additional Accumulated Translation Deferred Shares Amount Shares Amount Paid In Capital Deficit Adjustment Compensation ------- ------ ------ -------- --------------- ----------- ---------- ------------ BALANCE, July 31, 1996 23,775 $ 6,288 $ ($ 4,607) $ 4 ($ 55) Issuances of common shares for cash - - 5,760 4,736 Conversion of convertible dept to common shares - - 3,612 1,967 Issuance of common shares for acquisition - - 2,716 1,847 Issuances of common shares for services - - 925 154 Deferred compensation - - - 1,394 (1,394) Compensation expense - - - 295 Warrants issued with restoration long term debt - - - 990 Cumulative effect of translation adjustment - - - 12 Net loss - - - (4,695) ------- ------ ------ -------- -------- -------- ----- ------- BALANCE, July 31, 1997 - - 36,788 $ 17,376 ($ 9,302) $ 16 ($1,154) Issuances of common shares for cash - - 5,500 3,496 Issuances of common shares for reduction in indebtedness - - 2,871 1,076 Conversion of convertible debt to common shares - - 200 100 Issuances of common shares for services - - 245 246 Compensation expense - - - 487 Cumulative effect of transition adjustments - - - (160) Exchange of common shares for common stock - - - (22,248) 22,248 Net loss - - - (5,094) ------- ------ ------ -------- -------- -------- ----- ------- BALANCE, July 31, 1998 - - 45,604 $ 46 $ 22,248 ($14,396) ($144) ($ 667) Issuances of common shares for cash - - 2,706 3 1,037 Issuances of common shares for services - - 96 40 Issuances of common shares for acquisition - - 279 179 Issuances of preferred stock 26 - - 1,176 Deferred compensation - - - 344 (344) Dividend expense - - - (80) Amortization of equity amount - - - 775 (775) Compensation expense - - - 545 Cumulative effect of transition adjustment - - - (714) Net loss - - - (6,736) (6,736) ------- ------ ------ -------- -------- -------- ----- ------- BALANCE, July 31, 1999 26 - 48,685 $ 49 $ 29,399 ($21,987) ($858) ($ 466) ======= ====== ====== ======== ======== ======== ===== ======= Total Stockholders' Equity ------------- BALANCE, July 31, 1996 $1,630 Issuances of common shares for cash 4,736 Conversion of convertible dept to common shares 1,967 Issuance of common shares for acquisition 1,847 Issuances of common shares for services 154 Deferred compensation 0 Compensation expense 295 Warrants issued with restoration long term debt 990 Cumulative effect of translation adjustment 12 Net loss (4,695) ------ BALANCE, July 31, 1997 $6,936 Issuances of common shares for cash 3,496 Issuances of common shares for reduction in indebtedness 1,076 Conversion of convertible debt to common shares 100 Issuances of common shares for services 246 Compensation expense 487 Cumulative effect of transition adjustments (160) Exchange of common shares for common stock 0 Net loss (5,094) ------ BALANCE, July 31, 1998 $7,087 Issuances of common shares for cash 1,640 Issuances of common shares for services 40 Issuances of common shares for acquisition 179 Issuances of preferred stock 4,176 Deferred compensation 0 Dividend expense (80) Amortization of equity amount 0 Compensation expense 545 Cumulative effect of transition adjustment (714) Net loss (6,736) ------ BALANCE, July 31, 1999 $6,137 ======
The accompanying notes are an integral part of these consolidated financial statements. 45 AMERICAN TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
For the Years Ended July 31, 1997 1998 1999 --------------------- ------------------ ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ($4,695) ($5,094) ($6,736) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization 591 1,822 3,248 Amortization of debt discount 87 307 346 Deferred compensation 295 487 545 Provision for losses on accounts receivable 735 1,024 2,346 Minority interest 48 - - Changes in operating assets and liabilities- Increase in accounts receivable (1,983) (2,723) (2,207) (Increase) decrease in prepaid expenses and other (849) 197 (1,632) Increase (decrease) in accounts payable (1,025) 3,479 (1,139) Increase (decrease) in accrued liabilities 884 (192) 1,857 Increase (decrease) in deferred revenue 378 71 (191) Other 4 - - ---------------------- ------------------- ----------------- Net cash used in operating activities (5,530) (622) (3,563) ---------------------- -------------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (590) (3,297) (956) Acquisition of business, net of cash acquired 73 (2,112) (171) Payments received on notes receivable 101 - - ---------------------- -------------------- ----------------- Net cash used in investing activities (416) (5,409) (1,127) ---------------------- -------------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt 3,632 2,547 437 Net increase (decrease) in short-term borrowings 281 353 (488) Payments on debt - (1,141) (679) Capital lease payments (401) (1,044) (941) Payments on long-term liabilities - (67) (123) Proceeds from issuance of preferred stock, net of issuance costs - - 4,176 Proceeds from issuance of common stock, net of issuance costs 3,699 4,553 1,596 ---------------------- -------------------- ----------------- Net cash provided by financing activities 7,211 5,201 3,978 ---------------------- -------------------- ----------------- NET INCREASE (DECREASE) IN CASH 1,265 (830) (712) CASH AND CASH EQUIVALENTS, beginning of period 656 1,921 1,091 ---------------------- -------------------- ----------------- CASH AND CASH EQUIVALENTS, end of period $1,921 $1,091 $ 379 ====================== ==================== =================
The accompanying notes are an integral part of these consolidated financial statements. 46 AMERICAN TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION The accompanying consolidated financial statements are those of American TeleSource International, Inc. and its subsidiaries ("ATSI" or the "Company"). The Company was formed on June 6, 1996 under the laws of the state of Delaware for the express purpose of effecting a "Plan of Arrangement" with American TeleSource International, Inc., which was incorporated under the laws of the province of Ontario, Canada (hereinafter referred to as "ATSI-Canada"). The Plan of Arrangement called for the stockholders of ATSI-Canada to exchange their shares on a one-for-one basis for shares of the Company. On April 30, 1998, shareholders of ATSI-Canada approved the Plan of Arrangement, and on May 11, 1998, ATSI-Canada became a wholly owned subsidiary of the Company. The Company is publicly traded on the OTC Bulletin Board under the symbol "AMTI". The accompanying consolidated balance sheet dated July 31, 1998 includes the assets, liabilities and shareholders' equity of ATSI-Canada which were transferred to the Company on May 11, 1998, and the accompanying statements of operations for the years ended July 31, 1997 and 1998 include the consolidated operations of ATSI-Canada through May 11, 1998. In May 1997, ATSI-Canada entered into an agreement to purchase up to 100% of the outstanding shares of Sistema de Telefonia Computarizada, S.A. de C.V. ("Computel"), the largest privately owned operator of casetas (public calling stations) in Mexico. Under the terms of the agreement, ATSI-Canada acquired 55% of the shares of Computel effective May 1, 1997 and the remaining 45% effective August 28, 1997. As ATSI-Canada acquired majority ownership effective May 1, 1997, the Company has recorded 100% of the net assets and liabilities of Computel as of that date. The Company's consolidated financial statements for the period May 1, 1997 to July 31, 1997 include the impact of the 45% minority ownership interest. For the years ended July 31, 1998 and July 31, 1999, the Company's consolidated financial statements include 100% of the activities of Computel. In July 1997, American TeleSource International de Mexico, S.A. de C.V. ("ATSI-Mexico") acquired 100% of the outstanding stock of Servicios de Infraestructura, S.A. de C.V. ("Sinfra"). In April 1998, TeleSpan, Inc. ("Telespan") purchased 100% of the outstanding stock of Sinfra from ATSI-Mexico. In March 1998, ATSI-Delaware acquired 100% of the outstanding stock of Soluciones Internactionales de Mercadeo, S.A. and subsequently changed the name to ATSI de CentroAmerica, S.A. Through its subsidiaries, the Company provides retail and wholesale communications services within and between the United States and select markets within Latin America. Utilizing a framework of licenses, interconnection and service agreements, network facilities and distribution channels, the Company aims to provide U.S standards of reliability to Mexico and other markets within Latin America which have historically been underserved by telecommunications monopolies. As of July 31, 1999, the Company's operating subsidiaries are as follows: American TeleSource International, Inc. ("ATSI-Texas" a Texas corporation) -------------------------------------------------------------------------- ATSI-Texas owns and operates a switching facility and multilingual call center in San Antonio, Texas. This facility provides U.S. based call services to public telephones owned by ATSI-Mexico and 47 casetas owned by Computel in Mexico, as well as to third party-owned public telephones, casetas and hotels in Mexico. Although these calls originate in Mexico, they are terminated and billed in the United States and Mexico by ATSI- Texas. In July 1998, ATSI-Texas also began providing domestic U.S. and international call services to residential customers in the U.S. American TeleSource International de Mexico, S.A. de C.V. --------------------------------------------------------- ("ATSI-Mexico" a Mexican corporation) ------------------------------------- ATSI-Mexico owns and operates coin-operated public telephones in Mexico. Utilizing its 20-year comercializadora license, ATSI purchases telephone lines and resells local, long distance and international calls from public telephones connected to the lines. Direct dial calls may be made from the telephones using pesos or quarters, and users may use the services of ATSI-Texas to place calls to the U.S. by billing calls to valid third parties, credit cards or calling cards. Computel (a Mexican corporation) -------------------------------- Computel is the largest private operator of casetas in Mexico, operating approximately 126 casetas in 66 cities. Direct dial calls may be made from the casetas using cash or credit cards, and users may use the services of ATSI-Texas to place calls to the U.S. by billing calls to valid third parties, credit cards or calling cards. Computel utilizes telephone lines owned by ATSI-Mexico. Sinfra (a Mexican corporation) ------------------------------- Utilizing its 20-year Teleport and Satellite Network license, Sinfra owns and operates the Company's teleport facilities in Cancun, Monterrey and Mexico City, Mexico. These facilities are used for the provision of international private network services. Sinfra also owns a 15-year Packet Switching Network license. TeleSpan, Inc. ("TeleSpan" a Texas corporation) ----------------------------------------------- TeleSpan owns and operates the Company's teleport facilities in the United States and Costa Rica. TeleSpan contracts with U.S. based entities and carriers seeking facilities or increased capacity into Mexico, Costa Rica, El Salvador and Guatemala. For network services into Mexico, TeleSpan utilizes facilities owned by Sinfra. GlobalScape, Inc. ("GlobalSCAPE" a Texas corporation) ----------------------------------------------------- GlobalSCAPE markets CuteFTP and other digitally downloadable software products and distributes them over the Internet utilizing electronic software distribution ("ESD"). ATSI de CentroAmerica (a Costa Rican corporation) ------------------------------------------------- ATSI de CentroAmerica markets international private network services in Costa Rica and other Latin American countries and looks to develop corporate development opportunities in Latin American countries through joint ventures and interconnection agreements with existing telecommunication monopolies. 48 2. FUTURE OPERATIONS, LIQUIDITY, CAPITAL RESOURCES AND VULNERABILITY DUE TO CERTAIN CONDITIONS The accompanying consolidated financial statements of the Company have been prepared on the basis of accounting principles applicable to a going concern. For the period from December 17, 1993 to July 31, 1999, the Company has incurred cumulative net losses of $21.9 million. Further, the Company had a working capital deficit of $5.7 million at July 31, 1998 and $6.7 million at July 31, 1999. Further, the Company had negative cash flows from operations of $5.5 million, $.6 million and $3.6 million for the years ended July 31, 1997, 1998 and 1999, respectively. The Company has limited capital resources available to it, and these resources may not be available to support its ongoing operations until such time as the Company is able to generate positive cash flow from operations. There is no assurance the Company will be able to achieve future revenue levels sufficient to support operations or recover its investment in property and equipment, goodwill and other intangible assets. These matters raise substantial doubt about the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the ongoing support of its stockholders and customers, its ability to obtain capital resources to support operations and its ability to successfully market its services. The Company is likely to require additional financial resources in the near term and could require additional financial resources in the long-term to support its ongoing operations. The Company has retained various financial advisers to assist it in refining its strategic growth plan, defining its capital needs and obtaining the funds required to meet those needs. The plan includes securing funds through equity offerings and entering into lease or long-term debt financing agreements to raise capital. There can be no assurances, however, that such equity offerings or other financing arrangements will actually be consummated or that such funds, if received, will be sufficient to support existing operations until revenue levels are achieved sufficient to generate positive cash flow from operations. If the Company is not successful in completing additional equity offerings or entering into other financial arrangements, or if the funds raised in such stock offerings or other financial arrangements are not adequate to support the Company until a successful level of operations is attained, the Company has limited additional sources of debt or equity capital and would likely be unable to continue operating as a going concern. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared on the accrual basis of accounting under generally accepted accounting principles of the U.S. All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified for comparative purposes. Estimates in Financial Statements --------------------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Revenue Recognition Policies ---------------------------- The Company recognizes revenue from its call services and direct dial services as such services are performed, net of unbillable calls. Revenue from network management service contracts is recognized when service commences for service commencement fees and monthly thereafter as services 49 are provided. The Company recognizes revenue from equipment sales when the title for the equipment transfers to the customer and from equipment installation projects when they are completed. Revenues related to the Company's Internet product are recognized at the point of delivery, as the Company bears no additional obligation beyond the provision of its software product other than post-contract customer service. Foreign Currency Translation ---------------------------- Until January 1, 1999, Mexico's economy was designated as highly inflationary. Generally Accepted Accounting Principles, "GAAP" require the functional currency of highly inflationary economies to be the same as the reporting currency. Accordingly, the consolidated financial statements of ATSI- Mexico and Computel, whose functional currency is the peso, were remeasured from the peso into the U.S. dollar for consolidation. Monetary and nonmonetary assets and liabilities were remeasured into U.S. dollars using current and historical exchange rates, respectively. The operating activities of ATSI-Mexico and Computel were remeasured into U.S. dollars using a weighted-average exchange rate. The resulting translation gains and losses were charged directly to operations. As of January 1, 1999, Mexico's economy was deemed to be no longer highly inflationary. According to GAAP requirements the change from highly inflationary to non-highly inflationary requires that the nonmonetary assets be remeasured using not the historical exchange rates, but the exchange rate in place as of the date the economy changes from highly inflationary to non-highly inflationary. As such, the Company's non-monetary assets in ATSI-Mexico and Computel have been remeasured using the exchange rate as of January 1, 1999. Subsequent to January 1, 1999, monetary assets and non-monetary assets are translated using current exchange rates and operating activity of ATSI-Mexico and Computel are remeasured in to U.S. dollars using a weighted average exchange rate. The effect of these translation adjustments are reflected in the cumulative translation account shown in equity. Accounts Receivable ------------------- The Company utilizes the services of credit card processing companies for the billing of commercial credit card calls. The Company receives cash from these calls, net of transaction and billing fees, generally within 20 days from the dates the calls are delivered. All other calls (calling card, collect, person-to-person and third party billed) are billed under an agreement between the Company and a billing clearinghouse. This agreement allows ATSI to submit call detail records to the clearinghouse, which in turn forwards these records to the local telephone company to be billed. The clearinghouse collects the funds from the local telephone company and then remits the funds, net of charges, to ATSI. Because this collection process can take up to 90 days to complete, ATSI participates in an advance funding program offered by the clearinghouse whereby 100% of the call records are purchased for 75% of their value within five days of presentment. The remaining 25% value of the call records are remitted to ATSI, net of interest and billing charges and an estimate for uncollectible calls, as the clearinghouse collects the funds from the local telephone companies. Under the advanced funding agreement, the collection clearinghouse has a security interest in the unfunded portion of the receivables as well as future receivables generated by the Company's long distance business. The allowance for doubtful accounts reflects the Company's estimate of uncollectible calls at July 31, 1998 and 1999 and includes $1.5 million of specific accounts identified by the Company as potentially uncollectible. ATSI currently pays a funding charge of prime plus 4% per annum on the amounts that are advanced to ATSI. Receivables sold with recourse during fiscal years 1997, 1998, and 1999 were $8,530,665, $11,127,221 and $6,138,549 respectively. At July 31, 1997, 1998 and 1999, $577,256, $484,381 and $444,398 of such receivables were uncollected, respectively. See Note 5 for additional disclosure regarding advanced funding. 50 In fiscal 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This statement provides accounting and reporting standards for, among other things, the transfer and servicing of financial assets, such as factoring receivables with recourse. The adoption of these statements has not had a material impact on the financial position or results of operations of the Company. Impuesto al Valor Agregado (Value-Added Tax) ("IVA") ---------------------------------------------------- The Company's Mexican subsidiaries are required to report a value-added tax related to both purchases and sales of services and assets, for local tax reporting. Accordingly, each subsidiary maintains both an IVA receivable and IVA payable account on their subsidiary ledgers. For consolidated reporting purposes, the Company nets its Mexican subsidiaries IVA receivable and IVA payable accounts as allowed by regulatory requirements in Mexico. For the years ended July 31, 1998 and 1999, this netting of IVA accounts resulted in the elimination of IVA payable and a corresponding reduction in IVA receivable of approximately $197,000 and $1.2 million, respectively. Basic and Diluted Loss Per Share -------------------------------- Loss per share was calculated using the weighted average number of common shares outstanding for the years ended July 31, 1997, 1998 and 1999. Common stock equivalents, which consist of the stock purchase warrants and options described in Note 9, were excluded from the computation of the weighted average number of common shares outstanding because their effect was antidilutive. Additionally, the Company has excluded the convertible preferred stock described in Note 8, from the computation of the weighted average number of common shares outstanding, as their effect will also be antidilutive. Property and Equipment ---------------------- Property and equipment are stated at cost. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the related assets, which range from five to fifteen years. Expenditures for maintenance and repairs are charged to expense as incurred. Direct installation costs and major improvements are capitalized. Effective for the fiscal years beginning after July 31, 1996, the Company follows rules as prescribed under Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 requires an assessment of the recoverability of the Company's investment in long-lived assets to be held and used in operations whenever events or circumstances indicate that their carrying amounts may not be recoverable. Such assessment requires that the future cash flows associated with the long-lived assets be estimated over their remaining useful lives and an impairment loss be recognized when the undiscounted future cash flows are less than the carrying value of such assets. As of July 31, 1999, the Company has determined that the estimated undiscounted future cash flows associated with its long-lived assets are greater than the carrying value of such assets and that no impairment loss needs to be recognized. Goodwill, Trademarks, Contracts and Other Assets ------------------------------------------------ As of the years ended July 31, 1998 and 1999, other assets include goodwill, primarily related to the purchase of Computel, of $5,216,646 and $5,296,646, respectively, net of accumulated amortization of $126,668 and $265,089, respectively. Goodwill is amortized over 51 40 years. As of July 31, 1998 and 1999 other assets include acquisition costs of $1,417,870, and $1,596,620, respectively, related to the Company's acquisitions of several of its independent marketing representatives, net of accumulated amortization of $244,652, and $893,212, respectively. These acquisition costs are being amortized over the life of the contracts, which approximates three years. As of July 31, 1999, other assets include $898,943 related to the purchase of the rights to CuteFTP, net of accumulated amortization of $110,352. This trademark is being amortized over an estimated five-year life. Additionally, as of July 31, 1998 and 1999, other assets include approximately $489,000 and $615,000 of other assets, not specifically identified as goodwill, acquisition costs or trademarks. As it relates to SFAS 121, as of July 31, 1999, the Company has determined that the estimated future cash flows associated with its goodwill and other intangible assets are greater than the carrying value of such assets and that no impairment loss needs to be recognized. For the years ended July 31, 1997, 1998 and 1999, the Company recorded amortization expense of $55,491, $369,219 and $925,440, respectively related to its other assets. Income Taxes ------------ The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". Under the provisions of SFAS 109, the Company recognizes deferred tax liabilities and assets based on enacted income tax rates that are expected to be in effect in the period in which the deferred tax liability or asset is expected to be settled or realized. A change in the tax laws or rates results in adjustments in the period in which the tax laws or rates are changed. Statements of Cash Flows ------------------------ Cash payments and non-cash investing and financing activities during the periods indicated were as follows:
For the Years Ended July 31, -------------------------------------------- 1997 1998 1999 ---- ---- ---- Cash payments for interest $ 416,756 $1,349,679 $1,101,771 Cash payments for taxes $ - $ 148,097 $ - Common shares issued for services $ 153,885 $ 246,591 $ 40,000 Common shares issued for acquisition of Computel and other $1,846,569 $ - $ 178,750 Assets acquired in acquisition of Computel $3,418,753 $ - $ - Liabilities assumed in acquisition of Computel $4,205,404 $ - $ - Conversion of convertible debt to common shares $1,966,531 $ 100,000 $ -
52 Capital lease obligations incurred $1,521,875 $4,635,693 $ - Common share subscriptions sold $1,113,170 $ - $ 42,500 For purposes of determining cash flows, the Company considers all temporary cash investments with an original maturity of three months or less to be cash and cash equivalents. New Accounting Pronouncements ----------------------------- In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and disclosure of comprehensive income and its components in a full set of financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997, and requires reclassification of comparative financial statements for earlier periods. The adoption of SFAS No. 130 has resulted in the presentation of comprehensive income (loss) that differs from net income (loss) as presented in the accompanying financial statements to the extent of foreign currency translation adjustments as shown in the accompanying consolidated statements of comprehensive income (loss). The Company presentation of its comprehensive income component, foreign currency translation adjustments, is presented net of tax, which is $0 for all periods presented, in light of the Company's current net operating loss carryforward position. 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 liabilities: The carrying value approximates fair value due to the short maturity of these items. Long-term debt and convertible debt: Since the Company's debt is not quoted, estimates are based on each obligations' characteristics, including remaining maturity, interest rate, credit rating, collateral, amortization schedule and liquidity (without consideration for the convertibility of the notes). The Company believes that the carrying amount does not differ materially from the fair value. 4. PROPERTY AND EQUIPMENT, NET (at cost) Following is a summary of the Company's property and equipment at July 31, 1998 and 1999: July 31, July 31, ------- ------- 1998 1999 ---- ---- Telecommunications equipment $ 6,084,771 $ 6,476,395 Land and buildings 892,507 447,748 Furniture and fixtures 882,449 902,873 53 Equipment under capital leases 5,585,291 7,758,739 Leasehold improvements 281,014 474,748 Other 517,192 608,914 ----------- ----------- 14,233,224 16,669,417 Less: accumulated depreciation and amortization (2,418,514) (4,712,671) ----------- ----------- Total - property and equipment, net $11,814,710 $11,956,746 =========== =========== Depreciation expense as reported in the Company's Consolidated Statements of Operations includes depreciation expense related to the Company's capital leases. For the years ended July 31, 1997, 1998 and 1999, the Company recorded approximately $536,000, $1,453,000 and $2,323,0000, respectively of depreciation expense related to its fixed assets. 5. NOTES PAYABLE AND CONVERTIBLE DEBT Notes Payable - -------------
Notes payable are comprised of the following: July 31, ------------------------------- 1998 1999 --------------- -------------- Note payable to a company, see terms below. $ 25,320 $ 137,071 Note payable to an individual, see terms below. - 150,000 Note payable to a bank, see terms below. - 150,000 Notes payable to related parties, see terms - 100,000 below. Note payable to an individual, see terms below. - 368,768 Notes payable to various banks, see terms below 416,846 56,878 Notes payable to a company, net of discount, see terms below. 364,803 309,588 ---------- ---------- $1,406,969 $1,272,305 Less: current portion $ 688,005 $ 960,523 ---------- ---------- Total non-current notes payable $ 718,964 $ 311,782 ========== ==========
During November 1996, the Company entered into an agreement with a financing company under which the Company is advanced an additional 13.75% of its receivables sold to a billing clearinghouse, as discussed in Note 3. These advances are typically outstanding for periods of less than 90 days, and are repaid, including accrued interest, by the clearinghouse on behalf of the Company as its receivables from long distance call services are collected. The Company was charged 4% per month for these fundings. When the agreement with the 54 financing company expired in November 1998, it was renewed on a month-to-month basis, and the Company ceased using the factoring arrangement altogether in April 1999 as part of its ongoing effort to minimize costs. The approximate $137,000 outstanding represents advances to be repaid by the clearinghouse to the financing company upon its subsequent collection of its receivables from long distance call services. During February 1999, the Company entered into a note payable with an individual, for working capital purposes, in the amount of $150,000. Interest accrues at an interest rate of 12% per year, principal and interest due at maturity. The note originally matured in May 1999, but the Company has extended the note with the individual for an additional six months. During January 1999, one of the Company's subsidiaries entered into a note payable with a bank in the amount of $180,000 related to its acquisition of a computer software program known as "CuteFTP". (See Note 10). The note calls for principal payments of $5,000 per month for twelve months and $10,000 per month for twelve months. Interest accrues monthly at an interest rate of the Lender's "Prime Rate" plus 1%. At July 31, 1999, the Lender's "Prime Rate" was 8.00%. In February 1999, the Company entered into notes payable with related parties, all of whom were officers or directors of the Company in the amount of $250,000. The notes accrue interest at a rate of 12% per year until paid in full. As of July 31, 1999, $100,000 of the notes remain outstanding. In January 1999, one of the Company's subsidiaries entered into an agreement with an individual related to its acquisition of a computer software program known as "CuteFTP". (See Note 10). The agreement calls for twelve principal and interest payments of $63,000 per month beginning February 28, 1999. The Company has imputed interest using an interest rate of 12% per annum. As of July 31, 1998 and July 31, 1999, the Company through its acquisition of Computel had approximately $416,846 and $56,878, respectively, of bank notes payable to various banks in Mexico. The notes have interest rates ranging from 8% to 15%, with monthly principal and interest payments of approximately $7,500. The notes mature between October 1999 and December 2015 and are collaterized by the assets of Computel. In the year ended July 31, 1999, the Company through Computel exchanged certain assets collaterized by the notes for a reduction in its indebtedness. The notes remaining mature during the year ended July 2000. During October 1997, the Company entered into a note payable with a company in the amount of $1,000,000. The note calls for quarterly payments of principal and interest beginning in January 1998 and continuing until October 2004. Interest accrues on the unpaid principal at the rate of 13% per year. The Company also issued 250,000 warrants to the note holder which carry an exercise price of $3.56 per warrant. These warrants expire in October 2000. The amount of debt discount recorded by the Company related to the issuance of these warrants was $103,333. The fair value of the warrants was calculated on the date of issuance using an option pricing model with the following assumptions: Dividend yield of 0.0%, expected volatility of 30%, risk-free interest rate of 6.00%, and an expected life of three years. The warrants expire three years from their date of issuance, and are not exercisable for a period of one year after their initial issuance. In January 1998, the noteholder exercised 700,000 warrants at an exercise price 55 of $0.70, unrelated to the warrants noted above, in consideration of a $490,000 reduction of the principal balance outstanding on the note. Convertible Debt - ---------------- In March and May 1997, the Company issued $2.2 million in convertible notes, interest at 10%. The principal and interest, which accrues quarterly, is due and payable three years from the date of issuance. The convertible notes convert into fully redeemable preferred stock at the Company's option. In addition, for each $50,000 unit of convertible debt, each holder was issued 108,549 warrants to purchase an equal number of shares of common stock at $0.27 per share. The fair value of the warrants was determined to be $0.37 per share and the Company assigned $990,000 to the value of the warrants in stockholders' equity. The fair value of the warrants was calculated on the date of issuance using an option pricing model with the following assumptions: Dividend yield of 0.0%, expected volatility of 62%, risk-free interest rate of 6.35%, and an expected life of three years. The warrants expire three years from their date of issuance, and were 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, 1998 and July 31, 1999, net of debt discount, was $1,603,802 and $1,942,614, respectively. All of the outstanding principal at July 31, 1999 is reflected in the current portion of convertible long-term debt. Maturities of notes payable and convertible debt as of July 31, 1999 were as follows: Year Ending July 31, 2000 $2,903,137 2001 107,983 2002 56,949 2003 67,138 2004 78,718 Thereafter 994 ---------- Total $3,214,919 ========== 6. LEASES Operating Leases ---------------- The Company leases office space, furniture, equipment and network capacity under noncancelable operating leases and certain month-to-month leases. During fiscal 1997, 1998 and 1999, the Company also leased certain equipment under capital leasing arrangements. Rental expense under operating leases for the years ended July 31, 1997, 1998 and 1999, was $176,700, $942,750 and $2,952,710, respectively. Future minimum lease payments under the noncancelable operating leases at July 31, 1999 are as follows: 56 2000 $ 2,929,328 2001 3,284,740 2002 2,598,753 2003 583,524 2004 574,542 Thereafter 1,864,863 ----------- Total minimum lease payments $11,835,750 =========== Capital Leases -------------- Future minimum lease payments under the capital leases together with the present value of the net minimum lease payment at July 31, 1999 are as follows: 2000 $ 2,295,036 2001 2,246,127 2002 2,022,825 2003 1,758,391 2004 562,335 Thereafter 277,435 ----------- Total minimum lease payments 9,162,149 Less: Amount representing taxes (45,302) ----------- Net minimum lease payments 9,116,847 Less: Amount representing interest (2,164,572) ----------- Present value of minimum lease payments $ 6,952,275 =========== In April 1997, the Company, through ATSI-Mexico secured a capital lease facility with IBM de Mexico to purchase intelligent pay telephones for installation in Mexico. The capital lease facility of approximately $1.725 million has allowed the Company to install U.S. standard intelligent pay telephones in various Mexican markets. In April 1998, the Company through ATSI- Mexico secured an additional capital lease facility with IBM de Mexico for approximately $2.9 million to increase network capacity and to fund the purchase and installation of public telephones in Mexico. In May 1999, the Company restructured its capital lease obligation with IBM de Mexico by extending the payment of its total obligation. The restructured lease facility calls for monthly payments of principal and interest of approximately $108,000 beginning in July 1999 and extending through June 2003. Interest accrues on the facility at an interest rate of approximately 13% per year. The obligation outstanding under said facility at July 31, 1998 and July 31, 1999 was approximately $4,272,000 and $3,826,000, respectively. In December 1998, the Company ordered a DMS 250/300 International gateway switch from Northern Telecom, Inc. at a cost of approximately $1.8 million. As of July 31, 1999, the Company entered into a capital lease transaction with NTFC Capital Corporation, ("NTFC") to finance the switch and an additional approximate $200,000 of equipment over a five and a half-year period with payments delayed for six months. Quarterly payments approximate $139,000 and the capital lease has an interest rate of approximately 11%. The lease facility requires that the Company meet certain financial covenants on a quarterly basis beginning October 31, 1999, including minimum revenue levels, gross margin levels, EBITDA results and debt to equity ratios. Due primarily to pricing pressures in the Company's network transport services business, 57 the Company may not be able to meet some of the financial covenants in the facility, which, if not cured, would allow NTFC to demand payment in full of the amount outstanding. However, because management does not believe that non- compliance is a certainty, the majority of the amount outstanding under the facility has been classified as non-current in the accompanying balance sheet. The Company also has certain affirmative covenants under the facility, including a covenant on Year 2000 compliance, under which the Company gives assurance that the Company's systems will be able to process transactions effectively before, on and after January 1, 2000. The Company secured a capital lease for approximately $500,000 in December 1998 for the purchase of ATM equipment from Network Equipment Technologies ("N.E.T"). The capital lease is for thirty-six months with monthly payments of approximately $16,000 a month. The Company's capital leases have interest rates ranging from 11% to 14%. 7. DEFERRED REVENUE The Company records deferred revenue related to the private network services it provides. Customers may be required to advance cash to the Company prior to service commencement to partially cover the cost of equipment and related installation costs. Any cash received prior to the actual commencement of services is recorded as deferred revenue until services are provided by the Company, at which time the Company recognizes service commencement revenue. 8. SHARE CAPITAL As discussed in Note 1, in May 1998, the Company completed its Plan of Arrangement whereby the shareholders of ATSI-Canada exchanged their shares on a one-for-one basis for shares of ATSI-Delaware stock. The exchange of shares resulted in the recording on the Company's books of $0.001 par value stock and additional paid-in capital. During the year ended July 31, 1997, the Company issued 13,012,448 common shares. Of this total, 5,760,355 shares were issued for approximately $4,737,000 of net cash proceeds, 924,761 shares were issued for services rendered to the Company, 3,611,786 shares were issued for the conversion of convertible debt to common shares, and 2,715,546 shares were issued related to the Company's acquisition of Computel. (See Note 10). During the year ended July 31, 1998, the Company issued 8,816,461 common shares. Of this total, 7,765,174 shares were issued for approximately $3.2 million of net cash proceeds and reductions in indebtedness of approximately $1.1 million through the exercise of 7,765,174 warrants and options, 245,016 shares were issued for services rendered to the Company, 200,000 were issued resulting from the conversion of a $100,000 convertible note and 606,271 shares were issued for approximately $333,000 in net cash proceeds. During the year ended July 31, 1999, the Company issued 3,081,721 common shares. Of this total, 2,203,160 shares were issued for approximately $1.3 million of net cash through the 58 exercise of 2,203,160 warrants and options, 36,643 shares were issued for consulting services rendered to the Company, 59,101 shares were issued to a shareholder in exchange for a guarantee of up to $500,000 of Company debt, 503,387 shares and an equal number of warrants to purchase the Company's common stock for $0.70 per share were issued in exchange for approximately $300,000 in net cash proceeds and 279,430 shares were issued related to the Company's acquisition of certain customer contracts in previous years. The shares issued for services rendered, the guarantee of Company debt, and the shares issued for the $300,000 in cash proceeds (including the shares underlying the warrants issued) have not been registered by the Company, nor does the Company have any obligation to register such shares. At July 31, 1999, stock subscription receivables of $42,500, were outstanding related to sales of common stock. Such amounts were collected by the Company subsequent to said date. No dividends were paid on the Company's stock during the years ended July 31, 1997, 1998 and 1999. The shareholders of ATSI-Canada approved the creation of a class of preferred stock at the Company's annual shareholders meeting on May 21, 1997. Effective June 25, 1997, the class of preferred stock was authorized under the Ontario Business Corporations Act. According to the Company's amended Articles of Incorporation, the Company's Board of Directors may issue, in series, an unlimited number of preferred shares, without par value. No preferred shares have been issued as of July 31, 1999. Pursuant to ATSI-Delaware's Certificate of Incorporation, the Company's Board of Directors may issue, in series, an unlimited number of preferred shares, with a par value of $0.001. In March and April 1999, the Company issued a total of 24,146 shares of Series A Preferred Stock for cash proceeds of approximately $2.4 million and in July 1999 the Company issued 2,000 shares of Series B Preferred Stock for cash proceeds of approximately $2.0 million. The Series A Preferred Stock accrues cumulative dividends at the rate of 10% per annum payable quarterly, while the Series B Preferred Stock accrues cumulative dividends at the rate of 6% per annum. In September 1999, the Company issued 500 shares of Series C Preferred Stock for cash proceeds of approximately $500,000. The Series C Preferred Stock accrues cumulative dividends at the rate of 6% per annum. The Series A Preferred Stock and any accumulated, unpaid dividends may be converted into Common Stock for up to one year at the average closing price of the Common Stock for twenty (20) trading days preceding the Date of Closing (the "Initial Conversion Price"). On each Anniversary Date up to and including the fifth Anniversary Date, the Conversion price on any unconverted Preferred Stock, will be reset to be equal to 75% of the average closing price of the stock for the then twenty (20) preceding days provided that the Conversion price can not be reset any lower than 75% of the Initial Conversion Price. The Series B Preferred Stock and any accumulated, unpaid dividends may be converted into Common Stock for up to two years at the lesser of a) the market price on the day prior to closing or b) 78% of the five lowest closing bid prices on the ten days preceding conversion. As these conversion features are considered a "beneficial conversion feature" to the holder, the Company allocated approximately $1.6 million and $1.1 million, respectively of the approximate $2.4 million and $2.0 million, respectively, in proceeds to additional paid-in capital as a discount to be amortized over a twelve month and 59 three month period, respectively. The Series A Preferred Stock is callable and redeemable by the Company at 100% of its face value, plus any accumulated, unpaid dividends at the Company's option any time after the Common Stock of the Company has traded at 200% or more of the conversion price in effect for at least twenty (20) consecutive trading days, so long as the Company does not call the Preferred Stock prior to the first anniversary date of the Date of Closing. The Series B Preferred Stock is callable and redeemable by the Company at 127% of its face value, plus any accumulated, unpaid dividends at the Company's option any time prior to the second anniversary date of the Date of Closing. The Series C Preferred Stock and any accumulated, unpaid dividends may be converted into Common Stock for up to two years at the lesser of a) the market price on the day prior to closing or b) 78% of the five lowest closing bid prices on the ten days preceding conversion. Consistent with the accounting for the Company's Series A and Series B Preferred Stock, this is considered a "beneficial conversion feature" to the holder. The Company will allocate approximately $139,000 of the proceeds to additional paid-in capital as a discount to be amortized over a three-month period. The terms of the Company's Series A, Series B and Series C Preferred Stock restrict the Company from declaring and paying on its common stock until such time as all outstanding dividends have been fulfilled related to the Preferred Stock. 9. STOCK PURCHASE WARRANTS AND STOCK OPTIONS During the year ended July 31, 1999, certain shareholders and holders of convertible debt of the Company were issued warrants to purchase shares of common stock at exercise prices ranging from $0.70 to $1.06 per share. Following is a summary of warrant activity from August 1, 1996 through July 31, 1999:
Year Ending July 31, ------------------------------------------- 1997 1998 1999 ------------------------------------------- Warrants outstanding, beginning 8,097,463 14,489,942 7,562,168 Warrants issued 9,931,854 667,400 933,387 Warrants expired (777,200) - (2,386,470) Warrants exercised (2,762,175) (7,595,174) (1,905,160) ---------- ---------- ---------- 14,489,942 7,562,168 4,203,925 Warrants outstanding, ending ========== ========== ==========
60 Warrants outstanding at July 31, 1999 expire as follows:
Number of Warrants Exercise Price Expiration Date ----------------------- -------------- --------------- 80,000 $1.06 November 6, 1999 30,000 $0.50 December 31, 1999 367,400 $0.85 January 1, 2000 550,824 $0.85 February 7, 2000 1,030,060 $0.27 February 17, 2000 1,000,000 $0.70 February 28, 2000 192,254 $0.75 April 7, 2000 503,387 $0.70 April 13, 2000 50,000 $2.00 June 20, 2000 250,000 $3.56 October 14, 2000 50,000 $3.09 March 9, 2002 100,000 $1.25 July 2, 2004
The Company had two fixed stock plans during 1997. The Company had a stock option plan that was in existence since May 1994 (the Canadian Plan). No options were ever issued as part of the Canadian Plan, even though the Company had the ability to issue options to acquire approximately 2,800,000 shares of the Company's common stock. In February 1997, the Company's Board of Directors adopted the 1997 Stock Option Plan, which replaced the Canadian Plan. Under the 1997 Stock Option Plan, options to purchase up to 5,000,000 shares of common stock may be granted to employees, directors, consultants and advisers. The 1997 Stock Option Plan is intended to permit the Company to retain and attract qualified individuals who will contribute to the Company's overall success. The exercise price of all of the options is equal to the market price of the shares of common stock as of the date of grant. The options vest pursuant to the individual stock option agreements, usually 33 percent per year beginning one year from the grant date with unexercised options expiring ten years after the date of the grant. On February 10, 1997, the Board of Directors granted a total of 4,488,000 options to purchase Common Shares to directors and employees of the Company. Certain grants were considered vested based on past service as of February 10, 1997. The 1997 Stock Option Plan was approved by a vote of the stockholders at the Company's Annual Meeting of Shareholders on May 21, 1997. In September 1998, the Company's Board of Directors adopted the 1998 Stock Option Plan. Under the 1998 Stock Option Plan, options to purchase up to 2,000,000 shares of common stock may be granted to employees, directors and certain other persons. The 1997 and 1998 Stock Option Plans are 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 September 9, 1998, the Board of Directors granted a total of 1,541,000 options to purchase 61 common stock to directors and employees of the Company. On December 16, 1998, the Board approved the granting of an additional 302,300 in options to employees of the Company. The 1998 Stock Option Plan was approved by a vote of the stockholders at the Company's Annual Meeting of Shareholders on December 17, 1998. A summary of the status of the Company's 1997 and 1998 Stock Option Plans for the years ended July 31, 1997, 1998 and 1999 and changes during the periods are presented below:
Years Ended July 31, ---------------------------------------------------------- 1997 Stock Option Plan 1997 1998 ---------------------------------------------------------- Weighted Weighed Average Average Shares Exercise Shares Exercise Price Price Outstanding, beginning of year - - 4,483,000 $0.58 Granted 4,488,000 $0.58 429,000 $2.33 Exercised - - (245,000) $0.58 Forfeited (5,000) $0.58 (11,667) $1.28 Outstanding, end of year 4,483,000 $0.58 4,655,333 $0.74 ========= ===== ========= ===== Options exercisable at end of year 1,786,332 $0.58 2,571,332 $0.58 ========= ===== ========= ===== Weighted average fair value of options granted during the year $0.45 $1.50 ===== =====
Year Ended July 31, ------------------------------- 1997 Stock Option Plan 1999 ------------------------------- Weighted Average Exercise Shares Price Outstanding, beginning of year 4,655,333 $0.74 Granted - - Exercised (298,000) $0.58 Forfeited (134,666) $0.71 Outstanding, end of year 4,222,667 $0.75 ========= ===== Options exercisable at end of year 3,271,333 $0.60 ========= ===== Weighted average fair value of options granted during the year $0.00 =====
62
Year Ended July 31, ------------------------------ 1999 ------------------------------ 1998 Stock Option Plan Weighted Average Exercise Shares Price Outstanding, beginning of year - - Granted 1,843,300 $0.60 Exercised - - Forfeited (57,500) $0.78 Outstanding, end of year 1,785,800 $0.60 ========= ===== Options exercisable at end of year - - Weighted average fair value of options granted during the year $0.64 =====
The weighted average remaining contractual life of the stock options outstanding at July 31, 1999 is approximately 7.5 years for options granted under the 1997 Stock Option Plan and approximately 9 years for options granted under the 1998 Stock Option Plan. In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation" was issued. SFAS 123 defines a fair value based method of accounting for employee stock options or similar equity instruments and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period of the award, which is usually the vesting period. However, SFAS 123 also allows entities to continue to measure compensation costs for employee stock compensation plans using the intrinsic value method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company has adopted SFAS 123 effective August 1, 1996, and has elected to remain with the accounting prescribed by APB 25. The Company has made the required disclosures prescribed by SFAS 123. In accordance with APB 25, the Company recorded approximately $1.4 million in deferred compensation 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. Additionally, the Company recorded approximately $340,000 in deferred compensation related to approximately 1.5 million of the options granted based on the increase in the Company's stock price from September 9, 1998 to December 17, 1998, when the underlying 1998 Stock Option Plan was approved by the Company's shareholders. As of July 31, 1998 and July 31, 1999, the Company had $666,899 and $465,487, respectively, of deferred compensation related to options granted. Because the Company has elected to remain with the accounting prescribed by APB 25, no compensation cost has been recognized for its fixed stock option plan based on SFAS 123. Had compensation cost for the Company's stock-based compensation plans been determined on 63 the fair value of the grant dates for awards under the fixed stock option plans consistent with the method of SFAS 123, the Company's net loss (in thousands) and loss per share would have been increased to the pro forma amounts indicated below:
Year Ended Year Ended Year Ended July 31, 1997 July 31, 1998 July 31, 1999 ----------------- ----------------- ------------------ Net Loss to common stockholders ------------------------------- As reported $(4,695) $(5,094) $(7,591) Pro forma $(5,235) $(5,936) $(7,312) Basic and Diluted Loss per share -------------------------------- As reported $ (0.18) $ (0.12) $ (0.16) Pro forma $ (0.20) $ (0.14) $ (0.15)
The fair value of the option grant is estimated based on the date of grant using an option pricing model with the following assumptions used for the grants in 1997, 1998 and 1999: Dividend yield of 0.0%, expected volatility of 60%, 46% and 62%, respectively, risk-free interest rate of 6.41%, 5.10% and 6.50%, respectively, and an expected life of ten years. 10. ACQUISITIONS As discussed in Note 1, the Company acquired 55% of Computel in May 1997 and acquired the remaining shares in August 1997. The total purchase price for the acquisition of Computel was approximately $3.6 million, of which $1.1 million was paid in cash, $700,000 in a note receivable forgiven by the Company and approximately $1.8 million in common stock, representing 2,715,546 shares. The Company recorded the assets and liabilities of Computel as of May 1, 1997. As Computel had net liabilities at May 1, 1997, the Company recorded goodwill of $2,279,231 related to the acquisition. The remaining 45% ownership interest is reflected as minority interest at July 31, 1997. Per the terms of the agreement, the remaining shares of Computel were acquired in August 1997 for the previously mentioned cash payment of approximately $1.1 million and forgiveness of the aforementioned note receivable. The Company recorded additional goodwill of approximately $2,857,000. The following unaudited pro forma results of operations for the year ended July 31, 1997, assumes the acquisition of Computel occurred as of the beginning of the period. Such pro forma information is not necessarily indicative of the results of future operations. 64
Year Ended July 31, ------------------- 1997 ---- (Unaudited) Operating revenues $ 20,312,000 Net loss ($5,408,000) Basic and Diluted net loss per share ($0.19)
These unaudited pro forma results have been prepared for comparative purposes only and include certain adjustments such as additional amortization of goodwill as a result of the acquisition, and the elimination of intercompany transactions. The unaudited pro forma information is not necessarily indicative of the results that would have occurred had such transactions actually taken place at the beginning of the period specified nor does such information purport to project the results of operations for any future date or period. Pro forma results of operations for the year ended July 31, 1998 have been omitted, as pro forma results would not materially differ from actual results of operations for the period. In January 1999, the Company acquired the rights to the source code of a computer software program known as "CuteFTP". Prior to January 1999, the Company had been the distributor of this software under an exclusive distribution agreement executed in June 1996 with the software's author. The Company acquired the rights to CuteFTP in exchange for cash payments totaling approximately $190,000 in January and February 1999 and an additional $756,000 to be paid in twelve monthly installments. 11. SEGMENT REPORTING In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which establishes standards for reporting information about operating segments in annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. SFAS No. 131 need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. In an attempt to identify its reportable operating segments, the Company considered a number of factors or criteria. These criteria included segmenting based upon geographic boundaries only, segmenting based on the products and services provided, segmenting based on legal entity and segmenting by business focus. Based on these criteria or factors the Company has determined that it has three reportable operating segments: (1) U.S. Telco; (2) Mexico Telco; and (3) Internet e-commerce. Clearly, the Company's Internet e-commerce subsidiary, GlobalSCAPE, Inc. and its operations can be differentiated from the telecommunication focus of the rest of the Company. Additionally, the Company believes that its U.S. and Mexican subsidiaries should be 65 separate segments in spite of the fact that many of the products are borderless. Both, the U.S. Telco and Mexican Telco segments include revenues generated from Integrated Prepaid, Postpaid, and Private Network Services. The Company's Carrier Services revenues, generated as a part of its U.S. Telco segment, are the only revenues not currently generated by both the U.S. Telco and Mexico Telco segments. The Company has included the operations of ATSI-Canada, ATSI- Delaware and all businesses falling below the reporting threshold in the "Other" segment. The "Other" segment also includes intercompany eliminations.
As of and for the years ending ------------------------------------------------------ July 31, July 31, July 31, 1997 1998 1999 U.S. Telco - -------------------------------------------------------------------------------------------- External revenues $ 13,714,251 $ 26,695,690 $ 25,516,665 Intercompany revenues $ 330,362 $ 1,300,000 $ 800,012 ------------ ------------ ------------ Total revenues $ 14,044,613 $ 27,995,690 $ 26,316,677 ============ ============ ============ Earnings before interest, taxes, depreciation and amortization (EBITDA) ($3,131,841) ($16,807) ($1,485,045) Operating loss ($3,603,447) ($1,294,037) ($3,342,035) Net loss ($3,806,889) ($1,819,986) ($3,866,051) Total assets $ 6,450,033 $ 10,049,021 $ 9,606,263 Mexico Telco - -------------------------------------------------------------------------------------------- External revenues $ 1,949,755 $ 6,298,620 $ 6,359,238 Intercompany revenues $ 1,359,891 $ 5,136,541 $ 5,052,890 ------------ ------------ ------------ Total revenues $ 3,309,646 $ 11,435,161 $ 11,412,128 ============ ============ ============ EBITDA ($183,002) ($1,434,261) ($1,071,502) Operating loss ($273,740) ($1,927,928) ($2,253,037) Net loss ($364,402) ($2,564,103) ($2,691,450) Total assets $ 9,097,780 $ 17,228,025 $ 13,236,868 Internet e-commerce - -------------------------------------------------------------------------------------------- External revenues $ 564,381 $ 1,525,517 $ 2,642,376 Intercompany revenues - 25,000 - ------------ ------------ ------------ Total revenues $ 564,381 $ 1,550,517 $ 2,642,376 ============ ============ ============ EBITDA $ 39,197 $ 215,051 $ 1,052,015 Operating income $ 36,483 $ 188,658 $ 873,832
66 Net income $ 38,282 $ 197,698 $ 854,068 Total assets $ 266,955 $ 537,289 $ 1,222,238 Other - --------------------------------------------------------------------------------------------- External revenues - - - Intercompany revenues ($1,690,253) ($6,461,541) ($5,852,902) ------------ ------------ ------------ Total revenues ($1,690,253) ($6,461,541) ($5,852,902) ============ ============ ============ EBITDA ($ 335,325) ($408,783) ($287,110) Operating loss ($361,013) ($433,683) ($318,274) Net loss ($562,119) ($907,570) ($1,887,651) Total assets $ 5,940 ($3,563,743) $ 88,924 Total - --------------------------------------------------------------------------------------------- External revenues $ 16,228,387 $ 34,519,827 $ 34,518,279 Intercompany revenues - - - ------------ ------------ ------------ Total revenues $ 16,228,387 $ 34,519,827 $ 34,518,279 ============ ============ ============ EBITDA ($3,610,971) ($1,644,800) ($1,791,642) Depreciation, Depletion and ($590,746) ($1,822,190) ($3,247,872) Amortization Operating loss ($4,201,717) ($3,466,990) ($5,039,514) Net loss ($4,695,128) ($5,093,961) ($7,591,084) Total assets $15,820,708 $24,250,592 $24,154,293
12. INCOME TAXES As of July 31,1999, the Company had net operating loss carryforwards of approximately $9,335,000 for U.S. federal income tax purposes which are available to reduce future taxable income of which $534,000 will expire in 2009, $2,385,000 will expire in 2010, $2,083,000 will expire in 2011, $2,894,000 will expire in 2012 and $1,439,000 will expire in 2019. The availability of the net operating loss (NOL) carryforwards to reduce U.S. federal taxable income is subject to various limitations in the event of an ownership change as defined in Section 382 of the Internal Revenue Code of 1986 (the "Code"). The Company experienced a change in ownership in excess of 50 percent, as defined in the Code, during the year ended July 31, 1998. This change in ownership limits the annual utilization of NOL under the Code to $1,284,000 per year, but does not impact its ability to utilize its NOL's because the annual limitation under the Code would allow full utilization within the statutory carryforward period. 67 The tax effects of significant temporary differences representing deferred income tax assets and liabilities are as follows as of July 31, 1998 and 1999: July 31, 1998 July 31,1999 Net operating loss carryforward $ 2,919,000 $ 3,174,000 Other tax differences, net 628,000 839,000 Valuation allowance (3,547,000) (4,013,000) ----------- ----------- Total deferred income tax assets $ - $ - =========== =========== A valuation reserve of $3,547,000 and $4,013,000, as of July 31, 1998 and 1999, respectively, representing the total of net deferred tax assets has been recognized by the Company as it cannot determine that it is more likely than not that all of the deferred tax assets will be realized. Additionally, the Company's effective tax rate differs from the statutory rate as the tax benefits have not been recorded on the losses incurred for the years ended July 31, 1997, 1998 and 1999. 13. COMMITMENTS AND CONTINGENCIES During the years ended July 31, 1998 and 1999, nine officers of the Company entered into employment agreements with ATSI-Texas or ATSI-Delaware, generally for periods of up to three years (with automatic one-year extensions) unless terminated earlier in accordance with the terms of the respective agreements. The annual base salary under such agreements for each of these nine officers range from $75,000 to $100,000 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. No bonuses were paid during fiscal 1999. Effective August 1998, two of the aforementioned officers entered into employment agreements with ATSI-Delaware, which superceded their previous agreements, each for a period of three years (with automatic one-year extensions) unless terminated earlier in accordance with the terms of the respective agreements. The annual base salary under such agreements for each of these two officers may not be less than $127,000 and $130,000, 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. No such bonuses were awarded for fiscal 1999. Subsequent to July 31, 1999, three officers whose employment agreements were to expire January 1, 2000 were informed that their agreements would not be renewed under the current terms and conditions. Two of the three officers have since entered into new employment agreements with ATSI-Delaware, each for a period of one year unless earlier terminated in 68 accordance with the terms of the respective agreements. The annual base salaries under such agreements may not be less than approximately $101,000 and $105,000, 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. 14. RISKS AND UNCERTAINTIES AND CONCENTRATIONS The Company's business is dependent upon key pieces of equipment, switching and transmission facilities, fiber capacity and the Solaridad satellites. Should the Company experience service interruptions from its underlying carriers, equipment failures or should there be damage or destruction to the Solaridad satellites or leased fiber lines there would likely be a temporary interruption of the Company's services which could adversely or materially affect the Company's operations. The Company believes that suitable arrangements could be obtained with other satellite or fiber optic network operators to provide transmission capacity. Additionally, the Company's network control center is protected by 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. During the year ended July 31, 1999, the Company's wholesale transport business had two customers, whose aggregated revenues approximated 10% of the Company's total revenues for the year. No other customer generated revenues individually greater than 5% during the year. 15. RELATED PARTY TRANSACTIONS In January 1997, ATSI-Canada entered into an agreement with an international consulting firm, of which ATSI-Delaware director Carlos K. Kauachi is president, for international business development support. Under the terms of the agreement, the Company paid the consulting firm $8,000 per month for a period of twelve months. In January 1998, the agreement was renewed at $10,000 per month for a period of twelve months. In March 1999, the agreement was renewed at $6,000 per month for a period of twelve months. In April 1998, the Company engaged two companies for billing and administrative services related to network management services it provides. The companies, which are owned by Tomas Revesz, an ATSI-Delaware director, were paid approximately $140,000 for their services during fiscal 1998. Subsequent to year-end, the Company entered into an agreement with the two companies capping their combined monthly fees at $18,500 per month. For fiscal 1999, the companies were paid approximately $180,000 for their services. Additionally, the Company has a payable to Mr. Revesz of $90,000. In February 1999, the Company entered into notes payable with related parties, all of whom were officers or directors of the Company in the amount of $250,000. The notes accrue interest at a rate of 12% per year until paid in full. As of July 31, 1999, $100,000 of the notes remain outstanding. 69 The Company has entered into a month-to-month agreement with Technology Impact Partners, a consulting firm of which Company director Richard C. Benkendorf, is principal and owner. Under the agreement, Technology Impact Partners provides the Company with various services that include strategic planning, business development and financial advisory services. Under the terms of the agreement, the Company pays the consulting firm $3,750 per month plus expenses. At July 31, 1999, the Company has a payable to Technology Impact Partners of approximately $74,000. 16. LEGAL PROCEEDINGS On January 29, 1999, one of the Company's customers, Twister Communications, Inc. filed a Demand for Arbitration seeking damages for breach of contract before the American Arbitration Association. The customer claims that the Company wrongfully terminated an International Carrier Services Agreement executed by the parties in June 1998 under which the Company provided wholesale carrier services from June 1998 to January 1999. The customer's claims for damages represent amounts that it claims it had to pay in order to replace the service provided by the Company. The Company disputes that it terminated the contract wrongfully and asserts that the customer breached the agreement by failing to pay for services rendered and by intentionally making false representation regarding its traffic patterns and on March 3, 1999 filed a Demand for Arbitration seeking damages for breach of contract in an amount equal to the amounts due to the Company for services rendered plus interest, plus additional damages for fraud. An arbitration panel was selected and the parties are now completing written discovery. While the Company believes that it has a justifiable basis for its arbitration demand and that it will be able to resolve the dispute without a material adverse effect on the Company's financial condition; until the arbitration proceedings take place, the Company can not reasonably estimate the possible loss, if any, and there can be no assurance that the resolution of this dispute would not have an adverse effect on the Company's results of operations. On June 16, 1999, the Company's subsidiary, ATSI Texas initiated a lawsuit in District Court, Bexar County, Texas against PrimeTEC International, Inc., Mike Moehle and Vartec Telecom, Inc. claiming misrepresentation and breach of conduct. Under an agreement the Company signed in late 1998, PrimeTEC was to provide quality fiber optic capacity in January 1999. Mike Moehle is PrimeTEC's former president who negotiated the fiber lease and Vartec is PrimeTEC's parent. The delivery of the route in early 1999 was a significant component of the Company's operational and sales goal for the year and the failure of its vendor to provide the capacity led to the Company negotiating an alternative agreement with Bestel, S.A. de C.V. at a higher cost. While the total economic impact is still being assessed, the Company believes lost revenues and incremental costs are in excess of $15 million. While the Company's contract contains certain limitations regarding the type and amounts of damages that can be pursued, the Company has authorized its attorneys to pursue all relief to which it is entitled under law. As such, the Company can not reasonably estimate the ultimate outcome of neither this lawsuit nor the additional costs that may be incurred in the pursuit of its case. The Company is also a party to additional claims and legal proceedings arising in the ordinary course of business. The Company believes it is unlikely that the final outcome of any 70 of the claims or proceedings to which the Company is a party would have a material adverse effect on the Company's financial statements; however, due to the inherent uncertainty of litigation, the range of possible loss, if any, cannot be estimated with a reasonable degree of precision and there can be no assurance that the resolution of any particular claim or proceeding would not have an adverse effect on the Company's results of operations in the period in which it occurred. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information called for by item 10 of Form 10-K is incorporated herein by reference to such information included in the Company' Proxy Statement of the 1999 Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION The information called for by item 11 of Form 10-K is incorporated herein by reference to such information included in the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by item 12 of Form 10-K is incorporated herein by reference to such information included in the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by item 13 of Form 10-K is incorporated herein by reference to such information included in the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders. 71 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements Index to Financial Statements appears on Page 40. (b) Reports on Form 8-K None. (c) Exhibits 3.1 Amended and Restated Certificate of Incorporation of American TeleSource International, Inc., a Delaware corporation (Exhibit 3.3 to Amendment No. 2 to Registration Statement on Form 10 (No. 333-05557) of ATSI filed on September 11, 1997) 3.2 Amended and Restated Bylaws of American TeleSource International, Inc. (Exhibit to Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 13, 2000) 4.1 Certificate of Designation, Preferences and Rights of 10% Series A Cumulative Convertible Preferred Stock (Exhibit 10.43 to Annual Report on Form 10-K for year ending July 31, 1999 filed on October 26, 1999) 4.2 Certificate of Designation, Preferences and Rights of 6% Series B Cumulative Convertible Preferred Stock (Exhibit 10.34 to Registration Statement on Form S-3 (No. 333-84115) filed August 18, 1999) 4.3 Certificate of Designation, Preferences and Rights of 6% Series C Cumulative Convertible Preferred Stock (Exhibit 10.40 to Registration Statement on Form S-3 (No. 333-84115) filed October 26, 1999) 4.4 Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI dated July 2, 1999 (Exhibit 10.33 to Registration Statement on Form S-3 (No. 333- 84115) filed August 18, 1999) 4.5 Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by ATSI dated July 2, 1999 (Exhibit 10.35 to Registration Statement on Form S-3 (No. 333- 84115) filed August 18, 1999) 4.6 Registration Rights Agreement between The Shaar Fund Ltd. and ATSI dated July 2, 1999 (Exhibit 10.36 to Registration Statement on Form S-3 (No. 333- 84115) filed August 18, 1999) 72 4.7 Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI dated September 24, 1999 (Exhibit 10.39 to Registration Statement on Form S-3 (No. 333-84115) filed October 26, 1999) 4.8 Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by ATSI dated September 24, 1999 (Exhibit 10.41 to Registration Statement on Form S-3 (No. 333-84115) filed October 26, 1999) 4.9 Registration Rights Agreement between The Shaar Fund Ltd. and ATSI dated September 24, 1999 (Exhibit 10.42 to Registration Statement on Form S-3 (No. 333-84115) filed October 26, 1999) 4.10 Amended and Restated 1997 Option Plan (Exhibit 10.30 to Registration Statement on Form S-4 (No. 333-47511) filed March 6, 1998) 4.11 Form of 1997 Option Plan Agreement (Exhibit 10.7 to Registration Statement on Form 10 (No. 000-23007) filed August 22, 1997) 4.12 American TeleSource International, Inc. 1998 Stock Option Plan (Exhibit 4.7 to Registration Statement on Form S-8 filed January 11, 2000) 10.1 Agreement with SATMEX (Agreement #095-1) (Exhibit 10.31 to Annual Report on Form 10-K for year ended July 31, 1998 (No. 000-23007)) 10.2 Agreement with SATMEX (Agreement #094-1) (Exhibit 10.32 to Annual Report on Form 10-K for year ended July 31, 1998 (No. 000-23007)) 10.3 Amendment to Agreement #094-1 with SATMEX (Exhibit to this Amended Annual Report on Form 10-K for year ended July31, 1999 filed April 13, 2000) Confidential treatment requested for portions of this document 10.4 Amendment to Agreement #095-1 with SATMEX (Exhibit to this Amended Annual Report on Form 10-K for year ended July31, 1999 filed April 13, 2000) Confidential treatment requested for portions of this document 10.5 Bestel Fiber Lease (Exhibit to this Amended Annual Report on Form 10-K for year ended July31, 1999 filed April 13, 2000) 10.6 Amendment to Private Line Agreement with Bestel, S.A. de C.V. (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 13, 2000) 10.7 Lease Finance Agreements between IBM de Mexico and ATSI-Mexico (Exhibit 10.21 to Amendment No. 1 to Registration Statement on Form 10 (No. 023007) filed September 11, 1997) 73 10.8 Telecommunications Services Agreement with Best Marketing and Natta Marketing (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 13, 2000) 10.9 Master Lease Agreement with NTFC (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 13, 2000) 10.10 BancBoston Master Lease Agreement (Exhibit to this Amended Annual Report on Form 10-K for year ended July31, 1999 filed April 13, 2000) 10.11 Employment Agreement with Arthur L. Smith dated - February 28, 1997(Exhibit 10.16 to Registration Statement on Form 10 (No. 333-05557) filed August 22, 1997) 10.12 Employment Agreement with Arthur L. Smith dated September 24, 1998 (Exhibit to this Amended Annual Report on Form 10-K filed April 13, 2000) 10.13 Employment Agreement with Craig K. Clement dated February 28, 1997 (Exhibit 10.18 to Registration Statement on Form 10 (No. 333-05557) filed August 22, 1997) 10.14 Employment Agreement with Craig K. Clement dated January 1, 2000 (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 13, 2000) 10.15 Employment Agreement with Sandra Poole-Christal dated January 1, 1998 (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 13, 2000) 10.16 Employment Agreement with Charles R. Poole dated February 28, 1997 (Exhibit 10.20 to Registration Statement on Form 10 (No. 333-05557) filed August 22, 1997) 10.17 Employment Agreement with Charles R. Poole dated September 24, 1998 (Exhibit to this Amended Annual Report on Form 10-K filed April 13, 2000) 10.18 Employment Agreement with H. Douglas Saathoff dated February 28, 1997(Exhibit 10.17 to Registration Statement on Form 10 (No. 333-05557) filed August 22, 1997) 10.19 Employment Agreement with H. Douglas Saathoff dated January 1, 2000 (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 13, 2000) 10.20 Office Space Lease Agreement (Exhibit 10.14 to Registration Statement on Form S-4 (No. 333-05557) filed June 7, 1996) 10.21 Amendment to Office Space Lease Agreement (Exhibit 10.14 to Registration Statement on Form S-4 (No. 333-05557) filed June 7, 1996) 10.22 Office Space Lease Agreement for GlobalSCAPE (Exhibit 10.29 to Registration Statement on Form S-4 (No. 333-47511) filed on March 6, 1998) 74 10.23 Commercial Lease with ACLP University Park SA, L.P. (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 13, 2000) 10.24 Amendment to Commercial Lease with ACLP University Park SA, L.P. (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 13, 2000) 10.25 Commercial Lease between GlobalSCAPE, Inc. and ACLP University Park SA, L.P (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 13, 2000) 10.26 Amendment to Commercial Lease between GlobalSCAPE, Inc. and ACLP University Park SA, L.P (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 13, 2000) 10.27 Compensation Agreement between ATSI-Texas and James McCourt relating to Guarantee of Equipment Line of Credit by James McCourt (Exhibit 10.3 to Registration Statement on Form 10 (No. 000-23007) filed on August 22, 1997) 10.28 Consulting Agreement with KAWA Consultores, S.A. de C.V. (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 13, 2000) 11 Statement of Computation of Per Share Earnings (Exhibit 11 to Annual Report on Form 10-K for year ended July 31, 1999 filed October 26, 1999) 22 Subsidiaries of ATSI (Exhibit 22 to Annual Report on Form 10-K for year ended July 31, 1999 filed October 26, 1999) 23 Consent of Arthur Andersen LLP) (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 13, 2000) 27 Financial Data Schedule (Exhibit 27 to Annual Report on Form 10-K for year ended July 31, 1999 filed October 26, 1999) 99.1 ATSI Shareholder Newsletter (Exhibit 99.1 to Annual Report on Form 10-K for year ended July 31, 1999(File No. 000-23007) filed October 26, 1999) 99.2 FCC Radio Station Authorization - C Band (Exhibit 10.10 to Registration Statement on Form S-4 (No. 333-05557) filed June 7, 1996) 99.3 FCC Radio Station Authorization - Ku Band (Exhibit 10.11 to Registration Statement on Form 10 (No. 333-05557) filed June 7, 1996) 99.4 Section 214 Certification from FCC (Exhibit 10.12 to Registration Statement on Form 10 (No. 333-05557) filed June 7, 1996) 75 99.5 Comercializadora License (Payphone License) issued to ATSI-Mexico (Exhibit 10.24 to Registration Statement on Form 10 (No. 000-23007) filed August 22, 1997) 99.6 Network Resale License issued to ATSI-Mexico (Exhibit 10.25 to Registration Statement on Form 10 (No. 000-23007) filed August 22, 1997) 99.7 Shared Teleport License issued to Sinfra (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 13, 2000) 99.8 Packet Switching Network License issued to SINFRA (Exhibit 10.26 to Registration Statement on Form 10 (No. 000-23007) filed August 22, 1997) 99.9 Value-Added Service License issued to SINFRA(Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 13, 2000) 99.10 Potential Dilution Chart (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 13, 2000) 99.11 Preferred Stock Features (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 13, 2000) 76 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto authorized, in San Antonio, Texas on April 13, 2000. AMERICAN TELESOURCE INTERNATIONAL, INC. By: /s/ Arthur L. Smith ------------------- Arthur L. Smith Chief Executive Officer By: /s/ H. Douglas Saathoff ------------------------- H. Douglas Saathoff Senior Vice President, Chief Financial Officer and Corporate Secretary Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, this report has been signed below by the following persons in the capacities indicated on April 13, 2000. Signature Title --------- ----- /s/ ARTHUR L. SMITH Chairman of the Board, Chief ------------------- Executive Officer, Director /s/ H. DOUGLAS SAATHOFF Chief Financial Officer, Senior Vice ----------------------- President, and Corporate Secretary /s/ RICHARD C. BENKENDORF Director ------------------------- /s/ CARLOS K. KAUACHI Director --------------------- /s/ MURRAY R. NYE Director ----------------- /s/ TOMAS REVESZ Director ---------------- /s/ ROBERT B. WERNER Director -------------------- 77 Exhibit List for 10-K 3.1 Amended and Restated Certificate of Incorporation of American TeleSource International, Inc., a Delaware corporation (Exhibit 3.3 to Amendment No. 2 to Registration Statement on Form 10 (No. 333-05557) of ATSI filed on September 11, 1997) 3.2 Amended and Restated Bylaws of American TeleSource International, Inc. (Exhibit to Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 11, 2000) 4.1 Certificate of Designation, Preferences and Rights of 10% Series A Cumulative Convertible Preferred Stock (Exhibit 10.43 to Annual Report on Form 10-K for year ending July 31, 1999 filed on October 26, 1999) 4.2 Certificate of Designation, Preferences and Rights of 6% Series B Cumulative Convertible Preferred Stock (Exhibit 10.34 to Registration Statement on Form S-3 (No. 333-84115) filed August 18, 1999) 4.3 Certificate of Designation, Preferences and Rights of 6% Series C Cumulative Convertible Preferred Stock (Exhibit 10.40 to Registration Statement on Form S-3 (No. 333-84115) filed October 26, 1999) 4.4 Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI dated July 2, 1999 (Exhibit 10.33 to Registration Statement on Form S-3 (No. 333-84115) filed August 18, 1999) 4.5 Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by ATSI dated July 2, 1999 (Exhibit 10.35 to Registration Statement on Form S-3 (No. 333-84115) filed August 18, 1999) 4.6 Registration Rights Agreement between The Shaar Fund Ltd. and ATSI dated July 2, 1999 (Exhibit 10.36 to Registration Statement on Form S-3 (No. 333-84115) filed August 18, 1999) 4.7 Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI dated September 24, 1999 (Exhibit 10.39 to Registration Statement on Form S-3 (No. 333-84115) filed October 26, 1999) 4.8 Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by ATSI dated September 24, 1999 (Exhibit 10.41 to Registration Statement on Form S-3 (No. 333-84115) filed October 26, 1999) 4.9 Registration Rights Agreement between The Shaar Fund Ltd. and ATSI dated September 24, 1999 (Exhibit 10.42 to Registration Statement on Form S-3 (No. 333-84115) filed October 26, 1999) 4.10 Amended and Restated 1997 Option Plan (Exhibit 10.30 to Registration Statement on Form S-4 (No. 333-47511) filed March 6, 1998) 4.11 Form of 1997 Option Plan Agreement (Exhibit 10.7 to Registration Statement on Form 10 (No. 000-23007) filed August 22, 1997) 4.12 American TeleSource International, Inc. 1998 Stock Option Plan (Exhibit 4.7 to Registration Statement on Form S-8 filed January 11, 2000) 10.1 Agreement with SATMEX (Agreement #095-1) (Exhibit 10.31 to Annual Report on Form 10-K for year ended July 31, 1998 (No. 000-23007)) 10.2 Agreement with SATMEX (Agreement #094-1) (Exhibit 10.32 to Annual Report on Form 10-K for year ended July 31, 1998 (No. 000-23007)) 10.3 Amendment to Agreement #094-1 with SATMEX (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 11, 2000) 10.4 Amendment to Agreement #095-1 with SATMEX (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 11, 2000) 10.5 Bestel Fiber Lease (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 11, 2000) 10.6 Amendment to Private Line Agreement with Bestel, S.A. de C.V. (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 11, 2000) 10.7 Lease Finance Agreements between IBM de Mexico and ATSI-Mexico (Exhibit 10.21 to Amendment No. 1 to Registration Statement on Form 10 (No. 023007) filed September 11, 1997) 10.10 BancBoston Master Lease Agreement (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 11, 2000) 10.11 Employment Agreement with Arthur L. Smith dated - February 28, 1997 (Exhibit 10.16 to Registration Statement on Form 10 (No. 333-05557) filed August 22, 1997) 10.12 Employment Agreement with Arthur L. Smith dated September 24, 1998 (Exhibit to this Amended Annual Report on Form 10-K filed April 11, 2000) 10.13 Employment Agreement with Craig K. Clement dated February 28, 1997 (Exhibit 10.18 to Registration Statement on Form 10 (No. 333-05557) filed August 22, 1997) 10.14 Employment Agreement with Craig K. Clement dated January 1, 2000 (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 11, 2000) 10.15 Employment Agreement with Sandra Poole-Christal dated January 1, 1998 (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 11, 2000) 10.16 Employment Agreement with Charles R. Poole dated February 28, 1997 (Exhibit 10.20 Registration Statement on Form 10 (No. 333- 05557) filed August 22, 1997) 10.17 Employment Agreement with Charles R. Poole dated September 24, 1998 (Exhibit to this Amended Annual Report on Form 10-K filed April 11, 2000) 10.18 Employment Agreement with H. Douglas Saathoff dated February 28, 1997 (Exhibit 10.17 to Registration Statement on Form 10 (No. 333-05557) filed August 22, 1997) 10.19 Employment Agreement with H. Douglas Saathoff dated January 1, 2000 (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 11, 2000) 10.20 Office Space Lease Agreement (Exhibit 10.14 to Registration Statement on Form S-4 (No. 333-05557) filed June 7, 1996) 10.21 Amendment to Office Space Lease Agreement (Exhibit 10.14 to Registration Statement on Form S-4 (No. 333-05557) filed June 7, 1996) 10.22 Office Space Lease Agreement for GlobalSCAPE (Exhibit 10.29 to Registration Statement on Form S-4 (No. 333-47511) filed on March 6, 1998) 10.23 New Office Space Lease Agreement for American TeleSource International, Inc. (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 11, 2000) 10.24 Amendment to New Office Space Lease Agreement for American TeleSource International, Inc. (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 11, 2000) 10.25 New Office Space Lease Agreement for GlobalSCAPE, Inc. (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 11, 2000) 10.26 Amendment to New Office Space Lease Agreement for GlobalSCAPE, Inc. (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 11, 2000) 10.26 Compensation Agreement between ATSI-Texas and James McCourt relating to Guarantee of Equipment Line of Credit by James McCourt (Exhibit 10.3 to Registration Statement on Form 10 (No. 000-23007) filed on August 22, 1997) 10.28 Consulting Agreement with KAWA Consultores, S.A. de C.V. (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 11, 2000) 11 Statement of Computation of Per Share Earnings (Exhibit 11 to Annual Report on Form 10-K for year ended July 31, 1999 filed October 26, 1999) 22 Subsidiaries of ATSI (Exhibit 22 to Annual Report on Form 10-K for year ended July 31, 1999 filed October 26, 1999) 23 Consent of Arthur Andersen LLP (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 11, 2000) 27 Financial Data Schedule (Exhibit 27 to Annual Report on Form 10-K for year ended July 31, 1999 filed October 26, 1999) 99.1 ATSI Shareholder Newsletter (Exhibit 99.1 to Annual Report on Form 10-K for year ended July 31, 1999 (File No. 000-23007) filed October 26, 1999) 99.2 FCC Radio Station Authorization - C Band (Exhibit 10.10 to Registration Statement on Form S-4 (No. 333-05557) filed June 7, 1996) 99.3 FCC Radio Station Authorization - Ku Band (Exhibit 10.11 to Registration Statement on Form 10 (No. 333-05557) filed June 7, 1996) 99.4 Section 214 Certification from FCC (Exhibit 10.12 to Registration Statement on Form 10 (No. 333-05557) filed June 7, 1996) 99.5 Comercializadora License (Payphone License) issued to ATSI-Mexico (Exhibit 10.24 to Registration Statement on Form 10 (No. 000-23007) filed August 22, 1997) 99.6 Network Resale License issued to ATSI-Mexico (Exhibit 10.25 to Registration Statement on Form 10 (No. 000-23007) filed August 22, 1997) 99.7 Shared Teleport License issued to Sinfra (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 11, 2000 99.8 Packet Switching Network License issued to SINFRA (Exhibit 10.26 to Registration Statement on Form 10 (No. 000-23007) filed August 22, 1997) 99.9 Value-Added Service License issued to SINFRA (Exhibit to this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 11, 2000) EX-3.2 2 AMENDED AND RESTATED BYLAWS Exhibit 3.2 Amended and Restated Bylaws of American TeleSource International, Inc. (formerly known as ATSI Merger Corp.) TABLE OF CONTENTS ----------------- 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 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
1 Section 6.2. Powers and Duties........................................................ 11 6.2.1. President........................................................ 11 6.2.2. Vice President................................................... 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 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
2 AMENDED AND RESTATED 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). 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. 3 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 of 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 procedures. 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 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 Section 13, 14 or 15 (d) of the Securities Exchange Act of 1934, as amended. Section 2.7. Voting of Shares ---------------- 4 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 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 the capital stock of the Company, present in person or represented by proxy and 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 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 5 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; 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 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 for: (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 6 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 stockholder 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 qualifies 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. 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, or 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. 7 Section 4.3. Organization, Conduct of Meetings. The Board of Directors --------------------------------- may, if it chooses, elect a Chairman of the Board and 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 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 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, if 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 8 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 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 meeting 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 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, 9 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 Treasures, and such other officers as the Board may determine. Vice Presidents, Assistant Secretaries and Assistant Treasurers my 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. 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 transactions and of the financial condition of the Company. The Treasurer may sign certificates evidencing shares of stock of the Company. 10 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 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 of Board my 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 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 11 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 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 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 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 12 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 judgement, 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 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 the 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. 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 that the request of the 13 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 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 attorney's 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 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 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 of transaction which would be valid in the absence of this provision. 14 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. 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 of 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. 15 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 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, 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 proceeding 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. 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. 16 CERTIFICATE ----------- I, the undersigned Secretary of AMERICAN TELESOURCE INTERNATIONAL, INC., do hereby certify that the foregoing is a true and correct copy of the Amended and Restated Bylaws of said Company as duly approved at the organizational meeting of the Company. WITNESS my hand and the seal of the Company this the _________ day of ____________ , 2000. /s/ H. Douglas Saathoff ------------------- 17 EX-10.3 3 AMENDMENT TO AGREEMENT #094-1 EXHIBIT 10.3 AMENDMENT TO AGREEMENT NO. 094-1 FOR PROVISION OF INTERNATIONAL SATELLITE SERVICES VIA THE MEXICAN SATELLITE SYSTEM EXECUTED BETWEEN SATELITES MEXICANOS, S.A. DE C.V. ("SATMEX"), REPRESENTED BY ING. LAURO ANDRES GONZALEZ MORENO, GENERAL DIRECTOR AND TELESPAN, INC. ("THE CUSTOMER"), REPRESENTED BY CHARLES RANDY POOLE, LEGAL REPRESENTATIVE IN ACCORDANCE WITH THE FOLLOWING BACKGROUND, RECITALS, AND CLAUSES: BACKGROUND 1. On April 28, 1998 SATMEX and the Customer executed Agreement No. 094-1 ("the Agreement") for the provision of International Satellite Services via the Mexican Satellite System. 1. In accordance with Paragraph One of the Agreement, SATMEX agreed to provide to the Customer international satellite services via the Mexican Satellite System by assigning uninterrupted space segment on C Band, transponders 8N and 10N, Region 2, Solidaridad 2 with a bandwidth of 10.225 MHz. 1. In accordance with Paragraph Eleven of the Agreement, the Customer agreed to pay SATMEX for the services in advance on a monthly basis a total of $51,696.10. RECITALS 1. The parties hereby state: .1 That they ratify all Recitals stated in the Agreement. .1 That they hereby agree to the terms and conditions of this present Amendment. After having made the above statements and recitals the Parties hereby agree to execute and adhere to the following: CLAUSES FIRST.- The Parties agree to modify Paragraph One of the Agreement to state as follows: SATMEX agrees to provide the Customer international satellite services via the Mexican Satellite System by assigning uninterrupted space segment on C Band, transponders 10N, 11N and 12N Region 2 and 3, Solidaridad 2 with a total bandwidth of 22.00 MHz. The Parties agree that the capacity referred to above will be utilized by the Customer as follows: May 1, 1998 to October 31, 1999 10.225 MHz November 1, 1999 to March 31, 2000 15.00 MHz April 1, 2000 to April 30, 2001 22.00 MHz SECOND.- The Parties agree in modifying the Paragraph Eleven of the Agreement as follows: The Customer shall pay SATMEX for the services in advance on a monthly basis a total of ************* in accordance with the following schedule: From May 1, 1998 to October 31, 1999 ********** monthly. From November 1, 1999 to March 31, 2000 ********** monthly. 18 From April 1, 2000 to April 1, 2001 ********** monthly. SECOND.- The Parties agree in substituting Addendum 1 of the Agreement for Addendum 1 attached hereto and duly executed by the parties and shall form an integral part of this Amendment. THIRD.- The term of this Amendment shall begin upon the date of execution and shall terminate in accordance with the term established in Paragraph Fourteen of the Agreement. FOURTH.- The Parties agree that all other Paragraphs of the Agreement, Amendment 1, and Amendment 2 as well as all other Addenda shall prevail as agreed to. FIFTH.- For everything relating to the fulfillment, contents, interpretation and scope of this Amendment as well as that not expressly stated herein, the Parties agree to submit to the established in the Civil Code of the Federal District and the jurisdiction and competence of the Federal Courts located in Mexico City waiving the right to any other jurisdiction future or present and for any reason whatsoever. This Amendment is executed in duplicate with each party retaining an original in Mexico City on November 1, 1999. SATMEX CUSTOMER ING. LAURO GONZALEZ MORENO CHARLES RANDY POOLE GENERAL DIRECTOR LEGAL REPRESENTATIVE 19 TECHNICAL ADDENDUM I GENERAL INFORMATION Customer: TELESPAN, INC. Address: 12500 NETWORK BOULEVARD, SUITE 407 City: SAN ANTONIO TEXAS USA Contract No. 094-I Date: April 28, 1998 Term: 3 years Legal Rep: CHARLES RANDY POOLE TECHNICAL INFORMATION OF ASSIGNED CAPACITY Type of Network: POINT TO POINT Bandwidth: May 1, 1998-October 31, 1999 10.225 MHz November 1, 1999-March 31, 2000 15.00 MHz April 1, 2000-April 30, 2001 22.00 MHz
Type: PRIVATE NETWORK Satellite: SOLIDARIDAD 2 Band: C Service Category: Uninterrupted Orbital Position: 113 (degrees) 0" Transponder: 10N, 11N and 12N Region: R2 and 3 Polarization: H/V Connectivity: R2/R2 Teleport: SAN ANTONIO, TEXAS TARIFF AGREEMENT TERM: TOTAL AGREEMENT ************* USD THREE YEARS MONTHLY RECURRING: May 1, 1998-October 31, 1999 ********** November 1, 1999-March 31, 2000 ********** April 1, 2000-April 30, 2001 ********** Commencement Date: May 1, 1998 Termination Date: April 30, 2001 Mexico, D.F. November 1, 1999 SATMEX THE CUSTOMER ING. LAURO ANDRES GONZALEZ MORENO CHARLES RANDY POOLE PRESIDENT PRESIDENT 20 EX-10.4 4 AMENDMENT AND AGREEMENT #095-1 EXHIBIT 10.4 THIRD AMENDMENT TO AGREEMENT NO. 095-1 FOR PROVISION OF INTERNATIONAL SATELLITE SERVICES VIA THE MEXICAN SATELLITE SYSTEM EXECUTED BETWEEN SATELITES MEXICANOS, S.A. DE C.V. ("SATMEX"), REPRESENTED BY ING. LAURO ANDRES GONZALEZ MORENO, GENERAL DIRECTOR AND TELESPAN, INC. ("THE CUSTOMER"), REPRESENTED BY CHARLES RANDY POOLE, LEGAL REPRESENTATIVE IN ACCORDANCE WITH THE FOLLOWING BACKGROUND, RECITALS, AND CLAUSES: BACKGROUND 1. On April 28, 1998 SATMEX and the Customer executed Agreement No. 095-1 ("the Agreement") for the provision of International Satellite Services via the Mexican Satellite System. 1. On September 1, 1998 SATMEX and the Customer executed an Amendment ("Amendment 1") to Agreement No. 095-1 for the provision of International Satellite Services via the Mexican Satellite System in which it was established that the monthly recurring would be $161,000 USD. 1. On January 4, 1999 SATMEX and the Customer executed an Amendment ("Amendment 2") to Agreement No. 095-1 for the provision of International Satellite Services via the Mexican Satellite System in which it was established that the late payment fees would be calculated based on the rate resulting from 1.5 times the Prime Rate issued by Citibank. 1. In accordance with Paragraph One of the Agreement, SATMEX agreed to provide to the Customer international satellite services via the Mexican Satellite System by assigning uninterrupted space segment on C Band, transponder 3W, Region 1, Solidaridad 2 with a bandwidth of 72 MHz. RECITALS .1 The parties hereby state: .1 That they ratify all Recitals stated in the Agreement. .1 That they hereby agree to the terms and conditions of this present Amendment. After having made the above statements and recitals the Parties hereby agree to execute and adhere to the following: CLAUSES FIRST.- The Parties agree that the Bandwidth established in the First Paragraph of The Agreement shall be utilized by the Customer as follows: May 1, 1998 to October 31, 1999 72.00 MHz November 1, 1999 to March 31, 2000 36.00 MHz April 1, 2000 to July 31, 2000 54.00 MHz August 1, 2000 to April 30, 2001 72.00 MHz SECOND.- The Parties agree in modifying the First Clause of Amendment 1 as follows: The Customer shall pay SATMEX for the services in advance on a monthly basis a total of ************* in accordance with the following schedule: From May 1, 1998 to October 31, 1999 *********** monthly. From November 1, 1999 to March 31, 2000 ********** monthly. 21 From April 1, 2000 to July 31, 2000 *********** monthly. From August 1, 2000 to April 30, 2001 *********** monthly. SECOND.- The Parties agree in substituting Addendum 1 of Amendment 1 for Addendum 1-b attached hereto and duly executed by the parties and shall form an integral part of this Amendment. THIRD.- The term of this Amendment shall begin upon the date of execution and shall terminate in accordance with the term established in Paragraph Fourteen of the Agreement. FOURTH.- The Parties agree that all other Paragraphs of the Agreement, Amendment 1, and Amendment 2 as well as all other Addenda shall prevail as agreed to. FIFTH.- For everything relating to the fulfillment, contents, interpretation and scope of this Amendment as well as that not expressly stated herein, the Parties agree to submit to the established in the Civil Code of the Federal District and the jurisdiction and competence of the Federal Courts located in Mexico City waiving the right to any other jurisdiction future or present and for any reason whatsoever. This Amendment is executed in duplicate with each party retaining an original in Mexico City on November 1, 1999. SATMEX CUSTOMER ING. LAURO GONZALEZ MORENO CHARLES RANDY POOLE GENERAL DIRECTOR LEGAL REPRESENTATIVE 22 TECHNICAL ADDENDUM I-b GENERAL INFORMATION Customer: TELESPAN, INC. Address: 12500 NETWORK BOULEVARD, SUITE 407 City: SAN ANTONIO TEXAS USA Contract No. 095-I Date: April 28, 1998 Term: 3 years Legal Rep: CHARLES RANDY POOLE TECHNICAL INFORMATION OF ASSIGNED CAPACITY Type of Network: POINT TO POINT Bandwidth: May 1, 1998-October 31, 1999 72.00 MHz November 1, 1999-March 31, 2000 36.00 MHz April 1, 2000-July 31, 2000 54.00 MHz August 1, 2000-April 30, 2001 72.00 MHz Type: PRIVATE NETWORK Satellite: SOLIDARIDAD 2 Band: C Service Category: Uninterrupted Orbital Position: 113(degrees) 0" Transponder: 3W Region: R1 Polarization: H/V Connectivity: R1/R1 Teleport: SAN ANTONIO, TEXAS TARIFF AGREEMENT TERM: TOTAL AGREEMENT ************* USD THREE YEARS MONTHLY RECURRING: May 1, 1998-October 31, 1999 *********** November 1, 1999-March 31, 2000 *********** April 1, 2000-July 31, 2000 *********** August 1, 2000-April 30, 2001 *********** Commencement Date: May 1, 1998 Termination Date: April 30, 2001 Mexico, D.F. November 1, 1999 SATMEX THE CUSTOMER ING. LAURO ANDRES GONZALEZ MORENO CHARLES RANDY POOLE PRESIDENT PRESIDENT 23 EX-10.5 5 BESTEL FIBER LEASE Exhibit 10.5 MASTER AGREEMENT FOR THE PROVISION OF TELECOMMUNICATION SERVICES EXECUTED BETWEEN "American TeleSource International, Inc." and BESTEL, S.A. DE C.V. Master Agreement for the provision of Telecommunication Services executed between BESTEL, S.A. DE C.V., represented by Lic. F. Xavier Basave Gonzalez and Ing. Pablo J. Galindo Tovar, ("BESTEL") and "American TeleSource International, Inc." represented by Charles R. Poole, (the "Customer") in accordance with the following Recitals and Clauses. AGREEMENT NUMBER: 100948-0011 The telecommunication Services that BESTEL shall provide to the Customer will be those shown in the following table and the parties agree that the provision of such services are governed by the terms and conditions of this Master Agreement for the Provision of Telecommunication Services and by that established in the Addenda corresponding to those Services and/or Promotional Programs selected:
- -------------------------------------------------------------------------------------------------------------- SERVICES AND ADDENDA OF CONTRACT DATE CUSTOMER'S SIGNATURE THIS PRESENT AGREEMENT - -------------------------------------------------------------------------------------------------------------- LONG DISTANCE xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xx x - -------------------------------------------------------------------------------------------------------------- OPERATOR SERVICES xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xx x - -------------------------------------------------------------------------------------------------------------- 800 SERVICES 29/SEPT/98 - -------------------------------------------------------------------------------------------------------------- PRIVATE LINE SERVICES xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xx x - -------------------------------------------------------------------------------------------------------------- DATA SERVICES xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xx x - -------------------------------------------------------------------------------------------------------------- LIT FIBER xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xx x - -------------------------------------------------------------------------------------------------------------- DARK FIBER xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xx x - -------------------------------------------------------------------------------------------------------------- COLLOCATION xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xx x - -------------------------------------------------------------------------------------------------------------- INTERNET SERVICES xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xx x - -------------------------------------------------------------------------------------------------------------- OTHER SERVICES (SPECIFY) xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xx x - --------------------------------------------------------------------------------------------------------------
CONDITIONS THE CUSTOMER accepts and acknowledges that once the Addenda corresponding to the Services and/or Promotional Programs selected are executed, these shall form an integral part of this Master Agreement for the Provision of Telecommunication Services. The Addenda corresponding to the Services and/or Promotional Programs selected at a later date than the date of execution of this Master Agreement, shall have an effective date as of the date of execution and acceptance and shall become an integral part of this Agreement. RECITALS I. BESTEL states through its legal representatives: 24 That they represent a Corporation duly incorporated under the laws of Mexico under the name of "Cableado y Sistemas" as is shown in Corporate Charter Number 33,515 dated August 1, 1995 and granted before Notary Public number 70 of Guadalajara, Jalisco and registered in the Public Commerce Registry of that city under number 177-178, Volume 586, First Book. That on September 2, 1996 its corporate name changed to "Bestel", S.A. de C.V. as is shown in corporate charter number 26,414 before Notary Public number 42 of Guadalajara and registered in the Public Commerce Registry of that city under number 146 of Volume 613, First Book. That the personality and capacity of its legal representatives as of this date has not been modified nor limited in any way. That on January 8, 1996 the Federal Government through the Ministry of Communications and Transportation (the "Ministry") granted a concession to install, operate and exploit a Public Telecommunications Network and therefore has the ability to provide the Services under this Agreement. That it desires to provide the Services under this Agreement to the Customer. That its tax identification number is BES950801CA1 and its address is Lopez Cotilla #1987-A, Colonia Obrera Centro, Guadalajara, Jalisco, 44140. That it has the personnel and technical capacity, as well as its own infrastructure or that of a third party necessary to provide the Services under this Agreement. II. THE CUSTOMER states through its legal representative: That it represents a Corporation duly incorporated under the laws of the State of Texas under the name of "American TeleSource International, Inc.". That the personality and capacity of its legal representative as of this date has not been modified nor limited in any way. That its address is 12500 Network Boulevard, Suite 407, San Antonio, TX 78249. That its telecommunications terminal equipment to be utilized by the CUSTOMER is duly homologated before the competent authorities and can be interconnected to a public telecommunications network without causing interferences or any damages to said network and complies with the authorized signaling. That it desires to contract with BESTEL the Services shown on the First Page of this Agreement which after its execution forms an integral part hereof. That it desires to commit to the traffic corresponding to the Services under this Agreement in the percentages shown hereunder or in its Addenda. Based on the above, the parties agree to the following: CLAUSES 1. OBJECTIVE. .1 BESTEL shall provide to the CUSTOMER the Services shown on the First page of this Agreement (the "Services") and THE CUSTOMER agrees to pay the consideration for such Services as established in the corresponding Addenda. .1 In the event THE CUSTOMER receives the Services or opts for any of the Promotional Programs 25 (modified from time to time) it is understood that THE CUSTOMER has accepted the applicable terms and conditions for those Services and/or Promotional Programs registered with the Federal Telecommunications Commission. 2. CONSIDERATION. 2.1 THE CUSTOMER agrees to pay BESTEL the total value of the consideration specified in the corresponding Addenda for the Contracted Services (the "Price") by no later than the date agreed upon. 2.2 The Price for the Services agreed to by the parties shall be subject to modifications in accordance with the changes that could arise under the terms and conditions of the Promotional Program under which the Customer has subscribed. In the event of conflict between the terms and conditions of this Agreement and those of the Promotional Program selected by the CUSTOMER, those contained in the Promotional Program shall prevail. 2.3 Except for that established in the Addenda, the rates can be modified at any time by BESTEL. The CUSTOMER acknowledges that BESTEL can make adjustments or discounts of such Price as of the effective date for the month of such adjustments or discounts. Such adjustments or discounts shall be stated in BESTEL's invoices presented to the CUSTOMER on the effective date of such rates. BESTEL shall be able to apply any adjustments or discounts against any outstanding amounts owed by the CUSTOMER. 2.4 All payments specified in this Agreement shall be made in accordance with that established in the corresponding service Addendum. In the event that the Price or any consideration would be established in another currency that is not Mexico's legal currency, but legal in any other country, the CUSTOMER agrees to pay BESTEL in such preestablished currency or in Mexican pesos at the exchange rate published by the Bank of Mexico in the Federal Daily Gazette on the date payment is made by the CUSTOMER. 2.5 The CUSTOMER acknowledges and accepts that if any other carrier would charge BESTEL any other amount for access to BESTEL's network required by the CUSTOMER or its customers, the CUSTOMER shall reimburse BESTEL such amounts. 2. FORM AND PLACE OF PAYMENT. 3.1 BESTEL shall send on a monthly basis an invoice to the CUSTOMER for the Services provided to the address shown in this Agreement. 3.2 Payment for the invoice(s) for the Services provided can be made in cash at the locations provided by BESTEL on such invoices or by check payable to BESTEL, S.A. DE C.V., by wire transfer or any other form specified by BESTEL. 3.3 Any differences that the CUSTOMER should have with the charges billed on the invoice should be directed to the Customer Service Center established by BESTEL. In the event the CUSTOMER wishes to dispute, CUSTOMER shall do so in writing by no later than the payment date shown on the invoice. 3.4 The invoices should be received by the CUSTOMER within the corresponding delivery time set for such CUSTOMER and can be modified by BESTEL from time to time. If the CUSTOMER does not receive the invoice, the CUSTOMER shall notify BESTEL so that a copy can be sent. Notwithstanding the above, the CUSTOMER shall pay immediately any outstanding amounts. 3.5 The CUSTOMER shall pay to BESTEL the amounts specified on the corresponding invoice by no later than the date established on the invoice which shall always be twenty (20) days after the close of the billing period. The CUSTOMER shall abide by the established in Paragraph 2.4 above. 26 3.6 THE CUSTOMER agrees that BESTEL may apply the payment for one of more of the Services under this Agreement to any outstanding amount generated by the provision of any of the Services for an amount or in any invoice order established by BESTEL. 3.7 BESTEL shall be able to partially or totally suspend the provision of the Services under this Agreement upon previous notice to the CUSTOMER, in the event the CUSTOMER pays late or does not completely pay its outstanding amounts. In the event of suspension and in order to reestablish the Services, the CUSTOMER shall pay any outstanding amounts as well as pay any reconnection charges. As well, in the event BESTEL so determines, the CUSTOMER shall provide BESTEL any security requested. 3.8 The amounts owed by the CUSTOMER after the payment date of the invoice shall be subject to late payment fees calculated by multiplying the TIIE Rate ( Interbank Interest Rate) published in the Federal Daily Gazette effective on the date of payment or substituted rate times 2.0 for the entire late period and until total payment has been made. 3.9 BESTEL shall be able to request total payment of any amount owed by the CUSTOMER before continuing to provide the Services under this Agreement. In the event that BESTEL should omit in any invoice amounts referred to in this Paragraph, such charges can be invoiced in any subsequent invoice in order for the CUSTOMER to cover its outstanding amounts. Such omission does not constitute a waiver by BESTEL to collect any amounts nor shall it be interpreted as the CUSTOMER'S right to not pay such amounts. 4.0 TERM. 4.1 This Agreement shall be in force as long as any Service in accordance with the corresponding Addenda remains in force unless otherwise specified. 4.2 In the event the CUSTOMER stops receiving BESTEL's services for any cause and receives them from another vendor or has terminated this Agreement, the parties agree that in the event the CUSTOMER desires to receive the SERVICES again and receive the Promotional Programs, it shall be understood that the CUSTOMER has accepted the terms and conditions established hereunder, which will be in force under the specified in subparagraph 4.1 above. 27 5. TERMINATION. 5.1 In the event the CUSTOMER does not fulfill any of its obligations under this Agreement, BESTEL shall terminate this Agreement without any liability. If this occurs, all amounts owed by the CUSTOMER to BESTEL at that time shall become due immediately. 5.2 BESTEL shall notify the CUSTOMER the termination of this Agreement indicating the amount owed and the due date in which such amount is to be paid. Those amounts owed by the CUSTOMER as of the termination date shall cause late fees as mentioned in 3.8 above. 5.3 In the event of default by BESTEL, the CUSTOMER shall notify BESTEL the cause(s) of such default so that BESTEL may correct to the CUSTOMER's satisfaction. After thirty (30) days and if such default continues, the CUSTOMER shall be able to terminate this Agreement, after paying any amounts owed to BESTEL without any liability. 5. SERVICE INTERRUPTIONS. 6.1 BESTEL shall not be responsible for the suspension or interruption of the Services because of force majeure or fortuitous cause or because of unforeseen circumstances including transmission failures as well as the suspension or interruption of communication by other networks through which the signals or traffic runs through. 6.2 BESTEL shall be able to interrupt for any necessary time the provision of the Services under this Agreement when an inspection or maintenance is needed for their facilities and/or equipment. BESTEL shall try to program such inspection or maintenance at hours that do not result inconvenient for the CUSTOMER. 6.3 Unless otherwise specified in this Agreement, the CUSTOMER acknowledges that the equipment and the lines through which the switched or dedicated local service is to be provided are not owned by BESTEL; therefore BESTEL shall not be responsible for any failures attributable to such equipment or lines. BESTEL shall only be responsible for the Services provided through circuits, equipment and fiber optic network owned by BESTEL or affiliates. 6.4 Unless otherwise specified in this Agreement, neither party shall be responsible for any damages, including indirect and/or consequential or for the loss of income derived or related with the provision of the Services under this Agreement. 5. LIABILITY. 7.1 According to the type of Services provided, the CUSTOMER shall not use such Services for international callback that utilizes the signaling of an incomplete call to any country where this type of service is not legal. As well, the CUSTOMER shall not use the contracted Services for transport of switched voice services to or from any other country since this is a violation of Mexican law. The CUSTOMER hereby assumes such responsibility and shall be responsible for any claims arising against BESTEL . 7.2 The CUSTOMER acknowledges that the Services provided hereunder and especially those of the corresponding Addenda cannot be marketed by the CUSTOMER unless the CUSTOMER has the licenses and/or authorizations to do so. 28 7.3 The CUSTOMER shall indemnify and hold BESTEL harmless from any damages, costs, responsibility and expenses resulting from such connections or connection intents and marketing of Services including those damages resulting from the use or unauthorized access to BESTEL's Public Telecommunications Network. 7.4 If necessary, the CUSTOMER hereby authorizes the Federal Telecommunications Commission, the Auditor of the Long Distance Carriers Committee and BESTEL to supervise the international private lines contracted through the execution of the corresponding Addenda authorizing BESTEL to immediately terminate this Agreement without any liability in the event misuse is detected. 7.2 BESTEL shall not be responsible for the contents of the information that the CUSTOMER transmits through its telecommunications network. 5. RELATIONSHIP OF PARTIES. 8.1 The nature of this Agreement is essentially commercial since BESTEL and THE CUSTOMER are companies of everyday business activities and in addition have the necessary elements to fulfill each and every obligation with their employees. As well, between the CUSTOMER' s employees and BESTEL's employees there does not exist any relationship whatsoever; therefore there is no labor relationship. THE CUSTOMER shall be the only party responsible of the obligations that the law establishes as an employer with regards to the personnel utilized and shall be responsible for each and every individual and collective claim that the CUSTOMER's employees could present against BESTEL assuming the liability of any claim presented and reimburse immediately any legal expense or of any other nature that BESTEL could incur for such concept. In the same fashion, BESTEL shall be the only responsible party of the obligations that the law establishes as an employer with regards to the personnel utilized and shall be responsible for each and every individual and collective claim that BESTEL's employees could present against the CUSTOMER assuming the liability of any claim presented. 5. TROUBLE REPORTS/REPAIRS 9.1 The CUSTOMER shall notify its trouble reports to BESTEL and BESTEL shall make available to the CUSTOMER a Customer Service Center that will be available 24 hours a day, 365 days per year where trouble tickets will be reported. BESTEL shall assign a confirmation number. 5. SERVICE GUARANTEES. 10.1 The guarantees offered by BESTEL are described and detailed in the Promotional Programs selected by the Customer and shall be attached to this Agreement forming an integral part hereof. 5. CREDIT INVESTIGATION. 11.1 THE CUSTOMER states that the information provided regarding its solvency and payment capacity is correct and based on that information BESTEL has made the decision to provide the Services under this Agreement. THE CUSTOMER hereby authorizes BESTEL to verify such information. As well, the CUSTOMER agrees that this authorization shall continue in force during the term of this Agreement for BESTEL's benefit. 5. NOTICES. 12.1 The parties agree that all notices, communications and notifications regarding this Agreement shall be directed to the addresses mentioned in the recitals of this Agreement. Such notices shall be made in writing 29 through certified mail or courier with a return receipt, facsimile or any other method that the other party has received such notification. In the event of address change, the parties agree to notify the other party with at least fifteen (15) days advance notice; otherwise the latest address shall prevail. 5. ASSIGNMENT; MODIFICATION. 13.1 THE CUSTOMER agrees that the rights and obligations derived under this Agreement shall not be assigned, transferred, negotiated nor modified in any way without the previous consent in writing from BESTEL. As well, BESTEL may assign its rights and obligations derived under this Agreement to any of its subsidiaries or affiliates or guarantee any obligation through notification to the CUSTOMER. 13.3 THE CUSTOMER shall notify BESTEL with sixty (60) days advance notice any modification to its corporate name, otherwise all documentation shall be generated using the previous name.DISPUTE RESOLUTION. 14.1 The parties express their firm conviction that in good faith in the event there are differences or disputes because of the interpretation, fulfillment and execution of this Agreement and in unlimited form for any technical aspect, service provision, application and collection of consideration and any other that require specific technical capacity, they shall reasonably try to resolve in a friendly fashion through mediation and/or conciliation, voluntarily and previous to any other procedure that the parties could have and take place during a term of thirty (30) days in which the parties promote a mutual consulting process in order to resolve or avoid any controversy or dispute without waiving their rights. 14.2 It shall be considered that the attempts to reach a friendly solution have failed when one of the parties notifies the other party at the termination of such term that the negotiations have not been satisfactory; therefore the parties may execute their rights or effect any action as specified in this Agreement. 14.3 For anything relating to the Agreement including its interpretation, fulfillment and execution of, the parties hereby agree to submit to the jurisdiction of the courts in Guadalajara, Jalisco and the Mexican laws thereby waiving any other jurisdiction which may correspond to them for reason of their present or future domiciles or for any other reason whatsoever or the invocation of the protection of their country. 5. ENTIRE AGREEMENT. 15.1 The parties agree that this Agreement and its Addenda constitute the only agreement and agree that this Agreement supersedes any agreement, communication, or proposal previously related with the objective of this Agreement. The parties hereby agree and acknowledge that this Agreement is subject to the terms and conditions of any applicable regulations. In the event such regulations are not followed, the responsible party shall cure such failure without terminating this Agreement unless such cure is not done in a reasonable time. The parties execute this Agreement in duplicate in Mexico, D.F. on September 29, 1998. `THE CUSTOMER' "BESTEL" "American TeleSource International, Inc." BESTEL, S.A. DE C.V. (Signature) (Signature) By: Charles R. Poole By: Lic. F. Xavier Basave Gonzalez Title: President Pablo J. Galindo Tovar Title: Legal Representatives 30 EX-10.6 6 AMENDMENT TO PRIVATE LINE AGREEMENT Exhibit 10.6 ADDENDUM TO THE AGREEMENT FOR PRIVATE LINE SERVICES NUMBER 100948-0011 FOR PROVISION OF TELECOMMUNICATION SERVICES This Addendum forms an integral part of the Master Telecommunications Services Agreement (Master Agreement). The information contained herein will be governed by the terms and conditions established in the Master Agreement executed between American Telesource International, Inc. (The "CUSTOMER") and BESTEL, S.A. DE C.V. ("BESTEL") dated September 29, 1998. This document may be modified or added to as necessary in the understanding that in order to form and become an integral part of the Master Agreement, it should be executed by the parties authorized legal representatives. In the event that this Addendum is substituted by another or other Addenda, these must maintain consecutive numbering taking into account the letter of the Addendum, with the last Addendum being the document in effect for both parties. Without prejudice of the above and as established in the Master Agreement, the Addenda corresponding to Services and/or Promotional Programs selected by the CUSTOMER at a date later than the execution date of the Master Agreement, will become effective as of the date of implementation of Services. 1. DESCRIPTION AND COST OF PRIVATE LINE SERVICES. 1 International DS3 link Mexico, D.F. - San Antonio, Tx ------------------------------------------------------- -------------------------------------------------------------------------- Circuit Installation Monthly Recurring (Pesos) (Pesos) -------------------------------------------------------------------------- 1 International DS3 Mexico - Laredo $0.00 xxxxxxxxxxx -------------------------------------------------------------------------- DS3 Laredo, Tx - San Antonio, Tx $0.00 xxxxxxxxxxx -------------------------------------------------------------------------- The CUSTOMER shall provide and maintain all necessary equipment for these circuits. These prices include the complete international circuit, including the local loops on both sides of the border. As of the date of execution of this Addendum, the CUSTOMER has not elected the option of adding an "ADD/DROP" in Monterrey; however, if the CUSTOMER should decide to do so, the monthly rate will be $18,512.00. 2. TERM 2.1 This Addendum shall be for 3 (three) years; however, either party may request in writing the termination with at least 1 calendar month in advance of the desired termination date, observing the obligations established herein. 3. CONSIDERATION 31 3.1 The CUSTOMER shall pay BESTEL for the services provided the amount specified above in Section 1 of this document or the amount specified on the invoice by no later than the due date shown on the invoice. BESTEL shall be able to collect any amount established in the tariff rates of the selected Promotional Program and accepted by the CUSTOMER. 3.2 In the event the CUSTOMER decides to terminate the services of this Addendum, the CUSTOMER shall be responsible for payment of the 100% of the amounts resulting from the remaining time left based on 2.1 of this Addendum. For this paragraph, the CUSTOMER shall always observe the specified in the Master Agreement. 4. RESPONSIBILITIES 4.1 The CUSTOMER shall be responsible for the use of the services contracted. 4.2 BESTEL shall not be responsible for the use, negligence, fraudulent use, contrary use against service specifications, illegal and/or unauthorized use by the CUSTOMER. 4.3 BESTEL shall not be responsible for any authorization, permit, license needed by the CUSTOMER in regards to this Agreement. 4.4 The CUSTOMER shall observe at all times the Intellectual Property Law and shall respond to all and each of any claims presented directly by or indirectly against BESTEL, The CUSTOMER shall indemnify and hold BESTEL harmless from and against any claim. Such indemnification shall include any legal expenses that BESTEL might incur. The parties hereby agree and execute this Addendum in duplicate in Mexico City, D.F. on March 16, 1999. THE CUSTOMER BESTEL AMERICAN TELESOURCE INTERNATIONAL, INC. BESTEL, S.A. DE C.V. (Signature) (Signatures) By: Mr. Charles R. Poole By: Lic. Ignacio de J. Romo Davila Title: President Ing. Pablo J. Galindo Tovar Title: Legal Representatives 32 EX-10.8 7 TELECOMMUNICATIONS SERVICES AGREEMENT Exhibit 10.8 TELECOMMUNICATION SERVICES AGREEMENT This Agreement is entered into this 1st day of October ____ 1998, by and between BEST TELEMARKETING, INC. AND NAFTA MARKETING, INC., Texas corporations with their principal offices at 221 East Upas, McAllen, Texas 78501 (`BEST/NAFTA), and TELESPAN, INC., a Texas corporation with its principal office at 12500 Network Blvd., Suite 407, San Antonio, Texas 78249 ("Customer"). WITNESSETH: WHEREAS, BEST/NAFTA are in the business of providing telecommunications services; and WHEREAS, Customer desires to contract telecommunications services from BEST/NAFTA; NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, and for other good valuable consideration, the parties do hereby contract and agree as follows: 1. BEST/NAFTA agree to furnish to Customer, and Customer agrees to contract with BEST/NAFTA, the telecommunication services as set forth in Exhibit A attached hereto and made a part of this Agreement as if set forth verbatim herein. 2. This Agreement shall commence on the 1st day of October 1998 (the "Commencement Date") subject to approval by the Board of Directors of American TeleSource International, Inc. (ATSI), who wholly owns Customer and continue for a period of one (1) year. This Agreement shall be extended, on the same terms and conditions, for an additional period of one (1) year unless either party notifies the other party in writing not less than sixty (60) days prior to the termination date of its desire to terminate this Agreement. 3. During the term of this Agreement, BEST/NAFTA shall charge for the telecommunication services, and Customer shall pay for such telecommunication services, that amount as determined by using the rates set out in Exhibit A. 4. BEST/NAFTA shall give Customer at least forty-five (45) days notification in the event any service rate in Exhibit A is modified and both parties must agree to any modifications. 5. Customer hereby acknowledges that BEST/NAFTA'S charges for the provision of its telecommunication services will be billed on a monthly basis and that payment for such services is due and payable fifteen (15) days from invoice date. Late payments will be assessed a late charge of 1.5% per month. Payments not received within thirty (30) days of the date of billing will result in the right of BEST/NAFTA to cancel and terminate the services provided herein. 6. Should Customer dispute any of the monthly charges on its monthly invoice, it shall notify BEST/NAFTA of the disputed charges not later than ten (10) days from the date of invoice. Said dispute shall set forth in writing all details concerning the disputed charges. In the event of a dispute, Customer shall pay the entire invoice in accordance with the payment terms set forth herein. After resolution of the disputed portion of the invoice, the adjustment, if any, shall be immediately credited to Customer's account. 7. No term or provision of this Agreement shall be deemed waived, and no breach shall be deemed excused, unless such waiver or consent shall be in writing and signed by the party claimed to have waived or consented. No consent by any party to, or waiver of, a breach or default by the other, whether expressed or implied, shall constitute a consent to, waiver of or excuse for any different or subsequent breach or default. 8. Neither BEST/NAFTA nor Customer shall be liable to the other for any consequential, indirect, special or incidental damages whatsoever, including, without limitation, any loss of revenue, goodwill, or profits or claims by third parties or otherwise in connection with or related to any of the services provided pursuant to this Agreement. 1 9. BEST/NAFTA warrant that the equipment used in providing the services to Customer pursuant to this Agreement is suitable for the uses intended, and Customer warrants and represents that it is fully authorized to contract for the services under this Agreement. BEST/NAFTA MAKES NO OTHER WARRANTIES, EITHER EXPRESSED OR IMPLIED 10 a. This Agreement authorizes BEST/NAFTA to start provisioning of telecommunications services as set forth herein, to Customer on the Commencement Date. This Agreement also authorizes BEST/NAFTA to act as Customer's agent in placing orders with the other carriers in order to provide telecommunications services, if requested. 10 b. Customer hereby represents and warrants that it is certified to do business in all jurisdictions in which it conducts business and is in good standing in all such jurisdictions. Customer shall be responsible for dealing with the proper regulatory agencies in order to obtain all necessary authorizations for its operations towards third parties (including End Users) in those jurisdictions where services are provided by the Customer. 10 c. Customer shall be responsible for and pay all expenses in connection with its business and its performance of this Agreement. Customer shall at all times conduct its efforts in a commercially reasonable and ethical manner. To the extent Customer makes any statements or representations to third parties (including End-Users) with regard to BEST/NAFTA, the Services, or the terms of this Agreement, such statements or representations shall be true, accurate and not misleading and shall conform to and be consistent with the terms herein. 11. If the performance of the respective obligations of BEST/NAFTA or Customer shall be prevented or interfered with by reason of any fire, flood, epidemic, earthquake or any other act of God, explosion, strike or other disputes, riot or civil disturbance, war (whether declared or undeclared) or armed conflict, any municipal ordinance or state or federal law, governmental orderer regulation or order of any court of competent jurisdiction, or other similar forces not within the control of BEST/NAFTA or Customer, as the case may be, then Customer and/or BEST/NAFTA, as the case may be, shall not be liable to the other for its failure to perform such obligations hereunder. 12. If any term or provision of this Agreement shall be found to be illegal or unenforceable, then, notwithstanding such illegality or unenforceability, this Agreement shall remain in full force and effect and such term or provision shall be deemed to be deleted. In addition, this Agreement shall be terminated upon the determination of a governmental entity having jurisdiction over the services provided under this Agreement. 13. Except as otherwise provided herein, the remedies provided for in this Agreement are in addition to any other remedies available at law or in equity, by statute or otherwise. 14. Should it be necessary for either party to this Agreement to retain the services of an attorney to enforce its rights under this Agreement, and should any suit be necessary to enforce said rights, then the prevailing party shall be entitled to receive reasonable attorney's fees from the other party. 15. This Agreement shall be governed by the laws of the State of Texas, with venue at San Antonio, Texas. 16. This Agreement shall be binding upon and inure to the benefit of BEST/NAFTA and Customer and their respective successors and assigns. BEST/NAFTA retains the right to assign all or part of this Agreement. In order to do so, BEST/NAFTA shall obtain prior written consent from the Customer. Likewise, the Customer has the right to assign all or part of this Agreement after obtaining prior written consent from BEST/NAFTA. BEST/NAFTA reserve the right to obtain necessary credit information or require additional security deposits from successors and assigns. 17. This Agreement, including the exhibits hereto and the documents and instruments referred to therein, embodies the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, representations, warranties, covenants or undertakings, other than those expressly set forth or referred to herein. This Agreement, and any documents and instruments 2 contemplated hereby, supersedes all prior agreements and understandings between the parties with respect to such subject matter. 18. This Agreement may be amended, modified or supplemented only by and instrument in writing executed by the party against which enforcement of the amendment, modification or supplement is sought. 19. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original. It shall not be necessary in making proof of this Agreement to produce or account for more than one (1) of such counterparts. BEST TELEMARKETING, INC. TELESPAN, INC. NAFTA MARKETING, INC. BY: Tomas Revesz BY: Randy Poole ---------------------------------- -------------------------------- SIGNATURE:___________________________ SIGNATURE:_________________________ TITLE: President TITLE: President ------------------------------- ----------------------------- DATE:________________________________ DATE:______________________________ 3 EXHIBIT "A" ----------- CONDITIONS FOR TELECOMMUNICATION SERVICES BEST/NAFTA shall provide network interconnection services to the Customer subject to the following conditions for pricing and otherwise as is stated in the following: 1. Operations ---------- (A) The interconnection of transmission facilities shall be provided at BEST/NAFTA's point-of-presence in Mexico. BEST/NAFTA shall contract with Facility Carriers to provide high quality standards in order to guarantee maximum reliability for digital state-of-the-art telecommunications network for voice, video and high-speed data. BEST/NAFTA shall assist the Customer and the Facility Carriers in testing as required to ensure the above-mentioned standards are met. (B) BEST/NAFTA shall provide the Customer with copy of original invoice and Call Detail Records ("CDR") of the switched voice services provided in Mexico. 2. COMPENSATION; ----------------- (A) The Customer shall pay BEST/NAFTA $12,500.00 US every month in total expenses and 2/10 cent for each minute of switched voice services provided in Mexico up to a maximum of $3,000 per month per company. In other words the total maximum payable per month could only be $18,500.00. (B) As stated in paragraph 5 of this Agreement, BEST/NAFTA shall invoice Customer monthly and Customer shall pay BEST/NAFTA within fifteen (15) days of invoice date. (C) BEST/NAFTA shall help negotiate directly with the Facility Carriers for any discounts and/or reimbursements due to facility outages of any duration. Such discounts and/or reimbursements will be passed through to the Customer via copy of original invoice. 4 EX-10.9 8 LOAN AND SECURITY AGREEMENT Exhibit 10.9 - -------------------------------------------------------------------------------- Lender: Loan and Security Agreement NTFC CAPITAL CORPORATION, a subsidiary of GE CAPITAL CORPORATION - -------------------------------------------------------------------------------- BORROWER INFORMATION BORROWER: AMERICAN TELESOURCE INTERNATIONAL, INC. ("ATII"), and each Subsidiary of ATII on a joint and several basis Person to contact/Title: Doug Saathoff, CFO Address: 12500 Network Blvd., Suite 407 City: San Antonio County: State: Texas Zip Code: 78249 Telephone Number: 210-558-6090 Facsimile Number: 210-558-6095 _X_ Corporation ___ Partnership ___ Cooperative AGREEMENT TERMS AND CONDITIONS SET FORTH BELOW AND ON FOLLOWING PAGES Fees: Borrowers shall pay to Lender an Origination Fee equal to one percent (1%) of the Commitment Amount (20,000) on the closing date. Borrower also shall pay at closing the expenses of Lender's counsel incurred in the preparation, negotiation and finalization of this Agreement and all attendant documentation and on the date of each subsequent Advance such expenses incurred since the closing date. Interest Rate: A fixed rate per annum of interest equal to the five year bank swap rate as reported on the First Borrowing Date on Telerate, plus 495 basis points. If Telerate should cease publication or cease publishing such rate, Lender shall designate a comparable reference rate for use in determining the Interest Rate hereunder. Agreement Date: June______, 1999 Financing Termination Date: ___________, 1999 Commitment Amount (US) $2,000,000 No. Of Payments: 20 payments after the expiration of the Capitalized Interest Period Supplier: NORTEL and any other vendor approved by Lender Initial Payment Date: The first day of the first calendar quarter following the Conversion Date Interest Payment Date: The Initial Payment Date and the first day of each subsequent calendar quarter. Payment Date: The Initial Payment Date and first day of each subsequent calendar quarter. 5 Payment Schedule: All amounts borrowed and outstanding hereunder shall be amortized and repaid quarterly, in arrears, in 20 equal payments of principal and interest sufficient to pay the Note in full, commencing on the Initial Payment Date, and on each Payment Date thereafter through and including the Maturity Date, provided, however, in any event the final payment shall be in an amount equal to all outstanding principal hereunder, plus all accrued and unpaid interest and all other unpaid charges hereunder. Capitalized Interest Period: The period of six full calendar months following the First Borrowing Date. During the Capitalized Interest Period, interest shall accrue on all principal amounts outstanding under the Note at the Interest Rate, and up to an aggregate of the maximum amount of Capitalized Interest shall be capitalized, monthly in arrears, and added to the principal amount of the Note by Lender, on behalf of Borrower, on the first day of each calendar month, thereby increasing the principal amount of the Note. The Lender may also evidence such increase by noting the date and amount of each such addition on a schedule to the Note. Interest accruing during the Capitalized Interest hereto shall be paid by Borrower monthly in arrears, on the first day of each calendar month, commencing on the first day of the month after the month in which such limit is exceeded. Interest Only Period: N/A Collateral Location Schedule: San Antonio, Texas First Borrowing Date: The date of the first borrowing hereunder by a Borrower Maximum Amount of Capitalized Interest: N/A Conversion Date: The last day of the capitalized Interest Period Maturity Date: The twentieth Payment Date 6 1. COMMITMENT TO LEND: (a) Subject to the terms and conditions provided in this Loan and Security Agreement ("Agreement") and so long as no Event of Default (as defined in Section 14 hereof) or event or condition which with notice or passage of time or both would constitute an Event of Default has occurred and is continuing hereunder, Lender agrees to lend to AMERICAN TELESOURCE INTERNATIONAL, INC., a Delaware corporation ("ATII"), to the Domestic and/or Foreign Subsidiaries of ATII which are signatories to this Agreement, and to such additional Domestic and/or Foreign Subsidiaries of ATII which hereafter may become a party hereto pursuant to Section 1(b) hereof (ATII, Domestic and/or Foreign Subsidiaries of ATII which are signatories to this Agreement, and such additional Domestic and/or Foreign Subsidiaries of ATII which may hereafter become a party hereto pursuant to Section 1(b) of this Agreement are individually referred to as a "Borrower" and collectively as the "Borrowers"), -------- --------- until the Termination Date set forth above, an amount in the aggregate not to exceed the Commitment Amount set forth above, which sum shall be used solely for the purchase by a Borrower of telecommunications equipment and associated software sublicenses from the Supplier pursuant to one or more Purchase Agreements (individually, a "Purchase Agreement" and collectively, the "Purchase Agreements") made by and between the Supplier and such Borrower for installation, if such Borrower is a Domestic Borrower, in the United States, Mexico and other Latin American jurisdictions, and if such Borrower is a Foreign Borrower, in Mexico and other Latin American jurisdictions. "Subsidiary" means, ---------- as to any person, a corporation, partnership, limited liability company or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership, limited liability company, or other entity, are at the time owned, or the management of which is otherwise controlled, directly or indirectly, through one or more intermediaries, or both, by such person. "Domestic Subsidiary" means a ------------------- Subsidiary incorporated under the laws of the United States, one of the states of the United States, the District of Columbia, or any territory, possession or protectorate of the United States. "Foreign Subsidiary" means a Subsidiary ------------------ incorporated under the laws of any jurisdiction other than the laws of the United States, one of the states of the United States, the District of Columbia, or any territory, possession or protectorate of the United States. "Domestic -------- Borrower" means ATII or a Borrower which is a Domestic Subsidiary of ATII, and - -------- "Foreign Borrower" means a Borrower which is a Foreign Subsidiary of ATII. ---------------- Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of ATII. (b) Lender and each Borrower acknowledge and agree that subject to the terms and conditions of this Agreement, ATII shall cause Domestic and/or Foreign Subsidiaries of ATII formed or acquired hereafter to become a Borrower hereunder (without the consent of any other Borrower) by executing a form of the annex to this Agreement set forth as Exhibit A and such additional Domestic Subsidiaries --------- may thereafter borrow amounts hereunder to finance the acquisition of equipment which is, or is to be placed, in the United States, Mexico and other Latin American jurisdictions, and such additional Foreign Subsidiaries of ATII may thereafter borrow amounts hereunder to finance the acquisition of equipment which is, or is to be placed, in Mexico and other Latin American jurisdictions. ATII and the other Borrowers agree that, prior to any additional Subsidiary of ATII becoming a Borrower hereunder, such Subsidiary and ATII shall execute and deliver to Lender a form of the annex to this Agreement set forth as Exhibit A, and if required by Lender cause the delivery of an opinion of legal counsel to ATII and such additional Subsidiary dated the date of the execution of the form of the annex to this Agreement set forth as Exhibit A in form and substance satisfactory to Lender and such other documents as the Lender may request, including but not limited to a certificate of a responsible officer of such additional Subsidiary as to the authority of such additional Subsidiary to execute, deliver and perform this Agreement and the Notes and as to the incumbency and signature of the officer or officers signing Borrowing Certificates and Notes. (c) The obligations of each Domestic Borrower hereunder and under each Note evidencing amounts from time to time advanced hereunder to a Borrower shall be joint and several obligations of ATII and all other Domestic Borrowers. The obligations of each Foreign Borrower hereunder and under each Note evidencing amounts from time to time advanced hereunder to a Foreign Borrower shall be joint and several obligations of ATII and all other Borrowers. 2. THE NOTES AND PAYMENT TERMS: All advances of funds to a Foreign Borrower (a "Foreign Borrower Advance") shall be evidenced by a single promissory note in the form of Exhibit B-1 executed by the Borrowers (the "Foreign Borrowing Note"), which shall be in a form and substance satisfactory to the Lender and 7 represent the joint and several obligations of the Borrowers to pay the aggregate unpaid advances on the Foreign Borrowing Note (the "Foreign Principal Amount"), plus any accrued interest thereon, and all extensions, renewals or modifications thereof including, without limitation, any expenses of Lender or other amounts due to Lender under the Foreign Borrowing Note or this Agreement. All advances of funds to a Domestic Borrower (a "Domestic Borrower Advance," and together with a Foreign Borrower Advance, an "Advance") shall be evidenced by a single promissory note in the form of Exhibit B-2 executed by the Domestic Borrowers (the "Domestic Borrowing Note," and together with the Foreign Borrowing Note, the "Note(s)"), which shall be in a form and substance satisfactory to the Lender and represent the joint and several obligations of the Domestic Borrowers to pay the aggregate unpaid advances on the Domestic Borrowing Note (the "Domestic Principal Amount," and together with the Foreign Principal Amount, the "Principal Amount"), plus any accrued interest thereon, and all extensions, renewals or modifications thereof including, without limitation, any expenses of Lender or other amounts due to Lender under the Domestic Borrowing Note or this Agreement. Each Note shall be dated the Closing Date and shall mature on the Maturity Date. Except as otherwise provided herein, each Note shall bear interest from the borrowing date on the outstanding unpaid Principal Amount thereof at the Interest Rate stated above (compounded monthly and computed on the basis of a year of 365 days for the actual days elapsed). In computing interest on the Notes, the borrowing date shall be included and the date of payment excluded. Each Borrower and Lender understand that the Payment Schedule is intended to amortize fully the principal amount of the Notes and any other principal and interest amounts outstanding will be added to the final payment on the Maturity Date. In any event, the entire outstanding principal amount of the Notes and all accrued but unpaid interest and all other outstanding amounts due thereunder shall be paid on the Maturity Date. If a Payment Date is not a business day, the Payment Date shall be on the first business day following the nonbusiness day, and interest thereon shall be payable at the rate in effect during such extension. Each payment shall be credited first to accrued and unpaid interest and the balance to the Principal Amount (provided that in any event the entire Principal Amount of the Notes then outstanding together with any accrued and unpaid interest shall be paid on the Maturity Date). The Lender is authorized to endorse the date and amount of each Advance and each payment of the Principal Amount and interest with respect to the Notes on the schedule annexed to and constituting a part of the Notes, which endorsement shall constitute prima facie evidence of the accuracy of the information endorsed. All payments shall be made in lawful money of the United States of America in immediately available funds and without set off or counterclaim to the Lender or any subsequent assignee of a Note. Each Borrower agrees to pay all amounts owing by it under this Agreement, any Note or the other Loan Documents free and clear of and without deduction for any present or future taxes (excepting any taxes assessed on Lender's income by the United States of America ) (collectively, the "Taxes") and has paid or shall pay when due all applicable deductions or withholdings for or on account of any Taxes, levies, duties, fees, deductions or withholdings, restrictions or conditions of any nature imposed by or on behalf of any jurisdiction (other than the United States of America) or any taxing authority (other than the United States of America) whatsoever on the payments by Borrowers to Lender under this Agreement, any Note or the other Loan Documents and (A) that if it is prevented by operation of law from paying any Taxes, then the interest rate or fees required to be paid under this Agreement, any Note or the other Loan Documents shall be increased by the amount necessary to yield to Lender interest or fees at the rates specified in this Agreement, any Note or the other Loan Documents after provision for the payment of all such Taxes and without taking into account any tax benefits accruing to Lender from such payment; (B) that it shall at the request of Lender execute and deliver to Lender such further instruments as may be necessary or desirable to effect the increase in the interest or fees as provided for in clause (a) immediately above, including a new Note to be issued in exchange for any Note theretofore issued; (C) that it shall hold Lender harmless from and against any liabilities with respect to any Taxes (whether or not properly or legally asserted); and (D) that it shall provide Lender with the original or a certified copy of evidence of the payment of any Taxes by it, as Lender may reasonably request, or, if no taxes have been paid to provide to Lender, at 8 Lender's request, with a certificate from the appropriate taxing authority or an opinion of counsel acceptable to Lender stating that no Taxes are payable. If Lender shall receive a refund of any Taxes paid by Borrower pursuant to this Section by reason of the fact that such Taxes were not correctly or legally asserted, Lender shall within sixty (60) days after receipt of such refund pay to Borrower the amount of such refund, as determined solely by Lender; provided, -------- however, that in no event shall the amount paid by Lender to Borrower pursuant - ------- to this sentence exceed the amount of Taxes originally paid by Borrower; and further provided that Lender shall not have any obligation under this Agreement - ------- -------- to claim or otherwise seek to obtain any such refund. Notwithstanding the foregoing, if the Borrowers shall fail to pay within five (5) days after when due any part of the Principal Amount, interest or any other amount payable hereunder or under a Note, such amount shall bear interest at a rate per annum that is three percent (3%) higher than the Interest Rate from the due date until such overdue Principal Amount, interest, or other amounts are paid in full (before and after judgment) whether or not any notice of default in the payment thereof has been delivered. Notwithstanding any provision of this Agreement, it is the intent of the Lender and the Borrowers that the Lender, or any subsequent holder of a Note, shall never be entitled to receive, collect, reserve or apply, as interest, any amount in excess of the maximum lawful rate of interest permitted to be charged by applicable law, as amended or enacted from time to time. In the event the Lender, or any subsequent holder of a Note, ever receives, collects, reserves or applies as interest, interest in excess of the then maximum lawful rate of interest, such amount which would be excessive interest shall be deemed a partial prepayment of the Principal Amount and treated hereunder as such, or, if the Principal Amount and all other amounts due are paid in full, any remaining excess funds shall immediately be paid to the Borrowers. In determining whether or not the interest paid or payable, under any specific contingency, exceeds the maximum lawful rate of interest, the Borrowers and the Lender shall, to the maximum extent permitted under applicable law, (a) exclude voluntary prepayments and the effects thereof as it may relate to any fees charged by the Lender, and (b) amortize, prorate, allocate and spread, in equal parts, the total amount of interest throughout the entire term of the Indebtedness; provided that if the Indebtedness is paid in full prior to the end of the full contemplated term hereof, and if the interest received over the actual period of existence hereof exceeds the maximum lawful rate of interest, the Lender or any subsequent holder of a Note shall refund to the Borrowers the amount of such excess, and in such event shall not be subject to any penalties provided by any laws for contracting for, charging, reserving, collecting or receiving interest in excess of the maximum lawful rate of interest. 3. PROCEDURES FOR BORROWING: ATII (and if a Borrower other than ATII is acquiring the equipment to be financed thereby, such other Borrower) shall execute and deliver to Lender, at least five (5) business days prior to the date of the requested Advance, a Borrowing Certificate in the form of Exhibit C-1 (a "Domestic Advance Borrowing Certificate") to request Advances to finance the acquisition by ATII or such other Domestic Borrower of equipment which is, or is to be placed, in jurisdictions within the United States, and at least thirty (30) business days prior to the date of the requested Advance, a Borrowing Certificate in the form of Exhibit C-2 (a "Foreign Advance Borrowing Certificate" and together with a Domestic Advance Borrowing Certificate, a "Borrowing Certificate") to request Advances to finance the acquisition by ATII or such other Borrower of equipment which is, or is to be placed, in Mexico or another Latin American jurisdiction. Each Borrowing Certificate shall be in form and substance satisfactory to Lender, and shall specify the business day on which the borrowing is to be made and the amount of the borrowing and have attached thereto the applicable purchase order issued by such Borrower and related invoice from the Supplier which is to be paid by Lender with the proceeds of the loan. On the borrowing date specified in the Borrowing Certificate, providing that all conditions precedent have been satisfied, Lender shall transmit the borrowed funds to an account maintained by and in the name of Supplier. The aggregate principal amount of each borrowing shall be not less than $25,000. Lender shall not be required to make Advances more than twice per calendar month. 4. PLACE OF PAYMENT: The Principal Amount, interest and fees, if any, shall be payable at 501 Corporate Centre Drive, Suite 600, Franklin, Tennessee 37067, or such other place as may be designated, from time to time in writing, by Lender or any subsequent holder. 9 5. PREPAYMENT: The Borrowers may, at their option but subject to the satisfaction of the requirements of the next sentence, at any time and from time to time, prepay any Advance, in whole or in part, upon at least (30) business days prior written notice to Lender specifying the date and amount of prepayment in a minimum amount of $50,000. Any such prepayment occurring during the first, second and third years following the date of such Advance shall be subject to a prepayment premium equal to a percentage of the amount being prepaid as follows: three percent (3%) if the prepayment is made during the first year following the date of such Advance; two percent (2%) if the prepayment is made during the second year following the date of such Advance; and one percent (1%) if the prepayment is made during the third year following the date of such Advance. 6. SECURITY INTEREST: OBLIGATIONS SECURED: Each Domestic Borrower (as debtor) hereby assigns as collateral and grants to Lender (as secured party), as security for all of the Indebtedness, and each Foreign Borrower (as debtor) hereby assigns as collateral and grants to Lender (as secured party), as security for the Foreign Borrower Indebtedness, a continuing security interest in and to, all of such Borrower's right, title and interest in and to the property and the property rights described in Section 7 hereof, whether now owned or hereafter acquired or arising, wherever located, together with all substitutions therefor and all accessions, replacements and renewals thereof, and in all proceeds and products thereof (collectively, the "Collateral"). ---------- "Indebtedness" means all Domestic Borrower Indebtedness and Foreign Borrower ------------ Indebtedness. "Foreign Borrower Indebtedness" means all indebtedness, ----------------------------- liabilities and obligations to Lender of all Foreign Borrowers, of any class or nature, whether arising under or in connection with this Agreement, and/or the other Loan Documents or otherwise, whether now existing or hereafter incurred, direct or indirect, absolute or contingent, secured or unsecured, matured or unmatured, joint or several, whether for principal, interest, fees, expenses, lease obligations, indemnities or otherwise, including, without limitation, future advances of any sort, including all future advances made by Lender for taxes, levies, insurance and/or repairs to or maintenance of the Collateral, the unpaid principal amount of, and accrued interest owed by the Foreign Borrowers on the Notes, and any expenses of collection or protection of Lender's rights, including reasonable attorneys' fees. "Domestic Borrower Indebtedness" means ------------------------------ all indebtedness, liabilities and obligations to Lender of ATII or any other Domestic Borrower, of any class or nature, whether arising under or in connection with this Agreement and/or all other documents, instruments, agreements and certificates evidencing or securing any advance hereunder or any obligation for the payment or performance thereof and/or executed and delivered in connection with any of the foregoing (the "Loan Documents") or otherwise, -------------- whether now existing or hereafter incurred, direct or indirect, absolute or contingent, secured or unsecured, matured or unmatured, joint or several, whether for principal, interest, fees, expenses, lease obligations, indemnities or otherwise, including, without limitation, future advances of any sort, all future advances made by Lender for taxes, levies, insurance and/or repairs to or maintenance of the Collateral, the unpaid principal amount of, and accrued interest owed by the Domestic Borrowers on the Notes, and any expenses of collection or protection of Lender's rights, including reasonable attorneys' fees. 7. DESCRIPTION OF COLLATERAL: The Collateral includes, and each Borrower hereby grants Lender a security interest in, all such Borrower's presently existing or hereafter acquired right, title and interest in, and to (i) the equipment, fixtures, and other property identified in a Borrowing Certificate pursuant to which Lender advances funds hereunder (Borrowing Certificates are collectively referred to as the "Collateral Schedule") or otherwise acquired or financed directly or indirectly with loan proceeds from Lender, including, without limitation, hardware and software, components, wiring, cabling and associated electronics and any and all replacements, additions, substitutions to or of any of the foregoing, together with all attachments, components, parts, accessions, improvements, upgrades, all accessories installed thereon or affixed thereto and all of the foregoing forming an integral part thereof; and (ii) to the extent not otherwise included, all proceeds of the foregoing, including without limitation, (A) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to a Borrower from time to time with respect to any of the Collateral; (B) any and all payments (in any form whatsoever) made or due and payable to a Borrower from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any governmental body, authority, bureau or agency (or any person acting under color of governmental authority); (C) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral; and (D) any and all cash proceeds and non-cash proceeds in the form of equipment, inventory, accounts, general intangibles, chattel paper or other proceeds (collectively, "Proceeds"). The Collateral Schedule is incorporated in and made a part of this Agreement. 10 8. REPRESENTATIONS AND WARRANTIES: In order to induce the Lender to enter into this Agreement and to make the loans contemplated herein, each Borrower represents and warrants that on the date of each Note's execution and until payment in full of the indebtedness: (a) Each Borrower (i) is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it was formed; (ii) has the power and legal authority to own or lease and operate its property and to carry on its business as now being conducted; (iii) is properly licensed, in good standing and duly qualified to do business in every jurisdiction where necessary; (iv) has the power and authority and the legal right to make, deliver and perform this Agreement and each Note to which it is a party and to borrow hereunder and has received all necessary authorization from its directors or partners, as applicable, to execute, deliver and perform this Agreement, the Notes to which it is a party and any related documents to be delivered pursuant to this Agreement, and (v) the Borrowers other than ATII are, and will remain, Subsidiaries of ATII for so long as such Subsidiary remains obligated to Lender hereunder. (b) The person executing this Agreement and each Note on behalf of each Borrower has been given the authority to bind each Borrower, and this Agreement and the Notes to which it is a party constitute legally binding and enforceable obligations of each Borrower. (c) The execution, delivery and performance of this Agreement and any Note will not violate any Borrower's charter, bylaws, partnership agreement or other organizational papers, or any law, agreement or undertaking to which any Borrower is a party, or by which any Borrower is bound or affected. (d) All required consents relative to the execution, delivery, and performance of this Agreement and the Notes have been obtained, including any required of the Federal Communications Commission, the Commerce Commission for any state or other jurisdiction in which any Borrower is operating ("PUC") or any other governmental authority. (e) All information, reports and other papers and data with respect to each Borrower (other than projections) furnished to the Lender by a Borrower at any time prior to the date hereof, were, to the best knowledge of each Borrower at the time the same were furnished, true and correct in all material respects, or have been subsequently supplemented by other information, reports or other papers or data, to the extent necessary to give the Lender a true and accurate knowledge of the subject matter thereof in all material respects; and all projections with respect to each Borrower furnished by a Borrower, as supplemented, were prepared or presented in good faith by such Borrower and had a reasonable basis. No fact is known to any Borrower which materially and adversely affects the business, operations, assets (taken as a whole), or financial condition of ATII or any Borrower which has not been set forth in the financial statements provided to Lender in connection with this Agreement or in such information, reports, papers and data, or otherwise disclosed in writing to the Lender prior to the first borrowing date relative to the initial loan made hereunder. All financial statements have been prepared in accordance with GAAP applied consistently throughout the period involved. (f) There have been no material adverse changes in ATII's consolidated financial position since the date of the financial statements provided to Lender in connection with the credit approval of ATII relative to this Agreement. (g) There is no litigation, investigation or proceeding threatened or pending against any Borrower or against any of its assets or revenues which, if decided adversely, would have a material adverse effect upon ATII's consolidated financial condition or its business, operations or assets (taken as a whole). (h) The Borrower requesting the Advance is the sole owner of and has good and marketable title to each item of Collateral acquired with proceeds of an Advance (or will have at the time such Borrower acquires rights in the Collateral hereafter arising), free and clear of all security interests, claims, liens, and encumbrances except as granted to Lender. Lender has a fully- perfected first priority lien on, and security interest in, all right, title and interest of each Borrower in the Perfected Collateral enforceable against such Borrower and third parties. 11 (i) Neither ATII nor any other Borrower is in default under any agreement, mortgage, note, security agreement or other documents to which it is a party or by which it, or any of its property, is bound in any respect which could be materially adverse to the business, operations, assets or financial condition of ATII on a consolidated basis, or which could materially adversely affect the ability of any Borrower to perform its obligations under this Agreement. (j) Each of ATII and each other Borrower has paid all taxes due, except such taxes as are being contested in good faith and against which ATII or such other Borrower has set up reserves satisfactory to the Lender. (k) No Borrower is engaged nor will any engage principally, or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" within the respective meaning of each of the quoted terms under Regulation U of the Board of Governors of the Federal Reserve System as now, and from time to time, hereafter in effect. No part of the proceeds of any loan will be used for "purchasing" or "carrying" "margin stock" as so defined or for any purpose which violates, or which would be inconsistent with, the provisions of the regulations of such Board of Governors. (l) No Borrower is an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940 as amended. (m) Neither ATII nor any other Borrower is in violation of any federal or state law, rule or regulation or determination of an arbitrator, court or other governmental authority, in each case applicable or binding upon ATII or any other Borrower or any of its properties or to which ATII or any other Borrower or any of its properties are subject, in each case which individually or in the aggregate would have a material adverse effect on the rights of the Borrower or the security interest of Lender in the Collateral or ATII's consolidated financial condition or operations or assets taken as a whole. (n) There is no event which is, or with notice or lapse of time, or both, would be an Event of Default as defined in Section 14 of this Agreement. (o) A Purchase Agreement has been duly executed and delivered by the Borrower and the Supplier with respect to the Collateral for which proceeds of an Advance are being requested by such Borrower and will be in full force and effect on the date of such Note. (p) ATII has reviewed its operations and those of its Subsidiaries with a view to assessing whether its business (together with the businesses of its Subsidiaries on a consolidated basis), will be vulnerable to a Year 2000 Problem or will be vulnerable to the effects of a Year 2000 Problem suffered by any major commercial customers of ATII or of any of its Subsidiaries, and has a reasonable basis to believe that no Year 2000 Problem will cause a material adverse effect to ATII on a consolidated basis. For purposes of this Agreement, "Year 2000 Problem" means any significant risk that computer hardware, software or equipment containing embedded microchips essential to the business or operations of ATII or any other Borrower will not, in the case of dates or time periods occurring after December 31, 1999, function at least as effectively and reliably as in the case of times or time periods occurring before January 1, 2000, including the making of leap year calculations. (q) Each Subsidiary of ATII is a signatory to this Agreement. 9. CONDITIONS PRECEDENT: (a) Initial Loan. The obligation of the Lender to make the initial loan on the first borrowing date shall be subject to the fulfillment prior to or contemporaneously with the making of such loan of the following conditions precedent: (i) The Lender shall have received an opinion of legal counsel to ATII and each other Borrower as of such date, dated the first borrowing date, in a form and substance satisfactory to Lender. 12 (ii) Lender shall have received a certificate of a responsible officer of ATII and each other Borrower as of such date, dated the first borrowing date, as to the authority of such Borrower(s) to execute, deliver and perform this Agreement and all Notes. (iii) The Lender shall have received a certificate of a responsible officer of ATII and each other Borrower as of such date, dated the first borrowing date, as to the incumbency and signature of the officer or officers signing the Agreement, the Notes and any other certificate or other documents to be delivered pursuant thereto, together with evidence of the incumbency of such responsible officer. (iv) The Lender shall have received copies of all consolidated financial statements of ATII as required by Lender. (v) The Lender shall have received copies, certified by a responsible officer of ATII to the satisfaction of Lender, of contracts in effect between one or more Borrowers and Qwest and Vartec containing such terms as are customary for such business (including but not limited to pricing) in form and substance satisfactory to Lender. (vi) The Lender shall have received copies, certified by a responsible officer of ATII to the satisfaction of Lender, of a copy of a vendor financing facility in effect between one or more Borrowers and Network Equipment Technologies, Inc. providing at least $1,000,000 of unrestricted borrowing availability and containing such terms as are customary (including but not limited to interest rates) in form and substance satisfactory to Lender. (vii) The Lender shall have received copies, certified by a responsible officer of ATII to the satisfaction of Lender, of a copy of a senior secured loan facility of ATII with Coast Business Credit the "SENIOR SECURED FACILITY" providing a credit line of at least $5,000,000 and containing such terms as are customary (including but not limited to interest rates) in form and substance satisfactory to Lender. (b) All Loans. The obligation of the Lender to make any loan (including the initial loan) to be made by it on any borrowing date is subject to the satisfaction of the following conditions precedent: (i) The Lender shall have received a Note conforming to the requirements hereof, and fully executed by each Borrower. (ii) The representations and warranties made by ATII and each other Borrower in this Agreement and in each Borrowing Certificate shall be correct in all material respects on and as of such borrowing date and after giving effect to the loan to be made on such borrowing date. (iii) No Event of Default or event or condition which with notice or passage of time or both would constitute an Event of Default shall have occurred and be continuing on such borrowing date or after giving effect to the loan to be made on such borrowing date. (iv) The Lender shall have received a Borrowing Certificate, dated such borrowing date for such loan, satisfying the requirements of Section 3. (v) Except where waived by Lender in the exercise of its reasonable discretion, the Lender shall have received the waiver of liens and consent of the real estate lessors of the Borrower, and of such other persons as the Lender shall deem desirable, to facilitate the removal by the Lender, upon the occurrence of an Event of Default, of all items of US Collateral which are or were personalty where first located on any real property that is subject to any real estate leases and/or mortgages, such waivers of liens and consents to be in form and substance satisfactory to the Lender and its counsel. (vi) The Borrowers shall have (1) executed and delivered to Lender all documents (including, without limitation, financing statements) necessary to create in favor of Lender a first-priority perfected security interest in, and lien on, Collateral located in the United States ("US Collateral") with evidence of any necessary filing, 13 registration or recordation of such documents, the payment of recording, stamp or other taxes measured by indebtedness or otherwise required as a result of filing, registration or recordation of such documents and searches confirming the absence of any other liens or security interests thereon, and (2) with respect to jurisdictions in the United States for which Lender has not previously received an opinion of counsel covering its security interests in the US Collateral, delivered an opinion of counsel to the applicable Borrower(s), dated the date of such Advance, in form and substance satisfactory to Lender to the effect that the lien and security interest of Lender on such US Collateral constitutes a perfected security interest in favor of Lender. (vii) the applicable Borrower(s) shall have (1) executed and delivered to Lender all documents necessary to create in favor of Lender a first-priority perfected security interest in, lien on, or trust or comparable security ownership interest in, Collateral located in Mexico ("Foreign Collateral," and together with US Collateral, the "Perfected Collateral"), together with evidence of (x) any necessary filing, registration or recordation of such documents, (y) the payment of recording, stamp or other taxes measured by indebtedness or otherwise required as a result of filing, registration or recordation of such documents and (z) the absence of any other liens or security interests on such Foreign Collateral, and (2) delivered an opinion of counsel to the applicable Borrower(s), dated the date of such advance, in form and substance satisfactory to Lender to the effect that (y) the documents have been validly executed and delivered by, and are binding and enforceable upon, the applicable Borrower(s) and do not conflict with the applicable Borrower's organizational documents, material contracts or applicable law, and (z) the security interest in, lien on, or trust or comparable security ownership interest of Lender on such Foreign Collateral is "perfected" or otherwise enforceable against such Borrower and third parties in favor of Lender under the laws of such foreign jurisdiction. (viii) No event of default, or event which with the giving of notice or the passage of time, or both, would constitute an event of default under the Senior Secured Facility shall have occurred and be continuing, the Senior Secured Facility must provide a credit line of at least $5,000,000, and, no Borrower shall have any past due accounts payables. (ix) All proceedings and all other documents and legal matters in connection with the transactions contemplated by the Agreement shall be satisfactory in form and substance to the Lender and its counsel. 10. INTENTIONALLY DELETED. 11. AFFIRMATIVE COVENANTS: Each Borrower (with respect to itself and its business, property and Collateral) warrants, covenants and agrees that from the Agreement date and until performance and payment in full of the Indebtedness, it will: (a) Furnish to Lender as soon as available, but in any event within one hundred and twenty (120) days after the end of each fiscal year of ATII, a copy of the consolidated balance sheet of ATII as of the end of such year and the related statements of earnings and changes in financial position for such year, setting forth in each case in comparative form, the figures for the previous year audited by independent certified public accountants. The financial statements shall be complete and correct in all material respects, and be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein (except as approved by such accountants or a responsible officer, as the case may be, and disclosed therein). (b) Furnish to Lender, concurrently with the delivery of the financial statements referred to in subsection (a) hereof, a certificate of a responsible officer of ATII and each other Borrower stating that, to the best of such officer's knowledge, ATII and each other Borrower, during such period, has observed or performed all of its covenants and other agreements, and satisfied every condition contained in this Agreement and in the Notes to be observed, performed or satisfied by it, and that such officer has obtained no knowledge of any Event of Default except as specified in such certificate. (c) Promptly upon receipt thereof, furnish to Lender one copy of each written financial audit report submitted to ATII by independent accountants resulting from any annual, interim or special audits made by them of ATII's books. 14 (d) Furnish to Lender copies of all financial statements and material reports which ATII or any other Borrower may make to, or file with, the Securities and Exchange Commission or any successor. (e) Pay promptly when due all taxes, assessments, governmental charges, claims for labor, supplies, rent and other obligations, which, if unpaid, might become a lien against the Perfected Collateral or any Borrower's other assets, except liabilities (i) being contested in good faith and by appropriate proceedings, which proceedings do not involve any danger of the sale, forfeiture or loss of the Perfected Collateral or any interest therein or a material part of ATII's or such Borrower's other assets, and (ii) against which ATII has set up reserves satisfactory to the Lender. (f) Comply with all applicable laws, statutes, orders, rules, regulations, and directions applicable to each Borrower and the Perfected Collateral or any part thereof or operation of any Borrower's business, except where the failure to comply will not have a material adverse effect on the value of the Perfected Collateral or the operations of ATII on a consolidated basis; provided that ATII or such Borrower may contest any such statutes, orders, rules, regulations, and directions in any reasonable manner which will not, in Lender's opinion, adversely affect Lender's rights or ATII's or such Borrower's financial condition, business or operations taken as a whole or the priority of the lien or security interest in the Perfected Collateral. (g) Maintain and preserve in full force and effect all rights, privileges, licenses, and franchises applicable to each Borrower necessary for the orderly and efficient conduct of each Borrower's business as is now conducted including, without limitation, any licenses or authorizations required by the FCC or any other public utility commission or comparable regulatory agency (a "PUC") for the operation and maintenance of its present systems. (h) Perform and comply in all material respects with all obligations under the contracts and all other agreements to which it is a party or by which it is bound relating to the Collateral except where the failure to do so would not materially and adversely affect the value of the Collateral taken as a whole. (i) Advise Lender promptly, in reasonable detail (i) of any lien, security interest, encumbrance or claim made or asserted against any of the Collateral, (ii) of any material change in the composition of the Collateral, and (iii) of the occurrence of any other event which would have a material adverse effect on the aggregate value of the Collateral, the security interest created hereunder, or on any Borrower's financial condition, business, or operations. (j) (1) Maintain books, records and accounts which, in reasonable detail, accurately and fairly reflect its transactions and dispositions of its assets and maintain a system of internal accounting controls sufficient to provide reasonable assurances that (A) transactions are executed in accordance with management's general or specific authorization, (B) transactions are recorded as necessary (x) to permit preparation of financial statements in conformity with GAAP and (y) to maintain accountability for assets, (C) access to assets is permitted only in accordance with management's general or specific authorization and (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences, and (2) prepare all financial statements required hereunder in accordance with GAAP consistently applied and in compliance with the regulations of any governmental regulatory body having jurisdiction over any Borrower or any Borrower's business and keep such books and records pertaining to its financial affairs and to the Collateral at ATII's address set forth above. (k) Permit Lender or its representatives, at all reasonable times, to inspect and copy each Borrower's books and records pertaining to its financial affairs and to the Collateral; (l) Keep the Collateral at the original location set forth in the Collateral Schedule and such principal place of business at the address set forth above and not move any of the Collateral from such locations, or change the location of ATII's or any other Borrower's principal place of business without giving Lender at least thirty (30) days advance written notice of such change or move, and in connection with any change in location of Collateral or of the principal place of business of ATII or any other Borrower, at its cost and expense, from time to time, at the written request of Lender, execute, deliver, file or record documents, agreements and instruments (in such manner and form as Lender may reasonably require) in order to create, preserve, perfect, validate or satisfy the first priority security interest 15 in, lien on, or trust or comparable security ownership interest in the Collateral as a result of the move of the Collateral or of the change of ATII's or such other Borrower's principal place of business. (m) Keep the Collateral in good repair and operating condition, ordinary wear and tear excepted, and maintain the Collateral owned or used by that Borrower in good working order in accordance with established maintenance procedures such that the Collateral performs to published specifications and shall maintain the equipment within two of the latest Product Computing Loads of the Supplier, and permit Lender or its representatives at all times, upon reasonable notice, to enter into and upon any premises where any of the Collateral is located for the purpose of inspecting it, observing its use or otherwise protecting its interest therein. (n) If any Collateral, in whole or in part, shall be lost, stolen or destroyed or damaged, or is taken in any condemnation or similar proceeding by a governmental authority (any such Collateral is referred to as the "Affected Collateral"), promptly and fully notify Lender and (i) immediately place the Affected Collateral in good condition and working order, or (ii) replace the Affected Collateral with one of like value which is in good repair, condition, and working order, and grant a first priority perfected security interest in, lien on, or trust or comparable security ownership interest in such substitution to the same extent that Lender had (or was required to have) in the Affected Collateral, or (iii) prepay Lender, without prepayment premium, loans in an amount equal to the value of such Affected Collateral. (o) At its cost and expense, from time to time, at the written request of Lender, execute, deliver, file or record documents, agreements and instruments (in such manner and form as Lender may reasonably require) in compliance with or to accomplish the covenants and agreements of each Borrower in this Agreement; in order to create, preserve, perfect, validate or satisfy the security interest in, lien on, or trust or comparable security ownership interest in the Collateral granted or required hereby; or to enable Lender to exercise and enforce its rights hereunder. Each Borrower also hereby authorizes Lender to file any such financing statement or amendment thereto, without the signature of the Borrower, or with a copy or telecopy of the Borrower's signature, to the extent permitted by applicable law, or during upon the occurrence and during the continuance of an Event of Default hereunder to execute any financing statement or amendment thereof on behalf of each Borrower as each Borrower's attorney-in- fact. Lender will promptly provide such Borrower with copies of any such financing continuation statements. (p) ATII shall take all actions necessary and commit adequate resources to assure that computer-based and other systems of ATII and its Subsidiaries are able to process dates effectively, including dates before, on and after January 1, 2000, without experiencing any Year 2000 Problem that could cause a material adverse effect to ATII. At the request of Lender, ATII will provide Lender with assurances and substantiations (including but not limited to the results of internal and external audit reports prepared in the ordinary course of business) reasonably acceptable to Lender as to the capability of ATII and its Subsidiaries to conduct its and their businesses and operations before, on and after January 1, 2000 without experiencing a Year 2000 Problem causing a material adverse effect. (q) Cause each Subsidiary of ATII formed or acquired after the date hereof to become a Borrower hereunder in conformity with the terms and conditions of Section 1(b). (r) Obtain Lender's prior written consent before using or generating any press release, advertisement, publicity materials or other publication in which the name or logo of Lender or any of its affiliates is used or may be reasonably inferred, and will not distribute any such materials in the absence of such prior written approval. (s) Comply with the financial covenants set forth on Exhibit C. (t) Furnish to Lender such additional information or documents, certificates, reports and agreements regarding ATII or any other Borrower, its financial condition or the Collateral, as Lender may reasonably request. 12. NEGATIVE COVENANTS: Until payment in full of the indebtedness, each Borrower covenants that it will not directly or indirectly; 16 (a) Sell, lease, assign, transfer, pledge, create, or permit a security interest in, or otherwise encumber any of the Perfected Collateral, or any of its rights therein, or permit any levy, lien or encumbrance thereon in favor of anyone other than Lender. (b) Use, or permit the Collateral to be used, for any unlawful purpose or in violation of any law, statue or ordinance. (c) Permit the Collateral to become part of, or be affixed to, any real property without first assuring, to the reasonable satisfaction of Lender, that Lender's security interest will be prior and senior to any interest or lien then held, or thereafter acquired, by any mortgagee of such real property or the owner or purchaser of any interest therein. (d) Permit the Collateral to comprise a part of any Borrower's inventory. (e) Permit anything to be done that may impair the value of any of the Perfected Collateral or the security intended to be afforded by this Agreement. (f) Dispose of any part of the Collateral without the express prior written consent of Lender. (g) Change its name or change its corporate structure in any material way without giving Lender at least thirty (30) days advance written notice thereof, and ensuring that any steps that Lender may deem desirable to continue the perfection and priority of Lender's security interests in the Collateral shall have been taken. (h) Engage in any business activities or operations substantially different from or unrelated to the present business activities and operations of ATII and its current Subsidiaries. (i) Enter into, become the subject of or effect any transaction of merger, acquisition or consolidation or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of any Borrower's business or assets, whether now owned or hereafter acquired. (j) Change the fiscal year end of ATII from December 31, except with the prior written consent of Lender, which consent shall not be unreasonably withheld. (k) Permit Borrowers which are Foreign Subsidiaries to acquire title to Collateral to be located in the United States. 13. RISK OF LOSS AND INSURANCE: All risk of loss of, damage to, or destruction of the Collateral shall, at all times, be with each Borrower. Each Borrower shall procure and maintain with financially sound and reputable companies, insurance policies (i) insuring the Collateral against loss by fire, explosion, theft and such other casualties as are usually insured against by companies engaged in the same or similar business, and (ii) insuring such Borrower and the Lender against liability for personal injury and property damage relating to the Collateral. The policies shall be in such form and in such amounts and coverage as may be reasonably satisfactory to the Lender, with losses payable to such Borrower and the Lender as their respective interest may appear. Each Borrower shall, if requested by Lender, deliver to the Lender evidence that such insurance coverage is in effect. All insurance shall (i) contain a breach of warranty clause in favor of the Lender, (ii) provide that no cancellation, reduction in amount or change in coverage thereof shall be effective until at least thirty (30) days after receipt by the Lender of written notice thereof, and (iii) be reasonably satisfactory in all respects to the Lender. If any Borrower fails to furnish such insurance or fails to pay the premiums therefor, Lender may do so or may obtain insurance of its interest only and add the amount of any such premium thereof to the other amounts secured hereby. Lender is under no obligation nor duty, however, to pay such premiums or obtain such insurance. 14. DEFAULT: The occurrence of any one or more of the following will constitute an "Event of Default" under this Agreement: 17 (a) The failure of any Borrower to pay when due any Payment Amount or any other amounts payable under this Agreement or any Note; (b) A breach or failure in the observance or performance by any Borrower of any other material provision of this Agreement or any other Loan Document which is not remedied within thirty (30) days after receipt by any Borrower of notice of such breach or failure; (c) Any material representation, warranty or covenant made herein, or in any certificate, document, financial or other statement delivered in connection with this Agreement, or hereafter made by any Borrower proves to have been incorrect in any material adverse respect when made or given; (d) Any Borrower, or any surety or guarantor of the Indebtedness evidenced by this Agreement or a Note (i) files a petition or has a petition filed against it under the bankruptcy code, or any proceeding for relief of insolvent debtors; (ii) generally fails to pay its debts as such debts become due; (iii) shall admit in writing its inability to pay its debts as they become due; (iv) has a custodian, trustee or receiver appointed, voluntarily or otherwise, for it or its assets; (v) benefits from, or is subject to, the entry of an order for relief by any court of insolvency; (vi) makes an assignment for the benefit of creditors; (vii) becomes insolvent (however otherwise evidenced); (viii) liquidates, winds-up, dissolves or suspends business; or (ix) has commenced against it any case, proceeding or other action seeking the issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets, which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within sixty (60) days from the entry thereof; (e) Any Borrower shall (i) default in any payment of any other instrument or agreement (other than with Lender) with an outstanding principal amount in excess of $10,000 beyond the period of grace, if any, provided in the applicable instrument or agreement, or (ii) default in the observance of any other provision of such other instrument or agreement as to cause, or permit the holder of such instrument or agreement to cause, the obligations thereunder to become due prior to its stated maturity; (f) One or more judgments or decrees shall be entered against any Borrower involving in the aggregate a liability (not paid or fully covered by insurance) of $10,000 or more, and any of such judgments or decrees shall not have been vacated, discharged, or stayed or bonded pending appeal within sixty (60) days after the entry thereof; or (g) Any guaranty or any subordination agreement required or delivered in connection with this Agreement is breached or becomes ineffective, or any guarantor, or subordinating creditor disavows its obligations under the guaranty or subordination agreement, as the case may be; or (h) Any Borrower fails to perform any of its obligations under any other agreement or lease with Lender; or (i) At any time a Borrower other than ATII ceases to be a Subsidiary of ATII; or (j) If any Change in Control should occur without Lender's prior written consent. A "Change in Control" of ATII shall be deemed to have occurred upon any change in the direct or indirect control of, or the ability or right to control, a majority of the voting shares of any class of securities or ownership rights in any ATII or any other Borrower or in the right and/or the power to control the election of the board of directors of ATII or any other Borrower; or (k) The occurrence of a material adverse effect on, or material adverse change in, (i) the business, operations or financial condition of ATII or any other Borrower, (ii) the ability of ATII or any other Borrower to perform its obligations under this Agreement, any Note, or the other Loan Documents, or (iii) the Lender's ability to enforce the rights and remedies granted under this Agreement or the other Loan Documents, in all cases whether attributable to a single circumstance or event or an aggregation of circumstances or events. 18 15. RIGHTS AND REMEDIES ON DEFAULT: At Lender's option, upon the occurrence of any such Event of Default under Section 14, and at any time thereafter, at Lender's option, Lender's commitment to lend shall terminate and/or all unmatured Indebtedness evidenced by the Note will immediately become due and payable without presentation, demand, protest, or notice of any kind, all of which are expressly waived. Lender may exercise, from time to time, any rights and remedies available to it under this Agreement, any Note, the Uniform Commercial Code and other applicable law. Each Borrower agrees that upon the occurrence and during the continuance of an Event of Default, to the extent permitted by applicable law (i) any amounts payable under this Agreement or under any Note shall thereafter bear interest at a rate per annum equal to the Interest Rate plus three percent (3%), or the maximum rate per annum allowed by law, whichever is less, compounded monthly and payable on demand (both before and after judgment), until the Indebtedness is paid in full or the Event of Default is cured, (ii) it will, at Lender's request, assemble the Collateral and make it available to Lender at places which Lender shall reasonably select, and (iii) Lender, by itself or its agent, may, without notice to any person and without judicial process of any kind, enter into any premises or upon any land owned, leased or otherwise under the real or apparent control of any Borrower, or any agent of any Borrower, where the Collateral may be, or where Lender believes the Collateral may be, and disassemble, render unusable, and/or repossess all or any item of the Collateral, disconnecting and separating the Collateral from any other property. Each Borrower expressly waives all further rights to possession of the Collateral after the occurrence and during the continuance of an Event of Default and all claims for injuries suffered through, or loss caused by, such entering and/or repossession. Lender shall have the right to sell, lease or otherwise dispose of the Collateral (or contract to do so), whether in its then condition or after further preparation or processing, either at public or private sale, in lots or in bulk, for cash or for credit, with or without warranties or representations, and upon such terms and conditions as Lender, in its sole discretion, may deem advisable. Lender shall have the right to purchase at any such sale. Lender will give the applicable Borrower reasonable notice of the time and place of any public sale of the Collateral or of the time after which any private sale or other intended disposition of the Collateral is to be made. Unless otherwise provided by law, the requirement of reasonable notice shall be met if such notice is delivered to the address of such Borrower set forth above at least ten (10) days before the time of the sale or disposition. Any proceeds of any disposition by Lender of any of the Collateral may be first applied by Lender to the payment of expenses, including reasonable attorneys' fees and legal expenses, incurred in connection with the repossession, care, safekeeping, sale or otherwise of any or all of the Collateral, or in any way relating to the rights of Lender hereunder. Any balance of such proceeds may be applied by Lender toward the payment of the Indebtedness in such order as Lender, in its sole discretion, shall determine. The Borrowers shall be liable for, and shall pay to Lender on demand, any deficiency which may remain after such sale, lease or other disposition, and Lender agrees to remit to the Borrowers any surplus resulting therefrom. 16. GENERAL AUTHORITY: Upon the occurrence and during the continuance of an Event of Default hereunder, Lender shall have the full power to exercise at any time and from time to time all or any of the following powers with respect to all or any of the Collateral: (a) To demand, sue for collection, receive and give acquittance for any and all monies due or to become due upon or by virtue thereof; (b) To receive, take, endorse, assign and deliver any and all checks, notes, drafts, documents and other property taken or received by Lender in connection therewith; (c) To settle, compromise, compound, prosecute or defend any action or proceeding with respect thereof; (d) To sell, transfer, assign or otherwise deal in or with the same or the proceeds thereof, as fully and effectually as if Lender were the absolute owner thereof; and (e) In general, to do all things necessary to perform the terms of this Agreement, including, without limitation, to take any action or proceedings which Lender deems necessary or appropriate to protect and preserve the security interest of Lender in the Collateral. In the case of failure of ATII or any Borrower to comply with any provision of this Agreement, Lender shall have the right, but shall not be obligated, to so comply in whole or in 19 part, and all moneys spent, and expenses and obligations incurred or assumed by Lender in connection with such performance or compliance, shall be payable on demand together with interest on such amounts equal to the Interest Rate plus three percent (3%) from the date and amount is expended or advanced by the Lender until paid. Such sums plus interest shall constitute indebtedness secured hereby. Lender's effecting such compliance shall not be a waiver of any Borrower's default. Lender shall be under no obligation or duty to exercise any of the powers hereby conferred upon it. 17. EXPENSES: Each Borrower agrees (a) to pay or reimburse Lender for all its reasonable costs, fees, charges and expenses incurred or arising in connection with the negotiation, review, preparation and execution of this Agreement, the Loan Documents, any commitment or proposal letter, or any amendment, supplement, waiver, modification to, or restructuring of this Agreement, the Indebtedness incurred hereunder, or the other Loan Documents, including, without limitation, reasonable outside counsel legal fees and disbursements, expenses, document charges and other charges and expenses of Lender, (b) to pay or reimburse Lender for all its reasonable costs, fees, charges and expenses incurred in connection with the administration of this Agreement and the other Loan Documents or the enforcement, protection or preservation of any rights under or in connection with this Agreement or any other Loan Documents, including, without limitation, reasonable outside counsel legal fees and disbursements, audit fees and charges, and all out-of-pocket expenses, (c) to pay, indemnify, and to hold Lender harmless from, any and all recording and filing fees and taxes and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes (excluding income and franchise taxes and taxes of similar nature), if any, which may be payable or determined to be payable in connection with the execution and delivery or recordation or filing of, or consummation of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement and the other Loan Documents. All of the amounts described in this Section are referred to collectively as the "Lender's Expenses," shall be payable upon Lender's demand, and shall accrue ------------------ interest at the Interest Rate in effect when such demand is made from five (5) days after the date of demand until paid in full. All Lender's Expenses, and interest thereon, shall be part of the Indebtedness and shall be secured by the Collateral. The agreements in this Section 17 shall survive repayment of the other Indebtedness. All Lender's Expenses that are outstanding on any Borrowing Date shall be paid before or with such Advance. If a Borrower has not paid to Lender the amount of all Lender's Expenses billed to ATII before such Borrowing Date, Lender shall be authorized to retain from any Advance on such Borrowing Date the amount of such Lender's Expenses that remain unpaid. Each Borrower's obligation to pay Lender's Expenses shall not be limited by any limitation on the amount of the Commitment that may be designated as available for such purposes, and any amounts so designated shall be used to pay Lender's Expenses accrued at the time of any Advance before any of the legal fees or similar expenses of the Borrowers. 18. NOTICES: Notices, demands and other communications required to be given hereunder to be effective shall be transmitted in writing by telex, telecopy, or facsimile transmission and confirmed by a similar mailed writing, by hand delivery, by first class, registered or certified mail, return receipt requested, or an overnight courier service, addressed to Lender at 501 Corporate Centre Drive, Suite 600, Franklin, TN 37067 (Attention: Director Operations & Administration), with a copy to TFS Portfolio Management, 10 Riverview Drive, Danbury, CT 06810, or to the applicable as the case may be, at the address set forth above or at such other address as any party may hereinafter substitute by written notice. Notice shall be effective four (4) days after the date it was mailed or upon receipt, whichever is earlier. 19. INDEMNIFICATION: Each Borrower shall indemnify Lender against and hold Lender harmless from any and all claims, actions, suits, damages, allegations, liabilities, and liens and all costs and expenses, including, without limitation, reasonable attorneys' fees incurred by Lender, arising out of or in any way related to a Borrower's ownership or use of the Collateral, or in connection with the transactions contemplated by this Agreement, including without limitation, the granting and perfection of the security interest and lien described herein. 20. FCC AND PUC APPROVALS; NOTIFICATION: The exercise of any rights hereunder by the Lender that may require FCC or PUC approval shall be subject to obtaining such approval. Pending obtaining any such FCC or PUC approval, each Borrower will refrain from taking or permitting any action to be taken which is contrary to the interest of the Lender. In accordance with the requirements of 47 C.F.R. Section 22.917 (1984), or any successor provision, the Lender agrees to notify the applicable Borrower and the FCC (if required) in writing at least ten (10) 20 days prior to the repossession, in accordance with the Agreement, of all or any part of the Collateral which is subject to the regulation. 21. ASSIGNMENT: Lender may, in whole or in part, without notice to, or the consent of any Borrower, sell, assign, grant a security interest in or pledge its interest in the Collateral and/or a Note and any amounts due or to become due hereunder to any third party ("Assignee"). Upon receiving written notice from Lender, a Borrower shall, if so directed, pay the amounts due hereunder, directly to Assignee. Any Assignee shall be entitled to rely on the agreements, representations, warranties, and covenants of ATII and each Borrower contained herein, as applicable, and shall be considered a third-party beneficiary thereof. Each Borrower shall also execute and deliver to Lender, or any Assignee, any additional documentation as Lender or Assignee may reasonably request. Without Lender's prior written consent, no Borrower shall assign or transfer its obligations hereunder. Any attempted transfer by any Borrower shall be void ab initio. 22. MISCELLANEOUS: (a) No failure or delay by the Lender to exercise any right, power or privilege hereunder shall operate as a waiver of any such right, power or privilege, nor shall any single or partial exercise of any right, power or privilege preclude any other or future exercise thereof. The Lender may waive any default before or after the same has been declared and restore this Agreement to full force without impairing any rights hereunder, such right of waiver being a continuing one. The waiver of any provision hereunder will not be effective unless in writing signed by the Lender. (b) If any provision in this Agreement or a Note shall be prohibited or unenforceable, such provision shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions. (c) To the extent that the Indebtedness is now or hereafter secured by property other than the Collateral, or by the guaranty, endorsement or property of any other person, corporation or entity, then Lender shall have the right, in its sole discretion, to determine which rights, security, liens, security interest or remedies it shall, at any time, pursue, relinquish, subordinate, modify, or take any other action with respect thereto without, in any way, modifying or affecting any of them or any of its rights hereunder. (d) Lender's duty of care (as imposed by law) with respect to the Collateral in its possession shall be deemed fulfilled if Lender exercises reasonable care in physically safekeeping such Collateral, or in the case of Collateral in the custody or possession of a bailee or other third person, exercises reasonable care in the selection of the bailee or other third person, and Lender need not otherwise preserve, protect, insure, or care for any Collateral. (e) No right or remedy is exclusive of any other provided under this Agreement or permitted by law or equity. All such rights and remedies shall be cumulative and may be exercised singularly or concurrently at Lender's option. The exercise or enforcement of any one such right or remedy shall neither be a condition to, nor bar the exercise or enforcement of any other. (f) All representations and warranties made herein or in any document, certificate or statement delivered pursuant thereto, or in connection therewith, shall survive the execution and delivery of this Agreement and the Notes. (g) ATII and each Borrower waive presentment, demand, protest and notice to the extent permitted by applicable law. (h) Time is of the essence with regard to each and every provision of this Agreement and each Note. (i) This Agreement may be executed in more than one counterpart, all of which taken together, shall constitute one agreement. (j) Except as otherwise provided in this Agreement, all computations and determinations as to accounting or financial matters and all financial statements to be delivered pursuant to this Agreement shall be made and prepared in accordance with GAAP (including principles of consolidation where appropriate), consistently applied, 21 and all accounting or financial terms shall have the meanings ascribed to such terms by GAAP. At such time that ATII has any Subsidiaries, all accounting and financial terms herein shall be deemed to include references to consolidated and consolidating principles, and covenants, representations and agreements with respect to ATII and its properties and activities shall be deemed to refer to ATII and its consolidated Subsidiaries collectively. 23. SUCCESSORS AND ASSIGNS: This Agreement shall be binding on the parties and inure to the benefit of Lender and each Borrower and their successors and permitted assigns. 24. GOVERNING LAW, JURISDICTION AND VENUE: (a) This Agreement and the Notes are being delivered to Lender in the State of New York and shall be construed in accordance with and governed by the laws of such state, except to the extent the internal laws of another jurisdiction are required to be applied in connection with the exercise of rights pertaining to Collateral in that jurisdiction. (b) EACH BORROWER HEREBY IRREVOCABLY CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF THE COURTS LOCATED IN WILLIAMSON COUNTY, TENNESSEE AND DAVIDSON COUNTY, TENNESSEE, INCLUDING WITHOUT LIMITATION FEDERAL COURTS SITTING IN THE MIDDLE DISTRICT OF TENNESSEE, THE CHANCERY COURT FOR WILLIAMSON COUNTY, TENNESSEE, AND THE CHANCERY COURT FOR DAVIDSON COUNTY, TENNESSEE, FOR ANY SUIT BROUGHT OR ACTION COMMENCED IN CONNECTION WITH THIS AGREEMENT, THE NOTES, THE OTHER LOAN DOCUMENTS, OR THE OBLIGATIONS, AND AGREES NOT TO CONTEST VENUE OR JURISDICTION IN ANY SUCH COURTS. The choice of forum set forth herein shall not be deemed to preclude the enforcement of any judgment obtained in such forum or the taking of any action under this Agreement to enforce the same in any appropriate jurisdiction. 25. WAIVERS AND LIMITATIONS OF LIABILITY: (a) EACH BORROWER AND LENDER HEREBY KNOWINGLY AND WILLINGLY WAIVE THEIR RESPECTIVE RIGHTS TO DEMAND A JURY TRIAL IN ANY ACTION OR PROCEEDING INVOLVING THIS AGREEMENT, THE NOTES ANY OTHER LOAN DOCUMENT, THE OBLIGATIONS, OR ANY RELATIONSHIP BETWEEN LENDER AND BORROWER. EACH BORROWER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. (b) LENDER SHALL HAVE NO LIABILITY UNDER OR IN CONNECTION WITH THIS AGREEMENT THE NOTES OR ANY OF THE OTHER LOAN DOCUMENTS FOR SPECIAL, EXEMPLARY, PUNITIVE, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES OF ANY SORT IN ANY SUIT BROUGHT OR ACTION COMMENCED IN CONNECTION WITH THIS AGREEMENT, THE NOTES THE OTHER LOAN DOCUMENTS, OR THE OBLIGATIONS, AND, EXCEPT TO THE EXTENT PROHIBITED BY LAW, EACH PARTY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH ACTION ANY SPECIAL, EXEMPLARY, PUNITIVE, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES OF ANY SORT OTHER THAN ACTUAL DAMAGES. (c) To the fullest extent permitted by law, except as otherwise expressly provided herein, each Borrower hereby waives (i) presentment, demand and protest and notice of presentment, protest, default, non-payment, maturity, release, compromise, settlement, extension or renewal of any or all commercial paper, accounts, contract rights, documents, instruments, chattel paper and guaranties at any time held by Lender on which any Borrower may in any way be liable and hereby ratifies and confirms whatever Lender may do in this regard; (ii) notice prior to taking possession or control of the Collateral or any bond or security which might be required by any court prior to allowing Lender to exercise any of Lender's remedies, including the issuance of an immediate writ of possession, except as expressly required in any of the Loan Documents; (iii) any marshalling of assets, or any right to compel Lender to resort first to any Collateral or other persons before pursuing any Borrower for payment of the Indebtedness and any defenses based on suretyship or impairment of Collateral; (iv) the benefit of all valuation, appraisement and exemption laws; (v) any right to require Lender to terminate its security interest in the Collateral or in any other property of any 22 Borrower until termination of this Agreement and the execution by each Borrower and by any person whose loans to a Borrower are used in whole or in part to satisfy the Obligations, of an agreement indemnifying Lender from any loss or damage Lender may incur as the result of dishonored or unsatisfied items of any account debtor applied to the Indebtedness; and (vi) notice of acceptance hereof. Each Borrower acknowledges that the foregoing waivers are a material inducement to Lender's entering into this Agreement and that Lender is relying upon the foregoing waivers in its future dealings with each Borrower. 26. ENTIRE AGREEMENT: This Agreement constitutes the entire agreement between Lender and each Borrower with respect to the subject matter hereof and supersedes all previous negotiations, proposals, commitments, writings, and understandings of any nature whatsoever. IN WITNESS WHEREOF, the parties have executed this Loan and Security Agreement by their duly authorized representatives: BORROWERS: --------- AMERICAN TELESOURCE INTERNATIONAL, INC. BY:_____________________________________ ______________ TITLE:__________________________________ ______________ [ADDITIONAL SIGNATURES FOR SUBSIDIARIES OF ATII] BY:__________________________________ ______________ TITLE:_______________________________ ______________ [ADDITIONAL SIGNATURES FOR SUBSIDIARIES OF ATII] BY:__________________________________ ______________ TITLE:_______________________________ ______________ [ADDITIONAL SIGNATURES FOR SUBSIDIARIES OF ATII] BY:__________________________________ ______________ 23 TITLE:_______________________________ ______________ [ADDITIONAL SIGNATURES FOR SUBSIDIARIES OF ATII] BY:__________________________________ ______________ TITLE:_______________________________ ______________ [ADDITIONAL SIGNATURES FOR SUBSIDIARIES OF ATII] BY:__________________________________ ______________ TITLE:_______________________________ ______________ [ADDITIONAL SIGNATURES FOR SUBSIDIARIES OF ATII] BY:__________________________________ ______________ TITLE:_______________________________ ______________ LENDER: ------ NTFC CAPITAL CORPORATION BY:__________________________________ ______________ TITLE:_______________________________ ______________ 24 EXHIBIT A --------- FORM OF ANNEX TO LOAN AND SECURITY AGREEMENT -------------------------------------------- By executing this Annex to Loan and Security Agreement attached to and forming a part of the Loan and Security Agreement dated as of June __________, 1999, (the "Loan Agreement"), between and among AMERICAN TELESOURCE INTERNATIONAL, INC., a _______________________ corporation ("ATII"), NTFC Capital Corporation (the "Lender"), Domestic and/or Foreign Subsidiaries of ATII which are signatories to the Loan Agreement, and such additional Domestic and/or Foreign Subsidiaries of ATII which may become a party to the Loan Agreement pursuant to Section 1(b) thereof, _____________________________ represents and warrants that it is a [FOREIGN or DOMESTIC] Subsidiary of ATII, joins as a party --------------------- to the Loan Agreement, assumes the obligations of a Borrower under the Loan Agreement, and confirms that it is bound by the terms and conditions of the Loan Agreement, including but not limited to the grant to Lender of a security interest in all its right, title and interest in and to the Collateral as provided in the Loan Agreement. _________________________________________ acknowledges and agrees that one or more other Subsidiaries of ATII may become additional Borrowers under the Loan Agreement without the consent of any other Borrower by execution of a form of the Annex to the Loan Agreement by ATII, the Subsidiary and the Lender. ______________________________ acknowledges and agrees that (i) other Subsidiaries of ATII may become additional Borrowers under the Loan Agreement without the consent of any other Borrower by execution of a form of the Annex to the Loan Agreement by ATII, the Subsidiary and the Lender; (ii) the Lender is willing to extend certain credit to the Borrowers, subject to the terms and conditions set forth in the Loan Agreement, including the condition that all Borrowers will be jointly and severally liable for all amounts owed by any Borrower under the Loan Agreement to Lender; (iii) without this joint and several liability for all Indebtedness owed by any Borrower to Lender under the Loan Agreement, Lender would not be willing to extend credit to any Borrower; and (iv) __________________________________________, the existing Borrowers and other Subsidiaries of ATII which may become additional Borrowers under the Loan Agreement are related entities, and ________________________ expects to increase its business, and to benefit directly and indirectly, through the use of the equipment to be acquired by it and the other Borrowers with the proceeds of the loans to be made pursuant to the Loan Agreement. _______________________ authorizes the Lender to attach this Annex to the Loan and Security Agreement, which shall be deemed a part of, and incorporated by reference in, the Loan Agreement. This Annex to the Loan and Security Agreement is being delivered to Lender in the State of Tennessee and shall be construed in accordance with and governed by the laws of such state, except to the extent the internal laws of another jurisdiction are required to be applied in connection with the exercise of rights pertaining to Collateral in that jurisdiction. Capitalized terms used in this Annex to the Loan Agreement without definition shall have the meanings set forth in the Loan Agreement to which this Annex is attached and form a part. This Annex may be executed in any number of counterparts (by facsimile transmission or otherwise) and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same document. IN WITNESS WHEREOF, the parties have executed this Annex to Loan and Security Agreement by their duly authorized representatives: ATII: ---- AMERICAN TELESOURCE INTERNATIONAL, INC. 25 BY:__________________________________ ______________ TITLE:_______________________________ ______________ BORROWER: -------- BY:__________________________________ TITLE:_______________________________ LENDER: ------ NTFC CAPITAL CORPORATION BY:__________________________________ TITLE:_______________________________ Exhibit B --------- Exhibit C --------- 26 EX-10.10 9 BANCBOSTON MASTER LEASE AGREEMENT Exhibit 10.10 RIDER NO. 1 To LEASE SCHEDULE NO. 1 To MASTER AGREEMENT Dated As Of December 4, 1998 This Rider No. 1 (the "Rider") is entered into between BancBoston Leasing Inc. ("Lessor") and American TeleSource International, Inv. ("Lessee"), is contemporaneous with and amends the above-referenced Lease Schedule together with all riders and amendments thereto, (the "Lease Schedule") which incorporates the terms and conditions of above-referenced Master Agreement by and between Lessor and Lessee (the "Master Agreement"). It is the intention of Lessor and Lessee that, upon execution, this Rider shall constitute a part of the Lease Schedule and the Master Agreement. IN CONSIDERATION OF the mutual covenants and promises as hereinafter set forth, Lessor and Lessee hereby agree as follows: 1. All capitalized terms used in this Rider shall, unless otherwise defined, have the meanings set forth in the Lease Schedule. The terms of this Rider shall apply only to the equipment (the "Equipment") set forth on the Lease Schedule. 2. To add a new Section 8 to the Lease Schedule, as follows: "8. Tax Indemnification. In the event any of the Equipment is, at any time during the Term of the Lease, located outside the United States (the "Foreign Equipment"), Lessee agrees to pay, indemnify and hold Lessor harmless from any of the following Taxes, as hereinafter defined, attributable to the Foreign Equipment or the Lease as it relates thereto: (a) any sales, use, excise, import or export, value added, or similar tax or duty and any other tax or duty not based on Lessor's net income, and (b) any taxes required to be withheld or deducted from any payment required under the Lease from the Lessee and all such taxes and any additional amounts which the Lessor specifies as necessary to preserve the after-tax yield the Lessor would have received if such taxes were not imposed shall be paid by the Lessee; and (c) all government permit fees, license fees, customs fees or similar fees levied upon the Foreign Equipment or the Lease. All foregoing fees and taxes shall be referred to as Taxes. The Taxes to be paid pursuant to this Section are in addition to any other payment due under the Lease. The obligations and indemnities of Lessee under this Section 8 shall continue in full force and effect, and shall survive, notwithstanding the expiration or other termination of this Master Agreement or the Lease Schedule". The terms and conditions of this Rider shall prevail where there may be conflicts or inconsistencies with the terms and conditions of the Lease Schedule as it applies to the Equipment. IN WITNESS WHEREOF, Lessor and Lessee, by their duly authorized representatives, have executed and delivered this Rider which is intended to take effect as a sealed instrument as of the date of the Lease Schedule. Accepted and Agreed to at Boston, Massachusetts BANCBOSTON LEASING INC AMERICAN TELESOURCE INTERNATIONAL, INC. By: _______________________________ By: /s/ H. Douglas Saathoff Title: ____________________________ Title: CFO 33 LEASE SCHEDULE NO. 1 TO MASTER AGREEMENT Date as Of December 4, 1998 This is Counterpart No. 2 of 2 which has been serially numbered and manually executed. To the extent that this document constitutes chattel paper under Article 9 of the Uniform Commercial Code of the Commonwealth of Massachusetts, no security interest in this document may be created through transfer or possession of any counterpart other than Counterpart No. 1. This Lease Schedule dated as of the 21/st/ day of January, 1999 is attached to and made a part of that certain Master Agreement ("Master Agreement") dated December 4, 1998 between BANCBOSTON LEASING INC ("Lessor") and American Telesource International, Inc. ("Lessee"). I. Equipment Location: 12500 Network Blvd. Suite 407 San Antonio, TX 78249
Equipment Description: Invoice 192047 Equipment Acquisition Quantity Manufacturer/Supplier Description Cost 1 Network Equipment INSTALLATION $xxxxx Technologies, Inc. INSTALLATION Invoice 192048 1 Network Equipment P2P-0192D $xxxxx Technologies, Inc. POWER SUPPLY, 48-60VDC, DC 3 P2L-0148N $xxxxx MOD.TRK,E3,NRDN 95 1 P2L-015OR $xxxxxx MOD,ACS,MAIN,TXN,RDNT 8 P2L-0115 $xxxxxx MOD,PR,E1,CE+75 TXN,NRDNT 1 P2N-0606D $xxxxxxx PROMINA 2000, DC, MULTISRVC 1 P2R-0700U $xxxxxxx P2000 REMOTEACCESS UNIT, 120VAC 1 P2S-278ML $xxxxxxx PVP, FMS/CMS S/W ADD-ONS-LIC 1 P2S-301ML $xxxxxxx PVP, FMS, OMS FMS FOUNDATION 1 P2SW-0600 $xxxxxxx PROMINA 2000 S/W-INITIAL LICENSE Invoice 192050 1 Network Equipment 097013L-009 $xxxxxxx Technologies, Inc. PS, STAGING SERVICES Invoice 192051 1 Network equipment EOS-GXT ONLINE DBL CONV $xxxxx Technologies, Inc. LIEBERT GXT1500-RT-120 UPS 1 EOS-CISCO760 $xxxxx CISCO 766M ISDN ROUTER 2 EOS-US ROBOTICS V.34 $xxxxx US ROBOTICS SPORTSTER 33.6 MODEM V3 2 EOS-LMR4TA-01 $xxxxx LANTRONIX LMR8TA-01 MIN HUB 8R 3 EOS-LRSI-T-01 $xxxxx LANTRONIX REMOTE ACCESS SERVER 2 EOS-ADTRAN TSU 100 V.35 $xxxxx ADTRAN TSU 100 V3.5 CSU/DSU 1 EOS-A21UFE1A9P SUN ULTRA $xxxxx SUN ULTRA 5 MDL 270 128MB 4GB FLOP 1 EOS-X7121A SUN MONITOR $xxxxx SUN X7121A 21" COLOR MONITOR 1 EOS-X1032A SUN ETHERNET $xxxxx SUN X470A ADAPTER & X1032A INSTALL 1 EOS-SG-XTAP8MM-010A TAPE $xxxxx SUN SG-XTAP*MM-010A U/14GB 8M 1 EOS-SOLS-251-C SOLARIS $xxxxx SUN X3856A CABLE W/PWR SOLARIS 2.5.1. 1 NET HANDLING FEE $xxxxx Invoice 192056 1 Network Equipment INSTALL $xxxxx Technologies Inc, INSTALLATION Invoice 192284 1 Network Equipment PS, STAGING SERVICES $xxxxx Technologies, Inc. Invoice 192285 1 Network Equipment EXPORT $xxxxx Technologies, Inc. EXPORT SERVICES Invoice 193015 1 Network Equipment EOS-J1128AB $xxxxxx Technologies, Inc. HP OPENVIEW VER.4.1/250 OR LESS IP 1 EOS-SUPPORT UDATE LTU $xxxxx HP PHONE/SAME DAY SYS SUPPORT 1 YR 1 EOS-HP 5.01 CD-ROM $xxxxx HP NETWORK NODE MANAGER 5.01 CD-ROM 1 EOS-UPDATE CD-ROM $xxxxx HP SUPPORT FOR CD-ROM ONE YEAR 1 EOS-HP 5.01 DOC FOR UNIX $xxxxx HP NETWORK NODE MGR 5.01 DOCUMENT 1 EOS0HP 5.0X DOC FOR UNIX $xxxxx PHONE SUPPORT FOR HP NODE MGR 1 EOS-NET SHUTDOWN SOFTWARE $xxxxx UPS SHUTDOWN S/W FOR SUN SOLARIS Invoice 193079 1 Network Equipment PS-TAC $xxxxx Technologies, Inc. ANNUAL TAC&PARTS MAINTENANCE Equipment Location: Roberto Rodriguez Saavadra Andador 21 No.7 Col. Benito Juarez Nvo. Laredo, Tamps 88274 R.F.C.-ROSR-540630-9J7 Equipment Description: Invoice 192049 1 Network Equipment P2P-01920 $xxxxx Technologies, Inc. POWER SUPPLY, 115-23 VAC, AC 3 P2L-0148N $xxxxx MOD.TRK,E3,NRDNT 1 P2L-0150R $xxxxx MOD,ACS MAIN, TXN, RDNT 8 P2L-0155N $xxxxx MOD, PR, E1, CE+75 TXN, NRDNT 1 P2N-0606A $xxxxx PROMINA 2000, AC, MULTISRVC 1 P2R-0700U $xxxxx P2000REMOTE ACCESS UNIT, 120VAC 1 P2SW-0600 $xxxxx PROMINA 2000 S/W-INITIAL LICENSE 2 P2A-129AU $xxxxx CBL, POWER, 115V Invoice 192048 1. PSL-0148N $xxxxx MOD.TRK,E3,NRDNT Texas Up-Front Tax (7.75%) $xxxxxx Total Acquisition Cost: $xxxxxxx
2. Lease Term: thirty-six (36) months commencing on 4/15/99. ------- 3. Rent: The rent during this Lease Term shall be payable in that number of consecutive payments and in the amount indicated below. The first rent payment is due on April 15, 1999 subsequent payments are due on the 15/th/ day of each subsequent month. Payment No. Monthly Rent ----------- ------------ 1-36 $16,634.36 n advance plus applicable taxes (amount to be paid on the fifteen of each month) 4. Purchase Option Price: $1.00 5. Security Interest; Remedies: Lessor and Lessee agree that this Lease Schedule constitutes a lease intended as security within the meaning of Article 9 of the Uniform Commercial Code ("UCC") as adopted by Massachusetts. Accordingly, Lessee hereby assigns and grants to Lessor a lien, claim and continuing security interest in the Equipment, additions, replacements and proceeds thereof including, without limitation, proceeds 34 of all insurance policies. Such lien, claim and continuing security interest shall secure the payment and performance of all obligations of Lessee to Lessor under this Lease Schedule as well as all other obligations and indebtedness of Lessee to Lessor, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising. In connection with the foregoing, Lessor shall hold legal title to, but not beneficial ownership of, the Equipment as additional security for the obligations of Lessee under this Lease Schedule. Any reference in the Master Agreement to "title" to the Equipment as held by Lessor shall mean, for purposes of this Lease Schedule, legal title. Upon the occurrence of an Event of Default, without limiting any of the rights of Lessor under Section 12 of the Master Agreement, Lessor may pursue the rights and remedies of a secured party under the UCC of Massachusetts or any other jurisdiction, and recover such other actual damages as may be incurred by Lessor. In addition, Lessor may sell, lease or otherwise dispose of any or all of the Equipment, whether or not in the possession of Lessor, at public or private sale and with or without notice to Lessee, which notice is hereby expressly waived by Lessee, to the extent permitted by, and not inconsistent with, applicable law. 7. Terms of Schedule: Lessor and Lessee agree that this Lease Schedule shall constitute a lease of the Equipment described in Section 1 above subject to the terms and conditions of which are hereby incorporated by reference in this Lease Schedule and made a part hereof to the same extent as if such terms and conditions were set forth in full herein. Terms used in this Lease Schedule and not otherwise defined herein shall have the meanings set forth in the Master Agreement. In the event of a conflict between the Master Agreement and the Lease Schedule, the terms and conditions of this Lease Schedule shall prevail. IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Schedule to be duly executed by their authorized representatives as of this 15/th/ day of ----- April, 1999. ----- ---- ACCEPTED AT BOSTON, MASSACHUSETTS LESSOR LESSEE BANCBOSTON LEASING INC. AMERICAN TELESOURCE INT'L., INC By: /s/ Angela Petrone By: /s/ H. Douglas Saathoff ---------------------------- ----------------------------- Title: Assistant Vice President Title: Chief Financial Officer ------------------------- -------------------------- 35 February 19, 1999 BancBoston Leasing Inc. 100 Federal Street Mail Stop 01-09-01 Attn.: Angela Petrone Boston, MA 02110 RE: Master Agreement dated December 4, 1998 between American TeleSource International, Inc. and BancBoston Leasing Inc. (Master Agreement") ------------------------------- Dear Ms. Petrone: This letter is written to acknowledge and confirm certain matters relating to the leasing of certain capital equipment manufactured by Network Equipment Technologies, Inc. ("NET") which BancBoston Leasing Inc. as lessor ("Lessor") has agreed to lease to American TeleSource International, Inc. ("Lessee") pursuant to the Master Agreement, and specifically Lease Schedule No. 1 dated February 19, 1999 to the Master Agreement (" Lease Schedule 1"). Lessee acknowledges that it agreed, at Lessor's request, to make a ten percent (10%) security deposit based upon the Acquisition Cost relating to the Equipment subject to Lease Schedule 1. Lessee erroneously made said security deposit to NET rather than to Lessor. Further, the amount which Lessee paid to NET was based upon its information and belief that the Acquisition Cost for the subject Equipment was $426,975.00, so that the ten percent (10%) security deposit Lessee forwarded to NET was $42,697.50. In fact, the Acquisition Cost relating to the Equipment subject to Schedule No. 1 was $493,174.33, so that the original ten percent (10%) security deposit should have been in the amount of $49,317.33. In effect, the security deposit that Lessee made to NET was short $6,619.83. Lessee forwards to BBL herewith said $6,619.83 shortfall, via Check #24544, and ----- acknowledges and agrees that NET should forward the balance of $42,697.50 to Lessor, thereby providing Lessor with the agreed upon amount of ten percent (10%) of the Acquisition Cost for schedule 1, or $49,317.33. The $49,317.33, ten percent (10%) security deposit, will be held by Lessor and/or an affiliate of Lessor in an interest bearing cash collateral account pursuant to a Pledge Agreement of even date herewith by and between Lessor and Lessee, with the interest remitted semi-annually to Lessee directly by Lessor. Lessee further recognizes that Lessor will fund to NET the amount of $493,174.33 the total amount of the Acquisition Cost of the Equipment relating to schedule 1; and Lessee will remit monthly lease payments to Lessor pursuant to Schedule 1. AMERICAN TELSOURCE INTERNATIONAL, INC. /s/ H. Douglas Saathoff By: H. Douglas Saathoff Its: CFO 36 CERTIFICATE OF ACCEPTANCE AND WAIVER To LEASE SCHEDULE NO. 1 Dated as of January 21, 1999 (the "Lease Schedule") To Master Agreement dated as of December 4, 1998 (the "Master Agreement") Between American TeleSource International, Inc. ("Lessee") and BancBostonLeasing Inc. (Lessor") 1. EQUIPMENT ACCEPTANCE ; LEASE COMMENCEMENT: ----------------------------------------- In order to induce Lessor to commence the Lease Term of the Lease Schedule and to agree to pay the vendor of the Equipment the Equipment Cost thereof when due, Lessee hereby certifies, covenants and represents: (a) that the Equipment has been delivered but not yet fully installed at the location(s) specified on the Lease Schedule, (b) that Lessee nevertheless desires to accept the Equipment for all purposes under the Lease Schedule as of the date hereof (the "Commencement Date"), to commence as of the date hereof the Lease Term including all of Lessee's obligations under the Lease Schedule and the Master Agreement, and to instruct Lessor to pay promptly the vendor of the Equipment the Equipment Cost thereof, (c) that, notwithstanding that the Equipment has not yet been fully installed, Lessee irrevocably waives any and all rights to revoke, reject, repudiate or cancel the Lease Schedule and, as between Lessee and Lessor (but not as between Lessee and vendor), Lessee hereby waives any and all rights to inspect and reject the Equipment as nonconforming or for any other reason; (d) that rent including Monthly rent for all the Equipment shall commence on the Commencement Date and shall not be subject to abatement, offset, reduction, defense, counterclaim, or recoupment for any reason whatsoever. Lessee hereby authorizes and instructs Lessor to insert the payment dates and the Lease Term commencement date, if applicable, in the Lease Schedule. Lessee: AMERICAN TELESOURCE INTERNATIONAL,INC. By: /s/ H. Douglas Saathoff Name: H. Douglas Saathoff Title: CFOS Date: March 29, 1999 -- 37 PLEDGE AGREEMENT This Agreement is made as of the 21/st/ day of January, 1999 among American TeleSource International, Inc., a Texas corporation with its principal place of business at 12500 Network Blvd., San Antonio, TX 78249 (The "Lessee") and BancBoston Leasing Inc., a Massachusetts corporation with its principal place of business at 100 Federal Street, Boston, MA 02110 ("Lessor" and "Agent"). WHEREAS, the Lessor is providing certain leasing accommodations to the Lessee pursuant to and evidenced by a Master Agreement dated as of December 4, 1998, and all Lease Schedules, Exhibits, and Riders thereto (the "Master Agreement"); and WHEREAS, in consideration of such accommodations, the Lessee has agreed to secure payment and performance of all obligations arising under the Master Agreement by granting the Lessor a first lien and continuing security interest in cash in an amount of not less than ten percent (10%) of the Acquisition Cost of the Equipment leased under the master Agreement (subject to adjustment to be negotiated by the Lessor and the Lessee for future lease schedules if and to the extent that the total amount secured by this Pledge Agreement exceeds $900,000.00) excluding interest earned thereon (the "cash Collateral"). NOW THEREFORE, for the mutual considerations herein contained, the parties hereby agree as follows: 1. Cash collateral. The term "Cash Collateral" as used herein shall mean --------------- all Cash Collateral delivered to the Lessor pursuant to this Agreement and all additions, substitutions, accessions, and proceeds thereto and thereof. 2. Pledge. As collateral security for the payment and performance in ------ full of any and all obligations, indebtedness, and liabilities, and direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, of the Lessee to the Lessor under the Master Agreement and under any other agreement executed in connection therewith (all of the foregoing collectively, the "Obligations"), the Lessee hereby pledges and assigns all of its right, title, and interest, and grants a first lien and continuing security interest to the Lessor, in the Cash Collateral. 3. Future Pledges. To the extent the Lessor extends additional -------------- leasing accommodations to the Lessee, the Lessee agrees to pledge and deposit with the Lessor, or at its direction, additional cash, to be additional Cash Collateral, subject to the lien and security interest granted herein and to the terms and provisions of this Agreement in such kinds and amounts as the parties may agree. 4. Cash Collateral Account. The Lessor shall, directly or through its ----------------------- agents, deposit the Cash Collateral in an interest-bearing First Rate Account ("Account ") with BancBoston. The Account shall be in the name of "BancBoston Leasing Inc., Agent, as Collateral Pledge for American TeleSource International, Inc., Collateral Account", and shall be administered by the agents or employees of Agent and/or BankBoston. Any notices given with respect to the Collateral or the Account shall be sent to Lessor. Lessor's security interest in and to the Cash Collateral shall extend only to the principal sum deposited by the Lessee, and any and all interest which may accrue on the Account ("Interest") shall be remitted semi-annually to the Lessee directly by BankBoston. In the event that Lessor receives any payment of or in respect of Interest on the Account, it shall hold such payment in trust for the benefit of the Lessee and shall immediately upon receipt notify the Lessee thereof and remit such payment to the Lessee in accordance with the Lessee's written instructions. Any interest earned on such Interest payments received by Lessor while in Lessor's possession or under its control shall also belong to the Lessee and be held in trust by Lessor for the Lessee and shall be remitted to the Lessee along with the original Interest payment. In no event shall Lessor or BankBoston be entitled to deduct, withhold, credit or set off any Interest or interest thereon against any amounts owing from the Lessee to Lessor or BankBoston, respectively, under this Agreement or any other agreement. 38 5. Return of Collateral. The Cash Collateral shall be held in the -------------------- Account until the Obligations shall no longer be outstanding, whereupon Lessor shall assign and deliver to the Lessee such of the Cash Collateral, with interest earned thereon, as has not been applied by Lessor pursuant to the terms hereof and which is held by Lessor or by Agent on Lessor's behalf. 6. Remedies Upon Default. Upon an Event on Default, as hereinafter --------------------- defined, either (i) Lessor, at its option, may transfer at any time to itself or its nominee, or (ii) Agent, at Lessor's option and direction, shall transfer to Lessor or Lessor's nominee any or all of the Cash Collateral and hold same as security hereunder or apply it to any of the Obligations in such order and manner as the Lessor may determine, all at the Lessor's sole discretion. 7. Representations, Warranties and Covenants of the Lessee. ------------------------------------------------------- 7.1 The Lessee represents and warrants that it is a corporation duly organized, existing, and in good standing under the laws of the State of Texas and is duly qualified and in good standing in every other state where to nature of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the Lessee's business or financial condition. 7.2 The Lessee represents and warrants that the execution, delivery, and performance of and under this Agreement are within the Lessee's corporate powers, have been duly authorized, and are not in contravention of law or the terms of the Lessee's charter, bylaws, or other incorporation papers, or of any indenture, agreement, or undertaking to which it is a party or by which it is bound. 7.3 The Lessee represents and warrants that it is the legal and equitable owner of the Cash Collateral and holds same free and clear of all liens, charges, encumbrances, and security interests of every kind and nature whatsoever, and the Lessee covenants that it will not assign this Agreement or any interest herein or in the Cash Collateral or any part thereof, or otherwise pledge, encumber, or grant any option with respect to the Cash Collateral or any part thereof, except with the prior written consent of the Lessor. 7.4 The Lessee represents and warrants that it has good right and legal authority to assign, deliver, and/or create a security interest in the Cash Collateral in the manner hereby provided or contemplated, and the Lessee covenants that it will defend its title to the Cash Collateral against all claims of all persons or entities. 7.5 The Lessee covenants that it shall not make or allow to be made any withdrawals of cash constituting Cash Collateral, or any part thereof, including the income and proceeds therefrom other than as expressly set forth in this Agreement. 7.6 The Lessee covenants that it shall at all reasonable times and from time to time, following reasonable notice given to the Lessee by Lessor, allow the Lessor, by or through any of its officer, agents, attorneys, or accountants, to examine, inspect, or make copies or extracts from the Lessee's books and records at Lessor's sole expense. 7.7 The Lessee covenants that it shall at all times do, make, execute, and deliver all such additional and further acts and instruments as the Lessor may at any time reasonably request in connection with the administration and enforcement of this Agreement or relative to the Cash Collateral, in order to vest more completely in and assure or make available to the Lessor any of the Cash Collateral and rights herewith or hereafter granted, assigned, or transferred to the Lessor, and to carry into effect the provisions and intent of this Agreement. 8. Attorney-in-Fact. The Lessor is hereby irrevocably appointed by the ---------------- Lessee as the Lessee's attorney-in-fact for the purposes of carrying out the provisions of this Agreement and taking any action and executing any 39 instrument which the Lessor may deem necessary or advisable to accomplish the purposes hereof upon the Lessee's failure to take such action or execute such instrument as and when required by this Agreement. 9. Default. An event of default ("Event of Default") shall exist ------- hereunder if: (a) the Lessee breaches any of the foregoing warranties and covenants and such breach continues for ten (10) days following receipt of notice from Lessor; (b) the Lessee from and after the date hereof does or attempts to encumber, sell, transfer, or otherwise dispose of any of the Cash Collateral or any interest therein without the prior written consent of the Lessor; (c) any of the Cash Collateral is attached or levied upon or seized in any legal proceeding or is held by virtue of any lien or distress, and such attachment, levy or seizure continues from ten (10) days following receipt of notice from Lessor to remove same; (d) the Lessee or any maker, endorser, guarantor, or surety of or for any of the Obligations makes or has made any representation or warranty herein, or in the Master Agreement, or in any financial statement delivered pursuant to the Master Agreement, which is or was false or materially misleading when made; (e) the Lessee fails to pay or perform when due any of the Obligations and such failure is not cured within the applicable grace period; and/or (f) any of the following occurs: the death, dissolution, termination of existence, insolvency, business failure, appointment of a receiver for any part of the property, assignment for the benefit of creditors, or the commencement of any proceeding under any bankruptcy or insolvency laws, of, by, or against the Lessee or nay maker, endorser, guarantor, or surety of or for any of the Obligations. 10. Waivers. The Lessee waives presentment, notice, protest, notice of ------- acceptance of this agreement, notice of any leasing or other financial accommodations extended, extensions granted, collateral received or delivered, or any other action taken in reliance thereon, all demands and notices in connection with the delivery, acceptance, performance, or enforcement of any Obligation as to which any of the Cash Collateral is pledged, and all other demands and notices of any description (other than notice of default), and assents to any extension or postponement of the time of payment or any other such indulgence, or any substitution, exchange, or release of collateral, and to the addition or re Master Agreement of any party or person primarily or secondarily liable for any of the Obligations. 11. Rights and Remedies of the Lessor. Upon the occurrence of an Event of --------------------------------- Default, or at any time thereafter, without further notice or demand, the Lessor may declare this Agreement to be in default and shall thereafter have, in addition to all other rights and remedies, the rights and remedies of a secured party under the Uniform Commercial Code of Massachusetts and of any and all other applicable jurisdictions. Right is expressly granted to the Lessor to apply the Cash Collateral to the Obligations in such order and manner as the Lessor may determine and all at the Lessor's sole discretion. 12. Miscellaneous ------------- 12.1 No delay or omission on the part of the Lessor in exercising any 40 right, power, privilege, or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power, privilege, or remedy by the Lessor preclude any other or further exercise thereof or the exercise of any other right, power or remedy. 12.2 No waiver of any right, power, privilege, or remedy shall be effective unless in writing and signed by the Lessor, and such waiver on one occasion shall not be construed as a bar to or waiver of any right, power, privilege, or remedy on any other occasion. 12.3 All remedies of the Lessor are cumulative and are not exclusive of any other remedy provided in law or equity. 12.4 This Agreement shall not be amended or modified, nor shall any of the Collateral be released nor shall the pledge or security interest created hereby be extended, except by a writing signed by the Lessee and the Lessor. 12.5 Any notice required to be given by the Lessee, Lessor/Agent hereunder shall be deemed adequately given if hand delivered or if sent (returned receipt requested) by overnight mail or by certified U.S. mail to any other parts at its address stated herein or at such other place as such party may designate in writing to the other parties. Notice shall be effective on the earlier of (i) actual receipt or (ii) the day after deposit in overnight mail or the third day-after deposit in U.S. mail. 12.6 All terms not defined herein shall have the meanings set forth in the Master Agreement. 13. Termination. This Agreement shall terminate when all the Obligations ----------- secured hereby have been fully paid and performed. At such time, the Collateral shall be distributed as provided in Section 5 above. 14. Severability. The provisions of this Agreement are severable, and if ------------ any clause or provision shall be held invalid and unenforceable in whole or in part in any jurisdiction, then such invalidity or inenforceability shall affect only such clause or provision or part hereof in such jurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction or any other clause or provision of this Agreement in any jurisdiction. 15. Successors and Assigns. This Agreement and the terms, covenants, and ---------------------- conditions hereof shall inure to the benefit of the successors and assigns of the Lessor. The Lessee shall not assign any of its rights or obligations herein. 16. Law and Jurisdiction. The validity and interpretation of this -------------------- Agreement and the rights and obligations of the parties shall be governed by the laws of the Commonwealth of Massachusetts (without reference to the choice of law doctrine thereof), and the Lessee irrevocably consents to the jurisdiction of the courts of the Commonwealth of Massachusetts and of nay federal court located therein in connection with any action or proceeding arising out of or related to this agreement. IN WITNESS WHEREOF, the Lessee has caused this Agreement to be duly executed as an instrument under seal as of the day and year first written above. 41 MASTER LEASE AGREEMENT This MASTER AGREEMENT, dated as of the 4/th/ day of December, 1998, which together with all riders and amendments now or hereafter executed and made a part hereof (the "Master Agreement"), is made at Boston, Massachusetts by and between BANCBOSTON LEASING INC. ("Lessor"), a Massachusetts corporation with its principal place of business at 100 Federal Street, Boston, Massachusetts 02110 and American Telesource International, Inc. ("Lessee"), a Texas corporation with its principal place of business at 12500 Network Blvd., San Antonio, TX 78249. Section 1. LEASE. In consideration of the premises, the Lessee hereby leases from the Lessor the Equipment described in the Lease Schedule attached hereto and agrees to pay rent and perform the terms and conditions set forth herein. Throughout this Lease, "rent" means (a) the amounts set forth in the Lease Schedule as "Monthly Rent", (b) all taxes set forth in Section 8 below, and (c) all other monetary amounts due hereunder. Section 2. TERM AND PURCHASE OPTION. Lessee shall signify its acceptance of the Equipment by promptly executing and delivering to Lessor a Certificate of Acceptance. This Lease will start on the day Lessee accepts physical possession of the Equipment from the vendor of the equipment as set forth in the Lease Schedule ("Vendor"), provided, Lessor is not bound hereunder until Lessor's authorized officer signs this Lease. Once the Lease begins it will continue for the Term, which shall be the number of full months shown on the Lease Schedule (initial term) plus the interim term (the number of days from the starting date through the last day of the month in which such start occurs). At the end of the Term, Lessee shall purchase the Equipment for the amount set forth in the Lease Schedule. Section 3. RENT. Lessee agrees to pay Lessor rent throughout the Term monthly in advance for the initial term at the Monthly Rent as set forth in the Lease Schedule, and monthly in arrears at 1/30 of the Monthly Rent for each day of the interim term. Rent is due on the 1/st/ of each month. If all or any part of a payment is not received within ten (10) days of its due date, Lessor will charge Lessee 1.5% per month interest on such amount beginning with such due date (or, if less in either case, the maximum amount permitted by law). Lessor intends that the rents, fees and charges to be paid by Lessee hereunder conform to all provisions of law; however, should any such amounts be in excess of the applicable amounts allowed by law, upon notice thereof Lessor will promptly refund such excess to Lessee. Section 4. DELIVERY, SELECTION AND PURCHASE OF EQUIPMENT. Lessee agrees that Lessor is not responsible for delivery or installation of the Equipment. Lessee will not have any claim against Lessor if the manufacturer, supplier or Vender delays in delivery or installation. Lessee agrees that LESSOR DID NOT SELECT, MANUFACTURE, SUPPLY OR INSPECT THE EQUIPMENT AND HAS NO EXPERTISE REGARDING THE EQUIPMENT. LESSEE SELECTED THE EQUIPMENT BASED ON LESSEE'S OWN JUDGEMENT. LESSOR IS BUYING THE EQUIPMENT AT LESSEE'S REQUEST ONLY FOR THE PURPOSE OF LEASING IT TO LESSEE. Lessee represents that before signing this Lease (i) it approved the supply contract (if any) between Lessor and Vendor and (ii) it has been advised in writing that Lessee may have rights against the Vender under a supply contract and that Lessee may contact the Vendor to determine the extent of these rights. To the extent transferable, Lessor hereby transfers all warranties of Vendor or manufacturer to Lessee. Section 5. NO WARRANTIES. Lessee agrees that: (A) LESSOR IS LEASING THE EQUIPMENT TO LESSEE "WHERE IS, AS IS AND "WITH ALL FAULTS". LESSOR DISCLAIMS ANY REPRESENTATION, GUARANTY OR WARRANTY, EXPRESS OR IMPLIED, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTIBILITY OR FITNESS FOR A PARTICULAR PURPOSE REGARDING THE EQUIPMENT; (B) Lessor will not be liable for any loss or injury caused to Lessee or any other person or property (including lost profits and consequential, incidental or special damages) caused by the Equipment or its failure to operate properly; 42 (C) IF THE EQUIPMENT DOES NOT WORK AS REPRESENTED BY THE VENDOR, OR IF THE VENDOR OR ANY OTHER PERSON FAILS TO PROVIDE ANY SERVICE OR IF THE EQUIPMENT IS UNSATISFACTORY FOR ANY OTHER REASON, LESSEE WILL MAKE ANY CLAIM SOLELY AGAINST THE VENDOR OR OTHER PERSON AND WILL MAKE NO CLAIM AGAINST LESSOR; and (D) Lessor makes no representation and disclaims any warranty that the Equipment is "Year 2000 Compliant", that is, that any computer application or other systems, if any, which may be contained or included in the Equipment will be able to recognize and perform properly, date sensitive functions involving certain dates prior to and any date after, December 31, 1999. Lessee shall not assert any defenses against Lessor or its assignees arising from the condition of the Equipment, or the use or intended use of the Equipment. Section 6. USE, REPAIRS AND SERVICE. LESSEE CERTIFIES THAT THE EQUIPMENT WILL BE USED SOLELY FOR BUSINESS OF COMMERCIAL PURPOSES AND NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES. The Equipment shall be located at the address set forth in the Lease Schedule, which shall be located in the continental U.S., or such other location consented to in writing by the Lessor. Lessee will not make any alterations to the Equipment and will not allow it to be used by anyone except Lessee or Lessee's employees. Lessee will keep the equipment in good working order and in accordance with its manufacturer's service standards, ordinary wear and tear excepted, will service the Equipment as recommended by its manufacturer, will enter into any maintenance contract required by the manufacturer or supplier at its own cost and expense, and will permit its possession, use and operation only in accordance with the law, applicable regulations, and the terms of Lessee's insurance policies. All replacement parts and additions will automatically become Lessor's property, but will be transferred to Lessee, together with the Equipment, at the end of the Term for the purchase price set forth in the Lease Schedule. Section 7. LOSS; DAMAGE; INSURANCE. Lessee assumes all risk of loss of the Equipment. Lessee will keep the Equipment insured against all risks of loss in an amount not less than its replacement cost (listing Lessor as loss payee and additional insured) and against public liability in an amount satisfactory to Lessor (listing Lessor as additional insured). Lessee will provide upon the acceptance of each item of Equipment, and as requested subsequently, a certificate of insurance or such other evidence of coverage. In the event of loss, theft, destruction, damage, condemnation or other taking of the Equipment, Lessee shall at Lessor's option (i) replace the Equipment with like equipment in good repair and condition or (ii) pay to the Lessor (1) past due rent, (2) all future rent to become due during the unexpired Term discounted to present value at 5%, and (3) all other amounts due under this Agreement. Section 8. TAXES AND OTHER FEES. Lessee agrees this is a "net" lease and will pay when due (or reimburse Lessor upon demand), and on a net after-tax basis shall indemnify and defend Lessor against (a) all filing, services, administrative and user fees, all taxes, assessments, levies, excises, fees and all other governmental charges that are at anytime imposed or levied upon or assessed against (i) the Equipment, (ii) any rent or other sum payable hereunder (other than any net income tax measured solely by the net income of the Lessor) or (iii) this Lease or the leasehold created herein, or which arise in respect of any use, operation or possession of the Equipment and (b) all penalties and similar charges, whether penal or administrative; and all other fees of any kind which may be charged regarding the leasing, use or ownership of the Equipment with respect to the Term. Lessee shall also reimburse Lessor for any and all costs (including reasonable attorney's fees) incurred in connection with any tax or fee described in this Section 8. Lessee's obligations set forth in this Section 8 will survive and continue after the end of the Term. Section 9. INDEMNIFICATION. Lessee agrees to defend Lessor against, indemnify, and reimburse Lessor for (on an after-tax basis) all claims, actions, suits, proceedings, costs, expenses and damages and liabilities in any way relating to or arising out of this Agreement or any Schedule, including, but not limited to, any claim or demand 43 based upon STRICT OR ABSOLUTE LIABILITY IN TORT, any violation of environmental regulations or patent, trademark or other comparable infringements. Lessee shall also reimburse Lessor for all attorney's fees and expenses (whether or not litigation is commenced) incurred in connection with such claims or demands. Lessee's obligations set forth in this Section 9 will survive and continue after the end of the Term. Section 10. TITLE. The Equipment will remain at all times, sole and exclusive property of Lessor and, if requested by Lessor, Lessee agrees to affix identifying marks to the Equipment designating the ownership by Lessor. The Equipment is considered personal property, and Lessee will not permit it to become affixed to real estate. If Lessor requests, Lessee will provide recordable waivers of any landlord's or mortgagee's interest in the Equipment. Lessee shall keep the Equipment at all times free and clear from all liens, security interests or encumbrances of any nature except those created hereunder or those arising under operation of law incurred in the ordinary course of business which are not delinquent or are being contested in good faith. Upon request of Lessor, Lessee shall execute any documents or instruments which may be necessary or appropriate to confirm, to record or to give notice of ownership including financing statements under the Uniform Commercial Code. Section 11. SURRENDER TO LESSOR. Immediately upon the expiration of the Initial Term or any Extended Term or at any other termination of this Master Agreement, Lessee shall surrender the Equipment to Lessor in good repair and working order, reasonable wear and tear excepted, by assembling and delivering the Equipment, ready for shipment, to a place or carrier, as Lessor may designate, within the state in which the Equipment was originally delivered to Lessee or to which the Equipment was thereafter moved with the written consent of Lessor. All costs of removal, assembly, packing, and delivery of such equipment to the place designated by Lessor shall be borne by Lessee. Section 12. DEFAULT AND REMEDIES. Lessee agrees that Lessee will be in default if (a) Lessee fails to pay rent as required hereunder and such failure continues after Lessor gives Lessee five (5) days written notice; (b) Lessee fails to maintain insurance as required herein and such failure continues for ten (10) days following written notice from Lessor; (c) Lessee does not comply with any other term of this Lease or any Schedule and such failure to comply continues after Lessor has given Lessee thirty 930) days written notice; (d) the Equipment is taken or encumbered by any security interest, encumbrance, lien or charge, choate or inchoate; (e) Lessee dies, sells all or substantially all of its assets, or goes out of business; (f) Lessee becomes insolvent, makes or consents to an assignment for the benefit of creditors or to the appointment of a receiver or trustee; (g) a petition is filed by or against Lessee under the Bankruptcy Code; (h) any information supplied to Lessor directly or indirectly by Lessee or Lessee's agents, including all financial information, is not true, correct and complete; (i) Lessee breaches any term of any loan, credit agreement or other material obligation; or (j) any party to any guaranty, letter of credit, subordination or credit agreement or other undertaking ("Undertaking"), given for the benefit of Lessor and obtained in connection with this Master Agreement or Lease Schedule, breaches, fails to continue, contests, or purports to terminate or to disclaim the Undertaking; or such the Undertaking becomes unenforceable; or a guarantor of this Master Agreement or any Lease Schedule shall die, cease to exist or terminate its independent operations; or any event or condition set forth in subsections (f), (g), (h), or (i) of this Section 12 shall occur with respect to any guarantor or other person responsible, in whole or n part, for payment or performance of this Master Agreement or any Lease Schedule. If any of these defaults occurs, Lessee agrees that Lessor may take one or more of the following actions, in addition to other actions available under law or equity (including without limitation all remedies available under the Uniform Commercial Code): (A) Lessor may cancel this Lease and/or recover damages against Lessee, not as a penalty but as a liquidation for all purposes of what is due to Lessor, including: (1) past due rent, (2) all future rent to become due during the unexpired term discounted to present value at 5%, (3) all late fees and any other charges, reimbursements or payments due and to become due, (4) reasonable attorney's fees and all costs and expenses incurred in repossessing, storing, repairing, refurbishing, leasing or selling the equipment; and (5) the amounts indemnified in Section 8 (provided, no amount shall be duplicated); and/or (B) Lessor may obtain a court order permitting 44 repossession. Lessee will be liable for any deficiency following repossession and sale. If notice of sale is required to be given to Lessee, Lessee agrees ten (10) days prior to notice is sufficient. Lessor may also sue for the amounts listed in clause "A" above without first remarketing the Equipment, and Lessee waives any rights under any law that provides otherwise. Section 13. ASSIGNMENT. Lessor may assign any or all of its interest under this Lease and/or the Equipment to a new owner or secured party at any time without prior notice to Lessee, and such new owner or secured party may also assign its rights. Lessee agrees that the new owner or secured party will have the same rights Lessor had under this Lease but will not have to perform any of Lessor's obligations 9in which case Lessor will retain those obligations). Lessee also agrees that the rights of the new owner or secured party will not be subject to any claims, defenses or set-offs that lessee may have against Lessor or any other person and that any assignment by Lessor would not materially change Lessee's obligations under this Lease or substantially increase Lessee's burdens or risks or constitute a delegation of material performance. LESSEE MAY NOT ASSIGN (TRANSFER) ANY OF ITS INTERESTS UNDER THE LEASE TO ANY OTHER PERSON OR SUBLEASE ANY OF THE EQUIPMENT WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR, ANY ATTEMPTED SUBLEASE OR ASSIGNMENT WILL BE VOID AND IS A DEFAULT HEREUNDER. Section 14. REPRESENTATIONS AND WARRANTIES. Lessee represents and warrants that (i) Lessee is duly organized, validly existing and in good standing in the jurisdiction of its organization and each jurisdiction in which it conducts business, (ii) this Agreement and each Schedule have been and will be duly authorized and upon execution by Lessee shall constitute the legal, valid and binding obligation of Lessee enforceable against Lessee in accordance with its terms, (iii) there are no pending or threatened actions or proceedings before any court, arbitrator or administrative agency that would have a material adverse effect on Lessee's business, (iv) Lessee is not in default under any obligation for borrowed money or for the deferred purchase price of property, any lease agreement or any other agreement; (v) the financial and other information that Lessee has submitted, or will submit, is or will at the time of the submission be accurate and true; and (vi) Lessee has reviewed the relevant areas within its business and has developed or is developing a program to become on a timely basis "Year 2000 Compliant", and from time to time, at the request of Lessor, Lessee shall provide to Lessor such updated information or documentation as is requested regarding the status of its efforts to become year 2000 Compliant. Section 15. FINANCIAL STATEMENTS. Lessee shall annually, within ninety (90) days after the close of its fiscal year, furnish to Lessor financial statements of Lessee, including a balance sheet as of the close of such year and statements of income and retained earnings for such year, prepared in accordance with generally accepted accounting principles, consistently applied from year to year, and certified by independent public accountants for Lessee reasonably acceptable to Lessor. If requested by Lessor, Lessee shall also provide quarterly financial statements of Lessee, similarly prepared for each of the first three quarters of each fiscal year, certified (subject to normal year-end audit adjustments) by the chief financial officer of Lessee and furnished to Lessor within forty-five (45) days following the end of each quarter, and such other financial information as may be reasonably requested by Lessor. Section 16. NON-CANCELABLE AGREEMENT: NO OFFSET. NEITHER THIS AGREEMENT NOR ANY SCHEDULE MAY BE CANCELED FOR ANY REASON WHATSOEVER. LESSEE SHALL NOT BE ENTITLED TO ANY ABATEMENT OF ANY PAYMENT DUE HEREUNDER OR ANY SCHEDULE, NOR TO ANY DEFENSE, REDUCTION, OFFSET, COUTERCLAIM, RECOUPMENT OR DEDUCTION FOR ANY REASON WHATSOEVER NOR TO ANY EXCUSE FROM THE PERFORMANCE OF ANY OF ITS OBLIGATIONS UNDER THIS LEASE OR ANY SCHEDULE. LESSEE'S OBLIGATIONS HEREUNDER ARE ABSOLUTE AND UNCONDITIONAL. Section 17. LESSOR'S PAYMENT; POWER OF ATTORNEY. If Lessee fails to perform any obligation hereunder, Lessor may at its option (but without any obligation to anyone to do so) perform such obligation, and 45 Lessee shall reimburse Lessor on demand for any costs incurred plus interest at the rate of 18% per annum or, if lower, the maximum rate allowable by law from the date of any such payment by Lessor. Lessee irrevocably appoints Lessor as Lessee's attorney-in-fact to do any act that Lessee is obligated to do under this Agreement and to exercise any and all rights and powers as Lessee might exercise with respect to the Equipment. Section 18. PLACE FOR SUIT; JURY WAIVER. Lessee agrees that: this Lease will be governed by the internal laws of the Commonwealth of Massachusetts, LESSEE WAIVES TRAIL BY JURY AND CONSENTS TO PERSONAL JURISDICTION IN THE STATE AND FEDERAL COURTS IN MASSACHUSETTS; ANY LEGAL PAPERS FOR ANY LAW SUIT WILL BE PROPERLY SERVED IF MAILED BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, WITH DELIVERY TO LESSEE; and ANY LAWSUIT ARISING OUT OF THIS LEASE, REGARDLESS OF WHO FILES THE SUIT, MUST BE BROUGHT ONLY IN THE STATE OR FEDERAL COURTS IN MASSACHUSETTS AND NOT ELSEWHERE, UNLESS LESSOR AGREES IN WRITING OR ELECTS OTHERWISE. Section 19. GENERAL. Any notice to Lessor under this Lease shall be in writing and shall be deemed given if mailed by registered or certified mail, return receipt requested, or by overnight courier via a nationally recognized provider of such services, to Lessor at the address listed on the front page of this Lease, Attention: Contract Manager, Angela Petrone, Vendor Finance, or if to Lessee, mailed first class to the address similarly shown unless changed in writing. Notice to Lessee of a Lessor assignment constitutes such change of address. Notices shall be effective upon receipt. This Lease constitutes the entire agreement between Lessor and Lessee and supersedes any prior oral or written agreements. This Lease shall be binding upon and inure to the benefit of the parties hereto and their permitted successors and assigns. This Lease nay not be modified, amended or terminated except by a writing signed by Lessee and an Executive Officer of Lessor. For the purposes of any arbitration, court proceeding, audit, accounting or otherwise, Lessee agree that any copy, reproduction or image (electronic or otherwise) kept of this Lease by Lessor in the ordinary course of business shall be conclusive, final and binding upon the parties hereto and evidence for all purposes. Section 20. NON-WAIVER. Lessor's failure to require performance by Lessee of any of the provisions of the Lease shall not be a waiver thereof. Section 21. CAPTIONS. Captions in this Lease are for convenience only. Lessee certifies that Lessee has read ALL TWENTY-ONE (21) Sections of this Lease and all applicable Schedules and agrees to all terms herein. LESSEE: AMERICAN TELESOURCE Accepted At Boston, Massachusetts INTERNATIONAL, INC. LESSOR: BANCBOSTON LEASING INC. Printed Name: H. Douglas Saathoff By:/s/ H. Douglas Saathoff By:__________________________________ Title:VP Finance Title:_______________________________ Date: 12/7/98 Date:________________________________ 46 EX-10.12 10 EMPLOYMENT AGREEMENT WITH ARTHUR L. SMITH Exhibit 10.12 EXECUTIVE EMPLOYMENT AGREEMENT Agreement made as of September 24, 1998, between AMERICAN TELESOURCE INTERNATIONAL, Inc., a Delaware corporation (the "Company"), and Arthur L. Smith ("Executive"). The Company and the Executive desire to enter into certain agreements providing for Executive's employment with the Company. The parties hereto agree as follows: 1. Employment. The Company agrees to employ Executive and Executive ---------- accepts such employment for the period beginning August 1, 1998 (the "Start Date") and ending upon termination pursuant to paragraph 1 (D) hereof (the --------------- "Employment Period"). (A) Services. During the Employment Period, Executive will be the Chief -------- Executive Officer of the Company, and in connection therewith will render such services of an executive and administrative character to the Company and its affiliates as are customarily rendered by persons holding such position with similarly situated companies, as the Board of Directors of American TeleSource International Inc., a Delaware, U.S.A. corporation (the "Board") may from time to time direct. Executive will devote his best efforts and substantially all of his business time and attention (except as otherwise specifically permitted herein and except for vacation periods and reasonable periods of illness or other incapacity) to the business of the Company and its affiliates and will faithfully and diligently carry out such duties and have such responsibilities as are customary among persons employed in substantially similar capacities for similar companies. Executive will report to the Board and shall faithfully and diligently comply with all of its reasonable and lawful directives. For purposes of this Agreement, the term "affiliates" means any corporation, limited partnership, limited liability company or other entity engaged in the same business as the Company or a related business, which controls, is controlled by or is under common control with the Company. (B) Salary. During the Employment Period and thereafter as provided in ------ paragraph (D) below, the Company will pay Executive a base salary at the rate of - ------------- not less than $130,000 per annum (or such higher amount as the Board may establish from time to time), and will be payable in accordance with the Company's regular payroll practices. (C) Benefits. In addition to the compensation described above in this -------- paragraph 1, Executive will be entitled during the Employment Period to the - ------------ following benefits: (1) such bonus as the Board in its sole discretion may from time to time authorize, but in no event shall bonuses paid during a year exceed 50% of Executive's base salary for such year; (2) such health insurance and other benefits as are available from time to time to the Company's salaried employees generally; (3) in accordance with the Company's vacation and absence paid as in effect from time to time, sick leave, personal time provided that Executive shall have no less than three weeks vacation each year, with salary; (4) reimbursement, upon submission of documentation in accordance with the Company's regular expense policies, for reasonable business expenses incurred on the Company's behalf by Executive; 47 (5) participation in any savings plan, 401(k) plan, profit sharing plan or pension plan as is available from time to time to the Company's salaried employees generally; and (6) opportunity to participate in any and all employee benefit plans from time to time in effect for executives or salaried employees of the Company generally (subject to any contribution therefore generally required by such employees and except to the extent such plans are in a category of benefit otherwise provided to Executive). (D) Termination. Unless earlier terminated by termination of Executive's ----------- employment pursuant to any of the provisions immediately below, Executive's employment with the Company will continue until the third anniversary of the Start Date, and Executive's employment shall be renewed automatically for one- year periods thereafter unless either party hereto gives written notice to the other party, at least 120 days prior to the next anniversary date, that such employment shall not be renewed: (1) Death. In the event of Executive's death during the term hereof, ----- Executive's employment hereunder shall immediately and automatically terminate. Notwithstanding such event, the Company shall pay to Executive's designated beneficiary or, if no beneficiary has been designated by Executive, to his estate, the base salary at the rate in effect on the date of death for a period of 6 months. The Company shall also pay to Executive's designated beneficiary or, if no beneficiary has been designated by Executive, to his estate, any incentive compensation that is earned but unpaid, based on the operations of the Company for the whole year, prorated through the date of death. (2) Disability. ---------- (a) The Company may terminate Executive's employment hereunder, upon notice to Executive, in the event that Executive becomes disabled during his employment hereunder through any illness, injury, accident or condition of either a physical or psychological nature and, as a result, is unable to perform substantially all of his duties and responsibilities hereunder for 90 days during any period of 365 consecutive calendar days. In the event of such termination, until the earliest of (i) the conclusion of the then-current term of this Agreement and (ii) the conclusion of a period of 6 months following the date of termination, the Company shall continue to pay Executive the base salary at the Rate in effect on the date of termination and shall continue to contribute to the cost of Executive's participation in the Company's group medical and dental insurance plan, if any, provided that Executive is entitled to continue such participation under applicable law and plan terms. The Company will also pay Executive, in the case of such termination, any incentive compensation that is earned but unpaid, based on the operations of the Company for the whole year, prorated through the date of such termination; (b) While receiving disability income payments under the Company's disability income plan, if any, Executive shall be entitled to receive the excess, if any, of base salary under paragraph I (B) hereof over such -------------- disability income payments, and shall be entitled to receive such bonus and other benefits as are described in paragraph 1(C), until the termination of his ------------- employment and except to the extent a longer period is specified in paragraph --------- 1(D)(2)(a). - --------- (3) Termination by the Company without Cause. The Company may at any time ---------------------------------------- terminate Executive's employment without Cause (as defined below) by giving Executive written notice of the effective date of termination. In the event of such termination, the Company shall have the continuing obligation to make payments of base salary in accordance with paragraph (B) above at the rate in ------------- effect on the effective date of such termination until the third anniversary of the Start Date or until 24 months after the effective date of such termination, whichever period is longer. Additionally, during such period following termination as the Company shall have the continuing obligation to make payments of base salary, the Company shall continue to contribute to the cost of Executive's participation in the Company's group medical and insurance plans, if any, provided that Executive is entitled to continue such participation under applicable law and plan. The Company will also pay Executive, in the event of 48 such termination, any incentive compensation that is earned but unpaid, based on operations of the Company for the whole year, prorated through the date of his termination. (4) Termination by the Company for Cause. The Company shall have the right ------------------------------------ to terminate the Executive's employment at any time for any of the following reasons (each of which is referred to herein as "Cause") by giving Executive written notice of the effective date of termination (which effective date may be the date of such notice): (a) the willful breach of any provision of paragraphs 1(A), 2, ------------------ 3, 4 or 5 (including, but not limited to, a refusal to follow reasonable and - --------- lawful directives of the Board; provided, however, that to the extent that such breach is curable, the Board will give Executive written notice of such breach and Executive will have 30 days from the receipt of such notice to cure such breach; (b) any act of fraud, embezzlement or other material dishonesty with respect to any aspect of the Company's business; (c) continued use of illegal drugs; (d) substantial failure of performance, repeated or continued after written notice of such failure and explanation of such failure of performance, which is reasonably determined by the Board of Directors to be materially injurious to the business or interests of the Company; or (e) conviction of a felony or of a crime involving moral turpitude. If the Company terminates Executive's employment for any of the reasons set forth above in this paragraph 1(D)4, the Company shall have no --------------- other obligations hereunder (including the obligation to continue to make base salary as provided in paragraph 1(D)3 from and after the effective date of --------------- payments of termination and shall have all other rights and remedies available under this or any other agreement and at law or in equity. (5) By the Executive for Good Reason. Executive may terminate his -------------------------------- employment hereunder for Good Reason, upon written notice to the Company setting forth the nature of such Good Reason in reasonable detail. "Good Reason" shall mean: (a) the material failure of the Company to provide Executive the base salary and incentive compensation and benefits in accordance with the terms of paragraph 1 and paragraph 6 hereof; --------------------------- (b) the material diminution in the nature or scope of Executive's responsibilities, duties or authority; or (c) the occurrence of a Change in Control (as defined herein). In the event of termination in accordance with this paragraph 1(D)(5), the ----------------- Company shall continue to pay Executive the base salary at the rate in effect on the effective date of such termination until the third anniversary of the Start Date or until 24 months after the effective date of such termination, whichever period is longer. Additionally, during such period following termination as the Company shall have the continuing obligation to make payments of base salary, the Company shall continue to contribute to the cost of Executive's participation in the Company's group medical and insurance plans, if any, provided that Executive is entitled to continue such participation under applicable law and plan. The Company will also pay Executive, in the event of such termination, any incentive compensation that is earned but unpaid, based on operations of the Company for the whole year, prorated through the date of his termination. 49 A "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), becomes the "beneficial owner" (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, of outstanding securities of the Company representing 40% or more of the combined voting power of the outstanding securities of the Company, or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the shareholders of the Company was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the shareholders of the Company approve (A) a merger or consolidation of the Company with any other entity (other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 60% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation), (B) a plan of complete liquidation of the Company or (C) an agreement or agreements for the sale or disposition, in a single transaction or series of related transactions, by the Company of all or substantially all of the property and assets of the Company. Notwithstanding the foregoing, events otherwise constituting a Change in Control in accordance with the foregoing shall not constitute a Change in Control if such events are solicited by the Company and are, if Executive is then a member of the Board, approved, recommended or supported by Executive in his capacity as a member of the Board of the Company in actions taken prior to, and with respect to, such events. (6) Voluntary Termination by Executive. Except as provided in paragraph ---------------------------------- --------- 1(D)(5), in the event that Executive's employment with the Company is terminated - ------- by Executive, such termination shall be a breach of this Agreement and the Company shall have no further obligations hereunder from and after the date of such termination. 2. Nondisclosure. Executive acknowledges that during the course of his ------------- performance of services for the Company he has acquired and will acquire technical knowledge with respect to the Company's business operations, including, by way of illustration, the Company's existing and contemplated services, trade secrets, patents and selling techniques and information, customer lists, supplier lists, and confidential information relating to the Company's policy and/or business strategy (all of such information herein referenced to as the "Confidential Information"); provided, however, that the term "Confidential Information" shall not include (a) any information which is or becomes publicly available otherwise than through breach of this Agreement, or (b) any information which is or becomes known or available to Executive on a non-confidential basis and not in contravention of applicable law from a source which is entitled to disclose such information to Executive. Executive agrees that he will not, while he is employed by the Company, divulge to any person, directly or indirectly, except to the Company or its officers and agents or as reasonably required in connection with his duties on behalf of the Company, or use, except on behalf of the Company, any Confidential Information acquired by Executive during the term of his employment. Executive agrees that he will not, at any time after his employment with the Company has ended, divulge to any person directly or indirectly any Confidential Information. Executive further agrees that if his relationship with the Company is terminated (for whatever reason) he shall not take with him but will leave with the Company all records, papers and computer data and any copies thereof relating to the Confidential Information (or if such papers, records, computer data or copies are not on the premises of the Company, Executive agrees to return such papers, records and computer data immediately upon his termination). Executive acknowledges that all such papers, records, computer data or copies thereof are and remain the property of the Company. 3. Inventions and Patents. Executive agrees that all inventions, ---------------------- innovations or improvements relating to the Company's business or method of conducting business (including new contributions, improvements, ideas and discoveries, whether patentable or not) conceived or made by him during his employment with the Company belong 50 to the Company. Executive will promptly disclose such inventions, innovations or improvements to the Board and perform all actions reasonably requested by the Board to establish and confirm such ownership. 4. Other Businesses. During the Employment Period, Executive agrees ---------------- that he will not, directly or indirectly except with the express written consent of the Board, become engaged in, render material services for, or permit his name to be used in connection with, or directly or indirectly counsel or consult with, any business other than the business of the Company and its affiliates; provided, however, that Executive may be a passive investor in any such business (subject to the limitations set forth in paragraph 5 below). ----------- 5. Noncompetition. Executive agrees that: -------------- (A) During the term he performs services for the Company and during the Post-Employment Period (as defined below), Executive will not interfere with the relationship between the Company or any affiliate and any employee, agent or representative of the Company or any such affiliate. (B) During the term he performs services for the Company and during the Post-Employment Period, Executive will not directly or indirectly divert or attempt to divert from the Company or any affiliate any business which provides telecommunications services in the United States or Latin America, including, without limitation, domestic and international call services or domestic and international telecommunications networks for voice, data, fax and/or video transmission between the United States and Latin America or within Latin America, or any related business in which the Company has been actively engaged during the term Executive performed services for the Company, nor interfere with the relationships of the Company with customers, dealers, distributors, franchisees or sources of supply. 51 (C) During the term he performs services for the Company and during the Post-Employment Period, Executive will not directly or indirectly own, manage, operate control, be employed by, participate in, or be connected in any manner with the ownership, management, operation or control of, any business or enterprise which provides telecommunications services in the United States or Latin America, including, without limitation, domestic and international call services or domestic and international telecommunication networks for voice, data, fax and/or video transmission between the United States and Latin America or within Latin America, or any related business in which the Company has been actively engaged during the then Executive performed services for the Company. (D) For purposes hereof, the "Post-Employment Period" shall mean: (i) in the event Executive's employment with the Company is terminated for Cause pursuant to paragraph 1(D)(4), the 12-month period following Executive's ----------------- termination of employment with the Company, or (ii) in the event Executive's employment with the Company is terminated for any reason other reason, the period during which the Company continues to make payments of base salary. 6. Stock Option. Effective as of the date hereof (the "Effective ------------ Date"), under the terms of the American TeleSource International, Inc. (ATSI) 1998 Stock Option Plan (the "Plan"), ATSI, a Delaware corporation ("ATSI"), hereby grants to Executive the option (the "Option") to purchase shares (the "Option Shares") of Common Stock, no par value per share, of ATSI, subject to the requisite approval of the Plan by ATSI's Board of Directors and ATSI's shareholders. The number of Option Shares, the purchase price per Option Share and the installments and dates in which the Executive shall have the right to exercise the Option are attached to this Agreement as Exhibit "B". The Plan is attached to this Agreement as Exhibit "A". Beginning on the Effective Date, such installments shall be cumulative (i.e. once the right to purchase the number of shares of an installment has accrued, such shares may be purchased at any time thereafter, or in part from time to time, until the business day immediately preceding the tenth anniversary of the Effective Date (the "Expiration Date") or until such earlier date as set forth in the following paragraph. Notwithstanding the preceding sentence, upon the occurrence of a Change in Control, Executive's right to exercise the Option shall become fully vested (i.e., all unissued Option Shares may be purchased at any time thereafter, or in part from time to time, until the Expiration Date or until such earlier date as set forth in the following paragraph). Upon termination of Executive's employment pursuant to Paragraph 1(D)(4) ----------------- (Termination by the Company for Cause) or paragraph 1(D)(6) (Voluntary ----------------- Termination by Executive), the Option shall remain exercisable for the four month period following such termination, but only to the extent such option was exercisable at termination. Upon termination of Executive's employment pursuant to paragraph 1(D)(1) (Death) or paragraph 1(D)(2) (Disability), the Option, to ----------------- ----------------- the extent then exercisable, shall remain exercisable for the one-year period following such termination. Upon termination of Executive's employment pursuant to paragraph (D)(3) (Termination by the Company without Cause) or ----------------- paragraph 1(D)(5) (By the Executive for Good Reason), Executive's right to - ----------------- exercise the Option shall become fully vested and the Option shall remain exercisable for the four-month period following such termination. 7. General Provisions. ------------------ (A) Notices. Any notice provided for in this Agreement must be in ------- writing and must be either personally delivered, or mailed by first class mail (postage prepaid and return receipt requested) or sent by reputable overnight courier service, to the recipient at the address below indicated: To the Company: Attn.: Board of Directors 12500 Network Boulevard, Suite 407 San Antonio, Texas 78249 To Executive: At Executive's last known address as listed 52 with the Company or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Agreement will be deemed to have been given when so delivered or sent or if mailed, five days after so mailed. (B) Severability. Whenever possible, each provision of this ------------ Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to he invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision in such jurisdiction or any other jurisdiction, or the legality or enforceability of such provision in any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein except that any court having jurisdiction shall have the power to reduce the duration, area or scope of such invalid, illegal or unenforceable provision and, in its reduced form it shall be enforceable. (C) Complete Agreement. This Agreement embodies the complete ------------------ agreement and understanding between the parties and supersedes and preempts any prior understandings, agreements or representations by or between the parties, written or oral, which may have been related to the subject matter hereof in any way. (D) Successors and Assigns. This Agreement is a personal service ---------------------- contract and is not assignable by the Executive. Subject to the Executive's rights under paragraph 1(D)(5)(d), this Agreement may be assigned from time to -------------------- time by the Company. This Agreement shall be binding on and inure to the benefit of the parties hereto and such parties' respective successors, personal representatives and permitted assigns. (E) Choice of Law. All questions concerning the construction, ------------- validity and interpretation of this Agreement will be governed by the internal law, and not the law of conflicts, of the State of Texas. (F) Remedies. Each of the parties to this Agreement will be -------- entitled to enforce his or its rights under this Agreement specifically, to recover damages (including, without limitation, reasonable fees and expenses of counsel) by reason of any breach of any provision of this Agreement and to exercise all other rights existing in his or its favor. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach or threatened breach of the provisions of this Agreement and that any party may in his or its sole discretion apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive relief in order to enforce or prevent any violations of the provisions of this Agreement. Such injunction or decree shall be available without the posting of any bond or other security. (G) Amendments and Waivers. Any provision of this Agreement may be ---------------------- amended or waived only with the prior written consent of Executive and a majority of the Board. (H) Absence of Conflicting Agreements. Executive hereby warrants --------------------------------- and covenants that his employment by the Company does not result in a breach of the terms, conditions or provisions of any agreement to which Executive is subject. (I) Survival. No termination of Executive's employment by either or -------- both parties shall reduce or terminate Executive's covenants and agreements in paragraphs 2, 3 and 5. - --------------------- IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered on the day and year first above written. 53 "Company" AMERICAN TELESOURCE INTERNATIONAL, INC. By: _______________________________________________ Name: _____________________________________________ Title: ____________________________________________ "Executive" _____________________________________________________ Arthur L. Smith 54 EX-10.14 11 EMPLOYMENT AGREEMENT WITH CRAIG K. CLEMENT EXHIBIT 10.14 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement"), executed this _______ day of September, 1999 to be effective as of January 1, 2000, is between AMERICAN TELESOURCE INTERNATIONAL, INC., a Delaware corporation (the "Employer"), and Craig K. Clement ("Employee"). R E C I T A L S: A. The Employer and Employee entered into an Executive Employment Agreement dated effective January 1, 1997 for a period of three years. B. The Employer decided not to renew the Executive Employment Agreement, and has given notice to Employee that the Executive Employment Agreement will not renew and will therefore terminate effective December 31, 1999. C. The Employer and Employee agreed to enter into new employment agreement for a one year term on the terms and conditions herein provided. D. The Employer considers the maintenance of a sound management team, including Employee, essential to protecting and enhancing its best interests and those of its stockholders. E. Employee will be an officer of the Employer and Employee will be a member of Employer's management team. NOW, THEREFORE, in consideration of Employee's future employment with Employer and other good and valuable consideration, the parties agree as follows: Section 1. Employment. The Employer hereby employs Employee, and Employee hereby accepts employment, upon the terms and subject to the conditions stated in this Agreement. Section 2. Duties. Employee shall be employed as Senior Vice President, Corporate Development of the Employer, or such other positions with Employer to which he may be appointed by the Board of Directors of the Employer (the "Board"). It is understood that Employee may be requested from time to time to provide assistance or services to, or act as an officer or director of the Employer or any of its subsidiaries or other affiliates. Employee shall perform such services and, if elected as a director or officer of any such company, shall hold such office (and discharge its duties) without additional compensation other than the compensation set forth in this Agreement; provided, --------- however, that this Agreement does not prohibit (or require) the affiliates of - ------- Employer from offering additional compensation. Employee agrees to devote his full work time and best efforts to the performance of the duties as an Employee of Employer and to the performance of such other duties as assigned him from time to time by the Board or the Chairman. Section 3. Term. The initial term of employment of Employee hereunder shall continue for one year, from January 1, 2000 ("Employment Date") until December 31, 2000, unless earlier terminated pursuant to Section 6 herein. Section 4. Compensation and Benefits. In consideration for the services of Employee hereunder, the Employer shall compensate Employee as follows: 55 (a) Base Salary. Until the termination of Employee's employment hereunder, Employer shall pay Employee a base salary at the rate of at least $1950.46 per week ("Base Salary"), payable in accordance with the regular payroll practices of the Employer for executives, less such deductions or amounts as are required to be deducted or withheld by applicable laws or regulations and less such other deductions or amounts, if any, as are authorized by Employee. The Base Salary may not be decreased at any time during the term of Employee's employment hereunder Any increase in Base Salary shall be in the sole discretion of the Compensation Committee of the Board. (b) Executive Bonus Plan. Employee shall be eligible to receive from the Employer such management incentive bonuses as may be provided in management incentive bonus plans adopted from time to time by Employer. (b) Vacation. Employee shall be entitled time off in accordance with the Employee's vacation and absence policy, as it may be modified from time to time during Employee's employment hereunder, provided that Employee will have no less than three (3) weeks of paid vacation during the initial term of this Agreement, and each subsequent year if the initial term is extended. (c) Life Insurance Benefits. Employer shall pay the premiums allocable to a term life insurance policy in the face amount of $50,000 covering Employee as the named insured, subject to Employee's passing a standard physical examination in order to permit issuance of the policy at standard (non-rated) premiums and satisfaction of any other standard underwriting requirements. Employee shall be the owner of such policy and shall have the right to designate the beneficiary of the policy proceeds. Employee shall be liable for income taxes with respect to premium amounts includable in Employee's taxable income. (d) Group Insurance Benefits. Employee shall be entitled to participate in the Employer's group health and disability programs as are made available to the Employer's other executives and officers and the Employee's participation in such programs shall be at the same rates which are available to the Employer's other executives and officers. (e) Savings Plans. Employee shall be entitled to participate in Employer's 401(k) plan, or other retirement or savings plans as are made available to the Employer's other executives and officers on the same terms which are available to the Employer's other executives and officers. (f) Health Club Membership. Employer shall pay for or reimburse Employee for a family membership at a health and fitness club of Employee's choosing, provided that the total cost of the membership does not exceed $75 per month. Section 5. Expenses. The parties anticipate that in connection with the services to be performed by Employee pursuant to the terms of this Agreement, Employee will be required to make payments for travel, entertainment of business associates and similar expenses. Employer shall reimburse Employee for all appropriate and reasonable expenses authorized by Employer and incurred by Employee in the performance of his duties hereunder. Employee shall comply with such budget limitations and approval and reporting requirements with respect to expenses as Employer may establish from time to time. Section 6. Termination. (a) General. Employee's employment hereunder shall commence on the Employment Date and continue until the end of the term specified in Section 3, except that the employment of Employee hereunder shall terminate prior to such time in accordance with the following: 56 (i) Death or Disability. Upon the death of Employee during the term of his employment hereunder or, at the option of Employer, in the event of Employee's Disability, upon 30 days' notice to Employee. "Disability" with respect to an Employee shall be deemed to exist if the Employee meets the definition of either "disabled" or "disability" under the terms of the Employer's long-term disability benefit program (including the definitions for total or partial disability). Any refusal by Employee to submit to a reasonable medical examination to determine whether Employee is so disabled shall be deemed to constitute conclusive evidence of Employee's disability. (ii) For Cause. For "Cause" immediately upon written notice by Employer to Employee. A termination shall be for "Cause" if: (1) Employee commits fraud, bribery, embezzlement or other material dishonesty with the respect to the business of Employer, or Employer discovers that Employee has committed any such act in the past with respect to a previous employer; or (2) Employee commits a felony or any criminal act involving moral turpitude or Employer discovers that Employee has committed any such act in the past; or (3) Employee commits a material breach of any of the covenants, representations, terms or provisions hereof; or (4) Employee violates any instructions or policies of Employer with respect to the operation of its business or affairs or Employee fails to obey written directions delivered to Employee by the Employer's Board or Chairman of the Board; or (5) Employee commits or omits to perform any act the performance of which or the omission of which constitutes substantial failure of Employee to diligently and effectively perform his duties to Employer or adversely affects or could adversely affect the Employer's business reputation; or (6) Employee uses illegal drugs. (iii) Without Cause. Without Cause immediately upon notice by Employer to Employee. (b) Severance Pay. (i) Termination Upon Death or Disability or For Cause. Employee shall not be entitled to any severance pay or other compensation upon termination of his employment pursuant to Section 6(a)(i) or (ii) except for his Base Salary accrued but unpaid as of the date of termination, unpaid expense reimbursements under Section 5 for expenses incurred in accordance with the terms hereof prior to termination, compensation for accrued, unused vacation as of the date of termination ("Accrued Amounts"), and in the event of termination pursuant to Section 6(a)(i) for Disability, an amount equal to twenty-six (26) times the difference between the Base Salary in effect at the time of termination and twenty-six weeks worth of the benefit to be paid under the Employer's long term disability plan. This amount shall be paid in a lump sum no later than ten (10) business days following the date of Employee's termination. (ii) Termination Without Cause. In the event Employee's employment hereunder is terminated pursuant to Section 6(a)(iii) prior to the expiration of the initial term of this Agreement (as such initial term may have been extended), Employer shall pay Employee, as consideration for the execution of 57 a separation and release agreement and in lieu of any further compensation payable hereunder other than Accrued Amounts, a cash amount equal to twenty-six (26) times Employee's then current Base Salary. Such separation payment shall be Employee's sole remedy in connection with such termination. The separation payment shall be made as specified above without regard to the number of months remaining in the term of this Agreement, and shall be paid in a lump sum within ten (10) business days of the Employee's execution of a separation and release agreement. (c) Change in Control. If a "Change in Control" occurs during Employee's employment under this Agreement, and if Employee's employment is terminated "Without Cause" pursuant to Section 6(a)(iii) above prior to the end of a period of twenty-four (24) months beyond the month in which a "Change in Control" occurs, or if Employee voluntarily terminates his employment prior to the end of a period three (3) months beyond the month in which a Change in Control of the Employer occurs, Employee shall receive the amount determined pursuant to Section 6(b)(ii) above. A "Change in Control" of Employer shall be deemed to have occurred if (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Act")), becomes the "beneficial owner" (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, of outstanding securities of Employer representing 40% of more of the combined voting power of the outstanding securities of the Employer, or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute a majority of the Board (except that any new director who is elected by the Board to fill a vacancy created by the death, resignation or disqualification of a member of the Board shall not be considered a new member of the Board for purposes of this definition), or (iii) the shareholders of Employer approve (A) a merger or consolidation of Employer with any other entity, other than a merger or consolidation which would result in the voting securities of Employer outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 60% of the combined voting power of the voting securities of Employer, or (B) a plan of complete liquidation of Employer, or (C) an agreement or agreements for the sale or disposition, in a single transaction or series of related transactions, by the Employer of all or substantially all of the property and assets of Employer. Section 7. Inventions; Assignment. (a) Inventions Defined. All rights to discoveries, inventions, improvements, designs and innovations (including all data and records pertaining thereto) that relate to the business of Employer, including its affiliates, whether or not able to be patented, copyrighted or reduced to writing, that Employee may discover, invent or originate during the term of his employment hereunder, and for a period of six months thereafter, either alone or with others and whether or not during working hours or by the use of the facilities of Employer ("Inventions"), shall be the exclusive property of Employer. Employee shall promptly disclose all Inventions to Employer, shall execute at the request of Employer any assignments or other documents Employer may deem necessary to protect or perfect its rights therein, and shall assist Employer, at Employer's expense, in obtaining, defending and enforcing Employer's rights therein. Employee hereby appoints Employer as his attorney-in-fact to execute on his behalf any assignments or other documents deemed necessary by Employer to protect or perfect its rights to any Inventions. (b) Covenant to Assign and Cooperate. Without limiting the generality of the foregoing, Employee shall assign and transfer to Employer the world-wide right, title and interest of Employee in the Inventions. Employee agrees that Employer may apply for and receive patent rights (including Letters Patent in the United States) for the Inventions in Employer's name in such countries as may be determined solely by Employer. Employee shall communicate to Employer all facts known to Employee relating to the Inventions and shall cooperate with Employer's reasonable requests in connection with vesting title to the Inventions and related patents exclusively in Employer and in connection with obtaining, maintaining and protecting Employer's exclusive patent rights in the Inventions. 58 (c) Successors and Assigns. Employee's obligations under this Section 7 shall inure to the benefit of Employer, its affiliates and their respective successors and assigns and shall survive the expiration of the term of this Agreement for such time as may be necessary to protect the proprietary rights of Employer and its affiliates in the Inventions. Section 8. Confidential Information. (a) Acknowledgment of Proprietary Interest. Employee acknowledges the proprietary interest of Employer and its affiliates in all Confidential Information (as defined below). Employee agrees that all Confidential Information learned by Employee during his employment with Employer or otherwise, whether developed by Employee alone or in conjunction with others or otherwise, is and shall remain the exclusive property of Employer. Employee further acknowledges and agrees that his disclosure of any Confidential Information will result in irreparable injury and damage to Employer. (b) Confidential Information Defined. "Confidential Information" means all trade secrets, copyrightable works, confidential or proprietary information of Employer or its affiliates, including without limitation, (i) information derived from reports, investigations, experiments, research and work in progress, (ii) methods of operation, (iii) market data, (iv) proprietary computer programs and codes, (v) drawings, designs, plans and proposals, (vi) marketing and sales programs, (vii) the identities of clients or customers , (viii) historical financial information and financial projections, (ix) pricing formulae and policies, (x) all other concepts, ideas, materials and information prepared or performed for or by Employer and (xi) all information related to the business, services, products, purchases or sales of Employer or any of its suppliers and customers, other than information that is publicly available. (c) Covenant Not To Divulge Confidential Information. Employer is entitled to prevent the disclosure of Confidential Information. As a portion of the consideration for the employment of Employee and for the compensation being paid to Employee by Employer, Employee agrees at all times during the term of his employment hereunder and thereafter to hold in strict confidence and not to disclose or allow to be disclosed to any person, firm or corporation, other than to persons engaged by Employer to further the business of Employer, and not to use except in the pursuit of the business of Employer, the Confidential Information, without the prior written consent of Employer. (d) Return of Materials at Termination. In the event of any termination or cessation of his employment with Employer for any reason, Employee shall promptly deliver to Employer all documents, data and other information derived from or otherwise pertaining to Confidential Information. Employee shall not take or retain any documents or other information, or any reproduction or excerpt thereof, containing or pertaining to any Confidential Information. Section 9. Non-Solicitation. (a) Solicitation of Employees. During Employee's employment with Employer and for a period of twelve (12) months after termination of such employment at any time and for any reason, and regardless of whether any payments are made to Employee under this Agreement as a result of such termination, Employee shall not solicit, participate in or promote the solicitation of any person who was employed by Employer or any of its affiliates at the time of Employee's termination of employment with Employer to leave the employ of Employer or any of its affiliates, or, on behalf of himself or any other person, hire, employ or engage any such person. Employee further agrees that, during such time, if an employee of Employer or any of its affiliates contacts Employee about prospective employment, Employee will inform such employee that he or she cannot discuss the matter further without the consent of Employer (and the applicable affiliate). 59 (b) Solicitation of Clients, Customers, Etc. During Employee's employment with Employer and for a period of twelve (12) months after termination of Employee's employment at any time and for any reason, and regardless of whether any payments are made to Employee under this Agreement as a result of such termination, Employee shall not, directly or indirectly, solicit any person who, at the time of termination of Employee's employment with Employer, was a client, customer, policyholder, vendor, consultant or agent of Employer or its affiliates to discontinue business, in whole or in part, with Employer or its affiliates. Employee further agrees that, during such time, if such a client, customer, policyholder, vendor, or consultant or agent contacts Employee about discontinuing business with Employer or moving that business elsewhere, Employee will inform such client, customer, policyholder, vendor, consultant or agent that he or she cannot discuss the matter further without the consent of Employer (and the applicable affiliate). Section 10. No-Compete. (a) Competition During Employment. Employee agrees that during the term of his employment with Employer, neither he nor any of his affiliates, will directly or indirectly compete with Employer or its affiliates in any way, and that he will not act as an officer, director, employee, consultant, shareholder, lender, or agent of any entity which is engaged in any business of the same nature as, or in competition with, the businesses in which Employer and its affiliates are now engaged or in which Employer or its affiliates become engaged during the term of employment; provided, however, that this Section 10(a) shall not prohibit Employee or any of his affiliates from: (i) purchasing or holding an aggregate equity interest of up to 1%, so long as Employee and his affiliates combined do not purchase or hold an aggregate equity interest of more than 5%, in any business in competition with Employer and its affiliates. Furthermore, Employee agrees that during the term of employment, he will undertake no planning for the organization of any business activity competitive with the work he performs as an employee of Employer and Employee will not combine or conspire with any other employees of Employer and its affiliates for the purpose of the organization of any such competitive business activity. (b) Competition Following Employment. In order to protect Employer against the unauthorized use or the disclosure of any Confidential Information of Employer and its affiliates presently known or hereinafter obtained by Employee during his employment under this Agreement, Employee agrees that for a period of twelve (12) months after the termination or cessation of his employment with Employer at any time and for any reason, and regardless of whether any payments are made to Employee under this Agreement as a result of such termination, neither Employee nor any of his affiliates, shall, directly or indirectly, for itself or himself or on behalf of any other corporation, person, firm, partnership, association, or any other entity (whether as an individual, agent, servant, employee, employer, officer, director, shareholder, investor, principal, consultant or in any other capacity): (i) engage or participate in any business which engages in competition with such businesses being conducted by Employer or any of its affiliates during the term of employment anywhere in any state in the United States or in any foreign country where the Employer or any of its affiliates provides telecommunications services, including, without limitation, domestic and international call services or domestic and international telecommunications networks of voice, data, fax or video transmission to or from the United States and Latin America or within Latin America, or any other business in which the Employer or any of its affiliates has been actively engaged during the term Employee performed services for the Employer; provided, however, that this provision shall not prohibit Employee or any of his affiliates from purchasing or holding an aggregate equity interest of up to 1%, so long as Employee and his affiliates combined do not purchase or hold an aggregate equity interest of more than 5%, in any business in competition with Employer; (ii) assist or finance any person or entity in any manner or in any way inconsistent with the intents and purposes of this Agreement. 60 Section 11. General. (a) Notices. All notices and other communications hereunder shall be in writing or by written telecommunication, and shall be deemed to have been duly given if delivered personally or if mailed by certified mail, return receipt requested or by written telecommunication, to the relevant address set forth below, or to such other address as the recipient of such notice or communication shall have specified to the other party in accordance with this Section 11(a): If to Employer, to: American TeleSource International, Inc. 12500 Network Boulevard, Suite 407 San Antonio, Texas, 78249 Attention: Chairman of the Board (or the subsequent headquarters of Employer as known to Employee) If to Employee, to the Employee's last known address appearing on Employer's records (b) Withholding. All payments required to be made to Employee by Employer under this Agreement shall be subject to the withholding of such amounts, if any, relating to federal, state and local taxes as may be required by law. (c) Equitable Remedies. Each of the parties hereto acknowledges and agrees that upon any breach by Employee of his obligations under any of Sections 7, 8, 9, and 10 Employer shall suffer immediate, great and irreparable injury and shall have no adequate remedy at law. Accordingly, in event of such breach, Employer shall be entitled, in addition other remedies and without showing actual damages, to specific performance and other appropriate injunctive and equitable relief. (d) Severability. If any provision of this Agreement is held to be illegal, invalid or unenforceable, such provision shall be fully severable, and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part hereof, and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement a provision as similar in its terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. (e) Waivers. No delay or omission by either party in exercising any right, power or privilege hereunder shall impair such right, power or privilege, nor shall any single or partial exercise of any such right, power or privilege preclude any further exercise thereof or the exercise of any other right, power or privilege. (f) Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. (g) Captions. The captions in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof. (h) Interpretation of Agreement. This Agreement shall be construed according to its fair meaning and not for or against either party. Use of the words "herein," "hereof," "hereto," "hereunder" and the like in this Agreement refer to this Agreement only as a whole and not to any particular section or subsection of this 61 Agreement, unless otherwise noted. The masculine gender shall be deemed to denote the feminine or neuter genders, the singular to denote the plural, and the plural to denote the singular, where the context so permits. (i) Binding Agreement; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties and shall be enforceable by the personal representatives and heirs of Employee and the successors and assigns of Employer. The affiliates of Employer shall be considered third party beneficiaries of this Agreement with respect to any services provided by Employee to them and in connection with Employee's covenants in Sections 7,8,9 and 10 hereof. This Agreement may be assigned by the Employer; provided that in the event of any such assignment, the Employer shall remain liable for all of its obligations hereunder and shall be liable for all obligations of all such assignees hereunder. If Employee dies while any amounts would still be payable to him hereunder, such amounts shall be paid to Employee's estate. This Agreement is not otherwise assignable by Employee. (j) Entire Agreement. This Agreement contains the entire understanding of the parties, supersedes all prior agreements and understandings relating to the subject matter hereof and may not be amended except by a written instrument hereafter signed by each of the parties hereto. (k) Governing Law. This Agreement and the performance hereof shall be construed and governed in accordance with the laws of the State of Texas, without regard to its choice of law principles. (l) Arbitration. Without limiting Employer's right to seek equitable remedies under Section 11(c) above, Employer and Employee agree that any dispute or controversy arising under or in connection with this Agreement shall be settled by arbitration. Arbitration under this Agreement shall be governed by the Federal Arbitration Act and proceed in San Antonio, Texas in accordance with the rules of the American Arbitration Association ("AAA"). Arbitration will be conducted before a panel of three neutral arbitrators selected from a AAA list of proposed arbitrators with business law experience. Either party may take any legal action needed to protect any right pending completion of the arbitration. The arbitrator will determine whether an issue is arbitrable and will give effect to applicable statutes of limitation. The arbitrator has the discretion to decide, upon documents only or with a hearing, any motion to dismiss for failure to state a claim or any motion for summary judgment. Discovery shall be governed by the Federal Rules of Civil Procedure and the Federal Rules of Evidence. All information developed by the arbitration or litigation shall be held in confidence subject to such protective orders as the arbitrator deems useful to ensure complete confidentiality. The decision of the arbitrator shall be final and binding on all parties to this Agreement, and judgment thereon may be entered in any court having jurisdiction over the parties. All costs of the arbitration proceeding or litigation to enforce the arbitration award shall be paid by the party against whom the arbitrator decides. (m) Employee Representations. Employee represents and certifies to Employer that he: (i) has received a copy of this Agreement for review and study and has had ample time to review it before signing; (ii) has read this Agreement carefully; (iii) has been given a fair opportunity to discuss and negotiate the terms of this Agreement; (iv) understands its provisions; (v) has had the opportunity to consult his attorney; (vi) has determined that it is in his best interest to enter into his Agreement; (vii) has not been influenced to sign this Agreement by any statement or representation by Employer or its counsel not contained in this Agreement; and (viii) enters into this Agreement knowingly and voluntarily. 62 EXECUTED as of the date and year first above written. AMERICAN TELESOURCE INTERNATIONAL, INC. By /s/ Arthur L. Smith ------------------- Chairman of Board of Directors /s/ Craig K. Clement -------------------- Craig K. Clement 63 EX-10.15 12 EMPLOYMENT AGREEMENT WITH SANDRA POOLE-CHRISTAL EXHIBIT 10.15 CORRECTED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT WHEREAS, GlobalSCAPE, Inc. ("GlobalSCAPE") and Sandra Poole-Christal ("Executive") entered into an Executive Employment Agreement dated effective January 1, 1998 (the "Original Agreement"); and WHEREAS the Original Agreement contained various errors; NOW THEREFORE, the parties have executed this Corrected and Restated Executive Employment Agreement (the "Agreement") effective as of the date of the Original Agreement: The parties hereto agree as follows: 1. Employment. The Company agrees to employ Executive and Executive ---------- accepts such employment for the period beginning January 1, 1998 (the "Start Date") and ending upon termination pursuant to paragraph 1 (D) hereof (the --------------- "Employment Period"). (A) Services. During the Employment Period, Executive will be the President of -------- the Company, and in connection therewith will render such services of an executive and administrative character to the Company and its affiliates as are customarily rendered by persons holding such position with similarly situated companies, as the Board of Directors of the company, (the "Board") may from time to time direct. Executive will devote her best efforts and substantially all of her business time and attention (except as otherwise specifically permitted herein and except for vacation periods and reasonable periods of illness or other incapacity) to the business of the Company and its affiliates and will faithfully and diligently carry out such duties and have such responsibilities as are customary among persons employed in substantially similar capacities for similar companies. Executive will report to GlobalSCAPE's Board of Directors and shall faithfully and diligently comply with all of its reasonable and lawful directives. For purposes of this Agreement, the term "affiliates" means any corporation, limited partnership, limited liability company or other entity engaged in the same business as the Company or a related business, which controls, is controlled by or is under common control with the Company. (B) Salary. During the Employment Period and thereafter as provided in ------ paragraph (D) below, the Company will pay Executive a base salary at the rate of - ------------- not less than $80,000 per annum (or such higher amount as the Board may establish from time to time), and will be payable in accordance with the Company's regular payroll practices. (C) Benefits. In addition to the compensation described above in this -------- paragraph 1, Executive will be entitled during the Employment Period to the - ----------- following benefits: (1) such bonus as the Board in its sole discretion may from time to time authorize, but in no event shall bonuses paid during a year exceed 50% of Executive's base salary for such year; (2) such health insurance and other benefits as are available from time to time to the Company's salaried employees generally; (3) in accordance with the Company's vacation and absence paid as in effect from time to time, sick leave, personal time provided that Executive shall have no less than three weeks vacation each year, with salary; (4) reimbursement, upon submission of documentation in accordance with the Company's regular expense policies, for reasonable business expenses incurred on the Company's behalf by Executive; 64 (5) participation in any savings plan, 401(k) plan, profit sharing plan or pension plan as is available from time to time to the Company's salaried employees generally; and (6) opportunity to participate in any and all employee benefit plans from time to time in effect for executives or salaried employees of the Company generally (subject to any contribution therefore generally required by such employees and except to the extent such plans are in a category of benefit otherwise provided to Executive). (D) Termination. Unless earlier terminated by termination of Executive's ----------- employment pursuant to any of the provisions immediately below, Executive's employment with the Company will continue until the third anniversary of the Start Date, and Executive's employment shall be renewed automatically for one- year periods thereafter unless either party hereto gives written notice to the other party, at least 120 days prior to the next anniversary date, that such employment shall not be renewed: (1) Death. In the event of Executive's death during the term hereof, ----- Executive's employment hereunder shall immediately and automatically terminate. Notwithstanding such event, the Company shall pay to Executive's designated beneficiary or, if no beneficiary has been designated by Executive, to her estate, the base salary at the rate in effect on the date of death for a period of 6 months. The Company shall also pay to Executive's designated beneficiary or, if no beneficiary has been designated by Executive, to her estate, any incentive compensation that is earned but unpaid, based on the operations of the Company for the whole year, prorated through the date of death. (2) Disability. ---------- (a) The Company may terminate Executive's employment hereunder, upon notice to Executive, in the event that Executive becomes disabled during her employment hereunder through any illness, injury, accident or condition of either a physical or psychological nature and, as a result, is unable to perform substantially all of her duties and responsibilities hereunder for 90 days during any period of 365 consecutive calendar days. In the event of such termination, until the earliest of (i) the conclusion of the then-current term of this Agreement and (ii) the conclusion of a period of 6 months following the date of termination, the Company shall continue to pay Executive the base salary at the rate in effect on the date of termination and shall continue to contribute to the cost of Executive's participation in the Company's group medical and dental insurance plan, if any, provided that Executive is entitled to continue such participation under applicable law and plan terms. The Company will also pay Executive, in the case of such termination, any incentive compensation that is earned but unpaid, based on the operations of the Company for the whole year, prorated through the date of such termination; (b) While receiving disability income payments under the Company's disability income plan, if any, Executive shall be entitled to receive the excess, if any, of base salary under paragraph I (B) hereof over such --------------- disability income payments, and shall be entitled to receive such bonus and other benefits as are described in paragraph 1(C), until the termination of her -------------- employment and except to the extent a longer period is specified in paragraph --------- 1(D)(2)(a). - ---------- (3) Termination by the Company without Cause. The Company may at any ---------------------------------------- time terminate Executive's employment without Cause (as defined below) by giving Executive written notice of the effective date of termination. In the event of such termination, the Company shall have the continuing obligation to make payments of base salary in accordance with paragraph (B) above at the rate in ------------- effect on the effective date of such termination until the third anniversary of the Start Date or until 12 months after the effective date of such termination, whichever period is longer. Additionally, during such period following termination as the Company shall have the continuing obligation to make payments of base salary, the Company shall continue to contribute to the cost of Executive's participation in the Company's group medical and insurance plans, if any, provided that Executive is entitled to continue such participation under applicable law and plan. The Company will also pay Executive, in the event of 65 such termination, any incentive compensation that is earned but unpaid, based on operations of the Company for the whole year, prorated through the date of her termination. (4) Termination by the Company for Cause. The Company shall have the right ------------------------------------ to terminate the Executive's employment at any time for any of the following reasons (each of which is referred to herein as "Cause") by giving Executive written notice of the effective date of termination (which effective date may be the date of such notice): (a) the willful breach of any provision of paragraphs 1(A), 2, 3, 4 ------------------------ or 5 (including, but not limited to, a refusal to follow reasonable and lawful - ---- directives of the Board; provided, however, that to the extent that such breach is curable, the Board will give Executive written notice of such breach and Executive will have 30 days from the receipt of such notice to cure such breach; (b) any act of fraud, embezzlement or other material dishonesty with respect to any aspect of the Company's business; (c) continued use of illegal drugs; (d) substantial failure of performance, repeated or continued after written notice of such failure and explanation of such failure of performance, which is reasonably determined by the Board of Directors to be materially injurious to the business or interests of the Company; or (e) conviction of a felony or of a crime involving moral turpitude. If the Company terminates Executive's employment for any of the reasons set forth above in this paragraph 1(D)4, the Company shall have no other --------------- obligations hereunder (including the obligation to continue to make payments of base salary as provided in paragraph 1(D)3 from and after the effective date of --------------- termination and shall have all other rights and remedies available under this or any other agreement and at law or in equity. (5) By the Executive for Good Reason. Executive may terminate her -------------------------------- employment hereunder for Good Reason, upon written notice to the Company setting forth the nature of such Good Reason in reasonable detail. "Good Reason" shall mean: (a) the material failure of the Company to provide Executive the base salary and incentive compensation and benefits in accordance with the terms of paragraph 1 and paragraph 6 hereof; - --------------------------- (b) the material diminution in the nature or scope of Executive's responsibilities, duties or authority; or (c) the occurrence of a Change in Control (as defined herein). In the event of termination in accordance with this paragraph 1(D)(5), the ----------------- Company shall continue to pay Executive the base salary at the rate in effect on the effective date of such termination until the third anniversary of the Start Date or, in the event this Agreement has been automatically extended thereafter in accordance with paragraph 1(D) hereof, until next anniversary of the Start -------------- Date. Additionally, during such period following termination as the Company shall have the continuing obligation to make payments of base salary, the Company shall continue to contribute to the cost of Executive's participation in the Company's group medical and insurance plans, if any, provided that Executive is entitled to continue such participation under applicable law and plan. The Company will also pay Executive, in the event of such termination, any incentive compensation that is earned but unpaid, based on operations of the Company for the whole year, prorated through the date of her termination. 66 A "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), becomes the "beneficial owner" (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, of outstanding securities of the Company representing 75% or more of the combined voting power of the outstanding securities of the Company, or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the shareholders of the Company was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the shareholders of the Company approve (A) a merger or consolidation of the Company with any other entity (other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 26% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation), (B) a plan of complete liquidation of the Company or (C) an agreement or agreements for the sale or disposition, in a single transaction or series of related transactions, by the Company of all or substantially all of the property and assets of the Company. Notwithstanding the foregoing, events otherwise constituting a Change in Control in accordance with the foregoing shall not constitute a Change in Control if such events are solicited by the Company and are, if Executive is then a member of the Board, approved, recommended or supported by Executive in her capacity as a member of the Board of the Company in actions taken prior to, and with respect to, such events. (6) Voluntary Termination by Executive. Except as provided in paragraph ---------------------------------- --------- 1(D)(5), in the event that Executive's employment with the Company is terminated - ------- by Executive, such termination shall be a breach of this Agreement and the Company shall have no further obligations hereunder from and after the date of such termination. 2. Nondisclosure. Executive acknowledges that during the course of her ------------- performance of services for the Company she has acquired and will acquire technical knowledge with respect to the Company's business operations, including, by way of illustration, the Company's existing and contemplated services, trade secrets, patents and selling techniques and information, customer lists, supplier lists, and confidential information relating to the Company's policy and/or business strategy (all of such information herein referenced to as the "Confidential Information"); provided, however, that the term "Confidential Information" shall not include (a) any information which is or becomes publicly available otherwise than through breach of this Agreement, or (b) any information which is or becomes known or available to Executive on a non-confidential basis and not in contravention of applicable law from a source which is entitled to disclose such information to Executive. Executive agrees that she will not, while she is employed by the Company, divulge to any person, directly or indirectly, except to the Company or its officers and agents or as reasonably required in connection with her duties on behalf of the Company, or use, except on behalf of the Company, any Confidential Information acquired by Executive during the term of her employment. Executive agrees that she will not, at any time after her employment with the Company has ended, divulge to any person directly or indirectly any Confidential Information. Executive further agrees that if her relationship with the Company is terminated (for whatever reason) she shall not take with her but will leave with the Company all records, papers and computer data and any copies thereof relating to the Confidential Information (or if such papers, records, computer data or copies are not on the premises of the Company, Executive agrees to return such papers, records and computer data immediately upon her termination). Executive acknowledges that all such papers, records, computer data or copies thereof are and remain the property of the Company. 3. Inventions and Patents. Executive agrees that all inventions, ---------------------- innovations or improvements relating to the Company's business or method of conducting business (including new contributions, improvements, ideas and discoveries, whether patentable or not) conceived or made by her during her employment with the Company belong 67 to the Company. Executive will promptly disclose such inventions, innovations or improvements to the Board and perform all actions reasonably requested by the Board to establish and confirm such ownership. 4. Other Businesses. During the Employment Period, Executive agrees that ---------------- she will not, directly or indirectly except with the express written consent of the Board, become engaged in, render material services for, or permit her name to be used in connection with, or directly or indirectly counsel or consult with, any business other than the business of the Company and its affiliates; provided, however, that Executive may be a passive investor in any such business (subject to the limitations set forth in paragraph 5 below). ----------- 5. Noncompetition. Executive agrees that: -------------- (A) During the term she performs services for the Company and during the Post-Employment Period (as defined below), Executive will not interfere with the relationship between the Company or any affiliate and any employee, agent or representative of the Company or any such affiliate. (B) During the term she performs services for the Company and during the Post-Employment Period, Executive will not directly or indirectly divert or attempt to divert from the Company or any affiliate any business which provides related services in which the Company has been actively engaged during the term Executive performed services for the Company, nor interfere with the relationships of the Company with customers, dealers, distributors, franchisees or sources of supply. (C) During the term she performs services for the Company and during the Post-Employment Period, Executive will not directly or indirectly own, manage, operate control, be employed by, participate in, or be connected in any manner with the ownership, management, operation or control of, any business or enterprise which provides software development or related services in which the Company has been actively engaged during the then Executive performed services for the Company. (D) For purposes hereof, the "Post-Employment Period" shall mean: (i) in the event Executive's employment with the Company is terminated for Cause pursuant to paragraph 1(D)(4), the 12-month period following Executive's ----------------- termination of employment with the Company, or (ii) in the event Executive's employment with the Company is terminated for any other reason, the period during which the Company continues to make payments of base salary. 6. Stock Option. Effective as of the date hereof (the "Effective ------------ Date"), under the terms of the GLOBALSCAPE 1998 Stock Option Plan (the "Plan"), GLOBALSCAPE, a Delaware corporation ("Global"), hereby grants to Executive the option (the "Option") to purchase shares (the "Option Shares") of Common Stock, $.001 par value per share, of GLOBALSCAPE. The number of Option Shares, the purchase price per Option Share and the installments and dates in which the Executive shall have the right to exercise the Option are attached to this Agreement as Exhibit "B". The Plan is attached to this Agreement as Exhibit "A". Beginning on the Effective Date, such installments shall be cumulative (i.e. once the right to purchase the number of shares of an installment has accrued, such shares may be purchased at any time thereafter, or in part from time to time, until the business day immediately preceding the tenth anniversary of the Effective Date (the "Expiration Date") or until such earlier date as set forth in the following paragraph. Notwithstanding the preceding sentence, upon the occurrence of a Change in Control, Executive's right to exercise the Option shall become fully vested (i.e., all unissued Option Shares may be purchased at any time thereafter, or in part from time to time, until the Expiration Date or until such earlier date as set forth in the following paragraph). Upon termination of Executive's employment pursuant to Paragraph 1(D)(4) ----------------- (Termination by the Company for Cause) or paragraph 1(D)(6) (Voluntary ----------------- Termination by Executive), the Option shall remain exercisable for the four month period following such termination, but only to the extent such option was exercisable at termination. 68 Upon termination of Executive's employment pursuant to paragraph 1(D)(1) (Death) ----------------- or paragraph 1(D)(2) (Disability), the Option, to the extent then exercisable, ----------------- shall remain exercisable for the one-year period following such termination. Upon termination of Executive's employment pursuant to paragraph (D)(3) ---------------- (Termination by the Company without Cause) or paragraph 1(D)(5) (By the ----------------- Executive for Good Reason), Executive's right to exercise the Option shall become fully vested and the Option shall remain exercisable for the four-month period following such termination. 7. General Provisions. ------------------ (A) Notices. Any notice provided for in this Agreement must be in ------- writing and must be either personally delivered, or mailed by first class mail (postage prepaid and return receipt requested) or sent by reputable overnight courier service, to the recipient at the address below indicated: To the Company: Attn.: Arthur L. Smith Chairman, GLOBALSCAPE Board of Directors 12500 Network Boulevard, Suite 407 San Antonio, Texas 78249 To Executive: Attn.: Sandra Poole-Christal Executive's last known address on records of Company or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Agreement will be deemed to have been given when so delivered or sent or if mailed, five days after so mailed. (B) Severability. Whenever possible, each provision of this ------------ Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to he invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision in such jurisdiction or any other jurisdiction, or the legality or enforceability of such provision in any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein except that any court having jurisdiction shall have the power to reduce the duration, area or scope of such invalid, illegal or unenforceable provision and, in its reduced form it shall be enforceable. (C) Complete Agreement. This Agreement embodies the complete ------------------ agreement and understanding between the parties and supersedes and preempts any prior understandings, agreements or representations by or between the parties, written or oral, which may have been related to the subject matter hereof in any way. (D) Successors and Assigns. This Agreement is a personal service ---------------------- contract and is not assignable by the Executive. Subject to the Executive's rights under paragraph 1(D)(5)(c), this Agreement may be assigned from time to -------------------- time by the Company. This Agreement shall be binding on and inure to the benefit of the parties hereto and such parties' respective successors, personal representatives and permitted assigns. (E) Choice of Law. All questions concerning the construction, ------------- validity and interpretation of this Agreement will be governed by the internal law, and not the law of conflicts, of the State of Texas. (F) Remedies. Each of the parties to this Agreement will be -------- entitled to enforce her or its rights under this Agreement specifically, to recover damages (including, without limitation, reasonable fees and expenses 69 of counsel) by reason of any breach of any provision of this Agreement and to exercise all other rights existing in her or its favor. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach or threatened breach of the provisions of this Agreement and that any party may in her or its sole discretion apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive relief in order to enforce or prevent any violations of the provisions of this Agreement. Such injunction or decree shall be available without the posting of any bond or other security. (G) Amendments and Waivers. Any provision of this Agreement may be ---------------------- amended or waived only with the prior written consent of Executive and a majority of the Board. (H) Absence of Conflicting Agreements. Executive hereby warrants and --------------------------------- covenants that her employment by the Company does not result in a breach of the terms, conditions or provisions of any agreement to which Executive is subject. (I) Survival. No termination of Executive's employment by either or -------- both parties shall reduce or terminate Executive's covenants and agreements in paragraphs 2,3 and 5. -------------------- IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered on the day and year first above written. "Company" GLOBALSCAPE, Inc. By: /s/ Arthur L. Smith ------------------- Name: Arthur L. Smith --------------- Title: Chairman of the Board of Directors ---------------------------------- "Executive" By: /s/ Sandra Poole-Christal ------------------------- Name: Sandra Poole-Christal --------------------- Exhibit B Number of Option Shares: 291,429 Purchase Price: $0.00 Vesting Schedule: 97,143 January 1, 1999 (dates Options may be 97,143 January 1, 2000 exercised) 97,143 January 1, 2001 Exercise Price $0.10 per Option Share Options Expire January 1, 2008 Subject to other terms and conditions stated in attached letter agreement. 70 EX-10.17 13 EMPLOYMENT AGREEMENT WITH CHARLES R. POOLE Exhibit 10.17 EXECUTIVE EMPLOYMENT AGREEMENT Agreement made as of September 24, 1998, between AMERICAN TELESOURCE INTERNATIONAL., Inc., a Delaware corporation (the "Company"), and Charles R. Poole ("Executive"). The Company and the Executive desire to enter into certain agreements providing for Executive's employment with the Company. The parties hereto agree as follows: 1. Employment. The Company agrees to employ Executive and Executive ---------- accepts such employment for the period beginning August 1, 1998 (the "Start Date") and ending upon termination pursuant to paragraph 1 (D) hereof (the --------------- "Employment Period"). (A) Services. During the Employment Period, Executive will be the President of -------- the Company, and in connection therewith will render such services of an executive and administrative character to the Company and its affiliates as are customarily rendered by persons holding such position with similarly situated companies, as the Board of Directors of American TeleSource International Inc., a Delaware, U.S.A. corporation (the "Board") may from time to time direct. Executive will devote his best efforts and substantially all of his business time and attention (except as otherwise specifically permitted herein and except for vacation periods and reasonable periods of illness or other incapacity) to the business of the Company and its affiliates and will faithfully and diligently carry out such duties and have such responsibilities as are customary among persons employed in substantially similar capacities for similar companies. Executive will report to the President and shall faithfully and diligently comply with all of its reasonable and lawful directives. For purposes of this Agreement, the term "affiliates" means any corporation, limited partnership, limited liability company or other entity engaged in the same business as the Company or a related business, which controls, is controlled by or is under common control with the Company. (B) Salary. During the Employment Period and thereafter as provided in ------ paragraph (D) below, the Company will pay Executive a base salary at the rate of - ------------- not less than $127,000 per annum (or such higher amount as the Board may establish from time to time), and will be payable in accordance with the Company's regular payroll practices. (C) Benefits. In addition to the compensation described above in this -------- paragraph 1, Executive will be entitled during the Employment Period to the - ----------- following benefits: (1) such bonus as the Board in its sole discretion may from time to time authorize, but in no event shall bonuses paid during a year exceed 50% of Executive's base salary for such year; (2) such health insurance and other benefits as are available from time to time to the Company's salaried employees generally; (3) in accordance with the Company's vacation and absence paid as in effect from time to time, sick leave, personal time provided that Executive shall have no less than three weeks vacation each year, with salary; (4) reimbursement, upon submission of documentation in accordance with the Company's regular expense policies, for reasonable business expenses incurred on the Company's behalf by Executive; 71 (5) participation in any savings plan, 401(k) plan, profit sharing plan or pension plan as is available from time to time to the Company's salaried employees generally; and (6) opportunity to participate in any and all employee benefit plans from time to time in effect for executives or salaried employees of the Company generally (subject to any contribution therefore generally required by such employees and except to the extent such plans are in a category of benefit otherwise provided to Executive). (D) Termination. Unless earlier terminated by termination of Executive's ----------- employment pursuant to any of the provisions immediately below, Executive's employment with the Company will continue until the third anniversary of the Start Date, and Executive's employment shall be renewed automatically for one- year periods thereafter unless either party hereto gives written notice to the other party, at least 120 days prior to the next anniversary date, that such employment shall not be renewed: (1) Death. In the event of Executive's death during the term hereof, ----- Executive's employment hereunder shall immediately and automatically terminate. Notwithstanding such event, the Company shall pay to Executive's designated beneficiary or, if no beneficiary has been designated by Executive, to his estate, the base salary at the rate in effect on the date of death for a period of 6 months. The Company shall also pay to Executive's designated beneficiary or, if no beneficiary has been designated by Executive, to his estate, any incentive compensation that is earned but unpaid, based on the operations of the Company for the whole year, prorated through the date of death. (2) Disability. ---------- (a) The Company may terminate Executive's employment hereunder, upon notice to Executive, in the event that Executive becomes disabled during his employment hereunder through any illness, injury, accident or condition of either a physical or psychological nature and, as a result, is unable to perform substantially all of his duties and responsibilities hereunder for 90 days during any period of 365 consecutive calendar days. In the event of such termination, until the earliest of (i) the conclusion of the then-current term of this Agreement and (ii) the conclusion of a period of 6 months following the date of termination, the Company shall continue to pay Executive the base salary at the Rate in effect on the date of termination and shall continue to contribute to the cost of Executive's participation in the Company's group medical and dental insurance plan, if any, provided that Executive is entitled to continue such participation under applicable law and plan terms. The Company will also pay Executive, in the case of such termination, any incentive compensation that is earned but unpaid, based on the operations of the Company for the whole year, prorated through the date of such termination; (b) While receiving disability income payments under the Company's disability income plan, if any, Executive shall be entitled to receive the excess, if any, of base salary under paragraph I (B) hereof over such --------------- disability income payments, and shall be entitled to receive such bonus and other benefits as are described in paragraph 1(C), until the termination of his -------------- employment and except to the extent a longer period is specified in paragraph 1(D)(2)(a). - ---------- (3) Termination by the Company without Cause. The Company may at any ---------------------------------------- time terminate Executive's employment without Cause (as defined below) by giving Executive written notice of the effective date of termination. In the event of such termination, the Company shall have the continuing obligation to make payments of base salary in accordance with paragraph (B) above at the rate in ------------- effect on the effective date of such termination until the third anniversary of the Start Date or until 24 months after the effective date of such termination, whichever period is longer. Additionally, during such period following termination as the Company shall have the continuing obligation to make payments of base salary, the Company shall continue to contribute to the cost of Executive's participation in the Company's group medical and insurance plans, if any, provided that Executive is entitled to continue such participation under applicable law and plan. The Company will also pay Executive, in the event of 72 such termination, any incentive compensation that is earned but unpaid, based on operations of the Company for the whole year, prorated through the date of his termination. (4) Termination by the Company for Cause. The Company shall have the ------------------------------------ right to terminate the Executive's employment at any time for any of the following reasons (each of which is referred to herein as "Cause") by giving Executive written notice of the effective date of termination (which effective date may be the date of such notice): (a) the willful breach of any provision of paragraphs 1(A), 2, 3, 4 ------------------------ or 5 (including, but not limited to, a refusal to follow reasonable and lawful - ---- directives of the President; provided, however, that to the extent that such breach is curable, the President will give Executive written notice of such breach and Executive will have 30 days from the receipt of such notice to cure such breach; (b) any act of fraud, embezzlement or other material dishonesty with respect to any aspect of the Company's business; (c) continued use of illegal drugs; (d) substantial failure of performance, repeated or continued after written notice of such failure and explanation of such failure of performance, which is reasonably determined by the Board of Directors to be materially injurious to the business or interests of the Company; or (e) conviction of a felony or of a crime involving moral turpitude. If the Company terminates Executive's employment for any of the reasons set forth above in this paragraph 1(D)4 , the Company shall have no --------------- other obligations hereunder (including the obligation to continue to make payments of base salary as provided in paragraph 1(D)3 from and after the --------------- effective date of termination and shall have all other rights and remedies available under this or any other agreement and at law or in equity. (5) By the Executive for Good Reason. Executive may terminate his -------------------------------- employment hereunder for Good Reason, upon written notice to the Company setting forth the nature of such Good Reason in reasonable detail. "Good Reason" shall mean: (a) the material failure of the Company to provide Executive the base salary and incentive compensation and benefits in accordance with the terms of paragraph 1 and paragraph 6 hereof; - --------------------------- (b) the material diminution in the nature or scope of Executive's responsibilities, duties or authority; or (c) the occurrence of a Change in Control (as defined herein). In the event of termination in accordance with this paragraph 1(D)(5), the ----------------- Company shall continue to pay Executive the base salary at the rate in effect on the effective date of such termination until the third anniversary of the Start Date or until 24 months after the effective date of such termination, whichever period is longer. Additionally, during such period following termination as the Company shall have the continuing obligation to make payments of base salary, the Company shall continue to contribute to the cost of Executive's participation in the Company's group medical and insurance plans, if any, provided that Executive is entitled to continue such participation under applicable law and plan. The Company will also pay Executive, in the event of such termination, any incentive compensation that is earned but unpaid, based on operations of the Company for the whole year, prorated through the date of his termination. 73 A "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), becomes the "beneficial owner" (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, of outstanding securities of the Company representing 40% or more of the combined voting power of the outstanding securities of the Company, or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the shareholders of the Company was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the shareholders of the Company approve (A) a merger or consolidation of the Company with any other entity (other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 60% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation), (B) a plan of complete liquidation of the Company or (C) an agreement or agreements for the sale or disposition, in a single transaction or series of related transactions, by the Company of all or substantially all of the property and assets of the Company. Notwithstanding the foregoing, events otherwise constituting a Change in Control in accordance with the foregoing shall not constitute a Change in Control if such events are solicited by the Company and are, if Executive is then a member of the Board, approved, recommended or supported by Executive in his capacity as a member of the Board of the Company in actions taken prior to, and with respect to, such events. (6) Voluntary Termination by Executive. Except as provided in ---------------------------------- paragraph 1(D)(5), in the event that Executive's employment with the Company is - ----------------- terminated by Executive, such termination shall be a breach of this Agreement and the Company shall have no further obligations hereunder from and after the date of such termination. 2. Nondisclosure. Executive acknowledges that during the course of his ------------- performance of services for the Company he has acquired and will acquire technical knowledge with respect to the Company's business operations, including, by way of illustration, the Company's existing and contemplated services, trade secrets, patents and selling techniques and information, customer lists, supplier lists, and confidential information relating to the Company's policy and/or business strategy (all of such information herein referenced to as the "Confidential Information"); provided, however, that the term "Confidential Information" shall not include (a) any information which is or becomes publicly available otherwise than through breach of this Agreement, or (b) any information which is or becomes known or available to Executive on a non-confidential basis and not in contravention of applicable law from a source which is entitled to disclose such information to Executive. Executive agrees that he will not, while he is employed by the Company, divulge to any person, directly or indirectly, except to the Company or its officers and agents or as reasonably required in connection with his duties on behalf of the Company, or use, except on behalf of the Company, any Confidential Information acquired by Executive during the term of his employment. Executive agrees that he will not, at any time after his employment with the Company has ended, divulge to any person directly or indirectly any Confidential Information. Executive further agrees that if his relationship with the Company is terminated (for whatever reason) he shall not take with him but will leave with the Company all records, papers and computer data and any copies thereof relating to the Confidential Information (or if such papers, records, computer data or copies are not on the premises of the Company, Executive agrees to return such papers, records and computer data immediately upon his termination). Executive acknowledges that all such papers, records, computer data or copies thereof are and remain the property of the Company. 3. Inventions and Patents. Executive agrees that all inventions, ---------------------- innovations or improvements relating to the Company's business or method of conducting business (including new contributions, improvements, ideas and discoveries, whether patentable or not) conceived or made by him during his employment with the Company belong 74 to the Company. Executive will promptly disclose such inventions, innovations or improvements to the Board and perform all actions reasonably requested by the Board to establish and confirm such ownership. 4. Other Businesses. During the Employment Period, Executive agrees ---------------- that he will not, directly or indirectly except with the express written consent of the Board, become engaged in, render material services for, or permit his name to be used in connection with, or directly or indirectly counsel or consult with, any business other than the business of the Company and its affiliates; provided, however, that Executive may be a passive investor in any such business (subject to the limitations set forth in paragraph 5 below). ----------- 5. Noncompetition. Executive agrees that: -------------- (A) During the term he performs services for the Company and during the Post-Employment Period (as defined below), Executive will not interfere with the relationship between the Company or any affiliate and any employee, agent or representative of the Company or any such affiliate. (B) During the term he performs services for the Company and during the Post-Employment Period, Executive will not directly or indirectly divert or attempt to divert from the Company or any affiliate any business which provides telecommunications services in the United States or Latin America, including, without limitation, domestic and international call services or domestic and international telecommunications networks for voice, data, fax and/or video transmission between the United States and Latin America or within Latin America, or any related business in which the Company has been actively engaged during the term Executive performed services for the Company, nor interfere with the relationships of the Company with customers, dealers, distributors, franchisees or sources of supply. 75 (C) During the term he performs services for the Company and during the Post-Employment Period, Executive will not directly or indirectly own, manage, operate control, be employed by, participate in, or be connected in any manner with the ownership, management, operation or control of, any business or enterprise which provides telecommunications services in the United States or Latin America, including, without limitation, domestic and international call services or domestic and international telecommunication networks for voice, data, fax and/or video transmission between the United States and Latin America or within Latin America, or any related business in which the Company has been actively engaged during the then Executive performed services for the Company. (D) For purposes hereof, the "Post-Employment Period" shall mean: (i) in the event Executive's employment with the Company is terminated for Cause pursuant to paragraph 1(D)(4), the 12-month period following Executive's ----------------- termination of employment with the Company, or (ii) in the event Executive's employment with the Company is terminated for any reason other reason, the period during which the Company continues to make payments of base salary. 6. Stock Option. Effective as of the date hereof (the "Effective Date"), ------------ under the terms of the American TeleSource International, Inc. (ATSI) 1998 Stock Option Plan (the "Plan"), ATSI, a Delaware corporation ("ATSI"), hereby grants to Executive the option (the "Option") to purchase shares (the "Option Shares") of Common Stock, no par value per share, of ATSI, subject to the requisite approval of the Plan by ATSI's Board of Directors and ATSI's shareholders. The number of Option Shares, the purchase price per Option Share and the installments and dates in which the Executive shall have the right to exercise the Option are attached to this Agreement as Exhibit "B". The Plan is attached to this Agreement as Exhibit "A". Beginning on the Effective Date, such installments shall be cumulative (i.e. once the right to purchase the number of shares of an installment has accrued, such shares may be purchased at any time thereafter, or in part from time to time, until the business day immediately preceding the tenth anniversary of the Effective Date (the "Expiration Date") or until such earlier date as set forth in the following paragraph. Notwithstanding the preceding sentence, upon the occurrence of a Change in Control, Executive's right to exercise the Option shall become fully vested (i.e., all unissued Option Shares may be purchased at any time thereafter, or in part from time to time, until the Expiration Date or until such earlier date as set forth in the following paragraph). Upon termination of Executive's employment pursuant to Paragraph 1(D)(4) ----------------- (Termination by the Company for Cause) or paragraph 1(D)(6) (Voluntary ----------------- Termination by Executive), the Option shall remain exercisable for the four month period following such termination, but only to the extent such option was exercisable at termination. Upon termination of Executive's employment pursuant to paragraph 1(D)(1) (Death) or paragraph 1(D)(2) (Disability), the Option, to ----------------- ----------------- the extent then exercisable, shall remain exercisable for the one-year period following such termination. Upon termination of Executive's employment pursuant to paragraph (D)(3) (Termination by the Company without Cause) or ----------------- paragraph 1(D)(5) (By the Executive for Good Reason), Executive's right to - ----------------- exercise the Option shall become fully vested and the Option shall remain exercisable for the four-month period following such termination. 7. General Provisions. ------------------ (A) Notices. Any notice provided for in this Agreement must be in ------- writing and must be either personally delivered, or mailed by first class mail (postage prepaid and return receipt requested) or sent by reputable overnight courier service, to the recipient at the address below indicated: To the Company: Attn.: Board of Directors 12500 Network Boulevard, Suite 407 San Antonio, Texas 78249 To Executive: At Executive's last known address as listed with the Company or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Agreement will be deemed to have been given when so delivered or sent or if mailed, five days after so mailed. (B) Severability. Whenever possible, each provision of this ------------ Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to he invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision in such jurisdiction or any other jurisdiction, or the legality or enforceability of such provision in any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein except that any court having jurisdiction shall have the power to reduce the duration, area or scope of such invalid, illegal or unenforceable provision and, in its reduced form it shall be enforceable. (C) Complete Agreement. This Agreement embodies the complete ------------------ agreement and understanding between the parties and supersedes and preempts any prior understandings, agreements or representations by or between the parties, written or oral, which may have been related to the subject matter hereof in any way. (D) Successors and Assigns. This Agreement is a personal service ---------------------- contract and is not assignable by the Executive. Subject to the Executive's rights under paragraph 1(D)(5)(d), this Agreement may be assigned from time to -------------------- time by the Company. This Agreement shall be binding on and inure to the benefit of the parties hereto and such parties' respective successors, personal representatives and permitted assigns. (E) Choice of Law. All questions concerning the construction, ------------- validity and interpretation of this Agreement will be governed by the internal law, and not the law of conflicts, of the State of Texas. (F) Remedies. Each of the parties to this Agreement will be entitled -------- to enforce his or its rights under this Agreement specifically, to recover damages (including, without limitation, reasonable fees and expenses of counsel) by reason of any breach of any provision of this Agreement and to exercise all other rights existing in his or its favor. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach or threatened breach of the provisions of this Agreement and that any party may in his or its sole discretion apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive relief in order to enforce or prevent any violations of the provisions of this Agreement. Such injunction or decree shall be available without the posting of any bond or other security. (G) Amendments and Waivers. Any provision of this Agreement may be ---------------------- amended or waived only with the prior written consent of Executive and a majority of the Board. (H) Absence of Conflicting Agreements. Executive hereby warrants --------------------------------- and covenants that his employment by the Company does not result in a breach of the terms, conditions or provisions of any agreement to which Executive is subject. (I) Survival. No termination of Executive's employment by either or -------- both parties shall reduce or terminate Executive's covenants and agreements in paragraphs 2, 3 and 5. - --------------------- IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered on the day and year first above written. "Company" AMERICAN TELESOURCE INTERNATIONAL, INC. BY:____________________________________ Name:__________________________________ Title:_________________________________ "Executive" _______________________________________ Charles R. Poole EX-10.19 14 EMPLOYMENT AGREEMENT WITH H. DOUGLAS SAATHOFF EXHIBIT 10.19 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement"), executed this _______ day of _______ 1999 to be effective as of January 1, 2000, is between AMERICAN TELESOURCE INTERNATIONAL, INC., a Delaware corporation (the "Employer"), and H. Douglas Saathoff ("Employee"). R E C I T A L S: F. The Employer and Employee entered into an Executive Employment Agreement dated effective January 1, 1997 for a period of three years. G. The Employer decided not to renew the Executive Employment Agreement, and has given notice to Employee that the Executive Employment Agreement will not renew and will therefore terminate effective December 31, 1999. H. The Employer and Employee agreed to enter into a new employment agreement for a one year term on the terms and conditions herein provided. I. The Employer considers the maintenance of a sound management team, including Employee, essential to protecting and enhancing its best interests and those of its stockholders. J. Employee will be an officer of the Employer and Employee will be a member of Employer's management team. NOW, THEREFORE, in consideration of the Employer's agreement to employ Employee pursuant to the terms of this Agreement and Employee's future employment with Employer, and other good and valuable consideration, the parties agree as follows: Section 1. Employment. The Employer hereby employs Employee, and Employee hereby accepts employment, upon the terms and subject to the conditions stated in this Agreement. Section 2. Duties. Employee shall be employed as Chief Financial Officer of the Employer, or such other positions with Employer to which he may be appointed by the Board of Directors of the Employer (the "Board"). It is understood that Employee may be requested from time to time to provide assistance or services to, or act as an officer or director of the Employer or any of its subsidiaries or other affiliates. Employee shall perform such services and, if elected as a director or officer of any such company, shall hold such office (and discharge its duties) without additional compensation other than the compensation set forth in this Agreement; provided, however, that this Agreement does not prohibit (or require) the affiliates of Employer from offering additional compensation. Employee agrees to devote his full work time and best efforts to the performance of the duties as an Employee of Employer and to the performance of such other duties as assigned him from time to time by the Board or the Chairman of the Board. Section 3. Term. The initial term of employment of Employee hereunder shall continue for one year, from January 1, 2000 ("Employment Date") until December 31, 2000, unless earlier terminated pursuant to Section 6 herein. Section 4. Compensation and Benefits. In consideration for the services of Employee hereunder, the Employer shall compensate Employee as follows: (a) Base Salary. Until the termination of Employee's employment hereunder, Employer shall pay Employee a base salary at the rate of at least $2014.15 per week ("Base Salary"), payable in accordance with the regular payroll practices of the Employer for executives, less such deductions or amounts as are required to be deducted or withheld by applicable laws or regulations and less such other deductions or amounts, if any, as are authorized by Employee. The Base Salary may not be decreased at any time during the term of Employee's employment hereunder Any increase in Base Salary shall be in the sole discretion of the Compensation Committee of the Board. (b) Executive Bonus Plan. Employee shall be eligible to receive from the Employer such management incentive bonuses as may be provided in management incentive bonus plans adopted from time to time by Employer. (c) Vacation. Employee shall be entitled time off in accordance with the Employee's vacation and absence policy, as it may be modified from time to time during Employee's employment hereunder, provided that Employee will have no less than four (4) weeks of paid vacation during the initial term of this Agreement, and each subsequent year if the initial term is extended. (d) Life Insurance Benefits. Employer shall pay the premiums allocable to a term life insurance policy in the face amount of $150,000 covering Employee as the named insured, subject to Employee's passing a standard physical examination in order to permit issuance of the policy at standard (non-rated) premiums and satisfaction of any other standard underwriting requirements. Employee shall be the owner of such policy and shall have the right to designate the beneficiary of the policy proceeds. Employee shall be liable for income taxes with respect to premium amounts includable in Employee's taxable income. (e) Group Insurance Benefits. Employee shall be entitled to participate in the Employer's group health and disability programs as are made available to the Employer's other executives and officers and the Employee's participation in such programs shall be at the same rates which are available to the Employer's other executives and officers. (f) Savings Plans. Employee shall be entitled to participate in Employer's 401(k) plan, or other retirement or savings plans as are made available to the Employer's other executives and officers on the same terms which are available to the Employer's other executives and officers; (g) Health Club Membership. Employer shall pay for or reimburse Employee for a family membership at a health and fitness club of Employee's choosing, provided that the total cost of the membership does not exceed $75 per month. Section 5. Expenses. The parties anticipate that in connection with the services to be performed by Employee pursuant to the terms of this Agreement, Employee will be required to make payments for travel, entertainment of business associates and similar expenses. Employer shall reimburse Employee for all appropriate and reasonable expenses authorized by Employer and incurred by Employee in the performance of his duties hereunder. Employee shall comply with such budget limitations and approval and reporting requirements with respect to expenses as Employer may establish from time to time. Section 6. Termination. (a) General. Employee's employment hereunder shall commence on the Employment Date and continue until the end of the term specified in Section 3, except that the employment of Employee hereunder shall terminate prior to such time in accordance with the following: (i) Death or Disability. Upon the death of Employee during the term of his employment hereunder or, at the option of Employer, in the event of Employee's Disability, upon 30 days' notice to Employee. "Disability" with respect to an Employee shall be deemed to exist if the Employee meets the definition of either "disabled" or "disability" under the terms of the Employer's long-term disability benefit program (including the definitions for total or partial disability). Any refusal by Employee to submit to a reasonable medical examination to determine whether Employee is so disabled shall be deemed to constitute conclusive evidence of Employee's disability. (ii) For Cause. For "Cause" immediately upon written notice by Employer to Employee. A termination shall be for "Cause" if: (7) Employee commits fraud, bribery, embezzlement or other material dishonesty with the respect to the business of Employer, or Employer discovers that Employee has committed any such act in the past with respect to a previous employer; or (8) Employee commits a felony or any criminal act involving moral turpitude or Employer discovers that Employee has committed any such act in the past; or (9) Employee commits a material breach of any of the covenants, representations, terms or provisions hereof; or (10) Employee violates any instructions or policies of Employer with respect to the operation of its business or affairs or Employee fails to obey written directions delivered to Employee by the Employer's Board or Chairman of the Board; or (11) Employee commits or omits to perform any act the performance of which or the omission of which constitutes substantial failure of Employee to diligently and effectively perform his duties to Employer or adversely affects or could adversely affect the Employer's business reputation; or (12) Employee uses illegal drugs. (iii) Without Cause. Without Cause immediately upon notice by Employer to Employee. (b) Severance Pay. (i) Termination Upon Death or Disability or For Cause. Employee shall not be entitled to any severance pay or other compensation upon termination of his employment pursuant to Section 6(a)(i) or (ii) except for his Base Salary accrued but unpaid as of the date of termination, unpaid expense reimbursements under Section 5 for expenses incurred in accordance with the terms hereof prior to termination, compensation for accrued, unused vacation as of the date of termination ("Accrued Amounts"), and in the event of termination pursuant to Section 6(a)(i) for Disability, an amount equal to twenty-six times the difference between the Base Salary in effect at the time of termination and twenty-six weeks' worth of benefits to be paid under the Employer's long term disability plan. This amount shall be paid in a lump sum no later than ten (10) business days following the date of Employee's termination. (ii) Termination Without Cause. In the event Employee's employment hereunder is terminated pursuant to Section 6(a)(iii) prior to the expiration of the initial term of this Agreement (as such initial term may have been extended), Employer shall pay Employee, as consideration for the execution of a separation and release agreement and in lieu of any further compensation payable hereunder other than Accrued Amounts, a cash amount equal to twenty-six (26) times Employee's then current Base Salary. Such separation payment shall be Employee's sole remedy in connection with such termination. The Separation payment shall be made as specified above without regard to the number of months remaining in the term of this Agreement, and shall be paid within ten (10) business days of the Employee's execution of a separation and release agreement. (c) Change in Control. If a "Change in Control" occurs during Employee's employment under this Agreement, and if Employee's employment is terminated "Without Cause" pursuant to Section 6(a)(iii) above prior to the end of a period of twenty-four (24) months beyond the month in which a "Change in Control" of the Employer occurs, or if Employee voluntarily terminates his employment prior to the end of a period three (3) months beyond the month in which a Change in Control of the Employer occurs, Employee shall receive the amount determined pursuant to Section 6(b)(ii) above. A "Change in Control" of Employer shall be deemed to have occurred if (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Act")), becomes the "beneficial owner" (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, of outstanding securities of Employer representing 40% of more of the combined voting power of the outstanding securities of the Employer, or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute a majority of the Board (except that any new director who is elected by the Board to fill a vacancy created by the death, resignation or disqualification of a member of the Board shall not be considered a new member of the Board for purposes of this definition), or (iii) the shareholders of Employer approve (A) a merger or consolidation of Employer with any other entity, other than a merger or consolidation which would result in the voting securities of Employer outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 60% of the combined voting power of the voting securities of Employer, or (B) a plan of complete liquidation of Employer, or (C) an agreement or agreements for the sale or disposition, in a single transaction or series of related transactions, by the Employer of all or substantially all of the property and assets of Employer. Section 7. Inventions; Assignment. (a) Inventions Defined. All rights to discoveries, inventions, improvements, designs and innovations (including all data and records pertaining thereto) that relate to the business of Employer, including its affiliates, whether or not able to be patented, copyrighted or reduced to writing, that Employee may discover, invent or originate during the term of his employment hereunder, and for a period of six months thereafter, either alone or with others and whether or not during working hours or by the use of the facilities of Employer ("Inventions"), shall be the exclusive property of Employer. Employee shall promptly disclose all Inventions to Employer, shall execute at the request of Employer any assignments or other documents Employer may deem necessary to protect or perfect its rights therein, and shall assist Employer, at Employer's expense, in obtaining, defending and enforcing Employer's rights therein. Employee hereby appoints Employer as his attorney-in-fact to execute on his behalf any assignments or other documents deemed necessary by Employer to protect or perfect its rights to any Inventions. (b) Covenant to Assign and Cooperate. Without limiting the generality of the foregoing, Employee shall assign and transfer to Employer the world-wide right, title and interest of Employee in the Inventions. Employee agrees that Employer may apply for and receive patent rights (including Letters Patent in the United States) for the Inventions in Employer's name in such countries as may be determined solely by Employer. Employee shall communicate to Employer all facts known to Employee relating to the Inventions and shall cooperate with Employer's reasonable requests in connection with vesting title to the Inventions and related patents exclusively in Employer and in connection with obtaining, maintaining and protecting Employer's exclusive patent rights in the Inventions. (c) Successors and Assigns. Employee's obligations under this Section 7 shall inure to the benefit of Employer, its affiliates and their respective successors and assigns and shall survive the expiration of the term of this Agreement for such time as may be necessary to protect the proprietary rights of Employer and its affiliates in the Inventions. Section 8. Confidential Information. (a) Acknowledgment of Proprietary Interest. Employee acknowledges the proprietary interest of Employer and its affiliates in all Confidential Information (as defined below). Employee agrees that all Confidential Information learned by Employee during his employment with Employer or otherwise, whether developed by Employee alone or in conjunction with others or otherwise, is and shall remain the exclusive property of Employer. Employee further acknowledges and agrees that his disclosure of any Confidential Information will result in irreparable injury and damage to Employer. (b) Confidential Information Defined. "Confidential Information" means all trade secrets, copyrightable works, confidential or proprietary information of Employer or its affiliates, including without limitation, (i) information derived from reports, investigations, experiments, research and work in progress, (ii) methods of operation, (iii) market data, (iv) proprietary computer programs and codes, (v) drawings, designs, plans and proposals, (vi) marketing and sales programs, (vii) the identities of clients or customers , (viii) historical financial information and financial projections, (ix) pricing formulae and policies, (x) all other concepts, ideas, materials and information prepared or performed for or by Employer and (xi) all information related to the business, services, products, purchases or sales of Employer or any of its suppliers and customers, other than information that is publicly available. (c) Covenant Not To Divulge Confidential Information. Employer is entitled to prevent the disclosure of Confidential Information. As a portion of the consideration for the employment of Employee and for the compensation being paid to Employee by Employer, Employee agrees at all times during the term of his employment hereunder and thereafter to hold in strict confidence and not to disclose or allow to be disclosed to any person, firm or corporation, other than to persons engaged by Employer to further the business of Employer, and not to use except in the pursuit of the business of Employer, the Confidential Information, without the prior written consent of Employer. (d) Return of Materials at Termination. In the event of any termination or cessation of his employment with Employer for any reason, Employee shall promptly deliver to Employer all documents, data and other information derived from or otherwise pertaining to Confidential Information. Employee shall not take or retain any documents or other information, or any reproduction or excerpt thereof, containing or pertaining to any Confidential Information. Section 9. Non-Solicitation. (a) Solicitation of Employees. During Employee's employment with Employer and for a period of twelve (12) months after termination of such employment at any time and for any reason, and regardless of whether any payments are made to Employee under this Agreement as a result of such termination, Employee shall not solicit, participate in or promote the solicitation of any person who was employed by Employer or any of its affiliates at the time of Employee's termination of employment with Employer to leave the employ of Employer or any of its affiliates, or, on behalf of himself or any other person, hire, employ or engage any such person. Employee further agrees that, during such time, if an employee of Employer or any of its affiliates contacts Employee about prospective employment, Employee will inform such employee that he or she cannot discuss the matter further without the consent of Employer (and the applicable affiliate). (b) Solicitation of Clients, Customers, Etc. During Employee's employment with Employer and for a period of twelve (12) months after termination of Employee's employment at any time and for any reason, and regardless of whether any payments are made to Employee under this Agreement as a result of such termination, Employee shall not, directly or indirectly, solicit any person who, at the time of termination of Employee's employment with Employer, was a client, customer, policyholder, vendor, consultant or agent of Employer or its affiliates to discontinue business, in whole or in part, with Employer or its affiliates. Employee further agrees that, during such time, if such a client, customer, policyholder, vendor, or consultant or agent contacts Employee about discontinuing business with Employer or moving that business elsewhere, Employee will inform such client, customer, policyholder, vendor, consultant or agent that he or she cannot discuss the matter further without the consent of Employer (and the applicable affiliate). Section 10. No-Compete. (a) Competition During Employment. Employee agrees that during the term of his employment with Employer, neither he nor any of his affiliates, will directly or indirectly compete with Employer or its affiliates in any way, and that he will not act as an officer, director, employee, consultant, shareholder, lender, or agent of any entity which is engaged in any business of the same nature as, or in competition with, the businesses in which Employer and its affiliates are now engaged or in which Employer or its affiliates become engaged during the term of employment; provided, however, that this Section 10(a) shall not prohibit Employee or any of his affiliates from: (i) purchasing or holding an aggregate equity interest of up to 1%, so long as Employee and his affiliates combined do not purchase or hold an aggregate equity interest of more than 5%, in any business in competition with Employer and its affiliates. Furthermore, Employee agrees that during the term of employment, he will undertake no planning for the organization of any business activity competitive with the work he performs as an employee of Employer and Employee will not combine or conspire with any other employees of Employer and its affiliates for the purpose of the organization of any such competitive business activity. (b) Competition Following Employment. In order to protect Employer against the unauthorized use or the disclosure of any Confidential Information of Employer and its affiliates presently known or hereinafter obtained by Employee during his employment under this Agreement, Employee agrees that for a period of twelve (12) months after the termination or cessation of his employment with Employer at any time and for any reason, and regardless of whether any payments are made to Employee under this Agreement as a result of such termination, neither Employee nor any of his affiliates, shall, directly or indirectly, for itself or himself or on behalf of any other corporation, person, firm, partnership, association, or any other entity (whether as an individual, agent, servant, employee, employer, officer, director, shareholder, investor, principal, consultant or in any other capacity): (i) engage or participate in any business which engages in competition with such businesses being conducted by Employer or any of its affiliates during the term of employment anywhere in any state in the United States or in any foreign country where the Employer or any of its affiliates provides telecommunications services, including, without limitation, domestic and international call services or domestic and international telecommunications networks of voice, data, fax or video transmission to or from the United States and Latin America or within Latin America, or any other business in which the Employer or any of its affiliates has been actively engaged during the term Employee performed services for the Employer; provided, however, that this provision shall not prohibit Employee or any of his affiliates from purchasing or holding an aggregate equity interest of up to 1%, so long as Employee and his affiliates combined do not purchase or hold an aggregate equity interest of more than 5%, in any business in competition with Employer; (ii) assist or finance any person or entity in any manner or in any way inconsistent with the intents and purposes of this Agreement. Section 11. General. (a) Notices. All notices and other communications hereunder shall be in writing or by written telecommunication, and shall be deemed to have been duly given if delivered personally or if mailed by certified mail, return receipt requested or by written telecommunication, to the relevant address set forth below, or to such other address as the recipient of such notice or communication shall have specified to the other party in accordance with this Section 11(a): If to Employer, to: American TeleSource International, Inc. 12500 Network Boulevard, Suite 407 San Antonio, Texas, 78249 Attention: Chairman of the Board (or the subsequent headquarters of Employer as known to Employee) If to Employee, to the Employee's last known address appearing on Employer's records (b) Withholding. All payments required to be made to Employee by Employer under this Agreement shall be subject to the withholding of such amounts, if any, relating to federal, state and local taxes as may be required by law. (c) Equitable Remedies. Each of the parties hereto acknowledges and agrees that upon any breach by Employee of his obligations under any of Sections 7, 8, 9, and 10 Employer shall suffer immediate, great and irreparable injury and shall have no adequate remedy at law. Accordingly, in event of such breach, Employer shall be entitled, in addition to other remedies and without showing actual damages, to specific performance and other appropriate injunctive and equitable relief. (d) Severability. If any provision of this Agreement is held to be illegal, invalid or unenforceable, such provision shall be fully severable, and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part hereof, and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement a provision as similar in its terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. (e) Waivers. No delay or omission by either party in exercising any right, power or privilege hereunder shall impair such right, power or privilege, nor shall any single or partial exercise of any such right, power or privilege preclude any further exercise thereof or the exercise of any other right, power or privilege. (f) Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. (g) Captions. The captions in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof. (h) Interpretation of Agreement. This Agreement shall be construed according to its fair meaning and not for or against either party. Use of the words "herein," "hereof," "hereto," "hereunder" and the like in this Agreement refer to this Agreement only as a whole and not to any particular section or subsection of this Agreement, unless otherwise noted. The masculine gender shall be deemed to denote the feminine or neuter genders, the singular to denote the plural, and the plural to denote the singular, where the context so permits. (i) Binding Agreement; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties and shall be enforceable by the personal representatives and heirs of Employee and the successors and assigns of Employer. The affiliates of Employer shall be considered third party beneficiaries of this Agreement with respect to any services provided by Employee to them and in connection with Employee's covenants in Sections 7,8,9 and 10 hereof. This Agreement may be assigned by the Employer; provided that in the event of any such assignment, the Employer shall remain liable for all of its obligations hereunder and shall be liable for all obligations of all such assignees hereunder. If Employee dies while any amounts would still be payable to him hereunder, such amounts shall be paid to Employee's estate. This Agreement is not otherwise assignable by Employee. (j) Entire Agreement. This Agreement contains the entire understanding of the parties, supersedes all prior agreements and understandings relating to the subject matter hereof and may not be amended except by a written instrument hereafter signed by each of the parties hereto. (k) Governing Law. This Agreement and the performance hereof shall be construed and governed in accordance with the laws of the State of Texas, without regard to its choice of law principles. (l) Arbitration. Without limiting Employer's right to seek equitable remedies under Section 11(c) above, Employer and Employee agree that any dispute or controversy arising under or in connection with this Agreement shall be settled by arbitration. Arbitration under this Agreement shall be governed by the Federal Arbitration Act and proceed in San Antonio, Texas in accordance with the rules of the American Arbitration Association ("AAA"). Arbitration will be conducted before a panel of three neutral arbitrators selected from a AAA list of proposed arbitrators with business law experience. Either party may take any legal action needed to protect any right pending completion of the arbitration. The arbitrator will determine whether an issue is arbitrable and will give effect to applicable statutes of limitation. The arbitrator has the discretion to decide, upon documents only or with a hearing, any motion to dismiss for failure to state a claim or any motion for summary judgment. Discovery shall be governed by the Federal Rules of Civil Procedure and the Federal Rules of Evidence. All information developed by the arbitration or litigation shall be held in confidence subject to such protective orders as the arbitrator deems useful to ensure complete confidentiality. The decision of the arbitrator shall be final and binding on all parties to this Agreement, and judgment thereon may be entered in any court having jurisdiction over the parties. All costs of the arbitration proceeding or litigation to enforce the arbitration award shall be paid by the party against whom the arbitrator decides. (m) Employee Representations. Employee represents and certifies to Employer that he: (i) has received a copy of this Agreement for review and study and has had ample time to review it before signing; (ii) has read this Agreement carefully; (iii) has been given a fair opportunity to discuss and negotiate the terms of this Agreement; (iv) understands its provisions; (v) has had the opportunity to consult his attorney; (vi) has determined that it is in his best interest to enter into his Agreement; (vii) has not been influenced to sign this Agreement by any statement or representation by Employer or its counsel not contained in this Agreement; and (viii) enters into this Agreement knowingly and voluntarily. EXECUTED as of the date and year first above written. AMERICAN TELESOURCE INTERNATIONAL, INC. By /s/ Arthur L. Smith ------------------- Chairman of Board of Directors /s/ H. Douglas Saathoff --------------------------- H. Douglas Saathoff EX-10.23 15 NEW OFFICE SPACE LEASE AGREEMENT Exhibit 10.23 COMMERCIAL LEASE ARTICLE 1.00 - BASIC LEASE TERMS 1.01 Parties. This lease agreement ("Lease") is entered into by and between the following Lessor and Lessee: ACLP University Park SA, L.P., a Texas limited partnership ("Lessor"), and American TeleSource International, Inc., a Texas corporation ("Lessee"). 1.02 Leased Premises. In consideration of the rents, terms, provisions and covenants of this Lease, Lessor hereby leases, lets and demises to the Lessee the following described premises ("Leased Premises"): The area shown on the attached Exhibit "A" consisting of approximately 26,250 rentable square feet at the western end of the building to be constructed and called University Park Tech Center II in San Antonio, Texas 78249, which consists of 84,525 square feet, and which is located on the land shown on Exhibit "B" attached hereto and ----------- incorporated herein for all purposes. Lessor and Lessee agree that final square footage for the purpose of rent calculations will be determined by Lessee's architect, using then-current BOMA standards (except that the space shall be measured from the edge of the roof for the exterior space adjacent to the exterior doorways) based on Lessee Improvements Final Plans and Specifications, subject to Lessor's approval, which may not be unreasonably refused or delayed. 1.03 Term. Subject to and upon the conditions set forth herein, the term (the "Term") of this Lease commences on December 15, 1999 (the "Commencement Date") and terminates one hundred and two (102) months thereafter (the "Termination Date"). Except as provided in Addendum 1 attached hereto and ---------- incorporated herein for all purposes, Lessee agrees that Lessor will not be liable to Lessee if Lessor does not deliver possession of the Leased Premises to Lessee on the Commencement Date, and Lessor's non-delivery of the Leased Premises to Lessee on the Commencement Date will not change the terms of this Lease or the obligations of Lessee hereunder. If delivery of the Leased Premises is delayed for any reason other than Lessee Delay (as hereinafter defined), Lessor and Lessee agree that the Commencement Date will be delayed until Substantial Completion (as hereinafter defined) of the Leased Premises, in which event the Term will be automatically extended for a period of time equal to the delay in Substantial Completion of the Leased Premises. If the Commencement Date is delayed, Lessor and Lessee shall, upon such delivery, execute an amendment to this Lease setting forth the actual Commencement Date and Termination Date. If Lessee enters the Leased Premises prior to Substantial Completion, Lessee shall execute and deliver to Lessor an Early Occupancy Agreement in a reasonable form provided by Lessor whereby Lessee releases Lessor from all liabilities, claims and causes of action arising out of any construction or other work performed at the Leased Premises and agrees to pay utility charges incurred by Lessee during such early occupancy. If the Termination Date falls on a day other than the last day of a month, the parties agree that the Term is automatically extended by the number of days necessary to cause the Term to end on the last day of a month. 1.04 Base Rent, Security Deposit. Base Rent is $25,987.50 net per month based upon an assumed 26,250 rentable square footage in the Leased Premises and shall be adjusted by $11.88 per rentable square foot per year based on the recalculation under Section 1.02 above. Security Deposit is $ 12,993.75. 1.05 Addresses. Lessor's Address: Lessee's Address: ACLP University Park SA, L.P. American TeleSource International, 17400 Dallas Parkway Inc. Suite 216 12500 Network Blvd. Dallas, Texas 75287 Suite 407 FAX (972) 407-9068 San Antonio, Texas 78249 FAX (210) 558-6095 With a copy to: CMC Commercial Realty Group, Inc. 5400 LBJ Freeway Suite 1450 Dallas, Texas 75240 FAX (972) 770-2805 1.06 Permitted Use. The Leased Premises may be used for office space and operation of telecommunications equipment. 1.07 Leasing Term Limitation on Adjacent Space and Right of First Refusal. Lessor agrees that Lessee may lease the First Bay shown on Exhibit "A" or the Second Bay shown on Exhibit "A" at any time prior to Lessor leasing the First Bay or the Second Bay to another person. Lessor agrees that it will notify Lessee at least thirty (30) days prior to entering into a lease of the First Bay or Second Bay, and will not enter into a lease for the First Bay for a term that continues longer than thirty-six (36) months or the Second Bay for a term that continues longer than sixty (60) months. Lessor further agrees that it will notify Lessee ninety (90) days prior to the expiration of any lease of the First Bay or Second Bay (or immediately upon learning that the First Bay or Second Bay are to become available prior to the expiration of their respective lease) and Lessee will have fifteen (15) days following receipt of notice to notify Lessor that it elects to lease the First Bay or Second Bay. If Lessee does not notify Lessor that it elects to lease the First Bay or Second Bay within fifteen (15) days, Lessor may re-let the First Bay or Second Bay for a term of up to thirty- six (36) months and the Second Bay for a term of up to sixty (60) months. If Lessee elects to lease the First Bay or Second Bay pursuant to this Section, then Lessor and Lessee will execute a modification of this Lease such that the First Bay or Second Bay become part of the Leased Premises and are leased on the same terms and conditions as provided in this Lease for the initial Leased Premises, including renewal options, but not including the rental per square foot, finish out allowance, and refurbishment allowance, with an additional security deposit to be calculated in the same manner as the security deposit for the Leased Premises, and with the term of the lease for the First Bay or Second Bay to expire on the Termination Date. If Lessee elects to lease the First Bay or Second Bay prior to the time that Lessor completes the Lessee Improvements, then the First Bay and Second Bay will be leased on all of the same terms and conditions as the initial Leased Premises, including rental per square foot, renewal options, finish out allowance, and refurbishment allowance. The date for completion of Lessee Improvements in the First Bay or Second Bay will be established consistently with the time frames for completion of Lessee Improvements for the initial Leased Premises. 1.08 Lessee's Future Expansion Needs. Lessor acknowledges that Lessee expects its business to grow significantly and that Lessee may require space in addition to the Leased Premises, First Bay and Second Bay. Lessor will keep Lessee informed of the status of the remaining space in the Building and give Lessee a reasonable opportunity to lease additional space that becomes available on reasonable terms and conditions. 1.09 Renewal Terms. Lessor agrees that Lessee may renew the Lease for two successive sixty (60) month renewal terms (each a "Renewal Term") by giving Lessor written notice of renewal at least one hundred eighty (180) days prior to the expiration of the Term or the first Renewal Term, respectively. The Lease will continue on the same terms and conditions during any Renewal Term, except that the rental rate per square foot shall be adjusted to ninety five percent (95%) of the prevailing market rate for comparable buildings in San Antonio at the time of renewal (taking into consideration the age and quality of the structure, type of building, location of the space in the building, definition of the leased area, estimated lease-up time, credit standing and financial status of the Lessee, term, extent of services provided by landlord, brokerage fees, leasehold improvement allowances, moving allowances, rental abatements and other incentive being offered). If there is a difference in opinion between Lessor and Lessee regarding the prevailing market rate of rental at the time of Renewal, Lessor and Lessee will negotiate in good faith to resolve the difference. Lessor and Lessee will also negotiate in good faith to establish a refurbishment allowance for the Leased Premises, which shall be administered by Lessor on the same terms and conditions as the Improvement Allowance for the Initial Lessee Improvements. Lessee may withdraw its notice of renewal if agreement on the prevailing market rate of rental is not reached within sixty (60) days of the beginning of the proposed Renewal Term. 1.10 Contingencies. Lessor agrees that if by May 1, 1999, Lessor has failed to acquire title to the land on which the Building is to be constructed, or if by June 1, 1999 it has not commenced construction of the Building, Lessee may terminate this Lease on one (1) day's advance written notice. Lessor agrees that Lessee's security deposit and seventh months' rent is due upon execution of the Lease; however Lessor and Lessee further agree that such payment will not be deposited until such time as Lessor has acquired title to the land on which the Building is to be constructed. ARTICLE 2.00 - RENT 2.01 Base Rent. Lessee agrees to pay monthly as base rent during the term of this Lease without notice, demand, counter-claim, set-off or abatement, except as otherwise set forth herein, the sum of money set forth in Section 1.04 of this Lease, which amount is payable to Lessor at the address shown above, except that Lessee shall not pay any base rent for the first six full calendar months following the Commencement Date. One monthly installment of rent is due and payable on the date of execution of this Lease by Lessee for the seventh month's rent and a like monthly installment is due and payable on or before the first day of each succeeding calendar month during the term of this Lease; provided, if the Commencement Date should be a date other than the first day of a calendar month, the free rental period set forth above will begin on the Commencement Date and the rental for the remainder of the calendar month in which the free rental period ends will be prorated and will due on the first day of the calendar month first following the end of the free rental period. Lessee shall pay, as additional rent, all other sums due under this Lease. 2.02 Additional Rent. Lessee agrees to pay as additional rent, without deduction or set-off of any kind except as otherwise set forth herein, Lessee's pro rata share of all ad valorem taxes and installments of special assessments (including dues and assessments by means of deed restrictions and/or owner's associations) lawfully levied or assessed against the Building (as hereinafter defined) of which the Leased Premises are a part and any and all insurance required herein or which is standard for similar projects (specifically including fire and casualty, commercial general liability and rent loss insurance). Said ad valorem taxes, assessments and insurance shall be prorated and paid on or before the first day of every month commencing on the Commencement Date, in advance, as additional rent. The proration shall be based upon Lessor's estimate of ad valorem taxes, assessments and insurance for the current calendar year, provided, that in the event Lessor is required under a mortgage, deed of trust, underlying lease or loan agreement covering the Building to escrow ad valorem taxes, assessments or insurance, Lessor may but shall not be obligated, to use the amount required to be escrowed as a basis for its estimate. There will be an annual accounting as to actual ad valorem taxes, assessments and insurance and appropriate payment or credits made. To the extent the Commencement Date or Termination Date of the Lease is not on the first day of the calendar year or last day of the calendar year respectively, Lessee's liability for ad valorem taxes, assessments and insurance shall be subject to a pro rata adjustment based on the number of days of any such year during which the Term is in effect. Lessee shall have the right at its expense to contest or appeal by appropriate proceedings any value assessment rendered by applicable taxing authorities and Lessor shall cooperate to the extent reasonably necessary in such contest or appeal. To the extent the Leased Premises are part of a multi-occupancy building, Lessee shall pay a pro rata share of such ad valorem taxes, assessments and insurance, such pro rata share to be equal to the product obtained by multiplying the total of such real property taxes assessments and insurance by a fraction, the numerator of which shall be the number of square feet of floor area of the Leased Premises and the denominator of which shall be the number of square feet of floor area in the Building of which the Leased Premises are a part. 2.03 Operating Expenses. Lessee agrees to pay, as additional rent, Lessee's pro rata share (as determined by the formula set forth in Section 2.02 above) of Lessor's Operating Expenses for the Building without deduction or set- off of any kind except as otherwise set forth herein. Lessor may invoice Lessee monthly for Lessee's pro rata share of the estimated Operating Expenses for each calendar year, which amount shall be adjusted from time-to-time based upon anticipated Operating Expenses. As of the date hereof, it is estimated that the Operating Expenses, taxes and insurance for calendar year 2000 will be approximately $2.20 per rentable square foot. Lessor agrees that the Lessee's portion of the Operating Expenses for common area maintenance, less costs of utilities, costs required to meet applicable laws, and capitalized costs of capital improvements and operating efficiency devices, will not exceed seventy- eight cents ($.78) per rentable square foot during the first year of the Term (the "Base Amount"), and will not increase for any year by more than five percent (5%) per year (cumulative) over the Base Amount. Within four months following the close of each calendar year, Lessor shall provide Lessee an accounting showing in reasonable detail all computations of additional rent due under this Section. In the event the accounting shows that the total of the monthly payments made by Lessee exceeds the amount of additional rent due by Lessee under this Section, such amount shall be credited against the next required payment of base rent. In the event the accounting shows that the total of the monthly payments made by Lessee is less than the amount of additional rent due by Lessee under this Section, the account shall be accompanied by an invoice for the additional rent. If this Lease shall terminate on a day other than the last day of a calendar year, the amount of any additional rent payable by Lessee applicable to the year in which such termination shall occur shall be prorated on the ratio that the number of days from the commencement of the calendar year to and including the termination date bears to 365. Provided Lessee is not in default of any terms of this Lease, Lessee shall have the right, at its own expense, to audit Lessor's books relevant to the additional rent payable under this Section. With respect to such audit, Lessee 1) may review Lessor's books during office hours, 2) must perform such audit at the location of Lessor's books, 3) must request such audit within six (6) months of receipt of its annual reconciliation of Operating Expenses, 4) must deliver to Lessor a copy of the results of such audit, 5) may not audit the same calendar year more than one time. If, as a result of such audit, it is determined that the Operating Expenses have been overstated by 3% or more, Lessor shall be required to reimburse Lessee for the costs of such audit. Assignees of Lessee may only audit periods for which they occupy the Leased Premises and subtenants of Lessee shall have no audit rights. Lessee agrees to pay any additional rent due under this Section within ten (10) days following receipt of the invoice or accounting showing additional rent due. 2.04 Definition of Operating Expenses. The term "Operating Expenses" includes all expenses incurred by Lessor with respect to the maintenance and operation of the Building (except for items described below) and includes, but is not limited to, the following: maintenance, repair and replacement costs; security; wages and benefits payable to employees of Lessor to the extent their duties are directly connected with the operation and maintenance of the Building; management fees, all services, utilities for common areas, supplies, repairs, replacement or other expenses for maintaining and operating the common parking and plaza areas; the cost, amortized over its useful life, of any expense required to be capitalized under GAAP principles other than capital improvements; the cost, amortized over its useful life, of any capital improvement made to the Building by Lessor after the date of this Lease, if required under any governmental law or regulation other than improvements made to the Building to effect compliance with the Americans With Disabilities Act (the "ADA") or as otherwise set forth herein, which capital improvements must be of mutual benefit to all tenants of the Building; and the cost, amortized over its useful life, of installation of any device or other equipment to the extent it improves the operating efficiency of any system within the Leased Premises and thereby reduces Operating Expenses, provided that, prior to installing any such device or equipment, Lessor will inform Lessee of such installation and the estimated cost savings and Lessor and Lessee must reasonably agree upon the estimated cost savings before agreeing to such installation. The term Operating Expenses does not include the following: expenses incurred to maintain the roof, foundation and structural soundness of the exterior walls of the Building; expenses incurred should the entire roof the Building need to be replaced; expenses to bring the Building into compliance with applicable law such as the ADA and Environmental Laws, expenses incurred to abate or remove any Hazardous Substance in the Building that was placed there by Lessor, income and franchise taxes of Lessor; expenses incurred in leasing to or procuring of lessees, leasing commissions, advertising expenses and expenses for the renovating of space for new lessees; interest or principal payments on any mortgage or other indebtedness of lessor; compensation paid to any employee of Lessor other than maintenance and property management personnel to the extent these services are directly associated with the operation and maintenance of the Building; any depreciation allowance or expense (except for depreciation of capital improvements and equipment specifically included within the definition of Operating Expenses); or operating expenses which are the responsibility of Lessee or any other lessee of the Building; or expenses (herein called "Defect Expenses") incurred as a result of or caused by latent defects, punch list items, or Lessor's failure to construct the Shell Building Improvements or Lessee Improvements in accordance with the requirements of this Lease and substantially in accordance with the Final Shell Plans and Specifications and Lessee Improvements Final Plans and Specifications as provided herein (such items being herein called "Defects"); and/or operating expenses otherwise caused by or resulting from Lessor's breach of its obligations under the Lease. 2.05 Late Payment Charge. Other remedies for nonpayment of rent notwithstanding, if the monthly rental payment is not received by Lessor on or before the fifth day of the month for which the rent is due, or if any other payment due Lessor by Lessee is not received by Lessor on or before the fifth day of the month next following the month in which Lessee was invoiced, Lessee agrees to pay a late payment charge of five percent (5%) of such past due amount in addition to such amounts owed under this Lease, provided, however, that Lessee is hereby granted a waiver of this late payment charge once every twelve (12) months during the term of this Lease. In addition, Lessor is entitled to charge one-hundred dollars ($100.00) for each check or payment which is not honored by Lessee's bank. Said charge is in addition to any other amounts owed under this Lease. 2.06 Security Deposit. The security deposit set forth above will be held by Lessor for the performance of Lessee's covenants and obligations under this Lease, it being expressly understood that the deposit is not an advance payment of rental or a measure of Lessor's damage in case of default by Lessee. Upon the occurrence of any event of default by Lessee or breach by Lessee of Lessee's covenants under this Lease, Lessor may, from time to time, without prejudice to any other remedy, use the security deposit to the extent necessary to make good any arrears of rent, or to repair any damage or injury, or pay any expense or liability incurred by Lessor as a result of the event of default or breach of covenant, and any remaining balance of the security deposit will be returned by Lessor to Lessee within a reasonable period of time following termination of this Lease. If any portion of the security deposit is so used or applied, Lessee shall upon ten days written notice from Lessor, deposit with Lessor by cash or cashier's check an amount sufficient to restore the security deposit to its original amount. 2.07 Holding Over. In no event may Lessee remain in the Leased Premises following the expiration or termination of this Lease without Lessor's prior written consent. If Lessee does not vacate the Leased Premises upon the expiration or termination of this Lease, Lessee agrees that it will be a tenant at will for the holdover period and that all of the terms and provisions of this Lease are applicable during that period, except that Lessee shall pay Lessor as base rental for the period of such holdover an amount equal to 1.50 times the base rent being paid by Lessee immediately prior to the expiration or termination of the Lease. Lessee agrees to vacate and deliver the Leased Premises to Lessor immediately upon Lessee's receipt of notice from Lessor to vacate. Such notice may be given pursuant to the notice provisions of Section 14.07 herein. Lessee agrees to pay the rental payable during the holdover period to Lessor on demand. No holding over by Lessee, whether with or without the consent of Lessor and notwithstanding receipt by Lessee of an invoice from Lessor for holdover rent, will extend the term of this Lease. Additionally, Lessee shall pay to Lessor all damages sustained by Lessor as a result of such holding over by Lessee. ARTICLE 3.00 - OCCUPANCY AND USE 3.01 Use. Lessee warrants and represents to Lessor that the Leased Premises may be used and occupied only for the purpose as set forth in Section 1.06. Lessee shall occupy the Leased Premises, conduct its business and control its agents, employees, invitees and visitors in such a manner as is lawful, reputable, will not create a nuisance, interfere with standard Building operations, or affect the structural integrity or design capabilities of the Building. Lessee shall not permit any operation which emits any odor or matter which intrudes outside the Leased Premises, attracts rodents, use any apparatus or machine which makes undue noise or causes vibration in any portion of the Building or otherwise interfere with, annoy or disturb any other party outside the Leased Premises, including without limitation, any other tenant in the Building. Lessee shall neither permit any waste on the Leased Premises nor allow the Leased Premises to be used in any way which would, in the reasonable opinion of Lessor, be extra hazardous on account of fire or which would in any way increase or render void the fire insurance on the Building. If at any time during the Term the State Board of Insurance or other insurance authority disallows any of Lessor's sprinkler credits or imposes an additional penalty or surcharge in Lessor's insurance premiums because of Lessee's original or subsequent placement or use of storage racks or bins, method of storage or nature of Lessee's inventory or any other act of Lessee, Lessee agrees to pay as additional rent the increase in Lessor's insurance premiums. Notwithstanding anything set forth in this Section 3.01, in no way does Lessor warrant or represent, either expressly or impliedly, that Lessee's use of the Leased Premises is in accordance with applicable codes or ordinances of the municipality within which the Building is located. Lessee agrees to indemnify and hold Lessor harmless from all claims, demands, actions, liabilities, costs, expenses, damages and obligations of any nature arising from or as a result of the use of the Leased Premises by Lessee in violation of applicable codes or ordinances of the municipalities or any other government bodies within which the building is located. The foregoing indemnification and the responsibilities of Lessee survive the termination or expiration of this Lease. 3.02 Signs. No sign of any type or description may be erected, placed or painted in or about the Leased Premises of Building, including those advertising the Leased Premises for sublease, except (i) those signs which are in conformance with Lessor's sign criteria attached as Exhibit "C" and, (ii) at ----------- Lessee's option and expense, a free-standing "monument" sign consistent in quality and appearance with the architectural standards of the Building, and as approved in advance by Lessor. All signs must be in conformance with applicable governmental requirements and limitations (including any applicable restrictive covenants). Such permitted signs must be removed by Lessee upon expiration or termination of the Lease at Lessee's sole cost and expense. Any damage or discoloration from such removal will be repaired at Lessee's sole cost and expense. 3.03 Compliance with Laws, Rules and Regulations. Lessee, at Lessee's sole cost and expense (except as provided in Section 2.04 hereof), shall comply with all laws, ordinances, orders, rules and regulations now in effect or enacted subsequent to the date hereof by state, federal, municipal or other agencies or bodies having jurisdiction over Lessee or the use, condition and occupancy of the Leased Premises except that Lessor shall be responsible for construction of the Lessee Improvements in compliance therewith as of the Commencement Date, including, but not limited to, compliance with the ADA as to the Building, but excluding the interior of the Leased Premises which is Lessee's responsibility. Lessee will comply with the rules and regulations of the Building adopted by Lessor which are set forth on a schedule attached to this Lease. At any time, Lessor may change and amend the rules and regulations in any reasonable manner not inconsistent with the terms of this Lease as may be deemed advisable for the safety, care, cleanliness, preservation of good order and operation or use of the Building or the Leased Premises. All changes and amendments to the rules and regulations of the Building will be sent by Lessor to Lessee in writing and must thereafter be carried out and observed by Lessee. 3.04 Warranty of Possession and Enjoyment. Lessor warrants that it has the right and authority to execute this Lease, and Lessee, upon payment of the required rents and subject to the terms, conditions, covenants and agreements contained in this Lease, is entitled to possession and quiet enjoyment of the Leased Premises during the full term of this Lease as well as any extension or renewal thereof. Lessor is not responsible for the acts or omissions of any other lessee or third party that may interfere with Lessee's use and enjoyment of the Leased Premises. 3.05 Inspection. Lessor or its authorized agents may at any and all reasonable times enter the Leased Premises to inspect the same, conduct tests, environmental audits or other procedures to determine Lessee's compliance with the terms hereof; to supply any other service to be provided by Lessor; to show the Leased Premises to prospective purchasers, lessees, (within six months prior to termination of this Lease), or mortgagees; to alter, improve or repair the Leased Premises or any other portion of the Building or for any other purpose Lessor deems reasonably necessary. LESSEE HEREBY WAIVES ANY CLAIM FOR DAMAGES FOR INJURY OR INCONVENIENCE TO OR INTERFERENCE WITH LESSEE'S BUSINESS, ANY LOSS OF OCCUPANCY OR USE OF THE LEASED PREMISES, AND ANY OTHER LOSS OCCASIONED BY INSPECTIONS MADE UNDER THIS SECTION INCLUDING CLAIMS RESULTING FROM THE NEGLIGENCE OF LESSOR BUT EXCLUDING ANY CLAIMS RESULTING FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF LESSOR. Lessee shall not change Lessor's lock system or in any other manner prohibit Lessor from entering the Leased Premises. Lessor is entitled to use any and all means which Lessor may deem proper to open any door in an emergency without liability therefor. During the final one-hundred eighty days of the Lease term, Lessor or its authorized agents have the right to erect or maintain on or about the Leased Premises or the Building customary signs advertising the Leased Premises for lease or sale. 3.06 Hazardous Waste. The term "Hazardous Substances," as used in this Lease means pollutants, contaminants, toxic or hazardous wastes, or any other substances, the use and/or the removal of which is required or the use of which is regulated, restricted, prohibited or penalized by any "Environmental Law," which term means any federal, state or local law, ordinance or other statute of a governmental or quasi-governmental authority relating to pollution or protection of the environment. Lessee hereby agrees that (i) no activity will be conducted on the Leased Premises that will produce any Hazardous Substance, except for such activities that are part of the ordinary course of Lessee's business activities (the "Permitted Activities"), provided said Permitted Activities are conducted in accordance with all Environmental Laws and have been approved in advance in writing by Lessor; Lessee shall obtain all required permits and pay all fees and conduct any testing required by any governmental agency; (ii) the Leased Premises will not be used in any manner for the storage of any Hazardous Substances except for the temporary storage of such materials that are used in the ordinary course of Lessee's business (the "Permitted Materials") provided such Permitted Materials are properly stored in a manner and location meeting all Environmental Laws and approved in advance in writing by Lessor; Lessee shall obtain all required permits and pay all fees and conduct any testing required by any governmental agency in connection with the Permitted Materials; (iii) no portion of the Leased Premises or Building will be used as a landfill or a dump; (iv) Lessee will not install any underground or above ground tanks of any type; (v) Lessee will not allow any surface or subsurface conditions to exist or come into existence that constitute, or with the passage of time may constitute a public or private nuisance; (vi) Lessee will not permit any Hazardous Substances to be brought onto the Leased Premises or Building, except for the Permitted Materials, and if so brought or found located thereon (except for pre-existing conditions or matters caused by the Lessor), the same must be immediately removed, with proper disposal, and all required cleanup procedures must be diligently undertaken pursuant to all Environmental Laws. Lessor or Lessor's representative's may, but are not required to, enter the Leased Premises for the purpose of inspecting the storage, use and disposal of Permitted Materials to ensure compliance with all Environmental Laws. Should it be determined, in Lessor's sole opinion, that said Permitted Materials are being improperly stored, used, or disposed of, then Lessee shall immediately take such corrective action as requested by Lessor. Should Lessee fail to take such corrective action within twenty-four (24) hours, Lessor has the right to perform such work and Lessee shall promptly reimburse Lessor for any and all costs associated with said work. If at any time during or after the term of the Lease, the Leased Premises or Building are found to be so contaminated or subject to said conditions as a result of Lessees breach of the terms of this Lease, Lessee shall diligently institute proper and thorough cleanup procedures at Lessee's sole cost. Before taking any action to comply with Environmental Laws or to clean up Hazardous Substances contaminating the Leased Premises or Building, Lessee shall submit to Lessor a plan of action, including any and all plans and documents required by any Environmental Law to be submitted to a governmental authority (collectively a "plan of action"). Such plan of action must be implemented by a licensed environmental contractor. Before Lessee begins the actions necessary to comply with Environmental Laws or to clean up contamination from Hazardous Substances, Lessor must have (1) approved the nature, scope and timing of the plan of action, and (2) approved any and all covenants and agreements to effect the plan of action. Lessee agrees to indemnify and hold Lessor harmless from all claims, demands, actions, liabilities, costs, expenses, damages and obligations of any nature arising from or as a result of the use of the Leased Premises or Building by Lessee in violation of this Section 3.06 but excluding pre-existing conditions or matters resulting from the negligence or willful misconduct of Lessor. The foregoing indemnification and the responsibilities of Lessee survive the termination or expiration of this Lease. Lessee represents that it has not been previously cited for any environmental violations by any applicable governmental agency and that there are no Permitted Materials to be stored in or upon the Leased Premises. In no event will any Permitted Materials be stored in or upon the Leased Premises without Lessor's prior written consent. 3.07 Parking and Road Use. Except as the number of spaces may be reduced pursuant to Section 3.08, Lessor will ensure that Lessee will have available to use, for the benefit of Lessee, its employees, customers, invitees and licensees, six (6) parking spaces for each 1000 rentable square feet of Leased Premises in the parking areas adjacent to the Building of which the Leased Premises are a part on an unassigned, unreserved basis, subject to reasonable regulation by Lessor. Lessor may use additional parking spaces if available, on a first come, first serve basis unless such use interferes with another tenant's rights. Lessor reserves the right in its sole discretion to designate specific areas within the parking areas for the exclusive use of visitors and invitees to the Building and others. Included in the aggregate allowance of parking spaces shall be fifteen (15) designated, reserve parking spaces for the exclusive use of Lessee, location of such spaces to be agreed upon by Lessor and Lessee and to be shown on the site plan attached hereto as Exhibit "A", provided that Lessor shall not be responsible for monitoring use of such spaces. Should Lessee increase the square footage of the Leased Premises at any time, Lessee shall be allowed additional parking spaces according to the ratio set forth herein. Any parking permitted by Lessor on any common drive areas by Lessee or any of Lessee's employees, customers, invitees or licensees will be permitted upon the express condition that all such drives must be kept clear for through traffic of all vehicles, including tractor-trailers. No driving or parking of any vehicles on non-paved areas adjoining the Building or within the Project of which the Building is a part is permitted. Lessee's failure to use all of the parking spaces allocated to it under this Section will not constitute a waiver by Lessee of the right to use those parking spaces at a later time. 3.08 Satellite Dishes. Lessor agrees that Lessee may locate up to three (3) satellite dishes in the rear parking lot (i.e., southern side of the Building), provided that each dish may not exceed thirty feet in diameter and thirty feet in height. Lessor agrees that Lessee may locate the dishes in any portion of the rear parking lot in a fenced area, said fence to be provided and maintained at the sole cost and expense of Lessee, not to exceed thirty five feet by two hundred feet, but that the number of parking spaces available to Lessee pursuant to Section 3.07 will be reduced by the actual number of parking spaces eliminated by the placement of the dishes on the location shown on Exhibit "A", provided that no satellite dish exceeds 30 feet in diameter and 30 feet in height. ARTICLE 4.00 - UTILITIES, SERVICE, SIGNAGE 4.01 Security Lighting. Lessor shall install security lighting at all entrances to the Leased Premises and in the parking lots adjacent to the Leased Premises at its expense; provided, however, the Lessor shall make no representation or warranty as to the sufficiency or adequacy of such lighting or the effectiveness thereof for security. 4.02 Building Services. Lessor shall provide the normal utility service connections to the Building. Lessee shall pay directly to the appropriate supplier the cost of all utility services to the Leased Premises, including, but not limited to, any required security deposits and initial connection charge, all charges for gas, electricity, telephone, water, sanitary and storm sewer service and security systems. If any services are jointly metered with other Leased Premises or property (for example, exterior lighting), Lessor shall make a reasonable determination of Lessee's proportionate share of the cost of such services and Lessee shall pay such share to Lessor within ten (10) days of receipt of any invoice thereof. Lessee shall pay all costs caused by Lessee introducing excessive pollutants or solids other than ordinary human waste into the sanitary sewer system, including permits, fees and charges levied by any governmental subdivision for any such pollutants or solids. Lessee shall be responsible for the installation and maintenance of any dilution tanks, holding tanks, settling tanks, sewer sampling devices, sand traps, grease traps or similar devices as may be required by any governmental subdivision for Lessee's use of the sanitary sewer system. If the Leased Premises are in a multi- occupancy Building, Lessee shall pay all surcharges levied due to Lessee's use of sanitary sewer or waste removal services insofar as such surcharges affect Lessor or other Lessees in the Building. Except as set forth herein, Lessor shall not be required to pay for any utility service, supplies or upkeep in connection with the Leased Premises or Building. Utility services for the common areas shall be part of Operating Expenses. Lessee agrees that Lessor is not liable to Lessee in any respect for damages to either person, property or business on account of any interruption or failure of utilities or services furnished by Lessor provided that Lessor uses reasonable diligence to repair the same promptly. No such interruption or failure may be construed as an eviction of Lessee or entitle Lessee to (i) any abatement of rent, (ii) terminate the Lease, or (iii) be relieved from fulfilling any covenant or agreement contained herein. Should any malfunction of the improvements or facilities to the Leased Premises or Building (which by definition do not include any improvements or facilities of Lessee above Building standard improvements) occur for any reason, Lessor shall use reasonable diligence to repair same promptly, but Lessee will not be entitled to any claim for rebate or abatement of rent or damages on account of such malfunction or of any interruptions in service occasioned thereby or resulting therefrom. 4.03 Theft or Burglary. Lessee expressly acknowledges that whether or not Lessor, from time to time, elects to provide security services, Lessor has not, nor will Lessor be deemed to have, warranted the efficiency of any security personnel, service, procedures or equipment and Lessor is not liable in any manner for the failure of any of the foregoing to prevent or control or apprehend anyone suspected of theft, personal injury, property damage or any criminal conduct in, on or around the Building. Lessee agrees that Lessor is not liable to Lessee for losses to Lessee's property or personal injury caused by criminal acts or entry by unauthorized persons into the Leased Premises. Lessee is responsible for the cost of repairs of damage and restoration of the Leased Premises following any such act. ARTICLE 5.00 - REPAIRS AND MAINTENANCE 5.01 Existing Conditions. On the Commencement Date, Lessee shall be deemed to have accepted the Leased Premises in their then existing condition, subject to all recorded matters, laws, ordinances, and governmental regulations and orders.; provided that, Lessee's acceptance of the Leased Premises shall not relieve Lessor from any maintenance and repair obligations under this Lease. Lessee acknowledges that neither Lessor nor any agent of Lessor has made any warranty or representation of any kind, either express or implied as to the condition of the Leased Premises or the suitability of the Leased Premises for Lessee's intended use other than that the Leased Premises will be constructed in accordance with the Lessee Improvements Final Plans and Specifications and will be free from Hazardous Materials. The taking of the possession of the Leased Premises by Lessee is intended by the parties to be conclusive evidence that Lessee accepts the Leased Premises and Lessor has complied with its obligations of Section 6.01 herein except for Defects (as defined in Section 2.04 hereof), the presence of Hazardous Materials, and punch list items. Prior to taking occupancy of the Leased Premises, Lessee shall sign a copy of the space plan of the Leased Premises acknowledging its condition on the date thereof (unless Lessor waives such requirement) and execute the Certificate of Acceptance form attached as Exhibit "D" accepting such condition of the Premises except for Defects, the presence of Hazardous Materials and punch list items. 5.02 Lessor Repairs And Maintenance. Lessor shall manage the Building in accordance with property management standards customary to the area and will keep the Building in compliance with all legal and regulatory requirements (including Environmental Laws, Americans with Disabilities Act, and municipal codes and ordinances). Lessor agrees to indemnify and hold Lessee harmless from all claims, demands, actions, liabilities, costs, expenses, damages and obligations of any nature arising from or as a result of the failure of the building to be in compliance with applicable laws and regulation. Lessor is not required to make any improvements, replacements or repairs of any kind or character to the Leased Premises during the Term. Lessor shall maintain the roof, foundation and structural soundness of exterior walls of the Building, mechanical, electrical and plumbing systems serving the Building and common areas, in good repair and condition except for reasonable wear and tear. Lessor shall also perform all ground maintenance, landscaping, pest control, and removal of debris from outside receptacles. Lessee agrees that Lessor is not liable to Lessee, except as expressly provided in this Lease, for any damage or inconvenience, and Lessee is not entitled to any abatement or reduction of rent by reason of any repairs, reasonable alterations or additions made by Lessor under this Lease. Should Lessor not repair or maintain the Building or the Leased Premises as required hereunder, after providing written notice to Lessor and after a thirty (30) day opportunity to cure by Lessor, or such longer period as shall be necessary, provided that Lessor has not commenced such repair within such 30 day period and has not diligently pursued same thereafter, Lessee may make such repairs or perform such maintenance and Lessor shall promptly reimburse Lessee for any reasonable expenses incurred by Lessee in performing such work, or if the Leased Premises are untenantable, Lessee may terminate this Lease. 5.03 Lessee Repairs And Maintenance. Lessee shall, at its sole cost and expense, maintain and repair the Leased Premises in good repair and condition, including, but not limited to carpet or other floor covering, interior partitions, doors, interior side of demising walls, telephone and computer cabling that serves Lessee's equipment exclusively, any supplemental air conditioning, interior water closets, kitchens and plumbing in connection therewith and any alterations, additions or improvements made by or on behalf of Lessee. Lessee shall take good care of all personal property and fixtures located within the Leased Premises. Lessee shall repair and pay for any damage caused by any act or omission of Lessee or Lessee's agents, employees, invitees, licensees or visitors to the Leased Premises, the Building, or the project. If Lessee fails to maintain, repair or replace promptly as required herein, Lessor may, at its option, and following at least thirty (30) days' advance written notice to Lessee, perform on Lessee's behalf and charge the cost of such performance to Lessee as additional rent which is due and payable by Lessee within ten (10) days from receipt of Lessor's invoice. Costs incurred under this section are the total responsibility of Lessee. 5.04 Request for Repairs. All requests for repairs or maintenance that are the responsibility of Lessor pursuant to any provision of this Lease must be made in writing to Lessor at the address in Section 1.05 and delivered pursuant to Section 14.07. After receipt of written notice, Lessor is entitled to a reasonable time within which to perform such repairs or maintenance. 5.05 Lessee Damages. Lessee shall not allow any damage to be committed on any portion of the Leased Premises or Building, and at the termination of this Lease, by lapse of time or otherwise, Lessee shall deliver the Leased Premises to Lessor in as good condition as existed at the Commencement Date of this Lease, ordinary wear and tear and casualty loss excepted. Lessor's standard move-out checklist will be followed by Lessee to ensure compliance with this provision. The cost and expense of any repairs necessary to restore the condition of the Leased Premises must be borne by Lessee. Should Lessor be required to expend any sums to ensure compliance with this Section 5.05, Lessee shall reimburse Lessor within ten (10) days of receipt of notice from Lessor. 5.06 Maintenance Contract. Lessor may, as an Operating Expenses, during the term of this Lease maintain a regularly scheduled preventative maintenance/service contract on an annual basis with a maintenance contractor for the servicing of all general sprinkler systems, hot water, heating and air conditioning systems and equipment within or servicing the Building. Lessee shall maintain, at Lessee's sole cost and expense, a regularly scheduled preventative maintenance/service contract on an annual basis with a maintenance contractor for the servicing of all hot water, heating and air conditioning systems within or exclusively servicing the Leased Premises. ARTICLE 6.00 - ALTERATIONS AND IMPROVEMENTS 6.01 Initial Lessee Improvements. A. Lessee Improvements. Lessee shall prepare final plans and ------------------- specifications for construction of the Lessee Improvements desired by Lessee and shall deliver to Lessor by July 1, 1999, two (2) copies of such plans and specifications and the names of two proposed contractors to construct the Lessee Improvements for Lessor approval. Lessor will promptly either approve of the plans and specifications and the contractors, or communicate its objections, and if Lessor has objections, the Lessor will work diligently with Lessee to resolve any objections such that approval of the plans and specifications and names of contractors is given within fifteen (15) days of receipt. Lessor shall be deemed to have approved the plans and specifications and the contractors unless Lessor shall have provided written notice to Lessee of Lessor's objections thereto within fourteen (14) days following the delivery thereof by Lessee to Lessor. The Lessor approved final plans and specifications for the Lessee Improvements are herein called the "Lessee Improvements Final Plans and Specifications". All reasonable costs involved in approving, drafting and preparing the Lessee Improvements Final Plans and Specifications shall be charged against the Improvement Allowance described below. Lessor shall apply for building permits to construct the Lessee Improvements and will submit bid requests to the two contractors selected by Lessee and the contractor for the Shell Building Improvements no later than two (2) days following approval of the Lessee Improvements Final Plans and Specifications. Contractors will be required to submit their bids no later than thirty (30) days following receipt of the bid request. Lessee shall have fifteen (15) days from receipt of all bids to select the contractor for the Lessee Improvements. Except for immaterial field changes, modifications to the Lessee Improvements Final Plans and Specifications must be made and accepted only by written change order or agreement signed by Lessor and Lessee and will constitute an amendment to this Lease. Lessee shall be responsible for payment in advance of all work and construction resulting from changes in the Lessee Improvements Final Plans and Specifications requested by Lessee if the additional cost attributable to the changes exceed the Improvement Allowance by more than $3.00 as described in subparagraph (c) below. The Lessee Improvements Final Plans and Specifications (when approved by Lessor and Lessee) are incorporated in this Lease by reference. For the purpose of this Section, an "immaterial field change" shall mean such field changes which are required by any governmental authority or changes which (i) do not affect the size, configuration, structural integrity, quality, character, architectural appearance and standard of workmanship contemplated in the Lessee Improvements Final Plans and Specifications, (ii) will not result in any default in any obligation to any person or violation of any governmental requirements, and (iii) the cost of or reduction resulting from any single field change or extra does not exceed $5,000.00. B. Subject to the Lessee's payment obligations under (c) below, Lessor shall cause the Lessee Improvements to be completed in a good and workmanlike manner, in accordance with all applicable laws and regulations, and in accordance with the Lessee Improvements Final Plans and Specifications. Lessor shall coordinate construction of Lessee Improvements, keeping Lessee informed on the progress of the work and of any expenditures made to perform such work and for such services shall be paid a construction management fee of five percent (5%) of the Hard Costs of such Lessee Improvements, which fee shall be paid out of the Improvement Allowance (as hereinafter defined). "Hard Costs" are the costs of labor, material and permits and licenses necessary to construct the Lessee Improvements, and do not include any legal, architectural, management or engineering expenses. Lessor agrees that all construction contracts and architectural contracts shall provide that the general contractor and architect for the project shall provide status reports and other reports relating to the construction of the Lessee Improvements to Lessee as well as to Lessor, and Lessee shall have the right at any and all times to inspect the Lessee Improvements at all stages of construction. Lessor agrees to cooperate with Lessee on any changes to the Lessee Improvements and agrees to provide to Lessee copies of all draw requests and the underlying documentation relating to the draw requests to Lessee. Lessor agrees to keep the Leased Premises free from any and all mechanic's or materialman's liens and to pay promptly for all work to be performed relative to the construction project. In the event any such lien attaches to the Leased Premises as a result of Lessor's actions, and if Lessor does not contest the lien diligently and in good faith or does not proceed in its effort to remove the lien, then, in addition to any other right or remedy of Lessee, Lessee may, but is not obligated to, obtain the release or otherwise discharge the same or to obtain a bond in satisfaction of same. Any amount paid by Lessee in order to release or discharge any such lien must be paid by Lessor to Lessee on demand. C. Lessor shall provide Lessee with an improvement allowance of $22.00 per rentable square foot of the Leased Premises (the "Improvement Allowance"). The Improvement Allowance shall be paid out from time to time to pay for costs incurred by Lessor in connection with the Lessee Improvements, including costs of Lessee's architect and/or space planner, the construction management fee of five percent (5%) of the Hard Costs of construction, and third party contractors as the Lessee Improvements progress. Lessee shall pay those costs of construction of the Lessee Improvements in excess of the Improvement Allowance, if any, and such amounts shall be paid by Lessee to Lessor within thirty (30) days following receipt by Lessee of a written request therefor from Lessor. In the event the costs and expenses of the Lessee Improvements shall exceed the Improvement Allowance, then at the option of Lessee and upon written request by Lessee and approval by Lessor's mortgagee/lender, the Lessor shall fund up to $3.00 per rentable square foot within the Leased Premises of such excess amounts and such excess amounts so funded by Lessor shall be paid by Lessee to Lessor as additional monthly rent. The amount to be added on a monthly basis to Base Rent shall be that monthly amount necessary to fully amortize, on a straight line basis, the excess amount over the term of this Lease at a ten percent (10%) interest rate. 6.02 Additional Lessee Improvements. Except as provided in Section 6.01 above, Lessee shall not make or allow to be made any material alterations or physical additions in or to the Leased Premises without complying with all local, state and federal ordinances, laws, statutes and without first obtaining the written consent of Lessor, which consent may not be unreasonably withheld. In any event, Lessee shall provide Lessor with a copy of the plans and specifications for any such alterations or improvements. Any alterations, physical additions or improvements to the Leased Premises (including Lessee Improvements) made by Lessor or Lessee become the property of Lessor and must be surrendered to Lessor upon the termination of this Lease without credit to Lessee. This clause does not apply to moveable equipment, trade fixtures, personal property or furniture owned by Lessee, which may be removed by Lessee at the end of the term of this Lease if Lessee is not then in default, if such equipment and furniture are not then subject to any other rights, liens and interest of Lessor and such removal can be accomplished without material damage to the Leased Premises and, if there shall exist any damage caused by such removal, such damage shall be repaired by Lessee. Upon completion of any such work by Lessee, Lessee shall provide Lessor with "as built plans", copies of all construction contracts and proof of payment for all labor and materials. Notwithstanding the above, Lessee shall be allowed, without prior approval of Lessor, to make $5,000.00 in non-structural alterations in any one calendar year, not to exceed an aggregate of $25,000.00 over the initial term of the Lease. 6.03 Mechanic's Lien. Lessee will not permit any mechanic's or materialman's lien(s) or other lien to be placed upon the Leased Premises or the Building and nothing in the Lease is intended in any way to constitute the consent by (or request of) Lessor, express or implied, by inference or otherwise, to any person for the performance of any labor or the furnishing of any materials to the Leased Premises, or any part that would give the rise to any mechanic's or materialman's or other lien against the Leased Premises. In the event any such lien attaches to the Leased Premises as a result of Lessee's actions, and if Lessee does not contest the lien diligently and in good faith or does not succeed in its effort to remove the lien, then, in addition to any other right or remedy of Lessor, Lessor may, but is not obligated to, obtain the release or otherwise discharge the same or to obtain a bond in satisfaction of same. Any amount paid by Lessor in order to release or discharge any such lien must be paid by Lessee to Lessor on demand as additional rent. ARTICLE 7.00 - CASUALTY AND INSURANCE 7.01 Substantial Destruction. If the Leased Premises or any part thereof are damaged by fire or other casualty, Lessee shall give prompt written notice thereof to Lessor. 1) If the Leased Premises are totally destroyed by fire or other casualty, 2) if the Leased Premises are damaged so that rebuilding cannot reasonably be completed within one hundred eighty (180) days after the date of written notification by Lessee to Lessor of the destruction, 3) if the Leased Premises are part of a Building which is substantially destroyed (even though the Leased Premises are not totally or substantially destroyed), 4) if the Leased Premises or Building is damaged by fire or other casualty and applicable law would prevent rebuilding to substantially the condition prior to such fire or casualty, 5) if any mortgagee requires the insurance proceeds payable as a result of such casualty to be applied to the payment of the mortgage debt or 6) the Leased Premises are materially damaged and less than two (2) years remain on the Term on the date of such casualty, Lessor or Lessee may at their option terminate this Lease by providing the other written notice thereof within sixty (60) days of such casualty and all obligations under the Lease shall terminate as of the date of the casualty; provided, however, Lessee shall not have the right to terminate this Lease if Lessor has theretofore commenced and is diligently pursuing rebuilding. 7.02 Partial Destruction. If this Lease is not terminated under Section 7.01, Lessor shall at its sole risk and expense proceed with reasonable diligence to rebuild or repair the Building or other improvements to substantially the same condition in which they existed prior to the damage, provided, Lessor has no obligation to repair or rebuild Lessee's furniture, fixtures or personal property. If the destruction was caused by an act or omission of Lessee, its employees, agents, or invitees, Lessee shall pay Lessor the difference between the actual cost of rebuilding or repairing the Leased Premises and any insurance proceeds received by Lessor. If the Leased Premises are to be rebuilt or repaired and are untenantable in whole or in part following the damage, either because of the damage or the rebuilding or repairing, and the damage or destruction was not caused or substantially contributed to by any act or negligence of Lessee, its agents, employees, invitees or those for whom Lessee is responsible, the rent payable under this Lease during the period for which the Leased Premises are untenantable will be adjusted to such an extent as may be fair and reasonable under the circumstances. If Lessor fails to complete the necessary repairs or rebuilding within one hundred fifty days from the date of the destruction, Lessee may at its option terminate this Lease by delivering written notice of termination to Lessor, whereupon all rights and obligations under this Lease cease to exist. If any damage or destruction occurs to the Leased Premises during the last twenty-four (24) months of the Lease term, Lessor may elect to terminate this Lease as of the date Lessee notifies Lessor of such damage. Lessor and Lessee hereby waive the provisions of any law from time to time in effect during the Term relating to the effect upon leases of partial or total destruction of Leased property and agree that their respective rights in the event of damage or destruction are those specifically set forth herein. 7.03 Property Insurance. Lessor shall at all times during the term of this Lease maintain a policy or policies of insurance with the premiums paid in advance, issued by and binding upon some solvent insurance company having an "A" rating or better, insuring the Building against all risk of direct physical loss in an amount equal to the full replacement cost of the Building structure and its improvements as of the date of the loss, providing protection against all perils, including, without limitations fire, extended coverage, vandalism, malicious mischief, a standard mortgagee clause and rental coverage; provided, Lessor is not obligated in any way or manner to insure any personal property (including, but not limited to, any furniture, machinery, goods or supplies) of Lessee upon or within the Leased Premises, any fixtures installed or paid for by Lessee upon or within the Leased Premises, or any improvements which Lessee may construct on the Leased Premises. The rental insurance policy will be for the full rental value for a period of one year, which insurance also covers real estate taxes, insurance and other amounts which might be due Lessor from Lessee pursuant to the terms of this Lease. Lessee agrees that it is not entitled to the proceeds of any policy of insurance maintained by Lessor even if the cost of such insurance is borne by Lessee as set forth in Article 2.00. Notwithstanding the foregoing, in the event Lessor has a net worth in excess of $50,000,000, it shall be entitled to self insure against all risk provided for in this paragraph in lieu of obtaining the insurance set forth herein. 7.04 Waiver of Subrogation. ANYTHING IN THIS LEASE TO THE CONTRARY NOT WITHSTANDING, LESSOR AND LESSEE HEREBY WAIVE AND RELEASE EACH OTHER OF AND FROM ANY AND ALL RIGHT OF RECOVERY, CLAIM, ACTION OR CAUSE OF ACTION, AGAINST EACH OTHER, THEIR AGENTS, OFFICERS AND EMPLOYEES, FOR ANY LOSS OR DAMAGE THAT MAY OCCUR TO THE LEASED PREMISES, IMPROVEMENTS TO THE BUILDING OF WHICH THE LEASED PREMISES ARE A PART, OR PERSONAL PROPERTY WITHIN THE BUILDING, BY REASON OF FIRE, EXPLOSION, OR ANY OTHER OCCURRENCE, REGARDLESS OF CAUSE OR ORIGIN, INCLUDING NEGLIGENCE OF LESSOR OR LESSEE AND THEIR AGENTS, OFFICERS AND EMPLOYEES. LESSOR AND LESSEE AGREE IMMEDIATELY TO GIVE THEIR RESPECTIVE INSURANCE COMPANIES WHICH HAVE ISSUED POLICIES OF INSURANCE COVERING ALL RISK OF DIRECT PHYSICAL LOSS, WRITTEN NOTICE OF THE TERMS OF THE MUTUAL WAIVERS CONTAINED IN THIS SECTION AND TO HAVE THE INSURANCE POLICIES PROPERLY ENDORSED, IF NECESSARY, TO PREVENT THE INVALIDATION OF THE INSURANCE COVERAGE BY REASON OF THE MUTUAL WAIVERS. 7.05 Hold Harmless. Lessor will not be liable to Lessee's employees, agents, invitees, licensees or visitors, or to any other person, for an injury to person or damage to property on or about the Leased Premises caused by any act or omission of Lessee, its agents, servants or employees, any tenant in the Building of which the Leased Premises are a part, or of any other person entering upon the Leased Premises under express or implied invitation by Lessee, the failure or cessation of any service provided by Lessor (including security service and devices or caused by leakage of gas, oil, water or steam or by electricity emanating from the Leased Premises) except as provided in this Lease. Lessee agrees to indemnify and hold harmless Lessor of and from any loss, attorney's fees, expenses or claims arising out of any such damage or injury except for damages or injury caused by Lessor's negligence, recklessness or willful misconduct. 7.06 A. At all times commencing on and after the earlier of the Commencement Date and the date Lessee or its agents, employees or contractors enters the Leased Premises for any purpose, Lessee shall carry and maintain, at its sole cost and expense: 1. Commercial General Liability Insurance applicable to the Leased Premises and its appurtenances providing, on an occurrence basis, a minimum combined single limit of Two Million Dollars ($2,000,000.00), with a contractual liability endorsement covering Lessee's indemnity obligations under this Lease; 2. All Risks of Physical Loss Insurance written at replacement cost value and with a replacement cost endorsement covering all of Lessee's personal property and improvements in the Leased Premises; 3. Workers' Compensation Insurance as required by the state in which the Leased Premises is located and in amounts as may be required by applicable statute; 4. Business interruption or loss of income insurance in amounts satisfactory to Lessor; and 5. Whenever good business practice, in Lessor's reasonable judgment, indicates the need of additional insurance coverage or different types of insurance in connection with the Leased Premises or Lessee's use and occupancy thereof, Lessee shall, upon request, obtain such insurance at Lessee's expense and provide Lessor with evidence thereof. B. Before any repairs, alterations, additions, improvements, or construction are undertaken by or on behalf of Lessee, Lessee shall carry and maintain, at its expense, or Lessee shall require any contractor performing work on the Leased Premises to carry and maintain, at no expense to Lessor, in addition to Workers' Compensation Insurance as required by the jurisdiction in which the Building is located, All Risk Builder's Risk Insurance in the amount of the replacement cost of any alterations, additions or improvements (or such other amount reasonably required by Lessor) and Commercial General Liability Insurance (including, without limitation, Contractor's Liability coverage, Contractual Liability coverage and Completed Operations coverage,) written on an occurrence basis with a minimum combined single limit of Two Million Dollars ($2,000,000.00) and adding "the named Lessor hereunder (or any successor thereto), and its respective members, principals, beneficiaries, partners, officers, directors, employees, agents and any Mortgagee(s)", and other designees of Lessor as the interest of such designees appear, as additional insureds (collectively referred to as the "Additional Insureds"). C. Any company writing any insurance which Lessee is required to maintain or cause to be maintained pursuant to the terms of this Lease (all such insurance as well as any other insurance pertaining to the Leased Premises or the operation of Lessee's business therein being referred to as "Lessee's Insurance"), as well as the form of such insurance, are at all times subject to Lessor's reasonable approval, and each such insurance company must have an A.M. Best rating of "A-" or better and be licensed and qualified to do business in the state in which the Leased Premises are located. All policies evidencing Lessee's Insurance (except for Workers' Compensation Insurance) must specify Lessee as named insured and the Additional Insureds as additional insureds. Provided that the coverage afforded Lessor and any designees of Lessor is not reduced or otherwise adversely affected, all of Lessee's Insurance may be carried under a blanket policy covering the Leased Premises and any other of Lessee's locations. All policies of Lessee's Insurance must contain endorsements requiring that the insurer(s) give Lessor and its designees at least thirty (30) days' advance written notice of any change, cancellation, termination or lapse of said insurance. Lessee shall be solely responsible for payment of premiums for all of Lessee's Insurance. Lessee shall deliver to Lessor at least fifteen (15) days prior to the time Lessee's Insurance is first required to be carried by Lessee, and upon renewals at least fifteen (15) days prior to the expiration of any such insurance coverage, certified copies of all policies procured by Lessee in compliance with its obligations under this Lease. The limits of Lessee's Insurance do not in any manner limit Lessee's liability under this Lease. D. Lessee shall not do or fail to do anything in, upon or about the Leased Premises which will (1) violate the terms of any of Lessor's insurance policies; (2) prevent Lessor from obtaining policies of insurance acceptable to Lessor or any Mortgagees; or (3) result in an increase in the rate of any insurance on the Leased Premises, the Building, any other property of Lessor or of others within the Building. In the event of the occurrence of any of the events set forth in this Section, Lessee shall pay Lessor upon demand, as additional rent, the cost of the amount of any increase in any such insurance premium, provided that the acceptance by Lessor of such payment may not be construed to be a waiver of any rights by Lessor in connection with a default by Lessee under the Lease. If Lessee fails to obtain the insurance coverage required by this Lease, Lessor may, at its option, obtain such insurance for Lessee, and Lessee shall pay, as additional rent, the cost of all premiums thereon and all of Lessor's costs associated therewith. ARTICLE 8.00 - CONDEMNATION 8.01 Substantial Taking. If all or a substantial portion of the Leased Premises or a substantial portion of the Building of which the Leased Premises are a part (even though the Leased Premises are not taken) are taken for any public or quasi-public use under any governmental law, ordinance or regulation, or by right of eminent domain or by purchase in lieu thereof, and the taking would prevent or materially interfere with the use of the Leased Premises or the Building of which the Leased Premises are a part for the purpose for which it is then being used, then Lessor and Lessee have the option to terminate this Lease and to abate the rent during the unexpired portion of this Lease effective on the date title or physical possession is taken by the condemning authority, whichever occurs first. All proceeds of any taking are the sole property of Lessor and Lessee agrees that Lessee is not entitled to any condemnation award or proceeds in lieu thereof. 8.02 Partial Taking. If a portion of the Leased Premises or a portion of the Building of which the Leased Premises are a part are taken for any public or quasi-public use under any governmental law, ordinance or regulation, or by right of eminent domain or by purchase in lieu thereof, and this Lease is not terminated as provided in Section 8.01 above, Lessor shall at Lessor's sole risk and expense, restore and reconstruct the Building and other improvements on the Leased Premises to the extent necessary to make it reasonably tenantable; provided, if the damages received by Lessor are insufficient to cover the costs of restoration, Lessor may terminate this Lease. The rent payable under this Lease during the unexpired portion of the term will be adjusted to such an extent as may be fair and reasonable under the circumstances. All proceeds of any taking are the sole property of Lessor and Lessee agrees that Lessee is not entitled to any condemnation award or proceeds in lieu thereof. ARTICLE 9.00 - ASSIGNMENT OR SUBLEASE 9.01 Lessor Assignment. Lessor may sell, transfer or assign, in whole or in part, its rights and obligations under this Lease and in the Leased Premises. Any such sale, transfer or assignment will release Lessor from any and all liabilities under this Lease arising after the date of such sale, assignment or transfer, so long as such transferee or assignee assumes the obligations of Lessor hereunder. 9.02 Lessee Assignment. Except for an assignment to an affiliate and except in the case of a merger or consolidation by Lessee with or into another entity, Lessee shall not assign, in whole or in part, this Lease, or allow it to be assigned, in whole or in part, or mortgage or pledge the same or sublet the Leased Premises, in whole or in part, without the prior written consent of Lessor which consent may not be unreasonably withheld, and in no event will any such assignment or sublease ever release Lessee or any guarantor from any obligation or liability hereunder unless consented to by Lessor. No assignee or sublessee of the Leased Premises or any portion thereof may assign or sublet the Leased Premises or any portion thereof. 9.03 Conditions of Assignment. If Lessee desires to assign or sublet all or any part of the Leased Premises or grant any license, concession or other right of occupancy of any portion of the Leased Premises, it must so notify Lessor at least thirty days in advance of the date on which Lessee desires to make such assignment or sublease. Lessee must provide Lessor with a copy of the proposed assignment or sublease and such information as Lessor might reasonably request concerning the proposed sublessee or assignee to allow Lessor to make informed judgments as to the financial condition, reputation, operations and general desirability of the proposed sublessee or assignee. Within fifteen days after Lessor's receipt of Lessee's proposed assignment or sublease and all required information concerning the proposed sublessee or assignee, Lessor may, in its reasonable discretion, either: (1) consent to the proposed assignment or sublease, or (2) refuse to consent to the proposed assignment or sublease, which refusal is deemed to have been exercised unless Lessor gives Lessee written notice providing otherwise. Upon the occurrence of an event of default, if all or any part of the Leased Premises are then assigned or sublet, Lessor, in addition to any other remedies provided by this Lease or provided by law, may, at its option, collect directly from the assignee or sublessee all rents becoming due to Lessee by reason of the assignment or sublease, and Lessor will be entitled to a security interest in all properties on the Leased Premises to secure payment of such sums. Lessee agrees that any collection directly by Lessor from the assignee or sublessee is not intended to constitute a novation or a release of Lessee or any guarantor from the further performance of its obligations under this Lease. 9.04 Subordination. Lessee accepts this Lease subject and subordinate to any recorded mortgage or deed of trust lien presently existing or hereafter created upon the Building or project of which the Leased Premises are a part (provided, however, that any such mortgagee may, at any time, subordinate such mortgage, deed of trust or other lien to this Lease) and to all existing recorded restrictions, covenants, easements and agreements with respect to the Building and to any renewals thereof. Lessee agrees that this clause is self- operative and no further instrument of subordination is required to effect such subordination. Lessor is hereby irrevocably vested with full power and authority to subordinate Lessee's interest under this Lease to any first mortgage or deed of trust lien hereafter placed on the Leased Premises, and Lessee agrees upon demand to execute additional reasonable instruments subordinating this Lease as Lessor may require. If the interests of Lessor under this Lease are transferred by reason of foreclosure or other proceedings for enforcement of any first mortgage or deed of trust lien on the Leased Premises, Lessee is bound to the transferee (sometimes called the "Purchaser") at the option of the Purchaser, under the terms, covenants and conditions of this Lease for the balance of the term remaining, including any extensions or renewals, with the same force and effect as if the Purchaser were Lessor under this Lease, and, if requested by the Purchaser, Lessee agrees to attorn to the Purchaser, including the first mortgagee under any such mortgage if it be the Purchaser, as its Lessor. Lessee will not be entitled to any credits as against Purchaser any prepaid rents or offsets against or credits due from Lessor, except as provided under the terms of any non-disturbance agreement provided pursuant to Section 13.14 of this Lease. 9.05 Estoppel Certificates. Lessee agrees to furnish, from time to time, within ten (10) days after receipt of a request from Lessor, Lessor's mortgagee or any potential purchaser of the Building, a statement certifying, if applicable, the following: Lessee is in possession of the Leased Premises; the Leased Premises are acceptable; the Lease is in full force and effect; the Lease is unmodified; Lessee claims no present charge, lien, or claim of offset against rent; the rent is paid for the current month, but is not prepaid for more than one month and will not be prepaid for more than one month in advance; there is no existing default by reason of some act or omission by Lessor; and such other matters as may be reasonably required by Lessor, Lessor's mortgagee or any potential purchaser. Lessee's failure to deliver such statement, in addition to being a default under this Lease, may be deemed to establish conclusively that this Lease is in full force and effect except as declared by Lessor, that Lessor is not in default of any of its obligations under this Lease and that Lessor has not received more than one month's rent in advance. Any notice and cure provisions set forth in any other part of this Lease does not apply to a default of this Section 9.05. ARTICLE 10 - LIENS 10.01 Landlord's Lien. As security for payment of rent, damages and all other payments required to be made by this Lease, Lessee hereby grants to Lessor a lien upon all property of Lessee now or subsequently located upon the Leased Premises and Lessee agrees not remove such property from the Leased Premises except in the ordinary course of business, provided at the time of such removal Lessee is not in default. If Lessee abandons or vacates any substantial portion of the Leased Premises or is in default in the payment of any rentals, damages or other payments required to be made by this Lease or is in default of any other provision of this Lease, Lessor may enter upon the Leased Premises, by picking or changing locks if necessary, and take possession of all or any part of the personal property, and may sell all or any part of the personal property at a public or private sale, in one or successive sales, with or without notice, to the highest bidder for cash, and, on behalf of Lessee, sell and convey all or part of the personal property to the highest bidder, delivering to the highest bidder all of Lessee's title and interest in the personal property sold. The proceeds of the sale of the personal property shall be applied by Lessor toward the reasonable costs and expenses of the sale, including attorney's fees, and then toward the payment of all sums then due by Lessee to Lessor under the terms of this Lease. Any excess remaining will be paid to Lessee or any other person entitled thereto by law. 10.02 Uniform Commercial Code. This Lease is intended as and constitutes a security agreement within the meaning of the Uniform Commercial Code of the state in which the Leased Premises are situated. Lessor, in addition to the rights prescribed in this Lease, has all of the rights, titles, liens and interests in and to Lessee's property, now or hereafter located upon the Leased Premises, which may be granted a secured party, as that term is defined, under the Uniform Commercial Code to secure to Lessor payment of all sums due and the full performance of all Lessee's covenants under this Lease. Lessee will on request execute and deliver to Lessor a financing statement for the purpose of perfecting Lessor's security interest under this Lease or Lessor may file this Lease or a copy thereof as a financing statement. Unless otherwise provided by law and for the purpose of exercising any right pursuant to this Section, Lessor and Lessee agree that reasonable notice has been given if such notice is given by ten days written notice, certified mail, return receipt requested, to Lessor or Lessee at the addresses specified herein. 10.03 Landlord's Lien Waiver. Upon request by Lessee, Lessor will execute a lien waiver in favor of Lessee's lender in the form prescribed by Lessee's lender. ARTICLE 11 - DEFAULT AND REMEDIES 11.01 Default by Lessee. The following are events of default by Lessee under this Lease: A. Lessee fails to pay, within ten (10) days of when due, any installment of rent or any other payment required pursuant to this Lease, and such failure shall be continuing five (5) days following written notice (which notice may include the cancellation notice described in Section 11.02(E) hereof) thereof from Lessor to Lessee; provided, however, in no event shall Lessee have the right to receive or Lessor have the obligation to provide, as a prerequisite to an event of default, more than two (2) written notices within any twelve (12) month period; B. Lessee fails to comply with any term, provision or covenant of this Lease, other than the payment of rent and fails to cure the failure within thirty (30) days of receipt of written notice (which notice may include the cancellation notice described in Section 11.02(E) hereof) from Lessor; C. Lessee or any guarantor of Lessee's obligations hereunder files a petition or is adjudged bankrupt or insolvent under any applicable federal or state bankruptcy or insolvency law, or admits that it cannot meet its financial obligations as they become due; or a receiver or trustee is appointed for all or substantially all of the assets of Lessee or such guarantor; or Lessee or any guarantor of Lessee's obligations hereunder makes a transfer in fraud of creditors or makes an assignment for the benefit of creditors; or D. Lessee does or permits to be done any act which results in a lien being filed against the Leased Premises or the Building and Lessee fails to contest the lien diligently and in good faith or does not prevail, within sixty (60) days of the date the lien is filed, in its efforts to remove the lien. 11.02 Remedies for Lessee's Default. Upon the occurrence of any event of default set forth in this Lease, Lessor is entitled to pursue any one or more of the remedies set forth herein without any notice or demand. A. Without declaring the Lease terminated, Lessor may enter upon and take possession of the Leased Premises, by picking or changing locks if necessary, and lock out, expel or remove Lessee and any other person who may be occupying all or any part of the Leased Premises without being liable for any claim for damages, and relet the Leased Premises on behalf of Lessee and receive the rent directly by reason of the reletting; provided however, that Lessor has no obligation to relet the Leased Premises so as to mitigate the amount for which Lessee is liable. Lessee agrees to pay Lessor on demand any deficiency that may arise by reason of any reletting of the Leased Premises; further, Lessee agrees to reimburse Lessor for any reasonably expenditures made by it in order to relet the Leased Premises, including, but not limited to, leasing commissions, lease incentives, remodeling and repair costs. B. Without declaring the Lease terminated, Lessor may enter upon the Leased Premises, by picking or changing locks if necessary, without being liable for any claim for damages, except for damages arising from Lessor's negligence, recklessness or willful misconduct, and do whatever Lessee is obligated to do under the terms of this Lease. Lessee agrees to reimburse Lessor on demand for any expenses which Lessor may incur in effecting compliance with Lessee's obligations under this Lease. C. Lessor may terminate this Lease, in which event Lessee shall immediately surrender the Leased Premises to Lessor, and if Lessee fails to surrender the Leased Premises, Lessor may, without prejudice to any other remedy which it may have for possession or arrearages in rent, enter upon and take possession of the Leased Premises, by picking or changing locks if necessary, and lock out, expel or remove Lessee and any other person who may be occupying all or any part of the Leased Premises without being liable for any claim for damages. Lessee agrees to pay on demand the amount of all loss and damage which Lessor may suffer by reason of the termination of this Lease under this Section, including without limitation, loss and damage due to the failure of Lessee to maintain and or repair the Leased Premises as required hereunder and/or due to the inability to relet the Leased Premises on terms satisfactory to Lessor or otherwise, and any reasonable expenditures made by Lessor in order to relet the Leased Premises, including, but not limited to, leasing commissions, lease incentives, and remodeling and repair costs; provided however, that Lessor will have no obligation to relet the Leased Premises so as to mitigate the amount for which Lessee is liable. In addition, upon termination Lessor may collect from Lessee the value of all future rentals required to be paid under this Lease from the date Lessor terminates the Lease until the original termination date in accordance with applicable law less amounts collected as rent by Lessor if the Leased Premises are re- let. Notwithstanding anything contained in this Lease to the contrary, this Lease may be terminated under this section by Lessor only by mailing or delivering written notice of such termination to Lessee, and no other act or omission of Lessor constitutes a termination of this Lease. D. In the event that Lessor exercises its remedy to lock out Lessee in accordance with any provision of this Lease, Lessee agrees that no notice is required to be posted by Lessor on any door to the Leased Premises (or elsewhere) disclosing the reason for such action or any other information, and that Lessor is not obligated to provide a key to the changed lock to Lessee unless Lessee has first: 1. brought current all payments due to Lessor under this Lease (unless Lessor has terminated this Lease, in which event payment of all past due amounts do not obligate Lessor to provide a key); 2. fully cured and remedied to Lessor's reasonable satisfaction all other defaults of Lessee under this Lease (unless Lessee has abandoned or vacated the Leased Premises, in which event Lessor is not obligated to provide the new key to Lessee under any circumstances); and 3. provided Lessor with additional security deposit and assurances reasonably satisfactory to Lessor that Lessee intends to and is able to meet and comply with its future obligations under this Lease, both monetary and nonmonetary. Lessor may, upon written request by Lessee, at Lessor's convenience, upon receipt by Lessor of an amount necessary to reimburse itself for time and expense in providing such service, and upon Lessee's execution and delivery of such waivers and indemnities as Lessor may require at Lessor's option either: a. escort Lessee or its specifically authorized employees or agents to the Leased Premises to retrieve personal belongings of Lessee's employees and property of Lessee that is not subject to a Security Interest provided in this Lease; or b. obtain from Lessee a list of such property and arrange for such items to be removed from the Leased Premises and made available to Lessee at such place at such time as Lessor may designate, provided however, that if Lessor elects option (ii), then Lessee shall pay Lessor in cash in advance, the estimated costs that Lessor may incur upon moving and storage charges theretofore incurred by Lessor with respect to such property. THE PROVISIONS OF THIS ARTICLE ARE INTENDED TO OVERRIDE AND SUPERSEDE ANY CONFLICTING PROVISIONS OF THE TEXAS PROPERTY CODE AND ANY AMENDMENTS OR SUCCESSOR STATUTES THERETO, AND OF ANY OTHER LAW, TO THE MAXIMUM EXTENT PERMITTED BY THE LAW. E. Notwithstanding any other remedy set forth in this Lease, if Lessor has made rent concessions of any type or character, or waived any base rent (i.e. given free rent), and Lessee fails to take possession of the Leased Premises on the Commencement Date or there occurs a Lessee event of default at any time during the term of this Lease, the rent concessions, including any waived base rent, are canceled and the amount of the base rent or other rent concessions are due and payable immediately as if no rent concessions or waiver of any base rent had ever been granted; provided, however, in the event of a default under 11.01(A) or 11.02(B) hereof, that in order for such cancellation of rent concessions to be effective, Lessor must give Lessee express notice of the free rent cancellation in the written notice described in Section11.01(A) and 11.01(B). A rent concession or waiver of the base rent will not relieve Lessee of any obligation to pay any other charge due and payable under this Lease including without limitation any sums due under Section 2.02 herein. F. If Lessor exercises any of its rights provided in this Article 11 and Lessee subsequently cures such default, Lessor is entitled to receive a service charge of $500.00 from Lessee for its time and expense, in addition to any other amounts owed hereunder, prior to allowing the Lessee to reenter and reoccupy the Leased Premises. G. Lessee hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Lessee being evicted or dispossessed for any cause, or in the event of Lessor obtaining possession of the Leased Premises by reason of the violation by Lessee of any of the covenants and conditions of this Lease or otherwise. The rights given to Lessor herein are in addition to any rights that may be given to Lessor by any statute or otherwise. H. Lessor's pursuit of any remedy specified in this Lease will not constitute an election to pursue that remedy only, nor preclude Lessor from pursuing any other remedy available at law or in equity, nor constitute a forfeiture or waiver of any rent or other amount due to Lessor as described herein. I. If Lessee or any guarantor of Lessee's obligations hereunder is the subject of any insolvency, bankruptcy, receivership, dissolution, reorganization or similar proceeding, federal or state, voluntary or involuntary, under any present or future law or act, Lessor is entitled to the automatic and absolute lifting of any automatic stay as to the enforcement of its remedies under this Lease, including specifically the stay imposed by Section 362 of the United States Federal Bankruptcy Code, as amended. Lessee hereby consents to the immediate lifting of any such automatic stay, and may not contest any motion by Lessor to lift such stay. Lessee expressly acknowledges that the Leased Premises is not now and will never be necessary to any plan or reorganization of any type. 11.03 Lessor's Liability. The liability of Lessor to Lessee for any default by Lessor under the terms of this Lease is limited to Lessee's actual direct, but not consequential, damages therefor and is recoverable only from the interest of Lessor in the Building, and Lessor is not personally liable for any deficiency. ARTICLE 12.00 - DEFINITIONS 12.01 Abandon. "Abandon" means the vacating of all or a substantial portion of the Leased Premises by Lessee or any approved sublessee, whether or not Lessee or any approved sublessee is in default of the rental payments due under this Lease; 12.02 Building. "Building" as used in this Lease means the building described in Section 1.02, including the Leased Premises and the land upon which the Building is situated. 12.03 Commencement Date. "Commencement Date" is the date set forth in Section 1.03. The Commencement Date constitutes the commencement of the term of this Lease for all purposes, whether or not Lessee has actually taken possession. ARTICLE 13.00 - MISCELLANEOUS 13.01 Waiver. Failure of Lessor to declare an event of default immediately upon its occurrence, or delay in taking any action in connection with an event of default, will not constitute a waiver of the default, but Lessor has the right to declare the default at any time and take such action as is lawful or authorized under this Lease. Pursuit of any one or more of the remedies set forth in Article 11.00 or Article 12.00 above will not preclude pursuit of any one or more of the other remedies provided elsewhere in this Lease or provided at law or in equity, nor will pursuit of any remedy constitute forfeiture or waiver of any rent or damages accruing to Lessor by reason of the violation of any of the terms, provisions or covenants of this Lease. Lessee agrees that failure by Lessor to enforce one or more of the remedies provided upon an event of default will not constitute a waiver of the default or of any other violation or breach of any of the terms, provisions and covenants contained in this Lease. No act or thing done by Lessor or its agents during the Lease Term may be deemed an acceptance of an attempted surrender of the Leased Premises, and no agreement to accept a surrender of the Leased Premises will be valid unless made in writing and signed by Lessor. No reentry or taking possession of the Leased Premises by Lessor may be construed as an election on its part to terminate this Lease, unless a written notice of such intention, signed by Lessor, is given by Lessor to Lessee. Notwithstanding any such reletting or reentry or taking possession, Lessor may at any time thereafter elect to terminate this Lease for a previous event of default. Lessee and Lessor agree that Lessor's acceptance of rent following an event of default hereunder will not constitute Lessor's waiver of such event of default. The failure of Lessor to enforce any of the Rules and Regulations described in Section 3.03 against Lessee or any other Lessee in the Building will not constitute a waiver of any such Rules and Regulations. No waiver of any provision of this Lease is effective unless such waiver is in writing and signed by Lessor. All rights granted to Lessor in this Lease are cumulative of every other right or remedy which Lessor may otherwise have at law or in equity, and the exercise of one or more rights or remedies does not prejudice or impair the concurrent or subsequent exercise of other rights or remedies. 13.02 Act of God. Lessor or Lessee is not required to perform any covenant or obligation in this Lease, or be liable in damages to the other, so long as the performance or non-performance of the covenant or obligation is delayed, caused or prevented by Force Majeure or by the other party. 13.03 Attorney's Fees. If either party defaults in the performance of any of the terms, covenants, agreements or conditions contained in this Lease and the other party places in the hands of an attorney the enforcement of all or any part of this Lease, the collection of any rent due or to become due or recovery of the possession of the Leased Premises, agrees to pay the non-defaulting party's costs of collection, including reasonable attorney's fees for the services of the attorney, whether suit is actually filed or not. 13.04 Successors. This Lease is binding upon and inures to the benefit of Lessor and Lessee and their respective heirs, personal representatives, successors and assigns. It is hereby covenanted and agreed that should Lessor's interest in the Leased Premises cease to exist for any reason during the term of this Lease, then notwithstanding the happening of such event this Lease nevertheless will remain unimpaired and in full force and effect, and Lessee hereunder agrees to attorn to the then owner of the Leased Premises. 13.05 Rent Tax. If applicable in the jurisdiction where the Leased Premises are situated, Lessee shall pay and be liable for all rental, sales and use taxes or other similar taxes, if any, levied or imposed by any city, state, county or other governmental body having authority, such payments to be in addition to all other payments required to be paid to Lessor by Lessee under the terms of this Lease. Any such payment must be paid concurrently with the payment of the rent, additional rent, operating expenses or other charge upon which the tax is based as set forth above. 13.06 Captions. The captions appearing in this Lease are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or intent of any Section. 13.07 Notice. All rent and other payments required to be made by Lessee must be paid to Lessor at the address set forth in Section 1.05. All payments required to be made by Lessor to Lessee are payable to Lessee at the address set forth in Section 1.05 or at any other address within the United States as Lessee may specify from time to time by written notice. For purposes hereof, any notice or document required or permitted to be delivered by the terms of this Lease (other than delivery of rental payments) will be deemed to be delivered upon the earlier of actual receipt, or (whether or not actually received) three days after being deposited in the United States Mail, postage prepaid, certified mail, return receipt requested, addressed to the parties at the respective addresses set forth in Section 1.05, or transmission by facsimile and receipt of confirmation of successful transmission by the transmitting facsimile; provided, however, any notice given by facsimile must be followed up by notice in one of the other manners set forth herein within five (5) days thereafter. Rental payments will be deemed received upon actual receipt only. Except as specifically set forth herein, in no event will notice by facsimile transmission be proper notice under the terms of this Lease. 13.08 Submission of Lease. Submission of this Lease to Lessee for signature does not constitute a reservation of space or an option or offer to lease. This Lease is not deemed effective until execution by and delivery to both Lessor and Lessee. 13.09 Representations, Warranties and Covenants of Lessee and Lessor. Lessee represents, warrants and covenants that it is now in a solvent condition; that no bankruptcy or insolvency proceedings are pending or contemplated by or against Lessee or any guarantor of Lessee's obligations under this Lease; that all reports, statements and other data furnished by Lessee to Lessor in connection with this Lease are true and correct in all material respects; that the execution and delivery of this Lease by Lessee does not contravene, result in a breach of, or constitute a default under any contract or agreement to which Lessee is a party or by which Lessee may be bound and does not violate or contravene any law, order, decree, rule or regulation to which Lessee is subject; and that there are no judicial or administrative actions, suits, or proceedings pending or threatened against or affecting Lessee or any guarantor of Lessee's obligations under this lease. Lessor represents, warrants and covenants that it is now in a solvent condition; that no bankruptcy or insolvency proceedings are pending or contemplated by or against Lessor or any guarantor of Lessor's obligations under this Lease; that all reports, statements and other data furnished by Lessor to Lessee in connection with this Lease are true and correct in all material respects; that the execution and delivery of this Lease by Lessor does not contravene, result in a breach of, or constitute a default under any contract or agreement to which Lessee is a party or by which Lessee may be bound and does not violate or contravene any law, order, decree, rule or regulation to which Lessor is subject; and that there are no judicial or administrative actions, suits, or proceedings pending or threatened against or affecting Lessor or any guarantor of Lessor's obligations under this lease. 13.10 Corporate Authority. If Lessee executes this Lease as a corporation, Lessee represents and warrants that Lessee is a duly authorized and existing corporation, that Lessee is qualified to do business in the state in which the Leased Premises are located, that the corporation has full right and authority to enter into this Lease, and that each person signing on behalf of the corporation is authorized to do so. Lessee shall additionally deliver (1) a corporate resolution authorizing execution of this Lease and confirming the authority of those persons executing the Lease, 2) certified Articles of Incorporation and 3) a certificate of existence and good standing from the State of Texas or if Lessee is not incorporated in Texas, a certificate of existence and good standing from Lessee's state of incorporation and a certificate evidencing Lessee's authority to do business in the State of Texas. If Lessor executes this Lease as a corporation, Lessor represents and warrants that Lessor is a duly authorized and existing corporation, that Lessor is qualified to do business in the state in which the Leased Premises are located, that the corporation has full right and authority to enter into this Lease, and that each person signing on behalf of the corporation is authorized to do so. Lessor shall additionally deliver (1) a corporate resolution authorizing execution of this Lease and confirming the authority of those persons executing the Lease, 2) certified Articles of Incorporation and 3) a certificate of existence and good standing from the State of Texas or if Lessee is not incorporated in Texas, a certificate of existence and good standing from Lessee's state of incorporation and a certificate evidencing Lessee's authority to do business in the State of Texas. 13.11 Partnership Authority. If Lessee executes this Lease as a general or limited partnership, Lessee represents and warrants that Lessee is a duly authorized and existing partnership, that, if applicable, Lessee is qualified to do business in the state where the Leased Premises are located, that the partnership has full right and authority to enter into this Lease, and that each person signing on behalf of the partnership is authorized to do so. Lessee, must additionally deliver a copy of its partnership agreement, and if a limited partnership, a copy of its certificate of limited partnership. The party executing the Lease on behalf of Lessee, if a corporate managing general partner or general partner, must additionally deliver 1) a corporate resolution authorizing execution of this Lease and confirming the authority of those executing this Lease, 2) certified Articles of Incorporation, 3) a certificate of existence and good standing from the State of Texas or if such party is not incorporated in Texas, a certificate of existence and good standing from such party's state of incorporation and a certificate evidencing such party's authority to do business in the State of Texas. If Lessor executes this Lease as a general or limited partnership, Lessor represents and warrants that Lessor is a duly authorized and existing partnership, that, if applicable, Lessor is qualified to do business in the state where the Leased Premises are located, that the partnership has full right and authority to enter into this Lease, and that each person signing on behalf of the partnership is authorized to do so. Lessor, must additionally deliver a copy of its partnership agreement, and if a limited partnership, a copy of its certificate of limited partnership. The party executing the Lease on behalf of Lessee, if a corporate managing general partner or general partner, must additionally deliver 1) a corporate resolution authorizing execution of this Lease and confirming the authority of those executing this Lease, 2) certified Articles of Incorporation, 3) a certificate of existence and good standing from the State of Texas or if such party is not incorporated in Texas, a certificate of existence and good standing from such party's state of incorporation and a certificate evidencing such party's authority to do business in the State of Texas. 13.12 Severability. If any provision of this Lease or the application thereof to any person or circumstance is ever determined by a court of competent jurisdiction to be invalid or unenforceable to any extent, Lessor and Lessee agree that the remainder of this Lease and the application of such provisions to other persons or circumstances will not be affected thereby and will be enforced to the greatest extent permitted by law. 13.13 Lessor's Liability. If Lessor is in default under this Lease and, if as a consequence of such default, Lessee recovers a money judgment against Lessor, such judgment may be satisfied only out of the right, title and interest of Lessor in the Leased Premises as the same may then be encumbered and neither Lessor nor any person or entity comprising Lessor has any liability for any deficiency. In no event does Lessee have the right to levy execution against any property of Lessor nor any person or entity comprising Lessor other than its interest in the Leased Premises as herein expressly provided. 13.14 Non Disturbance Agreement. Lessor shall deliver a non-disturbance agreement from each of Lessors mortgagees within sixty (60) days of the execution of this Lease in form satisfactory to Lessee in its reasonable judgment. If any new lien or mortgage is placed on the Building or Leased Premises during the term of this Lease, Landlord will deliver additional non- disturbance agreements as soon as practical in form satisfactory to Lessee in its reasonable judgment. 13.15 Notice to Mortgagees. Provided that Lessee has received prior written notice of the name and address of such lender, Lessee shall serve written notice of any claimed default or breach by Lessor under this Lease upon any lender which is a beneficiary under any deed of trust or mortgage against the Leased Premises, and no notice to Lessor is effective against Lessor unless such notice is served upon said lender; notwithstanding anything to the contrary contained herein, Lessee shall allow such lender the same period following lender's receipt of such notice to cure such default or breach as is afforded Lessor. 13.16 No Recordation. Lessee may not record this Lease. 13.17 Counterparts. This Lease may be executed in two or more counterparts, and it is not necessary that any one of the counterparts be executed by all of the parties hereto. Each fully or partially executed counterpart may be deemed an original, but all such counterparts taken together constitute but one and the same instrument. 13.18 Governing Law. THIS LEASE IS INTENDED BY THE PARTIES TO BE GOVERNED BY, AND CONSTRUED UNDER AND IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES OF AMERICA AS APPLICABLE TO TRANSACTIONS WITHIN THE STATE OF TEXAS. 13.19 Broker. Lessee represents and warrants that Lessee has dealt with no broker except Providence Commercial Real Estate Services, Inc., for Lessee, and Pruitt Realty, for Lessor, the brokers which has been identified to Lessor and Lessee, and that, insofar as Lessee and Lessor know, no other broker negotiated this Lease or is entitled to any commission in connection herewith. Lessor agrees to indemnify and hold harmless Lessee from and against any liability or claim, whether meritorious or not, arising with respect to any broker whose claim arises by, through or on behalf of Lessor. Lessee agrees to indemnify and hold harmless Lessor from and against any liability or claim, whether meritorious or not, arising with respect to any broker whose claim arises by, through or on behalf of Lessee. 13.20 Publication. Each party hereby agrees that the other has the right, but not the obligation, at its own expense to publicize and/or advertise the execution of this Lease and the related transaction. 13.21 DTPA Waiver. LESSEE WAIVES ITS RIGHTS UNDER THE DECEPTIVE TRADE PRACTICES - CONSUMER PROTECTION ACT, SECTION 17.41 ET SEQ., BUSINESS & COMMERCE CODE, A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND PROTECTIONS. AFTER CONSULTATION WITH AN ATTORNEY OF LESSEE'S OWN SELECTION, LESSEE VOLUNTARILY CONSENTS TO THIS WAIVER. 13.22 Construction of Lease. Lessee declares that Lessee has read and understands all parts of this Lease, including all printed parts hereof. It is agreed that, in the construction and interpretation of the terms of this Lease, the rule of construction that a document is to be construed most strictly against the party who prepared the same shall not be applied, it being agreed that both parties hereto have participated in the preparation of the final form of this Lease. Wherever in this Lease provision is made for liquidated damages, it is because the parties hereto acknowledge and agree that the determination of actual damages (of which such liquidated damages are in lieu) is speculative and difficult to determine; the parties agree that liquidated damages herein are not a penalty. 13.23 Financial Statements. Lessee acknowledges that it has provided Lessor with its financial statement(s) as a primary inducement to Lessor's agreement to lease the Leased Premises to Lessee, and that Lessor has relied on the accuracy of said financial statement(s) in entering into this Lease. Lessee represents and warrants that the information contained in said financial statement(s) is true, complete and correct in all material aspects, and agrees that the foregoing representations are conditions to all of Lessor's obligations under this Lease. At the request of Lessor (only upon the sale or refinancing of the Building, or upon any extension or renewal hereof), Lessee shall, not later than thirty (30) days following such request, furnish to Lessor a financial statement of Lessee as of the end of the prior fiscal year accompanied by a statement of income and expense for the year then ended, together with a certificate of the chief financial officer, owner or partner of Lessee to the effect that the financial statements have been prepared in conformity with generally accepted accounting principles consistently applied and fairly present the financial condition and results of operations of Lessee as of and for the periods covered. 13.24 Time of Essence. With respect to all required acts of Lessee, time is of the essence of this Lease. 13.25 Joint and Several Liability. If there is more than one Lessee, the obligations hereunder imposed upon Lessee are joint and several. If there is a guarantor(s) of Lessee's obligations hereunder, the obligations of Lessee are joint and several obligations of Lessee and each such guarantor, and Lessor need not first proceed against Lessee hereunder before proceeding against each such guarantor, nor will any such guarantor be released from its guarantee for any reason whatsoever, including, without limitation, any amendment of this Lease, any forbearance by Lessor or waiver of any of Lessor's rights, the failure to give Lessee or any such guarantor any notices, or the release of any party liable for the payment or performance of any of Lessee's obligations hereunder. 13.26 Taxes and Lessee's Property. Lessee is solely liable for all taxes levied or assessed against personal property, furniture or fixtures placed by Lessee in the Premises. If any such taxes for which Lessee is liable are levied or assessed against Lessor or Lessor's property and if Lessor elects to pay the same or if the assessed value of Lessor's property is increased by inclusion of personal property, furniture or fixtures placed by Lessee in the Premises, and Lessor elects to pay the taxes based on such increase, Lessee shall pay Lessor upon demand that part of such taxes for which Lessee is primarily liable hereunder. 13.27 Constructive Eviction. Lessee shall not be entitled to claim a constructive eviction from the Leased Premises unless Lessee has first notified Lessor in writing of the condition giving rise thereto, and, if the complaints are justified, unless Lessor has failed to remedy such conditions with a reasonable time after receipt of said notice. ARTICLE 14.00 - AMENDMENT AND LIMITATION OF WARRANTIES 14.01 Entire Agreement. IT IS EXPRESSLY AGREED BY LESSEE, AS A MATERIAL CONSIDERATION FOR THE EXECUTION OF THIS LEASE, THAT THIS LEASE, WITH THE SPECIFIC REFERENCES TO WRITTEN EXTRINSIC DOCUMENTS, IS THE ENTIRE AGREEMENT OF THE PARTIES; THAT THERE ARE, AND WERE, NO VERBAL REPRESENTATIONS, WARRANTIES, UNDERSTANDINGS, STIPULATIONS, AGREEMENTS OR PROMISES PERTAINING TO THIS LEASE OR TO THE EXPRESSLY MENTIONED WRITTEN EXTRINSIC DOCUMENTS NOT INCORPORATED IN WRITING IN THIS LEASE. 14.02 Amendment. THIS LEASE MAY NOT BE ALTERED, WAIVED, AMENDED OR EXTENDED EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY LESSOR AND LESSEE. 14.03 Limitation of Warranties. LESSOR AND LESSEE EXPRESSLY AGREE THAT THERE ARE AND SHALL BE NO IMPLIED WARRANTIES OF MERCHANTABILITY, HABITABILITY, FITNESS FOR A PARTICULAR PURPOSE OR OF ANY OTHER KIND ARISING OUT OF THIS LEASE, AND THERE ARE NO WARRANTIES WHICH EXTEND BEYOND THOSE EXPRESSLY SET FORTH IN THIS LEASE. ARTICLE 15.00 - SIGNATURES SIGNED this _______ day of April, 1999. LESSOR: LESSEE: ACLP UNIVERSITY PARK SA, L.P. AMERICAN TELESOURCE a Texas limited partnership INTERNATIONAL, INC., a Texas corporation BY: ACLP UNIVERSITY PARK SA GP, INC., a Texas corporation By: _______________________________ Name: _______________________________ Title: _______________________________ By: ______________________________ Name: Sue Shelton Title: Executive Vice President LESSEE ACKNOWLEDGES THAT THIS LEASE INCLUDES THE INDEMNIFICATION PROVISIONS SET FORTH IN SECTIONS 3.01, 3.06, 7.05 AND 13.19 HEREOF. RULES AND REGULATIONS 1. Lessor agrees to furnish Lessee two keys without charge. Additional keys will be furnished at a nominal charge. Lessee shall not change locks or install additional locks on doors without prior written consent of Lessor. Lessee shall not make or cause to be made duplicates of keys procured from Lessor without prior approval of Lessor. All keys to Leased Premises shall be surrendered to Lessor upon termination of this Lease. 2. Lessee will refer all contractors, contractors representatives and installation technicians rendering any service on or to the Leased Premises for Lessee to Lessor for Lessor's approval before performance of any contractual service. Lessee's contractors and installation technicians shall comply with Lessor's rules and regulations pertaining to construction and installation. This provision shall apply to all work performed on or about the Leased Premises or project, including installation of telephones, telegraph equipment, electrical devices and attachments and installations of any nature affecting floors, walls, woodwork, trim, windows, ceilings and equipment or any other physical portion of the Leased Premises or project. 3. Lessee shall not at any time occupy any part of the Leased Premises or project as sleeping or lodging quarters. 4. Lessee shall not place, install or operate on the Leased Premises or in any part of the building any engine, stove or machinery, or conduct mechanical operations or cook thereon or therein, or place or use in or about the Leased Premises or project any explosives, gasoline, kerosene, oil, acids, caustics, or any flammable, explosive or hazardous material without written consent of Lessor, except that Lessee may provide a kitchen for use by its employees during normal business hours. 5. Lessor will not be responsible for lost, stolen or damaged personal property, equipment, money or jewelry from the Leased Premises by a third party or the project regardless of whether such loss occurs when the area is locked against entry or not. 6. No dogs, cats, fowl, or other animals shall be brought into or kept in or about the Leased Premises or project. 7. Employees of Lessor shall not receive or carry messages for or to any Lessee or other person or contract with or render free or paid services to any Lessee or to any of Lessee's agents, employees or invitees. 8. None of the parking, plaza, recreation or lawn areas, entries, exits, passages, doors, elevators, hallways or stairways shall be blocked or obstructed or any rubbish, litter, trash, or material of any nature placed, emptied or thrown into these areas or such area used by Lessee's agents, employees or invitees at any time for purposes inconsistent with their designation by Lessor. 9. The water closets and other water fixtures shall not be used for any purpose other than those for which they were constructed, and any damage resulting to them from misuse, including improper disposal of any materials, or by the defacing or injury of any part of the Building shall be borne by the person who shall occasion it. No person shall waste water by interfering with the faucets or otherwise. 10. No person shall disturb occupants of the Building by the use of any radios, record players, tape recorders, musical instruments, the making of unseemly noises or any unreasonable use. 11. Nothing shall be thrown out of the windows of the Building or down the stairways or other passages. 12. Lessee and its employees, agents and invitees shall park their vehicles only in those parking areas designated by Lessor. Lessee shall furnish Lessor with state automobile license numbers of Lessee's vehicles and its employees' vehicles within five days after taking possession of the Leased Premises and shall notify Lessor of any changes within five days after such change occurs. Lessee shall not leave any vehicle in a state of disrepair (including without limitation, flat tires, out of date inspection stickers or license plates) on the Leased Premises or project. If Lessee or its employees, agents or invitees park their vehicles in areas other than the designated parking areas or leave any vehicle in a state of disrepair, Lessor, after giving written notice to Lessee of such violation, shall have the right to remove such vehicles at Lessee's expense. 13. Parking in a parking garage or area shall be in compliance with all parking rules and regulations including any sticker or other identification system established by Lessor. Failure to observe the rules and regulations shall terminate Lessee's right to use the parking garage or area and subject the vehicle in violation of the parking rules and regulations to removal and impoundment. No termination of parking privileges or removal of impoundment of a vehicle shall create any liability on Lessor or be deemed to interfere with Lessee's right to possession of its Leased Premises. Vehicles must be parked entirely within the stall lines and all directional signs, arrows and posted speed limits must be observed. Parking is prohibited in areas not striped for parking, in aisles, where "No Parking" signs are posted, on ramps, in cross hatched areas, and in other areas as may be designated by Lessor. Parking stickers or other forms of identification supplied by Lessor shall remain the property of Lessor and not the property of Lessee and are not transferable. Every person is required to park and lock his vehicle. All responsibility for damage to vehicles or persons is assumed by the owner of the vehicle or its driver. 14. Lessee shall not lay floor covering within the Leased Premises without written approval of the Lessor. The use of cement or other similar adhesive materials not easily removed with water is expressly prohibited. 15. Lessee agrees to cooperate and assist Lessor in the prevention of canvassing, soliciting and peddling within the Building or project. 16. It is Lessor's desire to maintain in the Building or project the highest standard of dignity and good taste consistent with comfort and convenience for Lessees. Any action or condition not meeting this high standard should be reported directly to Lessor. Your cooperation will be mutually beneficial and sincerely appreciated. As provided in the Lease, Lessor reserves the right to make such other and further reasonable rules and regulations as in its judgment may from time to time be necessary, for the safety, care and cleanliness of the Leased Premises and for the preservation of good order therein. 17. The parking spaces provided to Lessee shall not be fewer than six spaces per 1000 rentable square feet of Leased Premises 18. All signage must be approved by Lessor and be within Lessor's specifications in accordance with Section 3.02 of the Lease. ADDENDUM 1 TO COMMERCIAL LEASE AGREEMENT ARTICLE 16.00 Lessor Improvements 16.01 Lessor Improvements. Prior to Lessee's occupancy, Lessor shall, at its own cost and expense, construct the Building and improvements (the "Shell Building Improvements") as generally shown on the site plan and artist's rendering prepared by Rehler Vaughn & Koone, Inc., and attached hereto as Exhibit "A". Lessor warrants that the Shell Building Improvements will be generally consistent in quality with the building shown in the artist's rendering attached as Exhibit "A" and with other buildings in Dallas, Texas, which were shown to Lessee's representatives as samples of Lessor's projects. The Final Shell Plans and Specifications shall be provided to Lessee on or before June1, 1999. Lessor will begin construction of the Shell Building Improvements no later than June 1, 1999 and shall have completed the Shell Building Improvements to the extent to allow construction of the Lessee Improvements no later than September 15, 1999. Except for immaterial field changes, modifications to the Final Shell Plans and Specifications must be made and accepted only by written change order or agreement signed by Lessor and Lessee and will constitute an amendment to this Lease. Lessee shall be responsible for payment in advance of all work and construction resulting from changes in the Final Shell Plans and Specifications requested by Lessee. The Final Shell Plans and Specifications (when approved by Lessor and Lessee) are incorporated in this Lease by reference. For the purpose of this Section, an "immaterial field change" shall mean such field changes which are required by any governmental authority or changes which (i) do not affect the size, configuration, structural integrity, quality, character, architectural appearance and standard of workmanship contemplated in the Final Shell Plans and Specifications, (ii) will not result in any default in any obligation to any person or violation of any governmental requirements, and (iii) the cost of or reduction resulting from any single field change or extra does not exceed $20,000 and the aggregate amount of all such changes and extras does not exceed $100,000. Lessor agrees to construct the improvements substantially in accordance with the Final Shell Plans and Specifications, in a good and workmanlike manner and in full compliance with all provisions of federal, state and local authorities having jurisdiction over the Leased Premises. ARTICLE 17.00 - Completion 17.01 Completion Date. --------------- (b) If (i) this Lease is executed and delivered by Lessee by April 9, 1999, (ii) the Lessee Improvement Final Plans and Specifications are approved by Lessor by July 15, 1999 (iii) Lessee has selected by September 1, 1999, the contractor who will construct the Lessee Improvements, and (iv) the building permit for the Lessee Improvements is issued by September 15, 1999, then Lessor shall cause Substantial Completion (as defined in Section 17.04 hereof) to occur no later than December 15, 1999 (such date being extended by the longest number of days that the satisfaction of any of the above conditions is delayed, Force Majeure and Lessee Delays with the date, as extended, being hereinafter referred to as the "Threshold Date"). In the event that the foregoing conditions are satisfied and Substantial Completion does not occur by the Threshold Date, then Lessee, as Lessee's sole and exclusive remedy and measure of damages for or related to the delay in Substantial Completion, shall have the right to receive one day of free rent, in addition to the free rent described in Section 3.01, for each day of unexcused delay beyond the Threshold Date, up to a maximum of sixty (60) days, and in the event of unexcused delay beyond sixty (60) days after the Threshold Date, the Lessee shall have the right to receive two (2) days of free rent, in addition to the free rent described in Section 3.01, for each day of unexercised delay beyond sixty days after the Threshold Date, and in the event of unexcused delay beyond one hundred twenty (120) days after the Threshold Date, the Lessee shall have the right to terminate this Lease by written notice thereof to Lessor within ten (10) days following the one hundred twentieth day after such Threshold Date; provided, however, in the event Lessee fails to deliver such termination notice within such ten (10) period, the Lessee shall be deemed to have waived any right to terminate this Lease for delay provided in this Section. 17.02 Force Majeure. "Force Majeure" delay shall mean a delay caused by ------------- reason of fire, acts of God, unreasonable delays in transportation, embargo, weather, strike, other labor disputes, governmental preemption of priorities or other controls in connection with a national or other public emergency, or shortages of fuel, supplies or labor or any similar cause not within the reasonable control of the party claiming the benefits of any Force Majeure provisions. The party claiming the benefits of any Force Majeure provisions shall be required (as a condition to the effectiveness thereof) to provide written notice of the occurrence of such Force Majeure event within ten (10) days following such occurrence. 17.03 Lessor and Lessee Delay. (a) The terms "Lessor Delays", "Delays caused by Lessor", "Lessee Delay" or "Delays caused by Lessee" shall mean delay in completion of construction of the Shell Building Improvements or the Lessee Improvements caused by: (1) Unless due to the acts or omissions of the other party or such party's agents, employees or contractors, the respective party's failure to perform its design approval obligations or its construction period obligations by the dates or within the time periods shown in the Lease or this Addendum 1; and (2) Any subsequent changes, modifications or alterations to the final plans and specifications or the Final Tenant Improvement Plans and specifications which reasonably cause delay in the completion thereof; and (b) "Lessee Delay" or "Delays caused by Lessee" shall also mean delays due to the scope and extent of the Lessee Improvements to be constructed by Lessor. For purposes of determining Lessee Delay under this Section, the Lessor must provide notice to Lessee of the existence of excessive Lessee Improvements, special design or construction considerations or other matters which will extend the time necessary for the construction of the Lessee Improvements beyond two (2) days; such notice to be provided by Lessor to Lessee together with Lessor's delivery of approval and/or objections to Lessee's plans and specifications for the Lessee Improvements from time-to-time. Such notice shall specify the reasons for the delay and the estimated length of delay and, unless the Lessee's plans and specifications are modified to eliminate such items, the estimated length of the delay shall be included as a Lessee Delay. For purposes of determining delay, the terms Lessor and Lessee shall include their respective contractors, agents and employees. In addition, the party claiming the benefits of such delay shall be required (as a condition to the effectiveness thereof) to provide written notice of the occurrence of such delay within ten (10) days following such occurrence. 17.04 "Substantial Completion" shall mean that time when the following conditions are satisfied: (a) Lessor secures and delivers to Lessee the required temporary or permanent certificate of occupancy, final inspection report or the substantial equivalent under applicable state or local law relative to the Shell Building Improvements and the Lessee Improvements; and (b) The construction is completed in accordance with the Final Shell Plans and Specifications and the Lessee Improvements Final Plans and Specifications as acknowledged by Lessor's architect in writing to Lessee, subject to normal punch list items which will not materially interfere with Lessee's ability to utilize the Leased Premises for its intended purposes. EXHIBIT "D" ----------- CERTIFICATE OF ACCEPTANCE Building:__________________________________________________________________ Lessor: __________________________________________________________________ Lessee: __________________________________________________________________ This certificate is being executed pursuant to the Commercial Lease (the "Lease") for Leased Premises (as defined in the Lease) in the Building named above, executed on the ___ day of _______ , 1999, between Lessor and Lessee. Lessee certifies to and agrees with Lessor and Lessor's successors, assigns, prospective purchasers and prospective lenders that: 1. Lessor has substantially completed all construction work and leasehold improvements required of Landlord under the terms of the Lease and/or any other agreement between Lessor and Lessee concerning the Leased Premises, and the Leased Premises have been delivered to Lessee in the conditional contemplated by Lessee, except for Defects, the presence of Hazardous Materials (as those terms are defined in the Lease) and punch list items. 2. Lessee has taken possession of and has accepted the Premises, and the Base Rent, additional rent, and/or other charges payable under the Lease are presently accruing in accordance with the terms of the Lease or if not, will commence to accrue on the ____ day of _______ , 1999. 3. The Lease has not been modified, altered or amended except as noted herein. 4. There are no offsets or credits against rentals, nor have rentals been prepaid except as may be provided in the Lease, but in no event have rentals been prepaid more than thirty (30) days in advance, except for the 7th month's rent. 5. The Lease Term will commence on ___ day of ___________ , 1999, and will expire on the ____ day of _________ , ____ , unless sooner terminated or extended pursuant to any provision of the Lease. Certified and Agreed to this ___ day of ________, 1999. Lessee:_________________________ Name:___________________________ Title:__________________________ CONDITIONS 1. The registration for the provision of value added services supported by this certificate have an indefinite term. When the service provider stops providing the services for its own convenience, the provider must notify the Ministry of Communications and Transportation. 1. To provide value added services, the provider agrees to solely utilize homologated equipment and public telecommunications networks authorized by the Ministry of Communications and Transportation. 1. The Ministry of Communications and Transportation shall have the ability at any time to make administrative technical inspections at the provider's facilities and request additional information related with the value added services registered. 1. The service provider must notify the Ministry of Communications and Transportation any modification in their address, legal representative, addition of new services or the transmission means utilized to provide the services.before any changes are made. 1. Providing false information upon registering the value added services or in any other request made to the Ministry of Communications and Transportation will be reason to initiate any sanction proceedings. 1. The value added services provider whose registration certificate is attached hereto must submit to the Ministry of Communications and Transportation on an annual basis and within 30 days after the anniversary date of this certificate, a completed "Annual Report of Value Added Services" for the purpose of maintaining updated information. By not submitting in a timely manner the above mentioned report, it shall be understood as desisting to continue to provide the services and shall automatically generate cancellation of its registration. 1. The exercise of the rights derived from this registration implies the unconditional acceptance of all the terms by the service provider. (Illegible signature) cc: Lic. Carlos Casasus Lopez Hermosa - Undersecretary of Communications and Technological Development. EX-10.24 16 AMENDMENT TO NEW OFFICE SPACE LEASE AGREEMENT EXHIBIT 10.24 FIRST AMENDMENT TO COMMERCIAL LEASE This First Amendment to Commercial Lease (this "Amendment") is made and entered into as of December 13, 1999, by and between ACLP University Park SA II, L.P., a Texas limited partnership ("Lessor"), and American Telesource International, Inc., a Texas corporation ("Lessee") for the purposes more fully described below. R E C I T A L S: --------------- A. Lessor and Lessee are parties to that certain Commercial Lease (the "Lease") dated as of April 13, 1999, wherein Lessor leased to Lessee the Premises, as defined in the Lease; B. Lessee and Lessor desire to amend the Lease as provided herein. A G R E E M E N T: ----------------- NOW THEREFORE, in consideration of the mutual covenants and agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lessor and Lessee hereby amend the Lease and Lessor and Lessee agree as follows: 1. Leased Premises. Lessee and Lessor agree that the Leased Premises ---------------- shall be relocated from the west end of the Building to the east end of the Building. The relocated space in the east end of the Building shall be the space to the immediate west of and adjacent to the space leased by Globalscape, Inc., as shown on Exhibit "A" ----------- attached hereto and incorporated herein for all purposes. Additionally, the square footage of the Leased Premises is hereby reduced from 26,250 rentable square feet to 15,050 rentable square feet. 2. Commencement Date. The "Commencement Date" of the Lease shall be ------------------ January 15, 2000. 3. Term. The Term of the lease shall remain 102 months from the ---- Commencement Date (i.e., 102 months from January 15, 2000). 4. Base Rent. Section 1.04, Base Rent, Security Deposit, is hereby ---------- deleted from the Lease and replaced in its entirety as provided below: "1.04 Base Rent, Security Deposit. Base Rent is $14,899.50 net per month based upon an assumed 15,050 rentable square footage in the Leased Premises and shall be adjusted by $11.88 per rentable square foot per year based on the recalculation under Section 1.02 above. Security Deposit is $7,449.75. Base Rent shall be payable as follows and in accordance with Section 2.01 herein: Months 1-6 free Months 7 - 102 $14,899.50" 5. Improvement Allowance. As provided in Section 6.01(c) of the --------------------- Lease, the Improvement Allowance is $22.00 per rentable square foot, as reduced to 15,050 in paragraph 1 above. Lessee may use up to an additional $3.00 per rentable square foot for Lessee Improvements and such additional amount shall be amortized at a rate of ten percent (10%) per annum as additional rent over the 96 months of the Lease that Base Rent is paid. 6. Right of First Refusal. Lessee shall have the right of first ---------------------- refusal for two (2) adjacent bays totaling approximately 8,050 square feet located immediately west of this relocated space, as shown on Exhibit "A". Accordingly, Section 1.07 of the Lease is ----------- hereby revised by deleting Exhibit "A" to the lease and replacing it with Exhibit "A" attached to this Amendment. ----------- 7. Miscellaneous ------------- a. Capitalized Terms. Terms not otherwise defined herein shall ------------------ have the meanings ascribed thereto in the Lease. b. Effect of Amendment. Except to the extent the Lease is ------------------- modified by this Amendment, the remaining terms and provisions of the Lease shall remain unmodified and in full force and effect. In the event of a conflict between the terms of the Lease and the terms of this Amendment, the terms of this Amendment shall prevail. c. Entire Agreement. This Amendment, together with the Lease, ---------------- embodies this entire understanding between Lessor and Lessee with respect to its subject matter and can be changed only by an instrument in writing signed by Lessor and Lessee. d. Counterparts. This Amendment may be executed in counterparts, ------------ each of which shall be deemed an original, but all of which, together, shall constitute one and the same Amendment. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date and year first set forth above. LESSOR: LESSEE: ACLP UNIVERSITY PARK SA II, L.P., AMERICAN TELESOURCE a Texas limited partnership INTERNATIONAL, INC., a Texas corporation By: ACLP University Park SA II, L.P., a Texas corporation, its general partner By: ___________________________ Name _____________________ Title:_____________________ By: __________________________ Sue Shelton Executive Vice President EX-10.25 17 NEW OFFICE SPACE LEASE AGREEMENT FOR GLOBALSCAPE Exhibit 10.25 COMMERCIAL LEASE ARTICLE 1.00 - BASIC LEASE TERMS 1.01 Parties. This lease agreement ("Lease") is entered into by and between the following Lessor and Lessee: ACLP University Park SA, L.P., a Texas limited partnership ("Lessor"), and GlobalSCAPE, Inc., a Texas corporation ("Lessee"). 1.02 Leased Premises. In consideration of the rents, terms, provisions and covenants of this Lease, Lessor hereby leases, lets and demises to the Lessee the following described premises ("Leased Premises"): The area shown on the attached Exhibit "A" consisting of approximately 7,350 rentable square feet at the eastern end of the building to be constructed and called University Park Tech Center II in San Antonio, Texas 78249, which consists of 84,525 square feet, and which is located on the land shown on Exhibit "B" attached hereto and ----------- incorporated herein for all purposes, consisting of 7,350 rentable square feet to be leased by Lessee beginning on the Commencement Date (the "Initial Space"), and 7,350 additional square feet to be leased by Lessee on or before twelve (12) calendar months following the Commencement Date (the "Must Take Space"). Lessor and Lessee agree that final square footage for the purpose of rent calculations will be determined by Lessee's architect, using then-current BOMA standards (except that the space shall be measured from the edge of the roof for the exterior space adjacent to the exterior doorways) based on Lessee Improvements Final Plans and Specifications, subject to Lessor's approval, which may not be unreasonably refused or delayed. 1.03 Term. Subject to and upon the conditions set forth herein, the term (the "Term") of this Lease commences on December 15, 1999 (the "Commencement Date") and terminates one hundred and two (102) months thereafter (the "Termination Date"). Except as provided in Addendum 1 attached hereto and ---------- incorporated herein for all purposes, Lessee agrees that Lessor will not be liable to Lessee if Lessor does not deliver possession of the Leased Premises to Lessee on the Commencement Date, and Lessor's non-delivery of the Leased Premises to Lessee on the Commencement Date will not change the terms of this Lease or the obligations of Lessee hereunder. If delivery of the Leased Premises is delayed for any reason other than Lessee Delay (as hereinafter defined), Lessor and Lessee agree that the Commencement Date will be delayed until Substantial Completion (as hereinafter defined) of the Leased Premises, in which event the Term will be automatically extended for a period of time equal to the delay in Substantial Completion of the Leased Premises. If the Commencement Date is delayed, Lessor and Lessee shall, upon such delivery, execute an amendment to this Lease setting forth the actual Commencement Date and Termination Date. If Lessee enters the Leased Premises prior to Substantial Completion, Lessee shall execute and deliver to Lessor an Early Occupancy Agreement in a reasonable form provided by Lessor whereby Lessee releases Lessor from all liabilities, claims and causes of action arising out of any construction or other work performed at the Leased Premises and agrees to pay utility charges incurred by Lessee during such early occupancy. If the Termination Date falls on a day other than the last day of a month, the parties agree that the Term is automatically extended by the number of days necessary to cause the Term to end on the last day of a month. 1.04 Base Rent, Security Deposit. Base Rent is $7,276.50 net per month based upon an assumed 7,350 rentable square footage in the Leased Premises and shall be adjusted by $11.88 per rentable square foot per year based on the recalculation under Section 1.02 above. Security Deposit is $ 3,638.25. 1.05 Addresses. Lessor's Address: Lessee's Address: ACLP University Park SA, L.P. GlobalSCAPE, Inc. 17400 Dallas Parkway ____________________ Suite 216 ____________________ Dallas, Texas 75287 San Antonio, Texas _____ FAX (972) 407-9068 FAX (___) _______ *[use Leased Premises address] With a copy to: CMC Commercial Realty Group, Inc. 5400 LBJ Freeway Suite 1450 Dallas, Texas 75240 FAX (972) 770-2805 1.06 Permitted Use. The Leased Premises may be used for office space, and assembly, distribution and sales of software. 1.07 Leasing Term Limitation on Adjacent Space and Right of First Refusal. Lessor agrees that Lessee may lease the Bay shown on Exhibit "A" adjacent to the Leased Premises at any time prior to Lessor leasing the Bay to another person. Lessor agrees that it will notify Lessee at least thirty (30) days prior to entering into a lease of the Bay, and will not enter into a lease for the Bay for a term that continues longer than sixty (60) months. Lessor further agrees that it will notify Lessee ninety (90) days prior to the expiration of any lease of the Bay (or immediately upon learning that the Bay is to become available prior to the expiration of its lease) and Lessee will have fifteen (15) days following receipt of notice to notify Lessor that it elects to lease the Bay. If Lessee does not notify Lessor that it elects to lease the Bay within fifteen (15) days, Lessor may re-let the Bay for a term of up to sixty (60) months. If Lessee elects to lease the Bay pursuant to this Section, then Lessor and Lessee will execute a modification of this Lease such that the Bay becomes part of the Leased Premises and is leased on the same terms and conditions as provided in this Lease for the initial Leased Premises, including renewal options, but not including the rental per square foot, finish out allowance, and refurbishment allowance, with an additional security deposit to be calculated in the same manner as the security deposit for the Leased Premises, and with the term of the lease for the Bay to expire on the Termination Date. If Lessee elects to lease the Bay prior to the time that Lessor completes the Lessee Improvements, then the Bay will be leased on all of the same terms and conditions as the initial Leased Premises, including rental per square foot, renewal options, finish out allowance, and refurbishment allowance. The date for completion of Lessee Improvements in the Bay will be established consistently with the time frames for completion of Lessee Improvements for the initial Leased Premises. 1.08 Lessee's Future Expansion Needs. Lessor acknowledges that Lessee expects its business to grow significantly and that Lessee may require space in addition to the Leased Premises and the Bay. Lessor will keep Lessee informed of the status of the remaining space in the Building and give Lessee a reasonable opportunity to lease additional space that becomes available on reasonable terms and conditions. 1.09 Renewal Terms. Lessor agrees that Lessee may renew the Lease for two successive sixty (60) month renewal terms (each a "Renewal Term") by giving Lessor written notice of renewal at least one hundred eighty (180) days prior to the expiration of the Term or the first Renewal Term, respectively. The Lease will continue on the same terms and conditions during any Renewal Term, except that the rental rate per square foot shall be adjusted to ninety five percent (95%) of the prevailing market rate for comparable buildings in San Antonio at the time of renewal (taking into consideration the age and quality of the structure, type of building, location of the space in the building, definition of the leased area, estimated lease-up time, credit standing and financial status of the Lessee, term, extent of services provided by landlord, brokerage fees, leasehold improvement allowances, moving allowances, rental abatements and other incentive being offered). If there is a difference in opinion between Lessor and Lessee regarding the prevailing market rate of rental at the time of Renewal, Lessor and Lessee will negotiate in good faith to resolve the difference. Lessor and Lessee will also negotiate in good faith to establish a refurbishment allowance for the Leased Premises, which shall be administered by Lessor on the same terms and conditions as the Improvement Allowance for the Initial Lessee Improvements. Lessee may withdraw its notice of renewal if agreement on the prevailing market rate of rental is not reached within sixty (60) days of the beginning of the proposed Renewal Term. 1.10 Contingencies. Lessor agrees that if by May 1, 1999, Lessor has failed to acquire title to the land on which the Building is to be constructed, or if by June 1, 1999 it has not commenced construction of the Building, Lessee may terminate this Lease on one (1) day's advance written notice. Lessor agrees that Lessee's security deposit and seventh months' rent is due upon execution of the Lease; however Lessor and Lessee further agree that such payment will not be deposited until such time as Lessor has acquired title to the land on which the Building is to be constructed. 1.11 Must Take Space. Lessee will notify Lessor at least three (3) calendar months prior to the date that Lessee desires to lease the Must Take Space and will provide Lessor with its preliminary plans and specifications for Lessee Improvements to the Must Take Space within forty-five (45) days of the date that it desires to take possession of the Must Take Space. The date for completion of Lessee Improvements to the Must Take Space will be established consistently with the time frames for completion of Lessee Improvements for the Initial Space. ARTICLE 2.00 - RENT 2.04 Base Rent. Lessee agrees to pay monthly as base rent during the term of this Lease without notice, demand, counter-claim, set-off or abatement, except as otherwise set forth herein, the sum of money set forth in Section 1.04 of this Lease, which amount is payable to Lessor at the address shown above, except that Lessee shall not pay any base rent for the first six full calendar months following the Commencement Date. One monthly installment of rent is due and payable on the date of execution of this Lease by Lessee for the seventh month's rent and a like monthly installment is due and payable on or before the first day of each succeeding calendar month during the term of this Lease; provided, if the Commencement Date should be a date other than the first day of a calendar month, the free rental period set forth above will begin on the Commencement Date and the rental for the remainder of the calendar month in which the free rental period ends will be prorated and will due on the first day of the calendar month first following the end of the free rental period. Lessee shall pay, as additional rent, all other sums due under this Lease. If Lessee elects to lease the Must Take Space and the lease of the Must Take Space begins prior to the end of the free rental period (or would have begun during the free rental period except for Lessor Delay), Lessee will not be obligated to pay rent on the Must Take Space for the remainder of the free rental period. 2.05 Additional Rent. Lessee agrees to pay as additional rent, without deduction or set-off of any kind except as otherwise set forth herein, Lessee's pro rata share of all ad valorem taxes and installments of special assessments (including dues and assessments by means of deed restrictions and/or owner's associations) lawfully levied or assessed against the Building (as hereinafter defined) of which the Leased Premises are a part and any and all insurance required herein or which is standard for similar projects (specifically including fire and casualty, commercial general liability and rent loss insurance). Said ad valorem taxes, assessments and insurance shall be prorated and paid on or before the first day of every month commencing on the Commencement Date, in advance, as additional rent. The proration shall be based upon Lessor's estimate of ad valorem taxes, assessments and insurance for the current calendar year, provided, that in the event Lessor is required under a mortgage, deed of trust, underlying lease or loan agreement covering the Building to escrow ad valorem taxes, assessments or insurance, Lessor may but shall not be obligated, to use the amount required to be escrowed as a basis for its estimate. There will be an annual accounting as to actual ad valorem taxes, assessments and insurance and appropriate payment or credits made. To the extent the Commencement Date or Termination Date of the Lease is not on the first day of the calendar year or last day of the calendar year respectively, Lessee's liability for ad valorem taxes, assessments and insurance shall be subject to a pro rata adjustment based on the number of days of any such year during which the Term is in effect. Lessee shall have the right at its expense to contest or appeal by appropriate proceedings any value assessment rendered by applicable taxing authorities and Lessor shall cooperate to the extent reasonably necessary in such contest or appeal. To the extent the Leased Premises are part of a multi- occupancy building, Lessee shall pay a pro rata share of such ad valorem taxes, assessments and insurance, such pro rata share to be equal to the product obtained by multiplying the total of such real property taxes assessments and insurance by a fraction, the numerator of which shall be the number of square feet of floor area of the Leased Premises and the denominator of which shall be the number of square feet of floor area in the Building of which the Leased Premises are a part. 2.06 Operating Expenses. Lessee agrees to pay, as additional rent, Lessee's pro rata share (as determined by the formula set forth in Section 2.02 above) of Lessor's Operating Expenses for the Building without deduction or set- off of any kind except as otherwise set forth herein. Lessor may invoice Lessee monthly for Lessee's pro rata share of the estimated Operating Expenses for each calendar year, which amount shall be adjusted from time-to-time based upon anticipated Operating Expenses. As of the date hereof, it is estimated that the Operating Expenses, taxes and insurance for calendar year 2000 will be approximately $2.20 per rentable square foot. Lessor agrees that the Lessee's portion of the Operating Expenses for common area maintenance, less costs of utilities, costs required to meet applicable laws, and capitalized costs of capital improvements and operating efficiency devices, will not exceed seventy- eight cents ($.78) per rentable square foot during the first year of the Term (the "Base Amount"), and will not increase for any year by more than five percent (5%) per year (cumulative) over the Base Amount. Within four months following the close of each calendar year, Lessor shall provide Lessee an accounting showing in reasonable detail all computations of additional rent due under this Section. In the event the accounting shows that the total of the monthly payments made by Lessee exceeds the amount of additional rent due by Lessee under this Section, such amount shall be credited against the next required payment of base rent. In the event the accounting shows that the total of the monthly payments made by Lessee is less than the amount of additional rent due by Lessee under this Section, the account shall be accompanied by an invoice for the additional rent. If this Lease shall terminate on a day other than the last day of a calendar year, the amount of any additional rent payable by Lessee applicable to the year in which such termination shall occur shall be prorated on the ratio that the number of days from the commencement of the calendar year to and including the termination date bears to 365. Provided Lessee is not in default of any terms of this Lease, Lessee shall have the right, at its own expense, to audit Lessor's books relevant to the additional rent payable under this Section. With respect to such audit, Lessee 1) may review Lessor's books during office hours, 2) must perform such audit at the location of Lessor's books, 3) must request such audit within six (6) months of receipt of its annual reconciliation of Operating Expenses, 4) must deliver to Lessor a copy of the results of such audit, 5) may not audit the same calendar year more than one time. If, as a result of such audit, it is determined that the Operating Expenses have been overstated by 3% or more, Lessor shall be required to reimburse Lessee for the costs of such audit. Assignees of Lessee may only audit periods for which they occupy the Leased Premises and subtenants of Lessee shall have no audit rights. Lessee agrees to pay any additional rent due under this Section within ten (10) days following receipt of the invoice or accounting showing additional rent due. 2.04 Definition of Operating Expenses. The term "Operating Expenses" includes all expenses incurred by Lessor with respect to the maintenance and operation of the Building (except for items described below) and includes, but is not limited to, the following: maintenance, repair and replacement costs; security; wages and benefits payable to employees of Lessor to the extent their duties are directly connected with the operation and maintenance of the Building; management fees, all services, utilities for common areas, supplies, repairs, replacement or other expenses for maintaining and operating the common parking and plaza areas; the cost, amortized over its useful life, of any expense required to be capitalized under GAAP principles other than capital improvements; the cost, amortized over its useful life, of any capital improvement made to the Building by Lessor after the date of this Lease, if required under any governmental law or regulation other than improvements made to the Building to effect compliance with the Americans With Disabilities Act (the "ADA") or as otherwise set forth herein, which capital improvements must be of mutual benefit to all tenants of the Building; and the cost, amortized over its useful life, of installation of any device or other equipment to the extent it improves the operating efficiency of any system within the Leased Premises and thereby reduces Operating Expenses, provided that, prior to installing any such device or equipment, Lessor will inform Lessee of such installation and the estimated cost savings and Lessor and Lessee must reasonably agree upon the estimated cost savings before agreeing to such installation. The term Operating Expenses does not include the following: expenses incurred to maintain the roof, foundation and structural soundness of the exterior walls of the Building; expenses incurred should the entire roof the Building need to be replaced; expenses to bring the Building into compliance with applicable law such as the ADA and Environmental Laws, expenses incurred to abate or remove any Hazardous Substance in the Building that was placed there by Lessor, income and franchise taxes of Lessor; expenses incurred in leasing to or procuring of lessees, leasing commissions, advertising expenses and expenses for the renovating of space for new lessees; interest or principal payments on any mortgage or other indebtedness of lessor; compensation paid to any employee of Lessor other than maintenance and property management personnel to the extent these services are directly associated with the operation and maintenance of the Building; any depreciation allowance or expense (except for depreciation of capital improvements and equipment specifically included within the definition of Operating Expenses); or operating expenses which are the responsibility of Lessee or any other lessee of the Building; or expenses (herein called "Defect Expenses") incurred as a result of or caused by latent defects, punch list items, or Lessor's failure to construct the Shell Building Improvements or Lessee Improvements in accordance with the requirements of this Lease and substantially in accordance with the Final Shell Plans and Specifications and Lessee Improvements Final Plans and Specifications as provided herein (such items being herein called "Defects"); and/or operating expenses otherwise caused by or resulting from Lessor's breach of its obligations under the Lease. 2.05 Late Payment Charge. Other remedies for nonpayment of rent notwithstanding, if the monthly rental payment is not received by Lessor on or before the fifth day of the month for which the rent is due, or if any other payment due Lessor by Lessee is not received by Lessor on or before the fifth day of the month next following the month in which Lessee was invoiced, Lessee agrees to pay a late payment charge of five percent (5%) of such past due amount in addition to such amounts owed under this Lease, provided, however, that Lessee is hereby granted a waiver of this late payment charge once every twelve (12) months during the term of this Lease. In addition, Lessor is entitled to charge one-hundred dollars ($100.00) for each check or payment which is not honored by Lessee's bank. Said charge is in addition to any other amounts owed under this Lease. 2.06 Security Deposit. The security deposit set forth above will be held by Lessor for the performance of Lessee's covenants and obligations under this Lease, it being expressly understood that the deposit is not an advance payment of rental or a measure of Lessor's damage in case of default by Lessee. Upon the occurrence of any event of default by Lessee or breach by Lessee of Lessee's covenants under this Lease, Lessor may, from time to time, without prejudice to any other remedy, use the security deposit to the extent necessary to make good any arrears of rent, or to repair any damage or injury, or pay any expense or liability incurred by Lessor as a result of the event of default or breach of covenant, and any remaining balance of the security deposit will be returned by Lessor to Lessee within a reasonable period of time following termination of this Lease. If any portion of the security deposit is so used or applied, Lessee shall upon ten days written notice from Lessor, deposit with Lessor by cash or cashier's check an amount sufficient to restore the security deposit to its original amount. 2.08 Holding Over. In no event may Lessee remain in the Leased Premises following the expiration or termination of this Lease without Lessor's prior written consent. If Lessee does not vacate the Leased Premises upon the expiration or termination of this Lease, Lessee agrees that it will be a tenant at will for the holdover period and that all of the terms and provisions of this Lease are applicable during that period, except that Lessee shall pay Lessor as base rental for the period of such holdover an amount equal to 1.50 times the base rent being paid by Lessee immediately prior to the expiration or termination of the Lease. Lessee agrees to vacate and deliver the Leased Premises to Lessor immediately upon Lessee's receipt of notice from Lessor to vacate. Such notice may be given pursuant to the notice provisions of Section 14.07 herein. Lessee agrees to pay the rental payable during the holdover period to Lessor on demand. No holding over by Lessee, whether with or without the consent of Lessor and notwithstanding receipt by Lessee of an invoice from Lessor for holdover rent, will extend the term of this Lease. Additionally, Lessee shall pay to Lessor all damages sustained by Lessor as a result of such holding over by Lessee. ARTICLE 3.00 - OCCUPANCY AND USE 3.01 Use. Lessee warrants and represents to Lessor that the Leased Premises may be used and occupied only for the purpose as set forth in Section 1.06. Lessee shall occupy the Leased Premises, conduct its business and control its agents, employees, invitees and visitors in such a manner as is lawful, reputable, will not create a nuisance, interfere with standard Building operations, or affect the structural integrity or design capabilities of the Building. Lessee shall not permit any operation which emits any odor or matter which intrudes outside the Leased Premises, attracts rodents, use any apparatus or machine which makes undue noise or causes vibration in any portion of the Building or otherwise interfere with, annoy or disturb any other party outside the Leased Premises, including without limitation, any other tenant in the Building. Lessee shall neither permit any waste on the Leased Premises nor allow the Leased Premises to be used in any way which would, in the reasonable opinion of Lessor, be extra hazardous on account of fire or which would in any way increase or render void the fire insurance on the Building. If at any time during the Term the State Board of Insurance or other insurance authority disallows any of Lessor's sprinkler credits or imposes an additional penalty or surcharge in Lessor's insurance premiums because of Lessee's original or subsequent placement or use of storage racks or bins, method of storage or nature of Lessee's inventory or any other act of Lessee, Lessee agrees to pay as additional rent the increase in Lessor's insurance premiums. Notwithstanding anything set forth in this Section 3.01, in no way does Lessor warrant or represent, either expressly or impliedly, that Lessee's use of the Leased Premises is in accordance with applicable codes or ordinances of the municipality within which the Building is located. Lessee agrees to indemnify and hold Lessor harmless from all claims, demands, actions, liabilities, costs, expenses, damages and obligations of any nature arising from or as a result of the use of the Leased Premises by Lessee in violation of applicable codes or ordinances of the municipalities or any other government bodies within which the building is located. The foregoing indemnification and the responsibilities of Lessee survive the termination or expiration of this Lease. 3.09 Signs. No sign of any type or description may be erected, placed or painted in or about the Leased Premises of Building, including those advertising the Leased Premises for sublease, except (i) those signs which are in conformance with Lessor's sign criteria attached as Exhibit "C" and, (ii) at ----------- Lessee's option and expense, a free-standing "monument" sign consistent in quality and appearance with the architectural standards of the Building, and as approved in advance by Lessor. All signs must be in conformance with applicable governmental requirements and limitations (including any applicable restrictive covenants). Such permitted signs must be removed by Lessee upon expiration or termination of the Lease at Lessee's sole cost and expense. Any damage or discoloration from such removal will be repaired at Lessee's sole cost and expense. 3.10 Compliance with Laws, Rules and Regulations. Lessee, at Lessee's sole cost and expense (except as provided in Section 2.04 hereof), shall comply with all laws, ordinances, orders, rules and regulations now in effect or enacted subsequent to the date hereof by state, federal, municipal or other agencies or bodies having jurisdiction over Lessee or the use, condition and occupancy of the Leased Premises except that Lessor shall be responsible for construction of the Lessee Improvements in compliance therewith as of the Commencement Date, including, but not limited to, compliance with the ADA as to the Building, but excluding the interior of the Leased Premises which is Lessee's responsibility. Lessee will comply with the rules and regulations of the Building adopted by Lessor which are set forth on a schedule attached to this Lease. At any time, Lessor may change and amend the rules and regulations in any reasonable manner not inconsistent with the terms of this Lease as may be deemed advisable for the safety, care, cleanliness, preservation of good order and operation or use of the Building or the Leased Premises. All changes and amendments to the rules and regulations of the Building will be sent by Lessor to Lessee in writing and must thereafter be carried out and observed by Lessee. 3.11 Warranty of Possession and Enjoyment. Lessor warrants that it has the right and authority to execute this Lease, and Lessee, upon payment of the required rents and subject to the terms, conditions, covenants and agreements contained in this Lease, is entitled to possession and quiet enjoyment of the Leased Premises during the full term of this Lease as well as any extension or renewal thereof. Lessor is not responsible for the acts or omissions of any other lessee or third party that may interfere with Lessee's use and enjoyment of the Leased Premises. 3.12 Inspection. Lessor or its authorized agents may at any and all reasonable times enter the Leased Premises to inspect the same, conduct tests, environmental audits or other procedures to determine Lessee's compliance with the terms hereof; to supply any other service to be provided by Lessor; to show the Leased Premises to prospective purchasers, lessees, (within six months prior to termination of this Lease), or mortgagees; to alter, improve or repair the Leased Premises or any other portion of the Building or for any other purpose Lessor deems reasonably necessary. LESSEE HEREBY WAIVES ANY CLAIM FOR DAMAGES FOR INJURY OR INCONVENIENCE TO OR INTERFERENCE WITH LESSEE'S BUSINESS, ANY LOSS OF OCCUPANCY OR USE OF THE LEASED PREMISES, AND ANY OTHER LOSS OCCASIONED BY INSPECTIONS MADE UNDER THIS SECTION INCLUDING CLAIMS RESULTING FROM THE NEGLIGENCE OF LESSOR BUT EXCLUDING ANY CLAIMS RESULTING FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF LESSOR. Lessee shall not change Lessor's lock system or in any other manner prohibit Lessor from entering the Leased Premises. Lessor is entitled to use any and all means which Lessor may deem proper to open any door in an emergency without liability therefor. During the final one-hundred eighty days of the Lease term, Lessor or its authorized agents have the right to erect or maintain on or about the Leased Premises or the Building customary signs advertising the Leased Premises for lease or sale. 3.13 Hazardous Waste. The term "Hazardous Substances," as used in this Lease means pollutants, contaminants, toxic or hazardous wastes, or any other substances, the use and/or the removal of which is required or the use of which is regulated, restricted, prohibited or penalized by any "Environmental Law," which term means any federal, state or local law, ordinance or other statute of a governmental or quasi-governmental authority relating to pollution or protection of the environment. Lessee hereby agrees that (i) no activity will be conducted on the Leased Premises that will produce any Hazardous Substance, except for such activities that are part of the ordinary course of Lessee's business activities (the "Permitted Activities"), provided said Permitted Activities are conducted in accordance with all Environmental Laws and have been approved in advance in writing by Lessor; Lessee shall obtain all required permits and pay all fees and conduct any testing required by any governmental agency; (ii) the Leased Premises will not be used in any manner for the storage of any Hazardous Substances except for the temporary storage of such materials that are used in the ordinary course of Lessee's business (the "Permitted Materials") provided such Permitted Materials are properly stored in a manner and location meeting all Environmental Laws and approved in advance in writing by Lessor; Lessee shall obtain all required permits and pay all fees and conduct any testing required by any governmental agency in connection with the Permitted Materials; (iii) no portion of the Leased Premises or Building will be used as a landfill or a dump; (iv) Lessee will not install any underground or above ground tanks of any type; (v) Lessee will not allow any surface or subsurface conditions to exist or come into existence that constitute, or with the passage of time may constitute a public or private nuisance; (vi) Lessee will not permit any Hazardous Substances to be brought onto the Leased Premises or Building, except for the Permitted Materials, and if so brought or found located thereon (except for pre-existing conditions or matters caused by the Lessor), the same must be immediately removed, with proper disposal, and all required cleanup procedures must be diligently undertaken pursuant to all Environmental Laws. Lessor or Lessor's representative's may, but are not required to, enter the Leased Premises for the purpose of inspecting the storage, use and disposal of Permitted Materials to ensure compliance with all Environmental Laws. Should it be determined, in Lessor's sole opinion, that said Permitted Materials are being improperly stored, used, or disposed of, then Lessee shall immediately take such corrective action as requested by Lessor. Should Lessee fail to take such corrective action within twenty-four (24) hours, Lessor has the right to perform such work and Lessee shall promptly reimburse Lessor for any and all costs associated with said work. If at any time during or after the term of the Lease, the Leased Premises or Building are found to be so contaminated or subject to said conditions as a result of Lessees breach of the terms of this Lease, Lessee shall diligently institute proper and thorough cleanup procedures at Lessee's sole cost. Before taking any action to comply with Environmental Laws or to clean up Hazardous Substances contaminating the Leased Premises or Building, Lessee shall submit to Lessor a plan of action, including any and all plans and documents required by any Environmental Law to be submitted to a governmental authority (collectively a "plan of action"). Such plan of action must be implemented by a licensed environmental contractor. Before Lessee begins the actions necessary to comply with Environmental Laws or to clean up contamination from Hazardous Substances, Lessor must have (1) approved the nature, scope and timing of the plan of action, and (2) approved any and all covenants and agreements to effect the plan of action. Lessee agrees to indemnify and hold Lessor harmless from all claims, demands, actions, liabilities, costs, expenses, damages and obligations of any nature arising from or as a result of the use of the Leased Premises or Building by Lessee in violation of this Section 3.06 but excluding pre-existing conditions or matters resulting from the negligence or willful misconduct of Lessor. The foregoing indemnification and the responsibilities of Lessee survive the termination or expiration of this Lease. Lessee represents that it has not been previously cited for any environmental violations by any applicable governmental agency and that there are no Permitted Materials to be stored in or upon the Leased Premises. In no event will any Permitted Materials be stored in or upon the Leased Premises without Lessor's prior written consent. 3.14 Parking and Road Use. Except as the number of spaces may be reduced pursuant to Section 3.08, Lessor will ensure that Lessee will have available to use, for the benefit of Lessee, its employees, customers, invitees and licensees, six (6) parking spaces for each 1000 rentable square feet of Leased Premises in the parking areas adjacent to the Building of which the Leased Premises are a part on an unassigned, unreserved basis, subject to reasonable regulation by Lessor. Lessor may use additional parking spaces if available, on a first come, first serve basis unless such use interferes with another tenant's rights. Lessor reserves the right in its sole discretion to designate specific areas within the parking areas for the exclusive use of visitors and invitees to the Building and others. Included in the aggregate allowance of parking spaces shall be five (5) designated, reserve parking spaces for the exclusive use of Lessee, location of such spaces to be agreed upon by Lessor and Lessee and to be shown on the site plan attached hereto as Exhibit "A", provided that Lessor shall not be responsible for monitoring use of such spaces. Should Lessee increase the square footage of the Leased Premises at any time, Lessee shall be allowed additional parking spaces according to the ratio set forth herein. Any parking permitted by Lessor on any common drive areas by Lessee or any of Lessee's employees, customers, invitees or licensees will be permitted upon the express condition that all such drives must be kept clear for through traffic of all vehicles, including tractor-trailers. No driving or parking of any vehicles on non-paved areas adjoining the Building or within the Project of which the Building is a part is permitted. Lessee's failure to use all of the parking spaces allocated to it under this Section will not constitute a waiver by Lessee of the right to use those parking spaces at a later time. 3.15 Satellite Dishes. Lessor agrees that Lessee may locate one or more satellite dishes or other telecommunications equipment on the roof of the Building or on the land on which the Building is constructed, provided the placement of the satellite dishes or other telecommunications equipment does not effect the structural integrity of the Building or materially impair the appearance of the Building or the land on which the Building is constructed and Lessee obtains Lessor's written approval as to location and size of satellite prior to the installation of such. ARTICLE 4.00 - UTILITIES, SERVICE, SIGNAGE 4.03 Security Lighting. Lessor shall install security lighting at all entrances to the Leased Premises and in the parking lots adjacent to the Leased Premises at its expense; provided, however, the Lessor shall make no representation or warranty as to the sufficiency or adequacy of such lighting or the effectiveness thereof for security. 4.04 Building Services. Lessor shall provide the normal utility service connections to the Building. Lessee shall pay directly to the appropriate supplier the cost of all utility services to the Leased Premises, including, but not limited to, any required security deposits and initial connection charge, all charges for gas, electricity, telephone, water, sanitary and storm sewer service and security systems. If any services are jointly metered with other Leased Premises or property (for example, exterior lighting), Lessor shall make a reasonable determination of Lessee's proportionate share of the cost of such services and Lessee shall pay such share to Lessor within ten (10) days of receipt of any invoice thereof. Lessee shall pay all costs caused by Lessee introducing excessive pollutants or solids other than ordinary human waste into the sanitary sewer system, including permits, fees and charges levied by any governmental subdivision for any such pollutants or solids. Lessee shall be responsible for the installation and maintenance of any dilution tanks, holding tanks, settling tanks, sewer sampling devices, sand traps, grease traps or similar devices as may be required by any governmental subdivision for Lessee's use of the sanitary sewer system. If the Leased Premises are in a multi- occupancy Building, Lessee shall pay all surcharges levied due to Lessee's use of sanitary sewer or waste removal services insofar as such surcharges affect Lessor or other Lessees in the Building. Except as set forth herein, Lessor shall not be required to pay for any utility service, supplies or upkeep in connection with the Leased Premises or Building. Utility services for the common areas shall be part of Operating Expenses. Lessee agrees that Lessor is not liable to Lessee in any respect for damages to either person, property or business on account of any interruption or failure of utilities or services furnished by Lessor provided that Lessor uses reasonable diligence to repair the same promptly. No such interruption or failure may be construed as an eviction of Lessee or entitle Lessee to (i) any abatement of rent, (ii) terminate the Lease, or (iii) be relieved from fulfilling any covenant or agreement contained herein. Should any malfunction of the improvements or facilities to the Leased Premises or Building (which by definition do not include any improvements or facilities of Lessee above Building standard improvements) occur for any reason, Lessor shall use reasonable diligence to repair same promptly, but Lessee will not be entitled to any claim for rebate or abatement of rent or damages on account of such malfunction or of any interruptions in service occasioned thereby or resulting therefrom. 4.03 Theft or Burglary. Lessee expressly acknowledges that whether or not Lessor, from time to time, elects to provide security services, Lessor has not, nor will Lessor be deemed to have, warranted the efficiency of any security personnel, service, procedures or equipment and Lessor is not liable in any manner for the failure of any of the foregoing to prevent or control or apprehend anyone suspected of theft, personal injury, property damage or any criminal conduct in, on or around the Building. Lessee agrees that Lessor is not liable to Lessee for losses to Lessee's property or personal injury caused by criminal acts or entry by unauthorized persons into the Leased Premises. Lessee is responsible for the cost of repairs of damage and restoration of the Leased Premises following any such act. ARTICLE 5.00 - REPAIRS AND MAINTENANCE 5.07 Existing Conditions. On the Commencement Date, Lessee shall be deemed to have accepted the Leased Premises in their then existing condition, subject to all recorded matters, laws, ordinances, and governmental regulations and orders.; provided that, Lessee's acceptance of the Leased Premises shall not relieve Lessor from any maintenance and repair obligations under this Lease. Lessee acknowledges that neither Lessor nor any agent of Lessor has made any warranty or representation of any kind, either express or implied as to the condition of the Leased Premises or the suitability of the Leased Premises for Lessee's intended use other than that the Leased Premises will be constructed in accordance with the Lessee Improvements Final Plans and Specifications and will be free from Hazardous Materials. The taking of the possession of the Leased Premises by Lessee is intended by the parties to be conclusive evidence that Lessee accepts the Leased Premises and Lessor has complied with its obligations of Section 6.01 herein except for Defects (as defined in Section 2.04 hereof), the presence of Hazardous Materials, and punch list items. Prior to taking occupancy of the Leased Premises, Lessee shall sign a copy of the space plan of the Leased Premises acknowledging its condition on the date thereof (unless Lessor waives such requirement) and execute the Certificate of Acceptance form attached as Exhibit "D" accepting such condition of the Premises except for Defects, the presence of Hazardous Materials and punch list items. 5.08 Lessor Repairs And Maintenance. Lessor shall manage the Building in accordance with property management standards customary to the area and will keep the Building in compliance with all legal and regulatory requirements (including Environmental Laws, Americans with Disabilities Act, and municipal codes and ordinances). Lessor agrees to indemnify and hold Lessee harmless from all claims, demands, actions, liabilities, costs, expenses, damages and obligations of any nature arising from or as a result of the failure of the building to be in compliance with applicable laws and regulation. Lessor is not required to make any improvements, replacements or repairs of any kind or character to the Leased Premises during the Term. Lessor shall maintain the roof, foundation and structural soundness of exterior walls of the Building, mechanical, electrical and plumbing systems serving the Building and common areas, in good repair and condition except for reasonable wear and tear. Lessor shall also perform all ground maintenance, landscaping, pest control, and removal of debris from outside receptacles. Lessee agrees that Lessor is not liable to Lessee, except as expressly provided in this Lease, for any damage or inconvenience, and Lessee is not entitled to any abatement or reduction of rent by reason of any repairs, reasonable alterations or additions made by Lessor under this Lease. Should Lessor not repair or maintain the Building or the Leased Premises as required hereunder, after providing written notice to Lessor and after a thirty (30) day opportunity to cure by Lessor, or such longer period as shall be necessary, provided that Lessor has not commenced such repair within such 30 day period and has not diligently pursued same thereafter, Lessee may make such repairs or perform such maintenance and Lessor shall promptly reimburse Lessee for any reasonable expenses incurred by Lessee in performing such work, or if the Leased Premises are untenantable, Lessee may terminate this Lease. 5.09 Lessee Repairs And Maintenance. Lessee shall, at its sole cost and expense, maintain and repair the Leased Premises in good repair and condition, including, but not limited to carpet or other floor covering, interior partitions, doors, interior side of demising walls, telephone and computer cabling that serves Lessee's equipment exclusively, any supplemental air conditioning, interior water closets, kitchens and plumbing in connection therewith and any alterations, additions or improvements made by or on behalf of Lessee. Lessee shall take good care of all personal property and fixtures located within the Leased Premises. Lessee shall repair and pay for any damage caused by any act or omission of Lessee or Lessee's agents, employees, invitees, licensees or visitors to the Leased Premises, the Building, or the project. If Lessee fails to maintain, repair or replace promptly as required herein, Lessor may, at its option, and following at least thirty (30) days' advance written notice to Lessee, perform on Lessee's behalf and charge the cost of such performance to Lessee as additional rent which is due and payable by Lessee within ten (10) days from receipt of Lessor's invoice. Costs incurred under this section are the total responsibility of Lessee. 5.10 Request for Repairs. All requests for repairs or maintenance that are the responsibility of Lessor pursuant to any provision of this Lease must be made in writing to Lessor at the address in Section 1.05 and delivered pursuant to Section 14.07. After receipt of written notice, Lessor is entitled to a reasonable time within which to perform such repairs or maintenance. 5.11 Lessee Damages. Lessee shall not allow any damage to be committed on any portion of the Leased Premises or Building, and at the termination of this Lease, by lapse of time or otherwise, Lessee shall deliver the Leased Premises to Lessor in as good condition as existed at the Commencement Date of this Lease, ordinary wear and tear and casualty loss excepted. Lessor's standard move-out checklist will be followed by Lessee to ensure compliance with this provision. The cost and expense of any repairs necessary to restore the condition of the Leased Premises must be borne by Lessee. Should Lessor be required to expend any sums to ensure compliance with this Section 5.05, Lessee shall reimburse Lessor within ten (10) days of receipt of notice from Lessor. 5.12 Maintenance Contract. Lessor may, as an Operating Expenses, during the term of this Lease maintain a regularly scheduled preventative maintenance/service contract on an annual basis with a maintenance contractor for the servicing of all general sprinkler systems, hot water, heating and air conditioning systems and equipment within or servicing the Building. Lessee shall maintain, at Lessee's sole cost and expense, a regularly scheduled preventative maintenance/service contract on an annual basis with a maintenance contractor for the servicing of all hot water, heating and air conditioning systems within or exclusively servicing the Leased Premises. ARTICLE 6.00 - ALTERATIONS AND IMPROVEMENTS 6.02 Initial Lessee Improvements. A. Lessee Improvements. Lessee shall prepare final plans and ------------------- specifications for construction of the Lessee Improvements desired by Lessee and shall deliver to Lessor by July 1, 1999, two (2) copies of such plans and specifications and the names of two proposed contractors to construct the Lessee Improvements for Lessor approval. Lessor will promptly either approve of the plans and specifications and the contractors, or communicate its objections, and if Lessor has objections, the Lessor will work diligently with Lessee to resolve any objections such that approval of the plans and specifications and names of contractors is given within fifteen (15) days of receipt. Lessor shall be deemed to have approved the plans and specifications and the contractors unless Lessor shall have provided written notice to Lessee of Lessor's objections thereto within fourteen (14) days following the delivery thereof by Lessee to Lessor. The Lessor approved final plans and specifications for the Lessee Improvements are herein called the "Lessee Improvements Final Plans and Specifications". All reasonable costs involved in approving, drafting and preparing the Lessee Improvements Final Plans and Specifications shall be charged against the Improvement Allowance described below. Lessor shall apply for building permits to construct the Lessee Improvements and will submit bid requests to the two contractors selected by Lessee and the contractor for the Shell Building Improvements no later than two (2) days following approval of the Lessee Improvements Final Plans and Specifications. Contractors will be required to submit their bids no later than thirty (30) days following receipt of the bid request. Lessee shall have fifteen (15) days from receipt of all bids to select the contractor for the Lessee Improvements. Except for immaterial field changes, modifications to the Lessee Improvements Final Plans and Specifications must be made and accepted only by written change order or agreement signed by Lessor and Lessee and will constitute an amendment to this Lease. Lessee shall be responsible for payment in advance of all work and construction resulting from changes in the Lessee Improvements Final Plans and Specifications requested by Lessee if the additional cost attributable to the changes exceed the Improvement Allowance by more than $3.00 as described in subparagraph (c) below. The Lessee Improvements Final Plans and Specifications (when approved by Lessor and Lessee) are incorporated in this Lease by reference. For the purpose of this Section, an "immaterial field change" shall mean such field changes which are required by any governmental authority or changes which (i) do not affect the size, configuration, structural integrity, quality, character, architectural appearance and standard of workmanship contemplated in the Lessee Improvements Final Plans and Specifications, (ii) will not result in any default in any obligation to any person or violation of any governmental requirements, and (iii) the cost of or reduction resulting from any single field change or extra does not exceed $5,000.00. B. Subject to the Lessee's payment obligations under (c) below, Lessor shall cause the Lessee Improvements to be completed in a good and workmanlike manner, in accordance with all applicable laws and regulations, and in accordance with the Lessee Improvements Final Plans and Specifications. Lessor shall coordinate construction of Lessee Improvements, keeping Lessee informed on the progress of the work and of any expenditures made to perform such work and for such services shall be paid a construction management fee of five percent (5%) of the Hard Costs of such Lessee Improvements, which fee shall be paid out of the Improvement Allowance (as hereinafter defined). "Hard Costs" are the costs of labor, material and permits and licenses necessary to construct the Lessee Improvements, and do not include any legal, architectural, management or engineering expenses. Lessor agrees that all construction contracts and architectural contracts shall provide that the general contractor and architect for the project shall provide status reports and other reports relating to the construction of the Lessee Improvements to Lessee as well as to Lessor, and Lessee shall have the right at any and all times to inspect the Lessee Improvements at all stages of construction. Lessor agrees to cooperate with Lessee on any changes to the Lessee Improvements and agrees to provide to Lessee copies of all draw requests and the underlying documentation relating to the draw requests to Lessee. Lessor agrees to keep the Leased Premises free from any and all mechanic's or materialman's liens and to pay promptly for all work to be performed relative to the construction project. In the event any such lien attaches to the Leased Premises as a result of Lessor's actions, and if Lessor does not contest the lien diligently and in good faith or does not proceed in its effort to remove the lien, then, in addition to any other right or remedy of Lessee, Lessee may, but is not obligated to, obtain the release or otherwise discharge the same or to obtain a bond in satisfaction of same. Any amount paid by Lessee in order to release or discharge any such lien must be paid by Lessor to Lessee on demand. C. Lessor shall provide Lessee with an improvement allowance of $22.00 per rentable square foot of the Leased Premises (the "Improvement Allowance"). The Improvement Allowance shall be paid out from time to time to pay for costs incurred by Lessor in connection with the Lessee Improvements, including costs of Lessee's architect and/or space planner, the construction management fee of five percent (5%) of the Hard Costs of construction, and third party contractors as the Lessee Improvements progress. Lessee shall pay those costs of construction of the Lessee Improvements in excess of the Improvement Allowance, if any, and such amounts shall be paid by Lessee to Lessor within thirty (30) days following receipt by Lessee of a written request therefor from Lessor. In the event the costs and expenses of the Lessee Improvements shall exceed the Improvement Allowance, then at the option of Lessee and upon written request by Lessee and approval by Lessor's mortgagee/lender, the Lessor shall fund up to $3.00 per rentable square foot within the Leased Premises of such excess amounts and such excess amounts so funded by Lessor shall be paid by Lessee to Lessor as additional monthly rent. The amount to be added on a monthly basis to Base Rent shall be that monthly amount necessary to fully amortize, on a straight line basis, the excess amount over the term of this Lease at a ten percent (10%) interest rate. 6.02 Additional Lessee Improvements. Except as provided in Section 6.01 above, Lessee shall not make or allow to be made any material alterations or physical additions in or to the Leased Premises without complying with all local, state and federal ordinances, laws, statutes and without first obtaining the written consent of Lessor, which consent may not be unreasonably withheld. In any event, Lessee shall provide Lessor with a copy of the plans and specifications for any such alterations or improvements. Any alterations, physical additions or improvements to the Leased Premises (including Lessee Improvements) made by Lessor or Lessee become the property of Lessor and must be surrendered to Lessor upon the termination of this Lease without credit to Lessee. This clause does not apply to moveable equipment, trade fixtures, personal property or furniture owned by Lessee, which may be removed by Lessee at the end of the term of this Lease if Lessee is not then in default, if such equipment and furniture are not then subject to any other rights, liens and interest of Lessor and such removal can be accomplished without material damage to the Leased Premises and, if there shall exist any damage caused by such removal, such damage shall be repaired by Lessee. Upon completion of any such work by Lessee, Lessee shall provide Lessor with "as built plans", copies of all construction contracts and proof of payment for all labor and materials. Notwithstanding the above, Lessee shall be allowed, without prior approval of Lessor, to make $5,000.00 in non-structural alterations in any one calendar year, not to exceed an aggregate of $25,000.00 over the initial term of the Lease. 6.03 Mechanic's Lien. Lessee will not permit any mechanic's or materialman's lien(s) or other lien to be placed upon the Leased Premises or the Building and nothing in the Lease is intended in any way to constitute the consent by (or request of) Lessor, express or implied, by inference or otherwise, to any person for the performance of any labor or the furnishing of any materials to the Leased Premises, or any part that would give the rise to any mechanic's or materialman's or other lien against the Leased Premises. In the event any such lien attaches to the Leased Premises as a result of Lessee's actions, and if Lessee does not contest the lien diligently and in good faith or does not succeed in its effort to remove the lien, then, in addition to any other right or remedy of Lessor, Lessor may, but is not obligated to, obtain the release or otherwise discharge the same or to obtain a bond in satisfaction of same. Any amount paid by Lessor in order to release or discharge any such lien must be paid by Lessee to Lessor on demand as additional rent. ARTICLE 7.00 - CASUALTY AND INSURANCE 7.01 Substantial Destruction. If the Leased Premises or any part thereof are damaged by fire or other casualty, Lessee shall give prompt written notice thereof to Lessor. 1) If the Leased Premises are totally destroyed by fire or other casualty, 2) if the Leased Premises are damaged so that rebuilding cannot reasonably be completed within one hundred eighty (180) days after the date of written notification by Lessee to Lessor of the destruction, 3) if the Leased Premises are part of a Building which is substantially destroyed (even though the Leased Premises are not totally or substantially destroyed), 4) if the Leased Premises or Building is damaged by fire or other casualty and applicable law would prevent rebuilding to substantially the condition prior to such fire or casualty, 5) if any mortgagee requires the insurance proceeds payable as a result of such casualty to be applied to the payment of the mortgage debt or 6) the Leased Premises are materially damaged and less than two (2) years remain on the Term on the date of such casualty, Lessor or Lessee may at their option terminate this Lease by providing the other written notice thereof within sixty (60) days of such casualty and all obligations under the Lease shall terminate as of the date of the casualty; provided, however, Lessee shall not have the right to terminate this Lease if Lessor has theretofore commenced and is diligently pursuing rebuilding. 7.02 Partial Destruction. If this Lease is not terminated under Section 7.01, Lessor shall at its sole risk and expense proceed with reasonable diligence to rebuild or repair the Building or other improvements to substantially the same condition in which they existed prior to the damage, provided, Lessor has no obligation to repair or rebuild Lessee's furniture, fixtures or personal property. If the destruction was caused by an act or omission of Lessee, its employees, agents, or invitees, Lessee shall pay Lessor the difference between the actual cost of rebuilding or repairing the Leased Premises and any insurance proceeds received by Lessor. If the Leased Premises are to be rebuilt or repaired and are untenantable in whole or in part following the damage, either because of the damage or the rebuilding or repairing, and the damage or destruction was not caused or substantially contributed to by any act or negligence of Lessee, its agents, employees, invitees or those for whom Lessee is responsible, the rent payable under this Lease during the period for which the Leased Premises are untenantable will be adjusted to such an extent as may be fair and reasonable under the circumstances. If Lessor fails to complete the necessary repairs or rebuilding within one hundred fifty days from the date of the destruction, Lessee may at its option terminate this Lease by delivering written notice of termination to Lessor, whereupon all rights and obligations under this Lease cease to exist. If any damage or destruction occurs to the Leased Premises during the last twenty-four (24) months of the Lease term, Lessor may elect to terminate this Lease as of the date Lessee notifies Lessor of such damage. Lessor and Lessee hereby waive the provisions of any law from time to time in effect during the Term relating to the effect upon leases of partial or total destruction of Leased property and agree that their respective rights in the event of damage or destruction are those specifically set forth herein. 7.03 Property Insurance. Lessor shall at all times during the term of this Lease maintain a policy or policies of insurance with the premiums paid in advance, issued by and binding upon some solvent insurance company having an "A" rating or better, insuring the Building against all risk of direct physical loss in an amount equal to the full replacement cost of the Building structure and its improvements as of the date of the loss, providing protection against all perils, including, without limitations fire, extended coverage, vandalism, malicious mischief, a standard mortgagee clause and rental coverage; provided, Lessor is not obligated in any way or manner to insure any personal property (including, but not limited to, any furniture, machinery, goods or supplies) of Lessee upon or within the Leased Premises, any fixtures installed or paid for by Lessee upon or within the Leased Premises, or any improvements which Lessee may construct on the Leased Premises. The rental insurance policy will be for the full rental value for a period of one year, which insurance also covers real estate taxes, insurance and other amounts which might be due Lessor from Lessee pursuant to the terms of this Lease. Lessee agrees that it is not entitled to the proceeds of any policy of insurance maintained by Lessor even if the cost of such insurance is borne by Lessee as set forth in Article 2.00. Notwithstanding the foregoing, in the event Lessor has a net worth in excess of $50,000,000, it shall be entitled to self insure against all risk provided for in this paragraph in lieu of obtaining the insurance set forth herein. 7.04 Waiver of Subrogation. ANYTHING IN THIS LEASE TO THE CONTRARY NOT WITHSTANDING, LESSOR AND LESSEE HEREBY WAIVE AND RELEASE EACH OTHER OF AND FROM ANY AND ALL RIGHT OF RECOVERY, CLAIM, ACTION OR CAUSE OF ACTION, AGAINST EACH OTHER, THEIR AGENTS, OFFICERS AND EMPLOYEES, FOR ANY LOSS OR DAMAGE THAT MAY OCCUR TO THE LEASED PREMISES, IMPROVEMENTS TO THE BUILDING OF WHICH THE LEASED PREMISES ARE A PART, OR PERSONAL PROPERTY WITHIN THE BUILDING, BY REASON OF FIRE, EXPLOSION, OR ANY OTHER OCCURRENCE, REGARDLESS OF CAUSE OR ORIGIN, INCLUDING NEGLIGENCE OF LESSOR OR LESSEE AND THEIR AGENTS, OFFICERS AND EMPLOYEES. LESSOR AND LESSEE AGREE IMMEDIATELY TO GIVE THEIR RESPECTIVE INSURANCE COMPANIES WHICH HAVE ISSUED POLICIES OF INSURANCE COVERING ALL RISK OF DIRECT PHYSICAL LOSS, WRITTEN NOTICE OF THE TERMS OF THE MUTUAL WAIVERS CONTAINED IN THIS SECTION AND TO HAVE THE INSURANCE POLICIES PROPERLY ENDORSED, IF NECESSARY, TO PREVENT THE INVALIDATION OF THE INSURANCE COVERAGE BY REASON OF THE MUTUAL WAIVERS. 7.05 Hold Harmless. Lessor will not be liable to Lessee's employees, agents, invitees, licensees or visitors, or to any other person, for an injury to person or damage to property on or about the Leased Premises caused by any act or omission of Lessee, its agents, servants or employees, any tenant in the Building of which the Leased Premises are a part, or of any other person entering upon the Leased Premises under express or implied invitation by Lessee, the failure or cessation of any service provided by Lessor (including security service and devices or caused by leakage of gas, oil, water or steam or by electricity emanating from the Leased Premises) except as provided in this Lease. Lessee agrees to indemnify and hold harmless Lessor of and from any loss, attorney's fees, expenses or claims arising out of any such damage or injury except for damages or injury caused by Lessor's negligence, recklessness or willful misconduct. 7.06 A. At all times commencing on and after the earlier of the Commencement Date and the date Lessee or its agents, employees or contractors enters the Leased Premises for any purpose, Lessee shall carry and maintain, at its sole cost and expense: 1. Commercial General Liability Insurance applicable to the Leased Premises and its appurtenances providing, on an occurrence basis, a minimum combined single limit of Two Million Dollars ($2,000,000.00), with a contractual liability endorsement covering Lessee's indemnity obligations under this Lease; 2. All Risks of Physical Loss Insurance written at replacement cost value and with a replacement cost endorsement covering all of Lessee's personal property and improvements in the Leased Premises; 3. Workers' Compensation Insurance as required by the state in which the Leased Premises is located and in amounts as may be required by applicable statute; 4. Business interruption or loss of income insurance in amounts satisfactory to Lessor; and 5. Whenever good business practice, in Lessor's reasonable judgment, indicates the need of additional insurance coverage or different types of insurance in connection with the Leased Premises or Lessee's use and occupancy thereof, Lessee shall, upon request, obtain such insurance at Lessee's expense and provide Lessor with evidence thereof. B. Before any repairs, alterations, additions, improvements, or construction are undertaken by or on behalf of Lessee, Lessee shall carry and maintain, at its expense, or Lessee shall require any contractor performing work on the Leased Premises to carry and maintain, at no expense to Lessor, in addition to Workers' Compensation Insurance as required by the jurisdiction in which the Building is located, All Risk Builder's Risk Insurance in the amount of the replacement cost of any alterations, additions or improvements (or such other amount reasonably required by Lessor) and Commercial General Liability Insurance (including, without limitation, Contractor's Liability coverage, Contractual Liability coverage and Completed Operations coverage,) written on an occurrence basis with a minimum combined single limit of Two Million Dollars ($2,000,000.00) and adding "the named Lessor hereunder (or any successor thereto), and its respective members, principals, beneficiaries, partners, officers, directors, employees, agents and any Mortgagee(s)", and other designees of Lessor as the interest of such designees appear, as additional insureds (collectively referred to as the "Additional Insureds"). C. Any company writing any insurance which Lessee is required to maintain or cause to be maintained pursuant to the terms of this Lease (all such insurance as well as any other insurance pertaining to the Leased Premises or the operation of Lessee's business therein being referred to as "Lessee's Insurance"), as well as the form of such insurance, are at all times subject to Lessor's reasonable approval, and each such insurance company must have an A.M. Best rating of "A-" or better and be licensed and qualified to do business in the state in which the Leased Premises are located. All policies evidencing Lessee's Insurance (except for Workers' Compensation Insurance) must specify Lessee as named insured and the Additional Insureds as additional insureds. Provided that the coverage afforded Lessor and any designees of Lessor is not reduced or otherwise adversely affected, all of Lessee's Insurance may be carried under a blanket policy covering the Leased Premises and any other of Lessee's locations. All policies of Lessee's Insurance must contain endorsements requiring that the insurer(s) give Lessor and its designees at least thirty (30) days' advance written notice of any change, cancellation, termination or lapse of said insurance. Lessee shall be solely responsible for payment of premiums for all of Lessee's Insurance. Lessee shall deliver to Lessor at least fifteen (15) days prior to the time Lessee's Insurance is first required to be carried by Lessee, and upon renewals at least fifteen (15) days prior to the expiration of any such insurance coverage, certified copies of all policies procured by Lessee in compliance with its obligations under this Lease. The limits of Lessee's Insurance do not in any manner limit Lessee's liability under this Lease. D. Lessee shall not do or fail to do anything in, upon or about the Leased Premises which will (1) violate the terms of any of Lessor's insurance policies; (2) prevent Lessor from obtaining policies of insurance acceptable to Lessor or any Mortgagees; or (3) result in an increase in the rate of any insurance on the Leased Premises, the Building, any other property of Lessor or of others within the Building. In the event of the occurrence of any of the events set forth in this Section, Lessee shall pay Lessor upon demand, as additional rent, the cost of the amount of any increase in any such insurance premium, provided that the acceptance by Lessor of such payment may not be construed to be a waiver of any rights by Lessor in connection with a default by Lessee under the Lease. If Lessee fails to obtain the insurance coverage required by this Lease, Lessor may, at its option, obtain such insurance for Lessee, and Lessee shall pay, as additional rent, the cost of all premiums thereon and all of Lessor's costs associated therewith. ARTICLE 8.00 - CONDEMNATION 8.01 Substantial Taking. If all or a substantial portion of the Leased Premises or a substantial portion of the Building of which the Leased Premises are a part (even though the Leased Premises are not taken) are taken for any public or quasi-public use under any governmental law, ordinance or regulation, or by right of eminent domain or by purchase in lieu thereof, and the taking would prevent or materially interfere with the use of the Leased Premises or the Building of which the Leased Premises are a part for the purpose for which it is then being used, then Lessor and Lessee have the option to terminate this Lease and to abate the rent during the unexpired portion of this Lease effective on the date title or physical possession is taken by the condemning authority, whichever occurs first. All proceeds of any taking are the sole property of Lessor and Lessee agrees that Lessee is not entitled to any condemnation award or proceeds in lieu thereof. 8.02 Partial Taking. If a portion of the Leased Premises or a portion of the Building of which the Leased Premises are a part are taken for any public or quasi-public use under any governmental law, ordinance or regulation, or by right of eminent domain or by purchase in lieu thereof, and this Lease is not terminated as provided in Section 8.01 above, Lessor shall at Lessor's sole risk and expense, restore and reconstruct the Building and other improvements on the Leased Premises to the extent necessary to make it reasonably tenantable; provided, if the damages received by Lessor are insufficient to cover the costs of restoration, Lessor may terminate this Lease. The rent payable under this Lease during the unexpired portion of the term will be adjusted to such an extent as may be fair and reasonable under the circumstances. All proceeds of any taking are the sole property of Lessor and Lessee agrees that Lessee is not entitled to any condemnation award or proceeds in lieu thereof. ARTICLE 9.00 - ASSIGNMENT OR SUBLEASE 9.01 Lessor Assignment. Lessor may sell, transfer or assign, in whole or in part, its rights and obligations under this Lease and in the Leased Premises. Any such sale, transfer or assignment will release Lessor from any and all liabilities under this Lease arising after the date of such sale, assignment or transfer, so long as such transferee or assignee assumes the obligations of Lessor hereunder. 9.02 Lessee Assignment. Except for an assignment to an affiliate and except in the case of a merger or consolidation by Lessee with or into another entity, Lessee shall not assign, in whole or in part, this Lease, or allow it to be assigned, in whole or in part, or mortgage or pledge the same or sublet the Leased Premises, in whole or in part, without the prior written consent of Lessor which consent may not be unreasonably withheld, and in no event will any such assignment or sublease ever release Lessee or any guarantor from any obligation or liability hereunder unless consented to by Lessor. No assignee or sublessee of the Leased Premises or any portion thereof may assign or sublet the Leased Premises or any portion thereof. 9.03 Conditions of Assignment. If Lessee desires to assign or sublet all or any part of the Leased Premises or grant any license, concession or other right of occupancy of any portion of the Leased Premises, it must so notify Lessor at least thirty days in advance of the date on which Lessee desires to make such assignment or sublease. Lessee must provide Lessor with a copy of the proposed assignment or sublease and such information as Lessor might reasonably request concerning the proposed sublessee or assignee to allow Lessor to make informed judgments as to the financial condition, reputation, operations and general desirability of the proposed sublessee or assignee. Within fifteen days after Lessor's receipt of Lessee's proposed assignment or sublease and all required information concerning the proposed sublessee or assignee, Lessor may, in its reasonable discretion, either: (1) consent to the proposed assignment or sublease, or (2) refuse to consent to the proposed assignment or sublease, which refusal is deemed to have been exercised unless Lessor gives Lessee written notice providing otherwise. Upon the occurrence of an event of default, if all or any part of the Leased Premises are then assigned or sublet, Lessor, in addition to any other remedies provided by this Lease or provided by law, may, at its option, collect directly from the assignee or sublessee all rents becoming due to Lessee by reason of the assignment or sublease, and Lessor will be entitled to a security interest in all properties on the Leased Premises to secure payment of such sums. Lessee agrees that any collection directly by Lessor from the assignee or sublessee is not intended to constitute a novation or a release of Lessee or any guarantor from the further performance of its obligations under this Lease. 9.04 Subordination. Lessee accepts this Lease subject and subordinate to any recorded mortgage or deed of trust lien presently existing or hereafter created upon the Building or project of which the Leased Premises are a part (provided, however, that any such mortgagee may, at any time, subordinate such mortgage, deed of trust or other lien to this Lease) and to all existing recorded restrictions, covenants, easements and agreements with respect to the Building and to any renewals thereof. Lessee agrees that this clause is self-operative and no further instrument of subordination is required to effect such subordination. Lessor is hereby irrevocably vested with full power and authority to subordinate Lessee's interest under this Lease to any first mortgage or deed of trust lien hereafter placed on the Leased Premises, and Lessee agrees upon demand to execute additional reasonable instruments subordinating this Lease as Lessor may require. If the interests of Lessor under this Lease are transferred by reason of foreclosure or other proceedings for enforcement of any first mortgage or deed of trust lien on the Leased Premises, Lessee is bound to the transferee (sometimes called the "Purchaser") at the option of the Purchaser, under the terms, covenants and conditions of this Lease for the balance of the term remaining, including any extensions or renewals, with the same force and effect as if the Purchaser were Lessor under this Lease, and, if requested by the Purchaser, Lessee agrees to attorn to the Purchaser, including the first mortgagee under any such mortgage if it be the Purchaser, as its Lessor. Lessee will not be entitled to any credits as against Purchaser any prepaid rents or offsets against or credits due from Lessor, except as provided under the terms of any non-disturbance agreement provided pursuant to Section 13.14 of this Lease. 9.05 Estoppel Certificates. Lessee agrees to furnish, from time to time, within ten (10) days after receipt of a request from Lessor, Lessor's mortgagee or any potential purchaser of the Building, a statement certifying, if applicable, the following: Lessee is in possession of the Leased Premises; the Leased Premises are acceptable; the Lease is in full force and effect; the Lease is unmodified; Lessee claims no present charge, lien, or claim of offset against rent; the rent is paid for the current month, but is not prepaid for more than one month and will not be prepaid for more than one month in advance; there is no existing default by reason of some act or omission by Lessor; and such other matters as may be reasonably required by Lessor, Lessor's mortgagee or any potential purchaser. Lessee's failure to deliver such statement, in addition to being a default under this Lease, may be deemed to establish conclusively that this Lease is in full force and effect except as declared by Lessor, that Lessor is not in default of any of its obligations under this Lease and that Lessor has not received more than one month's rent in advance. Any notice and cure provisions set forth in any other part of this Lease does not apply to a default of this Section 9.05. ARTICLE 10 - LIENS 10.01 Landlord's Lien. As security for payment of rent, damages and all other payments required to be made by this Lease, Lessee hereby grants to Lessor a lien upon all property of Lessee now or subsequently located upon the Leased Premises and Lessee agrees not remove such property from the Leased Premises except in the ordinary course of business, provided at the time of such removal Lessee is not in default. If Lessee abandons or vacates any substantial portion of the Leased Premises or is in default in the payment of any rentals, damages or other payments required to be made by this Lease or is in default of any other provision of this Lease, Lessor may enter upon the Leased Premises, by picking or changing locks if necessary, and take possession of all or any part of the personal property, and may sell all or any part of the personal property at a public or private sale, in one or successive sales, with or without notice, to the highest bidder for cash, and, on behalf of Lessee, sell and convey all or part of the personal property to the highest bidder, delivering to the highest bidder all of Lessee's title and interest in the personal property sold. The proceeds of the sale of the personal property shall be applied by Lessor toward the reasonable costs and expenses of the sale, including attorney's fees, and then toward the payment of all sums then due by Lessee to Lessor under the terms of this Lease. Any excess remaining will be paid to Lessee or any other person entitled thereto by law. 10.02 Uniform Commercial Code. This Lease is intended as and constitutes a security agreement within the meaning of the Uniform Commercial Code of the state in which the Leased Premises are situated. Lessor, in addition to the rights prescribed in this Lease, has all of the rights, titles, liens and interests in and to Lessee's property, now or hereafter located upon the Leased Premises, which may be granted a secured party, as that term is defined, under the Uniform Commercial Code to secure to Lessor payment of all sums due and the full performance of all Lessee's covenants under this Lease. Lessee will on request execute and deliver to Lessor a financing statement for the purpose of perfecting Lessor's security interest under this Lease or Lessor may file this Lease or a copy thereof as a financing statement. Unless otherwise provided by law and for the purpose of exercising any right pursuant to this Section, Lessor and Lessee agree that reasonable notice has been given if such notice is given by ten days written notice, certified mail, return receipt requested, to Lessor or Lessee at the addresses specified herein. 10.03 Landlord's Lien Waiver. Upon request by Lessee, Lessor will execute a lien waiver in favor of Lessee's lender in the form prescribed by Lessee's lender. ARTICLE 11 - DEFAULT AND REMEDIES 11.01 Default by Lessee. The following are events of default by Lessee under this Lease: A. Lessee fails to pay, within ten (10) days of when due, any installment of rent or any other payment required pursuant to this Lease, and such failure shall be continuing five (5) days following written notice (which notice may include the cancellation notice described in Section 11.02(E) hereof) thereof from Lessor to Lessee; provided, however, in no event shall Lessee have the right to receive or Lessor have the obligation to provide, as a prerequisite to an event of default, more than two (2) written notices within any twelve (12) month period; B. Lessee fails to comply with any term, provision or covenant of this Lease, other than the payment of rent and fails to cure the failure within thirty (30) days of receipt of written notice (which notice may include the cancellation notice described in Section 11.02(E) hereof) from Lessor; C. Lessee or any guarantor of Lessee's obligations hereunder files a petition or is adjudged bankrupt or insolvent under any applicable federal or state bankruptcy or insolvency law, or admits that it cannot meet its financial obligations as they become due; or a receiver or trustee is appointed for all or substantially all of the assets of Lessee or such guarantor; or Lessee or any guarantor of Lessee's obligations hereunder makes a transfer in fraud of creditors or makes an assignment for the benefit of creditors; or D. Lessee does or permits to be done any act which results in a lien being filed against the Leased Premises or the Building and Lessee fails to contest the lien diligently and in good faith or does not prevail, within sixty (60) days of the date the lien is filed, in its efforts to remove the lien. 11.02 Remedies for Lessee's Default. Upon the occurrence of any event of default set forth in this Lease, Lessor is entitled to pursue any one or more of the remedies set forth herein without any notice or demand. A. Without declaring the Lease terminated, Lessor may enter upon and take possession of the Leased Premises, by picking or changing locks if necessary, and lock out, expel or remove Lessee and any other person who may be occupying all or any part of the Leased Premises without being liable for any claim for damages, and relet the Leased Premises on behalf of Lessee and receive the rent directly by reason of the reletting; provided however, that Lessor has no obligation to relet the Leased Premises so as to mitigate the amount for which Lessee is liable. Lessee agrees to pay Lessor on demand any deficiency that may arise by reason of any reletting of the Leased Premises; further, Lessee agrees to reimburse Lessor for any reasonably expenditures made by it in order to relet the Leased Premises, including, but not limited to, leasing commissions, lease incentives, remodeling and repair costs. B. Without declaring the Lease terminated, Lessor may enter upon the Leased Premises, by picking or changing locks if necessary, without being liable for any claim for damages, except for damages arising from Lessor's negligence, recklessness or willful misconduct, and do whatever Lessee is obligated to do under the terms of this Lease. Lessee agrees to reimburse Lessor on demand for any expenses which Lessor may incur in effecting compliance with Lessee's obligations under this Lease. C. Lessor may terminate this Lease, in which event Lessee shall immediately surrender the Leased Premises to Lessor, and if Lessee fails to surrender the Leased Premises, Lessor may, without prejudice to any other remedy which it may have for possession or arrearages in rent, enter upon and take possession of the Leased Premises, by picking or changing locks if necessary, and lock out, expel or remove Lessee and any other person who may be occupying all or any part of the Leased Premises without being liable for any claim for damages. Lessee agrees to pay on demand the amount of all loss and damage which Lessor may suffer by reason of the termination of this Lease under this Section, including without limitation, loss and damage due to the failure of Lessee to maintain and or repair the Leased Premises as required hereunder and/or due to the inability to relet the Leased Premises on terms satisfactory to Lessor or otherwise, and any reasonable expenditures made by Lessor in order to relet the Leased Premises, including, but not limited to, leasing commissions, lease incentives, and remodeling and repair costs; provided however, that Lessor will have no obligation to relet the Leased Premises so as to mitigate the amount for which Lessee is liable. In addition, upon termination Lessor may collect from Lessee the value of all future rentals required to be paid under this Lease from the date Lessor terminates the Lease until the original termination date in accordance with applicable law less amounts collected as rent by Lessor if the Leased Premises are re-let. Notwithstanding anything contained in this Lease to the contrary, this Lease may be terminated under this section by Lessor only by mailing or delivering written notice of such termination to Lessee, and no other act or omission of Lessor constitutes a termination of this Lease. D. In the event that Lessor exercises its remedy to lock out Lessee in accordance with any provision of this Lease, Lessee agrees that no notice is required to be posted by Lessor on any door to the Leased Premises (or elsewhere) disclosing the reason for such action or any other information, and that Lessor is not obligated to provide a key to the changed lock to Lessee unless Lessee has first: 1. brought current all payments due to Lessor under this Lease (unless Lessor has terminated this Lease, in which event payment of all past due amounts do not obligate Lessor to provide a key); 2. fully cured and remedied to Lessor's reasonable satisfaction all other defaults of Lessee under this Lease (unless Lessee has abandoned or vacated the Leased Premises, in which event Lessor is not obligated to provide the new key to Lessee under any circumstances); and 3. provided Lessor with additional security deposit and assurances reasonably satisfactory to Lessor that Lessee intends to and is able to meet and comply with its future obligations under this Lease, both monetary and nonmonetary. Lessor may, upon written request by Lessee, at Lessor's convenience, upon receipt by Lessor of an amount necessary to reimburse itself for time and expense in providing such service, and upon Lessee's execution and delivery of such waivers and indemnities as Lessor may require at Lessor's option either: a. escort Lessee or its specifically authorized employees or agents to the Leased Premises to retrieve personal belongings of Lessee's employees and property of Lessee that is not subject to a Security Interest provided in this Lease; or b. obtain from Lessee a list of such property and arrange for such items to be removed from the Leased Premises and made available to Lessee at such place at such time as Lessor may designate, provided however, that if Lessor elects option (ii), then Lessee shall pay Lessor in cash in advance, the estimated costs that Lessor may incur upon moving and storage charges theretofore incurred by Lessor with respect to such property. THE PROVISIONS OF THIS ARTICLE ARE INTENDED TO OVERRIDE AND SUPERSEDE ANY CONFLICTING PROVISIONS OF THE TEXAS PROPERTY CODE AND ANY AMENDMENTS OR SUCCESSOR STATUTES THERETO, AND OF ANY OTHER LAW, TO THE MAXIMUM EXTENT PERMITTED BY THE LAW. E. Notwithstanding any other remedy set forth in this Lease, if Lessor has made rent concessions of any type or character, or waived any base rent (i.e. given free rent), and Lessee fails to take possession of the Leased Premises on the Commencement Date or there occurs a Lessee event of default at any time during the term of this Lease, the rent concessions, including any waived base rent, are canceled and the amount of the base rent or other rent concessions are due and payable immediately as if no rent concessions or waiver of any base rent had ever been granted; provided, however, in the event of a default under 11.01(A) or 11.02(B) hereof, that in order for such cancellation of rent concessions to be effective, Lessor must give Lessee express notice of the free rent cancellation in the written notice described in Section11.01(A) and 11.01(B). A rent concession or waiver of the base rent will not relieve Lessee of any obligation to pay any other charge due and payable under this Lease including without limitation any sums due under Section 2.02 herein. F. If Lessor exercises any of its rights provided in this Article 11 and Lessee subsequently cures such default, Lessor is entitled to receive a service charge of $500.00 from Lessee for its time and expense, in addition to any other amounts owed hereunder, prior to allowing the Lessee to reenter and reoccupy the Leased Premises. G. Lessee hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Lessee being evicted or dispossessed for any cause, or in the event of Lessor obtaining possession of the Leased Premises by reason of the violation by Lessee of any of the covenants and conditions of this Lease or otherwise. The rights given to Lessor herein are in addition to any rights that may be given to Lessor by any statute or otherwise. H. Lessor's pursuit of any remedy specified in this Lease will not constitute an election to pursue that remedy only, nor preclude Lessor from pursuing any other remedy available at law or in equity, nor constitute a forfeiture or waiver of any rent or other amount due to Lessor as described herein. I. If Lessee or any guarantor of Lessee's obligations hereunder is the subject of any insolvency, bankruptcy, receivership, dissolution, reorganization or similar proceeding, federal or state, voluntary or involuntary, under any present or future law or act, Lessor is entitled to the automatic and absolute lifting of any automatic stay as to the enforcement of its remedies under this Lease, including specifically the stay imposed by Section 362 of the United States Federal Bankruptcy Code, as amended. Lessee hereby consents to the immediate lifting of any such automatic stay, and may not contest any motion by Lessor to lift such stay. Lessee expressly acknowledges that the Leased Premises is not now and will never be necessary to any plan or reorganization of any type. 11.03 Lessor's Liability. The liability of Lessor to Lessee for any default by Lessor under the terms of this Lease is limited to Lessee's actual direct, but not consequential, damages therefor and is recoverable only from the interest of Lessor in the Building, and Lessor is not personally liable for any deficiency. ARTICLE 12.00 - DEFINITIONS 12.01 Abandon. "Abandon" means the vacating of all or a substantial portion of the Leased Premises by Lessee or any approved sublessee, whether or not Lessee or any approved sublessee is in default of the rental payments due under this Lease; 12.02 Building. "Building" as used in this Lease means the building described in Section 1.02, including the Leased Premises and the land upon which the Building is situated. 12.03 Commencement Date. "Commencement Date" is the date set forth in Section 1.03. The Commencement Date constitutes the commencement of the term of this Lease for all purposes, whether or not Lessee has actually taken possession. ARTICLE 13.00 - MISCELLANEOUS 13.01 Waiver. Failure of Lessor to declare an event of default immediately upon its occurrence, or delay in taking any action in connection with an event of default, will not constitute a waiver of the default, but Lessor has the right to declare the default at any time and take such action as is lawful or authorized under this Lease. Pursuit of any one or more of the remedies set forth in Article 11.00 or Article 12.00 above will not preclude pursuit of any one or more of the other remedies provided elsewhere in this Lease or provided at law or in equity, nor will pursuit of any remedy constitute forfeiture or waiver of any rent or damages accruing to Lessor by reason of the violation of any of the terms, provisions or covenants of this Lease. Lessee agrees that failure by Lessor to enforce one or more of the remedies provided upon an event of default will not constitute a waiver of the default or of any other violation or breach of any of the terms, provisions and covenants contained in this Lease. No act or thing done by Lessor or its agents during the Lease Term may be deemed an acceptance of an attempted surrender of the Leased Premises, and no agreement to accept a surrender of the Leased Premises will be valid unless made in writing and signed by Lessor. No reentry or taking possession of the Leased Premises by Lessor may be construed as an election on its part to terminate this Lease, unless a written notice of such intention, signed by Lessor, is given by Lessor to Lessee. Notwithstanding any such reletting or reentry or taking possession, Lessor may at any time thereafter elect to terminate this Lease for a previous event of default. Lessee and Lessor agree that Lessor's acceptance of rent following an event of default hereunder will not constitute Lessor's waiver of such event of default. The failure of Lessor to enforce any of the Rules and Regulations described in Section 3.03 against Lessee or any other Lessee in the Building will not constitute a waiver of any such Rules and Regulations. No waiver of any provision of this Lease is effective unless such waiver is in writing and signed by Lessor. All rights granted to Lessor in this Lease are cumulative of every other right or remedy which Lessor may otherwise have at law or in equity, and the exercise of one or more rights or remedies does not prejudice or impair the concurrent or subsequent exercise of other rights or remedies. 13.02 Act of God. Lessor or Lessee is not required to perform any covenant or obligation in this Lease, or be liable in damages to the other, so long as the performance or non-performance of the covenant or obligation is delayed, caused or prevented by Force Majeure or by the other party. 13.03 Attorney's Fees. If either party defaults in the performance of any of the terms, covenants, agreements or conditions contained in this Lease and the other party places in the hands of an attorney the enforcement of all or any part of this Lease, the collection of any rent due or to become due or recovery of the possession of the Leased Premises, agrees to pay the non-defaulting party's costs of collection, including reasonable attorney's fees for the services of the attorney, whether suit is actually filed or not. 13.04 Successors. This Lease is binding upon and inures to the benefit of Lessor and Lessee and their respective heirs, personal representatives, successors and assigns. It is hereby covenanted and agreed that should Lessor's interest in the Leased Premises cease to exist for any reason during the term of this Lease, then notwithstanding the happening of such event this Lease nevertheless will remain unimpaired and in full force and effect, and Lessee hereunder agrees to attorn to the then owner of the Leased Premises. 13.05 Rent Tax. If applicable in the jurisdiction where the Leased Premises are situated, Lessee shall pay and be liable for all rental, sales and use taxes or other similar taxes, if any, levied or imposed by any city, state, county or other governmental body having authority, such payments to be in addition to all other payments required to be paid to Lessor by Lessee under the terms of this Lease. Any such payment must be paid concurrently with the payment of the rent, additional rent, operating expenses or other charge upon which the tax is based as set forth above. 13.06 Captions. The captions appearing in this Lease are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or intent of any Section. 13.07 Notice. All rent and other payments required to be made by Lessee must be paid to Lessor at the address set forth in Section 1.05. All payments required to be made by Lessor to Lessee are payable to Lessee at the address set forth in Section 1.05 or at any other address within the United States as Lessee may specify from time to time by written notice. For purposes hereof, any notice or document required or permitted to be delivered by the terms of this Lease (other than delivery of rental payments) will be deemed to be delivered upon the earlier of actual receipt, or (whether or not actually received) three days after being deposited in the United States Mail, postage prepaid, certified mail, return receipt requested, addressed to the parties at the respective addresses set forth in Section 1.05, or transmission by facsimile and receipt of confirmation of successful transmission by the transmitting facsimile; provided, however, any notice given by facsimile must be followed up by notice in one of the other manners set forth herein within five (5) days thereafter. Rental payments will be deemed received upon actual receipt only. Except as specifically set forth herein, in no event will notice by facsimile transmission be proper notice under the terms of this Lease. 13.08 Submission of Lease. Submission of this Lease to Lessee for signature does not constitute a reservation of space or an option or offer to lease. This Lease is not deemed effective until execution by and delivery to both Lessor and Lessee. 13.09 Representations, Warranties and Covenants of Lessee and Lessor. Lessee represents, warrants and covenants that it is now in a solvent condition; that no bankruptcy or insolvency proceedings are pending or contemplated by or against Lessee or any guarantor of Lessee's obligations under this Lease; that all reports, statements and other data furnished by Lessee to Lessor in connection with this Lease are true and correct in all material respects; that the execution and delivery of this Lease by Lessee does not contravene, result in a breach of, or constitute a default under any contract or agreement to which Lessee is a party or by which Lessee may be bound and does not violate or contravene any law, order, decree, rule or regulation to which Lessee is subject; and that there are no judicial or administrative actions, suits, or proceedings pending or threatened against or affecting Lessee or any guarantor of Lessee's obligations under this lease. Lessor represents, warrants and covenants that it is now in a solvent condition; that no bankruptcy or insolvency proceedings are pending or contemplated by or against Lessor or any guarantor of Lessor's obligations under this Lease; that all reports, statements and other data furnished by Lessor to Lessee in connection with this Lease are true and correct in all material respects; that the execution and delivery of this Lease by Lessor does not contravene, result in a breach of, or constitute a default under any contract or agreement to which Lessee is a party or by which Lessee may be bound and does not violate or contravene any law, order, decree, rule or regulation to which Lessor is subject; and that there are no judicial or administrative actions, suits, or proceedings pending or threatened against or affecting Lessor or any guarantor of Lessor's obligations under this lease. 13.10 Corporate Authority. If Lessee executes this Lease as a corporation, Lessee represents and warrants that Lessee is a duly authorized and existing corporation, that Lessee is qualified to do business in the state in which the Leased Premises are located, that the corporation has full right and authority to enter into this Lease, and that each person signing on behalf of the corporation is authorized to do so. Lessee shall additionally deliver (1) a corporate resolution authorizing execution of this Lease and confirming the authority of those persons executing the Lease, 2) certified Articles of Incorporation and 3) a certificate of existence and good standing from the State of Texas or if Lessee is not incorporated in Texas, a certificate of existence and good standing from Lessee's state of incorporation and a certificate evidencing Lessee's authority to do business in the State of Texas. If Lessor executes this Lease as a corporation, Lessor represents and warrants that Lessor is a duly authorized and existing corporation, that Lessor is qualified to do business in the state in which the Leased Premises are located, that the corporation has full right and authority to enter into this Lease, and that each person signing on behalf of the corporation is authorized to do so. Lessor shall additionally deliver (1) a corporate resolution authorizing execution of this Lease and confirming the authority of those persons executing the Lease, 2) certified Articles of Incorporation and 3) a certificate of existence and good standing from the State of Texas or if Lessee is not incorporated in Texas, a certificate of existence and good standing from Lessee's state of incorporation and a certificate evidencing Lessee's authority to do business in the State of Texas. 13.11 Partnership Authority. If Lessee executes this Lease as a general or limited partnership, Lessee represents and warrants that Lessee is a duly authorized and existing partnership, that, if applicable, Lessee is qualified to do business in the state where the Leased Premises are located, that the partnership has full right and authority to enter into this Lease, and that each person signing on behalf of the partnership is authorized to do so. Lessee, must additionally deliver a copy of its partnership agreement, and if a limited partnership, a copy of its certificate of limited partnership. The party executing the Lease on behalf of Lessee, if a corporate managing general partner or general partner, must additionally deliver 1) a corporate resolution authorizing execution of this Lease and confirming the authority of those executing this Lease, 2) certified Articles of Incorporation, 3) a certificate of existence and good standing from the State of Texas or if such party is not incorporated in Texas, a certificate of existence and good standing from such party's state of incorporation and a certificate evidencing such party's authority to do business in the State of Texas. If Lessor executes this Lease as a general or limited partnership, Lessor represents and warrants that Lessor is a duly authorized and existing partnership, that, if applicable, Lessor is qualified to do business in the state where the Leased Premises are located, that the partnership has full right and authority to enter into this Lease, and that each person signing on behalf of the partnership is authorized to do so. Lessor, must additionally deliver a copy of its partnership agreement, and if a limited partnership, a copy of its certificate of limited partnership. The party executing the Lease on behalf of Lessee, if a corporate managing general partner or general partner, must additionally deliver 1) a corporate resolution authorizing execution of this Lease and confirming the authority of those executing this Lease, 2) certified Articles of Incorporation, 3) a certificate of existence and good standing from the State of Texas or if such party is not incorporated in Texas, a certificate of existence and good standing from such party's state of incorporation and a certificate evidencing such party's authority to do business in the State of Texas. 13.12 Severability. If any provision of this Lease or the application thereof to any person or circumstance is ever determined by a court of competent jurisdiction to be invalid or unenforceable to any extent, Lessor and Lessee agree that the remainder of this Lease and the application of such provisions to other persons or circumstances will not be affected thereby and will be enforced to the greatest extent permitted by law. 13.13 Lessor's Liability. If Lessor is in default under this Lease and, if as a consequence of such default, Lessee recovers a money judgment against Lessor, such judgment may be satisfied only out of the right, title and interest of Lessor in the Leased Premises as the same may then be encumbered and neither Lessor nor any person or entity comprising Lessor has any liability for any deficiency. In no event does Lessee have the right to levy execution against any property of Lessor nor any person or entity comprising Lessor other than its interest in the Leased Premises as herein expressly provided. 13.14 Non Disturbance Agreement. Lessor shall deliver a non-disturbance agreement from each of Lessors mortgagees within sixty (60) days of the execution of this Lease in form satisfactory to Lessee in its reasonable judgment. If any new lien or mortgage is placed on the Building or Leased Premises during the term of this Lease, Landlord will deliver additional non-disturbance agreements as soon as practical in form satisfactory to Lessee in its reasonable judgment. 13.15 Notice to Mortgagees. Provided that Lessee has received prior written notice of the name and address of such lender, Lessee shall serve written notice of any claimed default or breach by Lessor under this Lease upon any lender which is a beneficiary under any deed of trust or mortgage against the Leased Premises, and no notice to Lessor is effective against Lessor unless such notice is served upon said lender; notwithstanding anything to the contrary contained herein, Lessee shall allow such lender the same period following lender's receipt of such notice to cure such default or breach as is afforded Lessor. 13.16 No Recordation. Lessee may not record this Lease. 13.17 Counterparts. This Lease may be executed in two or more counterparts, and it is not necessary that any one of the counterparts be executed by all of the parties hereto. Each fully or partially executed counterpart may be deemed an original, but all such counterparts taken together constitute but one and the same instrument. 13.18 Governing Law. THIS LEASE IS INTENDED BY THE PARTIES TO BE GOVERNED BY, AND CONSTRUED UNDER AND IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES OF AMERICA AS APPLICABLE TO TRANSACTIONS WITHIN THE STATE OF TEXAS. 13.19 Broker. Lessee represents and warrants that Lessee has dealt with no broker except Providence Commercial Real Estate Services, Inc., for Lessee, and Pruitt Realty, for Lessor, the brokers which has been identified to Lessor and Lessee, and that, insofar as Lessee and Lessor know, no other broker negotiated this Lease or is entitled to any commission in connection herewith. Lessor agrees to indemnify and hold harmless Lessee from and against any liability or claim, whether meritorious or not, arising with respect to any broker whose claim arises by, through or on behalf of Lessor. Lessee agrees to indemnify and hold harmless Lessor from and against any liability or claim, whether meritorious or not, arising with respect to any broker whose claim arises by, through or on behalf of Lessee. 13.20 Publication. Each party hereby agrees that the other has the right, but not the obligation, at its own expense to publicize and/or advertise the execution of this Lease and the related transaction. 13.21 DTPA Waiver. LESSEE WAIVES ITS RIGHTS UNDER THE DECEPTIVE TRADE PRACTICES - CONSUMER PROTECTION ACT, SECTION 17.41 ET SEQ., BUSINESS & COMMERCE CODE, A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND PROTECTIONS. AFTER CONSULTATION WITH AN ATTORNEY OF LESSEE'S OWN SELECTION, LESSEE VOLUNTARILY CONSENTS TO THIS WAIVER. 13.22 Construction of Lease. Lessee declares that Lessee has read and understands all parts of this Lease, including all printed parts hereof. It is agreed that, in the construction and interpretation of the terms of this Lease, the rule of construction that a document is to be construed most strictly against the party who prepared the same shall not be applied, it being agreed that both parties hereto have participated in the preparation of the final form of this Lease. Wherever in this Lease provision is made for liquidated damages, it is because the parties hereto acknowledge and agree that the determination of actual damages (of which such liquidated damages are in lieu) is speculative and difficult to determine; the parties agree that liquidated damages herein are not a penalty. 13.23 Financial Statements. Lessee acknowledges that it has provided Lessor with its financial statement(s) as a primary inducement to Lessor's agreement to lease the Leased Premises to Lessee, and that Lessor has relied on the accuracy of said financial statement(s) in entering into this Lease. Lessee represents and warrants that the information contained in said financial statement(s) is true, complete and correct in all material aspects, and agrees that the foregoing representations are conditions to all of Lessor's obligations under this Lease. At the request of Lessor (only upon the sale or refinancing of the Building, or upon any extension or renewal hereof), Lessee shall, not later than thirty (30) days following such request, furnish to Lessor a financial statement of Lessee as of the end of the prior fiscal year accompanied by a statement of income and expense for the year then ended, together with a certificate of the chief financial officer, owner or partner of Lessee to the effect that the financial statements have been prepared in conformity with generally accepted accounting principles consistently applied and fairly present the financial condition and results of operations of Lessee as of and for the periods covered. 13.24 Time of Essence. With respect to all required acts of Lessee, time is of the essence of this Lease. 13.25 Joint and Several Liability. If there is more than one Lessee, the obligations hereunder imposed upon Lessee are joint and several. If there is a guarantor(s) of Lessee's obligations hereunder, the obligations of Lessee are joint and several obligations of Lessee and each such guarantor, and Lessor need not first proceed against Lessee hereunder before proceeding against each such guarantor, nor will any such guarantor be released from its guarantee for any reason whatsoever, including, without limitation, any amendment of this Lease, any forbearance by Lessor or waiver of any of Lessor's rights, the failure to give Lessee or any such guarantor any notices, or the release of any party liable for the payment or performance of any of Lessee's obligations hereunder. 13.26 Taxes and Lessee's Property. Lessee is solely liable for all taxes levied or assessed against personal property, furniture or fixtures placed by Lessee in the Premises. If any such taxes for which Lessee is liable are levied or assessed against Lessor or Lessor's property and if Lessor elects to pay the same or if the assessed value of Lessor's property is increased by inclusion of personal property, furniture or fixtures placed by Lessee in the Premises, and Lessor elects to pay the taxes based on such increase, Lessee shall pay Lessor upon demand that part of such taxes for which Lessee is primarily liable hereunder. 13.27 Constructive Eviction. Lessee shall not be entitled to claim a constructive eviction from the Leased Premises unless Lessee has first notified Lessor in writing of the condition giving rise thereto, and, if the complaints are justified, unless Lessor has failed to remedy such conditions with a reasonable time after receipt of said notice. ARTICLE 14.00 - AMENDMENT AND LIMITATION OF WARRANTIES 14.01 Entire Agreement. IT IS EXPRESSLY AGREED BY LESSEE, AS A MATERIAL CONSIDERATION FOR THE EXECUTION OF THIS LEASE, THAT THIS LEASE, WITH THE SPECIFIC REFERENCES TO WRITTEN EXTRINSIC DOCUMENTS, IS THE ENTIRE AGREEMENT OF THE PARTIES; THAT THERE ARE, AND WERE, NO VERBAL REPRESENTATIONS, WARRANTIES, UNDERSTANDINGS, STIPULATIONS, AGREEMENTS OR PROMISES PERTAINING TO THIS LEASE OR TO THE EXPRESSLY MENTIONED WRITTEN EXTRINSIC DOCUMENTS NOT INCORPORATED IN WRITING IN THIS LEASE. 14.02 Amendment. THIS LEASE MAY NOT BE ALTERED, WAIVED, AMENDED OR EXTENDED EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY LESSOR AND LESSEE. 14.03 Limitation of Warranties. LESSOR AND LESSEE EXPRESSLY AGREE THAT THERE ARE AND SHALL BE NO IMPLIED WARRANTIES OF MERCHANTABILITY, HABITABILITY, FITNESS FOR A PARTICULAR PURPOSE OR OF ANY OTHER KIND ARISING OUT OF THIS LEASE, AND THERE ARE NO WARRANTIES WHICH EXTEND BEYOND THOSE EXPRESSLY SET FORTH IN THIS LEASE. ARTICLE 15.00 - SIGNATURES SIGNED this _______ day of April, 1999. LESSOR: LESSEE: ACLP UNIVERSITY PARK SA, L.P. GLOBALSCAPE, INC., a Texas limited partnership a Texas corporation BY: ACLP UNIVERSITY PARK SA GP, INC., a Texas corporation By: ___________________________ Name: ___________________________ By: ___________________________ Title: ___________________________ Name: Sue Shelton Title: Executive Vice President LESSEE ACKNOWLEDGES THAT THIS LEASE INCLUDES THE INDEMNIFICATION PROVISIONS SET FORTH IN SECTIONS 3.01, 3.06, 7.05 AND 13.19 HEREOF. RULES AND REGULATIONS 19. Lessor agrees to furnish Lessee two keys without charge. Additional keys will be furnished at a nominal charge. Lessee shall not change locks or install additional locks on doors without prior written consent of Lessor. Lessee shall not make or cause to be made duplicates of keys procured from Lessor without prior approval of Lessor. All keys to Leased Premises shall be surrendered to Lessor upon termination of this Lease. 20. Lessee will refer all contractors, contractors representatives and installation technicians rendering any service on or to the Leased Premises for Lessee to Lessor for Lessor's approval before performance of any contractual service. Lessee's contractors and installation technicians shall comply with Lessor's rules and regulations pertaining to construction and installation. This provision shall apply to all work performed on or about the Leased Premises or project, including installation of telephones, telegraph equipment, electrical devices and attachments and installations of any nature affecting floors, walls, woodwork, trim, windows, ceilings and equipment or any other physical portion of the Leased Premises or project. 21. Lessee shall not at any time occupy any part of the Leased Premises or project as sleeping or lodging quarters. 22. Lessee shall not place, install or operate on the Leased Premises or in any part of the building any engine, stove or machinery, or conduct mechanical operations or cook thereon or therein, or place or use in or about the Leased Premises or project any explosives, gasoline, kerosene, oil, acids, caustics, or any flammable, explosive or hazardous material without written consent of Lessor, except that Lessee may provide a kitchen for use by its employees during normal business hours. 23. Lessor will not be responsible for lost, stolen or damaged personal property, equipment, money or jewelry from the Leased Premises by a third party or the project regardless of whether such loss occurs when the area is locked against entry or not. 24. No dogs, cats, fowl, or other animals shall be brought into or kept in or about the Leased Premises or project. 25. Employees of Lessor shall not receive or carry messages for or to any Lessee or other person or contract with or render free or paid services to any Lessee or to any of Lessee's agents, employees or invitees. 26. None of the parking, plaza, recreation or lawn areas, entries, exits, passages, doors, elevators, hallways or stairways shall be blocked or obstructed or any rubbish, litter, trash, or material of any nature placed, emptied or thrown into these areas or such area used by Lessee's agents, employees or invitees at any time for purposes inconsistent with their designation by Lessor. 27. The water closets and other water fixtures shall not be used for any purpose other than those for which they were constructed, and any damage resulting to them from misuse, including improper disposal of any materials, or by the defacing or injury of any part of the Building shall be borne by the person who shall occasion it. No person shall waste water by interfering with the faucets or otherwise. 28. No person shall disturb occupants of the Building by the use of any radios, record players, tape recorders, musical instruments, the making of unseemly noises or any unreasonable use. 29. Nothing shall be thrown out of the windows of the Building or down the stairways or other passages. 30. Lessee and its employees, agents and invitees shall park their vehicles only in those parking areas designated by Lessor. Lessee shall furnish Lessor with state automobile license numbers of Lessee's vehicles and its employees' vehicles within five days after taking possession of the Leased Premises and shall notify Lessor of any changes within five days after such change occurs. Lessee shall not leave any vehicle in a state of disrepair (including without limitation, flat tires, out of date inspection stickers or license plates) on the Leased Premises or project. If Lessee or its employees, agents or invitees park their vehicles in areas other than the designated parking areas or leave any vehicle in a state of disrepair, Lessor, after giving written notice to Lessee of such violation, shall have the right to remove such vehicles at Lessee's expense. 31. Parking in a parking garage or area shall be in compliance with all parking rules and regulations including any sticker or other identification system established by Lessor. Failure to observe the rules and regulations shall terminate Lessee's right to use the parking garage or area and subject the vehicle in violation of the parking rules and regulations to removal and impoundment. No termination of parking privileges or removal of impoundment of a vehicle shall create any liability on Lessor or be deemed to interfere with Lessee's right to possession of its Leased Premises. Vehicles must be parked entirely within the stall lines and all directional signs, arrows and posted speed limits must be observed. Parking is prohibited in areas not striped for parking, in aisles, where "No Parking" signs are posted, on ramps, in cross hatched areas, and in other areas as may be designated by Lessor. Parking stickers or other forms of identification supplied by Lessor shall remain the property of Lessor and not the property of Lessee and are not transferable. Every person is required to park and lock his vehicle. All responsibility for damage to vehicles or persons is assumed by the owner of the vehicle or its driver. 32. Lessee shall not lay floor covering within the Leased Premises without written approval of the Lessor. The use of cement or other similar adhesive materials not easily removed with water is expressly prohibited. 33. Lessee agrees to cooperate and assist Lessor in the prevention of canvassing, soliciting and peddling within the Building or project. 34. It is Lessor's desire to maintain in the Building or project the highest standard of dignity and good taste consistent with comfort and convenience for Lessees. Any action or condition not meeting this high standard should be reported directly to Lessor. Your cooperation will be mutually beneficial and sincerely appreciated. As provided in the Lease, Lessor reserves the right to make such other and further reasonable rules and regulations as in its judgment may from time to time be necessary, for the safety, care and cleanliness of the Leased Premises and for the preservation of good order therein. 35. The parking spaces provided to Lessee shall not be fewer than six spaces per 1000 rentable square feet of Leased Premises 36. All signage must be approved by Lessor and be within Lessor's specifications in accordance with Section 3.02 of the Lease. ADDENDUM 1 TO COMMERCIAL LEASE AGREEMENT ARTICLE 16.00 Lessor Improvements 16.01 Lessor Improvements. Prior to Lessee's occupancy, Lessor shall, at its own cost and expense, construct the Building and improvements (the "Shell Building Improvements") as generally shown on the site plan and artist's rendering prepared by Rehler Vaughn & Koone, Inc., and attached hereto as Exhibit "A". Lessor warrants that the Shell Building Improvements will be generally consistent in quality with the building shown in the artist's rendering attached as Exhibit "A" and with other buildings in Dallas, Texas, which were shown to Lessee's representatives as samples of Lessor's projects. The Final Shell Plans and Specifications shall be provided to Lessee on or before June1, 1999. Lessor will begin construction of the Shell Building Improvements no later than June 1, 1999 and shall have completed the Shell Building Improvements to the extent to allow construction of the Lessee Improvements no later than September 15, 1999. Except for immaterial field changes, modifications to the Final Shell Plans and Specifications must be made and accepted only by written change order or agreement signed by Lessor and Lessee and will constitute an amendment to this Lease. Lessee shall be responsible for payment in advance of all work and construction resulting from changes in the Final Shell Plans and Specifications requested by Lessee. The Final Shell Plans and Specifications (when approved by Lessor and Lessee) are incorporated in this Lease by reference. For the purpose of this Section, an "immaterial field change" shall mean such field changes which are required by any governmental authority or changes which (i) do not affect the size, configuration, structural integrity, quality, character, architectural appearance and standard of workmanship contemplated in the Final Shell Plans and Specifications, (ii) will not result in any default in any obligation to any person or violation of any governmental requirements, and (iii) the cost of or reduction resulting from any single field change or extra does not exceed $20,000 and the aggregate amount of all such changes and extras does not exceed $100,000. Lessor agrees to construct the improvements substantially in accordance with the Final Shell Plans and Specifications, in a good and workmanlike manner and in full compliance with all provisions of federal, state and local authorities having jurisdiction over the Leased Premises. ARTICLE 17.00 - Completion 17.01 Completion Date. --------------- (b) If (i) this Lease is executed and delivered by Lessee by April 9, 1999, (ii) the Lessee Improvement Final Plans and Specifications are approved by Lessor by July 15, 1999 (iii) Lessee has selected by September 1, 1999, the contractor who will construct the Lessee Improvements, and (iv) the building permit for the Lessee Improvements is issued by September 15, 1999, then Lessor shall cause Substantial Completion (as defined in Section 17.04 hereof) to occur no later than December 15, 1999 (such date being extended by the longest number of days that the satisfaction of any of the above conditions is delayed, Force Majeure and Lessee Delays with the date, as extended, being hereinafter referred to as the "Threshold Date"). In the event that the foregoing conditions are satisfied and Substantial Completion does not occur by the Threshold Date, then Lessee, as Lessee's sole and exclusive remedy and measure of damages for or related to the delay in Substantial Completion, shall have the right to receive one day of free rent, in addition to the free rent described in Section 3.01, for each day of unexcused delay beyond the Threshold Date, up to a maximum of sixty (60) days, and in the event of unexcused delay beyond sixty (60) days after the Threshold Date, the Lessee shall have the right to receive two (2) days of free rent, in addition to the free rent described in Section 3.01, for each day of unexercised delay beyond sixty days after the Threshold Date, and in the event of unexcused delay beyond one hundred twenty (120) days after the Threshold Date, the Lessee shall have the right to terminate this Lease by written notice thereof to Lessor within ten (10) days following the one hundred twentieth day after such Threshold Date; provided, however, in the event Lessee fails to deliver such termination notice within such ten (10) period, the Lessee shall be deemed to have waived any right to terminate this Lease for delay provided in this Section. 17.02 Force Majeure. "Force Majeure" delay shall mean a delay caused by ------------- reason of fire, acts of God, unreasonable delays in transportation, embargo, weather, strike, other labor disputes, governmental preemption of priorities or other controls in connection with a national or other public emergency, or shortages of fuel, supplies or labor or any similar cause not within the reasonable control of the party claiming the benefits of any Force Majeure provisions. The party claiming the benefits of any Force Majeure provisions shall be required (as a condition to the effectiveness thereof) to provide written notice of the occurrence of such Force Majeure event within ten (10) days following such occurrence. 17.05 Lessor and Lessee Delay. (c) The terms "Lessor Delays", "Delays caused by Lessor", "Lessee Delay" or "Delays caused by Lessee" shall mean delay in completion of construction of the Shell Building Improvements or the Lessee Improvements caused by: (1) Unless due to the acts or omissions of the other party or such party's agents, employees or contractors, the respective party's failure to perform its design approval obligations or its construction period obligations by the dates or within the time periods shown in the Lease or this Addendum 1; and (2) Any subsequent changes, modifications or alterations to the final plans and specifications or the Final Tenant Improvement Plans and specifications which reasonably cause delay in the completion thereof; and (d) "Lessee Delay" or "Delays caused by Lessee" shall also mean delays due to the scope and extent of the Lessee Improvements to be constructed by Lessor. For purposes of determining Lessee Delay under this Section, the Lessor must provide notice to Lessee of the existence of excessive Lessee Improvements, special design or construction considerations or other matters which will extend the time necessary for the construction of the Lessee Improvements beyond two (2) days; such notice to be provided by Lessor to Lessee together with Lessor's delivery of approval and/or objections to Lessee's plans and specifications for the Lessee Improvements from time-to-time. Such notice shall specify the reasons for the delay and the estimated length of delay and, unless the Lessee's plans and specifications are modified to eliminate such items, the estimated length of the delay shall be included as a Lessee Delay. For purposes of determining delay, the terms Lessor and Lessee shall include their respective contractors, agents and employees. In addition, the party claiming the benefits of such delay shall be required (as a condition to the effectiveness thereof) to provide written notice of the occurrence of such delay within ten (10) days following such occurrence. 17.06 "Substantial Completion" shall mean that time when the following conditions are satisfied: (c) Lessor secures and delivers to Lessee the required temporary or permanent certificate of occupancy, final inspection report or the substantial equivalent under applicable state or local law relative to the Shell Building Improvements and the Lessee Improvements; and (d) The construction is completed in accordance with the Final Shell Plans and Specifications and the Lessee Improvements Final Plans and Specifications as acknowledged by Lessor's architect in writing to Lessee, subject to normal punch list items which will not materially interfere with Lessee's ability to utilize the Leased Premises for its intended purposes. EXHIBIT "D" ----------- CERTIFICATE OF ACCEPTANCE Building: ______________________________________________________________________ Lessor: ________________________________________________________________________ Lessee: ________________________________________________________________________ This certificate is being executed pursuant to the Commercial Lease (the "Lease") for Leased Premises (as defined in the Lease) in the Building named above, executed on the ___ day of _______ , 1999, between Lessor and Lessee. Lessee certifies to and agrees with Lessor and Lessor's successors, assigns, prospective purchasers and prospective lenders that: 3. Lessor has substantially completed all construction work and leasehold improvements required of Landlord under the terms of the Lease and/or any other agreement between Lessor and Lessee concerning the Leased Premises, and the Leased Premises have been delivered to Lessee in the conditional contemplated by Lessee, except for Defects, the presence of Hazardous Materials (as those terms are defined in the Lease) and punch list items. 4. Lessee has taken possession of and has accepted the Premises, and the Base Rent, additional rent, and/or other charges payable under the Lease are presently accruing in accordance with the terms of the Lease or if not, will commence to accrue on the ____ day of _______ , 1999. 3. The Lease has not been modified, altered or amended except as noted herein. 4. There are no offsets or credits against rentals, nor have rentals been prepaid except as may be provided in the Lease, but in no event have rentals been prepaid more than thirty (30) days in advance, except for the 7th month's rent. 5. The Lease Term will commence on ___ day of ___________ , 1999, and will expire on the ____ day of _________ , ____ , unless sooner terminated or extended pursuant to any provision of the Lease. Certified and Agreed to this ___ day of ________, 1999. Lessee: ____________________ Name: ______________________ Title: _____________________ EX-10.26 18 AMDNT. TO NEW OFFICE SPACE LEASE AGRMNT. GLOBALSCA EXHIBIT 10.26 FIRST AMENDMENT TO COMMERCIAL LEASE This First Amendment to Commercial Lease (this "Amendment") is made and entered into as of December 13, 1999, by and between ACLP University Park SA II, L.P., a Texas limited partnership ("Lessor"), and Globalscape, Inc., a Texas corporation ("Lessee") for the purposes more fully described below. R E C I T A L S: --------------- A. Lessor and Lessee are parties to that certain Commercial Lease (the "Lease") dated as of April 13, 1999, wherein Lessor leased to Lessee the Premises, as defined in the Lease; B. Lessee and Lessor desire to amend the Lease as provided herein. A G R E E M E N T: ----------------- NOW THEREFORE, in consideration of the mutual covenants and agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lessor and Lessee hereby amend the Lease and Lessor and Lessee agree as follows: 8. Termination of Right of First Refusal Lessor and Lessee agree that ------------------------------------- Section 1.07, Leasing Term Limitation on Adjacent Space and Right of First Refusal, of the Lease, is hereby terminated and deleted in its entirety and that Lessee has no further rights or claim to any space in the Building other than the Leased Premises. 9. Leased Premises Lessee will take the Initial Space of 7,350 square --------------- feet and the Must Take Space of 7,350 square feet upon the Commencement Date of the Lease. The Leased Premises will comprise 14,700 total rentable square feet upon the Commencement Date. 10. Base Rent Section 1.04, Base Rent, Security Deposit, of the Lease --------- is hereby deleted and replaced in its entirety with the following: "1.04 Base Rent, Security Deposit. Base Rent is $15,888.25 net per month based upon an assumed 14,700 rentable square footage in the Leased Premises and shall be adjusted by $12.97 per rentable square foot per year based on the recalculation under Section 1.02 above. Security Deposit is $7,974.13." 11. Improvement Allowance Tenant Improvement Allowance is hereby --------------------- increased from $22.00 per rentable square foot to $28.00 per rentable square foot. 12. Amortization of Excess Improvement Allowance. -------------------------------------------- (A) Lessor has increased Lessee's Improvement Allowance and, as a result, hereby deletes in its entirety the third to last sentence in Section 6.01(A) which reads, "Lessee shall be responsible for payment in advance of all work and construction resulting from changes in the Lessee Improvements Final Plans and Specifications requested by Lessee if the additional cost attributable to the changes exceed the Improvement Allowance by more than $3.00 as described in subparagraph (c) below." and replaces it with the following: "Lessee shall be solely responsible for payment in advance of all work and construction resulting from changes in the Lessee Improvements which exceed the Improvement Allowance." (B) The last two sentences of Section 6.01(C) are hereby deleted in their entirety. 13. Miscellaneous ------------- a. Capitalized Terms. Terms not otherwise defined herein shall ----------------- have the meanings ascribed thereto in the Lease. b. Effect of Amendment. Except to the extent the Lease is ------------------- modified by this Amendment, the remaining terms and provisions of the Lease shall remain unmodified and in full force and effect. In the event of a conflict between the terms of the Lease and the terms of this Amendment, the terms of this Amendment shall prevail. c. Entire Agreement. This Amendment, together with the Lease, ---------------- embodies this entire understanding between Lessor and Lessee with respect to its subject matter and can be changed only by an instrument in writing signed by Lessor and Lessee. d. Counterparts. This Amendment may be executed in counterparts, ------------ each of which shall be deemed an original, but all of which, together, shall constitute one and the same Amendment. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date and year first set forth above. LESSOR: LESSEE: ACLP UNIVERSITY PARK SA II, L.P., GLOBALSCAPE, INC., a Texas limited partnership a Texas corporation By: ACLP University Park SA II, L.P., a Texas corporation, its general partner By: ___________________________ Name ______________________ Title: ____________________ By: ________________________ Sue Shelton Executive Vice President EX-10.28 19 CONSULTING AGREEMENT WITH KAWA CONSULTORES Exhibit 10.28 KAWA Consultores, S.A. de C.V. - -------------------------------------------------------------------------------- CONTRACT AGREEMENT FOR TELECOMMUNICATIONS CONSULTING SERVICES This contract for Telecommunications Consulting Services is made between KAWA Consultores of Mexico, D.F. (hereinafter referred to as KAWA) and American Telesource Inc. (hereinafter referred to as ATSI) of San Antonio, Texas. 1) Background. 1.1) KAWA Consultores is a corporation dully incorporated according to the laws of Mexico as established in Notary Public Statement N. 9318 dated May 8th, 1996. KAWA wishes to provide specialized consulting services to ATSI. 1.2) American Telesource Inc. (ATSI) is also a corporation --------------------------------------------------------------------- ATSI wishes to receive specialized consulting services provided by KAWA. 2) Articles. Article ONE.- Starting date. - ----------- This contract shall become effective on January 1st, 1998 and remain valid for twelve consecutive months. It can be extended for additional periods by written notification from ATSI to KAWA. Article TWO.- Focus and purpose of consulting activity. - ----------- Assist ATSI in developing and implementing the necessary relations in the Central and Southamerican regions as a business relations base to expand ATSI's Network coverage to the Americas. Article THREE.- Description of the Service. - ------------- The consulting services to be provided by KAWA will focus on corporate relations and business development and these activities will be defined according to the following criteria : . Collaborating in the development of ATSI's strategy in Mexico and Latin America. . Developing high level business relationships and assisting on finding "country or regional" partners to expand the ATSI Network in Central and Southamerica. . Exploring new business segments and opportunities in Central and Southamerica. . Lobbying the regulatory authorities in Central and Southamerica for the necessary support. . Identifying and evaluating acquisition and or alliance opportunities in the Central - american region. Article FOUR. - Obligations. - ------------ By KAWA: ------- 1.1) Pursue negotiations and reach corporate agreements and contracts with regional or country associates to establish and implement partnership and operative interconnection throughout Central and Southamerica. 1.2) KAWA shall make the best efforts to assure that the "country partner" in every case will be the most adequate and reliable option in the country and will pursue the relationship through to its completion. 1.3) KAWA shall dedicate an average of 90 hours per month of effective activity in order to expedite the deployment of the Network backbone for the Americas. 1.4) KAWA shall make intensive follow up and negotiations with representatives of Telecomm and of the corresponding officials in the Telecommunications Authorities in Latin American countries. 1.5) KAWA shall dedicate travel time as required to pursue negotiations with potential partners and Telecomm officials in the Latin - american countries. For this purpose a period of 5 travel days per month shall be made available to ATSI as a minimum. 1.6) KAWA shall participate in the successful implementation and follow up of partnerships in each country in order to develop the market as required. By ATSI: ------- 2.1) ATSI shall continue enhancing corporate support as required in order to follow up on the successful implementation of operations with each country or region including negotiations for equipment provisioning and Interconnection Agreements with "Regional or country" partners. 2.2) ATSI shall selectively provide assistance with a corporate representative when visiting countries or seeking country partners when this is required. This will include facilitating relationships with existing or potential partners and regulatory authorities with whom ATSI already has contacts. 2.3) ATSI shall increase local support with the US Carriers and customers in order to successfully implement products and services included in the Interconnection Contracts and Agreements. Article FIVE. - Compensation. - ------------ The basis for compensation is as follows : a) 90 hours per month at $100 DLLs. or 9,000 DLLs. per month paid in cash. b) ATSI agrees to share 50 % of the corporate office expense including : . Maintenance of the spaces. . Conservation of furniture and office equipment. . Assistant and office boy salaries. . Light and telecommunications and other operative expenses. These expenses have been estimated at $ 1,000 DLLs/month for the year of 1998 which shall be added to the compensation stated in point a) above. c) Travel and entertainment expenses. ATSI agrees to reimburse expenses according to the expense reports provided by KAWA. Article SIX. - Form of payment. - ----------- The compensation shall be invoiced and paid in the US according to the instructions provided by KAWA. Article SEVEN. -Taxes and other expenses. - ------------- KAWA will be solely responsible for the payment of its taxes or other operating expenses related with the consulting services except those specifically agreed upon according with article THREE above. Article EIGHT. - Termination. - ------------- This agreement could be terminated if the following occur: a) If at the end of twelve months ATSI does not wish to continue receiving the services of KAWA. b) Non compliance of the parties with the articles of this contract. c) Non compliance by ATSI of the committed compensation as per article THREE above. d) Regardless of the reason for the termination of this agreement KAWA will not reimburse any amount to ATSI. e) In case of anticipated termination prior to January 1st, 1999, ATSI agrees to pay an extraordinary compensation equivalent to 1 month of services according to article FIVE above. f) In case of anticipated termination caused by KAWA, KAWA agrees to notify of its intention with a minimum anticipation of 60 days. Article NINE. - Contingencies. - ------------ Extraordinary events beyond the control of ATSI such as fire, explosion, major earthquake, vandalism or similar shall not be considered as anticipated termination. The affected party shall notify the other as soon as possible. In this case non of the parties shall be liable to any penalty whatsoever. Article TEN. - Confidentiality and non disclosure. - ----------- Both parties agree to treat all information and data regarding the consulting services with full confidentiality and therefor agree to disclosure only by written consent of the other party. Article ELEVEN. - Jurisdiction. - -------------- For interpretation and arbitration of this agreement both parties agree to submit to the laws and jurisdiction of Mexico City. This agreement is signed in Mexico City on the 1st of January of 1998. For ATSI For KAWA Mr. Arturo Smith Mr. Carlos Kauachi Chairman & CEO President /s/ Arturo Smith /s/ Carlos Kauachi ---------------- ------------------ EX-23 20 CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K/A, into the Company's previously filed Registration Statements (File No. 333-50259; File No. 333-94439 and File No. 333-89683). /s/ ARTHUR ANDERSEN LLP - ------------------------- Arthur Andersen LLP San Antonio, Texas April 13, 2000 EX-99.7 21 SHARED TELEPORT LICENSE EXHIBIT 99.7 PERMIT GRANTED BY THE FEDERAL GOVERNMENT THROUGH THE MINISTRY OF COMMUNICATIONS AND TRANSPORTATION (THE "MINISTRY") TO SERVICIOS DE INFRAESTRUCTURA, S.A. DE C.V., ("SINFRA") TO INSTALL, OPERATE AND EXPLOIT AN EARTH STATION OR TELEPORT NETWORK TO PROVIDE DEDICATED DOMESTIC PRIVATE LINE SERVICES THROUGH THE NATIONAL SATELLITES OR THOSE DETERMINED BY THE FEDERAL GOVERNMENT IN ACCORDANCE WITH THE FOLLOWING ANTECEDENTS AND CONDITIONS: ANTECEDENTS I. The National Plan of Development 1989-1994 establishes the importance of the modernizing telecommunications for National Development and emphasizes the need to diversify services, improve quality and expand coverage with more participation of individuals. I. The Telecommunications Modernization Program 1989-1994 establishes the need to promote the development of new services in competition that utilize the existing capacity of the national satellites and complement the country's basic telecommunication services I. As well, such program considers the possibility for telecommunication entities to install and operate master earth stations or teleports and very small aperture terminals (VSAT's) located at the customer's facilities that allow the establishment of circuits and private networks sharing the satellite's capacity. I. On March 30, 1994 SINFRA submitted a request to the Ministry for a permit to install, operate and exploit a network integrated by a master earth station and remote earth stations in several areas throughout Mexico, that would use the satellite capacity under the charge of the Federal Government. The Ministry acknowledges that SINFRA satisfies the technical and legal requirements, in accordance with the antecedents mentioned above and with Article 36 of the Federal Public Administration Law, 6th Section X of the Internal Regulations of the Ministry, 3rd, 9th, and 11th of the General Communications Law, 6th, 34th and 58th Section II of the Telecommunications Regulations, and hereby grants the following: PERMIT To install, operate and exploit an earth station network (the "Network") to provide dedicated services through the national satellites or those determined by the Federal Government in accordance with the technical parameters specified in Addendum 1 of this permit. The Network will be designed as follows in its first phase: A Master Earth Station located in Mexico City to provide dedicated services and private networks via national satellites to provide voice, data and videoconferencing services through VSAT's located at the customer's facilities that will allow the shared use of the master earth station and satellite capacity. CONDITIONS i. PERMIT SCOPE 1a. APPLICABLE LEGISLATION The installation, operation and exploitation of the earth stations mentioned in this permit shall be governed by the Mexican Constitution, the General Communications Law, National Property Law and Federal Copyright Law and its regulations, by international agreements, contracts and treaties executed and any future agreements, contracts and treaties to be executed and ratified by the Mexican Government in this matter and by the terms of this permit. 2a. DEFINITIONS To determine the scope and specify the services mentioned in this permit the terms utilized within this permit are defined below. 2a.1 MASTER EARTH STATION Main Earth Station owned by the permit holder that provides dedicated circuits and domestic private networks through VSAT's. 2a.2 REMOTE EARTH STATION Small earth stations that provide links up to 128 Kbps. or its equivalent in voice, data or videoconferencing channels owned by the permit holder and/or the customers. 2a.3 DOMESTIC LINK VIA SATELLITE Link established by the use of a national satellite or between earth stations located within Mexico through the use of domestic, international or foreign satellites. 2a.4 DEDICATED DOMESTIC LINK VIA SATELLITE Point to point and/or point to multi-point telecommunication circuit using VSAT'S and sharing the use of the master earth station and satellite capacity contracted by SINFRA with the Ministry or with Telecomunicaciones de Mexico ("TELECOMM"). 2a.5 PRIVATE LINK Telecommunication circuit that is established and used for customer's internal communications. 2a.6 INTERNATIONAL LINK Link that is established between an earth station located in Mexico and an earth station located in another country through the use of a foreign satellite. 2a.7 SATELLITE CAPACITY Satellite capacity that TELECOMM provides to third parties, which is not extensive to earth stations for domestic links. II NETWORK OPERATION, EXPANSION AND EXPLOITATION 3a. MASTER EARTH STATION LINKS SINFRA may install and operate the transmission and switched infrastructure that it may require to send communication signals, control and supervise between the master earth station and the customer's remote earth stations, and between this and the point of connection with other networks or it can use the networks of other companies or entities authorized by the Ministry to carry such signals. 4a. NETWORK EXPANSION SINFRA must present each year to the Ministry an updated configuration of the Network, including a customer list and the way in which the customer's are connected to the master earth station and the number of customer remote earth stations, their location within Mexico and the use of the assigned frequencies. 5a. NETWORK MODIFICATIONS SINFRA shall require previous approval from the Ministry to realize any substantial modifications to the Network when such modifications could negatively affect the customer's equipment or the networks with which it is interconnected. 6a. TECHNICAL STANDARDS SINFRA must construct and establish the authorized Network with equipment complying with the homologation conditions established by the Ministry. 7a. AVAILABILITY OF FREQUENCIES The services to be provided under this permit will be subject to the availability and efficient use of the capacity of frequency bands C and Ku on domestic satellites or other satellites that Telecomunicaciones de Mexico (TELECOMM) may determine for service needs. 8a. NETWORK IMPLEMENTATION The system must begin operating within the first twelve months of receipt of this permit; otherwise, the administrative process to void this permit will be initiated. 9a. MARKETING, INSTALLATION AND MAINTENANCE SERVICES OF VSAT's SINFRA can market, install, and maintain the customer's VSAT's through a separate accounting process and/or through affiliates or agents. 10a. PURCHASE OF EARTH STATIONS BY SINFRA CUSTOMERS SINFRA customers may use SINFRA's earth stations or may acquire VSAT's with any vendor of their choice that satisfies the standards established by the Ministry. 11a. REMOTE STATIONS CONNECTION SINFRA must provide service to any customer requesting so. SINFRA may deny providing service only if the customer's equipment is not compatible with its network or does not satisfy the standards established by the Ministry. 12a. MARKETING CRITERIA SINFRA will present to the Ministry within 30 days of issuance of this permit the marketing criteria it will use with customers for the services that SINFRA will provide. Modifications to such criteria must be notified to the Ministry within 30 days of their effective date. 13a. EMERGENCY SERVICES SINFRA must provide emergency services free of charge to institutions and organizations providing emergency services, granting them priority for their communications; security services and those of emergency help will be provided in accordance with the applicable international agreements. 14a. SINFRA'S RESPONSIBILITIES SINFRA shall be the only responsible party before the Ministry for the provision of services; the Ministry shall not be liable in regards to SINFRA's customers. In the event SINFRA does not provide the services in the terms and conditions set forth in this permit, the Ministry will apply necessary measures. II INTERCONNECTION 15a. INTERCONNECTION WITH PUBLIC NETWORKS SINFRA will negotiate with other telecommunication operators or carriers authorized by the Ministry, the terms and conditions for interconnection of the Network with such operators. In the event an agreement is not reached within two months of the interconnection request, the Ministry will intervene and determine such terms and conditions. 16a. INTERCONNECTION WITH FOREIGN NETWORKS In the event it would be necessary to negotiate with any foreign government any interconnection to the Network, SINFRA will realize before the Mexican government through the Ministry the necessary terms for the execution of their respective agreement. Interconnection agreements that are executed with foreign companies must be previously approved by the Ministry who can modify them when the Ministry considers that it will damage the interests of any other network operators, customers or Mexico. 17a. NETWORK INTERFERENCE The operation of the services must not affect the quality nor interfere in any manner whatsoever with any other authorized telecommunication services that share the frequency bands utilized; otherwise, SINFRA must make any necessary modifications to the Ministry's satisfaction in order to avoid or eliminate such interference. 18a. SIGNAL CONDUCTION AGREEMENTS VIA SATELLITE SINFRA will contract with TELECOMM the satellite capacity that it may require to provide the services authorized and shall be responsible for payment of the corresponding tariffs. IV RATES 19a. APPLICABLE RATES SINFRA will register with the Ministry the rates for the services provided through the Network. These rates must be competitive on an international level. SINFRA will present to the Ministry rate studies every year and must include productivity improvements and costs for services. If the Ministry believes that sufficient competition will be generated with any of the communication services provided, more flexibility in rate control may be authorized. SINFRA may apply promotional rates lower than the maximum rates as long as these promotional rates do not reflect a direct loss. 20a. COST ACCOUNTING SINFRA must have a cost and revenue accounting system for the services offered that identifies the functioning of such services. 21a. REVENUE PARTICIPATION In accordance with Article 110 of the General Communications Law, SINFRA must pay on a monthly basis to the Federal Government 2.5% of its tariffed revenue provided through the earth stations. III. GENERAL PROVISIONS 22a. PAYMENT OBLIGATION TO TELECOMUNICACIONES DE MEXICO SINFRA must pay on a monthly basis 2.5% of its tariffed revenue to Telecomunicaciones de Mexico for its support, supervision of services, analysis and carrier assignment or frequency assignment. 23a. FAIR COMPETITION AND PREFERENTIAL TREATMENT SINFRA shall not be able to apply monopolistic or preferential practices that may prevent fair competition with other companies providing the same services. 24a. INSPECTION AND SUPERVISION At all times the Ministry shall have the authority to supervise and inspect the installations and services provided by SINFRA. SINFRA shall give the Ministry all the help it may require. The Ministry will verify through regular inspections the fulfillment of the technical and administrative standards, and its coverage commitments, operation, and service quality. 25a. TECHNICAL AND ADMINISTRATIVE INFORMATION SINFRA must provide to the Ministry the technical, administrative and financial information in the form and terms that the Ministry may determine. 26a. REAL RIGHTS This permit does not create real rights in favor of SINFRA nor of third parties regarding public domain property affected by the authorized services; any hoarding practice regarding such property in the provision of services by SINFRA will void this permit. The Ministry reserves the right to grant another or other permits to third parties, so that they may exploit within the same geographical area, or in a different area, identical or similar services contained herein. 27a. ASSIGNMENT SINFRA shall not assign, transfer, pledge, encumber, or sell in any manner whatsoever, totally or partially, this permit or the rights derived from this permit to third parties without previous authorization from the Ministry. 28a PAYMENT OF RIGHTS. SINFRA must pay within 30 days from the date of this permit, the fees established by the Federal Rights Law for technical studies, granting of the permit, inspection visits, Network changes or modifications and those that may result hereinafter. II TERM, TERMINATION AND CANCELLATION 29a. TERM This permit will be in effect for 15 years effective from the date this permit is granted. The Ministry shall review this permit 5 years after its granting considering the public interest and may include new terms if necessary. This present permit may be renewed for an equal term if SINFRA has satisfied the conditions this permit imposes, requests such renewal 180 days in advance of its expiration and accepts the new conditions that the Ministry may impose. 30a. CAUSES OF CANCELLATION This permit will be cancelled for any of the following reasons in addition to those specified in Article 29 of the General Communications Law. I. For not efficiently and regularly providing the services herein notwithstanding the warning made by the Ministry to SINFRA. II. For total or partial service suspension without previous authorization from the Ministry and without justified cause. III. Because the facilities authorized are modified, or the nature or conditions in which the authorized services are provided are substantially altered, without previous authorization from the Ministry. IV. For nonpayment of the amounts stated in Paragraphs 20a and 27a. V. For any repeated violation of the obligations herein, and having received a written warning from the Ministry. VI. For not complying with the assigned technical parameters in the operation of the services herein. VII. For not complying with Paragraph 8 of this permit. The cancellation of this permit will be subject to the process established in Article 34 of the General Communications Law. 31a. GUARANTEE To guarantee compliance with the obligations imposed in this permit, SINFRA shall obtain a bond with an authorized company in the amount of $1,000,000 (One million pesos) payable to the Federal Treasury. This guarantee shall remain in effect during the term of this permit. SINFRA agrees to increase the amount of the bond within ten (10) business days if the Ministry feels it is necessary. The bond must contain a statement saying that the bonding institution accepts the rules contained in Articles 95 and 118 of the Federal Bonding Institutions Law in effect and waives the benefit of discussion in accordance with the policy model approved by the Federal Treasury. This permit will go into effect on the day of its signature. Granted in Mexico City on the (Illegible Stamp) of the month of one thousand nine hundred and ninety four. SUBSECRETARY FOR COMMUNICATION AND TECHNOLOGICAL DEVELOPMENT Signature LIC. ANDRES MASSIEU BERLANGA EX-99.9 22 VALUE-ADDED SERVICE LICENSE EXHIBIT 99.9 GENERAL DIRECTION OF NETWORKS AND RADIOCOMMUNICATION 119.206 0645 REGISTRATION NUMBER 24--SVA-96 REGISTRATION CERTIFICATE ISSUED BY THE MINISTRY OF COMMUNICATIONS AND TRANSPORTATION FOR THE PROVISION OF VALUE ADDED SERVICES Based on Article 33 of the Federal Telecommunications Law the following registration certificate is granted in accordance with the following terms: Granted to: American Telesource International de Mexico, S.A. de C.V, Address: Torres Adalid 7, Col. Del Valle, C.P. 03100 Legal Representative: Jesus Enriquez Perez Type of Service(s): Electronic Data Exchange, Electronic Mail and Remote access to Databases Applications: Transfer of documents through preestablished formats; data and facsimile mailboxes; provision of general interest data stored in databases; Internet access. Public Network Utilized: Telefonos de Mexico, S.A. de C.V.'s Public Telephone Network This registration certificate is governed by the General Communications Law, the Federal Telecommunications Law, Telecommunications Regulations and all applicable legislation issued; by the Contracts, Agreements, and Treaties executed and those in the future to be executed and ratified by the Mexican Government and by the conditions shown in this certificate. In Mexico City, D.F. on February 23, 1996. General Director Lic. Luis Miguel Alvarez Alonso CONDITIONS 1. The registration for the provision of value added services supported by this certificate have an indefinite term. When the service provider stops providing the services for its own convenience, the provider must notify the Ministry of Communications and Transportation. 1. To provide value added services, the provider agrees to solely utilize homologated equipment and public telecommunications networks authorized by the Ministry of Communications and Transportation. 1. The Ministry of Communications and Transportation shall have the ability at any time to make administrative technical inspections at the provider's facilities and request additional information related with the value added services registered. 1. The service provider must notify the Ministry of Communications and Transportation any modification in their address, legal representative, addition of new services or the transmission means utilized to provide the services.before any changes are made. 1. Providing false information upon registering the value added services or in any other request made to the Ministry of Communications and Transportation will be reason to initiate any sanction proceedings. 1. The value added services provider whose registration certificate is attached hereto must submit to the Ministry of Communications and Transportation on an annual basis and within 30 days after the anniversary date of this certificate, a completed "Annual Report of Value Added Services" for the purpose of maintaining updated information. By not submitting in a timely manner the above mentioned report, it shall be understood as desisting to continue to provide the services and shall automatically generate cancellation of its registration. 1. The exercise of the rights derived from this registration implies the unconditional acceptance of all the terms by the service provider. (Illegible signature) cc: Lic. Carlos Casasus Lopez Hermosa - Undersecretary of Communications and Technological Development. EX-99.10 23 POTENTIAL DILUTION CHART Exhibit 99.10 Potential Dilution Chart
- ------------------------------------------------------------------------------------------------------------------------------------ Name of Security Amount Term Conversion or Registration Resulting Number of % of Total Current Exercise Price Status of of Common Outstanding on a Underlying Fully-Diluted Common Stock Basis Assuming Full Conversion - ------------------------------------------------------------------------------------------------------------------------------------ Series A Preferred 1,141 mandatory 1141 divided by $6.11 Unregistered 18,674 Less than 1% - - March conversion on times 100 (until March February 28, 2005 25, 2001) - ------------------------------------------------------------------------------------------------------------------------------------ Warrant 1 expires March 9, $3.09 per share common Unregistered 40,000 Less than 1% 2002 stock - ------------------------------------------------------------------------------------------------------------------------------------ Series A Preferred 13,116 mandatory 13,116 divided by $.7078 Unregistered 1,810,681, assuming 2.5% - - April 23, 1999 conversion on times 100 (until April conversion at 141.283 February 28, 2005 23, 2000) (plus Venbanc) - ------------------------------------------------------------------------------------------------------------------------------------ Warrant 1 expires July 2, $ 1.25 to be registered, 50,000 Less than 1% 2004 included in registration statement filed with SEC in October, 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Warrant 1 expires $ 1.19 to be registered, 20,000 Less than 1% September 24, included in 2004 registration statement filed with SEC in October, 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Series A Preferred 4,370 mandatory 4370 divided by $.8969 unregistered 487,233 Less than 1% - - December 3, 1999 conversion on times 100 (until February 28, 2005 December 3, 2000) - ------------------------------------------------------------------------------------------------------------------------------------
27 - ----------------------------------------------------------------------------------------------------------------------------------- Series A Preferred - 10,000 mandatory 10,000 divided by $.9430 unregistered 1,060,445 1.48% December 8, 1999 conversion on times 100 (until February 28, 2005 December 8, 2000) - ----------------------------------------------------------------------------------------------------------------------------------- Warrant 1 exercisable $.9430 unregistered 106,045 Less than 1% after December 8, 2000; expires December 8, 2004 - ----------------------------------------------------------------------------------------------------------------------------------- Series A Preferred - 10,000 mandatory 10,000 divided by to be registered, 506,329 Less than 1% February 4, 2000 conversion on $1.975 times 100 (until initial filing February 28, 2005 February 2, 2001) April 30, 2000 - ----------------------------------------------------------------------------------------------------------------------------------- Series D Preferred 3,000 mandatory lesser of $5.4375 or 83% to be registered, 551,724 assuming Less than 1% conversion on of the average of the 5 included in conversion price February 22, 2002 lowest closing bid amendment to of $5.4375 prices of the common registration stock during the 10 statement filed trading days preceding with SEC in conversion, times 1000 October, 1999 per share - ----------------------------------------------------------------------------------------------------------------------------------- Warrants 2 expires February $ 4.37 to be registered 150,000 Less than 1% 22, 2004 - ----------------------------------------------------------------------------------------------------------------------------------- Series D Redemption 1 expires five $ 4.37 to be registered 150,000 Less than 1% Warrant years from date (may be issued if ATSI of issuance redeems) - ----------------------------------------------------------------------------------------------------------------------------------- Common stock 19,693 n/a n/a to be registered 19,693 Less than 1% - ----------------------------------------------------------------------------------------------------------------------------------- Warrants 2 Expire March 31, $ 7.17 Piggyback 175,000 Less than 1% 2003 registration rights - ----------------------------------------------------------------------------------------------------------------------------------- Vested options under earlier of 10 n/a registered 283,500 Less than 1% stock option plans years from date of grant or four months - -----------------------------------------------------------------------------------------------------------------------------------
28 - ---------------------------------------------------------------------------------------------------------------------------------- from termination of employment - ---------------------------------------------------------------------------------------------------------------------------------- Unvested options under same as vested n/a registered 1,336,881 1.87% stock option plans - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL NEW SHARES OF 6,766,205 9.47% COMMON STOCK - ----------------------------------------------------------------------------------------------------------------------------------
29 EX-99.11 24 PREFERRED STOCK FEATURES Exhibit 99.11 Preferred Stock Features - ------------------------
Series A Series D - ----------------------------------------------------------------------------------------------------------------------------- Shares 37,186 3,000 Outstanding - ----------------------------------------------------------------------------------------------------------------------------- Amount Paid Per $100 $1000 Share - ----------------------------------------------------------------------------------------------------------------------------- Dividends 10% per annum payable quarterly in arrears 6% per annum payable quarterly in arrears, beginning June 1, 1999; payable in shares of ATSI beginning March 31, 2000; payable in cash or common stock registered shares of ATSI common stock, at ATSI's election participate in distributions to common stock holders as if preferred stock had been converted into common stock on record date for distribution - ----------------------------------------------------------------------------------------------------------------------------- Dividend Prior to common stock, ratably with series D Prior to common stock, ratably with Series A Preference preferred stock preferred stock - ----------------------------------------------------------------------------------------------------------------------------- Liquidation Prior to common stock, shares ratably with series D Prior to common stock, ratably with Series A Preference preferred stock; liquidation payment of $100 per preferred stock; liquidation payment of $1300 per share outstanding plus accrued and unpaid dividends share outstanding plus accrued and unpaid dividends - ----------------------------------------------------------------------------------------------------------------------------- Voting Rights Votes as if conversion of outstanding shares None, except as required by Delaware law occurred on record date for vote; majority approval required for significant corporate events such as merger or sale - ----------------------------------------------------------------------------------------------------------------------------- Conversion Price Average of closing sale prices for the 20 trading Lesser of $5.4375 or 83% of the average of the days preceding issuance times $100 per share, plus lowest 5 closing bid prices for the common stock accrued and unpaid dividends; reset on each during the 10 trading days prior to conversion anniversary date to greater of 75% of initial conversion price or 75% of 20 day trading average prior to anniversary date - ----------------------------------------------------------------------------------------------------------------------------- Conversion Time From date of issuance to February 28, 2005; Any time after February 22, 2000, except for a mandatory conversion on February 28, 2005 single 30 day lock out if common stock price falls below $2.50; mandatory conversion of any remaining shares on February 22, 2002 - ----------------------------------------------------------------------------------------------------------------------------- Adjustments to As appropriate in event of stock split, reverse Upon notice of stock split, dividend, or issuance Conversion Price stock split or stock dividend of additional shares at a discount to market, holder may elect to convert based on average closing bid price during five or fewer trading days preceding conversion; If common stock becomes ineligible for trading on OTCBB, AMEX or NASDAQ, conversion price adjusted to 65% of average of five lowest closing bid prices during ten trading days preceding conversion. If ATSI issues common stock, common stock warrants or securities convertible into common stock at a lower price than conversion price for Series D preferred, and agrees to register the common stock, --- holder's conversion price is adjusted to lowest price for new issuance - -----------------------------------------------------------------------------------------------------------------------------
30 - ----------------------------------------------------------------------------------------------------------------------------- Change of no special provision holder may elect redemption at 120% of sum of $1300 Control of ATSI per share and accrued and unpaid dividends, or convert to whatever type of security the common stockholders received in the change of control; - ----------------------------------------------------------------------------------------------------------------------------- Mandatory N/A Upon change of control of ATSI, holder may elect Redemption redemption at 120% of sum of $1300 per share and accrued and unpaid dividends, or convert to whatever type of security the common stockholders received in the change of control; Holder may elect redemption at $1270 per share plus accrued and unpaid dividends if ATSI refuses to honor conversion notice or third party brings suit challenging conversion - ----------------------------------------------------------------------------------------------------------------------------- Optional At ATSI's option after first anniversary of issue At ATSI's option if price of common stock falls Redemption date if market price of common stock is 200% or below price at closing date, for $1270 per share more of conversion price, for $100 per share plus plus accrued but unpaid dividends plus additional accrued and unpaid dividends warrant for 150,000 shares of common stock (on same terms as warrant issued to The Shaar Fund on February 22, 2000) - ----------------------------------------------------------------------------------------------------------------------------- Trading/ restricted, common shares issued on conversion Restricted; common shares issued on conversion to Conversion restricted with exception of common shares be restricted until registration; Restrictions underlying 10,000 shares of Series A which ATSI has agreed to register one time 30 day lock out if price of common stock is $2.50 or less - ----------------------------------------------------------------------------------------------------------------------------- Registration For 10,000 shares issued February 4, 2000, Registration Statement for underlying common stock Rights registration statement for underlying common stock to be filed by April 1, 2000 and effective by June to be filed by April 30, 2000; with agreement that 1, 2000 first third may not be converted into common stock until April 30, 2000, second third until July 31, 2000 and final third until October 31, 2000. - ----------------------------------------------------------------------------------------------------------------------------- Liquidated $25,000 for failure to file registration statement $60,000 for failing to file by April 1, 2000 or Damages for by April 30, 2000 or obtain effectiveness by 90 obtain effectiveness by June 1, 2000; $60,000 for Failure to Meet days from filing, and $25,000 for each subsequent each subsequent 30 day period Registration 30 day period that targets are not met Deadlines - ----------------------------------------------------------------------------------------------------------------------------- Other N/A Ten day right of first refusal on issuance of common stock, warrants for common stock, or securities convertible into common stock for price less than then-current market price, or debt with interest greater than 9.9% No issuances of common stock that would cause holder to own more than 5% of ATSI's total common stock at any given time; if 5% limit would be exceeded on mandatory conversion date ATSI may redeem excess shares or extend conversion date for one year Total issuances of common stock during term of Series D not to exceed 11,509,944 (20% of - -----------------------------------------------------------------------------------------------------------------------------
31 - ----------------------------------------------------------------------------------------------------------------------------- ATSI's total shares outstanding at closing date) ATSI must redeem any excess May not create new stock having liquidation preference over Series D - -----------------------------------------------------------------------------------------------------------------------------
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