-----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, OU4grYPRVE2poLhisV4UBieEGM/G7aDuJB+3w+orcfFr+fG6vmgNZP/HAZR6brLm Ifp7Yx0Hcvn9lBgGKy/RwA== 0000930661-00-000955.txt : 20000417 0000930661-00-000955.hdr.sgml : 20000417 ACCESSION NUMBER: 0000930661-00-000955 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 8 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: S-3/A SEC ACT: SEC FILE NUMBER: 333-89683 FILM NUMBER: 600848 BUSINESS ADDRESS: STREET 1: 12500 NETWORK BLVD STREET 2: SUITE 407 CITY: SAN ANTONIO STATE: TX ZIP: 78249 BUSINESS PHONE: 2105586090 S-3/A 1 AMENDMENT TO FORM S-3 As filed with the Securities and Exchange Commission on April 14, 2000 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 AMERICAN TELESOURCE INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 74-2849955 (I.R.S. Employer Identification Number) 12500 Network Boulevard, Suite 407, San Antonio, Texas 78249 (210) 558-6090 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Arthur L. Smith, Chief Executive Officer 12500 Network Boulevard, Suite 407, San Antonio, Texas 78249 (210) 558-6090 (Name, address, including zip code and telephone number, including area code, of agent for service) Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this Registration Statement. If only the securities being registered on this Form are being offered pursuant to a dividend or interest reinvestment plans, please check the following box. [_] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------- Proposed Maximum Proposed Title of Amount Offering Maximum Amount of Securities To be Price Aggregate Registration To be Registered Registered Per Share Offering Price Fee -------------------------------------------------------------------------------------------------------- Common stock issued upon conversion of preferred stock (1) 484,872 $0.76 $ 748,326 $ 208.03 - ------------------------------------------------------------------------------------------------------- Common stock issued in payment of dividends on preferred stock (1) 7,436 $0.76 $ 89,799 $ 24.96 - ------------------------------------------------------------------------------------------------------- Common stock issuable upon conversion of convertible preferred stock (2) 1,200,000 $6.06 $7,275,000 $1,920.60 - ------------------------------------------------------------------------------------------------------- Common Stock to be paid as dividend on convertible preferred (2) 144,000 $6.06 $ 873,000 $ 230.47 - ------------------------------------------------------------------------------------------------------- Common stock issuable upon exercise of warrants granted as placement fee (1) 50,000 $0.76 $ 38,000 $ 10.56 - ------------------------------------------------------------------------------------------------------- Common stock issued as placement fee (1) 19,693 $0.76 $ 14,967 $ 4.16 - ------------------------------------------------------------------------------------------------------- Common Stock issuable upon exercise of warrants (2) 3,200,000 $6.06 $1,940,000 $ 512.16 =======================================================================================================
(1) Calculated pursuant to Rule 457 (c), using the average of the high and low prices reported on October 18, 1999, solely for the purpose of calculating the Registration Fee; fee calculated and paid upon filing of original Registration Statement on Form S-3 filed on October 26, 1999 pursuant to Rule 457(c). (2) Calculated pursuant to Rule 457 (c), using the average of the high and low prices reported on April 10, 2000, solely for the purpose of calculating the Registration Fee. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the SEC, acting pursuant to said Section 8(a) may determine. PROSPECTUS NOT COMPLETE [Not Yet Issued] 2,226,001 Shares of Common Stock AMERICAN TELESOURCE INTERNATIONAL, INC. Investing in our common stock involves a high degree of risk. See "Risk Factors" beginning on page 8. The selling shareholders identified on page 24 of this prospectus are offering these shares of common stock. For additional information on the methods of sale, you should refer to the section entitled "Plan of Distribution" on page 25. We will not receive any of the proceeds from the sale of the common stock by the selling shareholders. Our common stock is traded on the American Stock Exchange under the symbol "AI". On April 10, 2000, the closing price of our common stock was $6.0625 per share. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. 1 TABLE OF CONTENTS
RELY ONLY ON THIS PROSPECTUS............................ 1 THE COMPANY............................................. 1 RISK FACTORS............................................ 8 FORWARD LOOKING STATEMENTS.............................. 19 USE OF PROCEEDS......................................... 19 COMMON STOCK ISSUED..................................... 19 SELLING SHAREHOLDERS.................................... 24 PLAN OF DISTRIBUTION.................................... 25 LEGAL MATTERS........................................... 27 EXPERTS................................................. 27 WHERE YOU CAN FIND MORE INFORMATION..................... 27
ii RELY ONLY ON THIS PROSPECTUS You should rely only on the information provided or incorporated by reference in this prospectus or any supplement. We have not authorized anyone to provide you with different information. This prospectus may be used only in states and other jurisdictions where it is legal to sell the common stock. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or the sale of any shares. THE COMPANY American TeleSource International, Inc., or ATSI, is a communications company focusing on the market for wholesale and retail services between the United States and Latin America, and within Latin America. In 1993, we began assembling a framework of licenses, interconnection and service agreements, network facilities and distribution channels so that we would be in a position to take advantage of the de-monopolization of the Latin American telecommunications market, as well as the increasing demand for services in this market. Most of our current operations involve services between the U.S. and Mexico or within Mexico. We have some operations in Central America as well, and may expand our operations in the rest of Latin America as the regulatory environment permits. We also own a subsidiary, GlobalSCAPE, Inc. which sells its proprietary Internet productivity software, CuteFTP(R), CuteHTML(R) CuteZIP(TM), CuteMAP (TM) and CuteMX(TM). We have had operating losses for almost every quarter since we began operations in 1994. 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. We have experienced difficulty in paying our vendors and lenders on time in the past, and may experience difficulty in the future. If we are unable to pay our vendors and lenders on time, they may stop providing critical services or repossess critical equipment that we need to stay in business. We do not know when we will achieve profitability, so to stay in business we will almost certainly have to borrow money or sell additional stock in our company. We do not know if we will be able to borrow money or sell additional stock on terms we find acceptable. Our strategy for the future is to maximize the use of our current infrastructure between Mexico and the United States, while focusing on expanding our retail customer base in Mexico and the United States. We also want to expand our network infrastructure in Mexico to reduce costs. We want to increase the ratio of retail traffic vs. wholesale traffic because we believe that retail traffic is less volatile than wholesale traffic, and retail customers pay more for our services than wholesale customers. Retail traffic should therefore produce greater profit margins than wholesale traffic. Our defined retail target market will be the underserved and underdeveloped Latino markets in the Mexico and the United States, where we plan to offer services that will function regardless of the user's location north or south of the U.S./Mexico border, such as 1 enhanced prepaid calling services. Our marketing term for these types of services is "borderless." We have applied for a long distance license from the Mexican government which, if obtained, could permit us to reduce our costs and expand our network in Mexico. We are also in negotiations to acquire a Mexican company which holds a long distance license, and we have obtained preliminary regulatory approval from the Mexican government to acquire this Company. Currently we must rely on Mexican-licensed long distance carriers to transport our traffic between our facilities in Mexico and the local telephone company in Mexico. If we obtain this license and are able to connect directly to the local telephone company in Mexico, we expect to reduce our costs significantly. This would also allow us to implement our retail strategy more effectively. Our capital stock As of April 10, 2000 we have 64,646,831 shares of common stock outstanding, of which 58,056,460 are registered with the SEC. Of the 6,590,371 outstanding shares that are not registered, 375,174 have been held for more than one year, making them eligible for resale in a "brokers transactions" as defined in SEC Rule 144. 492,308 shares are included in the registration statement of which this prospectus is a part, and we have agreed to register an additional 2,632,929 shares, with the initial registration statement to be filed no later than April 30, 2000. We have included 19,693 shares of common stock in this prospectus that have not yet been issued, but will be issued upon effectiveness of the registration statement. In addition to our common stock, we currently have two series of preferred stock outstanding. The series of preferred stock were issued in private placements and are not freely tradable, but are convertible into shares of common stock. We also have warrants outstanding for the purchase of common stock. In addition to the 1,420,000 shares of common stock that may be issued upon conversion of preferred stock and exercise of warrants that included in the registration statement of which this prospectus is a part, we have agreed to register an additional 506,330 shares of common stock that may be issued upon conversion of the series A preferred stock issued on February 4, 2000, with the registration statement to be filed no later than April 30, 2000. The following table shows the potential dilution of our common stock. The conversion price for the preferred stock floats with the market, so we do not know exactly how many shares of common stock will be issued upon conversion of the preferred stock. We have assumed the conversion prices shown on the table, but the actual number of shares of common stock that may be issued may be materially higher or lower. See the table on page 5, "Preferred Stock" for more information on the terms of the preferred stock, including the conversion price and adjustments to the conversion price. 2 Potential Dilution Chart
- ------------------------------------------------------------------------------------------------------------------------------------ Name of Security Amount Term Conversion or Exercise Registration Resulting Number of Price Status of Shares of Common Underlying Common Stock - --------------------------------------------------------------------------------------------------------------------------------- Series A Preferred - March 1,141 mandatory 1141 divided by $6.11 Unregistered 18,674 conversion on times 100 (until March February 28, 25, 2001) 2005 - --------------------------------------------------------------------------------------------------------------------------------- Warrant 1 expires March $3.09 per share common Unregistered 40,000 9, 2002 stock - --------------------------------------------------------------------------------------------------------------------------------- Series A Preferred - 13,116 mandatory 13,116 divided by $.7078 Unregistered 1,810,681, assuming April 23, 1999 conversion on times 100 (until April conversion at 141.283 February 28, 23, 2000) (plus Venbanc) 2005 - --------------------------------------------------------------------------------------------------------------------------------- Warrant 1 expires July 2, $ 1.25 to be registered, 50,000 2004 included in registration statement filed with SEC in October, 1999 - --------------------------------------------------------------------------------------------------------------------------------- Warrant 1 expires $ 1.19 to be registered, 20,000 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 December 3, 1999 conversion on times 100 (until February 28, December 3, 2000) 2005 - --------------------------------------------------------------------------------------------------------------------------------- Series A Preferred - 10,000 mandatory 10,000 divided by $.9430 unregistered 1,060,445 December 8, 1999 conversion on times 100 (until February 28, December 8, 2000) 2005 - --------------------------------------------------------------------------------------------------------------------------------- Warrant 1 exercisable $.9430 unregistered 106,045 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------- Name of Security % of Total Current Outstanding on a Fully-Diluted Basis Assuming Full Conversion - --------------------------------------------------- Series A Preferred - March Less than 1% - --------------------------------------------------- Warrant Less than 1% - --------------------------------------------------- Series A Preferred - 2.5% April 23, 1999 - --------------------------------------------------- Warrant Less than 1% - --------------------------------------------------- Warrant Less than 1% - --------------------------------------------------- Series A Preferred - Less than 1% December 3, 1999 - --------------------------------------------------- Series A Preferred - 1.48% December 8, 1999 - --------------------------------------------------- Warrant Less than 1% - ---------------------------------------------------
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- ------------------------------------------------------------------------------------------------------------------------------------ after December 8, 2000; expires December 8, 2004 - ------------------------------------------------------------------------------------------------------------------------------------ Series A Preferred - 10,000 mandatory 10,000 divided by $1.975 to be registered, 506,329 Less than 1% February 4, 2000 conversion on times 100 (until initial filing February 28, February 2, 2001) April 30, 2000 2005 - ------------------------------------------------------------------------------------------------------------------------------------ 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, lowest closing bid amendment to of $5.4375 2002 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 $ 4.37 to be registered 150,000 Less than 1% February 22, 2004 - ------------------------------------------------------------------------------------------------------------------------------------ Series D Redemption 1 expires five $ 4.37 to be registered 150,000 Less than 1% Warrant years from (may be issued if ATSI date of redeems) issuance - ------------------------------------------------------------------------------------------------------------------------------------ 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 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 - ------------------------------------------------------------------------------------------------------------------------------------
4 The features of our common stock are described in our Registration Statement on Form S-4 filed with the SEC on March 6, 1998 and incorporated by reference in this prospectus. The features of the preferred stock and the registration status of the common stock into which they may be converted are summarized in the table below. 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 Votes as if conversion of outstanding shares None, except as required by Delaware law Rights occurred on record date for vote; majority approval required for significant corporate events such as merger or sale - ----------------------------------------------------------------------------------------------------------------------------- Conversion Average of closing sale prices for the 20 trading Lesser of $5.4375 or 83% of the average of the Price 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 From date of issuance to February 28, 2005; Any time after February 22, 2000, except for a Time 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 stock split or stock dividend of additional shares at a discount to market, holder may elect to convert - -----------------------------------------------------------------------------------------------------------------------------
5 - ----------------------------------------------------------------------------------------------------------------------------- Price 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 - ----------------------------------------------------------------------------------------------------------------------------- Change of no special provision holder may elect redemption at 120% of sum of $1300 Control of per share and accrued and unpaid dividends, or ATSI 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 - -----------------------------------------------------------------------------------------------------------------------------
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- ----------------------------------------------------------------------------------------------------------------------------- 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 ATSI's total shares outstanding at closing date); ATSI must redeem any excess May not create new stock having liquidation preference over Series D - -----------------------------------------------------------------------------------------------------------------------------
You may find additional information about the series D preferred stock that is covered by this prospectus in the section of this prospectus entitled Common Stock Issued on page 19. We also have outstanding warrants and options for the purchase of our common stock as described on the table appearing on page 3 of this prospectus. 7 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 8 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 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 9 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 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 10 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. 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 11 revenues by six months. This difficulty is described in more detail in our amended 10-K 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. Our amended 10-K describes these technologies. The risk of network 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 12 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 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. 13 . 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. 14 . 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. The table on page 23 of this prospectus shows the number of shares of common stock that may be issued on conversion of the series D preferred stock at different assumed market prices, and the resulting percentage of ownership of common stock that The Shaar Fund would have. 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. 15 . 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 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 on page 3 shows all of the outstanding securities that are convertible into or exercisable for ATSI's common stock. The table on page 5 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 table on page 23 of this prospectus shows the number of shares that may be issued upon conversion of the series D preferred stock at different market prices. . 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 16 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 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. 17 . 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 has 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 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 18 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. . 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. FORWARD-LOOKING STATEMENTS This prospectus and the documents incorporated by reference in this prospectus contain "forward-looking statements." "Forward looking statements" are those statements, which describe management's beliefs and expectations about the future. We have identified forward-looking statements in this prospectus by using words such as "anticipate," "believe," "could," "estimate," "may," "could," "expect," and "intend." Although we believe these expectations are reasonable, our operations involve a number of risks and uncertainties, including those described in the Risk Factors section of this prospectus. Therefore, these types of statements may prove to be incorrect. USE OF PROCEEDS The selling shareholders will receive the proceeds from the shares of common stock. We will not receive any of the proceeds. COMMON STOCK ISSUED The common stock offered by this prospectus has been or may be issued to the selling shareholders pursuant to the terms of the following securities: . 484,872 shares of common stock issued upon conversion of 500 shares of the series C preferred stock issued to The Shaar Fund on September 24, 1999, . 7,436 shares of common stock issued as a dividend on the series C preferred stock, 19 . 20,000 shares of common stock that may be issued to The Shaar Fund under the terms of a warrant issued to The Shaar Fund on September 24, 1999, . 50,000 shares of common stock that may be issued to Corporate Capital Management under a warrant issued as a placement fee in connection with ATSI's series B preferred stock issuance, 19,693 shares of common stock issued to Corporate Capital Management LLC as commission on ATSI's series C preferred stock issuance, . an undetermined number of shares of common stock that may be issued upon conversion of 3,000 shares of series D preferred stock issued to The Shaar Fund on February 22, 2000, . an undetermined number of shares of common stock that may be issued to The Shaar Fund in payment of dividends due on the series D preferred stock, . 150,000 shares of common stock that may be issued to The Shaar Fund under the terms of a warrant issued to The Shaar Fund on February 22, 2000, and . 150,000 shares of common stock that may be issued to The Shaar Fund under the terms of a warrant that may be issued to The Shaar Fund if ATSI elects to redeem the series D preferred stock. We do not know how many shares of common stock will be issued upon conversion of the series D preferred stock. As described in the chart on page 23 of this prospectus, the series D preferred stock is convertible into common stock based on a floating rate that is a discount of the common stock price at the time of conversion. The conversion price for the series D preferred stock as of April 10, 2000 was $4.90, which means that if The Shaar Fund had converted all of its series D preferred stock on that date we would have issued 612,245 shares of common stock. However, due to the fluctuating conversion rate, we do not know the number of shares of common stock that will be issued on conversion of the series D preferred stock, and the number of shares may be materially higher or lower than this. You should carefully review this information and the discussion in the Risk Factors section describing the risks arising from the uncertainty regarding the number of shares that may be issued and the potential dilution to your ownership of our common stock. Series C Preferred Stock The Shaar Fund purchased 500 shares of Series C Preferred Stock for $1000 per share on September 24, 1999. The Shaar Fund converted all of its shares of series C preferred stock on March 7, 2000, resulting in the issuance of 484,872 shares of common stock. The series C preferred stock had terms similar to the series D preferred stock. The registration rights agreement signed by ATSI and The Shaar Fund at the time of the sale of the Series C Preferred Stock requires ATSI to register the common stock into which the 20 series C preferred stock was converted. The Registration Rights Agreement provides that we will indemnify The Shaar Fund and its assignees against certain liabilities, including civil liabilities under the Securities Act of 1933, as amended. Series D Preferred Stock The Shaar Fund purchased 3000 shares of series D preferred stock for $1000 per share on February 22, 2000. The Shaar Fund may convert each share of series D preferred stock into that number of shares of common stock that is equal to 1000 divided by a conversion price that is the lesser of: . $5.4375 (the closing sale price of the common stock on the American Stock Exchange on February 17, 2000), and . 83% of the average of the five lowest closing bid prices of the common stock on the American Stock Exchange during the ten trading day period immediately preceding the date of conversion. Therefore, the number of shares of common stock that The Shaar Fund may acquire increases if the price of the common stock decreases. Although there is no ceiling on the maximum number of shares of common stock that The Shaar Fund may acquire, if the closing price for the common stock falls to $2.50 or less on any trading day, The Shaar Fund may not convert any series D preferred stock for a single period of thirty days from that day. The series D preferred stock will never be convertible into fewer than 551,724 shares of common stock, which is the number of shares that may be acquired if the conversion price is $5.4375. The Shaar Fund may convert any of its shares of series D preferred stock at any time it elects after February 22, 2000, but any shares not converted by February 22, 2002 must be converted by ATSI at the conversion price on that day. The registration rights agreement signed by ATSI and The Shaar Fund at the time of the sale of the series D preferred stock requires ATSI to register that number of common shares into which all of the shares of the series D preferred stock would be convertible at a conversion price of $2.50. If the closing sale price for the common stock falls below $3.00, we are required to register additional shares of common stock based on an assumed conversion price of .30 per share. This registration rights agreement provides that we will indemnify The Shaar Fund and its assignees against certain liabilities, including civil liabilities under the Securities Act of 1933, as amended. Dividends on Series C Preferred Stock and Series D Preferred Stock The series C and D preferred stock require quarterly dividends at 6% per annum calculated on the value of $1000 per share, which may be paid at our option either in cash or registered shares 21 of common stock valued at the conversion price on the dividend payment date. We issued 7,436 shares of common stock to pay the dividends due on the series C preferred stock and have included those shares in this registration statement. The first dividend on the series D preferred stock was due on March 31, 2000, and was for a total $52,500. We have included 144,000 shares of common stock in this prospectus and registration statement for the payment of dividends on the series D preferred stock. The Warrants The Shaar Fund may elect to acquire up to a total of 170,000 additional shares of common stock under the terms of warrants issued in connection with the series C and D preferred stock as follows: . 20,000 shares at an exercise price of $1.19; and . 150,000 shares at an exercise price of $4.37. The features of these warrants are described in more detail in the chart appearing on page 3 of this prospectus. If we elect to redeem the series D preferred stock, part of the redemption price would be an additional warrant for 150,000 shares on the same terms as the warrant The Shaar Fund currently holds. Under the registration rights agreements we signed with The Shaar Fund at the time of the sale of the series D preferred stock we are required to register 300,000 shares of common stock that may be issued on the exercise of the existing warrants and the warrants that may be issued if we elect to redeem the series D preferred stock. We issued Corporate Capital Management a warrant for the purchase of 50,000 shares of common stock at an exercise price of $1.25 as a placement fee in connection with our issuance of our series B preferred stock on July 2, 1999. The features of this warrant are described in more detail in the chart included on page 3 of this prospectus. We agreed to register the common shares underlying this warrant as consideration for Corporate Capital Management's services in connection with the issuance of the series C preferred stock. The Shaar Fund's Percentage Ownership of Common Stock The table below shows the % of ATSI's common stock that The Shaar Fund may own assuming different conversion prices of the series D preferred stock. Although we have provided similar information in this prospectus in the Potential Dilution Chart on page 3, and the Selling Shareholders table on page 24, we wanted you to see the relationship between changes in our common stock price and the percentage of ATSI that The Shaar Fund might own. 22
- ---------------------------------------------------------------------------------------------------------------------------------- Avg. of 5 Series D Total Number Total Number Shares of Shares of Total Shares Shaar Fund Lowest Bid Conversion of Shares of of Shares of Common Common Issued to The % of ATSI Prices During Price (lesser of Common Common Stock issued Stock issued Shaar Fund common stock 10 Trading $5.4375 and Stock Issued Stock issued on exercise of upon on full Days 83% of Upon in payment of warrants conversion of conversion Preceding average Conversion of dividends over series C Conversion Series D two years preferred Preferred stock Stock - ---------------------------------------------------------------------------------------------------------------------------------- $ 0.37 $0.3071 9,768,805 1,172,257 170,000 492,402 11,603,464 15.37% - ---------------------------------------------------------------------------------------------------------------------------------- $ .50 $ .415 7,228,916 867,470 170,000 492,402 8,758,788 12.06% - ---------------------------------------------------------------------------------------------------------------------------------- $ 1.00 $ .83 3,614,458 433,735 170,000 492,402 4,710,595 6.87% - ---------------------------------------------------------------------------------------------------------------------------------- $ 1.32 $ 1.096 2,738,226 328,587 170,000 492,402 3,729,215 5.51% - ---------------------------------------------------------------------------------------------------------------------------------- $ 1.50 $ 1.245 2,409,639 289,157 170,000 492,402 3,361,197 5.00% - ---------------------------------------------------------------------------------------------------------------------------------- $ 2.00 $ 1.66 1,807,229 216,867 170,000 492,402 2,686,498 4.04% - ---------------------------------------------------------------------------------------------------------------------------------- $ 2.50 $ 2.075 1,445,783 173,494 170,000 492,402 2,281,679 3.45% - ---------------------------------------------------------------------------------------------------------------------------------- $ 3.00 $ 2.49 1,204,819 144,578 170,000 492,402 2,011,800 3.05% - ---------------------------------------------------------------------------------------------------------------------------------- $ 3.50 $ 2.905 1,032,702 123,924 170,000 492,402 1,819,029 2.77% - ---------------------------------------------------------------------------------------------------------------------------------- $ 4.00 $ 3.32 903,614 108,434 170,000 492,402 1,674,450 2.55% - ---------------------------------------------------------------------------------------------------------------------------------- $ 4.50 $ 3.735 803,213 96,386 170,000 492,402 1,562,000 2.39% - ---------------------------------------------------------------------------------------------------------------------------------- $ 5.00 $ 4.15 722,892 86,747 170,000 492,402 1,472,041 2.25% - ---------------------------------------------------------------------------------------------------------------------------------- $ 5.50 $ 4.565 657,174 78,861 170,000 492,402 1,398,437 2.14% - ---------------------------------------------------------------------------------------------------------------------------------- $ 6.00 $ 4.98 602,410 72,289 170,000 492,402 1,337,101 2.05% - ---------------------------------------------------------------------------------------------------------------------------------- $ 6.50 $ 5.395 556,070 66,728 170,000 492,402 1,285,201 1.97% - ---------------------------------------------------------------------------------------------------------------------------------- $ 6.55 $5.4375 551,724 66,207 170,000 492,402 1,280,333 1.96% - ---------------------------------------------------------------------------------------------------------------------------------- $ 7.00 $5.4375 551,724 66,207 170,000 492,402 1,280,333 1.96% - ---------------------------------------------------------------------------------------------------------------------------------- $ 8.00 $5.4375 551,724 66,207 170,000 492,402 1,280,333 1.96% - ---------------------------------------------------------------------------------------------------------------------------------- $ 9.00 $5.4375 551,724 66,207 170,000 492,402 1,280,333 1.96% - ---------------------------------------------------------------------------------------------------------------------------------- $10.00 $5.4375 551,724 66,207 170,000 492,402 1,280,333 1.96% - ----------------------------------------------------------------------------------------------------------------------------------
23 SELLING SHAREHOLDERS There are two selling shareholders, The Shaar Fund and Corporate Capital Management LLC. The selling shareholders and their affiliates have not held any position, office or other material relationship with ATSI, other than as described below during the three years preceding the date of this prospectus. . On July 2, 1999, we issued 2,000 shares of a series B preferred stock and a warrant for the purchase of 50,000 shares of common stock to The Shaar Fund for $2,000,000. This series B stock was substantially similar to the series D preferred stock described in this prospectus and is described in more detail in our registration statement filed with the SEC on July 30, 1999 (File No.333-84115). The Shaar Fund has converted all of the shares of series B preferred stock into common stock (resulting in the issuance of 2,541,734 shares of common stock) and sold the common stock . Corporate Capital Management assisted us in placing the series B preferred stock, for which they received a placement fee of cash and the warrant that is described in this prospectus. We have also paid Corporate Capital Management a placement fee in connection with the placement of the series C preferred and a placement fee in connection with the placement of the series D preferred. The shareholders, the amount of common stock owned as of April 10, 2000, the maximum amount of common stock that may be offered under the Registration Statement, and the percentage ownership in ATSI as of April 10, 2000 is shown in the table below.
- ---------------------------------------------------------------------------------------------------- Amount of % of Maximum % of Common Common Common Amount of Stock Owned Name Stock Stock Common as of April 10, Owned as of Owned as of Stock that 2000 including April 10, April 10, may be Maximum 2000 2000 Offered Amount that May be Offered - ---------------------------------------------------------------------------------------------------- The Shaar Fund 492,308 less than 1% 1,862,308 2.82% - ---------------------------------------------------------------------------------------------------- Corporate Capital Management 69,693 less than 1% 69,693 less than 1% - ----------------------------------------------------------------------------------------------------
Explanation of Table - -------------------- . The amount of shares listed in the table below as "owned" by The Shaar Fund includes the 484,872 shares of common stock that The Shaar Fund acquired upon conversion of the series C preferred stock and 7,436 shares of common stock that The Shaar Fund received in payment of a dividend on the series C preferred stock 24 The amount of shares listed in the table below as the number that The Shaar Fund may offer pursuant to this prospectus includes the following . 492,308 shares of common stock, which is the number of shares that The Shaar Fund acquired upon conversion of the series C preferred stock and the payment of a dividend on the series C preferred stock . 20,000 shares of common stock, which is the number of shares that The Shaar Fund may purchase under the terms of the warrant issued on September 24, 1999; . 1,200,000 shares of common stock, which is the number of shares that The Shaar Fund may purchase under the series D preferred stock assuming a conversion price of $2.50. We have assumed a conversion price of $2.50 since that is the assumed conversion price we are required to use under our registration rights agreement with The Shaar Fund to calculate the number of shares of common stock included in this prospectus for the series D preferred stock. Although we cannot be sure how many shares of common stock will be issued to The Shaar Fund because of the fluctuation in conversion price; we do not expect it to exceed this amount. . 150,000 shares of common stock, which is the number of shares that The Shaar Fund may purchase under the warrant issued on February 22, 2000. It does not include any shares of common stock that may be paid as a dividend on the series D preferred stock, and does not include the shares that The Shaar Fund could purchase under an additional warrant for 150,000 shares of common stock that ATSI would be required to issue if it elected to redeem the series D preferred stock. The amount of shares of common stock listed in the table below as "owned" by Corporate Capital Management as of April 10, 2000, and the amount of shares of common stock listed as the number of shares that and that may be offered under this prospectus includes the following: . 50,000 shares of common stock that Corporate Capital Management may purchase under the terms of the warrant issued on July 2, 1999 as a placement fee for the series B preferred stock; and . 19, 693 shares of common stock issued as a placement fee in connection with the series C preferred stock. PLAN OF DISTRIBUTION The Registration Statement of which this prospectus forms a part has been filed to satisfy registration rights held by the selling shareholders under agreements between ATSI and the selling shareholders. To ATSI's knowledge, as of this date, none of the selling shareholders has entered into any agreement, arrangement or understanding with any particular broker or market maker with respect to the shares offered by them, nor does ATSI know the identity of the brokers or market makers which might participate in such an offering. We have not agreed to pay any 25 underwriting discounts or commissions. We have agreed to pay the expenses of registration of the shares of common stock included in this prospectus. Our expenses as of April 10, 2000 for the registration of the common stock are approximately $23,410.94. The shares being registered and offered may be sold from time to time by the selling shareholders while the Registration Statement is in effect. The selling shareholders will act independently of ATSI in making decisions with respect to the timing, manner, and size of each sale. The sales may be made on the NASD Over-the- Counter Bulletin Board or otherwise, at prices and on terms then prevailing or at prices related to the market price, or in negotiated transactions. The shares may be sold by one or more of the following methods: (1) A block trade in which the broker-dealer engaged by a selling shareholder would attempt to sell shares as agent but may position and resell a portion of the block as principal to facilitate the transaction. (2) Purchases by the broker-dealer as principal and resale by such broker or dealer for its account according to this prospectus. (3) ordinary brokerage transactions and transactions in which the broker solicits purchasers. To our knowledge, none of the selling shareholders has, as of the date of this prospectus, entered into any arrangement with a broker or dealer for the sale of shares through a block trade, special offering, or secondary distribution of a purchase by a broker-dealer. In effecting sales, broker- dealers engaged by a selling shareholder may arrange for other broker-dealers to participate. Broker-dealers may receive commissions or discounts from a selling shareholder in amounts to be negotiated. In offering the shares, the selling shareholders and any broker-dealers who execute sales for the selling shareholders may be deemed to be "underwriters" within the meaning of the Securities Act of 1933 in connection with such sales, and any profits realized by the selling shareholders and the compensation of such broker-dealers may be deemed to be underwriting discounts and commissions. We have agreed to keep the Registration Statement of which this prospectus is a part effective until The Shaar Fund sells the shares of common stock offered under this prospectus or until two years following the effective date of the Registration Statement of which this prospectus is a part, whichever comes first. No sales may be made pursuant to this prospectus after this date unless we amend or supplement this prospectus to indicate that we have agreed to extend the effective period. We cannot assure you that any of the selling shareholders will sell any or all of the shares of common stock registered in the Registration Statement. 26 LEGAL MATTERS The validity of the shares of common stock offered hereby is being passed upon by Alice King, Esq., San Antonio, Texas. Alice King is ATSI's Corporate Counsel and is an employee. EXPERTS The consolidated balance sheets as of July 31, 1998 and 1999, and the related consolidated statements of operations, stockholders' equity, comprehensive loss and cash flows for the years ended July 31, 1997, 1998 and 1999 of ATSI and its subsidiaries have been incorporated by reference in this prospectus and Registration Statement in reliance upon the report of Arthur Andersen LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION Government Filings. We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). You may read and copy any document we file at the SEC's public reference rooms in Washington, D.C., New York, New York, and Chicago, Illinois. The SEC public reference room in Washington D.C. is located at 450 Fifth Street, N.W., Washington D.C., 20549. Please call the SEC at 1-800-SEC-0330 for further information on the pubic reference rooms. Our SEC filings are also available to you free of charge at the SEC's web site at http://www.sec.gov. ------------------ Information Incorporated by Reference. The SEC allows us to "incorporate by reference" the information we file with them which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this prospectus, and later information that we file with the SEC will automatically update and replace information previously filed, including information contained in this prospectus. We incorporate by reference the documents listed below and any future filings made with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until this offering has been completed. . Our Amended Annual Report on Form 10-KA for the year ended July 31, 1999 . Our Amended Quarterly Reports on Form 10-QA for the quarters ended October 31, 1999 and January 31, 2000; . Our Proxy Statement dated October 25, 1999 for our annual meeting of shareholders; . The description of our common stock included in our Registration Statement on Form S-4 filed on March 6, 1998. . Our Registration Statement on Form S-3 for 3,198,054 shares of Common Stock filed on August 18, 1999. 27 You may request a free copy of these filings by writing or telephoning us at the following address: American TeleSource International, Inc. Investor Relations 12500 Network Blvd., Suite 407 San Antonio, Texas 78249 (210) 558-6090. We will not send exhibits to these documents unless the exhibits are specifically incorporated by reference in this document. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following are the expenses (estimated except for the SEC registration fee) for the issuance and distribution of the securities being registered, all of which will be paid by ATSI: SEC Registration $ 2,910.94 Legal 10,000.00 Printing 10,000.00 Miscellaneous 500.00 ---------- Total: $23,410.94 ATSI will not pay commissions and discounts of underwriters, dealers or agents, if any, or any transfer taxes. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS As permitted by Section 145 of the Delaware General Corporation Law, ATSI's Amended and Restated Certificate of Incorporation includes a provision that eliminates the personal liability of its directors for monetary damages for breach or alleged breach of their duty of care. In addition, the DGCL and ATSI's Bylaws provide for indemnification of ATSI's directors and officers for certain liabilities and expenses that they may incur in such capacities. In general, directors and officers are indemnified with respect to actions taken in good faith in a manner reasonably believed to be in, or not opposed to, the best interests of ATSI, and with respect to any criminal action or proceeding, actions that the indemnitee had no reasonable cause to believe were unlawful. ATSI has purchased insurance with respect to, among other things, the liabilities that may arise under the provisions referred to above. The directors and officers of ATSI are also insured against liabilities, including liabilities arising under the Securities act of 1933, as amended, 28 which might be incurred by them in their capacities as directors and officers of ATSI and against which they are not indemnified by ATSI. In connection with this offering, The Shaar Fund (or its assignees under a Registration Rights Agreement signed by ATSI and The Shaar Fund) has agreed to indemnify ATSI, and its officers, directors and controlling persons, against any losses, claims, damages or liabilities to which they may become subject that arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in this prospectus or the Registration Statement or any omission or alleged omission to state in this prospectus or the Registration Statement a material fact required to be stated or necessary to make the statements in this prospectus or the Registration Statement not misleading, to the extent that such statement or omission was made in reliance on the written information furnished to ATSI by The Shaar Fund. ITEM 16. EXHIBITS. 4.1 Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI dated September 24, 1999 (Exhibit 10.39 to Registration Statement on Form S-3, File No. 33-89683 filed on October 26, 1999) 4.2 Certificate of Designation, Preferences and Rights of 6% Series C Cumulative Convertible Preferred Stock of American TeleSource International, Inc. (Exhibit 10.40 to Registration Statement on Form S-3, File No. 33-89683 filed on October 26, 1999) 4.3 Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by American TeleSource International dated September 24, 1999 (Exhibit 10.41 to Registration Statement on Form S-3, File No. 33-89683 filed on October 26, 1999) 4.4 Registration Rights Agreement between The Shaar Fund Ltd. and ATSI dated September 24, 1999 (Exhibit 10.42 to Registration Statement on Form S-3, File No. 33-89683 filed on October 26, 1999) 4.5 Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI dated February 22, 2000 (Exhibit to this Registration Statement on Form S-3, File No. 33-89683 filed on April 13, 2000) 4.6 Certificate of Designation, Preferences and Rights of 6% Series D Cumulative Convertible Preferred Stock of American TeleSource International, Inc. (Exhibit to this Registration Statement on Form S-3, File No. 33-89683 filed on April 13, 2000) 4.7 Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by American TeleSource International dated February 22, 2000 (Exhibit to this Registration Statement on Form S-3, File No. 33-89683 filed on April 13, 2000) 4.8 Common Stock Purchase Warrant issued to Corporate Capital Management LLC by American TeleSource International dated February 22, 2000 (Exhibit to this Registration Statement on Form S-3, File No. 33-89683 filed on April 13, 2000) 4.9 Registration Rights Agreement between The Shaar Fund Ltd. and ATSI dated September 24, 1999 (Exhibit to this Registration Statement on Form S-3, File No. 33-89683 filed on April 13, 2000) 5.1 Opinion regarding legality 23 Consent of Arthur Andersen LLP (Exhibit to this Registration Statement on Form S-3, File No. 33-89683 filed on April 13, 2000) 24 Power of Attorney (included on signature page to the Registration Statement) 29 ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes: A. Undertakings Regarding Amendments to this Prospectus and the Registration Statement 1. To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post- effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" in the effective Registration Statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. Provided, however, that the undertakings set forth in paragraphs (1)(A)(i) and (ii) of this section do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by ATSI pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in this Registration Statement. 2. That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 3. To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. 30 B. Undertaking Regarding Filings Incorporating Subsequent Exchange Act Documents by Reference. ATSI hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of ATSI's Annual Report on Form 10-K pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of any employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in this Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. C. Undertaking in Respect of Indemnification. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling person of ATSI pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by ATSI of expenses incurred or paid by a director, officer or controlling person of ATSI in the successful defense of any action , suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of San Antonio, State of Texas on the 13th day of April 2000. AMERICAN TELESOURCE INTERNATIONAL, INC. By: /s/ H. Douglas Saathoff ------------------------ H. Douglas Saathoff Chief Financial Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints H. Douglas Saathoff as attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign this Registration Statement and any amendments to this Registration Statement and to file the same, with exhibits thereto and other documents in connection therewith, with the SEC, granting to said attorney-in-fact full power and authority to do and perform each and every act and thing 31 requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. In witness whereof, each of the undersigned has executed this Power of Attorney as of the date indicted. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated. /s/ Arthur L. Smith Chairman of the Board of Directors October 26, 1999 - -------------------------- Arthur L. Smith Chief Executive Officer Director /s/ H. Douglas Saathoff Chief Financial Officer October 26, 1999 - -------------------------- H. Douglas Saathoff Senior Vice President Secretary Treasurer /s/ Richard C. Benkendorf Director October 26, 1999 - -------------------------- Richard C. Benkendorf /s/ Carlos K. Kauachi Director October 26, 1999 - -------------------------- Carlos K. Kauachi /s/ Murray R. Nye Director October 26, 1999 - -------------------------- Murray R. Nye /s/ Tomas Revesz Director October 26, 1999 - -------------------------- Tomas Revesz /s/ Robert B. Werner Director October 26, 1999 - -------------------------- Robert B. Werner 32 EXHIBIT INDEX 4.1 Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI dated September 24, 1999 (Exhibit 10.39 to Registration Statement on Form S-3, File No. 33-89683 filed on October 26, 1999) 4.2 Certificate of Designation, Preferences and Rights of 6% Series C Cumulative Convertible Preferred Stock of American TeleSource International, Inc. (Exhibit 10.40 to Registration Statement on Form S-3, File No. 33-89683 filed on October 26, 1999) 4.3 Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by American TeleSource International dated September 24, 1999 (Exhibit 10.41 to Registration Statement on Form S-3, File No. 33-89683 filed on October 26, 1999) 4.4 Registration Rights Agreement between The Shaar Fund Ltd. and ATSI dated September 24, 1999 (Exhibit 10.42 to Registration Statement on Form S-3, File No. 33-89683 filed on October 26, 1999) 4.5 Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI dated February 22, 2000 (Exhibit to this Registration Statement on Form S-3, File No. 33-89683 filed on April 13, 2000) 4.6 Certificate of Designation, Preferences and Rights of 6% Series D Cumulative Convertible Preferred Stock of American TeleSource International, Inc. (Exhibit to this Registration Statement on Form S-3, File No. 33-89683 filed on April 13, 2000) 4.7 Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by American TeleSource International dated February 22, 2000 (Exhibit to this Registration Statement on Form S-3, File No. 33-89683 filed on April 13, 2000) 4.8 Common Stock Purchase Warrant issued to Corporate Capital Management LLC by American TeleSource International dated February 22, 2000 (Exhibit to this Registration Statement on Form S-3, File No. 33-89683 filed on April 13, 2000) 4.9 Registration Rights Agreement between The Shaar Fund Ltd. and ATSI dated September 24, 1999 (Exhibit to this Registration Statement on Form S-3, File No. 33-89683 filed on April 13, 2000) 5.1 Opinion regarding legality 23 Consent of Arthur Andersen LLP (Exhibit to this Registration Statement on Form S-3, File No. 33-89683 filed on April 13, 2000) 24 Power of Attorney (included on signature page to the Registration Statement) 33 EX-4.5 2 SECURITIES PURCHASE AGREEMENT Exhibit 4.5 SECURITIES PURCHASE AGREEMENT This Securities Purchase Agreement, dated as of February 22, 2000, between American TeleSource International, Inc., a Delaware corporation with principal executive offices located at 12500 Network Boulevard, Suite 407, San Antonio, Texas 78249 (the "Company"), and The Shaar Fund Ltd., a British Virgin Islands corporation with principal domestic executive offices located at Two World Trade Center, Suite 1820, New York, New York 10048 ("Buyer"). Whereas, Buyer desires to purchase from the Company, and the Company desires to issue and sell to the Buyer, upon the terms and subject to the conditions of this Agreement, (i) 3,000 shares of the Company's 6% Series D Cumulative Convertible Preferred Stock, par value $0.001 per share (collectively, the "Preferred Shares"), and (ii) its Common Stock Purchase Warrants or Warrant in the form attached hereto as Exhibit A (collectively, the "Warrants"); Whereas, upon the terms and subject to the designations, preferences and rights set forth in the Company's Certificate of Designation of 6% Series D Cumulative Convertible Preferred Stock in the form attached hereto as Exhibit B (the "Certificate of Designation"), the Preferred Shares are convertible into shares of the Company's common stock, par value $0.001 per share (the "Common Stock"); Whereas, the Warrants, upon the terms and subject to the conditions in the Warrants, will for a period of five (5) years be exercisable to purchase 150,000 shares of Common Stock; Whereas, upon the terms and subject to the conditions of the Certificate of Designation, the Preferred Stock may be redeemed by the Company at a redemption price including, without limitation, the issuance of its Common Stock Purchase Warrants having the same terms and conditions as the Warrants and exercisable to purchase an additional 150,000 shares of Common Stock (the "Redemption Warrants"); Now, Therefore, in consideration of the premises and the mutual covenants contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: I. Purchase and Sale of Preferred Shares and Warrants A. Transaction. Buyer hereby agrees to purchase from the Company, and the Company has offered and hereby agrees to issue and sell to the Buyer in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act of 1933, as amended (the "Securities Act"), the Preferred Shares and the Warrants to purchase 150,000 shares of Common Stock. B. Purchase Price; Form of Payment. The purchase price for the Preferred Shares and the Warrants to be purchased by Buyer hereunder shall be $3,000,000 (the "Purchase Price"). Buyer shall pay the Purchase Price by wire transfer of immediately available funds to the escrow agent (the "Escrow Agent") identified in those certain Escrow Instructions of even date herewith, a copy of which is attached hereto as Exhibit C (the "Escrow Instructions"). Simultaneously with the execution of this Agreement and against receipt by the Escrow Agent of the Purchase Price, the Company shall deliver one or more duly authorized, issued and executed certificates (I/N/O Buyer or, if the Company has been notified otherwise, I/N/O Buyer's nominee) evidencing the Preferred Shares and the Warrants which the Buyer is purchasing, to the Escrow Agent or its designated depository. By executing and delivering this Agreement, Buyer and the Company each hereby agree to observe the terms and conditions of the Escrow Instructions, all of which are incorporated herein by reference as if fully set forth herein. 36 C. Method of Payment. Payment into escrow of the Purchase Price shall be made by wire transfer of immediately available funds to: The Bank of New York 48 Wall Street New York, NY 10038 ABA No.: 021000018 For the Account of: Cadwalader, Wickersham & Taft Trust Account IOLA Fund Account No.: 0902061070 Simultaneously with the execution of this Agreement, the Buyer shall deposit with the Escrow Agent the Purchase Price and the Company shall deposit with the Escrow Agent the Preferred Shares and the Warrants. II. Buyer's Representations, Warranties; Access to Information; Independent Investigation Buyer represents and warrants to and covenants and agrees with the Company as follows: A. Buyer is purchasing the Preferred Shares, the Warrants, the Redemption Warrants, if any, the Common Stock issuable upon exercise of the Warrants and the Redemption Warrants, if any, (the "Warrant Shares") and the shares of Common Stock issuable upon conversion of the Preferred Shares (the "Conversion Shares" and, collectively with the Preferred Shares, the Warrants, the Redemption Warrants and the Warrant Shares, the "Securities") for its own account, for investment purposes only and not with a view towards or in connection with the public sale or distribution thereof in violation of the Securities Act. B. Buyer is (i) an "accredited investor" within the meaning of Rule 501 of Regulation D under the Securities Act, (ii) experienced in making investments of the kind contemplated by this Agreement, (iii) capable, by reason of its business and financial experience, of evaluating the relative merits and risks of an investment in the Securities, and (iv) able to afford the loss of its investment in the Securities. C. Buyer understands that the Securities are being offered and sold by the Company in reliance on an exemption from the registration requirements of the Securities Act and equivalent state securities and "blue sky" laws, and that the Company is relying upon the accuracy of, and Buyer's compliance with, Buyer's representations, warranties and covenants set forth in this Agreement to determine the availability of such exemption and the eligibility of Buyer to purchase the Securities; D. Buyer acknowledges that in making its decision to purchase the Securities it has been given an opportunity to ask questions of and to receive answers from the Company's executive officers, directors and management personnel concerning the terms and conditions of the private placement of the Securities by the Company. E. Buyer understands that the Securities have not been approved or disapproved by the Securities and Exchange Commission (the "Commission") or any state securities commission and that the foregoing authorities have not reviewed any documents or instruments in connection with the offer and sale to Buyer of the Securities and have not confirmed or determined the adequacy or accuracy of any such documents or instruments. F. This Agreement has been duly and validly authorized, executed and delivered by Buyer and is a valid and binding agreement of Buyer enforceable against Buyer in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and except as rights to indemnity and contribution may be limited by federal or state securities laws or the public policy underlying such laws. 37 G. Neither Buyer nor its affiliates nor any person acting on its or their behalf has the intention of entering, or will enter into, prior to the closing, any put option, short position or other similar instrument or position with respect to the Common Stock and neither Buyer nor any of its affiliates nor any person acting on its or their behalf will at any time use shares of Common Stock acquired pursuant to this Agreement to settle any put option, short position or other similar instrument or position that may have been entered into prior to the execution of this Agreement. H. Neither Buyer nor any of its affiliates is a broker-dealer registered as such with the Commission. III. The Company's Representations, Warranties and Covenants The Company represents and warrants to and convenants and agrees with Buyer that: A. Capitalization. 1. The authorized capital stock of the Company consists of: (i) 100,000,000 shares of Common Stock, of which 57,549,721 shares are issued and outstanding on the date hereof, and (ii) 10,000,000 shares of "blank check" preferred stock, par value $0.001 per share, of which (x) 50,000 shares have been designated 10% Series A Cumulative Convertible Preferred Stock (the "Series A Preferred Stock"), of which 38,401 shares have been issued and are outstanding, (y) 2,000 shares have been designated 6% Series B Cumulative Convertible Preferred Stock (the "Series B Preferred Stock"), of which 2,000 shares have been issued and are outstanding, and (z) 500 shares have been designated 6% Series C Cumulative Preferred Stock (the "Series C Preferred Stock"), of which 500 shares have been issued and are outstanding. All of the issued and outstanding shares of Common Stock, Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock have been duly authorized and validly issued and are fully paid and nonassessable. As of the date hereof, the Company has outstanding vested stock options to purchase 3,281,369 shares of Common Stock and non-vested stock options to purchase 1,382,103 shares of Common Stock, in each case pursuant to its 1997 and 1998 Stock Option Plans, and warrants to purchase 1,997,219 shares of Common Stock. The Conversion Shares and Warrant Shares have been duly and validly authorized and reserved for issuance by the Company, and when issued by the Company upon conversion of, or in lieu of accrued dividends on, the Preferred Shares and on exercise of the Warrants and the Redemption Warrants, if any, will be duly and validly issued, fully paid and nonassessable and will not subject the holder thereof to personal liability by reason of being such holder. There are no preemptive, subscription, "call" or other similar rights to acquire the Common Stock (including the Conversion Shares and Warrant Shares) that have been issued or granted to any person, except as disclosed on Schedule III.A.1. hereto or otherwise previously disclosed in writing to Buyer. 2. Except as disclosed on Schedule III.A.2. hereto, the Company does not own or control, directly or indirectly, any interest in any other corporation, partnership, limited liability company, unincorporated business organization, association, trust or other business entity. B. Organization; Reporting Company Status. 1. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and is duly qualified as a foreign corporation in all jurisdictions in which the failure to so qualify would have a material adverse effect on the business, properties, prospects, condition (financial or otherwise) or results of operations of the Company or on the consummation of any of the transactions contemplated by this Agreement (a "Material Adverse Effect"). 2. The Company has registered the Common Stock pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and has timely filed with the Commission all reports and information required to be filed by it pursuant to all reporting obligations under Section 13(a) or 15(d), as applicable, of the Exchange Act for the 12-month period immediately preceding 38 the date hereof. The Common Stock is traded on the American Stock Exchange (the "Amex") and the Company has not received any notice regarding, and to its knowledge there is no threat of, the termination or discontinuance of the eligibility of the Common Stock for such trading. C. Authorized Shares. The Company has duly and validly authorized and reserved for issuance 3,500,000 shares of Common Stock sufficient in number for the conversion of the Preferred Shares and the exercise of the Warrants and the Redemption Warrants. The Company understands and acknowledges the potentially dilutive effect to the Common Stock of the issuance of the Preferred Shares and Warrant Shares upon conversion of the Preferred Shares and exercise of the Warrants and Redemption Warrants, respectively. The Company further acknowledges that its obligation to issue Conversion Shares upon conversion of the Preferred Shares and Warrant Shares upon exercise of the Warrants or Redemption Warrants, if any, in accordance with this Agreement, the Certificate of Designation, the Warrants and the Redemption Warrants is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other stockholders of the Company and notwithstanding the commencement of any case under 11 U.S.C. (S) 101 et seq. (the "Bankruptcy Code"). In the event the Company is a debtor under the Bankruptcy Code, the Company hereby waives to the fullest extent permitted any rights to relief it may have under 11 U.S.C. (S) 362 in respect of the conversion of the Preferred Shares and the exercise of the Warrants or Redemption Warrants, if any. The Company agrees, without cost or expense to Buyer, to take or consent to any and all action necessary to effectuate relief under 11 U.S.C. (S) 362. Schedule III.C. hereto sets forth (i) all issuances and sales by the Company since July 31, 1998 of its capital stock, and other securities convertible, exercisable or exchangeable for capital stock of the Company, (ii) the amount of such securities sold, including any underlying shares of capital stock, (iii) the purchaser thereof, and (iv) the amount paid therefor. D. Authority; Validity and Enforceability. The Company has the requisite corporate power and authority to file and perform its obligations under the Certificate of Designation and to enter into the Documents (as hereinafter defined), and to perform all of its obligations hereunder and thereunder (including the issuance, sale and delivery to Buyer of the Securities). The execution, delivery and performance by the Company of the Documents, and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the filing of the Certificate of Designation with the Delaware Secretary of State's office, the issuance of the Preferred Shares, the Warrants and the Redemption Warrants and the issuance and reservation for issuance of the Conversion Shares and Warrant Shares), has been duly authorized by all necessary corporate action on the part of the Company. Each of the Documents has been duly and validly executed and delivered by the Company, the Certificate of Designation has been duly filed with the Delaware Secretary of State's office by the Company, and each instrument constitutes a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and except as rights to indemnity and contribution may be limited by federal or state securities laws or the public policy underlying such laws. The Securities have been duly and validly authorized for issuance by the Company and, when executed and delivered by the Company, will be valid and binding obligations of the Company enforceable against the Company in accordance with their terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally. For purposes of this Agreement, the term "Documents" means (i) this Agreement; (ii) the Registration Rights Agreement of even date herewith between the Company and Buyer, a copy of which is annexed hereto as Exhibit D (the "Registration Rights Agreement"); (iii) the Certificate of Designation; (iv) the Warrants; and (v) the Escrow Instructions. E. Authorization of the Securities. The authorization, issuance, sale and delivery of the Preferred Shares, the Warrants and the Redemption Warrants has been duly authorized by all requisite corporate action on the part of the Company. As of the Closing Date, the Preferred Shares and the Warrants, and the Conversion Shares and Redemption Warrants and the Warrant Shares upon their issuance in accordance with the Preferred Shares and the Warrants, respectively, will be validly issued and outstanding, fully paid and nonassessable, and not subject to any preemptive rights, rights of first refusal or other similar rights. F. Non-contravention. The execution and delivery by the Company of the Documents, the issuance of the Securities, and the consummation by the Company of the other transactions contemplated hereby and thereby, including, without limitation, the filing of the Certificate of Designation with the Delaware Secretary of 39 State's office, do not and will not conflict with or result in a breach by the Company of any of the terms or provisions of, or constitute a default (or an event which, with notice, lapse of time or both, would constitute a default) under (i) the articles of incorporation or by-laws of the Company or (ii) any indenture, mortgage, deed of trust or other material agreement or instrument to which the Company is a party or by which its properties or assets are bound, or any law, rule, regulation, decree, judgment or order of any court or public or governmental authority having jurisdiction over the Company or any of the Company's properties or assets, except as to clause (ii) above such conflict, breach or default which would not have a Material Adverse Effect. G. Approvals. No authorization, approval or consent of any court or public or governmental authority is required to be obtained by the Company for the issuance and sale of the Preferred Shares or the Warrants (and the Redemption Warrants, the Conversion Shares and Warrant Shares) to Buyer as contemplated by this Agreement, except such authorizations, approvals and consents as have been obtained by the Company prior to the date hereof. H. Commission Filings. None of the Company's reports and documents filed with the Commission pursuant to the Securities Act or the Exchange Act (collectively, the "Commission Filings") prior to the date hereof contained at the time they were filed any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. I. Absence of Certain Changes. Except as set forth on Schedule III.I., since the Balance Sheet Date (as defined in Section III.M.), there has not occurred any change, event or development in the business, financial condition, prospects or results of operations of the Company, and there has not existed any condition, having or reasonably likely to have a Material Adverse Effect. J. Full Disclosure. There is no fact known to the Company (other than general economic or industry conditions known to the public generally) that has not been fully disclosed in writing to the Buyer that (i) reasonably could be expected to have a Material Adverse Effect or (ii) reasonably could be expected to materially and adversely affect the ability of the Company to perform its obligations pursuant to the Documents. K. Absence of Litigation. There is no action, suit, claim, proceeding, inquiry or investigation pending or, to the Company's knowledge, threatened, by or before any court or public or governmental authority which, if determined adversely to the Company, would have a Material Adverse Effect. L. Absence of Events of Default. No "Event of Default" (as defined in any agreement or instrument to which the Company is a party) and no event which, with notice, lapse of time or both, would constitute an Event of Default (as so defined), has occurred and is continuing, which could have a Material Adverse Effect. M. Financial Statements; No Undisclosed Liabilities. The Company has delivered to Buyer true and complete copies of its audited balance sheet as at July 31, 1998 and July 31, 1999 and the related audited statements of operations and cash flows for the three fiscal years ended July 31, 1999 including the related notes and schedules thereto (collectively, the "Financial Statements"), and all management letters, if any, from the Company's independent auditors relating to the dates and periods covered by the Financial Statements. Each of the Financial Statements is complete and correct in all material respects, has been prepared in accordance with United States General Accepted Accounting Principles ("GAAP") (subject, in the case of the interim Financial Statements, to normal year end adjustments and the absence of footnotes) and in conformity with the practices consistently applied by the Company without modification of the accounting principles used in the preparation thereof, and fairly presents the financial position, results of operations and cash flows of the Company as at the dates and for the periods indicated. For purposes hereof, the audited balance sheet of the Company as at July 31, 1999 is hereinafter referred to as the "Balance Sheet" and July 31, 1999 is hereinafter referred to as the "Balance Sheet Date". The Company has no indebtedness, obligations or liabilities of any kind (whether accrued, absolute, contingent or otherwise, and whether due or to become due) that would have been required to be reflected in, reserved against or otherwise described in the Balance Sheet or in the notes thereto in accordance with GAAP, which was not fully reflected in, reserved against or otherwise described in the Balance Sheet or the notes thereto or was not incurred since the Balance Sheet Date in the ordinary course of business consistent with the Company's past practices. 40 N. Compliance with Laws; Permits. The Company is in compliance with all laws, rules, regulations, codes, ordinances and statutes (collectively, "Laws") applicable to it or to the conduct of its business, except for such noncompliance as would not have a Material Adverse Effect. The Company possesses all permits, approvals, authorizations, licenses, certificates and consents from all public and governmental authorities which are necessary to conduct its business, except for those the absence of which would not have a Material Adverse Effect. O. Related Party Transactions. Except as set forth on Schedule III.O. hereto and excluding receivables between the Company and its Subsidiaries, neither the Company nor any of its officers, directors or "Affiliates" (as such term is defined in Rule 12b-2 under the Exchange Act) has borrowed any moneys from or has outstanding any indebtedness or other similar obligations to the Company. Except as set forth on Schedule III.O. hereto, neither the Company nor any of its officers, directors or Affiliates (i) owns any direct or indirect interest constituting more than a 1% equity (or similar profit participation) interest in, or controls or is a director, officer, partner, member or employee of, or consultant to or lender to or borrower from, or has the right to participate in the profits of, any person or entity which is (x) a competitor, supplier, customer, landlord, tenant, creditor or debtor of the Company, (y) engaged in a business related to the business of the Company, or (z) a participant in any transaction to which the Company is a party (other than in the ordinary course of the Company's business) or (ii) is a party to any contract, agreement, commitment or other arrangement with the Company. P. Insurance. The Company maintains property and casualty, general liability, workers' compensation, environmental hazard, personal injury and other similar types of insurance with financially sound and reputable insurers that is adequate and consistent with industry standards and the Company's historical claims experience. The Company has not received notice from, and has no knowledge of any threat by, any insurer (that has issued any insurance policy to the Company) that such insurer intends to deny coverage under or cancel, discontinue or not renew any such insurance policy presently in force. Q. Securities Law Matters. Based, in part, upon the representations and warranties of Buyer set forth in Section II hereof, the offer and sale by the Company of the Securities is exempt from (i) the registration and prospectus delivery requirements of the Securities Act and the rules and regulations of the Commission thereunder and (ii) the registration and/or qualification provisions of all applicable state securities and "blue sky" laws. Other than pursuant to an effective registration statement under the Securities Act, the Company has not issued, offered or sold the Preferred Shares or any shares of Common Stock (including for this purpose any securities of the same or a similar class as the Preferred Shares or Common Stock, or any securities convertible into or exchangeable or exercisable for the Preferred Shares or Common Stock or any such other securities) within the one-year period next preceding the date hereof, except as disclosed on Schedule III.C or III.Q. hereto or otherwise previously disclosed in writing to Buyer, and the Company shall not directly or indirectly take, and shall not permit any of its directors, officers or Affiliates directly or indirectly to take, any action (including, without limitation, any offering or sale to any person or entity of the Preferred Shares or shares of Common Stock), so as to make unavailable the exemption from Securities Act registration being relied upon by the Company for the offer and sale to Buyer of the Preferred Shares and the Warrants (and the Redemption Warrants, the Conversion Shares and the Warrant Shares) as contemplated by this Agreement. No form of general solicitation or advertising has been used or authorized by the Company or any of its officers, directors or Affiliates in connection with the offer or sale of the Preferred Shares and the Warrants (and the Redemption Warrants, the Conversion Shares and the Warrant Shares) as contemplated by this Agreement or any other agreement to which the Company is a party. R. Environmental Matters. 1. The operations of the Company are in compliance with all applicable Environmental Laws and all permits issued pursuant to Environmental Laws or otherwise; 2. The Company has obtained or applied for all permits required under all applicable Environmental Laws necessary to operate its business; 3. The Company is not the subject of any outstanding written order of or agreement with any governmental authority or person respecting (i) Environmental Laws, (ii) Remedial Action or (iii) any Release or threatened Release of Hazardous Materials; 41 4. The Company has not received, since July 31, 1999, any written communication alleging that it may be in violation of any Environmental Law or any permit issued pursuant to any Environmental Law, or may have any liability under any Environmental Law; 5. The Company does not have any current contingent liability in connection with any Release of any Hazardous Materials into the indoor or outdoor environment (whether on-site or off-site); 6. Except as set forth on Schedule III.R. hereto, to the Company's knowledge, there are no investigations of the business, operations, or currently or previously owned, operated or leased property of the Company pending or threatened which could lead to the imposition of any liability pursuant to any Environmental Law; 7. There are not located at any of the properties of the Company any (A) underground storage tanks, (B) asbestos-containing material or (C) equipment containing polychlorinated biphenyls; and, 8. The Company has provided to Buyer all environmentally related audits, studies, reports, analyses, and results of investigations that have been performed with respect to the currently or previously owned, leased or operated properties of the Company. For purposes of this Section III.R.: "Environmental Law" means any foreign, federal, state or local statute, regulation, ordinance, or rule of common law now in effect in any way relating to the protection of human health and safety or the environment including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act, the Hazardous Materials Transportation Act, the Resource Conservation and Recovery Act, the Clean Water Act, the Clean Air Act, the Toxic Substances Control Act, the Federal Insecticide, Fungicide, and Rodenticide Act, and the Occupational Safety and Health Act, and the regulations promulgated pursuant thereto. "Hazardous Material" means any substance, material or waste which is regulated by the United States, Canada or any of its provinces, or any state or local governmental authority including, without limitation, petroleum and its by-products, asbestos, and any material or substance which is defined as a "hazardous waste," "hazardous substance," "hazardous material," "restricted hazardous waste," "industrial waste," "solid waste," "contaminant," "pollutant," "toxic waste" or "toxic substance" under any provision of any Environmental Law; "Release" means any release, spill, filtration, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, or leaching into the indoor or outdoor environment, or into or out of any property; "Remedial Action" means all actions to (x) clean up, remove, treat or in any other way address any Hazardous Material; (y) prevent the Release of any Hazardous Material so it does not endanger or threaten to endanger public health or welfare or the indoor or outdoor environment; or (z) perform pre-remedial studies and investigations or post-remedial monitoring and care. S. Labor Matters. The Company is not party to any labor or collective bargaining agreement and there are no labor or collective bargaining agreements which pertain to employees of the Company. Except as set forth on Schedule III.S, no employees of the Company are represented by any labor organization and none of such employees has made a pending demand for recognition, and there are no representation proceedings or petitions seeking a representation proceeding presently pending or, to the Company's knowledge, threatened to be brought or filed, with the National Labor Relations Board or other labor relations tribunal. There is no organizing activity involving the Company pending or, to the Company's knowledge, threatened by any labor organization or group of employees of the Company. There are no (i) strikes, work stoppages, slowdowns, lockouts or arbitrations or (ii) material grievances or other labor disputes pending or, to the knowledge of the Company, threatened against 42 or involving the Company. There are no unfair labor practice charges, grievances or complaints pending or, to the knowledge of the Company, threatened by or on behalf of any employee or group of employees of the Company. T. ERISA Matters. The Company and its ERISA Affiliates are in compliance in all material respects with all provisions of ERISA applicable to it. No Reportable Event has occurred, been waived or exists as to which the Company or any ERISA Affiliate was required to file a report with the PBGC, and the present value of all liabilities under all Plans (based on those assumptions used to fund such Plans) did not, as of the most recent annual valuation date applicable thereto, exceed the value of the assets of all such Plans in the aggregate. None of the Company or ERISA Affiliates has incurred any Withdrawal Liability that could result in a Material Adverse Effect. None of the Company or ERISA Affiliates has received any notification that any Multiemployer Plan is in reorganization or has been terminated within the meaning of Title IV of ERISA, and no Multiemployer Plan is reasonably expected to be in reorganization or termination where such reorganization or termination has resulted or could reasonably be expected to result in increases to the contributions required to be made to such Plan or otherwise. For purposes of this Section III.T.: "ERISA" means the Employee Retirement Income Security Act of 1974, together with the regulations thereunder, as the same may be amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) that was, is or hereafter may become, a member of a group of which the Company is a member and which is treated as a single employer under Section 414 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). "Multiemployer Plan" means a multiemployer plan as defined in Section 4001(a)(3) of ERISA to which the Company or any ERISA Affiliate (other than one considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Section 414 of the Internal Revenue Code) is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto. "Plan" means any pension plan (other than a Multiemployer Plan) subject to the provision of Title IV of ERISA or Section 412 of the Internal Revenue Code that is maintained for employees of the Company or any ERISA Affiliate. "Reportable Event" means any reportable event as defined in Section 4043(b) of ERISA or the regulations issued thereunder with respect to a Plan (other than a Plan maintained by an ERISA Affiliate that is considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Section 414 of the Internal Revenue Code). "Withdrawal Liability" means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. U. Tax Matters. 1. The Company has filed all Tax Returns which it is required to file under applicable Laws, except for such Tax Returns in respect of which the failure so to file does not and could not have a Material Adverse Effect; all such Tax Returns are true and accurate in all material respects and have been prepared in compliance with all applicable Laws; the Company has paid all Taxes due and owing by it (whether or not such Taxes are required to be shown on a Tax Return) and has withheld and paid over to the appropriate taxing authorities all Taxes which it is required to withhold from amounts paid or owing to any employee, stockholder, creditor or other third parties; and since the Balance Sheet Date, the charges, 43 accruals and reserves for Taxes with respect to the Company (including any provisions for deferred income taxes) reflected on the books of the Company are adequate to cover any Tax liabilities of the Company if its current tax year were treated as ending on the date hereof. 2. No claim has been made by a taxing authority in a jurisdiction where the Company does not file tax returns that such corporation is or may be subject to taxation by that jurisdiction. There are no foreign, federal, state or local tax audits or administrative or judicial proceedings pending or being conducted with respect to the Company; no information related to Tax matters has been requested by any foreign, federal, state or local taxing authority; and, except as disclosed above, no written notice indicating an intent to open an audit or other review has been received by the Company from any foreign, federal, state or local taxing authority. There are no material unresolved questions or claims concerning the Company's Tax liability. The Company (A) has not executed or entered into a closing agreement pursuant to Section 7121 of the Internal Revenue Code or any predecessor provision thereof or any similar provision of state, local or foreign law; or (B) has not agreed to nor is required to make any adjustments pursuant to Section 481(a) of the Internal Revenue Code or any similar provision of state, local or foreign law by reason of a change in accounting method initiated by the Company or any of its subsidiaries or has any knowledge that the IRS has proposed any such adjustment or change in accounting method, or has any application pending with any taxing authority requesting permission for any changes in accounting methods that relate to the business or operations of the Company. The Company has not been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Internal Revenue Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Internal Revenue Code. 3. The Company has not made an election under Section 341(f) of the Internal Revenue Code. The Company is not liable for the Taxes of another person that is not a subsidiary of the Company (A) under Treas. Reg. Section 1.1502-6 (or comparable provisions of state, local or foreign law), (B) as a transferee or successor, (C) by contract or indemnity or (D) otherwise. The Company is not a party to any tax sharing agreement. The Company has not made any payments, nor is it obligated to make payments nor is it a party to an agreement that could obligate it to make any payments, that would not be deductible under Section 280G of the Internal Revenue Code. For purposes of this Section III.U.: "IRS" means the United States Internal Revenue Service. "Tax" or "Taxes" means federal, state, county, local, foreign, or other income, gross receipts, ad valorem, franchise, profits, sales or use, transfer, registration, excise, utility, environmental, communications, real or personal property, capital stock, license, payroll, wage or other withholding, employment, social security, severance, stamp, occupation, alternative or add-on minimum, estimated and other taxes of any kind whatsoever (including, without limitation, deficiencies, penalties, additions to tax, and interest attributable thereto), whether disputed or not. "Tax Return" means any return, information report or filing with respect to Taxes, including any schedules attached thereto and including any amendment thereof. V. Property. The Company has good and indefeasible title to all real and personal property owned by it, free and clear of all liens, encumbrances and defects except such as are described on Schedule III.V. hereto or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company; and any real property and buildings held under lease by the Company are held by it under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company. W. Intellectual Property. The Company owns or possesses adequate and enforceable rights to use all patents, patent applications, trademarks, trademark applications, trade names, service marks, copyrights, copyright applications, licenses, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) and other similar rights and proprietary knowledge 44 (collectively, "Intangibles") necessary for the conduct of its business as now being conducted including, but not limited to, those described on Schedule III.W. hereto. The Company is not infringing upon or in conflict with any right of any other person with respect to any Intangibles. Except as disclosed on Schedule III.W. hereto, no claims have been asserted by any person to the ownership or use of any Intangibles and the Company has no knowledge of any basis for such claim. X. Internal Controls and Procedures. The Company maintains accurate books and records and internal accounting controls which provide reasonable assurance that (i) all transactions to which the Company is a party or by which its properties are bound are executed with management's authorization; (ii) the reported accountability of the Company's assets is compared with existing assets at regular intervals; (iii) access to the Company's assets is permitted only in accordance with management's authorization; and (iv) all transactions to which the Company is a party or by which its properties are bound are recorded as necessary to permit preparation of the financial statements of the Company in accordance with GAAP. Y. Payments and Contributions. Neither the Company nor any of its directors, officers or, to its knowledge, other employees has (i) used any Company funds for any unlawful contribution, endorsement, gift, entertainment or other unlawful expense relating to political activity; (ii) made any direct or indirect unlawful payment of Company funds to any foreign or domestic government official or employee, (iii) violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any bribe, rebate, payoff, influence payment, kickback or other similar payment to any person with respect to Company matters. Z. No Misrepresentation. No representation or warranty of the Company contained in this Agreement, any schedule, annex or exhibit hereto or any agreement, instrument or certificate furnished by the Company to Buyer pursuant to this Agreement, contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading. AA. Finder's Fee. There is no finder's fee, brokerage commission or like payment in connection with the transactions contemplated by this Agreement for which Buyer is liable or responsible. IV. Certain Covenants and Acknowledgments A. Restrictive Legend. Buyer acknowledges and agrees that, upon issuance pursuant to this Agreement, the Preferred Shares the Warrants and the Redemption Warrants shall have endorsed thereon a legend in substantially the following form (and a stop-transfer order may be placed against transfer of the Preferred Shares until such legend has been removed): "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND ARE BEING OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH OTHER LAWS." B. Filings. The Company shall make all necessary Commission Filings and "blue sky" filings required to be made by the Company in connection with the sale of the Securities to the Buyer as required by all applicable Laws, and shall provide a copy thereof to the Buyer promptly after such filing. C. Reporting Status. So long as the Buyer beneficially owns any of the Securities, the Company shall timely file all reports required to be filed by it with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. 45 D. Use of Proceeds. The Company shall use the net proceeds from the sale of the Securities (excluding amounts paid by the Company for Buyer's out- of-pocket costs and expenses incurred in connection with the transactions contemplated by this Agreement) solely for general corporate and working capital purposes. E. Listing. Except to the extent the Company lists its Common Stock on the New York Stock Exchange, the Company shall use its best efforts to maintain its trading of the Common Stock on the Amex. F. Reserved Conversion Shares. The Company at all times from and after the date hereof shall have a sufficient number of shares of Common Stock duly and validly authorized and reserved for issuance to satisfy the conversion, in full, of the Preferred Shares and upon the exercise of the Warrants and the Redemption Warrants. G. Right of First Refusal. If the Company should propose (the "Proposal") to issue Common Stock or securities convertible into Common Stock at a price less than the Current Market Price (as defined in the Certificate of Designation), or debt at less than par value or having an effective annual interest rate in excess of 9.9% (each a "Right of First Refusal Security" and collectively, the "Right of First Refusal Securities"), in each case on the date of issuance during the period ending two years after the Closing Date (the "Right of First Refusal Period"), the Company shall be obligated to offer such right of First Refusal Securities to the Buyer on the terms set forth in the Proposal (the "Offer") and the Buyer shall have the right, but not the obligation, to accept such Offer on such terms. If during the Right of First Refusal Period, the Company provides written notice to the Buyer that it proposes to issue any Right of First Refusal Securities on the terms set forth in the Proposal, then Buyer shall have ten (10) business days to accept or reject such offer in writing. If the Company fails to: (i) issue a Proposal during the Right of First Refusal Period; (ii) offer Buyer the opportunity to complete the transaction as set forth in the Proposal; or (iii) enter into an agreement with Buyer, at such terms after the Buyer has accepted the Offer, then the Company shall pay to Buyer, as liquidated damages, an amount in total equal to 10% of the amount paid to the Company for the Right of First Refusal Securities. The foregoing right of first refusal is and shall be senior in right to any other right of first refusal issued by the Company to any other Person (as defined in the Certificate of Designation). Notwithstanding the foregoing, the Buyer shall have no rights under this Section IV.G. in respect of Common Stock or any other securities of the Company issuable (i) upon the exercise or conversion of options, warrants or other rights to purchase securities of the Company outstanding as of the date hereof or (ii) to officers, directors or employees of the Company or any of its subsidiaries. H. Amendment of Certificate of Designation. The Company agrees to take all necessary action (including without limitation an appropriate filing or filings with the Secretary of State of the State of Delaware) to effect, as promptly as possible but in no event later than February 29, 2000, the amendment of Section 4(a)(ii) of the Certificate of Designation by the replacement of the word and numbers "December 31, 1999" each time they occur in such Section 4(a)(ii) with the word and numbers "March 31, 2000". It is understood and agreed that the first Dividend Payment Due Date (as defined in the Certificate of Designation) with respect to the Preferred Stock will be March 31, 2000. V. Transfer Agent Instructions A. The Company undertakes and agrees that no instruction other than the instructions referred to in this Section V and customary stop transfer instructions prior to the registration and sale of the Common Stock pursuant to an effective Securities Act registration statement will be given to its transfer agent for the Common Stock and that the Common Stock issuable upon conversion of the Preferred Shares and exercise of the Warrants and the Redemption Warrants otherwise shall be freely transferable on the books and records of the Company as and to the extent provided in this Agreement, the Registration Rights Agreement and applicable law. Nothing contained in this Section V.A. shall affect in any way Buyer's obligations and agreement to comply with all applicable securities laws upon resale of such Common Stock. If, at any time, Buyer provides the Company with an opinion of counsel reasonably satisfactory to the Company that registration of the resale by Buyer of such Common Stock is not required under the Securities Act, the Company shall permit the transfer of such Common Stock and, promptly instruct the Company's transfer agent to issue one or more certificates for Common Stock without any restrictive legends endorsed thereon. 46 B. The Company shall permit Buyer to exercise its right to convert the Preferred Shares by telecopying an executed and completed Notice of Conversion (as defined in the Certificate of Designation) to the Company. Each date on which a Conversion Notice is telecopied to and received by the Company in accordance with the provisions hereof shall be deemed a Conversion Date (as defined in the Certificate of Designation). The Company shall transmit the certificates evidencing the shares of Common Stock issuable upon conversion of the Preferred Shares (together with certificates evidencing any Preferred Shares not being so converted) to Buyer via express courier, by electronic transfer or otherwise, within five business days after receipt by the Company of the Notice of Conversion (the "Delivery Date"). Within 30 days after Buyer delivers the Notice of Conversion to the Company, Buyer shall deliver to the Company the Preferred Shares being converted. C. The Company shall permit Buyer to exercise its right to purchase shares of Common Stock pursuant to exercise of the Warrants and the Redemption Warrants in accordance with the applicable terms of the Warrants and the Redemption Warrants. The last date that the Company may deliver shares of Common Stock issuable upon any exercise of Warrants or Redemption Warrants is referred to herein as the "Warrant Delivery Date." D. The Company understands that a delay in the issuance of the shares of Common Stock issuable in lieu of cash dividends on the Preferred Shares, upon the conversion of the Preferred Shares or exercise of the Warrants or Redemption Warrants beyond the applicable Dividend Payment Due Date (as defined in the Certificate of Designation), Delivery Date or Warrant Delivery Date could result in economic loss to Buyer. As compensation to Buyer for such loss (and not as a penalty), the Company agrees to pay to Buyer for late issuance of Common Stock issuable in lieu of cash dividends on the Preferred Shares, upon conversion of the Preferred Shares or exercise of the Warrants or Redemption Warrants in accordance with the following schedule (where "No. Business Days" is defined as the number of business days beyond five days from the Dividend Payment Due Date, the Delivery Date or the Warrant Delivery Date, as applicable): Compensation For Each 10 Shares of Preferred Shares Not Converted Timely or 500 Shares of Common Stock Issuable In Payment of Dividends or Upon Exercise of Warrants or Redemption No. Business Days Warrants Not Issued Timely ------------------- ---------------------------------- 1 $ 25 2 50 3 75 4 100 5 125 6 150 7 175 8 200 9 225 10 250 more than 10 $250 + $100 for each Business Day Late beyond 10 days The Company shall pay to Buyer the compensation described above by the transfer of immediately available funds upon Buyer's demand. Nothing herein shall limit Buyer's right to pursue actual damages for the Company's failure to issue and deliver Common Stock to Buyer; and in addition to any other remedies which may be available to Buyer, in the event the Company fails for any reason to effect delivery of such shares of Common Stock within five business days after the relevant Dividend Payment Due Date, the Delivery Date or the Warrant Delivery Date, as applicable, Buyer shall be entitled to rescind the relevant Notice of Conversion or exercise of Warrants or 47 Redemption Warrants by delivering a notice to such effect to the Company whereupon the Company and Buyer shall each be restored to their respective original positions immediately prior to delivery of such Notice of Conversion on delivery. VI. Delivery Instructions The Securities shall be delivered by the Company to the Escrow Agent pursuant to Section I.B. hereof on a "delivery-against-payment basis" at the Closing. VII. Closing Date The date and time of the issuance and sale of the Preferred Shares and the Warrants (the "Closing Date") shall be the date hereof or such other date as shall be mutually agreed upon in writing. The issuance and sale of the Securities shall occur on the Closing Date at the offices of the Escrow Agent. Notwithstanding anything to the contrary contained herein, the Escrow Agent shall not be authorized to release to the Company the Purchase Price and to Buyer the Securities being purchased by Buyer unless the conditions set forth in Section VIII.C. and IX.G. hereof have been satisfied. VIII. Conditions to the Company's Obligations Buyer understands that the Company's obligation to sell the Securities on the Closing Date to Buyer pursuant to this Agreement is conditioned upon: A. Delivery by Buyer to the Escrow Agent of the Purchase Price; B. The accuracy in all material respects on the Closing Date of the representations and warranties of Buyer contained in this Agreement as if made on the Closing Date (except for representations and warranties which, by their express terms, speak as of and relate to a specified date, in which case such accuracy shall be determined as of such specified date) and the performance by Buyer in all material respects on or before the Closing Date of all covenants and agreements of Buyer required to be performed by it pursuant to this Agreement on or before the Closing Date; and C. There shall not be in effect any Law or order, ruling, judgment or writ of any court or public or governmental authority restraining, enjoining or otherwise prohibiting any of the transactions contemplated by this Agreement. IX. Conditions to Buyer's Obligations The Company understands that Buyer's obligation to purchase the Securities on the Closing Date pursuant to this Agreement is conditioned upon: A. Delivery by the Company to Buyer of evidence that the Certificate of Designation has been filed and is effective; B. Delivery by the Company to the Escrow Agent of one or more certificates (I/N/O Buyer or I/N/O Buyer's nominee) evidencing the Securities to be purchased by Buyer pursuant to this Agreement; C. The accuracy in all respects on the Closing Date of the representations and warranties of the Company contained in this Agreement as if made on the Closing Date (except for representations and warranties which, by their express terms, speak as of and relate to a specified date, in which case such accuracy shall be determined as of such specified date) and the performance by the Company in all respects on or before the Closing Date of all covenants and agreements of the Company required to be performed by it pursuant to this Agreement on or before the Closing Date; 48 D. Buyer having received an opinion of counsel for the Company, dated the Closing Date, in form, scope and substance reasonably satisfactory to the Buyer as to the matters set forth in Annex A; E. There not having occurred (i) any general suspension of trading in, or limitation on prices listed for, the Common Stock on the Amex, (ii) the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) the commencement of a war, armed hostilities or other international or national calamity directly or indirectly involving the United States or any of its territories, protectorates or possessions, or (iv) in the case of the foregoing existing at the date of this Agreement, a material acceleration or worsening thereof; F. There not having occurred any event or development, and there being in existence no condition, having or which reasonably and foreseeably could have a Material Adverse Effect; G. The Company shall have delivered to Buyer (as provided in the Escrow Instructions) reimbursement of Buyer's out-of-pocket costs and expenses whether or not accounted for or incurred in connection with the transactions contemplated by this Agreement (including the fees and disbursements of Buyer's legal counsel); H. There shall not be in effect any Law or order, ruling, judgment or writ of any court or public or governmental authority restraining, enjoining or otherwise prohibiting any of the transactions contemplated by this Agreement; and I. Delivery of irrevocable instructions to the Company's transfer agent to reserve 3,500,000 shares of Common Stock for issuance of the Conversion Shares and the Warrant Shares. X. Termination A. Termination by Mutual Written Consent. This Agreement may be terminated and the transactions contemplated hereby may be abandoned, for any reason and at any time prior to the Closing Date, by the mutual written consent of the Company and Buyer. B. Termination by the Company or Buyer. This Agreement may be terminated and the transactions contemplated hereby may be abandoned by action of the Company or Buyer if (i) the Closing shall not have occurred at or prior to 5:00 p.m., New York City time, on February 29, 2000 (the "Latest Closing Date"); provided, however, that the right to terminate this Agreement pursuant to clause (i) shall not be available to any party whose failure to fulfill any of its obligations under this Agreement has been the cause of or resulted in the failure of the Closing to occur at or before such time and date, or (ii) any court or public or governmental authority shall have issued an order, ruling, judgment or writ, or there shall be in effect any Law, restraining, enjoining or otherwise prohibiting the consummation of any of the transactions contemplated by this Agreement; provided, further, however, that if the Closing shall not have occurred on or prior to the Latest Closing Date, the Closing may only occur after the Latest Closing Date with the written acceptance of Buyer. C. Termination by Buyer. This Agreement may be terminated and the transactions contemplated hereby may be abandoned by Buyer at any time prior to the Closing Date, if (i) the Company shall have failed to comply with any of its covenants or agreements contained in this Agreement, (ii) there shall have been a breach by the Company with respect to any representation or warranty made by it in this Agreement, (iii) there shall have occurred any event or development, or there shall be in existence any condition, having or reasonably and forseeably likely to have a Material Adverse Effect or (iv) the Company shall have failed to satisfy the conditions set forth in Section IX hereof. D. Termination by the Company. This Agreement may be terminated and the transactions contemplated hereby may be abandoned by the Company at any time prior to the Closing Date, if (i) Buyer shall have failed to comply with any of its covenants or agreements contained in this Agreement or (ii) there shall have been a breach by Buyer with respect to any representation or warranty made by it in this Agreement. 49 E. Fees and Expenses of Termination. If this Agreement is terminated for any reason, other than pursuant to Section X.D, the Company shall reimburse Buyer for all of Buyer's out-of-pocket costs and expenses incurred in connection with the transactions contemplated by this Agreement and the other Documents (including, without limitation, the fees and disbursements of Buyer's legal counsel). XI. Survival; Indemnification A. The representations, warranties and covenants made by each of the Company and Buyer in this Agreement, the annexes, schedules and exhibits hereto and in each instrument, agreement and certificate entered into and delivered by them pursuant to this Agreement, shall survive the Closing and the consummation of the transactions contemplated hereby. In the event of a breach or violation of any of such representations, warranties or covenants, the party to whom such representations, warranties or covenants have been made shall have all rights and remedies for such breach or violation available to it under the provisions of this Agreement or otherwise, whether at law or in equity, irrespective of any investigation made by or on behalf of such party on or prior to the Closing Date. B. The Company hereby agrees to indemnify and hold harmless the Buyer, its Affiliates and their respective officers, directors, partners and members (collectively, the "Buyer Indemnitees"), from and against any and all losses, claims, damages, judgments, penalties, liabilities and deficiencies (collectively, "Losses"), and agrees to reimburse the Buyer Indemnitees for all out of-pocket expenses (including the fees and expenses of legal counsel), in each case promptly as incurred by the Buyer Indemnitees and to the extent arising out of or in connection with: 1. any misrepresentation, omission of fact or breach of any of the Company's representations or warranties contained in this Agreement or the other Documents, or the annexes, schedules or exhibits hereto or thereto or any instrument, agreement or certificate entered into or delivered by the Company pursuant to this Agreement or the other Documents; or 2. any failure by the Company to perform any of its covenants, agreements. undertakings or obligations set forth in this Agreement or the other Documents, or the annexes, schedules or exhibits hereto or thereto or any instrument, agreement or certificate entered into or delivered by the Company pursuant to this Agreement or the other Documents; or 3. resales of the Common Shares by Buyer in the manner and as contemplated by this Agreement and the Registration Rights Agreement. C. Buyer hereby agrees to indemnify and hold harmless the Company, its Affiliates and their respective officers, directors, partners and members (collectively, the "Company Indemnitees"), from and against any and all Losses, and agrees to reimburse the Company Indemnitees for all out-of-pocket expenses (including the fees and expenses of legal counsel), in each case promptly as incurred by the Company Indemnitees and to the extent arising out of or in connection with: 1. any misrepresentation, omission of fact, or breach of any of Buyer's representations or warranties contained in this Agreement or the other Documents, or the annexes, schedules or exhibits hereto or thereto or any instrument, agreement or certificate entered into or delivered by Buyer pursuant to this Agreement or the other Documents; or 2. any failure by Buyer to perform in any material respect any of its covenants, agreements, undertakings or obligations set forth in this Agreement or the other Documents or any instrument, certificate or agreement entered into or delivered by Buyer pursuant to this Agreement or the other Documents. D. Promptly after receipt by either party hereto seeking indemnification pursuant to this Section XI (an "Indemnified Party") of written notice of any investigation, claim, proceeding or other action in 50 respect of which indemnification is being sought (each, a "Claim"), the Indemnified Party promptly shall notify the party against whom indemnification pursuant to this Section XI is being sought (the "Indemnifying Party") of the commencement thereof; but the omission so to notify the Indemnifying Party shall not relieve it from any liability that it otherwise may have to the Indemnified Party except to the extent that the Indemnifying Party is materially prejudiced and forfeits substantive rights and defenses by reason of such failure. In connection with any Claim as to which both the Indemnifying Party and the Indemnified Party are parties, the Indemnifying Party shall be entitled to assume the defense thereof. Notwithstanding the assumption of the defense of any Claim by the Indemnifying Party, the Indemnified Party shall have the right to employ separate legal counsel and to participate in the defense of such Claim, and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs and expenses of such separate legal counsel to the Indemnified Party if (and only if): (x) the Indemnifying Party shall have agreed to pay such fees, out-of- pocket costs and expenses, (y) the Indemnified Party and the Indemnifying Party reasonably shall have concluded that representation of the Indemnified Party and the Indemnifying Party by the same legal counsel would not be appropriate due to actual or, as reasonably determined by legal counsel to the Indemnified Party, potentially differing interests between such parties in the conduct of the defense of such Claim, or if there may be legal defenses available to the Indemnified Party that are in addition to or disparate from those available to the Indemnifying Party, or (z) the Indemnifying Party shall have failed to employ legal counsel reasonably satisfactory to the Indemnified Party within a reasonable period of time after notice of the commencement of such Claim. If the Indemnified Party employs separate legal counsel in circumstances other than as described in clause (x), (y) or (z) above, the fees, costs and expenses of such legal counsel shall be borne exclusively by the Indemnified Party. Except as provided above, the Indemnifying Party shall not, in connection with any Claim in the same jurisdiction, be liable for the fees and expenses of more than one firm of legal counsel for the Indemnified Party (together with appropriate local counsel). The Indemnifying Party shall not, without the prior written consent of the Indemnified Party (which consent shall not unreasonably be withheld), settle or compromise any Claim or consent to the entry of any judgment that does not include an unconditional release of the Indemnified Party from all liabilities with respect to such Claim or judgment. E. In the event one party hereunder should have a claim for indemnification that does not involve a claim or demand being asserted by a third party, the Indemnified Party promptly shall deliver notice of such claim to the Indemnifying Party. If the Indemnified Party disputes the claim, such dispute shall be resolved by mutual agreement of the Indemnified Party and the Indemnifying Party or by binding arbitration conducted in accordance with the procedures and rules of the American Arbitration Association. Judgment upon any award rendered by any arbitrators may be entered in any court having competent jurisdiction thereof. XII. Governing Law; Miscellaneous THIS AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICTS OF LAW PRINCIPLES OF SUCH STATE. EACH OF THE PARTIES CONSENTS TO THE JURISDICTION OF THE FEDERAL COURTS WHOSE DISTRICTS ENCOMPASS ANY PART OF THE CITY OF NEW YORK OR THE STATE COURTS OF THE STATE OF NEW YORK SITTING IN THE CITY OF NEW YORK IN CONNECTION WITH ANY DISPUTE ARISING UNDER THIS AGREEMENT AND HEREBY WAIVES, TO THE MAXIMUM EXTENT PERMITTED BY LAW, ANY OBJECTION, INCLUDING ANY OBJECTION BASED ON FORUM NON CONVENIENS, TO THE BRINGING OF ANY SUCH PROCEEDING IN SUCH JURISDICTIONS. A signed facsimile transmission of this Agreement shall constitute delivery thereof and shall be legal and binding on all parties hereto. This Agreement may be signed in one or more counterparts, each of which shall be deemed an original. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction. This Agreement may be amended only by an instrument in writing signed by the party to be charged with enforcement. This Agreement and the other Documents supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. 51 XIII. Notices Except as may be otherwise provided herein, any notice or other communication or delivery required or permitted hereunder shall be in writing and shall be delivered personally or sent by certified mail, postage prepaid, or by a nationally recognized overnight courier service, and shall be deemed given when so delivered personally or by overnight courier service, or, if mailed, three (3) days after the date of deposit in the United States mails, as follows: A. if to the Company, to: American TeleSource International, Inc. 12500 Network Boulevard, Suite 407 San Antonio, Texas 78249 (210) 558-6090 (210) 558-6095 (Fax) Attention: H. Douglas Saathoff with a copy to: Alice L. King, Esq. Corporate Counsel American TeleSource International, Inc. 12500 Network Boulevard, Suite 407 San Antonio, Texas 78249 (210) 558-6090 (210) 558-6095 (Fax) B. if to the Buyer, to: The Shaar Fund Ltd. c/o Levinson Capital Management 2 World Trade Center, Suite 1820 New York, NY 10048 Attention: Samuel Levinson (212) 432-7711 (212) 432-7771 (Fax) with a copy to: Cadwalader, Wickersham & Taft 100 Maiden Lane New York, NY 10038 Attention: Dennis J. Block, Esq. (212) 504-5555 (212) 504-5557 (Fax) C. if to the Escrow Agent, to: Cadwalader, Wickersham & Taft 100 Maiden Lane New York, NY 10038 Attention: Dennis J. Block, Esq. (212) 504-5555 (212) 504-5557 (Fax) 52 The Company, Buyer or the Escrow Agent may change the foregoing address by notice given pursuant to this Section XIII. XIV. Confidentiality Each of the Company and Buyer agrees to keep confidential and not to disclose to or use for the benefit of any third party the terms of this Agreement or any other information which at any time is communicated by the other party as being confidential without the prior written approval of the other party; provided, however, that this provision shall not apply to information which, at the time of disclosure, is already part of the public domain (except by breach of this Agreement) and information which is required to be disclosed by law (including, without limitation, pursuant to Item 601(b)(10) of Regulation S-K under the Securities Act and the Exchange Act). XV. Assignment This Agreement shall not be assignable by either of the parties hereto prior to the Closing without the prior written consent of the other party, and any attempted assignment contrary to the provisions hereby shall be null and void; provided, however, that Buyer may assign its rights and obligations hereunder, in whole or in part, to any financially able affiliate of Buyer who furnishes to the Company the representations and warranties set forth in Section II hereof and otherwise agrees to be bound by the terms of this Agreement. In Witness Whereof, the parties hereto have duly executed and delivered this Agreement on the date first above written. American TeleSource International, Inc. By: /s/ H. Douglas Saathoff ----------------------- Name: H. Douglas Saathoff Title: Chief Financial Officer The Shaar Fund Ltd. By: /s/ Samuel Levinson ------------------- Name: Samuel Levinson Title: Managing Director 53 EX-4.6 3 CERTIFICATE OF DESIGNATION EXHIBIT 4.6 CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF 6% SERIES D CUMULATIVE CONVERTIBLE PREFERRED STOCK OF AMERICAN TELESOURCE INTERNATIONAL, INC. Pursuant to Section 151 of the General Corporation Law of the State of Delaware American TeleSource International, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), hereby certifies that the Board of Directors of the Corporation effective as of February 15, 2000 adopted resolutions by Unanimous Written Consent adopting this Certificate of Designation, Preferences and Rights designating a new class of its preferred stock called the 6% Series D Cumulative Convertible Preferred Stock, having the terms set forth herein, and that the Corporation has caused this Certificate of Amendment to the Certificate of Incorporation to be executed by a duly authorized officer as of the 18th day of February, 2000. 6% Series D Cumulative Convertible Preferred Stock ARTICLE 1 Definitions The terms defined in this Article whenever used in this Certificate of Designation have the following respective meanings: (a) "Additional Capital Shares" has the meaning set forth in Section 6.1(c). (b) "Affiliate" has the meaning ascribed to such term in Rule 12b-2 under the Securities Exchange Act of 1934, as amended. (c) "AMEX" means the American Stock Exchange. (d) "Business Day" means a day other than Saturday, Sunday or any day on which banks located in the State of New York are authorized or obligated to close. (e) "Capital Shares" means the Common Shares and any other shares of any other class or series of common stock, whether now or hereafter authorized and however designated, which have the right to participate in the distribution of earnings and assets (upon dissolution, liquidation or winding-up) of the Corporation. (f) "Closing Date" means the Issue Date. (g) "Common Shares" or "Common Stock" means shares of common stock, par value $0.001 per share, of the Corporation. (h) "Common Stock Issued at Conversion" when used with reference to the securities issuable upon conversion of the Series D Preferred Stock, means all Common Shares now or hereafter Outstanding and securities of any other class or series into which the Series C Preferred Stock hereafter shall have been changed or substituted, whether now or hereafter created and however designated. (i) "Conversion Date" means any day on which all or any portion of shares of the Series D Preferred Stock is converted in accordance with the provisions hereof. 54 (j) "Conversion Notice" has the meaning set forth in Section 6.2. (k) "Conversion Price" means on any date of determination the applicable price for the conversion of shares of Series D Preferred Stock into Common Shares on such day as set forth in Section 6.1. (l) "Conversion Ratio" means on any date of determination the applicable percentage of the Market Price for conversion of shares of Series D Preferred Stock into Common Shares on such day as set forth in Section 6.1. (m) "Corporation" means American TeleSource International, Inc., a Delaware corporation, and any successor or resulting corporation by way of merger, consolidation or otherwise. (n) "Current Market Price" means on any date of determination the closing price of a Common Share on such day as reported on the AMEX; provided, if such security bid is not listed or admitted to trading on the AMEX, then as reported on the principal national security exchange or quotation system on which such security is quoted or listed or admitted to trading, or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the closing bid price of such security on the over-the-counter market on the day in question as reported by Bloomberg LP, or a similar generally accepted reporting service, as the case may be. (o) "Default Dividend Rate" shall be equal to the Preferred Stock Dividend Rate plus an additional 4% per annum. (p) "Holder" means The Shaar Fund Ltd., any successor thereto, or any Person or Persons to whom the Series D Preferred Stock is subsequently transferred in accordance with the provisions hereof. (q) "Issue Date" has the meaning set forth in Section 6.1. (r) "Market Disruption Event" means any event that results in a material suspension or limitation of trading of the Common Shares on the AMEX. (s) "Market Price" per Common Share, on any date of determination, means the arithmetic mean of the lowest closing prices of the Common Shares as reported on the AMEX five (5) Trading Days during the period of ten (10) Trading Days immediately preceding such date of determination, it being understood that such five (5) Trading Days need not be consecutive; provided, if such security is not listed or admitted to trading on the AMEX, then as reported on the principal national security exchange or quotation system on which such security is quoted or listed or admitted to trading, or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the closing bid price of such security on the over-the-counter market on the day in question as reported by Bloomberg LP, or a similar generally accepted reporting service, as the case may be, for five (5) Trading Days during the period of ten (10) Trading Days immediately preceding such date of determination, it being understood that such five (5) Trading Days need not be consecutive. (t) "Optional Redemption Price" means (i) a sum in cash equal to one hundred twenty-seven percent (127%) of the Stated Value plus (ii) the Company's ---- common stock purchase warrant or warrants to purchase 150,000 shares of Common Stock, having the same terms and conditions as the Warrant. (u) "Outstanding" when used with reference to Common Shares or Capital Shares (collectively, "Shares"), means, on any date of determination, all issued and outstanding Shares, and includes all such Shares issuable in respect of outstanding scrip or any certificates representing fractional interests in such Shares; provided, however, that any such Shares directly or indirectly owned or held by or for the account of the Corporation or any Subsidiary of the Corporation shall not be deemed "Outstanding" for purposes hereof. (v) "Person" means an individual, a corporation, a partnership, an association, a limited liability company, an unincorporated business organization, a trust or other entity or organization, and any government or political subdivision or any agency or instrumentality thereof. 55 (w) "Registration Rights Agreement" means that certain Registration Rights Agreement dated the Closing Date between the Corporation and The Shaar Fund Ltd., including any amendments thereto. (x) "SEC" means the United States Securities and Exchange Commission. (y) "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the SEC thereunder, all as in effect at the time. (z) "Securities Purchase Agreement" means that certain Securities Purchase Agreement dated the Closing Date between the Corporation and The Shaar Fund Ltd., including any amendments thereto. (aa) "Series D Preferred Shares" or "Series D Preferred Stock" means the shares of 6% Series D Cumulative Convertible Preferred Stock of the Corporation or such other convertible Preferred Stock exchanged therefor. (bb) "Stated Value" has the meaning set forth in Article 2. (cc) "Subsidiary" means any entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are owned directly or indirectly by the Corporation. (dd) "Trading Day" means any day on which purchases and sales of securities authorized for quotation on the AMEX are reported thereon and on which no Market Disruption Event has occurred. (ee) "Valuation Event" has the meaning set forth in Section 6.1. (ff) "Valuation Period" means the ten (10) Trading Day period immediately preceding the Conversion Date. (gg) "Warrant" means the warrant to purchase Common Stock issued by the Company to the initial Holder pursuant to the Securities Purchase Agreement. All references to "cash" or "$" herein means currency of the United States of America. ARTICLE 2 Designation And Amount The designation of this series, which consists of 3,000 shares of Preferred Stock, is 6% Series D Cumulative Convertible Preferred Stock (the "Series D Preferred Stock") and the stated value shall be $1,000.00 per share (the "Stated Value"). ARTICLE 3 Rank The Series D Preferred Stock shall rank (i) prior to the Common Stock; (ii) prior to any class or series of capital stock of the Corporation hereafter created other than "Pari Passu Securities" (collectively, with the Common Stock, "Junior Securities") and (iii) pari passu with the 10% Series A Cumulative Convertible Preferred Stock, the 6% Series B Cumulative Convertible Preferred Stock, and the 6% Series C Cumulative Convertible Preferred Stock of the Corporation currently outstanding and any class or series of capital stock of the Corporation hereafter created specifically ranking on parity with the Series D Preferred Stock ("Pari Passu Securities"). 56 ARTICLE 4 Dividends (a) (i) The Holder shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available for the payment of dividends, dividends (subject to Article 4(a)(ii) hereof) at the rate of six percent (6%) per annum (computed on the basis of a 360-day year) (the "Dividend Rate") on the Stated Value of each share of Series D Preferred Stock on and as of the most recent Dividend Payment Due Date (as defined below) with respect to each Dividend Period (as defined below). Dividends on the Series D Preferred Stock shall be cumulative from the date of issue, whether or not declared for any reason, including if such declaration is prohibited under any outstanding indebtedness or borrowings of the Corporation or any of its Subsidiaries, or any other contractual provision binding on the Corporation or any of its Subsidiaries, and whether or not there shall be funds legally available for the payment thereof. (ii) Each dividend shall be payable in equal quarterly amounts on each March 31, June 30, September 30 and December 31 of each year or, if any such date is not a business day, on the next succeeding business day (each, a "Dividend Payment Due Date"), commencing December 31, 1999, to the holders of record of shares of the Series D Preferred Stock, as they appear on the stock records of the Corporation at the close of business on any record date, not more than 60 days or less than 10 days preceding the payment dates thereof, as shall be fixed by the Board of Directors. For the purposes hereof, "Dividend Period" means the period commencing on and including the Issue Date through December 31, 1999 and thereafter each quarterly period commencing on the day after the immediately preceding Dividend Payment Due Date and ending on and including the immediately subsequent Dividend Payment Due Date. Accrued and unpaid dividends for any past Dividend Period may be declared and paid at any time, without reference to any Dividend Payment Due Date, to holders of record on such date, not more than 15 days preceding the payment date thereof, as may be fixed by the Board of Directors. (iii) Subject to the next sentence, at the option of the Corporation, the dividend shall be paid in cash or through the issuance of duly and validly authorized and issued, fully paid and nonassessable shares of the Common Stock valued at the Market Price. The Corporation may exercise such option only if the Common Stock to be issued in lieu of cash payments shall be registered for resale in the Registration Statement (as defined in the Registration Rights Agreement) to be filed by the Corporation to register the Common Stock issuable upon conversion of the shares of Series D Preferred Stock and exercise of the Warrants as set forth in the Registration Rights Agreement. Notwithstanding the foregoing, until such Registration Statement (as defined in the Registration Rights Agreement) has been declared effective under the Securities Act by the SEC, payment of dividends on the Series D Preferred Stock shall be in cash. (b) The Holder shall not be entitled to any dividends in excess of the cumulative dividends, as herein provided, on the Series D Preferred Stock. Except as provided in this Article 4, no interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on the Series D Preferred Stock that may be in arrears. (c) So long as any shares of the Series D Preferred Stock are outstanding, no dividends, except as described in the next succeeding sentence, shall be declared or paid or set apart for payment on Pari Passu Securities for any period unless full cumulative dividends required to be paid in cash have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the Series D Preferred Stock for all Dividend Periods terminating on or prior to the date of payment of the dividend on such class or series of Pari Passu Securities. When dividends are not paid in full or a sum sufficient for such payment is not set apart, as aforesaid, all dividends declared upon shares of the Series D Preferred Stock and all dividends declared upon any other class or series of Pari Passu Securities shall be declared ratably in proportion to the respective amounts of dividends accumulated and unpaid on the Series D Preferred Stock and accumulated and unpaid on such Pari Passu Securities. (d) So long as any shares of the Series D Preferred Stock are outstanding, no dividends shall be declared or paid or set apart for payment or other distribution declared or made upon Junior Securities, nor shall any Junior Securities be redeemed, purchased or otherwise acquired (other than a redemption, purchase or other acquisition of shares of Common Stock made for purposes of an employee incentive or benefit plan (including a 57 stock option plan) of the Corporation or any subsidiary or any cashless exercise of warrants), (all such dividends, distributions, redemptions or purchases being hereinafter referred to as a "Junior Securities Distribution") for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Corporation, directly or indirectly, unless in each case (i) the full cumulative dividends required to be paid in cash on all outstanding shares of the Series D Preferred Stock and any other Pari Passu Securities shall have been paid or set apart for payment for all past Dividend Periods with respect to the Series D Preferred Stock and all past dividend periods with respect to such Pari Passu Securities, and (ii) sufficient funds shall have been paid or set apart for the payment of the dividend for the current Dividend Period with respect to the Series D Preferred Stock and the current dividend period with respect to such Pari Passu Securities. ARTICLE 5 Liquidation Preference (a) If the Corporation shall commence a voluntary case under the Federal bankruptcy laws or any other applicable Federal or state bankruptcy, insolvency or similar law, or consent to the entry of an order for relief in an involuntary case under any law or to the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or make an assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due, or if a decree or order for relief in respect of the Corporation shall be entered by a court having jurisdiction in the premises in an involuntary case under the Federal bankruptcy laws or any other applicable Federal or state bankruptcy, insolvency or similar law resulting in the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and any such decree or order shall be unstayed and in effect for a period of 30 consecutive days and, on account of any such event, the Corporation shall liquidate, dissolve or wind up, or if the Corporation shall otherwise liquidate, dissolve or wind up (each such event being considered a "Liquidation Event"), no distribution shall be made to the holders of any shares of Common Stock or Junior Securities of the Corporation upon liquidation, dissolution or winding-up unless prior thereto, the holders of shares of Series D Preferred Stock, subject to this Article 5, shall have received the Liquidation Preference (as defined in Article 5(c)) with respect to each share. If upon the occurrence of a Liquidation Event, the assets and funds legally available for distribution among the holders of the Series D Preferred Stock and holders of Pari Passu Securities shall be insufficient to permit the payment to such holders of the preferential amounts payable thereon, then the entire assets and funds of the Corporation legally available for distribution to the Series D Preferred Stock and the Pari Passu Securities shall be distributed ratably among such shares in proportion to the ratio that the liquidation preference payable on each such share bears to the aggregate liquidation preference payable on all such shares. (b) At the option of each Holder, the sale, conveyance or disposition of all or substantially all of the assets of the Corporation, the effectuation by the Corporation of a transaction or series of related transactions in which more than 50% of the voting power of the Corporation is obtained by any Person or "group" as defined in or pursuant to Section 13 of the Securities Exchange Act of 1934, as amended, other than a Person or "group" (as so defined), if any, having more than 50% of the voting power of the Corporation on the Issue Date, or the consolidation, merger or other business combination of the Corporation with or into any other Person or Persons when the Corporation is not the survivor shall either: (i) be deemed to be a liquidation, dissolution or winding up of the Corporation pursuant to which the Corporation shall be required to distribute, upon consummation of and as a condition to, such transaction an amount equal to 120% of the Liquidation Preference with respect to each outstanding share of Series D Preferred Stock in accordance with and subject to the terms of this Article 5 or (ii) be treated pursuant to Section 6.4 hereof; provided, that all holders of Series D Preferred Stock shall be deemed to elect the option set forth in clause (i) hereof if at least a majority in interest of such holders elect such option. (c) For purposes hereof, the "Liquidation Preference" with respect to a share of the Series D Preferred Stock shall mean an amount equal to the sum of (i) the Stated Value thereof, plus (ii) an amount equal to 30% of such Stated Value, plus (iii) the aggregate of all accrued and unpaid dividends on such share of Series D Preferred Stock until the most recent Dividend Payment Due Date; provided that, in the event of an actual liquidation, dissolution or winding up of the Corporation, the amount referred to in clause (iii) above shall be calculated by including accrued and unpaid dividends to the actual date of such liquidation, dissolution or winding up, rather than the Dividend Payment Due Date referred to above. 58 ARTICLE 6 Conversion of Preferred Stock Section 6.1 Conversion; Conversion Price At the option of the Holder, the shares of Series D Preferred Stock may be converted, either in whole or in part (in whole shares of Series D Preferred Stock), into Common Shares (calculated as to each such conversion to the nearest 1/100th of a share of Common Stock), at any time, and from time to time following the date of issuance of the Series D Preferred Stock (the "Issue Date") at a Conversion Price per share of Common Stock equal to the lesser of: (i) the closing price of the Common Stock on February 16, 2000, being $5.4375, as the same may be adjusted from time to time for any subdivision or combination of Outstanding Common Shares after the Issue Date; and (ii) eighty-three percent (83%) of the Market Price determined as of the Conversion Date; provided that the Holder may not exercise any right of conversion set forth in this Article 6 during the period of thirty (30) days commencing on and including the first Trading Day following the Issue Date, if any, on which the Current Market Price of the Common Stock is $2.50 or less, as the same may be adjusted from time to time for any subdivision or combination of Outstanding Common Shares after the Issue Date; and provided, further, that if the Corporation's Common Stock, for any reason, (a) becomes ineligible for trading on AMEX, (b) is not listed on the New York Stock Exchange or (c) is not admitted to trading on the NASDAQ National Market, the NASDAQ SmallCap Market, then any remaining unconverted Series D Preferred Stock may be converted, at the sole option of the Holder, at a Conversion Price per share of Common Stock equal to 65% of the Market Price determined as of the Conversion Date. At the Corporation's option, the amount of accrued and unpaid dividends as of the Conversion Date may be paid in cash or in Common Stock valued at the Market Price on the Conversion Date. The number of shares of Common Stock due upon conversion of Series D Preferred Stock shall be (i) the number of shares of Series D Preferred Stock to be converted, multiplied by (ii) the Stated Value and divided by (iii) the applicable Conversion Price. Notwithstanding any other provision herein, the Conversion Price shall not be less than the par value of the Common Stock Within two Business Days of the occurrence of a Valuation Event, the Corporation shall send notice (the "Valuation Event Notice") of such occurrence to the Holder. Notwithstanding anything to the contrary contained herein, if a Valuation Event occurs during the period of ten (10) Trading Days immediately preceding a Conversion Date, the Market Price with respect to such Conversion Date shall be (a) the arithmetic mean of the lowest closing prices of the Common Shares (reported as provided in the definition of "Market Price") for five (5) Trading Days (it being understood that such five (5) Trading Days need not be consecutive) during the period beginning on the Trading Day immediately following the occurrence of such Valuation Event and ending on the Conversion Date (the "New Valuation Period"), if such New Valuation Period includes five (5) Trading Days or more, or (b) the arithmetic mean of the lowest closing prices of the Common Shares (reported as provided in the definition of "Market Price") for all Trading Days in the New Valuation Period, if such New Valuation Period includes four (4) Trading Days or less; provided that, if the Valuation Event occurs on the Trading Day immediately preceding such Conversion Date, then the Conversion Price shall be the lesser of (x) the closing price of the Common Stock on February 16, 2000, being $5.4375, as the same may be adjusted from time to time for any subdivision or combination of Outstanding Common Shares after the Issue Date, and (y) eighty-three percent (83%) of the Current Market Price of the Common Shares on the Trading Day immediately preceding the Conversion Date; and provided, further, that the Holder may, in its discretion, postpone such Conversion Date to a Trading Day which is no more than ten (10) Trading Days after the occurrence of the latest Valuation Event by delivering a notification to the Corporation within two Business Days of the receipt of the Valuation Event Notice. In the event that the Holder deems the Market Price is to be calculated with reference to a period other than the ten (10) Trading Days immediately prior to the Conversion Date, the Holder shall give written notice of such fact to the Corporation in the related Conversion Notice at the time of conversion. For purposes of this Section 6.1, a "Valuation Event" shall mean an event in which the Corporation at any time takes any of the following actions: (a) subdivides or combines its Capital Shares; 59 (b) makes any distribution on its Capital Shares; (c) issues any additional Capital Shares (the "Additional Capital Shares"), otherwise than as provided in the foregoing Sections 6.1(a) and 6.1(b) above, at a price per share less, or for other consideration lower, than the Current Market Price in effect immediately prior to such issuances, or without consideration, except for issuances under stock option plans presently in effect and issuances under presently outstanding warrants, options or convertible securities (and except for issuances upon exercise, conversion or exchange of securities described in Section 6.1(d) and 6.1(e) below); (d) issues any warrants, options or other rights to subscribe for or purchase any Additional Capital Shares and the price per share for which Additional Capital Shares may at any time thereafter be issuable pursuant to such warrants, options or other rights shall be less than the Current Market Price in effect immediately prior to such issuance of the warrants, options or other rights; (e) issues any securities convertible into or exchangeable or exercisable for Additional Capital Shares and the consideration per share for which Additional Capital Shares may at any time thereafter be issuable pursuant to the terms of such convertible, exchangeable or exercisable securities shall be less than the Current Market Price in effect immediately prior to such issuance of such convertible or exchangeable securities; (f) makes a distribution of its assets or evidences of indebtedness to the holders of its Capital Shares as a dividend in liquidation or by way of return of capital or other than as a dividend payable out of earnings or surplus legally available for the payment of dividends under applicable law or any distribution to such holders made in respect of the sale of all or substantially all of the Corporation's assets (other than under the circumstances provided for in the foregoing Sections 6.1(a) through 6.1(e)); or (g) takes any action affecting the number of Outstanding Capital Shares, other than an action described in any of the foregoing Sections 6.1(a) through 6.1(f) hereof, inclusive, which in the opinion of the Corporation's Board of Directors, determined in good faith, would have a material adverse effect upon the rights of the Holder at the time of a conversion of the Preferred Stock. Section 6.2 Exercise of Conversion Privilege (a) Conversion of the Series D Preferred Stock may be exercised, in whole or in part, by the Holder by telecopying an executed and completed notice of conversion in the form annexed hereto as Annex I (the "Conversion Notice") to the Corporation. Each date on which a Conversion Notice is telecopied to the Corporation in accordance with the provisions of this Section 6.2 shall constitute a Conversion Date. The Corporation shall convert the Series D Preferred Stock and issue the Common Stock Issued at Conversion to be issued upon conversion thereof, and all voting and other rights associated with the beneficial ownership of such Common Stock Issued at Conversion to be issued upon conversion thereof shall vest with the Holder, effective as of the Conversion Date at the time specified in the Conversion Notice. The Conversion Notice also shall state the name or names (with addresses) of the Persons who are to become the holders of the Common Stock Issued at Conversion in connection with such conversion. The Holder shall deliver the shares of Series D Preferred Stock to the Corporation by express courier within 30 days following the date on which the telecopied Conversion Notice has been transmitted to the Corporation. Upon surrender for conversion, the Preferred Stock shall be accompanied by a proper assignment thereof to the Corporation or be endorsed in blank. As promptly as practicable after the receipt of the Conversion Notice as aforesaid, but in any event not more than five (5) Business Days after the Corporation's receipt of such Conversion Notice and the Series D Preferred Stock being converted, the Corporation shall (i) issue the Common Stock Issued at Conversion in accordance with the provisions of this Article 6 (including, without limitation, any shares of Common Stock issued pursuant to Section 4(a)(iii), at the option of the Corporation, in payment of dividends on the Series D Preferred Stock), (ii) cause to be mailed for delivery by overnight courier to the Holder a certificate or certificate(s) representing the number of Common Shares to which the Holder is entitled by virtue of 60 such conversion and (iii) remit, in immediately available funds, payment as provided in Section 6.3 in respect of any fraction of a Common Share issuable upon such conversion and payment in the amount of accrued and unpaid dividends as of the Conversion Date. Such conversion shall be deemed to have been effected at the time at which the Conversion Notice indicates so long as the Series D Preferred Stock shall have been surrendered as aforesaid at such time, and at such time the rights of the Holder of the Series D Preferred Stock, as such, shall cease and the Person or Persons in whose name or names the Common Stock Issued at Conversion shall be issuable shall be deemed to have become the holder or holders of record of the Common Shares represented thereby and all voting and other rights associated with the beneficial ownership of such Common Shares shall at such time vest with such Person or Persons. The Conversion Notice shall constitute a contract between the Holder and the Corporation, whereby the Holder shall be deemed to subscribe for the number of Common Shares which it will be entitled to receive upon such conversion and, in payment and satisfaction of such subscription (and for any cash adjustment to which it is entitled pursuant to Section 6.4), to surrender the Series D Preferred Stock and to release the Corporation from all liability thereon. No cash payment aggregating less than $1.00 shall be required to be given unless specifically requested by the Holder. (b) If, at any time (i) the Corporation challenges, disputes or denies the right of the Holder hereof to effect the conversion of the Series D Preferred Stock into Common Shares or otherwise dishonors or rejects any Conversion Notice delivered in accordance with this Section 6.2 or (ii) any third party who is not and has never been an Affiliate of the Holder commences any lawsuit or proceeding or otherwise asserts any claim before any court or public or governmental authority which seeks to challenge, deny, enjoin, limit, modify, delay or dispute the right of the Holder hereof to effect the conversion of the Series D Preferred Stock into Common Shares, then the Holder shall have the right, by written notice to the Corporation, to require the Corporation to promptly redeem, to the extent permitted by law, the Series D Preferred Stock for cash at a redemption price equal to 127% of the Stated Value thereof together with all accrued and unpaid dividends thereon (the "Mandatory Purchase Amount"). Under any of the circumstances set forth above, the Corporation shall be responsible for the payment of all costs and expenses of the Holder, including reasonable legal fees and expenses, as and when incurred in disputing any such action or pursuing its rights hereunder (in addition to any other rights of the Holder). (c) The Holder shall be entitled to exercise its conversion privilege notwithstanding the commencement of any case under 11 U.S.C. (S) 101 et seq. (the "Bankruptcy Code"). In the event the Corporation is a debtor under the Bankruptcy Code, the Corporation hereby waives to the fullest extent permitted any rights to relief it may have under 11 U.S.C. (S) 362 in respect of the Holder's conversion privilege. The Corporation hereby waives to the fullest extent permitted any rights to relief it may have under 11 U.S.C. (S) 362 in respect of the conversion of the Series D Preferred Stock. The Corporation agrees, without cost or expense to the Holder, to take or consent to any and all action necessary to effectuate relief under 11 U.S.C. (S) 362. Section 6.3 Fractional Shares No fractional Common Shares or scrip representing fractional Common Shares shall be issued upon conversion of the Series D Preferred Stock. Instead of any fractional Common Shares which otherwise would be issuable upon conversion of the Series D Preferred Stock, the Corporation shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction. No cash payment of less than $1.00 shall be required to be given unless specifically requested by the Holder. Section 6.4 Reclassification, Consolidation, Merger or Mandatory Share Exchange At any time while the Series D Preferred Stock remains outstanding and any shares thereof have not been converted, in case of any reclassification or change of Outstanding Common Shares issuable upon conversion of the Series D Preferred Stock (other than a change in par value, or from par value to no par value per share, or from no par value per share to par value or as a result of a subdivision or combination of outstanding securities issuable upon conversion of the Series D Preferred Stock) or in case of any consolidation, merger or mandatory share exchange of the Corporation with or into another corporation (other than a merger or mandatory share exchange with another corporation in which the Corporation is a continuing corporation and which does not result in any reclassification or change, other than a change in par value, or from par value to no par value per share, or from no par value per share to par value, or as a result of a subdivision or combination of Outstanding Common Shares upon conversion of the 61 Series D Preferred Stock), or in the case of any sale or transfer to another corporation of the property of the Corporation as an entirety or substantially as an entirety, the Corporation will not effect any such action unless the Corporation, or such successor, resulting or purchasing corporation, as the case may be, shall, without benefit of any additional consideration therefor, issues a new preferred stock providing that the Holder shall have the right to convert such new preferred stock (upon terms and conditions not less favorable to the Holder than those in effect pursuant to the Series D Preferred Stock) and to receive upon such exercise, in lieu of each Common Share theretofore issuable upon conversion of the Series D Preferred Stock, the kind and amount of shares of stock, other securities, money or property receivable upon such reclassification, change, consolidation, merger, mandatory share exchange, sale or transfer by the holder of one Common Share issuable upon conversion of the Series D Preferred Stock had the Series D Preferred Stock been converted immediately prior to such reclassification, change, consolidation, merger, mandatory share exchange or sale or transfer. The provisions of this Section 6.4 shall similarly apply to successive reclassifications, changes, consolidations, mergers, mandatory share exchanges and sales and transfers. Section 6.5 Adjustments to Conversion Price For so long as any shares of the Series D Preferred Stock are outstanding, if the Corporation: (i) issues and sells pursuant to an exemption from registration under the Securities Act (A) Common Shares at a purchase price on the date of issuance thereof that is lower than the Conversion Price (other than Common Shares issuable upon exercise, conversion or exchange of securities described in the following clause (B) or (C), (B) warrants or options with an exercise price representing a percentage of the Current Market Price on the date of issuance of the warrants or options that is lower than the Conversion Price, except for employee stock option agreements or stock incentive agreements of the Corporation, or (C) convertible, exchangeable or exercisable securities with a right to exchange at lower than the Current Market Price on the date of issuance or conversion, as applicable, of such convertible, exchangeable or exercisable securities, except for stock option agreements or stock incentive agreements; and (ii) grants the right to the purchaser(s) thereof to demand that the Corporation register under the Securities Act prior to two years from the Issue Date such Common Shares issued or the Common Shares for which such warrants or options may be exercised or such convertible, exchangeable or exercisable securities may be converted, exchanged or exercised, then the Conversion Price shall be reduced to equal the lowest of any such lower prices. Section 6.6 Optional Redemption and Optional Conversion At any time after the date of issuance of the Series D Preferred Stock until the Mandatory Conversion Date (as defined below), to the extent permitted by law, the Corporation, upon notice delivered to the Holder as provided in Section 6.7, may redeem all (but not less than all) of the Series D Preferred Stock (but only with respect to such shares as to which the Holder has not theretofore furnished a Conversion Notice in compliance with Section 6.2), at the Optional Redemption Price, together with all accrued and unpaid dividends thereon to the date of redemption (the "Redemption Date"); provided, however, that the Corporation may only redeem the Series B Preferred Stock under this Section 6.6 if the Current Market Price is less than the Current Market Price on the Issue Date. Except as set forth in this Section 6.6, the Corporation shall not have the right to prepay or redeem the Series D Preferred Stock. Section 6.7 Notice of Redemption Notice of redemption pursuant to Section 6.6 shall be provided by the Corporation to the Holder in writing (by registered mail or overnight courier at the Holder's last address appearing in the Corporation's security registry) not less than 10 nor more than 15 days prior to the Redemption Date, which notice shall specify the Redemption Date and refer to Section 6.6 (including a statement of the Market Price per Common Share) and this Section 6.7. Section 6.8 Surrender of Preferred Stock Upon any redemption of the Series D Preferred Stock pursuant to Sections 6.6 or 6.7 the Holder shall either deliver the Series D Preferred Stock by hand to the Corporation at its principal executive offices or surrender the same to the Corporation at such address by express courier. Payment of the optional Redemption Price specified in Section 6.6 shall be made by the Corporation to the Holder against receipt of the Series D Preferred Stock (as 62 provided in this Section 6.8) by wire transfer of immediately available funds to such account(s) as the Holder shall specify to the Corporation. If payment of such redemption price is not made in full by the or the Redemption Date the Holder shall again have the right to convert the Series D Preferred Stock as provided in Article 6 hereof. Section 6.9 Mandatory Conversion On the second (2/nd/) anniversary of the Issue Date subject to 6.10(a) (the "Mandatory Conversion Date"), the Corporation shall convert all Series D Preferred Stock outstanding at the Conversion Price. Section 6.10 Certain Conversion Limitations (a) Notwithstanding anything herein to the contrary, the Holder shall not have the right, and the Corporation shall not have the obligation, to convert all or any portion of the Series D Preferred Stock (and the Corporation shall not have the right to pay dividends on the Series D Preferred Stock in shares of Common Stock) if and to the extent that the issuance to the Holder of shares of Common Stock upon such conversion (or payment of dividends) would result in the Holder being deemed the "beneficial owner" of more than 5% of the then outstanding shares of Common Stock within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules promulgated thereunder. If any court of competent jurisdiction shall determine that the foregoing limitation is ineffective to prevent a Holder from being deemed the beneficial owner of more than 5% of the then outstanding shares of Common Stock, then the Corporation shall redeem, to the extent permitted by law, so many of such Holder's shares (the "Redemption Shares") of Series D Preferred Stock as are necessary to cause such Holder to be deemed the beneficial owner of not more than 5% of the then outstanding shares of Common Stock. Upon such determination by a court of competent jurisdiction, the Redemption Shares shall immediately and without further action be deemed returned to the status of authorized but unissued shares of Series D Preferred Stock, and the Holder shall have no interest in or rights under such Redemption Shares. Any and all dividends paid on or prior to the date of such determination shall be deemed dividends paid on the remaining shares of Series D Preferred Stock held by the Holder. Such redemption shall be for cash at a redemption price equal to the sum of (i) the Stated Value of the Redemption Shares and (ii) any accrued and unpaid dividends to the date of such redemption; provided, however, if the redemption is a result of the mandatory conversion pursuant to Section 6.9, the Corporation may either (i) make such redemption in cash at a redemption price equal to the sum of (x) 127% of the Stated Value of such shares and (y) any accrued and unpaid dividends to the date of such redemption or (ii) extend the Mandatory Conversion Date for a period of one year. (b) Unless the Corporation shall have obtained the approval of its voting stockholders to such issuance in accordance with the rules of the AMEX or such stock market with which the Corporation shall be required to comply, but only to the extent required thereby, the Corporation shall not issue shares of Common Stock (i) upon conversion of any shares of Series D Preferred Stock or (ii) as a dividend on the Series D Preferred Stock, if such issuance of Common Stock, when added to the number of shares of Common Stock previously issued by the Corporation (i) upon conversion of shares of the Series D Preferred Stock, (ii) upon exercise of the Warrants issued pursuant to the terms of the Securities Purchase Agreement and (iii) in payment of dividends on the Series D Preferred Stock, would equal or exceed 20% of the number of shares of the Corporation's Common Stock which were issued and outstanding on the Issue Date (the "Maximum Issuance Amount"). In the event that a properly executed Conversion Notice is received by the Corporation which would require the Corporation to issue shares of Common Stock equal to or in excess of the Maximum Issuance Amount, the Corporation shall honor such conversion request by (i) converting the number of shares of Series D Preferred Stock stated in the Conversion Notice not in excess of the Maximum Issuance Amount and (ii) redeeming, to the extent permitted by law, the number of shares of Series D Preferred Stock stated in the Conversion Notice equal to or in excess of the Maximum Issuance Amount in cash at a price equal to 127% of the Stated Value of the shares of Series D Preferred Stock to be so redeemed, together with all accrued and unpaid dividends thereon. In the event that the Corporation shall elect to pay a dividend in shares of Common Stock which would require the Corporation to issue shares of Common Stock equal to or in excess of the Maximum Issuance Amount, the Corporation shall pay (i) a dividend in shares of Common Stock equal to one less than an amount which would result in the Corporation issuing shares equal to the Maximum Issuance Amount and (ii) the balance of the dividend in cash. 63 ARTICLE 7 Voting Rights The holders of the Series D Preferred Stock have no voting power, except as otherwise provided by the General Corporation Law of the State of Delaware ("DGCL"), in this Article 7, and in Article 8 below. Notwithstanding the above, the Corporation shall provide each Holder of Series D Preferred Stock with prior notification of any meeting of the shareholders (and copies of proxy materials and other information sent to shareholders). In the event of any taking by the Corporation of a record of its shareholders for the purpose of determining shareholders who are entitled to receive payment of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire (including by way of merger, consolidation or recapitalization) any share of any class or any other securities or property, or to receive any other right, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed liquidation, dissolution or winding up of the Corporation, the Corporation shall mail a notice to each Holder, at least 30 days prior to the consummation of the transaction or event, whichever is earlier), of the date on which any such action is to be taken for the purpose of such dividend, distribution, right or other event, and a brief statement regarding, the amount and character of such dividend, distribution, right or other event to the extent known at such time. To the extent that under the DGCL the vote of the Holders of the Series D Preferred Stock, voting separately as a class or series as applicable, is required to authorize a given action of the Corporation, the affirmative vote or consent of the Holders of at least a majority of the outstanding shares of Series D Preferred Stock represented at a duly held meeting at which a quorum is present or by written consent of a majority of the outstanding shares of Series D Preferred Stock (except as otherwise may be required under the DGCL) shall constitute the approval of such action by the class. To the extent that under the DGCL holders of the Series D Preferred Stock are entitled to vote on a matter with holders of Common Stock, voting together as one class, each share of Series D Preferred Stock shall be entitled to a number of votes equal to the number of shares of Common Stock into which it is then convertible using the record date for the taking of such vote of shareholders as the date as of which the Conversion Price is calculated. Holders of the Series D Preferred Stock shall be entitled to notice of all shareholder meetings or written consents (and copies of proxy materials and other information sent to shareholders) with respect to which they would be entitled to vote, which notice would be provided pursuant to the Corporation's bylaws and the DGCL. 64 Except as otherwise required by applicable law, subject to receipt of the approval of the Holders of the Series D Preferred Stock as required herein, the Corporation may alter or change the rights, preferences or privileges of the Series D Preferred Stock without the approval of any other class or series of capital stock of the Corporation. ARTICLE 8 Protective Provisions So long as shares of Series D Preferred Stock are outstanding, the Corporation shall not, without first obtaining the approval (by vote or written consent, as provided by the DGCL) of the Holders of at least a majority of the then outstanding shares of Series D Preferred Stock: (a) alter or change the rights, preferences or privileges of the Series D Preferred Stock; (b) create any new class or series of capital stock having a preference over the Series D Preferred Stock as to distribution of assets upon liquidation, dissolution or winding up of the Corporation ("Senior Securities") or alter or change the rights, preferences or privileges of any Senior Securities so as to affect adversely the Series D Preferred Stock; (c) increase the authorized number of shares of Series D Preferred Stock; or (d) do any act or thing not authorized or contemplated by this Certificate of Designation which would result in taxation of the holders of shares of the Series D Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as amended (or any comparable provision of the Internal Revenue Code as hereafter from time to time amended). In the event Holders of least a majority of the then outstanding shares of Series D Preferred Stock give their approval to allow the Corporation to alter or change the rights, preferences or privileges of the shares of Series D Preferred Stock, pursuant to subsection (a) above, so as to affect the Series D Preferred Stock, then the Corporation will deliver notice of such approved change to the Holders of the Series D Preferred Stock that did not approve such alteration or change (the "Dissenting Holders") and Dissenting Holders shall have the right for a period of 30 days to convert pursuant to the terms of this Certificate of Designation as they exist prior to such alteration or change or continue to hold their shares of Series D Preferred Stock. ARTICLE 9 Miscellaneous Section 9.1 Loss, Theft, Destruction of Preferred Stock Certificates Upon receipt of evidence satisfactory to the Corporation of the loss, theft, destruction or mutilation of shares of Series D Preferred Stock and, in the case of any such loss, theft or destruction, upon receipt of indemnity or security reasonably satisfactory to the Corporation, or, in the case of any such mutilation, upon surrender and cancellation of the Series D Preferred Stock, the Corporation shall make, issue and deliver, in lieu of such lost, stolen, destroyed or mutilated shares of Series D Preferred Stock, new shares of Series D Preferred Stock of like tenor. The Series D Preferred Stock shall be held and owned upon the express condition that the provisions of this Section 9.1 are exclusive with respect to the replacement of mutilated, destroyed, lost or stolen shares of Series D Preferred Stock and shall preclude any and all other rights and remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement of negotiable instruments or other securities without the surrender thereof. Section 9.2 Who Deemed Absolute Owner The Corporation may deem the Person in whose name the Series D Preferred Stock shall be registered upon the registry books of the Corporation to be, and may treat it as, the absolute owner of the Series D Preferred Stock for the purpose of receiving payment of dividends on the Series D Preferred Stock, for the conversion of the Series D Preferred Stock and for all other purposes, and the Corporation shall not be affected by any notice to the contrary. 65 All such payments and such conversion shall be valid and effectual to satisfy and discharge the liability upon the Series D Preferred Stock to the extent of the sum or sums so paid or the conversion so made. Section 9.3 Notice of Certain Events In the case of the occurrence of any Valuation Event described in Sections 6.1, or 6.6 of this Certificate of Designation, the Corporation shall cause to be mailed to the Holder of the Series D Preferred Stock at its last address as it appears in the Corporation's security registry, at least 20 days prior to the applicable record, effective or expiration date hereinafter specified (or, if such 20 days notice is not possible, at the earliest possible date prior to any such record, effective or expiration date), a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, issuance or granting of rights, options or warrants, or if a record is not to be taken, the date as of which the Holders of record of Series D Preferred Stock to be entitled to such dividend, distribution, issuance or granting of rights, options or warrants are to be determination or the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up is expected to become effective, and (y) the date as of which it is expected that Holders of record of Series D Preferred Stock will be entitled to exchange their shares for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale transfer, dissolution, liquidation or winding-up. Section 9.4 Register The Corporation shall keep at its principal office a register in which the Corporation shall provide for the registration of the Series D Preferred Stock. Upon any transfer of the Series D Preferred Stock in accordance with the provisions hereof, the Corporation shall register such transfer on the Series D Preferred Stock register. The Corporation may deem the person in whose name the Series D Preferred Stock shall be registered upon the registry books of the Corporation to be, and may treat it as, the absolute owner of the Series D Preferred Stock for the purpose of receiving payment of dividends on the Series D Preferred Stock, for the conversion of the Series D Preferred Stock and for all other purposes, and the Corporation shall not be affected by any notice to the contrary. All such payments and such conversions shall be valid and effective to satisfy and discharge the liability upon the Series D Preferred Stock to the extent of the sum or sums so paid or the conversion or conversions so made. Section 9.5 Withholding To the extent required by applicable law, the Corporation may withhold amounts for or on account of any taxes imposed or levied by or on behalf of any taxing authority in the United States having jurisdiction over the Corporation from any payments made pursuant to the Series D Preferred Stock. Section 9.6 Headings The headings of the Articles and Sections of this Certificate of Designation are inserted for convenience only and do not constitute a part of this Certificate of Designation. In Witness Whereof, the Corporation has caused this Certificate of Designation, Preferences and Rights to be signed by its duly authorized officers on ___________________, 2000. AMERICAN TELESOURCE INTERNATIONAL, INC. By: /s/ H. Douglas Saathoff ----------------------- H. Douglas Saathoff Title: Senior Vice President By: /s/ Charles R. Poole -------------------- Name: Charles R. Poole Title: President 66 ANNEX I FORM OF CONVERSION NOTICE To: American TeleSource International, Inc. 12500 Network Boulevard, Suite 407 San Antonio, Texas 78249 The undersigned owner of this Series D 6% Convertible Preferred Stock (the "Series D Preferred Stock") issued by American TeleSource International, Inc. (the "Corporation") hereby irrevocably exercises its option to convert __________ shares of the Series D Preferred Stock into shares of the common stock, par value $0.001 per share ("Common Stock"), of the Corporation in accordance with the terms of the Certificate of Designation. The undersigned hereby instructs the Corporation to convert the number of shares of the Series D Preferred Stock specified above into Shares of Common Stock Issued at Conversion in accordance with the provisions of Article 6 of the Certificate of Designation. The undersigned directs that the Common Stock issuable and certificates therefor deliverable upon conversion, the Series D Preferred Stock re-certificated, if any, not being surrendered for conversion hereby, together with any check in payment for fractional Common Stock, be issued in the name of and delivered to the undersigned unless a different name has been indicated below. All capitalized terms used and not defined herein have the respective meanings assigned to them in the Certificate of Designation. So long as the Series D Preferred Stock shall have been surrendered for conversion hereby, the conversion pursuant hereto shall be deemed to have been effected at the date and time specified below, and at such time the rights of the undersigned as a Holder of the Series D Preferred Stock shall cease and the Person or Persons in whose name or names the Common Stock Issued at Conversion shall be issuable shall be deemed to have become the holder or holders of record of the Common Shares represented thereby and all voting and other rights associated with the beneficial ownership of such Common Shares shall at such time vest with such Person or Persons. Date and time:_____________________ ________________________________________ Signature Fill in for registration of Series D Preferred Stock: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ Please print name and address (including zip code number) 67 EX-4.7 4 COMMON STOCK PURCHASE Exhibit 4.7 THIS COMMON STOCK PURCHASE WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR THE PROVISIONS OF THIS COMMON STOCK PURCHASE WARRANT. Number of Shares of Common Stock: 150,000 Warrant No. 1 COMMON STOCK PURCHASE WARRANT To Purchase Common Stock of American TeleSource International, Inc. This Is To Certify That The Shaar Fund Ltd., or registered assigns, is entitled, at any time from the Closing Date (as hereinafter defined) to the Expiration Date (as hereinafter defined), to purchase from American TeleSource International, Inc., a Delaware corporation (the "Company"), 150,000 shares of Common Stock (as hereinafter defined and subject to adjustment as provided herein), in whole or in part, including fractional parts, at a purchase price set forth herein, all on the terms and conditions and pursuant to the provisions hereinafter set forth. Definitions ----------- As used in this Common Stock Purchase Warrant (this "Warrant"), the following terms have the respective meanings set forth below: "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Company after the Closing Date, other than Warrant Stock. "Amex" shall mean The American Stock Exchange. "Book Value" shall mean, in respect of any share of Common Stock on any date herein specified, the consolidated book value of the Company as of the last day of any month immediately preceding such date, divided by the number of Fully Diluted Outstanding shares of Common Stock as determined in accordance with GAAP (assuming the payment of the exercise prices for such shares) by Arthur Andersen LLP or any other firm of independent certified public accountants of recognized national standing selected by the Company and reasonably acceptable to the Holder. "Business Day" shall mean any day that is not a Saturday or Sunday or a day on which banks are required or permitted to be closed in the State of New York. "Closing Date" shall have the meaning set forth in the Securities Purchase Agreement. "Commission" shall mean the Securities and Exchange Commission or any other federal agency then administering the Securities Act and other federal securities laws. 68 "Common Stock" shall mean (except where the context otherwise indicates) the Common Stock, par value $0.001 per share, of the Company as constituted on the Closing Date, and any capital stock into which such Common Stock may thereafter be changed, and shall also include (i) capital stock of the Company of any other class (regardless of how denominated) issued to the holders of shares of Common Stock upon any reclassification thereof which is also not preferred as to dividends or assets over any other class of stock of the Company and which is not subject to redemption and (ii) shares of common stock of any successor or acquiring corporation received by or distributed to the holders of Common Stock of the Company in the circumstances contemplated by Section 4.4. "Convertible Securities" shall mean evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable, with or without payment of additional consideration in cash or property, for shares of Common Stock, either immediately or upon the occurrence of a specified date or a specified event. "Current Market Price" shall mean, as of any date of determination, the average of the closing prices of the Common Shares as reported on the Amex for the five Trading Days immediately preceding such date of determination; provided that, if such security is not listed on the Amex, the closing prices as reported on the principal national security exchange or quotation system on which such security is quoted or listed or admitted to trading (closing bid prices in the case of a quotation system), or if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the closing bid prices of such security on the over-the-counter market as reported by Bloomberg LP, or a similar generally accepted reporting service, as the case may be, for the five Trading Days immediately preceding such date of determination. "Current Warrant Price" shall mean, in respect of a share of Common Stock at any date herein specified, one hundred and fifteen percent (115%) of the arithmetic mean of the lowest closing prices of a share of Common Stock as reported on the Amex on five (5) Trading Days during the period of ten (10) Trading Days immediately preceding February 17, 2000, it being understood that such five (5) Trading Days need not be consecutive. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time. "Exercise Period" shall mean the period during which this Warrant is exercisable pursuant to Section 2.1. "Expiration Date" shall mean February 22, 2005. "Fully Diluted Outstanding" shall mean, when used with reference to Common Stock, at any date as of which the number of shares thereof is to be determined, all shares of Common Stock Outstanding at such date and all shares of Common Stock issuable in respect of this Warrant, outstanding on such date, and other options or warrants to purchase, or securities convertible into, shares of Common Stock outstanding on such date which would be deemed outstanding in accordance with GAAP for purposes of determining Book Value or net income per share. "GAAP" shall mean generally accepted accounting principles in the United States of America as from time to time in effect. "Holder" shall mean the Person in whose name the Warrant or Warrant Stock set forth herein is registered on the books of the Company maintained for such purpose. "Market Price" per Common Share means the average of the closing prices of the Common Shares as reported on the Amex for the five trading days immediately preceding February 17, 2000. "Other Property" shall have the meaning set forth in Section 4.4. 69 "Outstanding" shall mean, when used with reference to Common Stock, at any date as of which the number of shares thereof is to be determined, all issued shares of Common Stock, except shares then owned or held by or for the account of the Company or any subsidiary thereof, and shall include all shares issuable in respect of outstanding scrip or any certificates representing fractional interests in shares of Common Stock. "Person" shall mean any individual, sole proprietorship, partnership, joint venture, trust, incorporated organization, association, corporation, institution, public benefit corporation, entity or government (whether federal, state, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof). "Registration Rights Agreement" shall mean the Registration Rights Agreement dated a date even herewith between the Company and The Shaar Fund Ltd., as it may be amended from time to time. "Restricted Common Stock" shall mean shares of Common Stock which are, or which upon their issuance on their exercise of this Warrant would be, evidenced by a certificate bearing the restrictive legend set forth in Section 9.1(a). "Securities Act" shall mean the Securities Act of 1933, as amended, or any successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Securities Purchase Agreement" shall mean the Securities Purchase Agreement dated as of a date even herewith between the Company and The Shaar Fund Ltd., as it may be amended from time to time. "Transfer" shall mean any disposition of any Warrant or Warrant Stock or of any interest in either thereof, which would constitute a sale thereof within the meaning of the Securities Act. "Transfer Notice" shall have the meaning set forth in Section 9.2. "Warrant Price" shall mean an amount equal to (i) the number of shares of Common Stock being purchased upon exercise of this Warrant pursuant to Section 2.1, multiplied by (ii) the Current Warrant Price as of the date of such exercise. "Warrant Stock" shall mean the shares of Common Stock purchased by the holders of the Warrants upon the exercise thereof. "Warrants" shall mean this Warrant and all warrants issued upon transfer, division or combination of, or in substitution for, any thereof. All Warrants shall at all times be identical as to terms and conditions and date, except as to the number of shares of Common Stock for which they may be exercised. Exercise of Warrant ------------------- Manner of Exercise - ------------------ From and after the Closing Date and until 5:00 p.m., New York time, on the Expiration Date, Holder may exercise this Warrant, on any Business Day, for all or any part of the number of shares of Common Stock purchasable hereunder. In order to exercise this Warrant, in whole or in part, Holder shall deliver to the Company at its principal office at 12500 Network Boulevard, Suite 407, San Antonio, Texas 78249, or at the office or agency designated by the Company pursuant to Section 12, (i) a written notice of Holder's election to exercise this Warrant, which notice shall specify the number of shares of Common Stock to be purchased, (ii) to the extent such exercise is not being effected through a Cashless Exercise, payment of the Warrant Price in cash or wire transfer or cashier's check drawn on a United States bank and (iii) this Warrant. Such notice shall be substantially in the form of the subscription form appearing at the end of this Warrant as Exhibit A, duly executed by Holder or its agent or attorney. Upon receipt of the items referred to in clauses (i), (ii) and (iii) above, the Company shall, as promptly as practicable, and in any event within five Business Days thereafter, execute or cause to be executed and deliver or cause to be delivered to Holder a certificate or certificates representing the aggregate number of full shares of 70 Common Stock issuable upon such exercise, together with cash in lieu of any fraction of a share, as hereinafter provided. The stock certificate or certificates so delivered shall be, to the extent possible, in such denomination or denominations as Holder shall request in the notice and shall be registered in the name of Holder or, subject to Section 9, such other name as shall be designated in the notice. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and Holder or any other Person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the notice, provided that the cash or check or checks and this Warrant are received by the Company as described above and all taxes required to be paid by Holder, if any, pursuant to Section 2.2 prior to the issuance of such shares have been paid. If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Stock, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased shares of Common Stock called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant, or, at the request of Holder, appropriate notation may be made on this Warrant and the same returned to Holder. Notwithstanding any provision herein to the contrary, the Company shall not be required to register shares in the name of any Person who acquired this Warrant (or part hereof) or any Warrant Stock otherwise than in accordance with this Warrant. Simultaneously with the exercise of this Warrant, payment in full of the Warrant Price may be made, at the option of the Holder, (i) by payment of the Warrant Price in cash by wire transfer or cashier's check drawn on a United States bank, (ii) by the surrender (which surrender shall be evidenced by cancellation of the number of Warrants represented by any certificate(s) evidencing the Warrants (the "Warrant Certificate") presented in connection with a Cashless Exercise) of a Warrant or Warrants (represented by one or more Warrant Certificates), and without payment of the Warrant Price in cash, for such number of shares as shall be equal to the product of (1) the number of shares for which such Warrant is exercisable with payment in cash of the Warrant Price as of the date of exercise multiplied by (2) the Cashless Exercise Ratio ------------- or (iii) by any combination of (i) and (ii). For purposes of this Agreement, the "Cashless Exercise Ratio" shall equal a fraction, the numerator of which is the excess of the Current Market Price per share of the Common Stock on the date of exercise over the Warrant Price per share as of the date of exercise and the denominator of which is the Current Market Price per share of the Common Stock on the date of exercise. An exercise of a Warrant in accordance with the immediately preceding sentences is herein called a "Cashless Exercise." Upon surrender of a Warrant Certificate representing more than one Warrant in connection with the Holder's option to elect a Cashless Exercise, the number of shares deliverable upon a Cashless Exercise shall be equal to the Cashless Exercise Ratio multiplied by the number of Warrants that the Holder specifies is to be exercised pursuant to a Cashless Exercise. All provisions of this Agreement shall be applicable with respect to an exercise of a Warrant Certificate pursuant to a Cashless Exercise for less than the full number of Warrants represented thereby. Payment of Taxes and Charges - ---------------------------- All shares of Common Stock issuable upon the exercise of this Warrant pursuant to the terms hereof shall be validly issued, fully paid and nonassessable, without any preemptive rights. The Company shall pay all expenses in connection with, and all taxes and other governmental charges that may be imposed with respect to, the issue or delivery thereof, unless such tax or charge is imposed by law upon Holder, in which case such taxes or charges shall be paid by Holder. The Company shall not be required, however, to pay any tax or other charge imposed in connection with any transfer involved in the issue of any certificate for shares of Common Stock issuable upon exercise of this Warrant in any name other than that of Holder, and in such case the Company shall not be required to issue or deliver any stock certificate until such tax or other charge has been paid or it has been established to the satisfaction of the Company that no such tax or other charge is due. Fractional Shares - ----------------- The Company shall not be required to issue a fractional share of Common Stock upon exercise of any Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to the same fraction of the Market Price per share of Common Stock as of the Closing Date. Continued Validity - ------------------ A holder of shares of Common Stock issued upon the exercise of this Warrant, in whole or in part (other than a holder who acquires such shares after the same have been publicly sold pursuant to a Registration Statement under the Securities Act or sold pursuant to Rule 144 thereunder), shall continue to be entitled with 71 respect to such shares to all rights to which it would have been entitled as Holder under Sections 9, 10 and 14 of this Warrant. The Company will, at the time of exercise of this Warrant, in whole or in part, upon the request of Holder, acknowledge in writing, in form reasonably satisfactory to Holder, its continuing obligation to afford Holder all such rights; provided, however, that if Holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to Holder all such rights to the extent permitted by law. Transfer, Division and Combination ---------------------------------- Transfer - -------- Subject to compliance with Section 9, transfer of this Warrant and all rights hereunder, in whole or in part, shall be registered on the books of the Company to be maintained for such purpose, upon surrender of this Warrant at the principal office of the Company referred to in Section 2.1 or the office or agency designated by the Company pursuant to Section 12, together with a written assignment of this Warrant substantially in the form of Exhibit B hereto duly executed by Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall, subject to Section 9, execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be canceled. A Warrant, if properly assigned in compliance with Section 9, may be exercised by a new Holder for the purchase of shares of Common Stock without having a new warrant issued. Division and Combination - ------------------------ Subject to Section 9, this Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office or agency of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by Holder or its agent or attorney. Subject to compliance with Section 3.1 and with Section 9, as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. Expenses - -------- The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrants or Warrants under this Section 3. Maintenance of Books - -------------------- The Company agrees to maintain, at its aforesaid office or agency, books for the registration and the registration of transfer of the Warrants. Adjustments ----------- The number of shares of Common Stock for which this Warrant is exercisable, or the price at which such shares may be purchased upon exercise of this Warrant, shall be subject to adjustment from time to time as set forth in this Section 4. The Company shall give Holder notice of any event described below which requires an adjustment pursuant to this Section 4 at the time of such event. Stock Dividends, Subdivisions and Combinations - ---------------------------------------------- If at any time the Company shall: take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, Additional Shares of Common Stock; subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock; or combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock; then (i) the number of shares of Common Stock for which this Warrant is exercisable immediately after the occurrence of any such event shall be adjusted to equal the number of shares of Common Stock which a record holder of the same number of shares of Common Stock for which this Warrant is exercisable immediately prior to the occurrence of such event would own or be entitled to receive after the happening of such event, and (ii) the Current Warrant Price shall be adjusted to equal (A) the Current Warrant Price multiplied by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of shares for which this Warrant is exercisable immediately after such adjustment. 72 Certain Other Distributions - --------------------------- If at any time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive any dividend or other distribution of: cash; any evidences of its indebtedness, any shares of its stock or any other securities or property of any nature whatsoever (other than cash, Convertible Securities or Additional Shares of Common Stock); or any warrants or other rights to subscribe for or purchase any evidences of its indebtedness, any shares of its stock or any other securities or property of any nature whatsoever (other than cash, Convertible Securities or Additional Shares of Common Stock); then Holder shall be entitled to receive such dividend or distribution as if Holder had exercised the Warrant. A reclassification of the Common Stock (other than a change in par value, or from par value to no par value or from no par value to par value) into shares of Common Stock and shares of any other class of stock shall be deemed a distribution by the Company to the holders of its Common Stock of such shares of such other class of stock within the meaning of this Section 4.2 and, if the outstanding shares of Common Stock shall be changed into a larger or smaller number of shares of Common Stock as a part of such reclassification, such change shall be deemed a subdivision or combination, as the case may be, of the outstanding shares of Common Stock within the meaning of Section 4.1. Other Provisions Applicable to Adjustments under this Section - ------------------------------------------------------------- The following provisions shall be applicable to the making of adjustments of the number of shares of Common Stock for which this Warrant is exercisable and the Current Warrant Price provided for in this Section 4: When Adjustments to be Made. The adjustments required by this Section 4 shall be made whenever and as often as any specified event requiring an adjustment shall occur. For the purpose of any adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. Fractional Interests. In computing adjustments under this Section 4, fractional interests in Common Stock shall be taken into account to the nearest 1/10th of a share. When Adjustment not Required. If the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall, thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. Challenge to Good Faith Determination. Whenever the Board of Directors of the Company shall be required to make a determination in good faith of the fair value of any item under this Section 4, such determination may be challenged in good faith by the Holder, and any dispute shall be resolved by an investment banking firm of recognized national standing selected by the Company and acceptable to Holder. Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets - -------------------------------------------------------------------------------- In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to the Common Stock of the Company), or sell, transfer or otherwise dispose of all or substantially all its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("Other Property"), are to be received by or distributed to the holders of Common Stock of the Company, then Holder shall have the right thereafter to receive, upon exercise of the Warrant, the number of shares of common stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, consolidation or disposition of assets by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of 73 this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined by resolution of the Board of Directors of the Company) in order to provide for adjustments of shares of Common Stock for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 4. For purposes of this Section 4.4, "common stock of the successor or acquiring corporation" shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 4.4 still similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets. Other Action Affecting Common Stock - ----------------------------------- In case at any time or from time to time the Company shall take any action in respect of its Common Stock, other than any action described in this Section 4, which would have a materially adverse effect upon the rights of Holder, the number of shares of Common Stock and/or the purchase price thereof shall be adjusted in such manner as may be equitable in the circumstances, as determined in good faith by the Board of Directors of the Company. Certain Limitations - ------------------- Notwithstanding anything herein to the contrary, the Company agrees not to enter into any transaction which, by reason of any adjustment hereunder, would cause the Current Warrant Price to be less than the par value per share of Common Stock. Notices to Holder ----------------- Notice of Adjustments - --------------------- Whenever the number of shares of Common Stock for which this Warrant is exercisable, or whenever the price at which a share of such Common Stock may be purchased upon exercise of the Warrants, shall be adjusted pursuant to Section 4, the Company shall forthwith prepare a certificate to be executed by the chief financial officer of the Company setting forth, in reasonable detail, the event requiring the adjustment and the method by which such adjustment was calculated (including a description of the basis on which the Board of Directors of the Company determined the fair value of any evidences of indebtedness, shares of stock, other securities or property or warrants or other subscription or purchase rights referred to in Section 4.2), specifying the number of shares of Common Stock for which this Warrant is exercisable and (if such adjustment was made pursuant to Section 4.4 or 4.5) describing the number and kind of any other shares of stock or Other Property for which this Warrant is exercisable, and any change in the purchase price or prices thereof, after giving effect to such adjustment or change. The Company shall promptly cause a signed copy of such certificate to be delivered to the Holder in accordance with Section 14.2. The Company shall keep at its office or agency designated pursuant to Section 12 copies of all such certificates and cause the same to be available for inspection at said office during normal business hours by the Holder or any prospective purchaser of a Warrant designated by Holder. Notice of Corporate Action - -------------------------- If at any time: the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right; or there shall be any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to, another corporation; or there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give to Holder (i) at least 30 days' prior written notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, 74 dissolution, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least 30 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause also shall specify (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, the date on which the holders of Common Stock shall be entitled to any such dividend, distribution or right, and the amount and character thereof, and (ii) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of the Company and delivered in accordance with Section 14.2. No Impairment ------------- The Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant, and (c) use its best efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. Upon the request of Holder, the Company will at any time during the period this Warrant is outstanding acknowledge in writing, in form satisfactory to Holder, the continuing validity of this Warrant and the obligations of the Company hereunder, to the extent permitted by law. Reservation and Authorization of Common Stock --------------------------------------------- From and after the Closing Date, the Company shall at all times reserve and keep available for issue upon the exercise of Warrants such number of its authorized but unissued shares of Common Stock as will be sufficient to permit the exercise in full of all outstanding Warrants. All shares of Common Stock which shall be so issuable, when issued upon exercise of any Warrant and payment therefor in accordance with the terms of such Warrant, shall be duly and validly issued and fully paid and nonassessable and not subject to preemptive rights. Before taking any action which would cause an adjustment reducing the Current Warrant Price below the then par value, if any, of the shares of Common Stock issuable upon exercise of the Warrants, the Company shall take any corporate action which may be necessary in order that the Company may validly and legally issue fully paid and nonassessable shares of such Common Stock at such adjusted Current Warrant Price. Before taking any action which would result in an adjustment in the number of shares of Common Stock for which this Warrant is exercisable or in the Current Warrant Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof. Taking of Record; Stock and Warrant Transfer Books -------------------------------------------------- In the case of all dividends or other distributions by the Company to the holders of its Common Stock with respect to which any provision of Section 4 refers to the taking of record of such holders, the Company will in each case take such a record and will take such record as of the close of business on a Business Day. The Company will not at any time, except upon dissolution, liquidation or winding up of the Company, close its stock transfer books or Warrant transfer books so as to result in preventing or delaying the exercise or transfer of any Warrant. 75 Restrictions on Transferability ------------------------------- The Warrants and the Warrant Stock shall not be transferred, hypothecated or assigned before satisfaction of the conditions specified in this Section 9, which conditions are intended to ensure compliance with the provisions of the Securities Act with respect to the Transfer of any Warrant or any Warrant Stock. Holder, by acceptance of this Warrant, agrees to be bound by the provisions of this Section 9. Restrictive Legend - ------------------ Holder, by accepting this Warrant and any Warrant Stock agrees that this Warrant and the Warrant Stock issuable upon exercise hereof may not be assigned or otherwise transferred unless and until (i) the Company has received an opinion of counsel for Holder that such securities may be sold pursuant to an exemption from registration under the Securities Act or (ii) a registration statement relating to such securities has been filed by the Company and declared effective by the Commission. Each certificate for Warrant Stock issuable hereunder shall bear a legend as follows until such securities have been sold pursuant to an effective registration statement under the Securities Act: "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND ARE BEING OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH OTHER LAWS." Except as otherwise provided in this Section 9, the Warrant shall be stamped or otherwise imprinted with a legend in substantially the following form: "THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR THE PROVISIONS OF THIS WARRANT." Notice of Proposed Transfers - ---------------------------- Prior to any Transfer or attempted Transfer of any Warrants or any shares of Restricted Common Stock, the Holder shall give ten days' prior written notice (a "Transfer Notice") to the Company of Holder's intention to effect such Transfer, describing the manner and circumstances of the proposed Transfer, and obtain from counsel to Holder who shall be reasonably satisfactory to the Company, an opinion that the proposed Transfer of such Warrants or such Restricted Common Stock may be effected without registration under the Securities Act. After receipt of the Transfer Notice and opinion, the Company shall, within five days thereof, notify the Holder as to whether such opinion is reasonably satisfactory and, if so, such holder shall thereupon be entitled to Transfer such Warrants or such Restricted Common Stock, in accordance with the terms of the Transfer Notice. Each certificate, if any, evidencing such shares of Restricted Common Stock issued upon such Transfer shall bear the restrictive legend set forth in Section 9.1(a), and the Warrant issued upon such Transfer shall bear the restrictive legend set forth in Section 9.1(b), unless in the opinion of such counsel such legend is not required in order to ensure compliance with the Securities Act. Holder shall not be entitled to Transfer such Warrants or such Restricted Common Stock until receipt of notice from the Company under this Section 9.2(a) that such opinion is reasonably satisfactory. Required Registration - --------------------- Pursuant to the terms and conditions set forth in Registration Rights Agreement, the Company shall prepare and file with the Commission not later than April 1, 2000, a Registration Statement relating to the offer and sale of the Common Stock issuable upon exercise of the Warrants and shall use its best efforts to cause the 76 Commission to declare such Registration Statement effective under the Securities Act as promptly as practicable but no later than June 1, 2000. Termination of Restrictions - --------------------------- Notwithstanding the foregoing provisions of Section 9, the restrictions imposed by this Section upon the transferability of the Warrants, the Warrant Stock and the Restricted Common Stock (or Common Stock issuable upon the exercise of the Warrants) and the legend requirements of Section 9.1 shall terminate as to any particular Warrant or share of Warrant Stock or Restricted Common Stock (or Common Stock issuable upon the exercise of the Warrants) (i) when and so long as such security shall have been effectively registered under the Securities Act and disposed of pursuant thereto or (ii) when the Company shall have received an opinion of counsel reasonably satisfactory to it that such shares may be transferred without registration thereof under the Securities Act. Whenever the restrictions imposed by Section 9 shall terminate as to this Warrant, as hereinabove provided, the Holder hereof shall be entitled to receive from the Company upon written request of the Holder, at the expense of the Company, a new Warrant bearing the following legend in place of the restrictive legend set forth hereon: "THE RESTRICTIONS ON TRANSFERABILITY OF THE WITHIN WARRANT CONTAINED IN SECTION 9 HEREOF TERMINATED ON __________, _____, AND ARE OF NO FURTHER FORCE AND EFFECT." All Warrants issued upon registration of transfer, division or combination of, or in substitution for, any Warrant or Warrants entitled to bear such legend shall have a similar legend endorsed thereon. Whenever the restrictions imposed by this Section shall terminate as to any share of Restricted Common Stock, as hereinabove provided, the holder thereof shall be entitled to receive from the Company, at the Company's expense, a new certificate representing such Common Stock not bearing the restrictive legend set forth in Section 9.1(a). Listing on Securities Exchange - ------------------------------ If the Company shall list any shares of Common Stock on any securities exchange or quotation system, it will, at its expense, list thereon, maintain and, when necessary, increase such listing of, all shares of Common Stock issued or, to the extent permissible under the applicable securities exchange rules, issuable upon the exercise of this Warrant so long as any shares of Common Stock shall be so listed during any such Exercise Period. Supplying Information --------------------- The Company shall cooperate with Holder in supplying such information as may be reasonably necessary for Holder to complete and file any information reporting forms presently or hereafter required by the Commission as a condition to the availability of an exemption from the Securities Act for the sale of any Warrant or Restricted Common Stock. Loss or Mutilation ------------------ Upon receipt by the Company from Holder of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of this Warrant and indemnity reasonably satisfactory to it (it being understood that the written agreement of the Holder shall be sufficient indemnity), and in case of mutilation upon surrender and cancellation hereof, the Company will execute and deliver in lieu hereof a new Warrant of like tenor to Holder; provided, in the case of mutilation no indemnity shall be required if this Warrant in identifiable form is surrendered to the Company for cancellation. Office of the Company --------------------- As long as any of the Warrants remain outstanding, the Company shall maintain an office or agency (which may be the principal executive offices of the Company) where the Warrants may be presented for exercise, registration of transfer, division or combination as provided in this Warrant. Limitation of Liability ----------------------- No provision hereof, in the absence of affirmative action by Holder to purchase shares of Common Stock, and no enumeration herein of the rights or privileges of Holder hereof, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 77 Miscellaneous ------------- Nonwaiver and Expenses - ---------------------- No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder's rights, powers or remedies. If the Company fails to make, when due, any payments provided for hereunder, or fails to comply with any other provision of this Warrant, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, without limitation, reasonable attorneys' fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder. Notice Generally - ---------------- Except as may be otherwise provided herein, any notice or other communication or delivery required or permitted hereunder shall be in writing and shall be delivered personally or sent by certified mail, postage prepaid, or by a nationally recognized overnight courier service, and shall be deemed given when so delivered personally or by overnight courier service, or, if mailed, three days after the date of deposit in the United States mails, as follows: if to the Company, to: American TeleSource International, Inc. 12500 Network Boulevard, Suite 407 San Antonio, Texas 78249 (210) 558-6090 (210) 558-6095 (Fax) Attention: H. Douglas Saathoff with a copy to: Alice L. King, Esq. Corporate Counsel American TeleSource International, Inc. 12500 Network Boulevard, Suite 407 San Antonio, Texas 78249 (210) 558-6090 (210) 558-6095 (Fax) if to the Holder, to: The Shaar Fund Ltd., c/o Levinson Capital Management 2 World Trade Center, Suite 1820 New York, NY 10048 Attention: Samuel Levinson (212) 432-7771 (212) 432-7771 (Fax) with a copy to: Cadwalader, Wickersham & Taft 100 Maiden Lane New York, NY 10038 Attention: Dennis J. Block, Esq. (212) 504-5555 (212) 504-5557 (Fax) The Company or the Holder may change the foregoing address by notice given pursuant to this Section 14.2. 78 Indemnification - --------------- The Company agrees to indemnify and hold harmless Holder from and against any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses and disbursements of any kind (collectively, "Losses") which may be imposed upon, incurred by or asserted against Holder in any manner relating to or arising out of any failure by the Company to perform or observe in any material respect any of its covenants, agreements, undertakings or obligations set forth in this Warrant; provided, however, that the Company shall not be liable under this Section 14.3 to the extent that any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses or disbursements are found in a final nonappealable judgment by a court to have resulted from Holder's gross negligence, bad faith or willful misconduct in its capacity as a stockholder or warrantholder of the Company; and provided, further, that the Company shall not be liable under this Section 14.3 to the extent that it has provided indemnity to Holder with respect to any Losses pursuant to the Registration Rights Agreement. Remedies - -------- Holder in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under Section 9 of this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of Section 9 of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. Successors and Assigns - ---------------------- Subject to the provisions of Sections 3.1 and 9, this Warrant and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and, with respect to Section 9 hereof, holders of Warrant Stock, and shall be enforceable by any such Holder or holder of Warrant Stock. Amendment - --------- This Warrant and all other Warrants may be modified or amended or the provisions hereof waived with the written consent of the Company and Holder. Severability - ------------ Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall only be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Warrant. Headings - -------- The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. Governing Law - ------------- This Warrant shall be governed by the laws of the State of New York, without regard to the provisions thereof relating to conflicts of law. [NO FURTHER TEXT ON THIS PAGE] 79 In Witness Whereof, the Company has caused this Warrant to be duly executed and its corporate seal to be impressed hereon and attested by its Secretary or an Assistant Secretary. Dated: February __, 2000 American TeleSource International, Inc. By:_____________________________________ Name: H. Douglas Saathoff Title: Chief Financial Officer Attest: By:______________________________ Name: Title: 80 EXHIBIT A SUBSCRIPTION FORM [To be executed only upon exercise of Warrant] The undersigned registered owner of this Warrant irrevocably exercises this Warrant for the purchase of __________ shares of Common Stock of American TeleSource International, Inc. and herewith makes payment therefor, all at the price and on the terms and conditions specified in this Warrant and requests that certificates for the shares of Common Stock hereby purchased (and any securities or other property issuable upon such exercise) be issued in the name of and delivered to ________________________________________________________________________________ whose address is ________________________________________________________________________________ and, if such shares of Common Stock shall not include all of the shares of Common Stock issuable as provided in this Warrant, that a new Warrant of like tenor and date for the balance of the shares of Common Stock issuable hereunder be delivered to the undersigned. ________________________________________ (Name of Registered Owner) _______________________________________ (Signature of Registered Owner) ________________________________________ (Street Address) ________________________________________ (City) (State) (Zip Code) Notice: The signature on this subscription must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatsoever. 81 EXHIBIT B ASSIGNMENT FORM For Value Received the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned under this Warrant, with respect to the number of shares of Common Stock set forth below: No. of Shares of Name and Address of Assignee Common Stock ---------------------------- ------------ and does hereby irrevocably constitute and appoint ________________________________________________________________________________ attorney-in-fact to register such transfer on the books of American TeleSource International, Inc. maintained for the purpose, with full power of substitution in the premises. Dated: ________________________ ________________________________________ (Print Name) ________________________________________ (Signature) ________________________________________ (Print Name of Witness) ________________________________________ (Witness's Signature) Notice: The signature on this assignment must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatsoever. 82 EX-4.8 5 COMMON STOCK PURCHASE WARRANT Exhibit 4.8 THIS COMMON STOCK PURCHASE WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR THE PROVISIONS OF THIS COMMON STOCK PURCHASE WARRANT. Number of Shares of Common Stock: 50,000 Warrant No. 1 COMMON STOCK PURCHASE WARRANT To Purchase Common Stock of American TeleSource International, Inc. This Is To Certify That Corporate Capital Management LLC, or registered assigns, is entitled, at any time from the Closing Date (as hereinafter defined) to the Expiration Date (as hereinafter defined), to purchase from American TeleSource International, Inc., a Delaware corporation (the "Company"), 50,000 shares of Common Stock (as hereinafter defined and subject to adjustment as provided herein), in whole or in part, including fractional parts, at a purchase price set forth herein, all on the terms and conditions and pursuant to the provisions hereinafter set forth. Definitions ----------- As used in this Common Stock Purchase Warrant (this "Warrant"), the following terms have the respective meanings set forth below: "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Company after the Closing Date, other than Warrant Stock. "Book Value" shall mean, in respect of any share of Common Stock on any date herein specified, the consolidated book value of the Company as of the last day of any month immediately preceding such date, divided by the number of Fully Diluted Outstanding shares of Common Stock as determined in accordance with GAAP (assuming the payment of the exercise prices for such shares) by Arthur Andersen LLP or any other firm of independent certified public accountants of recognized national standing selected by the Company and reasonably acceptable to the Holder. "Business Day" shall mean any day that is not a Saturday or Sunday or a day on which banks are required or permitted to be closed in the State of New York. "Closing Date" shall mean July 1, 1999. "Commission" shall mean the Securities and Exchange Commission or any other federal agency then administering the Securities Act and other federal securities laws. "Common Stock" shall mean (except where the context otherwise indicates) the Common Stock, par value $0.001 per share, of the Company as constituted on the Closing Date, and any capital stock into which such Common Stock may thereafter be changed, and shall also include (i) capital stock of the Company of any other class (regardless of how denominated) issued to the holders of shares of Common Stock upon any reclassification thereof which is also not preferred as to dividends or assets over any other class of stock of the Company and which 83 is not subject to redemption and (ii) shares of common stock of any successor or acquiring corporation received by or distributed to the holders of Common Stock of the Company in the circumstances contemplated by Section 4.3. "Convertible Securities" shall mean evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable, with or without payment of additional consideration in cash or property, for shares of Common Stock, either immediately or upon the occurrence of a specified date or a specified event. "Current Market Price" shall mean, as of any date of determination, the average of the closing bid prices of the Common Shares as reported on the OTCBB for the five Trading Days immediately preceding such date of determination; provided that, if such security is not listed or admitted to trading on the OTCBB, the closing prices as reported on the principal national security exchange or quotation system on which such security is quoted or listed or admitted to trading (closing bid prices in the case of a quotation system), or if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the closing bid prices of such security on the over-the-counter market as reported by Bloomberg LP, or a similar generally accepted reporting service, as the case may be, for the five Trading Days immediately preceding such date of determination. "Current Warrant Price" shall mean, in respect of a share of Common Stock at any date herein specified, one hundred and fifteen percent (115%) of the arithmetic mean of the lowest closing bid prices of a share of Common Stock as reported on the OTCBB on five (5) Trading Days during the period of ten (10) Trading Days immediately preceding the Closing Date, it being understood that such five (5) Trading Days need not be consecutive. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time. "Exercise Period" shall mean the period during which this Warrant is exercisable pursuant to Section 2.1. "Expiration Date" shall mean July 2, 2004. "Fully Diluted Outstanding" shall mean, when used with reference to Common Stock, at any date as of which the number of shares thereof is to be determined, all shares of Common Stock Outstanding at such date and all shares of Common Stock issuable in respect of this Warrant, outstanding on such date, and other options or warrants to purchase, or securities convertible into, shares of Common Stock outstanding on such date which would be deemed outstanding in accordance with GAAP for purposes of determining Book Value or net income per share. "GAAP" shall mean generally accepted accounting principles in the United States of America as from time to time in effect. "Holder" shall mean the Person in whose name the Warrant or Warrant Stock set forth herein is registered on the books of the Company maintained for such purpose. "Market Price" per Common Share means the average of the closing bid prices of the Common Shares as reported on the OTC Bulletin Board service of the National Association of Securities Dealers, Inc. for the five trading days immediately preceding the Closing Date. "OTCBB" shall mean the OTC Bulletin Board service of the National Association of Securities Dealers, Inc. "Other Property" shall have the meaning set forth in Section 4.3. "Outstanding" shall mean, when used with reference to Common Stock, at any date as of which the number of shares thereof is to be determined, all issued shares of Common Stock, except shares then owned or 84 held by or for the account of the Company or any subsidiary thereof, and shall include all shares issuable in respect of outstanding scrip or any certificates representing fractional interests in shares of Common Stock. "Person" shall mean any individual, sole proprietorship, partnership, joint venture, trust, incorporated organization, association, corporation, institution, public benefit corporation, entity or government (whether federal, state, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof). "Restricted Common Stock" shall mean shares of Common Stock which are, or which upon their issuance on their exercise of this Warrant would be, evidenced by a certificate bearing the restrictive legend set forth in Section 9.1(a). "Securities Act" shall mean the Securities Act of 1933, as amended, or any successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Transfer" shall mean any disposition of any Warrant or Warrant Stock or of any interest in either thereof, which would constitute a sale thereof within the meaning of the Securities Act. "Transfer Notice" shall have the meaning set forth in Section 9.2. "Warrant Price" shall mean an amount equal to (i) the number of shares of Common Stock being purchased upon exercise of this Warrant pursuant to Section 2.1, multiplied by (ii) the Current Warrant Price as of the date of such exercise. "Warrant Stock" shall mean the shares of Common Stock purchased by the holders of the Warrants upon the exercise thereof. "Warrants" shall mean this Warrant and all warrants issued upon transfer, division or combination of, or in substitution for, any thereof. All Warrants shall at all times be identical as to terms and conditions and date, except as to the number of shares of Common Stock for which they may be exercised. Exercise of Warrant ------------------- Manner of Exercise - ------------------ From and after the Closing Date and until 5:00 p.m., New York time, on the Expiration Date, Holder may exercise this Warrant, on any Business Day, for all or any part of the number of shares of Common Stock purchasable hereunder. In order to exercise this Warrant, in whole or in part, Holder shall deliver to the Company at its principal office at 12500 Network Boulevard, Suite 407, San Antonio, Texas 78249, or at the office or agency designated by the Company pursuant to Section 12, (i) a written notice of Holder's election to exercise this Warrant, which notice shall specify the number of shares of Common Stock to be purchased, (ii) to the extent such exercise is not being effected through a Cashless Exercise, payment of the Warrant Price in cash or wire transfer or cashier's check drawn on a United States bank and (iii) this Warrant. Such notice shall be substantially in the form of the subscription form appearing at the end of this Warrant as Exhibit A, duly executed by Holder or its agent or attorney. Upon receipt of the items referred to in clauses (i), (ii) and (iii) above, the Company shall, as promptly as practicable, and in any event within five Business Days thereafter, execute or cause to be executed and deliver or cause to be delivered to Holder a certificate or certificates representing the aggregate number of full shares of Common Stock issuable upon such exercise, together with cash in lieu of any fraction of a share, as hereinafter provided. The stock certificate or certificates so delivered shall be, to the extent possible, in such denomination or denominations as Holder shall request in the notice and shall be registered in the name of Holder or, subject to Section 9, such other name as shall be designated in the notice. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and Holder or any other Person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as 85 of the date the notice, provided that the cash or check or checks and this Warrant are received by the Company as described above and all taxes required to be paid by Holder, if any, pursuant to Section 2.2 prior to the issuance of such shares have been paid. If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Stock, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased shares of Common Stock called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant, or, at the request of Holder, appropriate notation may be made on this Warrant and the same returned to Holder. Notwithstanding any provision herein to the contrary, the Company shall not be required to register shares in the name of any Person who acquired this Warrant (or part hereof) or any Warrant Stock otherwise than in accordance with this Warrant. Simultaneously with the exercise of this Warrant, payment in full of the Warrant Price may be made by payment of the Warrant Price in cash by wire transfer or cashier's check drawn on a United States bank Payment of Taxes and Charges - ---------------------------- All shares of Common Stock issuable upon the exercise of this Warrant pursuant to the terms hereof shall be validly issued, fully paid and nonassessable, without any preemptive rights. The Company shall pay all expenses in connection with, and all taxes and other governmental charges that may be imposed with respect to, the issue or delivery thereof, unless such tax or charge is imposed by law upon Holder, in which case such taxes or charges shall be paid by Holder. The Company shall not be required, however, to pay any tax or other charge imposed in connection with any transfer involved in the issue of any certificate for shares of Common Stock issuable upon exercise of this Warrant in any name other than that of Holder, and in such case the Company shall not be required to issue or deliver any stock certificate until such tax or other charge has been paid or it has been established to the satisfaction of the Company that no such tax or other charge is due. Fractional Shares - ----------------- The Company shall not be required to issue a fractional share of Common Stock upon exercise of any Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to the same fraction of the Market Price per share of Common Stock as of the Closing Date. Continued Validity - ------------------ A holder of shares of Common Stock issued upon the exercise of this Warrant, in whole or in part (other than a holder who acquires such shares after the same have been publicly sold pursuant to a Registration Statement under the Securities Act or sold pursuant to Rule 144 thereunder), shall continue to be entitled with respect to such shares to all rights to which it would have been entitled as Holder under Sections 9, 10 and 14 of this Warrant. The Company will, at the time of exercise of this Warrant, in whole or in part, upon the request of Holder, acknowledge in writing, in form reasonably satisfactory to Holder, its continuing obligation to afford Holder all such rights; provided, however, that if Holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to Holder all such rights to the extent permitted by law. Transfer, Division and Combination ---------------------------------- Transfer - -------- Subject to compliance with Section 9, transfer of this Warrant and all rights hereunder, in whole or in part, shall be registered on the books of the Company to be maintained for such purpose, upon surrender of this Warrant at the principal office of the Company referred to in Section 2.1 or the office or agency designated by the Company pursuant to Section 12, together with a written assignment of this Warrant substantially in the form of Exhibit B hereto duly executed by Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall, subject to Section 9, execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be canceled. A Warrant, if properly assigned in compliance with Section 9, may be exercised by a new Holder for the purchase of shares of Common Stock without having a new warrant issued. 86 Division and Combination - ------------------------ Subject to Section 9, this Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office or agency of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by Holder or its agent or attorney. Subject to compliance with Section 3.1 and with Section 9, as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. Expenses - -------- The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrants or Warrants under this Section 3. Maintenance of Books - -------------------- The Company agrees to maintain, at its aforesaid office or agency, books for the registration and the registration of transfer of the Warrants. Adjustments ----------- The number of shares of Common Stock for which this Warrant is exercisable, or the price at which such shares may be purchased upon exercise of this Warrant, shall be subject to adjustment from time to time as set forth in this Section 4. The Company shall give Holder notice of any event described below which requires an adjustment pursuant to this Section 4 at the time of such event. Stock Dividends, Subdivisions and Combinations - ---------------------------------------------- If at any time the Company shall: take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, Additional Shares of Common Stock; subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock; or combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock; then (i) the number of shares of Common Stock for which this Warrant is exercisable immediately after the occurrence of any such event shall be adjusted to equal the number of shares of Common Stock which a record holder of the same number of shares of Common Stock for which this Warrant is exercisable immediately prior to the occurrence of such event would own or be entitled to receive after the happening of such event, and (ii) the Current Warrant Price shall be adjusted to equal (A) the Current Warrant Price multiplied by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of shares for which this Warrant is exercisable immediately after such adjustment. Other Provisions Applicable to Adjustments under this Section - ------------------------------------------------------------- The following provisions shall be applicable to the making of adjustments of the number of shares of Common Stock for which this Warrant is exercisable and the Current Warrant Price provided for in this Section 4: When Adjustments to be Made. The adjustments required by this Section 4 shall be made whenever and as often as any specified event requiring an adjustment shall occur. For the purpose of any adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. Fractional Interests. In computing adjustments under this Section 4, fractional interests in Common Stock shall be taken into account to the nearest 1/10th of a share. When Adjustment not Required. If the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall, thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. Challenge to Good Faith Determination. Whenever the Board of Directors of the Company shall be required to make a determination in good faith of the fair value of any item under this Section 4, such determination may 87 be challenged in good faith by the Holder, and any dispute shall be resolved by an investment banking firm of recognized national standing selected by the Company and acceptable to Holder. Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets - -------------------------------------------------------------------------------- In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to the Common Stock of the Company), or sell, transfer or otherwise dispose of all or substantially all its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("Other Property"), are to be received by or distributed to the holders of Common Stock of the Company, then Holder shall have the right thereafter to receive, upon exercise of the Warrant, the number of shares of common stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, consolidation or disposition of assets by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined by resolution of the Board of Directors of the Company) in order to provide for adjustments of shares of Common Stock for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 4. For purposes of this Section 4.3, "common stock of the successor or acquiring corporation" shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 4.3 still similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets. Other Action Affecting Common Stock - ----------------------------------- In case at any time or from time to time the Company shall take any action in respect of its Common Stock, other than any action described in this Section 4, which would have a materially adverse effect upon the rights of Holder, the number of shares of Common Stock and/or the purchase price thereof shall be adjusted in such manner as may be equitable in the circumstances, as determined in good faith by the Board of Directors of the Company. Certain Limitations - ------------------- Notwithstanding anything herein to the contrary, the Company agrees not to enter into any transaction which, by reason of any adjustment hereunder, would cause the Current Warrant Price to be less than the par value per share of Common Stock. Notices to Holder ----------------- Notice of Adjustments - --------------------- Whenever the number of shares of Common Stock for which this Warrant is exercisable, or whenever the price at which a share of such Common Stock may be purchased upon exercise of the Warrants, shall be adjusted pursuant to Section 4, the Company shall forthwith prepare a certificate to be executed by the chief financial officer of the Company setting forth, in reasonable detail, the event requiring the adjustment and the method by which such adjustment was calculated, specifying the number of shares of Common Stock for which this Warrant is exercisable and (if such adjustment was made pursuant to Section 4.3 or 4.4) describing the number and kind of any other shares of stock or Other Property for which this Warrant is exercisable, and any change in the purchase price or prices thereof, after giving effect to such adjustment or change. The Company shall promptly cause a signed copy of such certificate to be delivered to the Holder in accordance with Section 14.2. The Company shall keep at its office or agency designated pursuant to Section 12 copies of all such certificates and cause the same 88 to be available for inspection at said office during normal business hours by the Holder or any prospective purchaser of a Warrant designated by Holder. Notice of Corporate Action - -------------------------- If at any time: the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right; or there shall be any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to, another corporation; or there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give to Holder (i) at least 30 days' prior written notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least 30 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause also shall specify (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, the date on which the holders of Common Stock shall be entitled to any such dividend, distribution or right, and the amount and character thereof, and (ii) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of the Company and delivered in accordance with Section 14.2. No Impairment ------------- The Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant, and (c) use its best efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. Upon the request of Holder, the Company will at any time during the period this Warrant is outstanding acknowledge in writing, in form satisfactory to Holder, the continuing validity of this Warrant and the obligations of the Company hereunder, to the extent permitted by law. Reservation and Authorization of Common Stock --------------------------------------------- From and after the Closing Date, the Company shall at all times reserve and keep available for issue upon the exercise of Warrants such number of its authorized but unissued shares of Common Stock as will be sufficient to permit the exercise in full of all outstanding Warrants. All shares of Common Stock which shall be so issuable, when issued upon exercise of any Warrant and payment therefor in accordance with the terms of such Warrant, shall be duly and validly issued and fully paid and nonassessable and not subject to preemptive rights. 89 Before taking any action which would cause an adjustment reducing the Current Warrant Price below the then par value, if any, of the shares of Common Stock issuable upon exercise of the Warrants, the Company shall take any corporate action which may be necessary in order that the Company may validly and legally issue fully paid and nonassessable shares of such Common Stock at such adjusted Current Warrant Price. Before taking any action which would result in an adjustment in the number of shares of Common Stock for which this Warrant is exercisable or in the Current Warrant Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof. Taking of Record; Stock and Warrant Transfer Books -------------------------------------------------- In the case of all dividends or other distributions by the Company to the holders of its Common Stock with respect to which any provision of Section 4 refers to the taking of record of such holders, the Company will in each case take such a record and will take such record as of the close of business on a Business Day. The Company will not at any time, except upon dissolution, liquidation or winding up of the Company, close its stock transfer books or Warrant transfer books so as to result in preventing or delaying the exercise or transfer of any Warrant. Restrictions on Transferability ------------------------------- The Warrants and the Warrant Stock shall not be transferred, hypothecated or assigned before satisfaction of the conditions specified in this Section 9, which conditions are intended to ensure compliance with the provisions of the Securities Act with respect to the Transfer of any Warrant or any Warrant Stock. Holder, by acceptance of this Warrant, agrees to be bound by the provisions of this Section 9. Restrictive Legend - ------------------ Holder, by accepting this Warrant and any Warrant Stock agrees that this Warrant and the Warrant Stock issuable upon exercise hereof may not be assigned or otherwise transferred unless and until (i) the Company has received an opinion of counsel for Holder that such securities may be sold pursuant to an exemption from registration under the Securities Act or (ii) a registration statement relating to such securities has been filed by the Company and declared effective by the Commission. Each certificate for Warrant Stock issuable hereunder shall bear a legend as follows until such securities have been sold pursuant to an effective registration statement under the Securities Act: "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND ARE BEING OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH OTHER LAWS." Except as otherwise provided in this Section 9, the Warrant shall be stamped or otherwise imprinted with a legend in substantially the following form: "THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR THE PROVISIONS OF THIS WARRANT." Notice of Proposed Transfers - ---------------------------- Prior to any Transfer or attempted Transfer of any Warrants or any shares of Restricted Common Stock, the Holder shall give ten days' prior written notice (a "Transfer Notice") to the Company of Holder's 90 intention to effect such Transfer, describing the manner and circumstances of the proposed Transfer, and obtain from counsel to Holder who shall be reasonably satisfactory to the Company, an opinion that the proposed Transfer of such Warrants or such Restricted Common Stock may be effected without registration under the Securities Act. After receipt of the Transfer Notice and opinion, the Company shall, within five days thereof, notify the Holder as to whether such opinion is reasonably satisfactory and, if so, such holder shall thereupon be entitled to Transfer such Warrants or such Restricted Common Stock, in accordance with the terms of the Transfer Notice. Each certificate, if any, evidencing such shares of Restricted Common Stock issued upon such Transfer shall bear the restrictive legend set forth in Section 9.1(a), and the Warrant issued upon such Transfer shall bear the restrictive legend set forth in Section 9.1(b), unless in the opinion of such counsel such legend is not required in order to ensure compliance with the Securities Act. Holder shall not be entitled to Transfer such Warrants or such Restricted Common Stock until receipt of notice from the Company under this Section 9.2(a) that such opinion is reasonably satisfactory. 9.4 Termination of Restrictions ------------------------------- Notwithstanding the foregoing provisions of Section 9, the restrictions imposed by this Section upon the transferability of the Warrants, the Warrant Stock and the Restricted Common Stock (or Common Stock issuable upon the exercise of the Warrants) and the legend requirements of Section 9.1 shall terminate as to any particular Warrant or share of Warrant Stock or Restricted Common Stock (or Common Stock issuable upon the exercise of the Warrants) (i) when and so long as such security shall have been effectively registered under the Securities Act and disposed of pursuant thereto or (ii) when the Company shall have received an opinion of counsel reasonably satisfactory to it that such shares may be transferred without registration thereof under the Securities Act. Whenever the restrictions imposed by Section 9 shall terminate as to this Warrant, as hereinabove provided, the Holder hereof shall be entitled to receive from the Company upon written request of the Holder, at the expense of the Company, a new Warrant bearing the following legend in place of the restrictive legend set forth hereon: "THE RESTRICTIONS ON TRANSFERABILITY OF THE WITHIN WARRANT CONTAINED IN SECTION 9 HEREOF TERMINATED ON __________, _____, AND ARE OF NO FURTHER FORCE AND EFFECT." All Warrants issued upon registration of transfer, division or combination of, or in substitution for, any Warrant or Warrants entitled to bear such legend shall have a similar legend endorsed thereon. Whenever the restrictions imposed by this Section shall terminate as to any share of Restricted Common Stock, as hereinabove provided, the holder thereof shall be entitled to receive from the Company, at the Company's expense, a new certificate representing such Common Stock not bearing the restrictive legend set forth in Section 9.1(a). Listing on Securities Exchange - ------------------------------ If the Company shall list any shares of Common Stock on any securities exchange or quotation system, it will, at its expense, list thereon, maintain and, when necessary, increase such listing of, all shares of Common Stock issued or, to the extent permissible under the applicable securities exchange rules, issuable upon the exercise of this Warrant so long as any shares of Common Stock shall be so listed during any such Exercise Period. Supplying Information --------------------- The Company shall cooperate with Holder in supplying such information as may be reasonably necessary for Holder to complete and file any information reporting forms presently or hereafter required by the Commission as a condition to the availability of an exemption from the Securities Act for the sale of any Warrant or Restricted Common Stock. Loss or Mutilation ------------------ Upon receipt by the Company from Holder of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of this Warrant and indemnity reasonably satisfactory to it (it being understood that the written agreement of the Holder shall be sufficient indemnity), and in case of mutilation upon surrender and cancellation hereof, the Company will execute and deliver in lieu hereof a new Warrant of like tenor to Holder; provided, in the case of mutilation no indemnity shall be required if this Warrant in identifiable form is surrendered to the Company for cancellation. 91 Office of the Company --------------------- As long as any of the Warrants remain outstanding, the Company shall maintain an office or agency (which may be the principal executive offices of the Company) where the Warrants may be presented for exercise, registration of transfer, division or combination as provided in this Warrant. Limitation of Liability ----------------------- No provision hereof, in the absence of affirmative action by Holder to purchase shares of Common Stock, and no enumeration herein of the rights or privileges of Holder hereof, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. Miscellaneous ------------- Nonwaiver and Expenses - ---------------------- No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder's rights, powers or remedies. If the Company fails to make, when due, any payments provided for hereunder, or fails to comply with any other provision of this Warrant, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, without limitation, reasonable attorneys' fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder. Notice Generally - ---------------- Except as may be otherwise provided herein, any notice or other communication or delivery required or permitted hereunder shall be in writing and shall be delivered personally or sent by certified mail, postage prepaid, or by a nationally recognized overnight courier service, and shall be deemed given when so delivered personally or by overnight courier service, or, if mailed, three days after the date of deposit in the United States mails, as follows: if to the Company, to: American TeleSource International, Inc. 12500 Network Boulevard, Suite 407 San Antonio, Texas 78249 (210) 558-6090 (210) 558-6095 (Fax) Attention: H. Douglas Saathoff with a copy to: Alice L. King, Esq. Corporate Counsel American TeleSource International, Inc. 12500 Network Boulevard, Suite 407 San Antonio, Texas 78249 (210) 558-6090 (210) 558-6095 (Fax) if to the Holder, to: Corporate Capital Management LLC 2000 South Plymouth Road, Suite 200 Minnetonka, Minnesota 55305 (612)545-7677 92 (612)512-9958 The Company or the Holder may change the foregoing address by notice given pursuant to this Section 14.2. Indemnification - --------------- The Company agrees to indemnify and hold harmless Holder from and against any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses and disbursements of any kind (collectively, "Losses") which may be imposed upon, incurred by or asserted against Holder in any manner relating to or arising out of any failure by the Company to perform or observe in any material respect any of its covenants, agreements, undertakings or obligations set forth in this Warrant; provided, however, that the Company shall not be liable under this Section 14.3 to the extent that any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses or disbursements are found in a final nonappealable judgment by a court to have resulted from Holder's gross negligence, bad faith or willful misconduct in its capacity as a stockholder or warrantholder of the Company. Remedies Holder in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under Section 9 of this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of Section 9 of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. Successors and Assigns - ---------------------- Subject to the provisions of Sections 3.1 and 9, this Warrant and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and, with respect to Section 9 hereof, holders of Warrant Stock, and shall be enforceable by any such Holder or holder of Warrant Stock. Amendment - --------- This Warrant and all other Warrants may be modified or amended or the provisions hereof waived with the written consent of the Company and Holder. Severability - ------------ Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall only be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Warrant. Headings - -------- The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. Governing Law - ------------- This Warrant shall be governed by the laws of the State of New York, without regard to the provisions thereof relating to conflicts of law. 93 In Witness Whereof, the Company has caused this Warrant to be duly executed and its corporate seal to be impressed hereon and attested by its Secretary or an Assistant Secretary. Dated: July 2, 1999 American TeleSource International, Inc. By:_______________________________________ Name: Title: Attest: By:______________________________ Name: Title: 94 EXHIBIT A SUBSCRIPTION FORM [To be executed only upon exercise of Warrant] The undersigned registered owner of this Warrant irrevocably exercises this Warrant for the purchase of __________ shares of Common Stock of American TeleSource International, Inc. and herewith makes payment therefor, all at the price and on the terms and conditions specified in this Warrant and requests that certificates for the shares of Common Stock hereby purchased (and any securities or other property issuable upon such exercise) be issued in the name of and delivered to - -------------------------------------------------------------------------------- whose address is - -------------------------------------------------------------------------------- and, if such shares of Common Stock shall not include all of the shares of Common Stock issuable as provided in this Warrant, that a new Warrant of like tenor and date for the balance of the shares of Common Stock issuable hereunder be delivered to the undersigned. _______________________________________ (Name of Registered Owner) _______________________________________ (Signature of Registered Owner) _______________________________________ (Street Address) _______________________________________ (City) (State) (Zip Code) Notice: The signature on this subscription must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatsoever. 95 EXHIBIT B ASSIGNMENT FORM For Value Received the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned under this Warrant, with respect to the number of shares of Common Stock set forth below: No. of Shares of Name and Address of Assignee Common Stock - ---------------------------- ------------ and does hereby irrevocably constitute and appoint - -------------------------------------------------------------------------------- attorney-in-fact to register such transfer on the books of American TeleSource International, Inc. maintained for the purpose, with full power of substitution in the premises. Dated:__________________________ ___________________________________________ (Print Name) ___________________________________________ (Signature) ___________________________________________ (Print Name of Witness) ___________________________________________ (Witness's Signature) Notice: The signature on this assignment must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatsoever. 96 EX-4.9 6 REGISTRATION RIGHTS AGREEMENT Exhibit 4.9 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement, dated as of February 22, 2000 (this "Agreement"), between American TeleSource International, Inc., a Delaware corporation, with principal executive offices located at 12500 Network Boulevard, Suite 407, San Antonio 78249 (the "Company"), and The Shaar Fund Ltd. (the "Initial Investor"). Whereas, upon the terms and subject to the conditions of the Securities Purchase Agreement dated as of February 22, 2000, between the Initial Investor and the Company (the "Securities Purchase Agreement"), the Company has agreed to issue and sell to the Initial Investor (i) 3,000 shares of its Series D 6% Convertible Preferred Stock, par value $0.001 per share (the "Preferred Shares"), which, upon the terms and subject to the conditions of the Company's Certificate of Designation of Series D 6% Convertible Preferred Stock (the "Certificate of Designation"), are convertible into shares of the Company's common stock, par value $0.001 per share (the "Common Stock") and (ii) Common Stock Purchase Warrants (the "Initial Warrants") to purchase 150,000 shares of Common Stock; Whereas, upon the terms and subject to the conditions of the Certificate of Designation, the Preferred Shares may be redeemed by the Company at a redemption price which includes, but is not limited to, the issuance of its Common Stock Purchase Warrants having the same terms and conditions as the Initial Warrants and exercisable to purchase an additional 150,000 shares of Common Stock (the "Redemption Warrants" and, together with the Initial Warrants, the "Warrants"); and Whereas, to induce the Initial Investor to execute and deliver the Securities Purchase Agreement, the Company has agreed to provide with respect to the Common Stock issued or issuable in lieu of cash dividend payments on the Preferred Shares, upon conversion of the Preferred Shares and upon exercise of the Warrants certain registration rights under the Securities Act; Now, Therefore, in consideration of the premises and the mutual covenants contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Definitions (a) As used in this Agreement, the following terms shall have the meanings: (i) "Affiliate," of any specified Person means any other Person who directly, or indirectly through one or more intermediaries, is in control of, is controlled by, or is under common control with, such specified Person. For purposes of this definition, control of a Person means the power, directly or indirectly, to direct or cause the direction of the management and policies of such Person whether by contract, securities, ownership or otherwise; and the terms "controlling" and "controlled" have the respective meanings correlative to the foregoing. (ii) "Commission" means the Securities and Exchange Commission. (iii) "Current Market Price" on any date of determination means the closing price of a share of the Common Stock on such day as reported on The American Stock Exchange (the "Amex") or, if such security is not listed on the Amex, on the principal national security exchange or quotation system on which such security is quoted or listed or admitted to trading, or, if not quoted or listed 97 or admitted to trading on any national securities exchange or quotation system, the closing bid price of such security on the over-the-counter market on the day in question as reported by Bloomberg LP, or a similar generally accepted reporting service, as the case may be. (iv) "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder, or any similar successor statute. (v) "Investors" means the Initial Investor and any transferee or assignee of Registrable Securities who agrees to become bound by all of the terms and provisions of this Agreement in accordance with Section 8 hereof. (vi) "Person" means any individual, partnership, corporation, limited liability company, joint stock company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof. (vii) "Prospectus" means the prospectus (excluding any preliminary prospectus but including, without limitation, any final prospectus filed pursuant to Rule 424(b) under the Securities Act and any prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance on Rule 430A under the Securities Act) included in the Registration Statement, as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement and by all other amendments and supplements to such prospectus, including all material incorporated by reference in such prospectus and all documents filed after the date of such prospectus by the Company under the Exchange Act and incorporated by reference therein. (viii) "Public Offering" means an offer registered with the Commission and the appropriate state securities commissions by the Company of its Common Stock and made pursuant to the Securities Act. (ix) "Registrable Securities" means the Common Stock issued or issuable (i) in lieu of cash dividend payments on the Preferred Shares, (ii) upon conversion of the Preferred Shares or (iii) upon exercise of the Warrants; provided, however, a share of Common Stock shall cease to be a Registrable Security for purposes of this Agreement when it no longer is a Restricted Security. (x) "Registration Statement" means a registration statement of the Company filed on an appropriate form under the Securities Act providing for the registration of, and the sale on a continuous or delayed basis by the holders of, all of the Registrable Securities pursuant to Rule 415 under the Securities Act, including the Prospectus contained therein and forming a part thereof, any amendments to such registration statement and supplements to such Prospectus, and all exhibits and other material incorporated by reference in such registration statement and Prospectus. (xi) "Restricted Security" means any share of Common Stock issued or issuable in lieu of cash dividend payments on the Preferred Shares, upon conversion of the Preferred Shares or upon exercise of the Warrants except any such share that (i) has been registered pursuant to an effective registration statement under the Securities Act and sold in a manner contemplated by the prospectus included in such registration statement, (ii) has been transferred in compliance with the resale provisions of Rule 144 under the Securities Act (or any successor provision thereto) or is transferable pursuant to paragraph (k) of Rule 144 under the Securities Act (or any successor provision thereto), or (iii) otherwise has been transferred and a new share of Common Stock not subject to transfer restrictions under the Securities Act has been delivered by or on behalf of the Company. (xii) "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder, or any similar successor statute. 98 (b) All capitalized terms used and not defined herein have the respective meaning assigned to them in the Securities Purchase Agreement. 2. Registration (a) Filing and Effectiveness of Registration Statement. The Company shall prepare and file with the Commission not later than April 1, 2000, a Registration Statement relating to the offer and sale of the Registrable Securities and shall use its best efforts to cause the Commission to declare such Registration Statement effective under the Securities Act as promptly as practicable but not later than June 1, 2000, assuming for purposes hereof a Conversion Price (as defined in the Certificate of Designation) of $2.50. The Company shall not include any other securities in the Registration Statement relating to the offer and sale of the Registrable Securities. The Company shall notify the Initial Investor by written notice that such Registration Statement has been declared effective by the Commission within 24 hours of such declaration by the Commission. (b) Registration Default. If the Registration Statement covering the Registrable Securities or the Additional Registrable Securities (as defined in Section 2(d) hereof) required to be filed by the Company pursuant to Section 2(a) or 2(d) hereof, as the case may be, is not (i) filed with the Commission on or before April 1, 2000 or (ii) declared effective by the Commission on or before June 1, 2000 (either of which, without duplication, an "Initial Date"), then the Company shall make the payments to the Initial Investor as provided in the next sentence as liquidated damages and not as a penalty. The amount to be paid by the Company to the Initial Investor shall be determined as of each Computation Date (as defined below), and such amount shall be equal to 2% (the "Liquidated Damage Rate") of the Purchase Price (as defined in the Securities Purchase Agreement) from the Initial Date to the first Computation Date and for each Computation Date thereafter, calculated on a pro rata basis to the date on which the Registration Statement is filed with (in the event of an Initial Date pursuant to clause (i) above) or declared effective by (in the event of an Initial Date pursuant to clause (ii) above) the Commission (the "Periodic Amount") provided, however, that in no event shall the liquidated damages be less than $25,000. The full Periodic Amount shall be paid by the Company to the Initial Investor by wire transfer of immediately available funds within three days after each Computation Date. As used in this Section 2(b), "Computation Date" means the date which is 30 days after the Initial Date and, if the Registration Statement required to be filed by the Company pursuant to Section 2(a) has not theretofore been declared effective by the Commission, each date which is 30 days after the previous Computation Date until such Registration Statement is so declared effective. Notwithstanding the above, if the Registration Statement covering the Registrable Securities or the Additional Registrable Securities required to be filed by the Company pursuant to Section 2(a) or 2(d) hereof, as the case may be, is not filed with the Commission by April 1, 2000, the Company shall be in default of this Registration Rights Agreement, and the Initial Investor shall be entitled to liquidated damages as set forth above. (c) Eligibility for Use of Form S-3. The Company agrees that at such time as it meets all the requirements for the use of Securities Act Registration Statement on Form S-3 it shall file all reports and information required to be filed by it with the Commission in a timely manner and take all such other action so as to maintain such eligibility for the use of such form. (d) Additional Registration Statement. In the event the Current Market Price declines to $3.00 per share or less, as the same may be adjusted from time to time for any subdivision or combination of shares of Common Stock after the date hereof (the date of such event, the "Decline Date"), the Company shall, to the extent required by the Securities Act (because the additional shares were not covered by the Registration Statement filed pursuant to Section 2(a)), as reasonably determined by the Initial Investor, file an additional Registration Statement with the Commission for such additional number of Registrable Securities as would be issuable upon conversion of the Preferred Shares and exercise of the Warrants (the "Additional Registrable Securities") in addition to those previously registered, assuming a Conversion Price (as defined in the Certificate of Designation) of $0.30 per share. The Company shall, to the extent required by the Securities Act, as reasonably determined by the Initial Investor, prepare and file with the Commission not later than the 30th day thereafter, a Registration Statement relating to the offer and sale of such Additional Registrable Securities and shall use its best efforts to cause the Commission to declare such Registration Statement effective under the Securities Act as promptly as practicable but 99 not later than 60 days thereafter. The Company shall not include any other securities in the Registration Statement relating to the offer and sale of such Additional Registrable Securities. If the Additional Registration Statement is not (i) filed with the Commission within 30 days after the Decline Date or (ii) declared effective by the Commission within 90 days after the Decline Date (either of which, without duplication, an "Additional Registration Date"), then the Company shall make the payments to the Initial Investor at the Liquidated Damage Rate from the Additional Registration Date to the first Additional Computation Date and for each Additional Computation Date thereafter, calculated on a pro rata basis to the date on which the Additional Registration Statement is filed with (in the event of an Additional Registration Date pursuant to clause (i) above) or declared effective by (in the event of an Additional Registration Date pursuant to clause (ii) above) the Commission (the "Additional Periodic Amount") provided, however, that in no event shall the liquidated damages be less than $25,000. The full Additional Periodic Amount shall be paid by the Company to the Initial Investor by wire transfer of immediately available funds within three days after each Additional Computation Date. As used in this Section 2(d), "Additional Computation Date" means the date which is 30 days after the Additional Registration Date and, if the Additional Registration Statement required to be filed by the Company pursuant to this Section 2(d) has not theretofore been declared effective by the Commission, each date which is 30 days after the previous Additional Computation Date until such Additional Registration Statement is so declared effective. (e) (i) If the Company proposes to register any of its warrants, Common Stock or any other shares of common stock of the Company under the Securities Act (other than a registration (A) on Form S-8 or S-4 or any successor or similar forms, (B) relating to Common Stock or any other shares of common stock of the Company issuable upon exercise of employee share options or in connection with any employee benefit or similar plan of the Company or (C) in connection with a direct or indirect acquisition by the Company of another Person or any transaction with respect to which Rule 145 (or any successor provision) under the Securities Act applies), whether or not for sale for its own account, it will each such time, give prompt written notice at least 20 days prior to the anticipated filing date of the registration statement relating to such registration to the Initial Investor, which notice shall set forth such Initial Investor's rights under this Section 3(e) and shall offer the Initial Investor the opportunity to include in such registration statement such number of Registrable Securities as the Initial Investor may request. Upon the written request of an Initial Investor made within 10 days after the receipt of notice from the Company (which request shall specify the number of Registrable Securities intended to be disposed of by such Initial Investor), the Company will use its best efforts to effect the registration under the Securities Act of all Registrable Securities that the Company has been so requested to register by the Initial Investor, to the extent requisite to permit the disposition of the Registrable Securities so to be registered; provided, however, that (A) if such registration involves a Public Offering, the Initial Investor must sell its Registrable Securities to the underwriters selected as provided in Section 3(b) hereof on the same terms and conditions as apply to the Company and (B) if, at any time after giving written notice of its intention to register any Registrable Securities pursuant to this Section 3 and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register such Registrable Securities, the Company shall give written notice to the Initial Investor and, thereupon, shall be relieved of its obligation to register any Registrable Securities in connection with such registration. The Company's obligations under this Section 2(e) shall terminate on the date that the registration statement to be filed in accordance with Section 2(a) is declared effective by the Commission. (ii) If a registration pursuant to this Section 2(e) involves a Public Offering and the managing underwriter thereof advises the Company that, in its view, the number of shares of Common Stock, warrants or other shares of Common Stock that the Company and the Initial Investor intend to include in such registration exceeds the largest number of shares of Common Stock or warrants (including any other shares of Common Stock or warrants of the Company) that can be sold without having an adverse effect on such Public Offering (the "Maximum Offering Size"), the Company will include in such registration only that number of shares of Common Stock or warrants, as applicable, which does not exceed the Maximum Offering Size, with the difference between the number of shares in the Maximum Offering Size and the number of shares originally 100 intended for inclusion (including the Common Stock covered by this Agreement, all shares and warrants originally intended to be issued and sold by the Company ("Company Shares") and all shares requested for inclusion by selling shareholders other than the Initial Investor pursuant to any registration rights agreement now in effect ("Third-Party Shares")) to be allocated among the Initial Investor, such other selling shareholders and the Company pro rata on the basis of the relative number of shares of Common Stock covered by this Agreement, Third-Party Shares and Company Shares, respectively. If as a result of the proration provisions of this Section 2(e)(ii), any Initial Investor is not entitled to include all such Registrable Securities in such registration, such Initial Investor may elect to withdraw its request to include any Registrable Securities in such registration. With respect to registrations pursuant to this Section 2(e), the number of securities required to satisfy any underwriters' over-allotment option shall be allocated among the Initial Investor, such other selling shareholders and the Company pro rata on the basis of the relative number of shares of Common Stock covered by this Agreement, Third-Party Shares and Company Shares, respectively. 3. Obligations of the Company In connection with the registration of the Registrable Securities, the Company shall: (a) Promptly (i) prepare and file with the Commission such amendments (including post-effective amendments) to the Registration Statement and supplements to the Prospectus as may be necessary to keep the Registration Statement continuously effective and in compliance with the provisions of the Securities Act applicable thereto so as to permit the Prospectus forming part thereof to be current and useable by Investors for resales of the Registrable Securities for a period of two years from the date on which the Registration Statement is first declared effective by the Commission (the "Effective Time") or such shorter period that will terminate when all the Registrable Securities covered by the Registration Statement have been sold pursuant thereto in accordance with the plan of distribution provided in the Prospectus, transferred pursuant to Rule 144 under the Securities Act or otherwise transferred in a manner that results in the delivery of new securities not subject to transfer restrictions under the Securities Act (the "Registration Period") and (ii) take all lawful action such that each of (A) the Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, not misleading and (B) the Prospectus forming part of the Registration Statement, and any amendment or supplement thereto, does not at any time during the Registration Period include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (b) During the Registration Period, comply with the provisions of the Securities Act with respect to the Registrable Securities of the Company covered by the Registration Statement until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the Investors as set forth in the Prospectus forming part of the Registration Statement; (c) (i) Prior to the filing with the Commission of any Registration Statement (including any amendments thereto) and the distribution or delivery of any Prospectus (including any supplements thereto), provide draft copies thereof (including a copy of the accountant's consent letter to be included in the filing) to the Investors and reflect in such documents all such comments as the Investors reasonably may propose and (ii) furnish to each Investor whose Registrable Securities are included in the Registration Statement and its legal counsel identified to the Company, (A) promptly after the same is prepared and publicly distributed, filed with the Commission, or received by the Company, one copy of the Registration Statement, each Prospectus, and each amendment or supplement thereto, and (B) such number of copies of the Prospectus and all amendments and supplements thereto and such other documents, as such Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Investor; (d) (i) Register or qualify the Registrable Securities covered by the Registration Statement under such securities or "blue sky" laws of such jurisdictions as the Investors who hold a majority-in-interest of the Registrable Securities being offered reasonably request, (ii) prepare and file in such jurisdictions such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary 101 to maintain the effectiveness thereof at all times during the Registration Period, (iii) take all such other lawful actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all such other lawful actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (A) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (B) subject itself to general taxation in any such jurisdiction or (C) file a general consent to service of process in any such jurisdiction; (e) As promptly as practicable after becoming aware of such event, notify each Investor of the occurrence of any event, as a result of which the Prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and promptly prepare an amendment to the Registration Statement and supplement to the Prospectus to correct such untrue statement or omission, and deliver a number of copies of such supplement and amendment to each Investor as such Investor may reasonably request; (f) As promptly as practicable after becoming aware of such event, notify each Investor who holds Registrable Securities being sold (or, in the event of an underwritten offering, the managing underwriters) of the issuance by the Commission of any stop order or other suspension of the effectiveness of the Registration Statement at the earliest possible time and take all lawful action to effect the withdrawal, recession or removal of such stop order or other suspension; (g) Cause all the Registrable Securities covered by the Registration Statement to be listed on the principal national securities exchange, and included in an inter-dealer quotation system of a registered national securities association, on or in which securities of the same class or series issued by the Company are then listed or included; (h) Maintain a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the effective date of the Registration Statement; (i) Cooperate with the Investors who hold Registrable Securities being offered to facilitate the timely preparation and delivery of certificates for the Registrable Securities to be offered pursuant to the registration statement and enable such certificates for the Registrable Securities to be in such denominations or amounts, as the case may be, as the Investors reasonably may request and registered in such names as the Investor may request; and, within three business days after a registration statement which includes Registrable Securities is declared effective by the Commission, deliver and cause legal counsel selected by the Company to deliver to the transfer agent for the Registrable Securities (with copies to the Investors whose Registrable Securities are included in such registration statement) an appropriate instruction and, to the extent necessary, an opinion of such counsel; (j) Take all such other lawful actions reasonably necessary to expedite and facilitate the disposition by the Investors of their Registrable Securities in accordance with the intended methods therefor provided in the Prospectus which are customary under the circumstances; (k) Make generally available to its security holders as soon as practicable, but in any event not later than three (3) months after (i) the effective date (as defined in Rule 158(c) under the Securities Act) of the Registration Statement, and (ii) the effective date of each post-effective amendment to the Registration Statement, as the case may be, an earnings statement of the Company and its subsidiaries complying with Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder (including, at the option of the Company, Rule 158); (1) In the event of an underwritten offering, promptly include or incorporate in a Prospectus supplement or post-effective amendment to the Registration Statement such information as the managers reasonably agree should be included therein and to which the Company does not reasonably object and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after it is notified of the matters to be included or incorporated in such Prospectus supplement or post-effective amendment; 102 (m) (i) Make reasonably available for inspection by Investors, any underwriter participating in any disposition pursuant to the Registration Statement, and any attorney, accountant or other agent retained by such Investors or any such underwriter all relevant financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries, and (ii) cause the Company's officers, directors and employees to supply all information reasonably requested by such Investors or any such underwriter, attorney, accountant or agent in connection with the Registration Statement, in each case, as is customary for similar due diligence examinations; provided, however, that all records, information and documents that are designated in writing by the Company as confidential, proprietary or containing any material nonpublic information shall be kept confidential by such Investors and any such underwriter, attorney, accountant or agent (pursuant to an appropriate confidentiality agreement in the case of any such holder or agent), unless such disclosure is made pursuant to judicial process in a court proceeding (after first giving the Company an opportunity promptly to seek a protective order or otherwise limit the scope of the information sought to be disclosed) or is required by law, or such records, information or documents become available to the public generally or through a third party not in violation of an accompanying obligation of confidentiality; and provided, further, that, if the foregoing inspection and information gathering would otherwise disrupt the Company's conduct of its business, such inspection and information gathering shall, to the maximum extent possible, be coordinated on behalf of the Investors and the other parties entitled thereto by one firm of counsel designed by and on behalf of the majority in interest of Investors and other parties; (n) In connection with any underwritten offering, make such representations and warranties to the Investors participating in such underwritten offering and to the managers, in form, substance and scope as are customarily made by the Company to underwriters in secondary underwritten offerings; (o) In connection with any underwritten offering, obtain opinions of counsel to the Company (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managers) addressed to the underwriters, covering such matters as are customarily covered in opinions requested in secondary underwritten offerings (it being agreed that the matters to be covered by such opinions shall include, without limitation, as of the date of the opinion and as of the Effective Time of the Registration Statement or most recent post-effective amendment thereto, as the case may be, the absence from the Registration Statement and the Prospectus, including any documents incorporated by reference therein, of an untrue statement of a material fact or the omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading, subject to customary limitations); (p) In connection with any underwritten offering, obtain "cold comfort" letters and updates thereof from the independent public accountants of the Company (and, if necessary, from the independent public accountants of any subsidiary of the Company or of any business acquired by the Company, in each case for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to each underwriter participating in such underwritten offering (if such underwriter has provided such letter, representations or documentation, if any, required for such cold comfort letter to be so addressed), in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with secondary underwritten offerings; (q) In connection with any underwritten offering, deliver such documents and certificates as may be reasonably required by the managers, if any; and (r) In the event that any broker-dealer registered under the Exchange Act shall be an "Affiliate" (as defined in Rule 2729(b)(1) of the rules and regulations of the National Association of Securities Dealers, Inc. (the "NASD Rules") (or any successor provision thereto)) of the Company or has a "conflict of interest" (as defined in Rule 2720(b)(7) of the NASD Rules (or any successor provision thereto)) and such broker-dealer shall underwrite, participate as a member of an underwriting syndicate or selling group or assist in the distribution of any Registrable Securities covered by the Registration Statement, whether as a holder of such Registrable Securities or as an underwriter, a placement or sales agent or a broker or dealer in respect thereof, or otherwise, the Company shall assist such broker-dealer in complying with the requirements of the NASD Rules, including, without limitation, by (A) engaging a "qualified independent underwriter" (as defined in Rule 2720(b)(15) of the NASD Rules (or any successor provision thereto)) to participate in the preparation of the Registration Statement relating to such Registrable Securities, to exercise usual standards of due diligence in respect 103 thereof and to recommend the public offering price of such Registrable Securities, (B) indemnifying such qualified independent underwriter to the extent of the indemnification of underwriters provided in Section 5 hereof, and (C) providing such information to such broker-dealer as may be required in order for such broker-dealer to comply with the requirements of the NASD Rules. 4. Obligations of the Investors In connection with the registration of the Registrable Securities, the Investors shall have the following obligations: (a) It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Investor that such Investor shall furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. As least seven days prior to the first anticipated filing date of the Registration Statement, the Company shall notify each Investor of the information the Company requires from each such Investor (the "Requested Information") if such Investor elects to have any of its Registrable Securities included in the Registration Statement. If at least two business days prior to the anticipated filing date the Company has not received the Requested Information from in Investor (a "Non-Responsive Investor"), then the Company may file the Registration Statement without including Registrable Securities of such Non-Responsive Investor and have no further obligations to the Non-Responsive Investor; (b) Each Investor by its acceptance of the Registrable Securities agrees to cooperate with the Company in connection with the preparation and filing of the Registration Statement hereunder, unless such Investor has notified the Company in writing of its election to exclude all of its Registrable Securities from the Registration Statement; and (c) Each Investor agrees that, upon receipt of any notice from the Company of the occurrence of any event of the kind described in Section 3(e) or 3(f), it shall immediately discontinue its disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Investor's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(e) and, if so directed by the Company, such Investor shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in such Investor's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. 5. Expenses of Registration All expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Section 3, but including, without limitation, all registration, listing, and qualifications fees, printing and engraving fees, accounting fees, and the fees and disbursements of counsel for the Company, and the reasonable fees of one firm of counsel to the holders of a majority in interest of the Registrable Securities shall be borne by the Company. 6. Indemnification and Contribution (a) The Company shall indemnify and hold harmless each Investor and each underwriter, if any, which facilitates the disposition of Registrable Securities, and each of their respective officers and directors and each person who controls such Investor or underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (each such person being sometimes hereinafter referred to as an "Indemnified Person") from and against any losses, claims, damages or liabilities, joint or several, to which such Indemnified Person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or an omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, not misleading, or 104 arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Prospectus or an omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and the Company hereby agrees to reimburse such Indemnified Person for all reasonable legal and other expenses incurred by them in connection with investigating or defending any such action or claim as and when such expenses are incurred; provided, however, that the Company shall not be liable to any such Indemnified Person in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon (i) an untrue statement or alleged untrue statement made in, or an omission or alleged omission from, such Registration Statement or Prospectus in reliance upon and in conformity with written information furnished to the Company by such Indemnified Person expressly for use therein or (ii) in the case of the occurrence of an event of the type specified in Section 3(e), the use by the Indemnified Person of an outdated or defective Prospectus after the Company has provided to such Indemnified Person written notice that such Prospectus is outdated or defective. (b) Indemnification by the Investors and Underwriters. Each Investor agrees, as a consequence of the inclusion of any of its Registrable Securities in a Registration Statement, and each underwriter, if any, which facilitates the disposition of Registrable Securities shall agree, as a consequence of facilitating such disposition of Registrable Securities, severally and not jointly, to (i) indemnify and hold harmless the Company, its directors (including any person who, with his or her consent, is named in the Registration Statement as a director nominee of the Company), its officers and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, against any losses, claims, damages or liabilities to which the Company or such other persons may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in such Registration Statement or Prospectus or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in light of the circumstances under which they were made, in the case of the Prospectus), not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such holder or underwriter expressly for use therein; provided, however, that no Investor or underwriter shall be liable under this Section 6(b) for any amount in excess of the net proceeds paid to such Investor or underwriter in respect of shares sold by it, and (ii) reimburse the Company for any legal or other expenses incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred. (c) Notice of Claims, etc. Promptly after receipt by a party seeking indemnification pursuant to this Section 6 (an "Indemnified Party") of written notice of any investigation, claim, proceeding or other action in respect of which indemnification is being sought (each, a "Claim"), the Indemnified Party promptly shall notify the party against whom indemnification pursuant to this Section 6 is being sought (the "Indemnifying Party") of the commencement thereof; but the omission to so notify the Indemnifying Party shall not relieve it from any liability that it otherwise may have to the Indemnified Party, except to the extent that the Indemnifying Party is materially prejudiced and forfeits substantive rights and defenses by reason of such failure. In connection with any Claim as to which both the Indemnifying Party and the Indemnified Party are parties, the Indemnifying Party shall be entitled to assume the defense thereof. Notwithstanding the assumption of the defense of any Claim by the Indemnifying Party, the Indemnified Party shall have the right to employ separate legal counsel and to participate in the defense of such Claim, and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs and expenses of such separate legal counsel to the Indemnified Party if (and only if): (x) the Indemnifying Party shall have agreed to pay such fees, costs and expenses, (y) the Indemnified Party and the Indemnifying Party shall reasonably have concluded that representation of the Indemnified Party by the Indemnifying Party by the same legal counsel would not be appropriate due to actual or, as reasonably determined by legal counsel to the Indemnified Party, potentially differing interests between such parties in the conduct of the defense of such Claim, or if there may be legal defenses available to the Indemnified Party that are in addition to or disparate from those available to the Indemnifying Party, or (z) the Indemnifying Party shall have failed to employ legal counsel reasonably satisfactory to the Indemnified Party within a reasonable period of time after notice of the commencement of such Claim. If the Indemnified Party employs separate legal counsel in circumstances other than as described in clauses (x), (y) or (z) above, the fees, costs and expenses of such legal counsel shall be borne exclusively by the Indemnified Party. Except as provided above, the Indemnifying Party shall not, in connection with any Claim in the same jurisdiction, be liable for the fees and expenses of more than one firm of counsel for the Indemnified Party (together 105 with appropriate local counsel). The Indemnified Party shall not, without the prior written consent of the Indemnifying Party (which consent shall not unreasonably be withheld), settle or compromise any Claim or consent to the entry of any judgment that does not include an unconditional release of the Indemnifying Party from all liabilities with respect to such Claim or judgment. (d) Contribution. If the indemnification provided for in this Section 6 is unavailable to or insufficient to hold harmless an Indemnified Person under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each Indemnifying Party shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and the Indemnified Party in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by such Indemnifying Party or by such Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 6(d) were determined by pro rata allocation (even if the Investors or any underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 6(d). The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The obligations of the Investors and any underwriters in this Section 6(d) to contribute shall be several in proportion to the percentage of Registrable Securities registered or underwritten, as the case may be, by them and not joint. (e) Notwithstanding any other provision of this Section 6, in no event shall any (i) Investor be required to undertake liability to any person under this Section 6 for any amounts in excess of the dollar amount of the proceeds to be received by such Investor from the sale of such Investor's Registrable Securities (after deducting any fees, discounts and commissions applicable thereto) pursuant to any Registration Statement under which such Registrable Securities are to be registered under the Securities Act and (ii) underwriter be required to undertake liability to any Person hereunder for any amounts in excess of the aggregate discount, commission or other compensation payable to such underwriter with respect to the Registrable Securities underwritten by it and distributed pursuant to the Registration Statement. (f) The obligations of the Company under this Section 6 shall be in addition to any liability which the Company may otherwise have to any Indemnified Person and the obligations of any Indemnified Person under this Section 6 shall be in addition to any liability which such Indemnified Person may otherwise have to the Company. The remedies provided in this Section 6 are not exclusive and shall not limit any rights or remedies which may otherwise be available to an indemnified party at law or in equity. 7. Rule 144 With a view to making available to the Investors the benefits of Rule 144 under the Securities Act or any other similar rule or regulation of the Commission that may at any time permit the Investors to sell securities of the Company to the public without registration ("Rule 144"), the Company agrees to use its best efforts to: (a) comply with the provisions of paragraph (c) (1) of Rule 144; and (b) file with the Commission in a timely manner all reports and other documents required to be filed by the Company pursuant to Section 13 or 15(d) under the Exchange Act; and, if at any time it is not required to file such reports but in the past had been required to or did file such reports, it will, upon the request of any Investor, make available other information as required by, and so long as necessary to permit sales of, its Registrable Securities pursuant to Rule 144. 106 8. Assignment The rights to have the Company register Registrable Securities pursuant to this Agreement shall be automatically assigned by the Investors to any permitted transferee of all or any portion of such Registrable Securities (or all or any portion of the Preferred Shares or Warrants of the Company which is convertible into such securities) only if: (a) the Investor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (b) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (i) the name and address of such transferee or assignee and (ii) the securities with respect to which such registration rights are being transferred or assigned, (c) immediately following such transfer or assignment, the securities so transferred or assigned to the transferee or assignee constitute Restricted Securities, and (d) at or before the time the Company received the written notice contemplated by clause (b) of this sentence the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein. 9. Amendment and Waiver Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Investors who hold a majority-in-interest of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 9 shall be binding upon each Investor and the Company. 10. Miscellaneous (a) A person or entity shall be deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. (b) If, after the date hereof and prior to the Commission declaring the Registration Statement to be filed pursuant to Section 2(a) effective under the Securities Act, the Company grants to any Person any registration rights with respect to any Company securities which are more favorable to such other Person than those provided in this Agreement, then the Company forthwith shall grant (by means of an amendment to this Agreement or otherwise) identical registration rights to all Investors hereunder. (c) Except as may be otherwise provided herein, any notice or other communication or delivery required or permitted hereunder shall be in writing and shall be delivered personally or sent by certified mail, postage prepaid, or by a nationally recognized overnight courier service, and shall be deemed given when so delivered personally or by overnight courier service, or, if mailed, three days after the date of deposit in the United States mails, as follows: (i) if to the Company, to: American TeleSource International, Inc. 12500 Network Boulevard, Suite 407 San Antonio, Texas 78249 (210) 558-6090 (210) 558-6095 (Fax) Attention: H. Douglas Saathoff 107 with a copy to: Alice L. King, Esq. Corporate Counsel American TeleSource International, Inc. 12500 Network Boulevard, Suite 407 San Antonio, Texas 78249 (210) 558-6090 (210) 558-6095 (Fax) (ii) if to the Initial Investor, to: The Shaar Fund Ltd., c/o Levinson Capital Management 2 World Trade Center, Suite 1820 New York, NY 10048 Attention: Samuel Levinson (212) 432-7711 (212) 432-7771 (Fax) with a copy to: Cadwalader, Wickersham & Taft 100 Maiden Lane New York, NY 10038 Attention: Dennis J. Block, Esq. (212) 504-5555 (212) 504-5557 (Fax) (iii) if to any other Investor, at such address as such Investor shall have provided in writing to the Company. The Company, the Initial Investor or any Investor may change the foregoing address by notice given pursuant to this Section 10(c). (d) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. (e) This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the City of New York or the state courts of the State of New York sitting in the City of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. (f) The remedies provided in this Agreement are cumulative and not exclusive of any remedies provided by law. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. 108 (g) The Company shall not enter into any agreement with respect to its securities that is inconsistent with the rights granted to the holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. The Company is not currently a party to any agreement granting any registration rights with respect to any of its securities to any person which conflicts with the Company's obligations hereunder or gives any other party the right to include any securities in any Registration Statement filed pursuant hereto, except for such rights and conflicts as have been irrevocably waived. Without limiting the generality of the foregoing, without the written consent of the holders of a majority in interest of the Registrable Securities, the Company shall not grant to any person the right to request it to register any of its securities under the Securities Act unless the rights so granted are subject in all respect to the prior rights of the holders of Registrable Securities set forth herein, and are not otherwise in conflict or inconsistent with the provisions of this Agreement. The restrictions on the Company's rights to grant registration rights under this paragraph shall terminate on the date the Registration Statement to be filed pursuant to Section 2(a) is declared effective by the Commission. (h) This Agreement, the Securities Purchase Agreement, the Escrow Instructions, dated as of a date even herewith (the "Escrow Instructions"), between the Company, the Initial Investor and Cadwalader, Wickersham & Taft, the Preferred Shares and the Warrants constitute the entire agreement among the parties hereto with respect to the subject matter hereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein. This Agreement, the Securities Purchase Agreement, the Escrow Instructions, the Preferred Shares and the Warrants supersede all prior agreements and undertakings among the parties hereto with respect to the subject matter hereof. (i) Subject to the requirements of Section 8 hereof, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. (j) All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. (k) The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning thereof. (1) The Company acknowledges that any failure by the Company to perform its obligations under Section 3, or any delay in such performance could result in direct damages to the Investors and the Company agrees that, in addition to any other liability the Company may have by reason of any such failure or delay, the Company shall be liable for all direct damages caused by such failure or delay. (m) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. A facsimile transmission of this signed Agreement shall be legal and binding on all parties hereto. [NO FURTHER TEXT ON THIS PAGE.] 109 In Witness Whereof, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. American TeleSource International, Inc. By: /s/ H. Douglas Saathoff ------------------------------ Name: H. Douglas Saathoff Title: Chief Financial Officer The Shaar Fund Ltd. By: /s/ Samuel Levinson ------------------------------ Name: Samuel Levinson Title: Managing Director 110 EX-5.1 7 LEGAL OPNINON Exhibit 5.1 April 11, 2000 American TeleSource International, Inc. 12500 Network Boulevard, Suite 407 San Antonio, Texas 78249 Re: American TeleSource International, Inc. Registration Statement on Form S-3 (the "Registration Statement") Ladies and Gentlemen: I have acted as counsel to American TeleSource International, Inc., a Delaware corporation, ("ATSI") in connection with the registration for resale of 2,226,001 shares of common stock of ATSI (the "Shares") on Form S-3. This opinion is being furnished in accordance with the requirements of Item 16 of Form S-3. I have reviewed the following: 1. ATSI's Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation"); 2. ATSI's Bylaws (the "Bylaws"); 3. ATSI's Certificate of Designation, Preferences and Rights of 6% Series C Cumulative Convertible Preferred Stock (the "Series C Certificate of Designation"); 4. Common Stock Purchase Warrant issued by ATSI to The Shaar Fund Ltd. dated September 24, 1999 (the "Series C Warrant"); 5. Written Consent of the Board of Directors of ATSI dated September effective September 24, 1999 regarding the issuance of the Series C Preferred Stock; 6. ATSI's Certificate of Designation, Preferences and Rights of 6% Series D Cumulative Convertible Preferred Stock (the "Series D Certificate of Designation"); 7. Common Stock Purchase Warrant issued by ATSI to The Shaar Fund Ltd. dated February 22, 2000 (the "Series D Warrant"); 8. Written Consent of the Board of Directors of ATSI dated February 15, 2000 regarding the issuance of the Series D Preferred Stock; and 9. Certificates of Good Standing for ATSI issued by the Secretary of State of the State of Delaware dated June 22, 1999 and February 11, 2000. I note that all of the shares of common stock that were issuable under the terms of the Series C Certificate of Designation were issued on March 7, 2000, including 484,872 upon conversion of the Series C Preferred Stock, and 7436 in payment of dividends due on the Series C Preferred Stock. 34 The Series D Certificate of Designation permits ATSI to redeem the 6% Series D Cumulative Convertible Preferred Stock upon payment of cash and delivery of an additional warrant in the form of the Series D Warrant (the "Redemption Warrant"). I have assumed, for the purposes of this opinion, that the Redemption Warrant, if issued, will be in the exact form of the Series D Warrant except for the date of issuance. Based on my review of these documents, it is my opinion that the Shares issued pursuant to the Series C Certificate of Designation have been duly authorized, validly issued, fully paid and nonassessable, and that the Shares issuable under the Series D Certificate of Designation and the Series C Warrant, the Series D Warrant, and the Redemption Warrant if, as and when issued in accordance with the terms of the Certificate of Incorporation and the Bylaws, and in accordance with the terms of the Series D Certificate of Designation, the Series D Warrant, and the Redemption Warrant, or in payment of dividends on the 6% Series D Cumulative Convertible Preferred Stock pursuant to the terms of the Series D Certificate of Designation, as applicable, will be duly authorized, validly issued, fully paid and nonassessable. I consent to the filing of this opinion as an Exhibit to the Registration Statement and to the reference to me under the caption "Legal Matters" in the prospectus which is part of the Registration Statement. In giving this consent, I do not admit that I come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the Rules and Regulations of the Securities and Exchange Commission thereunder. Very truly yours, /s/ Alice L. King Alice L. King Corporate Counsel 35 EX-23 8 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this registration statement of our report dated October 5, 1999 included in American TeleSource International, Inc.'s Form 10-K/A for the year ended July 31, 1999 and to all references to our Firm included in this registration statement. /s/ ARTHUR ANDERSEN LLP ----------------------- Arthur Andersen LLP San Antonio, Texas April 13, 2000 111 -----END PRIVACY-ENHANCED MESSAGE-----