-----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, IXCKeb3NJAoKL3XOD1C7Gl0kuYnX1H4673Is0l6bIHNcMRzLepTY59YBPY64Zvk/ Gn/hYpYxuDpCozU8PcDjVw== 0000930661-99-001984.txt : 19990819 0000930661-99-001984.hdr.sgml : 19990819 ACCESSION NUMBER: 0000930661-99-001984 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19990818 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: 333-84115 FILM NUMBER: 99695255 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 FORM S-3/A As filed with the Securities and Exchange Commission on August 18, 1999 Registration Number 333-84115 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) 74-2690895 (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 continuos 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 Proposed Title of Amount Maximum Maximum Amount of Securities to be Offering Price Aggregate Registration To be Registered Registered Per Share Offering Price Fee (4) - -------------------------------------------------------------------------------------------------------- Common stock issuable upon conversion of convertible preferred stock (1) 2,694,691 $1.16 $3,125,842 $8,689.84 -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------- Common Stock to be paid as dividend on convertible preferred (1) 323,363 $1.16 $ 375,101 $1,042.78 - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Common Stock issuable upon exercise of warrants (2) 100,000 $1.16 $ 116,000 $ 322.48 - -------------------------------------------------------------------------------------------------------- Common Stock issuable upon exercise of warrants (3) 80,000 $1.06 $ 84,800 $ 235.74 ========================================================================================================
(1) Calculated pursuant to Rule 457 (c), using the average of the high and low prices reported on August 16, 1999, solely for the purpose of calculating the Registration Fee. (2) Calculated pursuant to Rule 457 (g) (3), using the average of the high and low prices reported on August 16, 1999, solely for the purpose of calculating the Registration Fee. (3) Calculated pursuant to Rule 457 (g) (1) using a fixed exercise price of $1.06 per share for the Common Stock, solely for the purpose of calculating the Registration Fee. (4) A fee of $11,677.75 has been previously paid. No additional monies are due. This Registration Statement shall become effective on August 19, 1999. 2 PROSPECTUS Issued August 18, 1999 3,198,054 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 3. The selling shareholders identified on page 12 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 13. 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 National Association of Securities Dealers, Inc. Over-the-Counter Bulletin Board under the symbol "AMTI." On August 16, 1999, the last reported bid price of our common stock was $1.1875 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. The date of this prospectus is August 18, 1999. 3 TABLE OF CONTENTS FORWARD LOOKING STATEMENTS 1 RELY ONLY ON THIS PROSPECTUS 2 THE COMPANY 2 RISK FACTORS 3 USE OF PROCEEDS 9 COMMON STOCK ISSUED 9 SELLING SHAREHOLDERS 12 PLAN OF DISTRIBUTION 13 LEGAL MATTERS 14 EXPERTS 15 WHERE YOU CAN FIND MORE INFORMATION 16 4 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. We do not promise to update any forward-looking statements, even if new information or future events indicate that these statements will prove to be incorrect. 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. ("ATSI(SM)") 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 originate retail traffic in Mexico through our captive distribution channels of public payphones and casetas. (Casetas are indoor calling centers where travelers or the large portion of the Mexican population that does not have a telephone may place or receive calls or faxes.) We originate retail traffic in the U.S. with our MEXICOnnect(SM) service (1010-624) and One Plus residential and commercial long distance services. We carry wholesale traffic into Mexico for other U.S. carriers who lack transmission facilities or require additional capacity. We also provide private network services to companies needing reliable private communications within Mexico and Central America and between Mexico or Central America and the United States. We also own a subsidiary, GlobalSCAPE, Inc., ("GlobalSCAPE") which sells, markets and distributes its proprietary Internet productivity software, CuteFTP(TM) and CuteHTML(TM). 5 The company began operations in 1994 as a Canadian holding company, Latcomm International, Inc. with a Texas operating subsidiary, Latin America Telecomm, Inc. Both corporations were renamed "American TeleSource International, Inc." in 1994. In May, 1998, the Canadian corporation completed a share exchange with a newly-formed Delaware corporation, also called American TeleSource International, Inc., which resulted in the Canadian corporation becoming the wholly-owned subsidiary of the Delaware corporation. Our principal operating subsidiaries are: . American TeleSource International de Mexico, S.A. de C.V., which we formed in 1995 to further position ourselves in the Mexican and Latin American market; . Sistema de Telefonia Computarizada, S.A. de C.V., which we acquired in August, 1997; this subsidiary owns 127 casetas in 66 cities in Mexico; . Servicios de Infraestructura, S.A. de C.V., which we acquired in June, 1997; this subsidiary owns certain transmission equipment and valuable long term licenses in Mexico; . TeleSpan, Inc., which we formed in February, 1998 to carry our wholesale and private network services traffic between the U.S. and Latin America; and . GlobalSCAPE, Inc., which we formed in April, 1996 to implement Internet strategies, which are not currently consistent with our core business. We are currently investigating various options to divest ourselves of this business, or to distribute some of the ownership of this business to our shareholders, in a effort to maximize shareholder value. 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 "borderless" services, such as enhanced prepaid calling services which will function regardless of the user's location north or south of the U.S./Mexico border. We have applied for a long distance concession from the Mexican government which, if obtained, could permit us to reduce our costs and expand our network in Mexico. Currently we must rely on Mexican-licensed long distance carriers to transport our traffic between our facilities in Mexico and the local telephone company. If we obtain this license and are able to interconnect directly with 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. 6 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 what we think are the major risks which could most affect our business. . We expect to incur losses 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. We must improve our cash flow from operations to generate a profit, either by increasing our sales or decreasing our expenses, or both. . We may not achieve anticipated sales We have made a substantial investment in our network and personnel to position ourself in our target markets and will continue to do so. We may not be able to achieve the sales volume needed to make this investment profitable. . 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. 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 may not be able to sell additional securities or borrow money on 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. If we sell more common stock the interest of 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. . Our auditors have questioned our viability Our auditors' opinion on our financial statements as of July 31, 1998 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 do not expect to pay dividends We have no plan to pay dividends in the near future. 7 . Our stock has been a penny stock which is more difficult to sell Our common stock is a "penny stock." It is relatively difficult for an investor to sell shares of a penny stock. A "penny stock" is any stock which falls below a selling price of $5.00 per share in the public market. Our common stock has traded below $5.00 per share since it began trading on the NASD Over-the-Counter Bulletin Board in January, 1998. It is much more difficult to sell a penny stock than stock that trades on a national market or stock exchange because of the extra steps the broker/dealer must take before selling the stock. A sale of penny stock does not usually take place as quickly as a sale of shares that trade on a national market or stock exchange. You may decide to sell your stock when the price is high enough for you to make a profit on your investment, but by the time the sale is complete, the price of the stock may have fallen to the point that you have a loss on your investment. Also, because of the difficulty in dealing in penny stock, many broker/dealers are unwilling to participate in buying and selling our shares. . 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. . Our stock price may fall if we fail to spin off GlobalSCAPE We have announced that we are considering a spin off or public offering (or combination of the two) of our subsidiary, GlobalSCAPE, and that we have retained an investment banking firm to help us evaluate the alternatives in achieving the appropriate value for GlobalSCAPE. If we do not complete this type of transaction (or if we take too long to complete this transaction) our stock price could fall. This transaction could be delayed or cancelled if we are unable to find an underwriter, are unable to negotiate a favorable offering price for the stock of GlobalSCAPE, there is a lack of public interest in such a transaction, or management and the Board determine that this transaction involves excessive operational and economic risk. . We may not successfully compete with others in our industry The market for all of our services is very competitive. The market for wholesale network services is particularly competitive on the basis of price. We currently have seven customers for this service. The volume of business sent by each customer fluctuates, but this traffic is often heavily concentrated among three or four customers. In the past, two of these customers have been responsible for 50% of this traffic. If we are not able to continue to offer competitive prices, these customers will find some other supplier and we will lose a substantial portion of our revenue very quickly. Many of our competitors in this market have more extensive networks than we do, as well as substantially greater financial, technical and marketing resources. For example, we compete 8 with American Telephone and Telegraph Company ("AT&T"), MCI/WorldCom, Inc. ("MCI/WorldCom") and Sprint Communications Company, L.P. ("Sprint") in this market, as well as numerous other large and small companies. Our large competitors are able to take advantage of their established customer base to generate economies of scale, substantially lowering their costs. In addition, industry capacity along the routes serviced by ATSI is generally growing as fiber optic cable is activated. If industry capacity exceeds demand along these routes, severe pricing pressure could develop. There have been and we expect there will continue to be, mergers, acquisitions, and joint ventures in our industry that create more large and well-positioned competitors, and reduce the number of potential customers for our wholesale network services. The market for retail services is also extremely competitive. ATSI competes with many other companies in this market, including AT&T, MCI/WorldCom and Sprint. These companies have stronger name recognition and brand loyalty, as well as a broader portfolio of services. We believe we can successfully compete by targeting the Latino population in the U.S. and by introducing innovative services. However, certain larger companies have announced that they intend to enter the Latino market in the U.S. as well, and in Mexico, we will compete with the former Mexican telephone monopoly, Telefonos de Mexico ("Telmex"), which has substantially greater resources than we do. 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. . We may not be able to collect large receivables 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 carrier in Mexico to terminate these calls. If a customer fails to pay a large balance on time, we will have difficulty paying our carrier in Mexico on time. If our carrier suspends services to us, it will affect all our customers. . Reliance on key personnel We depend on a small number of key technical and managerial personnel. We may not be able to retain these personnel or attract the new personnel that we need to attain profitability. . We may not be able to lease transmission facilities we need 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 cable, we do not own a satellite or any fiber optic cable and must therefore lease transmission capacity from other companies. 9 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. There are a limited number of suppliers for the products and services we need to complete our network. We may have difficulty finding alternate suppliers if any of our suppliers go out of business or are acquired by our competitors. Also if certain current suppliers fail to honor their contractual commitments, we could be very seriously affected. . We may not be able to pay our suppliers on time We have not always paid all of our suppliers on time due to temporary cash shortfalls. These suppliers have given us payment extensions in the past, but 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 We purchased some of our significant equipment with borrowed money. 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 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 may have service interruptions and problems with the quality of transmission 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 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. 10 To stay competitive, we will continue to integrate the latest technologies into our network. We are currently implementing "packet switching" transport capabilities such as Asynchronous Transfer Mode and we will continue to explore new technologies as they are developed. The risk of network problems increases during periods of expansion and transition to new technologies. . Changes in telecommunications regulations may harm our competitive position The telecommunications industry in the United States is regulated by the Federal Communications Commission (the "FCC") and by the public utilities commissions in the various states. As a result of the deregulation required by the Telecommunications Act of 1996, the FCC has issued, and continues to issue, major changes to their regulations. These new regulations have significantly changed and will continue to change the competitive environment. 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. Other new regulations affect the pricing for services that we purchase from others. Pricing changes could put us at a relative disadvantage to larger competitors. We cannot predict what other changes there may be in the regulations or what effect these changes will have on our business. The Mexican telecommunications industry is also going through the process of de-monopolization and regulatory change, and new laws and regulations there could affect our business. These regulatory changes may not continue to improve market conditions for us and, even if they do, we may not have the opportunity to provide additional telecommunications services within Mexico and between Mexico and other countries. The international telecommunications industry is also governed by foreign laws and treaties between the United States and other countries. Changes in these laws or treaties may also affect the competitive environment. . Our compliance with laws and regulations could be challenged 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 to right to offer services. To our knowledge, we are not currently subject to any regulatory inquiry or investigation. . We may not be able to obtain new licenses we need to reduce costs and expand our network 11 Our strategy for the future depends on obtaining a long distance concession from the Mexican government. We may not be able to obtain this license, and if we do not obtain this license, we may not be able to implement our strategy for the future or continue to offer services at competitive prices. Our strategy is to expand into other Latin American countries as regulatory conditions in those countries in permit. We may not be able to obtain the licenses we need for this expansion. . Our operations may be interrupted by the Year 2000 problem The Year 2000 problem is the result of computer programs that were designed to use two digits rather than four to specify the applicable year. As a result, date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in miscalculations or major system failures which could cause disruptions in our operations, including the inability to process call billing records. We have implemented a comprehensive Year 2000 plan to assess our internal readiness and the readiness of our suppliers. We have identified some software applications that must be upgraded to avoid a disruption in our operations, but we expect to have those upgrades installed prior to the end of the year. Although we have received satisfactory responses from our suppliers regarding their Year 2000 readiness, we do not control them. Their systems may be affected by the Year 2000 problem. If any of our critical suppliers fails to perform because of the Year 2000 problem, we could suffer a serious interruption in service. . 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 and other Latin American countries 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. A period of poor economic performance could reduce the demand for our services in Mexico. There might be trade disputes between the United States and Mexico which result in trade barriers such as additional taxes on our services. The Mexican government might also decide to restrict the conversion of pesos into dollars or restrict the transfer of dollars out of Mexico. These types of changes, whether they occur or are only threatened, would also make it more difficult for us to obtain financing in the United States. . If the value of the Mexican Peso declines relative to the Dollar, we will have decreased earnings as stated Dollars Approximately 20% of ATSI's revenue is collected in Mexican Pesos. If the value of the Peso relative to the Dollar declines, that is, if Pesos are convertible into fewer Dollars, then 12 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. 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 may be issued pursuant to the terms of (i) shares of 6% Series B Cumulative Convertible Preferred Stock issued to The Shaar Fund on July 2, 1999 (the "Series B Preferred Stock"), (ii) a Common Stock Warrant issued to The Shaar Fund on July 2, 1999, (iii) a Common Stock Purchase Warrant that may be issued to The Shaar Fund if ATSI elects to redeem the Series B Preferred Stock, (iv) a Warrant issued to Gary Wright on November 6, 1998, and (v) a Warrant issued to Rocky Dazzo on November 6, 1998. 13 Series B Preferred Stock The Shaar Fund purchased 2000 shares of Series B Preferred Stock for $1000 per share on July 2, 1999. The Shaar Fund may convert each share of Series B Preferred Stock into that number of shares of common stock that is equal to 1000 divided by the lesser of: (i) $1.375 (the closing bid price of the common stock on the NASD Over-the-Counter Bulletin Board on July 1, 1999), and (ii) seventy- eight percent (78%) of the average of the five lowest closing bid prices of the common stock on the NASD Over-the-Counter Bulletin Board during the ten trading day period immediately preceding the date of conversion (the "Conversion Price"). 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 bid price for the common stock falls to $.85 or less on any trading day, The Shaar Fund may not convert any Series B Preferred Stock for a single period of forty-five days from that day. The Series B Preferred Stock will never be convertible into fewer than 1,454,545 shares of common stock (i.e., the number of shares that may be acquired if the Conversion Price is $1.375). Here are some examples of the number of shares of common stock that The Shaar Fund may acquire, assuming different prices of the common stock: 14
------------------------------------------------------------------------------------------- 78% of Avg. of 5 Closing Bid on Formula Number of Shares of Lowest Bid Prices July 1, 1999 Common Stock During 10 Trading Days Preceding Conversion - -------------------------------------------------------------------------------------------- 1.00 1.375 2,000,000 divided by 2,000,000 1.00 - -------------------------------------------------------------------------------------------- 1.36 1.375 2,000,000 divided by 1,470,588 1.36 - -------------------------------------------------------------------------------------------- 1.39 1.375 2,000,000 divided by 1,454,545 1.375 - -------------------------------------------------------------------------------------------- 2.00 1.375 2,000,000 divided by 1,454,545 1.375 - -------------------------------------------------------------------------------------------- 2.50 1.375 2,000,000 divided by 1,454,545 1.375 - --------------------------------------------------------------------------------------------
The Shaar Fund may convert any of its shares of Series B Preferred Stock at any time it elects after October 1, 1999, but any shares not converted by July 2, 2001 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 B Preferred Stock requires ATSI to register that number of common shares into which all of the shares of the Series B Preferred Stock would be convertible at a Conversion Price of $.7422 (one-half of the closing bid price of the common stock on the NASD Over-the-Counter Bulletin Board on July 2, 1999). If the closing bid price for the common stock falls below .80, ATSI is required to register additional shares of its common stock based on an assumed Conversion Price of .30 per share. ATSI must pay quarterly dividends on the Series B Preferred Stock at the rate of 6% per annum calculated on a value of $1000 per share. ATSI may elect to pay the dividends in either cash or in shares of its registered common stock, valued at the Conversion Price on each dividend payment date. We have included 323,362 shares of common stock in this prospectus and Registration Statement for the payment of dividends on the Series B Preferred Stock. 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. The Shaar Fund Warrants The Shaar Fund may elect to acquire up to 50,000 additional shares of common stock at an exercise price of $1.25 per share under the terms of a Common Stock Purchase Warrant issued on July 2, 1999. If ATSI elects to redeem the Series B Preferred Stock, part of the redemption price is an additional warrant for 50,000 shares on the same terms as the Common Stock Purchase Warrant. ATSI is required to register 100,000 shares of its common stock for the 15 exercise of these warrants under the Registration Rights Agreement signed by The Shaar Fund and ATSI at the time of the sale of the Series B Preferred Stock and the Common Stock Purchase Warrant. Rocky Dazzo Warrant Rocky Dazzo may acquire up to 40,000 shares of ATSI common stock at an exercise price of $1.06 under the terms of a warrant issued on November 6, 1998. The warrant includes "tag along" registration rights. Gary Wright Gary Wright may acquire up to 40,000 shares of ATSI common stock at an exercise price of $1.06 under the terms of a warrant issued on November 6, 1998. The warrant includes "tag along" registration rights. SELLING SHAREHOLDERS There are three selling shareholders. None of the selling shareholders or their affiliates has held any position, office or other material relationship, other than as a shareholder, with ATSI during the three years preceding the date of this prospectus. The shareholders, the amount of common stock owned by each of them as of July 30, 1999, the maximum amount of common stock that may be offered by them under the Registration Statement, and their percentage ownership in ATSI as of July 30, 1999: 16
- ------------------------------------------------------------------------------------------------------------- Name Amount of Common Maximum Amount of Percentage Stock Owned as of Common Stock that Ownership of ATSI July 30, 1999 may be Offered as of July 30, 1999 - ------------------------------------------------------------------------------------------------------------- The Shaar Fund 2,744,691/1/ 2,744,691/1/ 5.4%/2/ - ------------------------------------------------------------------------------------------------------------- Gary Wright 565,305/3/ 40,000 1.2%/4/ - ------------------------------------------------------------------------------------------------------------- Rocky Dazzo 532,000 40,000 1.1% - -------------------------------------------------------------------------------------------------------------
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. 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. __________________ /1/ The maximum number of shares that The Shaar Fund may acquire pursuant to the terms of the Series B Preferred Stock (described in the section entitled Issuance of Common Stock) if a conversion price of $.7422 is assumed plus the number of shares that The Shaar Fund may purchase pursuant to the Common Stock Purchase Warrant issued on July 2, 1999; does not include any shares of common stock that may be paid as a dividend on the Series B Preferred Stock and does not include the shares that The Shaar Fund could purchase under an additional warrant for 50,000 shares of common stock that ATSI would be required to issue if it elected to redeem the Series B Preferred Stock. /2/ Assumes that The Shaar Fund acquires (i) the maximum number of shares that The Shaar Fund may acquire pursuant to the terms of the Series B Preferred Stock (described in the section entitled Issuance of Common Stock) if a conversion price of $.7422 is assumed, and (ii) the maximum number of shares that The Shaar Fund may purchase pursuant to the Common Stock Purchase Warrant issued on July 2, 1999; does not include any shares of common stock that may be paid as a dividend on the Series B Preferred Stock and does not include the shares that The Shaar Fund could purchase under an additional warrant for 50,000 shares of common stock that ATSI would be required to issue if it elected to redeem the Series B Preferred Stock. /3/ Includes 304,605 shares held in name of Gary Wright, 115,700 held by employee stock option plan of which Gary Wright is a beneficiary, 105,000 shares held in individual retirement account for Gary Wright, and 40,000 shares that may be acquired if the warrant described in Common Stock Issued is acquired. /4/ Based on 565,305 shares - see footnote 3, above 17 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. 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. 18 EXPERTS The consolidated balance sheets as of July 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended July 31, 1996, 1997 and 1998 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 Annual Report on Form 10-K for the year ended July 31, 1998 . Our Quarterly Reports on Form 10-Q for the quarters ended October 31, 1998, January 31, 1999 and April 30, 1999; . Our Proxy Statement dated November 6, 1998 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. 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. 19 We will not send exhibits to these documents unless the exhibits are specifically incorporated by reference in these documents. 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 $10,290.84 Legal 6,000.00 Printing 3,000.00 Miscellaneous 1,000.00 Total: $20,290.84 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, 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 20 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. 5.1 Opinion regarding legality* 10.33 Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI dated July 2, 1999** 10.34 Certificate of Designation, Preferences and Rights of 6% Series B Cumulative Convertible Preferred Stock of American TeleSource International, Inc.* 10.35 Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by American TeleSource International dated July 2, 1999* 10.36 Registration Rights Agreement between The Shaar Fund Ltd. and ATSI dated July 2, 1999* 10.37 Warrant issued to Gary Wright dated November 6, 1998* 10.38 Warrant issued to Rocky Dazzo dated November 6, 1998* 23 Consent of Arthur Andersen LLP* 24 Power of Attorney (included on signature page to the Registration Statement) *previously filed **filed herewith 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 bereflected 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 21 (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. 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. 22 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 30th day of July, 1999. 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 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 July 30, 1999 - ------------------------- Arthur L. Smith Chief Executive Officer Director /s/ H. Douglas Saathoff Chief Financial Officer July 30, 1999 - ------------------------- H. Douglas Saathoff Senior Vice President Secretary Treasurer /s/ Richard C. Benkendorf Director July 30, 1999 - ------------------------- Richard C. Benkendorf 23 /s/ Carlos K. Kauachi Director July 30, 1999 - --------------------- Carlos K. Kauachi /s/ Murray R. Nye Director July 30, 1999 - --------------------- Murray R. Nye /s/ Tomas Revesz Director July 30, 1999 - --------------------- Tomas Revesz /s/ Robert B. Werner Director July 30, 1999 - --------------------- Robert B. Werner 24 EX-10.33 2 SECURITIES PURCHASE AGREEMENT EXHIBIT 10.33 SECURITIES PURCHASE AGREEMENT This Securities Purchase Agreement, dated as of July 2, 1999, 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. ("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) 2,000 shares of the Company's 6% Series B 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 B 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 50,000 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 50,000 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 50,000 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 $2,000,000 (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 other has been notified, 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 agrees to observe the terms and conditions of the Escrow Instructions, all of which are incorporated herein by reference as if fully set forth herein. 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 it 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 it 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. 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 use at any time 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 The Company represents and warrants to Buyer that: A. Capitalization. 1. The authorized capital stock of the Company consists of: (i) 100,000,000 shares of Common Stock, of which 48,122,252 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 50,000 shares have been designated 10% Series A Cumulative Convertible Preferred Stock, of which 24,146 shares have been issued and are outstanding. All of the issued and outstanding shares of Common 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 and warrants to purchase 3,419,333 shares of Common Stock and non-vested stock options to purchase 2,576,467 shares of Common Stock, in each case pursuant to its 1998 Stock Option Plan, and warrants to purchase 5,514,325 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 the date hereof. The Common Stock is traded on the OTC Bulletin Board service of the National Association of Securities Dealers, Inc. ("OTCBB") 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 5,000,000 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 it 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 it 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 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 that have been obtained by the Company prior to the date hereof. H. Commission Filings. None of the Company's reports and documents heretofore filed with the Commission pursuant to the Securities Act or the Exchange Act (collectively, the "Commission Filings") 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. 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, 1997 and July 31, 1998 and the related audited statements of operations and cash flows for the three fiscal years ended July 31, 1998 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, 1998 is hereinafter referred to as the "Balance Sheet" and July 31, 1998 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 in the ordinary course of business consistent with the Company's past practices since the Balance Sheet Date. 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 which 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, 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 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 next preceding the date hereof, except as disclosed on Schedule III.A 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; 4. The Company has not received, since July 31, 1998, 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.6 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 is 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 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 Pension Benefits Guaranty Corporation, 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 to so 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 have 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, 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 or 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 under (A) 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, is obligated to make payments or is 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 (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 are 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 Securities (and any shares of Common Stock issued in conversion of the Preferred Shares or exercise of the 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, the Warrant Shares and the Conversion 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. 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 and finder's fees in connection with such sale) 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 or The Nasdaq Stock Market, the Company shall use its best efforts to maintain its trading of the Common Stock on OTCBB. 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 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 the 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 the Buyer the opportunity to complete the transaction as set forth in the Proposal; or (iii) enter into an agreement with the Buyer, at such terms after the Buyer has accepted the Offer, then the Company shall pay to the 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. 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 and that the removal of restrictive legends is permitted under applicable law, 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. 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 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 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 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 The 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 measured 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 measured 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; 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 OTCBB, (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 5,000,000 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 July 5, 1999 (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 provided 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. 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 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 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, 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 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 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 facsimile transmission of this signed Agreement 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 supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. 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. Doublas 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) The Company, the 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 -----END PRIVACY-ENHANCED MESSAGE-----