<PAGE>
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
- -
ACT OF 1934
For the quarterly period ended April 30, 1999
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 0-23007
AMERICAN TELESOURCE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2849995
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
12500 Network Blvd., Suite 407
San Antonio, Texas 78249
(210) 558-6090
(Address, including zip code, of registrant's principal executive offices
and telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-
The number of shares outstanding of the registrant,s common stock at June
9, 1999 was 48,390,703.
________________________________________________________________________________
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 1999
INDEX
<TABLE>
<CAPTION>
Part I FINANCIAL INFORMATION
Page
----
<S> <C>
Item 1. Interim Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of July 31, 1998 and April 30, 1999................... 3
Consolidated Statements of Operations for the Three and Nine
Months Ended April 30, 1998 and 1999................................................. 4
Consolidated Statements of Cash Flows for the Nine Months Ended
April 30, 1998 and 1999.............................................................. 5
Notes to Consolidated Financial Statements........................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 8
Part II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K..................................................... 15
</TABLE>
2
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American TeleSource International, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share information)
<TABLE>
<CAPTION>
July 31, April 30,
1998 1999
---------- ----------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,091 $ 216
Accounts receivable, net of allowance of $ 209 and $434, respectively 3,748 3,863
Prepaid expenses and other assets 649 2,638
---------- ----------
Total current assets 5,488 6,717
---------- ----------
PROPERTY AND EQUIPMENT (At cost): 14,233 16,956
Less - Accumulated depreciation and amortization (2,418) (4,040)
---------- ----------
Net property and equipment 11,815 12,916
---------- ----------
OTHER ASSETS, net:
Goodwill, net 5,091 5,066
Contracts, net 1,173 934
Trademark, net - 883
Other assets 489 352
---------- ----------
Total assets $ 24,056 $ 26,868
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 5,683 $ 4,773
Accrued liabilities 1,918 2,979
Current portion of notes payable 688 1,448
Current portion of convertible debt - 1,855
Current portion of obligations under capital leases 2,351 1,334
Deferred revenue 535 492
---------- ----------
Total current liabilities 11,175 12,881
---------- ----------
LONG-TERM LIABILITIES:
- ---------------------
Notes payable, less current portion 719 2,130
Convertible long-term debt, less current portion 1,604 -
Obligations under capital leases, less current portion 2,941 3,742
Other long-term liabilities 530 555
---------- ----------
Total long-term liabilities 5,794 6,427
---------- ----------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Preferred shares, $0.001 par value, 10,000,000 shares authorized,
Series A Cumulative Convertible Preferred Stock, 50,000 shares
authorized, 0 shares issued and outstanding at July 31, 1998,
21,245 shares issued and outstanding at April 30, 1999 - -
Common stock, $0.001 par value, 100,000,000 shares authorized,
45,603,566 issued and outstanding at July 31, 1998,
48,098,087 issued and outstanding at April 30, 1999 46 48
Stock subscriptions receivable, 0 shares outstanding
at July 31, 1998, 4,200 shares outstanding at April 30, 1999 - (420)
Additional paid-in capital 22,248 26,199
Accumulated deficit (14,396) (17,470)
Deferred compensation (667) (622)
Cumulative translation adjustment (144) (175)
---------- ----------
Total stockholders' equity 7,087 7,560
---------- ----------
Total liabilities and stockholders' equity $ 24,056 $ 26,868
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
American TeleSource International, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended April 30, Nine months ended April 30,
-------------------------------- --------------------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Network management services $ 2,950 $ 3,307 $ 7,477 $ 14,319
Call services 3,875 1,816 10,382 5,143
Direct dial services 1,515 1,629 4,657 4,474
Internet E-commerce 493 679 1,053 1,856
---------- ---------- ---------- ----------
Total operating revenues 8,833 7,431 23,569 25,792
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Cost of services 5,532 4,142 14,435 15,467
Selling, general and administrative 4,154 3,240 10,240 9,814
Depreciation and amortization 628 942 1,508 2,349
---------- ---------- ---------- ----------
Total operating expenses 10,314 8,324 26,183 27,630
---------- ---------- ---------- ----------
Operating loss (1,481) (893) (2,614) (1,838)
OTHER INCOME(EXPENSE)
Interest income 64 11 94 41
Other income (expense) 3 (50) 23 (23)
Interest expense (357) (398) (1,086) (1,178)
---------- ---------- ---------- ----------
Total other income (expense) (290) (437) (969) (1,160)
---------- ---------- ---------- ----------
Loss before income tax expense (1,771) (1,330) (3,583) (2,998)
Foreign income tax expense (152) 17 (152) (45)
---------- ---------- ---------- ----------
Net loss ($1,923) ($1,313) ($3,735) ($3,043)
Less: Preferred stock dividends - ($31) - ($31)
---------- ---------- ---------- ----------
Net loss to common shareholders ($1,923) ($1,344) ($3,735) ($3,074)
========== ========== ========== ==========
Net loss per common share ($0.04) ($0.03) ($0.09) ($0.07)
========== ========== ========== ==========
Weighted average common shares
outstanding 43,447 46,844 39,612 46,259
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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American TeleSource International, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended April 30,
-------------------------------
1998 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($3,735) ($3,074)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization 1,508 2,349
Amortization of debt discount 228 254
Amortization of discount on preferred equity - 21
Deferred compensation 373 395
Cumulative translation adjustment (23) 129
Provision for losses on accounts receivable 739 627
Changes in operating assets and liabilities-
Increase in accounts receivable (1,443) (742)
Increase in other assets - current and long-term (635) (815)
Increase (decrease) in accounts payable 2,133 (818)
Increase in accrued liabilities (196) 758
Increase in deferred revenue (174) (42)
------- -------
Net cash used in operating activities (1,225) (958)
------- -------
Cash flows from investing activities:
Purchases of property and equipment (2,890) (866)
Cash paid in acquisitions (2,111) (171)
------- -------
Net cash used in investing activities (5,001) (1,037)
------- -------
Cash flows from financing activities:
Proceeds from issuance of debt 2,913 489
Net increase (decrease) in short-term borrowings 314 (306)
Payments on debt (400) (385)
Capital lease payments (949) (774)
Proceeds from issuance of preferred stock,
net of issuance costs - 1,133
Proceeds from issuance of common stock,
net of issuance costs 4,271 963
------- -------
Net cash provided by financing activities 6,149 1,120
------- -------
Net decrease in cash (77) (875)
Cash, beginning of period 1,921 1,091
------- -------
Cash, end of period $ 1,844 $ 216
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements, which include
the accounts of American TeleSource International, Inc. and its subsidiaries
("ATSI" or "the Company"), as defined in the Company's annual report on Form 10-
K, have been prepared in accordance with Rule 10-01 of Regulation S-X, "Interim
Financial Statements," and accordingly do not include all information and
footnotes required under generally accepted accounting principles for complete
financial statements. In the opinion of management, these interim financial
statements contain all adjustments, without audit, necessary to present fairly
the consolidated financial position of ATSI as of July 31, 1998 and April 30,
1999, the results of their operations for the three and nine months ended April
30, 1998 and 1999 and cash flows for the nine months ended April 30, 1998 and
1999. All adjustments are of a normal recurring nature. All significant
intercompany balances and transactions have been eliminated in consolidation.
It is recommended that these interim consolidated financial statements be read
in conjunction with the consolidated financial statements and the notes thereto
for the year ended July 31, 1998 included in the Company's annual report on Form
10-K filed with the SEC on October 29, 1998. Certain prior period amounts have
been reclassified for comparative purposes. The results of operations for any
interim period are not necessarily indicative of the results to be expected for
the full year.
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share", which establishes standards for
computing and presenting earning per share ("EPS") with entities with publicly
held common stock or potential common stock. SFAS No. 128 simplifies the
standards for computing EPS previously found in Accounting Principles Board
Opinion No. 15, "Earnings per Share", and makes them comparable to international
EPS standards. It replaces the presentation of primary EPS with a presentation
of basic EPS, which excludes dilution. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
a complex capital structure. As the Company had a net loss for the three and
nine months ended April 30, 1998 and 1999, diluted EPS equals basic EPS, as
potentially dilutive common stock equivalents are antidilutive in loss periods.
Prior period EPS data has been restated as required by SFAS No. 128.
2. FUTURE OPERATIONS
The consolidated financial statements of the Company have been prepared on
the basis of accounting principles applicable to a going concern. For the
period from December 17, 1993 to April 30, 1999, the Company has incurred
cumulative net losses of approximately $17,416. Further, the Company has a
working capital deficit of approximately $6,164 at April 30, 1999. Although the
Company has capital resources available to it, these resources are limited and
may not be available to support its ongoing operations until such time as the
Company is able to maintain positive cash flow from operations. There is no
assurance the Company will be able to achieve future revenue levels sufficient
to support operations or recover its investment in property and equipment,
goodwill and other intangible assets. These matters raise substantial doubt
about the Company's ability to continue as a going concern. The ability of the
Company to continue as a going concern is dependent upon the ongoing support of
its stockholders and customers, its ability to obtain capital resources to
support operations and its ability to successfully market its services.
The Company is likely to require additional financial resources in the near
term and could require additional financial resources in the long-term to
support its ongoing operations. The Company has retained various financial
advisers to assist it in refining its strategic growth plan, defining its
capital needs and obtaining the funds required to meet those needs. The plan
includes securing funds through equity offerings and entering into lease or
long-term debt financing agreements to raise capital. There can be no
assurances, however, that such equity offerings or other long-term debt
financing arrangements will actually be consummated or that such funds, if
received, will be sufficient to support existing operations until revenue levels
are achieved sufficient to maintain positive cash flow from operations. If the
Company is not successful in completing additional equity offerings or entering
into other financial arrangements, or if the funds raised in such stock
offerings or other financial arrangements are not adequate to support the
Company until a successful level
6
<PAGE>
of operations is attained, the Company has limited additional sources of debt or
equity capital and would likely be unable to continue operating as a going
concern.
3. PROPERTY, PLANT AND EQUIPMENT
In December 1998, the Company signed an agreement with Network Equipment
Technologies, Inc. (N.E.T.) for the purchase, financing and installation of ATM
(asynchronous transfer mode) equipment in the U.S. and Mexico. This equipment
is being purchased through a capital lease transaction covering thirty-six
months and carrying an interest rate of 9.5%. Monthly payments of principal and
interest total approximately $29,000. The Company commenced making capital lease
payments in May 1999.
Additionally, in December 1998, the Company signed an agreement with
Northern Telecom "Nortel" for the purchase and installation of a Nortel DMS
250/300 International Gateway switch. The Company has received a commitment
from a company, subject to the completion of satisfactory documentation, to
finance the purchase of the switch through a note to be paid in twenty (20)
quarterly payments beginning approximately six months following the closing date
of this transaction. Interest accrues monthly at a fixed rate equal to the five
year bank swap rate as reported on Telerate, plus 4.95%. The Company has
recorded the purchase of the Nortel switch as both an increase in property and
equipment and notes payable.
4. PRIVATE PLACEMENTS
Effective March 25, 1999, the "Date of Closing", the Company issued
approximately $1.1 million, representing 11,329 shares at a stated value of $100
per share, in $0.001 par value Convertible Preferred Stock ("Preferred Stock")
through a private placement to accredited investors. The Preferred Stock accrue
cumulative dividends at the rate of 10% per annum and are payable quarterly. The
Preferred Stock and any accumulated, unpaid dividends may be converted into
Common Stock for up to one year at approximately $0.77, the average closing
price of the Common Stock for twenty (20) trading days preceding the Date of
Closing (the "Initial Conversion Price"). The Preferred Stock may not be
converted for a period of ninety (90) days following the Date of Closing except
in the event of a change in control of the Company or an offering of securities
by the Company or a subsidiary of the Company. On each Anniversary Date up to
and including the fifth Anniversary Date, the Conversion price on any
unconverted Preferred Stock, will be reset to be equal to 75% of the average
closing price of the stock for the then twenty (20) preceding days provided that
the Conversion price can not be reset any lower than the Initial Conversion
Price. As this conversion feature is considered to be a "beneficial conversion
feature" to the holder, the Company has allocated $234,397 of the approximate
$1.1 million in proceeds to additional paid-in capital as a discount to be
amortized over a twelve month period, using the effective interest method. The
Preferred Stock is callable and redeemable by the Company at 100% of its face
value, plus any accumulated, unpaid dividends at the Company's option any time
after the Common Stock of the Company has traded at 200% or more of the
Conversion Price in effect for at least twenty (20) consecutive trading days, so
long as the Company does not call the Preferred Stock prior to the first
anniversary date of the Date of Closing.
Effective April 23, 1999, the "Date of Closing", the Company issued
approximately $1.0 million, representing 9,916 shares at a stated value of $100
per share, in $0.001 par value Convertible Preferred Stock ("Preferred Stock")
through a private placement to accredited investors. The Preferred Stock issued
effective April 23, 1999 was identical to that issued effective March 25, 1999,
with the exception of the Initial Conversion price which is $0.71, the average
closing price of the Common Stock for twenty (20) days preceding the Date of
Closing. Accordingly, the conversion feature was considered to be a "beneficial
conversion feature" to the holder and the Company has allocated all of the
approximate $1.0 million in proceeds to additional paid-in capital as a discount
to be amortized over a twelve month period, using the effective interest period.
As of the date of this filing, approximately $420,000 of the $1.0 million in
proceeds represents a subscription receivable outstanding. The company has
properly accounted for this portion of the proceeds as a non-cash transaction in
its accompanying consolidated financial statements.
In April 1999, the Company issued 1,003,387 shares of Common Stock through
a private placement to accredited investors at a price of $0.60 per share.
Additionally, each shareholder received a warrant to purchase an
7
<PAGE>
additional share of Common Stock at a price of $0.70 per share for a period of
one year from the date of the private placement.
5. YEAR 2000 COMPLIANCE
The Company has initiated a program to identify and address issues
associated with the ability of its date-sensitive information, telephony and
business systems to properly recognize the year 2000 in order to avoid
interruption of the operation of these systems at the turn of the century. This
program is being conducted by the Company's Management Information Systems
group, which is coordinating the efforts of internal resources as well as third
party vendors in making all of the necessary changes for all management systems
and product related infrastructure for the Company's divisions and subsidiaries.
The Company has completed substantially all of the necessary testing and
deployment with final completion planned for September 1999. However, the
Company must rely on the representations and warranties of third parties,
including domestic U.S. and foreign carriers of its traffic, in testing for
readiness for year 2000 issues and cannot ensure compliance by these parties.
The Company expects to avoid disruption of its owned information, telephony and
business systems as a result of these efforts.
6. LEGAL PROCEEDINGS
On January 29, 1999, one of the Company's customers filed a Demand for
Arbitration seeking damages for breach of contract. The customer claims that
the Company wrongfully terminated an International Carrier Services Agreement
executed by the parties in June 1998 under which the Company provided wholesale
carrier services from June 1998 to January 1999. The customer's claims for
damages represent amounts that it claims it had to pay in order to replace the
service provided by the Company. The Company asserts that the customer breached
the agreement by failing to pay for services rendered and by intentionally
making false representation regarding its traffic patterns and on March 3, 1999
filed a Demand for Arbitration seeking damages for breach of contract in an
amount equal to the amounts due to the Company for services rendered plus
interest, plus additional damages for fraud. The parties are in the process of
selecting an arbitration panel. No reserve has been established for the amounts
owed to the Company by the customer, in the amount of $846,000, in the
accompanying consolidated financial statements.
The Company believes that it has a justifiable basis for its arbitration
demand and that it will be able to settle the dispute without a material adverse
effect on the Company's financial statements; however, until the arbitration
proceedings take place, the Company can not reasonably estimate the possible
loss, if any, and there can be no assurance that the resolution of this dispute
would not have an adverse effect on the Company's results of operations.
7. SUBSEQUENT EVENTS
In May 1999, the Company restructured its capital lease obligation with IBM
de Mexico by extending the payment of its total obligation over a forty-eight
(48) month period. The net result of the restructuring was a shift of
approximately $1.3 million in the Company's capital lease obligation from
current to long-term in the accompanying consolidated financial statements. The
restructured lease facility calls for monthly payments of principal and interest
of approximately $108,000 beginning in July 1999 and extending through June
2003.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Quarterly Report on Form 10-Q contains certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Specifically, all statements other
than statements of historical facts included in the report regarding the
Company's financial position, business strategy and plans and objectives of
management of the Company for future operations are forward-looking statements.
These forward-looking statements are based on the beliefs of the Company's
management, as well as assumptions made by and information currently available
to the Company's management. When used in this report, the words "anticipate,"
"believe," "could," "estimate," "expect" and "intend" and words or phrases of
similar import, as they relate to the
8
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Company or Company's management, are intended to identify forward-looking
statements. Such statements reflect the current view of the Company with respect
to future events and are subject to certain risks, uncertainties and assumptions
related to certain factors including, without limitation, the inability to
obtain capital, changes in the Mexican political or economic environment, the
adoption by Mexico of new laws or regulations, or changes effected by Mexico to
existing laws affecting the communications industry generally or the Company
specifically, increased or redirected competition efforts, targeting the
Company's services or operation, by competitors, general economic conditions,
customer relations, relationships with vendors, the interest rate environment,
seasonality, the operation of the Company's network, the ability of the
Company's direct sales force to successfully replace its independent marketing
representatives or the failure of its direct sales force to produce anticipated
results, transmission costs, product introductions and acceptance, the inability
to continue to generate new sources of revenue, technological change, changes in
industry practices, one-time events and other factors described herein
("cautionary statements"). Reference is made to the risks and uncertainties
described in the Company's annual report on Form 10-K. Although the Company
believes that the expectations are reasonable, it can give no assurance that
such expectations will prove to be correct. Based upon changing conditions,
should any one or more of these risks or uncertainties materialize, or should
any underlying assumptions prove incorrect, actual results may vary materially
from those described herein as anticipated, believed, estimated, expected or
intended. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the applicable cautionary statements.
General
The Company's mission is to become a full-service international
telecommunications carrier, providing direct dial and operator assisted call
services and network services on both a retail and wholesale basis within and
between select markets in Latin America and the United States. Utilizing a
framework of licenses, interconnection and service agreements, network
facilities and retail distribution channels (hereinafter collectively referred
to as the "framework"), the Company is primarily focused on capturing market
share in the international telecommunications corridor between the United States
and Mexico. Even with poor phone-line penetration, the Company's research
indicates that Mexico may exchange more international traffic with the U.S. than
any other country in the world within the next two years. As the regulatory
environments allow, the Company also plans to establish framework in other Latin
American countries as well. In addition to the U.S. and Mexico, the Company
currently owns or has rights to use facilities in and has strategic
relationships with carriers in Costa Rica, El Salvador, and Guatemala.
Utilizing the framework described above, the Company provides local,
domestic long distance and international calls from its own public telephones
and casetas within Mexico, and provides similar services to some third party-
owned casetas, public telephones and hotels in Mexico as well. Consumers
visiting a Company-owned caseta or public telephone may dial directly to the
desired party in exchange for cash payment, or can charge the call to a U.S.
address (collect, person-to-person, etc.) or calling card, or to a U.S. dollar-
denominated credit card with the assistance of an operator. In July 1998, the
Company began providing domestic U.S. and international call services to Mexico
to residential customers on a limited basis in the U.S. Callers may either pre-
subscribe to the Company's one-plus residential service, or dial around their
pre-subscribed carrier by dialing 10-10-624, plus the area code and desired
number. Where possible, these retail calls are transported over the Company's
own network infrastructure.
Utilizing the same framework described above, the Company also serves as a
retail and wholesale facilities-based provider of network services for corporate
clients and U.S. and Latin American telecommunications carriers. These
customers typically lack transmission facilities into certain markets, or
require additional capacity into certain markets. The Company currently provides
these services to and from the United States, Mexico, Costa Rica, El Salvador
and Guatemala.
The Company is also the sole owner of GlobalSCAPE, Inc., which is rapidly
becoming a leader in electronic commerce of top Internet-based software,
utilizing the Web as an integral component of its development, marketing,
distribution and customer relationship strategies. Utilizing CuteFTP as its
flagship product, GlobalSCAPE has a user base of approximately 7.5 million users
as of May 31, 1999.
The Company's consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
losses since inception and has a working capital deficit as of April 30, 1999.
For the reasons stated in Liquidity and Capital Resources and subject to the
risks referred to in Liquidity and Capital, the Company expects improved results
of operations and liquidity in the last three months of fiscal 1999.
9
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Results of Operations
The following table sets forth certain items included in the Company's
results of operations in dollar amounts and as a percentage of total revenues
for the three and nine-month periods ended April 30, 1998 and 1999.
<TABLE>
<CAPTION>
Three Months Ended April 30, Nine Months Ended April 30,
---------------------------- ---------------------------
1998 1999 1998 1999
---- ----- ---- ----
(unaudited)
$ % $ % $ % $ %
----------- --------- --------- --------- ---------- --------- ---------- --------
Operating revenues
- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Network management services $ 2,950 33% $ 3,307 45% $ 7,477 32% $ 14,319 56%
Call services 3,875 44% 1,816 24% 10,382 44% 5,143 20%
Direct dial services 1,515 17% 1,629 22% 4,657 20% 4,474 17%
Internet E-commerce 493 6% 679 9% 1,053 4% 1,856 7%
----------- --------- --------- --------- ---------- --------- ---------- --------
Total operating revenues 8,833 100% 7,431 100% 23,569 100% 25,792 100%
Cost of services 5,532 63% 4,142 56% 14,435 61% 15,467 60%
----------- --------- --------- --------- ---------- --------- ---------- --------
Gross Margin 3,301 37% 3,289 44% 9,134 39% 10,325 40%
Selling, general and
administrative expense 4,154 47% 3,240 44% 10,240 43% 9,814 38%
----------- --------- --------- --------- ---------- --------- ---------- --------
Depreciation and amortization 628 7% 942 12% 1,508 7% 2,349 9%
----------- --------- --------- --------- ---------- --------- ---------- --------
Operating loss (1,481) (17%) (893) (12%) (2,614) (11%) (1,838) (7%)
Other, net (442) (5%) (420) (6%) (1,121) (5%) (1,205) (5%)
----------- --------- --------- --------- ---------- --------- ---------- --------
Net loss ($1,923) (22%) ($1,313) (18%) ($3,735) (16%) ($3,043) (12%)
Less: Preferred stock dividends - 0% (31) 0% - 0% (31) 0%
----------- --------- --------- --------- ---------- --------- ---------- --------
Net loss to common shareholders ($1,923) (22%) ($1,344) (18%) ($3,735) (16%) ($3,074) (12%)
====================================================================================
</TABLE>
Three Months Ended April 30, 1999 Compared to Three Months Ended April 30, 1998
Operating revenues. Operating revenues decreased approximately $1.4
million, or 16%, due primarily to declines in the Company's call services. This
decline was somewhat offset by growth in the Company's network management,
direct dial and Internet e-commerce services.
Network Management Services, which includes both retail and wholesale
transport services, increased approximately 12%, or $360,000, between periods.
In July 1998, the Company signed an agreement with Satelites Mexicanos, S.A. de
C.V. ("SATMEX"), under which the Company was able to secure satellite capacity
for resale purposes. The ability to manage and resell this capacity allowed the
Company to increase billings to existing corporate clients who previously dealt
directly with SATMEX, and to add additional retail, corporate customers more
quickly. Revenues from the wholesale transport of traffic for U.S.-based
carriers into Mexico decreased slightly between periods. Although the Company
processed approximately the same amount of traffic between periods, competitive
and other market factors caused the Company to decrease the price at which it
did so.
Call Service revenues decreased approximately $2.1 million, or 53%, between
periods. This decline is principally the result of the Company's strategy to
focus on core product offerings which best utilize its own network
10
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infrastructure. In an effort to improve overall gross margins and reduce
selling, general and administrative costs, the Company ceased providing U.S.-
based call services in July of last year, and decreased the level of call
services business with third-party owned telephones and hotels in Mexico,
Jamaica and the Dominican Republic. During the quarter ending April 30, 1999,
the Company's operator center in San Antonio processed approximately 45,000
calls from Mexico, as compared to approximately 100,000 calls in the same period
in 1998.
Direct dial services revenues, which are generated by calls processed by
the Company without live or automated operator assistance, increased
approximately $114,000, or 7.5%, between periods. The majority of these
revenues, which are stated in U.S. dollars in the accompanying financial
statements, are generated by the Company's public telephones and casetas in
Mexico in exchange for immediate cash payment in pesos. Although the number of
these calls increased slightly between periods, the increase was offset somewhat
by weakening of the peso vs. the dollar between periods from 8.5 pesos to the
dollar to 9.7 pesos to the dollar.
Revenues from GlobalSCAPE, Inc., the Company's e-commerce subsidiary,
increased approximately $186,000, or 38%, between periods. In January 1999,
GlobalSCAPE purchased the rights to the source code of CuteFTP, the company's
flagship product. An enhanced version of CuteFTP was subsequently released
which increased the number of downloads and subsequent purchases of CuteFTP,
increasing revenues.
Cost of Services. Cost of services decreased from $5.5 million in the
previous year's quarter to $4.1 million in the current year's quarter, and also
decreased as a percentage of revenues from 63% to 56%, respectively. The
decrease was partially due to the Company's decision to cease providing U.S.-
based call services in July of last year, and decreased the level of call
services business with third-party owned telephones and hotels in Mexico,
Jamaica and the Dominican Republic. Such calls did not fully utilize the
Company's owned network and therefore produced relatively lower gross margins.
The aforementioned purchase of the source code for CuteFTP by GlobalSCAPE
also contributed to the decline in cost of services as a percentage of revenues.
Prior to the purchase, the Company had an obligation to pay royalties to
CuteFTP's original author in return for the right to sell and distribute
CuteFTP. The purchase of the source code eliminated such royalty fees.
Selling, General and Administrative (SG&A) expenses. SG&A expenses
declined 22%, or approximately $914,000, between periods. By decreasing the
volume of retail call services traffic processed, the Company was able to
eliminate overhead costs associated with the traffic. In addition, the Company
continued to implement cost-cutting measures, consisting primarily of reductions
in staff, which was initiated in July 1998. The period ending April 30, 1998
also contained one-time charges of approximately $225,000 incurred in the
Company's re-incorporation in Delaware.
Depreciation and Amortization. Depreciation and amortization rose
approximately $314,000, or 50%, between quarters and increased as a percentage
of revenues from 7% to 12%. This increase was caused by the addition of
approximately $3.4 million in equipment between April 30, 1998 and April 30,
1999. The majority of the assets purchased consisted of equipment that added
capacity to the Company's international network infrastructure including the
Monterrey Hub installed in April 1998, the Network Equipment Technologies
(N.E.T.) equipment purchased in December 1998 and the Company's new Nortel DMS
250/300 International Gateway switch purchased in January 1999.
Operating Loss. The Company's operating loss improved $588,000 between
quarters and decreased as a percentage of revenues from 17% to 12%, due to
greater margins and decreased sales volumes offset to some degree by increased
depreciation and amortization.
Other Income (Expense). Other income (expense) decreased approximately
($22,000). This improvement was attributable to decreased foreign income tax
expense; offset by increased interest expense and reduced interest income.
Nine Months Ended April 30, 1999 Compared to Nine Months Ended April 30, 1998
Operating revenues. Operating revenues increased approximately $2.2
million, or 9%, due to growth in the
11
<PAGE>
Company's network management and Internet e-commerce services. This growth was
partially offset by declines in the Company's call services and direct dial
services.
Network management services, which includes both retail and wholesale
transport services, increased approximately $6.8 million, or 92% between
periods. This growth was principally due to the amount of wholesale network
services provided to other carriers seeking transmission facilities or
additional capacity. The Company processed approximately 25.2 million minutes
of traffic for other carriers during the nine months ended April 30, 1998, as
compared to approximately 53.1 million minutes during the period ended April 30,
1999. In April 1998, the Company completed its Monterrey Hub facility, which
significantly increased the Company's ability to process additional carrier
traffic. Additionally, in July 1998, the Company signed an agreement with
Satelites Mexicanos, S.A. de C.V. ("SATMEX"), under which the Company was able
to secure satellite capacity for resale purposes. The ability to manage and
resell this capacity allowed the Company to increase billings to existing
corporate clients who previously dealt directly with SATMEX, and to add
additional retail, corporate customers more quickly.
Call service revenues decreased approximately $5.2 million, or 50% between
periods. This decline is principally the result of the Company's strategy to
focus on core product offerings which best utilize its own network
infrastructure. In an effort to improve overall gross margins and reduce
selling, general and administrative costs, the Company ceased providing U.S.-
based call services in July of last year, and decreased the level of call
services business with third-party owned telephones and hotels in Mexico,
Jamaica and the Dominican Republic. During the nine months ending April 30,
1999, the Company's operator center in San Antonio processed approximately
128,000 calls from Mexico, as compared to approximately 238,000 calls in the
same period in 1998.
Direct dial services revenues, which are generated by calls processed by
the Company without live or automated operator assistance, decreased
approximately $183,000, or 4%, between periods. The majority of these revenues,
which are stated in U.S. dollars in the accompanying financial statements, are
generated by the Company's public telephones and casetas in Mexico in exchange
for immediate cash payment in pesos. While the number of these calls remained
relatively flat between periods the pesos generated converted to fewer U.S.
dollars due to the weakening of the peso vs. the dollar between periods from 8.2
pesos to the dollar to 9.9 pesos to the dollar.
Revenues from GlobalSCAPE, Inc., the Company's e-commerce subsidiary
increased approximately $803,000, or 76% between periods. This growth was
primarily due to the increase in the number of downloads and subsequent
purchases of CuteFTP, increasing revenues. In January 1999, GlobalSCAPE
purchased the rights to the source code of CuteFTP, the company's flagship
product. An enhanced version of CuteFTP was subsequently released which
resulted in increased downloads and purchases of CuteFTP.
Cost of Services. Cost of services increased from $14.4 million to $15. 5
million or 7% but decreased slightly as a percentage of total revenues from 61%
to 60%. The increase in cost of services was attributable to the increased
volume of business handled by the Company as discussed above. The decrease in
cost of services, as a percentage of revenues was partially due to the Company's
decision to cease providing U.S.-based call services in July of last year, and
decrease the level of call services business with third-party owned telephones
and hotels in Mexico, Jamaica and the Dominican Republic. Such calls did not
fully utilize the Company's owned network and therefore produced relatively
lower gross margins.
The aforementioned purchase of the source code for CuteFTP by GlobalSCAPE
also contributed to the decline in cost of services as a percentage of revenues.
Prior to the purchase, the Company had an obligation to pay royalties to
CuteFTP's original author in return for the right to sell and distribute
CuteFTP. The purchase of the source code eliminated such royalty fees.
Selling, General and Administrative (SG&A). SG&A expenses decreased 4%, or
approximately $426,000, between periods. As a percentage of revenues, these
expenses decreased from 43% to 38%. By decreasing the volume of retail call
services traffic processed, the Company was able to eliminate overhead costs
associated with the traffic. In addition, the Company continued to implement
cost-cutting measures, consisting primarily of reductions in staff, which was
initiated in July 1998. For the nine months ending April 30, 1998, the Company
incurred approximately $500,000 of charges related to the Company's re-
incorporation in Delaware.
12
<PAGE>
Depreciation and Amortization. Depreciation and amortization rose
approximately $841,000, or 56%, between periods, and increased as a percentage
of revenues from 7% to 9%. This increase was caused by the addition of
approximately $3.4 million in equipment between April 30, 1998 and April 30,
1999. The majority of the assets purchased consisted of equipment that added
capacity to the Company's international network infrastructure including the
Monterrey Hub installed in April 1998, the Network Equipment Technologies
(N.E.T.) equipment purchased in December 1998 and the Company's new Nortel DMS
250/300 International Gateway switch purchased in January 1999.
Operating Loss. The Company's operating loss improved $776,000, or 30%,
between periods and improved as a percentage of revenues from 11% to 7%,
primarily due to increased sales volumes, improved gross margins and reductions
in the Company's SG&A expenses.
Other Income (Expense). Other income (expense) increased approximately
($84,000). This increase was primarily attributable to an increase in interest
expense and reduced interest income offset by reduced foreign income tax
expense.
Liquidity and Capital Resources
During the nine month period ended April 30, 1999, the Company generated
negative cash flows from operations of approximately $958,000. This compares
with the approximate $1.2 million in negative cash flows from operations
produced during the same time period in the prior year. Although the Company
produced positive EBITDA of approximately $511,000 during the nine-month period
ending April 30, 1999, it did not produce positive cash flows from operations
principally because the rate at which it reduced payables exceeded the rate at
which it collected on receivables.
The Company purchased approximately $866,000 in equipment during the nine-
month period ending April 30, 1999, primarily related to the expansion and
upgrading of its international satellite-based network between the U.S. and
Mexico. The equipment was partially paid for from cash flows generated
internally by the Company, as well as some of the cash proceeds of $359,000
generated from the exercise of options and warrants during the period. A
portion of the proceeds from the options and warrants was also applied to
working capital needs during the period.
On January 16, 1999, GlobalSCAPE purchased the rights to the source code
for CuteFTP, the company's flagship product. Terms of the purchase called for a
cash payment of approximately $171,000 to be made by January 31, 1999, and for
monthly payments of $63,000 for a twelve-month period starting in February 1999.
In order to make the cash payment due in January, GlobalSCAPE borrowed $180,000
from a bank at an interest rate of prime plus 1%. The note is to be paid back
over a two year period in monthly principal installments of $5,000 plus interest
for an initial twelve-month period, and in monthly principal amounts of $10,000,
plus interest, over a subsequent twelve-month period.
During December 1998, the Company ordered a DMS 250/300 international
gateway switch from Northern Telecom, Inc. at a cost of approximately $1.8
million. In June 1999, the Company received a commitment to finance the
purchase of this switch from a company over a five and one-half year period.
The commitment is subject to, among other things, the completion of legal
documents satisfactory to both the lender and the Company. In accordance with
current accounting literature, the Company has recorded the obligation for the
switch as a long-term note payable in the accompanying consolidated balance
sheet and has treated the purchase of the switch as a non-cash transaction for
cash flow purposes. Also during December 1998, the Company secured $500,000 in
ATM equipment under another capital lease transaction.
In an effort to improve its working capital position, the Company issued
approximately $2.1 million in 10% Series A Cumulative Convertible Preferred
Stock ("Preferred Stock") during March and April 1999. The Company also
generated approximately $602,000 in proceeds during April 1999 through the
private sale of common stock to various individuals. In May 1999, the Company
restructured its capital lease arrangement with IBM de Mexico, extending payment
of the total obligation owed as of June 30, 1999 over a 48 month period.
The Company has $2.2 million of notes outstanding to various individuals
that become due in March 2000. The notes, which total approximately $1.9
million net of unamortized debt discount in the accompanying balance
13
<PAGE>
sheet, plus accrued interest have been classified as a current liability in the
accompanying balance sheet.
The net result of the above-described operating, investing and financing
activities during the nine-month period was a working capital deficit of
approximately $6.2 million and a cash balance of approximately $216,000 as of
April 30, 1999. The Company's current ratio was .52:1 at April 30, 1999,
compared to .49:1 at July 31, 1998.
The Company did not generate sufficient cash flows from operations or
financings to cover working capital, capital expenditure needs and debt service
requirements during the nine-month period ending April 30, 1999 and keep the
amount of cash maintained by the Company from decreasing. In an effort to
alleviate its working capital deficit, the Company anticipates raising
additional funds through the sale of equity securities. Dependent upon its
ability to meet debt service requirements, the Company is also seeking
additional debt financing which would enable it to shift short-term obligations
to long-term. The Company believes that operating results in the near term will
also allow it to obtain financing for needed capital expenditures from
manufacturers of the equipment in the form of capital leases, similar to
arrangements already obtained to finance the purchase of the Company's ATM
equipment from NET.
The Company is also considering the sale of all or a part of its ownership
in GlobalSCAPE via a private or a public offering of GlobalSCAPE shares. No
assurances may be given, however, that the Company will be able to generate
additional cash proceeds through the above-mentioned debt and equity scenarios,
or that the Company will be able to generate cash proceeds through the
divestiture of any or all of its ownership position in GlobalSCAPE.
In an effort to improve internal cash flows and to improve operating
results, the Company's focus continues to be on generating traffic that will
flow through its international network infrastructure between the U.S. and
Mexico. The Company anticipates that the majority of near-term growth will be
derived from providing wholesale network transport services from the U.S. to
Mexico for carriers seeking termination of their traffic in Mexico.
Historically, the Company has provided these services strictly through the
utilization of its satellite-based infrastructure. In an effort to increase the
capacity available for resale, and to enhance the reliability and quality of its
infrastructure, in June 1999 the Company secured a fiber route between its
international switching facilities in Dallas, Texas and its facilities in Mexico
City, Mexico. Once operational, the Company will operate an international,
hybrid (satellite and fiber-based) and redundant network which, when combined
with its international gateway switch in Dallas, Texas, it believes will give it
a foundation for near-term growth. However, no assurances may be given that the
Company will be able to grow revenues in the near term.
Although the Company believes that wholesale prices for such traffic
between the U.S. and Mexico may continue to be volatile and may continue to
decline, it believes that its current framework of licenses, agreements and
infrastructure will allow it to achieve margins which, when combined with
margins from call services and direct dial services, will produce positive cash
flows sufficient to meet its debt service requirements. However, no assurances
may be given that this will be the case.
In an effort to continue to maintain overall corporate margins and to
secure a less volatile overall customer base, the Company believes that it will
need to continue to invest in the build-out of network infrastructure, primarily
in Mexico, and that it must eventually grow a retail-oriented customer base. By
continuing to build network to support its traffic patterns in Mexico, the
Company believes it can reduce its costs by reducing its reliance on third-party
vendors. Under its current licensing, the Company is able to transport traffic
to, from and within Mexico, but must deliver or receive that traffic from a
concessioned carrier that has the ability to interconnect into Mexico's local
telecommunications infrastructure. The Company has applied for, and expects to
receive, a 50-year long distance concession from the Mexican government that
would give it the capability of interconnecting to the local infrastructure in
Mexico. However, no assurances may be given that the Company will be able to
obtain the financing or the concession necessary to further establish network
infrastructure in Mexico.
Subsequent to July 1999, the Company expects to invest funds, if available,
into marketing retail services targeting Latinos in the U.S. and Mexico who
frequently make international calls between the U.S. and Mexico. The Company
feels that it is important to capture a portion of this market not only to
generate higher retail revenues on a per-minute basis as compared to wholesale
services, but to establish brand-name recognition among the consumers frequently
making calls in the U.S.-Mexican corridor. By doing do, the Company feels that
it can secure a less volatile, protectable customer base. No assurances may be
given, however, that the Company will be able to obtain or
14
<PAGE>
generate the funds necessary to do so, or that the Company will be able to
successfully market such services if the funds are available.
Inflation/Foreign Currency
Inflation has not had a significant impact on the Company's operations.
With the exception of direct dial services provided from the Company's casetas
and public telephones, almost all of the Company's revenues are generated and
collected in U.S. dollars. Direct dial services from the Company's casetas and
public telephones are generally provided on a "sent-paid" basis at the time of
the call in exchange for cash payment, so the Company does not maintain
receivables on its books that are denominated in pesos. In an effort to reduce
foreign currency risk, the Company attempts to convert pesos collected to U.S.
dollars quickly, and attempts to maintain minimal cash balances denominated in
pesos. Some expenses related to certain services provided by the Company are
incurred in foreign currencies, primarily in pesos. The devaluation of the
Mexican peso over the past several years has not had a material adverse impact
on the Company's financial condition or operating results.
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
The exhibits listed below are filed as part of this report.
Exhibit
Number
- ------
11 Computation of Earnings per Share (filed herewith)
27 Financial Data Schedule (filed herewith)
(b) Current Reports on Form 8-K.
None.
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AMERICAN TELESOURCE INTERNATIONAL INC.
(Registrant)
Date: June 14, 1999 By: /s/ H. Douglas Saathoff
--------------------------
Name: H. Douglas Saathoff
Title: Chief Financial Officer
16
<PAGE>
Exhibit 11
AMERICAN TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
---------------------------------------- -----------------------------------------
April 30, 1998 April 30, 1999 April 30, 1998 April 30, 1999
----------------- ------------------- ----------------- ---------------------
<S> <C> <C> <C> <C>
COMPUTATION OF NET LOSS PER SHARE
Net loss ($1,923) ($1,313) ($3,735) ($3,043)
------------- ------------- ------------ --------------
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 43,447 46,844 39,612 46,259
------------- ------------- ------------ --------------
BASIC LOSS PER COMMON SHARE ($0.04) ($0.03) ($0.09) ($0.07)
------------- ------------- ------------ --------------
COMPUTATION OF DILUTED LOSS PER SHARE
Net loss ($1,923) ($1,313) ($3,735) ($3,043)
Interest not incurred upon assumed conversion
of convertible note - - 6 -
------------- ------------- ------------ --------------
Preferred dividends - (31) - (31)
------------- ------------- ------------ --------------
Net loss applicable to common stockholders
used for computation ($1,923) ($1,344) ($3,729) ($3,074)
------------- ------------- ------------ --------------
Weighted average number of shares of common
stock outstanding 43,447 46,844 39,612 46,259
Weighted average incremental shares outstanding
upon assumed conversion of options and warrants 9,332 3,575 12,834 3,060
Weighted average incremental shares outstanding
upon assumed conversion of convertible debt - - 130 -
------------- ------------- ------------ --------------
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS USED FOR
COMPUTATION 52,779 50,419 52,576 49,319
------------- ------------- ------------ --------------
DILUTED LOSS PER COMMON SHARE AND COMMON
------------- ------------- ------------ --------------
SHARE EQUIVALENT ($0.04) ($0.03) ($0.07) ($0.06)
------------- ------------- ------------ --------------
</TABLE>
(a) This calculation is submitted in accordance with Item 601 (b) (11) of
Regulation S-K although it is not required by SFAS No. 128 because it is
antidilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUL-31-1999 JUL-31-1999
<PERIOD-START> FEB-01-1999 AUG-01-1998
<PERIOD-END> APR-30-1999 APR-30-1999
<CASH> 0 216
<SECURITIES> 0 0
<RECEIVABLES> 0 4,297
<ALLOWANCES> 0 434
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 6,717
<PP&E> 0 16,956
<DEPRECIATION> 0 4,040
<TOTAL-ASSETS> 0 26,868
<CURRENT-LIABILITIES> 0 12,881
<BONDS> 0 0
0 0
0 0
<COMMON> 0 48
<OTHER-SE> 0 7,512
<TOTAL-LIABILITY-AND-EQUITY> 0 26,868
<SALES> 7,431 25,792
<TOTAL-REVENUES> 7,431 25,792
<CGS> 4,142 15,467
<TOTAL-COSTS> 8,324 27,630
<OTHER-EXPENSES> 39 (18)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 398 1,178
<INCOME-PRETAX> (1,330) (2,998)
<INCOME-TAX> (17) 45
<INCOME-CONTINUING> (1,313) (3,043)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,344) (3,074)
<EPS-BASIC> (0.03) (0.07)
<EPS-DILUTED> (0.03) (0.07)
</TABLE>
