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SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549
_______________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended July 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number:
AMERICAN TELESOURCE
INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 74-2849995
(State of Incorporation) (I.R.S. Employer
Identification No.)
12500 Network Blvd. Suite 407,
San Antonio, Texas
(Address of Principal 78249
Executive Office) (Zip Code)
(210) 558-6090
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.001 Per Share
(Title of Class)
_______________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
--
The aggregate market value of the Registrant's outstanding Common Stock
held by non-affiliates of the Registrant at October 25, 1999, was approximately
--
$41,558,696. There were 48,685,287 shares of Common Stock outstanding at
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October 25, 1999, and the closing sales price on the NASDAQ/OTCB for the
Company's Common Stock was $0.92 on such date.
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DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for the 1999 Annual Meeting of
Stockholders to be held in December 1999, are incorporated by reference in Part
III hereof.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business......................................................... 3
Overview and Recent Developments................................ 3
Strategy and Competitive Conditions............................. 4
Retail Distribution Network..................................... 5
Services and Products........................................... 6
Network Management Services............................... 6
Call Services............................................. 6
Direct Dial Services...................................... 7
Sales..................................................... 8
Electronic Commerce Via Internet.......................... 8
Network......................................................... 9
Year 2000 Issue................................................. 9
Licenses/Regulatory............................................. 10
Employees....................................................... 11
Additional Risk Factors......................................... 11
Item 2. Properties....................................................... 15
Item 3. Legal Proceedings................................................ 15
Item 4. Submission of Matters to a Vote of Security Holders.............. 16
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................. 16
Item 6. Selected Financial and Operating Data............................ 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 17
General......................................................... 17
Results of Operations........................................... 19
Liquidity and Capital Resources................................. 23
Inflation/Foreign Currency...................................... 25
Seasonality..................................................... 25
Year 2000 Compliance............................................ 25
Item 8. Financial Statements and Supplementary Data...................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures........................................... 52
PART III
Item 10. Directors and Officers of the Registrant........................ 52
Item 11. Executive Compensation.......................................... 52
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 52
Item 13. Certain Relationships and Related Transactions.................. 52
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K........................................................ 52
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This Annual Report on Form 10-K and the documents incorporated by reference
in this Annual Report contain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities and Exchange Act of 1934, as amended. "Forward looking statements"
are those statements that describe management's beliefs and expectations about
the future. We have identified forward-looking statements by using words such
as "anticipate," "believe," "could," "estimate," "may," "expect," and "intend."
Although we believe these expectations are reasonable, our operations involve a
number of risks and uncertainties, including those described in the Additional
Risk Factors section of this Annual Report and other documents filed with the
Securities and Exchange Commission. Therefore, these types of statements may
prove to be incorrect. 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.
PART I.
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ITEM I. BUSINESS
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Overview and Recent Developments
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The Company is a telecommunications provider, focusing on the market for
wholesale and retail services between the United States and Latin America, and
within Latin America. Most of the Company's current operations involve services
between the U.S. and Mexico or within Mexico. The Company owns various
transmission facilities, including teleports and switching facilities, and
leases facilities of other providers as necessary to complete its network. The
Company's subsidiary GlobalSCAPE, Inc. distributes Internet productivity
software.
The Company began operations in 1994 as a Canadian holding company, Latcomm
International, Inc. with a Texas operating subsidiary, Latin America Telecomm,
Inc. Both corporations were renamed "American TeleSource International, Inc."
in 1994. In May 1998, the Canadian corporation completed a share exchange with
a newly formed Delaware corporation, also called American TeleSource
International, Inc., which resulted in the Canadian corporation becoming the
wholly owned subsidiary of the Delaware corporation. The Company's principal
operating subsidiaries are:
. American TeleSource International de Mexico, S.A. de C.V. ("ATSI
Mexico"), which was formed in 1995 to support the Company's operations in
Mexico, and performs regulatory, sales, marketing, planning, and technical
maintenance services.
. Sistema de Telefonia Computarizada, S.A. de C.V. ("Sistecom"), which the
Company acquired in August, 1997; this subsidiary owns 126 casetas in 66
cities in Mexico;
. Servicios de Infraestructura, S.A. de C.V. ("Sinfra"), which the Company
acquired in June, 1997; this subsidiary owns certain transmission equipment and
valuable long term licenses in Mexico;
. TeleSpan, Inc. ("TeleSpan"), which was formed in February, 1998 to carry
the Company's wholesale and private network services traffic between the U.S.
and Latin America; and
. GlobalSCAPE, Inc. ("GlobalSCAPE"), which was formed in April 1996 to
implement Internet strategies which are not currently consistent with the
Company's core business.
Recent Developments
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During its fiscal year ending July 31, 1999, the Company:
. executed a Marketing Agreement with American Telephone and Telegraph
Company ("AT&T"), providing for the Company's pay telephones in Mexico
to be programmed with an AT&T "hot button." The Company receives a
commission each time a pay telephone customer uses the hot button to
access the AT&T network;
. signed an Interconnection Agreement with Bestel S.A. de C.V., further
diversifying the Company's route choices in Mexico;
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. secured a three year lease of fiber optic cable from Bestel S.A. de C.V.
and began transporting increased wholesale volume over this route;
. commissioned its new Nortel/TM/ International Gateway DMS 300/250 switch
located in Dallas;
. executed an interconnection agreement with Radiografica Costarricense,
S.A. ("RACSA"), a division of Instituto Costarricense de Electricidad,
the Costa Rican telephone company enabling the Company to interconnect
to the RACSA frame relay network "cloud" in Costa Rica, and provide high
quality, low cost connectivity via this protocol throughout the Central
American Region, Mexico and the United States
. applied for a long distance concession from the Mexican government
which, if granted, will permit the Company to carry its own intra-Mexico
long distance traffic and interconnect directly with the local Mexican
network, thereby substantially reducing costs
In fiscal year 1999 GlobalSCAPE acquired the ownership of its flagship
software product, CuteFTP/TM,, from its original author, and subsequently
executed an agreement with Tech Data Corporation for distribution of CuteFTP in
209 CompUSA stores nationwide. GlobalSCAPE also released two new Internet
productivity software products, CuteHTML/TM/ and CuteMAP/TM/. Subsequent to July
31, 1999, GloblaSCAPE signed an agreement with Lycos, Inc. ("Lycos") to
distribute CuteFTP over the Lycos network.
Strategy and Competitive Conditions
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The Company's strategy is to position itself to take advantage of the de-
monopolization of the Latin American telecommunications market, as well as the
increasing demand for services in this market. Historically,
telecommunications services in Latin America have been provided by state-run
companies operating as a legal or de facto monopoly. Although these companies
failed to satisfy the demand for services in their countries, the regulatory
scheme effectively precluded competition by foreign carriers. Currently, there
is a trend toward demonopolization of the telecommunications industry in Latin
America, and many of these countries are in various stages of migration toward a
competitive, multi-carrier market.
At the same time that Latin American markets have been opening up, the
demand for telecommunications services between the United States and Latin
America (particularly Mexico) has been strengthened by:
. rapid growth of the Latino segment of the United States population
. increase in trade and travel between Latin America and the United States
. increase in "line density" (the build out of local networks and
corresponding increase in the number of telephones in homes and
businesses) in Latin countries
. proliferation of communications devices such as faxes, mobile phones,
pagers, and personal computers
. declining rates for services as a result of increased competition.
In addition, technological advances have provided emerging carriers with
the means to provide high quality transmission on a cost-effective basis.
"Packet switching" networks, which allow voice and data to be carried on the
same network, are replacing traditional circuit-switched systems.
The Company has focused most of its efforts on Mexico, but has some
operations in Costa Rica, El Salvador, and Guatemala and intends to expand its
services as regulatory and market conditions permit. Ultimately the Company
would like to provide services throughout Latin America.
Strategy and Competitive Conditions - Mexican Market. Telefonos de Mexico
("Telmex") had a legal franchise to control the entire market for local and long
distance telecommunications in Mexico until June of 1995, when new laws began to
open the market to effective competition. In January 1997, the Mexican
government began granting concessions to provide long distance service to
competing companies, and has licensed at least 15 new long distance providers.
Several of these new concessionaires are Mexican based affiliates of top tier
U.S. Carriers (e.g. MCI/Worldcom, Inc. and AT&T). Although the Mexican
government has also licensed nine new local competitors, the build out of
additional local infrastructure is just beginning, and the local network in
Mexico is still dominated by Telmex. The Company began assembling a framework of
licenses, interconnection and service agreements, network facilities, and
distribution channels in Mexico in 1994 in anticipation of the demonoplization
of this market. In 1994, the Company began providing private network services
between the U.S. and Mexico via satellite. Since then, the Company has
established a retail distribution network in Mexico through the acquisition of
public payphones and casetas, has entered the U.S. wholesale market for
termination services to Mexico, and has begun implementation of a U.S. retail
strategy through the introduction of its presubscribed and dial around services
targeted to the Latino market in the U.S. The Company has also invested in its
own
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transmission facilities, beginning in 1994 with satellite teleport equipment,
and most recently with the acquisition of a new Nortel International Gateway
Switch and the deployment of packet switching technology in its network. As true
competition has emerged, the Company has been able to negotiate increasingly
more favorable rates for local network interconnection and long distance
services with the newly licensed long distance carriers. In fiscal year 1999 the
Company applied for its own long distance concession, which, if granted, will
permit the Company to interconnect directly with the local network and build out
its own long distance network, thereby reducing costs further. The Company
believes that its establishment of a solid framework of licenses, proprietary
network and favorable interconnection agreements has positioned it to take
advantage of the benefits to be reaped as the Mexican telecommunications
industry enters a truly competitive phase. The Company believes that it has a
clear competitive advantage over pure resellers, and that it has overcome
significant hurdles that are a barrier to entry in this market even for large
carriers. The Company intends to use its framework to capture increased amounts
of the communications traffic in the Mexican market.
Retail. Although Telmex and several large U.S. based carriers (with
their Mexican affiliates) are active participants in the Mexican retail market,
the Company believes that these carriers will focus on the most lucrative
sectors of the market, leaving many opportunities to further develop the large
portion of the market that continues to be underserved, both in the U.S. and
Mexico. The Company will devote most of its new resources on deploying
innovative new public and prepaid services targeted to the consumer market, and
in particular services which incorporate the Company's "borderless" concept of
seamless function, regardless of the user's location north or south of the
U.S./Mexico border. The Company will use its existing retail distribution
network, and may pursue acquisitions of established distribution channels from
others. The Company believes that its focus on a retail strategy, combined with
the cost reductions that will follow the grant of a Mexican long distance
license, will permit it to improve overall corporate profit margins and secure a
stable customer base.
Wholesale. The U.S. wholesale market for termination to Mexico has
become increasingly dynamic as competition, call volumes and industry capacity
along U.S. -Mexico routes have all increased. Although the Company increased
the volume of wholesale minutes it transmitted to Mexico during fiscal year
1999, downward pricing pressure in this market resulted in little additional
revenue for these minutes. The Company expects its wholesale volume of traffic
transported to increase during the upcoming year as a result of the inauguration
of its high quality ATM based fiber route to Mexico in July, 1999. In addition,
the Company plans to explore ways to exploit its wholesale operation with out
the investment of significant new resources (see Network Management Services-
Carrier Services).
Although the Company has succeeded in obtaining interconnection
agreements with various Mexican-based providers that permit the Company to
terminate northbound traffic in the U.S., it has not realized substantial
revenue from these arrangements. The Company believes that the long distance
concession, if obtained, will permit it to lower costs significantly, improving
its competitive position in the wholesale market for both north and south bound
services.
Retail Distribution Network
The Company's Mexican retail distribution network consists of communication
centers, formerly referred to as casetas, and public pay telephones.
Casetas. Casetas are indoor calling centers strategically located to serve
travelers and the large population of the country who do not have personal
telephones. Casetas are a widely recognized and utilized medium in Mexico, but
do not currently have a real equivalent in the U.S. The Company's casetas offer
local, domestic Mexico and international long distance calling, as well as
facsimile service. The Company is the largest caseta operator in Mexico with
approximately 126 casetas in 66 cities operating under the trade name
"ComputelTM". Each location employs at least one attendant, who processes
calls, monitors call duration, collects money and runs daily reports on call
activity. As compared to public pay telephones, casetas offer privacy and
comfort as well as the personalized attention needed by customers who are not
accustomed to using a telephone. Key factors favoring the Company over
competing caseta operators are the well-recognized Computel name, a reliable
platform and billing system, the provision of facsimile services (which are not
offered by many other operators) and a larger distribution network. The next
largest competitor in Mexico has only 70 locations.
Using these casetas as the cornerstone, the Company intends to further
increase its retail presence in Mexico and the U.S. The next generation caseta
will be a "Communication Center" and will offer additional services, such as
Internet access and prepaid services. The Company intends to bring the
Communication Center concept to strategic markets in the U.S., targeting Mexican
nationals and U.S. citizens of Mexican origin who are familiar with the caseta
concept and the ComputelTM name. The Communication Centers will be used to
distribute "borderless" products that function in the same manner regardless of
the users location north or south of the U.S./Mexico border. These products
will be targeted to established Latino households, as well as to recent
immigrants and transient Latinos who may have acculturation issues, or identity,
credit or economic challenges. ATSI believes it will capture customer loyalty
by serving these challenged consumers, and will keep their business as they
establish households in the U.S.
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The main source of competition for Communication Centers on both sides of
the border will be prepaid card services, payphone and prepaid cellular, which
are essentially designed for the same target market. There is already a robust
market for prepaid calling cards in the U.S. Regulations in Mexico have only
recently permitted the use of dial around products from payphones, and the
Company expects many more prepaid card vendors to enter that market. The
Company is aware of only a limited number of caseta-style call centers in the
U.S. located on the East Coast, in Miami and Los Angeles.
Pay Telephones. The Company also owns and operates approximately 574 pay
telephones in various Mexican cities and resort areas, including Acapulco,
Cancun, Cozumel, Mazatlan, Puerto Vallarta, Tijuana, Huatulco, Puerto Escondido,
Cabo San Lucas, and Puerto Angel. The Company also has pay telephones in the
Mexico City airport and Mexico City's mass transit metro system transfer
stations. All of the Company's pay telephones are "intelligent" phones, meaning
that certain features are fully automated, reducing operating costs. The
Company's telephones accept pesos and U.S. quarters. Customers may also access a
Company operator for assistance in placing collect, third party, person-to
person calls or credit card calls.
The Company markets its pay telephone services in Mexico through direct
sales efforts as well as some independent marketing representatives working on a
commission basis. The Company has targeted a significant portion of its pay
telephone marketing efforts toward various resort areas in Mexico, specifically
on locations with high tourist-traffic such as airports, ship ports and marinas,
restaurants and bars. Approximately 16 million U.S. tourists visit Mexico each
year, and the country's vacation destinations are major hubs for northern
visitors via major U.S. airline carriers, and cruise ships. Although the Company
targets the tourist market for payphones and operator-assisted calling, these
services are available for Mexican nationals as well.
As of October 1, 1999, there were 31 authorized payphone providers in
Mexico, of which Telmex is the largest. The Company believes it is the second
largest provider after Telmex in the tourist markets, where it has focused its
efforts. The Company's multi-pay payphones give it a significant advantage over
its largest competitor, Telmex, which accepts only pre-paid Telmex calling
cards. Vendors of the cards are often difficult to locate and denominations
tend to be higher than needed by consumers. Although other companies have plans
to install pay telephones, the Company believes that it will be one of the few
providers with its own network, allowing it to maintain flexibility with respect
to rates.
Services and Products
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In the presentation of its financial results, the Company divides its
revenues into four categories: Network Management Services, Call Services,
Direct Dial Services and Electronic Commerce.
Network Management Services
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The Company offers private network telecommunications services between the
United States and Latin America and within Latin America.
Carrier Services
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The Company offers wholesale termination services to U.S. and Latin
American carriers who lack transmission facilities or require additional
capacity. Revenues from this service accounted for approximately 41% of overall
Company revenues in fiscal 1999. This market experienced tremendous downward
pricing pressure during fiscal year 1999 due to a combination of several
factors, most notably an increase in the activation of fiber optic cable along
U.S.-Mexico routes and regulatory changes which permitted the top tier carriers
to lower their international wholesale rates. Therefore, although the Company
experienced increased volumes in this line of business during the year, it
realized little additional revenue. The Company has seen a substantial increase
in volume since it activated its high-quality fiber route in July, 1999, and
believes this fiber network will continue to attract increased volumes from top
tier carriers. In addition, the Company believes it will generate opportunities
to transport traffic for Mexican carriers. The Company should be able to use
the increased volumes to negotiate more favorable termination costs in Mexico,
and if the Company receives a Mexican long distance concession, it will be able
to substantially cut its costs for carrying this traffic.
Private Networks
The Company offers private communications links for multi-national and
Latin American customers who use a high volume of telecommunications services
and need greater dependability than is available through public networks. These
services include data, voice, and fax transmission as well as videoconferencing
and Internet. During fiscal 1999, the Company did not devote significant
resources toward the development of this business in Mexico. However, expansion
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this line of business is consistent with the Company's plans to build out its
network in Mexico, since many of the same facilities that would be used for
delivery of retail consumer products could be used for private network services
as well.
The Company has and will continue to use the provision of private network
services as an entry into new Latin markets that are in the process of migrating
from state-run systems to competitive systems.
The Company competes with MCI/Worldcom, Americatel, Pointe Communications
Corporation, and Telscape International Inc., among others, in providing private
network services. Factors contributing to the Company's competitiveness in the
private network business include reliability, network quality, speed of
installation, and in some cases, geography, network size, and hauling capacity.
The Company believes it has the reputation as being a responsive service
provider capable of processing all types of network traffic.
Call Services
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The Company's principal Call Service is operator-assistance for
international collect, person-to-person, third party, calling card and credit
card calls originating in Mexico. The primary source of demand for operator
assistance are the Company's pay telephones and casetas in Mexico. The Company
also provides operator services for calls originating from payphones and casetas
owned by others, hotel and resort operators, and others who control the right to
direct operator-assisted calling from groups of telephones. The Company pays
these third parties a commission based on the revenue generated by the call
traffic they send.
The Company offers a service by which pin numbers are issued to Latin
American travelers that enable them to use their credit cards to place calls
through the Company's Call Services Center. (Latin Americans frequently do not
have travel calling cards.) The Company also offers travel cards that enable
Mexican travelers to use their cellular phones to place international calls to
Mexico while in the United States.
As part of its ongoing efforts to minimize costs, the Company began
outsourcing its live operator services in July 1999, and executed an agreement
with another operator service provider to handle the Company's call services
traffic on a transaction basis. The vendor will continue the Company's practice
of providing bilingual service 24 hours per day, 7 days per week.
As of July 16, 1998, the Company ceased providing operator services for
domestic U.S. calls and international calls originating in Jamaica and the
Dominican Republic in order to focus on the more profitable Mexican market.
The Company's owned retail distribution network will continue to generate
call services traffic. Competition for traffic from third parties in this
market revolves largely around the amount of commissions the operator services
provider is willing to pay. The Company is currently focusing more on improving
its profitability rather than simply generating additional revenues, and it has
therefore lost ground to competitors willing to accept lower profit margins by
paying higher commissions. However, the Company believes it has a reputation as
a reliable provider, and it is also able to offer the value-added service of
intelligent pay telephones in hotel lobbies.
Direct Dial Services
During fiscal 1999, the Company provided direct dial services (long
distance calls which do not require live or automated operator assistance) in
both Mexico and, to a lesser extent, the United States. Direct dial calls were
generated in Mexico from the Company's own Communications Centers and pay
telephones. Consumers visiting these locations can make calls on a "sent paid"
basis by making a cash payment at the time the call is placed. In the U.S., the
Company provided 1+ and MEXICOnnect (SM) service to residential and business
customers in the San Antonio metropolitan area. MEXICOnnect allows customer to
dial-around their presubscribed carrier by dialing 10-10-624 + the area code +
the telephone number. Under the 1+ program, customers presubscribe to the
Company's network for all long distance calls made from their telephone number,
eliminating the need to dial any extra digits to reach the Company's network.
In Mexico, the Company competes with other companies who have a
comercializadora license for sent paid traffic. The comercializadora allows
companies to interconnect with the local telecommunications infrastructure in
order to resell local and long distance services from public telephones. In
the U.S., the Company competes with large carriers such as AT&T, MCI/Worldcom,
and Sprint Communications Company, L.P. ("Sprint") as well as numerous smaller
companies for presubscribed long distance. Price remains a primary concern for
many consumers since the technology is not distinguishable from one provider to
another. The Company is focused on the Latino market and offers an aggressive
international rate to Mexico as well as competitive domestic rates. Unlike many
other long distance providers, the Company's charges are included on the
customer's bill from the local phone company. The Company also offers the
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convenience of bilingual customer service. The Company believes that it will be
able to expand its presubscribed customer base by using U.S. Communication
Centers as magnets to attract underserved Latino customers to the Company's
products.
There are numerous dial-around products on the market, offered by small and
large companies, and by long distance resellers as well as facilities-based
carriers. MEXICOnnect's competitive advantage is its focus on the Latino
market, and the elimination of per call minimums, monthly access fees,
surcharges, and other types of restrictions and small print that make dial-
around discounts deceiving. In comparison to long distance resellers, the
Company has greater flexibility in adjusting rates, as it has greater control
over its own network.
Sales
Direct dial sales are supervised by the Senior Vice President, Sales and
Marketing based in San Antonio. U.S. domestic carrier sales are supervised by
the Senior Vice President, Sales and Marketing in San Antonio. Mexican carrier
sales are also supervised by the Senior Vice President, Sales and Marketing in
San Antonio, who is assisted by the Director General (President) of ATSI-Mexico.
The Director of Central American operations, based in San Jose, Costa Rica,
manages the Central American carrier and private network accounts under the
supervision of the Senior Vice President, Sales and Marketing in San Antonio.
Payphone, hospitality and aggregator sales are managed from ATSI-Mexico with
supervision from the Senior Vice President, Sales and Marketing in San Antonio.
Communication center's sales efforts are managed from Computel's offices in
Guadalajara with oversight from ATSI-Mexico in Mexico City. The Company is in
the process of consolidating the operations of Computel and ATSI-Mexico.
Electronic Commerce via Internet
GlobalSCAPE was formed in April 1996 to implement Internet related
strategies that are not complementary to the Company's core business.
GlobalSCAPE's revenues are attributable to sales of Internet productivity
software, primarily its flagship product CuteFTP/TM/ which it has historically
distributed via its web site. GlobalSCAPE operates autonomously, generating
substantially all funds for its development and expansion internally from its
own operations. In January 1999 GlobalSCAPE acquired ownership of CuteFTP from
its original author, and subsequently released an enhanced new version.
GlobalSCAPE also released two new products, CuteHTML/TM/ and CuteMAP/TM/. Also
in fiscal 1999, GlobalSCAPE began distributing CuteFTP in CompUSA stores, and
began realizing revenue from advertisements placed in its software. Subsequent
to July 31, 1999, GlobalSCAPE has executed an agreement with Lycos to distribute
a branded version of CuteFTP over the Lycos network.
The Company announced in February, 1999 that it was considering a spin off
or public offering of GlobalSCAPE's stock, and the Company has retained an
investment banking firm to assist it in evaluating these options and other
options to finance GlobalSCAPE's continued growth.
GlobalSCAPE's market includes all computer users on the Internet.
GlobalSCAPE's products are distributed as shareware, meaning that users may
download and use the products for free on a trial basis for a limited time.
After the expiration of the trial period, the user must register the product to
be in compliance with the license and to obtain product support. GlobalSCAPE's
primary source of revenue is generated through product registration, with
additional revenues generated by advertising in the form of ad banners and
sponsorships in its "live" software products and on its web site. On a monthly
basis, GlobalSCAPE receives approximately 1.2 million unique visitors to its web
site and displays more than 15 million in-product and web site ad banners.
The Company's flagship product, CuteFTP, is a Windows-based file transfer
protocol (FTP) utility allowing users the ability to transfer and manage files
via the Internet, including MP3's, web pages, software, videos and graphics. The
Company believes that CuteFTP has 30% of the U.S. market share for FTP programs.
The Company's portfolio of products also includes CuteHTML, an advanced HTML
editor for developing web sites, and CuteMAP, an image mapping utility for
graphic navigation through web sites, and others in various stages of alpha and
beta testing. GlobalSCAPE intends to leverage its strong brand recognition into
a full suite of "Cute" products.
GlobalSCAPE operates in a highly competitive environment with respect to
all its products. CuteFTP's primary competitors are WSFTP, FTP Voyager and
Bulletproof FTP. While many FTP products have mimicked CuteFTP's features, they
are not commercially successful due to their late arrival to the marketplace and
lack of support infrastructure. CuteHTML and CuteMAP, although relatively new to
the market, have the advantage of being able to piggyback on the success of
CuteFTP through product integration and cross-marketing efforts.
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Network
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The Company has established a technologically advanced network having an
ATM backbone with satellite and fiber optic arms. ATM (or Asynchronous Transfer
Mode) is a packet switching technology that allocates bandwidth on demand for
high-speed connection of voice, data and video services. This technology allows
the Company to use its switch capacity more efficiently than a circuit-switched
system that requires capacity to be dedicated to certain customers regardless of
whether they are using it fully. The Company's network also employs compression
technology to carry greater volumes on the same facilities. ATM is compatible
with Internet protocols and Frame Relay, permitting the Company to explore even
more cost-effective transmission methods in the future.
Generally, the Company's strategy is to use the fiber optic arm to access
major metropolitan areas in Mexico and the satellite arm to access semi-rural
and smaller metropolitan areas. This hybrid network also offers redundancy that
can minimize service interruptions. The Company's fiber route runs from its
facility at the Infomart in Dallas, Texas to Mexico City, Mexico. The Company
has satellite transmission and receiving equipment in 1) San Antonio, Texas, 2)
Mexico City, Monterrey, and Cancun, Mexico, 3) Guatemala City, Guatemala, 4) San
Salvador, El Salvador, and 5) San Jose, Costa Rica.
The Company leases fiber capacity from third parties, primarily Bestel.
The Company leases satellite capacity on the Mexican satellites Solidaridad I
and II, from Satelites Mexicanos, S.A. de C.V. ("SATMEX").
The Company owns switching and other equipment in the U.S. and Mexico. In
April 1999, the Company began using its new Nortel DMS 300/250 International
Gateway Switch in its Dallas location. This advanced switch will permit the
Company to deploy the new retail and wholesale products that are key to its
competitive strategy.
All aspects of the Company's owned network facilities are designed to allow
for modular expansion, permitting the Company to increase capacity as needed.
The Company must contract with others to complete the intra-Mexico and
domestic U.S. portions of its network. The Company has interconnection and
service agreements in place with four Mexican long distance concessionaires,
Operadora Protel, S.A. de C.V., Avantel, S.A. de C.V., Miditel, S.A. de C.V. and
Bestel, S.A. de C.V. The Company has applied for its own Mexican long distance
concession, which will allow it to build out its network in Mexico and to
interconnect directly with Telmex and other local carriers, thereby lowering its
transmission costs. The Company has interconnection agreements with
Radiografica Costarricense, S.A., FT&T, S.A. , and Corporacion Solares, S.A. de
C.V. for transmission services in Costa Rica, Guatemala and El Salvador,
respectively. In the U.S., the Company purchases long distance capacity from
various companies.
The Company purchases local line access in Mexico for its payphones and
casetas from Telmex, and various cellular companies including SOS
Telecomunicaciones, S.A. de C.V., Portatel del Sureste, S.A. de C.V., Movitel
del Noreste, S.A. de C.V, and Baja Celular Mexicana, S.A. de C.V.
Year 2000 Issue
The Company initiated a program to identify and address issues associated
with the ability of its date-sensitive information, telephony and business
systems to properly recognize the year 2000 in order to avoid interruption of
the operation of these systems at the turn of the century. This program is
being conducted by the Company's Management Information Systems group, which is
coordinating the efforts of internal resources as well as third party vendors in
making all of the necessary changes for all management systems and product
related infrastructure for the Company's divisions and subsidiaries. The Company
believes it is 96% complete in achieving Year 2000 readiness, and will be Year
2000 ready by November 30, 1999. The only significant remaining item is an
outstanding issue related to the payroll systems of the Company's Mexican
subsidiaries. The Company expects to avoid disruption of its owned information,
telephony and business systems as a result of these efforts. However, the
Company must rely on the representations and warranties of third parties,
including domestic U.S. and foreign carriers of its traffic, in testing for
readiness for year 2000 issues and cannot ensure compliance by these parties.
The Company has developed contingency plans in areas where it believes there is
any significant risk or where a third party has not adequately responded to the
Company's inquiries, which includes transitions to other providers.
The Company believes that a worst case scenario resulting from a Year 2000
related failure would be a temporary disruption of normal business operations.
Based upon the work completed to date, the Company believes that such an
occurrence is unlikely. However, as stated above, the Company is relying on
representations and warranties of third parties who are beyond the Company's
control. A disruption of business operations could have a material adverse
effect on the Company's financial performance.
9
<PAGE>
The Company has expended approximately $100,000 in its Year 2000 program to
date, and does not expect to experience any material additional cost.
Licenses/Regulatory
- --------------------
The Company's operations are subject to federal, state and foreign laws and
regulations.
Federal
- -------
Pursuant to Section 214 of the Communications Act of 1934, the Federal
Communications Commission ("FCC") has granted the Company global authority to
provide switched international telecommunications services between the U.S. and
certain other countries. The Company maintains informational tariffs on file
with the FCC for its international retail rates and charges.
In October 1996, the FCC issued an order that non-dominant interexchange
carriers will no longer be required to file tariffs for interstate domestic long
distance services. Under the terms of the FCC order, detariffing would be
mandatory after a nine-month transition period. Interexchange carriers would
still be required to retain and make available information as to the rates and
terms of the services they offer. The FCC's order was appealed by several
parties and, in February 1997, the D.C. Circuit issued a stay preventing the
rules from taking effect pending judicial review. The Company is currently
unable to predict what impact the FCC's order will have on the Company.
The Telecommunications Act of 1996 ("Telecom Act"), which became law in
February 1996, was designed to promote competition in all aspects of
telecommunications. The FCC has promulgated and continues to promulgate major
changes to their telecommunications regulations, many of which will have an
impact on the Company. The Company cannot predict the ultimate effect of these
various changes. One aspect of the Telecom Act that is of particular importance
to the Company is that it allows Bell Operating Companies (BOCs) to offer in-
region long distance service once they meet certain requirements. The rules for
competition are still being decided by regulators and the courts. Although no
BOCs has been permitted to provide in-region long distance service at this time,
the Company anticipates that Southwestern Bell may be granted permission in the
near term. Given their extensive resources and established customer bases, the
entry of the BOCs into the long distance market, specifically the international
market, will create increased competition for the Company.
The International Settlements Policy (the "ISP") governs settlements
between U.S. carriers and foreign carriers of the cost of terminating traffic
over each other's networks. The FCC recently enacted certain changes in its
rules designed to allow U.S. carriers to propose methods to pay for
international call termination that deviate from traditional accounting rates
and the ISP. The FCC has also established lower benchmarks for the rates that
U.S. carriers can pay foreign carriers for the termination of international
services. These rule changes have lowered the costs of the Company's top tier
competitors and are contributing to the substantial downward pricing pressure
facing the Company in the wholesale carrier market.
State
Many states require telecommunications providers operating within the state
to maintain certificates and tariffs with the state regulatory agencies, and to
meet various other requirements (e.g. reporting, consumer protection,
notification of corporate events). The Company believes it is in compliance
with all applicable State laws and regulations governing its services.
Mexico
The Secretaria de Comunicaciones y Transportes ("SCT") and COFETEL have
issued the Company's Mexican subsidiaries the following licenses:
Comercializadora License - a 20-year license issued in February
1997allowing for nationwide resale of local calling and long distance services
from public pay telephones and casetas.
Teleport and Satellite Network License - a 15-year license issued in May
1994 allowing for transport of voice, data, and video services domestically and
internationally. The license allows for the operation of a network utilizing
stand-alone VSAT terminals and/or teleport facilities, and interconnection to
the public switched network via other licensed carriers. A shared teleport
facility enables the Company to provide services to multiple users/customers
through a single centralized satellite earth station.
10
<PAGE>
Packet Switching Network License - a 20-year license issued in October 1994
allowing for the installation and operation of a network interconnecting packet
switching nodes via the Company's proprietary network or circuits leased from
other licensed carriers. The license supports any type of packet switching
technology, and can be utilized in conjunction with the Teleport and Satellite
Network License to build a hybrid nationwide network with international access
to the U.S.
Value-Added Service License - an indefinite license allowing the Company to
provide a value added network service, such as delivering public access to the
Internet.
Mexico is in the process of revising its regulatory scheme consistent with
its new competitive market. Various technical and pricing issues related to
interconnections between carriers are the subject of regulatory actions which
will effect the competitive environment in ways the Company is not able to
determine at this time.
Other Foreign Countries
In addition to Mexico, the Company currently has operations in Costa Rica,
El Salvador, and Guatemala. The telecommunications markets in these countries
are in transition from monopolies to functioning, competitive markets. The
Company has established a presence in those countries by providing a limited
range of services, and intends to expand the services it offers as regulatory
conditions permit. The Company does not believe that any of its current
operations in those countries requires licensing, and it believes it is in
compliance with applicable laws and regulations governing its operations in
those countries.
Employees
- ---------
At September 1, 1999, the Company (excluding ATSI-Mexico) had 85 full-time
employees, of whom 10 were operators, 11 were sales and marketing personnel, and
64 performed operational, technical and administrative functions, and 9 part-
time employees, 5 of whom were operators. Of the foregoing, 22 were employed by
GlobalSCAPE, and 5 were employed by Sinfra. The Company believes its future
success will depend to a large extent on its continued ability to attract and
retain highly skilled and qualified employees. The Company considers its
employee relations to be good. None of the aforementioned employees belong to
labor unions.
At September 1, 1999, ATSI-Mexico had 465 full-time employees of whom 375
were operators and 90 performed sales, marketing, operational, technical and
administrative functions. A portion of ATSI-Mexico's employees, chiefly
operators, belong to a union.
ADDITIONAL RISK FACTORS
-----------------------
In addition to the risks described above, management of the Company
believes the following additional factors are significant.
. The Company will probably incur losses
The Company has never been profitable and will probably not become profitable
in the near future. The Company has invested and will continue to invest
significant amounts of money in its network and personnel in order to maintain
and develop the infrastructure it needs to compete in its target markets. The
Company must improve cash flow from operations to generate a profit, either by
increasing sales or decreasing expenses, or both.
. The Company may not achieve anticipated sales
The Company has made a substantial investment in personnel and network
equipment to position itself in its target markets and will continue to do so.
The Company may not be able to achieve the sales volume needed to make this
investment profitable.
. The Company may not be able to raise additional capital
In the past the Company has financed its operations almost exclusively through
the private sales of securities. Since the Company is losing money, the
Company must raise the money it needs to continue operations and expand its
network either by selling more securities or borrowing money. The Company may
not be able to sell additional securities or borrow money on acceptable terms.
Without these additional funds, the Company will not be able to implement its
strategy as described in this Annual Report on Form 10K for the future, and
the Company will either have to scale back
11
<PAGE>
or cease operations. If the Company sells more common stock (or convertible
preferred stock) the interest of our existing shareholders will be diluted.
. The Company's auditors have questioned its viability
The auditors' opinion on the Company's financial statements as of July 31,
1999, calls attention to substantial doubts as to the Company's ability to
continue as a going concern. Our financial statements are prepared on the
assumption that the Company will continue in business. They do not contain
any adjustments to reflect the uncertainty over our continuing in business.
. The Company does not expect to pay dividends
The Company has no plan to pay dividends in the near future.
. The Company's stock has been a penny stock which is more difficult to sell
The Company's common stock is a "penny stock," which is relatively more
difficult for an investor to sell.
A "penny stock" is any stock that 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. An investor may decide to sell stock at a certain
price, but by the time the sale is complete, the price of the stock may have
fallen to the point that the investor does not achieve the desired result.
Also, because of the difficulty in dealing in penny stocks, many
broker/dealers are unwilling to participate in buying and selling these
shares.
. The Company's common stock price is volatile
The Company's common stock price has historically been volatile. Volatility
makes it more difficult for a shareholder to sell shares at the desired time
and price.
. The Company's stock price may fall if the Company fails to spin off
GlobalSCAPE
The Company announced it is considering a spin off or public offering (or
combination of the two) of GlobalSCAPE, and the Company has retained an
investment banking firm to evaluate the alternatives in achieving the
appropriate value for GlobalSCAPE. If the Company does not complete this
type of transaction (or if the Company takes too long to complete this
transaction) the Company's stock price could fall. This transaction could be
delayed or cancelled if the Company is unable to find an underwriter, is
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.
. The Company may not successfully compete with others in the industry
All of the Company's target markets are very competitive.
The market for wholesale network services is very particularly competitive on
the basis of price. The Company currently has 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 the Company is not able to continue to offer competitive prices, these
customers will find some other suppliers, and the Company will lose a
substantial portion of its revenue very quickly. Many of our competitors in
this market have more extensive networks than the Company, as well as
substantially greater financial, technical and marketing resources. For
example, the Company competes with AT&T, MCI/WorldCom and Sprint
Communications Company, L.P. ("Sprint") in this market, as well as numerous
other large and small companies. Large competitors are able to take advantage
of their established customer base to generate economies of scale,
substantially lowering their costs. In addition, prices for this service have
fallen dramatically in the recent past, and these pricing pressures could
continue.
12
<PAGE>
The Company expects there will continue to be mergers, acquisitions, and joint
ventures in our industry creating more large and well-positioned competitors
reducing the number of potential customers for the wholesale network services.
The market for retail services is also extremely competitive. The Company
competes with many other companies in this market, including AT&T,
MCI/Worlcomm and Sprint. These companies have stronger name recognition and
brand loyalty as well as a broader portfolio of services. The Company
believes it can successfully compete by targeting the Latino population in the
U.S. and by introducing innovative services. Certain larger companies,
however, have also announced they intend to enter the Latino market in the
U.S. as well. In Mexico, the Company will compete with Telmex which has
substantially greater resources than the Company does.
The telecommunications industry has been characterized by steady technological
change. The Company may not be able to raise the money it needs to acquire
the new technology necessary to keep its services competitive.
. The Company may not be able to collect large receivables
Wholesale network customers generate large receivable balances, often over
$500,000 for a two-week period. The Company incurs substantial direct costs
to provide this service. since the Company must pay its long distance carriers
in Mexico to terminate these calls. If a customer fails to pay a large
balance on time, the Company will have difficulty paying its carrier in Mexico
on time. If long distance providers suspend services, the Company's retail
services will be affected as well.
. Reliance on key personnel
The Company depends on a small number of key technical and managerial
personnel. The Company may not be able to retain these personnel or attract
the new personnel the Company needs to attain profitability.
. The Company may not be able to lease transmission facilities
The Company does not own all of the transmission facilities it needs to
complete calls. For example, although the Company owns the switching and
transport equipment needed to receive and transmit calls via satellite and
fiber optic cable, the Company neither owns a satellite nor any fiber optic
cable, and it must therefore lease transmission capacity from other companies.
The Company may not be able to lease facilities at cost-effective rates in the
future or enter into contractual arrangements necessary to expand or improve
its network as necessary to keep up with technological change.
There are a limited number of suppliers for the products and services the
Company needs to complete its network. The Company may have difficulty
finding alternate suppliers if any existing suppliers go out of business or
are acquired by the Company's competitors.
Also if certain current suppliers fail to honor their contractual commitments,
the Company could be seriously affected.
. The Company may not be able to pay suppliers on time
The Company has not always paid all of its suppliers on time due to temporary
cash shortfalls. These suppliers have given payment extensions in the past,
but critical suppliers may discontinue service if the Company is 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. The Company's
ability to make payments on time depends on its ability to raise additional
capital or improve cash flow from operations.
. The Company may not be able to make debt payments on time
The Company has borrowed money to purchase some of its significant equipment.
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 the Company does not make payments on time.
The Company has not always paid all of its equipment lenders on time due to
temporary cash shortfalls. These lenders have given payment extensions in the
past, but they may exercise their right to take possession of certain critical
equipment if the Company is not able to make payments on time in the future.
The Company's ability to make our payments on time depends on its ability to
raise additional capital or improve cash flow from operations.
13
<PAGE>
. The Company may have service interruptions and problems with the quality
of transmission
To retain and attract customers, the Company must keep its network operational
24 hours per day, 365 days per year. The Company has experienced service
interruptions and other problems affecting the quality of voice and data
transmission. To date, these problems have been temporary. The Company may
experience more serious problems. In addition to the normal risks any
telecommunications company faces (such fire, flood, power failure, equipment
failure), the Company 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. The Company has the
ability to transmit calls via either the satellite or fiber optic portion of
its network, and this redundancy should provide protection if there is a
problem with one portion of the network. However, a significant amount of
time could pass before the Company could re-route traffic from one portion of
the network to the other, and there may not be sufficient capacity on only one
portion of the network to carry all of the Company's traffic at any given
time.
To stay competitive, the Company will continue to integrate the latest
technologies into its network. 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 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 the Company purchases from
others. Pricing changes could put us at a relative disadvantage to larger
competitors. The Company cannot predict what other changes there may be in
the regulations or what effect these changes will have on the Company's
targeted markets.
The Mexican telecommunications industry has gone through the process of de-
monopolization, and ongoing regulatory changes, and new laws and regulations
there could affect the Company's target markets. These regulatory changes may
not continue to improve market conditions and, even if they do, the Company
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.
. Compliance with laws and regulations could be challenged
The Company believes it and its subsidiaries are in compliance with all
domestic and foreign telecommunications laws governing our current business.
Government enforcement and interpretation of the telecommunications laws and
licenses is, however, 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 compliance with the laws may be
challenged. It could be very expensive to defend this type of challenge, and
the Company might not win. If the Company were found to have violated the
laws governing our business, the Company could be fined or denied the right to
offer services. To our knowledge, the Company is not currently subject to any
regulatory inquiry or investigation.
. The Company may not be able to obtain new licenses the Company needs to
reduce costs and expand our network
Complete fulfillment of the Company's strategy requires a long distance
concession from the Mexican government. The Company may not be able to obtain
this concession, and if the Company does not obtain this concession, the
Company may not be able to fully implement its strategy for the future or
continue to offer services at competitive prices. The Company's strategy is to
expand into other Latin American countries as regulatory conditions in those
countries in permit. The Company may not be able to obtain the licenses the
Company needs for this expansion.
. 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
14
<PAGE>
than the year 2000. This could result in miscalculations or major system
failures that could cause disruptions in our operations, including the
inability to process call billing records. The Company has implemented a
comprehensive Year 2000 plan to assess our internal readiness and the
readiness of our suppliers. The Company has identified some software
applications that must be upgraded to avoid a disruption in our operations,
but the Company expects to have those upgrades installed by November 30, 1999.
Although the Company has received satisfactory responses from our suppliers
regarding their Year 2000 readiness, the Company does 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, the Company could
suffer a serious interruption in service.
. 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 that 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, the Company
will have decreased earnings as stated Dollars
Approximately 20% of ATSI's revenue is collected in Mexican Pesos. If the
value of the Peso relative to the Dollar declines, (that is if Pesos are
convertible into fewer Dollars) then our earnings, which are stated in
dollars, will decline. The Company does not engage in any type of hedging
transactions to minimize this risk and does not intend to do so.
ITEM 2. PROPERTIES
The Company's executive offices, principal teleport facility and control
center are located at its leased facility in San Antonio, Texas, consisting of
11,819 square feet. The lease expires August 2002, and has two five-year
renewal options. The Company pays annual rent of $98,452 (increasing to
$107,789 per year for the last year) under the lease and is responsible for
taxes and insurance. GlobalSCAPE, Inc.'s offices are located at its leased
facility in San Antonio, Texas, consisting of 5,401 square feet. The lease
expires January 31, 2001. GlobalSCAPE, Inc. pays annual rent of $87,496 per
year and is responsible for taxes and insurance.
Subsequent to year-end, the Company and GlobalSCAPE entered into agreements
for new office space beginning in December of 1999. Both agreements are for a
period of eight and a half-years with rent deferred for the first six months of
the agreement. The Company's facility will consist of 26,250 square feet with
annual rent of $311,850 per year while GlobalSCAPE's facility will consist of
14,553 square feet with annual rent of $174,636 per year. Management believes
its leased facilities are suitable and adequate for their intended use.
ITEM 3. LEGAL PROCEEDINGS
On January 29, 1999, one of the Company's customers, Twister
Communications, Inc. filed a Demand for Arbitration seeking damages for breach
of contract. The customer claims that the Company wrongfully terminated an
International Carrier Services Agreement executed by the parties in June 1998
under which the Company provided wholesale carrier services from June 1998 to
January 1999. The customer's claims for damages represent amounts that it
claims it had to pay in order to replace the service provided by the Company.
The Company disputes that it terminated the contract wrongfully and asserts that
the customer breached the agreement by failing to pay for services rendered and
by intentionally making false representation regarding its traffic patterns and
on March 3, 1999 filed a Demand for Arbitration seeking damages for breach of
contract in an amount equal to the amounts due to the Company for services
rendered plus interest, plus additional damages for fraud. An arbitration panel
was selected and the parties are now completing written discovery.
15
<PAGE>
While the Company believes that it has a justifiable basis for its
arbitration demand and that it will be able to resolve the dispute without a
material adverse effect on the Company's financial condition; until the
arbitration proceedings take place, the Company can not reasonably estimate the
possible loss, if any, and there can be no assurance that the resolution of this
dispute would not have an adverse effect on the Company's results of operations.
On June 16, 1999, the Company initiated a lawsuit against one of its
vendors claiming misrepresentation and breach of conduct. Under an agreement
the Company signed in late 1998, the vendor was to provide quality fiber optic
capacity in January 1999. The delivery of the route in early 1999 was a
significant component of the Company's operational and sales goal for the year
and the failure of its vendor to provide the capacity led to the Company
negotiating an alternative agreement with Bestel, S.A. de C.V. at a higher cost.
While the total economic impact is still being assessed, the Company believes
lost revenues and incremental costs are in excess of $15 million. While the
Company's contract contains certain limitations regarding the type and amounts
of damages that can be pursued, the Company has authorized its attorneys to
pursue all relief to which it is entitled under law. As such, the Company can
not reasonably estimate the ultimate outcome of this lawsuit nor the additional
costs that may be incurred in the pursuit of its case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no submission of matters to a vote of security holders during
the fourth quarter of the Company's fiscal year.
PART II.
--------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the NASD: OTCBB under the symbol
"AMTI". Prior to December 1997, the Company's Common Stock was traded on the
Canadian Dealing Network under the symbol ATIL.CDN. The table below sets forth
the high and low bid prices for the Common Stock from August 1, 1997 through
December 21, 1997 as reported by the Canadian Dealing Network and from December
22, 1997 through October 25, 1999 as reported by NASD: OTCBB. These price
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission, and may not necessarily represent actual transactions.
Fiscal 1998 High Low
----------------------------------------
First - .............$ 3 1/4 $ 1 3/8
Second - ............$ 3 7/16 $ 2
Third - .............$ 3 1/2 $ 1 5/7
Fourth - ............$ 2 1/4 $ 3/4
Fiscal 1999 High Low
----------------------------------------
First - .............$ 1 1/8 $ 15/32
Second - ............$ 1 9/32 $ 3/4
Third - .............$ 1 13/64 $ 5/8
Fourth - ............$ 1 53/64 $ 1 1/32
Fiscal 2000 High Low
----------------------------------------
First - through
October 25, 1999)......$ 1 11/32 $ 45/64
At October 25, 1999 the closing price of the Company's Common Stock as
reported by NSD:OTCBB was $0.92 per share. As of October 25, 1999, the Company
had approximately 5,000 stockholders, including both beneficial and registered
owners. ATSI has not paid dividends on its common stock the past three years
and does not expect to do so in the foreseeable future.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA.
The following selected financial and operating data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial Statements
and the Notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
Years ended July 31,
--------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- --------- ---------
(In thousands of $, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Operating revenues:
Call services $4,470 $10,807 $12,545 $13,547 $ 6,602
Direct dial services - - 1,421 6,085 6,024
Network management services 318 2,614 1,698 13,362 19,250
Internet e-commerce - 54 564 1,526 2,642
Total operating revenues 4,788 13,475 16,228 34,520 34,518
---------- ---------- ---------- --------- ---------
Operating expenses:
Cost of services 4,061 10,833 12,792 22,287 21,312
Selling, general and administrative 2,196 3,876 6,312 12,853 12,652
Bad debt 340 554 735 1,024 2,346
Depreciation and amortization 141 281 591 1,822 3,248
---------- ---------- ---------- --------- ---------
Total operating expenses 6,738 15,544 20,430 37,986 39,558
Loss from operations (1,950) (2,069) (4,202) (3,466) (5,040)
---------- ---------- ---------- --------- ---------
Net loss $(2,004) $(2,205) $(4,695) $(5,094) $(7,591)
---------- ---------- ---------- --------- ---------
Per share information:
Net loss $ (0.14) $ (0.11) $ (0.18) $ (0.12) $ (0.16)
---------- ---------- ---------- --------- ---------
Weighted average common shares outstanding 13,922 19,928 26,807 41,093 47,467
---------- ---------- ---------- --------- ---------
Consolidated Balance Sheet Data:
Working capital (deficit) $ (446) $ (592) $ 195 $(5,687) $(6,910)
Current assets 1,088 1,789 5,989 5,683 5,059
Total assets 2,766 4,348 15,821 24,251 24,154
Long-term obligations, including current portion 133 604 3,912 8,303 10,168
Total stockholders' equity 1,231 1,629 6,936 7,087 6,137
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE: Certain Statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Securities Act. See page
2 for additional factors relating to such statements.
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the three fiscal years ended July 31,
1997, 1998, and 1999. It should be read in conjunction with the Consolidated
Financial Statements of the Company, the Notes thereto and the other financial
information included elsewhere in this annual report on Form 10-K. For purposes
of the following discussion, references to year periods refer to the Company's
fiscal year ended July 31.
General
The Company's mission is to employ leading-edge technologies for delivery
of exceptional telecommunication services to underserved Latino markets in the
U.S. and Latin America emphasizing convenience, accessibility, quality,
reliability, and affordability, while continually seeking to add value through
new and innovative products and services. Utilizing a framework of licenses,
interconnection and service agreements, network facilities and retail
distribution channels (hereinafter collectively referred to as the "framework"),
the Company is primarily focused on capturing market share in the international
telecommunications corridor between the United States and Mexico. Even with
poor phone-line penetration, the Company's research indicates that Mexico may
exchange more international traffic with the U.S. than any other country
17
<PAGE>
in the world within the next two years. As the regulatory environments allow,
the Company also plans to establish framework in other Latin American countries
as well. In addition to the U.S. and Mexico, the Company currently owns or has
rights to use facilities in and has strategic relationships with carriers in
Costa Rica, El Salvador, and Guatemala.
Utilizing the framework described above, the Company provides local,
domestic long distance and international calls from its own public telephones
and casetas within Mexico, and provides similar services to some third party-
owned casetas, public telephones and hotels in Mexico. Consumers visiting a
Company-owned communication center or public telephone may dial directly to the
desired party in exchange for cash payment, or can charge the call to a U.S.
address (collect, person-to-person, etc.) or calling card, or to a U.S. dollar-
denominated credit card with the assistance of an operator. In July 1998, the
Company began providing domestic U.S. and international call services to Mexico
to residential customers on a limited basis in the U.S. Callers may either pre-
subscribe to the Company's one-plus residential service, or dial around their
pre-subscribed carrier by dialing 10-10-624, plus the area code and desired
number. Where possible, these retail calls are transported over the Company's
own network infrastructure.
Utilizing the same framework described above, the Company also serves as a
retail and wholesale facilities-based provider of network services for corporate
clients and U.S. and Latin American telecommunications carriers. These
customers typically lack transmission facilities into certain markets, or
require additional capacity into certain markets. The Company currently provides
these services to and from the United States, Mexico, Costa Rica, El Salvador
and Guatemala.
The Company is also the sole owner of GlobalSCAPE, Inc., which is rapidly
becoming a leader in electronic commerce of top Internet-based software,
utilizing the Web as an integral component of its development, marketing,
distribution and customer relationship strategies. Utilizing CuteFTP as its
flagship product, GlobalSCAPE has a user base of approximately 7.5 million users
as of July 31, 1999.
The Company's consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
losses since inception and has a working capital deficit as of July 31, 1999.
Additionally, the Company has had recurring negative cash flows from operations
with the exception of a three month period ended January 31, 1998. For the
reasons stated in Liquidity and Capital Resources and subject to the risks
referred to in Liquidity and Capital Resources, the Company expects improved
results of operations and liquidity in fiscal 2000. However, no assurance may
be given that this will be the case.
18
<PAGE>
Results of Operations
The following table sets forth certain items included in the Company's
results of operations in thousands of dollar amounts and as a percentage of
total revenues for the years ended July 31, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
Year Ended July 31,
-----------------------------------------------------------------------------------
1997 1998 1999
---------------------- ------------------------ -----------------------
$ % $ % $ %
--- --- --- --- --- ---
Operating revenues
- ------------------
<S> <C> <C> <C> <C> <C> <C>
Network management services $ 1,698 11% $13,362 39% $19,250 56%
Call services $12,545 77% $13,547 39% $ 6,602 19%
Direct dial services $ 1,421 9% $ 6,085 18% $ 6,024 17%
Internet e-commerce $ 564 3% $ 1,526 4% $ 2,642 8%
---------- ---------- ----------
Total operating revenues $16,228 100% $34,520 100% $34,518 100%
Cost of services $12,792 79% $22,287 65% $21,312 62%
---------- ---------- ----------
Gross margin $ 3,436 21% $12,233 35% $13,206 38%
Selling, general and
Administrative expenses $ 6,312 39% $12,853 37% $12,652 37%
Bad debt expenses $ 735 4% $ 1,024 3% $ 2,346 6%
Depreciation and amortization $ 591 4% $ 1,822 5% $ 3,248 10%
---------- ---------- ----------
Operating loss $(4,202) -26% $(3,466) -10% $(5,040) -15%
Other, net $ (493) -3% $(1,628) -5% $(1,696) -5%
---------- ---------- ----------
Net loss $(4,695) -29% $(5,094) -15% $(6,736) -20%
Less: preferred stock dividends $ - 0% $ - 0% $ (855) -2%
---------- ---------- ----------
Net loss to common shareholders $(4,695) -29% $(5,094) -15% $(7,591) -22%
========== ========== ==========
</TABLE>
Year ended July 31, 1999 Compared to Year Ended July 31, 1998
Operating Revenues. Operating revenues were flat between years, due
primarily to declines in the Company's call services revenues offset by the
growth in the Company's network management and Internet e-commerce services.
Network management services, which includes both retail and wholesale
transport services increased 44%, or $5.9 million from 1998 to 1999. Revenues
from the wholesale transport of traffic for U.S.-based carriers increased as the
Company processed approximately 78.6 million minutes in 1999 as compared to 46.1
million minutes in 1998. The 70% increase in minutes did not result in a
corresponding increase in revenues as competitive and other market factors
caused the Company's revenue per minute to decline from period to period. The
Company's agreement with Satelites Mexicanos, S.A. de C.V. ("SATMEX"), secured
in the fourth quarter of fiscal 1998 allowed the Company to secure and resell
additional bandwidth capacity. This increased capacity and flexibility allowed
the Company to increase billings to existing corporate clients who previously
dealt with SATMEX directly and to add additional retail, corporate clients more
quickly.
Call services revenue decreased approximately $6.9 million, or 51%, between
years. This decline is principally attributable to the Company's strategy to
focus on providing international call services from its own payphones and
communication centers (casetas). In July 1998, the Company ceased providing call
services for third-party owned payphones and hotels in the U.S., Jamaica and the
Dominican Republic and decreased the level of services provided to third-party
owned telephones and hotels in Mexico, as these services did not utilize the
Company's core business and the costs
19
<PAGE>
associated with further provision of services did not justify keeping the
business. For the year ended July 31, 1999, the Company processed approximately
160,000 calls from Mexico as compared to approximately 314,000 for the same
period in 1998 and no calls for third-party owned telephones and hotels in the
U.S., Jamaica and the Dominican Republic as compared to approximately 350,000
calls in 1998.
Direct dial service revenues, which are generated by calls processed by the
Company without live or automated operator assistance, declined slightly between
years. A majority of these revenues, stated in U.S. dollars in the accompanying
consolidated financial statements are generated by calls processed by the
Company's public telephones and casetas in Mexico in exchange for immediate cash
payment in pesos, the local Mexican currency. While the number of these calls
and consequently the pesos collected increased between years, those pesos
converted into fewer U.S. dollars as the average exchange rate between years
went from 8.33 pesos to the dollar for fiscal 1998 to 9.77 pesos to the dollar
for fiscal 1999.
Revenues from GlobalSCAPE, Inc., the Company's e-commerce subsidiary
increased approximately $1.1 million or 73% between years. GlobalSCAPE's
purchase of the rights to the source code of CuteFTP, its flagship product in
January 1999, resulted in an enhanced version of CuteFTP which increased the
number of downloads and subsequent purchases. Additionally, GlobalSCAPE began
using its Internet presence to produce ad revenues in the fourth quarter of
1999.
Cost of Services. Cost of services decreased approximately $975,000, or 4%
between years, and decreased as a percentage of revenues from 65% to 62%. The
decline in cost of services between years was primarily a result of the
contributions of GlobalSCAPE. Prior to GlobalSCAPE's purchase of CuteFTP, it
was obligated to pay royalties to CuteFTP's original author for the right to
sell and distribute CuteFTP. The purchase of the source code eliminated such
royalty fees and improved GlobalSCAPE's and the Company's gross margins. Gross
margins for the Company's telco operations remained flat at 34% between years,
in spite of intense market pressures in the Company's wholesale network
transport services. By eliminating and reducing certain call services, such as
those offered to third-party owned payphones and hotels in the U.S., Jamaica,
the Dominican Republic and Mexico, which did not fully utilize the Company's own
network infrastructure, the Company was able to move toward vertical integration
of its services and operations and maximize its gross margins using its own
network where possible.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
decreased 2%, or approximately $200,000 between year, as the Company did not
incur expenses incurred in the prior year associated with its Plan of
Arrangement. As a percentage of revenue, these expenses remained flat at 37%.
The Company had anticipated that these expenses would decline as a percentage of
revenues, but they did not do so in light of the circumstances surrounding the
delay of fiber capacity available to the Company. In the fourth quarter of
1999, the Company began to further integrate its two primary operating
subsidiaries in Mexico, Computel and ATSI-Mexico as the Company continues to
seek ways to lower its SG&A expense levels. Net of non-cash expenses, related to
the Company's option plans, SG&A expenses decreased approximately $300,000.
Bad Debt Expense. Bad Debt Expense increased $1.3 million from fiscal 1998
to fiscal 1999. During the fourth quarter of 1999, the Company established
specific bad debt reserves of approximately $1.5 million related to retail and
wholesale transport of network management services. While the Company has
reserved for these customers, it is actively pursuing collection of amounts owed
including legal proceedings specifically related to approximately $1.2 million
of the accounts reserved. Excluding these specific reserves, bad debt expense
declined both as a % of revenues and in actual dollars between years.
Depreciation and Amortization. Depreciation and amortization rose
approximately $1.4 millon, or 78%, and rose as a percentage of revenues from 5%
to 10% between years. The increased depreciation and amortization is
attributable to an approximate $2.4 million increase in fixed assets between
years as well as increased amortization related to acquisition costs, trademarks
and goodwill. The majority of the assets purchased consisted of equipment which
added capacity to the Company's existing international network infrastructure
including the Network Technologies (N.E.T.) equipment purchased in December 1998
and the Company's new Nortel DMS 250/300 International Gateway switch purchased
in January 1999.
Operating Loss. The Company's operating loss increased $1.6 million from
1998 primarily due to increased depreciation and amortization and increased bad
debt expense which more than offset the improvements in gross margin dollars
produced from 1998 to 1999.
Other Income(expense). Other income (expense) decreased approximately
$70,000 between years. This decrease was principally attributable to the
increase in interest expense from approximately $1.6 million for 1998 to
approximately $1.7 million for 1999.
20
<PAGE>
Preferred Stock Dividends. During fiscal 1999, the Company recorded
approximately $855,000 of expense related to cumulative convertible preferred
stock. In addition to cumulative dividends on its Series A and Series B
Preferred Stock, which are accrued at 10% and 6%, respectively per month, the
Company has recorded a discount or "beneficial conversion feature" associated
with the issuance of its preferred stock of approximately $1.6 million related
to Series A Preferred Stock, which is being amortized over a twelve-month period
and $1.1 million related to Series B Preferred Stock, which is being amortized
over a three-month period.
Year ended July 31, 1998 Compared to Year Ended July 31, 1997
Operating Revenues. Operating revenues increased approximately $18.3
million, or 113%, as the Company experienced growth in each service category.
Network management services increased 687% from $1.7 million in 1997 to
$13.4 million in 1998. The majority of this growth was due to the amount of
wholesale network services provided to other carriers seeking transmission
facilities or additional capacity for their services. The Company began
providing these services in October 1997, and produced approximately $10 million
in revenues from this service during 1998.
Call services revenue increased approximately $1.0 million, or 8%,
primarily due to growth in the Company's customer base in Mexico that produces
calls to the United States from hotels, public telephones and casetas. As a
result of the installation of public telephones, the implementation of a direct
sales strategy, and the purchase of Computel in August 1997, the Company
processed approximately 314,000 international calls originating in Mexico during
fiscal 1998. This compares to approximately 200,000 calls processed the year
before. This increase in international calls from Mexico was offset to a large
extent by a decrease in domestic and international operator-assisted calls
originating in the United States and Jamaica. During 1998, the Company de-
emphasized these services due to relatively lower profit margins on this
business. On July 16, 1998, the Company ceased providing these services
altogether. Revenues from these services decreased from approximately $3.9
million in 1997 to approximately $2.9 million in 1998. The Company does not
anticipate producing significant revenues from such services, if any, during
fiscal 1999.
Direct dial services, calls processed in exchange for cash without
utilizing the company's operator center in San Antonio, Texas, increased 328%
from approximately $1.4 million in fiscal 1997 to approximately $6.1 million in
fiscal 1998. This increase was primarily due to the acquisition in May and
August 1997 of Computel, the largest private caseta operator in Mexico. The
Company also began processing local and domestic long distance calls within
Mexico during the latter half of 1997 from its own intelligent payphones
installed in resort areas of Mexico. These calls are made by depositing coins
(pesos or quarters) in the Company's phones to initiate service.
Cost of Services. Cost of services increased approximately $9.5 million,
or 74% between years, but decreased as a percentage of revenues from 79% to 65%.
The increase in cost of services is attributable to the increased volume of
business handled by the Company during 1998, as discussed above. The
improvement in the Company's gross profit margin resulted from the change in the
mix of services it provided during 1998 as described above, and its continuing
efforts to decrease costs subsequent to the demonopolization of Telmex, which
took place January 1, 1997. Subsequent to Telmex's demonopolization, the
Company was able to negotiate with newly concessioned carriers in Mexico to
transport its calls originating and terminating in Mexico, which has lowered the
associated per minute rate to carry those calls. Additionally, the Company was
one of the first four companies to receive a public payphone comercializadora
license from the SCT in February 1997, which has allowed the Company to provide
local, domestic and international calls from public telephones in Mexico. In
November 1997, the Company purchased the customer base of Comunicaciones del
Caribe, S.A. de C.V., an independent marketing representative in the
Cancun/Cozumel area of Mexico which did not have a comercializadora license, and
which had been utilizing the Company's operator center for processing
international calls. By purchasing the customer base, the Company was able to
eliminate a layer of expense associated with the traffic and effectively lower
its overall commission rate paid to public telephone location owners in Mexico.
The Company has also improved its gross margin by utilizing its own existing
satellite network infrastructure and licenses to provide network services to
other carriers seeking transmission facilities or extra capacity for their own
services.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses rose
104%, or approximately $6.5 million, from 1997 to 1998. As a percentage of
revenue, these expenses decreased from 39% to 37% between years. The growth in
dollars between years was caused by the acquisition of Computel, the continued
growth of the Company's ATSI-Mexico operations, the expensing of costs related
to the Company's planned acquisition of additional concessions from the Mexican
regulatory authorities, and the expensing of costs related to the Company's
reincorporation from Canada to Delaware. Approximately $890,000 of the increase
was due to the acquisition of Computel, which operates approximately 134 retail-
based casetas in approximately sixty cities throughout Mexico, and employs in
excess of 400 people. In August 1997, ATSI-Mexico expanded its operations and
began procuring, installing, operating and maintaining coin-operated,
intelligent
21
<PAGE>
payphones. During 1998, the Company expensed $631,000 in costs incurred relative
to the Company's reincorporation. Approximately $268,000 in expenses were
incurred during 1997 relative to the reincorporation.
Bad Debt Expense. Bad Debt expense increased approximately $300,000 between
years but decreased as a % of revenues from 4% to 3%. The principal reason for
the improved bad debt expense as a percentage of revenues was the increase in
network management services revenues between years.
Depreciation and Amortization. Depreciation and amortization rose
approximately $1.2 millon, or 208%, and rose as a percentage of revenues from 4%
to 5% between years. From July 31, 1997 through July 31, 1998, the Company
acquired approximately $7.9 million in equipment. Approximately $4.6 million of
these assets were acquired through capital lease arrangements. The majority of
the assets consisted of equipment that added capacity to the Company's existing
international network infrastructure, and intelligent coin telephones that were
installed in Mexico. Approximately $1.4 million in fixed assets were acquired
subsequent to July 31, 1997 with the acquisition of Computel. The Company also
recorded $2.8 million of goodwill during 1998 associated with the purchase of
Computel, which is being amortized over a forty-year period.
Operating Loss. The Company's operating loss improved $736,000 to
approximately $3.5 million for 1998. Increased revenue levels and improved
gross margins more than offset increases in selling, general and administrative
expenses and depreciation and amortization, allowing for the improvement.
Other Income (expense). Other income (expense) rose approximately 230%, or
$1.1 million, between years. This increase was due almost exclusively to
increased interest expense levels. During 1998, the Company incurred capital
lease obligations of approximately $4.6 million related to the purchase of
equipment mentioned above, and issued notes payable in the amount of
approximately $3.1 million.
Year Ended July 31, 1997 Compared to Year Ended July 31, 1996
Operating Revenues. Operating revenues increased approximately $2.8 million
or 20%, due mainly to increased revenues from call services. Approximately $1.4
million of revenues in fiscal 1996 were attributable to the sale and
installation of a large network in Mexico to one of Mexico's largest milk
producers. Subsequent to completing the sale and installation of the network,
the Company began recognizing monthly revenues from the management of the
network. The sale and installation of such a large network is not considered to
be of a recurring nature by the Company; however, management of this and other
networks is considered to be a recurring source of revenues for the Company.
GlobalSCAPE had revenue of $500,000 in fiscal 1997, representing less than 4% of
the Company's consolidated revenue.
Operating revenues from call services increased 29%, or approximately $3.2
million, due almost entirely to increased call volumes from international call
services provided from hotels and resorts in Jamaica, increased call volumes
attributable to the Company's Brazilian calling card product, and the inclusion
of Computel's revenues attributable to call services provided by Computel during
the last quarter of fiscal 1997 (which represented approximately $1.4 million of
consolidated revenues in fiscal 1997). Revenues from international calls
originating in Mexico increased 5%, while call volumes and related revenues from
calls originating in Mexico and from calls originating and terminating
domestically within the U.S. remained relatively constant between periods.
Although the Company continued to install Charge-a-Call telephones in Mexico
throughout fiscal 1997, the number of calls per phone decreased slightly. The
Company believes this was due to increasing costs to the consumer. The Company
began to lower the price per call to the consumer from certain telephones in the
first quarter of fiscal 1998 based on the decrease in the Company's cost of
providing these calls through its agreement with Investcom. The increased volume
of calls relating to Jamaica and Brazil increased the number of international
calls processed by the Company as compared to domestic calls processed entirely
within the United States. Because international calls typically generate higher
revenues on a per call basis than domestic calls, the average revenue per
completed call processed by the Company increased from $14.93 for fiscal 1996 to
$17.88 for fiscal 1997.
Excluding the $1.4 million of revenues recognized in fiscal 1996
attributable to the sale and installation of the network to the Mexican milk
producer, revenues from network management services increased approximately
$596,000, or 67%. This increase was largely due to recurring revenues from the
Mexican milk producer and Investcom commencing in the early and latter part,
respectively, of fiscal 1997.
Cost of Services. Cost of services increased approximately $2.0 million, or
18%, resulting in an increase in the Company's overall gross margin from 20% in
fiscal 1996 to 21% in fiscal 1997. If the approximately $1.4 million in revenues
and the $960,000 in costs related to the sale and installation of the network to
the Mexican milk producer were excluded from the Company's results for fiscal
1996, the Company's gross profit percentage would have been 18% for fiscal 1996.
The increase in cost of services was primarily attributable to the increased
volume of calls handled by the Company from Jamaica
22
<PAGE>
to the U.S. and from the U.S. to Brazil, the inclusion of Computel's cost of
services for the last quarter of fiscal 1997, and rising costs associated with
transporting calls from Mexico to the Company's Switching/Operator Facility in
San Antonio, Texas. Although Telmex officially lost its status as a monopoly on
August 10, 1996, Investcom was not allowed connectivity to Telmex's local
network in Mexico until January 1997 and did not have the switch capacity in
Mexico to process the Company's traffic until May 1997. As a result, the Company
was unable to commence processing any of its traffic at lower per-minute costs
until May 1997. Subsequent to May 1997, the public phones serviced by the
Company in Mexico were frequently only able to access the Company's operator
center utilizing a cellular connection, since local connectivity had not yet
been provided by Telmex. This added a per-minute air time charge to the
Company's cost of transmitting calls from Mexico, resulting in a decline in the
gross profit margin on international calls transmitted from the Company's public
phones in Mexico.
Selling, General and Administrative Expenses. SG&A expenses rose 63%, or
approximately $2.4 million between years. If the revenues related to the sale
and installation of the network to the Mexican milk producer in fiscal 1996 were
excluded, SG&A expenses would have increased as a percentage of overall revenues
from 29% to 32%. The increase in SG&A expense is almost entirely due to expanded
operations within Mexico and the inclusion of Computel's SG&A expense for the
last quarter of fiscal 1997. ATSI-Mexico had less than five employees at the
beginning of fiscal 1996 as compared to 36 employees at the end of fiscal 1997.
Computel operates 134 casetas in approximately 72 cities throughout Mexico, and
has approximately 430 employees.
Bad Debt Expense. Bad debt expense increased approximately $180,000 between
years and remained flat as a percentage of revenues at 4%. The Company incurred
greater bad debt expense due to the higher revenue levels between years.
Depreciation and Amortization. Depreciation and amortization increased
approximately $310,000, or 110%, due primarily to approximately $2.1 million in
fixed asset additions principally for the development of the Company's teleport
facilities in San Antonio, Texas, Cancun and Mexico City, Mexico, and San Jose,
Costa Rica; the acquisition of intelligent payphones; and the inclusion of
Computel's depreciation attributable to the acquisition of Computel.
Other income (expense). Other income (expense) increased to a net expense
of approximately $445,000 primarily as a result of interest expense incurred on
capital lease obligations and convertible notes issued in 1997.
Liquidity and Capital Resources
Because the Company did not produce sufficient gross margin dollars to cover
its selling, general and administrative costs, the Company generated negative
cash flows from operations during the year ended July 31, 1999 of approximately
$3.6 million. This shortfall includes the $1.5 million provision for specific
accounts receivable generated during the year for which the Company may not
receive any funds.
The Company's payable and accrued liability position increased from July 31,
1998 to July 31, 1999 as the Company often utilized cash flows produced from
financing activities to pay down debt and capital lease obligations before
paying vendors or suppliers of services to the Company.
When possible, the Company arranged capital lease obligations in order to
obtain equipment necessary to expand or maintain its operations. During fiscal
1999, the Company was able to secure long-term capital lease arrangements of
$2.0 million from NTFC Capital Corporation to cover the acquisition of its
Nortel DMS 250/300 switch and $900,000 from Bank Boston Leasing to cover the
cost of ATM equipment needed to upgrade its network to a packet-switching
environment. As of July 31, 1999 the Company has only utilized approximately
$500,000 of the Bank Boston Leasing facility. During the year ended July 31,
1999 the Company acquired approximately $1.0 million in equipment which was not
financed. The majority of this equipment was used to maintain or upgrade its
network between the U.S. and Mexico.
In January 1999, GlobalSCAPE purchased the rights to the source code for
CuteFTP, its flagship product. Terms of the purchase called for a cash payment
of approximately $171,000, which the Company financed through a bank note of
$180,000 at an interest rate of prime plus 1%, and twelve monthly payments of
principal and interest of $63,000 beginning February 1999. The terms of the note
called for principal and interest payments over a two-year period, comprised
initially of twelve monthly principal payments of $5,000 plus interest to be
followed by twelve monthly principal payments of $10,000 plus interest.
GlobalSCAPE paid the monthly amounts owed for these obligations out of recurring
cash flows produced from its operations during fiscal 1999, and management
anticipates that it will continue to be able to do so during the next fiscal
year.
23
<PAGE>
In addition to the financing by GlobalSCAPE, the Company borrowed $250,000
from officers and directors of the Company that was used for working capital
purposes. As of July 31, 1999, a total of $100,000 remained outstanding to two
officers of the Company.
During 1999, the Company stopped factoring a portion of its receivables. At
that point, the Company had accumulated an approximate $319,000 balance due to
the factoring company. As of July 31, 1999 approximately $137,000 remains
outstanding on this balance, which is being paid monthly from cash generated by
the Company's call services business.
The Company paid approximately $941,000 toward its capital lease obligations
during fiscal 1999. In an effort to reduce its cash outflows, in May 1999 the
Company restructured its capital lease obligation with IBM de Mexico, extending
payment of the total obligation over a forty-eight (48) month period. Monthly
payments due under the facility with NTFC Capital Corporation are deferred until
January 2000.
In an effort to improve its working capital position, the Company raised
approximately $4.2 million from March 1999 through July 1999, net of issuance
costs, in private placements of preferred stock, and another $302,000 in a
private placement of common stock. Exercises of warrants and options during
fiscal 1999 generated an additional approximate $1.3 million in cash proceeds
during the year. The majority of the proceeds from these private placements and
warrant and option exercises were used to pay vendors and suppliers of services
to the Company.
The net result of the Company's operating, investing and financing activities
during the year was a working capital deficit at July 31, 1999 of approximately
$6.9 million and cash on hand of approximately $379,000. Included in the
Company's current obligations, net of the associated debt discount, are notes
payable of $2.2 million which will be due and payable, along with accrued
interest of approximately $760,000 in March 2000.
Although the Company generated cash flows from financings in excess of $6.2
million during fiscal 1999, these proceeds were not sufficient to cover the net
cash used in operations, capital expenditures and debt service requirements of
approximately $6.9 million incurred during the year. As planned, the Company
shifted its focus during the year away from traffic generated outside of its
core market of Mexico, and focused on generating and transporting traffic over
its own international network infrastructure in order to produce better cash
flow results. The result was an increase in wholesale network transport traffic
flowing over the Company's network. Overall, network services contributed
approximately 56% of overall corporate revenues during the year, as opposed to
approximately 39% in fiscal 1998. However, market pressures caused the price at
which wholesale network transport services could be sold to decline
approximately 40% during fiscal 1999. Although the Company was able to reduce
its costs associated with transporting the traffic, the Company produced less
dollars of gross margin on a per minute basis than it had in fiscal 1998.
GlobalSCAPE's gross margins increased during the year with the purchase of the
source code to CuteFTP, but on a consolidated basis the Company was unable to
generate the gross margin dollars necessary to cover SG&A costs and all of its
debt service requirements.
As of October 1999, the Company is continuing to experience market pressures
on its wholesale network transport services business. In order to produce better
cash flows, the Company must focus on keeping its international network between
Mexico and the U.S. optimally utilized with a blend of retail and wholesale
traffic. Because the Company upgraded its network during fiscal 1999 to an ATM
packet-switching environment, the Company feels that it can transport traffic as
efficiently as possible in an effort to minimize costs. However, the Company
anticipates that pricing pressures will continue in its wholesale transport
market, so it will focus its efforts on implementing a retail strategy which
targets the growing and underserved Latino markets in both the U.S. and Mexico.
Although management does not expect improved results from this effort until the
latter stages of fiscal 2000, it believes that its retail strategy combined with
the deployment of leading edge technology for communications transport will
ultimately bring about improved profitability and sustainable growth in the
future.
In the near term, the Company must continue to manage its costs of
providing services and overhead costs as it begins focusing on optimizing use of
its network. The Company has applied for a long distance concession in Mexico
which, if obtained, the Company believes will eventually allow it to
significantly reduce its cost of transporting services. In order for it to
significantly reduce costs with the concession, the Company would need to
purchase a significant amount of hardware and software, allowing it to expand
and operate its own network in Mexico.
Until the Company is able to produce positive cash flows from operations in
an amount sufficient to meet its debt service and capital expenditure
requirements, it must be able to access debt and/or equity capital to assist it
in doing so, although no assurance may be given that it will be able to do so.
In September 1999, the Company issued approximately $500,000 of 6% Series C
Preferred Stock on terms substantially similar to those of the Series B
Preferred Stock. In an effort to meet its financial needs going forward, the
Company has engaged the investment banking firm of Gerard, Klauer Mattison
24
<PAGE>
& Co. ("GKM"). GKM will assist the Company in finding and securing financial and
strategic relationships. The Company has also engaged the investment banking
firm of SunTrust Equitable Securities to assist it in, among other things,
raising private or public funds for GlobalSCAPE. However, there can be no
assurance that such funds will be raised.
Inflation/Foreign Currency
Inflation has not had a significant impact on the Company's operations.
With the exception of direct dial services from the Company's casetas and coin
operated public telephones, almost all of the Company's revenues are generated
and collected in U.S. dollars. Direct dial services from the Company's casetas
and public telephones are generally provided on a "sent-paid" basis at the time
of the call in exchange for cash payment, so the Company does not maintain
receivables on its books that are denominated in pesos. In an effort to reduce
foreign currency risk, the Company attempts to convert pesos collected to U.S.
dollars quickly and attempts to maintain minimal cash balances denominated in
pesos. Some expenses related to certain services provided by the Company are
incurred in foreign currencies, primarily Mexican pesos. The devaluation of the
Mexican peso over the past several years has not had a material adverse effect
on the Company's financial condition or operating results.
Seasonality
The Company's call service revenues are typically higher on a per phone
basis during January through July, the peak tourism months in Mexico.
Year 2000 Compliance
The Company initiated a program to identify and address issues associated
with the ability of its date-sensitive information, telephony and business
systems to properly recognize the year 2000 in order to avoid interruption of
the operation of these systems at the turn of the century. This program is
being conducted by the Company's Management Information Systems group, which is
coordinating the efforts of internal resources as well as third party vendors in
making all of the necessary changes for all management systems and product
related infrastructure for the Company's divisions and subsidiaries. The Company
believes it is 96% complete in achieving Year 2000 readiness, and will be Year
2000 ready by November 30, 1999. The only significant remaining item is an
outstanding issue related to the payroll systems of the Company's Mexican
subsidiaries. The Company expects to avoid disruption of its owned information,
telephony and business systems as a result of these efforts. However, the
Company must rely on the representations and warranties of third parties,
including domestic U.S. and foreign carriers of its traffic, in testing for
readiness for year 2000 issues and cannot ensure compliance by these parties.
The Company has developed contingency plans in areas where it believes there is
any significant risk or where a third party has not adequately responded to the
Company's inquiries, which includes transitions to other providers.
The Company believes that a worst case scenario resulting from a Year 2000
related failure would be a temporary disruption of normal business operations.
Based upon the work completed to date, the Company believes that such an
occurrence is unlikely. However, as stated above, the Company is relying on
representations and warranties of third parties who are beyond the Company's
control. A disruption of business operations could have a material adverse
effect on the Company's financial performance.
The Company has expended approximately $100,000 in its Year 2000 program to
date, and does not expect to experience any material additional cost.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements of American TeleSource International,
Inc. and Subsidiaries
Report of Independent Public Accountants.................................. 27
Consolidated Balance Sheets as of July 31, 1998 and 1999.................. 28
Consolidated Statements of Operations for the Years Ended July 31, 1997,
1998 and 1999............................................................. 29
Consolidated Statements of Comprehensive Income (Loss) for the Years
Ended July 31, 1997, 1998 and 1999........................................ 30
Consolidated Statements of Stockholders' Equity for the Years Ended
July 31, 1997, 1998 and 1999.............................................. 31
Consolidated Statements of Cash Flows for the Years Ended July 31, 1997,
1998 and 1999............................................................. 32
Notes to Consolidated Financial Statements................................ 33
26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of American TeleSource International, Inc.:
We have audited the accompanying consolidated balance sheets of American
TeleSource International, Inc. (a Delaware corporation) and subsidiaries (the
Company) as of July 31, 1998 and 1999, and the related consolidated statements
of operations, comprehensive income (loss), stockholders' equity and cash flows
for the years ended July 31, 1997, 1998 and 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American TeleSource
International, Inc. and subsidiaries as of July 31, 1998 and 1999, and the
results of their operations and their cash flows for the years ended July 31,
1997, 1998 and 1999, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company has a working capital
deficit, has suffered recurring losses from operations since inception, has
negative cash flows from operations and has limited capital resources available
to support further development of its operations. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts including goodwill
and other intangibles or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
October 5, 1999
27
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
<TABLE>
<CAPTION>
July 31,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $1,091 $379
Accounts receivable, net of allowance of $209 and $1,600, respectively 3,748 3,693
Prepaid expenses and other 844 987
------------ ------------
Total current assets 5,683 5,059
------------ ------------
PROPERTY AND EQUIPMENT (At cost): 14,233 16,669
Less - Accumulated depreciation and amortization (2,418) (4,713)
------------ ------------
Net property and equipment 11,815 11,956
------------ ------------
OTHER ASSETS, net
Goodwill, net 5,091 5,032
Contracts, net 1,173 703
Trademarks, net - 789
Other assets 489 615
------------ ------------
Total assets $24,251 $24,154
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $5,683 $4,164
Accrued liabilities 2,113 3,239
Current portion of notes payable 688 961
Current portion of convertible long-term debt - 1,942
Current portion of obligations under capital leases 2,351 1,430
Deferred revenue 535 233
------------ ------------
Total current liabilities 11,370 11,969
------------ ------------
LONG-TERM LIABILITIES:
Notes payable, less current portion 719 312
Convertible long-term debt, less current portion 1,604 -
Obligations under capital leases, less current portion 2,941 5,523
Other 530 213
------------ ------------
Total long-term liabilities 5,794 6,048
------------ ------------
COMMITMENTS AND CONTINGENCIES: (See Note 13)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value, 10,000,000 shares authorized,
Series A Cumulative Convertible Preferred Stock, 50,000 shares
authorized, no shares issued and outstanding at July 31, 1998
24,145 shares issued and outstanding at July 31, 1999 - -
Series B Cumulative Convertible Preferred Stock, 2,000 shares
authorized, no shares issued and outstanding at July 31, 1998
2,000 shares issued and outstanding at July 31, 1999 - -
Common stock, $0.001 par value, 100,000,000 shares authorized,
45,603,566 issued and outstanding at July 31, 1998
48,685,287 issued and outstanding at July 31, 1999 46 49
Additional paid in capital 22,248 29,399
Accumulated deficit (14,396) (21,987)
Deferred compensation (667) (466)
Cumulative translation adjustment (144) (858)
------------ ------------
Total stockholders' equity 7,087 6,137
------------ ------------
Total liabilities and stockholders' equity $ 24,251 $ 24,154
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Years Ended July 31,
1997 1998 1999
------------- ----------- ---------
<S> <C> <C> <C>
OPERATING REVENUES:
Network management services $ 1,698 $ 13,362 $ 19,250
Call services 12,545 13,547 6,602
Direct dial services 1,421 6,085 6,024
Internet e-commerce 564 1,526 2,642
------------- ----------- ---------
Total operating revenues 16,228 34,520 34,518
------------- ----------- ---------
OPERATING EXPENSES:
Cost of services 12,792 22,287 21,312
Selling, general and administrative 6,312 12,853 12,652
Bad debt expense 735 1,024 2,346
Depreciation and amortization 591 1,822 3,248
------------- ----------- ---------
Total operating expenses 20,430 37,986 39,558
------------- ----------- ---------
OPERATING LOSS (4,202) (3,466) (5,040)
OTHER INCOME (EXPENSE):
Interest income 27 76 59
Other income 68 32 -
Other expense (27) (24) (10)
Interest expense (513) (1,573) (1,745)
------------- ----------- ---------
Total other income (expense) (445) (1,489) (1,696)
------------- ----------- ---------
LOSS BEFORE INCOME TAX EXPENSE
AND MINORITY INTEREST (4,647) (4,955) (6,736)
FOREIGN INCOME TAX EXPENSE - (139) -
MINORITY INTEREST (48) - -
------------- ----------- ---------
NET LOSS ($4,695) ($5,094) ($6,736)
LESS: PREFERRED STOCK DIVIDENDS - - (855)
------------- ----------- ---------
NET LOSS TO COMMON SHAREHOLDERS ($4,695) ($5,094) ($7,591)
============= =========== =========
BASIC AND DILUTED LOSS PER SHARE ($0.18) ($0.12) ($0.16)
============= =========== =========
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 26,807 41,093 47,467
============= =========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended July 31,
----------------------------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net loss ($4,695) ($5,094) ($7,591)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments $12 ($160) ($714)
Comprehensive loss to common stockholders ($4,683) ($5,254) ($8,305)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Preferred Shares Common Stock
----------------------- ---------------------- Additional
Shares Amount Shares Amount Paid In Capital
--------- --------- ---------- --------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE, July 31, 1996 - $ - 23,775 $ 6,288 $ -
Issuances of common shares for cash - - 5,760 4,736 -
Conversion of convertible debt to common shares - - 3,612 1,967 -
Issuance of common shares for acquisition - - 2,716 1,847 -
Issuances of common shares for services - - 925 154 -
Deferred compensation - - - 1,394 -
Compensation expense - - - - -
Warrants issued with convertible long term debt - - - 990 -
Cumulative effect of translation adjustment - - - - -
Net loss - - - - -
--------- --------- ---------- --------- ---------------
BALANCE, July 31, 1997 - - 36,788 $ 17,376 -
Issuances of common shares for cash - - 5,500 3,496 -
Issuances of common shares for reduction in indebtedness - - 2,871 1,076 -
Conversion of convertible debt to common shares - - 200 100 -
Issuances of common shares for services - - 245 246 -
Compensation expense - - - - -
Cumulative effect of translation adjustment - - - - -
Exchange of common shares for common stock - - - (22,248) 22,248
Net loss - - - - -
--------- --------- ---------- --------- ---------------
BALANCE, July 31, 1998 - - 45,604 $ 46 $ 22,248
Issuances of common shares for cash - - 2,706 3 1,637
Issuances of common shares for services - - 96 - 40
Issuances of common shares for acquisition - - 279 - 179
Issuances of preferred stock 26 - - - 4,176
Deferred compensation - - - - 344
Dividend expense - - - - -
Amortization of equity discount - - - - 775
Compensation expense - - - - -
Cumulative effect of translation adjustment - - - - -
Net loss - - - - -
--------- --------- ---------- --------- ---------------
BALANCE, July 31, 1999 26 - 48,685 $ 49 $ 29,399
<CAPTION>
Cumulative Total
Accumulated Translation Deferred Stockholders'
Deficit Adjustment Compensation Equity
----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
BALANCE, July 31, 1996 ($4,607) $ 4 ($55) $ 1,630
Issuances of common shares for cash - - - 4,736
Conversion of convertible debt to common shares - - - 1,967
Issuance of common shares for acquisition - - - 1,847
Issuances of common shares for services - - - 154
Deferred compensation - - (1,394) 0
Compensation expense - - 295 295
Warrants issued with convertible long term debt - - - 990
Cumulative effect of translation adjustment - 12 - 12
Net loss (4,695) - - (4,695)
----------- ----------- ------------ -------------
BALANCE, July 31, 1997 ($9,302) $ 16 ($1,154) $ 6,936
Issuances of common shares for cash - - - 3,496
Issuances of common shares for reduction in indebtedness - - - 1,076
Conversion of convertible debt to common shares - - - 100
Issuances of common shares for services - - - 246
Compensation expense - - 487 487
Cumulative effect of translation adjustment - (160) - (160)
Exchange of common shares for common stock - - - 0
Net loss (5,094) - - (5,094)
----------- ----------- ------------ -------------
BALANCE, July 31, 1998 ($14,396) ($144) ($667) $ 7,087
Issuances of common shares for cash - - - 1,640
Issuances of common shares for services - - - 40
Issuances of common shares for acquisition - - - 179
Issuances of preferred stock - - - 4,176
Deferred compensation - - (344) 0
Dividend expense (80) - - (80)
Amortization of equity discount (775) - - 0
Compensation expense - - 545 545
Cumulative effect of translation adjustment - (714) - (714)
----------- ----------- ------------ -------------
Net loss (6,736) - - (6,736)
BALANCE, July 31, 1999 ($21,987) ($858) ($466) $ 6,137
=========== =========== ============ =============
</TABLE>
The accompanying notes are an integral part of consolidated these financial
statements.
31
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended July 31,
1997 1998 1999
----------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($4,695) ($5,094) ($6,736)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization 591 1,822 3,248
Amortization of debt discount 87 307 346
Deferred compensation 295 487 545
Provision for losses on accounts receivable 735 1,024 2,346
Minority interest 48 - -
Changes in operating assets and liabilities-
Increase in accounts receivable (1,983) (2,723) (2,207)
(Increase) decrease in prepaid expenses and other (849) 197 (1,632)
Increase (decrease) in accounts payable (1,025) 3,479 (1,139)
Increase (decrease) in accrued liabilities 884 (192) 1,857
Increase (decrease) in deferred revenue 378 71 (191)
Other 4 - -
---------- -------- ----------
Net cash used in operating activities (5,530) (622) (3,563)
---------- -------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (590) (3,297) (956)
Acquisition of business, net of cash acquired 73 (2,112) (171)
Payments received on notes receivable 101 - -
---------- -------- ----------
Net cash used in investing activities (416) (5,409) (1,127)
---------- -------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 3,632 2,547 437
Net increase (decrease) in short-term borrowings 281 353 (488)
Payments on debt - (1,141) (679)
Capital lease payments (401) (1,044) (941)
Payments on long-term liabilities - (67) (123)
Proceeds from issuance of preferred stock,
net of issuance costs - - 4,176
Proceeds from issuance of common stock,
net of issuance costs 3,699 4,553 1,596
---------- -------- ----------
Net cash provided by financing activities 7,211 5,201 3,978
---------- -------- ----------
NET INCREASE (DECREASE) IN CASH 1,265 (830) (712)
CASH AND CASH EQUIVALENTS, beginning of period 656 1,921 1,091
---------- -------- ----------
CASH AND CASH EQUIVALENTS, end of period $1,921 $1,091 $379
========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The accompanying consolidated financial statements are those of American
TeleSource International, Inc. and its subsidiaries ("ATSI" or the "Company").
The Company was formed on June 6, 1996 under the laws of the state of Delaware
for the express purpose of effecting a "Plan of Arrangement" with American
TeleSource International, Inc., which was incorporated under the laws of the
province of Ontario, Canada (hereinafter referred to as "ATSI-Canada"). The
Plan of Arrangement called for the stockholders of ATSI-Canada to exchange their
shares on a one-for-one basis for shares of the Company. On April 30, 1998,
shareholders of ATSI-Canada approved the Plan of Arrangement, and on May 11,
1998, ATSI-Canada became a wholly owned subsidiary of the Company. The Company
is publicly traded on the OTC Bulletin Board under the symbol "AMTI".
The accompanying consolidated balance sheet dated July 31, 1998 includes
the assets, liabilities and shareholders' equity of ATSI-Canada which were
transferred to the Company on May 11, 1998, and the accompanying statements of
operations for the years ended July 31, 1997 and 1998 include the consolidated
operations of ATSI-Canada through May 11, 1998.
In May 1997, ATSI-Canada entered into an agreement to purchase up to 100%
of the outstanding shares of Sistema de Telefonia Computarizada, S.A. de C.V.
("Computel"), the largest privately owned operator of casetas (public calling
stations) in Mexico. Under the terms of the agreement, ATSI-Canada acquired 55%
of the shares of Computel effective May 1, 1997 and the remaining 45% effective
August 28, 1997. As ATSI-Canada acquired majority ownership effective May 1,
1997, the Company has recorded 100% of the net assets and liabilities of
Computel as of that date. The Company's consolidated financial statements for
the period May 1, 1997 to July 31, 1997 include the impact of the 45% minority
ownership interest. For the years ended July 31, 1998 and July 31, 1999, the
Company's consolidated financial statements include 100% of the activities of
Computel.
In July 1997, American TeleSource International de Mexico, S.A. de C.V.
("ATSI-Mexico") acquired 100% of the outstanding stock of Servicios de
Infraestructura, S.A. de C.V. ("Sinfra"). In April 1998, TeleSpan, Inc.
("Telespan") purchased 100% of the outstanding stock of Sinfra from ATSI-Mexico.
In March 1998, ATSI-Delaware acquired 100% of the outstanding stock of
Soluciones Internactionales de Mercadeo, S.A. and subsequently changed the name
to ATSI de CentroAmerica, S.A.
Through its subsidiaries, the Company provides retail and wholesale
communications services within and between the United States and select markets
within Latin America. Utilizing a framework of licenses, interconnection and
service agreements, network facilities and distribution channels, the Company
aims to provide U.S standards of reliability to Mexico and other markets within
Latin America which have historically been underserved by telecommunications
monopolies. As of July 31, 1999, the Company's operating subsidiaries are as
follows:
American TeleSource International, Inc. ("ATSI-Texas" a Texas corporation)
--------------------------------------------------------------------------
ATSI-Texas owns and operates a switching facility and multilingual call
center in San Antonio, Texas. This facility provides U.S. based call services
to public telephones owned by ATSI-Mexico and casetas owned by Computel in
Mexico, as well as to third party-owned public telephones, casetas and hotels in
Mexico. Although these calls originate in Mexico, they are terminated and
billed in the United States and Mexico by ATSI-Texas. In July 1998, ATSI-Texas
also began providing domestic U.S. and international call services to
residential customers in the U.S.
American TeleSource International de Mexico, S.A. de C.V.
---------------------------------------------------------
("ATSI-Mexico" a Mexican corporation)
-------------------------------------
ATSI-Mexico owns and operates coin-operated public telephones in Mexico.
Utilizing its 20-year comercializadora license, ATSI purchases telephone lines
and resells local, long distance and international calls from public telephones
connected to the lines. Direct dial calls may be made from the telephones using
pesos or quarters, and users may use the services of ATSI-Texas to place calls
to the U.S. by billing calls to valid third parties, credit cards or calling
cards.
33
<PAGE>
Computel (a Mexican corporation)
--------------------------------
Computel is the largest private operator of casetas in Mexico, operating
approximately 126 casetas in 66 cities. Direct dial calls may be made from the
casetas using cash or credit cards, and users may use the services of ATSI-Texas
to place calls to the U.S. by billing calls to valid third parties, credit cards
or calling cards. Computel utilizes telephone lines owned by ATSI-Mexico.
Sinfra (a Mexican corporation)
-------------------------------
Utilizing its 20-year Teleport and Satellite Network license, Sinfra owns and
operates the Company's teleport facilities in Cancun, Monterrey and Mexico City,
Mexico. These facilities are used for the provision of international private
network services. Sinfra also owns a 15-year Packet Switching Network license.
TeleSpan, Inc. ("TeleSpan" a Texas corporation)
-----------------------------------------------
TeleSpan owns and operates the Company's teleport facilities in the United
States and Costa Rica. TeleSpan contracts with U.S. based entities and carriers
seeking facilities or increased capacity into Mexico, Costa Rica, El Salvador
and Guatemala. For network services into Mexico, TeleSpan utilizes facilities
owned by Sinfra.
GlobalScape, Inc. ("GlobalSCAPE" a Texas corporation)
-----------------------------------------------------
GlobalSCAPE markets CuteFTP and other digitally downloadable software
products and distributes them over the Internet utilizing electronic software
distribution ("ESD").
ATSI de CentroAmerica (a Costa Rican corporation)
-------------------------------------------------
ATSI de CentroAmerica markets international private network services in Costa
Rica and other Latin American countries and looks to develop corporate
development opportunities in Latin American countries through joint ventures and
interconnection agreements with existing telecommunication monopolies.
2. FUTURE OPERATIONS, LIQUIDITY, CAPITAL RESOURCES AND VULNERABILITY DUE
TO CERTAIN CONDITIONS
The accompanying consolidated financial statements of the Company have been
prepared on the basis of accounting principles applicable to a going concern.
For the period from December 17, 1993 to July 31, 1999, the Company has incurred
cumulative net losses of $21.9 million. Further, the Company had a working
capital deficit of $5.7 million at July 31, 1998 and $6.7 million at July 31,
1999. Further, the Company had negative cash flows from operations of $5.5
million, $.6 million and $3.6 million for the years ended July 31, 1997, 1998
and 1999, respectively. The Company has limited capital resources available to
it, and these resources may not be available to support its ongoing operations
until such time as the Company is able to generate positive cash flow from
operations. There is no assurance the Company will be able to achieve future
revenue levels sufficient to support operations or recover its investment in
property and equipment, goodwill and other intangible assets. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. The ability of the Company to continue as a going concern is dependent
upon the ongoing support of its stockholders and customers, its ability to
obtain capital resources to support operations and its ability to successfully
market its services.
The Company is likely to require additional financial resources in the near
term and could require additional financial resources in the long-term to
support its ongoing operations. The Company has retained various financial
advisers to assist it in refining its strategic growth plan, defining its
capital needs and obtaining the funds required to meet those needs. The plan
includes securing funds through equity offerings and entering into lease or
long-term debt financing agreements to raise capital. There can be no
assurances, however, that such equity offerings or other financing arrangements
will actually be consummated or that such funds, if received, will be sufficient
to support existing operations until revenue levels are achieved sufficient to
generate positive cash flow from operations. If the Company is not successful
in completing additional equity offerings or entering into other financial
arrangements, or if the funds raised in such stock offerings or other financial
arrangements are not adequate to support the Company until a successful level of
operations is attained, the Company has limited additional sources of debt or
equity capital and would likely be unable to continue operating as a going
concern.
34
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared on the accrual
basis of accounting under generally accepted accounting principles of the U.S.
All significant intercompany balances and transactions have been eliminated in
consolidation. Certain prior period amounts have been reclassified for
comparative purposes.
Estimates in Financial Statements
---------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Revenue Recognition Policies
----------------------------
The Company recognizes revenue from its call services and direct dial
services as such services are performed, net of unbillable calls. Revenue from
network management service contracts is recognized when service commences for
service commencement fees and monthly thereafter as services are provided. The
Company recognizes revenue from equipment sales when the title for the equipment
transfers to the customer and from equipment installation projects when they are
completed. Revenues related to the Company's Internet product are recognized at
the point of delivery, as the Company bears no additional obligation beyond the
provision of its software product other than post-contract customer service.
Foreign Currency Translation
----------------------------
Until January 1, 1999, Mexico's economy was designated as highly
inflationary. Generally Accepted Accounting Principles, "GAAP" require the
functional currency of highly inflationary economies to be the same as the
reporting currency. Accordingly, the consolidated financial statements of ATSI-
Mexico and Computel, whose functional currency is the peso, were remeasured from
the peso into the U.S. dollar for consolidation. Monetary and nonmonetary
assets and liabilities were remeasured into U.S. dollars using current and
historical exchange rates, respectively. The operating activities of ATSI-Mexico
and Computel were remeasured into U.S. dollars using a weighted-average exchange
rate. The resulting translation gains and losses were charged directly to
operations. As of January 1, 1999, Mexico's economy was deemed to be no longer
highly inflationary. According to GAAP requirements the change from highly
inflationary to non-highly inflationary requires that the nonmonetary assets be
remeasured using not the historical exchange rates, but the exchange rate in
place as of the date the economy changes from highly inflationary to non-highly
inflationary. As such, the Company's non-monetary assets in ATSI-Mexico and
Computel have been remeasured using the exchange rate as of January 1, 1999.
Subsequent to January 1, 1999, monetary assets and non-monetary assets are
translated using current exchange rates and operating activity of ATSI-Mexico
and Computel are remeasured in to U.S. dollars using a weighted average exchange
rate. The effect of these translation adjustments are reflected in the
cumulative translation account shown in equity.
Accounts Receivable
-------------------
The Company utilizes the services of credit card processing companies for
the billing of commercial credit card calls. The Company receives cash from
these calls, net of transaction and billing fees, generally within 20 days from
the dates the calls are delivered. All other calls (calling card, collect,
person-to-person and third party billed) are billed under an agreement between
the Company and a billing clearinghouse. This agreement allows ATSI to submit
call detail records to the clearinghouse, which in turn forwards these records
to the local telephone company to be billed. The clearinghouse collects the
funds from the local telephone company and then remits the funds, net of
charges, to ATSI. Because this collection process can take up to 90 days to
complete, ATSI participates in an advance funding program offered by the
clearinghouse whereby 100% of the call records are purchased for 75% of their
value within five days of presentment. The remaining 25% value of the call
records are remitted to ATSI, net of interest and billing charges and an
estimate for uncollectible calls, as the clearinghouse collects the funds from
the local telephone companies. Under the advanced funding agreement, the
collection clearinghouse has a security interest in the unfunded portion of the
receivables as well as future receivables generated by the Company's long
distance business. The allowance for doubtful accounts reflects the Company's
estimate of uncollectible calls at July 31, 1998 and 1999 and includes $1.5
million of specific accounts identified by the Company as potentially
uncollectible. ATSI currently pays a funding charge of prime plus 4% per annum
on the amounts that are advanced to ATSI. Receivables sold with recourse during
fiscal years 1997, 1998, and 1999 were $8,530,665, $11,127,221 and $6,138,549
respectively. At July 31, 1997, 1998 and 1999, $577,256, $484,381 and $444,398
of such receivables were uncollected, respectively. See Note 5 for additional
disclosure regarding advanced funding.
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 125 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". This statement provides accounting
and reporting standards for, among other things, the transfer and servicing of
financial assets, such as factoring receivables with
35
<PAGE>
recourse. The adoption of these statements has not had a material impact on the
financial position or results of operations of the Company.
Impuesto al Valor Agregado (Value-Added Tax) ("IVA")
----------------------------------------------------
The Company's Mexican subsidiaries are required to report a value-added tax
related to both purchases and sales of services and assets, for local tax
reporting. Accordingly, each subsidiary maintains both an IVA receivable and IVA
payable account on their subsidiary ledgers. For consolidated reporting
purposes, the Company nets its Mexican subsidiaries IVA receivable and IVA
payable accounts as allowed by regulatory requirements in Mexico. For the years
ended July 31, 1998 and 1999, this netting of IVA accounts resulted in the
elimination of IVA payable and a corresponding reduction in IVA receivable of
approximately $197,000 and $1.2 million, respectively.
Basic and Diluted Loss Per Share
--------------------------------
Loss per share was calculated using the weighted average number of common
shares outstanding for the years ended July 31, 1997, 1998 and 1999. Common
stock equivalents, which consist of the stock purchase warrants and options
described in Note 9, were excluded from the computation of the weighted average
number of common shares outstanding because their effect was antidilutive.
Additionally, the Company has excluded the convertible preferred stock described
in Note 8, from the computation of the weighted average number of common shares
outstanding as their effect will also be antidilutive.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation and amortization
are computed on a straight-line basis over the estimated useful lives of the
related assets, which range from five to fifteen years. Expenditures for
maintenance and repairs are charged to expense as incurred. Direct installation
costs and major improvements are capitalized.
Effective for the fiscal years beginning after July 31, 1996, the Company
follows rules as prescribed under Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 requires an assessment of the
recoverability of the Company's investment in long-lived assets to be held and
used in operations whenever events or circumstances indicate that their carrying
amounts may not be recoverable. Such assessment requires that the future cash
flows associated with the long-lived assets be estimated over their remaining
useful lives and an impairment loss be recognized when the undiscounted future
cash flows are less than the carrying value of such assets. As of July 31,
1999, the Company has determined that the estimated undiscounted future cash
flows associated with its long-lived assets are greater than the carrying value
of such assets and that no impairment loss needs to be recognized.
Goodwill, Trademarks, Contracts and Other Assets
------------------------------------------------
As of the years ended July 31, 1998 and 1999, other assets include
goodwill, primarily related to the purchase of Computel, of $5,216,646 and
$5,296,646, respectively, net of accumulated amortization of $126,668 and
$265,089, respectively. Goodwill is amortized over 40 years. As of July 31,
1998 and 1999 other assets include acquisition costs of $1,417,870, and
$1,596,620, respectively, related to the Company's acquisitions of several of
its independent marketing representatives, net of accumulated amortization of
$244,652, and $893,212, respectively. These acquisition costs are being
amortized over the life of the contracts, which approximates three years. As of
July 31, 1999, other assets include $898,943 related to the purchase of the
rights to CuteFTP, net of accumulated amortization of $110,352. This trademark
is being amortized over an estimated five-year life. Additionally, as of July
31, 1998 and 1999, other assets include approximately $489,000 and $615,000 of
other assets, not specifically identified as goodwill, acquisition costs or
trademarks. As it relates to SFAS 121, as of July 31, 1999, the Company has
determined that the estimated future cash flows associated with its goodwill and
other intangible assets are greater than the carrying value of such assets and
that no impairment loss needs to be recognized. For the years ended July 31,
1997, 1998 and 1999, the Company recorded amortization expense of $55,491,
$369,219 and $925,440, respectively related to its other assets.
Income Taxes
------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under the provisions of SFAS 109, the Company
recognizes deferred tax liabilities and assets based on enacted income tax rates
that are expected to be in effect in the period in which the deferred tax
liability or asset is expected to be settled or realized. A change in the tax
laws or rates results in adjustments in the period in which the tax laws or
rates are changed.
36
<PAGE>
Statements of Cash Flows
------------------------
Cash payments and non-cash investing and financing activities during the
periods indicated were as follows:
<TABLE>
<CAPTION>
For the Years Ended July 31,
-----------------------------
1997 1998 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash payments for interest $ 416,756 $1,349,679 $1,101,771
Cash payments for taxes $ - $ 148,097 $ -
Common shares issued for services $ 153,885 $ 246,591 $ 40,000
Common shares issued for acquisition of Computel and
other $1,846,569 $ - $ 178,750
Assets acquired in acquisition of Computel $3,418,753 $ - $ -
Liabilities assumed in acquisition of Computel $4,205,404 $ - $ -
Conversion of convertible debt to common shares $1,966,531 $ 100,000 $ -
Capital lease obligations incurred $1,521,875 $4,635,693 $ -
Common share subscriptions sold $1,113,170 $ - $ 42,500
</TABLE>
For purposes of determining cash flows, the Company considers all temporary
cash investments with an original maturity of three months or less to be cash
and cash equivalents.
New Accounting Pronouncements
-----------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and disclosure of comprehensive income and its components in a full
set of financial statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997, and requires reclassification of comparative
financial statements for earlier periods. The adoption of SFAS No. 130 has
resulted in the presentation of comprehensive income (loss) that differs from
net income (loss) as presented in the accompanying financial statements to the
extent of foreign currency translation adjustments as shown in the accompanying
consolidated statements of comprehensive income (loss). The Company
presentation of its comprehensive income component, foreign currency translation
adjustments, is presented net of tax, which is $0 for all periods presented, in
light of the Company's current net operating loss carryforward position.
Disclosures about Fair Value of Financial Instruments
-----------------------------------------------------
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument held by the Company:
Current assets and liabilities: The carrying value approximates fair value
due to the short maturity of these items.
Long-term debt and convertible debt: Since the Company's debt is not
quoted, estimates are based on each obligations' characteristics, including
remaining maturity, interest rate, credit rating, collateral, amortization
schedule and liquidity (without consideration for the convertibility of the
notes). The Company believes that the carrying amount does not differ
materially from the fair value.
37
<PAGE>
4. PROPERTY AND EQUIPMENT, NET (at cost)
Following is a summary of the Company's property and equipment at July 31,
1998 and 1999:
<TABLE>
<CAPTION>
July 31, 1998 July 31, 1999
------------------- ------------------
<S> <C> <C>
Telecommunications equipment $ 6,084,771 $ 6,476,395
Land and buildings 892,507 447,748
Furniture and fixtures 882,449 902,873
Equipment under capital leases 5,585,291 7,758,739
Leasehold improvements 281,014 474,748
Other 517,192 608,914
----------- -----------
14,233,224 16,669,417
Less: accumulated depreciation and amortization (2,418,514) (4,712,671)
----------- -----------
Total - property and equipment, net $11,814,710 $11,956,746
=========== ===========
</TABLE>
Depreciation expense as reported in the Company's Consolidated Statements
of Operations includes depreciation expense related to the Company's capital
leases. For the years ended July 31, 1997, 1998 and 1999, the Company recorded
approximately $536,000, $1,453,000 and $2,323,0000, respectively of depreciation
expense related to its fixed assets.
5. NOTES PAYABLE AND CONVERTIBLE DEBT
<TABLE>
<CAPTION>
Notes Payable
- -------------
Notes payable are comprised of the following: July 31,
---------------
1998 1999
--------------- ---------------
<S> <C> <C>
Note payable to a company, see terms below. $ 25,320 $ 137,071
Note payable to an individual, see terms below. - 150,000
Note payable to a bank, see terms below. - 150,000
Notes payable to related parties, see terms below. - 100,000
Note payable to an individual, see terms below. - 368,768
Notes payable to various banks, see terms below. 416,846 56,878
Notes payable to a company, net of discount, see terms below. 364,803 309,588
---------- ----------
$1,406,969 $1,272,305
Less: current portion $ 688,005 $ 960,523
---------- ----------
$ 718,964 $ 311,782
Total non-current notes payable ========== ==========
</TABLE>
38
<PAGE>
During November 1996, the Company entered into an agreement with a
financing company under which the Company is advanced an additional 13.75% of
its receivables sold to a billing clearinghouse, as discussed in Note 3. These
advances are typically outstanding for periods of less than 90 days, and are
repaid, including accrued interest, by the clearinghouse on behalf of the
Company as its receivables from long distance call services are collected. The
Company was charged 4% per month for these fundings. When the agreement with
the financing company expired in November 1998, it was renewed on a month-to-
month basis, and the Company ceased using the factoring arrangement altogether
in April 1999 as part of its ongoing effort to minimize costs. The approximate
$137,000 outstanding represents advances to be repaid by the clearinghouse to
the financing company upon its subsequent collection of its receivables from
long distance call services.
During February 1999, the Company entered into a note payable with an
individual, for working capital purposes, in the amount of $150,000. Interest
accrues at an interest rate of 12% per year, principal and interest due at
maturity. The note originally matured in May 1999, but the Company has extended
the note with the individual for an additional six months.
During January 1999, one of the Company's subsidiaries entered into a note
payable with a bank in the amount of $180,000 related to its acquisition of a
computer software program known as "CuteFTP". (See Note 10). The note calls
for principal payments of $5,000 per month for twelve months and $10,000 per
month for twelve months. Interest accrues monthly at an interest rate of the
Lender's "Prime Rate" plus 1%. At July 31, 1999, the Lender's "Prime Rate" was
8.00%.
In February 1999, the Company entered into notes payable with related
parties, all of whom were officers or directors of the Company in the amount of
$250,000. The notes accrue interest at a rate of 12% per year until paid in
full. As of July 31, 1999, $100,000 of the notes remain outstanding.
In January 1999, one of the Company's subsidiaries entered into an
agreement with an individual related to its acquisition of a computer software
program known as "CuteFTP". (See Note 10). The agreement calls for twelve
principal and interest payments of $63,000 per month beginning February 28,
1999. The Company has imputed interest using an interest rate of 12% per annum.
As of July 31, 1998 and July 31, 1999, the Company through its acquisition
of Computel had approximately $416,846 and $56,878, respectively, of bank notes
payable to various banks in Mexico. The notes have interest rates ranging from
8% to 15%, with monthly principal and interest payments of approximately $7,500.
The notes mature between October 1999 and December 2015 and are collaterized by
the assets of Computel. In the year ended July 31, 1999, the Company through
Computel exchanged certain assets collaterized by the notes for a reduction in
its indebtedness. The notes remaining mature during the year ended July 2000.
During October 1997, the Company entered into a note payable with a company
in the amount of $1,000,000. The note calls for quarterly payments of principal
and interest beginning in January 1998 and continuing until October 2004.
Interest accrues on the unpaid principal at the rate of 13% per year. The
Company also issued 250,000 warrants to the note holder which carry an exercise
price of $3.56 per warrant. These warrants expire in October 2000. The amount
of debt discount recorded by the Company related to the issuance of these
warrants was $103,333. The fair value of the warrants was calculated on the date
of issuance using an option pricing model with the following assumptions:
Dividend yield of 0.0%, expected volatility of 30%, risk-free interest rate of
6.00%, and an expected life of three years. The warrants expire three years
from their date of issuance, and are not exercisable for a period of one year
after their initial issuance. In January 1998, the noteholder exercised 700,000
warrants at an exercise price of $0.70, unrelated to the warrants noted above,
in consideration of a $490,000 reduction of the principal balance outstanding on
the note.
Convertible Debt
- ----------------
In March and May 1997, the Company issued $2.2 million in convertible notes,
interest at 10%. The principal and interest, which accrues quarterly, is due
and payable three years from the date of issuance. The convertible notes
convert into fully redeemable preferred stock at the Company's option. In
addition, for each $50,000 unit of convertible debt, each holder was issued
108,549 warrants to purchase an equal number of shares of common stock at $0.27
per share. The fair value of the warrants was determined to be $0.37 per share
and the Company assigned $990,000 to the value of the warrants in stockholders'
equity. The fair value of the warrants was
39
<PAGE>
calculated on the date of issuance using an option pricing model with the
following assumptions: Dividend yield of 0.0%, expected volatility of 62%, risk-
free interest rate of 6.35%, and an expected life of three years. The warrants
expire three years from their date of issuance, and were not exercisable for a
period of one year after their initial issuance. The Company has recorded the
$990,000 as debt discount and is amortizing the discount over the term of the
debt based on the effective interest method. Principal outstanding as of July
31, 1998 and July 31, 1999, net of debt discount, was $1,603,802 and $1,942,614,
respectively. All of the outstanding principal at July 31, 1999, is reflected in
the current portion of convertible long-term debt.
Maturities of notes payable and convertible debt as of July 31, 1999 were as
follows:
<TABLE>
<S> <C>
Year Ending July 31, 2000 $2,903,137
2001 107,983
2002 56,949
2003 67,138
2004 78,718
Thereafter 994
----------
Total $3,214,919
==========
</TABLE>
6. LEASES
Operating Leases
----------------
The Company leases office space, furniture, equipment and network capacity
under noncancelable operating leases and certain month-to-month leases. During
fiscal 1997, 1998 and 1999, the Company also leased certain equipment under
capital leasing arrangements. Rental expense under operating leases for the
years ended July 31, 1997, 1998 and 1999, was $176,700, $942,750 and $2,952,710,
respectively. Future minimum lease payments under the noncancelable operating
leases at July 31, 1999, are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 2,929,328
2001 3,284,740
2002 2,598,753
2003 583,524
2004 574,542
Thereafter 1,864,863
-----------
Total minimum lease payments $11,835,750
===========
</TABLE>
Capital Leases
--------------
Future minimum lease payments under the capital leases together with the
present value of the net minimum lease payments at July 31, 1999 are as follows:
<TABLE>
<S> <C>
2000 $ 2,295,036
2001 2,246,127
2002 2,022,825
2003 1,758,391
2004 562,335
Thereafter 277,435
-----------
Total minimum lease payments 9,162,149
Less: Amount representing taxes (45,302)
-----------
Net minimum lease payments 9,116,847
Less: Amount representing interest (2,164,572)
-----------
Present value of minimum lease payments $ 6,952,275
===========
</TABLE>
40
<PAGE>
In April 1997, the Company, through ATSI-Mexico secured a capital lease
facility with IBM de Mexico to purchase intelligent pay telephones for
installation in Mexico. The capital lease facility of approximately $1.725
million has allowed the Company to install U.S. standard intelligent pay
telephones in various Mexican markets. In April 1998, the Company through ATSI-
Mexico secured an additional capital lease facility with IBM de Mexico for
approximately $2.9 million to increase network capacity and to fund the purchase
and installation of public telephones in Mexico. In May 1999, the Company
restructured its capital lease obligation with IBM de Mexico by extending the
payment of its total obligation. The restructured lease facility calls for
monthly payments of principal and interest of approximately $108,000 beginning
in July 1999 and extending through June 2003. Interest accrues on the facility
at an interest rate of approximately 13% per year. The obligation outstanding
under said facility at July 31, 1998 and July 31, 1999 was approximately
$4,272,000 and $3,826,000, respectively.
In December 1998, the Company ordered a DMS 250/300 International gateway
switch from Northern Telecom, Inc. at a cost of approximately $1.8 million. As
of July 31, 1999, the Company entered into a capital lease transaction with NTFC
Capital Corporation, ("NTFC") to finance the switch and an additional
approximate $200,000 of equipment over a five and a half-year period with
payments delayed for six months. Quarterly payments approximate $139,000 and the
capital lease has an interest rate of approximately 11%. The lease facility
requires that the Company meet certain financial covenants on a quarterly basis
beginning October 31, 1999, including minimum revenue levels, gross margin
levels, EBITDA results and debt to equity ratios. Due primarily to pricing
pressures in the Company's network transport services business, the Company may
not be able to meet some of the financial covenants in the facility, which, if
not cured, would allow NTFC to demand payment in full of the amount outstanding.
However, because management does not believe that non-compliance is a certainty,
the majority of the amount outstanding under the facility has been classified as
non-current in the accompanying balance sheet. The Company also has certain
affirmative covenants under the facility, including a covenant on Year 2000
compliance, under which the Company gives assurance that the Company's systems
will be able to process transactions effectively before, on and after January 1,
2000.
The Company secured a capital lease for approximately $500,000 in December
1998 for the purchase of ATM equipment from Network Equipment Technologies
("N.E.T"). The capital lease is for thirty-six months with monthly payments of
approximately $16,000 a month. The Company's capital leases have interest rates
ranging from 11% to 14%.
7. DEFERRED REVENUE
The Company records deferred revenue related to the private network
services it provides. Customers may be required to advance cash to the Company
prior to service commencement to partially cover the cost of equipment and
related installation costs. Any cash received prior to the actual commencement
of services is recorded as deferred revenue until services are provided by the
Company, at which time the Company recognizes service commencement revenue.
8. SHARE CAPITAL
As discussed in Note 1, in May 1998, the Company completed its Plan of
Arrangement whereby the shareholders of ATSI-Canada exchanged their shares on a
one-for-one basis for shares of ATSI-Delaware stock. The exchange of shares
resulted in the recording on the Company's books of $0.001 par value stock and
additional paid-in capital.
During the year ended July 31, 1997, the Company issued 13,012,448 common
shares. Of this total, 5,760,355 shares were issued for approximately
$4,737,000 of net cash proceeds, 924,761 shares were issued for services
rendered to the Company, 3,611,786 shares were issued for the conversion of
convertible debt to common shares, and 2,715,546 shares were issued related to
the Company's acquisition of Computel. (See Note 10).
During the year ended July 31, 1998, the Company issued 8,816,461 common
shares. Of this total, 7,765,174 shares were issued for approximately $3.2
million of net cash proceeds and reductions in indebtedness of approximately
$1.1 million through the exercise of 7,765,174 warrants and options, 245,016
shares were issued for
41
<PAGE>
services rendered to the Company, 200,000 were issued resulting from the
conversion of a $100,000 convertible note and 606,271 shares were issued for
approximately $333,000 in net cash proceeds.
During the year ended July 31, 1999, the Company issued 3,081,721 common
shares. Of this total, 2,203,160 shares were issued for approximately $1.3
million of net cash through the exercise of 2,203,160 warrants and options,
36,643 shares were issued for consulting services rendered to the Company,
59,101 shares were issued to a shareholder in exchange for a guarantee of up to
$500,000 of Company debt, 503,387 shares and an equal number of warrants to
purchase the Company's common stock for $0.70 per share were issued in exchange
for approximately $300,000 in net cash proceeds and 279,430 shares were issued
related to the Company's acquisition of certain customer contracts in previous
years. The shares issued for services rendered , the guarantee of Company debt,
and the shares issued for the $300,000 in cash proceeds (including the shares
underlying the warrants issued) have not been registered by the Company, nor
does the Company have any obligation to register such shares.
At July 31, 1999, stock subscription receivables of $42,500, were
outstanding related to sales of common stock. Such amounts were collected by
the Company subsequent to said date. No dividends were paid on the Company's
stock during the years ended July 31, 1997, 1998 and 1999.
The shareholders of ATSI-Canada approved the creation of a class of
preferred stock at the Company's annual shareholders meeting on May 21, 1997.
Effective June 25, 1997, the class of preferred stock was authorized under the
Ontario Business Corporations Act. According to the Company's amended Articles
of Incorporation, the Company's Board of Directors may issue, in series, an
unlimited number of preferred shares, without par value. No preferred shares
have been issued as of July 31, 1999.
Pursuant to ATSI-Delaware's Certificate of Incorporation, the Company's
Board of Directors may issue, in series, an unlimited number of preferred
shares, with a par value of $0.001. In March and April 1999, the Company issued
a total of 24,146 shares of Series A Preferred Stock for cash proceeds of
approximately $2.4 million and in July 1999 the Company issued 2,000 shares of
Series B Preferred Stock for cash proceeds of approximately $2.0 million. The
Series A Preferred Stock accrues cumulative dividends at the rate of 10% per
annum payable quarterly, while the Series B Preferred Stock accrues cumulative
dividends at the rate of 6% per annum.
In September 1999, the Company issued 500 shares of Series C Preferred
Stock for cash proceeds of approximately $500,000. The Series C Preferred Stock
accrues cumulative dividends at the rate of 6% per annum.
The Series A Preferred Stock and any accumulated, unpaid dividends may be
converted into Common Stock for up to one year at the average closing price of
the Common Stock for twenty (20) trading days preceding the Date of Closing (the
"Initial Conversion Price"). On each Anniversary Date up to and including the
fifth Anniversary Date, the Conversion price on any unconverted Preferred Stock,
will be reset to be equal to 75% of the average closing price of the stock for
the then twenty (20) preceding days provided that the Conversion price can not
be reset any lower than 75% of the Initial Conversion Price. The Series B
Preferred Stock and any accumulated, unpaid dividends may be converted into
Common Stock for up to two years at the lesser of a) the market price on the day
prior to closing or b) 78% of the five lowest closing bid prices on the ten days
preceding conversion. As these conversion features are considered a "beneficial
conversion feature" to the holder, the Company allocated approximately $1.6
million and $1.1 million, respectively of the approximate $2.4 million and $2.0
million, respectively, in proceeds to additional paid-in capital as a discount
to be amortized over a twelve month and three month period, respectively. The
Series A Preferred Stock is callable and redeemable by the Company at 100% of
its face value, plus any accumulated, unpaid dividends at the Company's option
any time after the Common Stock of the Company has traded at 200% or more of the
conversion price in effect for at least twenty (20) consecutive trading days, so
long as the Company does not call the Preferred Stock prior to the first
anniversary date of the Date of Closing. The Series B Preferred Stock is
callable and redeemable by the Company at 127% of its face value, plus any
accumulated, unpaid dividends at the Company's option any time prior to the
second anniversary date of the Date of Closing.
The Series C Preferred Stock and any accumulated, unpaid dividends may be
converted into Common Stock for up to two years at the lesser of a) the market
price on the day prior to closing or b) 78% of the five lowest closing bid
prices on the ten days preceding conversion. Consistent with the accounting for
the Company's Series A and Series B Preferred Stock, this is considered a
"beneficial conversion feature" to the holder. The Company will
42
<PAGE>
allocate approximately $139,000 of the proceeds to additional paid-in capital as
a discount to be amortized over a three-month period.
The terms of the Company's Series A, Series B and Series C Preferred Stock
restrict the Company from declaring and paying on its common stock until such
time as all outstanding dividends have been fulfilled related to the Preferred
Stock.
9. STOCK PURCHASE WARRANTS AND STOCK OPTIONS
During the year ended July 31, 1999, certain shareholders and holders of
convertible debt of the Company were issued warrants to purchase shares of
common stock at exercise prices ranging from $0.70 to $1.06 per share.
Following is a summary of warrant activity from August 1, 1996 through July 31,
1999:
<TABLE>
<CAPTION>
Year Ending July 31,
-------------------------------------------------------------
1997 1998 1999
-------------------------------------------------------------
<S> <C> <C> <C>
Warrants outstanding, beginning 8,097,463 14,489,942 7,562,168
Warrants issued 9,931,854 667,400 933,387
Warrants expired (777,200) - (2,386,470)
Warrants exercised (2,762,175) (7,595,174) (1,905,160)
---------- ---------- ----------
Warrants outstanding, ending 14,489,942 7,562,168 4,203,925
========== ========== ==========
</TABLE>
Warrants outstanding at July 31, 1999 expire as follows:
<TABLE>
<CAPTION>
Number of Warrants Exercise Price Expiration Date
- ------------------ -------------- ---------------
<S> <C> <C>
80,000 $1.06 November 6, 1999
30,000 $0.50 December 31, 1999
367,400 $0.85 January 1, 2000
550,824 $0.85 February 7, 2000
1,030,060 $0.27 February 17, 2000
1,000,000 $0.70 February 28, 2000
192,254 $0.75 April 7, 2000
503,387 $0.70 April 13, 2000
50,000 $2.00 June 20, 2000
250,000 $3.56 October 14, 2000
50,000 $3.09 March 9, 2002
100,000 $1.25 July 2, 2004
</TABLE>
The Company had two fixed stock plans during 1997. The Company had a stock
option plan that was in existence since May 1994 (the Canadian Plan). No
options were ever issued as part of the Canadian Plan, even though the Company
had the ability to issue options to acquire approximately 2,800,000 shares of
the Company's common stock. In February 1997, the Company's Board of Directors
adopted the 1997 Stock Option Plan, which replaced the Canadian Plan. Under the
1997 Stock Option Plan, options to purchase up to 5,000,000 shares of common
stock may be granted to employees, directors, consultants and advisers. The
1997 Stock Option Plan is intended to permit the Company to retain and attract
qualified individuals who will contribute to the Company's overall success. The
exercise price of all of the options is equal to the market price of the shares
of common stock as of the date of grant. The options vest pursuant to the
individual stock option agreements, usually 33 percent per
43
<PAGE>
year beginning one year from the grant date with unexercised options expiring
ten years after the date of the grant. On February 10, 1997, the Board of
Directors granted a total of 4,488,000 options to purchase Common Shares to
directors and employees of the Company. Certain grants were considered vested
based on past service as of February 10, 1997. The 1997 Stock Option Plan was
approved by a vote of the stockholders at the Company's Annual Meeting of
Shareholders on May 21, 1997.
In September 1998, the Company's Board of Directors adopted the 1998 Stock
Option Plan. Under the 1998 Stock Option Plan, options to purchase up to
2,000,000 shares of common stock may be granted to employees, directors and
certain other persons. The 1997 and 1998 Stock Option Plans are intended to
permit the Company to retain and attract qualified individuals who will
contribute to the Company's overall success. The exercise price of all of the
options is equal to the market price of the shares of common stock as of the
date of grant. The options vest pursuant to the individual stock option
agreements, usually 33 percent per year beginning one year from the grant date
with unexercised options expiring ten years after the date of the grant. On
September 9, 1998, the Board of Directors granted a total of 1,541,000 options
to purchase common stock to directors and employees of the Company. On December
16, 1998, the Board approved the granting of an additional 302,300 in options to
employees of the Company. The 1998 Stock Option Plan was approved by a vote of
the stockholders at the Company's Annual Meeting of Shareholders on December 17,
1998.
A summary of the status of the Company's 1997 and 1998 Stock Option Plans
for the years ended July 31, 1997, 1998 and 1999 and changes during the periods
are presented below:
<TABLE>
<CAPTION>
Years Ended July 31,
---------------------------------------------------------------------
1997 Stock Option Plan 1997 1998
---------------------------------------------------------------------
Weighted Weighed
Average Average
Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C>
Outstanding, beginning of year - - 4,483,000 $0.58
Granted 4,488,000 $0.58 429,000 $2.33
Exercised - - (245,000) $0.58
Forfeited (5,000) $0.58 (11,667) $1.28
Outstanding, end of year 4,483,000 $0.58 4,655,333 $0.74
========= ===== ========= =====
Options exercisable at end of year 1,786,332 $0.58 2,571,332 $0.58
========= ===== ========= =====
Weighted average fair value of options
granted during the year $0.45 $1.50
===== =====
</TABLE>
<TABLE>
<CAPTION>
Year Ended July 31,
-----------------------------------
1997 Stock Option Plan 1999
-----------------------------------
Weighted
Average
Shares Exercise Price
<S> <C> <C>
Outstanding, beginning of year 4,655,333 $0.74
Granted - -
Exercised (298,000) $0.58
Forfeited (134,666) $0.71
Outstanding, end of year 4,222,667 $0.75
========= =====
Options exercisable at end of year 3,271,333 $0.60
========= =====
Weighted average fair value of options
granted during the year $0.00
=====
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Year Ended July 31,
-----------------------------------
1999
-----------------------------------
1998 Stock Option Plan
<S> <C> <C>
Weighted
Average
Shares Exercise Price
Outstanding, beginning of year - -
Granted 1,843,300 $0.60
Exercised - -
Forfeited (57,500) $0.78
Outstanding, end of year 1,785,800 $0.60
========= =====
Options exercisable at end of year - -
Weighted average fair value of options
granted during the year $0.64
=====
</TABLE>
The weighted average remaining contractual life of the stock options
outstanding at July 31, 1999 is approximately 7.5 years for options granted
under the 1997 Stock Option Plan and approximately 9 years for options granted
under the 1998 Stock Option Plan.
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation"
was issued. SFAS 123 defines a fair value based method of accounting for
employee stock options or similar equity instruments and encourages all entities
to adopt that method of accounting for all of their employee stock compensation
plans. Under the fair value based method, compensation cost is measured at the
grant date based on the value of the award and is recognized over the service
period of the award, which is usually the vesting period. However, SFAS 123
also allows entities to continue to measure compensation costs for employee
stock compensation plans using the intrinsic value method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). The Company has adopted SFAS 123 effective August 1, 1996, and has
elected to remain with the accounting prescribed by APB 25. The Company has
made the required disclosures prescribed by SFAS 123.
In accordance with APB 25, the Company recorded approximately $1.4 million
in deferred compensation related to approximately 1.5 million of the options
granted based on the increase in the Company's stock price from February 10,
1997 when the options were granted, to May 21, 1997, when the underlying 1997
Stock Option Plan was approved by the Company's shareholders. Additionally, the
Company recorded approximately $340,000 in deferred compensation related to
approximately 1.5 million of the options granted based on the increase in the
Company's stock price from September 9, 1998 to December 17, 1998, when the
underlying 1998 Stock Option Plan was approved by the Company's shareholders.
As of July 31, 1998 and July 31, 1999, the Company had $666,899 and
$465,487, respectively, of deferred compensation related to options granted.
Because the Company has elected to remain with the accounting prescribed by
APB 25, no compensation cost has been recognized for its fixed stock option plan
based on SFAS 123. Had compensation cost for the Company's stock-based
compensation plans been determined on the fair value of the grant dates for
awards under the fixed stock option plans consistent with the method of SFAS
123, the Company's net loss (in thousands) and loss per share would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
July 31, 1997 July 31, 1998 July 31, 1999
-------------- ------------------ -------------------
Net Loss to common stockholders
- -------------------------------
<S> <C> <C> <C>
As reported $(4,695) $(5,094) $(7,591)
Pro forma $(5,235) $(5,936) $(7,312)
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Basic and Diluted Loss per share
- --------------------------------
<S> <C> <C> <C>
As reported $ (0.18) $ (0.12) $ (0.16)
Pro forma $ (0.20) $ (0.14) $ (0.15)
</TABLE>
The fair value of the option grant is estimated based on the date of grant
using an option pricing model with the following assumptions used for the grants
in 1997, 1998 and 1999: Dividend yield of 0.0%, expected volatility of 60%, 46%
and 62%, respectively, risk-free interest rate of 6.41%, 5.10% and 6.50%,
respectively, and an expected life of ten years.
10. ACQUISITIONS
As discussed in Note 1, the Company acquired 55% of Computel in May 1997
and acquired the remaining shares in August 1997. The total purchase price for
the acquisition of Computel was approximately $3.6 million, of which $1.1
million was paid in cash, $700,000 in a note receivable forgiven by the Company
and approximately $1.8 million in common stock, representing 2,715,546 shares.
The Company recorded the assets and liabilities of Computel as of May 1, 1997.
As Computel had net liabilities at May 1, 1997, the Company recorded goodwill of
$2,279,231 related to the acquisition. The remaining 45% ownership interest is
reflected as minority interest at July 31, 1997. Per the terms of the
agreement, the remaining shares of Computel were acquired in August 1997 for the
previously mentioned cash payment of approximately $1.1 million and forgiveness
of the aforementioned note receivable. The Company recorded additional goodwill
of approximately $2,857,000.
The following unaudited pro forma results of operations for the year ended
July 31, 1997, assumes the acquisition of Computel occurred as of the beginning
of the period. Such pro forma information is not necessarily indicative of the
results of future operations.
<TABLE>
<CAPTION>
Year Ended July 31,
-------------------------
1997
----
(Unaudited)
<S> <C>
Operating revenues $ 20,312,000
Net loss ($5,408,000)
Basic and Diluted net loss per share ($0.19)
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments such as additional amortization of
goodwill as a result of the acquisition, and the elimination of intercompany
transactions. The unaudited pro forma information is not necessarily indicative
of the results that would have occurred had such transactions actually taken
place at the beginning of the period specified nor does such information purport
to project the results of operations for any future date or period.
Pro forma results of operations for the year ended July 31, 1998 have been
omitted, as pro forma results would not materially differ from actual results of
operations for the period.
In January 1999, the Company acquired the rights to the source code of a
computer software program known as "CuteFTP". Prior to January 1999, the Company
had been the distributor of this software under an exclusive distribution
agreement executed in June 1996 with the software's author. The Company
acquired the rights to CuteFTP in exchange for cash payments totaling
approximately $190,000 in January and February 1999 and an additional $756,000
to be paid in twelve monthly installments.
11. SEGMENT REPORTING
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which establishes standards for
reporting information about operating segments in annual and interim financial
statements. It also establishes standards for related disclosures about
products and services, geographic
46
<PAGE>
areas and major customers. SFAS No. 131 supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise." Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. SFAS No. 131 need not be applied to interim
financial statements in the initial year of its application, but comparative
information for interim periods in the initial year of application is to be
reported in financial statements for interim periods in the second year of
application. The Company has three reportable operating segments: (1) U.S.
Telco; (2) Mexico Telco; and (3) Internet e-commerce. The Company has included
the operations of ATSI-Canada, ATSI-Delaware and all businesses falling below
the reporting threshold in the "Other" segment. The "Other" segment also
includes intercompany eliminations.
<TABLE>
<CAPTION>
As of and for the years ending
--------------------------------------------------------
July 31, 1997 July 31, 1998 July 31, 1999
<S> <C> <C> <C>
U.S. Telco
- -------------------------------------------------------------------------------------------------------
External revenues $ 13,714,251 $ 26,695,690 $ 25,516,665
Intercompany revenues $ 330,362 $ 1,300,000 $ 800,012
------------ ------------ ------------
Total revenues $ 14,044,613 $ 27,995,690 $ 26,316,677
============ ============ ============
Earnings before interest, taxes, depreciation
and amortization (EBITDA) ($3,131,841) ($16,807) ($1,485,045)
Operating loss ($3,603,447) ($1,294,037) ($3,342,035)
Net loss ($3,806,889) ($1,819,986) ($3,866,051)
Total assets $ 6,450,033 $ 10,049,021 $ 9,606,263
Mexico Telco
- -------------------------------------------------------------------------------------------------------
External revenues $ 1,949,755 $ 6,298,620 $ 6,359,238
Intercompany revenues $ 1,359,891 $ 5,136,541 $ 5,052,890
------------ ------------ ------------
Total revenues $ 3,309,646 $ 11,435,161 $ 11,412,128
============ ============ ============
EBITDA ($183,002) ($1,434,261) ($1,071,502)
Operating loss ($273,740) ($1,927,928) ($2,253,037)
Net loss ($364,402) ($2,564,103) ($2,691,450)
Total assets $ 9,097,780 $ 17,228,025 $ 13,236,868
Internet e-commerce
- -------------------------------------------------------------------------------------------------------
External revenues $ 564,381 $ 1,525,517 $ 2,642,376
Intercompany revenues - 25,000 -
------------ ------------ ------------
Total revenues $ 564,381 $ 1,550,517 $ 2,642,376
============ ============ ============
EBITDA $ 39,197 $ 215,051 $ 1,052,015
Operating income $ 36,483 $ 188,658 $ 873,832
Net income $ 38,282 $ 197,698 $ 854,068
Total assets $ 266,955 $ 537,289 $ 1,222,238
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Other
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
External revenues - - -
Intercompany revenues ($1,690,253) ($6,461,541) ($5,852,902)
------------ ------------ ------------
Total revenues ($1,690,253) ($6,461,541) ($5,852,902)
============ ============ ============
EBITDA ($335,325) ($408,783) ($287,110)
Operating loss ($361,013) ($433,683) ($318,274)
Net loss ($562,119) ($907,570) ($1,887,651)
Total assets $ 5,940 ($3,563,743) $ 88,924
Total
- -------------------------------------------------------------------------------------------------------
External revenues $ 16,228,387 $ 34,519,827 $ 34,518,279
Intercompany revenues - - -
------------ ------------ ------------
Total revenues $ 16,228,387 $ 34,519,827 $ 34,518,279
============ ============ ============
EBITDA ($3,610,971) ($1,644,800) ($1,791,642)
Depreciation, Depletion and Amortization ($590,746) ($1,822,190) ($3,247,872)
Operating loss ($4,201,717) ($3,466,990) ($5,039,514)
Net loss ($4,695,128) ($5,093,961) ($7,591,084)
Total assets $ 15,820,708 $ 24,250,592 $ 24,154,293
</TABLE>
12. INCOME TAXES
As of July 31,1999, the Company had net operating loss carryforwards of
approximately $9,335,000 for U.S. federal income tax purposes which are
available to reduce future taxable income of which $534,000 will expire in 2009,
$2,385,000 will expire in 2010, $2,083,000 will expire in 2011, $2,894,000 will
expire in 2012 and $1,439,000 will expire in 2019. The availability of the net
operating loss (NOL) carryforwards to reduce U.S. federal taxable income is
subject to various limitations in the event of an ownership change as defined in
Section 382 of the Internal Revenue Code of 1986 (the "Code"). The Company
experienced a change in ownership in excess of 50 percent, as defined in the
Code, during the year ended July 31, 1998. This change in ownership limits the
annual utilization of NOL under the Code to $1,284,000 per year, but does not
impact its ability to utilize its NOL's because the annual limitation under the
Code would allow full utilization within the statutory carryforward period.
The tax effects of significant temporary differences representing deferred
income tax assets and liabilities are as follows as of July 31, 1998 and 1999:
<TABLE>
<CAPTION>
July 31, 1998 July 31,1999
<S> <C> <C>
Net operating loss carryforward $ 2,919,000 $ 3,174,000
Other tax differences, net 628,000 839,000
Valuation allowance (3,547,000) (4,013,000)
------------ ------------
Total deferred income tax assets $ - $ -
============ ============
</TABLE>
48
<PAGE>
A valuation reserve of $3,547,000 and $4,013,000, as of July 31, 1998 and
1999, respectively, representing the total of net deferred tax assets has been
recognized by the Company as it cannot determine that it is more likely than not
that all of the deferred tax assets will be realized.
Additionally, the Company's effective tax rate differs from the statutory
rate as the tax benefits have not been recorded on the losses incurred for the
years ended July 31, 1997, 1998 and 1999.
13. COMMITMENTS AND CONTINGENCIES
During the years ended July 31, 1998 and 1999, nine officers of the Company
entered into employment agreements with ATSI-Texas or ATSI-Delaware, generally
for periods of up to three years (with automatic one-year extensions) unless
terminated earlier in accordance with the terms of the respective agreements.
The annual base salary under such agreements for each of these nine officers
range from $75,000 to $100,000 per annum, and is subject to increase within the
discretion of the Board. In addition, each of these officers is eligible to
receive a bonus in such amount as may be determined by the Board of Directors
from time to time. Bonuses may not exceed 50% of the executive's base salary in
any fiscal year. No bonuses were paid during fiscal 1999.
Effective August 1998, two of the aforementioned officers entered into
employment agreements with ATSI-Delaware, which superceded their previous
agreements, each for a period of three years (with automatic one-year
extensions) unless terminated earlier in accordance with the terms of the
respective agreements. The annual base salary under such agreements for each of
these two officers may not be less than $127,000 and $130,000, respectively, per
annum, and is subject to increase within the discretion of the Board. In
addition, each of these officers is eligible to receive a bonus in such amount
as may be determined by the Board of Directors from time to time. Bonuses may
not exceed 50% of the executive's base salary in any fiscal year. No such
bonuses were awarded for fiscal 1999.
Subsequent to July 31, 1999, three officers whose employment agreements were
to expire January 1, 2000 were informed that their agreements would not be
renewed under the current terms and conditions. Two of the three officers have
since entered into new employment agreements with ATSI-Delaware, each for a
period of one year unless earlier terminated in accordance with the terms of the
respective agreements. The annual base salaries under such agreements may not
be less than approximately $101,000 and $105,000, respectively, per annum, and
is subject to increase within the discretion of the Board. In addition, each of
these officers is eligible to receive a bonus in such amount as may be
determined by the Board of Directors from time to time. Bonuses may not exceed
50% of the executive's base salary in any fiscal year.
14. RISKS AND UNCERTAINTIES AND CONCENTRATIONS
The Company's business is dependent upon key pieces of equipment, switching
and transmission facilities, fiber capacity and the Solaridad satellites.
Should the Company experience service interruptions from its underlying
carriers, equipment failures or should there be damage or destruction to the
Solaridad satellites or leased fiber lines there would likely be a temporary
interruption of the Company's services which could adversely or materially
affect the Company's operations. The Company believes that suitable arrangements
could be obtained with other satellite or fiber optic network operators to
provide transmission capacity. Additionally, the Company's network control
center is protected by an uninterruptible power supply system which, upon
commercial power failure, utilizes battery back-up until an on-site generator is
automatically triggered to supply power.
During the year ended July 31, 1999, the Company's wholesale transport
business had two customers, whose aggregated revenues approximated 10% of the
Company's total revenues for the year. No other customer generated revenues
individually greater than 5% during the year.
15. RELATED PARTY TRANSACTIONS
In January 1997, ATSI-Canada entered into an agreement with an
international consulting firm, of which ATSI-Delaware director Carlos K. Kauachi
is president, for international business development support. Under the
49
<PAGE>
terms of the agreement, the Company paid the consulting firm $8,000 per month
for a period of twelve months. In January 1998, the agreement was renewed at
$10,000 per month for a period of twelve months. In March 1999, the agreement
was renewed at $6,000 per month for a period of twelve months.
In April 1998, the Company engaged two companies for billing and
administrative services related to network management services it provides. The
companies, which are owned by Tomas Revesz, an ATSI-Delaware director, were paid
approximately $140,000 for their services during fiscal 1998. Subsequent to
year-end, the Company entered into an agreement with the two companies capping
their combined monthly fees at $18,500 per month. For fiscal 1999, the
companies were paid approximately $180,000 for their services. Additionally,
the Company has a payable to Mr. Revesz of $90,000.
In February 1999, the Company entered into notes payable with related
parties, all of whom were officers or directors of the Company in the amount of
$250,000. The notes accrue interest at a rate of 12% per year until paid in
full. As of July 31, 1999, $100,000 of the notes remain outstanding.
The Company has entered into a month-to-month agreement with Technology
Impact Partners, a consulting firm of which Company director Richard C.
Benkendorf, is principal and owner. Under the agreement, Technology Impact
Partners provides the Company with various services that include strategic
planning, business development and financial advisory services. Under the terms
of the agreement, the Company pays the consulting firm $3,750 per month plus
expenses. At July 31, 1999, the Company has a payable to Technology Impact
Partners of approximately $74,000.
16. LEGAL PROCEEDINGS
On January 29, 1999, one of the Company's customers, Twister
Communications, Inc. filed a Demand for Arbitration seeking damages for breach
of contract. The customer claims that the Company wrongfully terminated an
International Carrier Services Agreement executed by the parties in June 1998
under which the Company provided wholesale carrier services from June 1998 to
January 1999. The customer's claims for damages represent amounts that it claims
it had to pay in order to replace the service provided by the Company. The
Company disputes that it terminated the contract wrongfully and asserts that the
customer breached the agreement by failing to pay for services rendered and by
intentionally making false representation regarding its traffic patterns and on
March 3, 1999 filed a Demand for Arbitration seeking damages for breach of
contract in an amount equal to the amounts due to the Company for services
rendered plus interest, plus additional damages for fraud. An arbitration panel
was selected and the parties are now completing written discovery.
While the Company believes that it has a justifiable basis for its
arbitration demand and that it will be able to resolve the dispute without a
material adverse effect on the Company's financial condition; until the
arbitration proceedings take place, the Company can not reasonably estimate the
possible loss, if any, and there can be no assurance that the resolution of this
dispute would not have an adverse effect on the Company's results of operations.
On June 16, 1999, the Company initiated a lawsuit against one of its
vendors claiming misrepresentation and breach of contract. Under an agreement
the Company signed in late 1998, the vendor was to provide quality fiber optic
capacity in January 1999. The delivery of the route in early 1999 was a
significant component of the Company's operational and sales goal for the year
and the failure of its vendor to provide the capacity led to the Company
negotiating an alternative agreement with Bestel, S.A. de C.V. at a higher cost,
in addition to the lost revenues and incremental costs incurred. While the
total economic impact is still being assessed, the Company believes lost
revenues and incremental costs total well in excess of $15 million. While the
Company's contract contains certain limitations regarding the type and amounts
of damages that can be pursued, the Company has authorized its attorneys to
pursue all relief to which it is entitled under law. As such, the Company can
not reasonably estimate the ultimate outcome of this lawsuit nor the additional
costs that may be incurred in the pursuit of its case.
The Company is also a party to additional claims and legal proceedings
arising in the ordinary course of business. The Company believes it is unlikely
that the final outcome of any of the claims or proceedings to which the Company
is a party would have a material adverse effect on the Company's financial
statements; however, due
50
<PAGE>
to the inherent uncertainty of litigation, the range of possible loss, if any,
cannot be estimated with a reasonable degree of precision and there can be no
assurance that the resolution of any particular claim or proceeding would not
have an adverse effect on the Company's results of operations in the period in
which it occurred.
51
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by item 10 of Form 10-K is incorporated herein by
reference to such information included in the Company' Proxy Statement of the
1999 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by item 11 of Form 10-K is incorporated herein by
reference to such information included in the Company's Proxy Statement for the
1999 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by item 12 of Form 10-K is incorporated herein by
reference to such information included in the Company's Proxy Statement for the
1999 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by item 13 of Form 10-K is incorporated herein by
reference to such information included in the Company's Proxy Statement for the
1999 Annual Meeting of Stockholders.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
3 Plan of Arrangement between ATSI-Canada and ATSI-Delaware***
3.1 Articles of Amalgamation of ATSI-Canada*
3.2 Bylaws of ATSI-Canada*
3.3 Amended and restated Certificate of Incorporation of ATSI-Delaware***
3.4 Bylaws of ATSI-Delaware*
4 Form of Private Placement Warrant*
10.1 Form of Customer Service Agreement for Private Networks*
10.2 Telecommunications Agreement between ATSI-Texas and Long Distance Exchange
Corp.*
10.3 Compensation Agreement between ATSI-Texas and James McCourt relating to
Guarantee of Equipment Line of Credit by James McCourt**
10.4 Agreement for Investment Banking Services between ATSI-Texas and Joseph
Charles & Associates, Inc.**
10.6 1997 Option Plan**
10.7 Form of Option Agreement**
10.8 Credit Card Processing Agreements with TBR Transaction Billing Resources
and Card Service International*
52
<PAGE>
10.9 Financing Agreement with Roger G. Watt and Convertible Notes issued to
Robert G. Watt*
10.10 FCC Radio Station Authorization-C Band*
10.11 FCC Radio Station Authorization-Ku Band*
10.12 Section 214 Certification from FCC*
10.13 Carrier Termination Services Agreement between U.S. Long Distance, Inc.
and ATSI-Texas*
10.14 Office Space Lease Agreement*
10.15 Amendment to Office Lease Agreement****
10.16 Employment Agreement with Arthur L. Smith**
10.17 Employment Agreement with H. Douglas Saathoff**
10.18 Employment Agreement with Craig K. Clement**
10.19 Employment Agreement with Everett L. Waller**
10.20 Employment Agreement with Charles R. Poole**
10.21 Lease/Finance Agreements between IBM de Mexico and ATSI-Mexico****
10.22 Primary Agreement with Computel**
10.23 Agreement with Investcom****
10.24 Payphone License issued to ATSI-Mexico**
10.25 Shared Teleport/Network Resale License issued to ATSI-Mexico**
10.26 Agreement with Avantel**
10.27 Registration Rights Agreement between ATSI-Canada and James R.
Leininger, M.D.**
10.28 Modification Agreement with Computel****
10.29 Office Space Lease Agreement of GlobalSCAPE*****
10.30 Amended and Restated 1997 Option Plan*****
10.31 Agreement with SATMEX (Agreement #095-1)******
10.32 Agreement with SATMEX (Agreement #094-1) ******
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, Inc. 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 Gary Wright dated November 6, 1998*******
10.39 Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI dated
September 24, 1999********
10.40 Certificate of Designation, Preferences and Rights of 6% Series C
Cumulative Convertible Preferred Stock of American TeleSource
International, Inc.********
10.41 Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by American
TeleSource International, Inc. dated September 24, 1999********
10.42 Registration Rights Agreement between The Shaar Fund Ltd. and ATSI
dated September 24, 1999********
10.43 Certificate of Designation, Preferences and Rights of 10% Series A
Cumulative Convertible Preferred Stock of American TeleSource
International, Inc.*********
10.44 Agreement with Bestel, S.A. de C.V.*********
11 Statement of Computation of Per Share Earnings*********
22 Subsidiaries of the Company*********
23 Consent of Arthur Andersen LLP*********
24 Power of Attorney (included on Signature Page to the Registration
Statement)*********
27 Financial Data Schedule*********
99.1 Ruling issued by Ontario Securities Commission*****
99.2 ATSI Shareholder Newsletter*********
* Contained in exhibits to Registration Statement on Form S-4 (No.
333-05557) of the Company filed June 7, 1996.
53
<PAGE>
** Contained in exhibits to Registration Statement on Form 10 (No.
000-23007) of the Company filed on August 22, 1997.
*** Contained in exhibits to Amendment No. 2 to Registration Statement on
FormS-4 (No. 333-05557) of the Company filed September 11, 1997.
**** Contained in exhibits to Amendment No. 1 to Registration Statement on
Form 10 (No. 023007) of the Company filed October 22, 1997.
***** Contained in exhibits to Registration Statement on Form S-4 (No.
333-47511) of the Company filed March 6, 1998.
****** Contained in exhibits to Registration Statement on Form 10-K (No.
000-23007) of the Company filed October 29, 1998.
******* Contained in exhibits to Registration Statement on Form S-3 (No.
333-84115) filed August 18, 1999
******** Contained in exhibits to Registration Statement on Form S-3 dated
October 26,1999
********* filed herewith
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto authorized, in San Antonio, Texas on
October 26, 1999.
AMERICAN TELESOURCE INTERNATIONAL, INC.
By:/s/ Arthur L. Smith /
-----------------------------------------------
Arthur L. Smith
Chief Executive Officer
By:/s/ H. Douglas Saathoff /
---------------------------------------------------
H. Douglas Saathoff
Senior Vice President, Chief Financial Officer and
Corporate Secretary
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, this report has been signed below by the following persons in the
capacities indicated on October 26, 1999.
Signature Title
--------- ----
/s/ ARTHUR L. SMITH Chairman of the Board, Chief Executive
------------------- Officer, Director
/s/ H. DOUGLAS SAATHOFF Chief Financial Officer, Senior Vice
----------------------- President, and Corporate Secretary
/s/ RICHARD C. BENKENDORF Director
-------------------------
/s/ CARLOS K. KAUACHI Director
---------------------
/s/ MURRAY R. NYE Director
-----------------
/s/ TOMAS REVESZ Director
----------------
/s/ ROBERT B. WERNER Director
--------------------
54
<PAGE>
EXHIBIT INDEX
3 Plan of Arrangement between ATSI-Canada and ATSI-Delaware***
3.1 Articles of Amalgamation of ATSI-Canada*
3.2 Bylaws of ATSI-Canada*
3.3 Amended and restated Certificate of Incorporation of ATSI-Delaware***
3.4 Bylaws of ATSI-Delaware*
4 Form of Private Placement Warrant*
10.1 Form of Customer Service Agreement for Private Networks*
10.2 Telecommunications Agreement between ATSI-Texas and Long Distance Exchange
Corp.*
10.3 Compensation Agreement between ATSI-Texas and James McCourt relating to
Guarantee of Equipment Line of Credit by James McCourt**
10.4 Agreement for Investment Banking Services between ATSI-Texas and Joseph
Charles & Associates, Inc.**
10.6 1997 Option Plan**
10.7 Form of Option Agreement**
10.8 Credit Card Processing Agreements with TBR Transaction Billing Resources
and Card Service International*
10.9 Financing Agreement with Roger G. Watt and Convertible Notes issued to
Robert G. Watt*
10.10 FCC Radio Station Authorization-C Band*
10.11 FCC Radio Station Authorization-Ku Band*
10.12 Section 214 Certification from FCC*
10.13 Carrier Termination Services Agreement between U.S. Long Distance, Inc.
and ATSI-Texas*
10.14 Office Space Lease Agreement*
10.15 Amendment to Office Lease Agreement****
10.16 Employment Agreement with Arthur L. Smith**
10.17 Employment Agreement with H. Douglas Saathoff**
10.18 Employment Agreement with Craig K. Clement**
10.19 Employment Agreement with Everett L. Waller**
10.20 Employment Agreement with Charles R. Poole**
10.21 Lease/Finance Agreements between IBM de Mexico and ATSI-Mexico****
10.22 Primary Agreement with Computel**
10.23 Agreement with Investcom****
10.24 Payphone License issued to ATSI-Mexico**
10.25 Shared Teleport/Network Resale License issued to ATSI-Mexico**
10.26 Agreement with Avantel**
10.27 Registration Rights Agreement between ATSI-Canada and James R.
Leininger, M.D.**
10.28 Modification Agreement with Computel****
10.29 Office Space Lease Agreement of GlobalSCAPE*****
10.30 Amended and Restated 1997 Option Plan*****
10.31 Agreement with SATMEX (Agreement #095-1)******
10.32 Agreement with SATMEX (Agreement #094-1) ******
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, Inc. 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 Gary Wright dated November 6, 1998*******
10.39 Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI dated
September 24, 1999********
10.40 Certificate of Designation, Preferences and Rights of 6% Series C
Cumulative Convertible Preferred Stock of American TeleSource
International, Inc.********
10.41 Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by American
TeleSource International, Inc. dated September 24, 1999********
55
<PAGE>
10.42 Registration Rights Agreement between The Shaar Fund Ltd. and ATSI
dated September 24, 1999********
10.43 Certificate of Designation, Preferences and Rights of 10% Series A
Cumulative Convertible Preferred Stock of American TeleSource
International, Inc.*********
10.44 Agreement with Bestel, S.A. de C.V.*********
11 Statement of Computation of Per Share Earnings*********
22 Subsidiaries of the Company*********
23 Consent of Arthur Andersen LLP*********
24 Power of Attorney (included on Signature Page to the Registration
Statement)*********
27 Financial Data Schedule*********
99.1 Ruling issued by Ontario Securities Commission*****
99.2 ATSI Shareholder Newsletter*********
* Contained in exhibits to Registration Statement on Form S-4 (No.
333-05557) of the Company filed June 7, 1996.
** Contained in exhibits to Registration Statement on Form 10 (No.
000-23007) of the Company filed on August 22, 1997.
*** Contained in exhibits to Amendment No. 2 to Registration Statement on
FormS-4 (No. 333-05557) of the Company filed September 11, 1997.
**** Contained in exhibits to Amendment No. 1 to Registration Statement on
Form 10 (No. 023007) of the Company filed October 22, 1997.
***** Contained in exhibits to Registration Statement on Form S-4 (No.
333-47511) of the Company filed March 6, 1998.
****** Contained in exhibits to Registration Statement on Form 10-K (No.
000-23007) of the Company filed October 29, 1998.
******* Contained in exhibits to Registration Statement on Form S-3 (No.
333-84115) filed August 18, 1999
******** Contained in exhibits to Registration Statement on Form S-3 dated
October 26,1999
********* filed herewith
56
<PAGE>
Exhibit 10.43
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF
10% SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK
OF
AMERICAN TELESOURCE INTERNATIONAL, INC.
PURSUANT TO SECTIOxN 151 OF THE GENERAL
CORPORATION LAW OF THE STATE OF DELAWARE
We, the undersigned, Arthur L. Smith and H. Douglas Saathoff, the Chief
Executive Officer and Secretary, respectively, of American TeleSource
International, Inc., a Delaware corporation (the "Corporation"), do hereby
certify that by unanimous written consent of the Board of Directors of the
Corporation pursuant to Section 141(f) of the General Corporation Law of the
State of Delaware (the "DGCL"), on March 25, 1999, the following resolutions
were duly approved and adopted, and such resolutions remain in full force and
effect as of the date hereof:
WHEREAS, pursuant to Article III of said Certificate of Incorporation of
the Corporation, 10,000,000 shares of the Corporation's authorized capital stock
are classified as preferred stock with a par value of $0.001 per share;
WHEREAS, pursuant to Article III of said Certificate of Incorporation of
the Corporation, authority was expressly vested in the Board of Directors
pursuant to Section 151 of the General Corporation Law of the State of Delaware
to authorize preferred stock with such powers, preference and relative
participation, optional or other special rights, classifications, limitations or
restrictions thereof as the Board of Directors may deem appropriate; and
WHEREAS, the Board of Directors now desires to fix and deem such matters
with respect to the Corporation's capital stock classified as preferred stock.
NOW, THEREFORE BE IT RESOLVED, that pursuant to the authority vested in the
Board of Directors by the Certificate of Incorporation of the Corporation, the
Board of Directors does hereby designate, vest, authorize and provide for the
issuance of 50,000 shares of preferred stock, each share having a par value of
$0.001 per share, all of which shall be designated "10% Series A Cumulative
Convertible Preferred Stock" (the "Series A Preferred Stock"); and
FURTHER RESOLVED, that all shares of Series A Preferred Stock shall be
identical with each other in all respects.
DIVIDENDS ON SERIES A PREFERRED STOCK
General Dividend Obligation. The Corporation shall pay to the holders of the
Series A Preferred Stock, out of funds of the Corporation at anytime available
for the payment of dividends under the provisions of the DGCL, preferential
dividends at the times and in the amounts provided for in this Article 1.
<PAGE>
Accrual of Dividends. Dividends on each share of Series A Preferred Stock shall
be cumulative from the date of issuance of such share, whether or not at the
time such dividend shall accrue or become due or at any other time there shall
be profits, surplus or other funds of the Corporation legally available for the
payment of dividends. Dividends shall accrue on each share of Series A
Preferred Stock at the rate and in the manner prescribed by this Article 1 from
and including the date of issuance of such share to and including the date on
which such share is redeemed, converted or is otherwise deemed no longer
outstanding in accordance with this Certificate of Designation. For purposes of
this Section 1.02, the date on which the Corporation shall initially issue a
share Series A Preferred Stock shall be deemed to be the "date of issuance" of
such share.
Payment of Dividends. Dividends shall accrue on each share of Series A
Preferred Stock at the rate of ten percent (10%) per annum of the Liquidation
Value (as defined in Section 3.01). Dividends shall be payable on Series A
Preferred Stock on the first day of each June, September, December, and March
beginning June 1, 1999 and each such day is herein referred to as a "Dividend
Payment Date." On each Dividend Payment Date all dividends which shall have
accrued on each share of Series A Preferred Stock then outstanding during the
calendar quarter ending upon such Dividend Payment Date shall be deemed to
become "due" for all purposes of this Article 1, regardless of whether the
Corporation shall be able or legally permitted to pay such dividend on such
Dividend Payment Date. If any dividend on any share of Series A Preferred Stock
shall for any reason not be paid at the time such dividend shall become due,
then such dividend in arrears shall be paid as soon as payments of same shall be
permissible under the provisions of the DGCL. Until such dividend in arrears is
paid, dividends shall continue to accrue, but not compound, on each share of
Series A Preferred Stock.
Distribution of Partial Dividends Payments. If at any time the Corporation
shall pay less than the total amount of dividends due on all outstanding shares
of Series A Preferred Stock at the time of such payment, such payment shall be
distributed among the holders of Series A Preferred Stock so that an equal
amount shall be paid with respect to each outstanding share of Series A
Preferred Stock.
Participating Dividends. In the event the Corporation pays a dividend or other
distribution (other than a distribution pursuant to Article 3 or a distribution
constituting an Extraordinary Common Stock Event (as defined in Section 6.03))
to the holders of Common Stock (as defined in Section 6.01), each holder of
Series A Preferred Stock shall fully participate in any such dividend or other
distribution based on the largest number of whole shares of Common Stock into
which such shares of Series A Preferred Stock could be converted under Article 6
on the record date of such dividend or other distribution.
REDEMPTION
Redemption. If at any time the Market Price (as defined in Section 6.02) is
200% or more of the then effective Conversion Price (as defined in Section 6.02)
for 20 consecutive trading days, all or any part of the Series A Preferred Stock
may be redeemed by the Corporation at its election, at any time and from time to
time, in the manner prescribed in this Article 2; provided, however, the
Corporation shall not redeem any shares of Series A Preferred Stock prior to the
first anniversary of the date on which the first shares of Series A Preferred
Stock is issued.
<PAGE>
Redemption Notice. Before causing any redemption pursuant to this Article 2,
the Corporation shall mail by certified or registered mail, return receipt
requested, or via confirmed facsimile to each record holder of any Series A
Preferred Stock at the address or the facsimile number (as applicable) shown on
the Corporation's records, a written notice (a "Redemption Notice") stating (a)
the number of shares of Series A Preferred Stock held of record by such holder
which the Corporation proposes to redeem, (b) the date (the "Redemption Date")
on which the Corporation proposes to cause the redemption and pay the Redemption
Price (as defined in Section 2.04(a)) for the shares to be redeemed, (c) the
Redemption Price to be paid for each share to be redeemed, and (d) the place at
which the shares to be redeemed may be surrendered in exchange for the
Redemption Price. Each Redemption Notice under this Section 2.02 shall be
mailed or transmitted (as applicable) at least ten (10) days before the
Redemption Date; provided, however, if the Corporation fails to pay the
Redemption Price on the Redemption Date (for a reason other than a holder's
failure to deposit the Series A Preferred Stock certificates pursuant to section
2.04(b)), the Redemption Date shall be the date on which the Corporation
actually pays the Redemption Price.
Determination of Number of Each Holder's Shares to be Redeemed. The number of
shares of Series A Preferred Stock to be redeemed from each holder thereof shall
be determined by multiplying the total number of shares of Series A Preferred
Stock to be redeemed times a fraction, the numerator of which shall be the total
number of shares of Series A Preferred Stock held by such holder and the
denominator of which shall be the total number of shares of Series A Preferred
Stock outstanding. No fractional shares may be redeemed.
Redemption Price.
For each share of Series A Preferred Stock which shall be redeemed by the
Corporation pursuant to this Article 2, the Corporation shall be obligated to
pay the holder of such share an amount (the "Redemption Price") equal to the
Liquidation Value, plus any accrued but unpaid dividends. Such payments which
the Corporation shall be obligated to make on any Redemption Date shall be
deemed to become "due" for purposes of this Article 2, regardless of whether the
Corporation shall be able or legally permitted to make such payments on such
Redemption Date.
Each holder of Series A Preferred Stock shall be entitled to receive on the
Redemption Date the full Redemption Price for each share of Series A Preferred
Stock held by such holder which the Corporation redeems on such Redemption Date
upon surrender by such holder at the Corporation's principal office of the
certificate representing each such share duly endorsed in blank or accompanied
by an appropriate form of assignment duly endorsed in blank. After the payment
by the Corporation of the full Redemption Price, all rights of the holder of
such shares of Series A Preferred Stock shall cease and terminate.
Unless all of the shares of the Series A Preferred Stock evidenced by the
certificate or certificates delivered shall have been redeemed, the Corporation
shall prepare a new certificate, substantially identical to that surrendered,
representing the balance of the Series A Preferred Stock formerly represented by
the certificate or certificates that are not redeemed and shall deliver such
certificate to the person designated as the holder thereof.
Redeemed Series A Preferred Stock to be Cancelled. In the event any shares of
Series A Preferred Stock are redeemed pursuant to this Article 2, the shares so
redeemed shall be
<PAGE>
canceled, shall return to the status of unauthorized, but unissued preferred
stock of no designated series, and shall not be issuable by the Corporation as
Series A Preferred Stock.
LIQUIDATION
Rights of Holders of Series A Preferred Stock. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, the
holders of Series A Preferred Stock shall be entitled to be paid out of the
assets of the Corporation available for distribution to its stockholders,
whether from capital, surplus or earnings, an amount in cash equal to the sum of
$100 per share (the "Liquidation Value"), plus all accrued but unpaid dividends
thereon to the date of final distribution. Except as provided herein, the
holders of Series A Preferred Stock shall not be entitled to receive any further
distribution upon such liquidation, dissolution or winding up of the
Corporation.
Allocation of Liquidation Payments Among Holders of Series A Preferred Stock.
If upon any liquidation, dissolution or winding up of the Corporation, the
assets of the Corporation available for distribution to holders of Series A
Preferred Stock (the "Total Amount Available") shall be insufficient to pay the
holders of outstanding Series A Preferred Stock, the full amounts to which they
shall be entitled under Section 3.01, each holder of Series A Preferred Stock
shall be entitled to receive an amount equal to the product derived by
multiplying the Total Amount Available times a fraction, the numerator of which
shall be the number of shares of Series A Preferred Stock held by such holder
and the denominator of which shall be the total number of shares of Series A
Preferred Stock then outstanding.
Effect of Consolidation, Mergers and Sales of Assets. A consolidation or merger
of the Corporation into or with another corporation or entity or the sale of all
or substantially all of the assets of the Corporation shall not be deemed a
liquidation, dissolution or winding up of the Corporation within the meaning of
this Article 3.
DISTRIBUTIONS OTHER THAN CASH
Whenever the distribution provided for in this Certificate of Designation shall
be payable in property other than cash, the value of such distribution shall be
the fair market value of such property as determined in good faith by the Board
of Directors.
VOTING POWER
General. Except as required by law, each holder of Series A Preferred Stock
- -------
shall be entitled to vote on all matters and shall be entitled to that number of
votes equal to the largest number of whole shares of Common Stock into which
such holder's shares of Series A Preferred Stock could be converted under
Article 6, on the record date for the determination of stockholders entitled to
vote on such matter or, if no such record date is established, at the date such
vote is taken or any written consent of stockholders is solicited. Except as
required by law or this Article 5, the holders of shares of Series A Preferred
Stock and Common Stock shall vote together as a single class on all matters.
Protective Provisions. So long as there is outstanding 50% or more of the total
- ---------------------
number of shares of Series A Preferred Stock issued from time to time by the
Corporation, the Corporation shall not, without first obtaining the approval by
vote or written consent of the holders of at least a majority of the then
outstanding shares of Series A Preferred Stock, take or cause to be taken any of
the following actions: (a) any consolidation or merger of the Corporation with
or into another
<PAGE>
corporation or entity in which the Corporation will not be the surviving entity,
(b) the sale of all or substantially all of the assets of the Corporation to a
corporation or entity that is not an affiliate of the Corporation, (c) any
voluntary liquidation, dissolution or winding up of the Corporation or (d) any
amendment of this Certificate of Designation.
CONVERSION RIGHTS
Description and Conversion Procedure. The Series A Preferred Stock shall be
convertible into shares of the common stock, par value $0.001 per share (the
"Common Stock"), of the Corporation as follows:
except as expressly herein provided otherwise, at the option of the holder, each
share of the Series A Preferred Stock may be converted at any time or from time
to time after the date of issuance and prior to February 28, 2005 (the
"Mandatory Conversion Date");
any Series A Preferred Stock shall be deemed to have been converted (the
"Conversion Date") when the Corporation shall have received the certificate or
certificates evidencing such shares appropriately endorsed to reflect conversion
thereof, and upon conversion as provided in this Article 6, the Corporation
shall issue as soon as reasonably practical that number of shares of Common
Stock ("Conversion Stock") as is equal to the Liquidation Value, plus all
accrued but unpaid dividends through the Conversion Date, divided by the
effective Conversion Price; on the Mandatory Conversion Date, all of the then
outstanding shares of Series A Preferred Stock will be deemed automatically
converted in accordance with the this Article 6; provided, however, the
Corporation shall not be obligated to issue a certificate evidencing the
Conversion Stock to the holder of Series A Preferred Stock, unless and until the
Corporation receives from such holder the certificate or certificates evidencing
such shares of Series A Preferred Stock; and
unless all of the Series A Preferred Stock evidenced by the certificate or
certificates delivered shall have been converted, the Corporation shall prepare
a new certificate, substantially identical to that surrendered, representing the
balance of the Series A Preferred Stock formerly represented by the certificate
or certificates that are not converted and shall deliver such certificate to the
person designated as the holder thereof.
Conversion Price. For purposes of this Certificate of Designation, the
"Conversion Price" of each share of Series A Preferred Stock shall initially
mean the Average Market Price (as defined below) of the Common Stock on the date
of issuance of the share of Preferred Stock. On each of the first five
anniversary dates of the date of issuance, the Conversion Price of each share of
Series A Preferred Stock will be reset to an amount equal to the greater of (a)
75% of the Average Market Price as of such anniversary of the date of issuance
or (b) 75% of the initial Conversion Price. For purposes of this Certificate of
Designation, the "Average Market Price" of the Common Stock on any date shall
mean the average Market Price (as defined below) of the Common Stock for the 20
trading days immediately preceding such date. For purposes of this Certificate
of Designation, the "Market Price" of the Common Stock on any date shall mean
the closing sale price of the Common Stock on such date on the principal
national securities exchange on which the shares are listed or admitted to
trading, or, if the Common Stock is not so listed or admitted to trading, or the
average of the highest closing bid price and lowest closing asked price on such
date as quoted on the National Association of Securities Dealers Automated
Quotation System or such other market in which such prices are regularly quoted,
or, if there have been no published bid or asked quotations with respect to the
Common Stock on such date, the Market Price shall be the fair market value per
share of Common Stock as established by the
<PAGE>
Board of Directors in good faith. The Conversion Price, as reset from time to
time as provided herein, is subject to further adjustment as provided in
Sections 6.03 and 6.04.
Adjustments to Conversion Price Upon Extraordinary Common Stock Event. Upon the
happening of an Extraordinary Common Stock Event (as defined below) after the
date of issuance, the Conversion Price shall, simultaneously with the happening
of such Extraordinary Common Stock Event, be adjusted by multiplying the then
effective Conversion Price by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such
Extraordinary Common Stock Event and the denominator of which shall be the
number of shares of Common Stock outstanding immediately after such
Extraordinary Common Stock Event, and the product so obtained shall thereafter
be the Conversion Price. The Conversion Price, as so adjusted, shall be
readjusted in the same manner upon the happening of any successive Extraordinary
Common Stock Event or Events. For purposes of this Certificate of Designation,
"Extraordinary Common Stock Event" shall mean (i) the issue of additional shares
of Common Stock as a dividend or other distribution on outstanding stock of this
Corporation, (ii) a subdivision of outstanding shares of Common Stock into a
greater number of shares of Common Stock, or (iii) a combination of outstanding
shares of Common Stock into a smaller number of shares of Common Stock.
Capital Reorganization or Reclassification. If the shares of Common Stock
issuable upon the conversion of shares of Series A Preferred Stock shall be
changed into the same or a different number of shares of any class or classes of
stock, whether by capital reorganization, reclassification or otherwise (other
than a subdivision or combination of shares or stock dividend provided for in
Section 6.03), then and in each such event the holder of each share of Series A
Preferred Stock shall have the right thereafter to convert such share into the
kind and amount of shares of stock and other securities and property receivable
upon such reorganization, reclassification or other change by holders of the
number of shares of Common Stock into which such share of Series A Preferred
Stock might have been converted immediately prior to such reorganization,
reclassification or change, all subject to further adjustment as provided
herein.
Cash in Lieu of Fractional Shares. No fractional shares of Common Stock or
scrip representing fractional shares shall be issued upon the conversion of
shares of Series A Preferred Stock. Instead of any fractional shares of Common
Stock which would otherwise be issuable upon conversion of Series A Preferred
Stock, this Corporation shall make, to the holder of the shares of Series A
Preferred Stock which were converted, a cash payment in respect of such
fractional shares based on the then effective Market Price of the Common Stock.
Reservation of Common Stock. This Corporation shall reserve and keep available
out of its authorized but unissued shares of Common Stock such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Series A Preferred Stock, and if at any
time the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of Series A
Preferred Stock, the Corporation shall take such corporate action as may be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purpose.
<PAGE>
Converted Series A Preferred Stock to be Cancelled. In the event any shares of
Series A Preferred Stock shall be converted pursuant to this Article 6, the
shares so converted shall be canceled, shall return to the status of
unauthorized, but unissued preferred stock of no designated series, and shall
not be issuable by the Corporation as Series A Preferred Stock.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be duly
executed by its Chief Executive Officer and Secretary this 25th day of March
1999.
AMERICAN TELESOURCE
INTERNATIONAL, INC.
/s/ Arthur L. Smith
----------------------------------------
Arthur L. Smith, Chief Executive Officer
/s/ H. Douglas Saathoff
----------------------------------------
H. Douglas Saathoff, Secretary
<PAGE>
Exhibit 10.44
MASTER AGREEMENT FOR THE PROVISION OF TELECOMMUNICATION SERVICES EXECUTED
BETWEEN "American TeleSource International, Inc." and BESTEL USA, Inc.
Master Agreement for the provision of Telecommunication Services executed
between BESTEL USA, Inc., represented by Ing. Manuel Vazquez Arroyo Aldrete,
("BESTEL") and "American TeleSource International, Inc." represented by Charles
R. Poole, (the "Customer") in accordance with the following Recitals and
Clauses.
AGREEMENT NUMBER: 100948-0011
The telecommunication Services that BESTEL shall provide to the Customer will be
those shown in the following table and the parties agree that the provision of
said services are governed by the terms and conditions of this Master Agreement
for the Provision of Telecommunication Services and by that established in the
Addenda corresponding to those Services and/or Promotional Programs selected:
<TABLE>
<CAPTION>
SERVICES AND ADDENDA OF THIS PRESENT CONTRACT DATE CUSTOMER'S SIGNATURE
AGREEMENT
<S> <C> <C>
LONG DISTANCE xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
OPERATOR SERVICES xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
800 SERVICES October 15, 1998 (Signature)
PRIVATE LINE SERVICES xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
DATA SERVICES xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
LIT FIBER xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
DARK FIBER xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
COLLOCATION xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
INTERNET SERVICES xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
OTHER SERVICES (SPECIFY) xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
</TABLE>
CONDITIONS
THE CUSTOMER accepts and acknowledges that once the Addenda corresponding to the
Services and/or Promotional Programs selected are executed, these shall form an
integral part of this Master Agreement for the Provision of Telecommunication
Services.
The Addenda corresponding to the Services and/or Promotional Programs selected
at a later date than the date of execution of this Master Agreement, shall have
an effective date as of the date of execution and acceptance and shall become an
integral part of this Agreement.
RECITALS
I. BESTEL states through its legal representative:
That it represents a Corporation duly incorporated under the laws of the State
of Nevada under the name of "Bestel USA, Inc.".
That the personality and capacity of its legal representative as of this date
has not been modified nor limited in any way.
That it has executed with Bestel, S.A. de C.V. an interconnection agreement
since said company has a concession dated January 8, 1996 granted by the Federal
Government through the Ministry of Communications and
<PAGE>
Transportation ("Ministry") to install, operate and exploit a Public
Telecommunications Network and therefore has the ability to provide the Services
under this Agreement.
That it desires to provide the Services under this Agreement to the Customer.
That its address is 1890 N. Shoreline Drive, Mountain View, CA 94643
That it has the personnel and technical capacity, as well as its own
infrastructure or that of a third party necessary to provide the Services under
this Agreement.
II. THE CUSTOMER states through its legal representative:
That it represents a Corporation duly incorporated under the laws of the State
of Texas under the name of "American TeleSource International, Inc.".
That the personality and capacity of its legal representative as of this date
has not been modified nor limited in any way.
That its address is 12500 Network Boulevard, Suite 407, San Antonio, TX 78249.
That its telecommunications terminal equipment to be utilized by the CUSTOMER is
duly homologated before the competent authorities and can be interconnected to a
public telecommunications network without causing interferences or any damages
to said network and complies with the authorized signaling.
That its objective, among others, is to provide long distance services, provided
in the United States and has authorization granted by the government through the
Federal Communications Commission (FCC).
That it desires to contract with BESTEL the Services shown on the First Page of
this Agreement which after its execution forms an integral part.
That it desires to commit to the traffic corresponding to the Services under
this Agreement in the percentages shown hereunder or in its Addenda.
Based on the above, the parties agree to the following:
CLAUSES
1. OBJECTIVE.
.1 BESTEL shall provide to the CUSTOMER the Services shown on the First page
of this Agreement (the "Services") and THE CUSTOMER agrees to pay the
consideration for such Services as established in the corresponding
Addenda.
.1 In the event THE CUSTOMER receives the Services or opts for any of the
Promotional Programs (modified from time to time) it is understood that THE
CUSTOMER has accepted the applicable terms and conditions for those
Services and/or Promotional Programs registered with the competent
authorities.
2. CONSIDERATION.
2.1 THE CUSTOMER agrees to pay BESTEL for the Services provided by BESTEL the
total value of the consideration specified in the corresponding Addenda for
the Contracted Services (the "Price") by no later than the date agreed
upon.
2.2 The Price for the Services agreed to by the parties shall be subject to
modifications in accordance with the changes that could arise under the
terms and conditions of the Promotional Program under which the Customer
has subscribed. Such Promotional Program as established under this
Agreement, shall form part of this Agreement. In the event of conflict
between the terms and conditions of this Agreement and those of the
Promotional Program selected by the CUSTOMER, those contained in the
Promotional Program shall prevail.
2.3 The rates can be modified at any time by BESTEL with a thirty (30) day
advance notice to the CUSTOMER and the CUSTOMER's acceptance. Such
adjustments or discounts shall be given in BESTEL's invoices
<PAGE>
presented to the CUSTOMER on the effective date of such rates. BESTEL shall
be able to apply any adjustments or discounts against any outstanding
amounts that the CUSTOMER has.
2. FORM AND PLACE OF PAYMENT.
3.1 BESTEL shall send on a monthly basis an invoice to the CUSTOMER for the
Services provided to the address shown in this Agreement.
3.2 Payment for the invoice(s) for the Services provided can be made in cash at
the locations provided by BESTEL on such invoices or by check payable to
BESTEL USA, Inc., by wire transfer or any other payment form specified by
BESTEL.
3.3 Any differences that the CUSTOMER should have with the charges billed on
the invoice should be directed to the Customer Service Center established
by BESTEL .In the event the CUSTOMER wishes to dispute, CUSTOMER shall do
so in writing by no later than the payment date shown on the invoice.
3.4 The invoices should be received by the CUSTOMER within the corresponding
delivery time set for such CUSTOMER and can be modified by BESTEL from time
to time. If the CUSTOMER does not receive the invoice, the CUSTOMER shall
notify BESTEL so that a copy can be sent. Notwithstanding the above, the
CUSTOMER shall pay immediately any outstanding amounts.
3.5 The CUSTOMER shall pay to BESTEL the amounts specified on the corresponding
invoice by no later than the date established on the invoice which shall
always be ten (10) days after the close of the billing period.
3.6 THE CUSTOMER agrees that BESTEL may apply the payment for one of more of
the Services under this Agreement to any outstanding amount generated by
the provision of any of the Services for an amount or in any invoice order
established by BESTEL.
3.7 BESTEL shall be able to partially or totally suspend the provision of the
Services under this Agreement upon previous notice to the CUSTOMER, in the
event the CUSTOMER pays late or does not completely pay its outstanding
amounts. In the event of suspension and in order to reestablish the
Services, the CUSTOMER shall pay any outstanding amounts as well as pay any
reconnection charges. As well, in the event BESTEL so determines, the
CUSTOMER shall provide BESTEL any security requested.
3.8 The amounts owed by the CUSTOMER after the payment date of the invoice
shall generate late payment fees calculated by multiplying the 30 day Libor
Rate (or substituted rate) in use on the date of payment times 2.0.
3.9 BESTEL shall be able to request total payment of any amount owed by the
CUSTOMER before continuing to provide the Services under this Agreement.
In the event that BESTEL should omit in any invoice amounts referred to in
this Paragraph, such charges can be invoiced in any subsequent invoice in
order for the CUSTOMER to cover its outstanding amounts. Such omission
does not constitute a waiver by BESTEL to collect any amounts nor shall it
be interpreted as the CUSTOMER'S right to not pay such amounts.
4.0 TERM.
4.1 Except for the Promotional Program contracted by the CUSTOMER, or that
established in the Addenda of the Services, this Agreement shall be
indefinite for both parties and any party may terminate with ninety (90)
days advance noticeto the other party its desire to terminate. However,
BESTEL may terminate this Agreement at any time due to a justified cause at
BESTEL's discretion.
4.2 In the event the CUSTOMER stops receiving BESTEL's services for any cause
and receives them from another vendor or has terminated this Agreement, the
parties agree that in the event the CUSTOMER desires to receive the
SERVICES again and receive the Promotional Programs, it shall be understood
that the CUSTOMER has accepted the terms and conditions established
hereunder.
5. TERMINATION.
5.1 In the event the CUSTOMER does not fulfill any of its obligations under
this Agreement, BESTEL shall terminate this Agreement without any
liability. If this occurs, all amounts owed by the CUSTOMER to BESTEL at
that time shall be due immediately.
<PAGE>
5.2 BESTEL shall notify the CUSTOMER the termination of this Agreement
indicating the amount owed and the due date in which such amount is to be
paid. Those amounts owed by the CUSTOMER as of the termination date shall
cause late fees as mentioned in 3.8 above.
5.3 In the event of default by BESTEL, the CUSTOMER shall notify BESTEL the
cause(s) of such default so that BESTEL may correct to the CUSTOMER's
satisfaction. After thirty (30) days and if such default persists, the
CUSTOMER shall be able to terminate this Agreement, after paying any
amounts owed to BESTEL without any liability.
6 SERVICE INTERRUPTIONS.
6.1 BESTEL shall not be responsible for the suspension or interruption of the
Services because of force majeure or fortuitous cause or because of
unforeseen circumstances including transmission failures as well as the
suspension or interruption of communication by other networks through which
the signals or traffic runs through.
6.2 BESTEL shall be able to interrupt for any necessary time the provision of
the Services under this Agreement when an inspection or maintenance is
needed for their facilities and/or equipment. BESTEL shall try to program
such inspection or maintenance at hours that do not result inconvenient for
the CUSTOMER.
6.3 Except for the stipulated in this Agreement, the CUSTOMER acknowledges that
the equipment and the lines through which the switched or dedicated local
service is to be provided are not owned by BESTEL; therefore BESTEL shall
not be responsible for any failures attributable to such equipment or
lines. BESTEL shall only be responsible for the Services provided through
circuits, equipment and fiber optic network owned by BESTEL or affiliates.
6.4 Except for the stipulated in this Agreement, neither party shall be
responsible for any damages, including indirect and/or consequential or for
the loss of income derived or related with the provision of the Services
under this Agreement.
7 LIABILITY.
7.1 BESTEL shall not be responsible for any wrong use, negligence, fraudulent
use, use contrary to specifications and/or unauthorized use that the
CUSTOMER makes of its facilities, line(s) and/or telecommunications
equipment by any of its executives, or employees or any third party that
could have direct or indirect access; as well, BESTEL shall not be
responsible for calls and/or transmission or reception of information
unrecognized by the CUSTOMER from such circumstances. The CUSTOMER shall
adopt the necessary means to prevent such acts and shall be responsible for
any claims against BESTEL.
7.2 BESTEL shall not be responsible for the contents of the information that
the CUSTOMER transmits through its telecommunications network.
8 RELATIONSHIP OF PARTIES.
8.1 The nature of this Agreement is essentially commercial since BESTEL and THE
CUSTOMER are companies of everyday business activities and in addition have
the necessary elements to fulfill each and every obligation with their
employees. As well, between the CUSTOMER' s employees and BESTEL's
employees there does not exist any relationship whatsoever; therefore there
is no labor relationship. THE CUSTOMER shall be the only party responsible
of the obligations that the law establishes as an employer with regards to
the personnel utilized and shall be responsible for each and every
individual and collective claim that the CUSTOMER's employees could present
against BESTEL assuming the liability of any claim presented and reimburse
immediately any legal expense or of any other nature that BESTEL could
incur for such concept. In the same fashion, BESTEL shall be the only
responsible party of the obligations that the law establishes as an
employer with regards to the personnel utilized and shall be responsible
for each and every individual and collective claim that BESTEL's employees
could present against the CUSTOMER assuming the liability of any claim
presented.
9 TROUBLE REPORTS/REPAIRS
9.1 The CUSTOMER shall notify its trouble reports to BESTEL and BESTEL shall
make available to the CUSTOMER a Customer Service Center that will be
available 24 hours a day, 365 days per year where trouble tickets will be
reported. BESTEL shall assign a confirmation number.
<PAGE>
10 SERVICE GUARANTEES.
10.1 The guarantees offered by BESTEL are described and detailed in the
Promotional Programs selected by the Customer and shall be attached to this
Agreement forming an integral part of this Agreement.
11 CREDIT INVESTIGATION.
11.1 THE CUSTOMER states that the information provided regarding its solvency
and payment capacity is correct and based on that information BESTEL has
made the decision to provide the Services under this Agreement. THE
CUSTOMER hereby authorizes BESTEL to verify such information. As well, the
CUSTOMER agrees that this authorization shall continue in force during the
term of this Agreement for BESTEL's benefit.
12 NOTICES.
12.1 The parties agree that all notices, communications and notifications
regarding this Agreement shall be directed to the addresses mentioned in
the recitals of this Agreement. Such notices shall be made in writing
through certified mail or courier with a return receipt, facsimile or any
other method that the other party has received such notification. In the
event of address change, the parties agree to notify the other party with
at least fifteen (15) days advance notice; otherwise the latest address
shall prevail.
In addition, the CUSTOMER agrees to send a copy of each notification to the
following address: Av. Lopez Cotilla, 1976-A, Col. Obrera Centro,
Guadalajara,, Mexico.
13 ASSIGNMENT; MODIFICATION.
13.1 THE CUSTOMER agrees that the rights and obligations derived under this
Agreement shall not be assigned, transferred, negotiated nor modified in
any way without the previous consent in writing from BESTEL. As well,
BESTEL may assign its rights and obligations derived under this Agreement
to any of its subsidiaries or affiliates or guarantee any obligation
through notification to the CUSTOMER.
13.3 THE CUSTOMER shall notify BESTEL with sixty (60) days advance notice any
modification to its corporate name, otherwise all documentation shall be
generated using the previous name.
<PAGE>
14 DISPUTE RESOLUTION.
14.1 The parties express their firm conviction that in good faith in the event
there are differences or disputes because of the interpretation,
fulfillment and execution of this Agreement and in unlimited form for any
technical aspect, service provision, application and collection of
consideration and any other that require specific technical capacity, they
shall reasonably try to resolve in a friendly fashion through mediation
and/or conciliation, voluntarily and previous to any other procedure that
the parties could have and take place during a term of thirty (30) days in
which the parties promote a mutual consulting process in order to resolve
or avoid any controversy or dispute without waiving their rights.
14.2 It shall be considered that the attempts to reach a friendly solution have
failed when one of the parties notifies the other party at the termination
of such term that the negotiations have not been satisfactory; therefore
the parties may execute their rights or effect any action as specified in
this Agreement.
15. ENTIRE AGREEMENT.
15.1 The parties agree that this Agreement and its Addenda constitute the only
agreement and agree that this Agreement supersedes any agreement,
communication, or proposal previously related with the objective of this
Agreement.
The parties hereby agree and acknowledge this Agreement is subject to the terms
and conditions of any applicable regulations. In the event such regulations are
not followed, the responsible party shall cure such failure without terminating
this Agreement unless such cure is not done in a reasonable time.
The parties execute this Agreement in duplicate in San Antonio, Texas on
September 28, 1998.
`THE CUSTOMER' "BESTEL"
"American TeleSource International, Inc." BESTEL USA, Inc.
/s/ Charles R. Poole /s/ Manuel Vazquez Arroyo
By: Charles R. Poole By: Manuel Vazquez Arroyo
Title: President Title: President
<PAGE>
EXHIBIT 11
AMERICAN TELESOURCE INTERNATIONAL INC. AND SUBSIDIARIES
COMPUTATIONS OF LOSS PER SHARE
(in thousands)
For the Year Ended
-------------------------------------------------
July 31, 1997 July 31, 1998 July 31, 1999
-------------------------------------------------
COMPUTATION OF BASIC LOSS
PER SHARE
Net loss ($4,695) ($5,094) ($7,591)
========== ========== ==========
WEIGHED AVERAGE NUMBER OF
SHARES COMMON STOCK
OUTSTANDING 26,807 41,093 47,467
========== ========== ==========
BASIC LOSS PER COMMON SHARE ($0.18) ($0.12) ($0.16)
========== ========== ==========
COMPUTATION OF DILUTED LOSS
PER SHARE
Net loss ($4,695) ($5,094) ($7,591)
Dividends not incurred upon
assumed conversion of
convertible preferred
stock 0 0 70
Interest not incurred
assumed conversion of
convertible note 9 0 0
---------- ---------- ----------
Not loss applicable to
common stockholders
used for computation ($4,686) ($5,094) ($7,521)
========== ========== ==========
Weighted average number of
shares of common stock
outstanding 26,807 41,093 47,467
Weighted average incremental
shares outstanding upon
assumed conversion of
options and warrants 3,061 10,228 4,272
Weighted average incremental
shares outstanding upon
assumed conversion of
preferred stock 0 0 264
Weighted average incremental
shares outstanding upon assumed
conversion of convertible note 200 0 0
---------- ---------- ----------
WEIGHT AVERAGE COMMON SHARES AND
COMMON SHAE EQUIVALENTS USED
FOR COMPUTATION 30,068 51,321 52,003
========== ========== ==========
DILUTED LOSS PER COMMON SHARE
AND COMMON EQUIVALENT ($0.16) ($0.10) ($0.14)
========== ========== ==========
<PAGE>
EXHIBIT 22
The subsidiaries of American TeleSource International, Inc. are as follows:
State or other Company Jurisdiction of Incorporation
---------------------- -----------------------------
American TeleSource International, Inc. Canada
American TeleSource International, Inc. Texas
American TeleSource International de Mexico, S.A. de C.V. Mexico
GlobalSCAPE, Inc. Delaware
Sistema de Telefonia Computarizada, S.A. de C.V.
("Computel") Mexico
Servicios de Infraestructura, S.A. de C.V. ("Sinfra") Mexico
TeleSpan, Inc. ("TeleSpan") Texas
ATSI de CentroAmerica, S.A. Costa Rica
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement on Form S-8 (File No. 333-50259).
San Antonio, Texas /s/ ARTHUR ANDERSEN LLP
October 22, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 379
<SECURITIES> 0
<RECEIVABLES> 5,293
<ALLOWANCES> 1,600
<INVENTORY> 0
<CURRENT-ASSETS> 5,059
<PP&E> 16,669
<DEPRECIATION> 4,713
<TOTAL-ASSETS> 24,154
<CURRENT-LIABILITIES> 11,969
<BONDS> 0
0
0
<COMMON> 49
<OTHER-SE> 6,088
<TOTAL-LIABILITY-AND-EQUITY> 24,154
<SALES> 34,518
<TOTAL-REVENUES> 34,518
<CGS> 21,312
<TOTAL-COSTS> 39,558
<OTHER-EXPENSES> (49)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,745
<INCOME-PRETAX> (6,736)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,736)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,591)
<EPS-BASIC> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
<PAGE>
Exhibit 99.2
American TeleSource International, Inc.
STOCKholder Newsletter
October 1999
Dear Stockholder,
[PHOTO APPEARS HERE] I am pleased to present you with ATSI's first stockholder
newsletter. My objective is to perio dically update you on
our progress and provide current information on the
Mexican telecommunications market, as well as the
regulatory environment and various global trends affecting
ATSI. More importantly, I wish to communicate our vision
and strategy in such a way that our stockholders will be
informed as to the long-term goals and objectives of the
ATSI organization.
ATSI has established itself as an emerging international
carrier, focusing on niche, underserved telecommunication
markets within and between the U.S. and Latin America,
primarily Mexico. An indisputable barrier to entry for
other competitors is the time required in duplicating the
accomplishments of ATSI to date. Our positioning strategy
has been to develop a solid corporate framework consisting
of unique licenses, interconnection and service
agreements, a network footprint and retail distribution -
not just to grow top-line revenues, but to build a
platform for supporting a stronger telecommunications company of tomorrow.
Through the utilization of this valuable framework, we are ahead in the race to
penetrate lucrative Latino markets.
Why Mexico? Of all the countries in the world, Mexico is the second leading
producer of long distance traffic with the U.S. The numbers of telephone and
access lines are increasing. Mexico is expected to surpass Canada and become the
number one international route with the U.S. for long distance traffic within
the next few years. As a result of NAFTA, the U.S. and Mexico enjoy even
stronger cultural and trade ties, with a significant flow of immigrants coming
north primarily for work. Another factor is Mexico's popularity among U.S.
tourists looking for an exotic getaway on a tight budget.
Thirty-eight years ago, my mom was one of those northbound immigrants seeking
work and a new lifestyle in the U.S. She eventually settled in South Texas. Due
to family ties in Mexico, she calls south of the border on a regular basis. I
have often said that my mom typifies the ATSI customer profile; she reads
Spanish newspapers and magazines, watches Spanish television, listens to Spanish
radio and stays on the telephone for extended periods of time. More
importantly, she is underserved when it comes to basic telephone services. Like
most Latinos north and south of the border, my mom is seeking convenient,
accessible and high-quality communication services at competitive rates.
The uniqueness of our borderless strategy is that ATSI's targeted customer
profile exists on both sides of the border. Whether in Los Angeles, California,
San Antonio, Texas, or Morelia, Michoacan, Mexico, Spanish-speaking consumers
seek the same basic communication services and, in most cases, prepay for
quality, affordability and convenience. With a highly recognized distribution
network of 127 Communication Centers (formerly referred to as casetas) in
Mexico, we are well positioned to offer our targeted niche market, highly
specialized, new and innovative services.
Technology also plays a key role in serving our borderless market. Although
transparent to the user, technology is vital in meeting a simple consumer demand
to communicate with friends and family. We
<PAGE>
recently installed an Asynchronous Transfer Mode (ATM) transborder network,
incorporating the latest in packet switching and compression technology. A
state-of-the-art proprietary network allows us to transport customer calls on
our own network, thereby gaining a cost advantage and giving us greater control
of overall call quality. Cost management and quality control are fundamental to
providing our Latino marketplace with affordable and reliable services.
ATSI's retail strategy focused on the growing and underserved Latino market,
combined with deployment of technology for efficient communication transport, is
expected to bring about profitable growth well into the future. We believe our
borderless strategy will set us apart from the competition, allowing us the
opportunity to increase stockholder value that is sustainable over the long-
term.
In this newsletter I will discuss the emerging marketplace in which we operate,
the market and regulatory environments, global trends, ATSI's retail focus, our
exciting Strategic Direction, expansion plans and various current events. For
additional information about the Company, please visit our web site at
www.atsi.net.
THE LATIN AMERICAN TELECOMMUNICATIONS MARKET
- --------------------------------------------
The Latin American telecommunications market, with a population of 488 million
strong, generated $50 billion in revenues in 1998, which are projected to grow
to $113 billion by the year 2005. Pent-up and growing demand exists for
telecommunication services throughout this underserved region. The average time
a person must wait to acquire a telephone line ranges from three months to
several years, with an average telephone line penetration of about 10 per 100
persons, and this penetration is growing.
We believe the following trends in the Latin American telecommunications market
will continue to drive growth:
(.) Continuing deregulation and privatization of markets
(.) Reduced international long distance rates driven by competition in
deregulated markets
(.) The increase in the availability of telephone and access lines
(.) The increasing globalization of commerce, trade and travel
(.) The proliferation of communication devices such as faxes, cellular
telephones and pagers
(.) Increasing demand for data transmission services, including the Internet
(.) More cost-efficient technological methods for transporting calls such as
packet switching
THE MEXICAN TELECOMMUNICATIONS MARKET
ATSI focuses on the international long distance market,
particularly within the U.S. - Mexico corridor, the second
busiest international long distance route in the world.
U.S. billed revenues for international long distance [PHOTO APPEARS HERE]
traffic with Mexico increased from $1.4 billion in 1993 to
approximately $3.0 billion in 1997. In addition, from 1995
to 1996, call-traffic between the U.S. and Mexico increased
16% compared with 13.2% for the rest of the world. Analysts
expect the market to continue outpacing the rest of the
world with growth rates estimated at 15% to 20% annually.
During the year 2000, Mexico is projected to increase
telephone line penetration from a current level of 9 to
12.5 per 100 persons.
The local and long distance telecommunications markets in Mexico had been a
Telefonos de Mexico (Telmex) monopoly until January 1, 1997, when the government
opened its market to competition. Since
<PAGE>
then, the Mexican Government has licensed 16 alternative facilities-based long
distance carriers or "Concessionaires" and 8 competitive local carriers.
Telmex and the newly licensed operators have focused on providing additional and
improved services to the residential and business markets. ATSI has focused its
efforts in areas underserved by the former monopoly and other emerging
competitive carriers. ATSI's services will be in greater demand as communication
needs grow beyond the ability of other carriers to meet them. I believe Telmex,
as well as the top tier competitive carriers (e.g., Alestra/AT&T,
Avantel/MCIWorldcom), will prioritize their resources to compete in the most
lucrative, yet capital intensive sectors, leaving many niche opportunities for
players like ATSI.
While many telecommunications service providers are capable of transporting
calls between the U.S. and Mexico, only a few have the retail distribution
channels needed to reach consumers and generate call volumes like ATSI. Early
on, we developed a two-pronged approach designed to capture both retail and
wholesale traffic:
1) The Company originates retail traffic in Mexico through its network of
Communication Centers and public pay telephones. Retail traffic in the
U.S. is originated through ATSI's MEXICOnnect service
(a "dial around" 10-10-624 product) and One Plus long distance, both
targeting the Latino community. These U.S. services are only offered in
San Antonio, Texas, at this time.
2) ATSI captures wholesale traffic by offering network termination
capabilities into Mexico for U.S. carriers either lacking transmission
facilities or requiring additional capacity. Similarly, the Company
provides these same services to Mexican carriers requiring U.S. and
global network termination.
Consequently, ATSI is uniquely positioned as a facilities-based carrier able to
originate, transport and terminate network traffic in both the U.S. and Mexico,
and ATSI is well poised to increase its retail market share within the growing
telecommunications corridor between the U.S. and Mexico.
THE MEXICAN REGULATORY ENVIRONMENT
Mexico is considered one of the Latin American leaders in telecommunications.
Development in Mexico's communications industry began in the 1940's, as there
was tremendous growth in radio broadcasting and an expansion in telephone
service. In the 1970's, large manufacturing facilities (maquiladoras) were
constructed throughout the country, creating a significant demand for more cost-
effective and reliable communications.
On August 9, 1996, President Zedillo's administration issued a decree creating
the Comision Federal the Telecomunicaciones (COFETEL), the Mexican Government's
regulator responsible for overseeing the liberalization of the
telecommunications industry. COFETEL's primary objectives include:
<PAGE>
(.) Promoting competition in all sectors of telecommunications
(.) Providing a judicially secure environment for private investment
(.) Ensuring end users non-discriminatory access to all types of
telecommunication services
Until August 1996, the Secretaria de Comunicaciones y Transportes (SCT) was the
exclusive authority for regulation of the Mexican telecommunications industry.
COFETEL operates under the SCT; however, since inception, COFETEL has taken
increased responsibility in both the reform and regulatory processes.
Mexico's Regulatory Structure
[FLOW CHART OF REGULATORY STRUCTURE APPEARS HERE]
Although Mexico leads most of its Latin American peers in creating a competitive
market, the telephone infrastructure is still "catching up" to other countries
such as the U.S. It is anticipated that telecommunications sector will continue
contributing a larger percentage of the Mexican GDP as the government implements
new laws and regulations.
We believe that the recent and planned privatization of many of the region's
major telephone companies together with the overall trend toward deregulation,
particularly in Mexico where the majority of our efforts have
<PAGE>
been focused, present significant opportunities to provide specialized services
to, from, and within this fast-growing market.
GLOBAL TRENDS
Carrier Opportunity
Estimates indicate that worldwide telecommunications deregulation is creating a
$600 billion revenue opportunity for international carriers. Emerging
international carriers, like ATSI, are expected to capture 40% of this revenue
over the next 10-year period.
Technological Advancements
Improvements in technology used in the transmission of telecommunication
services continues to occur rapidly; newer and better switches, fiber optic
cables with enormous capacity to move traffic at a fraction of historical costs,
and a variety of methods for consumers to access carrier networks, such as
prepaid and Voice over Internet Protocol (VoIP).
Investment Community
The investment community is searching for companies that possess both plans to
differentiate themselves from others in the international long distance group,
and a viable strategy to compete with the incumbent or former government owned
Telephone Company. The investment community prefers companies striving for a
balance favoring retail over wholesale traffic. While wholesale is an effective
method for utilizing a company's network, and for obtaining volume discounts
from other carriers, an over-reliance on wholesale produces long-term risks due
to declining margins and a lack of customer loyalty.
ATSI'S RETAIL SERVICES WITHIN MEXICO
ATSI entered the Mexican markets by establishing retail distribution channels
(Communication Centers and public pay telephones) offering local calling,
domestic and international long distance, facsimile and in some cases, Internet
connectivity.
[PICTURE APPEARS HERE]
<PAGE>
Communication Centers
The Communication Center market segment is generally fragmented with dozens
of small operators. Currently, we are aware of 12 multi-location caseta
operators competing with ATSI. Location and brand recognition are key factors
for competing effectively. ATSI maintains a market leadership position, with 127
Communication Centers located in prime high-traffic areas in 66 Mexican cities.
ATSI operates its Communication Centers under the name of Computel, a highly
recognized brand throughout Mexico.
ATSI's Communication Centers are strategically located to serve the "in-
country" traveler, tourists and the predominantly large population of Mexico
that does not have a telephone. ATSI Centers utilize on average four telephone
lines, with six to eight telephones available to customers. Every location
employs an attendant who processes calls, monitors call duration, collects fees
and generates daily call activity reports.
[PICTURE APPEARS HERE]
Moving into fiscal year 2000, ATSI has begun the process of transitioning
its retail distribution locations into "next generation" Communication Centers.
As we enter the new millennium, ATSI's Communication Centers will offer a
variety of enhanced telecommunication services beyond basic telephony, including
prepaid services and Internet connectivity.
ATSI Communication Centers will also play an important role as we expand
our retail presence in the U.S. (see "Expanding the ATSI Retail Presence"). The
Communication Center concept, together with the experience gained from serving
target markets within Mexico, will be brought to the U.S. to serve the needs of
the nearly 18 million Latino Americans of Mexican origin, the more than 350,000
new Mexican immigrants who arrive each year, and the more than 54.4 million
international travelers who traverse between Mexico and the U.S. annually.
Cancun, Mexico
Key differentiators that keep customers coming back to ATSI:
(,) Comfort, convenience and innovation - Communication Centers are air-
conditioned, centrally located and staffed with operators providing new and
enhanced services with personalized attention.
(.) Accurate billing - aside from tive rates, ATSI's proprietary call
accounting system offers higher reliability.
<PAGE>
(.) Provision of receipts - so that business calls may be expensed for
reimbursement or tax purposes. The competition does not typically offer this
service, which is important to the traveling business customer.
Public Pay Telephones
The Company has 574 public pay telephones in targeted niche markets such as
resort cities and ship ports of call. ATSI is currently the only payphone
operator with network facilities capable of transporting and billing its own
long distance calls originating in Mexico. Additionally, the Company's "multi-
pay" telephones offer consumers a variety of convenient payment methods,
including coin, credit card and collect. Telmex telephones are not as user-
friendly, because they only accept hard-to-find Telmex prepaid smart-chip
calling cards.
[PICTURES APPEARS HERE]
ATSI'S STRATEGIC DIRECTION
Maintain Focus on Underserved Latino Markets
While many of ATSI's competitors in the international long distance arena
attempt to be "all things to all people," ATSI will maintain focus on specific
retail and wholesale call-traffic generators within the U.S. - Mexico corridor,
while placing a stronger emphasis on retail services.
Increase Retail Distribution in the U.S. and Mexico
The cornerstone of our retail services includes the expansion of Communication
Centers in both the U.S. and Mexico, creating a borderless network of
distribution outlets (see "Expanding the ATSI Retail Presence"). Communication
Centers are an ideal platform for creating additional revenue streams from new
and innovative services, thereby improving ATSI's return on invested capital.
Due to the stranglehold Telmex has over providing local phone lines, and the
poor quality of cellular alternatives, ATSI will not expand its public pay
telephone network in Mexico. ATSI will transport traffic for other payphone
operators or consider expansion through franchise programs. Efforts will be
focused on increasing the productivity of our existing pay telephone assets.
<PAGE>
Deploy Seamless Transborder Services
The U.S. - Mexico border is one of the most traversed in the world, with
immigrant flow between the countries continuing to increase. Borderless services
will not only meet the practical needs and offer convenience to the consumer,
but will allow us to differentiate our services from other providers.
Increase the "Value Proposition" of the Wholesale Carrier Product
The value of our wholesale carrier services will be enhanced through:
(.) Termination to additional countries with an emphasis on Latin America
(.) Increase points-of-presence by leveraging on the excess capacity of fiber
and switching facilities that currently exist in the U.S.
(.) Data transport on high capacity ATM network (e.g. virtual private networks
and VoIP)
Reduce Transport and Termination Costs
ATSI is pursuing a long distance license in Mexico that will allow for a
significant reduction in termination and origination costs within that country.
Prior to building out the network under the license, we will leverage current
call volumes for increased discounts from our current Mexican carrier vendors.
ATSI will also execute additional interconnection and service agreements for
multiple traffic routing alternatives. In the U.S., we will aggressively pursue
carrier agreements that allow for profitable resale of termination services into
other countries in addition to Mexico.
Construct a State-of-the-Art Network
Due to an over-capacity of fiber and switches in the U.S., we expect to lease
and partition facilities rather than construct our own. In Mexico, ATSI has
adopted a "smart-build" modular strategy, allowing us to scale up the network
when customers are added, emphasizing reliability and flexibility. Our smart
build approach incorporates a hybrid network, using fiber optic technology to
access major metropolitan areas and satellite technology to access semi-rural
and smaller metropolitan areas. In addition, we will seek strategic
technological partnerships (such as those we have secured with Northern Telecom
and Network Equipment Technologies) to minimize technological dependence on
third parties, and extend the reach and efficiency of our network (see "ATSI
Current Events - Long Distance License").
EXPANDING ATSI'S RETAIL PRESENCE (U.S. - MEXICO CORRIDOR)
In order to sustain growth in revenues and improvement in margins, ATSI must
meet the challenge facing emerging international carriers by migrating away from
shrinking wholesale markets into more profitable retail markets. ATSI plans to
invest a majority of its new resources developing retail programs targeting the
<PAGE>
growing Latino market.
In the U.S., the Latino population is growing four times faster than the general
population. By the year 2010, it is estimated that Latinos in the U.S. will
reach 41.5 million, with 25.6% of Mexican origin. Of particular interest is the
fact that 60% of the U.S. Latino households live in 10 Metropolitan areas. It
has also been reported that 80% of the U.S. long distance minutes to Mexico
originate in the 6 market areas of Los Angeles-Long Beach, San Francisco-San
Jose, Chicago, New York, Houston and San Antonio.
The Communication Center is a widely recognized and utilized medium in Mexico.
It is our belief that the Communication Center concept will find acceptance by
familiar and new consumers in the U.S. A key to the successful offering of
retail services must include an acceptable, easy and efficient method for
consumers to purchase telecommunication services.
Our Communication Centers will serve as magnets
to attract customers to services designed to meet
the needs of the Latino. Through use of these
services, the consumer will develop ATSI brand loyalty
to which they will adhere when transitioning to more [PHOTO APPEARS HERE]
traditional applications such as residential direct dial
and dial-up Internet services. Generally speaking,
recent immigrants and those with economic challenges are
served through "prepaid" accounts, while the more
established households tend to subscribe to
"post-paid" services.
ATSI CURRENT EVENTS
Network Enhancements
ATSI focused a great deal of its resources and efforts this past year in
deploying technological enhancements to the network. With the addition of a
transborder fiber optic link and a state-of-the-art Northern Telecom gateway
switch, we operate a highly efficient ATM "pipe" between Dallas, Texas, and
Mexico City, Mexico. The new fiber link and switch include some of the most
advanced compression and packet switching technology available today. The new
hardware results in lower transport costs for the Company and exceptional
quality for the consumer. As we expand the network in Mexico and throughout
Latin America, we will continue deploying the latest in technology for
applications such as VoIP.
Gerard Klauer Mattison & Co., Inc.
<PAGE>
In July, we secured a relationship with the investment-banking firm of Gerard
Klauer Mattison & Co., Inc. (GKM). GKM has successfully established a
reputation as a research-driven firm serving many large institutional investors.
GKM has managed over $3.5 billion of public offerings and private placements,
and advised in $2.2 billion of transactions including mergers and acquisitions.
Their equity division consists of 25 traders making markets in a large number of
stocks. We have worked closely with GKM's high-energy team in positioning ATSI
for the financial markets and potential strategic relationships. GKM is also
providing us with advisory relating to certain financial strategies. Having
become intimate with ATSI over the last few months, GKM supports both the
management team and our Strategic Direction. We are excited about the future
opportunities that exist to utilize GKM's full service capabilities.
Long Distance License
In November 1998, ATSI applied to the Mexican Government for a long distance
license. We are in the final stages of the process and remain confident that a
license will be obtained. This particular license will enable the Company to
expand its operations and services to both urban and rural locations, while
simultaneously decreasing its operating costs for both wholesale and retail
service offerings.
[PHOTO APPEARS HERE]
[LOGO APPEARS HERE]
<PAGE>
GlobalSCAPE, Inc.
The prospects are exceptional for ATSI's wholly owned e-corporation,
GlobalSCAPE, Inc., an industry leader in providing Internet-based software
utilities. GlobalSCAPE offers "best of breed" products in various categories,
including file management, applications development and multimedia utilities.
The Company's business model allows it to continually market and deliver
software products to end users who want them on a "just in time" basis. To
complement its own software development efforts, GlobalSCAPE also intends to
seek the distribution rights of third-party authored software.
The Company's products are available online and distributed as shareware,
meaning, "free to download and use on a trial basis." However, GlobalSCAPE's
primary source of revenue derives from product registration. Additionally, the
Company generates revenue from advertising in the form of ad banners and
sponsorships, which are promoted through its "live" software products and on its
vertical portal web site. For more information, please visit the GlobalSCAPE web
site at www.globalscape.com.
GlobalSCAPE's programs are consistently touted on leading shareware sites' top
download lists. CNET's Download.com currently ranks Company products as the "Top
10 Most Frequently Downloaded Programs" within their respective categories. On a
monthly basis, the Company receives approximately 1.2 million unique visitors
and displays more than 15 million in-product and web site ad banners. Because of
this exposure, GlobalSCAPE is diligently working to leverage its name brand
recognition into a full suite of "Cute" products.
The Company's flagship product, CuteFTP, is a Windows/(R)/
[PHOTO APPEARS HERE] -based file transfer protocol (FTP) utility that allows
users the ability to transfer and manage files via the
Internet, including files such as MP3's, web pages, software, videos and
graphics. CuteFTP/TM/ is a market leader, with an estimated 30% of the U.S.
market share as reported by Media Metrix. The Company's portfolio of products
also includes CuteHTML/TM/, an advanced HTML editor for developing web sites,
and CuteMAP/TM/, an image mapping utility for graphic navigation through web
sites, as well as products in various stages of alpha and beta testing.
<PAGE>
GlobalSCAPE's goal is to accelerate the growth of its revenue streams from
software registrations and advertising. To accomplish this goal, the strategy is
to (i) grow the user base and, (ii) maximize the value of the user base. Certain
components of the Company's strategy include accelerating core product
development, distributing complementary third-party authored products, offering
complementary products to users based on product category, implementing
aggressive marketing plans, and continually improving the support
infrastructure. GlobalSCAPE's market essentially includes all computer users on
the Internet.
In July 1999, GlobalSCAPE engaged the investment-banking firm of SunTrust
Equitable Securities, Inc. to determine the best path for unleashing value for
ATSI stockholders. Since its engagement, SunTrust has assisted GlobalSCAPE in
refining its Strategic Plan, corporate marketing materials, and financial model
for the best possible representation in executing a financing strategy.
ATSI PEER GROUP COMPARISON
ATSI monitors the peer group shown on the following table for measuring
corporate performance and identifying trends within our sector of the
telecommunications industry. I encourage each of our stockholders to follow this
peer group of companies for accomplishing these same objectives.
<TABLE>
<CAPTION>
Shares Recent
Closing Outstanding/ 1998 Quarter Paid in Profit
Price 52 Week YTD Market Cap Revenues Revenues Year Capital Margin Market
Company Symbol (10-5-99) High/Low Return (millions) (millions) (millions) Founded (millions) (ttm) Presence
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ATSI ATSI.OB $ 1.00 $1.84/$0.44 8% 48.4/345 $ 34.5 $ 8.7 1994 $ 25 -12.0% U.S., Mexico,
Central A
FirstCom FCLX 9.38 12.75/0.84 249% 22.6/212 19.1 11.6 1997 73 -92.0% Chile, Peru,
Colombia
IDT Corp IDTC 21.58 35.00/9.50 41% 23.9/615 335.4 191.8 1990 277 -0.1% Worldwide
PointeCom PCOM.OB 2.40 2.78/0.69 201% 45.4/109 27.6 13.2 1995 73 -37.0% U.S., CENTRAL
AM., S.A.
Pacific
Gateway PGEX 16.13 50.31/13.13 -66% 19.5/315 466.3 140.0 1991 72 3.3% U.S. & Europe
Primus PRTL 18.19 25.13/6.88 15% 28.7/522 421.6 185.6 1086 243 -18.0% N.Am.,
Asia-Pacific, Eur
Startec
Global STGC 14.00 18.75/3.38 38% 9.39/131 161.2 61.9 1989 44 -19.0% U.S., Europe
Star
Telecom STRX 5.19 18.00/5.08 -59% 58.6/304 696.5 272.3 1994 364 -3.3% Worldwide
Teleglobe TGO 19.31 40.94/14.81 -44% 252.8/4.86 3,388.9 709.9 1950 1,240 4.2% Worldwide
Telscope TSCP 6.75 10.38/5.38 -9% 6.66/44 132.2 32.4 1992 44 -6.1% Latin America
Vistel VYTL 27.25 58.88/7.88 27% 32.6/888 135.2 68.7 1994 129 -66.0% U.S. W. Europe,
U.K., Lat.
WorldPort WRDP.OB $ 0.69 $12.38/$0.49 -93% 22.7/$16 $28.5 $24.5 1997 $111 -184.0% Netherlands,
Europe, N.
Footnotes:
(1) FirstCom was previously named interAmericas Communication Corp., which was founded in 1994
(2) Paid in Capital is calculated through most recently reported quarter
(3) YTD Return utilizing closing price as of 1/1/99
</TABLE>
LOOKING TO THE FUTURE
The liberalization of a telecom market typically begins with the privatization
of the government owned Telephone Company. Privatization is followed by a
demonopolization process, which strips the former monopoly of its status, and
allows competitive carriers to enter the marketplace. Subsequent to
demonopolization, markets typically migrate through three stages of development.
The first is the protective stage, where the former monopoly vigorously protects
its market share and revenue streams to the extent allowed under the newly
established regulations. This particular stage is the most difficult for
emerging carriers, as the former Phone Company continues operating as a de facto
monopoly, exercising its significant market power. During the second stage, the
competitive stage, newly licensed carriers attempt to establish themselves and
capture market share. The third stage is the consolidation stage, where carriers
seek alliances, joint ventures or mergers with former competitors to create
critical mass. Due to the market power exhibited in Mexico by Telmex over the
past few years, I believe we just recently entered the competitive stage.
We have developed clear advantages over our competition, as a result of the
proper licensing, execution of carrier interconnection and service agreements,
investment in and deployment of network facilities and retail
<PAGE>
distribution channels - a solid corporate framework. These advantages enhance
ATSI's ability to compete in the long-term by ensuring our ability to be a
low-cost provider of services. While the competition acquires the tools to
effectively compete, ATSI expects to have acquired significant market share.
ATSI has assembled an experienced management team that understands the markets
in which we operate, is bilingual and bicultural, has a focused vision, is
entrepreneurial, and has successful career histories. The management team has
thoroughly positioned the Company to capitalize on the opportunities by having
established a solid corporate framework during the difficult protective stage.
As a result, our Company is transitioning into a retail-oriented, growth
opportunity, beginning to capitalize on the competitive stage.
Make no mistake about it...our vision is big. Over the next several years, ATSI
intends to expand its network under the long distance license to consist of
nearly 1,400 miles of fiber optics and 101 satellite terminals, covering 115
Mexican cities. Our retail distribution in Mexico will more than double, and
"next generation" Communication Centers will appear in select U.S. communities.
Peering even further into the future, ATSI will duplicate its strategy in other
Latin American countries as regulatory environments permit. This is an
incredible opportunity when considering that two-thirds of the Western
Hemisphere's population is Latino.
As we continue to penetrate the underserved and underdeveloped
telecommunications marketplace of Latinos, I remain confident that our
commitment to further strengthen the corporate framework will lead to a greater
return on investment. I expect value to be realized as more and more competitors
attempt market entry, undoubtedly facing a multitude of barriers and challenges
that ATSI has already overcome. Our future looks bright and we maintain focused
on creating value for you, the ATSI stockholder.
STOCKHOLDER CONTACT
Karen R. Mella
Director, Investor Relations
American TeleSource International, Inc. [ATSI LOGO APPEARS HERE]
12500 Network Blvd., Suite 407
San Antonio, Texas 78249
Voice: (210) 558-6090, ext. 1161
Fax: (210) 558-6095
E-mail: [email protected]
STOCK SYMBOL
OTCBB: AMTI
This Newsletter contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities and Exchange Act of 1934, as amended. "Forward looking statements"
are those statements, which describe management's beliefs and expectations about
the future. We have identified forward-looking statements by using words such as
"anticipate," "believe," "could," "estimate," "may," "could," "expect," and
"intend." Although we believe these expectations are reasonable, our operations
involve a number of risks and uncertainties, including those described in our
Annual Report on Form 10-K and other documents filed with the Securities and
Exchange Commission. Therefore, these types of statements may prove to be
incorrect. We
<PAGE>
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.
<PAGE>
[PICTURE APPEARS HERE]
ATSI's teleport facility in San Antonio, Texas, provides satelitte-based
communication services within and between the U.S. and Latin America.
18
