<PAGE>
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QA
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
- -
ACT OF 1934
For the quarterly period ended October 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 0-23007
AMERICAN TELESOURCE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2849995
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
12500 Network Blvd., Suite 407
San Antonio, Texas 78249
(210) 558-6090
(Address, including zip code, of registrant's principal executive offices
and telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---
The number of shares outstanding of the registrant's common stock at
December 10, 1999 were 49,115,545.
- -------------------------------------------------------------------------------
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 1999
INDEX
Part I FINANCIAL INFORMATION
Page
----
Item 1. Interim Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of July 31, 1999 and
October 31, 1999............................................ 3
Consolidated Statements of Operations for the Three
Months Ended October 31, 1998 and 1999...................... 4
Consolidated Statements of Comprehensive Loss for the
Three Months Ended October 31, 1998 and 1999................ 5
Consolidated Statements of Cash Flows for the Three
Months Ended October 31, 1998 and 1999...................... 6
Notes to Consolidated Financial Statements.................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 11
Part II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K.............................. 18
2
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
<TABLE>
<CAPTION>
July 31, October 31,
1999 1999
-------- ----------
(unaudited)
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 379 $ 513
Accounts receivable, net of allowance of $ 1,600 and $ 1,547, respectively 3,693 3,373
Prepaid expenses and other assets 755 1,301
-------- --------
Total current assets 4,827 5,187
-------- --------
PROPERTY AND EQUIPMENT (At cost): 16,669 17,317
Less - Accumulated depreciation and amortization (4,713) (5,312)
-------- --------
Net property and equipment 11,956 12,005
-------- --------
OTHER ASSETS, net
Goodwill, net 5,032 4,997
Contracts, net 703 539
Trademarks, net 789 741
Other assets 615 749
-------- --------
Total assets $ 23,922 $ 24,218
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 4,004 $ 5,866
Accrued liabilities 3,167 3,264
Current portion of notes payable 961 699
Current portion of convertible long-term debt 1,942 2,033
Current portion of obligations under capital leases 1,430 3,417
Deferred revenue 233 176
-------- --------
Total current liabilities 11,737 15,455
-------- --------
LONG-TERM LIABILITIES:
Notes payable, less current portion 312 308
Obligations under capital leases, less current portion 5,523 3,334
Other long-term liabilities 213 182
-------- --------
Total long-term liabilities 6,048 3,824
-------- --------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value, 10,000,000 shares authorized,
Series A Cumulative Convertible Preferred Stock, 50,000 shares
authorized, 24,145 shares issued and outstanding at July 31,
1999 and October 31, 1999 - -
Series B Cumulative Convertible Preferred Stock, 2,000 shares
authorized, 2,000 shares issued and outstanding at July 31, 1999,
1,925 shares issued and outstanding at October 31, 1999 - -
Series C Cumulative Convertible Preferred Stock, 500 shares
authorized, no shares issued and outstanding at July 31, 1999,
500 shares issued and outstanding at October 31, 1999 - -
Common stock, $0.001 par value, 100,000,000 shares authorized,
48,685,287 issued and outstanding at July 31, 1999,
48,814,561 issued and outstanding at October 31, 1999 49 49
Additional paid in capital 29,399 31,013
Accumulated deficit (21,987) (25,194)
Deferred compensation (466) (309)
Accumulated other comprehensive income (858) (620)
-------- --------
Total stockholders' equity 6,137 4,939
Total liabilities and stockholders' equity $ 23,922 $ 24,218
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended October 31,
1998 1999
--------- ---------
<S> <C> <C>
OPERATING REVENUES:
Network Services
Carrier $ 5,626 $ 5,368
Private Network 1,087 737
Call Services
Integrated Prepaid 1,268 1,401
Postpaid 1,699 1,175
Internet e-commerce 556 773
--------- ---------
Total operating revenues 10,236 9,454
--------- ---------
OPERATING EXPENSES:
Cost of services 6,501 6,526
Selling, general and administrative 3,109 3,374
Bad debt expense 224 120
Depreciation and amortization 649 908
--------- ---------
Total operating expenses 10,483 10,928
--------- ---------
Operating loss (247) (1,474)
OTHER INCOME(EXPENSE):
Interest income 13 5
Other income 18 10
Interest expense (415) (488)
--------- ---------
Total other income (expense) (384) (473)
--------- ---------
LOSS BEFORE INCOME TAX EXPENSE (631) (1,947)
FOREIGN INCOME TAX EXPENSE (11) 0
NET LOSS ($642) ($1,947)
LESS: PREFERRED DIVIDENDS 0 (1,260)
--------- ---------
NET LOSS TO COMMON STOCKHOLDERS ($642) ($3,207)
========= =========
BASIC AND DILUTED LOSS PER SHARE ($0.01) ($0.07)
========= =========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 45,627 48,687
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
<TABLE>
<CAPTION>
For the three months ended
--------------------------
October 31,
--------------------------
1998 1999
---------- ----------
<S> <C> <C>
Net loss to common stockholders ($642) ($3,207)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments $ 32 $ 238
---------- ----------
Comprehensive loss to common stockholders ($610) ($2,969)
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended October 31,
1998 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($642) ($1,947)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Depreciation and amortization 649 908
Amortization of debt discount 82 94
Deferred compensation 116 157
Provision for losses on accounts receivable 224 120
Changes in operating assets and liabilities
(Increase) Decrease in accounts receivable (476) 124
(Increase) Decrease in other assets 306 (752)
Increase (Decrease) in accounts payable (156) 1,769
Increase (Decrease) in accrued liabilities (157) 27
Decrease in deferred revenue (70) (56)
---------- ----------
Net cash provided by (used in) operating activities (124) 444
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (297) (248)
---------- ----------
Net cash used in investing activities (297) (248)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 59 -
Net decrease in short-term borrowings (188) (97)
Net increase from advanced funding arrangements 382 33
Payments on debt (49) (170)
Capital lease payments (525) (276)
Payments on long-term (53) (11)
liabilities
Proceeds from issuance of preferred stock, net
of issuance costs - 417
Proceeds from issuance of common stock, net
of issuance costs 23 42
---------- ----------
Net cash used in financing activities (351) (62)
---------- ----------
Net increase (decrease) in cash (772) 134
Cash, beginning of period 1,091 379
---------- ----------
Cash, end of period $319 $ 513
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
6
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements, which include
the accounts of ATSI-Delaware, ATSI-Canada, ATSI-Texas, ATSI-Mexico, Computel,
ATSI de CentroAmerica, Telespan, Sinfra and GlobalSCAPE have been prepared in
accordance with Rule 10-01 of Regulation S-X, "Interim Financial Statements,"
and accordingly do not include all information and footnotes required under
generally accepted accounting principles for complete financial statements. In
the opinion of management, these interim financial statements contain all
adjustments, without audit, necessary to present fairly the consolidated
financial position of ATSI and its subsidiaries ("ATSI" or "the Company") as of
July 31, 1999 and October 31, 1999, the results of their operations for the
three months ended October 31, 1998 and 1999 and cash flows for the three months
ended October 31, 1998 and 1999. All adjustments are of a normal recurring
nature. All significant intercompany balances and transactions have been
eliminated in consolidation. It is recommended that these interim consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes thereto for the year ended July 31, 1999 included in
the Company's annual report on Form 10-K filed with the SEC on October 26, 1999.
Certain prior period amounts have been reclassified for comparative purposes.
The results of operations for any interim period are not necessarily indicative
of the results to be expected for the full year.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and display 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.
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share", which establishes standards for
computing and presenting earning per share ("EPS") with entities with publicly
held common stock or potential common stock. SFAS No. 128 simplifies the
standards for computing EPS previously found in Accounting Principles Board
Opinion No. 15, "Earnings per Share," and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS, which excludes dilution. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with a complex capital structure. As the Company had a net loss
for the three months ended October 31, 1998 and 1999, diluted EPS equals basic
EPS, as potentially dilutive common stock equivalents are antidilutive in loss
periods.
7
<PAGE>
2. FUTURE OPERATIONS
The consolidated financial statements of the Company have been prepared on
the basis of accounting principles applicable to a going concern. For the
period from December 17, 1993 to October 31, 1999, the Company has incurred
cumulative net losses of approximately $25,140. Further, the Company has a
working capital deficit of approximately $10,268 at October 31, 1999. Although
the Company has capital resources available to it, these resources are limited
and may not be available to support its ongoing operations until such time as
the Company is able to maintain positive cash flow from operations. There is no
assurance the Company will be able to achieve future revenue levels sufficient
to support operations or recover its investment in property and equipment,
goodwill and other intangible assets. These matters raise substantial doubt
about the Company's ability to continue as a going concern. The ability of the
Company to continue as a going concern is dependent upon the ongoing support of
its stockholders and customers, its ability to obtain capital resources to
support operations and its ability to successfully market its services.
The Company is likely to require additional financial resources in the near
term and could require additional financial resources in the long-term to
support its ongoing operations. The Company has retained various financial
advisers to assist it in refining its strategic growth plan, defining its
capital needs and obtaining the funds required to meet those needs. The plan
includes securing funds through equity offerings and entering into lease or
long-term debt financing agreements to raise capital. There can be no
assurances, however, that such equity offerings or other long-term debt
financing arrangements will actually be consummated or that such funds, if
received, will be sufficient to support existing operations until revenue levels
are achieved sufficient to maintain positive cash flow from operations. If the
Company is not successful in completing additional equity offerings or entering
into other financial arrangements, or if the funds raised in such stock
offerings or other financial arrangements are not adequate to support the
Company until a successful level of operations is attained, the Company has
limited additional sources of debt or equity capital and would likely be unable
to continue operating as a going concern.
3. PRIVATE PLACEMENTS
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 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. As this conversion feature is
considered a "a beneficial conversion feature" to the holder the Company has
allocated approximately $130,000 of the approximate $500,000 in proceeds to
additional paid-in capital as a discount to be amortized over a three-month
period. The terms of the Company's Series C Preferred Stock restrict the Company
from declaring and paying dividends on its common stock until such time as all
outstanding dividends have been fulfilled related to the Preferred Stock.
4. CAPITAL LEASES
As of July 31, 1999, the Company entered into a capital lease transaction
with NTFC Capital Corporation, ("NTFC") to finance the purchase of a DMS
250/3000 International gateway switch from Northern Telecom, Inc. at a cost of
approximately $1.8 million and additional equipment totaling
8
<PAGE>
approximately $200,000 over a five and a half-year period with payments delayed
for six months. 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. As of October 31, 1999, the Company did not meet certain of its
financial covenants related to EBITDA results. While the Company has requested a
waiver from NTFC for not meeting all of its financial covenants, there is no
guarantee it will receive it. Should the company be unable to cure its default
related to non-compliance within the time period called for in the debt
facility, one of the options available to NTFC Capital Corporation would be to
call the debt. Accordingly, the Company has classified the total amount
outstanding under said lease as current in the accompanying balance sheet.
5. SEGMENT REPORTING
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which establishes standards for
reporting information about operating segments in annual and interim financial
statements. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997. SFAS No. 131 need not
be applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial year
of application is to be reported in financial statements for interim periods in
the second year of application. In an attempt to identify its reportable
operating segments, the Company considered a number of factors or criteria.
These criteria included segmenting based upon geographic boundaries only,
segmenting based on the products and services provided, segmenting based on
legal entity and segmenting by business focus. Based on these criteria or
factors the Company has determined that it has three reportable operating
segments: (1) U.S. Telco; (2) Mexico Telco; and (3) Internet e-commerce.
Clearly, the Company's Internet e-commerce subsidiary, GlobalSCAPE, Inc. and its
operations can be differentiated from the telecommunication focus of the rest of
the Company. Additionally, the Company believes that its U.S. and Mexican
subsidiaries should be separate segments in spite of the fact that many of the
products are borderless. Both, the U.S. Telco and Mexican Telco segments include
revenues generated from Integrated Prepaid, Postpaid, and Private Network
Services. The Company's Carrier Services revenues, generated as a part of its
U.S. Telco segment, are the only revenues not currently generated by both the
U.S. Telco and Mexico Telco segments. The Company has included the operations
of ATSI-Canada, ATSI-Delaware and all businesses falling below the reporting
threshold in the "Other" segment. The "Other" segment also includes intercompany
eliminations.
For the three months ended
October 31, October 31,
1998 1999
U.S. Telco
- -----------------------------------------------------------------------------
External revenues $ 8,284,135 $ 7,020,757
Intercompany revenues - $ 279,188
----------- -----------
Total revenues $ 8,284,135 $ 7,299,945
=========== ===========
Earnings before interest, taxes, depreciation
and amortization (EBITDA) $ 857,765 ($279,311)
9
<PAGE>
Operating income (loss) $ 425,613 ($820,284)
Net income (loss) $ 970,063 ($1,138,539)
Total assets $10,209,509 $ 9,568,399
Mexico Telco
- -----------------------------------------------------------------------------
External revenues $ 1,396,678 $ 1,661,037
Intercompany revenues $ 898,916 $ 985,000
----------- -----------
Total revenues $ 2,295,594 $ 2,646,037
=========== ===========
EBITDA ($577,851) ($478,808)
Operating loss ($769,627) ($768,878)
Net loss ($893,687) ($1,009,550)
Total assets $16,314,093 $12,968,251
Internet e-commerce
- -----------------------------------------------------------------------------
External revenues $ 555,466 $ 772,590
Intercompany revenues - -
----------- -----------
Total revenues $ 555,466 $ 772,590
=========== ===========
EBITDA $ 124,192 $ 273,028
Operating income $ 105,016 $ 194,200
Net income $ 110,938 $ 195,256
Total assets $ 442,972 $ 1,372,837
Other
- -----------------------------------------------------------------------------
External revenues - -
Intercompany revenues ($898,916) ($1,264,188)
----------- -----------
Total revenues ($898,916) ($1,264,188)
=========== ===========
EBITDA ($2,510) ($71,077)
Operating loss ($8,725) ($78,733)
Net loss ($829,197) ($1,254,122)
Total assets ($4,365,007) $ 307,706
Total
- -----------------------------------------------------------------------------
External revenues $10,236,279 $ 9,454,384
Intercompany revenues - -
----------- -----------
10
<PAGE>
Total revenues $10,236,279 $ 9,454,384
=========== ===========
EBITDA $ 401,616 ($556,168)
Depreciation, Depletion and Amortization ($649,339) ($907,527)
Operating loss ($247,723) ($1,473,695)
Net loss ($642,383) ($3,206,955)
Total assets $22,601,567 $24,217,193
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Quarterly Report on Form 10-Q contains certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Specifically, all statements other
than statements of historical facts included in the report regarding the
Company's financial position, business strategy and plans and objectives of
management of the Company for future operations are forward-looking statements.
These forward-looking statements are based on the beliefs of the Company's
management, as well as assumptions made by and information currently available
to the Company's management. When used in this report, the words "anticipate,"
"believe," "could," "estimate," "expect" and "intend" and words or phrases of
similar import, as they relate to the Company or Company's management, are
intended to identify forward-looking statements. Such statements reflect the
current view of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions related to certain factors
including, without limitation, the inability to obtain capital, changes in the
Mexican political or economic environment; the adoption by Mexico of new laws or
regulations, or changes effected by Mexico to existing laws affecting the
communications industry generally or the Company specifically; increased or
redirected competition efforts, targeting the Company's services or operation,
by competitors; general economic conditions, customer relations, relationships
with vendors, the interest rate environment, seasonality, the operation of the
Company's network, the ability of the Company's direct sales force to
successfully replace its independent marketing representatives or the failure of
said direct sales force to produce anticipated results, transmission costs,
product introductions and acceptance, the inability to continue to generate new
sources of revenue, technological change, changes in industry practices, on-time
events and other factors described herein ("cautionary statements"). Reference
is made to the risks and uncertainties contained in the Company's annual report
on Form 10-K. Although the Company believes that the expectations are
reasonable, it can give no assurance that such expectations will prove to be
correct. Based upon changing conditions, should any one or more of these risks
or uncertainties materialize, or should any underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected or intended. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the applicable
cautionary statements.
General
The Company's mission is to employ leading-edge technologies for delivery
of exceptional telecommunication services to underserved Latino markets in the
U.S. and Latin America emphasizing
11
<PAGE>
convenience, accessibility, quality, reliability, and affordability, while
continually seeking to add value through new and innovative products and
services. Utilizing a framework of licenses, interconnection and service
agreements, network facilities and retail distribution channels (hereinafter
collectively referred to as the "framework"), the Company is primarily focused
on capturing market share in the international telecommunications corridor
between the United States and Mexico. Even with poor phone-line penetration, the
Company's research indicates that Mexico may exchange more international traffic
with the U.S. than any other country in the world within the next two years. As
the regulatory environments allow, the Company 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 communication centers 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 October 31, 1999.
For the reasons stated in Liquidity and Capital Resources and subject to the
risks referred to in Liquidity and Capital, the Company expects improved results
of operations and liquidity in the rest of fiscal 2000.
Results of Operations
The following table sets forth certain items included in the Company's
results of operations in dollar amounts and as a percentage of total revenues
for the three-month periods ended October 31, 1998 and 1999.
Three Months Ended October 31,
------------------------------
1998 1999
---- ----
12
<PAGE>
<TABLE>
<CAPTION>
$ % $ %
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating revenues
- ------------------
Network management services
Carrier services $ 5,626 55% $ 5,368 57%
Private network 1,087 11% 737 8%
Call services
Integrated Prepaid 1,268 12% 1,401 15%
Postpaid 1,699 17% 1,175 12%
Internet e-commerce 556 5% 773 8%
-------- -------- -------- --------
Total operating revenues 10,236 100% 9,454 100%
Cost of services 6,501 64% 6,526 69%
-------- -------- -------- --------
Gross Margin 3,735 36% 2,928 31%
Selling, general and administrative expense 3,109 30% 3,374 36%
Bad debt expense 224 2% 120 1%
Depreciation and amortization 649 6% 908 10%
-------- -------- -------- --------
Operating loss (247) (2%) (1,474) (16%)
Other, net (395) (4%) (473) (5%)
-------- -------- -------- --------
Net loss (642) (6%) (1,947) (21%)
Less: preferred stock dividends - 0% (1,260) (13%)
-------- -------- -------- --------
Net loss ($642) (6%) ($3,207) (34%)
======== ======== ======== ========
</TABLE>
Three Months ended October 31, 1999 Compared to Three Months ended October 31,
1998
Operating Revenues. Operating revenues were down 8% between periods, due
primarily to declines in the Company's network management services and postpaid
call services revenues offset somewhat by the growth in the Company's integrated
prepaid call services revenue and its Internet e-commerce services revenue.
Network management services, which includes both carrier services and
private network services declined approximately $610,000 from $6.7 million to
$6.1 million. During the quarter ended October 31, 1999, the Company processed
more minutes in its carrier services business than it had in any previous
quarter and transported 56% more minutes than it had in the first quarter of
fiscal 1999. In spite of this increase in volumes, the Company's carrier
services revenues declined from $5.6 million to $5.4 million, between quarters,
due to pricing and other market pressures, which resulted in the Company's
revenue per minute declining significantly between periods. The Company's
private network services
13
<PAGE>
declined from $1.1 million to $737,000 between periods due to the loss of a
customer upon expiration of its contract as well as the termination of several
customers with poor credit histories.
Call services revenue, which is comprised of both integrated prepaid
revenues, generated from calls paid for before or at the time the call is
placed, and postpaid calling services, which represent calls subsequently billed
to the consumer or other appropriate party, declined approximately $390,000
between quarters. This decline was the result of an approximate $130,000
increase in integrated prepaid revenues offset by an approximate $525,000
decline in postpaid revenues. The approximate 15% increase in integrated
prepaid revenues between periods came from calls generated from the Company's
payphones and communication centers in Mexico, which continue to be one of the
Company's competitive advantages in Mexico. The Company's decline in postpaid
revenues was a result of several factors. As the Company continued its focus of
providing revenues from its own payphones and communication centers, it de-
emphasized revenues generated from third-party owned premises, because of higher
costs associated with these calls. The Company also experienced a decline in its
operator services calls as new services such as prepaid cellular were introduced
into the market by the Company's competitors and Mexican cellular providers
recently introduced "calling party pays". These two factors led to a tremendous
increase in cellular traffic in Mexico and the resultant congestion hindered the
ability of the Company to complete operator assisted calls from certain of its
payphones, which use cellular access to transport calls.
Revenues from the Company's e-commerce subsidiary GlobalSCAPE, Inc.
increased 39% between quarters from approximately $556,000 to approximately
$773,000 as GlobalSCAPE continued to increase the rate at which users download
its products. Each month during the quarter ended October 31, 1999, the Company
produced an all-time record number of downloads culminating with a record
740,000 downloads in October. Downloads serve not only as the primary driver for
product registration revenues but increase GlobalSCAPE's targeted audience for
banner advertisements. GlobalSCAPE began selling banner advertisements in April
1999, and for the quarter ended October 31, 1999, advertising revenues
represented approximately 15% of the total e-commerce revenues.
Cost of Services. Cost of services remained flat at $6.5 million between
quarters but increased as a percentage of revenues from 64% to 69% between
quarters. Cost of services on the Company's e-commerce subsidiary declined from
28% to 3% between quarters, due to its purchase of the source code to CuteFTP in
January 1998, which resulted in the elimination of royalty payments associated
with its sale and distribution. Cost of services on the Company's telco business
increased from 66% to 75% between quarters. This increase was primarily due to
the pricing pressures related to the Company's carrier services business as well
as costs related to reserve capacity held by the Company during the period. The
completion of the Company's fiber-based international network in July 1999 left
the Company with excess satellite capacity during the quarter. Effective October
1999 the Company restructured its satellite bandwidth contract resulting in
lower short-term financial obligations while still allowing the Company the
flexibility and additional capacity it will need in both the near and long-term
to achieve its business plan. The Company experienced a slight decline in the
cost of services percentage related to its call services business as it has
continued to challenge underlying carrier costs. Management believe that the
further build-out of its network, its increased focus on retail-based call
services and by shifting traffic from third-party owned networks to its own
networks that it will be able to maintain a competitive advantage over its
competitors in its targeted markets. The Company's telco gross margins remain
well above that of the average of the companies in its peer group.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
increased 9%, or approximately $265,000 between periods, due primarily to
increased personnel and costs related to the
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Company's e-commerce subsidiary GlobalSCAPE subsequent to October 1998, related
to the introduction of new products and the enhancement of its current products.
As mentioned earlier, downloads of its products, the primary driver for both its
product registration and advertising revenues continued to increase throughout
the year with October's downloads of 740,000 representing the fourth consecutive
month of record downloads. SG&A expenses related to the Company's telco
operations remained flat between periods as the Company incurred non-recurring
costs related to the integration of its Mexican operations. This integration has
resulted in the termination of approximately 40 employees to date, each of whom
must be paid three months of severance in accordance with Mexican law. The
Company expects to have completed the integration of its Mexican operations and
the close of its Guadalajara office by December 31, 1999.
Bad Debt Expense. Bad Debt Expense declined from $224,000 to $120,000
between periods due to the decline in the Company's postpaid call services
business between quarters.
Depreciation and Amortization. Depreciation and amortization rose
approximately $259,000 between periods, The increased depreciation and
amortization is attributable to an approximate $2.7 million increase in fixed
assets between October 31, 1998 and October 31, 1999 as well as increased
amortization related to the Company's acquisition of the source code to CuteFTP.
Operating Loss. The Company's operating loss increased $1.2 million from
the first quarter of fiscal 1999 to the first quarter of fiscal 2000 primarily
due to decreased revenues, increased selling, general and administrative
expenses and increased depreciation and amortization.
Other Income(expense). Other income (expense) decreased approximately
$90,000 between years. This decrease was principally attributable to the
increase in interest expense from approximately $415,000 for the quarter ended
October 31, 1998 to approximately $488,000 for the quarter ended October 31,
1999.
Preferred Stock Dividends. During the first quarter of fiscal 2000, the
Company recorded approximately $1.3 million of expense related to cumulative
convertible preferred stock. In addition to cumulative dividends on its Series
A, Series B and Series C Preferred Stock, which are accrued at 10%, 6% and 6%,
respectively, per month the Companyhas recorded amortization related to a
discount or "beneficial conversion feature" associated with the issuance of its
preferred stock of approximately $1.6 million related to its Series A Preferred
Stock, which is being amortized over a twelve-month period, $1.1 million related
to its Series B Preferred Stock, which is being amortized over a three-month
period and approximately $130,000 related to its Series C Preferred Stock, which
is being amortized over a three-month period. The Company completed the
amortization of the discount related to its Series B Preferred Stock in the
first quarter of fiscal 2000.
Net Loss. The net loss for the three months ended October 31, 1999
increased approximately $2.6 million from $642,000 to $3.2 million. The
increased net loss was due to decreased revenues, increased selling, general and
administrative expenses, increased depreciation and amortization and the
preferred stock dividends.
Liquidity and Capital Resources
During the quarter ended October 31, 1999, the Company produced positive
cash flows from operations of approximately $444,000 as compared to negative
cash flows from operations of approximately $124,000 for the previous year's
quarter. The positive cash flows from operations were
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primarily a result of an increase in the Company's payable and accrued liability
position from July 31, 1999 to October 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.
During the quarter ended October 31, 1999, the Company acquired
approximately $248,000 in equipment which was not financed through capital lease
or financing arrangements. Additionally, the Company paid approximately $276,000
towards its capital lease obligations and an additional $170,000 towards its
note payables during the three months ended October 31, 1999.
In an effort to improve its working capital position, the Company raised
approximately $420,000 in September 1999, net of issuance costs, in a private
placement of preferred stock, and an additional $42,000 was raised through the
exercise of warrants and options.
The net result of the Company's operating, investing and financing
activities during the quarter was a working capital deficit at July 31, 1999 of
approximately $10.3 million and cash on hand of approximately $513,000.
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. The Company
anticipates converting the total liability including accrued interest to equity
prior to its maturity. The Company's current obligations also include the total
obligation under its debt facility with NTFC Capital Corporation because of the
Company's non-compliance with the EBITDA covenant of the debt facility as of
October 31, 1999. Although the Company does not anticipate NTFC Capital
Corporation calling the amounts due under the debt facility, the Company has
classified the debt as being current in accordance with generally accepted
accounting principles. The Company is currently in the process of obtaining a
formal waiver from the lender, and is also reviewing the covenant requirements
in the future for possible adjustment.
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
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capital to assist it in doing so, although no assurance may be given that it
will be able to do so. In an effort to meet its financial needs going forward,
the Company has engaged the investment banking firm of Gerard, Klauer Mattison &
Co. ("GKM"). GKM will assist the Company in finding and securing financial and
strategic relationships. The Company has also engaged the investment banking
firm of SunTrust Equitable Securities to assist it in, among other things,
raising private or public funds for GlobalSCAPE. However, there can be no
assurance that such funds will be raised. While the Company to work with both
GKM and SunTrust Equitable Securities in forming medium and long-term financing
solutions, it may be necessary for the Company to continue to access debt and/or
equity capital in the near-term.
Inflation/Foreign Currency
Inflation has not had a significant impact on the Company's operations.
With the exception of integrated prepaid revenues from the Company's
communication centers and payphones, almost all of the Company's revenues are
generated and collected in U.S. dollars. Integrated prepaid services from the
Company's communication centers and payphones are provided 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 99% complete in achieving Year 2000 readiness, and will be Year
2000 ready before the end of December 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
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is relying on representations and warranties of third parties that are beyond
the Company's control. A disruption of business operations could have a material
adverse effect on the Company's financial performance.
The Company has expended approximately $100,000 in its Year 2000 program to
date, and does not expect to experience any material additional cost.
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
The exhibits listed below are filed as part of this report.
Exhibit
Number
- ------
11 Computation of Earnings per Share (Exhibit to Form 10-Q filed
December 15, 1999)
27 Financial Data Schedule (Exhibit to Form 10-Q filed December 15,
1999)
(b) Current Reports on Form 8-K.
None.
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AMERICAN TELESOURCE INTERNATIONAL INC.
(Registrant)
Date: April 13, 2000 By: /s/ H. Douglas Saathoff
------------------------
Name: H. Douglas Saathoff
Title: Chief Financial Officer
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