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As filed with the Securities and Exchange Commission on January 11, 2000
Registration Number 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
AMERICAN TELESOURCE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
74-2849995
(I.R.S. Employer Identification Number)
12500 Network Boulevard, Suite 407, San Antonio, Texas 78249
(210) 558-6090
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Arthur L. Smith, Chief Executive Officer
12500 Network Boulevard, Suite 407, San Antonio, Texas 78249
(210) 558-6090
(Name, address, including zip code and telephone number,
including area code, of agent for service)
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement.
If only the securities being registered on this Form are being offered pursuant
to a dividend or interest reinvestment plans, please check the following box.
/_/
If any of the securities being registered on this Form are to be offered on a
delayed or continuos basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. /_/
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. /_/
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /_/
CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Title of Amount Maximum Maximum Amount of
Securities To be Offering Price Aggregate Registration
To be Registered Registered Per Share Offering Price Fee (3)
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<S> <C> <C> <C> <C>
Common stock issuable upon conversion of
convertible preferred stock (1) 984,640 $1.10 $1,083,104 $303.27
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Common Stock to be paid as dividend on
convertible preferred (1) 118,157 $1.10 $ 129,973 $ 36.39
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Common stock issuable upon exercise of
warrants granted as placement fee (2) 50,000 $1.10 $ 55,000 $ 15.40
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Common stock issuable as placement fee (2) 19,693 $1.10 $ 21,662 $ 6.07
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Common Stock issuable upon exercise of
warrants (2) 40,000 $1.10 $ 44,000 $ 12.32
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(1) Calculated pursuant to Rule 457 (c), using the average of the high and low
prices reported on January 10, 2000, solely for the purpose of calculating
the Registration Fee.
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(2) Calculated pursuant to Rule 457 (g) (3), using the average of the high and
low prices reported on January 10, 2000, solely for the purpose of
calculating the Registration Fee.
(3) A fee of $256.16 was previously paid in conjunction with the Company's S-3
filing filed on October 26, 1999. A balance of $117.29 remains to be paid
with this filing.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PROSPECTUS NOT COMPLETE
1,212,490 Shares of Common Stock
AMERICAN TELESOURCE INTERNATIONAL, INC.
Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 8.
The selling shareholders identified on page 14 of this prospectus are
offering these shares of common stock. For additional information on the
methods of sale, you should refer to the section entitled "Plan of Distribution"
on page 15. We will not receive any of the proceeds from the sale of the common
stock by the selling shareholders.
Our common stock is traded on the National Association of Securities
Dealers, Inc. Over-the-Counter Bulletin Board under the symbol "AMTI." On
January 10, 2000, the last reported bid price of our common stock was $1.10 per
share.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is January 11, 2000.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
FORWARD LOOKING STATEMENTS............................................................ 1
RELY ONLY ON THIS PROSPECTUS.......................................................... 1
ATSI.................................................................................. 1
RISK FACTORS.......................................................................... 8
EMPLOYEES............................................................................. 12
PROPERTIES............................................................................ 12
LEGAL PROCEEDINGS..................................................................... 12
USE OF PROCEEDS....................................................................... 13
COMMON STOCK ISSUED................................................................... 13
SELLING SHAREHOLDERS.................................................................. 14
PLAN OF DISTRIBUTION.................................................................. 15
MARKET FOR REGISTRANT'S COMMON EQUITY................................................. 16
SELECTED FINANCIAL AND OPERATING DATA................................................. 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................................. 17
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.. 26
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................................... 26
EXECUTIVE COMPENSATION................................................................ 29
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................ 32
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................... 33
LEGAL MATTERS......................................................................... 34
EXPERTS............................................................................... 34
WHERE YOU CAN FIND MORE INFORMATION................................................... 34
INDEX TO FINANCIAL STATEMENTS......................................................... 36
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FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated by reference in this
prospectus contain "forward-looking statements." "Forward looking statements"
are those statements which describe management's beliefs and expectations about
the future. We have identified forward-looking statements in this prospectus by
using words such as "anticipate," "believe," "could," "estimate," "may,"
"could," "expect," and "intend." Although we believe these expectations are
reasonable, our operations involve a number of risks and uncertainties,
including those described in the Risk Factors section of this prospectus.
Therefore, these types of statements may prove to be incorrect. We do not
promise to update any forward-looking statements, even if new information or
future events indicate that these statements will prove to be incorrect.
RELY ONLY ON THIS PROSPECTUS
You should rely only on the information provided or incorporated by
reference in this prospectus or any supplement. We have not authorized anyone to
provide you with different information. This prospectus may be used only in
states and other jurisdictions where it is legal to sell the common stock. The
information contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or the sale of
any shares.
ATSI
American TeleSource International, Inc. ("ATSI") is a telecommunications
company, focusing on the market for wholesale and retail services between the
United States and Latin America, and within Latin America. In 1993, we began
assembling a framework of licenses, interconnection and service agreements,
network facilities and distribution channels so that we would be in a position
to take advantage of the de-monopolization of the Latin American
telecommunications market, as well as the increasing demand for services in this
market. Most of our current operations involve services between the U.S. and
Mexico or within Mexico. We have some operations in Central America as well, and
may expand our operations in the rest of Latin America as the regulatory
environment permits.
We originate retail traffic in Mexico from our public payphones and
casetas. Casetas are indoor calling centers where travelers or the large portion
of the Mexican population that does not have a telephone may place or receive
calls or faxes. We originate retail traffic in the U.S. with our MEXICOnnect/SM/
service (1010-624) and One Plus residential and commercial long distance
services. We carry wholesale traffic into Mexico for other U.S. carriers who
lack transmission facilities or require additional capacity. We also provide
private network services to companies needing reliable private communications
within Mexico and Central America and between Mexico or Central America and the
United States.
We also own a subsidiary, GlobalSCAPE, Inc., ("GlobalSCAPE") which sells
its proprietary Internet productivity software, CuteFTP/TM/, CuteHTML/TM/ and
CuteMAP/TM/.
We began operations in 1994 as a Canadian holding company, Latcomm
International, Inc. with a Texas operating subsidiary, Latin America Telecomm,
Inc. Both corporations were renamed "American TeleSource International, Inc." in
1994. In May 1998, the Canadian corporation completed a share exchange with a
newly formed Delaware corporation, also called American TeleSource
International, Inc., which resulted in the Canadian corporation becoming the
wholly owned subsidiary of the Delaware corporation. Our principal operating
subsidiaries are:
. American TeleSource International de Mexico, S.A. de C.V., which we formed
in 1995 to further position ourselves in the Mexican and Latin American
market;
. Sistema de Telefonia Computarizada, S.A. de C.V., which we acquired in
August 1997; this subsidiary owns 126 casetas in 66 cities in Mexico;
. Servicios de Infraestructura, S.A. de C.V., which we acquired in June 1997;
this subsidiary owns certain transmission equipment and valuable long term
licenses in Mexico;
. TeleSpan, Inc., which we formed in February 1998 to carry our wholesale and
private network services traffic between the U.S. and Latin America; and
. GlobalSCAPE, Inc., which we formed in April 1996 to implement Internet
strategies, which are not currently consistent with our core business. We
are currently investigating various options to divest ourselves of this
business, or to distribute some of the ownership of this business to our
shareholders, in an effort to maximize shareholder value.
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Strategy and Competitive Conditions
ATSI's strategy is to position itself to take advantage of the
demonopolization 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
monopolies. Although these companies failed to satisfy the demand for services
in their countries, the regulatory scheme effectively prevented competition by
foreign carriers such as ATSI. 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
. 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 such as
ATSI 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, more expensive circuit-switched
systems.
ATSI 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 ATSI 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 licenses to provide long
distance service to competing companies, and has licensed at least 15 new long
distance providers. Several of these new license holders are Mexican based
affiliates of top tier U.S. carriers such as MCI/Worldcom 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. ATSI began assembling a framework of
licenses, interconnection and service agreements, network facilities, and
distribution channels in Mexico in 1993 in anticipation of the demonoplization
of this market. In 1994, ATSI began providing private network services between
the U.S. and Mexico via satellite. Since then, ATSI 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. ATSI has also invested in its own 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, ATSI 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 ATSI applied
for its own long distance license, which, if granted, will permit ATSI to
interconnect directly with the local network and build out its own long distance
network, thereby reducing costs further. ATSI 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. ATSI
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. ATSI 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, ATSI 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.
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ATSI 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 ATSI's "borderless" concept of seamless function, regardless
of the user's location north or south of the U.S./Mexico border. ATSI will use
its existing retail distribution network, and may pursue acquisitions of
established distribution channels from others. ATSI 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 ATSI 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.
ATSI 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, ATSI plans to explore ways to
exploit its wholesale operation without the investment of significant new
resources (see Network Management Services - Carrier Services).
Although ATSI has succeeded in obtaining interconnection agreements with
various Mexican-based providers that permit ATSI to terminate northbound traffic
in the U.S., it has not realized substantial revenue from these arrangements.
ATSI 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
ATSI's Mexican retail distribution network consists of 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. ATSI's casetas offer local, intra-
Mexico and international long distance calling, as well as facsimile service.
ATSI is the largest caseta operator in Mexico with approximately 126 casetas in
66 cities operating under the trade name "Computel/TM/". 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 ATSI 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, ATSI 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. ATSI 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
Computel/TM/ 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.
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 ATSI
expects many more prepaid card vendors to enter that market. ATSI 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
ATSI 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. ATSI also has pay telephones in the Mexico City airport and Mexico City's
mass transit metro system
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transfer stations. All of ATSI's pay telephones are "intelligent" phones,
meaning that certain features are fully automated, reducing operating costs.
ATSI's telephones accept pesos and U.S. quarters. Customers may also access an
ATSI operator for assistance in placing collect, third party, person-to -person
calls or credit card calls.
ATSI markets its pay telephone services in Mexico through direct sales
efforts as well as some independent marketing representatives working on a
commission basis. ATSI 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 ATSI
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. ATSI believes it is the second largest
provider after Telmex in the tourist markets, where it has focused its efforts.
ATSI'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, ATSI 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
In the presentation of its financial results, ATSI divides its revenues
into three categories:
. Network Management Services, which includes Carriers Services and Private
Network Services
. Call Services, which includes Integrated Prepaid and Postpaid
. Electronic Commerce.
Network Management Services
Carrier Services
ATSI 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 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 ATSI experienced increased
volumes in this line of business during the year, it realized little additional
revenue. ATSI 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, ATSI
believes it will generate opportunities to transport traffic for Mexican
carriers. ATSI should be able to use the increased volumes to negotiate more
favorable termination costs in Mexico, and if ATSI receives a Mexican long
distance license, it will be able to substantially cut its costs for carrying
this traffic.
Private Networks
ATSI 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, ATSI did not devote significant resources toward
the development of this business in Mexico. However, expansion of this line of
business is consistent with ATSI'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.
ATSI 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.
ATSI competes with MCI/Worldcom, Americatel, Pointe Communications
Corporation, and Telscape International Inc., among others, in providing private
network services. Factors contributing to ATSI's competitiveness in the private
network business include reliability, network quality, speed of installation,
and in some cases, geography, network size, and hauling capacity. ATSI believes
it has the reputation as being a responsive service provider capable of
processing all types of network traffic.
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Call Services
Postpaid
ATSI'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
ATSI's pay telephones and casetas in Mexico. ATSI 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. ATSI pays these third parties a
commission based on the revenue generated by the call traffic they send. These
postpaid calling services are billed to the consumer or other appropriate party
subsequent to the time the call is placed.
As part of its ongoing efforts to minimize costs, ATSI began outsourcing
its live operator services in July 1999, and executed an agreement with another
operator service provider to handle ATSI's call services traffic on a
transaction basis. The vendor will continue ATSI's practice of providing
bilingual service 24 hours per day, 7 days per week.
ATSI's owned retail distribution network of payphones and casetas 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. ATSI 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, ATSI 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.
During fiscal 1999, ATSI provided direct dial services (long distance calls
which do not require live or automated operator assistance) to a small extent in
the United States. ATSI provided 1+ and MEXICOnnect 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 ATSI's network for all long distance calls made from their telephone number,
eliminating the need to dial any extra digits to reach ATSI's network.
ATSI competes with large carriers such as AT&T, MCI/Worldcom, and 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. ATSI 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, ATSI's
charges are included on the customer's bill from the local phone company. ATSI
also offers the convenience of bilingual customer service. ATSI 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
ATSI'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, ATSI has greater
flexibility in adjusting rates, as it has greater control over its own network.
Integrated Prepaid
The Company also generates call services revenues from direct dial calls
made in Mexico from ATSI's own communication centers and pay telephones. These
integrated prepaid revenues are paid for by the consumer prior to or at the time
the calls are placed. In Mexico, the Company competes with other payphone and
caseta operators, including Telmex, the form monopoly.
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
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from Computel's offices in Guadalajara with oversight from ATSI-Mexico in Mexico
City. ATSI 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 ATSI's core business. GlobalSCAPE's
revenues are attributable to sales of Internet productivity software, primarily
its flagship product CuteFTP/TM/ that 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. In fiscal 1999, GlobalSCAPE also
released two new products, CuteHTML/TM/ and CuteMAP/TM/, began distributing
CuteFTP in CompUSA stores, and began realizing revenue from advertisements
placed in its software.
ATSI announced in February, 1999 that it was considering a spin off or
public offering of GlobalSCAPE's stock, and ATSI 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.
GlobalSCAPE's flagship product, CuteFTP/TM/, is a Windows/R/-based file
transfer protocol (FTP) utility allowing users the ability to transfer and
manage files via the Internet, including media files, web pages, software, and
graphics. ATSI believes that CuteFTP/TM/ has 30% of the U.S. market share for
FTP programs. ATSI'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, 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/TM/'s primary competitors are WS_FTP Voyager and
Bulletproof FTP. While many FTP products have mimicked CuteFTP/TM/'s features,
they are not commercially successful due to their late arrival to the
marketplace and lack of support infrastructure. CuteHTML/TM/ and CuteMAP/TM/,
although relatively new to the market, have the advantage of being able to
piggyback on the success of CuteFTP/TM/ through product integration and cross-
marketing efforts.
Network
ATSI has established a technologically advanced network having an "ATM"
backbone with satellite and fiber optic arms. ATM stands for "Asynchronous
Transfer Mode," and is a packet switching technology that allocates bandwidth on
demand for high-speed connection of voice, data and video services. This
technology allows ATSI 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. ATSI's network also
employs compression technology to carry greater volumes on the same facilities.
ATM is compatible with Internet protocols and Frame Relay, permitting ATSI to
explore even more cost-effective transmission methods in the future.
Generally, ATSI's strategy is to use the fiber optic arm of its network 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. ATSI's fiber route runs from its
facility at the Infomart in Dallas, Texas to Mexico City, Mexico. ATSI has
satellite transmission and receiving equipment in:
. San Antonio, Texas
. Mexico City, Monterrey, and Cancun, Mexico
. Guatemala City, Guatemala
. San Salvador, El Salvador, and
. San Jose, Costa Rica.
6
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ATSI leases fiber capacity from third parties, primarily Bestel. ATSI
leases satellite capacity on the Mexican satellites Solidaridad I and II, from
Satelites Mexicanos, S.A. de C.V. ("SATMEX").
ATSI owns switching and other equipment in the U.S. and Mexico. In April
1999, ATSI began using its new Nortel DMS 300/250 International Gateway Switch
in its Dallas location. This advanced switch will permit ATSI to deploy the new
retail and wholesale products that are key to its competitive strategy.
All aspects of ATSI's owned network facilities are designed to allow for
modular expansion, permitting ATSI to increase capacity as needed.
ATSI must contract with others to complete the intra-Mexico and domestic
U.S. portions of its network. ATSI 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. ATSI
has applied for its own Mexican long distance license, 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. ATSI 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., ATSI purchases long
distance capacity from various companies.
ATSI 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.
Licenses/Regulatory
United States
Pursuant to Section 214 of the Communications Act of 1934, the Federal
Communications Commission ("FCC") has granted ATSI global authority to provide
switched international telecommunications services between the U.S. and certain
other countries. ATSI maintains informational tariffs on file with the FCC for
its international retail rates and charges.
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 ATSI. ATSI cannot predict the ultimate effect of these various
changes. One aspect of the Telecom Act that is of particular importance to ATSI
is that it allows the former Bell local monopolies such as Southwestern Bell and
Ameritech to offer "in region" long distance service once they meet certain
requirements. "In region" means that they will be permitted to offer long
distance within their traditional local service franchise area, allowing them to
offer an additional service to their already-established customer base. The
rules for competition are still being decided by regulators and the courts.
Although no Bell companies have been permitted to provide in-region long
distance service at this time, ATSI anticipates that Southwestern Bell may be
granted permission in the near term. Given their extensive resources and
established customer bases, the entry of the Bell companies into the long
distance market, specifically the international market, will create increased
competition for ATSI.
The International Settlements Policy (the "ISP") indirectly regulates the
prices that the dominant carriers such as AT&T may charge for international
calling. The FCC recently enacted certain changes in its rules which made it
possible for the large carriers to lower their international prices, which has
contributed to the substantial downward pricing pressure facing ATSI in the
wholesale carrier market.
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). ATSI 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 ATSI's Mexican subsidiaries the following licenses:
Comercializadora License - a 20-year license issued in February 1997
allowing for nationwide resale of local calling and long distance services from
public pay telephones and casetas.
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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 ATSI to provide services to multiple users/customers through a
single centralized satellite earth station.
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 ATSI'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 ATSI's other licenses to build a hybrid
nationwide network with international access to the U.S.
Value-Added Service License - an indefinite license allowing ATSI 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 ATSI is not able to determine at
this time.
Other Foreign Countries
In addition to Mexico, ATSI 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. ATSI 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. ATSI 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.
RISK FACTORS
The purchase of our common stock is very risky. You should not invest any
money that you cannot afford to lose. Before you buy our stock, you should
carefully read this entire prospectus. We have highlighted for you what we think
are the major risks which could most affect our business.
. It is difficult for us to compete with much larger companies such as AT&T,
Sprint and MCI/Worldcom
The large carriers such as AT&T, Sprint and MCI/Worldcom have more extensive
owned networks than we do, which enables them to control costs more easily
than we can. They are also able to take advantage of their large customer base
to generate economies of scale, substantially lowering their costs. Therefore,
they are better able than we are to lower their prices as needed to retain
customers. In addition, these companies have stronger name recognition and
brand loyalty, as well as a broader portfolio of services, making it difficult
for us to attract new customers. We believe we can successfully compete by
targeting the Latino population in the U.S. and by introducing innovative
services. However, some larger companies have announced that they intend to
enter the Latino market in the U.S. In Mexico, we compete with the former
Mexican telephone monopoly, Telmex, which has substantially greater resources
than we do.
Mergers, acquisitions, and joint ventures in our industry have created and
will continue to create more large and well positioned competitors. As a
result, we won't have as many potential customers for our wholesale network
services.
. The market for wholesale services is extremely price sensitive and there
may be downward pricing pressure in this market making it difficult for us to
retain customers and generate adequate revenue from this service.
Industry capacity along the routes serviced by ATSI is generally growing as
fiber optic cable is activated. This increased capacity along with intense
competition among carriers in this market has created severe downward pricing
pressure. For example, from October 1998 to October 1999, the prevailing price
per minute to carry traffic from the U.S. to Mexico declined by approximately
45%. Generally, our wholesale customers are able to re-route their traffic to
other carriers very quickly in response to price changes. Although we carried
almost twice as much wholesale traffic in fiscal year 1999 than in fiscal year
1998, we realized about the same amount of revenue. Our recent network
enhancements have resulted in increased volumes, and we believe we will
continue to increase our wholesale volumes.
. The telecommunications industry has been characterized by continual
technological change. We may not be able to raise the money we need to acquire
the new technology necessary to keep our services competitive.
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To compete successfully in the wholesale and retail markets, we must maintain
the highest quality of service. Therefore, we must continually upgrade our
network to keep pace with technological change. This is expensive, and we do
not have the substantial resources that our large competitors have. We believe
that our investment in our current network infrastructure will allow us to
upgrade and retain high quality transmission without a major network overhaul
for the next several years.
. We may not be able to generate the sales volume we need to recover our
substantial capital investment in our network
We have and must continue to spend substantial sums to keep our network up to
date and to expand our network. Therefore, to attain profitability, we must
generate a large volume of sales. We compete for wholesale and retail
customers with larger, and better known companies making it relatively more
difficult for us to attract new customers for our services.
. If we do not raise additional capital we may go out of business
We have never been profitable and do not expect to become profitable in the
near future. We have invested and will continue to invest significant amounts
of money in our network and personnel in order to maintain and develop the
infrastructure we need to compete in the markets for our services. In the past
we have financed our operations almost exclusively through the private sales
of securities. Since we are losing money, we must raise the money we need to
continue operations and expand our network either by selling more securities
or borrowing money. We may not be able to sell additional securities or borrow
money on acceptable terms. If we are not able to raise additional money, we
will not be able to implement our strategy for the future, and we will either
have to scale back our operations or stop operations.
If we sell more common stock the interest of our existing shareholders will be
diluted, meaning that their percentage of ownership of ATSI will be reduced,
and the price of our common stock may go down. If we borrow money, our expense
in running the business will be increased, requiring us to generate even more
revenue to generate a profit.
. A large portion of our revenue is concentrated among a few customers, making
us vulnerable to sudden revenue declines
Our revenues from wholesale services currently comprise about 60% of our total
revenues. We currently have seven customers for our wholesale services. The
volume of business sent by each customer fluctuates, but this traffic is often
heavily concentrated among three or four customers. In the past, two of these
customers have been responsible for 50% of this traffic. If we are not able to
continue to offer competitive prices, these customers will find some other
supplier and we will lose a substantial portion of our revenue very quickly.
. We may not be able to collect large receivables, which would create serious
cash flow problems
Our wholesale network customers generate large receivable balances, often over
$500,000 for a two-week period. We incur substantial direct costs to provide
this service since we must pay our carrier in Mexico to terminate these calls.
If a customer fails to pay a large balance on time, we will have difficulty
paying our carrier in Mexico on time. If our carrier suspends services to us,
it will affect all our customers.
. Our auditors have questioned our viability
Our auditors' opinion on our financial statements as of July 31, 1999 calls
attention to substantial doubts as to our ability to continue as a going
concern. This means that they question whether we can continue in business. If
we cannot continue in business, our common stockholders would likely lose
their entire investment. Our financial statements are prepared on the
assumption that we will continue in business. They do not contain any
adjustments to reflect the uncertainty over our continuing in business.
. We do not expect to pay dividends
We have no plan to pay dividends in the near future.
. Our stock has been a penny stock which is more difficult to sell
Our common stock is a "penny stock." It is relatively difficult for an
investor to sell shares of a penny stock.
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A "penny stock" is any stock which falls below a selling price of $5.00 per
share in the public market. Our common stock has traded below $5.00 per share
since it began trading on the NASD Over-the-Counter Bulletin Board in January,
1998. It is much more difficult to sell a penny stock than stock that trades
on a national market or stock exchange because of the extra steps the
broker/dealer must take before selling the stock. A sale of penny stock does
not usually take place as quickly as a sale of shares that trade on a national
market or stock exchange. You may decide to sell your stock when the price is
high enough for you to make a profit on your investment, but by the time the
sale is complete, the price of the stock may have fallen to the point that you
have a loss on your investment. Also, because of the difficulty in dealing in
penny stock, many broker/dealers are unwilling to participate in buying and
selling our shares.
. Our common stock price is volatile, which makes it more difficult for your to
sell shares when you choose, at prices you find attractive.
Over the past year, the price of our common stock has fluctuated by as much as
100% within a 30 day period. See the section of this Prospectus entitled
"Market for Registrant's common Equity and Related Stockholder Matters" on
page 21 for more information on changes in our stock price over time. This
volatility, combined with the effect of the penny stock rules described above
may make it difficult for you to complete a sale of your shares at the price
you wish.
. Our stock price may fall if we fail to spin off GlobalSCAPE
We have announced that we are considering a spin off or public offering (or
combination of the two) of our subsidiary, GlobalSCAPE, and that we have
retained an investment banking firm to help us evaluate the alternatives in
achieving the appropriate value for GlobalSCAPE. If we do not complete this
type of transaction (or if we take too long to complete this transaction) our
stock price could fall. This transaction could be delayed or cancelled if we
are unable to find an underwriter, we are unable to negotiate a favorable
offering price for the stock of GlobalSCAPE, there is a lack of public
interest in such a transaction, or management and the Board determine that
this transaction involves excessive operational and economic risk.
. We may not be able to attract and retain qualified personnel since we are not
as attractive an employer as other, larger carriers
We compete for technical and managerial personnel with other
telecommunications companies. Many of these have greater resources than we do
and are able to offer more attractive compensation packages, as well as the
security of working for an established company. We have been able to attract
qualified personnel in part by granting incentive stock options, and believe
we will be able to continue to do so.
. We may not be able to lease transmission facilities we need at cost-effective
rates
We do not own all of the transmission facilities we need to complete calls.
Therefore, we depend on contractual arrangements with other telecommunications
companies to complete our network. For example, although we own the switching
and transport equipment needed to receive and transmit calls via satellite and
fiber optic cable, we do not own a satellite or any fiber optic cable and must
therefore lease transmission capacity from other companies. We may not be able
to lease facilities at cost-effective rates in the future or enter into
contractual arrangements necessary to expand our network or improve our
network as necessary to keep up with technological change.
There are a limited number of suppliers for the products and services we need
to complete our network. We may have difficulty finding alternate suppliers if
any of our suppliers go out of business or are acquired by our competitors.
Also if certain current suppliers fail to honor their contractual commitments,
we could be very seriously affected.
. We may not be able to pay our suppliers on time, causing them to discontinue
critical services
We have not always paid all of our suppliers on time due to temporary cash
shortfalls. These suppliers have given us payment extensions in the past, but
critical suppliers may discontinue service if we are not able to make payments
on time in the future. In addition, equipment vendors may refuse to provide
critical technical support for their products if they are not paid on time
under the terms of support arrangements. Our ability to make payments on time
depends on our ability to raise additional capital or improve our cash flow
from operations.
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. We may not be able to make our debt payments on time, causing our lenders
to repossess critical equipment
We purchased some of our significant equipment with borrowed money. The
lenders have a security interest in the equipment to secure repayment of the
debt. This means that the lenders may take possession of the equipment and
sell it to repay the debt if we do not make our payments on time. We have not
always paid all of our equipment lenders on time due to temporary cash
shortfalls. These lenders have given us payment extensions in the past, but
they may exercise their right to take possession of certain critical equipment
if we are not able to make payments on time in the future. Our ability to make
our payments on time depends on our ability to raise additional capital or
improve our cash flow from operations.
. We may have service interruptions and problems with the quality of
transmission, causing us to lose call volumes and customers
To retain and attract customers, we must keep our network operational 24 hours
per day, 365 days per year. We have experienced service interruptions and
other problems that affect the quality of voice and data transmission. To
date, these problems have been temporary. We may experience more serious
problems. In addition to the normal risks that any telecommunications company
faces (such as fire, flood, power failure, equipment failure), we may have a
serious problem if a meteor or space debris strikes the satellite that
transmits our traffic, or a volcanic eruption or earthquake interferes with
our operations in Mexico City. We have the ability to transmit calls via
either the satellite or fiber optic portion of our network, and this
redundancy should protect us if there is a problem with one portion of our
network. However, a significant amount of time could pass before we could re-
route traffic from one portion of our network to the other, and there may not
be sufficient capacity on only one portion of the network to carry all of our
traffic at any given time.
To stay competitive, we will continue to integrate the latest technologies
into our network. We are currently implementing "packet switching" transport
capabilities such as Asynchronous Transfer Mode and we will continue to
explore new technologies as they are developed. The risk of network problems
increases during periods of expansion and transition to new technologies.
. Changes in telecommunications regulations may harm our competitive position
The telecommunications industry in the United States is regulated by the
Federal Communications Commission (the "FCC") and by the public utilities
commissions in the various states. As a result of the deregulation required by
the Telecommunications Act of 1996, the FCC has issued, and continues to
issue, major changes to their regulations. These new regulations have
significantly changed and will continue to change the competitive environment.
For example, FCC regulations now permit the regional Bell operating companies
(former local telephone monopolies such as Southwestern Bell) to enter the
long distance market if certain conditions are met. The entry of these
formidable competitors into the long distance market will make it more
difficult for us to establish a retail customer base. Other new regulations
affect the pricing for services that we purchase from others. Pricing changes
could put us at a relative disadvantage to larger competitors. We cannot
predict what other changes there may be in the regulations or what effect
these changes will have on our business.
The Mexican telecommunications industry is also going through the process of
de-monopolization and regulatory change, and new laws and regulations there
could affect our business. These regulatory changes may not continue to
improve market conditions for us and, even if they do, we may not have the
opportunity to provide additional telecommunications services within Mexico
and between Mexico and other countries.
The international telecommunications industry is also governed by foreign laws
and treaties between the United States and other countries. Changes in these
laws or treaties may also affect the competitive environment.
. Our compliance with laws and regulations could be challenged
We believe that we are in compliance with all domestic and foreign
telecommunications laws that govern our current business. However, government
enforcement and interpretation of the telecommunications laws and licenses is
unpredictable and is often based on informal views of government officials and
ministries. This is particularly true in Mexico and certain of our target
Latin American markets, where government officials and ministries may be
subject to influence by the former telecommunications monopoly, such as
Telmex. This means that our compliance with the laws may be challenged. It
could be very expensive to defend this type of challenge and we might not win.
If we were found to have violated the laws that govern our business, we could
be fined or denied the right to offer services. To our knowledge, we are not
currently subject to any regulatory inquiry or investigation.
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. We may not be able to obtain new licenses we need to reduce costs and expand
our network
Our strategy for the future depends on obtaining a long distance concession
from the Mexican government. We may not be able to obtain this license, and if
we do not obtain this license, we may not be able to implement our strategy
for the future or continue to offer services at competitive prices. Our
strategy is to expand into other Latin American countries as regulatory
conditions in those countries permit. We may not be able to obtain the
licenses we need for this expansion.
. Our operations may be affected by political changes in Mexico and other
Latin American countries
The majority of our foreign operations are in Mexico. The political and
economic climate in Mexico and other Latin American countries is more
uncertain than in the United States and unfavorable changes could have a
direct impact on our operations in Mexico. For example, newly elected
government officials could decide to quickly reverse the deregulation of the
Mexican telecommunications industry economy and take steps to limit our
business, such as seizing our property, revoking our licenses, or modifying
our contracts with Mexican suppliers. A period of poor economic performance
could reduce the demand for our services in Mexico. There might be trade
disputes between the United States and Mexico which result in trade barriers
such as additional taxes on our services. The Mexican government might also
decide to restrict the conversion of pesos into dollars or restrict the
transfer of dollars out of Mexico. These types of changes, whether they occur
or are only threatened, would also make it more difficult for us to obtain
financing in the United States.
. If the value of the Mexican Peso declines relative to the Dollar, we will
have decreased earnings as stated Dollars
Approximately 20% of ATSI's revenue is collected in Mexican Pesos. If the
value of the Peso relative to the Dollar declines, that is, if Pesos are
convertible into fewer Dollars, then our earnings, which are stated in
dollars, will decline. We do not engage in any type of hedging transactions to
minimize this risk and do not intend to do so.
EMPLOYEES
At December 1, 1999, ATSI (excluding ATSI-Mexico) had 84 full-time
employees, of whom 9 were sales and marketing personnel, and 72 performed
operational, technical and administrative functions, and 3 part-time employees.
Of the foregoing, 22 were employed by GlobalSCAPE, and 7 were employed by
Sinfra. ATSI believes its future success will depend to a large extent on its
continued ability to attract and retain highly skilled and qualified employees.
ATSI considers its employee relations to be good. None of the aforementioned
employees belong to labor unions.
At December 1, 1999, ATSI-Mexico had 434 full-time employees of whom 375
were operators and 59 performed sales, marketing, operational, technical and
administrative functions. A portion of ATSI-Mexico's employees, chiefly
operators, belong to a union.
PROPERTIES
ATSI'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. ATSI 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, ATSI 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. ATSI's facility will consist of 15,050 square feet with annual rent
of $178,794 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.
LEGAL PROCEEDINGS
On January 29, 1999, one of ATSI's customers, Twister Communications, Inc.
filed a Demand for Arbitration seeking damages for breach of contract. The
customer claims that ATSI wrongfully terminated an International Carrier
Services Agreement executed by the parties in June 1998 under which ATSI
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 ATSI. ATSI 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
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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 ATSI for
services rendered plus interest, plus additional damages for fraud. An
arbitration panel was selected and the parties are now completing written
discovery.
While ATSI 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 ATSI's financial condition; until the arbitration proceedings
take place, ATSI 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 ATSI's results of operations.
On June 16, 1999, ATSI initiated a lawsuit against one of its vendors
claiming misrepresentation and breach of conduct. Under an agreement ATSI 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
ATSI's operational and sales goal for the year and the failure of its vendor to
provide the capacity led to ATSI negotiating an alternative agreement with
Bestel, S.A. de C.V. at a higher cost. While the total economic impact is still
being assessed, ATSI believes lost revenues and incremental costs are in excess
of $15 million. While ATSI's contract contains certain limitations regarding the
type and amounts of damages that can be pursued, ATSI has authorized its
attorneys to pursue all relief to which it is entitled under law. As such, ATSI
can not reasonably estimate the ultimate outcome of neither this lawsuit nor the
additional costs that may be incurred in the pursuit of its case.
USE OF PROCEEDS
The selling shareholders will receive the proceeds from the shares of
common stock. We will not receive any of the proceeds.
COMMON STOCK ISSUED
The common stock offered by this prospectus may be issued to the selling
stockholders pursuant to the terms of the following:
. shares of 6% Series C Cumulative Convertible Preferred Stock,
("Series C Preferred Stock") issued to The Shaar Fund on September
24, 1999,
. a Common Stock Warrant issued to The Shaar Fund on September 24,
1999,
. a Common Stock Purchase Warrant that may be issued to The Shaar Fund
if ATSI elects to redeem the Series C Preferred Stock,
. a Common Stock Purchase Warrant issued to Corporate Capital
Management LLC as commission on ATSI's 6% Series B Cumulative
Convertible Preferred Stock issuance,
. 19,693 shares of Common Stock issued to Corporate Capital Management
LLC as commission on ATSI's Series C Preferred Stock issuance.
Series C Preferred Stock
The Shaar Fund purchased 500 shares of Series C Preferred Stock for $1000
per share on September 24, 1999. The Shaar Fund may convert each share of Series
C Preferred Stock into that number of shares of common stock that is equal to
1000 divided by a "Conversion Price" that is the lesser of:
. $1.031 (the closing bid price of the common stock on the NASD Over-the-
Counter Bulletin Board on September 23, 1999), and
. seventy-eight percent (78%) of the average of the five lowest closing bid
prices of the common stock on the NASD Over-the-Counter Bulletin Board
during the ten trading day period immediately preceding the date of
conversion.
Therefore, the number of shares of common stock that The Shaar Fund may
acquire increases if the price of the common stock decreases. Although there is
no ceiling on the maximum number of shares of common stock that The Shaar Fund
may acquire, if the closing bid price for the common stock falls to $.85 or less
on any trading day, The Shaar Fund may not convert any Series C Preferred Stock
for a single period of forty-five days from that day. The Series C Preferred
Stock
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will never be convertible into fewer than 484,966 shares of common stock (i.e.,
the number of shares that may be acquired if the Conversion Price is $1.031).
Here are some examples of the number of shares of common stock that The Shaar
Fund may acquire, assuming different prices of the common stock:
<TABLE>
<CAPTION>
78% of Avg. of 5
Lowest Bid Prices
During 10 Trading
Days Preceding Closing Bid on Number of Shares of
Conversion September 23, 1999 Formula Common Stock
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
0.85 1.031 500,000 divided by 0.85 588,235
- ------------------------------------------------------------------------------------------------------------
1.01 1.031 500,000 divided by 1.01 495,050
- ------------------------------------------------------------------------------------------------------------
1.05 1.031 500,000 divided by 1.031 484,966
- ------------------------------------------------------------------------------------------------------------
2.00 1.031 500,000 divided by 1.031 484,966
- ------------------------------------------------------------------------------------------------------------
2.50 1.031 500,000 divided by 1.031 484,966
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The Shaar Fund may convert any of its shares of Series C Preferred Stock at any
time it elects after December 23, 1999, but any shares not converted by
September 24, 2001 must be converted by ATSI at the Conversion Price on that
day.
The Registration Rights Agreement signed by ATSI and The Shaar Fund at the time
of the sale of the Series C Preferred Stock requires ATSI to register that
number of common shares into which all of the shares of the Series C Preferred
Stock would be convertible at a Conversion Price of $.5078 (one-half of the
closing bid price of the common stock on the NASD Over-the-Counter Bulletin
Board on September 24, 1999). If the closing bid price for the common stock
falls below .80, ATSI is required to register additional shares of its common
stock based on an assumed Conversion Price of .30 per share.
ATSI must pay quarterly dividends on the Series C Preferred Stock at the rate of
6% per annum calculated on a value of $1000 per share. ATSI may elect to pay the
dividends in either cash or in shares of its registered common stock, valued at
the Conversion Price on each dividend payment date. We have included 118,157
shares of common stock in this prospectus and Registration Statement for the
payment of dividends on the Series C Preferred Stock.
The Registration Rights Agreement provides that we will indemnify The Shaar Fund
and its assignees against certain liabilities, including civil liabilities under
the Securities Act of 1933, as amended.
Series B Preferred Stock
On July 2, 1999, ATSI issued 2000 shares of 6% Series B Cumulative Convertible
Preferred Stock to The Shaar Fund. This Series B Preferred Stock has
substantially the same terms as the Series C Preferred Stock described in this
Prospectus, except that the formula for determining the conversion price
incorporates the closing bid price for the common stock on July 1, 1999 instead
of September 23, 1999. This transaction is described in more detail in our
Registration Statement on Form S-3 filed on August 18, 1999.
The Warrants
The Shaar Fund may elect to acquire up to 20,000 additional shares of common
stock at an exercise price of $1.19 per share under the terms of a Common Stock
Purchase Warrant issued on September 24, 1999. If ATSI elects to redeem the
Series C Preferred Stock, part of the redemption price is an additional warrant
for 20,000 shares on the same terms as the Common Stock Purchase Warrant. ATSI
is required to register 40,000 shares of its common stock for the exercise of
these warrants under the Registration Rights Agreement signed by The Shaar Fund
and ATSI at the time of the sale of the Series C Preferred Stock and the Common
Stock Purchase Warrant.
ATSI issued Corporate Capital Management a Common Stock Purchase Warrant for the
purchase of 50,000 shares of ATSI common stock at an exercise price of $1.25 as
a commission in connection with its issuance of its 6% Series B Cumulative
Convertible Preferred Stock on July 2, 1999. ATSI agreed to register the common
shares underlying this warrant as consideration for Corporate Capital
Management's services in connection with the issuance of the Series C Preferred
Stock.
SELLING SHAREHOLDERS
There are two selling shareholders, The Shaar Fund, Ltd., and Corporate
Capital Management, LLC. The selling shareholders and their affiliates have not
held any position, office or other material relationship, other than as a
shareholder, with ATSI during the three years preceding the date of this
prospectus. The shareholders, the amount of common stock
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<PAGE>
owned as of January 10, 2000, the maximum amount of common stock that may be
offered under the Registration Statement, and the percentage ownership in ATSI
as of January 10, 2000:
The amount of shares listed in the table below as "owned" by The Shaar Fund
includes the following:
. the remaining number of shares that The Shaar Fund may acquire under the
terms of Series B Preferred Stock assuming a conversion price of $0.7422,
. the number of shares that The Shaar Fund may purchase under the terms of
the Common Stock Purchase Warrant issued on July 2, 1999;
. the maximum number of shares that The Shaar Fund may acquire under the
terms of the terms of Series C Preferred Stock assuming a conversion price
of $0.5078; plus
. the number of shares that The Shaar Fund may purchase under the terms of
the Common Stock Purchase Warrant issued on September 24, 1999.
It does not include any shares of common stock that may be paid as a dividend on
the Series B Preferred Stock or the Series C Preferred Stock and does not
include the shares that The Shaar Fund could purchase under additional warrants
for 70,000 shares of common stock that ATSI would be required to issue if it
elected to redeem the Series B Preferred Stock and Series C Preferred Stock.
The amount shown as the maximum amount of common stock that the Shaar Fund
may offer under this Prospectus assumes that The Shaar Fund acquires all of the
common stock it may acquire under the terms of the Series C Preferred Stock at
an assumed conversion price of $0.5078, plus the number of shares that The Shaar
Fund may purchase under the terms of the Common Stock Purchase Warrant issued on
September 24, 1999.
The amount of shares listed in the table below as "owned" by Corporate
Capital Management and that may be offered under this prospectus includes the
following:
. the number of shares that Corporate Capital Management may purchase under
the terms of the Common Stock Purchase Warrant issued on July 2, 1999;
. the number of shares that Corporate Capital Management may purchase under
the terms of the Common Stock Purchase Warrant issued on September 24,
1999.
<TABLE>
<CAPTION>
Amount of Common Maximum Amount of % Ownership of
Stock Owned as of Common Stock that ATSI as of January
Name January 10, 2000 may be Offered 10, 2000
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
The Shaar Fund 2,233,568 1,004,640 4.2%
- ----------------------------------------------------------------------------------------------------------------------
Corporate Capital Management 69,693 69,693 Less than 1%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
PLAN OF DISTRIBUTION
The Registration Statement of which this prospectus forms a part has been
filed to satisfy registration rights held by the selling shareholders under
agreements between ATSI and the selling shareholders. To ATSI's knowledge, as of
this date, none of the selling shareholders has entered into any agreement,
arrangement or understanding with any particular broker or market maker with
respect to the shares offered by them, nor does ATSI know the identity of the
brokers or market makers which might participate in such an offering.
The shares being registered and offered may be sold from time to time by
the selling shareholders while the Registration Statement is in effect. The
selling shareholders will act independently of ATSI in making decisions with
respect to the timing, manner, and size of each sale. The sales may be made on
the NASD Over-the- Counter Bulletin Board or otherwise, at prices and on terms
then prevailing or at prices related to the market price, or in negotiated
transactions.
The shares may be sold by one or more of the following methods:
15
<PAGE>
. A block trade in which the broker-dealer engaged by a selling shareholder
would attempt to sell shares as agent but may position and resell a
portion of the block as principal to facilitate the transaction.
. Purchases by the broker-dealer as principal and resale by such broker or
dealer for its account according to this prospectus.
. ordinary brokerage transactions and transactions in which the broker
solicits purchasers.
To our knowledge, none of the selling shareholders has, as of the date of
this prospectus, entered into any arrangement with a broker or dealer for the
sale of shares through a block trade, special offering, or secondary
distribution of a purchase by a broker-dealer. In effecting sales, broker-
dealers engaged by a selling shareholder may arrange for other broker-dealers to
participate. Broker-dealers may receive commissions or discounts from a selling
shareholder in amounts to be negotiated.
In offering the shares, the selling shareholders and any broker-dealers who
execute sales for the selling shareholders may be deemed to be "underwriters"
within the meaning of the Securities Act of 1933 in connection with such sales,
and any profits realized by the selling shareholders and the compensation of
such broker-dealers may be deemed to be underwriting discounts and commissions.
We have agreed to keep the Registration Statement of which this prospectus
is a part effective until The Shaar Fund sells the shares of common stock
offered under this prospectus or until two years following the effective date of
the Registration Statement of which this prospectus is a part, whichever comes
first. No sales may be made pursuant to this prospectus after this date unless
we amend or supplement this prospectus to indicate that we have agreed to extend
the effective period.
We cannot assure you that any of the selling shareholders will sell any or
all of the shares of common stock registered in the Registration Statement.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ATSI's Common Stock is quoted on the NASD: OTCBB under the symbol "AMTI".
Prior to December 1997, ATSI'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
January 10, 2000 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 - ...............................$ 1 11/32 $ 45/64
Second - (through January 10, 2000)....$ 1 13/64 $ 49/64
At January 10, 2000 the closing price of ATSI's Common Stock as reported by
NSD:OTCBB was $1.10 per share. As of January 10, 2000, ATSI 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>
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 ATSI's Consolidated Financial Statements and the
Notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
For the three months
Years ended July 31, ending October 31,
1995 1996 1997 1998 1999 1998 1999
---- ---- ---- ---- ---- ---- ----
(In thousands of $, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Operating revenues:
Network management services $ 318 $ 2,614 $ 1,698 $ 13,362 $ 19,250 $ 6,713 $ 6,105
Call services 4,470 10,807 13,986 19,632 12,626 2,967 2,576
Internet e-commerce - 54 564 1,526 2,642 556 773
-------- -------- -------- -------- -------- -------- ---------
Total operating revenues 4,788 13,475 16,228 34,520 34,518 10,236 9,454
Operating expenses:
Cost of services 4,061 10,833 12,792 22,287 21,312 6,501 6,526
Selling, general and administrative 2,196 3,876 6,312 12,853 12,652 3,109 3,374
Bad debt 340 554 735 1,024 2,346 224 120
Depreciation and amortization 141 281 591 1,822 3,248 649 908
-------- -------- -------- -------- -------- -------- ---------
Total operating expenses 6,738 15,544 20,430 37,986 39,558 10,483 10,928
Loss from operations (1,950) (2,069) (4,202) (3,466) (5,040) (247) (1,474)
-------- -------- -------- -------- -------- -------- ---------
Net loss ($2,004) ($2,205) ($4,695) ($5,094) ($7,591) ($642) ($3,207)
-------- -------- -------- -------- -------- -------- ---------
Per share information
Net loss ($0.14) ($0.11) ($0.18) ($0.12) ($0.16) ($0.01) ($0.07)
-------- -------- -------- -------- -------- -------- ---------
Weighted average common shares
outstanding 13,922 19,928 26,807 41,093 47,467 45,627 48,687
Consolidated Balance Sheet Data:
Working capital (deficit) ($446) ($592) $ 195 ($5,687) ($6,910) ($6,384) ($10,268)
Current assets 1,088 1,789 5,989 5,683 4,827 4,592 5,187
Total assets 2,766 4,348 15,821 24,251 23,922 22,875 24,218
Long-term obligations, including
current portion 133 604 3,912 8,303 10,168 7,727 9,791
Total stockholders' equity 1,231 1,629 6,936 7,087 6,137 6,617 4,939
</TABLE>
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 ATSI for the three fiscal years ended July 31, 1997,
1998, and 1999 and the three months ended October 31, 1998 and 1999. It should
be read in conjunction with the Consolidated Financial Statements of ATSI, the
Notes thereto and the other financial information included elsewhere in this
Registration Statement on Form S-1. For purposes of the following discussion,
references to year periods refer to ATSI's fiscal year ended July 31.
General
ATSI'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 (the "framework"), ATSI is primarily focused on capturing
market share in the international telecommunications corridor between the United
States and Mexico. Even with poor phone-line penetration, ATSI'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
17
<PAGE>
environments allow, ATSI plans to establish framework in other Latin American
countries as well. In addition to the U.S. and Mexico, ATSI 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, ATSI 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, ATSI 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 ATSI'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 ATSI's own network infrastructure.
Utilizing the same framework described above, ATSI 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. ATSI currently provides these services
to and from the United States, Mexico, Costa Rica, El Salvador and Guatemala.
ATSI 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.
ATSI's consolidated financial statements have been prepared assuming that
ATSI will continue as a going concern. ATSI has incurred losses since inception
and has a working capital deficit as of July 31, 1999. Additionally, ATSI 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, ATSI expects improved results of operations and liquidity in fiscal
2000. However, no assurance may be given that this will be the case.
Results of Operations
The following table sets forth certain items included in ATSI'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 and the three months ended
October 31, 1998 and 1999.
<TABLE>
<CAPTION>
Year Ended July 31, Three months ended October 31,
1997 1998 1999 1998 1999
$ % $ % $ % $ % $ %
--- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues
- ------------------
Network services
Carrier $ 0 0% $ 10,047 29% $ 14,123 41% $ 5,626 55% $ 5,368 57%
Private Network 1,698 11% 3,315 10% 5,127 15% 1,087 11% 737 8%
Call services
Integrated Prepaid 1,421 9% 6,102 18% 5,424 15% 1,268 12% 1,401 15%
Postpaid 12,545 77% 13,530 39% 7,202 21% 1,699 17% 1,175 12%
Internet e-commerce 564 3% 1,526 4% 2,642 8% 556 5% 773 8%
------- -------- -------- ------- --------
Total operating revenues 16,228 100% 34,520 100% 34,518 100% 10,236 100% 9,454 100%
Cost of services 12,792 79% 22,287 65% 21,312 62% 6,501 64% 6,526 69%
------- -------- -------- ------- --------
Gross margin 3,436 21% 12,233 35% 13,206 38% 3,735 36% 2,928 31%
Selling, general and
administrative expenses 6,312 39% 12,853 37% 12,652 37% 3,109 30% 3,374 36%
Bad debt 735 4% 1,024 3% 2,346 6% 224 2% 120 1%
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Depreciation and amortization 591 4% 1,822 5% 3,248 10% 649 6% 908 10%
------- -------- -------- ------- --------
Operating loss (4,202) -26% (3,466) -10% (5,040) -15% (247) -2% (1,474) -16%
Other, net (493) -3% (1,628) -5% (1,696) -5% (395) -4% (473) -5%
------- -------- -------- ------- --------
Net loss ($4,695) -29% ($5,094) -15% ($6,736) -20% ($642) -6% ($1,947) -21%
Less: preferred stock dividends
- 0% - 0% 855 -2% - 0% 1,260 -13%
Net loss to common shareholders
($4,695) -29% ($5,094) -15% ($7,591) -22% ($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 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
19
<PAGE>
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 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 Company has 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.
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 ATSI's call services revenues offset by the growth in
ATSI's network management and Internet e-commerce services.
Network management services, which includes both carrier and private
network 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 ATSI
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 ATSI's
revenue per minute to decline from period to period. ATSI's agreement with
Satelites Mexicanos, S.A. de C.V. ("SATMEX"), secured in the fourth quarter of
fiscal 1998 allowed ATSI to secure and resell additional bandwidth capacity.
This increased capacity and flexibility allowed ATSI to increase billings to
existing corporate clients who previously dealt with SATMEX directly and to add
additional retail, corporate clients more quickly.
20
<PAGE>
Call services revenue, which includes both integrated prepaid and postpaid
services decreased approximately $6.9 million, or 51%, between years. This
decline is principally attributable declines in the Company's postpaid revenues
related to ATSI's strategy to focus on providing international call services
from its own payphones and communication centers (casetas). In July 1998, ATSI
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 ATSI's core business and the costs associated with further
provision of services did not justify keeping the business. For the year ended
July 31, 1999, ATSI 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.
Integrated prepaid revenues, generated by calls paid for before or at the
time the call is placed 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 ATSI'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., ATSI'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 ATSI's gross margins. Gross margins for
ATSI's telco operations remained flat at 34% between years, in spite of intense
market pressures in ATSI's carrier services. By eliminating and reducing certain
call services, namely postpaid 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 ATSI's own network infrastructure, ATSI 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 ATSI 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%. ATSI 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 ATSI. In the fourth quarter of 1999, ATSI began to further
integrate its two primary operating subsidiaries in Mexico, Computel and ATSI-
Mexico as ATSI continues to seek ways to lower its SG&A expense levels. Net of
non-cash expenses, related to ATSI'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, ATSI established specific bad
debt reserves of approximately $1.5 million related to retail and wholesale
transport of network management services. While ATSI 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 million, 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 ATSI's existing international network infrastructure including
the Network Technologies (N.E.T.) equipment purchased in December 1998 and
ATSI's new Nortel DMS 250/300 International Gateway switch purchased in January
1999.
Operating Loss. ATSI'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.
21
<PAGE>
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.
Preferred Stock Dividends. During fiscal 1999, ATSI 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, ATSI 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 ATSI 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. ATSI began providing these
services in October 1997, and produced approximately $10 million in revenues
from this service during 1998.
Postpaid call services revenue increased approximately $1.0 million, or 8%,
primarily due to growth in ATSI'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, ATSI 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, ATSI de-emphasized these services
due to relatively lower profit margins on this business. On July 16, 1998, ATSI
ceased providing these services altogether. Revenues from these services
decreased from approximately $3.9 million in 1997 to approximately $2.9 million
in 1998. ATSI does not anticipate producing significant revenues from such
services, if any, during fiscal 1999.
Integrated prepaid call services, calls processed in exchange for cash
without utilizing ATSI'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. ATSI
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 ATSI'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 ATSI during 1998, as discussed above. The improvement in
ATSI'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, ATSI 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, ATSI was one of the first four companies to receive a
public payphone comercializadora license from the SCT in February 1997, which
has allowed ATSI to provide local, domestic and international calls from public
telephones in Mexico. In November 1997, ATSI 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 ATSI's operator center for processing
international calls. By purchasing the customer base, ATSI 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. ATSI 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 ATSI's ATSI-Mexico operations, the expensing of costs related to
ATSI's planned acquisition of additional concessions from the Mexican regulatory
authorities, and the expensing of costs related to ATSI's reincorporation from
Canada to Delaware. Approximately $890,000
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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 payphones. During 1998, ATSI expensed
$631,000 in costs incurred relative to ATSI'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 million, or 208%, and rose as a percentage of revenues from
4% to 5% between years. From July 31, 1997 through July 31, 1998, ATSI 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 ATSI'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. ATSI 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. ATSI'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, ATSI 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 postpaid 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, ATSI 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 ATSI; however, management of this and other networks
is considered to be a recurring source of revenues for ATSI. GlobalSCAPE had
revenue of $500,000 in fiscal 1997, representing less than 4% of ATSI'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 ATSI'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 ATSI continued to install Charge-a-Call telephones in Mexico throughout
fiscal 1997, the number of calls per phone decreased slightly. ATSI believes
this was due to increasing costs to the consumer. ATSI 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 ATSI'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 ATSI 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 ATSI
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 ATSI'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 ATSI's
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<PAGE>
results for fiscal 1996, ATSI'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 ATSI from Jamaica 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 ATSI'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 ATSI's traffic
until May 1997. As a result, ATSI 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 ATSI in Mexico were frequently only able to access
ATSI'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
ATSI's cost of transmitting calls from Mexico, resulting in a decline in the
gross profit margin on international calls transmitted from ATSI'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%. ATSI 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 ATSI'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 ATSI did not produce sufficient gross margin dollars to cover its
selling, general and administrative costs, ATSI 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 ATSI may not receive any
funds.
ATSI's payable and accrued liability position increased from July 31, 1998
to July 31, 1999 as ATSI often utilized cash flows produced from financing
activities to pay down debt and capital lease obligations before paying vendors
or suppliers of services to ATSI.
When possible, ATSI arranged capital lease obligations in order to obtain
equipment necessary to expand or maintain its operations. During fiscal 1999,
ATSI 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 ATSI has only utilized approximately $500,000 of the Bank Boston Leasing
facility. During the year ended July 31, 1999 ATSI 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 ATSI 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.
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<PAGE>
In addition to the financing by GlobalSCAPE, ATSI borrowed $250,000 from
officers and directors of ATSI that was used for working capital purposes. As of
July 31, 1999, a total of $100,000 remained outstanding to two officers of ATSI.
During 1999, ATSI stopped factoring a portion of its receivables. At that
point, ATSI 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 ATSI's call services
business.
ATSI paid approximately $941,000 toward its capital lease obligations
during fiscal 1999. In an effort to reduce its cash outflows, in May 1999 ATSI
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, ATSI 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 ATSI.
The net result of ATSI'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 ATSI'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'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.
The Company's receivable balance at October 31, 1999 includes balances of
approximately $325,000 due to the Company from several of its private network
customers located in Central America which are past due. Subsequent to October
1999, the Company has intensified its efforts to collect these balances.
However, it can not ensure that it will be able to collect the full amounts due
under its contracts with these customers. No amounts have been reserved as being
uncollectible for these accounts as of October 31, 1999.
Although ATSI 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, ATSI 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 ATSI'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 ATSI was able to reduce its costs associated with
transporting the traffic, ATSI 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 ATSI 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, ATSI is continuing to experience market pressures on
its wholesale network transport services business. In order to produce better
cash flows, ATSI must focus on keeping its international network between Mexico
and the U.S. optimally utilized with a blend of retail and wholesale traffic.
Because ATSI upgraded its network during fiscal 1999 to an ATM packet-switching
environment, ATSI feels that it can transport traffic as efficiently as possible
in an effort to minimize costs. However, ATSI 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, ATSI must continue to manage its costs of providing
services and overhead costs as it begins focusing on optimizing use of its
network. ATSI has applied for a long distance concession in Mexico which, if
obtained, ATSI believes will eventually allow it to significantly reduce its
cost of transporting services. In order for it to significantly reduce costs
with the concession, ATSI would need to purchase a significant amount of
hardware and software, allowing it to expand and operate its own network in
Mexico.
Until ATSI 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, ATSI 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, ATSI has engaged the investment banking
firm of Gerard, Klauer Mattison & Co. ("GKM"). GKM will assist ATSI in finding
and securing financial and strategic relationships. ATSI has also engaged the
investment banking
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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 ATSI's operations. With the
exception of direct dial services from ATSI's casetas and coin operated public
telephones, almost all of ATSI's revenues are generated and collected in U.S.
dollars. Direct dial services from ATSI'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 ATSI does not maintain receivables on its books that are
denominated in pesos. In an effort to reduce foreign currency risk, ATSI
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 ATSI 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 ATSI's financial condition or operating
results.
Seasonality
ATSI's call service revenues are typically higher on a per phone basis
during January through July, the peak tourism months in Mexico.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
The following table sets forth certain information concerning the current
directors and executive officers of ATSI:
<TABLE>
<CAPTION>
Name Age Position Held
- ---- --- -------------
<S> <C> <C>
Arthur L. Smith 34 Chief Executive Officer and Chairman of the Board of Directors
Charles R. Poole 56 President
H. Douglas Saathoff 37 Secretary, Treasurer, Senior Vice President and Chief Financial
Officer
Craig K. Clement 41 Senior Vice President, Corporate Development
Everett L. Waller 48 Senior Vice President, Operations
Jeffrey J. Gehring 43 Senior Vice President, Sales and Marketing
H. Steve Kennedy 44 Senior Vice President, Engineering and Chief Technical Officer
Charles E. Bagby, Jr. 45 Senior Vice President, Operations and Engineering
Glenn Dower 49 Senior Vice President, Chief Information Officer
Sandra Poole-Christal 33 President of GlobalSCAPE, Inc.
Jesus Enriquez 47 Senior Vice President
Murray R. Nye 47 Director
Tomas Revesz 62 Director
Richard C. Benkendorf 60 Director
Carlos K. Kauachi 59 Director
Robert B. Werner 42 Director
</TABLE>
Arthur L. Smith has served as Chief Executive Officer and a director of
ATSI since its formation in June 1996 and served as President of ATSI since its
formation in June 1996 to July 1998. Mr. Smith also served as President, Chief
Operating Officer and a director of ATSI-Canada since its formation in May 1994.
From December 1993 until May 1994, Mr. Smith served in the same positions with
Latcomm International Inc., which company amalgamated with Willingdon Resources
Ltd. to form ATSI-Canada in May 1994. Mr. Smith has also served as President and
Chief Executive Officer of American TeleSource International, Inc., a Texas
corporation ("ATSI-Texas"), one of ATSI's principal operating subsidiaries,
since December 1993. From June 1989 to December 1993, Mr. Smith was employed as
director of international sales by GeoComm Partners, a satellite-based
telecommunications company located in San Antonio, providing telecommunications
services to Latin America. Mr. Smith has over nine years experience in the
telecommunications industry.
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Charles R. Poole has served as President of ATSI since July 1998 and served
as Chief Operating Officer of ATSI from December 1997, to July 1998. Mr. Poole
served as Vice President of ATSI from February 1997 to December 1997. Mr. Poole
has also served as Senior Vice President-Sales and Marketing of ATSI-Texas since
February 1997. From February 1995 to January 1997, Mr. Poole served as Senior
Vice President for A+ Communications, responsible for paging, cellular and
telemessaging sales. From April 1994 to February 1995, Mr. Poole served as
Senior Vice President of American Paging, a communications company. From 1992 to
1994, Mr. Poole served as Division Manager, Data Documents, Inc. of Chicago,
Illinois. From 1989 to 1992, Mr. Poole served as President of GeoComm Partners,
a satellite-based telecommunications company located in San Antonio, providing
telecommunication services to Latin America. Prior to that time, Mr. Poole was
Senior Vice President of Mobilecomm, a Bell South company, for approximately
five years. Mr. Poole has over fifteen years experience in the
telecommunications industry. Mr. Poole is the father of Sandra Poole-Christal,
President of ATSI's subsidiary, GlobalSCAPE, Inc.
H. Douglas Saathoff, C.P.A., has served as Secretary, Treasurer, Senior
Vice President and Chief Financial Officer of ATSI since its formation in June
1996. Mr. Saathoff also served as Vice President, Chief Financial Officer and
Treasurer of ATSI-Canada since February 1996 and Secretary since June 1996. Mr.
Saathoff has served as Vice President-Finance of ATSI-Texas since June 1994, and
as Secretary and Treasurer of ATSI-Texas since October 1994. From May 1993 to
May 1994, Mr. Saathoff served in the position of Chief Accountant for Santa Rosa
Healthcare Corporation, a San Antonio-based healthcare corporation. From January
1990 to February 1993, Mr. Saathoff served as Financial Reporting Manager for
U.S. Long Distance Corp., a San Antonio-based, publicly traded long distance
telecommunications company. Prior to that time, Mr. Saathoff served as an
accountant with Arthur Andersen LLP for approximately five years.
Craig K. Clement has served as Senior Vice President, Corporate Development
of ATSI since its formation in June 1996. Mr. Clement has also served as Vice
President-Corporate Development for ATSI-Texas since August 1994. From April
1993 to July 1994, Mr. Clement served as Vice President of Corporate Development
for LATelco, a wireless communications company. From February 1992 until March
1993, Mr. Clement served as Vice President of Operations for CSI Environmental,
an environmental cleanup company. From August 1983 until July 1993, Mr. Clement
served as President of Yucca Oil Company, an oil and gas exploration company.
Mr. Clement served as a director of Geocommunications, Inc., a satellite
networks company, from November 1987 to November 1991. Mr. Clement also served
as a director of PANACO, a Nasdaq-traded company, from 1988 to 1993, and was a
member of the compensation committee.
Everett L. Waller has served as Vice President, Operations of ATSI since
its formation in June 1996. Mr. Waller has also served as Senior Vice President-
Operations and Technical Services of ATSI-Texas since January 1997. Mr. Waller
served as Senior Vice President-Operations and Sales of ATSI-Texas from August
1993 to January 1997. From May 1994 to August 1995, Mr. Waller served as Vice
President-Operations of ATSI-Texas. Prior to that time, Mr. Waller served as
Vice President of Technical Services of U.S. Long Distance Corp., a San Antonio-
based, publicly traded long distance telecommunications company, for a period of
seven years.
Jeffrey J. Gehring has served as Senior Vice President, Sales and Marketing
of ATSI since February 1998 and Vice President of Sales of ATSI-Texas since
February 1998. From August 1996 to January 1998, Mr. Gehring served as Regional
Vice President at A+ Communications, a communications company. From March 1995
to July 1996, Mr. Gehring was Vice President of Premier Paging Corporation, a
communications company. From March 1994 to March 1995 Mr. Gehring was General
Manager of American Paging, a communications company. From October, 1991 to
March 1994, Mr. Gehring was Vice President of Sales for GeoComm Partners, a
satellite-based telecommunications company.
H. Steve Kennedy has served as Senior Vice President, Engineering and Chief
Technical Officer of ATSI since January 1998 and Vice President of Engineering
of ATSI-Texas since July 1998 and Chief Technical Officer since April 1998. From
July 1996 to January 1998, Mr. Kennedy served as President and was a principal
of HSK INC, a telecommunications service provider. From August 1995 to July
1996, Mr. Kennedy served as Director of Technical Services for Wireless
Resources, Inc., a wireless telecommunications company. From July 1994 to August
1995, Mr. Kennedy served as Regional Technical Manager of American Paging, a
communications company. From November 1993 to July 1994, Mr. Kennedy served as
Vice President of Technical Services for Zycom Corporation, a communications
company.
Glenn Dower has served as Senior Vice President and Chief Information
Officer of ATSI since January 1999. Mr. Dower was employed from 1989 until 1998
as the Director of Information Resources with DSC Communications, Inc.
(Alcatel), a digital switching manufacturer headquartered in Plano, Texas, where
he was responsible for directing the deployment of the Internet/Intranet,
Executive Information Systems, Information Warehousing and Document Management
applications.
27
<PAGE>
Charles E. Bagby, Jr. has served as Senior Vice President, Operations and
Engineering of ATSI since May 1999. Prior to joining ATSI, Mr. Bagby served for
eleven years in various capacities with AT&T, most recently as the Global
Customer-Service Satisfaction Team Manager (November, 1997-July, 1998) and then
the System Planning and Support Manager (August 1998-May 1999) in the Consumer
Markets Division, Global Sales and Service Organization. From August 1996 to
November 1997, Mr. Bagby served as a Consultant for AT&T's Quality & Process
Improvement (ISO 9000) in its Business Markets Division. From May 1995 to August
1996, he served as the Operations Manager: Latin American Data Communication
Services in the Business Communications Services division, and from August 1993
to May 1995 as a Manager: Network Performance & Assets in the Business
Communications Services division.
Sandra Poole-Christal has served as President of GlobalSCAPE, Inc. since
January 1, 1998. Ms. Poole-Christal founded GlobalSCAPE, Inc. in 1996 at the
request of ATSI. Ms. Poole-Christal was one of the founding employees of ATSI,
serving as its Director of International Sales and Marketing from January 1994
until April 1996. Prior to joining ATSI, Ms. Poole-Christal served as an account
executive with GeoComm Partners. Ms. Poole-Christal holds a BA in Communications
from Baylor University. Ms. Poole-Christal is the daughter of Charles R. Poole,
President of ATSI.
Jesus Enriquez has served as Senior Vice President of ATSI since February
1998, and as Director General of American TeleSource International de Mexico,
S.A. de C.V. (ATSI-Mexico), one of ATSI's principal operating subsidiaries,
since August 1996. From March 1995 to July 1996 Mr. Enriquez served as
Commercial Director of ATSI-Mexico. From January 1989 to February 1995, Mr.
Enriquez was the Director General of Servicios Espectro Radioelectricos
("SERSA"), an international communications company in Mexico City.
Murray R. Nye has served as a director of ATSI since its formation in June
1996. Mr. Nye also served as Chief Executive Officer and a director of ATSI-
Canada from its formation in May 1994. From December 1993 until May 1994, Mr.
Nye served in the same positions with Latcomm International Inc., which company
amalgamated with Willingdon Resources Ltd. to form ATSI-Canada in May 1994. From
1992 to 1995, Mr. Nye served as President of Kirriemuir Oil & Gas Ltd. From 1989
until 1992, Mr. Nye was self-employed as a consultant and Mr. Nye is again
currently self-employed as a consultant. Mr. Nye serves as a director of D.M.I.
Technologies, Inc., an Alberta Stock Exchange-traded company.
Tomas Revesz has served as a director of ATSI since its formation in June
1996. Mr. Revesz has served as President of Long Distance International, Inc., a
long distance reseller, since October 1993. From 1983 to June 1993, Mr. Revesz
served as President of Star Long Distance, Inc., also a long distance reseller.
From January 1990 until August 1993, Mr. Revesz served as Vice President of
Operations of AAA Telephone & Communications, Inc., a telephone interconnection
company.
Richard C. Benkendorf has served as a director of ATSI since October 1996.
From 1991 to present, Mr. Benkendorf has been a principal of Technology Impact
Partners, which provides advisory and investment services. From 1989-1991, Mr.
Benkendorf served as Senior Vice President Investment, Planning, Mergers &
Acquisitions and Venture Capital for Ameritech, a communications services
company.
Carlos K. Kauachi has served as a director of ATSI since October 1996. From
1996 to present, Mr. Kauachi has been self-employed as a consultant. From 1962
until 1996, Mr. Kauachi served in various positions with Telefonos de Mexico;
the then privately owned telecommunications monopoly in Mexico, including Vice
President-Telephone Business Development, Vice President-Marketing and Sales
and, most recently, Vice President-International Business Development.
Robert B. Werner has served as a director of ATSI since September 1998.
From 1990 to present, Mr. Werner has been a stockholder and practicing attorney
with the law firm of Jeffers and Banack, Incorporated, located in San Antonio,
Texas.
28
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning the compensation
earned during ATSI's last three fiscal years by ATSI's Chief Executive Officer
and each of ATSI's other four most highly compensated executive officers whose
total cash compensation exceeded $100,000 for services rendered in all
capacities for the fiscal year ended July 31, 1999 (collectively, the "Named
Executive Officers").
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
---------------------------------------------------------------------------------------
Awards Payouts
--------------------------------------------
Securities
Other Annual Restricted Underlying LTIP All Other
Fiscal Compensa-tion Stock Options/ Payout Compen-
Name And Principal Position Year Salary ($) Bonus ($) ($)(1) Awards ($) SARs (#) ($) sation ($)
- --------------------------- ------ ---------- --------- ------------- ---------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arthur L. Smith(2)................ 1999 $129,519 - - - 200,000 - -
Chief Executive Officer 1998 96,731 $10,634 - - - -
1997 91,538 10,000 - - 800,000 - -
Charles R. Poole(3)............... 1999 126,442 - - - 150,000 - -
President 1998 95,808 2,474 - - 50,000 - -
1997 46,000(4) - - - 300,000 - -
H. Douglas Saathoff(5)............ 1999 102,244 - - - 100,000 - -
Chief Financial Officer, Senior 1998 91,394 13,631 - - - - -
Vice President , Treasurer and 1997 87,769 10,000 - - 900,000 - -
Secretary
Craig K. Clement(6)............... 1999 99,015 - - - 100,000 - -
Senior Vice President, Corporate 1998 88,192 15,662 - - - - -
Development 1997 93,448 10,000 - - 900,000 - -
Sandra Poole-Christal............. 1999 80,000 40,000 - - 75,000 - -
President, GlobalSCAPE 1998 73,423 31,000 - - - -
1997 55,385 - - - 15,000 - -
</TABLE>
_______________
(1) Certain of ATSI's executive officers receive personal benefits in addition
to salary; however, ATSI has concluded that the aggregate amount of such
personal benefits do not exceed the lesser of $50,000 or 10% of annual
salary and bonus for any Named Executive Officer.
(2) Also serves as Chief Executive Officer of American TeleSource
International, Inc., a Texas corporation ("ATSI-Texas"), ATSI's principal
operating subsidiary. Mr. Smith's compensation is paid by ATSI-Texas.
(3) Also serves as President of ATSI-Texas. Mr. Poole's compensation is paid by
ATSI-Texas.
(4) Amount shown reflects Mr. Poole's salary from February 1, 1997, the
beginning date of his employment with ATSI, through July 31, 1997, the end
of fiscal 1997.
(5) Also serves as Vice President-Finance and Secretary and Treasurer of ATSI-
Texas. Mr. Saathoff's compensation is paid by ATSI-Texas.
(6) Also serves as Vice President-Corporate Development of ATSI-Texas. Mr.
Clement's compensation is paid by ATSI-Texas.
Employment Agreements
ATSI has entered into employment agreements with certain of its executive
officers as follows:
<TABLE>
<CAPTION>
Name Term Minimum
Annual Salary
<S> <C> <C>
Craig K. Clement January 1, 1997 - December 31, 1999(4)(5) $92,000(1)
Craig K. Clement January 1, 2000 - December 31, 2000 $101,424(2)
Sandra Poole-Christal(7) January 1, 1998 - December 31, 2001(4) $80,000(3)
Charles R. Poole August 1, 1998 - July 31, 2001(4) $127,000(6)
Arthur L. Smith August 1, 1998 - July 31, 2001(4) $130,000(6)
H. Douglas Saathoff January 1, 2000 - December 31, 2000 $104,738(2)
H. Douglas Saathoff January 1, 1997 - December 31, 1999(4)(5) $95,000(2)
</TABLE>
29
<PAGE>
(1) agreement provides for lump sum payment equal to 6 months of salary in the
event of executive's disability or termination without cause; if executive
resigns within two months following a change in control of company, or is
terminated within 24 months following a change in control of company, executive
is entitled to lump sum payment equal to six months of salary.
(2) agreement provides for 6 months of continuing payments in the event of
executive's death or disability; if executive is terminated without cause,
executive is entitled to continuing payments until the third anniversary of the
start date or for 12 months from termination, whichever is longer; if executive
resigns following a change in control of Company, executive is entitled to
continuing payments until the third anniversary of the start date, or if
agreement has been renewed, until 1 year following anniversary date.
(3) agreement provides for 6 months of continuing payments in the event of
executive's death or disability; if executive is terminated without cause,
executive is entitled to continuing payments until the third anniversary of the
start date or for 12 months from termination, whichever is longer; if executive
resigns following a change in control of GlobalSCAPE, executive is entitled to
continuing payments until the third anniversary of the start date, or if
agreement has been renewed, until 1 year following anniversary date.
(4) agreement provides for an automatic renewal for an additional one-year term
unless notice of termination is given 120 days prior to end of initial term.
(5) notice of non-renewal has been given.
(6) agreement provides for 6 months of continuing payments in the event of
executive's death or disability; if executive is terminated without cause or
resigns following a change in control in company, executive is entitled to
continuing payments until third anniversary of start date or end of 24 months
from termination, whichever comes first.
(7) agreement is between Sandra Poole-Christal and ATSI's subsidiary
GlobalSCAPE, Inc.
The Board may increase each officer's salary, and may pay a bonus to each
of them from time to time. Each of the employment agreements provides for early
termination under certain conditions, and restricts each executive from various
competing and other potentially damaging activities during employment and for a
specified time after termination of employment.
Pursuant to each of Messrs. Smith's and Poole's employment agreement, ATSI
granted to them, under ATSI's 1998 Stock Option Plan, incentive stock options to
purchase 200,000 and 150,000 shares, respectively, of ATSI's Common Stock, at an
exercise price of $0.55 per share, representing the fair market value of a share
of Common Stock on the date of grant. Additionally, pursuant to and on the date
each of Messrs. Saathoff's and Clement's employment agreement was entered into,
and pursuant to each of Messrs. Smith's and Poole's prior employment agreements,
ATSI granted to them, under ATSI's 1997 Stock Option Plan, nonqualified options
to purchase 900,000, 900,000, 800,000 and 300,000 shares, respectively, of
ATSI's Common Stock, at an exercise price of $0.58 per share, representing the
fair market value of a share of Common Stock on the date of grant. In fiscal
1999, Messrs. Saathoff and Clement and Ms.Poole-Christal were issued incentive
stock options to purchase 100,000, 100,000 and 75,000 shares, respectively, of
ATSI's Common Stock, at an exercise price of $0.55 per share representing the
fair market value of a share of Common Stock on the date of grant. Upon the
occurrence of a change in control, as defined in the respective governing option
agreements, the exercisability of all such options, to the extent unexercisable,
will be accelerated.
Stock Option Plans
1997 Option Plan
The American TeleSource International Inc. 1997 Stock Option Plan (the
"1997 Option Plan") was adopted in February 1997 by the Board of Directors of
ATSI and approved in May 1997 by ATSI's shareholders.
The 1997 Option Plan terminated on February 10, 1998. No further options
will be granted under the 1997 Option Plan. All options outstanding under the
1997 Option Plan on the date of termination will remain outstanding under the
1997 Option Plan in accordance with their respective terms and conditions.
As of July 31, 1999, options for 4,222,667 shares were outstanding under
the 1997 Option Plan at a weighted average exercise price of $.75 and options
for 3,271,333 shares were exercisable. As of July 31, 1999, 543,000 options had
been exercised.
1998 Option Plan
The American TeleSource International, Inc. 1998 Stock Option Plan (the
"1998 Option Plan") was adopted in September 1998 by the Board of Directors of
ATSI and approved December 1998 by ATSI's shareholders.
30
<PAGE>
The 1998 Option Plan authorizes the grant of up to two million incentive stock
options and non-qualified stock options to employees, directors and certain
other persons. As of July 31, 1999, the Board had granted options to purchase
1,843,300 shares of Common Stock under the 1998 Option Plan at exercise prices
as follows: (i) 1,541,000 at $0.55 per share, (ii) 302,300 at $0.78 per share.
As of July 31, 1999, options for 1,785,800 shares were outstanding under the
1998 Option Plan at a weighted average exercise price of $0.60. As of July 31,
1999 no options were exercisable, however, 57,500 options had been forfeited.
Stock Option Grant Table
The following table sets forth certain information concerning options
granted to the Named Executive Officers during ATSI's fiscal year ended July 31,
1999.
<TABLE>
<CAPTION> Potential Realizable Value At
Assumed Annual Rates of Stock
Price Appreciation For Option
Individual Grants Term
-----------------------------------------------------------------------------------------
Percent of
Total
Number of Options
Securities Granted to
Underlying Employees Exercise or
Options in Fiscal Base Price Expiration
Name Granted (#) Year ($/share) Date 5% ($)(1) 10% ($)(1)
---- ----------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Arthur L. Smith................ 200,000(2) 10.9 $0.55 09/09/08 $180,000 $286,000
Charles R. Poole............... 150,000(2) 8.1 $0.55 09/09/08 $135,000 $214,500
H. Douglas Saathoff............ 100,000(2) 5.4 $0.55 09/09/08 $ 90,000 $143,000
Craig K. Clement............... 100,000(2) 5.4 $0.55 09/09/08 $ 90,000 $143,000
Sandra Poole-Christal.......... 75,000(2) 0.4 $0.55 09/09/08 $ 67,500 $107,250
</TABLE>
_______________
(1) The 5% and 10% assumed annual compound rates of stock appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent ATSI' estimate or projection of future Common Stock prices. The
actual value realized may be greater or less than the potential realizable
value set forth in the table.
(2) None of such options are presently exercisable. The options become
exercisable in three equal annual installments commencing on September 9,
1999. The exercise price represented the market price of a share of Common
Stock on September 9, 1998, the effective date of the grant.
Aggregate Option Exercises in Fiscal 1999 and Fiscal Year-End Option Values
Table
The following table shows stock options exercised by the Named Executive
Officers during the fiscal year ended July 31, 1999, including the aggregate
value of gains on the date of exercise. In addition, the table includes the
number of shares covered by both exercisable and unexercisable stock options as
of July 31, 1999. Also reported are the values of "in-the-money" options which
represent the positive spread between the exercise price of any such existing
stock options and the Common Stock price as of July 31, 1999.
<TABLE>
<CAPTION>
Shares Value of Unexercised
Acquired Number of Securities Underlying In-the-Money
On Value Unexercised Options at
Name Exercise(#) Realized($) Options at Fiscal Year End(#) Fiscal Year End($)(1)
- ---- ----------- ----------- ------------------------------- --------------------------
Exercisable Unexercisable Exercisable Unexercisable
-------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Arthur L. Smith - - 666,667 333,333 $480,000 $246,000
Charles R. Poole - - 216,666 283,334 144,000 184,500
H. Douglas Saathoff - - 733,334 266,666 528,000 195,000
Craig K. Clement - - 623,334 266,666 448,800 195,000
Sandra Poole-Christal - - 15,000 75,000 10,800 56,250
</TABLE>
____________________
31
<PAGE>
(1) Values stated are based upon the $1.30 closing price per share on July 30,
1999, as reported on the Electronic Bulletin Board, and represent the
difference between the fair market value of the shares underlying the
options and the exercise price of the options at fiscal year end.
Compensation Committee Interlocks and Insider Participation
Messrs. Benkendorf, Kauachi and Nye serve on the Compensation Committee.
The Compensation Committee met four times in fiscal 1999.
In January 1997, ATSI entered into an agreement with KAWA Consultores, S.A.
de C.V., an international consulting firm of which Company director Carlos K.
Kauachi is president, for international business development support. Under the
terms of the agreement, ATSI 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 (payable in a combination of cash and Common Stock) for a period of
twelve months. In March 1999, the agreement was renewed at $6,000 per month for
a period of twelve months.
ATSI 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
ATSI with various services that include strategic planning, business development
and financial advisory services. Under the terms of the agreement, ATSI pays the
consulting firm $3,750 per month plus expenses. At July 31, 1999, ATSI has a
payable to Technology Impact Partners of approximately $74,000.
Director Compensation
Directors are reimbursed their reasonable out-of-pocket expenses in
connection with their travel to and attendance at meetings of the Board of
Directors. Each director other than Arthur L. Smith receives $1,000 for each
meeting of the Board attended excluding telephonic meetings for which each
director other than Arthur L. Smith receives $250.
On September 9, 1998, each of the directors of ATSI were granted options to
purchase 75,000 shares of Common Stock of ATSI, with the exception of Murray R.
Nye, who was granted options to purchase 150,000 shares of Common Stock of ATSI.
In addition, each of the directors serving on a committee of the Board were
granted options to purchase an additional 15,000 shares of Common Stock for each
committee served on, at an exercise price of $0.55 per share under the 1998
Option Plan.
CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
In April 1998, ATSI engaged two companies for billing and administrative
services related to network management services it provides. The companies,
which are owned by Tomas Revesz, a director of ATSI, were paid approximately
$140,000 for their services during fiscal 1998. Subsequent to year-end, ATSI
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, ATSI has a payable to
Mr. Revesz of $90,000.
In January 1997, ATSI issued 90,000 shares of Common Stock, and in February
1997 ATSI issued warrants for the purchase of 250,000 shares of common stock at
$0.85 for three years to J&W, a joint venture ("J&W") upon cancellation of a
contract with J&W for pay telephone equipment financing. One third of J&W was
owned by Robert B. Werner , a director of ATSI. Upon dissolution of J&W, Mr.
Werner received 30,000 shares of the Common Stock and 83,300 of the warrants.
Also in connection with the cancellation of the contract, ATSI issued warrants
in February 1997 for the purchase of 58,824 shares of Common Stock at $0.85 to
Jeffers & Banack, Incorporated, a law firm in which Mr. Werner is a partner. In
addition, ATSI is represented by the law firm of Jeffers & Banack , Incorporated
with respect to one litigation matter.
See "Compensation Committee Interlocks and Insider Participation" for certain
additional relationships and related party transactions. The information called
for by item 11 of Form 10-K is incorporated herein by reference to such
information included in ATSI's Proxy Statement for the 1999 Annual Meeting of
Stockholders.
32
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding ownership of
the Common Stock as of January 3, 2000 by (i) each person known by ATSI to be
the beneficial owner of more than 5% of the outstanding shares of Common Stock,
(ii) each director of ATSI, (iii) the Chief Executive Officer and each other
executive officer of ATSI named in the Summary Compensation Table, and (iv) all
executive officers and directors of ATSI as a group. (13)
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership of
Name Common Stock(1) Percent of Class
---- --------------- ----------------
<S> <C> <C>
Arthur L. Smith (2)................................................ 3,423,616 6.68%
Charles R. Poole (3)............................................... 443,334 *
H. Douglas Saathoff (4)............................................ 1,037,084 2.02%
Craig K. Clement (5)............................................... 823,334 1.61%
Sandra Poole-Christal (6).......................................... 115,000 *
Murray R. Nye (7).................................................. 470,500 *
Robert B. Werner (8)............................................... 372,362 *
Tomas Revesz (9)................................................... 122,000 *
Richard C. Benkendorf (10)......................................... 180,000 *
Carlos K. Kauachi (11)............................................. 159,123 *
All directors and executive officers as a group (16 persons) (12).. 8,020,854 14.63%
</TABLE>
* Less than 1%
(1) To the knowledge of ATSI, each person named in the table has sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by him. Shares of Common Stock that are not outstanding
but that may be acquired by a person upon exercise of options or warrants
within 60 days of January 3, 2000 are deemed outstanding for the purpose of
computing the percentage of outstanding shares beneficially owned by such
person but are not deemed outstanding for the purpose of computing the
percentage of outstanding shares beneficially owned by any other person.
(2) Includes 866,667 shares issuable upon exercise of presently exercisable
options or options exercisable within 60 days of January 3, 2000.
(3) Includes 383,334 shares issuable upon exercise of presently exercisable
options or options exercisable within 60 days of January 3, 2000.
(4) Includes 933,334 shares issuable upon exercise of presently exercisable
options or options exercisable within 60 days of January 3, 2000.
(5) Includes 823,334 shares issuable upon exercise of presently exercisable
options or options exercisable within 60 days of January 3, 2000.
(6) Includes 40,000 shares issuable upon exercise of presently exercisable
options or options exercisable within 60 days of January 3, 2000.
(7) Includes 205,000 shares issuable upon exercise of presently exercisable
options or options exercisable within 60 days of January 3, 2000.
(8) Includes 178,393 shares issuable upon exercise of presently exercisable
options and warrants or options and warrants exercisable within 60 days of
January 3, 2000.
(9) Includes 105,000 shares issuable upon exercise of presently exercisable
options or options exercisable within 60 days of January 3, 2000.
(10) Includes 85,000 shares issuable upon exercise of presently exercisable
options or options exercisable within 60 days of January 3, 2000.
(11) Includes 30,000 shares issuable upon exercise of presently exercisable
options or options exercisable within 60 days of January 3, 2000.
(12) Includes 4,468,063 shares issuable upon exercise of presently exercisable
options or options exercisable within 60 days of January 3, 2000.
The following table sets forth certain information regarding ownership of
ATSI's wholly-owned subsidiary GlobalSCAPE, Inc.'s Common Stock as of January 3,
2000 by (i) each person known by ATSI to be the beneficial owner of more than 5%
of the outstanding shares of Common Stock, (ii) each director of ATSI or ATSI's
subsidiary, (iii) the Chief Executive Officer and each other executive officer
of ATSI named in the Summary Compensation Table, and (iv) all executive officers
and directors of ATSI as a group.
33
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership of
Name Common Stock(1) Percent of Class
---- --------------- ----------------
<S> <C> <C>
Arthur L. Smith (2).............................................. 18,190 1.05%
H. Douglas Saathoff (2).......................................... 18,190 1.05%
Craig K. Clement (2)............................................. 18,190 1.05%
Sandra Poole-Christal (3)........................................ 97,143 5.40%
All directors and executive officers as a group (4 persons) (4).. 151,713 8.19%
</TABLE>
(1) To the knowledge of ATSI, each person named in the table has sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by him. Shares of Common Stock that are not outstanding
but that may be acquired by a person upon exercise of options or warrants
within 60 days of January 3, 2000 are deemed outstanding for the purpose of
computing the percentage of outstanding shares beneficially owned by such
person but are not deemed outstanding for the purpose of computing the
percentage of outstanding shares beneficially owned by any other person.
(2) Includes 18,190 shares issuable upon exercise of presently exercisable
options or options exercisable within 60 days of January 3, 2000.
(3) Includes 97,143 shares issuable upon exercise of presently exercisable
options or options exercisable within 60 days of January 3, 2000.
(4) Includes 151,713 shares issuable upon exercise of presently exercisable
options or options exercisable within 60 days of January 3, 2000.
LEGAL MATTERS
The validity of the shares of common stock offered hereby is being passed
upon by Alice King, Esq., San Antonio, Texas. Alice King is ATSI's Corporate
Counsel and is an employee.
EXPERTS
The consolidated balance sheets as of July 31, 1998 and 1999, and the
related consolidated statements of operations, stockholders' equity,
comprehensive loss and cash flows for the years ended July 31, 1997, 1998 and
1999 of ATSI and its subsidiaries have been included in and incorporated by
reference in this prospectus and Registration Statement in reliance upon the
report of Arthur Andersen LLP, independent certified public accountants,
included in and incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Government Filings. We file annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission
(the "SEC"). You may read and copy any document we file at the SEC's public
reference rooms in Washington, D.C., New York, New York, and Chicago, Illinois.
The SEC public reference room in Washington D.C. is located at 450 Fifth Street,
N.W., Washington D.C., 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the pubic reference rooms. Our SEC filings are also available to
you free of charge at the SEC's web site at http://www.sec.gov.
-------------------
Information Incorporated by Reference. The SEC allows us to "incorporate by
reference" the information we file with them which means that we can disclose
important information to you by referring you to those documents. The
information incorporated by reference is considered to be part of this
prospectus, and later information that we file with the SEC will automatically
update and replace information previously filed, including information contained
in this prospectus.
We incorporate by reference the documents listed below and any future
filings made with the SEC under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 until this offering has been completed.
. Our Annual Report on Form 10-K for the years ended July 31, 1998 and 1999
. Our Quarterly Reports on Form 10-Q for the quarters ended October 31, 1998,
January 31, 1999, April 30, 1999 and October 31, 1999;
. Our Proxy Statements dated November 6, 1998 and October 25, 1999 for our
annual meeting of shareholders;
. The description of our common stock included in our Registration Statement on
Form S-4 filed on March 6, 1998.
. Our Registration Statement on Form S-3 for 3,198,054 shares of Common Stock
filed on August 18, 1999.
34
<PAGE>
You may request a free copy of these filings by writing or telephoning us at the
following address:
American TeleSource International, Inc.
Investor Relations
12500 Network Blvd., Suite 407
San Antonio, Texas 78249
(210) 558-6090.
We will not send exhibits to these documents unless the exhibits are
specifically incorporated by reference in these documents.
35
<PAGE>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements of American TeleSource International, Inc. and
Subsidiaries
<TABLE>
<S> <C>
Report of Independent Public Accountants............................................................................ 37
Consolidated Balance Sheets as of July 31, 1998 and 1999 and October 31, 1999....................................... 38
Consolidated Statements of Operations for the Years Ended July 31, 1997, 1998 and 1999 and the Three Month
Periods ended October 31, 1998 and 1999............................................................................. 39
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended July 31, 1997, 1998 and 1999 and the
Month Periods ended October 31, 1998 and 1999....................................................................... 40
Consolidated Statements of Stockholders' Equity for the Years Ended July 31, 1997, 1998 and 1999 and the Three
Month Period ended October 31, 1999................................................................................. 41
Consolidated Statements of Cash Flows for the Years Ended July 31, 1997, 1998 and 1999 and the Three Month Periods
ended October 31, 1998 and 1999..................................................................................... 42
Notes to Consolidated Financial Statements.......................................................................... 43
</TABLE>
36
<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
37
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
<TABLE>
<CAPTION>
July 31, July 31, October 31,
1998 1999 1999
---------- -------- ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 1,091 $ 379 $ 513
Accounts receivable, net of allowance of $209, $ 1,600 and $ 1,547, respectively 3,748 3,693 3,373
Prepaid expenses and other assets 844 755 1,301
-------- -------- --------
Total current assets 5,683 4,827 5,187
-------- -------- --------
PROPERTY AND EQUIPMENT (At cost): 14,233 16,669 17,317
Less - Accumulated depreciation and amortization (2,418) (4,713) (5,312)
-------- -------- --------
Net property and equipment 11,815 11,956 12,005
-------- -------- --------
OTHER ASSETS, net
Goodwill, net 5,091 5,032 4,997
Contracts, net 1,173 703 539
Trademarks, net -- 789 741
Other assets 489 615 749
-------- -------- --------
Total assets $ 24,251 $ 23,922 $ 24,218
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,683 $ 4,004 $ 5,866
Accrued liabilities 2,113 3,167 3,264
Current portion of notes payable 688 961 699
Current portion of convertible long-term debt -- 1,942 2,033
Current portion of obligations under capital leases 2,351 1,430 3,417
Deferred revenue 535 233 176
-------- -------- --------
Total current liabilities 11,370 11,737 15,455
-------- -------- --------
LONG-TERM LIABILITIES:
Notes payable, less current portion 719 312 308
Convertible long-term debt, less current portion 1,604 -- --
Obligations under capital leases, less current portion 2,941 5,523 3,334
Other long-term liabilities 530 213 182
-------- -------- --------
Total long-term liabilities 5,794 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, no shares
issued and outstanding at July 31, 1998, 24,145
shares issued and outstanding at July 31, 1999 and October 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, 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, 1998 and 1999,
500 shares issued and outstanding at October 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, 48,814,651 issued and outstanding at October 31, 1999 46 49 49
Additional paid in capital 22,248 29,399 31,013
Accumulated deficit (14,396) (21,987) (25,194)
Deferred compensation (667) (466) (309)
Cumulative translation adjustment (144) (858) (620)
-------- -------- --------
Total stockholders' equity 7,087 6,137 4,939
Total liabilities and stockholders' equity $ 24,251 $ 23,922 $ 24,218
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
38
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
(Unaudited)
Year ended July 31, Three months ended October 31,
1997 1998 1999 1998 1999
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Network Services
Carrier $ 0 $ 10,047 $ 14,123 $ 5,626 $ 5,368
Private Network 1,698 3,315 5,127 1,087 737
Call Services
Integrated Prepaid 1,421 6,102 5,424 1,268 1,401
Postpaid 12,545 13,530 7,202 1,699 1,175
Internet e-commerce 564 1,526 2,642 556 773
------------ ------------ ------------ ------------ -------------
Total operating revenues 16,228 34,520 34,518 10,236 9,454
------------ ------------ ------------ ------------ -------------
OPERATING EXPENSES:
Cost of services 12,792 22,287 21,312 6,501 6,526
Selling, general and administrative 6,312 12,853 12,652 3,109 3,374
Bad debt expense 735 1,024 2,346 224 120
Depreciation and amortization 591 1,822 3,248 649 908
------------ ------------ ------------ ------------ -------------
Total operating expenses 20,430 37,986 39,558 10,483 10,928
------------ ------------ ------------ ------------ -------------
Operating loss (4,202) (3,466) (5,040) (247) (1,474)
OTHER INCOME(EXPENSE):
Interest income 27 76 59 13 5
Other income 41 8 (10) 18 10
Interest expense (513) (1,573) (1,745) (415) (488)
------------ ------------ ------------ ------------ -------------
Total other income (expense) (445) (1,489) (1,696) (384) (473)
------------ ------------ ------------ ------------ -------------
LOSS BEFORE INCOME TAX EXPENSE (4,647) (4,955) (6,736) (631) (1,947)
FOREIGN INCOME TAX EXPENSE -- (139) -- (11) --
MINORITY INTEREST (48) -- -- -- --
NET LOSS $ (4,695) $ (5,094) $ (6,736) $ (642) $ (1,947)
LESS: PREFERRED DIVIDENDS -- -- (855) -- (1,260)
------------ ------------ ------------ ------------ -------------
NET LOSS TO COMMON STOCKHOLDERS $ (4,695) $ (5,094) $ (7,591) $ (642) $ (3,207)
============ ============ ============ ============ =============
BASIC AND DILUTED LOSS PER SHARE $ (0.18) $ (0.12) $ (0.16) $ (0.01) $ (0.07)
============ ============ ============ ============ =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 26,807 41,093 47,467 45,627 48,687
============ ============ ============ ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
39
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
For the Years Ended For the three months ended
July 31, October 31,
---------- ---------- ---------- ---------- ----------
1997 1998 1999 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net loss to common stockholders ($4,695) ($5,094) ($7,591) ($642) ($3,207)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments $12 ($160) ($714) $ 32 $238
---------- ---------- ---------- ---------- ----------
Comprehensive loss to common stockholders ($4,683) ($5,254) ($8,305) ($610) ($2,969)
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
40
<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
Issuances of preferred stock (unaudited) 1 -- -- -- 417
Dividend expense (unaudited) -- -- -- -- --
Amortization of equity discount (unaudited) -- -- -- -- 1,168
Compensation expense (unaudited) -- -- -- -- --
Cumulative effect of translation adjustment (unaudited) -- -- -- -- --
Conversion of preferred stock (unaudited) -- -- 130 -- 29
Net loss (unaudited) -- -- -- -- --
--------- ---------- ---------- -------- ---------------
BALANCE, October 31, 1999 (unaudited) 27 -- 48,685 $ 49 $ 31,013
========= ========== ========== ======== ===============
<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
Issuances of preferred stock (unaudited) -- -- -- 417
Dividend expense (unaudited) (92) -- -- (92)
Amortization of equity discount (unaudited) (1,168) -- -- 0
Compensation expense (unaudited) -- -- 157 157
Cumulative effect of translation adjustment (unaudited) -- -- -- 0
Conversion of preferred stock (unaudited) -- 238 -- 267
Net loss (unaudited) (1,947) -- -- (1,947)
----------- ---------- ------------ -----------
BALANCE, October 31, 1999 (unaudited) $ (25,194) $ (620) $ (309) $ 4,939
=========== ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
41
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
For the Years Ended July 31, Three months ended October 31,
1997 1998 1999 1998 1999
----------- ------------------------------------- ----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,695) $ (5,094) $ (6,736) $ (642) $ (1,947)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Depreciation and amortization 591 1,822 3,248 649 908
Amortization of debt discount 87 307 346 82 94
Deferred compensation 295 487 545 116 157
Provision for losses on accounts receivable 735 1,024 2,346 224 120
48 -- -- -- --
Changes in operating assets and liabilities
(Increase) Decrease in accounts receivable (1,983) (2,723) (2,207) (476) 124
(Increase) Decrease in other assets (849) 197 (1,632) 306 (752)
Increase (Decrease) in accounts payable (1,021) 3,479 (1,139) (156) 1,769
Increase (Decrease) in accrued liabilities 884 (192) 1,857 (157) 27
Decrease in deferred revenue 378 71 (191) (70) (56)
------- --------------------------------- -------
Net cash provided by (used in) operating activities (5,530) (622) (3,563) (124) 444
------- --------------------------------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (590) (3,297) (956) (297) (248)
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) (297) (248)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 3,632 2,547 437 59 --
Net decrease in short-term borrowings 281 353 (488) (188) (97)
Net increase from advanced funding arrangements -- -- -- 382 33
Payments on debt -- (1,141) (679) (49) (170)
Capital lease payments (401) (1,044) (941) (525) (276)
Payments on long-term liabilities -- (67) (123) (53) (11)
Proceeds from issuance of preferred stock, net
of issuance costs -- -- 4,176 -- 417
Proceeds from issuance of common stock, net
of issuance costs 3,699 4,553 1,596 23 42
------- ------- ------- ------- -------
Net cash provided by (used in) financing activities 7,211 5,201 3,978 (351) (62)
------- ------- ------- ------- -------
Net increase (decrease) in cash 1,265 (830) (712) (772) 134
Cash, beginning of period 656 1,921 1,091 1,091 379
------- ------- ------- ------- -------
Cash, end of period $ 1,921 $ 1,091 $ 379 $ 319 $ 513
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
42
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Data with respect to the three month periods ended October 31, 1998 and 1999 are
unaudited
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
unaudited interim financial statements of American TeleSource International,
Inc. as of October 31, 1998 and 1999 and for the three month periods then ended
included herein have been prepared in accordance with generally accepted
accounting principles for interim financial reporting and with Securities and
Exchange Commission rules and regulations for 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, all adjustments, without audit, necessary for a fair
presentation of the consolidated financial position of American TeleSource
International, Inc, and its subsidiaries as of October 31, 1998 and 1999 and the
results of their operations and cash flows for the three month periods ended
October 31, 1998 and 1999 have been included.
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, and
the three months ended October 31, 1998 and 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 October 31, 1999, the Company's operating subsidiaries are as
follows:
43
<PAGE>
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.
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 and to October 31, 1999,
the Company has incurred cumulative net losses of $21.9 million and
$25.1 million, respectively.
44
<PAGE>
Further, the Company had a working capital deficit of $5.7 million at July 31,
1998, $6.7 million at July 31, 1999 and $10.3 million at October 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.
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
45
<PAGE>
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, 1999 and the three-month period ending October 31, 1999
were $8,530,665, $11,127,221, $6,138,549 and $1,323,093, respectively. At July
31, 1997, 1998, 1999 and October 31, 1999, $577,256, $484,381, $444,398 and
$411,147 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 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 and the three month period ended October 31, 1999,
this netting of IVA accounts resulted in the elimination of IVA payable and a
corresponding reduction in IVA receivable of approximately $197,000, $1.3
million and $1.5 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 and the
three-month periods ended October 31, 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.
46
<PAGE>
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 and the three-month period
ended October 31, 1999, other assets include goodwill, primarily related to the
purchase of Computel, of $5,216,646, $5,296,646 and $5,296,646, respectively,
net of accumulated amortization of $126,668, $265,089 and $299,717,
respectively. Goodwill is amortized over 40 years. As of July 31, 1998 and
1999 and October 31, 1999 other assets include acquisition costs of $1,417,870,
$1,596,620 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, $893,212 and $1,057,452, respectively. These
acquisition costs are being amortized over the life of the contracts, which
approximates three years. As of July 31, 1999 and October 31, 1999, other assets
include $898,943 related to the purchase of the rights to CuteFTP, net of
accumulated amortization of $110,352 and $157,645, respectively. This trademark
is being amortized over an estimated five-year life. Additionally, as of July
31, 1998 and 1999 and October 31, 1999, other assets include approximately
$489,000, $615,000 and $749,000 of other assets, not specifically identified as
goodwill, acquisition costs or trademarks. As it relates to SFAS 121, as of
July 31, 1999 and October 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 and the
three-month periods ended October 31, 1998 and 1999, the Company recorded
amortization expense of $55,491, $369,219, $925,440, $171,677 and $252,510,
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.
47
<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 Three Months Ended
For the Years Ended July 31, October 31,
1997 1998 1999 1998 1999
---------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Cash payments for interest $ 416,756 $1,349,679 $1,101,771 $ 414,961 $ 488,264
Cash payments for taxes $ - $ 148,097 $ - $ 10,930 $ -
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 $ - $ 110,617 $ 21,051
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.
48
<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 and October 31, 1999:
<TABLE>
<CAPTION>
July 31, 1998 July 31, 1999 October 31, 1999
------------- ------------- ----------------
<S> <C> <C> <C>
Telecommunications equipment $ 6,084 ,771 $ 6,476,395 $ 6,709,820
Land and buildings 892,507 447,748 460,495
Furniture and fixtures 882,449 902,873 930,912
Equipment under capital leases 5,585,291 7,758,739 8,025,089
Leasehold improvements 281,014 474,748 474,748
Other 517,192 608,914 715,439
------------- ------------- ----------------
14,233,224 16,669,417 17,316,503
Less: accumulated depreciation and amortization (2,418,514) (4,712,671) (5,312,203)
------------- ------------- ----------------
Total - property and equipment, net $ 11,814,710 $ 11,956,746 $ 12,004,300
============= ============= ================
</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 and the three months
ended October 31, 1998 and 1999, the Company recorded approximately $536,000,
$1,453,000, $2,323,0000, $477,662 and $655,017, respectively of depreciation
expense related to its fixed assets.
5. NOTES PAYABLE AND CONVERTIBLE DEBT
Notes Payable
- -------------
<TABLE>
<CAPTION>
July 31, October 31,
Notes payable are comprised of the following: -------- -----------
1998 1999 1999
---- ---- ----
<S> <C> <C> <C>
Note payable to a company, see terms below. $ 25,320 $ 137,071 $ 39,725
Note payable to an individual, see terms below. - 150,000 150,000
Note payable to a bank, see terms below. - 150,000 190,000
Notes payable to related parties, see terms below. - 100,000 72,858
Note payable to an individual, see terms below. - 368,768 185,283
Notes payable to various banks, see terms below. 416,846 56,878 55,641
Notes payable to a company, net of discount, see terms below. 364,803 309,588 314,017
---------- ---------- ----------
$1,406,969 $1,272,305 $1,007,524
Less: current portion $ 688,005 $ 960,523 $ 699,313
---------- ---------- ----------
$ 718,964 $ 311,782 $ 308,211
Total non-current notes payable ========== ========== ==========
</TABLE>
49
<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
$40,000 outstanding at October 31, 1999 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/TM/". (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 October 1999, the Company's subsidiary entered into an additional note
payable with a bank in the amount of $50,000 for working capital purposes. The
note calls for principal payments of $1,000 per month for six months and $3,667
per month for twelve months. Interest accrues monthly at an interest rate of the
Lender's "Prime Rate" plus 1%. At October 31, 1999, the Lender's "Prime Rate"
was 8.25%.
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 October 31, 1999, approximately $73,000 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/TM/". (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 and October 31, 1999, the Company
through its acquisition of Computel had approximately $416,846, $56,878 and
$55,641, 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.
50
<PAGE>
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 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 and
October 31, 1999, net of debt discount, was $1,603,802, $1,942,614 and
$2,032,623, respectively. All of the outstanding principal at July 31, 1999 and
October 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 and the three months ended October 31,
1998 and 1999, was $176,700, $942,750, $2,952,710, $728,981 and $633,374,
respectively. Future minimum lease payments under the noncancelable operating
leases at July 31, 1999, are as follows:
<TABLE>
<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>
51
<PAGE>
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>
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, July 31, 1999 and October 31, 1999 was
approximately $4,272,000, $3,826,000 and $3,704,000, 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. 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 its
October 31, 1999 balance sheet.
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
52
<PAGE>
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 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.
During the three months ended October 31, 1999, the Company issued 129,274
common shares related to the conversion of $75,000 of the Company's Series B
Preferred Stock.
At July 31, 1999 and October 31, 1999, stock subscription receivables of
$42,500 and $0, respectively, 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 or the three months ended October 31, 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.
53
<PAGE>
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 allocate
approximately $130,000 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
</TABLE>
54
<PAGE>
<TABLE>
<S> <C> <C>
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 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 Average Weighed 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>
55
<PAGE>
<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>
<TABLE>
<CAPTION>
Year Ended July 31,
------------------------------
1999
------------------------------
1998 Stock Option Plan
Weighted Average
Shares Exercise Price
<S> <C> <C>
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, July 31, 1999 and October 31, 1999, the Company had
$666,899, $465,487 and $308,874, respectively, of deferred compensation related
to options granted.
56
<PAGE>
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)
Basic and Diluted Loss per share
--------------------------------
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.
57
<PAGE>
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 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 As of and for the three months ending
July 31, 1997 July 31, 1998 July 31, 1999 October 31, 1998 October 31, 1999
<S> <C> <C> <C> <C> <C>
U.S. Telco
- -----------------------------------------------------------------------------------------------------------------------
External revenues $ 13,714,251 $ 26,695,690 $ 25,516,665 $ 8,284,135 $ 7,020,757
Intercompany revenues $ 330,362 $ 1,300,000 $ 800,012 - $ 279,188
------------ ------------ ------------ ------------
Total revenues $ 14,044,613 $ 27,995,690 $ 26,316,677 $ 8,284,135 $ 7,299,945
============ ============ ============ ============ ============
Earnings before interest,
taxes, depreciation and
amortization (EBITDA) ($3,131,841) ($16,807) ($1,485,045) $ 857,765 ($279,311)
Operating loss ($3,603,447) ($1,294,037) ($3,342,035) $ 425,613 ($820,284)
Net loss ($3,806,889) ($1,819,986) ($3,866,051) $ 970,063 ($1,138,539)
Total assets $ 6,450,033 $ 10,049,021 $ 9,606,263 $ 10,209,509 $ 9,568,399
Mexico Telco
- -----------------------------------------------------------------------------------------------------------------------
External revenues $ 1,949,755 $ 6,298,620 $ 6,359,238 $ 1,396,678 $ 1,661,037
Intercompany revenues $ 1,359,891 $ 5,136,541 $ 5,052,890 $ 898,916 $ 985,000
------------ ------------ ------------ ------------ ------------
Total revenues $ 3,309,646 $ 11,435,161 $ 11,412,128 $ 2,295,594 $ 2,646,037
============ ============ ============ ============ ============
EBITDA ($183,002) ($1,434,261) ($1,071,502) ($577,851) ($478,808)
Operating loss ($273,740) ($1,927,928) ($2,253,037) ($769,627) ($768,878)
Net loss ($364,402) ($2,564,103) ($2,691,450) ($893,687) ($1,009,550)
Total assets $ 9,097,780 $ 17,228,025 $ 13,236,868 $ 16,314,093 $ 12,968,251
</TABLE>
58
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Internet e-commerce
- -----------------------------------------------------------------------------------------------------------------------
External revenues $ 564,381 $ 1,525,517 $ 2,642,376 $ 555,466 $ 772,590
Intercompany revenues - 25,000 - - -
------------ ------------ ------------ ------------ ------------
Total revenues $ 564,381 $ 1,550,517 $ 2,642,376 $ 555,466 $ 772,590
============ ============ ============ ============ ============
EBITDA $ 39,197 $ 215,051 $ 1,052,015 $ 124,192 $ 273,028
Operating income $ 36,483 $ 188,658 $ 873,832 $ 105,016 $ 194,200
Net income $ 38,282 $ 197,698 $ 854,068 $ 110,938 $ 195,256
Total assets $ 266,955 $ 537,289 $ 1,222,238 $ 442,972 $ 1,372,837
Other
- -----------------------------------------------------------------------------------------------------------------------
External revenues - - - - -
Intercompany revenues ($1,690,253) ($6,461,541) ($5,852,902) ($898,916) ($1,264,188)
------------ ------------ ------------ ------------ ------------
Total revenues ($1,690,253) ($6,461,541) ($5,852,902) ($898,916) ($1,264,188)
============ ============ ============ ============ ============
EBITDA ($335,325) ($408,783) ($287,110) ($2,510) ($71,077)
Operating loss ($361,013) ($433,683) ($318,274) ($8,725) ($78,733)
Net loss ($562,119) ($907,570) ($1,887,651) ($829,197) ($1,254,122)
Total assets $ 5,940 ($3,563,743) $ 88,924 ($4,365,007) $ 307,706
Total
- -----------------------------------------------------------------------------------------------------------------------
External revenues $ 16,228,387 $ 34,519,827 $ 34,518,279 $ 10,236,279 $ 9,454,384
Intercompany revenues - - - - -
------------ ------------ ------------ ------------ ------------
Total revenues $ 16,228,387 $ 34,519,827 $ 34,518,279 $ 10,236,279 $ 9,454,384
============ ============ ============ ============ ============
EBITDA ($3,610,971) ($1,644,800) ($1,791,642) $ 401,616 ($556,168)
Depreciation, Depletion and
Amortization ($590,746) ($1,822,190) ($3,247,872) ($649,339) ($907,527)
Operating loss ($4,201,717) ($3,466,990) ($5,039,514) ($247,723) ($1,473,695)
Net loss ($4,695,128) ($5,093,961) ($7,591,084) ($642,383) ($3,206,955)
Total assets $ 15,820,708 $ 24,250,592 $ 24,154,293 $ 22,601,567 $ 24,217,193
</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.
59
<PAGE>
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>
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
60
<PAGE>
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 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. For the three
months ended October 31, 1999, the Company incurred costs of approximately
$47,000 related to these services. Additionally, the Company has a payable to
Mr. Revesz of $90,000 as of July 31, 1999 and October 31, 1999.
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 and October 31, 1999 approximately $100,000 and
$73,000, respectively 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 and October 31, 1999, the Company has a payable to
Technology Impact Partners of approximately $74,000 and $67,000, respectively.
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
61
<PAGE>
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 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.
62
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the expenses (estimated except for the SEC
registration fee) for the issuance and distribution of the securities being
registered, all of which will be paid by ATSI:
<TABLE>
<CAPTION>
<S> <C>
SEC Registration $ 373.45
Legal 1,000.00
Printing 3,000.00
Miscellaneous 500.00
Total: $4,873.45
</TABLE>
ATSI will not pay commissions and discounts of underwriters, dealers or agents,
if any, or any transfer taxes.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 145 of the Delaware General Corporation Law, ATSI's
Amended and Restated Certificate of Incorporation includes a provision that
eliminates the personal liability of its directors for monetary damages for
breach or alleged breach of their duty of care. In addition, the DGCL and
ATSI's Bylaws provide for indemnification of ATSI's directors and officers for
certain liabilities and expenses that they may incur in such capacities. In
general, directors and officers are indemnified with respect to actions taken in
good faith in a manner reasonably believed to be in, or not opposed to, the best
interests of ATSI, and with respect to any criminal action or proceeding,
actions that the indemnitee had no reasonable cause to believe were unlawful.
ATSI has purchased insurance with respect to, among other things, the
liabilities that may arise under the provisions referred to above. The
directors and officers of ATSI are also insured against liabilities, including
liabilities arising under the Securities act of 1933, as amended, which might be
incurred by them in their capacities as directors and officers of ATSI and
against which they are not indemnified by ATSI.
II-1
<PAGE>
In connection with this offering, The Shaar Fund (or its assignees under a
Registration Rights Agreement signed by ATSI and The Shaar Fund) has agreed to
indemnify ATSI, and its officers, directors and controlling persons, against any
losses, claims, damages or liabilities to which they may become subject that
arise out of or are based upon an untrue statement or alleged untrue statement
of a material fact contained in this prospectus or the Registration Statement or
any omission or alleged omission to state in this prospectus or the Registration
Statement a material fact required to be stated or necessary to make the
statements in this prospectus or the Registration Statement not misleading, to
the extent that such statement or omission was made in reliance on the written
information furnished to ATSI by The Shaar Fund.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In addition to the securities being registered in this Registration
Statement on Form S-1, each of the following issuances of securities was made in
reliance upon the exemption from registration under the Securities Act of 1933,
as amended ( the "Securities Act"), set forth in section 4(2) and/or 3(b) of the
Act. Such issuances were, in each case made to a limited number of purchasers,
who based upon representations made by the purchasers or facts known to the
Company, were either accredited (in substantially all cases) or sophisticated,
were in most cases existing stockholders, were familiar with or had access to
all material information concerning the operations and financial condition of
the Company, and acquired the securities for investment only and not with a view
to subsequent distribution. No general distribution was made in connection with
any such issuances.
In October 1998 and October 1999, the Company issued 59,101 and 31,566
shares, respectively, to an individual as consideration for his continuing
guaranty of approximately $500,000 of capital leases obtained by the Company.
The Company will continue to pay an additional $25,000 in stock annually so long
as the guaranty remains outstanding.
In December 1998, the Company issued 279,430 shares of Common Stock in
conjunction with its acquisition of one of its independent marketing
representatives in November 1997.
In January 1999, the Company issued 16,643 shares of Common Stock, in
lieu of $15,000 owed to one of its consultants, for services rendered for the
last quarter of 1998.
In January 1999, the Company issued 20,000 shares of Common Stock to a
broker/dealer as a commission for previously completed private placements.
In March 1999, April 1999 and December 1999, the Company sold 11,330
shares, 12,816 shares and 14,255 shares, respectively of Series A Preferred
Stock for $1,133,000, $1,281,560 and $1,425,500, respectively. The Series A
Preferred Stock and any accumulated, unpaid dividends may be converted into
Common Stock for up to five years at calculated conversion prices.
In April 1999, the Company sold 503,387 shares of Common Stock for
approximately $302,000. In connection with the sale the Company issued 41,667
shares of Common Stock to a broker/dealer as a commission.
ITEM 16. EXHIBITS.
5.1 Opinion regarding legality*
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 dated September 24, 1999*
10.42 Registration Rights Agreement between The Shaar Fund Ltd. and ATSI
dated September 24, 1999*
23 Consent of Arthur Andersen LLP**
24 Power of Attorney (included on signature page to the Registration
Statement)
* Contained in exhibits to Registration Statement on Form S-3 filed
October 26, 1999
II-2
<PAGE>
** Filed herewith
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
A. Undertakings Regarding Amendments to this Prospectus and the Registration
Statement
1. To file, during any period in which offers or sales are being made, a post-
effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the Securities
Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" in the
effective Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
Provided, however, that the undertakings set forth in paragraphs
(1)(A)(i) and (ii) of this section do not apply if the information required to
be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by ATSI pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in this
Registration Statement.
2. That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
B. Undertaking Regarding Filings Incorporating Subsequent Exchange Act
Documents by Reference. ATSI hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
ATSI's Annual Report on Form 10-K pursuant to section 13(a) or section 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of any
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
C. Undertaking in Respect of Indemnification. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 (the "Act") may be
permitted to directors, officers and controlling person of ATSI pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by ATSI of
expenses incurred or paid by a director, officer or controlling person of ATSI
in the successful defense of any action , suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of San Antonio, State of Texas on the 11th day of
January 2000.
AMERICAN TELESOURCE INTERNATIONAL, INC.
By: /s/ H. Douglas Saathoff
------------------------
H. Douglas Saathoff
Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints H.
Douglas Saathoff as attorney-in-fact, with the power of substitution, for him in
any and all capacities, to sign this Registration Statement and any amendments
to this Registration Statement and to file the same, with exhibits thereto and
other documents in connection therewith, with the SEC, granting to said
attorney-in-fact full power and authority to do and perform each and every act
and thing requisite and necessary to be done in connection therewith, as fully
to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact, or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
In witness whereof, each of the undersigned has executed this Power of
Attorney as of the date indicted.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Arthur L. Smith Chairman of the Board of Directors January 11, 2000
- --------------------------
Arthur L. Smith Chief Executive Officer
Director
/s/ H. Douglas Saathoff Chief Financial Officer January 11, 2000
- --------------------------
H. Douglas Saathoff Senior Vice President
Secretary
Treasurer
/s/Richard C. Benkendorf Director January 11, 2000
- --------------------------
Richard C. Benkendorf
/s/Carlos K. Kauachi Director January 11, 2000
- --------------------------
Carlos K. Kauachi
/s/ Murray R. Nye Director January 11, 2000
- --------------------------
Murray R. Nye
/s/ Tomas Revesz Director January 11, 2000
- --------------------------
Tomas Revesz
/s/Robert B. Werner Director January 11, 2000
- --------------------------
Robert B. Werner
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
5.1 Opinion regarding legality*
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 dated September 24, 1999*
10.42 Registration Rights Agreement between The Shaar Fund Ltd. and ATSI
dated September 24, 1999*
23 Consent of Arthur Andersen LLP**
24 Power of Attorney (included on signature page to the Registration
Statement)
* Contained in exhibits in Registration Statement on Form S-3 filed on
October 26, 1999
** File herewith
II-5
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report included in this registration statement and to the incorporation by
reference in this registration statement of our report dated October 5, 1999
included in American TeleSource International, Inc.'s Form 10-K for the year
ended July 31, 1999 and to all references to our Firm included in this
registration statement.
/s/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
San Antonio, Texas
January 10, 2000
