<PAGE>
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QA
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
--
ACT OF 1934
For the quarterly period ended April 30, 2000
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 0-23007
AMERICAN TELESOURCE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2849995
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
6000 Northwest Parkway, Suite 110
San Antonio, Texas 78249
(210) 547-1000
(Address, including zip code, of registrant's principal executive offices
and telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--
The number of shares outstanding of the registrant's common stock at
June 12, 2000 was 66,642,415.
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<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 2000
INDEX
Part I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Interim Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of July 31, 1999 and April 30, 2000.............................. 3
Consolidated Statements of Operations for the Three and Nine Months
Ended April 30, 1999 and 2000.................................................................. 4
Consolidated Statements of Comprehensive Loss for the Three and Nine Months
Ended April 30, 1999 and 2000.................................................................. 5
Consolidated Statements of Cash Flows for the Nine Months Ended April 30, 1999 and 2000......... 6
Notes to Consolidated Financial Statements...................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 13
Part II OTHER INFORMATION
Item 2 Change in Securities and Use of Proceeds.......................................................... 24
Item 4 Submission of Matters to a Vote of Security Holders............................................... 25
Item 6 Exhibits and Reports on Form 8-K.................................................................. 25
</TABLE>
2
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
<TABLE>
<CAPTION>
July 31, April 30,
1999 2000
--------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 379 $ 3,947
Accounts receivable, net of allowance of $ 1,600 and $ 1,613, respectively 3,693 4,059
Notes receivable, current - 169
Inventory - 72
Prepaid expenses and other assets 755 734
--------------- --------------
Total current assets 4,827 8,981
--------------- --------------
PROPERTY AND EQUIPMENT (At cost): 16,669 18,469
Less - Accumulated depreciation and amortization (4,713) (7,482)
--------------- --------------
Net property and equipment 11,956 10,987
--------------- --------------
OTHER ASSETS, net
Goodwill, net 5,032 4,928
Contracts, net 703 199
Trademarks, net 789 655
Other assets 615 846
--------------- --------------
Total assets $ 23,922 $ 26,596
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 4,004 $ 4,109
Accrued liabilities 3,167 1,866
Current portion of notes payable 961 223
Current portion of convertible long-term debt 1,942 -
Current portion of obligations under capital leases 1,430 1,434
Deferred revenue 233 123
--------------- --------------
Total current liabilities 11,737 7,755
--------------- --------------
LONG-TERM LIABILITIES:
Notes payable, less current portion 312 -
Obligations under capital leases, less current portion 5,523 4,652
Other long-term liabilities 213 28
--------------- --------------
Total long-term liabilities 6,048 4,680
--------------- --------------
COMMITMENTS AND CONTINGENCIES:
REDEEMABLE PREFERRED STOCK
Series D Cumulative Convertible Preferred Stock, 3,000 shares
authorized, no shares issued and outstanding at July 31, 1999, 3,000
shares issued and outstanding at April 30, 2000, carrying value of
$3,034,000 at April 30, 2000, mandatory redemption value of $4,680,000 - 3,034
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value, 10,000,000 shares authorized,
Series A Cumulative Convertible Preferred Stock, 50,000 shares
authorized, 24,145 shares issued and outstanding at July 31, 1999,
24,255 shares issued and outstanding at April 30, 2000 - -
Series B Cumulative Convertible Preferred Stock, 2,000 shares
authorized, 2,000 shares issued and outstanding at July 31, 1999,
no shares issued and outstanding at April 30, 2000 - -
Common stock, $0.001 par value, 100,000,000 shares authorized,
48,685,287 issued and outstanding at July 31, 1999,
66,639,081 issued and outstanding at April 30, 2000 49 67
Additional paid in capital 29,399 48,134
Accumulated deficit (21,987) (35,092)
Notes receivable from shareholders - (1,158)
Deferred compensation (466) (149)
Accumulated other comprehensive income (858) (675)
--------------- --------------
Total stockholders' equity 6,137 11,127
Total liabilities and stockholders' equity $ 23,922 $ 26,596
=============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended April 30, Nine months ended April 30,
1999 2000 1999 2000
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Network Services
Carrier $1,877 $5,362 $10,621 $17,019
Private Network 1,430 488 3,698 1,828
Call Services
Integrated Prepaid 1,399 1,590 4,023 4,511
Postpaid 2,046 690 5,594 2,853
Internet e-commerce 679 1,387 1,856 3,440
----------------- ----------------- ----------------- -----------------
Total operating revenues 7,431 9,517 25,792 29,651
----------------- ----------------- ----------------- -----------------
OPERATING EXPENSES:
Cost of services 4,142 6,723 15,467 20,353
Selling, general and administrative 3,000 3,755 9,187 10,382
Bad debt expense 240 172 627 385
Depreciation and amortization 942 1,129 2,349 3,464
----------------- ----------------- ----------------- -----------------
Total operating expenses 8,324 11,779 27,630 34,584
----------------- ----------------- ----------------- -----------------
Operating loss (893) (2,262) (1,838) (4,933)
OTHER INCOME(EXPENSE):
Other income (expense) (33) 13 (68) 33
Interest expense (387) (363) (1,137) (1,471)
----------------- ----------------- ----------------- -----------------
Total other income (expense) (420) (350) (1,205) (1,438)
----------------- ----------------- ----------------- -----------------
NET LOSS ($1,313) ($2,612) ($3,043) ($6,371)
LESS: PREFERRED DIVIDENDS (31) (4,683) (31) (6,734)
----------------- ----------------- ----------------- -----------------
NET LOSS TO COMMON STOCKHOLDERS ($1,344) ($7,295) ($3,074) ($13,105)
================= ================= ================= =================
BASIC AND DILUTED LOSS PER SHARE ($0.03) ($0.12) ($0.07) ($0.25)
================= ================= ================= =================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 46,844 61,780 46,259 53,448
================= ================= ================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
-------------------------------- -------------------------------
January 31, January 31,
-------------------------------- -------------------------------
1999 2000 1999 2000
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net loss to common stockholders ($1,344) ($7,295) ($3,074) ($13,105)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (88) 165 (31) 183
-------- --------- -------- ----------
Comprehensive loss to common stockholders ($1,432) ($7,230) ($3,105) ($12,922)
======== ========= ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended April 30,
1999 2000
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($3,043) ($6,371)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization 2,349 3,464
Amortization of debt discount 254 353
Deferred compensation 395 317
Provision for losses on accounts receivable 627 385
Changes in operating assets and liabilities
Increase in accounts receivable (1,074) (758)
Increase in other assets-current and long-term (815) (263)
Decrease in accounts payable (688) (818)
Increase (Decrease) in accrued liabilities 747 (29)
Decrease in deferred revenue (42) (110)
---------- ---------
Net cash used in operating activities (1,290) (3,830)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (866) (1,206)
Net cash paid in acquisitions (171) --
---------- ---------
Net cash used in investing activities (1,037) (1,206)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 489 237
Net decrease in short-term borrowings (306) (306)
Increase (decrease) from advanced funding arrangements 332 (40)
Payments on debt (385) (723)
Capital lease payments (774) (1,021)
Proceeds from issuance of preferred stock, net
of issuance costs 1,133 5,683
Proceeds from issuance of common stock, net
of issuance costs 963 4,774
---------- ---------
Net cash provided by financing activities 1,452 8,604
---------- ---------
Net (decrease) increase in cash (875) 3,568
Cash, beginning of period 1,091 379
---------- ---------
Cash, end of period $ 216 $ 3,947
========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements, which include
the accounts of ATSI-Delaware, ATSI-Canada, ATSI-Texas, ATSI-Mexico, ATSI de
CentroAmerica, Computel, Telespan, Sinfra and GlobalSCAPE have been prepared in
accordance with Rule 10-01 of Regulation S-X, "Interim Financial Statements,"
and accordingly do not include all information and footnotes required under
generally accepted accounting principles for complete financial statements. In
the opinion of management, these interim financial statements contain all
adjustments, without audit, necessary to present fairly the consolidated
financial position of ATSI, Inc. and its subsidiaries ("ATSI" or "the Company")
as of July 31, 1999 and April 30, 2000, the results of their operations for the
three and nine months ended April 30, 1999 and 2000 and cash flows for the nine
months ended April 30, 1999 and 2000. All adjustments are of a normal recurring
nature. All significant intercompany balances and transactions have been
eliminated in consolidation. It is recommended that these interim consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes thereto for the year ended July 31, 1999 included in
our annual report as amended on Form 10-K/A filed with the SEC on April 14, 2000
and August 25, 2000. Certain prior period amounts have been reclassified for
comparative purposes. The results of operations for any interim period are not
necessarily indicative of the results to be expected for the full year.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. However, in June 1999, FASB issued Statement of Financial
Accounting Standards (SFAS) No. 137, "Accounting for Derivative Instruments and
Hedging Activities- Deferral of the Effective Date of FASB Statement No. 133".
SFAS 137 delays the effective date of SFAS 133 to June 15, 2000. We believe the
adoption of this statement will not have a material effect on our financial
condition or results of operations.
2. FUTURE OPERATIONS
Our consolidated financial statements have been prepared on the basis of
accounting principles applicable to a going concern. As of April 30, 2000, we
had positive working capital of approximately $1.2 million. For the period from
December 17, 1993 to April 30, 2000, we have incurred cumulative net losses of
approximately $35.1 million. Although we have capital resources available to
us, these resources are limited and may not be available to support our ongoing
operations until such time as we are able to maintain positive cash flow from
operations. There is no assurance we will be able to achieve future revenue
levels sufficient to support operations or recover our investment in property
and equipment, goodwill and other intangible assets. These matters raise
substantial doubt about our ability to continue as a going concern. Our ability
to continue as a going concern is dependent upon the ongoing support of our
7
<PAGE>
stockholders and customers, our ability to obtain capital resources to support
operations and our ability to successfully market our services.
We are likely to require additional financial resources in the near term
and could require additional financial resources in the long-term to support our
ongoing operations. We have retained various financial advisers to assist us in
refining our strategic growth plan, defining our capital needs and obtaining the
funds required to meet those needs. The plan includes securing funds through
equity offerings and entering into lease or long-term debt financing agreements
to raise capital.
There can be no assurances, however, that such equity offerings or other
long-term debt financing arrangements will actually be consummated or that such
funds, if received, will be sufficient to support existing operations until
revenue levels are achieved sufficient to maintain positive cash flow from
operations. If we are 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 us
until a successful level of operations is attained, we have limited additional
sources of debt or equity capital and would likely be unable to continue
operating as a going concern.
3. CAPITAL LEASES
As of July 31, 1999, we entered into a capital lease transaction with NTFC
Capital Corporation, ("NTFC") to finance the purchase of a DMS 250/3000
International gateway switch from Northern Telecom, Inc. and additional
equipment totaling approximately $2.0 million over a five and a half-year period
with payments delayed for six months. The lease facility requires that we meet
certain financial covenants on a quarterly basis beginning October 31, 1999,
including minimum revenue levels, gross margin levels, earnings before interest,
taxes and depreciation and amortization (EBITDA) results and debt to equity
ratios. As of April 30, 2000, we were in default of quarterly financial
covenants related to revenues, gross margins and EBITDA. We have received a
waiver from NTFC stating that it waived our compliance requirements as of April
30, 2000. However, based upon our results before and after the period ended
April 30, 2000, we will most likely be in default of these same covenants at the
end of our next fiscal quarter and year end, July 31, 2000. As such, we have
requested that NTFC review our current business plan, including expected results
and capital requirements, in order to re-set the financial covenants applicable
to its capital lease obligation and prevent events of default from occurring on
a quarterly basis going forward. Based on discussions with NTFC, management
believes it is probable that NTFC will re-set the financial covenants such that
we will be in compliance as of July 31, 2000. NTFC is in the process of
reviewing this information, and we anticipate receiving the results of this
review prior to July 31, 2000. As such, we have classified our obligation to
NTFC as long-term. However, should we not receive revised financial covenants
from NTFC, it is likely that we will be required to classify our entire
obligation to NTFC as current as of July 31, 2000.
4. PREFERRED STOCK
In February 2000, we issued 1,000 shares of Series A Preferred Stock for
cash proceeds of approximately $1.0 million. The Series A Preferred Stock
accrues cumulative dividends at the rate of 10% per annum.
The Series A Preferred Stock and any accumulated, unpaid dividends may be
converted into Common Stock for up to one year at the average closing price of
the Common Stock for twenty (20) days
8
<PAGE>
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 initial beneficial conversion feature which
represents the difference between the Initial Conversion Price and the market
price on the Commitment Date is $1,000,000, therefore, we will allocate all of
the proceeds to additional paid-in capital as a discount to be amortized over a
ninety day period the earliest period at which the beneficial conversion feature
could be realized. The Company adjusted its preferred dividend expense to $4.7
million and $6.7 million for the three and nine months ended April 30, 2000 from
$3.9 million and $5.8 million in its previously filed 3/rd/ Quarter 10-Q. The
Series A Preferred Stock is callable and redeemable by us at 100% of its face
value, plus any accumulated, unpaid dividends at our option any time after our
Common Stock has traded at 200% or more of the conversion price in effect for at
least twenty (20) consecutive trading days, so long as we do not call the
Preferred Stock prior to the first anniversary date of the Date of Closing. The
terms of our Series A Preferred Stock restrict us from declaring and paying
dividends on its common stock until such time as all outstanding dividends have
been fulfilled related to the Preferred Stock.
During the quarter, the holders of our Series A Preferred Stock first and
second closings elected to convert 2,414 shares into our Common Stock. This
conversion resulted in the issuance of 3,287,478 shares of our Common Stock
during the quarter. Accumulated dividends approximating $241,000 associated with
the Series A Preferred Stock mentioned above converted to 328,753 shares of our
Common Stock. In addition, the holder of our Series C Preferred Stock elected
to convert 500 shares into our Common Stock. This conversion resulted in the
issuance of 484,872 shares of our Common Stock during the quarter. Accumulated
dividends of approximately $8,000 associated with the Series C Preferred Stock
mentioned above converted to 7,436 shares of our Common Stock.
5. REDEEMABLE PREFERRED STOCKS
In February 2000, we issued 3,000 shares of Series D Preferred Stock for
cash proceeds of approximately $3.0 million. The Series D Preferred Stock
accrues cumulative dividends at the rate of 6% per annum.
The Series D 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) 83% of the five lowest closing bid
prices on the ten days preceding conversion. As this conversion feature is
considered a " beneficial conversion feature" to the holder, we allocated all of
the proceeds to additional paid-in capital as a discount to be amortized over
the lesser of the period most beneficial to the holder or upon exercise of the
conversion feature. The discount was amortized in its entirety during the
quarter ended April 30, 2000. The terms of our Series D Preferred Stock restrict
us from declaring and paying dividends on our common stock until such time as
all outstanding dividends have been fulfilled related to the Preferred Stock.
The Series D Preferred Stock contains a mandatory redemption feature should
there be a change of control. The redemption feature calls for a redemption
value of 120% of the sum of $1,300 per share and accrued and unpaid dividends.
If there were a change of control, excluding accrued and unpaid dividends, we
would be required to redeem the $3,000,000 Series D Preferred stock for
approximately $4.7 million.
9
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6. SEGMENT REPORTING
In an attempt to identify its reportable operating segments, we considered a
number of factors or criteria. These criteria included segmenting based upon
geographic boundaries only, segmenting based on the products and services
provided, segmenting based on legal entity and segmenting by business focus.
Based on these criteria or factors, we have determined that we have three
reportable operating segments: (1) U.S. Telco; (2) Mexico Telco; and (3)
Internet e-commerce. Clearly, our Internet e-commerce subsidiary, GlobalSCAPE,
Inc. and its operations can be differentiated from the telecommunication focus
of the rest of the Company. Additionally, we believe that our U.S. and Mexican
subsidiaries should be separate segments in spite of the fact that many of the
products are borderless. Both, the U.S. Telco and Mexico Telco segments include
revenues generated from Integrated Prepaid, Postpaid, and Private Network
Services. Our Carrier Services revenues, generated as a part of our U.S. Telco
segment, are the only revenues not currently generated by both the U.S. Telco
and Mexico Telco segments. We have 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. We have
used earnings before interest, taxes, depreciation and amortization (EBITDA) in
our segment reporting as it is the chief measure of profit or loss used in
assessing the performance of each of our segments.
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
April 30, April 30, April 30, April 30,
1999 2000 1999 2000
<S> <C> <C> <C> <C>
U.S. Telco
-----------------------------------------------------------------------------------------------------------------------------
External revenues $ 5,044,718 $ 6,278,920 $ 19,270,984 $ 20,921,925
Intercompany revenues $ 456,663 $ 243,210 $ 456,663 $ 843,074
------------ ------------ ------------ -------------
Total revenues $ 5,501,381 $ 6,522,130 $ 19,727,647 $ 21,764,999
============ ============ ============ =============
EBITDA ($240,204) ($1,613,292) $ 740,055 ($2,374,649)
Operating loss ($707,537) ($2,143,688) ($624,708) ($3,748,425)
Net loss ($1,384,639) ($2,470,456) ($1,402,257) ($4,499,360)
Total assets $ 12,796,280 $ 11,430,640 $ 12,796,280 $ 11,430,640
Mexico Telco
-----------------------------------------------------------------------------------------------------------------------------
External revenues $ 1,707,355 $ 1,851,603 $ 4,665,387 $ 5,289,170
Intercompany revenues $ 1,896,427 $ 925,030 $ 3,906,073 $ 2,918,198
------------ ------------ ------------ -------------
Total revenues $ 3,603,782 $ 2,776,633 $ 8,571,460 $ 8,207,368
============ ============ ============ =============
EBITDA $ 230,592 ($40,194) ($744,446) ($539,934)
Operating loss ($170,076) ($543,150) ($1,592,676) ($2,375,351)
Net loss ($263,056) ($717,894) ($1,942,936) ($2,979,484)
Total assets $ 14,332,122 $ 11,226,584 $ 14,332,122 $ 11,226,584
Internet e-commerce
-----------------------------------------------------------------------------------------------------------------------------
External revenues $ 679,172 $ 1,386,756 $ 1,856,048 $ 3,440,380
</TABLE>
10
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<TABLE>
<S> <C> <C> <C> <C>
Intercompany revenues - - - -
------------ ------------ ------------ -------------
Total revenues $ 679,172 $ 1,386,756 $ 1,856,048 $ 3,440,380
============ ============ ============ =============
EBITDA $ 264,675 $ 549,533 $ 724,338 $ 1,573,038
Operating income $ 202,241 $ 455,034 $ 611,939 $ 1,333,684
Net income $ 205,589 $ 444,358 $ 624,747 $ 1,320,670
Total assets $ 1,266,299 $ 2,467,180 $ 1,266,299 $ 2,467,180
Other
-----------------------------------------------------------------------------------------------------------------------------
External revenues - - - -
Intercompany revenues ($2,353,090) ($1,168,240) ($4,362,736) ($3,761,272)
------------ ------------ ------------ -------------
Total revenues ($2,353,090) ($1,168,240) ($4,362,736) ($3,761,272)
============ ============ ============ =============
EBITDA ($206,145) ($29,088) ($208,645) ($127,287)
Operating loss ($217,799) ($30,402) ($232,749) ($142,715)
Net income (loss) $ 98,239 ($4,551,011) ($353,872) ($6,946,306)
Total assets ($1,526,827) $ 1,471,339 ($1,526,827) $ 1,471,339
Total
-----------------------------------------------------------------------------------------------------------------------------
External revenues $ 7,431,245 $ 9,517,279 $ 25,792,419 $ 29,651,475
Intercompany revenues - - - -
------------ ------------ ------------ -------------
Total revenues $ 7,431,245 $ 9,517,279 $ 25,792,419 $ 29,651,475
============ ============ ============ =============
EBITDA $ 48,918 ($1,133,041) $ 511,302 ($1,468,832)
Depreciation, Depletion and Amortization ($942,089) ($1,129,165) ($2,349,496) ($3,463,975)
Operating loss ($893,171) ($2,262,206) ($1,838,194) ($4,932,807)
Net loss ($1,343,867) ($7,295,003) ($3,074,318) ($13,104,480)
Total assets $ 26,867,874 $ 26,595,743 $ 26,867,874 $ 26,595,743
</TABLE>
7. LEGAL PROCEEDINGS
On February 11, 2000, we filed a Petition and Application for TRO and
Temporary Injunctive Relief in district court in Bexar County, Texas (Cause
Number 2000CI02032) against the former manager of our Costa Rican operations,
Alejandro Filloy, a former private network customer, Simple Communications
Technologies, Inc. and two other defendants, Gammacom Communicaciones, S.A. and
American Teleport Services, Inc. We allege that Alejandro Filloy and Simple
Communications used our assets to establish a competing business under the names
Gammacom (a Costa Rican corporation) and American Teleport Services (a Florida
corporation). We have asserted claims for conversion, fraud, and tortious
interference with contractual relations and conspiracy. We have also asked for
payment of unpaid amounts due from Simple Communications Technologies, Inc.
under its agreement for private network services. This action was moved to
federal court on March 6, 2000 and is now pending in the U.S. District Court for
the Western District of San Antonio, Civil Action No. SA 00CA-302-OG.
11
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In addition, we have filed a petition for payment against another private
network customer, International Telecommunications Systems, Inc. ("ITS"), in the
district court in Bexar County, Texas (Cause Number 2000CIO5482). The petition
demands payment of charges for services used and for charges which continue to
accrue under the terms of the three-year agreement between the Company and ITS.
ITS has asserted that it did not have a binding written contract and does not
owe us for any service not used.
We have outstanding receivables related to these private network customers
for both services used and services which continue to accrue under the terms of
the respective agreements. While we can not estimate the possible loss, if any,
related to these receivables, there can be no assurance that the resolutions of
both of these disputes would not have a material effect on our results of
operations. As such, we have established a reserve for the amounts related to
services, which continue to accrue under the agreements.
On January 29, 1999 and March 3, 1999, respectively, one of our customers
Twister Communications, Inc. and the Company filed Demands for Arbitration
seeking damages for breach of contract before the American Arbitration
Association. An arbitration panel was selected and the companies began the
process of completing written discovery. On May 23, 2000, Twister
Communications, Inc. was placed in involuntary Chapter 7 bankruptcy by three of
its other creditors (U.S. Bankruptcy Court for the Southern District of Texas,
Houston Division, Case No. 00-34799-H1-7). The bankruptcy trustee's initial
report to the court indicates that Twister does not possess sufficient assets to
pay any meaningful portion of its debt.
In light of the recent events, we believe it is unlikely that we will be
able to recover any portion of our debt and will write off the approximate
$846,000 receivable from our customer. Because we previously allowed for this
receivable in its entirety, the write-off will have no impact on our earnings
but will reduce both the Company's Accounts Receivable and its Allowance for
Doubtful Accounts.
8. RELATED PARTY TRANSACTIONS
In February 2000, our Board of Directors approved a plan to lend
approximately $1.4 million, at a market interest rate, in the aggregate to
certain key executive officers to allow them to exercise approximately 2,250,000
of their vested options. The executive officers who borrowed under the plan must
adhere to the following conditions: 1) they must contribute 10% in cash of the
amount borrowed; 2) the stock obtained with the exercises must be escrowed under
a twelve month standstill agreement or until such time as the note is paid; and
3) any derivative equity obtained from the stock's ownership must be escrowed
for a six-month period. As of April 30, 2000, we had lent approximately $1.2
million to key executive officers allowing them to exercise vested options. We
recognized the transaction by recording a note receivable for each executive
officer.
9. SUBSEQUENT EVENTS
On June 8, 2000 we announced that we had signed a definitive agreement to
acquire a Mexican company which holds a long distance concession license in that
country. The terms of the agreement call for the Company and its Mexican
affiliates to purchase 100% of the stock of Grupo Intelcom de Mexico, S.A. de
C.V. from Alfonso Torres Roqueni (a 51% stockholder) and COMSAT Mexico, S.A. de
C.V. (a 49% stockholder) for a total of approximately $755,500 in cash, $500,000
in the form of a note payable and 400,000 shares of American TeleSource
International, Inc. stock. Additionally, Mr. Torres will receive 100,000
warrants exercisable at $6.00 for a period of three years. As previously
announced, the
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transfer of the long distance concession license has already been approved by
Mexico's telecommunications regulator, Comision Federal de Telecomunicaciones
("Cofetel"). Final regulatory authorization from the Secretaria de
Comunicaciones y Transportes ("SCT"), a process required in any
telecommunications business combination in Mexico, is pending.
On June 14, 2000 we announced that we had signed a definitive agreement to
acquire privately held San Diego, California-based Genesis Communications
International, Inc. ("Genesis") in exchange for approximately $37.3 million in
shares of ATSI common stock. Closing of the transaction is contingent on
required U.S. regulatory approval and other customary conditions. In accordance
with the agreement, the number of shares to be issued upon consummation of the
transaction will be within a range of approximately 4.7 million to 9.6 million
shares, depending upon ATSI's stock price at closing.
Genesis is certified as an inter-exchange carrier ("IXC") in California,
Colorado, New Jersey, Nevada, New Mexico, Oregon, Illinois, Florida, New York,
Utah and Texas. Genesis is also certified as a local exchange carrier ("CLEC")
in California, Arizona, Nevada, New Mexico, New Jersey, Oregon, Florida, New
York and Texas.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Quarterly Report on Form 10-Q contains certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Specifically, all statements other
than statements of historical facts included in the report regarding the
Company's financial position, business strategy and plans and objectives of
management of the Company for future operations are forward-looking statements.
These forward-looking statements are based on the beliefs of the Company's
management, as well as assumptions made by and information currently available
to the Company's management. When used in this report, the words "anticipate,"
"believe," "could," "estimate," "expect" and "intend" and words or phrases of
similar import, as they relate to the Company or Company's management, are
intended to identify forward-looking statements. Such statements reflect the
current view of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions related to certain factors
including, without limitation, the inability to obtain capital, changes in the
Mexican political or economic environment, the adoption by Mexico of new laws or
regulations, or changes effected by Mexico to existing laws affecting the
communications industry generally or the Company specifically, increased or
redirected competition efforts, targeting the Company's services or operation,
by competitors, general economic conditions, customer relations, relationships
with vendors, the interest rate environment, seasonality, the operation of the
Company's network, the ability of the Company's direct sales force to
successfully replace its independent marketing representatives or the failure of
its direct sales force to produce anticipated results, transmission costs,
product introductions and acceptance, the inability to continue to generate new
sources of revenue, technological change, changes in industry practices, one-
time events and other factors described herein ("cautionary statements").
Reference is made to the risks and uncertainties described in the Company's
annual report on Form 10-K. Although the Company believes that the expectations
are reasonable, it can give no assurance that such expectations will prove to be
correct. Based upon changing conditions, should any one or more of these risks
or uncertainties materialize, or should any underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected or intended. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the applicable
cautionary statements.
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<PAGE>
General
Our mission is to employ leading-edge technologies for delivery of
exceptional telecommunication services to underserved Latino markets in the U.S.
and Latin America emphasizing convenience, accessibility, quality, reliability,
and affordability, while continually seeking to add value through new and
innovative products and services. Utilizing a framework of licenses,
interconnection and service agreements, network facilities and retail
distribution channels (hereinafter collectively referred to as the "framework"),
we are primarily focused on capturing market share in the international
telecommunications corridor between the United States and Mexico. Even with poor
phone-line penetration, our research indicates that Mexico may exchange more
international traffic with the U.S. than any other country in the world within
the next two years. As the regulatory environments allow, we plan to establish
framework in other Latin American countries as well. In addition to the U.S. and
Mexico, we currently own or have rights to use facilities in and have strategic
relationships with carriers in Costa Rica, El Salvador, and Guatemala.
Utilizing the framework described above, we provide local, domestic long
distance and international calls from our own public telephones and
communication centers within 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, we 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 our 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 our own network infrastructure.
Utilizing the same framework described above, we also serve 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. We currently provide these services to
and from the United States, Mexico, Costa Rica, El Salvador and Guatemala.
In June 2000, we announced that we had signed a definitive agreement to
purchase Grupo Intelcom, S.A. de C.V., a Mexican entity which holds a 30-year
long distance concession in that country. Upon consummation of the transaction,
we intend to extend our network in Mexico beyond our backbone network,
interconnecting into the local telephone infrastructure in targeted markets in
Mexico. By doing so, we hope to ultimately process the majority of our
telecommunications traffic "on-net", reducing our direct cost of doing
business.
We are 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 10 million users as of January 31,
2000.
Our consolidated financial statements have been prepared assuming that we
will continue as a going concern. Although we have positive working capital of
approximately $2.4 million at April 30, 2000, we have incurred losses since
inception and have not been able to generate positive cash flows from operations
on a consistent basis. For the reasons stated in Liquidity and Capital Resources
and subject to the risks referred to in Liquidity and Capital Resources, we
expect improved results of operations and liquidity during the next twelve
months.
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Results of Operations
The following table sets forth certain items included in our results of
operations in dollar amounts and as a percentage of total revenues for the three
and nine-month periods ended April 30, 1999 and 2000.
<TABLE>
<CAPTION>
Three months ended April 30, Nine months ended April 30,
---------------------------- ---------------------------
1999 2000 1999 2000
---- ---- ---- ----
(unaudited)
$ % $ % $ % $ %
-------- ------ -------- ------ -------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues:
-------------------
Network Services
Carrier $ 1,877 25% $ 5,362 56% $ 10,621 41% $ 17,019 57%
Private Network 1,430 19% 488 5% 3,698 14% 1,828 6%
Call Services
Integrated Prepaid 1,399 19% 1,590 17% 4,023 16% 4,511 15%
Postpaid 2,046 28% 690 7% 5,594 22% 2,853 10%
Internet e-commerce 679 9% 1,387 15% 1,856 7% 3,440 12%
-------- ------ -------- ------ -------- ------ --------- ------
Total operating revenues 7,431 100% 9,517 100% 25,792 100% 29,651 100%
Cost of services 4,142 56% 6,723 71% 15,467 60% 20,353 69%
-------- ------ -------- ------ -------- ------ --------- ------
Gross margin 3,289 44% 2,794 29% 10,325 40% 9,298 31%
Selling, general and
administrative expense 3,000 40% 3,755 39% 9,187 36% 10,382 35%
Bad debt expense 240 3% 172 2% 627 2% 385 1%
Depreciation and amortization 942 13% 1,129 12% 2,349 9% 3,464 12%
-------- ------ -------- ------ -------- ------ --------- ------
Operating loss (893) (12%) (2,262) (24%) (1,838) (7%) (4,933) (17%)
Other, net (420) (6%) (350) (4%) (1,205) (5%) (1,438) (4%)
-------- ------ -------- ------ -------- ------ --------- ------
Net loss (1,313) (18%) (2,612) (28%) (3,043) (12%) (6,371) (21%)
Less: preferred dividends (31) 0% (4,683) (49%) (31) 0% (6,734) (23%)
-------- ------ -------- ------ -------- ------ --------- ------
Net loss to common stockholders ($1,344) (18%) ($7,295) (77%) ($3,074) (12%) ($13,105) (44%)
======== ====== ======== ====== ======== ====== ========= ======
</TABLE>
Three Months Ended April 30, 2000 Compared to Three Months Ended April 30, 1999
Operating revenues. Operating revenues increased approximately $2.1
million, or 28%, due to increases in our carrier, integrated prepaid and
Internet e-commerce services. This increase was offset to some extent by the
decline in our private network and postpaid services.
Network management services increased approximately $2.5 million, or 77%.
This growth was principally due to the additional minutes processed for third
party carriers during the quarter ended April 30, 2000. We processed
approximately 50.5 million minutes of traffic for these carriers during the
quarter ended April 30, 2000, as compared to approximately 8.7 million minutes
during the quarter ended April 30, 1999. In the fourth quarter ended July 31,
1999, our alternate fiber route became fully operational enabling us to increase
our volume of carrier traffic over the quarter ended April 30, 1999. Due to
pricing and other
15
<PAGE>
market pressures, our revenues per minute for carrier services declined
significantly between quarters resulting in revenue increases far less than the
associated volume increases. As we continue to shift our focus towards retail-
based call services, it is likely that the growth trend in our third party
carrier volumes will slow. Our research indicates that nearly 80% of
international traffic with Mexico goes to/from six markets in the United States
(Southern California, Dallas, Houston, South Texas, Chicago and New York). It is
our desire to implement a paired market strategy by introducing retail based
products in these markets to complement the products to be offered in Mexico.
Communication centers are expected to be the magnets for these services just as
they are in Mexico. It is our stated goal to grow retail revenue as opposed to
wholesale carrier revenues because retail revenues are typically less volatile
and produce better margins. Our private network revenues declined from $1.4
million to $488,000 between periods due to the loss of customers upon expiration
or termination of their contracts. We have shifted our focus away from the
provision of these private network services to public traffic in the U.S.-
Mexican corridor. All of the above revenues are included in our U.S. Telco
results in Footnote 5 in the accompanying financial statements as external
revenues with the exception of approximately $107,000 of private network
revenues included in our external Mexico Telco results.
Call service revenues decreased approximately $1.2 million, or 34% between
quarters. The decline was principally attributable to lower volumes of operator-
assisted calls originating in Mexico and terminating in the U.S, new services
such as prepaid cellular being introduced into the market by our competitors,
and Mexican cellular providers recently introducing the concept of "calling
party pays". During the quarter ended April 30, 2000, we processed approximately
10,000 operator-assisted calls originating in Mexico and terminating in the U.S.
as compared to approximately 45,000 calls processed in the quarter ending April
30, 1999. We now provide these services almost exclusively from our own
communication centers and payphones, due to the added expenses associated with
third party owned locations. As we believe this downturn in operator-assisted
call volume trend may continue, we have recently begun utilizing the services of
third party owned operator centers to further reduce the cost of providing these
calls. We receive a commission from these third-party operator centers on a per-
call basis, which we recognize as revenue. In the past, we recognized revenue on
the gross value of a call when it was processed by our own in-house operator
center. As such, the amount of revenue now being recognized per call is lower
than it used to be. Integrated prepaid services, calls processed in exchange for
cash without utilizing an operator center, increased to $1.6 million from $1.4
million for the periods ended April 30, 2000 and April 30, 1999, respectively.
The calls are paid for almost exclusively in pesos, and the resulting revenues
are translated to U.S. dollars in the accompanying consolidated financial
statements. The average conversion rate of pesos to dollars during the quarters
ended April 30, 1999 and April 30, 2000, was 9.7 and 9.4 respectively. While
call volumes increased slightly between periods, the pesos generated converted
to more U.S. dollars, period to period. During the quarter ended April 30, 2000,
we generated approximately $13,000 in revenues from the sale of retail services,
primarily prepaid calling cards and cellular phones. These revenues, included in
the integrated prepaid services' section, were generated in the U.S. and Mexico
communication centers. With the exception of approximately $4,000 of retail
services generated by the U.S. communication centers, all of the integrated
prepaid revenue is included in our external Mexico Telco results in Footnote 5
in the accompanying financial statements. Approximately $160,000 of our postpaid
revenues are included in our Mexico Telco results, while the approximate
$530,000 of postpaid revenues remaining is included in our U.S. Telco results.
Our Internet e-commerce services increased approximately $708,000, or 104%
between quarters. This growth was due primarily to the increased number of
downloads of the Internet e-commerce's products between quarters. Downloads grew
from nearly 1.4 million in the quarter ended April 1999 to nearly 3.1 million in
the quarter ended April 2000. The increase in downloads has resulted in a
corresponding increase
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<PAGE>
in our revenues as downloads serve as the primary driver of revenues in coming
months as well as increasing the target audience for banner advertisements. We
began selling banner advertisements in April 1999 and advertising revenues
produced approximately 10% of overall e-commerce revenues during the quarter
ended April 30, 2000.
Cost of Services. Cost of services increased approximately $2.6 million, or
62%, between quarters and increased as a percentage of revenues from 56% to 71%,
between quarters. The increase in cost of services was principally attributable
to the increased volume of carrier services business handled by the Company as
discussed above. As noted in revenues our carrier services business is
exclusively accounted for in our U.S. Telco segment. The increase in cost of
sales, as a percentage of revenues, was due primarily to the percentage of lower
margin carrier services traffic increasing from 25% to 56% of overall corporate
revenues, quarter to quarter. This resultant change in our traffic mix was the
primary contributor to an increase in the combined telco operations cost of
services from 61% to 82% for the quarter. As long as wholesale carrier services
comprise a large percentage of our revenues the telco operations cost of
services will be approximately 80%. As such we continue to focus on retail
growth with an ultimate retail/wholesale mix of 70% retail and 30% wholesale. We
can not estimate when we will be able to achieve this desired mix.
Selling, General and Administrative (SG&A) Expense. SG&A expenses increased
25%, or approximately $755,000, between quarters. As a percentage of revenues,
these expenses remained relatively constant. This increase in SG&A was primarily
due to added SG&A costs at our Internet e-commerce subsidiary to support the
introduction of new products into the market and growth within GlobalSCAPE as it
prepares to spin-off from the parent company. GlobalSCAPE's SG&A costs increased
approximately $380,000 between quarters. SG&A costs associated with our telco
businesses increased between periods primarily due to the opening of two
communication centers in the U.S., as well as costs incurred related to future
openings subsequent to April 30th. These costs are included in our U.S. Telco
segment. Additionally, we incurred costs related to our American Stock Exchange
listing in February 2000, including a listing fee of approximately $50,000,
which has been recorded in our Other segment as it is corporate in nature.
Depreciation and Amortization. Depreciation and amortization increased
approximately $187,000, or 20%, between quarters and decreased slightly as a
percentage of revenues from 13% to 12%. The increase was primarily related to
purchases of property, plant and equipment of approximately $1.4 million during
the twelve months between April 30, 1999 and April 30, 2000.
Operating Loss. Our operating loss increased approximately $1.4 million
between quarters and increased as a percentage of revenues from 12% to 24%, due
to higher cost of services, increased selling, general and administrative
expenses, and increased depreciation and amortization.
Other Income (Expense). Other income (expense) decreased approximately
$70,000 between quarters. This decrease was principally attributable to our
conversion of convertible notes and a note payable subsequent to January 31 for
which we incurred additional debt discount expenses.
Preferred Dividends. During the third quarter of fiscal 2000, we recorded
approximately $147,000 of dividend expense related to cumulative convertible
preferred stock. In addition to cumulative dividends on its Series A, Series C,
and Series D Preferred Stock, which are accrued at 10%, 6% and 6%, respectively,
we have recorded approximately $4.5 million related to the discount or
"beneficial conversion feature" associated with its various preferred stock
issuances. Accounting rules call for us to amortize as a discount the difference
between the market price and the most beneficial conversion price to the holder
over the lesser of the period most beneficial to the holder or upon exercise of
the conversion feature. Due to increases in
17
<PAGE>
our stock price at the time such issuances occurred, this "beneficial conversion
feature" has in some instances been substantial. The period over which this
amortization is recorded ranges from immediately for our Series D Preferred
Stock to one year for our various Series A Preferred Stock issuances. The
Company's preferred stock issuances between February 2000 and April 2000 were
approximately $4.0 million. As of April 30, 2000 the Company has approximately
$580,000 million of discount recorded related to the beneficial conversion
features of its December 1999 and February 2000 Series A Preferred Stock which
will be amortized over the next eight and ten months.
Net loss. The net loss between quarters increased by approximately $6.0
million from $1.3 million to $7.3 million due primarily to increased cost of
services as a percentage of revenues, increased selling, general and
administrative expenses, and preferred stock dividends and discounts.
Nine Months Ended April 30, 2000 Compared to Nine Months Ended April 30, 1999
Operating revenues. Operating revenues increased approximately $3.9
million, or 15%, due to growth in our carrier, integrated prepaid and Internet
e-commerce services. This increase was offset to some extent by the decline in
our private network and postpaid services.
Network management services increased approximately $4.5 million, or 32%.
This growth was principally due to the additional minutes processed for other
carriers during the nine months ended April 31, 2000. We processed approximately
51.7 million minutes of traffic for other carriers during the nine months ended
April 30, 1999, as compared to approximately 137.5 million minutes during the
nine months ended April 30, 2000. Due to pricing and other market pressures, our
revenues per minute for carrier services declined significantly between periods
resulting in revenue increases far less than the associated volume increases. As
we continue to shift our focus towards retail-based call services, it is likely
that the growth trend in our third party carrier volumes will slow. Our research
indicates that nearly 80% of international traffic with Mexico goes to/from six
markets in the United States (Southern California, Dallas, Houston, South Texas,
Chicago and New York). It is our desire to implement a paired market strategy by
introducing retail based products in these markets to complement the products to
be offered in Mexico. Communication centers are expected to be the magnets for
these services just as they are in Mexico. It is our stated goal to grow retail
revenue as opposed to wholesale carrier revenues because retail revenues are
typically less volatile and produce better margins. Our private network revenues
declined from $3.7 million to $1.8 between periods due to the loss of customers
upon expiration or termination of their contracts. We have shifted our focus
away from the provision of these private network services to public traffic in
the U.S.-Mexican corridor. All of the above revenues are included in our U.S.
Telco results in Footnote 5 in the accompanying financial statements as external
revenues with the exception of approximately $380,000 of private network
revenues included in our external Mexico Telco results.
Call service revenues decreased approximately $2.3 million, or 23% between
periods. The decline was principally attributable to lower volumes of operator-
assisted calls originating in Mexico and terminating in the U.S, new services
such as prepaid cellular being introduced into the market by the our
competitors, and Mexican cellular providers recently introducing the concept of
"calling party pays". During the nine months ended April 30, 2000, we processed
approximately 42,000 operator-assisted calls originating in Mexico and
terminating in the U.S. as compared to approximately 128,000 calls processed in
the nine months ending April 30, 1999. We now provide these services almost
exclusively from our own communication centers and payphones, due to the added
expenses associated with third party owned locations. As we believe this
downturn in operator-assisted call volume trend may continue, we have recently
begun utilizing the services of third party owned operator centers to further
reduce the cost of
18
<PAGE>
providing these calls. We receive a commission from these third-party operator
centers on a per-call basis, which we recognize as revenue. In the past, we
recognized revenue on the gross value of a call when it was processed by our own
in-house operator center. As such, the amount of revenue now being recognized
per call is lower than it used to be. Integrated prepaid services, calls
processed in exchange for cash without utilizing an operator center, increased
to $4.5 million from $4.0 million for the periods ended April 30, 2000 and April
30, 1999, respectively. The calls are paid for almost exclusively in pesos, and
the resulting revenues are translated to U.S. dollars in the accompanying
consolidated financial statements. The average conversion rate of pesos to
dollars during the periods ended April 30, 1999 and April 30, 2000, was 9.9 and
9.4 respectively. While call volumes increased slightly between periods, the
pesos generated converted to more U.S. dollars, period to period. During the
nine months ended April 30, 2000, we generated approximately $18,000 in revenues
from the sale of retail services, primarily prepaid calling cards and cellular
phones. These revenues, included in integrated prepaid, were generated in the
U.S. and Mexico communication centers. With the exception of approximately
$4,000 of retail services generated by the U.S. communication centers, all of
the integrated prepaid revenue is included in our external Mexico Telco results
in Footnote 5 in the accompanying financial statements. Approximately, $400,000
of our postpaid revenues are included in our Mexico Telco results, while the
approximate $2.4 million of postpaid revenues remaining are included in our U.S.
Telco results.
Our Internet e-commerce services increased approximately $1.6 million, or
85% between periods. This growth was due primarily to the increased number of
downloads of the Internet e-commerce's products between periods. Downloads grew
from nearly 2.6 million in the nine months ended April 30, 1999 to approximately
7.4 million in the nine months ended April 30, 2000. The increase in downloads
has resulted in a corresponding increase in our revenues as downloads serve as
the primary driver of revenues in coming months as well as increasing the target
audience for banner advertisements.
Cost of Services. Cost of services increased approximately $4.9 million, or
32%, between periods and increased as a percentage of revenues from 60% to 69%,
between periods. The increase in cost of services was principally attributable
to the increased volume of business we handled as discussed above. As noted in
revenues our carrier services business is exclusively accounted for in our U.S.
Telco segment. The increase in cost of sales, as a percentage of revenues, was
due primarily to the percentage of lower margin carrier services traffic
increasing from 41% to 57% of overall corporate revenues, period to period. This
resultant change in our traffic mix was the primary contributor to an increase
in the combined telco operations cost of services from 64% to 77% for the
period. As long as wholesale carrier services comprise a large percentage of our
revenues the telco operations cost of services will be approximately 80%. As
such we continue to focus on retail growth with an ultimate retail/wholesale mix
of 70% retail and 30% wholesale. We can not estimate when we will be able to
achieve this desired mix.
Selling, General and Administrative (SG&A) Expense. SG&A expenses increased
13%, or approximately $1.2 million, between periods. As a percentage of
revenues, these expenses remained relatively constant. The increase in SG&A was
primarily due to added SG&A costs at our Internet e-commerce subsidiary to
support the introduction of new products into the market and growth within
GlobalSCAPE as it prepares to spin-off from the parent company. GlobalSCAPE's
increase in SG&A costs period to period was approximately $740,000. SG&A costs
associated with our telco businesses increased between periods primarily due to
the opening of two communication centers in the U.S. as well as costs incurred
related to future openings subsequent to April 30/th/. These costs have been
included in the SG&A expenses of our U.S. Telco segment. Additionally, we
incurred costs related to our American Stock Exchange listing in February 2000,
including a listing fee of approximately $50,000, which have been
19
<PAGE>
included in our Other segment as they are corporate in nature.
Depreciation and Amortization. Depreciation and amortization increased
approximately $1.1 million, or 47%, between periods and increased as a
percentage of revenues from 9% to 12%. The increase was primarily related to
purchases of property, plant and equipment of approximately $1.4 million for the
nine months ended April 30, 2000.
Operating Loss. Our operating loss increased approximately $3.1 million
between periods and increased as a percentage of revenues from 7% to 17%, due to
higher cost of services, increased selling, general and administrative expenses,
and increased depreciation and amortization.
Other Income (Expense). Other income (expense) increased approximately
$233,000 between periods. This increase was principally attributable to
additional debt discount expense associated with our conversion of convertible
notes and a note payable in January 2000. Additional increases in interest
expense are a result of increased indebtedness and capital leases.
Preferred Dividends. During the nine months ending April 30, 2000, we
recorded approximately $325,000 of dividend expense related to cumulative
convertible preferred stock. In addition to cumulative dividends on our Series
A, Series B, Series C, and Series D Preferred Stock, which are accrued at 10%,
6%, 6%, and 6%, respectively, we have recorded approximately $6.4 million
related to the discount or "beneficial conversion feature" associated with our
various preferred stock issuances. Accounting rules call for us to amortize as a
discount the difference between the market price and the most beneficial
conversion price to the holder over the lesser of the period most beneficial to
the holder or upon exercise of the conversion feature. Due to increases in our
stock price at the time such issuances occurred this "beneficial conversion
feature" has in some instances been substantial. The period over which this
amortization is recorded ranges from immediately for our Series D Preferred
Stock to one year for our various Series A Preferred Stock issuances. The
proceeds of the preferred stock issuances during the nine months ended April 30,
2000 were approximately $5.8 million. As of April 30, 2000, we have
approximately $580,000 of discount recorded related to the beneficial conversion
features of its December 1999 and February 2000 Series A Preferred Stock which
will be amortized over the next eight and ten months.
Net loss. The net loss for the nine months ended April 30, 2000 increased
approximately $10 million to $13.1 million from the $3.1 million net loss for
the nine months ended April 30, 1999. The increased net loss was due primarily
to increased cost of services as a percentage of revenues, increased selling,
general and administrative expenses, increased depreciation and amortization
expense, increased interest expense and the preferred stock dividends and
discounts.
Liquidity and Capital Resources
During the nine months ended April 30, 2000, we generated negative cash
flows from operations of approximately $3.8 million. The amount of cash used in
our operations is a result of the net loss incurred during the period, as well
as activities related to payments to vendors. We have historically operated with
negative cash flows and have sought to fund those losses and deficits by
completing private equity placements.
For the nine months ended April 30, 2000, our net loss, after adjustments
for non-cash items (depreciation and amortization, amortization of debt
discount, deferred compensation and the provision for losses on accounts
receivable) was approximately $1.8 million. Management of the operating assets
and liabilities, which consists mainly of collections on accounts receivable and
payments made on outstanding
20
<PAGE>
payables and accrued liabilities, produced negative cash flows of approximately
$2.0 million, resulting in the negative cash flows for the period of $3.8
million. For the three months ended April 30, 2000, our net loss, after
adjustments for the same non-cash items mentioned above, was approximately $1.3
million. Management of its operating assets and liabilities resulted in a net
amount of cash being used of $2.0 million. Although we have produced negative
earnings before interest, taxes, depreciation and amortization ("EBITDA") of
approximately $1.5 million during the nine month period ending April 30, 2000,
cash raised from private equity issuances (discussed below) has allowed us to
reduce our combined accounts payable/accrued liabilities balance by
approximately $1.2 million between July 31, 1999 and April 30, 2000.
Until we are able to produce positive cash flows from operations on a
recurring basis, management will be faced with deciding whether to use available
funds to pay vendors and suppliers for services necessary for operations, to
service its debt requirements, or to purchase equipment to be used in the growth
of our business. Until then, our operating activities may result in net cash
being used, or provided, during quarterly periods, regardless of our income
statement results for the periods. As noted in our amended Form 10-K we have not
always paid all of out suppliers on time. Some of these suppliers are critical
to our operations. These suppliers have given us payment extensions in the past,
although there is no guarantee they will do so in the future.
During the nine months ended April 30, 2000, we received cash proceeds, net
of issuance costs, of $5.7 million from the issuance of preferred stock, and
$4.8 million from the issuance of common stock as a result of warrant and option
exercises. These funds were used to pay down outstanding payables balances as
mentioned above, to make payments on our debt and capital lease obligations, and
to purchase approximately $1.2 million in equipment used in our network
operations. On January 31, 2000, we converted approximately $2.9 million in
outstanding notes and accrued interest which had been classified as a current
liability into common stock of the Company. The net result of our operating,
investing and financing activities was an increase in cash during the period of
$3.6 million and positive working capital at April 30, 2000 of approximately
$1.2 million. This represents a $8.1 million improvement over our working
capital deficit of $6.9 million at July 31, 1999 and a $5.1 million improvement
over the working capital deficit of $3.9 million at January 31, 2000.
As of April 30, 2000, we were in default of financial covenants related to
revenues, gross margins and EBITDA with NTFC Capital Corporation, which provided
a long-term capital lease of approximately $2.0 million for our international
gateway switch in Dallas, Texas. We requested and received a waiver of its
requirements as of that date. Based upon our results before and after the period
ended April 30, 2000, we will most likely be in default of these same covenants
at the end of its next fiscal quarter and year end, July 31, 2000. As such, we
have requested that NTFC review our current business plan, including expected
results and capital requirements, in order to re-set the financial covenants
applicable to its capital lease obligation and prevent events of default from
occurring on a quarterly basis going forward. Based on discussions with NTFC,
management believes it is probable that NTFC will re-set the financial covenants
such that we will be in compliance as of July 31, 2000. NTFC is in the process
of reviewing this information, and we anticipate receiving the results of this
review prior to July 31, 2000. As such, we have classified our obligation to
NTFC as long-term. However, should we not receive revised financial covenants
from NTFC, it is likely that we will be required to classify our entire
obligation to NTFC as current as of July 31, 2000.
Our current liabilities as of April 30, 2000 are approximately $7.8
million. Included in our current obligations are $1.4 million of current capital
leases, approximately $223,000 of current note payables and approximately $6
million of accounts payable and accrued liabilities. As of April 30, 2000 our
current assets
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are sufficient to fund our current liabilities. Until, however, we are able to
produce positive cash flows from operations on a recurring basis, we will need
to continue to seek outside sources of funds to continue operations on a long-
term basis.
On February 17, 2000, we announced plans to capitalize on the value of our
wholly owned subsidiary, GlobalSCAPE, Inc. by distributing a portion of our
ownership in GlobalSCAPE to our shareholders, and offering additional
GlobalSCAPE shares to ATSI shareholders and the GlobalSCAPE customer base.
Shareholders of ATSI will be allowed to participate in these transactions, which
are designed to accomplish three goals: 1) To increase ATSI shareholder value;
2) to raise funds necessary for further growth at GlobalSCAPE, and 3) to raise
funds necessary for further growth at ATSI. Management anticipates that the
transaction will provide cash to ATSI to reduce or eliminate its working capital
deficit. In addition, the transactions should also provide an ongoing benefit to
ATSI, as it will realize a stepped-up benefit through its retained ownership in
GlobalSCAPE, enhancing its own financial position and its ability to act on or
finance opportunities going forward. However, depending on the percentage of its
ownership to be retained after the distribution and offering, GlobalSCAPE will
contribute less profits and cash flows to ATSI. Because GlobalSCAPE currently
contributes significantly to our consolidated EBITDA results, we expect our
consolidated operating and cash flow results to decline after the distribution
and offering.
On July 28, 2000 we filed an amended Form 10 for our wholly-owned
subsidiary GlobalSCAPE, Inc. in which we noted that in light of current market
conditions we have decided not to make a public offering of GlobalSCAPE common
stock contemporaneously with the distribution. We will complete the distribution
as planned and we will continue to evaluate a public offering as well as other
alternatives to finance GlobalSCAPE's growth and raise funds for ATSI. The
distribution is expected to occur on or before September 8, 2000 to shareholders
of record as of July 14, 2000.
In the near term, we must continue to manage our costs of providing
services and overhead costs as we begin focusing on optimizing use of our
network. On June 8, 2000, we announced that we had signed a definitive agreement
to acquire a Mexican company which holds a long distance concession license in
that country, which we believe will eventually allow us to significantly reduce
our cost of transporting services. The terms of the agreement call for us and
our Mexican affiliates to purchase 100% of the stock of Grupo Intelcom de
Mexico, S.A. de C.V. from Alfonso Torres Roqueni (a 51% stockholder) and COMSAT
Mexico, S.A. de C.V. (a 49% stockholder) for a total purchase price of
approximately $3,255,000 consisting of $755,000 in cash, $500,000 in the form of
a note payable and 400,000 shares of our common stock. Additionally, Mr. Torres
will receive 100,000 warrants at $6.00 for a period of three years. At July 31,
2000 Grupo Intelcom had total assets of approximately $10,000 and a net loss for
the seven months ending July 31, 2000 of approximately $8,000. In order for us
to significantly reduce costs with the concession, we will need to purchase a
significant amount of hardware and software, allowing us to expand and operate
our own network in Mexico. This expansion of our network will allow us to reduce
our origination and termination costs through the elimination of interconnection
costs we currently pay to other concessionaires. We believe that these capital
expenditures may approximate $60 million over a five-year period. We will likely
need to raise these funds through additional debt and/or equity capital. On
April 14, 2000, in anticipation of these funding requirements, and to meet our
current cash flow needs, we signed an agreement with a private equity fund,
under which the fund agreed to purchase up to 5,000,000 shares of our common
stock over an eighteen-month period at 92% of the market price for our common
stock at the time of purchase. We have no initial commitment to draw on the
facility, but may do so based upon average trading volumes on an as-needed basis
as often as every twenty days, subject to certain restrictions. If we use this
facility we must issue the investor warrants for 1,500 shares of common stock
for every $100,000 that is invested at an exercise price of 120% of the average
of the five closing sale prices preceding the date of the investment, and an
additional 1,000 warrants per $100,000 invested as a finder's fee on the same
terms. The amount of
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funds to be generated under the facility for us will depend on the price of
ATSI's common stock at the time each draw is executed. Before we can draw on the
facility, any shares to be issued under the facility must be registered with the
Securities and Exchange Commission. As of June 14, no registration statement had
been filed to do so.
On June 14, 2000, we announced that we signed a definitive agreement to
acquire privately held San Diego, California-based Genesis Communications
International, Inc. ("Genesis") in exchange for approximately $37.3 million in
shares of ATSI common stock. Closing of the transaction is contingent upon,
among other things, required U.S. regulatory approval and approval by the
Genesis shareholders. In accordance with the agreement, the number of shares to
be issued upon consummation of the transaction will vary depending on the
average of the closing price of our common stock for the ten days preceding
closing, between an agreed range of approximately 4.7 million to 9.6 million
shares.
Over the past five years, Genesis has successfully penetrated the Latino
markets in the United States and has captured a customer base consisting of
65,000 long distance customers and 10,000 local service customers. Genesis is
certified as an inter-exchange carrier ("IXC") in California, Colorado, New
Jersey, Nevada, New Mexico, Oregon, Illinois, Florida, New York, Utah and Texas.
Genesis is also certified as a local exchange carrier ("CLEC") in California,
Arizona, Nevada, New Mexico, New Jersey, Oregon, Florida, New York and Texas.
For the year ended December 31, 1999, Genesis produced revenues of approximately
$24.1 million, EBITDA of approximately $1.6 million and net income before taxes
of approximately $570,000. Through May 30, 2000, the Company has continued to
produce positive EBITDA. No assurances may be given that it will continue to
produce positive EBITDA. Based on Genesis's historical performance, ATSI
management believes that, if the transaction is consummated, the acquisition of
Genesis will enhance our cash flows and will be accretive to earnings.
Until we are able to produce positive cash flows from operations in an
amount sufficient to meet its debt service and capital expenditure requirements,
we must be able to access debt and/or equity capital to assist us in doing so,
although no assurance may be given that we will be able to do so. The terms of
the series C and D preferred stock and the related warrants include many
potentially adverse effects for us and our shareholders as described in the Risk
Factors section of our Form 10-K/A. However, as described in our risk factor
captioned, "If we do not raise additional capital, we may go out of business,"
we are not able to raise funds on terms as favorable as those available to
profitable companies. At the time these issuances were made, we needed funds to
continue operations and were not able to find financing on more favorable terms.
Our board of directors believed it to be in the best interest of the
shareholders to raise the funds needed to continue operations.
In an effort to meet its financial needs going forward, we have engaged the
investment banking firm of Gerard, Klauer Mattison & Co. ("GKM"). GKM is
assisting us in finding and securing financial and strategic relationships.
While we will continue to work with GKM in forming medium and long-term
financing solutions, it may be necessary for us to continue to access debt
and/or equity capital in the near-term.
Inflation/Foreign Currency
Inflation has not had a significant impact on our operations. With the
exception of integrated prepaid revenues from our communication centers and
payphones, almost all of our revenues are generated and collected in U.S.
dollars. Integrated prepaid services from our communication centers and
payphones are provided at the time of the call in exchange for cash payment, so
we do not maintain
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receivables on our books that are denominated in pesos. In an effort to reduce
foreign currency risk, we attempt to convert pesos collected to U.S. dollars
quickly and attempt to maintain minimal cash balances denominated in pesos. Some
expenses related to certain services provided by us 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 our financial
condition or operating results.
Market Risk
We are subject to several market risks. Specifically, we face commodity
price risks, equity price risks and foreign currency exchange risk.
Certain of our businesses, namely wholesale carrier services, operate in an
extremely price sensitive environment. The wholesale business over the past
twelve months has seen significant reductions in the price per minute charged
for transporting minutes of traffic. While we have been able to withstand these
pricing pressures, certain of our competitors are much larger and greater
positioned to continue to withstand these price reductions. Our ability to
further absorb these price reductions may be dependent on our ability to further
reduce our costs of transporting these minutes.
Until such time as we are able to consistently produce positive cash flows
from operations it will be dependent on our ability to continue to access debt
and equity sources of capital. While recent history has shown us capable of
raising equity sources of capital; future equity financings and the terms of
those financings will be largely dependent on our stock price, our operations
and the future dilution to our shareholders.
We face two distinct risks related to foreign currency exchange risk;
transaction risk and translation risk.
As previously discussed under the caption "Inflation", We face risks
related to certain of our revenue streams, namely, direct dial or integrated
prepaid services from our own Mexican communication centers and payphones and
the transacting of business in pesos as opposed to U.S. dollars. Historically,
we have been able to minimize foreign currency exchange risk by converting from
pesos to U.S. dollars quickly and by maintaining minimal cash balances
denominated in pesos. As we grows our retail business in Mexico it is likely
that we will face increasing foreign currency transaction risks.
Historically, we have recorded foreign currency translation gains/losses
due to the volatility of the peso exchange rate as compared to the U.S. dollar
over time. We anticipate we will continue to experience translation gains/losses
in our assets and liabilities, specifically in fixed assets which are accounted
for at historical pesos amounts on the books of our Mexican subsidiaries but
converted to U.S. dollars for consolidation purposes at current exchange rates.
PART II OTHER INFORMATION
Item 2 Change in Securities and Use of Proceeds
In February 2000 we issued 10,000 shares of our Series A preferred stock
for approximately $1,000,000 to Kings Peak LLC. As noted in Note 4 of this
amended 10-Q our Series A preferred stock converts to common stock at a discount
to market originally defined as the Initial Conversion Price. The conversion
price is reset on the anniversary date to 75% of the then calculated conversion
price or 75%
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of the initial conversion price so long as the conversion price can never be
reset to lower than 75% of the initial conversion price. The Series A preferred
stock accrues dividends at 10% per annum. We currently have a pending
Registration statement on Form S-3 (File No. 333-35846) to register these
shares.
In February 2000 we issued 3,000 shares of Series D preferred stock for
cash proceeds of approximately $3,000,000 and a warrant to purchase 150,000
shares of common stock at $4.37 to the Shaar Fund. Additionally, we paid $90,000
to Corporate Capital Management LLC for introducing us to the Shaar Fund. As
noted in Note 4 of this amended 10-Q our Series D preferred stock converts to
common stock at a discount to market based on the lower of an Initial Conversion
Price or 83% of the five lowest closing bid prices of the ten days preceding
conversion. The Series D preferred stock accrues dividends at 6% per annum. We
currently have a pending Registration statement on Form S-3 (File No. 333-89683)
to register these shares.
The terms of our Series A and D preferred stock restrict us from declaring
and paying dividends on our common stock until such time as all dividends have
been fulfilled related to the Preferred Stock.
Each of these offerings were transactions by an issuer not involving any
public offering under Section 4(2) of the Securities Act of 1933, as amended and
SEC Regulation D.
Item 4 Submission of Matters to a Vote of Security Holders
On December 9, 1999 we held our 1999 Annual Stockholders Meeting. The
stockholders were asked to vote on two items: the election of Class B members of
our Board of directors and the ratification of the selection of Arthur Andersen
LLP as independent public accountants for the fiscal year ending July 31, 2000.
Murray R. Nye and Richard C. Benkendorf were elected as Class B members of the
board of directors with their terms to expire at the Annual Meeting of
Stockholders held in 2002. The results of the vote were as follows:
For Against
Murray R. Nye 33,401,025 6,966,606
Richard C. Benkendorf 33,742,325 6,625,306
Mr. Nye and Mr. Benkendorf join Mr. Arthur L. Smith, Mr. Carlos Kauachi and
Mr. Tomas Revesz, whose terms expire at the Annual Meeting of Stockholders held
in either 2000 or 2001.
The results of the vote on the selection of Arthur Andersen LLP as
independent public accountants for the fiscal year ending July 31, 2000 were as
follows:
For Withheld Abstained
39,103,830 1,193,800 43,001
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
The exhibits listed below are filed as part of this report.
Exhibit
Number
------
4.1 Securities Purchase Agreement between COMSAT Mexico, S.A. de C.V. and ATSI
(Exhibit to
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Form 10-Q filed June 14, 2000)
4.2 Escrow Agreement between COMSAT Mexico, S.A. de C.V. and ATSI (Exhibit to
Form 10-Q filed June 14, 2000)
4.3 Securities Purchase Agreement between Alfonso Torres Roqueni and ATSI
(Exhibit to Form 10-Q filed June 14, 2000)
4.4 Escrow Agreement between Alfonso Torres Roqueni and ATSI (Exhibit to Form
10-Q filed June 14, 2000)
4.5 Warrant Agreement between Alfonso Torres Roqueni and ATSI (Exhibit to Form
10-Q filed June 14, 2000)
4.6 Promissory Note between Alfonso Torres Roqueni and ATSI (Exhibit to Form
10-Q filed June 14, 2000)
11 Computation of Earnings per Share (Exhibit to Form 10-Q filed June 14,
2000)
27 Financial Data Schedule (Exhibit to Form 10-Q filed June 14, 2000)
(b) Current Reports on Form 8-K.
None.
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AMERICAN TELESOURCE INTERNATIONAL INC.
(Registrant)
Date: August 25, 2000 By: /s/ H. Douglas Saathoff
-----------------------
Name: H. Douglas Saathoff
Title: Chief Financial Officer
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