<PAGE>
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
-
ACT OF 1934
For the quarterly period ended April 30, 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)
<TABLE>
<S> <C>
Delaware 74-2849995
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
</TABLE>
12500 Network Blvd., Suite 407
San Antonio, Texas 78249
(210) 558-6090
(Address, including zip code, of registrant's principal executive offices
and telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--
The number of shares outstanding of the registrant's common stock at June
12, 2000 was 66,642,415.
--------------------------------------------------------------------------------
<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
Page
----
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.......................... 23
Item 6. Exhibits and Reports on Form 8-K ................................. 23
<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 1,900
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 7,789
--------- --------
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:
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 - -
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 - -
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 50,211
Accumulated deficit (21,987) (34,169)
Notes receivable from shareholders - (1,158)
Deferred compensation (466) (149)
Accumulated other comprehensive income (858) (675)
--------- --------
Total stockholders' equity 6,137 14,127
Total liabilities and stockholders' equity $ 23,922 $ 26,596
========= ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended 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) (3,917) (31) (5,811)
-------- ------- -------- ---------
NET LOSS TO COMMON STOCKHOLDERS $ (1,344) $(6,529) $ (3,074) $ (12,182)
======== ======= ======== =========
BASIC AND DILUTED LOSS PER SHARE $ (0.03) $ (0.11) $ (0.07) $ (0.23)
======== ======= ======== =========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 46,844 61,780 46,259 53,448
======== ======= ======== =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
-------------------------- -------------------------
April 30, April 30,
-------------------------- --------------------------
1999 2000 1999 2000
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net loss to common stockholders $(1,344) $(6,529) $(3,074) $(12,182)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (88) 165 (31) 183
------- ------- ------- --------
Comprehensive loss to common stockholders $(1,432) $(6,364) $(3,105) $(11,999)
======= ======= ======= ========
</TABLE>
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 (1,074) (758)
receivable
Increase in other assets-current and (815) (263)
long-term
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
the Company's annual report as amended on Form 10-K/A filed with the SEC on
April 14, 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. The Company
believes the adoption of this statement will not have a material effect on the
financial condition or results of operations of the Company.
2. FUTURE OPERATIONS
The consolidated financial statements of the Company have been prepared on
the basis of accounting principles applicable to a going concern. As of April
30, 2000, the Company had positive working capital of approximately $1.2
million. For the period from December 17, 1993 to April 30, 2000, the Company
has incurred cumulative net losses of approximately $34.2 million. Although the
Company has capital resources available to it, these resources are limited and
may not be available to support its ongoing operations until such time as the
Company is able to maintain positive cash flow from operations. There is no
assurance the Company will be able to achieve future revenue levels sufficient
to support operations or recover its investment in property and equipment,
goodwill and other intangible assets. These matters raise substantial doubt
about the Company's ability to continue as a going concern. The ability of the
Company to continue
7
<PAGE>
as a going concern is dependent upon the ongoing support of its stockholders and
customers, its ability to obtain capital resources to support operations and its
ability to successfully market its services.
The Company is likely to require additional financial resources in the near
term and could require additional financial resources in the long-term to
support its ongoing operations. The Company has retained various financial
advisers to assist it in refining its strategic growth plan, defining its
capital needs and obtaining the funds required to meet those needs. The plan
includes securing funds through equity offerings and entering into lease or
long-term debt financing agreements to raise capital.
There can be no assurances, however, that such equity offerings or other
long-term debt financing arrangements will actually be consummated or that such
funds, if received, will be sufficient to support existing operations until
revenue levels are achieved sufficient to maintain positive cash flow from
operations. If the Company is not successful in completing additional equity
offerings or entering into other financial arrangements, or if the funds raised
in such stock offerings or other financial arrangements are not adequate to
support the Company until a successful level of operations is attained, the
Company has limited additional sources of debt or equity capital and would
likely be unable to continue operating as a going concern.
3. CAPITAL LEASES
As of July 31, 1999, the Company entered into a capital lease transaction
with NTFC Capital Corporation, ("NTFC") to finance the purchase of a DMS
250/3000 International gateway switch from Northern Telecom, Inc. 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 the
Company 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, the Company was in default of quarterly
financial covenants related to revenues, gross margins and EBITDA. The Company
has received a waiver from NTFC stating that it waived the Company's compliance
requirements as of April 30, 2000. However, based upon the Company's results
before and after the period ended April 30, 2000, the Company 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, the Company has requested that NTFC review
the Company's 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
the Company will be in compliance as of July 31, 2000. NTFC is in the process
of reviewing this information, and the Company anticipates receiving the results
of this review prior to July 31, 2000. As such, the Company has classified its
obligation to NTFC as long-term. However, should the Company not receive
revised financial covenants from NTFC, it is likely that the Company will be
required to classify its entire obligation to NTFC as current as of July 31,
2000.
4. PREFERRED STOCK
In February 2000, the Company 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.
8
<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) 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. As this conversion
feature is considered a " beneficial conversion feature" to the holder, the
Company allocated all of the proceeds to additional paid-in capital as a
discount to be amortized over the lesser of one year or upon exercise of the
conversion feature. 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 terms of
the Company's Series A Preferred Stock restrict the Company from declaring and
paying dividends on its common stock until such time as all outstanding
dividends have been fulfilled related to the Preferred Stock.
In February 2000, the Company also 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, the Company
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 the Company's Series D
Preferred Stock restrict the Company from declaring and paying dividends on its
common stock until such time as all outstanding dividends have been fulfilled
related to the Preferred Stock.
During the quarter, the holders of the Company's Series A Preferred Stock
first and second closings elected to convert 2,414 shares into Common Stock of
the Company. This conversion resulted in the issuance of 3,287,478 shares of the
Company's 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 the Company's Common Stock. In addition, the holder of the
Company's Series C Preferred Stock elected to convert 500 shares into Common
Stock of the Company. This conversion resulted in the issuance of 484,872
shares of the Company's 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 the Company's Common Stock.
5. SEGMENT REPORTING
In an attempt to identify its reportable operating segments, the Company
considered a number of factors or criteria. These criteria included segmenting
based upon geographic boundaries only, segmenting based on the products and
services provided, segmenting based on legal entity and segmenting by business
focus. Based on these criteria or factors, the Company has determined that it
has three reportable operating segments: (1) U.S. Telco; (2) Mexico Telco; and
(3) Internet e-commerce. Clearly, the Company's Internet e-commerce subsidiary,
GlobalSCAPE, Inc. and its operations can be differentiated from the
9
<PAGE>
telecommunication focus of the rest of the Company. Additionally, the Company
believes that its U.S. and Mexican subsidiaries should be separate segments in
spite of the fact that many of the products are borderless. Both, the U.S. Telco
and Mexico Telco segments include revenues generated from Integrated Prepaid,
Postpaid, and Private Network Services. The Company's Carrier Services revenues,
generated as a part of its U.S. Telco segment, are the only revenues not
currently generated by both the U.S. Telco and Mexico Telco segments. The
Company has included the operations of ATSI-Canada, ATSI-Delaware and all
businesses falling below the reporting threshold in the "Other" segment. The
"Other" segment also includes intercompany eliminations.
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
April 30, 1999 April 30, 2000 April 30, 1999 April 30, 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
============ ============ ============ =============
Earnings before interest, taxes, depreciation and
amortization (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 $ 12,588,829 $ 12,796,280 $ 12,588,829
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
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)
------------ ------------ ------------ -------------
</TABLE>
10
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[CAPTION]
<TABLE>
<S> <C> <C> <C> <C>
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 $ (3,784,935) $ (353,872) $ (6,023,423)
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) $ (6,528,927) $ (3,074,318) $ (12,181,597)
Total assets $ 26,867,874 $ 27,753,932 $ 26,867,874 $ 27,753,932
</TABLE>
8. LEGAL PROCEEDINGS
On February 11, 2000, the Company 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 its 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. The Company alleges that Alejandro Filloy and
Simple Communications used ATSI's assets to establish a competing business under
the names Gammacom (a Costa Rican corporation) and American Teleport Services (a
Florida corporation). The Company has asserted claims for conversion, fraud, and
tortious interference with contractual relations and conspiracy. The Company
has 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.
In addition, the Company has 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 the Company for any service not used.
The Company has 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 the Company 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 the Company's results of
11
<PAGE>
operations. As such, the Company has 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 the
Company's customer 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, the Company believes it is unlikely
that it will be able to recover any portion of its debt and will write off the
approximate $846,000 receivable from its customer. Because the Company had
previously allowed for this receivable in its entirety, the write-off will have
no impact on the earnings of the Company but will reduce both the Company's
Accounts Receivable and its Allowance for Doubtful Accounts.
9. RELATED PARTY TRANSACTIONS
In February 2000, the Company's 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, the Company had lent
approximately $1.2 million to key executive officers allowing them to exercise
vested options. The Company recognized the transaction by recording a note
receivable for each executive officer.
10. SUBSEQUENT EVENTS
On June 8, 2000 the Company announced that it 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 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 the Company announced that it 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
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<PAGE>
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.
General
The Company's mission is to employ leading-edge technologies for delivery
of exceptional telecommunication services to underserved Latino markets in the
U.S. and Latin America emphasizing convenience, accessibility, quality,
reliability, and affordability, while continually seeking to add value through
new and innovative products and services. Utilizing a framework of licenses,
interconnection and service agreements, network facilities and retail
distribution channels (hereinafter collectively referred to
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<PAGE>
as the "framework"), the Company is primarily focused on capturing market share
in the international telecommunications corridor between the United States and
Mexico. Even with poor phone-line penetration, the Company's research indicates
that Mexico may exchange more international traffic with the U.S. than any other
country in the world within the next two years. As the regulatory environments
allow, the Company plans to establish framework in other Latin American
countries as well. In addition to the U.S. and Mexico, the Company currently
owns or has rights to use facilities in and has strategic relationships with
carriers in Costa Rica, El Salvador, and Guatemala.
Utilizing the framework described above, the Company provides local,
domestic long distance and international calls from its own public telephones
and communication centers within Mexico. Consumers visiting a Company-owned
communication center or public telephone may dial directly to the desired party
in exchange for cash payment, or can charge the call to a U.S. address (collect,
person-to-person, etc.) or calling card, or to a U.S. dollar-denominated credit
card with the assistance of an operator. In July 1998, the Company began
providing domestic U.S. and international call services to Mexico to residential
customers on a limited basis in the U.S. Callers may either pre-subscribe to
the Company's one-plus residential service, or dial around their pre-subscribed
carrier by dialing 10-10-624, plus the area code and desired number. Where
possible, these retail calls are transported over the Company's own network
infrastructure.
Utilizing the same framework described above, the Company also serves as a
retail and wholesale facilities-based provider of network services for corporate
clients and U.S. and Latin American telecommunications carriers. These
customers typically lack transmission facilities into certain markets, or
require additional capacity into certain markets. The Company currently provides
these services to and from the United States, Mexico, Costa Rica, El Salvador
and Guatemala.
In June 2000, the Company announced that it had signed a definitive
agreements 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, the Company intends to extend its network in Mexico beyond its
backbone network, interconnecting into the local telephone infrastructure in
targeted markets in Mexico. By doing so, the Company hopes to ultimately process
the majority of its telecommunications traffic "on-net", reducing its direct
cost of doing business.
The Company is also the sole owner of GlobalSCAPE, Inc., which is rapidly
becoming a leader in electronic commerce of top Internet-based software,
utilizing the Web as an integral component of its development, marketing,
distribution and customer relationship strategies. Utilizing CuteFTP as its
flagship product, GlobalSCAPE has a user base of approximately 10 million users
as of January 31, 2000.
The Company's consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. Although the Company has
positive working capital of approximately $2.4 million at April 30, 2000, the
Company has incurred losses since inception and has 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, the Company expects 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 the Company's
results of operations in dollar amounts and as a percentage of total revenues
for the three and nine-month periods ended April 30, 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) (5)%
-------- --- -------- --- -------- --- --------- ---
Net loss (1,313) (18)% (2,612) (28)% (3,043) (12)% (6,371) (22)%
Less: preferred dividends (31) 0 % (3,917) (41)% (31) 0 % (5,811) (20)%
-------- --- -------- --- -------- --- --------- ---
Net loss to common stockholders $ (1,344) (18)% $ (6,529) (69)% $ (3,074) (12)% $ (12,182) (42)%
======== === ======== === ======== === ========= ===
</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 the Company's carrier, integrated prepaid
and Internet e-commerce services. This increase was offset to some extent by the
decline in the Company's 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. The Company 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, the Company's alternate fiber route became
15
<PAGE>
fully operational enabling the Company to increase its volume of carrier traffic
over the quarter ended April 30, 1999. Due to pricing and other market
pressures, the Company's revenues per minute for carrier services declined
significantly between quarters resulting in revenue increases far less than the
associated volume increases. As the Company continues to shift its focus towards
retail-based call services, it is likely that the growth trend in its third
party carrier volumes will slow. The Company's 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 the Company's stated goal to grow
retail revenue as opposed to wholesale carrier revenues because retail revenues
are typically less volatile and produce better margins. The Company's 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. The
Company has shifted its 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 the Company's 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 the Company's
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 the
Company's competitors, and Mexican cellular providers recently introducing the
concept of "calling party pays". During the quarter ended April 30, 2000, the
Company 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. The Company now provides these
services almost exclusively from its own communication centers and payphones,
due to the added expenses associated with third party owned locations. As the
Company believes this downturn in operator-assisted call volume trend may
continue, it has recently begun utilizing the services of third party owned
operator centers to further reduce the cost of providing these calls. The
Company receives a commission from these third-party operator centers on a per-
call basis, which recognizes as revenue. In the past, the Company recognized
revenue on the gross value of a call when it was processed by its own inhouse
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 the Company's 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, the Company 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 the
Company's external Mexico Telco results in Footnote 5 in the accompanying
financial statements. Approximately $160,000 of the Company's postpaid revenues
are included in the Company's Mexico Telco results, while the approximate
$530,000 of postpaid revenues remaining are included in the Company's U.S. Telco
results.
The Company's Internet e-commerce services increased approximately
$708,000, or 104% between
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<PAGE>
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 in the Company's revenues as downloads serve as the primary driver of
revenues in coming months as well as increasing the target audience for banner
advertisements. The Company 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. 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 the Company's 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 the Company's revenues the telco operations cost of
services will be approximately 80%. As such the Company continues to focus on
retail growth with an ultimate retail/wholesale mix of 70% retail and 30%
wholesale. The Company can not estimate when it 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 the Company's 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 the Company's 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.
Additionally, the Company incurred costs related to its American Stock Exchange
listing in February 2000, including a listing fee of approximately $50,000.
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. The Company's 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 the
Company conversion of convertible notes and a note payable subsequent to January
31 for which the Company incurred additional debt discount expenses.
Preferred Dividends. During the third quarter of fiscal 2000, the Company
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, the Company has recorded approximately $3.8 million related to the
discount or "beneficial
17
<PAGE>
conversion feature" associated with its various preferred stock issuances.
Accounting rules call for the Company 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 the Company's 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 the Company's Series D Preferred Stock to one year
for the Company's 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
$1.4 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 $5.2
million from $1.3 million to $6.5 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 the Company's carrier, integrated prepaid and
Internet e-commerce services. This increase was offset to some extent by the
decline in the Company's 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. The Company 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, the Company's revenues per minute for carrier services declined
significantly between periods resulting in revenue increases far less than the
associated volume increases. As the Company continues to shift its focus towards
retail-based call services, it is likely that the growth trend in its third
party carrier volumes will slow. The Company's 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 the Company's stated goal to grow
retail revenue as opposed to wholesale carrier revenues because retail revenues
are typically less volatile and produce better margins. The Company's 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. The Company
has shifted its 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 the Company's 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 the Company's 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 Company's
competitors, and Mexican cellular providers recently introducing the concept of
"calling party pays". During the nine months ended April 30, 2000, the Company
processed approximately 42,000
18
<PAGE>
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. The Company now provides these services almost exclusively from
its own communication centers and payphones, due to the added expenses
associated with third party owned locations. As the Company believes this
downturn in operator-assisted call volume trend may continue, it has recently
begun utilizing the services of third party owned operator centers to further
reduce the cost of providing these calls. The Company receives a commission from
these third-party operator centers on a per-call basis, which recognizes as
revenue. In the past, the Company recognized revenue on the gross value of a
call when it was processed by its 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 the Company's 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, the Company 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 the Company's external Mexico Telco results in
Footnote 5 in the accompanying financial statements. Approximately, $400,000 of
the Company's postpaid revenues are included in the Company's Mexico Telco
results, while the approximate $2.4 million of postpaid revenues remaining are
included in the Company's U.S. Telco results.
The Company's 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 the Company's
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 handled by the Company as
discussed above. 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 the Company's 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
the Company's revenues the telco operations cost of services will be
approximately 80%. As such the Company continues to focus on retail growth with
an ultimate retail/wholesale mix of 70% retail and 30% wholesale. The Company
can not estimate when it 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 the Company's Internet e-commerce
subsidiary to support the introduction of new products into the market and
growth
19
<PAGE>
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 the Company's 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. Additionally, the Company incurred costs related to its American Stock
Exchange listing in February 2000, including a listing fee of approximately
$50,000.
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. The Company's 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 the Company's 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, the
Company recorded approximately $325,000 of dividend expense related to
cumulative convertible preferred stock. In addition to cumulative dividends on
its Series A, Series B, Series C, and Series D Preferred Stock, which are
accrued at 10%, 6%, 6%, and 6%, respectively, the Company has recorded
approximately $5.5 million related to the discount or "beneficial conversion
feature" associated with its various preferred stock issuances. Accounting rules
call for the Company 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 the Company's 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 the Company's Series D Preferred Stock to one year for the
Company's 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, the Company has approximately
$1.4 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 for the nine months ended April 30, 2000 increased
approximately $9.1 million to $12.2 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, the Company generated negative
cash flows from operations of approximately $3.8 million. The amount of cash
used in the Company's operations is a result of the net loss incurred during the
period, as well as activities related to payments to vendors. The Company
20
<PAGE>
has historically operated with negative cash flows and has sought to fund those
losses and deficits by completing private equity placements.
For the nine months ended April 30, 2000, the Company's 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 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, the
Company's 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 the Company has 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 the Company to reduce its combined
accounts payable/accrued liabilities balance by approximately $1.2 million
between July 31, 1999 and April 30, 2000.
Until the Company is 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 the Company's business. Until then, the Company's
operating activities may result in net cash being used, or provided, during
quarterly periods, regardless of the Company's income statement results for the
periods.
During the nine months ended April 30, 2000, the Company 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 the Company's debt and capital
lease obligations, and to purchase approximately $1.2 million in equipment used
in the Company's network operations. On January 31, 2000, the Company 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 the Company's 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 the Company's 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, the Company was 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 the
Company's international gateway switch in Dallas, Texas. The Company requested
and received a waiver of its requirements as of that date. Based upon the
Company's results before and after the period ended April 30, 2000, the Company
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, the Company has requested
that NTFC review the Company's 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
the Company will be in compliance as of July 31, 2000. NTFC is in the process
of reviewing this information, and the Company anticipates receiving the results
of this review prior to July 31, 2000. As such, the Company has
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classified its obligation to NTFC as long-term. However, should the Company not
receive revised financial covenants from NTFC, it is likely that the Company
will be required to classify its entire obligation to NTFC as current as of July
31, 2000.
Until the Company is able to produce positive cash flows from operations on
a recurring basis, it will need to continue to seek outside sources of funds to
continue operations on a long-term basis.
On February 17, 2000, the Company announced plans to capitalize on the
value of its wholly owned subsidiary, GlobalSCAPE, Inc. by spinning out a
portion of its ownership in GlobalSCAPE to its 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 spin-off and offering,
GlobalSCAPE will contribute less profits and cash flows to ATSI. Because
GlobalSCAPE currently contributes significantly to the Company's consolidated
EBITDA results, the Company expects its consolidated operating and cash flow
results to decline after the spin-off and offering.
In the near term, the Company must continue to manage its costs of
providing services and overhead costs as it begins focusing on optimizing use of
its network. On June 8, 2000, the Company announced that it had secured a long
distance concession in Mexico which it believes will eventually allow it to
significantly reduce its cost of transporting services. In order for it to
significantly reduce costs with the concession, the Company would need to
purchase a significant amount of hardware and software, allowing it to expand
and operate its own network in Mexico. The Company believes that these capital
expenditures may approximate $60 million over a five-year period. Should the
Company be granted this concession it would 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 its current cash flow
needs, the Company signed an agreement with a private equity fund, under which
the fund agreed to purchase up to 5,000,000 shares of the Company's common stock
over an eighteen month period. The Company has 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. The amount
of funds to be generated under the facility for Company use will depend on the
price of ATSI's common stock at the time each draw is executed. Before the
Company 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, the Company announced that it 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. 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.
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.
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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. ATSI management believes that, if the
transaction is consummated, the acquisition of Genesis will enhance the
Company's cash flows and will be accretive to earnings.
Until the Company is able to produce positive cash flows from operations in
an amount sufficient to meet its debt service and capital expenditure
requirements, it must be able to access debt and/or equity capital to assist it
in doing so, although no assurance may be given that it will be able to do so.
In an effort to meet its financial needs going forward, the Company has engaged
the investment banking firm of Gerard, Klauer Mattison & Co. ("GKM"). GKM is
assisting the Company in finding and securing financial and strategic
relationships. While the Company will continue to work with GKM in forming
medium and long-term financing solutions, it may be necessary for the Company to
continue to access debt and/or equity capital in the near-term.
Inflation/Foreign Currency
Inflation has not had a significant impact on the Company's operations.
With the exception of integrated prepaid revenues from the Company's
communication centers and payphones, almost all of the Company's revenues are
generated and collected in U.S. dollars. Integrated prepaid services from the
Company's communication centers and payphones are provided at the time of the
call in exchange for cash payment, so the Company does not maintain receivables
on its books that are denominated in pesos. In an effort to reduce foreign
currency risk, the Company attempts to convert pesos collected to U.S. dollars
quickly and attempts to maintain minimal cash balances denominated in pesos.
Some expenses related to certain services provided by the Company are incurred
in foreign currencies, primarily Mexican pesos. The devaluation of the Mexican
peso over the past several years has not had a material adverse effect on the
Company's financial condition or operating results.
PART II OTHER INFORMATION
Item 2 Change in Securities and Use of Proceeds
None.
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 this Form 10-Q filed June 14, 2000)
4.2 Escrow Agreement between COMSAT Mexico, S.A. de C.V. and ATSI (Exhibit
to this Form 10-Q filed June 14, 2000)
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4.3 Securities Purchase Agreement between Alfonso Torres Roqueni and ATSI
(Exhibit to this Form 10-Q filed June 14, 2000)
4.4 Escrow Agreement between Alfonso Torres Roqueni and ATSI (Exhibit to
this Form 10-Q filed June 14, 2000)
4.5 Warrant Agreement between Alfonso Torres Roqueni and ATSI (Exhibit to
this Form 10-Q filed June 14, 2000)
4.6 Promissory Note between Alfonso Torres Roqueni and ATSI (Exhibit to this
Form 10-Q filed June 14, 2000)
11 Computation of Earnings per Share (Exhibit to this Form 10-Q filed June
14, 2000)
27 Financial Data Schedule (Exhibit to this 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: June 14, 2000 By: /s/ H. Douglas Saathoff
-----------------------
Name: H. Douglas Saathoff
Title: Chief Financial Officer
25
