<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 October 31, 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) 558-6090
(Address, including zip code, of registrant's principal executive offices
and telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---
The number of shares outstanding of the registrant's common stock at
December 12, 2000 was 68,189,971.
--------------------------------------------------------------------------------
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 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, 2000 and October 31, 2000........................................ 3
Consolidated Statements of Operations for the Three Months Ended October 31, 1999
and 2000.................................................................................................... 4
Consolidated Statements of Comprehensive Loss for the Three Months Ended
October 31, 1999 and 2000................................................................................... 5
Consolidated Statements of Cash Flows for the Three Months Ended October 31, 1999
and 2000.................................................................................................... 6
Notes to Consolidated Financial Statements ................................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ...................... 15
Part II OTHER INFORMATION
Item 2. Change in Securities and Use of Proceeds.................................................................... 25
Item 6 Exhibits and Reports on Form 8-K............................................................................ 26
</TABLE>
2
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
<TABLE>
<CAPTION>
July 31, October 31,
2000 2000
--------- -----------
(unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 1,550 $ 2,799
Accounts receivable, net of allowance of $ 757 and $ 769, respectively 3,186 2,146
Inventory 74 88
Prepaid expenses and other assets 631 573
--------- -----------
Total current assets 5,441 5,606
--------- -----------
PROPERTY AND EQUIPMENT (At cost): 19,388 20,199
Less - Accumulated depreciation and amortization (8,330) (9,371)
--------- -----------
Net property and equipment 11,058 10,828
--------- -----------
OTHER ASSETS, net
Goodwill, net 4,901 4,867
Concession license, net 4,422 4,374
Trademarks, net 570 525
Other assets 502 498
--------- -----------
Total assets $26,894 $26,698
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 3,931 $ 5,639
Accrued liabilities 2,350 2,902
Current portion of notes payable 544 515
Current portion of convertible long-term debt 289 515
Current portion of obligations under capital leases 3,411 3,511
Deferred revenue 167 160
--------- -----------
Total current liabilities 10,692 13,242
--------- -----------
LONG-TERM LIABILITIES:
Obligations under capital leases, less current portion 2,506 2,195
Other long-term liabilities 56 68
--------- -----------
Total long-term liabilities 2,562 2,263
--------- -----------
MINORITY INTEREST - 555
--------- -----------
COMMITMENTS AND CONTINGENCIES:
REDEEMABLE PREFERRED STOCK
Series D Cumulative Preferred Stock, 3,000 shares authorized, 3,000 shares
issued and outstanding at July 31, 2000 and October 31, 2000, carrying value
of $2,662,375 and $2,718,375 at July 31, 2000 and October 31, 2000, respectively 2,662 2,718
Series E Cumulative Preferred Stock, 10,000 shares authorized, no shares issued
and outstanding at July 31, 2000, 2,500 shares issued and outstanding at October
31, 2000, carrying value of $1,535,809 - 1,536
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value, 10,000,000 shares authorized, Series A
Cumulative Convertible Preferred Stock, 50,000 shares authorized, 24,255 shares
issued and outstanding at July 31, 2000, 17,588 shares issued and outstanding at
October 31, 2000 - -
Common stock, $0.001 par value, 100,000,000 shares authorized, 67,408,979
issued and outstanding at July 31, 2000,
67,986,944 issued and outstanding at October 31, 2000 67 68
Additional paid in capital 51,625 52,346
Accumulated deficit (39,125) (45,290)
Warrants outstanding 417 1,381
Notes due from officers (1,108) (1,108)
Deferred compensation (119) (194)
Other comprehensive loss (779) (819)
--------- -----------
Total stockholders' equity 10,978 6,384
Total liabilities and stockholders' equity $26,894 $26,698
========= ===========
</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 October 31,
1999 2000
------------- -------------
<S> <C> <C>
OPERATING REVENUES:
Network Services
Carrier $5,368 $3,769
Private Network 737 583
Call Services
Integrated Prepaid 1,401 1,390
Postpaid 1,175 335
Internet e-commerce 782 1,422
------------- -------------
Total operating revenues 9,463 7,499
------------- -------------
OPERATING EXPENSES:
Cost of services 6,526 5,528
Selling, general and administrative 3,374 5,221
Bad debt expense 120 51
Depreciation and amortization 908 1,150
------------- -------------
Total operating expenses 10,928 11,950
------------- -------------
Operating loss (1,465) (4,451)
OTHER INCOME(EXPENSE):
Interest income 5 28
Other income 1 197
Interest expense (488) (433)
------------- -------------
Total other income (expense) (482) (208)
------------- -------------
LOSS BEFORE INCOME TAX EXPENSE (1,947) (4,659)
INCOME TAX EXPENSE 0 (66)
MINORITY INTEREST 0 41
NET LOSS ($1,947) ($4,684)
LESS: PREFERRED DIVIDENDS (1,260) (887)
------------- -------------
NET LOSS TO COMMON STOCKHOLDERS ($3,207) ($5,571)
============= =============
BASIC AND DILUTED LOSS PER SHARE ($0.07) ($0.08)
============= =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 48,687 67,703
============= =============
</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
----------------------------------------
October 31,
----------------------------------------
1999 2000
--------- ---------
<S> <C> <C>
Net loss to common stockholders ($3,207) ($5,571)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments $ 238 ($40)
--------- ---------
Comprehensive loss to common stockholders ($2,969) ($5,611)
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended October 31,
1999 2000
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($1,947) ($4,684)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Depreciation and amortization 908 1,150
Amortization of debt discount 94 122
Deferred compensation 157 181
Provision for losses on accounts receivable 120 51
Minority interest - (39)
Changes in operating assets and liabilities
(Increase) Decrease in accounts receivable 124 902
(Increase) Decrease in other assets (752) (185)
Increase (Decrease) in accounts payable 1,769 1,389
Increase (Decrease) in accrued liabilities 27 466
Decrease in deferred revenue (56) (7)
-------------- -------------
Net cash provided by (used in) operating activities 444 (654)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (248) (296)
-------------- -------------
Net cash used in investing activities (248) (296)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt - 315
Net decrease in short-term borrowings (97) -
Net increase from advanced funding arrangements 33 66
Payments on debt (170) (358)
Capital lease payments (276) (211)
Payments on long-term liabilities (11) -
Proceeds from issuance of preferred stock, net
of issuance costs 417 2,306
Proceeds from issuance of common stock, net
of issuance costs 42 81
-------------- -------------
Net cash (used in) provided by financing activities (62) 2,199
-------------- -------------
Net increase in cash 134 1,249
Cash, beginning of period 379 1,550
-------------- -------------
Cash, end of period $ 513 $ 2,799
============== =============
</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 following subsidiaries: ATSI-Delaware, ATSI-Canada, ATSI-Texas, ATSI-Mexico,
ATSI-COM, Computel, ATSI de CentroAmerica, Telespan, Sinfra and GlobalSCAPE have
been prepared in accordance with Rule 10-01 of Regulation S-X, "Interim
Financial Statements," and accordingly do not include all information and
footnotes required under accounting principles generally accepted in the U.S.
for complete financial statements. See Note 6 related to the distribution of a
portion of ATSI's ownership in GlobalSCAPE. In the opinion of management, these
interim financial statements contain all adjustments, without audit, necessary
to present fairly the consolidated financial position of ATSI and its
subsidiaries ("ATSI" or "the Company") as of July 31, 2000 and October 31, 2000,
the results of their operations for the three months ended October 31, 1999 and
2000, comprehensive loss for the three months ended October 31, 1999 and 2000,
and cash flows for the three months ended October 31, 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, 2000 included in the Company's annual report on Form 10-
K filed with the SEC on November 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 December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which provides the SEC's views in applying accounting principles
generally accepted in the U.S. to selected revenue recognition issues. We have
reviewed the guidance of this SAB and believe that our accounting policies and
the disclosures in the consolidated financial statements and in "Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations" are appropriate and adequately address the requirements of this SAB.
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities", an amendment of
SFAS No. 133. SFAS No. 133 established 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. SFAS No. 138,
effective after June 15, 2000, amends the accounting and reporting standards of
SFAS No. 133. The adoption of this statement by the Company, as of August 1,
2000, has not had a material effect on our financial condition or results of
operations.
In September 2000, the Financial Accounting Standards Board ("FASB") ")
issued Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", a replacement of FASB Statement No. 125. SFAS No. 140,
7
<PAGE>
effective after March 31, 2001 for reporting and disclosure proposes on fiscal
years ending after December 15, 2000, provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. Those standards are based on consistent application of a financial-
components approach that focuses on control. Under that approach, after a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. This Statement provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. We believe that SFAS No. 140 will not have a material effect on the
financial condition or results of the Company once adopted.
2. FUTURE OPERATIONS
The consolidated financial statements of the Company have been prepared on
the basis of accounting principles applicable to a going concern. For the period
from December 17, 1993 to October 31, 2000, the Company has incurred cumulative
net losses of approximately $45.3 million. Further, the Company has a working
capital deficit of approximately $7.6 million at October 31, 2000. Although the
Company has capital resources available to it, these resources are limited and
may not be available to support its ongoing operations until such time as the
Company is able to maintain positive cash flow from operations. There is no
assurance the Company will be able to achieve future revenue levels sufficient
to support operations or recover its investment in property and equipment,
goodwill and other intangible assets. These matters raise substantial doubt
about the Company's ability to continue as a going concern. The ability of the
Company to continue as a going concern is dependent upon the ongoing support of
its stockholders and customers, its ability to obtain capital resources to
support operations and its ability to successfully market its services.
The Company is likely to require additional financial resources in the near
term and could require additional financial resources in the long-term to
support its ongoing operations. The Company has retained various financial
advisers to assist it in refining its strategic growth plan, defining its
capital needs and obtaining the funds required to meet those needs. The plan
includes securing funds through equity offerings and entering into lease or
long-term debt financing agreements to raise capital. There can be no
assurances, however, that such equity offerings or other long-term debt
financing arrangements will actually be consummated or that such funds, if
received, will be sufficient to support existing operations until revenue levels
are achieved sufficient to maintain positive cash flow from operations. If the
Company is not successful in completing additional equity offerings or entering
into other financial arrangements, or if the funds raised in such stock
offerings or other financial arrangements are not adequate to support the
Company until a successful level of operations is attained, the Company has
limited additional sources of debt or equity capital and would likely be unable
to continue operating as a going concern.
3. CAPITAL LEASES
In December 1998, we ordered a DMS 250/300 International gateway switch
from Northern Telecom, Inc. at a cost of approximately $1.8 million. As of July
31, 1999, we entered into a capital lease transaction with NTFC Capital
Corporation, ("NTFC") to finance the switch and an additional approximate
$200,000 of equipment over a five and a half-year period with payments deferred
for six months. Quarterly payments approximate $141,000 and the capital lease
has an interest rate of approximately 12%. 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, EBITDA results and
debt to equity ratios. As of October 31, 2000, we are not in compliance with the
financial
8
<PAGE>
covenants related to revenues, gross margins and EBITDA results. We have
classified the capital lease in our accompanying consolidated balance sheet as a
current liability. The Company has requested NTFC to review our current business
plan, including expected results and capital requirements, with the objective of
resetting the financial covenants applicable to this capital lease obligation
and prevent events of default on a prospective basis.
4. PREFERRED STOCK
In October 2000, we issued 2,500 shares of Series E Preferred Stock and
warrants to purchase 909,091 shares of common stock for cash proceeds of
approximately $2.5 million. Subject to the completion of certain conditions, we
may issue an additional 7,500 shares of Series E Preferred Stock and warrants to
purchase 2,727,273 shares of common stock for cash proceeds of approximately
$7.5 million. The Series E Preferred Stock does not accrue dividends. In
addition, we are obligated to issue 175,000 warrants as a finder's fee to an
entity that introduced us to the equity fund at an exercise price of $1.72 per
warrant. These warrants expire October 2004. The fair value of the warrants was
determined to be $1.27 per warrant and we assigned approximately $964,000 of the
proceeds to warrants outstanding in stockholders' equity.
The conditions referenced above include: a) the closing of the Company's
acquisition of Genesis Communications International, Inc. b) registration of the
Common Stock underlying the Series E Preferred Stock and Warrants and c) an
investment in ATSI by an additional investor previously approved by the
institutional investor. The Series E Preferred Stock also allows the investor to
invest up to an additional $8 million, but restricts their ownership to no more
than 5% of our common stock at any point in time.
The Series E Preferred Stock may be converted into Common Stock for up to
three years at the lesser of a) the market price - defined as the average of the
closing bid price for the five lowest of the ten trading days prior to
conversion or b) the fixed conversion price - defined as 120% of the lesser of
the average closing bid price for the ten days prior to closing or the October
12, 2000 closing bid price. Consistent with the accounting for our Series A,
Series B, Series C and Series D Preferred Stock, this is considered a
"beneficial conversion feature" to the holder. Of the approximate $1.5 million
of proceeds assigned to the Series E Preferred Stock approximately $828,000 was
allocated 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. The conversion price will be reset on the later of February 11, 2001
(four months from October 11, 2000) or the date of an effective registration
statement. The reset price will be the lesser of the "market price" as defined
above or the "fixed conversion price" defined above subject to a floor price of
75% of the fixed conversion price. If the closing bid price falls below the
floor price for any ten trading days in a consecutive twenty-day trading period,
the floor price will be terminated.
The terms of our Series E 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 collectively, the Preferred Stock.
The terms of our Series E Preferred Stock allow for mandatory redemption by
the holder upon certain conditions. The Series E Preferred Stock allows the
holder to elect redemption at $1,250 per share plus 6% per annum if: 1) ATSI
refuses conversion notice, 2) an effective registration statement is not
obtained by prior to March 11, 2001, 3) bankruptcy proceedings are initiated
against the Company,
9
<PAGE>
4) The Secretaria de Comunicaciones y Transportes of the SCT limits or
terminates the scope of the concession or, 5) if the Company fails to maintain a
listing on NASDAQ, NYSE or AMEX.
In the quarter ended October 31, 2000, the holder elected to convert 6,667
shares of Series A Preferred Stock and accumulated dividends of approximately
$39,000 into shares of common stock resulting in the issuance of 381,606 shares
of common stock. As of October 2000, 3,333 shares of Series A Preferred Stock
remains to be converted.
5. GLOBALSCAPE STOCK OPTIONS
In January 1998, the Board of Directors of our subsidiary, GlobalSCAPE,
Inc. approved the 1998 Stock Option Plan (the Plan) for officers, other
employees, directors and consultants of GlobalSCAPE. Under the terms of the
Plan, up to 728,571 shares of the subsidiary's common stock may be granted in
the form of incentive stock options or non-qualified stock options, awarded, or
sold to officers, other employees, directors and consultants. GlobalSCAPE
awarded approximately 384,000 options under the Plan, which were subsequently
cancelled in February 2000. Subsequent to July 31, 2000, our subsidiary
reinstated all but 6,000 of these options, which resulted in the recognition of
compensation expense of approximately $152,000. An additional $103,000 of
deferred compensation expense will be recognized over the remaining vesting
periods.
6. DISTRIBUTION OF OWNERSHIP IN GLOBALSCAPE
On September 12, 2000, we completed the distribution of a portion of our
ownership in our wholly owned subsidiary GlobalSCAPE to our shareholders. The
distribution was part of a previously announced plan to distribute or spin-off a
portion of our ownership in GlobalSCAPE contemporaneously with a public offering
of GlobalSCAPE, in order to raise funds for GlobalSCAPE's growth and ATSI's
general corporate purposes. GlobalSCAPE and ATSI decided not to make a public
offering of GlobalSCAPE common stock contemporaneously with the distribution in
light of current market conditions. We distributed approximately 3,444,833 of
our 12,920,000 shares to our shareholders. The distribution represented
approximately 27% of our ownership. The distribution did not generate any
proceeds to ATSI or GlobalSCAPE and resulted in approximately $300,000 of
expense to GlobalSCAPE for legal and accounting fees, printing and distribution
costs.
7. Acquisitions
On December 1, 2000 the Company announced that it had signed an amendment
to the original definitive agreement to acquire privately-held, California-based
Genesis Communications International, Inc. ("Genesis"), which we originally
announced on June 14, 2000. Under the amended agreement, the number of shares of
ATSI common stock to be delivered to Genesis shareholders at closing will range
from 6,294,416 to 19,000,000. The number of shares of ATSI common stock to be
issued at closing will be based on the Average Price of ATSI's common stock,
which is defined as the average of the sum of the closing sale prices of ATSI
common stock on The American Stock Exchange for each of the ten trading days
ending two trading days preceding the closing date. Genesis shareholders will
also receive one share of common stock of GlobalSCAPE, Inc. for each twenty
shares of ATSI received.
The following unaudited pro forma results of operations, for the three
months ended October 31, 1999 and 2000, assumes the acquisition of Genesis
occurred as of August 1, 1999. Such pro forma information is not necessarily
indicative of the results of future operations. Although the Company believes
the acquisition may qualify for treatment as a pooling-of-interests, in
accordance with generally
10
<PAGE>
accepted accounting principles the following pro forma results were prepared
assuming the transaction was accounted for as a purchase.
For the three months ended October 31,
------------------------------------------
1999 2000
---- ----
(unaudited)
------------------------------------------
Operating revenues $15,489 $13,501
Gross margin $ 5,635 $ 3,755
EBITDA ($55) ($3,245)
Net loss to common
shareholders ($3,197) ($5,816)
Basic and diluted loss
Per share ($0.05) ($0.07)
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments such as the amortization of
goodwill, the elimination of intercompany transactions and the elimination of
certain personnel costs and professional fees related to the acquisition. We
have valued the acquisition at $16,720,000 based on the issuance of 19,000,000
shares of our common stock at a stock price of $0.88. For purposes of this pro-
forma disclosure we have assumed that the entire valuation will be accounted for
as goodwill to be amortized over a period of twenty years.
The unaudited pro forma information is not necessarily indicative of the
results that would have occurred had such transactions actually taken place at
the beginning of the period specified nor does such information purport to
project the results of operations for any future date or period.
8. SEGMENT REPORTING
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which establishes standards for
reporting information about operating segments in annual and interim financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise." Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. SFAS No. 131 need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application. In an attempt to identify its reportable operating segments, the
Company considered a number of factors or criteria. These criteria included
segmenting based upon geographic boundaries only, segmenting based on the
products and services provided, segmenting based on legal entity and segmenting
by business focus. Based on these criteria or factors the Company has determined
that it has three reportable operating segments: (1) U.S. Telco; (2) Mexico
Telco; and (3) Internet e-commerce. Clearly, the Company's Internet e-commerce
subsidiary, GlobalSCAPE, Inc. and its operations can be differentiated from the
telecommunication focus of the rest of the Company. Additionally, the Company
believes that its U.S. and Mexican subsidiaries should be separate segments in
spite of the fact that many of the products are borderless. Both, the U.S. Telco
and Mexican Telco segments include revenues generated from Integrated Prepaid,
Postpaid, and Private Network Services. The Company's Carrier Services revenues,
generated as a part of its U.S. Telco segment, are the only revenues not
currently
11
<PAGE>
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
October 31, October 31,
1999 2000
U.S. Telco
-----------------------------------------------------------------------------------------------
<S> <C> <C>
External revenues $ 7,020,757 $ 4,451,269
Intercompany revenues $ 607,636 $ 528,510
----------- ------------
Total revenues $ 7,628,393 $ 4,979,779
=========== ============
Earnings before interest, taxes, depreciation and
amortization (EBITDA) ($581,424) ($2,723,916)
Operating loss ($1,164,591) ($3,312,190)
Net loss ($1,229,123) ($3,399,965)
Total assets $11,058,017 $ 16,319,304
Mexico Telco
-----------------------------------------------------------------------------------------------
External revenues $ 1,661,037 $ 1,625,901
Intercompany revenues $ 656,551 $ 507,246
----------- ------------
Total revenues $ 2,317,588 $ 2,133,147
=========== ============
EBITDA ($276,271) ($543,831)
Operating loss ($525,578) ($927,523)
Net loss ($758,296) ($1,103,562)
Total assets $11,649,497 $ 9,439,123
Internet e-commerce
-----------------------------------------------------------------------------------------------
External revenues $ 781,576 $ 1,421,833
Intercompany revenues - -
----------- ------------
Total revenues $ 781,576 $ 1,421,833
=========== ============
EBITDA $ 300,513 ($33,020)
Operating income (loss) $ 231,685 ($153,005)
Net income (loss) $ 223,756 ($231,534)
Total assets $ 1,372,837 $ 1,983,960
Other
-----------------------------------------------------------------------------------------------
External revenues - -
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C>
Intercompany revenues ($1,264,187) ($1,035,756)
------------ ------------
Total revenues ($1,264,187) ($1,035,756)
============ ============
EBITDA - -
Operating loss ($6,225) ($57,594)
Net loss ($1,443,292) ($836,176)
Total assets $ 136,842 ($1,044,083)
Total
--------------------------------------------------------------------------------------------
External revenues $ 9,463,370 $ 7,499,003
Intercompany revenues - -
------------ ------------
Total revenues $ 9,463,370 $ 7,499,003
============ ============
EBITDA ($557,182) ($3,300,767)
Depreciation, Depletion and Amortization ($907,527) ($1,149,545)
Operating loss ($1,464,709) ($4,450,312)
Net loss ($3,206,955) ($5,571,237)
Total assets $ 24,217,193 $ 26,698,304
</TABLE>
9. LEGAL PROCEEDINGS
On June 16, 1999, our subsidiary, ATSI-Texas initiated a lawsuit in
District Court, Bexar County, Texas against PrimeTEC International, Inc., Mike
Moehle and Vartec Telecom, Inc. claiming misrepresentation and breach of
conduct. Under an agreement signed in late 1998, PrimeTEC was to provide quality
fiber optic capacity in January 1999. Mike Moehle is PrimeTEC's former president
who negotiated the fiber lease and Vartec is PrimeTEC's parent, which was to
provide the fiber capacity. The delivery of the route in early 1999 was a
significant component of our operational and sales goal for the year and the
failure of our vendor to provide the capacity led to our negotiating an
alternative agreement with Bestel, S.A. de C.V. at a higher cost. This case was
settled in full in November 2000 for $500,000 in cash and $500,000 to be applied
to carrier services provided by ATSI to Vartec.
In January 1999, we terminated a wholesale carrier services contract with
Twister Communications, Inc. for failure to pay for services rendered. On
January 29, 1999, while we were attempting to collect payments from them, they
filed a Demand for Arbitration seeking damages for breach of contract before the
American Arbitration Association. On March 3, 1999 we filed a Demand for
Arbitration seeking damages for breach of contract in an amount equal to the
amounts due to us for services rendered plus interest, plus additional damages
for fraud. Although an arbitration panel was initially selected, Twister has
since filed for bankruptcy and has not pursued any discovery in this matter.
Although we are monitoring the bankruptcy proceeding to determine whether we can
recover a portion of the amount owed us, it is unlikely that we will ever
receive any proceeds from Twister through bankruptcy. Until the arbitration
proceedings are formally dropped or take place, we can not
13
<PAGE>
reasonably estimate the possible loss, if any, and there can be no assurance
that the resolution of this dispute would not have an adverse effect on our
results of operations.
We believe that we have a justifiable basis for our arbitration demand and
that we will be able to resolve the dispute without a material adverse effect on
our financial condition. Moreover, given the bankruptcy proceeding, we do not
believe that Twister will pursue the arbitration.
On February 11, 2000 we filed a complaint and application for injunctive
relief, against Alex Filloy and Simple Communications for illegally using ATSI's
assets to establish a competing business under the names Gammacom (a Costa Rican
corporation) and American Teleport Services (a Florida corporation). Simple
Communications is a former private network customer. We have claimed damages for
breach of contract against Simple Communications for failing to pay for private
network services; against Alex Filloy and his company Gammacom for conversion of
ATSI's assets including its equipment, customer lists, trade secrets and lease
space; fraud against Alex Filloy for submission of expenses for reimbursement
related to his establishment of the competing business; tortious interference
with contractual relations and conspiracy against Alex Filloy, Gammacom,
American Teleport Services and Simple Communications for diverting ATSI
customers to the competing business; and breach of fiduciary duty against Alex
Filloy. We have also applied for temporary and permanent injunctive relief.
The case has been settled for cash payments from Simple and Filloy of
$30,000 and $7,500, respectively. In addition, we have obtained a permanent
injunction prohibiting Filloy from using customer lists and trade secrets
obtained while he worked with ATSI.
We are also a party to additional claims and legal proceedings arising in
the ordinary course of business. We believe it is unlikely that the final
outcome of any of the claims or proceedings to which we are a party would have a
material adverse effect on our financial statements; however, due to the
inherent uncertainty of litigation, the range of possible loss, if any, cannot
be estimated with a reasonable degree of precision and there can be no assurance
that the resolution of any particular claim or proceeding would not have an
adverse effect on our results of operations in the period in which it occurred.
10. Subsequent Events
In November 2000, the Company entered into a convertible note agreement for
$565,000, which paid in full a previously issued convertible note. This
convertible note originally matured November 30, 2000 but was extended 30 days
with the option to extend for two additional thirty-day periods. At maturity,
the lender must elect either (i) to be paid in cash for all outstanding
principal and accrued interest at a rate of 12% per annum since the issuance of
this note, or (ii) to convert into shares of Series E convertible preferred
stock on terms equal to those provided to Rose Glen Capital Funding Corp. If
full funding of $10 million from Rose Glen has not taken place by maturity, then
all unconverted principal and accrued interest will convert into ATSI common
stock at a rate equal to a 10% discount to the average closing price of the
Company's common stock on The American Stock Exchange for the 10 day period
preceding the maturity date, or $1.62, whichever is greater. In addition, the
lender shall receive 5,000 warrants to purchase ATSI common stock at a price of
$1.72, which are exercisable for three years from the date of issuance.
On December 1, 2000, the Company announced that it had signed an amendment
to the original definitive agreement to acquire privately-held, California-based
Genesis Communications International,
14
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Inc. ("Genesis"), which we originally announced on June 14, 2000. Under the
amended agreement, the number of shares of ATSI common stock to be delivered to
Genesis shareholders at closing will range from 6,294,416 to 19,000,000. The
number of shares of ATSI common stock to be issued at closing will be based on
the Average Price of ATSI's common stock, which is defined as the average of the
sum of the closing sale prices of ATSI common stock on The American Stock
Exchange for each of the ten trading days ending two trading days preceding the
closing date. Genesis shareholders will also receive one share of common stock
of GlobalSCAPE, Inc. for each twenty shares of ATSI received.
In accordance with the terms of the amended agreement, both ATSI and
Genesis will need to obtain requisite approvals from their respective
shareholders in order for the transaction to close. ATSI must first obtain the
requisite approvals from its shareholders before a Fairness Hearing may be set
by the California Department of Corporations ("DOC"). While ATSI plans for the
merger to qualify for a permit to be issued under the California Corporate
Securities Law of 1968, if this permit cannot be obtained within a reasonable
time or without the imposition of burdensome conditions, then ATSI will seek to
have its shares registered with the Securities and Exchange Commission in order
to effect the transaction.
The boards of directors of both companies have approved the transaction.
ATSI has not yet set a date for its annual shareholder meeting, at which it
expects to obtain the requisite approvals. The transaction is not expected to
close until February 2001. If all conditions to the closing have not been
reasonably satisfied or waived by February 28, 2001, then either party may
terminate the amended agreement. In addition, if the Average Price, as defined
above, on the date of closing is below $0.88 or above $7.00, then either company
may terminate the agreement if they wish.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Quarterly Report on Form 10-Q contains certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Specifically, all statements other
than statements of historical facts included in the report regarding the
Company's financial position, business strategy and plans and objectives of
management of the Company for future operations are forward-looking statements.
These forward-looking statements are based on the beliefs of the Company's
management, as well as assumptions made by and information currently available
to the Company's management. When used in this report, the words "anticipate,"
"believe," "could," "estimate," "expect" and "intend" and words or phrases of
similar import, as they relate to the Company or Company's management, are
intended to identify forward-looking statements. Such statements reflect the
current view of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions related to certain factors
including, without limitation, the inability to obtain capital, changes in the
Mexican political or economic environment; the adoption by Mexico of new laws or
regulations, or changes effected by Mexico to existing laws affecting the
communications industry generally or the Company specifically; increased or
redirected competition efforts, targeting the Company's services or operation,
by competitors; general economic conditions, customer relations, relationships
with vendors, the interest rate environment, seasonality, the operation of the
Company's network, the ability of the Company's direct sales force to
successfully replace its independent marketing representatives or the failure of
said direct sales force to produce anticipated results, transmission costs,
product introductions and acceptance, the inability to continue to generate new
sources of revenue, technological change, changes in industry practices,
one-time events and other
15
<PAGE>
factors described herein ("cautionary statements"). Reference is made to the
risks and uncertainties contained in the Company's annual report on Form 10-K.
Although the Company believes that the expectations are reasonable, it can give
no assurance that such expectations will prove to be correct. Based upon
changing conditions, should any one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual
results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the applicable cautionary
statements.
General
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 and the U.S. may
exchange more international traffic than any other two countries in the world
within the next two years. As the regulatory environments allow, we also plan to
establish framework in other Latin American countries as well. In addition to
facilities we own or operate in 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, and provide similar services to some third
party-owned casetas, public telephones and hotels in Mexico. Consumers visiting
a Company-owned communication center or public telephone may dial directly to
the desired party in exchange for cash payment, or can charge the call to a U.S.
address (collect, person-to-person, etc.) or calling card, or to a U.S. dollar-
denominated credit card with the assistance of an operator. In July 1998, 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.
We also own approximately 73% 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's downloads and registrations for products
increased from approximately 2.2 million and 28,000 for the quarter ended
October 31, 1999 to approximately 2.7 million and 42,000 for the quarter ended
October 31, 2000, respectively.
16
<PAGE>
As discussed in Note 8 to our consolidated financial statements we have
determined that we have three reportable operating segments: 1) U.S Telco; 2)
Mexico Telco; and 3) Internet e-commerce.
Additionally, we have determined that our U.S. and Mexican subsidiaries
should be reported as separate segments although many of our products are
borderless and utilize the operations of entities in both the U.S. and Mexico.
Both the U.S. Telco and Mexico Telco segments include revenues generated from
Private Network, Postpaid and Integrated Prepaid Services. For the periods
presented, our U.S. Telco segment generated all of the carrier services
revenues. GlobalSCAPE, Inc. and its operations are accounted for exclusively as
a part of the Internet e-commerce operating segment.
Our consolidated financial statements have been prepared assuming that we
will continue as a going concern. We have incurred losses since inception and
have a working capital deficit as of October 31, 2000. Additionally, we have had
recurring negative cash flows from operations with the exception of the three-
month periods ended January 31, 1998 and October 31, 1999. 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 in the last half of fiscal 2001. However, we cannot assure you that
this will be the case.
Results of Operations
The following table sets forth certain items included in the Company's
results of operations in dollar amounts and as a percentage of total revenues
for the three-month periods ended October 31, 1999 and 2000.
<TABLE>
<CAPTION>
Three Months Ended October 31,
------------------------------
1999 2000
---- ----
$ % $ %
------- ----- ------- ----
<S> <C> <C> <C> <C>
Operating revenues
------------------
Network management services
Carrier services $ 5,368 57% $3,769 50%
Private network 737 8% 583 8%
Call services
Integrated Prepaid 1,401 15% 1,390 19%
Postpaid 1,175 12% 335 4%
Internet e-commerce 782 8% 1,422 19%
------- ---- ------ ----
Total operating revenues 9,463 100% 7,499 100%
Cost of services 6,526 69% 5,528 74%
------- ---- ------ ----
Gross Margin 2,928 31% 1,971 26%
Selling, general and administrative
expense 3,374 36% 5,221 69%
Bad debt expense 120 1% 51 1%
</TABLE>
17
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Depreciation and amortization 908 10% 1,150 15%
-------- ----- -------- ----
Operating loss (1,474) (16%) (4,451) (59%)
Other, net (473) (5%) (208) (3%)
-------- ----- -------- ----
Loss before income tax expense (1,947) (21%) (4,659) (62%)
Income tax expense 0 0% (66) (1%)
Minority interest 0 0% 41 1%
Net loss (1,947) (21%) (4,684) (62%)
Less: preferred stock dividends (1,260) (13%) (887) (12%)
-------- ----- -------- ----
Net loss ($3,207) (34%) ($5,571) (74%)
======== ===== ======== ====
</TABLE>
Three Months ended October 31, 2000 Compared to Three Months ended October 31,
1999
Operating Revenues. Consolidated operating revenues were down 21% between
periods from $9.5 million for the first quarter of fiscal 2000 to $7.5 million
for the first quarter of fiscal 2001. Telco revenues (all revenues other than e-
commerce) declined from $8.7 million to $6.0 million while e-commerce revenues
generated by GlobalSCAPE each increased by approximately $640,000 between
periods. During the first quarter of fiscal 2001 we continued to shift our focus
away from certain services, such as Postpaid Call Services and Satellite-based
Private Network services. This shifting of revenues is a result of the changing
face of the telecommunications market in Mexico since the demonopolization of
Telmex began in January 1997, as well as regulatory and technological advances
made by the Company. Prior to Telmex's demonopolization, limited avenues existed
for callers to make calls from Mexico to the United States. The vast majority of
the calls placed in Mexico had to be made from either a subscribed Telmex line,
from a Telmex payphone on a prepaid basis, or on a postpaid basis by accessing a
U.S.-based operator and billing the call on collect to a valid U.S. address, or
to a valid dollar-denominated credit card. Almost all calls utilized the Telmex
local and long distance network infrastructure. Because of the limited calling
options available in Mexico at the time, the Company set up its own operator
center and processed calls from its own phones and casetas, as well as locations
owned by others, and did so at premium prices. Historically, we also focused on
selling satellite-based private networks in an effort to establish a satellite-
based network infrastructure between the U.S. and Mexico, which we felt we would
eventually utilize to carry our own international calls at some point and
decrease our dependence on the more expensive Telmex network infrastructure.
As of October 31, 2000, approximately 20 long distance concessions had been
granted to companies desiring to compete against the former Telmex monopoly. The
entrance of these alternative long distance providers into the Mexican market
has resulted in several changes, most notably more fiber optic capacity,
particularly in the crystal triangle made up of Mexico City, Guadalajara and
Monterrey; a steady increase in the calling options available within Mexico; and
a decrease in the cost of
18
<PAGE>
long distance phone calls on both a retail and wholesale basis due to more
competition. Callers now have a variety of ways to make calls from public
telephones or cellular telephones, many of which are made on a prepaid basis at
lower premiums than postpaid calls used to be. As a result of the decreasing
volumes of postpaid calls generated and processed by the Company, and lower
margin associated with those calls, the Company stopped providing these services
to most non-owned locations, closed its operator center in November 1999 and
began utilizing the services of third-party owned operator centers. As such,
revenues generated from postpaid services declined from $1.2 million for the
first quarter of fiscal 2000 to approximately $335,000 for the first quarter of
fiscal 2001.
Fiber optic lines installed during fiscal 2000 have also reduced satellite-
based private network demand in Mexico, causing us to reduce our focus on
selling satellite-based private networks within Mexico. Private network revenues
declined from approximately $737,000 to approximately $583,000 quarter to
quarter.
Utilizing licenses it received upon its acquisition of Sinfra in 1997, the
Company set up a satellite-based network between San Antonio, Texas and
Monterrey and Mexico City, Mexico. The Company also began leasing fiber optic
capacity between San Antonio, Dallas, Monterrey and Mexico City in July 1999.
Together, these two networks represent the Company's fixed costs of operation
today. Armed with this hybrid network, the Company has focused its efforts
recently on maintaining its retail presence of payphones and communications
centers in Mexico, and adding third party traffic to its network between the
U.S. and Mexico. As such, integrated prepaid traffic from its Mexican locations
has remained relatively constant, and the amount of wholesale carrier traffic
transported by the Company has increased during. However, increased fiber optic
capacity into the major metropolitan areas of Mexico has resulted in pricing
pressures and much lower per-minute revenues for carrier services. Large
increases in volumes have resulted in comparatively smaller revenue increases,
and lower margins on carrier services. While the number of minutes of carrier
traffic processed by the Company increased by approximately 7% between quarters,
revenues actually decreased by approximately 30% or $1.6 million from $5.4
million to $3.8 million. In addition to market pressures, the Company
experienced a disruption in service, not related to Year 2000 issues, which
resulted in a loss of transported minutes during the quarter.
All of the above revenues are included in our U.S. Telco results in
Footnote 8 in the accompanying financial statements as external revenues with
the exception of approximately $98,000 of private network service revenues and
approximately $178,000 of postpaid service revenues included in our external
Mexico Telco results.
Integrated prepaid service revenues, which are generated by calls processed
by us without live or automated operator assistance, remained flat at
approximately $1.4 million for both quarters. A majority of these revenues,
stated in U.S. dollars in the accompanying consolidated financial statements,
are generated by calls processed by our public telephones and casetas in Mexico
in exchange for immediate cash payment in pesos, the currency in Mexico. During
fiscal 2001, we also generated approximately $31,000 in revenues from the sale
of other companies' services, primarily prepaid calling cards and prepaid
cellular packages. These revenues, included in integrated prepaid, were
generated in the U.S. and Mexico communication centers. With the exception of
approximately $19,000 of retail service revenues included in our U.S. Telco
results as external revenues, all of the above revenues are included in our
Mexico Telco results.
Revenues from the Company's e-commerce subsidiary GlobalSCAPE, Inc.
increased 82% between quarters from approximately $782,000 to approximately $1.4
million as GlobalSCAPE
19
<PAGE>
continued to increase the rate at which users download and register its
products. During the quarter ended October 31, 1999, GlobalSCAPE customers
downloaded and registered approximately 2.2 million and 28,000 of its products,
respectively. During the quarter ended October 31, 2000, downloads and
registrations increased approximately 23% and 50%, respectively, compared to the
first quarter of fiscal year 2000. Downloads serve not only as the primary
driver for product registration revenues but increase GlobalSCAPE's targeted
audience for banner advertisements. GlobalSCAPE began selling banner
advertisements in April 1999, and for the quarter ended October 31, 2000,
advertising revenues represented approximately 9% of the total e-commerce
revenues.
Cost of Services. Cost of services declined approximately 15% or $1.0
million between quarters but increased as a percentage of revenues from 69% to
74% between quarters. Cost of services for e-commerce remained flat at 3%, for
the first quarters of fiscal 2000 and fiscal 2001. Cost of services as a
percentage of revenues on the Company's telco business increased from 75% to 90%
between quarters. This increase was primarily due to the pricing pressures
related to the Company's carrier services business as well as increased costs
related to reserve satellite capacity held by the Company during the period. As
the Company experienced a significant decline in network management revenue, a
greater portion of the satellite bandwidth was not being utilized. In an effort
to reduce the additional reserved satellite capacity cost, the Company
restructured its satellite bandwidth contract in September 2000 resulting in
lower short-term financial obligations while still allowing the Company the
flexibility and additional capacity it will need in both the near and long-term
to achieve its business plan. To further combat pricing pressures, the Company,
in September 2000, renegotiated lower prices within its carrier service line,
which should result in better margins going-forward. The shift toward prepaid
services away from postpaid services, which historically were sold at high
premiums, in Mexico has also contributed to lower margins. In order for the
Company's telco business to strengthen its gross profit margin and maintain a
competitive advantage over its competitors, management's belief is that it needs
to further build-out its network, continue to focus on retail-based call
services and continue to shift traffic from third-party owned networks to its
own networks. As such, we continue to desire to produce retail growth, with a
desired ultimate retail/wholesale mix of 70% retail and 30% wholesale. We cannot
estimate when we will be able to achieve this desired mix.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
increased 55%, or approximately $1.8 million between periods. SG&A expenses
associated with our e-commerce subsidiary increased approximately 214% or
$932,000 between periods due primarily to continuing growth, professional fees
of approximately $230,000 related to the Form 10 and other SEC filings, R&D
costs related to product enhancement and the development of new products and
approximately $152,000 of compensation expense related to the granting of stock
options. SG&A expenses associated with our U.S. and Mexico telco segments
increased approximately 31% or $914,000 between periods. This increase was due
primarily to the Company's recording of approximately $475,000 of severance
expenses in the quarter as well as increased professional fees of $141,000
related to SEC filings, Genesis transaction costs and strategic research
services. Additionally, our Mexico telco segment's salaries and wages increased
as a result of severance packages paid to terminated employees in accordance
with Mexican law.
Bad Debt Expense. Bad Debt Expense declined approximately 58% or $69,000
between periods due to the decline in the Company's postpaid call services
business between quarters.
Depreciation and Amortization. Depreciation and amortization increased
approximately 27% or $242,000 between periods. The primary reason for the
increase in depreciation and amortization expense during the quarter was
$158,000 of expense attributed to capitalized leasehold improvements at
20
<PAGE>
our previous location, for which we believe there to be no future benefit.
Additionally, the increased depreciation and amortization is attributable to an
approximate $2.9 million increase in fixed assets between October 31, 1999 and
October 31, 2000.
Operating Loss. The Company's operating loss increased approximately
202% or $3.0 million from the first quarter of fiscal 2000, primarily due to
decreased revenues, increased cost of services as a percentage of revenues,
increased selling, general and administrative expenses and increased
depreciation and amortization.
Other Income(expense). Other expense decreased approximately 127% or
$265,000 between quarters from $473,000 to $208,000. This decrease was
principally attributable to other income of approximately $184,000 related to
the settlement of liquidating damages owed to the holders of our Series C and
Series D Preferred Stock.
Preferred Stock Dividends. During the quarter ended October 31, 2000,
we recorded approximately $887,000 of non-cash expenses related to cumulative
convertible preferred stock, in the form of discount or "beneficial conversion
feature" as well as cumulative dividends on our preferred stock. As of October
31, 2000, two months remain to fully recognize the "beneficial conversion
feature" associated with our Series A preferred stock issuance.
Net Loss. The net loss for the three months ended October 31, 2000
increased approximately 74% or $2.4 million between periods. The increased net
loss was primarily due to decreased revenues, increased cost of services as a
percentage of revenues, increased selling, general and administrative expenses
and increased depreciation and amortization.
Liquidity and Capital Resources
Because we did not produce sufficient gross margin dollars to cover our
selling, general and administrative costs, we generated negative cash flows from
operations during the first quarter of fiscal year 2001. The amount of cash used
in our operations is a result of the net loss incurred during the period, the
timing of cash receipts from our customers, 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 quarter ended October 31, 2000, our net loss, after adjustments
for non-cash items (depreciation and amortization, amortization of debt
discount, deferred compensation, provision for losses on accounts receivable and
minority interest) was approximately $3.2 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 positive cash flows of approximately $2.6 million, resulting in the
negative operating cash flows for the period of $654,000. Accordingly, our
combined accounts payable/accrued liabilities balance increased by approximately
$2.3 million between July 31, 2000 and October 31, 2000.
During the quarter ended October 31, 2000, the Company acquired
approximately $296,000 in equipment which was not financed through capital lease
or financing arrangements. Additional cash outflows included the payment of
approximately $211,000 towards our capital lease obligations and an additional
$358,000 towards note payables during the three months ended October 31, 2000.
21
<PAGE>
In an effort to improve our working capital position, we raised
approximately $2.3 million, in October 2000, net of issuance costs, in a private
placement of preferred stock, and an additional $81,000 was raised through the
exercise of options. These funds were used to pay down outstanding payable
balances, to make payments on debt and capital lease obligations, and to
purchase approximately $296,000 in equipment. The net result of the Company's
operating, investing and financing activities during the quarter was a working
capital deficit at October 31, 2000 of approximately $7.6 million and cash on
hand of approximately $2.8 million. This represents a $2.3 million increase in
our working capital deficit from $5.3 million at July 31, 2000.
Included in the Company's current obligations are notes payable and
convertible debt of approximately $1.0 million, $515,000 of which were scheduled
to mature on October 31, 2000. This debt obligation was fulfilled in its
entirety with the issuance of a new debt instrument on November 1, 2000 for a
period of thirty days with the right to extend for two thirty-day periods. As of
November 30, 2000, the note was extended an additional thirty days. The
Company's current obligations also include the total obligation under its debt
facility with NTFC Capital Corporation because of the Company's non-compliance
with various covenants of the debt facility as of October 31, 2000. Although the
Company does not anticipate NTFC Capital Corporation calling the amounts due
under the debt facility, the Company has classified the debt as current in
accordance with accounting principles generally accepted in the U.S. Based upon
our results before and after the period ended October 31, 2000, we will most
likely be in default of these same covenants at the end of our next fiscal
quarter January 31, 2001. 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 after it has completed
its review of this information.
During October 2000, we issued 2,500 shares of Series E Preferred Stock
resulting in cash proceeds of approximately $2.5 million. Subject to the
satisfaction of certain conditions, we may issue an additional 7,500 shares of
Series E Preferred Stock resulting in additional cash proceeds of approximately
$7.5 million. We cannot assure you that we will be able to fulfill the
outstanding conditions and receive the additional $7.5 million of cash proceeds.
The terms of the Series E Preferred Stock are very similar to that of our Series
B, C and D Preferred Stock and are explained in more detail in footnote 4 of the
Notes to Consolidated Financial Statements. The terms of the series E preferred
stock and the related warrants include many potentially adverse effects for us
and our shareholders as described in the Risk Factors section of the Form 10-K
filed November 14, 2000. 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.
As planned, we continued to shift our focus away from traffic generated
outside of our core market of Mexico, and focused on generating and transporting
traffic over our own international network infrastructure in order to produce
better cash flow results. The result was an increase in wholesale network
transport traffic flowing over our network. Overall, network services
contributed approximately 58% of overall corporate revenues during the quarter
ended October 31, 2000. We continue to experience market pressures on our
carrier services business. In order to produce better cash flows, we must focus
on keeping our international network between Mexico and the U.S. optimally
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utilized with a blend of retail and wholesale traffic. However, we anticipate
that pricing pressures will continue in our wholesale transport market, so it
will focus our efforts on implementing a retail strategy which targets the
growing and underserved Latino markets in both the U.S. and Mexico. Although
management does not expect improved results from this effort until the latter
stages of fiscal 2001, it believes that our retail strategy combined with the
deployment of leading edge technology for communications transport will
ultimately bring about improved profitability and sustainable growth in the
future.
In the near term, the Company must continue to manage its costs of
providing services and overhead costs as it begins focusing on optimizing use of
its network and its recently acquired concession license.
Consistent with our shift towards a more retail-oriented strategy, on
December 1, 2000, we announced that we had amended the definitive agreement,
originally announced on June 14, 2000 to acquire privately held San Diego,
California-based Genesis Communications International, Inc. ("Genesis"). Under
the amended agreement, the number of shares of ATSI common stock to be delivered
to Genesis shareholders at closing will range from 6,294,416 to 19,000,000. The
number of shares of ATSI common stock to be issued at closing will be based on
the Average Price of ATSI's common stock, which is defined as the average of the
sum of the closing sale prices of ATSI common stock on The American Stock
Exchange for each of the ten trading days ending two trading days preceding the
closing date. Genesis shareholders will also receive one share of common stock
of GlobalSCAPE, Inc. for each twenty shares of ATSI received.
In accordance with the terms of the amended agreement, both ATSI and
Genesis will need to obtain requisite approvals from their respective
shareholders in order for the transaction to close. The boards of directors of
both companies have approved the transaction. ATSI has not yet set a date for
its annual shareholder meeting, at which it expects to obtain the requisite
approvals. The transaction is not expected to close until February 2001. If all
conditions to the closing have not been reasonably satisfied or waived by
February 28, 2001, then either party may terminate the amended agreement. In
addition, if the Average Price, as defined above, on the date of closing is
below $0.88 or above $7.00, then either company may terminate the agreement if
they wish.
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. We cannot assure 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.
Going forward, the Company hopes to improve its performance during the
next year primarily by consolidating the Genesis customer base and operations in
the U.S. with its own Mexico-based retail customer base and operations, and by
extending its own network between its customers utilizing its long distance
concession in order to better control its costs of doing business. The Company
would also like
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to increase and integrate its service offerings on a retail basis on both sides
of the U.S.-Mexico border. However, neither of these objectives can be satisfied
fully in the near term without first closing on the Genesis transaction.
On September 12, 2000, we completed the distribution of a portion of
our ownership in our wholly owned subsidiary GlobalSCAPE to our shareholders.
The distribution was part of a previously announced plan to distribute or
spin-off a portion of our ownership in GlobalSCAPE contemporaneously with a
public offering of GlobalSCAPE, in order to raise funds for GlobalSCAPE's growth
and ATSI's general corporate purposes. GlobalSCAPE and ATSI decided not to make
a public offering of GlobalSCAPE common stock contemporaneously with the
distribution in light of current market conditions. We are still evaluating
different ways to potentially benefit financially by giving up some, or all of
our current ownership in GlobalSCAPE. 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,
if one is made.
Inflation/Foreign Currency
Inflation has not had a significant impact on the Company's operations.
With the exception of integrated prepaid revenues from the Company's
communication centers and payphones, almost all of the Company's revenues are
generated and collected in U.S. dollars. Integrated prepaid services from the
Company's communication centers and payphones are provided at the time of the
call in exchange for cash payment, so the Company does not maintain receivables
on its books that are denominated in pesos. In an effort to reduce foreign
currency risk, the Company attempts to convert pesos collected to U.S. dollars
quickly and attempts to maintain minimal cash balances denominated in pesos.
Some expenses related to certain services provided by the Company are incurred
in foreign currencies, primarily Mexican pesos. The devaluation of the Mexican
peso over the past several years has not had a material adverse effect on the
Company's financial condition or operating results.
Seasonality
The Company's call service revenues are typically higher on a per phone
basis during January through July, the peak tourism months in Mexico.
Year 2000 Compliance
Prior to January 1, 2000 we initiated a program to identify and address
issues associated with the ability of our date-sensitive information, telephony
and business systems to properly recognize the year 2000 in order to avoid
interruption of the operation of these systems at the turn of the century. We
expended approximately $100,000 in our efforts to ensure readiness for year 2000
issues. As of October 31, 2000, we have experienced no problems associated with
Year 2000 issues, that have caused a disruption in our normal business
operations, within our internal systems or the systems of our external vendors
or customers.
Market Risk
We are subject to several market risks. Specifically, we face commodity
price risks, equity price risks and foreign currency exchange risk.
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Commodity Price 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 better 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.
Equity Price Risks
------------------
Until such time as we are able to consistently produce positive cash
flows from operations, we 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.
Foreign Currency Exchange Risk
------------------------------
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, 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
grow 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 October 2000, we issued 2,500 shares of Series E preferred stock and
warrants to purchase 909,091 shares of common stock at $1.72 to RGC
International Investors, LDC for cash proceeds of approximately $2,500,000.
Subject to the completion of certain conditions, we may issue an additional
7,500 shares of Series E Preferred Stock and warrants to purchase 2,727,273
shares of common stock for cash proceeds of approximately $7.5 million. The
Series E Preferred Stock does not accrue dividends. In addition, we are
obligated to issue 175,000 warrants as a finder's fee to an entity that
introduced us to the equity fund at an exercise price of $1.72 per warrant.
These warrants expire October 2004.
As noted in Note 4 of this Form 10-Q the Series E Preferred Stock may
be converted into
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Common Stock for up to three years at the lesser of a) the market price -
defined as the average of the closing bid price for the five lowest of the ten
trading days prior to conversion or b) the fixed conversion price -defined as
120% of the lesser of the average closing bid price for the ten days prior to
closing or the October 12, 2000 closing bid price. The conversion price will be
reset on the later of February 11, 2001 (four months from October 11, 2000) or
the date of an effective registration statement. The reset price will be the
lesser of the "market price" as defined above or the "fixed conversion price"
defined above subject to a floor price of 75% of the fixed conversion price. If
the closing bid price falls below the floor price for any ten trading days in a
consecutive twenty-day trading period, the floor price will be terminated.
The terms of our Series E 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 collectively, the Preferred Stock.
On November 27, 2000 our Registration statement on Form S-3 (File No.
333-50008) registering these shares was declared effective.
This offering was a transaction 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 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
The exhibits listed below are filed as part of this report.
Exhibit
Number
-------
11 Computation of Earnings per Share (Exhibit to this Form 10-Q filed December
15, 2000)
27 Financial Data Schedule (Exhibit to this Form 10-Q filed December
15, 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: December 15, 2000 By: /s/H. Douglas Saathoff
-----------------------
Name: H. Douglas Saathoff
Title: Chief Financial Officer
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