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SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549
_______________________
FORM 10-KA
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended July 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number:
AMERICAN TELESOURCE
INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 74-2849995
(State of Incorporation) (I.R.S.Employer
Identification No.)
6000 Northwest Parkway, Suite 110
San Antonio, Texas
(Address of Principal 78249
Executive Office) (Zip Code)
(210) 547-1000
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.001 Per Share
(Title of Class)
_______________________
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]
The aggregate market value of the Registrant's outstanding Common Stock
held by non-affiliates of the Registrant at October 25, 1999, was approximately
$41,558,696. There were 48,685,287 shares of Common Stock outstanding at October
25, 1999, and the closing sales price on the NASDAQ/OTCB for our Common Stock
was $0.92 on such date.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for the 1999 Annual Meeting of
Stockholders to be held in December 1999, are incorporated by reference in Part
III hereof.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business.............................................................................................. 3
Overview and Recent Developments.................................................................... 3
Strategy and Competitive Conditions................................................................. 4
Retail Distribution Network........................................................................... 6
Services and Products................................................................................. 8
Network Management Services.................................................................. 8
Call Services............................................................................. 9
Direct Dial Services...................................................................... 10
Sales..................................................................................... 10
Electronic Commerce Via Internet.......................................................... 11
Network............................................................................................... 12
Year 2000 Issue..................................................................................... 13
Licenses/Regulatory................................................................................. 13
Employees........................................................................................... 15
Additional Risk Factors............................................................................. 16
Item 2. Properties............................................................................................ 25
Item 3. Legal Proceedings..................................................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders................................................... 26
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................. 26
Item 6. Selected Financial and Operating Data................................................................. 28
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 29
General............................................................................................. 29
Results of Operations............................................................................... 30
Liquidity and Capital Resources..................................................................... 37
Inflation/Foreign Currency.......................................................................... 39
Seasonality......................................................................................... 39
Year 2000 Compliance................................................................................ 39
Item 8. Financial Statements and Supplementary Data........................................................... 41
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures................. 71
PART III
Item 10. Directors and Officers of the Registrant.............................................................. 71
Item 11. Executive Compensation................................................................................ 71
Item 12. Security Ownership of Certain Beneficial Owners and Management........................................ 72
Item 13. Certain Relationships and Related Transactions........................................................ 72
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................... 72
2
This Annual Report on Form 10-K and the documents incorporated by reference
in this Annual Report contain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities and Exchange Act of 1934, as amended. "Forward looking statements"
are those statements that describe management's beliefs and expectations about
the future. We have identified forward-looking statements by using words such as
"anticipate," "believe," "could," "estimate," "may," "expect," and "intend."
Although we believe these expectations are reasonable, our operations involve a
number of risks and uncertainties, including those described in the Additional
Risk Factors section of this Annual Report and other documents filed with the
Securities and Exchange Commission. Therefore, these types of statements may
prove to be incorrect.
PART I.
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ITEM I. BUSINESS
Overview and Recent Developments
We are a telecommunications provider, focusing on the market for wholesale
and retail services between the United States and Latin America, and within
Latin America. Most of our current operations involve services between the U.S.
and Mexico or within Mexico. We own various transmission facilities and leases
facilities of other providers as necessary to complete our network.
Specifically, we own teleports, which are the earth stations where satellite
transmission and receiving equipment are located, and switches, which are
computers which route calls to their intended destination by opening and closing
appropriate circuits. We lease fiber optic cable and satellite capacity to
connect our teleports and switches in the United States to our teleports and
switches in Mexico, and rely on other carriers to complete the long distance
portion of our traffic within the U.S. and Mexico.
Our subsidiary GlobalSCAPE, Inc. distributes Internet productivity
software.
We began operations in 1994 as a Canadian holding company, Latcomm
International, Inc. with a Texas operating subsidiary, Latin America Telecomm,
Inc. Both corporations were renamed "American TeleSource International, Inc." in
1994. In May 1998, the Canadian corporation completed a share exchange with a
newly formed Delaware corporation, also called American TeleSource
International, Inc., which resulted in the Canadian corporation becoming the
wholly owned subsidiary of the Delaware corporation.
We have had operating losses for almost every quarter since we began
operations in 1994. The auditor's opinion on our financial statements as of July
31, 1999 calls attention to substantial doubts about our ability to continue as
a going concern. This means that they question whether we can continue in
business. We have experienced difficulty in paying our vendors and lenders on
time in the past, and may experience difficulty in the future. If we are unable
to pay our vendors and lenders on time, they may stop providing critical
services or repossess critical equipment that we need to stay in business.
Our principal operating subsidiaries are:
. American TeleSource International de Mexico, S.A. de C.V. or ATSI
Mexico, which was formed in 1995 to support our operations in Mexico, and
perform regulatory, sales, marketing, planning, and technical maintenance
services.
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. Sistema de Telefonia Computarizada, S.A. de C.V. or Sistecom, which we
acquired in August, 1997; this subsidiary owns 126 casetas in 66 cities in
Mexico;
. Servicios de Infraestructura, S.A. de C.V. or Sinfra, which we acquired
in June, 1997; this subsidiary owns certain transmission equipment and
valuable long term licenses in Mexico;
. TeleSpan, Inc. which was formed in February 1998 to carry our wholesale
and private network services traffic between the U.S. and Latin America;
and
. GlobalSCAPE, Inc. which was formed in April 1996 to implement Internet
strategies which are not currently consistent with our core business.
Recent Developments
During our fiscal year ending July 31, 1999, we:
. executed a Marketing Agreement with AT&T providing for our pay
telephones in Mexico to be programmed with an AT&T "hot button." We
receive a commission each time a pay telephone customer uses the hot
button to access the AT&T network;
. signed a reciprocal services agreement with Bestel S.A. de C.V., further
diversifying our route choices in Mexico for intra-Mexico long distance;
. secured a three year lease of fiber optic cable from Bestel S.A. de C.V.
and began transporting increased wholesale volume over this route;
. commissioned our new Nortel(TM) International Gateway DMS 300/250 switch
located in Dallas;
. executed a reciprocal services agreement with Radiografica
Costarricense, S.A. or RACSA), a division of Instituto Costarricense de
Electricidad, the Costa Rican telephone company enabling us to connect
to the RACSA network in Costa Rica, and provide high quality, low cost
transmission services throughout Central America, Mexico and the United
States
. applied for a long distance license from the Mexican government which,
if granted, will permit us to carry our own intra-Mexico long distance
traffic and interconnect directly with the local Mexican network,
thereby substantially reducing costs
In fiscal year 1999 GlobalSCAPE acquired the ownership of its flagship
software product, CuteFTP(R), from its original author, and subsequently
executed an agreement with Tech Data Corporation for distribution of CuteFTP in
209 CompUSA stores nationwide. GlobalSCAPE also released two new Internet
productivity software products, CuteHTML(R) and CuteMAP(R). Subsequent to July
31, 1999, GloblaSCAPE signed an agreement with Lycos, Inc. to distribute CuteFTP
over the Lycos network.
Strategy and Competitive Conditions
Our strategy is to position ourselves to take advantage of the de-
monopolization of the Latin American telecommunications market, as well as the
increasing demand for services in this market.
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Historically, telecommunications services in Latin America have been provided by
state-run companies operating as a legal or de facto monopoly. Although these
companies failed to satisfy the demand for services in their countries, the
regulatory scheme effectively precluded competition by foreign carriers.
Currently, there is a trend toward demonopolization of the telecommunications
industry in Latin America, and many of these countries are in various stages of
migration toward a competitive, multi-carrier market.
At the same time that Latin American markets have been opening up, the
demand for telecommunications services between the United States and Latin
America (particularly Mexico) has been strengthened by:
. rapid growth of the Latino segment of the United States population
. increase in trade and travel between Latin America and the United States
. the build out of local networks and corresponding increase in the number
of telephones in homes and businesses in Latin countries
. proliferation of communications devices such as faxes, mobile phones,
pagers, and personal computers
. declining rates for services as a result of increased competition.
In addition, technological advances have provided emerging carriers with
the means to provide high quality transmission on a cost-effective basis. Most
notably, we as well as other emerging carriers now use packet switching
technology, which is a method of transmitting telecommunications traffic by
breaking the information into packets. The packets can then be organized in a
way that permits the information to be transmitted over long distances more
quickly and with less capacity than traditional methods. The packets are
reassembled at the receiving end to re-create the message. We have also
incorporated asynchronous transfer mode or "ATM" technology into our network.
ATM is a high-speed, packet-switching technology that allows voice, facsimile,
video and data packets to be carried simultaneously on the same network.
We have focused most of our efforts on Mexico, but have some operations in
Costa Rica, El Salvador, and Guatemala and intend to expand our services as
regulatory and market conditions permit. Ultimately we would like to provide
services throughout Latin America.
Strategy and Competitive Conditions - Mexican Market. Telefonos de Mexico
(or Telmex) had a legal franchise to control the entire market for local and
long distance telecommunications in Mexico until June of 1995, when new laws
began to open the market to effective competition. This means that Telmex owned
or controlled all of the physical infrastructure needed to transport
telecommunications traffic, including the local network of telephone lines to
homes and business in a given area, and the long distance network of lines
between the local networks. In January 1997, the Mexican government began
granting licenses to provide long distance service to competing companies, and
has licensed at least 15 new long distance providers. Two of these new license
holders are Mexican based affiliates of top tier U.S. carriers MCI/Worldcom and
AT&T. Although the Mexican government has also licensed nine new local
competitors, the build out of additional local infrastructure is just beginning,
and the local network in Mexico is still dominated by Telmex. We began
assembling a framework of licenses, reciprocal services agreements with other
carriers, other service agreements, network facilities, and distribution
channels in Mexico in 1994 in anticipation of the demonoplization of this
market. In 1994, we began providing private network services between the U.S.
and Mexico via satellite. Since then, we have established a retail distribution
network in Mexico through the acquisition of public payphones and casetas, have
entered the U.S. wholesale market for termination services to Mexico, and have
begun implementation of a U.S. retail strategy through the introduction of our
presubscribed and dial around
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services targeted to the Latino market in the U.S. We have also invested in our
own transmission facilities, beginning in 1994 with satellite teleport equipment
and most recently with the acquisition of a new Nortel International Gateway
Switch and the deployment of packet switching technology in our network. As true
competition has emerged, we have been able to negotiate increasingly more
favorable rates for local network access and long distance services with the
newly licensed long distance carriers. In fiscal year 1999 we applied for our
own long distance license, which, if granted, will permit us to interconnect
directly with the local network and build out our own long distance network,
thereby reducing costs further. We believe that our establishment of a solid
framework of licenses, proprietary network and favorable reciprocal services
agreements have positioned us to take advantage of the benefits to be reaped as
the Mexican telecommunications industry enters a truly competitive phase. We
believe that we have a clear competitive advantage over pure resellers, and that
we have overcome significant hurdles that are a barrier to entry in this market
even for large carriers. We intend to use our framework to capture increased
amounts of the communications traffic in the Mexican market.
Retail. Although Telmex and the Mexican affiliates of several large U.S.
based carriers are active participants in the Mexican retail market, we believe
that these carriers will focus on the most lucrative sectors of the market,
leaving many opportunities to further develop the large portion of the market
that continues to be underserved, both in the U.S. and Mexico. We will devote
most of our new resources on deploying innovative new public and prepaid
services that will function in the same manner regardless of the consumer's
location north or south of the U.S./Mexico border, such as enhanced prepaid
calling services. Our marketing term for these types of services is
"borderless." We will use our existing retail distribution network, and may
pursue acquisitions of established distribution channels from others. We believe
that our focus on a retail strategy, combined with the cost reductions that will
follow the grant of a Mexican long distance license, will permit us to improve
overall corporate profit margins and secure a stable customer base.
Wholesale. The U.S. wholesale market for termination to Mexico has become
increasingly dynamic as competition, call volumes and industry capacity along
U.S. -Mexico routes have all increased. Although we increased the volume of
wholesale minutes we transmitted to Mexico during fiscal year 1999, downward
pricing pressure in this market resulted in little additional revenue for these
minutes. We expect our wholesale volume of traffic transported to increase
during the upcoming year as a result of the inauguration of our high quality ATM
based fiber route to Mexico in July 1999. In addition, we plan to explore ways
to exploit our wholesale operation without the investment of significant new
resources (see Network Management Services - Carrier Services).
Although we have succeeded in obtaining reciprocal services agreements
with various Mexican-based providers that permit us to terminate northbound
traffic in the U.S., we have not realized substantial revenue from these
arrangements. We believe that the long distance license, if obtained, will
permit us to lower costs significantly, improving our competitive position in
the wholesale market for both north and southbound services.
Retail Distribution Network
Our Mexican retail distribution network consists of communication centers,
formerly referred to as casetas, and public pay telephones.
Casetas. Casetas are indoor calling centers strategically located to serve
travelers and the large population of the country who do not have personal
telephones. Casetas are a widely recognized and utilized medium in Mexico, but
do not currently have a real equivalent in the U.S. Our casetas offer local,
domestic Mexico and international long distance calling, as well as facsimile
service. We are the
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largest caseta operator in Mexico with approximately 126 casetas in 66 cities
operating under the trade name "Computel(TM)". Each location employs at least
one attendant, who processes calls, monitors call duration, collects money and
runs daily reports on call activity. As compared to public pay telephones,
casetas offer privacy and comfort as well as the personalized attention needed
by customers who are not accustomed to using a telephone. Key factors favoring
us over competing caseta operators are the well-recognized Computel name, a
reliable platform and billing system, the provision of facsimile services (which
are not offered by many other operators) and a larger distribution network. The
next largest competitor in Mexico has only 70 locations.
Using these casetas as the cornerstone, we intend to further increase our
retail presence in Mexico and the U.S. The next generation caseta will be a
"Communication Center" and will offer additional services, such as Internet
access and prepaid services. We intend to bring the Communication Center concept
to strategic markets in the U.S., targeting Mexican nationals and U.S. citizens
of Mexican origin who are familiar with the caseta concept and the ComputelTM
name. The Communication Centers will be used to distribute "borderless" products
that function in the same manner regardless of the users location north or south
of the U.S./Mexico border. We will target these products to established Latino
households, and on a prepaid basis to recent immigrants and transient Latinos
who may have acculturation issues, or identity, credit or economic challenges.
We believe we will capture customer loyalty by serving these challenged
consumers, and will keep their business as they establish households in the U.S.
The main source of competition for Communication Centers on both sides of
the border will be prepaid card services, payphone and prepaid cellular, which
are essentially designed for the same target market. There is already a robust
market for prepaid calling cards in the U.S. Regulations in Mexico have only
recently permitted the use of dial around products from payphones, and we expect
many more prepaid card vendors to enter that market. We are aware of only a
limited number of caseta-style call centers in the U.S. located on the East
Coast, in Miami and Los Angeles.
Pay Telephones. We also own and operate approximately 574 pay telephones in
various Mexican cities and resort areas, including Acapulco, Cancun, Cozumel,
Mazatlan, Puerto Vallarta, Tijuana, Huatulco, Puerto Escondido, Cabo San Lucas,
and Puerto Angel. We also have pay telephones in the Mexico City airport and
Mexico City's mass transit metro system transfer stations. All of our pay
telephones are "intelligent" phones, meaning that certain features are fully
automated, reducing operating costs. Our telephones accept pesos and U.S.
quarters.
We market our pay telephone services in Mexico through direct sales efforts
as well as some independent marketing representatives working on a commission
basis. We have targeted a significant portion of our pay telephone marketing
efforts toward various resort areas in Mexico, specifically on locations with
high tourist-traffic such as airports, ship ports and marinas, restaurants and
bars. Approximately 16 million U.S. tourists visit Mexico each year, and the
country's vacation destinations are major hubs for northern visitors via major
U.S. airline carriers, and cruise ships. Although we target the tourist market
for payphones and operator-assisted calling, these services are available for
Mexican nationals as well.
As of October 1, 1999, there were 31 authorized payphone providers in
Mexico, of which Telmex is the largest. We believe we are the second largest
provider after Telmex in the tourist markets, where we have focused our efforts.
Our multi-pay payphones give us a significant advantage over our largest
competitor, Telmex, which accepts only pre-paid Telmex calling cards. Vendors
of the cards are often difficult to locate and denominations tend to be higher
than needed by consumers. Although other
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companies have plans to install pay telephones, we believe that we will be one
of the few providers with our own network, allowing us to maintain flexibility
with respect to rates.
Services and Products
In the presentation of our financial results, we divide our revenues into
four categories: Network Management Services, Call Services, Direct Dial
Services and Electronic Commerce.
Network Management Services
Our offers private network telecommunications services between the United
States and Latin America and within Latin America.
Carrier Services
We offer wholesale termination services to U.S. and Latin American carriers
who lack transmission facilities or require additional capacity. Revenues from
this service accounted for approximately 41% of our overall revenues in fiscal
1999. The percentage of our total volume of wholesale traffic sent by customer
fluctuates dramatically, on a quarterly, and sometimes, daily basis. Although
two customers may make up 50% of this volume at a given time, a month later the
volumes sent by these two customers may be less than 5%. In general, our
agreements with these customers do not require significant volume commitments
from them, so they are free to re-route their traffic away from us to a lower
priced carrier at will. While we are the primary route choice for certain
customers and certain segments of some customer's traffic we are the second or
third route choice for some of these customers, meaning that they send us their
overflow traffic if their primary route choice does not have sufficient capacity
to meet their demand. The volume of this overflow traffic may fluctuate
dramatically from day to day. For fiscal 1999, we had two customers whose
traffic accounted for more than 10% of our consolidated revenues. This market
experienced tremendous downward pricing pressure during fiscal year 1999 due to
a combination of several factors, most notably an increase in the activation of
fiber optic cable along U.S.-Mexico routes and regulatory changes which
permitted the top tier carriers to lower their international wholesale rates.
Therefore, although we experienced increased volumes in this line of business
during the year, we realized little additional revenue. We have seen a
substantial increase in volume since we activated our high-quality fiber route
in July 1999, and believe this fiber network will continue to attract increased
volumes from top tier carriers. In addition, we believe it will generate
opportunities to transport traffic for Mexican carriers. We should be able to
use the increased volumes to negotiate more favorable termination costs in
Mexico, and if we receive a Mexican long distance license, we will be able to
substantially cut our costs for carrying this traffic.
We occupy a unique position in the market for wholesale services. Our
unique licenses from the Mexican government allow us to transport traffic from
the United States to Mexico outside of the International Settlement Policy,
which is the international accounting and settlements policy governing the
methods that U.S. and foreign carriers use to settle the cost of carrying
traffic over each other's network. The International Settlements Policy causes
MCI/Worldcom and AT&T to charge higher rates than they might otherwise charge.
However, we are at a disadvantage with respect to these large carriers because
we do not currently have a Mexican license to carry our own long distance
traffic within Mexico and must pay a licensed carrier, such as the Mexican
affiliate of MCI/Worldcom or AT&T, to carry our traffic from our Mexican
teleports to our final destination. At the other end of the spectrum, we
compete with numerous small companies who illegally carry traffic into and
within Mexico. These companies do not pay the fees charged by Mexican-licensed
carriers and are therefore able to offer very competitive prices. However,
these companies do not typically own their own transmission facilities,
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and are not able to control costs effectively as us. They are also subject to
regulatory action shutting down their operations in Mexico.
We believe that we have less than 1% of the market for wholesale
termination services. See our Risk Factor captioned "We may not successfully
compete with others in the industry" for additional description of the
competition in this market.
Private Networks
We offer private communications links for multi-national and Latin American
customers who use a high volume of telecommunications services and need greater
dependability than is available through public networks. These services include
data, voice, and fax transmission as well as videoconferencing and Internet.
During fiscal 1999, we did not devote significant resources toward the
development of this business in Mexico. However, expansion of this line of
business is consistent with our plans to build out our network in Mexico, since
many of the same facilities that would be used for delivery of retail consumer
products could be used for private network services as well.
We have and will continue to use the provision of private network services
as an entry into new Latin markets that are in the process of migrating from
state-run systems to competitive systems.
We compete with MCI/Worldcom, Americatel, Pointe Communications Corporation, and
Telscape International Inc., as well as the former telecommunication monopolies
in the Latin American countries in providing private network services. Factors
contributing to our competitiveness include reliability, network quality, speed
of installation, and in some cases, geography, network size, and hauling
capacity. We believe we have a reputation as a responsive service provider
capable of processing all types of network traffic. We are at a competitive
disadvantage with respect to larger carriers who are able to provide networks
for countries for corporations that encompass more countries in Latin America,
as well as Europe, Asia and other parts of the globe. Prices in this market are
also generally declining as fiber optic cable is activated.
We believe that we have less than 1% of the market for private network
services.
Call Services
Our principal Call Service is operator-assistance for international
collect, person-to-person, third party, calling card and credit card calls
originating in Mexico. The primary sources of demand for operator assistance are
our pay telephones and casetas in Mexico. We also provide operator services for
calls originating from payphones and casetas owned by others, hotel and resort
operators, and others who control the right to direct operator-assisted calling
from groups of telephones. We pay these third parties a commission based on the
revenue generated by the call traffic they send.
During the year ended July 31, 1999 we offered a service by which pin
numbers are issued to Latin American travelers that enable them to use their
credit cards to place calls through our Call Services Center. (Latin Americans
frequently do not have travel calling cards.) We also offered travel cards that
enable Mexican travelers to use their cellular phones to place international
calls to Mexico while in the United States. We have ceased providing these
services in order to devote more resources to higher margin products.
As part of our ongoing efforts to minimize costs, we began outsourcing our
live operator services in July 1999, and executed an agreement with another
operator service provider to handle our call
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services traffic on a transaction basis. The vendor will continue our practice
of providing bilingual service 24 hours per day, 7 days per week.
As of July 16, 1998, we ceased providing operator services for domestic
U.S. calls and international calls originating in Jamaica and the Dominican
Republic in order to focus on the more profitable Mexican market.
Our owned retail distribution network will continue to generate call
services traffic. Competition for traffic from third parties in this market
revolves largely around the amount of commissions the operator services provider
is willing to pay. We are currently focusing more on improving our profitability
rather than simply generating additional revenues, and it has therefore lost
ground to competitors willing to accept lower profit margins by paying higher
commissions. However, we believe we have a reputation as a reliable provider,
and we are also able to offer the value-added service of intelligent pay
telephones in hotel lobbies.
Other than Telmex we compete with BBG Communications, Helix Communications
and International Communication Services in the Call Services area.
We believe that we have less than 1% of the market for call services.
Direct Dial Services
During fiscal 1999, we provided direct dial services (long distance calls
which do not require live or automated operator assistance) in both Mexico and,
to a lesser extent, the United States. Direct dial calls were generated in
Mexico from our own Communications Centers and pay telephones. Consumers
visiting these locations can make calls on a "sent paid" basis by making a cash
payment at the time the call is placed. In the U.S., we provided 1+ and
MEXICOnnect (SM) service to residential and business customers in the San
Antonio metropolitan area. MEXICOnnect allows customer to dial-around their
presubscribed carrier by dialing 10-10-624 + the area code + the telephone
number. Under the 1+ program, customers presubscribe to our network for all long
distance calls made from their telephone number, eliminating the need to dial
any extra digits to reach our network.
In Mexico, we compete with other companies who have a comercializadora
license for sent paid traffic. The comercializadora allows companies to
interconnect with the local telecommunications infrastructure in order to resell
local and long distance services from public telephones. In the U.S., we compete
with large carriers such as AT&T, MCI/Worldcom, and Sprint as well as numerous
smaller companies for presubscribed long distance. Price remains a primary
concern for many consumers since the technology is not distinguishable from one
provider to another. We are focused on the Latino market and offer an aggressive
international rate to Mexico as well as competitive domestic rates. Unlike many
other long distance providers, our charges are included on the customer's bill
from the local phone company. We also offer the convenience of bilingual
customer service. We believe that we will be able to expand our presubscribed
customer base by using U.S. Communication Centers as magnets to attract
underserved Latino customers to our products.
There are numerous dial-around products on the market, offered by small and
large companies, and by long distance resellers as well as facilities-based
carriers. MEXICOnnect's competitive advantage is its focus on the Latino market,
and the elimination of per call minimums, monthly access fees, surcharges, and
other types of restrictions and small print that make dial-around discounts
deceiving. In comparison to long distance resellers, we have greater flexibility
in adjusting rates, as it has greater control over our own network.
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Sales
Direct dial sales are supervised by the Senior Vice President, Sales and
Marketing based in San Antonio. U.S. domestic carrier sales are supervised by
the Senior Vice President, Sales and Marketing in San Antonio. Mexican carrier
sales are also supervised by the Senior Vice President, Sales and Marketing in
San Antonio, who is assisted by the Director General (President) of ATSI-Mexico.
The Director of Central American operations, based in San Jose, Costa Rica,
manages the Central American carrier and private network accounts under the
supervision of the Senior Vice President, Sales and Marketing in San Antonio.
Payphone, hospitality and aggregator sales are managed from ATSI-Mexico with
supervision from the Senior Vice President, Sales and Marketing in San Antonio.
Communication center's sales efforts are managed from Computel's offices in
Guadalajara with oversight from ATSI-Mexico in Mexico City. We are in the
process of consolidating the operations of Computel and ATSI-Mexico.
Electronic Commerce via Internet
GlobalSCAPE was formed in April 1996 to implement Internet related
strategies that are not complementary to our core business. GlobalSCAPE's
revenues are attributable to sales of Internet productivity software, primarily
its flagship product CuteFTP(TM) which it has historically distributed via its
web site. GlobalSCAPE operates autonomously, generating substantially all funds
for its development and expansion internally from its own operations. In January
1999 GlobalSCAPE acquired ownership of CuteFTP from its original author, and
subsequently released an enhanced new version. GlobalSCAPE also released two new
products, CuteHTML(TM) and CuteMAP(TM). Also in fiscal 1999, GlobalSCAPE began
distributing CuteFTP in CompUSA stores, and began realizing revenue from
advertisements placed in its software. Subsequent to July 31, 1999, GlobalSCAPE
has executed an agreement with Lycos to distribute a branded version of CuteFTP
over the Lycos network.
We announced in February, 1999 that we were considering a spin off or
public offering of GlobalSCAPE's stock, and we have retained an investment
banking firm to assist us in evaluating these options and other options to
finance GlobalSCAPE's continued growth.
GlobalSCAPE's market includes all computer users on the Internet.
GlobalSCAPE's products are distributed as shareware, meaning that users may
download and use the products for free on a trial basis for a limited time.
After the expiration of the trial period, the user must register the product to
be in compliance with the license and to obtain product support. GlobalSCAPE's
primary source of revenue is generated through product registration, with
additional revenues generated by advertising in the form of ad banners and
sponsorships in its "live" software products and on our web site. On a monthly
basis, GlobalSCAPE receives approximately 1.2 million unique visitors to its web
site and displays more than 15 million in-product and web site ad banners. For
the year ended July 31, 1999, approximately 4,000,000 copies of software
products were downloaded from GlobalSCAPE's servers, of which approximately
92,000 copies were registered (including approximately 7,000 upgrades of
previously registered products).
GlobalSCAPE's's flagship product, CuteFTP(R), is a Windows(R)-based file
transfer protocol (FTP) utility allowing users the ability to transfer and
manage files via the Internet, including MP3's, web pages, software, videos and
graphics. We believe that CuteFTP(R) has 30% of the U.S. market share for FTP
programs. Our portfolio of products also includes CuteHTML(R), an advanced HTML
editor for developing web sites, and CuteMAP(R), an image mapping utility for
graphic navigation through web sites, and others in various stages of alpha and
beta testing.
11
GlobalSCAPE intends to leverage its strong brand recognition into a full
suite of "Cute" products, and to use its products in order to attract
advertising revenue and to market products of other on-line retailers and
service providers on a revenue sharing basis.
GlobalSCAPE operates in a highly competitive environment with respect to
all its products. CuteFTP(TM)'s primary competitors are WSFTP, FTP Voyager and
Bulletproof FTP. While many FTP products have mimicked CuteFTP(TM)'s features,
they are not commercially successful due to their late arrival to the
marketplace and lack of support infrastructure. CuteHTML(TM) and CuteMAP(TM),
although relatively new to the market, have the advantage of being able to
piggyback on the success of CuteFTP(TM) through product integration and cross-
marketing efforts.
Network
We have established a technologically advanced network which uses both
satellite and fiber optic cable to transmit telecommunications traffic between
the U.S. and Mexico. Our network incorporates ATM technology, which is
compatible with other transmission technologies such as frame relay and Internet
protocols, permitting us to explore even more cost-effective transmission
methods in the future. See page 5, "Strategy and Competitive Conditions" for a
description of ATM technology. Frame relay is a method of allocating capacity
on demand so that a customer's needs may be filled with less capacity than the
traditional system of dedicating a certain amount of capacity to a particular
purpose. Internet protocol refers to a method of organizing information such
that it may be carried on the Internet. Our network also employs compression
technology to carry greater volumes on the same facilities.
Generally, our strategy is to use the fiber optic arm to access major
metropolitan areas in Mexico and the satellite arm to access semi-rural and
smaller metropolitan areas. If there is a problem in either the satellite
portion of the network, we will be able to minimize service interruptions by
transferring traffic to the other portion until the problem is resolved. Our
fiber route runs from our facility at the Infomart in Dallas, Texas to Mexico
City, Mexico. We have satellite transmission and receiving equipment in 1) San
Antonio, Texas, 2) Mexico City, Monterrey, and Cancun, Mexico, 3) Guatemala
City, Guatemala, 4) San Salvador, El Salvador, and 5) San Jose, Costa Rica.
We lease fiber capacity from third parties, primarily Bestel USA, Inc. with
whom it has a 3-year lease for fiber optic cable from San Antonio, Texas to
Laredo, Texas until March 2002. We lease satellite capacity on the Mexican
satellites Solidaridad I and II, from Satelites Mexicanos, S.A. de C.V. or
"SATMEX, with whom it has an agreement for capacity through April 2001. ATSI
has leased a fixed amount of capacity from each of these vendors for a fixed
monthly price. Each of these vendors has the right to terminate service for
non-payment. During 1999, ATSI was unable to make payments to SATMEX on time.
SATMEX agreed not to suspend service under the terms of a payment plan calling
for ATSI to bring our account current by December 15, 1999. ATSI has met the
terms of the payment plan, and is now current in our payments to both of these
vendors.
We own switching and other equipment in the U.S. and Mexico. In April
1999, we began using our new Nortel DMS 300/250 International Gateway Switch in
our Dallas location. This advanced switch will permit us to deploy the new
retail and wholesale products that are key to our competitive strategy.
All aspects of our owned network facilities are designed to allow for
modular expansion, permitting us to increase capacity as needed.
12
We must contract with others to complete the intra-Mexico and domestic U.S.
portions of our network. We have reciprocal service agreements in place with
four Mexican long distance license holders, Operadora Protel, S.A. de C.V.,
Avantel, S.A. de C.V., Miditel, S.A. de C.V. and Bestel, S.A. de C.V. We have
applied for our own Mexican long distance license, which will allow us to build
out our network in Mexico and to interconnect directly with Telmex and other
local carriers, thereby lowering our transmission costs. We have reciprocal
service agreements with Radiografica Costarricense, S.A., FT&T, S.A., and
Corporacion Solares, S.A. de C.V. for transmission services in Costa Rica,
Guatemala and El Salvador, respectively. In the U.S., we purchase long distance
capacity from various companies.
We purchase local line access in Mexico for our payphones and casetas from
Telmex, and various cellular companies including SOS Telecomunicaciones, S.A. de
C.V., Portatel del Sureste, S.A. de C.V., Movitel del Noreste, S.A. de C.V, and
Baja Celular Mexicana, S.A. de C.V.
Year 2000 Issue
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. This program is being conducted by
our Management Information Systems group, which is coordinating the efforts of
internal resources as well as third party vendors in making all of the necessary
changes for all management systems and product related infrastructure for our
divisions and subsidiaries. We believe we are 96% complete in achieving Year
2000 readiness, and will be Year 2000 ready by November 30, 1999. The only
significant remaining item is an outstanding issue related to the payroll
systems of our Mexican subsidiaries. We expect to avoid disruption of our owned
information, telephony and business systems as a result of these efforts.
However, we must rely on the representations and warranties of third parties,
including domestic U.S. and foreign carriers of our traffic, in testing for
readiness for year 2000 issues and cannot ensure compliance by these parties.
We have developed contingency plans in areas where it believes there is any
significant risk or where a third party has not adequately responded to our
inquiries, which includes transitions to other providers.
We believe that a worst case scenario resulting from a Year 2000 related
failure would be a temporary disruption of normal business operations. Based
upon the work completed to date, we believe that such an occurrence is unlikely.
However, as stated above, we are relying on representations and warranties of
third parties that are beyond our control. A disruption of business operations
could have a material adverse effect on our financial performance.
We have expended approximately $100,000 in our Year 2000 program to date,
and do not expect to experience any material additional cost.
Licenses/Regulatory
Our operations are subject to federal, state and foreign laws and
regulations.
Federal
Pursuant to Section 214 of the Communications Act of 1934, the Federal
Communications Commission ("FCC") has granted us global authority to provide
switched international
13
telecommunications services between the U.S. and certain other countries. We
maintain informational tariffs on file with the FCC for our international retail
rates and charges.
In October 1996, the FCC issued an order that non-dominant interexchange
carriers will no longer be required to file tariffs for interstate domestic long
distance services. Under the terms of the FCC order, detariffing would be
mandatory after a nine-month transition period. Interexchange carriers would
still be required to retain and make available information as to the rates and
terms of the services they offer. The FCC's order was appealed by several
parties and, in February 1997, the D.C. Circuit issued a stay preventing the
rules from taking effect pending judicial review. We are currently unable to
predict what impact the FCC's order will have on us.
The Telecommunications Act of 1996, which became law in February 1996, was
designed to dismantle the monopoly system and promote competition in all aspects
of telecommunications. The FCC has promulgated and continues to promulgate major
changes to their telecommunications regulations. One aspect of the Telecom Act
that is of particular importance to us is that it allows Bell Operating
Companies or BOCs to offer in-region long distance service once they have taken
certain steps to open their local service monopoly to competition. Given their
extensive resources and established customer bases, the entry of the BOCs into
the long distance market, specifically the international market, will create
increased competition for us. Southwestern Bell's application to offer in region
long distance is expected to be approved in April 2000.
Although we do not know of any other specific new or proposed regulations
that will affect our business directly, the regulatory scheme for competitive
telecommunications market is still evolving and there could be unanticipated
changes in the competitive environment for communications in general. For
example, the FCC is currently considering rules that govern how Internet
providers share telephone lines with local telephone companies and compensate
local telephone companies. These rules could affect the role that the Internet
ultimately plays in the telecommunications market.
The International Settlements Policy governs settlements between top tier U.S.
carriers and foreign carriers of the cost of terminating traffic over each
other's networks. The FCC recently enacted certain changes in our rules
designed to allow U.S. carriers to propose methods to pay for international call
termination that deviate from traditional accounting rates and the International
Settlement Policy. The FCC has also established lower benchmarks for the rates
that U.S. carriers can pay foreign carriers for the termination of international
services and these benchmarks may continue to decline. These rule changes have
lowered the costs of our top tier competitors and are contributing to the
substantial downward pricing pressure facing us in the wholesale carrier market.
State
Many states require telecommunications providers operating within the state
to maintain certificates and tariffs with the state regulatory agencies, and to
meet various other requirements (e.g. reporting, consumer protection,
notification of corporate events). We believe we are in compliance with all
applicable State laws and regulations governing our services.
Mexico
The Secretaria de Comunicaciones y Transportes or the SCT and COFETEL have
issued our Mexican subsidiaries the following licenses:
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Comercializadora License - a 20-year license issued in February 1997
allowing for nationwide resale of local calling and long distance services from
public pay telephones and casetas.
Teleport and Satellite Network License - a 15-year license issued in May
1994 allowing for transport of voice, data, and video services domestically and
internationally. The license allows for the operation of a network utilizing
stand-alone VSAT terminals and/or teleport facilities, and connection to the
local network via carriers having a long distance license. A shared teleport
facility enables us to provide services to multiple customers through a single
teleport.
Packet Switching Network License - a 20-year license issued in October 1994
allowing for the installation and operation of a network interconnecting packet
switching nodes via our proprietary network or circuits leased from other
licensed carriers. The license supports any type of packet switching technology,
and can be utilized in conjunction with the Teleport and Satellite Network
License to build a hybrid nationwide network with international access to the
U.S.
Value-Added Service License - an indefinite license allowing us to provide
a value added network service, such as delivering public access to the Internet.
Like the United States, Mexico is in the process of revising its regulatory
scheme consistent with its new competitive market. Various technical and
pricing issues related to connections between carriers are the subject of
regulatory actions which will effect the competitive environment in ways we are
not able to determine at this time.
Other Foreign Countries
In addition to Mexico, We currently have operations in Costa Rica, El
Salvador, and Guatemala. The telecommunications markets in these countries are
in transition from monopolies to functioning, competitive markets. We have
established a presence in those countries by providing a limited range of
services, and intend to expand the services it offers as regulatory conditions
permit. We do not believe that any of our current operations in those
countries requires licensing, and we believe we will be in compliance with
applicable laws and regulations governing our operations in those countries.
Employees
At September 1, 1999, we (excluding ATSI-Mexico) had 85 full-time
employees, of whom 10 were operators, 11 were sales and marketing personnel, and
64 performed operational, technical and administrative functions, and 9 part-
time employees, 5 of who were operators. Of the foregoing, 22 were employed by
GlobalSCAPE, and 5 were employed by Sinfra. We believe our future success will
depend to a large extent on our continued ability to attract and retain highly
skilled and qualified employees. We consider our employee relations to be good.
None of these aforementioned employees belong to labor unions.
At September 1, 1999, ATSI-Mexico had 465 full-time employees of whom 375
were operators and 90 performed sales, marketing, operational, technical and
administrative functions. A portion of ATSI-Mexico's employees, chiefly
operators, belong to a union.
15
ADDITIONAL RISK FACTORS
The purchase of our common stock is very risky. You should not invest
any money that you cannot afford to lose. Before you buy our stock, you should
carefully read our entire 10-K. We have highlighted for you below all of the
material risks to our business that we are aware of.
RISKS RELATED TO OPERATIONS
. Our auditors have questioned our viability
Our auditors' opinion on our financial statements as of July 31, 1999 calls
attention to substantial doubts as to our ability to continue as a going
concern. This means that they question whether we can continue in business.
If we cannot continue in business, our common stockholders would likely lose
their entire investment. Our financial statements are prepared on the
assumption that we will continue in business. They do not contain any
adjustments to reflect the uncertainty over our continuing in business.
. It is difficult for us to compete with much larger companies such as AT&T,
Sprint, MCI-Worldcom and Telmex
The large carriers such as AT&T, Sprint and MCI/Worldcom in the U.S., and
Telmex in Mexico, have more extensive owned networks than we do, which enables
them to control costs more easily than we can. They are also able to take
advantage of their large customer base to generate economies of scale,
substantially lowering their per-call costs. Therefore, they are better able
than we are to lower their prices as needed to retain customers. In addition,
these companies have stronger name recognition and brand loyalty, as well as a
broader portfolio of services, making it difficult for us to attract new
customers. Our competitive strategy in the U.S. revolves around targeting
markets that are largely underserved by the big carriers. However, some
larger companies are beginning efforts or have announced that they plan to
begin efforts to capture these markets.
Mergers, acquisitions and joint ventures in our industry have created and may
continue to create more large and well-positioned competitors.
. The market for wholesale services is extremely price sensitive and there is
downward pricing pressure in this market making it difficult for us to retain
customers and generate adequate profit from this service
Industry capacity along the routes serviced by ATSI is generally growing as
fiber optic cable is activated. There have also been changes in the
international regulatory scheme that have permitted large carriers such as
AT&T and MCI/WorldCom to reduce the amount they may charge for international
services. These factors, along with intense competition among carriers in
this market, have created severe downward pricing pressure. For example, from
October 1998 to October 1999, the prevailing price per minute to carry traffic
from the U.S. to Mexico declined by approximately 45%. Although we carried
almost twice as much wholesale traffic in fiscal year 1999 than in fiscal year
1998, we recognized about the same amount of revenue. If these pricing
pressures continue, we must continue to lower our costs in order to maintain
sufficient profits to continue in this market.
. We may not be able to collect large receivables, which could create serious
cash flow problems
Our wholesale network customers generate large receivable balances, often over
$500,000 for a two-
16
week period. We incur substantial direct costs to provide this service since
we must pay our carriers in Mexico to terminate these calls. If a customer
fails to pay a large balance on time, we will have difficulty paying our
carriers in Mexico on time. If our carriers suspend services to us, it may
affect all our customers.
. We may not be able to pay our suppliers on time, causing them to discontinue
critical services
We have not always paid all of our suppliers on time due to temporary cash
shortfalls. Our critical suppliers are SATMEX for satellite transmission
capacity and Bestel for fiber optic cable. We also rely on various Mexican
and U.S. long distance companies to complete the intra-Mexico and intra-U.S.
long distance portion of our calls. For the first three quarters of fiscal
2000, the monthly average amount due to these suppliers as a group was
approximately $1,724,000. We currently have overdue outstanding balances with
long distance carriers for the first three quarters of fiscal 2000 of
approximately $1.1 million on which we are making payments. Critical
suppliers may discontinue service if we are not able to make payments on time
in the future. In addition, equipment vendors may refuse to provide critical
technical support for their products if they are not paid on time under the
terms of support arrangements. Our ability to make payments on time depends
on our ability to raise additional capital or improve our cash flow from
operations.
. We may not be able to make our debt payments on time or meet financial
covenants in our loan agreements, causing our lenders to repossess critical
equipment
We purchased some of our significant equipment with borrowed money, including
a substantial number of our payphones located in Mexico, our DMS 250/350
International gateway switch from Nortel, and packet-switching equipment from
Network Equipment Technologies. We pay these three lenders approximately
$171,165 on a monthly basis. See footnote 6 to the financial statements of
this amended 10-K, which includes more information about our equipment,
equipment debt and capital lease obligations. The lenders have a security
interest in the equipment to secure repayment of the debt. This means that
the lenders may take possession of the equipment and sell it to repay the debt
if we do not make our payments on time. These lenders may exercise their
right to take possession of certain critical equipment if we are not able to
make payments on time in the future. Our ability to make our payments on time
depends on our ability to raise additional capital or improve our cash flow
from operations. We are not currently in compliance with the financial
covenants in our Nortel switch loan agreement. Footnote 3 of our financial
statements in our amended 10-Q for the period ended January 31, 2000 contains
more detail on our non-compliance with those financial covenants, and
footnotes 4 and 5 of the financial statements in this amended 10-K for the
year ended July 31, 1999 contains more information on our secured loans and
capital leases.
. A large portion of our revenue is concentrated among a few customers, making
us vulnerable to sudden revenue declines.
Our revenues from wholesale services currently comprise about 60% of our total
revenues. The volume of business sent by each customer fluctuates, but this
traffic is often heavily concentrated among three or four customers. During
some periods in the past, two of these customers have been responsible for 50%
of this traffic. Generally, our wholesale customers are able to re-route their
traffic to other carriers very quickly in response to price changes. If we
are not able to continue to offer competitive prices, these customers will
find some other supplier and we will lose a substantial portion of our revenue
very quickly. In addition, mergers and acquisitions in our industry may reduce
the already limited number of customers for our wholesale services.
17
. The telecommunications industry has been characterized by steady technological
change. We may not be able to raise the money we need to acquire the new
technology necessary to keep our services competitive.
To compete successfully in the wholesale and retail markets, we must maintain
the highest quality of service. Therefore, we must continually upgrade our
network to keep pace with technological change. This is expensive, and we do
not have the substantial resources that our large competitors have.
. We may not be able to generate the sales volume we need to recover our
substantial capital investment in our infrastructure.
We have made a substantial investment in our network and personnel to position
us in our target markets and will continue to do so. Therefore, we must
achieve a high volume of sales to make this investment worth while. We
compete for wholesale and retail customers with larger, and better known
companies making it relatively more difficult for us to attract new customers
for our services.
. We may not be able to lease transmission facilities we need at cost-effective
rates
We do not own all of the transmission facilities we need to complete calls.
Therefore, we depend on contractual arrangements with other telecommunications
companies to complete our network. For example, although we own the switching
and transport equipment needed to receive and transmit calls via satellite and
fiber optic lines, we do not own a satellite or any fiber optic lines and must
therefore lease transmission capacity from other companies. We may not be
able to lease facilities at cost-effective rates in the future or enter into
contractual arrangements necessary to expand our network or improve our
network as necessary to keep up with technological change.
In 1999 we experienced difficulty in obtaining fiber optic cable due to a
supplier's default under the terms of a lease agreement. This difficulty was
central to our failure to meet our revenue goals for 1999 since our goals were
based on implementing a new fiber optic route in January of 1999. We were
required to lease fiber optic lines from a different supplier at a higher
price, with the alternative fiber becoming operational in June 1999 - delaying
the new revenues by six months. This difficulty is described in more detail
in Legal Proceedings.
. The carriers on whom we rely for intra-Mexico long distance may not stay
in business leaving us fewer and more expensive options to complete calls
There are only 15 licensed Mexican long distance companies, and we currently
have agreements with four of them. One of these, Avantel, S.A. de C.V. has
said publicly that it may not continue in the business because of its
difficulty in achieving a desired profit margin. If the number of carriers who
provide intra-Mexico long distance is reduced, we will have fewer route
choices and may have to pay more for this service.
. We may have service interruptions and problems with the quality of
transmission, causing us to lose call volumes and customers
To retain and attract customers, we must keep our network operational 24 hours
per day, 365 days per year. We have experienced service interruptions and
other problems that affect the quality of voice and data transmission. To
date, these problems have been temporary. We may experience
18
more serious problems. In addition to the normal risks that any
telecommunications company faces (such as fire, flood, power failure,
equipment failure), we may have a serious problem if a meteor or space debris
strikes the satellite that transmits our traffic, or a volcanic eruption or
earthquake interferes with our operations in Mexico City. We have the ability
to transmit calls via either the satellite or fiber optic portion of our
network, and this redundancy should protect us if there is a problem with one
portion of our network. However, a significant amount of time could pass
before we could re-route traffic from one portion of our network to the other,
and there may not be sufficient capacity on only one portion of the network to
carry all of our traffic at any given time.
To stay competitive, we will attempt to integrate the latest technologies into
our network. We are currently implementing "packet switching" transport
capabilities such as Asynchronous Transfer Mode and we will continue to
explore new technologies as they are developed. The risk of network problems
increases during periods of expansion and transition to new technologies.
. Changes in telecommunications regulations may harm our competitive position
Historically, telecommunications in the U.S. and Mexico have been closely
regulated under a monopoly system. As a result of the Telecommunications Act
of 1996 in the U.S. and new Mexican laws enacted in the 1990's, the
telecommunications industry in the U.S. and Mexico are in the process of a
revolutionary change to a fully competitive system. U.S. and Mexican
regulations governing competition are evolving as the market evolves. For
example, FCC regulations now permit the regional Bell operating companies
(former local telephone monopolies such as Southwestern Bell) to enter the
long distance market if certain conditions are met. The entry of these
formidable competitors into the long distance market will make it more
difficult for us to establish a retail customer base. There may be
significant regulatory changes that we cannot even predict at this time. We
cannot be sure that the governments of the U.S. and Mexico will even continue
to support a migration toward a competitive telecommunications market.
. Regulators may challenge our compliance with laws and regulations causing us
considerable expense and possibly leading to a temporary or permanent shut
down of some operations
Government enforcement and interpretation of the telecommunications laws and
licenses is unpredictable and is often based on informal views of government
officials and ministries. This is particularly true in Mexico and certain of
our target Latin American markets, where government officials and ministries
may be subject to influence by the former telecommunications monopoly, such as
Telmex. This means that our compliance with the laws may be challenged. It
could be very expensive to defend this type of challenge and we might not win.
If we were found to have violated the laws that govern our business, we could
be fined or denied the right to offer services.
. Our operations may be affected by political changes in Mexico and other Latin
American countries
The majority of our foreign operations are in Mexico. The political and
economic climate in Mexico is more uncertain than in the United States and
unfavorable changes could have a direct impact on our operations in Mexico.
For example, a newly elected set of government officials could decide to
quickly reverse the deregulation of the Mexican telecommunications industry
economy and take steps such as seizing our property, revoking our licenses, or
modifying our contracts with Mexican suppliers. A period of poor economic
performance could reduce the demand for our services in Mexico. There might
be trade disputes between the United States and Mexico which result in trade
barriers such as additional taxes on our services. The Mexican government
might also decide to
19
restrict the conversion of pesos into dollars or restrict the transfer of
dollars out of Mexico. These types of changes, whether they occur or are only
threatened, would also make it more difficult for us to obtain financing in
the United States.
. If the value of the Mexican Peso declines relative to the Dollar, we will
have decreased earnings as stated Dollars
Approximately 20% of ATSI's revenue are collected in Mexican Pesos. If the
value of the Peso relative to the Dollar declines, that is, if Pesos are
convertible into fewer Dollars, then our earnings, which are stated in
dollars, will decline. We do not engage in any type of hedging transactions
to minimize this risk and do not intend to do so.
RISKS RELATED TO FINANCING
. If we do not raise additional capital we may go out of business
In the past we have financed our operations almost exclusively through the
private sales of securities. In the near term we expect to sell additional
common stock or securities convertible into common stock, which will dilute
our existing shareholders' percentage ownership of ATSI and depress the price
of our common stock. See the risk factors in the section captioned "Risk
Related to Market for Common Stock," below. Since we are not a profitable
company, it is difficult for us to raise money on terms we find acceptable.
The terms we are able to arrange may be more costly than the terms that
profitable companies could obtain, and may place significant restrictions on
our operations.
. We owe $330,000 to the holder of our series D preferred stock for taking too
long to obtain an effective registration statement, and we will owe it even
more money if the registration statement is not declared effective soon.
Under the terms of registration rights agreements we signed with The Shaar
Fund at the time we issued our series C preferred stock on September 24, 1999
we are required to pay liquidated damages to The Shaar Fund of $25,000 for
failing to file a registration statement for the underlying common stock by
October 24, 2000 or failing to obtain effectiveness by December 23, 2000, and
an additional $25,000 for each subsequent 30 day period that we fail to meet
those targets. We initially filed our registration statement for the common
stock underlying the series C preferred stock on October 26, 2000, 2 days
late. The Shaar Fund has waived the penalty resulting from that late filing.
As of June 30, 2000, we have not obtained effectiveness of the registration
statement, resulting in liquidated damages owing to The Shaar Fund of
$150,000, with another $25,000 to accrue if the registration statement is not
effective by July 20, 2000.
Under the terms of registration rights agreements we signed with The Shaar
Fund at the time we issued our series D preferred stock on February 22, 2000
we are required to pay liquidated damages to The Shaar Fund of $60,000 for
failing to file a registration statement for the underlying common stock by
April 1, 2000 or failing to obtain effectiveness by June 1, 2000 and an
additional $60,000 for each subsequent 30 day period that we fail to meet
those targets. We filed a registration statement including the common stock
underlying the series D preferred stock late resulting in liquidated damages
of $60,000. As of July 1, 2000 we have not obtained effectiveness of the
registration statement resulting in an additional $120,000 of damages.
20
. The terms of our preferred stock includes disincentives to a merger or other
change of control of ATSI, which could discourage a transaction that would
otherwise be in the interest of our stockholders.
In the event of a change of control of ATSI, the terms of the series D
preferred stock permit The Shaar Fund to choose either to receive whatever
cash or stock the common stockholders receive in the change of control as if
the series D stock had been converted, or to require us to redeem the series D
preferred stock at $1560 per share. If all 3,000 shares of the series D
preferred stock were outstanding at the time of a change of control, this
could result in a payment to The Shaar Fund of $4,680,000. The possibility
that we might have to pay this large amount of cash would make it more
difficult for us to agree to a merger or other opportunity that might arise
even though it would otherwise be in the best interest of the shareholders.
. We may have to redeem the series D preferred stock for a substantial amount of
cash, which would severely restrict the amount of cash available for our
operations.
The terms of the series D preferred stock require us to redeem the stock for
cash in two circumstances in addition to the change of control situation
described in the immediately preceding risk factor.
First, the terms of the series D preferred stock prohibits The Shaar Fund from
acquiring more than 11,509,944 shares of our common stock, which is 20% of the
amount of shares of common stock outstanding at the time we issued the series
D preferred stock. The terms of the series D preferred stock also prohibit
The Shaar Fund from holding more than 5% of our common stock at any given
time. Due to the floating conversion rate, the number of shares of common
stock that may be issued on the conversion of the series D stock increases as
the price of our common stock decreases, so we do not know the actual number
of shares of common stock that the series D preferred stock will be
convertible into. On the second anniversary of the issuance of the series D
preferred stock we are required to convert all remaining unconverted series D
preferred stock. If this conversion would cause The Shaar Fund to exceed
these limits, then we must redeem the excess shares of Series D preferred
stock for cash equal to $1270 per share, plus accrued but unpaid dividends.
Second, if we refuse to honor a conversion notice or a third party challenges
our right to honor a conversion notice by filing a lawsuit, The Shaar fund may
require us to redeem any shares it then holds for $1270 per share. If all
3,000 shares were outstanding at the time of redemption, this would result in
a cash payment of $3,810,000 plus accrued and unpaid dividends. If we were
required to make a cash payment of this size, it would severely restrict our
ability to fund our operations.
. We may redeem our preferred stock only under certain circumstances, and
redemption requires us to pay a significant amount of cash and issue
additional warrants; therefore we are limited as to what steps we may take to
prevent further dilution to the common stock if we find alternative forms of
financing
We may redeem the series A preferred stock only after the first anniversary of
the issue date, and only if the market price for our common stock is 200% or
more of conversion price for the series A preferred stock. The redemption
price for the series A stock is $100 per share plus accrued and unpaid
dividends. We may redeem the series D preferred stock only if the price of
our common stock falls below $9.00, the price on the date of closing the
series D preferred stock. The redemption price is $1270 per share, plus
accrued but unpaid dividends, plus an additional warrant for the purchase of
150,000 shares of common stock. In the event that we are able to find
replacement
21
financing that does not require dilution of the common stock, these
restrictions would make it difficult for us to "refinance" the preferred stock
and prevent dilution to the common stock.
. The partial distribution and public offering of shares of our subsidiary
GlobalSCAPE will have a negative impact on our operating results and cash
flows
Because GlobalSCAPE currently contributes significantly to our consolidated
EBITDA results, we expect our consolidated operating and cash flow results to
decline after the distibution and offering.
RISKS RELATING TO MARKET FOR OUR COMMON STOCK
. We expect the holders of our preferred stock and warrants and our employees
who have stock options to convert their stock and exercise their warrants and
options, which will result in significant dilution to the common stock
Given the current market price of our stock, the holders of each of most of
these securities will realize a financial benefit by converting or exercising
their securities, so we expect that almost all of the common stock that may be
issued under the terms of each of these securities will be issued. Even if
the holders of the preferred stock do not elect to convert, the terms of the
preferred stock require conversion after a certain time. Since the conversion
price of our preferred stock floats at a discount to market price, we do not
know how many shares will ultimately be issued.
. The sale of the common stock issued upon conversion of preferred stock and
exercise of the warrants will put downward pricing pressure on ATSI's common
stock; any potential short sales by those converting will also put downward
pressure on ATSI's common stock
Most of the common stock issued upon conversion of preferred stock has been or
will be registered with the SEC, meaning that the common stock will be freely
tradable in the near term. We expect many of the stockholders will sell their
holdings in the near term, and in particular we expect The Shaar Fund to sell
its shares of common stock resulting from the conversion of the series C stock
very shortly after the effectiveness of the registration statement of which
this prospectus is a part, and its shares of common stock resulting from the
conversion of the series D preferred stock very shortly after it is issued to
them. The addition of this substantial number of shares of common stock to
the market will put downward pricing pressure on out stock.
. We will likely continue to issue common stock or securities convertible into
common stock to raise funds we need, which will further dilute your ownership
of ATSI and may put additional downward pricing pressure on the common stock
Since we continue to operate at a loss, we will continue to need additional
funds to stay in business. At this time, we are not likely to be able to
borrow enough money to continue operations on terms we find acceptable so we
expect to have to sell more shares of common stock or more securities
convertible in common stock. Convertible securities will likely have similar
features to our existing preferred stock, including conversion at a discount
to market. The sale of additional securities will further dilute your
ownership of ATSI and put additional downward pricing pressure on the stock.
22
From January 1, 1999 to August 22, 2000, we issued 14,355,475 new shares of
common stock on a fully diluted basis, which represents approximately 18% of
our fully diluted outstanding common stock. The fully diluted outstanding
common stock includes an assumed number of shares of common stock that have
not yet been issued, but are issuable upon conversion of convertible preferred
stock, warrants and stock options. Our convertible preferred stock has a
conversion price that floats with the market price of our common stock. We
calculated the number of shares included in this amount by using an assumed
conversion price based on our market price as of August 22, 2000. The actual
number of shares that may be issued may be materially higher or lower.
. The potential dilution of your ownership of ATSI will increase as our stock
price goes down, since our preferred stock is convertible at a floating rate
that is a discount to the market price.
Our series A and D preferred stock is convertible into common stock based on a
conversion price that is a discount to the market price for ATSI's common
stock. The conversion price for the series A stock is reset each year on the
anniversary of the issuance of the stock, and the conversion price for the
series D preferred stock floats with the market on a day-to-day basis. For
each series, the number of shares of common stock that will be issued on
conversion increases as the price of our common stock decreases. Therefore,
as our stock price falls, the potential dilution to the common stock
increases, and the amount of pricing pressure on the stock resulting from the
entry of the new common stock into the market increases.
. We have signed an agreement for a private equity line of credit.
We signed an agreement on April 10, 2000 with an investor under which we may
require the investor to purchase up to 5 million shares of common stock over
an eighteen month period at 92% of the market price for our common stock at
the time of purchase. We are not required to use this credit line facility,
but if we do use this facility, we must issue common stock for an aggregate
investment of at least $1.5 million over the term of the facility. If ATSI
elects to use this facility, it must issue to the investor warrants for 1,500
shares of common stock for every $100,000 that is invested at an exercise
price of 120% of the average of the five closing sale prices preceding the
date of the investment, and an additional 1,000 warrants per 100,000 invested
as a finder's fee on the same terms. To use this facility, we must file a
registration statement for the common stock that we would issue and obtain
effectiveness of the registration statement.
If we elect to raise funds by selling shares of common stock under our 5
million share credit line facility described above, those shares will be
issued at an 8% discount to the market price for our common stock
. Sales of common stock by the preferred holders may cause the stock price to
decrease, allowing the preferred stock holders to convert their preferred
stock into even greater amounts of common stock, the sales of which would
further depress the stock price.
The terms of the preferred stock may amplify a decline in the price of our
common stock since sales of the common stock by the preferred holders may
cause the stock price to fall, allowing them to convert into even more shares
of common stock, the sales of which would further depress the stock price.
. The potential dilution of your ownership of ATSI resulting from our series D
preferred stock will increase if we sell additional common stock for less than
the conversion price applicable to the series D preferred stock.
23
The terms of the series D preferred stock require us to adjust the conversion
price if we sell common stock or securities convertible into common stock at a
greater discount to market than provided for the series D preferred stock.
Therefore, if we sell common stock or securities convertible into common stock
in the future on more favorable terms than the discounted terms, we will have
to issue even more shares of common stock to The Shaar Fund than initially
agreed on.
. We expect to issue additional shares of common stock to pay dividends on the
preferred stock, further diluting your ownership of ATSI and putting
additional downward pricing pressure on the common stock.
The series A stock requires quarterly dividends of 10% per annum, and the
series D stock requires quarterly dividends of 6% per annum. We have the
option of paying these dividends in shares of common stock instead of cash and
we expect to use that option. The issuance of these additional shares of
common stock will further dilute your ownership of ATSI and put additional
downward pricing pressure on the common stock.
. The issuance of our convertible preferred stock may violate the rules of The
American Stock Exchange, which could result in the delisting of our common
stock
The rules of The American Stock Exchange, or the Amex, require that the voting
rights of existing shareholders may not be disparately reduced or restricted
through any corporate action or issuance. The Amex has stated in its
interpretive materials relating to the exchange rules that floating priced
convertible securities that vote on an as converted basis, such as our series
A preferred stock, raise voting rights concerns because of the possibility
that, due to a decline it the price of the underlying common stock the
preferred stock holder will having voting rights disproportionate to its
investment in our company. These interpretive materials also indicate that
the Amex may view the issuance of floating rate convertible securities, such
as our series A or D preferred stock as a violation of their rule against
engaging in operations which are contrary to the public interest since the
returns on securities of this type may become excessive compared with those of
public investors in our common stock.
. We have agreed to issue additional shares as consideration for the purchase of
Genesis Communications International, Inc.
We will have to issue up to an additional 9.6 million shares upon the closing
of this transaction. The entry of these shares will put further market
pressure on the price of common stock.
. You will almost certainly not receive any cash dividends on the common stock
in the foreseeable future.
Sometimes investors buy common stock of companies with the goal of generating
periodic income in the form of dividends. You may receive dividends from time
to time on stock you own in other companies. We have no plan to pay dividends
in the near future.
. If the price of common stock falls to a low price for a substantial period of
time, the Amex may delist our common stock
The Amex has in the past delisted stock that fell below $4 per share for an
extended period of time. If our common stock falls to this level and is
delisted, trading in our common stock would be
24
conducted in the over-the-counter market on the electronic bulletin board or
in the pink sheets administered by the NASD. This would likely adversely
affect the liquidity of the common stock because it would be more difficult
for stockholders to obtain accurate stock quotations. In addition, if our
stock were not traded on a national exchange, sales of our stock would likely
be subject to the SEC's penny stock rules which generally create a delay
between the time that a stockholder decides to sell shares and the time that
the sale may be completed.
. A delay or failure to complete a public offering may have a negative impact
on us
If we experience a delay or fail to complete a public offering we may inhibit
GlobalSCAPE's ability to accelerate the implementation of their business plan.
Additionally, a delay or failure to complete a public offering may adversely
impact the influx of further capital into ATSI and/or GlobalSCAPE.
ITEM 2. PROPERTIES
Our executive offices, principal teleport facility and control center are
located at our leased facility in San Antonio, Texas, consisting of 11,819
square feet. The lease expires August 2002, and has two five-year renewal
options. We pays annual rent of $98,452 (increasing to $107,789 per year for the
last year) under the lease and are responsible for taxes and insurance.
GlobalSCAPE, Inc.'s offices are located at its leased facility in San Antonio,
Texas, consisting of 5,401 square feet. The lease expires January 31, 2001.
GlobalSCAPE, Inc. pays annual rent of $87,496 per year and is responsible for
taxes and insurance.
Subsequent to year-end, ATSI and GlobalSCAPE entered into agreements for
new office space beginning in December of 1999. Both agreements are for a period
of eight and a half-years with rent deferred for the first six months of the
agreement. Our facility will consist of 26,250 square feet with annual rent of
$311,850 per year while GlobalSCAPE's facility will consist of 14,553 square
feet with annual rent of $174,636 per year. Management believes our leased
facilities are suitable and adequate for their intended use.
ITEM 3. LEGAL PROCEEDINGS
On January 29, 1999, one of our customers, Twister Communications, Inc.
filed a Demand for Arbitration seeking damages for breach of contract before the
American Arbitration Association. The customer claims that we wrongfully
terminated an International Carrier Services Agreement executed by the parties
in June 1998 under which we provided wholesale carrier services from June 1998
to January 1999. The customer's claims for damages represent amounts that it
claims it had to pay in order to replace the service provided by us. We dispute
that we terminated the contract wrongfully and assert that the customer breached
the agreement by failing to pay for services rendered and by intentionally
making false representation regarding our traffic patterns and on March 3, 1999
filed a Demand for Arbitration seeking damages for breach of contract in an
amount equal to the amounts due to us for services rendered plus interest, plus
additional damages for fraud. An arbitration panel was selected and the parties
are now completing written discovery.
While 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; until the arbitration proceedings
take place, we can not reasonably estimate the possible loss, if any, and there
can be no assurance that the resolution of this dispute would not have an
adverse effect on our results of operations.
25
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 Our 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. 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. While the total economic impact is still being
assessed, we believe lost revenues and incremental costs are in excess of $15
million. While our contract contains certain limitations regarding the type and
amounts of damages that can be pursued, we have authorized our attorneys to
pursue all relief to which we are entitled under law. As such, we can not
reasonably estimate the ultimate outcome of neither this lawsuit nor the
additional costs that may be incurred in the pursuit of our case.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no submissions of matters to a vote of security holders during
the fourth quarter of our fiscal year.
PART II.
--------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is quoted on the AMEX under the symbol "AI". From December
1997 to February 14, 2000 our Common Stock was traded on the NASD: OTCBB under
the symbol "AMTI". Prior to December 1997, our Common Stock was traded on the
Canadian Dealing Network under the symbol ATIL.CDN. The table below sets forth
the high and low bid prices for the Common Stock from August 1, 1997 through
December 21, 1997 as reported by the Canadian Dealing Network, from December 22,
1997 through February 14, 2000 as reported by NASD: OTCBB and from February 15,
2000 through August 22, 2000. These price quotations reflect inter-dealer
prices, without retail mark-up, markdown or commission, and may not necessarily
represent actual transactions.
Fiscal 1998 High Low
--------------------------------------------------
First - ........................ $ 3 1/4 $ 1 3/8
Second - ....................... $ 3 7/16 $ 2
Third - ........................ $ 3 1/2 $ 1 5/7
Fourth - ....................... $ 2 1/4 $ 3/4
Fiscal 1999 High Low
--------------------------------------------------
First - ........................ $ 1 1/8 $ 15/32
Second - ....................... $ 1 9/32 $ 3/4
Third - ........................ $ 1 13/64 $ 5/8
26
Fourth - .......................... $1 53/64 $ 1 1/32
Fiscal 2000 High Low
-----------------------------------------------------
First - ........................... $ 1 11/32 $ 45/64
Second - .......................... $ 2 29/32 $ 45/64
Third - ........................... $ 9 7/16 $2 1/2
Fourth - .......................... $ 6 5/16 $4 1/2
Fiscal 2001 High Low
-----------------------------------------------------
First - (through August 22, 2000).. $ 4 $2 15/16
At August 22, 2000 the closing price of our Common Stock as reported by
AMEX was $3.00 per share. As of August 22, 2000, we had approximately 15,000
stockholders, including both beneficial and registered owners. The terms of our
Series A, Series B, Series C and Series D Preferred Stock restrict us from
paying dividends on our Common Stock until such time as all outstanding
dividends have been fulfilled related to the Preferred Stock. ATSI has not paid
dividends on our common stock the past three years and does not expect to do so
in the foreseeable future.
Since the filing of our Registration Statement on Form S-4 on March 6, 1998
we have had several sales of unregistered securities. They are as follows:
On January 6, 1999 we issued 20,000 shares of our common stock for services
related to a previous private placement. We also issued 16,643 shares to an
individual for consulting services provided for the month of January in the
amount of $7,500.
In February 1999 we issued 279,430 shares of our common stock with a market
value of approximately $203,750 in completion of our acquisition in 1998 of
certain customer contracts.
In March 1999 we issued 11,330 shares of Series A preferred stock for
approximately $1,133,000. Additionally, we issued 1,141 shares of Series A
preferred stock to a company for services rendered in connection with placement
of the Series A preferred stock. As noted in Note 8 of the accompanying
financial statements, the Series A preferred stock converts to common stock at a
discount to market at an Initial Conversion Price calculated at closing. The
conversion price is reset each anniversary date at the lower of 75% of the then
calculated conversion price or 75% of the initial conversion price. At no time
can the conversion price be reset lower than 75% of the initial conversion
price. The Series A preferred stock accrues dividends at the rate of 10% per
annum.
In April 1999 we issued 12,416 shares of Series A preferred stock for
approximately $1.2 million. Additionally, we issued 700 shares of Series A
preferred stock and paid $14,556 to two companies for services rendered in
connection with the placement of the Series A preferred stock. As noted above
the Series A preferred stock converts at a discount to market at an Initial
Conversion Price calculated at closing. The conversion price is reset each
anniversary date at the lower of 75% of the then calculated conversion price or
75% of the initial conversion price. At no time can the conversion price be
reset lower than 75% of the initial conversion price. The Series A preferred
stock accrues dividends at the rate of 10% per annum. In April 1999 we also
issued 59,101 shares in lieu of $25,000 cash to an individual in accordance with
an agreement signed previously in which he guaranteed up to $500,000 of our
debt. Lastly we issued 503,387 shares of common stock in a private placement at
a price of $0.60 per share on April 13, 1999. For each share purchased the
investors received a warrant entitling them to purchase an additional share at
an exercise price of $0.70 per share for a period of one year. In
27
conjunction with this private placement we issued 58,339 to two companies for
services rendered in connection with the private placement of common stock.
In July 1999 we issued 2,000 shares of Series B preferred stock for
approximately $2 million. Additionally, we issued a warrant for 50,000 shares of
common stock at an exercise price of $1.25 to the purchaser of the Series B
preferred stock. We also issued a warrant for an additional 50,000 shares of
common stock at an exercise price of $1.25 and paid $200,000 to a company as a
finder's fee for introducing us to the investor. As noted in Note 8 the Series B
preferred stock also converts to common stock at a discount to market at the
lower of an initial conversion price or 78% of the five lowest closing bid
prices of the ten days preceding conversion. The Series B preferred stock
accrues dividends at the rate of 6% per annum. Subsequent to year-end the Series
B preferred stock was registered with the SEC in a Registration Statement on
Form S-3 (File No. 333-84115) filed August 19, 1999.
For those securities not registered with the SEC exemptions are claimed
according to Section 4(2) of the Securities Act of 1933 and SEC Regulation
(D).
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA.
The following selected financial and operating data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and The Company's Consolidated Financial Statements
and the Notes thereto included elsewhere herein.
Years ended July 31,
--------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(In thousands of $, except per share data)
Consolidated Statement of Operations
Data:
Operating revenues:
Call services $ 4,470 $10,807 $12,545 $13,547 $ 6,602
Direct dial services - - 1,421 6,085 6,024
Network management services 318 2,614 1,698 13,362 19,250
Internet e-commerce - 54 564 1,526 2,642
------ ------ ------ ------ ------
Total operating revenues 4,788 13,475 16,228 34,520 34,518
Operating expenses:
Cost of services 4,061 10,833 12,792 22,287 21,312
Selling, general and administrative 2,196 3,876 6,312 12,853 12,652
Bad debt 340 554 735 1,024 2,346
Depreciation and amortization 141 281 591 1,822 3,248
------ ------ ------ ------ ------
Total operating expenses 6,738 15,544 20,430 37,986 39,558
Loss from operations (1,950) (2,069) (4,202) (3,466) (5,040)
------ ------ ------ ------ ------
Net loss $(2,004) $(2,205) $(4,695) $(5,094) $(7,591)
------ ------ ------ ------ ------
Per share information:
Net loss $ (0.14) $ (0.11) $ (0.18) $ (0.12) $ (0.16)
------ ------ ------ ------ ------
Weighted average common shares 13,922 19,928 26,807 41,093 47,467
------ ------ ------ ------ ------
outstanding
Consolidated Balance Sheet Data:
Working capital (deficit) $ (446) $ (592) $ 195 $(5,687) $(6,910)
Current assets 1,088 1,789 5,989 5,683 5,059
Total assets 2,766 4,348 15,821 24,251 24,154
28
Long-term obligations, including 133 604 3,912 8,303 10,168
current portion
Total stockholders' equity 1,231 1,629 6,936 7,087 6,137
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE: Certain Statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Securities Act. See page
2 for additional factors relating to such statements.
The following is a discussion of the consolidated financial condition and
results of operations of ATSI for the three fiscal years ended July 31, 1997,
1998, and 1999. It should be read in conjunction with our Consolidated
Financial Statements, the Notes thereto and the other financial information
included elsewhere in this annual report on Form 10-K. For purposes of the
following discussion, references to year periods refer to our fiscal year ended
July 31.
General
Our mission is to employ leading-edge technologies for delivery of
exceptional telecommunication services to underserved Latino markets in the U.S.
and Latin America emphasizing convenience, accessibility, quality, reliability,
and affordability, while continually seeking to add value through new and
innovative products and services. Utilizing a framework of licenses,
interconnection and service agreements, network facilities and retail
distribution channels (hereinafter collectively referred to as the "framework"),
we are primarily focused on capturing market share in the international
telecommunications corridor between the United States and Mexico. Even with
poor phone-line penetration, our research indicates that Mexico may exchange
more international traffic with the U.S. than any other country in the world
within the next two years. As the regulatory environments allow, We also plan
to establish framework in other Latin American countries as well. In addition
to the U.S. and Mexico, we currently own or have rights to use facilities in and
have strategic relationships with carriers in Costa Rica, El Salvador, and
Guatemala.
Utilizing the framework described above, we provide local, domestic long
distance and international calls from our own public telephones and casetas
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 are also the sole owner of GlobalSCAPE, Inc., which is rapidly becoming
a leader in electronic commerce of top Internet-based software, utilizing the
Web as an integral component of its
29
development, marketing, distribution and customer relationship strategies.
Utilizing CuteFTP as its flagship product, GlobalSCAPE has a user base of
approximately 7.5 million users as of July 31, 1999.
As discussed in Note 11 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 separate segments in spite of the fact that many of our products are
borderless. Both the U.S. Telco and Mexico Telco segments include revenues
generated from Network Management Services and Direct Dial Services. For the
three years presented all of the call services revenues were generated by our
U.S. Telco segment. Our wholly-owned subsidiary 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 July 31, 1999. Additionally, We have had
recurring negative cash flows from operations with the exception of a three-
month period ended January 31, 1998. For the reasons stated in Liquidity and
Capital Resources and subject to the risks referred to in Liquidity and Capital
Resources, we expect improved results of operations and liquidity in fiscal
2000. However, no assurance may be given that this will be the case.
Results of Operations
The following table sets forth certain items included in our results of
operations in thousands of dollar amounts and as a percentage of total revenues
for the years ended July 31, 1997, 1998 and 1999.
Year Ended July 31,
--------------------------------------------------------------------------------------------
1997 1998 1999
---------------------------- ---------------------------- ----------------------------
$ % $ % $ %
- - - - - -
Operating revenues
- ------------------
Network management services $ 1,698 11% $ 13,362 39% $ 19,250 56%
Call services $ 12,545 77% $ 13,547 39% $ 6,602 19%
Direct dial services $ 1,421 9% $ 6,085 18% $ 6,024 17%
Internet e-commerce $ 564 3% $ 1,526 4% $ 2,642 8%
------------ ---------- ----------
Total operating revenues $ 16,228 100% $ 34,520 100% $ 34,518 100%
Cost of services $ 12,792 79% $ 22,287 65% $ 21,312 62%
------------ ---------- ----------
Gross margin $ 3,436 21% $ 12,233 35% $ 13,206 38%
Selling, general and
Administrative expenses $ 6,312 39% $ 12,853 37% $ 12,652 37%
Bad debt expenses $ 735 4% $ 1,024 3% $ 2,346 6%
Depreciation and amortization $ 591 4% $ 1,822 5% $ 3,248 10%
------------ ---------- ----------
Operating loss $ (4,202) -26% $ (3,466) -10% $ (5,040) -15%
Other, net $ (493) -3% $ (1,628) -5% $ (1,696) -5%
------------ ---------- ----------
30
Net loss $ (4,695) -29% $ (5,094) -15% $ (6,736) -20%
Less: preferred stock dividends $ - 0% $ - 0% $ (855) -2%
------------ ---------- ----------
Net loss to common shareholders $ (4,695) -29% $ (5,094) -15% $ (7,591) -22%
============ ========== ==========
Year ended July 31, 1999 Compared to Year Ended July 31, 1998
Operating Revenues. Operating revenues were flat between years, due
primarily to declines in call services revenues offset by the growth in network
management and Internet e-commerce services.
Network management services, which includes both retail and wholesale
transport services increased 44%, or $5.9 million from 1998 to 1999. Revenues
from the wholesale transport of traffic for U.S.-based carriers increased as we
processed approximately 78.6 million minutes in 1999 as compared to 46.1 million
minutes in 1998. The 70% increase in minutes did not result in a corresponding
increase in revenues as competitive and other market factors caused our revenue
per minute to decline from period to period. Our agreement with Satelites
Mexicanos, S.A. de C.V. ("SATMEX"), secured in the fourth quarter of fiscal 1998
allowed us to secure and resell additional bandwidth capacity. This increased
capacity and flexibility allowed us to increase billings to existing corporate
clients who previously dealt with SATMEX directly and to add additional retail,
corporate clients more quickly. All of the above revenues are included in our
U.S. Telco results in Footnote 11 in the accompanying financial statements as
external revenues with the exception of approximately $460,000 of network
management service revenues included in our external Mexico Telco results.
Call services revenue decreased approximately $6.9 million, or 51%, between
years. This decline is principally attributable to our strategy to focus on
providing international call services from our own payphones and communication
centers (casetas). In July 1998, we ceased providing call services for third-
party owned payphones and hotels in the U.S., Jamaica and the Dominican Republic
and decreased the level of services provided to third-party owned telephones and
hotels in Mexico, as these services did not utilize our core business and the
costs associated with further provision of services did not justify keeping the
business. For the year ended July 31, 1999, we processed approximately 160,000
calls from Mexico as compared to approximately 314,000 for the same period in
1998 and no calls for third-party owned telephones and hotels in the U.S.,
Jamaica and the Dominican Republic as compared to approximately 350,000 calls in
1998. All of the above revenue is included in our U.S. Telco results in Footnote
11 in the accompanying consolidated financial statements.
Direct dial service revenues, which are generated by calls processed by us
without live or automated operator assistance, declined slightly between years.
A majority of these revenues, stated in U.S. dollars in the accompanying
consolidated financial statements are generated by calls processed by Our public
telephones and casetas in Mexico in exchange for immediate cash payment in
pesos, the local Mexican currency. While the number of these calls and
consequently the pesos collected increased between years, those pesos converted
into fewer U.S. dollars as the average exchange rate between years went from
8.33 pesos to the dollar for fiscal 1998 to 9.77 pesos to the dollar for fiscal
1999. With the exception of approximately $136,000 of direct dial 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 GlobalSCAPE, Inc., our e-commerce subsidiary increased
approximately $1.1 million or 73% between years. GlobalSCAPE's purchase of the
rights to the source code of CuteFTP, its flagship product in January 1999,
resulted in an enhanced version of CuteFTP which increased the
31
number of downloads and subsequent purchases. Additionally, GlobalSCAPE began
using its Internet presence to produce ad revenues in the fourth quarter of
1999.
Cost of Services. Cost of services decreased approximately $975,000, or 4%
between years, and decreased as a percentage of revenues from 65% to 62%. The
decline in cost of services between years was primarily a result of the
contributions of GlobalSCAPE. Prior to GlobalSCAPE's purchase of CuteFTP, it
was obligated to pay royalties to CuteFTP's original author for the right to
sell and distribute CuteFTP. The purchase of the source code eliminated such
royalty fees and improved GlobalSCAPE's and ATSI's gross margins. Gross margins
for our combined telco operations remained flat at 34% between years, in spite
of intense market pressures in our wholesale network transport services, which
is accounted for in our U.S. Telco segment. By eliminating and reducing certain
call services, such as those offered to third-party owned payphones and hotels
in the U.S., Jamaica, the Dominican Republic and Mexico, which did not fully
utilize our own network infrastructure, we were able to move toward vertical
integration of our services and operations and maximize our gross margins using
our own network where possible. As noted previously our call services products
are accounted for exclusively in our U.S. Telco segment.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
decreased 2%, or approximately $200,000 between years, as we did not incur
expenses incurred in the prior year associated with our Plan of Arrangement. As
a percentage of revenue, these expenses remained flat at 37%. We had
anticipated that these expenses would decline as a percentage of revenues, but
they did not do so in light of the circumstances surrounding the delay of fiber
capacity available to us. In the fourth quarter of 1999, we began to further
integrate the two primary operating subsidiaries in our Mexico Telco segment,
Computel and ATSI-Mexico, as we continue to seek ways to lower our SG&A expense
levels. Net of non-cash expenses, related to our option plans, SG&A expenses
decreased approximately $300,000.
Bad Debt Expense. Bad Debt Expense increased $1.3 million from fiscal 1998
to fiscal 1999. During the fourth quarter of 1999, we established specific bad
debt reserves of approximately $1.5 million related to retail and wholesale
transport of network management services. While We has reserved for these
customers, it is actively pursuing collection of amounts owed including legal
proceedings specifically related to approximately $1.2 million of the accounts
reserved. Excluding these specific reserves, bad debt expense declined both as
a % of revenues and in actual dollars between years.
Depreciation and Amortization. Depreciation and amortization rose
approximately $1.4 million, or 78%, and rose as a percentage of revenues from 5%
to 10% between years. The increased depreciation and amortization is
attributable to an approximate $2.4 million increase in fixed assets between
years as well as increased amortization related to acquisition costs, trademarks
and goodwill. The majority of the assets purchased consisted of equipment which
added capacity to our existing international network infrastructure including
the Network Technologies (N.E.T.) equipment purchased in December 1998 and our
new Nortel DMS 250/300 International Gateway switch purchased in January 1999.
Operating Loss. Our operating loss increased $1.6 million from 1998
primarily due to increased depreciation and amortization and increased bad debt
expense which more than offset the improvements in gross margin dollars produced
from 1998 to 1999.
Other Income(expense). Other income (expense) decreased approximately
$70,000 between years. This decrease was principally attributable to the
increase in interest expense from approximately $1.6 million for 1998 to
approximately $1.7 million for 1999.
32
Preferred Stock Dividends. During fiscal 1999, we recorded approximately
$855,000 of expense related to cumulative convertible preferred stock. In
addition to cumulative dividends on our Series A and Series B Preferred Stock,
which are accrued at 10% and 6%, respectively per month, we have recorded a
discount or "beneficial conversion feature" associated with the issuance of our
preferred stock of approximately $1.6 million related to Series A Preferred
Stock, which is being amortized over a twelve-month period and $1.1 million
related to Series B Preferred Stock, which is being amortized over a three-month
period.
Net income (loss.) Net loss increased from approximately $5.1 million to
$7.6 million between years. The increase in net loss was due primarily to
increased bad debt expense, depreciation and amortization and preferred stock
dividends between years.
Year ended July 31, 1998 Compared to Year Ended July 31, 1997
Operating Revenues. Operating revenues increased approximately $18.3
million, or 113%, as we experienced growth in each service category.
Network management services increased 687% from $1.7 million in 1997 to
$13.4 million in 1998. The majority of this growth was due to the amount of
wholesale network services provided to other carriers seeking transmission
facilities or additional capacity for their services. We began providing these
services in October 1997, and produced approximately $10 million in revenues
from this service during 1998. All of the above revenues are included as
external revenues in our U.S. Telco results in the accompanying financial
statements with the exception of approximately $33,000 included as private
network revenues in our Mexico Telco results.
Call services revenue increased approximately $1.0 million, or 8%,
primarily due to growth in our customer base in Mexico that produces calls to
the United States from hotels, public telephones and casetas. As a result of
the installation of public telephones, the implementation of a direct sales
strategy, and the purchase of Computel in August 1997, we processed
approximately 314,000 international calls originating in Mexico during fiscal
1998. This compares to approximately 200,000 calls processed the year before.
This increase in international calls from Mexico was offset to a large extent by
a decrease in domestic and international operator-assisted calls originating in
the United States and Jamaica. During 1998, we de-emphasized these services due
to relatively lower profit margins on this business. On July 16, 1998, we
ceased providing these services altogether. Revenues from these services
decreased from approximately $3.9 million in 1997 to approximately $2.9 million
in 1998. We do not anticipate producing significant revenues from such
services, if any, during fiscal 1999. With the exception of approximately
$16,000 of revenues included in Mexico Telco results, all of the remaining
revenues are included as external revenues in our U.S. Telco results.
Direct dial services, calls processed in exchange for cash without
utilizing our operator center in San Antonio, Texas, increased 328% from
approximately $1.4 million in fiscal 1997 to approximately $6.1 million in
fiscal 1998. This increase was primarily due to the acquisition in May and
August 1997 of Computel, the largest private caseta operator in Mexico. We also
began processing local and domestic long distance calls within Mexico during the
latter half of 1997 from our own intelligent payphones installed in resort areas
of Mexico. These calls are made by depositing coins (pesos or quarters) in our
phones to initiate service. All of the above revenues are included in our Mexico
Telco results.
33
Cost of Services. Cost of services increased approximately $9.5 million,
or 74% between years, but decreased as a percentage of revenues from 79% to 65%.
The increase in cost of services is attributable to the increased volume of
business handled by us during 1998, as discussed above, primarily in our
wholesale carrier services product which is accounted for in our U.S. Telco
segment. The improvement in our gross profit margin resulted from the change in
the mix of services we provided during 1998 as described above, and our
continuing efforts to decrease costs subsequent to the demonopolization of
Telmex, which took place January 1, 1997. Subsequent to Telmex's
demonopolization, we were able to negotiate with newly concessioned carriers in
Mexico to transport our calls originating and terminating in Mexico, which has
lowered the associated per minute rate to carry those calls. Additionally, we
were one of the first four companies to receive a public payphone
comercializadora license from the SCT in February 1997, which has allowed us to
provide local, domestic and international calls from public telephones in
Mexico. In November 1997, we purchased the customer base of Comunicaciones del
Caribe, S.A. de C.V., an independent marketing representative in the
Cancun/Cozumel area of Mexico which did not have a comercializadora license, and
which had been utilizing our operator center for processing international calls.
By purchasing the customer base, we were able to eliminate a layer of expense
associated with the traffic and effectively lower our overall commission rate
paid to public telephone location owners in Mexico. We have also improved our
gross margin by utilizing our own existing satellite network infrastructure and
licenses to provide network services to other carriers seeking transmission
facilities or extra capacity for their own services.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses rose
104%, or approximately $6.5 million, from 1997 to 1998. As a percentage of
revenue, these expenses decreased from 39% to 37% between years. The growth in
dollars between years was caused by the acquisition of Computel, the continued
growth of our ATSI-Mexico operations, the expensing of costs related to our
planned acquisition of additional concessions from the Mexican regulatory
authorities, and the expensing of costs related to our reincorporation from
Canada to Delaware. Approximately $890,000 of the increase was due to the
acquisition of Computel, which operates approximately 134 retail-based casetas
in approximately sixty cities throughout Mexico, and employs in excess of 400
people. In August 1997, ATSI-Mexico expanded our operations and began
procuring, installing, operating and maintaining coin-operated, intelligent
payphones. During 1998, we expensed $631,000 in costs incurred relative to our
reincorporation. Approximately $268,000 in expenses were incurred during 1997
relative to the reincorporation. All of the costs associated with our ATSI-
Mexico operations are included in our Mexico Telco segment while the
reincorporation costs have been included in the segment defined as Other as they
are corporate in nature.
Bad Debt Expense. Bad Debt expense increased approximately $300,000 between
years but decreased as a % of revenues from 4% to 3%. The principal reason for
the improved bad debt expense as a percentage of revenues was the increase in
network management services revenues between years.
Depreciation and Amortization. Depreciation and amortization rose
approximately $1.2 million, or 208%, and rose as a percentage of revenues from
4% to 5% between years. From July 31, 1997 through July 31, 1998, we acquired
approximately $7.9 million in equipment. Approximately $4.6 million of these
assets were acquired through capital lease arrangements. The majority of the
assets consisted of equipment that added capacity to our existing international
network infrastructure, and intelligent coin telephones that were installed in
Mexico. Approximately $1.4 million in fixed assets were acquired subsequent to
July 31, 1997 with the acquisition of Computel. We also recorded $2.8 million of
goodwill during 1998 associated with the purchase of Computel, which is being
amortized over a forty-year period.
34
Operating Loss. Our operating loss improved $736,000 to approximately $3.5
million for 1998. Increased revenue levels and improved gross margins more than
offset increases in selling, general and administrative expenses and
depreciation and amortization, allowing for the improvement.
Other Income (expense). Other income (expense) rose approximately 230%, or
$1.1 million, between years. This increase was due almost exclusively to
increased interest expense levels. During 1998, we incurred capital lease
obligations of approximately $4.6 million related to the purchase of equipment
mentioned above, and issued notes payable in the amount of approximately $3.1
million.
Net income (loss). Net loss increased from approximately $4.7 million to
approximately $5.1 million due primarily to increased depreciation and
amortization and increased interest expenses, offset to some extent by increased
revenues, increased gross margin dollars and improved SG&A as a % of revenues.
Year Ended July 31, 1997 Compared to Year Ended July 31, 1996
Operating Revenues. Operating revenues increased approximately $2.8 million
or 20%, due mainly to increased revenues from call services. Approximately $1.4
million of revenues in fiscal 1996 were attributable to the sale and
installation of a large network in Mexico to one of Mexico's largest milk
producers. Subsequent to completing the sale and installation of the network, we
began recognizing monthly revenues from the management of the network. The sale
and installation of such a large network is not considered to be of a recurring
nature by Us; however, management of this and other networks is considered to be
a recurring source of revenues for Us. GlobalSCAPE had revenue of $500,000 in
fiscal 1997, representing less than 4% of our consolidated revenue.
Operating revenues from call services increased 29%, or approximately $3.2
million, due almost entirely to increased call volumes from international call
services provided from hotels and resorts in Jamaica, increased call volumes
attributable to our Brazilian calling card product, and the inclusion of
Computel's revenues attributable to call services provided by Computel during
the last quarter of fiscal 1997 (which represented approximately $1.4 million of
consolidated revenues in fiscal 1997). Revenues from international calls
originating in Mexico increased 5%, while call volumes and related revenues from
calls originating in Mexico and from calls originating and terminating
domestically within the U.S. remained relatively constant between periods.
Although we continued to install Charge-a-Call telephones in Mexico throughout
fiscal 1997, the number of calls per phone decreased slightly. We believe this
was due to increasing costs to the consumer. We began to lower the price per
call to the consumer from certain telephones in the first quarter of fiscal 1998
based on the decrease in our cost of providing these calls through our agreement
with Investcom. The increased volume of calls relating to Jamaica and Brazil
increased the number of international calls processed by us as compared to
domestic calls processed entirely within the United States. Because
international calls typically generate higher revenues on a per call basis than
domestic calls, the average revenue per completed call processed by Us increased
from $14.93 for fiscal 1996 to $17.88 for fiscal 1997.
Excluding the previously mentioned $1.4 million of revenues, revenues from
network management services increased approximately $596,000, or 67%. This
increase was largely due to recurring revenues from the Mexican milk producer
and Investcom commencing in the early and latter part, respectively, of fiscal
1997.
In fiscal 1997, all of our revenues were included as external revenues in
our U.S. Telco results with the exception of approximately $564,000 included in
our Internet e-commerce segment and approximately $1.9 million included in our
Mexico Telco results. The approximate $1.9 million
35
consisted of approximately $200,000 of private network revenues, $1.4 million of
direct dial revenues and approximately $300,000 of call services revenues.
Cost of Services. Cost of services increased approximately $2.0 million, or
18%, resulting in an increase in our overall gross margin from 20% in fiscal
1996 to 21% in fiscal 1997. If the approximately $1.4 million in revenues and
the $960,000 in costs related to the sale and installation of the network to the
Mexican milk producer were excluded from our results for fiscal 1996, our gross
profit percentage would have been 18% for fiscal 1996. The increase in cost of
services was primarily attributable to the increased volume of calls handled by
us from Jamaica to the U.S. and from the U.S. to Brazil, included in our U.S.
Telco segment and the inclusion of Computel's cost of services for the last
quarter of fiscal 1997, as included in our Mexico Telco segment, and rising
costs associated with transporting calls from Mexico to our Switching/Operator
Facility in San Antonio, Texas. These increased origination costs have been
captured in both our U.S. Telco and Mexico Telco segments. Although Telmex
officially lost its status as a monopoly on August 10, 1996, Investcom was not
allowed connectivity to Telmex's local network in Mexico until January 1997 and
did not have the switch capacity in Mexico to process our traffic until May
1997. As a result, were unable to commence processing any of our traffic at
lower per-minute costs until May 1997. Subsequent to May 1997, the public phones
serviced by us in Mexico were frequently only able to access our operator center
utilizing a cellular connection, since local connectivity had not yet been
provided by Telmex. This added a per-minute air time charge to our cost of
transmitting calls from Mexico, resulting in a decline in the gross profit
margin on international calls transmitted from our public phones in Mexico.
Selling, General and Administrative Expenses. SG&A expenses rose 63%, or
approximately $2.4 million between years. If the revenues related to the sale
and installation of the network to the Mexican milk producer in fiscal 1996 were
excluded, SG&A expenses would have increased as a percentage of overall revenues
from 29% to 32%. The increase in SG&A expense is almost entirely due to expanded
operations within Mexico and the inclusion of Computel's SG&A expense for the
last quarter of fiscal 1997. These costs are included in our Mexico Telco
segment. ATSI-Mexico had less than five employees at the beginning of fiscal
1996 as compared to 36 employees at the end of fiscal 1997. Computel operates
134 casetas in approximately 72 cities throughout Mexico, and has approximately
430 employees.
Bad Debt Expense. Bad debt expense increased approximately $180,000 between
years and remained flat as a percentage of revenues at 4%. We incurred greater
bad debt expense due to the higher revenue levels between years.
Depreciation and Amortization. Depreciation and amortization increased
approximately $310,000, or 110%, due primarily to approximately $2.1 million in
fixed asset additions principally for the development of our teleport facilities
in San Antonio, Texas, Cancun and Mexico City, Mexico, and San Jose, Costa Rica;
the acquisition of intelligent payphones; and the inclusion of Computel's
depreciation attributable to the acquisition of Computel.
Other income (expense). Other income (expense) increased to a net expense
of approximately $445,000 primarily as a result of interest expense incurred on
capital lease obligations and convertible notes issued in 1997.
Net income (loss). The net loss increased from approximately $2.2 million
for the year ended 1996 to approximately $4.7 million for the year ended July
31, 1997 primarily as a result of increased SG&A expense and increased interest
expense between years.
36
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 year ended July 31, 1999 of approximately $3.6 million.
This shortfall includes the $1.5 million provision for specific accounts
receivable generated during the year for which we may not receive any funds.
Our payable and accrued liability position increased from July 31, 1998 to
July 31, 1999 as we often utilized cash flows produced from financing activities
to pay down debt and capital lease obligations before paying vendors or
suppliers of services. As a result we have not always paid all of our suppliers
on time. Some of these suppliers are critical to our operations. These suppliers
have given us payment extensions in the past, although there is no guarantee
they will do so in the future. Our ability to continue to make payments to these
suppliers is dependent on our ability to continue to raise additional capital
and improve our cash flows from operations.
When possible, we arranged capital lease obligations in order to obtain
equipment necessary to expand or maintain our operations. During fiscal 1999,
we were able to secure long-term capital lease arrangements of $2.0 million from
NTFC Capital Corporation to cover the acquisition of our Nortel DMS 250/300
switch and $900,000 from Bank Boston Leasing to cover the cost of ATM equipment
needed to upgrade our network to a packet-switching environment. As of July 31,
1999 we have only utilized approximately $500,000 of the Bank Boston Leasing
facility. During the year ended July 31, 1999 we acquired approximately $1.0
million in equipment which was not financed. The majority of this equipment was
used to maintain or upgrade our network between the U.S. and Mexico.
In January 1999, GlobalSCAPE purchased the rights to the source code for
CuteFTP, its flagship product. Terms of the purchase called for a cash payment
of approximately $171,000, which Our financed through a bank note of $180,000 at
an interest rate of prime plus 1%, and twelve monthly payments of principal and
interest of $63,000 beginning February 1999. The terms of the note called for
principal and interest payments over a two-year period, comprised initially of
twelve monthly principal payments of $5,000 plus interest to be followed by
twelve monthly principal payments of $10,000 plus interest. GlobalSCAPE paid the
monthly amounts owed for these obligations out of recurring cash flows produced
from its operations during fiscal 1999, and management anticipates that it will
continue to be able to do so during the next fiscal year.
In addition to the financing by GlobalSCAPE, we borrowed $250,000 from
officers and directors of ATSI that was used for working capital purposes. As
of July 31, 1999, a total of $100,000 remained outstanding to two of our
officers.
During 1999, we stopped factoring a portion of our receivables. At that
point, we had accumulated an approximate $319,000 balance due to the factoring
company. As of July 31, 1999 approximately $137,000 remains outstanding on this
balance, which is being paid monthly from cash generated by our call services
business.
We paid approximately $941,000 toward our capital lease obligations during
fiscal 1999. In an effort to reduce our cash outflows, in May 1999 we
restructured our capital lease obligation with IBM de Mexico, extending payment
of the total obligation over a forty-eight (48) month period. Monthly payments
due under the facility with NTFC Capital Corporation are deferred until January
2000.
In an effort to improve our working capital position, we raised
approximately $4.2 million from March 1999 through July 1999, net of issuance
costs, in private placements of preferred stock, and
37
another $302,000 in a private placement of common stock. Exercises of warrants
and options during fiscal 1999 generated an additional approximate $1.3 million
in cash proceeds during the year. The majority of the proceeds from these
private placements and warrant and option exercises were used to pay vendors and
suppliers of services. As noted in note 8 to our consolidated financial
statements these private placements consisted of Series A, B and C preferred
stock which convert to common stock at a discount to market. See Note 8 of our
Form 10-K/A for the material terms of these various issuances.
The net result of our operating, investing and financing activities during
the year was a working capital deficit at July 31, 1999 of approximately $6.9
million and cash on hand of approximately $379,000. Our current liabilities as
of July 31, 1999 are approximately $12 million. Included in our current
obligations, net of the associated debt discount, are notes payable of $2.2
million which will be due and payable, along with accrued interest of
approximately $760,000 in March 2000. Additionally we have approximately $1.4
million of current capital leases and approximately $7.4 million of accounts
payable and accrued liabilities. In order for us to meet all of our current
obligations it will be necessary for us to raise additional capital through debt
or equity financings.
Although we generated cash flows from financings in excess of $6.2 million
during fiscal 1999, these proceeds were not sufficient to cover the net cash
used in operations, capital expenditures and debt service requirements of
approximately $6.9 million incurred during the year. As planned, we shifted our
focus during the year 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
56% of overall corporate revenues during the year, as opposed to approximately
39% in fiscal 1998. However, market pressures caused the price at which
wholesale network transport services could be sold to decline approximately 40%
during fiscal 1999. Although we were able to reduce our costs associated with
transporting the traffic, we produced less dollars of gross margin on a per
minute basis than it had in fiscal 1998. GlobalSCAPE's gross margins increased
during the year with the purchase of the source code to CuteFTP, but on a
consolidated basis we were unable to generate the gross margin dollars necessary
to cover SG&A costs and all of our debt service requirements.
As of October 1999, we are continuing to experience market pressures on our
wholesale network transport services business. In order to produce better cash
flows, we must focus on keeping our international network between Mexico and the
U.S. optimally utilized with a blend of retail and wholesale traffic. Because
we upgraded our network during fiscal 1999 to an ATM packet-switching
environment, we feel that we can transport traffic as efficiently as possible in
an effort to minimize costs. 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 2000, 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, we must continue to manage our costs of providing
services and overhead costs as it begins focusing on optimizing use of our
network. We have applied for a long distance concession in Mexico which, if
obtained, we believe will eventually allow us to significantly reduce our cost
of transporting services. In order for it to significantly reduce costs with
the concession, we would need to purchase a significant amount of hardware and
software, allowing it to expand and operate our own network in Mexico.
38
Until we are able to produce positive cash flows from operations in an
amount sufficient to meet our debt service and capital expenditure requirements,
we must be able to access debt and/or equity capital to assist us in doing so,
although no assurance may be given that it will be able to do so. In September
1999, we issued approximately $500,000 of 6% Series C Preferred Stock on terms
substantially similar to those of the Series B Preferred Stock. The terms of the
series C preferred stock and the related warrants include many potentially
adverse effects for us and our shareholders as described in the Risk Factors
section of this Form 10-K/A. However, as described in our risk factor
captioned, "If we do not raise additional capital, we may go out of business,"
we are not able to raise funds on terms as favorable as those available to
profitable companies. At the time these issuances were made, we needed funds to
continue operations and were not able to find financing on more favorable terms.
Our board of directors believed it to be in the best interest of the
shareholders to raise the funds needed to continue operations.
In an effort to meet our financial needs going forward, we have engaged the
investment banking firm of Gerard, Klauer Mattison & Co. ("GKM"). GKM will
assist us in finding and securing financial and strategic relationships. We
have also engaged the investment banking firm of SunTrust Equitable Securities
to assist us in, among other things, raising private or public funds for
GlobalSCAPE. However, there can be no assurance that such funds will be raised.
Inflation/Foreign Currency
Inflation has not had a significant impact on our operations. With the
exception of direct dial services from our casetas and coin operated public
telephones, almost all of our revenues are generated and collected in U.S.
dollars. Direct dial services from our casetas and public telephones are
generally provided on a "sent-paid" basis at the time of the call in exchange
for cash payment, so we do not maintain receivables on our books that are
denominated in pesos. In an effort to reduce foreign currency risk, We 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 us are incurred in foreign currencies, primarily Mexican
pesos. The devaluation of the Mexican peso over the past several years has not
had a material adverse effect on our financial condition or operating results.
Seasonality
Our call service revenues are typically higher on a per phone basis during
January through July, the peak tourism months in Mexico.
Year 2000 Compliance
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. This program is being conducted by
our Management Information Systems group, which is coordinating the efforts of
internal resources as well as third party vendors in making all of the necessary
changes for all management systems and product related infrastructure for our
divisions and subsidiaries. We believes we are 96% complete in achieving Year
2000 readiness, and will be Year 2000 ready by November 30, 1999. The only
significant remaining item is an outstanding issue related to the payroll
systems of our Mexican subsidiaries. We expect to avoid disruption of our owned
information, telephony and business systems as a result of these efforts.
However, we must rely on the representations and warranties of third parties,
including domestic U.S. and foreign carriers of our traffic, in testing for
readiness for year 2000 issues and cannot ensure compliance by these parties.
We have developed contingency plans in areas where
39
we believe there is any significant risk or where a third party has not
adequately responded to our inquiries, which includes transitions to other
providers.
We believe that a worst case scenario resulting from a Year 2000 related
failure would be a temporary disruption of normal business operations. Based
upon the work completed to date, we believe that such an occurrence is unlikely.
However, as stated above, we are relying on representations and warranties of
third parties that are beyond our control. A disruption of business operations
could have a material adverse effect on our financial performance.
We have expended approximately $100,000 in our Year 2000 program to date,
and do not expect to experience any material additional cost.
Market Risk
We are subject to several market risks. Specifically, we face commodity
price risks, equity price risks and foreign currency exchange risk.
Certain of our businesses, namely wholesale carrier services, operate in an
extremely price sensitive environment. The wholesale business over the past
twelve months has seen significant reductions in the price per minute charged
for transporting minutes of traffic. While we have been able to withstand these
pricing pressures, certain of our competitors are much larger and greater
positioned to continue to withstand these price reductions. Our ability to
further absorb these price reductions may be dependent on our ability to further
reduce our costs of transporting these minutes.
Until such time as we are able to consistently produce positive cash flows
from operations it will be dependent on our ability to continue to access debt
and equity sources of capital. While recent history has shown us capable of
raising equity sources of capital; future equity financings and the terms of
those financings will be largely dependent on our stock price, our operations
and the future dilution to our shareholders.
We face two distinct risks related to foreign currency exchange risk;
transaction risk and translation risk.
As previously discussed under the caption "Inflation", we face risks
related to certain of our revenue streams, namely, direct dial or integrated
prepaid services from our own Mexican communication centers and payphones and
the transacting of business in pesos as opposed to U.S. dollars. Historically,
we have been able to minimize foreign currency exchange risk by converting from
pesos to U.S. dollars quickly and by maintaining minimal cash balances
denominated in pesos. As we 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.
40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements of American TeleSource International, Inc. and
Subsidiaries
Report of Independent Public Accountants.......................................................... 42
Consolidated Balance Sheets as of July 31, 1998 and 1999.......................................... 43
Consolidated Statements of Operations for the Years Ended July 31, 1997, 1998 and 1999............ 44
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended July 31, 1997,
1998 and 1999..................................................................................... 45
Consolidated Statements of Stockholders' Equity for the Years Ended July 31, 1997, 1998 and 1999.. 46
Consolidated Statements of Cash Flows for the Years Ended July 31, 1997, 1998 and 1999............ 47
Notes to Consolidated Financial Statements........................................................ 48
41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of American TeleSource International, Inc.:
We have audited the accompanying consolidated balance sheets of American
TeleSource International, Inc. (a Delaware corporation) and subsidiaries (ATSI)
as of July 31, 1998 and 1999, and the related consolidated statements of
operations, comprehensive income (loss), stockholders' equity and cash flows for
the years ended July 31, 1997, 1998 and 1999. These financial statements are the
responsibility of our management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American TeleSource
International, Inc. and subsidiaries as of July 31, 1998 and 1999, and the
results of their operations and their cash flows for the years ended July 31,
1997, 1998 and 1999, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that ATSI will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, ATSI has a working capital deficit, has
suffered recurring losses from operations since inception, has negative cash
flows from operations and has limited capital resources available to support
further development of its operations. These matters raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts including goodwill and other
intangibles or the amount and classification of liabilities that might result
should It be unable to continue as a going concern.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
October 5, 1999
42
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
July 31,
-------------------------------------
1998 1999
---------- ----------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 1,091 $ 379
Accounts receivable, net of allowance of $209 and $1,600, respectively 3,748 3,693
Prepaid expenses and other 844 987
---------- ----------
Total current assets 5,683 5,059
---------- ----------
PROPERTY AND EQUIPMENT (At cost): 14,233 16,669
Less - Accumulated depreciation and amortization (2,418) (4,713)
---------- ----------
Net property and equipment 11,815 11,956
---------- ----------
OTHER ASSETS, net
Goodwill, net 5,091 5,032
Contracts, net 1,173 703
Trademarks, net - 789
Other assets 489 615
---------- ----------
Total assets $ 24,251 $ 24,154
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 5,683 $ 4,164
Accrued liabilities 2,113 3,239
Current portion of notes payable 688 961
Current portion of convertible long-term debt - 1,942
Current portion of obligations under capital leases 2,351 1,430
Deferred revenue 535 233
---------- ----------
Total current liabilities 11,370 11,969
---------- ----------
LONG-TERM LIABILITIES:
Notes payable, less current portion 719 312
Convertible long-term debt, less current portion 1,604 -
Obligations under capital leases, less current portion 2,941 5,523
Other 530 213
---------- ----------
Total long-term liabilities 5,794 6,048
---------- ----------
COMMITMENTS AND CONTINGENCIES: (See Note 13)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value, 10,000,000 shares authorized,
Series A Cumulative Convertible Preferred Stock, 50,000 shares
authorized, no shares issued and outstanding at July 31, 1998
24,145 shares issued and outstanding at July 31, 1999 - -
Series B Cumulative Convertible Preferred Stock, 2,000 shares
authorized, no shares issued and outstanding at July 31, 1998
2,000 shares issued and outstanding at July 31, 1999 - -
Common stock, $0.001 par value, 100,000,000 shares authorized,
45,603,566 issued and outstanding at July 31, 1998
48,685,287 issued and outstanding at July 31, 1999 46 49
Additional paid in capital 22,248 29,399
Accumulated deficit (14,396) (21,987)
Deferred compensation (667) (466)
Other comprehensive income (144) (858)
---------- ----------
Total stockholders' equity 7,087 6,137
---------- ----------
Total liabilities and stockholders' equity $ 24,251 $ 24,154
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
43
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Years Ended July 31,
1997 1998 1999
----------- ------------ -----------
OPERATING REVENUES:
Network management services $ 1,698 $ 13,362 $ 19,250
Call services 12,545 13,547 6,602
Direct dial services 1,421 6,085 6,024
Internet e-commerce 564 1,526 2,642
----------- ------------ -----------
Total operating revenues 16,228 34,520 34,518
----------- ------------ -----------
OPERATING EXPENSES:
Cost of services 12,792 22,287 21,312
Selling, general and administrative 6,312 12,853 12,652
Bad debt expense 735 1,024 2,346
Depreciation and amortization 591 1,822 3,248
----------- ------------ -----------
Total operating expenses 20,430 37,986 39,558
----------- ------------ -----------
OPERATING LOSS (4,202) (3,466) (5,040)
OTHER INCOME (EXPENSE):
Interest income 27 76 59
Other income 68 32 -
Other expense (27) (24) (10)
Interest expense (513) (1,573) (1,745)
----------- ------------ -----------
Total other income (expense) (445) (1,489) (1,696)
----------- ------------ -----------
LOSS BEFORE INCOME TAX EXPENSE
AND MINORITY INTEREST (4,647) (4,955) (6,736)
FOREIGN INCOME TAX EXPENSE - (139) -
MINORITY INTEREST (48) - -
----------- ------------ -----------
NET LOSS ($4,695) ($5,094) ($6,736)
LESS: PREFERRED STOCK DIVIDENDS - - (855)
----------- ------------ -----------
NET LOSS TO COMMON SHAREHOLDERS ($4,695) ($5,094) ($7,591)
=========== ============ ===========
BASIC AND DILUTED LOSS PER SHARE ($0.18) ($0.12) ($0.16)
=========== ============ ===========
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 26,807 41,093 47,467
=========== ============ ===========
The accompanying notes are an integral part of these consolidated financial statements.
44
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
For the Years Ended July 31,
--------------------------------------------------------------------
1997 1998 1999
-------- ---------- -----------
Net loss ($4,695) ($5,094) ($7,591)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments $12 ($160) ($714)
-------- --------- ----------
Comprehensive loss to common stockholders ($4,683) ($5,254) ($8,305)
======== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
45
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Preferred Shares Common Stock Additional Accumulated
------------------ ---------------------
Shares Amount Shares Amount Paid in Capital Deficit
-------- -------- -------- -------- ----------------- -----------
BALANCE, July 31, 1996 - $ - 23,775 $ 6,288 $ ($4,607)
Issuances of common shares for cash - - 5,760 4,736
Conversion of convertible debt to common shares - - 3,812 1,967
Issuance of common shares for acquisition - - 2,716 1,847
Issuances of common shares for services - - 925 154
Deferred compensation - - - 1,394
Compensation expense
Warrants issued with convertible long term debt - - - 990
Cumulative effect of translation adjustment - - -
Net loss - - - (4,695)
---- ------ ------ -------- -------- --------
BALANCE, July 31, 1997 - - 36,788 $ 17,375 ($9,302)
Issuances of common shares for cash - - 5,500 3,496
Issuances of common shares for reduction in indebtedness - - 2,871 1,076
Conversion of convertible debt to common shares - - 200 100
Issuances of common shares for services - - 245 246
Compensation expense - - -
Cumulative effect of translation adjustment - - -
Exchange of common shares for common stock - - - (22,248) 22,248
Net loss - - - (5,094)
---- ------ ------ -------- -------- --------
BALANCE, July 31, 1998 - - 45,604 $ 46 $ 22,248 ($14,396)
Issuances of common shares for cash - - 2,706 3 1,637
Issuances of common shares for services - - 96 40
Issuances of common shares for acquisition - - 279 179
Issuances of preferred stock 26 - - 4,176
Deferred compensation - - - 344
Dividend expense - - - (80)
Amortization of equity discount - - - 775 (775)
Compensation expense - - -
Cumulative effect of translation adjustment - - -
Net loss - - - (6,736)
---- ------ ------ -------- -------- --------
BALANCE, July 31, 1999 26 - 48,685 $ 49 $ 29,399 ($21,987)
==== ====== ====== ======== ======== ========
Cumulative Total
Translation Deferred Stockholders'
Adjustment Compensation Equity
------------- -------------- ------------
BALANCE, July 31, 1996 $ 4 ($55) $ 1,630
Issuances of common shares for cash 4,736
Conversion of convertible debt to common shares 1,967
Issuance of common shares for acquisition 1,847
Issuances of common shares for services 154
Deferred compensation (1,394) 0
Compensation expense 295 295
Warrants issued with convertible long term debt 990
Cumulative effect of translation adjustment 12 12
Net loss (4,695)
------ ------- -------
BALANCE, July 31, 1997 $ 16 ($1,154) $ 6,936
Issuances of common shares for cash 3,496
Issuances of common shares for reduction in indebtedness 1,076
Conversion of convertible debt to common shares 100
Issuances of common shares for services 246
Compensation expense 487 487
Cumulative effect of translation adjustment (160) (160)
Exchange of common shares for common stock 0
Net loss (5,094)
------ ------- -------
BALANCE, July 31, 1998 ($144) ($667) $ 7,087
Issuances of common shares for cash 1,640
Issuances of common shares for services 40
Issuances of common shares for acquisition 179
Issuances of preferred stock 4,176
Deferred compensation (344) 0
Dividend expense (80)
Amortization of equity discount 0
Compensation expense 545 545
Cumulative effect of translation adjustment (714) (714)
Net loss (6,736)
------ ------- -------
BALANCE, July 31, 1999 ($858) ($466) $ 6,137
====== ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
46
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended July 31,
1997 1998 1999
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($4,695) ($5,094) ($6,736)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization 591 1,822 3,248
Amortization of debt discount 87 307 346
Deferred compensation 295 487 545
Provision for losses on accounts receivable 735 1,024 2,346
Minority interest 48 - -
Changes in operating assets and liabilities-
Increase in accounts receivable (1,983) (2,723) (2,207)
(Increase) decrease in prepaid expenses and other (849) 197 (1,632)
Increase (decrease) in accounts payable (1,025) 3,479 (1,139)
Increase (decrease) in accrued liabilities 884 (192) 1,857
Increase (decrease) in deferred revenue 378 71 (191)
Other 4 - -
------------- ------------- -------------
Net cash used in operating activities (5,530) (622) (3,563)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (590) (3,297) (956)
Acquisition of business, net of cash acquired 73 (2,112) (171)
Payments received on notes receivable 101 - -
------------- ------------- -------------
Net cash used in investing activities (416) (5,409) (1,127)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 3,632 2,547 437
Net increase (decrease) in short-term borrowings 281 353 (488)
Payments on debt - (1,141) (679)
Capital lease payments (401) (1,044) (941)
Payments on long-term liabilities - (67) (123)
Proceeds from issuance of preferred stock,
net of issuance costs - - 4,176
Proceeds from issuance of common stock,
net of issuance costs 3,699 4,553 1,596
------------- ------------- -------------
Net cash provided by financing activities 7,211 5,201 3,978
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH 1,265 (830) (712)
CASH AND CASH EQUIVALENTS, beginning of period 656 1,921 1,091
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 1,921 $ 1,091 $ 379
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
47
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The accompanying consolidated financial statements are those of American
TeleSource International, Inc. and our subsidiaries ("ATSI" or the "Company").
We were formed on June 6, 1996 under the laws of the state of Delaware for the
express purpose of effecting a "Plan of Arrangement" with American TeleSource
International, Inc., which was incorporated under the laws of the province of
Ontario, Canada (hereinafter referred to as "ATSI-Canada"). The Plan of
Arrangement called for the stockholders of ATSI-Canada to exchange their shares
on a one-for-one basis for shares of ATSI. On April 30, 1998, shareholders of
ATSI-Canada approved the Plan of Arrangement, and on May 11, 1998, ATSI-Canada
became a wholly owned subsidiary of ATSI. ATSI is publicly traded on the OTC
Bulletin Board under the symbol "AMTI".
The accompanying consolidated balance sheet dated July 31, 1998 includes
the assets, liabilities and shareholders' equity of ATSI-Canada which were
transferred to ATSI on May 11, 1998, and the accompanying statements of
operations for the years ended July 31, 1997 and 1998 include the consolidated
operations of ATSI-Canada through May 11, 1998.
In May 1997, ATSI-Canada entered into an agreement to purchase up to 100%
of the outstanding shares of Sistema de Telefonia Computarizada, S.A. de C.V.
("Computel"), the largest privately owned operator of casetas (public calling
stations) in Mexico. Under the terms of the agreement, ATSI-Canada acquired 55%
of the shares of Computel effective May 1, 1997 and the remaining 45% effective
August 28, 1997. As ATSI-Canada acquired majority ownership effective May 1,
1997, ATSI has recorded 100% of the net assets and liabilities of Computel as of
that date. Our consolidated financial statements for the period May 1, 1997 to
July 31, 1997 include the impact of the 45% minority ownership interest. For
the years ended July 31, 1998 and July 31, 1999, our consolidated financial
statements include 100% of the activities of Computel.
In July 1997, American TeleSource International de Mexico, S.A. de C.V.
("ATSI-Mexico") acquired 100% of the outstanding stock of Servicios de
Infraestructura, S.A. de C.V. ("Sinfra"). In April 1998, TeleSpan, Inc.
("Telespan") purchased 100% of the outstanding stock of Sinfra from ATSI-Mexico.
In March 1998, ATSI-Delaware acquired 100% of the outstanding stock of
Soluciones Internactionales de Mercadeo, S.A. and subsequently changed the name
to ATSI de CentroAmerica, S.A.
Through our subsidiaries, we provide retail and wholesale communications
services within and between the United States and select markets within Latin
America. Utilizing a framework of licenses, interconnection and service
agreements, network facilities and distribution channels, we aims to provide U.S
standards of reliability to Mexico and other markets within Latin America which
have historically been underserved by telecommunications monopolies. As of July
31, 1999, our operating subsidiaries are as follows:
American TeleSource International, Inc. ("ATSI-Texas" a Texas corporation)
--------------------------------------------------------------------------
ATSI-Texas owns and operates a switching facility and multilingual call
center in San Antonio, Texas. This facility provides U.S. based call services
to public telephones owned by ATSI-Mexico and
48
casetas owned by Computel in Mexico, as well as to third party-owned public
telephones, casetas and hotels in Mexico. Although these calls originate in
Mexico, they are terminated and billed in the United States and Mexico by ATSI-
Texas. In July 1998, ATSI-Texas also began providing domestic U.S. and
international call services to residential customers in the U.S.
American TeleSource International de Mexico, S.A. de C.V.
---------------------------------------------------------
("ATSI-Mexico" a Mexican corporation)
-------------------------------------
ATSI-Mexico owns and operates coin-operated public telephones in Mexico.
Utilizing our 20-year comercializadora license, ATSI purchases telephone lines
and resells local, long distance and international calls from public telephones
connected to the lines. Direct dial calls may be made from the telephones using
pesos or quarters, and users may use the services of ATSI-Texas to place calls
to the U.S. by billing calls to valid third parties, credit cards or calling
cards.
Computel (a Mexican corporation)
--------------------------------
Computel is the largest private operator of casetas in Mexico, operating
approximately 126 casetas in 66 cities. Direct dial calls may be made from the
casetas using cash or credit cards, and users may use the services of ATSI-Texas
to place calls to the U.S. by billing calls to valid third parties, credit cards
or calling cards. Computel utilizes telephone lines owned by ATSI-Mexico.
Sinfra (a Mexican corporation)
-------------------------------
Utilizing our 20-year Teleport and Satellite Network license, Sinfra owns
and operates our teleport facilities in Cancun, Monterrey and Mexico City,
Mexico. These facilities are used for the provision of international private
network services. Sinfra also owns a 15-year Packet Switching Network license.
TeleSpan, Inc. ("TeleSpan" a Texas corporation)
-----------------------------------------------
TeleSpan owns and operates our teleport facilities in the United States and
Costa Rica. TeleSpan contracts with U.S. based entities and carriers seeking
facilities or increased capacity into Mexico, Costa Rica, El Salvador and
Guatemala. For network services into Mexico, TeleSpan utilizes facilities owned
by Sinfra.
GlobalScape, Inc. ("GlobalSCAPE" a Texas corporation)
-----------------------------------------------------
GlobalSCAPE markets CuteFTP and other digitally downloadable software
products and distributes them over the Internet utilizing electronic software
distribution ("ESD").
ATSI de CentroAmerica (a Costa Rican corporation)
-------------------------------------------------
ATSI de CentroAmerica markets international private network services in
Costa Rica and other Latin American countries and looks to develop corporate
development opportunities in Latin American countries through joint ventures and
interconnection agreements with existing telecommunication monopolies.
49
2. FUTURE OPERATIONS, LIQUIDITY, CAPITAL RESOURCES AND VULNERABILITY DUE
TO CERTAIN CONDITIONS
The accompanying consolidated financial statements have been prepared on
the basis of accounting principles applicable to a going concern. For the
period from December 17, 1993 to July 31, 1999, we have incurred cumulative net
losses of $21.9 million. Further, we had a working capital deficit of $5.7
million at July 31, 1998 and $6.7 million at July 31, 1999. Further, we had
negative cash flows from operations of $5.5 million, $.6 million and $3.6
million for the years ended July 31, 1997, 1998 and 1999, respectively. We have
limited capital resources available to us, and these resources may not be
available to support our ongoing operations until such time as we are able to
generate positive cash flow from operations. There is no assurance we will be
able to achieve future revenue levels sufficient to support operations or
recover our investment in property and equipment, goodwill and other intangible
assets. These matters raise substantial doubt about our ability to continue as a
going concern. Our ability to continue as a going concern is dependent upon the
ongoing support of our stockholders and customers, our ability to obtain capital
resources to support operations and our ability to successfully market our
services.
We are likely to require additional financial resources in the near term
and could require additional financial resources in the long-term to support our
ongoing operations. We have retained various financial advisers to assist us in
refining our strategic growth plan, defining our capital needs and obtaining the
funds required to meet those needs. The plan includes securing funds through
equity offerings and entering into lease or long-term debt financing agreements
to raise capital. There can be no assurances, however, that such equity
offerings or other financing arrangements will actually be consummated or that
such funds, if received, will be sufficient to support existing operations until
revenue levels are achieved sufficient to generate positive cash flow from
operations. If we are not successful in completing additional equity offerings
or entering into other financial arrangements, or if the funds raised in such
stock offerings or other financial arrangements are not adequate to support Us
until a successful level of operations is attained, we have limited additional
sources of debt or equity capital and would likely be unable to continue
operating as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared on the accrual
basis of accounting under generally accepted accounting principles of the U.S.
All significant intercompany balances and transactions have been eliminated in
consolidation. Certain prior period amounts have been reclassified for
comparative purposes.
Estimates in Financial Statements
---------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Revenue Recognition Policies
----------------------------
We recognize revenue from our call services and direct dial services as
such services are performed, net of unbillable calls. Revenue from network
management service contracts is recognized when service commences for service
commencement fees and monthly thereafter as services are provided. We recognize
revenue from equipment sales when the title for the equipment transfers to the
50
customer and from equipment installation projects when they are completed.
Revenues related to our Internet product are recognized at the point of
delivery, as we bear no additional obligation beyond the provision of our
software product other than post-contract customer service.
Foreign Currency Translation
----------------------------
Until January 1, 1999, Mexico's economy was designated as highly
inflationary. Generally Accepted Accounting Principles, "GAAP" require the
functional currency of highly inflationary economies to be the same as the
reporting currency. Accordingly, the consolidated financial statements of ATSI-
Mexico and Computel, whose functional currency is the peso, were remeasured from
the peso into the U.S. dollar for consolidation. Monetary and nonmonetary
assets and liabilities were remeasured into U.S. dollars using current and
historical exchange rates, respectively. The operating activities of ATSI-Mexico
and Computel were remeasured into U.S. dollars using a weighted-average exchange
rate. The resulting translation gains and losses were charged directly to
operations. As of January 1, 1999, Mexico's economy was deemed to be no longer
highly inflationary. According to GAAP requirements the change from highly
inflationary to non-highly inflationary requires that the nonmonetary assets be
remeasured using not the historical exchange rates, but the exchange rate in
place as of the date the economy changes from highly inflationary to non-highly
inflationary. As such, our non-monetary assets in ATSI-Mexico and Computel have
been remeasured using the exchange rate as of January 1, 1999. Subsequent to
January 1, 1999, monetary assets and non-monetary assets are translated using
current exchange rates and operating activity of ATSI-Mexico and Computel are
remeasured in to U.S. dollars using a weighted average exchange rate. The
effect of these translation adjustments are reflected in the cumulative
translation account shown in equity.
Accounts Receivable
-------------------
We utilize the services of credit card processing companies for the billing
of commercial credit card calls. We receive cash from these calls, net of
transaction and billing fees, generally within 20 days from the dates the calls
are delivered. All other calls (calling card, collect, person-to-person and
third party billed) are billed under an agreement between a billing
clearinghouse and us. This agreement allows ATSI to submit call detail records
to the clearinghouse, which in turn forwards these records to the local
telephone company to be billed. The clearinghouse collects the funds from the
local telephone company and then remits the funds, net of charges, to ATSI.
Because this collection process can take up to 90 days to complete, ATSI
participates in an advance funding program offered by the clearinghouse whereby
100% of the call records are purchased for 75% of their value within five days
of presentment. The remaining 25% value of the call records are remitted to
ATSI, net of interest and billing charges and an estimate for uncollectible
calls, as the clearinghouse collects the funds from the local telephone
companies. Under the advanced funding agreement, the collection clearinghouse
has a security interest in the unfunded portion of the receivables as well as
future receivables generated by our long distance business. The allowance for
doubtful accounts reflects our estimate of uncollectible calls at July 31, 1998
and 1999 and includes $1.5 million of specific accounts identified by our as
potentially uncollectible. ATSI currently pays a funding charge of prime plus
4% per annum on the amounts that are advanced to ATSI. Receivables sold with
recourse during fiscal years 1997, 1998, and 1999 were $8,530,665, $11,127,221
and $6,138,549 respectively. At July 31, 1997, 1998 and 1999, $577,256,
$484,381 and $444,398 of such receivables were uncollected, respectively. See
Note 5 for additional disclosure regarding advanced funding.
In fiscal 1998, we adopted Statement of Financial Accounting Standards
(SFAS) No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement provides accounting and
reporting standards for, among other things, the transfer and
51
servicing of financial assets, such as factoring receivables with recourse. The
adoption of these statements has not had a material impact on our financial
position or results of operations.
Impuesto al Valor Agregado (Value-Added Tax) ("IVA")
----------------------------------------------------
Our Mexican subsidiaries are required to report a value-added tax related
to both purchases and sales of services and assets, for local tax reporting.
Accordingly, each subsidiary maintains both an IVA receivable and IVA payable
account on their subsidiary ledgers. For consolidated reporting purposes, we net
our Mexican subsidiaries IVA receivable and IVA payable accounts as allowed by
regulatory requirements in Mexico. For the years ended July 31, 1998 and 1999,
this netting of IVA accounts resulted in the elimination of IVA payable and a
corresponding reduction in IVA receivable of approximately $197,000 and $1.2
million, respectively.
Basic and Diluted Loss Per Share
--------------------------------
Loss per share was calculated using the weighted average number of common
shares outstanding for the years ended July 31, 1997, 1998 and 1999. Common
stock equivalents, which consist of the stock purchase warrants and options
described in Note 9, were excluded from the computation of the weighted average
number of common shares outstanding because their effect was antidilutive.
Additionally, we have excluded the convertible preferred stock described in Note
8, from the computation of the weighted average number of common shares
outstanding, as their effect will also be antidilutive.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation and amortization
are computed on a straight-line basis over the estimated useful lives of the
related assets, which range from five to fifteen years. Expenditures for
maintenance and repairs are charged to expense as incurred. Direct installation
costs and major improvements are capitalized.
Effective for the fiscal years beginning after July 31, 1996, we follow
rules as prescribed under Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121"). SFAS 121 requires an assessment of the
recoverability of our investment in long-lived assets to be held and used in
operations whenever events or circumstances indicate that their carrying amounts
may not be recoverable. Such assessment requires that the future cash flows
associated with the long-lived assets are estimated over their remaining useful
lives and an impairment loss is recognized when the undiscounted future cash
flows are less than the carrying value of such assets. As of July 31, 1999, we
have determined that the estimated undiscounted future cash flows associated
with our long-lived assets are greater than the carrying value of such assets
and that no impairment loss needs to be recognized.
Goodwill, Trademarks, Contracts and Other Assets
------------------------------------------------
As of the years ended July 31, 1998 and 1999, other assets include
goodwill, primarily related to the purchase of Computel, of $5,216,646 and
$5,296,646, respectively, net of accumulated amortization of $126,668 and
$265,089, respectively. Goodwill is amortized over 40 years. As of July 31,
1998 and 1999 other assets include acquisition costs of $1,417,870, and
$1,596,620, respectively, related to our acquisitions of several of our
independent marketing representatives, net of accumulated amortization of
$244,652, and $893,212, respectively. These acquisition costs are being
amortized over the life of the contracts, which approximates three years. As of
July 31, 1999, other assets include $898,943 related to the purchase of the
rights to
52
CuteFTP, net of accumulated amortization of $110,352. This trademark is being
amortized over an estimated five-year life. Additionally, as of July 31, 1998
and 1999, other assets include approximately $489,000 and $615,000 of other
assets, not specifically identified as goodwill, acquisition costs or
trademarks. As it relates to SFAS 121, as of July 31, 1999, we have determined
that the estimated future cash flows associated with our goodwill and other
intangible assets are greater than the carrying value of such assets and that no
impairment loss needs to be recognized. For the years ended July 31, 1997, 1998
and 1999, we recorded amortization expense of $55,491, $369,219 and $925,440
respectively related to our other assets.
Income Taxes
------------
We account for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes". Under the provisions of SFAS 109, we recognize deferred tax
liabilities and assets based on enacted income tax rates that are expected to be
in effect in the period in which the deferred tax liability or asset is expected
to be settled or realized. A change in the tax laws or rates results in
adjustments in the period in which the tax laws or rates are changed.
Statements of Cash Flows
------------------------
Cash payments and non-cash investing and financing activities during the
periods indicated were as follows:
For the Years Ended July 31,
----------------------------
1997 1998 1999
-------------- ------------- -------------
Cash payments for interest $ 416,756 $1,349,679 $1,101,771
Cash payments for taxes $ - $ 148,097 $ -
Common shares issued for services $ 153,885 $ 246,591 $ 40,000
Common shares issued for acquisition of
Computel and other $1,846,569 $ - $ 178,750
Assets acquired in acquisition of Computel $3,418,753 $ - $ -
Liabilities assumed in acquisition of
Computel $4,205,404 $ - $ -
Conversion of convertible debt to common
shares $1,966,531 $ 100,000 $ -
Capital lease obligations incurred $1,521,875 $4,635,693 $ -
Common share subscriptions sold $1,113,170 $ - $ 42,500
For purposes of determining cash flows, we consider all temporary cash
investments with an original maturity of three months or less to be cash and
cash equivalents.
53
New Accounting Pronouncements
-----------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and disclosure of comprehensive income and its components in a full
set of financial statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997, and requires reclassification of comparative
financial statements for earlier periods. The adoption of SFAS No. 130 has
resulted in the presentation of comprehensive income (loss) that differs from
net income (loss) as presented in the accompanying financial statements to the
extent of foreign currency translation adjustments as shown in the accompanying
consolidated statements of comprehensive income (loss). Our presentation of our
comprehensive income component, foreign currency translation adjustments, is
presented net of tax, which is $0 for all periods presented, in light of our
current net operating loss carryforward position.
Disclosures about Fair Value of Financial Instruments
-----------------------------------------------------
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument held by us:
Current assets and liabilities: The carrying value approximates fair value
due to the short maturity of these items.
Long-term debt and convertible debt: Since our debt is not quoted,
estimates are based on each obligations' characteristics, including remaining
maturity, interest rate, credit rating, collateral, amortization schedule and
liquidity (without consideration for the convertibility of the notes). We
believe that the carrying amount does not differ materially from the fair value.
4. PROPERTY AND EQUIPMENT, NET (at cost)
Following is a summary of our property and equipment at July 31, 1998 and
1999:
July 31, July 31,
-------- --------
1998 1999
---- ----
Telecommunications equipment $ 6,084,771 $ 6,476,395
Land and buildings 892,507 447,748
Furniture and fixtures 882,449 902,873
Equipment under capital leases 5,585,291 7,758,739
Leasehold improvements 281,014 474,748
Other 517,192 608,914
----------- -----------
14,233,224 16,669,417
Less: accumulated depreciation and amortization (2,418,514) (4,712,671)
----------- -----------
Total - property and equipment, net $11,814,710 $11,956,746
=========== ===========
54
Depreciation expense as reported in our Consolidated Statements of
Operations includes depreciation expense related to our capital leases. For the
years ended July 31, 1997, 1998 and 1999, we recorded approximately $536,000,
$1,453,000 and $2,323,0000, respectively of depreciation expense related to our
fixed assets.
5. NOTES PAYABLE AND CONVERTIBLE DEBT
Notes Payable
- -------------
Notes payable are comprised of the following: July 31,
--------
1998 1999
---- ----
Note payable to a company, see terms below. $ 25,320 $ 137,071
Note payable to an individual, see terms below. - 150,000
Note payable to a bank, see terms below. - 150,000
Notes payable to related parties, see terms below. - 100,000
Note payable to an individual, see terms below. - 368,768
Notes payable to various banks, see terms below. 416,846 56,878
Notes payable to a company, net of discount, see ---------- ----------
terms below. 364,803 309,588
---------- ----------
$1,406,969 $1,272,305
$ 688,005 $ 960,523
Less: current portion ---------- ----------
$ 718,964 $ 311,782
Total non-current notes payable ========== ==========
During November 1996, we entered into an agreement with a financing company
under which we are advanced an additional 13.75% of our receivables sold to a
billing clearinghouse, as discussed in Note 3. These advances are typically
outstanding for periods of less than 90 days, and are repaid, including accrued
interest, by the clearinghouse on behalf of us as our receivables from long
distance call services are collected. We were charged 4% per month for these
fundings. When the agreement with the financing company expired in November
1998, it was renewed on a month-to-month basis, and we ceased using the
factoring arrangement altogether in April 1999 as part of our ongoing effort to
minimize costs. The approximate $137,000 outstanding represents advances to be
repaid by the clearinghouse to the financing company upon our subsequent
collection of our receivables from long distance call services.
During February 1999, we entered into a note payable with an individual,
for working capital purposes, in the amount of $150,000. Interest accrues at an
interest rate of 12% per year, principal and interest due at maturity. The note
originally matured in May 1999, but we have extended the note with the
individual for an additional six months.
55
During January 1999, one of our subsidiaries entered into a note payable
with a bank in the amount of $180,000 related to our acquisition of a computer
software program known as "CuteFTP". (See Note 10). The note calls for principal
payments of $5,000 per month for twelve months and $10,000 per month for twelve
months. Interest accrues monthly at an interest rate of the Lender's "Prime
Rate" plus 1%. At July 31, 1999, the Lender's "Prime Rate" was 8.00%.
In February 1999, we entered into notes payable with related parties, all
of whom were officers or directors of ATSI in the amount of $250,000. The notes
accrue interest at a rate of 12% per year until paid in full. As of July 31,
1999, $100,000 of the notes remain outstanding.
In January 1999, one of our subsidiaries entered into an agreement with an
individual related to its acquisition of a computer software program known as
"CuteFTP". (See Note 10). The agreement calls for twelve principal and interest
payments of $63,000 per month beginning February 28, 1999. We have imputed
interest using an interest rate of 12% per annum.
As of July 31, 1998 and July 31, 1999, we through our acquisition of
Computel had approximately $416,846 and $56,878, respectively, of bank notes
payable to various banks in Mexico. The notes have interest rates ranging from
8% to 15%, with monthly principal and interest payments of approximately $7,500.
The notes mature between October 1999 and December 2015 and are collaterized by
the assets of Computel. In the year ended July 31, 1999, we through Computel
exchanged certain assets collaterized by the notes for a reduction in our
indebtedness. The notes remaining mature during the year ended July 2000.
During October 1997, we entered into a note payable with a company in the
amount of $1,000,000. The note calls for quarterly payments of principal and
interest beginning in January 1998 and continuing until October 2004. Interest
accrues on the unpaid principal at the rate of 13% per year. We also issued
250,000 warrants to the note holder which carry an exercise price of $3.56 per
warrant. These warrants expire in October 2000. The amount of debt discount
recorded by us related to the issuance of these warrants was $103,333. The fair
value of the warrants was calculated on the date of issuance using an option
pricing model with the following assumptions: Dividend yield of 0.0%, expected
volatility of 30%, risk-free interest rate of 6.00%, and an expected life of
three years. The warrants expire three years from their date of issuance, and
are not exercisable for a period of one year after their initial issuance. In
January 1998, the noteholder exercised 700,000 warrants at an exercise price of
$0.70, unrelated to the warrants noted above, in consideration of a $490,000
reduction of the principal balance outstanding on the note.
Convertible Debt
- ----------------
In March and May 1997, we issued $2.2 million in convertible notes,
interest at 10%. The principal and interest, which accrues quarterly, is due and
payable three years from the date of issuance. The convertible notes convert
into fully redeemable preferred stock at our option. In addition, for each
$50,000 unit of convertible debt, each holder was issued 108,549 warrants to
purchase an equal number of shares of common stock at $0.27 per share. The fair
value of the warrants was determined to be $0.37 per share and we assigned
$990,000 to the
56
value of the warrants in stockholders' equity. The fair value of the warrants
was calculated on the date of issuance using an option pricing model with the
following assumptions: Dividend yield of 0.0%, expected volatility of 62%, risk-
free interest rate of 6.35%, and an expected life of three years. The warrants
expire three years from their date of issuance, and were not exercisable for a
period of one year after their initial issuance. We have recorded the $990,000
as debt discount and is amortizing the discount over the term of the debt based
on the effective interest method. Principal outstanding as of July 31, 1998 and
July 31, 1999, net of debt discount, was $1,603,802 and $1,942,614,
respectively. All of the outstanding principal at July 31, 1999 is reflected in
the current portion of convertible long-term debt.
Maturities of notes payable and convertible debt as of July 31, 1999 were as
follows:
Year Ending July 31, 2000 $2,903,137
2001 107,983
2002 56,949
2003 67,138
2004 78,718
Thereafter 994
---
Total $3,214,919
==========
6. LEASES
Operating Leases
----------------
We lease office space, furniture, equipment and network capacity under
noncancelable operating leases and certain month-to-month leases. During fiscal
1997, 1998 and 1999, we also leased certain equipment under capital leasing
arrangements. Rental expense under operating leases for the years ended July 31,
1997, 1998 and 1999, was $176,700, $942,750 and $2,952,710, respectively. Future
minimum lease payments under the noncancelable operating leases at July 31, 1999
are as follows:
2000 $ 2,929,328
2001 3,284,740
2002 2,598,753
2003 583,524
2004 574,542
Thereafter 1,864,863
-----------
Total minimum lease payments $11,835,750
===========
57
Capital Leases
--------------
Future minimum lease payments under the capital leases together with the
present value of the net minimum lease payments at July 31, 1999 are as follows:
2000 $ 2,295,036
2001 2,246,127
2002 2,022,825
2003 1,758,391
2004 562,335
Thereafter 277,435
-----------
Total minimum lease payments 9,162,149
Less: Amount representing taxes (45,302)
-----------
Net minimum lease payments 9,116,847
Less: Amount representing interest (2,164,572)
-----------
Present value of minimum lease payments $ 6,952,275
===========
In April 1997, we, through ATSI-Mexico secured a capital lease facility
with IBM de Mexico to purchase intelligent pay telephones for installation in
Mexico. The capital lease facility of approximately $1.725 million has allowed
us to install U.S. standard intelligent pay telephones in various Mexican
markets. In April 1998, we through ATSI-Mexico secured an additional capital
lease facility with IBM de Mexico for approximately $2.9 million to increase
network capacity and to fund the purchase and installation of public telephones
in Mexico. In May 1999, we restructured our capital lease obligation with IBM de
Mexico by extending the payment of our total obligation. The restructured lease
facility calls for monthly payments of principal and interest of approximately
$108,000 beginning in July 1999 and extending through June 2003. Interest
accrues on the facility at an interest rate of approximately 13% per year. The
obligation outstanding under said facility at July 31, 1998 and July 31, 1999
was approximately $4,272,000 and $3,826,000, respectively.
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 delayed
for six months. Quarterly payments approximate $139,000 and the capital lease
has an interest rate of approximately 11%. The lease facility requires that 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. Due primarily to pricing pressures in our network
transport services business, we may not be able to meet some of the financial
covenants in the facility, which, if not cured, would allow NTFC to demand
payment in full of the amount outstanding. However, because management does not
believe that non-compliance is a certainty, the majority of the amount
outstanding under the facility has been classified as non-current in the
accompanying balance sheet. We also have certain affirmative covenants under the
facility, including a covenant on Year 2000 compliance, under which we give
assurance that our systems will be able to process transactions effectively
before, on and after January 1, 2000.
58
We secured a capital lease for approximately $500,000 in December 1998 for
the purchase of ATM equipment from Network Equipment Technologies ("N.E.T"). The
capital lease is for thirty-six months with monthly payments of approximately
$16,000 a month. Our capital leases have interest rates ranging from 11% to 14%.
7. DEFERRED REVENUE
We record deferred revenue related to the private network services it
provide. Customers may be required to advance cash to us prior to service
commencement to partially cover the cost of equipment and related installation
costs. Any cash received prior to the actual commencement of services is
recorded as deferred revenue until services are provided by us, at which time we
recognizes service commencement revenue.
8. SHARE CAPITAL
As discussed in Note 1, in May 1998, we completed our Plan of Arrangement
whereby the shareholders of ATSI-Canada exchanged their shares on a one-for-one
basis for shares of ATSI-Delaware stock. The exchange of shares resulted in the
recording on our books of $0.001 par value stock and additional paid-in capital.
During the year ended July 31, 1997, we issued 13,012,448 common shares. Of
this total, 5,760,355 shares were issued for approximately $4,737,000 of net
cash proceeds, 924,761 shares were issued for services rendered to us, 3,611,786
shares were issued for the conversion of convertible debt to common shares, and
2,715,546 shares were issued related to our acquisition of Computel. (See Note
10).
During the year ended July 31, 1998, we issued 8,816,461 common shares. Of
this total, 7,765,174 shares were issued for approximately $3.2 million of net
cash proceeds and reductions in indebtedness of approximately $1.1 million
through the exercise of 7,765,174 warrants and options, 245,016 shares were
issued for services rendered to us, 200,000 were issued resulting from the
conversion of a $100,000 convertible note and 606,271 shares were issued for
approximately $333,000 in net cash proceeds.
During the year ended July 31, 1999, we issued 3,081,721 common shares. Of
this total, 2,203,160 shares were issued for approximately $1.3 million of net
cash through the exercise of 2,203,160 warrants and options, 36,643 shares were
issued for consulting services rendered to us, 59,101 shares were issued to a
shareholder in exchange for a guarantee of up to $500,000 of Company debt,
503,387 shares and an equal number of warrants to purchase our common stock for
$0.70 per share were issued in exchange for approximately $300,000 in net cash
proceeds and 279,430 shares were issued related to our acquisition of certain
customer contracts in previous years. The shares issued for services rendered,
the guarantee of Company debt, and the shares issued for the $300,000 in cash
proceeds (including the shares underlying the warrants issued) have not been
registered by us, nor do we have any obligation to register such shares.
59
As noted in the previous paragraphs we have on occasion granted shares of
our common stock in lieu of cash for services rendered by both employees and
non-employees. These services have included bonuses, employee commissions and
professional fees. The fair value of these services was determined using
invoiced amounts and in lieu of cash, we distributed shares to these parties
based upon the market price of our common stock when the services were rendered.
These services were expensed in the period in which the services were performed
according to the terms of invoices and/or contracted agreements in compliance
with generally accepted accounting principles.
Additionally, we have from time to time issued shares in lieu of cash for
services rendered related to private equity placements. The contracts with the
various parties called for a designated number of shares to be issued based upon
the total shares distributed in the private placements.
At July 31, 1999, stock subscription receivables of $42,500, were
outstanding related to sales of common stock. We collected such amounts
subsequent to said date. No dividends were paid on our stock during the years
ended July 31, 1997, 1998 and 1999.
The shareholders of ATSI-Canada approved the creation of a class of
preferred stock at our annual shareholders meeting on May 21, 1997. Effective
June 25, 1997, the class of preferred stock was authorized under the Ontario
Business Corporations Act. According to our amended Articles of Incorporation,
our Board of directors may issue, in series, an unlimited number of preferred
shares, without par value. No preferred shares have been issued as of July 31,
1999.
Pursuant to ATSI-Delaware's Certificate of Incorporation, our Board of
directors may issue, in series, an unlimited number of preferred shares, with a
par value of $0.001. In March and April 1999, we issued a total of 24,146 shares
of Series A Preferred Stock for cash proceeds of approximately $2.4 million and
in July 1999 we issued 2,000 shares of Series B Preferred Stock for cash
proceeds of approximately $2.0 million. The Series A Preferred Stock accrues
cumulative dividends at the rate of 10% per annum payable quarterly, while the
Series B Preferred Stock accrues cumulative dividends at the rate of 6% per
annum.
In September 1999, we issued 500 shares of Series C Preferred Stock for
cash proceeds of approximately $500,000. The Series C Preferred Stock accrues
cumulative dividends at the rate of 6% per annum.
The Series A Preferred Stock and any accumulated, unpaid dividends may be
converted into Common Stock for up to one year at the average closing price of
the Common Stock for twenty (20) trading days preceding the Date of Closing (the
"Initial Conversion Price"). On each Anniversary Date up to and including the
fifth Anniversary Date, the Conversion price on any unconverted Preferred Stock,
will be reset to be equal to 75% of the average closing price of the stock for
the then twenty (20) preceding days provided that the Conversion price can not
be reset any lower than 75% of the Initial Conversion Price. The Series B
Preferred Stock and any accumulated, unpaid dividends may be converted into
Common Stock for up to two years at the lesser of a) the market price on the day
prior to closing or b) 78% of the five lowest closing bid prices on the ten days
preceding conversion. As these conversion features are considered a "beneficial
conversion feature" to the holder, we allocated approximately $1.6 million and
$1.1
60
million, respectively of the approximate $2.4 million and $2.0 million,
respectively, in proceeds to additional paid-in capital as a discount to be
amortized over a twelve month and three month period, respectively. The Series A
Preferred Stock is callable and redeemable by us at 100% of its face value, plus
any accumulated, unpaid dividends at our option any time after the Common Stock
of ATSI has traded at 200% or more of the conversion price in effect for at
least twenty (20) consecutive trading days, so long as we do not call the
Preferred Stock prior to the first anniversary date of the Date of Closing. The
Series B Preferred Stock is callable and redeemable by us at 127% of its face
value, plus any accumulated, unpaid dividends at our option any time prior to
the second anniversary date of the Date of Closing.
The Series C Preferred Stock and any accumulated, unpaid dividends may be
converted into Common Stock for up to two years at the lesser of a) the market
price on the day prior to closing or b) 78% of the five lowest closing bid
prices on the ten days preceding conversion. Consistent with the accounting for
our Series A and Series B Preferred Stock, this is considered a "beneficial
conversion feature" to the holder. We will allocate approximately $139,000 of
the proceeds to additional paid-in capital as a discount to be amortized over a
three-month period.
The terms of our Series A, Series B and Series C Preferred Stock restrict
us from declaring and paying on our common stock until such time as all
outstanding dividends have been fulfilled related to the Preferred Stock.
9. STOCK PURCHASE WARRANTS AND STOCK OPTIONS
During the year ended July 31, 1999, certain shareholders and holders of
convertible debt were issued warrants to purchase shares of common stock at
exercise prices ranging from $0.70 to $1.06 per share. Following is a summary of
warrant activity from August 1, 1996 through July 31, 1999:
Year Ending July 31,
---------------------------------------------------
1997 1998 1999
---------------------------------------------------
Warrants outstanding, beginning 8,097,463 14,489,942 7,562,168
Warrants issued 9,931,854 667,400 933,387
Warrants expired (777,200) - (2,386,470)
Warrants exercised (2,762,175) (7,595,174) (1,905,160)
---------- ---------- ----------
14,489,942
==========
Warrants outstanding, ending 7,562,168 4,203,925
========== ==========
Warrants outstanding at July 31, 1999 expire as follows:
Number of Warrants Exercise Price Expiration Date
------------------ -------------- ---------------
80,000 $1.06 November 6, 1999
30,000 $0.50 December 31, 1999
367,400 $0.85 January 1, 2000
61
550,824 $0.85 February 7, 2000
1,030,060 $0.27 February 17, 2000
1,000,000 $0.70 February 28, 2000
192,254 $0.75 April 7, 2000
503,387 $0.70 April 13, 2000
50,000 $2.00 June 20, 2000
250,000 $3.56 October 14, 2000
50,000 $3.09 March 9, 2002
100,000 $1.25 July 2, 2004
We had two fixed stock plans during 1997. We had a stock option plan that
was in existence since May 1994 (the Canadian Plan). No options were ever issued
as part of the Canadian Plan, even though we had the ability to issue options to
acquire approximately 2,800,000 shares of our common stock. In February 1997,
our Board of directors adopted the 1997 Stock Option Plan, which replaced the
Canadian Plan. Under the 1997 Stock Option Plan, options to purchase up to
5,000,000 shares of common stock may be granted to employees, directors,
consultants and advisers. The 1997 Stock Option Plan is intended to permit us to
retain and attract qualified individuals who will contribute to our overall
success. The exercise price of all of the options is equal to the market price
of the shares of common stock as of the date of grant. The options vest pursuant
to the individual stock option agreements, usually 33 percent per year beginning
one year from the grant date with unexercised options expiring ten years after
the date of the grant. On February 10, 1997, the Board of directors granted a
total of 4,488,000 options to purchase Common Shares to directors and employees
of ATSI. Certain grants were considered vested based on past service as of
February 10, 1997. The 1997 Stock Option Plan was approved by a vote of the
stockholders at our Annual Meeting of Shareholders on May 21, 1997.
In September 1998, our Board of directors adopted the 1998 Stock Option
Plan. Under the 1998 Stock Option Plan, options to purchase up to 2,000,000
shares of common stock may be granted to employees, directors and certain other
persons. The 1997 and 1998 Stock Option Plans are intended to permit us to
retain and attract qualified individuals who will contribute to our overall
success. The exercise price of all of the options is equal to the market price
of the shares of common stock as of the date of grant. The options vest pursuant
to the individual stock option agreements, usually 33 percent per year beginning
one year from the grant date with unexercised options expiring ten years after
the date of the grant. On September 9, 1998, the Board of directors granted a
total of 1,541,000 options to purchase common stock to directors and employees
of ATSI. On December 16, 1998, the Board approved the granting of an additional
302,300 in options to employees of ATSI. The 1998 Stock Option Plan was approved
by a vote of the stockholders at our Annual Meeting of Shareholders on December
17, 1998.
A summary of the status of our 1997 and 1998 Stock Option Plans for the
years ended July 31, 1997, 1998 and 1999 and changes during the periods are
presented below:
Years Ended July 31,
-------------------------------------
1997 Stock Option Plan 1997 1998
-------------------------------------
62
Weighted Weighed
Average Average
Shares Exercise Shares Exercise
Price Price
Outstanding, beginning of year - - 4,483,000 $0.58
Granted 4,488,000 $0.58 429,000 $2.33
Exercised - - (245,000) $0.58
Forfeited (5,000) $0.58 (11,667) $1.28
Outstanding, end of year 4,483,000 $0.58 4,655,333 $0.74
========= ===== ========= =====
Options exercisable at end of year
1,786,332 $0.58 2,571,332 $0.58
========= ===== ========= =====
Weighted average fair value of
options granted during the year
$0.45 $1.50
===== =====
Year Ended July 31,
------------------------------
1997 Stock Option Plan 1999
------------------------------
Weighted
Average
Shares Exercise
Price
Outstanding, beginning of year 4,655,333 $0.74
Granted - -
Exercised (298,000) $0.58
Forfeited (134,666) $0.71
Outstanding, end of year 4,222,667 $0.75
========= =====
Options exercisable at end of year 3,271,333 $0.60
========= =====
Weighted average fair value of
options granted during the year =====
$0.00
=====
Year Ended July 31,
---------------------------------
1999
---------------------------------
1998 Stock Option Plan
Weighted
Average
Exercise
Shares Price
Outstanding, beginning of year - -
Granted 1,843,300 $0.60
Exercised - -
Forfeited (57,500) $0.78
Outstanding, end of year 1,785,800 $0.60
========= =====
Options exercisable at end of year - -
Weighted average fair value of
options granted during the year
$0.64
=====
63
The weighted average remaining contractual life of the stock options
outstanding at July 31, 1999 is approximately 7.5 years for options granted
under the 1997 Stock Option Plan and approximately 9 years for options granted
under the 1998 Stock Option Plan.
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation"
was issued. SFAS 123 defines a fair value based method of accounting for
employee stock options or similar equity instruments and encourages all entities
to adopt that method of accounting for all of their employee stock compensation
plans. Under the fair value based method, compensation cost is measured at the
grant date based on the value of the award and is recognized over the service
period of the award, which is usually the vesting period. However, SFAS 123 also
allows entities to continue to measure compensation costs for employee stock
compensation plans using the intrinsic value method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). We
have adopted SFAS 123 effective August 1, 1996, and have elected to remain with
the accounting prescribed by APB 25. We have made the required disclosures
prescribed by SFAS 123.
In accordance with APB 25, we recorded approximately $1.4 million in
deferred compensation related to approximately 1.5 million of the options
granted based on the increase in our stock price from February 10, 1997 when the
options were granted, to May 21, 1997, when the underlying 1997 Stock Option
Plan was approved by our shareholders. Additionally, We recorded approximately
$340,000 in deferred compensation related to approximately 1.5 million of the
options granted based on the increase in our stock price from September 9, 1998
to December 17, 1998, when the underlying 1998 Stock Option Plan was approved by
our shareholders.
As of July 31, 1998 and July 31, 1999, we had $666,899 and $465,487,
respectively, of deferred compensation related to options granted.
Because we have elected to remain with the accounting prescribed by APB 25,
no compensation cost has been recognized for our fixed stock option plan based
on SFAS 123. Had compensation cost for our stock-based compensation plans been
determined on the fair value of the grant dates for awards under the fixed stock
option plans consistent with the method of SFAS 123, our net loss (in thousands)
and loss per share would have been increased to the pro forma amounts indicated
below:
Year Ended Year Ended Year Ended
July 31, 1997 July 31, 1998 July 31, 1999
------------- ------------- -------------
Net Loss to common stockholders
-------------------------------
As reported $(4,695) $(5,094) $(7,591)
Pro forma $(5,235) $(5,936) $(7,312)
Basic and Diluted Loss per share
--------------------------------
As reported $ (0.18) $ (0.12) $ (0.16)
Pro forma $ (0.20) $ (0.14) $ (0.15)
64
The fair value of the option grant is estimated based on the date of grant
using an option pricing model with the following assumptions used for the grants
in 1997, 1998 and 1999: Dividend yield of 0.0%, expected volatility of 60%, 46%
and 62%, respectively, risk-free interest rate of 6.41%, 5.10% and 6.50%,
respectively, and an expected life of ten years.
10. ACQUISITIONS
As discussed in Note 1, we acquired 55% of Computel in May 1997 and
acquired the remaining shares in August 1997. The total purchase price for the
acquisition of Computel was approximately $3.6 million, of which $1.1 million
was paid in cash, $700,000 in a note receivable forgiven by us and approximately
$1.8 million in common stock, representing 2,715,546 shares. We recorded the
assets and liabilities of Computel as of May 1, 1997. As Computel had net
liabilities at May 1, 1997, we recorded goodwill of $2,279,231 related to the
acquisition. The remaining 45% ownership interest is reflected as minority
interest at July 31, 1997. Per the terms of the agreement, the remaining shares
of Computel were acquired in August 1997 for the previously mentioned cash
payment of approximately $1.1 million and forgiveness of the aforementioned note
receivable. We recorded additional goodwill of approximately $2,857,000.
The following unaudited pro forma results of operations for the year ended
July 31, 1997, assumes the acquisition of Computel occurred as of the beginning
of the period. Such pro forma information is not necessarily indicative of the
results of future operations.
Year Ended July 31,
-------------------
1997
----
(Unaudited)
Operating revenues $ 20,312,000
Net loss ($5,408,000)
Basic and Diluted net loss per share ($0.19)
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments such as additional amortization of
goodwill as a result of the acquisition, and the elimination of intercompany
transactions. The unaudited pro forma information is not necessarily indicative
of the results that would have occurred had such transactions actually taken
place at the beginning of the period specified nor does such information purport
to project the results of operations for any future date or period.
Pro forma results of operations for the year ended July 31, 1998 have been
omitted, as pro forma results would not materially differ from actual results of
operations for the period.
In January 1999, GlobalSCAPE acquired the rights to the source code of a
computer software program known as "CuteFTP". Prior to January 1999, it had been
the distributor of this software under an exclusive distribution agreement
executed in June 1996 with the software's author. They acquired the rights to
CuteFTP in exchange for cash payments totaling
65
approximately $190,000 in January and February 1999 and an additional $756,000
to be paid in twelve monthly installments.
11. SEGMENT REPORTING
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which establishes standards for
reporting information about operating segments in annual and interim financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise." Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. SFAS No. 131 need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application. In an attempt to identify its reportable operating segments, we
considered a number of factors or criteria. These criteria included segmenting
based upon geographic boundaries only, segmenting based on the products and
services provided, segmenting based on legal entity and segmenting by business
focus. Based on these criteria or factors we have determined that we have three
reportable operating segments: (1) U.S. Telco; (2) Mexico Telco; and (3)
Internet e-commerce. Clearly, our Internet e-commerce subsidiary, GlobalSCAPE,
Inc. and its operations can be differentiated from the telecommunication focus
of the rest of ATSI. Additionally, we believe that our U.S. and Mexican
subsidiaries should be separate segments in spite of the fact that many of the
products are borderless. Both, the U.S. Telco and Mexican Telco segments include
revenues generated from Integrated Prepaid, Postpaid, and Private Network
Services. Our Carrier Services revenues, generated as a part of our U.S. Telco
segment, are the only revenues not currently generated by both the U.S. Telco
and Mexico Telco segments. We have included the operations of ATSI-Canada, ATSI-
Delaware and all businesses falling below the reporting threshold in the "Other"
segment. The "Other" segment also includes intercompany eliminations. We have
used earnings before interest, taxes, depreciation and amortization (EBITDA) in
our segment reporting as it is the chief measure of profit or loss used in
assessing the performance of each of our segments.
As of and for the years ending
--------------------------------------------------
July 31, 1997 July 31, 1998 July 31, 1999
U.S. Telco
- -----------------------------------------------------------------------------
External revenues $ 13,714,251 $ 26,695,690 $ 25,516,665
Intercompany revenues $ 330,362 $ 1,300,000 $ 800,012
------------ ------------ ------------
Total revenues $ 14,044,613 $ 27,995,690 $ 26,316,677
============ ============ ============
EBITDA ($3,131,841) ($16,807) ($1,485,045)
Operating loss ($3,603,447) ($1,294,037) ($3,342,035)
Net loss ($3,806,889) ($1,819,986) ($3,866,051)
66
Total assets $ 6,450,033 $ 10,049,021 $ 9,606,263
Mexico Telco
- -----------------------------------------------------------------------------
External revenues $ 1,949,755 $ 6,298,620 $ 6,359,238
Intercompany revenues $ 1,359,891 $ 5,136,541 $ 5,052,890
------------ ------------ ------------
Total revenues $ 3,309,646 $ 11,435,161 $ 11,412,128
============ ============ ============
EBITDA ($183,002) ($1,434,261) ($1,071,502)
Operating loss ($273,740) ($1,927,928) ($2,253,037)
Net loss ($364,402) ($2,564,103) ($2,691,450)
Total assets $ 9,097,780 $ 17,228,025 $ 13,236,868
Internet e-commerce
- -----------------------------------------------------------------------------
External revenues $ 564,381 $ 1,525,517 $ 2,642,376
Intercompany revenues - 25,000 -
------------ ------------ ------------
Total revenues $ 564,381 $ 1,550,517 $ 2,642,376
============ ============ ============
EBITDA $ 39,197 $ 215,051 $ 1,052,015
Operating income $ 36,483 $ 188,658 $ 873,832
Net income $ 38,282 $ 197,698 $ 854,068
Total assets $ 266,955 $ 537,289 $ 1,222,238
Other
- -----------------------------------------------------------------------------
External revenues - - -
Intercompany revenues ($1,690,253) ($6,461,541) ($5,852,902)
------------ ------------ ------------
Total revenues ($1,690,253) ($6,461,541) ($5,852,902)
============ ============ ============
EBITDA ($335,325) ($408,783) ($287,110)
Operating loss ($361,013) ($433,683) ($318,274)
Net loss ($562,119) ($907,570) ($1,887,651)
Total assets $ 5,940 ($3,563,743) $ 88,924
Total
- -----------------------------------------------------------------------------
External revenues $ 16,228,387 $ 34,519,827 $ 34,518,279
Intercompany revenues - - -
------------ ------------ ------------
Total revenues $ 16,228,387 $ 34,519,827 $ 34,518,279
============ ============ ============
EBITDA ($3,610,971) ($1,644,800) ($1,791,642)
67
Depreciation, Depletion and ($590,746) ($1,822,190) ($3,247,872)
Amortization
Operating loss ($4,201,717) ($3,466,990) ($5,039,514)
Net loss ($4,695,128) ($5,093,961) ($7,591,084)
Total assets $ 15,820,708 $ 24,250,592 $ 24,154,293
12. INCOME TAXES
As of July 31,1999, we had net operating loss carryforwards of
approximately $9,335,000 for U.S. federal income tax purposes which are
available to reduce future taxable income of which $534,000 will expire in 2009,
$2,385,000 will expire in 2010, $2,083,000 will expire in 2011, $2,894,000 will
expire in 2012 and $1,439,000 will expire in 2019. The availability of the net
operating loss (NOL) carryforwards to reduce U.S. federal taxable income is
subject to various limitations in the event of an ownership change as defined in
Section 382 of the Internal Revenue Code of 1986 (the "Code"). We experienced a
change in ownership in excess of 50 percent, as defined in the Code, during the
year ended July 31, 1998. This change in ownership limits the annual utilization
of NOL under the Code to $1,284,000 per year, but does not impact our ability to
utilize our NOL's because the annual limitation under the Code would allow full
utilization within the statutory carryforward period.
The tax effects of significant temporary differences representing deferred
income tax assets and liabilities are as follows as of July 31, 1998 and 1999:
July 31, 1998 July 31,1999
Net operating loss carryforward $ 2,919,000 $ 3,174,000
Other tax differences, net 628,000 839,000
Valuation allowance (3,547,000) (4,013,000)
----------- ----------
Total deferred income tax assets $ - $ -
=========== ==========
A valuation reserve of $3,547,000 and $4,013,000, as of July 31, 1998 and
1999, respectively, representing the total of net deferred tax assets has been
recognized by us as it cannot determine that it is more likely than not that all
of the deferred tax assets will be realized.
Additionally, our effective tax rate differs from the statutory rate as the
tax benefits have not been recorded on the losses incurred for the years ended
July 31, 1997, 1998 and 1999.
68
13. COMMITMENTS AND CONTINGENCIES
During the years ended July 31, 1998 and 1999, nine of our officers entered
into employment agreements with ATSI-Texas or ATSI-Delaware, generally for
periods of up to three years (with automatic one-year extensions) unless
terminated earlier in accordance with the terms of the respective agreements.
The annual base salary under such agreements for each of these nine officers
range from $75,000 to $100,000 per annum, and is subject to increase within the
discretion of the Board. In addition, each of these officers is eligible to
receive a bonus in such amount as may be determined by the Board of directors
from time to time. Bonuses may not exceed 50% of the executive's base salary in
any fiscal year. No bonuses were paid during fiscal 1999.
Effective August 1998, two of the aforementioned officers entered into
employment agreements with ATSI-Delaware, which superceded their previous
agreements, each for a period of three years (with automatic one-year
extensions) unless terminated earlier in accordance with the terms of the
respective agreements. The annual base salary under such agreements for each of
these two officers may not be less than $127,000 and $130,000, respectively, per
annum, and is subject to increase within the discretion of the Board. In
addition, each of these officers is eligible to receive a bonus in such amount
as may be determined by the Board of directors from time to time. Bonuses may
not exceed 50% of the executive's base salary in any fiscal year. No such
bonuses were awarded for fiscal 1999.
Subsequent to July 31, 1999, three officers whose employment agreements
were to expire January 1, 2000 were informed that their agreements would not be
renewed under the current terms and conditions. Two of the three officers have
since entered into new employment agreements with ATSI-Delaware, each for a
period of one year unless earlier terminated in accordance with the terms of the
respective agreements. The annual base salaries under such agreements may not be
less than approximately $101,000 and $105,000, respectively, per annum, and is
subject to increase within the discretion of the Board. In addition, each of
these officers is eligible to receive a bonus in such amount as may be
determined by the Board of directors from time to time. Bonuses may not exceed
50% of the executive's base salary in any fiscal year.
14. RISKS AND UNCERTAINTIES AND CONCENTRATIONS
Our business is dependent upon key pieces of equipment, switching and
transmission facilities, fiber capacity and the Solaridad satellites. Should we
experience service interruptions from our underlying carriers, equipment
failures or should there be damage or destruction to the Solaridad satellites or
leased fiber lines there would likely be a temporary interruption of our
services which could adversely or materially affect our operations. We believe
that suitable arrangements could be obtained with other satellite or fiber optic
network operators to provide transmission capacity. Additionally, our network
control center is protected by an uninterruptible power supply system which,
upon commercial power failure, utilizes battery back up until an on-site
generator is automatically triggered to supply power.
69
During the year ended July 31, 1999, our wholesale transport business had
two customers, whose aggregated revenues approximated 10% of our total revenues
for the year. No other customer generated revenues individually greater than 5%
during the year.
15. RELATED PARTY TRANSACTIONS
In January 1997, ATSI-Canada entered into an agreement with an
international consulting firm, of which ATSI-Delaware director Carlos K. Kauachi
is president, for international business development support. Under the terms of
the agreement, we paid the consulting firm $8,000 per month for a period of
twelve months. In January 1998, the agreement was renewed at $10,000 per month
for a period of twelve months. In March 1999, the agreement was renewed at
$6,000 per month for a period of twelve months.
In April 1998, we engaged two companies for billing and administrative
services related to network management services we provide. The companies, which
are owned by Tomas Revesz, an ATSI-Delaware director, were paid approximately
$140,000 for their services during fiscal 1998. Subsequent to year-end, we
entered into an agreement with the two companies capping their combined monthly
fees at $18,500 per month. For fiscal 1999, the companies were paid
approximately $180,000 for their services. Additionally, we have a payable to
Mr. Revesz of $90,000.
In February 1999, we entered into notes payable with related parties, all
of whom were officers or directors of ATSI in the amount of $250,000. The notes
accrue interest at a rate of 12% per year until paid in full. As of July 31,
1999, $100,000 of the notes remain outstanding.
We have entered into a month-to-month agreement with Technology Impact
Partners, a consulting firm of which Company director Richard C. Benkendorf, is
principal and owner. Under the agreement, Technology Impact Partners provides us
with various services that include strategic planning, business development and
financial advisory services. Under the terms of the agreement, We pay the
consulting firm $3,750 per month plus expenses. At July 31, 1999, we had a
payable to Technology Impact Partners of approximately $74,000.
16. LEGAL PROCEEDINGS
On January 29, 1999, one of our customers, Twister Communications, Inc.
filed a Demand for Arbitration seeking damages for breach of contract before the
American Arbitration Association. The customer claims that we wrongfully
terminated an International Carrier Services Agreement executed by the parties
in June 1998 under which we provided wholesale carrier services from June 1998
to January 1999. The customer's claims for damages represent amounts that it
claims it had to pay in order to replace the service provided by us. We dispute
that it terminated the contract wrongfully and asserts that the customer
breached the agreement by failing to pay for services rendered and by
intentionally making false representation regarding our traffic patterns and on
March 3, 1999 filed a Demand for Arbitration seeking damages for breach of
contract in an amount equal to the amounts due to us for services rendered plus
70
interest, plus additional damages for fraud. An arbitration panel was
selected and the parties are now completing written discovery.
While 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; until the arbitration proceedings
take place, we can not reasonably estimate the possible loss, if any, and there
can be no assurance that the resolution of this dispute would not have an
adverse effect on our results of operations.
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 we 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. 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 Us negotiating an alternative agreement with Bestel, S.A. de
C.V. at a higher cost. While the total economic impact is still being assessed,
we believe lost revenues and incremental costs are in excess of $15 million.
While our contract contains certain limitations regarding the type and amounts
of damages that can be pursued, we have authorized our attorneys to pursue all
relief to which it is entitled under law. As such, we can not reasonably
estimate the ultimate outcome of neither this lawsuit nor the additional costs
that may be incurred in the pursuit of our case.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by item 10 of Form 10-K is incorporated herein by
reference to such information included in our Proxy Statement of the 1999 Annual
Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by item 11 of Form 10-K is incorporated herein by
reference to such information included in our Proxy Statement for the 1999
Annual Meeting of Stockholders.
71
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by item 12 of Form 10-K is incorporated herein by
reference to such information included in our Proxy Statement for the 1999
Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by item 13 of Form 10-K is incorporated herein by
reference to such information included in our Proxy Statement for the 1999
Annual Meeting of Stockholders.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
Index to Financial Statements appears on Page 40.
(b) Reports on Form 8-K
None.
(c) Exhibits
3.1 Amended and Restated Certificate of Incorporation of American TeleSource
International, Inc., a Delaware corporation (Exhibit 3.3 to Amendment No. 2
to Registration statement on Form 10 (No. 333-05557) of ATSI filed on
September 11, 1997)
3.2 Amended and Restated Bylaws of American TeleSource International, Inc.
(Exhibit to Amended Annual Report on Form 10-K for year ended July 31, 1999
filed April 13, 2000)
4.1 Certificate of Designation, Preferences and Rights of 10% Series A
Cumulative Convertible Preferred Stock (Exhibit 10.43 to Annual Report on
Form 10-K for year ending July 31, 1999 filed on October 26, 1999)
4.2 Certificate of Designation, Preferences and Rights of 6% Series B
Cumulative Convertible Preferred Stock (Exhibit 10.34 to Registration
statement on Form S-3 (No. 333-84115) filed August 18, 1999)
4.3 Certificate of Designation, Preferences and Rights of 6% Series C
Cumulative Convertible Preferred Stock (Exhibit 10.40 to Registration
statement on Form S-3 (No. 333-84115) filed October 26, 1999)
72
4.4 Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI dated
July 2, 1999 (Exhibit 10.33 to Registration statement on Form S-3 (No. 333-
84115) filed August 18, 1999)
4.5 Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by ATSI dated
July 2, 1999 (Exhibit 10.35 to Registration statement on Form S-3 (No. 333-
84115) filed August 18, 1999)
4.6 Registration Rights Agreement between The Shaar Fund Ltd. and ATSI dated
July 2, 1999 (Exhibit 10.36 to Registration statement on Form S-3 (No. 333-
84115) filed August 18, 1999)
4.7 Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI dated
September 24, 1999 (Exhibit 10.39 to Registration statement on Form S-3
(No. 333-84115) filed October 26, 1999)
4.8 Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by ATSI dated
September 24, 1999 (Exhibit 10.41 to Registration statement on Form S-3
(No. 333-84115) filed October 26, 1999)
4.9 Registration Rights Agreement between The Shaar Fund Ltd. and ATSI dated
September 24, 1999 (Exhibit 10.42 to Registration statement on Form S-3
(No. 333-84115) filed October 26, 1999)
4.10 Amended and Restated 1997 Option Plan (Exhibit 10.30 to Registration
statement on Form S-4 (No. 333-47511) filed March 6, 1998)
4.11 Form of 1997 Option Plan Agreement (Exhibit 10.7 to Registration statement
on Form 10 (No. 000-23007) filed August 22, 1997)
4.12 American TeleSource International, Inc. 1998 Stock Option Plan (Exhibit 4.7
to Registration statement on Form S-8 filed January 11, 2000)
10.1 Agreement with SATMEX (Agreement #095-1) (Exhibit 10.31 to Annual Report on
Form 10-K for year ended July 31, 1998 (No. 000-23007))
10.2 Agreement with SATMEX (Agreement #094-1) (Exhibit 10.32 to Annual Report on
Form 10-K for year ended July 31, 1998 (No. 000-23007))
10.3 Amendment to Agreement #094-1 with SATMEX (Exhibit to this Amended Annual
Report on Form 10-K for year ended July 31, 1999 filed August 25, 2000)
Confidential treatment requested for portions of this document omitted
materials have been filed separately with the Commission.
10.4 Amendment to Agreement #095-1 with SATMEX (Exhibit to this Amended Annual
Report on Form 10-K for year ended July 31, 1999 filed August 25, 2000)
Confidential treatment requested for portions of this document. Omitted
materials have been filed separately with the Commission.
73
10.5 Bestel Fiber Lease (Exhibit to this Amended Annual Report on Form 10-K for
year ended July 31, 1999 filed April 14, 2000)
10.6 Addendum to Fiber Lease with Bestel, S.A. de C.V. (Exhibit to this Amended
Annual Report on Form 10-K for year ended July 31, 1999 filed August 25,
2000) Confidential treatment requested for portions of this document.
Omitted materials filed separately with the Commission.
10.7 Lease Finance Agreements between IBM de Mexico and ATSI-Mexico (Exhibit
10.21 to Amendment No. 1 to Registration statement on Form 10 (No. 023007)
filed September 11, 1997)
10.8 Amendments to Lease Finance Agreements between IBM de Mexico and ATSI-
Mexico (to be filed)
10.9 Master Lease Agreement with NTFC (Exhibit to this Amended Annual Report on
Form 10-K for year ended July 31, 1999 filed April 14, 2000)
10.10 BancBoston Master Lease Agreement (Exhibit to this Amended Annual Report
on Form 10-K for year ended July 31, 1999 filed August 25, 2000)
Confidential treatment requested for portions of this document. Omitted
materials filed separately with the Commission.
10.11 Employment Agreement with Arthur L. Smith dated - February 28,
1997(Exhibit 10.16 to Registration statement on Form 10 (No. 333-05557)
filed August 22, 1997)
10.12 Employment Agreement with Arthur L. Smith dated September 24, 1998
(Exhibit to this Amended Annual Report on Form 10-K filed April 14,
2000)
10.13 Employment Agreement with Craig K. Clement dated February 28, 1997
(Exhibit 10.18 to Registration statement on Form 10 (No. 333-05557) filed
August 22, 1997)
10.14 Employment Agreement with Craig K. Clement dated January 1, 2000 (Exhibit
to this Amended Annual Report on Form 10-K for year ended July 31, 1999
filed April 14, 2000)
10.15 Employment Agreement with Sandra Poole-Christal dated January 1, 1998
(Exhibit to this Amended Annual Report on Form 10-K for year ended July
31, 1999 filed April 14, 2000)
10.16 Employment Agreement with Charles R. Poole dated February 28, 1997
(Exhibit 10.20 to Registration statement on Form 10 (No. 333-05557) filed
August 22, 1997)
10.17 Employment Agreement with Charles R. Poole dated September 24, 1998
(Exhibit to this Amended Annual Report on Form 10-K filed April 14,
2000)
10.18 Employment Agreement with H. Douglas Saathoff dated February 28,
1997(Exhibit 10.17 to Registration statement on Form 10 (No. 333-05557)
filed August 22, 1997)
74
10.19 Employment Agreement with H. Douglas Saathoff dated January 1, 2000
(Exhibit to this Amended Annual Report on Form 10-K for year ended July
31, 1999 filed April 14, 2000)
10.20 Office Space Lease Agreement (Exhibit 10.14 to Registration statement on
Form S-4 (No. 333-05557) filed June 7, 1996)
10.21 Amendment to Office Space Lease Agreement (Exhibit 10.14 to Registration
statement on Form S-4 (No. 333-05557) filed June 7, 1996)
10.22 Office Space Lease Agreement for GlobalSCAPE (Exhibit 10.29 to
Registration statement on Form S-4 (No. 333-47511) filed on March 6,
1998)
10.23 Commercial Lease with ACLP University Park SA, L.P. (Exhibit to this
Amended Annual Report on Form 10-K for year ended July 31, 1999 filed
April 14, 2000)
10.24 Amendment to Commercial Lease with ACLP University Park SA, L.P. (Exhibit
to this Amended Annual Report on Form 10-K for year ended July 31, 1999
filed April 14, 2000)
10.25 Commercial Lease between GlobalSCAPE, Inc. and ACLP University Park SA,
L.P (Exhibit to this Amended Annual Report on Form 10-K for year ended
July 31, 1999 filed April 14, 2000)
10.26 Amendment to Commercial Lease between GlobalSCAPE, Inc. and ACLP
University Park SA, L.P (Exhibit to this Amended Annual Report on Form
10-K for year ended July 31, 1999 filed April 14, 2000)
10.27 Compensation Agreement between ATSI-Texas and James relating to Guarantee
of Equipment Line of Credit by James McCourt (Exhibit 10.3 to
Registration statement on Form 10 (No. 000-23007) filed on August 22,
1997)
10.28 Consulting Agreement with KAWA Consultores, S.A. de C.V. (Exhibit to this
Amended Annual Report on Form 10-K for year ended July 31, 1999 filed
April 14, 2000)
11 Statement of Computation of Per Share Earnings (Exhibit 11 to Annual
Report on Form 10-K for year ended July 31, 1999 filed October 26, 1999)
22 Subsidiaries of ATSI (Exhibit 22 to Annual Report on Form 10-K for year
ended July 31, 1999 filed October 26, 1999)
23 Consent of Arthur Andersen LLP) (Exhibit to this Amended Annual Report on
Form 10-K for year ended July 31, 1999 filed August 25, 2000)
27 Financial Data Schedule (Exhibit 27 to Annual Report on Form 10-K for
year ended July 31, 1999 filed October 26, 1999)
75
99.1 ATSI Shareholder Newsletter (Exhibit 99.1 to Annual Report on Form 10-K
for year ended July 31, 1999(File No. 000-23007) filed October 26, 1999)
99.2 FCC Radio Station Authorization - C Band (Exhibit 10.10 to Registration
statement on Form S-4 (No. 333-05557) filed June 7, 1996)
99.3 FCC Radio Station Authorization - Ku Band (Exhibit 10.11 to Registration
statement on Form 10 (No. 333-05557) filed June 7, 1996)
99.4 Section 214 Certification from FCC (Exhibit 10.12 to Registration
statement on Form 10 (No. 333-05557) filed June 7, 1996)
99.5 Comercializadora License (Payphone License) issued to ATSI-Mexico
(Exhibit 10.24 to Registration statement on Form 10 (No. 000-23007) filed
August 22, 1997)
99.6 Network Resale License issued to ATSI-Mexico (Exhibit 10.25 to
Registration statement on Form 10 (No. 000-23007) filed August 22,
1997)
99.7 Shared Teleport License issued to Sinfra (Exhibit to this Amended Annual
Report on Form 10-K for year ended July 31, 1999 filed April 14,
2000)
99.8 Packet Switching Network License issued to SINFRA (Exhibit 10.26 to
Registration statement on Form 10 (No. 000-23007) filed August 22, 1997)
99.9 Value-Added Service License issued to SINFRA(Exhibit to this Amended
Annual Report on Form 10-K for year ended July 14, 1999 filed April 13,
2000)
99.10 Potential Dilution Chart (Exhibit to this Amended Annual Report on Form
10-K for year ended July 31, 1999 filed April 14, 2000)
99.11 Preferred Stock Features (Exhibit to this Amended Annual Report on Form
10-K for year ended July 31, 1999 filed April 14, 2000)
76
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto authorized, in San Antonio, Texas on
August 25, 2000.
AMERICAN TELESOURCE INTERNATIONAL, INC.
By: /s/ Arthur L. Smith
-------------------
Arthur L. Smith
Chief Executive Officer
By: /s/ H. Douglas Saathoff
-------------------------
H. Douglas Saathoff
Senior Vice President, Chief Financial Officer and
Corporate Secretary
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, this report has been signed below by the following persons in the
capacities indicated on April 13, 2000.
Signature Title
--------- -----
/s/ ARTHUR L. SMITH Chairman of the Board, Chief
------------------- Executive Officer, Director
(Principal Executive Officer)
/s/ H. DOUGLAS SAATHOFF Chief Financial Officer, Senior Vice
----------------------- President, and Corporate Secretary
(Principal Accounting and Finance
Officer)
/s/ RICHARD C. BENKENDORF Director
-------------------------
/s/ CARLOS K. KAUACHI Director
---------------------
/s/ MURRAY R. NYE Director
-----------------
/s/ TOMAS REVESZ Director
----------------
/s/ ROBERT B. WERNER Director
--------------------
77