-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KdRMJLuhCylCEKPqqL+XH2YEP8EZIHm5x/JFlVsb7DezgKJEg9URfkQIa/npN0Ud Xmy6pNr0excFv3iTGwbK0w== 0000930661-99-001469.txt : 19990615 0000930661-99-001469.hdr.sgml : 19990615 ACCESSION NUMBER: 0000930661-99-001469 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990430 FILED AS OF DATE: 19990614 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN TELESOURCE INTERNATIONAL INC CENTRAL INDEX KEY: 0001014052 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 742698095 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23007 FILM NUMBER: 99645708 BUSINESS ADDRESS: STREET 1: 12500 NETWORK BLVD STREET 2: SUITE 407 CITY: SAN ANTONIO STATE: TX ZIP: 78249 BUSINESS PHONE: 2105586090 10-Q 1 FORM 10-Q ________________________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE - - ACT OF 1934 For the quarterly period ended April 30, 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 0-23007 AMERICAN TELESOURCE INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware 74-2849995 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 12500 Network Blvd., Suite 407 San Antonio, Texas 78249 (210) 558-6090 (Address, including zip code, of registrant's principal executive offices and telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No - The number of shares outstanding of the registrant,s common stock at June 9, 1999 was 48,390,703. ________________________________________________________________________________ AMERICAN TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED APRIL 30, 1999 INDEX
Part I FINANCIAL INFORMATION Page ---- Item 1. Interim Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets as of July 31, 1998 and April 30, 1999................... 3 Consolidated Statements of Operations for the Three and Nine Months Ended April 30, 1998 and 1999................................................. 4 Consolidated Statements of Cash Flows for the Nine Months Ended April 30, 1998 and 1999.............................................................. 5 Notes to Consolidated Financial Statements........................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................................... 8 Part II OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K..................................................... 15
2 American TeleSource International, Inc. and Subsidiaries Consolidated Balance Sheets (In thousands, except share information)
July 31, April 30, 1998 1999 ---------- ---------- (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,091 $ 216 Accounts receivable, net of allowance of $ 209 and $434, respectively 3,748 3,863 Prepaid expenses and other assets 649 2,638 ---------- ---------- Total current assets 5,488 6,717 ---------- ---------- PROPERTY AND EQUIPMENT (At cost): 14,233 16,956 Less - Accumulated depreciation and amortization (2,418) (4,040) ---------- ---------- Net property and equipment 11,815 12,916 ---------- ---------- OTHER ASSETS, net: Goodwill, net 5,091 5,066 Contracts, net 1,173 934 Trademark, net - 883 Other assets 489 352 ---------- ---------- Total assets $ 24,056 $ 26,868 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Accounts payable $ 5,683 $ 4,773 Accrued liabilities 1,918 2,979 Current portion of notes payable 688 1,448 Current portion of convertible debt - 1,855 Current portion of obligations under capital leases 2,351 1,334 Deferred revenue 535 492 ---------- ---------- Total current liabilities 11,175 12,881 ---------- ---------- LONG-TERM LIABILITIES: - --------------------- Notes payable, less current portion 719 2,130 Convertible long-term debt, less current portion 1,604 - Obligations under capital leases, less current portion 2,941 3,742 Other long-term liabilities 530 555 ---------- ---------- Total long-term liabilities 5,794 6,427 ---------- ---------- COMMITMENTS AND CONTINGENCIES: STOCKHOLDERS' EQUITY: Preferred shares, $0.001 par value, 10,000,000 shares authorized, Series A Cumulative Convertible Preferred Stock, 50,000 shares authorized, 0 shares issued and outstanding at July 31, 1998, 21,245 shares issued and outstanding at April 30, 1999 - - Common stock, $0.001 par value, 100,000,000 shares authorized, 45,603,566 issued and outstanding at July 31, 1998, 48,098,087 issued and outstanding at April 30, 1999 46 48 Stock subscriptions receivable, 0 shares outstanding at July 31, 1998, 4,200 shares outstanding at April 30, 1999 - (420) Additional paid-in capital 22,248 26,199 Accumulated deficit (14,396) (17,470) Deferred compensation (667) (622) Cumulative translation adjustment (144) (175) ---------- ---------- Total stockholders' equity 7,087 7,560 ---------- ---------- Total liabilities and stockholders' equity $ 24,056 $ 26,868 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 3 American TeleSource International, Inc. and Subsidiaries Consolidated Statements of Operations (In thousands, except per share amounts) (unaudited)
Three months ended April 30, Nine months ended April 30, -------------------------------- -------------------------------- 1998 1999 1998 1999 ---------- ---------- ---------- ---------- OPERATING REVENUES: Network management services $ 2,950 $ 3,307 $ 7,477 $ 14,319 Call services 3,875 1,816 10,382 5,143 Direct dial services 1,515 1,629 4,657 4,474 Internet E-commerce 493 679 1,053 1,856 ---------- ---------- ---------- ---------- Total operating revenues 8,833 7,431 23,569 25,792 ---------- ---------- ---------- ---------- OPERATING EXPENSES: Cost of services 5,532 4,142 14,435 15,467 Selling, general and administrative 4,154 3,240 10,240 9,814 Depreciation and amortization 628 942 1,508 2,349 ---------- ---------- ---------- ---------- Total operating expenses 10,314 8,324 26,183 27,630 ---------- ---------- ---------- ---------- Operating loss (1,481) (893) (2,614) (1,838) OTHER INCOME(EXPENSE) Interest income 64 11 94 41 Other income (expense) 3 (50) 23 (23) Interest expense (357) (398) (1,086) (1,178) ---------- ---------- ---------- ---------- Total other income (expense) (290) (437) (969) (1,160) ---------- ---------- ---------- ---------- Loss before income tax expense (1,771) (1,330) (3,583) (2,998) Foreign income tax expense (152) 17 (152) (45) ---------- ---------- ---------- ---------- Net loss ($1,923) ($1,313) ($3,735) ($3,043) Less: Preferred stock dividends - ($31) - ($31) ---------- ---------- ---------- ---------- Net loss to common shareholders ($1,923) ($1,344) ($3,735) ($3,074) ========== ========== ========== ========== Net loss per common share ($0.04) ($0.03) ($0.09) ($0.07) ========== ========== ========== ========== Weighted average common shares outstanding 43,447 46,844 39,612 46,259 ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 4 American TeleSource International, Inc. and Subsidiaries Consolidated Statement of Cash Flows (In thousands) (unaudited)
Nine months ended April 30, ------------------------------- 1998 1999 ------- ------- Cash flows from operating activities: Net loss ($3,735) ($3,074) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization 1,508 2,349 Amortization of debt discount 228 254 Amortization of discount on preferred equity - 21 Deferred compensation 373 395 Cumulative translation adjustment (23) 129 Provision for losses on accounts receivable 739 627 Changes in operating assets and liabilities- Increase in accounts receivable (1,443) (742) Increase in other assets - current and long-term (635) (815) Increase (decrease) in accounts payable 2,133 (818) Increase in accrued liabilities (196) 758 Increase in deferred revenue (174) (42) ------- ------- Net cash used in operating activities (1,225) (958) ------- ------- Cash flows from investing activities: Purchases of property and equipment (2,890) (866) Cash paid in acquisitions (2,111) (171) ------- ------- Net cash used in investing activities (5,001) (1,037) ------- ------- Cash flows from financing activities: Proceeds from issuance of debt 2,913 489 Net increase (decrease) in short-term borrowings 314 (306) Payments on debt (400) (385) Capital lease payments (949) (774) Proceeds from issuance of preferred stock, net of issuance costs - 1,133 Proceeds from issuance of common stock, net of issuance costs 4,271 963 ------- ------- Net cash provided by financing activities 6,149 1,120 ------- ------- Net decrease in cash (77) (875) Cash, beginning of period 1,921 1,091 ------- ------- Cash, end of period $ 1,844 $ 216 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 5 AMERICAN TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts) 1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements, which include the accounts of American TeleSource International, Inc. and its subsidiaries ("ATSI" or "the Company"), as defined in the Company's annual report on Form 10- K, have been prepared in accordance with Rule 10-01 of Regulation S-X, "Interim Financial Statements," and accordingly do not include all information and footnotes required under generally accepted accounting principles for complete financial statements. In the opinion of management, these interim financial statements contain all adjustments, without audit, necessary to present fairly the consolidated financial position of ATSI as of July 31, 1998 and April 30, 1999, the results of their operations for the three and nine months ended April 30, 1998 and 1999 and cash flows for the nine months ended April 30, 1998 and 1999. All adjustments are of a normal recurring nature. All significant intercompany balances and transactions have been eliminated in consolidation. It is recommended that these interim consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto for the year ended July 31, 1998 included in the Company's annual report on Form 10-K filed with the SEC on October 29, 1998. Certain prior period amounts have been reclassified for comparative purposes. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. In fiscal 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share", which establishes standards for computing and presenting earning per share ("EPS") with entities with publicly held common stock or potential common stock. SFAS No. 128 simplifies the standards for computing EPS previously found in Accounting Principles Board Opinion No. 15, "Earnings per Share", and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS, which excludes dilution. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with a complex capital structure. As the Company had a net loss for the three and nine months ended April 30, 1998 and 1999, diluted EPS equals basic EPS, as potentially dilutive common stock equivalents are antidilutive in loss periods. Prior period EPS data has been restated as required by SFAS No. 128. 2. FUTURE OPERATIONS The consolidated financial statements of the Company have been prepared on the basis of accounting principles applicable to a going concern. For the period from December 17, 1993 to April 30, 1999, the Company has incurred cumulative net losses of approximately $17,416. Further, the Company has a working capital deficit of approximately $6,164 at April 30, 1999. Although the Company has capital resources available to it, these resources are limited and may not be available to support its ongoing operations until such time as the Company is able to maintain positive cash flow from operations. There is no assurance the Company will be able to achieve future revenue levels sufficient to support operations or recover its investment in property and equipment, goodwill and other intangible assets. These matters raise substantial doubt about the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the ongoing support of its stockholders and customers, its ability to obtain capital resources to support operations and its ability to successfully market its services. The Company is likely to require additional financial resources in the near term and could require additional financial resources in the long-term to support its ongoing operations. The Company has retained various financial advisers to assist it in refining its strategic growth plan, defining its capital needs and obtaining the funds required to meet those needs. The plan includes securing funds through equity offerings and entering into lease or long-term debt financing agreements to raise capital. There can be no assurances, however, that such equity offerings or other long-term debt financing arrangements will actually be consummated or that such funds, if received, will be sufficient to support existing operations until revenue levels are achieved sufficient to maintain positive cash flow from operations. If the Company is not successful in completing additional equity offerings or entering into other financial arrangements, or if the funds raised in such stock offerings or other financial arrangements are not adequate to support the Company until a successful level 6 of operations is attained, the Company has limited additional sources of debt or equity capital and would likely be unable to continue operating as a going concern. 3. PROPERTY, PLANT AND EQUIPMENT In December 1998, the Company signed an agreement with Network Equipment Technologies, Inc. (N.E.T.) for the purchase, financing and installation of ATM (asynchronous transfer mode) equipment in the U.S. and Mexico. This equipment is being purchased through a capital lease transaction covering thirty-six months and carrying an interest rate of 9.5%. Monthly payments of principal and interest total approximately $29,000. The Company commenced making capital lease payments in May 1999. Additionally, in December 1998, the Company signed an agreement with Northern Telecom "Nortel" for the purchase and installation of a Nortel DMS 250/300 International Gateway switch. The Company has received a commitment from a company, subject to the completion of satisfactory documentation, to finance the purchase of the switch through a note to be paid in twenty (20) quarterly payments beginning approximately six months following the closing date of this transaction. Interest accrues monthly at a fixed rate equal to the five year bank swap rate as reported on Telerate, plus 4.95%. The Company has recorded the purchase of the Nortel switch as both an increase in property and equipment and notes payable. 4. PRIVATE PLACEMENTS Effective March 25, 1999, the "Date of Closing", the Company issued approximately $1.1 million, representing 11,329 shares at a stated value of $100 per share, in $0.001 par value Convertible Preferred Stock ("Preferred Stock") through a private placement to accredited investors. The Preferred Stock accrue cumulative dividends at the rate of 10% per annum and are payable quarterly. The Preferred Stock and any accumulated, unpaid dividends may be converted into Common Stock for up to one year at approximately $0.77, the average closing price of the Common Stock for twenty (20) trading days preceding the Date of Closing (the "Initial Conversion Price"). The Preferred Stock may not be converted for a period of ninety (90) days following the Date of Closing except in the event of a change in control of the Company or an offering of securities by the Company or a subsidiary of the Company. 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 the Initial Conversion Price. As this conversion feature is considered to be a "beneficial conversion feature" to the holder, the Company has allocated $234,397 of the approximate $1.1 million in proceeds to additional paid-in capital as a discount to be amortized over a twelve month period, using the effective interest method. The Preferred Stock is callable and redeemable by the Company at 100% of its face value, plus any accumulated, unpaid dividends at the Company's option any time after the Common Stock of the Company has traded at 200% or more of the Conversion Price in effect for at least twenty (20) consecutive trading days, so long as the Company does not call the Preferred Stock prior to the first anniversary date of the Date of Closing. Effective April 23, 1999, the "Date of Closing", the Company issued approximately $1.0 million, representing 9,916 shares at a stated value of $100 per share, in $0.001 par value Convertible Preferred Stock ("Preferred Stock") through a private placement to accredited investors. The Preferred Stock issued effective April 23, 1999 was identical to that issued effective March 25, 1999, with the exception of the Initial Conversion price which is $0.71, the average closing price of the Common Stock for twenty (20) days preceding the Date of Closing. Accordingly, the conversion feature was considered to be a "beneficial conversion feature" to the holder and the Company has allocated all of the approximate $1.0 million in proceeds to additional paid-in capital as a discount to be amortized over a twelve month period, using the effective interest period. As of the date of this filing, approximately $420,000 of the $1.0 million in proceeds represents a subscription receivable outstanding. The company has properly accounted for this portion of the proceeds as a non-cash transaction in its accompanying consolidated financial statements. In April 1999, the Company issued 1,003,387 shares of Common Stock through a private placement to accredited investors at a price of $0.60 per share. Additionally, each shareholder received a warrant to purchase an 7 additional share of Common Stock at a price of $0.70 per share for a period of one year from the date of the private placement. 5. YEAR 2000 COMPLIANCE The Company has initiated a program to identify and address issues associated with the ability of its 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 the Company's 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 the Company's divisions and subsidiaries. The Company has completed substantially all of the necessary testing and deployment with final completion planned for September 1999. However, the Company must rely on the representations and warranties of third parties, including domestic U.S. and foreign carriers of its traffic, in testing for readiness for year 2000 issues and cannot ensure compliance by these parties. The Company expects to avoid disruption of its owned information, telephony and business systems as a result of these efforts. 6. LEGAL PROCEEDINGS On January 29, 1999, one of the Company's customers filed a Demand for Arbitration seeking damages for breach of contract. The customer claims that the Company wrongfully terminated an International Carrier Services Agreement executed by the parties in June 1998 under which the Company provided wholesale carrier services from June 1998 to January 1999. The customer's claims for damages represent amounts that it claims it had to pay in order to replace the service provided by the Company. The Company asserts that the customer breached the agreement by failing to pay for services rendered and by intentionally making false representation regarding its traffic patterns and on March 3, 1999 filed a Demand for Arbitration seeking damages for breach of contract in an amount equal to the amounts due to the Company for services rendered plus interest, plus additional damages for fraud. The parties are in the process of selecting an arbitration panel. No reserve has been established for the amounts owed to the Company by the customer, in the amount of $846,000, in the accompanying consolidated financial statements. The Company believes that it has a justifiable basis for its arbitration demand and that it will be able to settle the dispute without a material adverse effect on the Company's financial statements; however, until the arbitration proceedings take place, the Company 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 the Company's results of operations. 7. SUBSEQUENT EVENTS In May 1999, the Company restructured its capital lease obligation with IBM de Mexico by extending the payment of its total obligation over a forty-eight (48) month period. The net result of the restructuring was a shift of approximately $1.3 million in the Company's capital lease obligation from current to long-term in the accompanying consolidated financial statements. 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. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This Quarterly Report on Form 10-Q contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Specifically, all statements other than statements of historical facts included in the report regarding the Company's financial position, business strategy and plans and objectives of management of the Company for future operations are forward-looking statements. These forward-looking statements are based on the beliefs of the Company's management, as well as assumptions made by and information currently available to the Company's management. When used in this report, the words "anticipate," "believe," "could," "estimate," "expect" and "intend" and words or phrases of similar import, as they relate to the 8 Company or Company's management, are intended to identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions related to certain factors including, without limitation, the inability to obtain capital, changes in the Mexican political or economic environment, the adoption by Mexico of new laws or regulations, or changes effected by Mexico to existing laws affecting the communications industry generally or the Company specifically, increased or redirected competition efforts, targeting the Company's services or operation, by competitors, general economic conditions, customer relations, relationships with vendors, the interest rate environment, seasonality, the operation of the Company's network, the ability of the Company's direct sales force to successfully replace its independent marketing representatives or the failure of its direct sales force to produce anticipated results, transmission costs, product introductions and acceptance, the inability to continue to generate new sources of revenue, technological change, changes in industry practices, one-time events and other factors described herein ("cautionary statements"). Reference is made to the risks and uncertainties described in the Company's annual report on Form 10-K. Although the Company believes that the expectations are reasonable, it can give no assurance that such expectations will prove to be correct. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the applicable cautionary statements. General The Company's mission is to become a full-service international telecommunications carrier, providing direct dial and operator assisted call services and network services on both a retail and wholesale basis within and between select markets in Latin America and the United States. Utilizing a framework of licenses, interconnection and service agreements, network facilities and retail distribution channels (hereinafter collectively referred to as the "framework"), the Company is primarily focused on capturing market share in the international telecommunications corridor between the United States and Mexico. Even with poor phone-line penetration, the Company's research indicates that Mexico may exchange more international traffic with the U.S. than any other country in the world within the next two years. As the regulatory environments allow, the Company also plans to establish framework in other Latin American countries as well. In addition to the U.S. and Mexico, the Company currently owns or has rights to use facilities in and has strategic relationships with carriers in Costa Rica, El Salvador, and Guatemala. Utilizing the framework described above, the Company provides local, domestic long distance and international calls from its own public telephones and casetas within Mexico, and provides similar services to some third party- owned casetas, public telephones and hotels in Mexico as well. Consumers visiting a Company-owned caseta or public telephone may dial directly to the desired party in exchange for cash payment, or can charge the call to a U.S. address (collect, person-to-person, etc.) or calling card, or to a U.S. dollar- denominated credit card with the assistance of an operator. In July 1998, the Company began providing domestic U.S. and international call services to Mexico to residential customers on a limited basis in the U.S. Callers may either pre- subscribe to the Company's one-plus residential service, or dial around their pre-subscribed carrier by dialing 10-10-624, plus the area code and desired number. Where possible, these retail calls are transported over the Company's own network infrastructure. Utilizing the same framework described above, the Company also serves as a retail and wholesale facilities-based provider of network services for corporate clients and U.S. and Latin American telecommunications carriers. These customers typically lack transmission facilities into certain markets, or require additional capacity into certain markets. The Company currently provides these services to and from the United States, Mexico, Costa Rica, El Salvador and Guatemala. The Company is also the sole owner of GlobalSCAPE, Inc., which is rapidly becoming a leader in electronic commerce of top Internet-based software, utilizing the Web as an integral component of its development, marketing, distribution and customer relationship strategies. Utilizing CuteFTP as its flagship product, GlobalSCAPE has a user base of approximately 7.5 million users as of May 31, 1999. The Company's consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred losses since inception and has a working capital deficit as of April 30, 1999. For the reasons stated in Liquidity and Capital Resources and subject to the risks referred to in Liquidity and Capital, the Company expects improved results of operations and liquidity in the last three months of fiscal 1999. 9 Results of Operations The following table sets forth certain items included in the Company's results of operations in dollar amounts and as a percentage of total revenues for the three and nine-month periods ended April 30, 1998 and 1999.
Three Months Ended April 30, Nine Months Ended April 30, ---------------------------- --------------------------- 1998 1999 1998 1999 ---- ----- ---- ---- (unaudited) $ % $ % $ % $ % ----------- --------- --------- --------- ---------- --------- ---------- -------- Operating revenues - ------------------ Network management services $ 2,950 33% $ 3,307 45% $ 7,477 32% $ 14,319 56% Call services 3,875 44% 1,816 24% 10,382 44% 5,143 20% Direct dial services 1,515 17% 1,629 22% 4,657 20% 4,474 17% Internet E-commerce 493 6% 679 9% 1,053 4% 1,856 7% ----------- --------- --------- --------- ---------- --------- ---------- -------- Total operating revenues 8,833 100% 7,431 100% 23,569 100% 25,792 100% Cost of services 5,532 63% 4,142 56% 14,435 61% 15,467 60% ----------- --------- --------- --------- ---------- --------- ---------- -------- Gross Margin 3,301 37% 3,289 44% 9,134 39% 10,325 40% Selling, general and administrative expense 4,154 47% 3,240 44% 10,240 43% 9,814 38% ----------- --------- --------- --------- ---------- --------- ---------- -------- Depreciation and amortization 628 7% 942 12% 1,508 7% 2,349 9% ----------- --------- --------- --------- ---------- --------- ---------- -------- Operating loss (1,481) (17%) (893) (12%) (2,614) (11%) (1,838) (7%) Other, net (442) (5%) (420) (6%) (1,121) (5%) (1,205) (5%) ----------- --------- --------- --------- ---------- --------- ---------- -------- Net loss ($1,923) (22%) ($1,313) (18%) ($3,735) (16%) ($3,043) (12%) Less: Preferred stock dividends - 0% (31) 0% - 0% (31) 0% ----------- --------- --------- --------- ---------- --------- ---------- -------- Net loss to common shareholders ($1,923) (22%) ($1,344) (18%) ($3,735) (16%) ($3,074) (12%) ====================================================================================
Three Months Ended April 30, 1999 Compared to Three Months Ended April 30, 1998 Operating revenues. Operating revenues decreased approximately $1.4 million, or 16%, due primarily to declines in the Company's call services. This decline was somewhat offset by growth in the Company's network management, direct dial and Internet e-commerce services. Network Management Services, which includes both retail and wholesale transport services, increased approximately 12%, or $360,000, between periods. In July 1998, the Company signed an agreement with Satelites Mexicanos, S.A. de C.V. ("SATMEX"), under which the Company was able to secure satellite capacity for resale purposes. The ability to manage and resell this capacity allowed the Company to increase billings to existing corporate clients who previously dealt directly with SATMEX, and to add additional retail, corporate customers more quickly. Revenues from the wholesale transport of traffic for U.S.-based carriers into Mexico decreased slightly between periods. Although the Company processed approximately the same amount of traffic between periods, competitive and other market factors caused the Company to decrease the price at which it did so. Call Service revenues decreased approximately $2.1 million, or 53%, between periods. This decline is principally the result of the Company's strategy to focus on core product offerings which best utilize its own network 10 infrastructure. In an effort to improve overall gross margins and reduce selling, general and administrative costs, the Company ceased providing U.S.- based call services in July of last year, and decreased the level of call services business with third-party owned telephones and hotels in Mexico, Jamaica and the Dominican Republic. During the quarter ending April 30, 1999, the Company's operator center in San Antonio processed approximately 45,000 calls from Mexico, as compared to approximately 100,000 calls in the same period in 1998. Direct dial services revenues, which are generated by calls processed by the Company without live or automated operator assistance, increased approximately $114,000, or 7.5%, between periods. The majority of these revenues, which are stated in U.S. dollars in the accompanying financial statements, are generated by the Company's public telephones and casetas in Mexico in exchange for immediate cash payment in pesos. Although the number of these calls increased slightly between periods, the increase was offset somewhat by weakening of the peso vs. the dollar between periods from 8.5 pesos to the dollar to 9.7 pesos to the dollar. Revenues from GlobalSCAPE, Inc., the Company's e-commerce subsidiary, increased approximately $186,000, or 38%, between periods. In January 1999, GlobalSCAPE purchased the rights to the source code of CuteFTP, the company's flagship product. An enhanced version of CuteFTP was subsequently released which increased the number of downloads and subsequent purchases of CuteFTP, increasing revenues. Cost of Services. Cost of services decreased from $5.5 million in the previous year's quarter to $4.1 million in the current year's quarter, and also decreased as a percentage of revenues from 63% to 56%, respectively. The decrease was partially due to the Company's decision to cease providing U.S.- based call services in July of last year, and decreased the level of call services business with third-party owned telephones and hotels in Mexico, Jamaica and the Dominican Republic. Such calls did not fully utilize the Company's owned network and therefore produced relatively lower gross margins. The aforementioned purchase of the source code for CuteFTP by GlobalSCAPE also contributed to the decline in cost of services as a percentage of revenues. Prior to the purchase, the Company had an obligation to pay royalties to CuteFTP's original author in return for the right to sell and distribute CuteFTP. The purchase of the source code eliminated such royalty fees. Selling, General and Administrative (SG&A) expenses. SG&A expenses declined 22%, or approximately $914,000, between periods. By decreasing the volume of retail call services traffic processed, the Company was able to eliminate overhead costs associated with the traffic. In addition, the Company continued to implement cost-cutting measures, consisting primarily of reductions in staff, which was initiated in July 1998. The period ending April 30, 1998 also contained one-time charges of approximately $225,000 incurred in the Company's re-incorporation in Delaware. Depreciation and Amortization. Depreciation and amortization rose approximately $314,000, or 50%, between quarters and increased as a percentage of revenues from 7% to 12%. This increase was caused by the addition of approximately $3.4 million in equipment between April 30, 1998 and April 30, 1999. The majority of the assets purchased consisted of equipment that added capacity to the Company's international network infrastructure including the Monterrey Hub installed in April 1998, the Network Equipment Technologies (N.E.T.) equipment purchased in December 1998 and the Company's new Nortel DMS 250/300 International Gateway switch purchased in January 1999. Operating Loss. The Company's operating loss improved $588,000 between quarters and decreased as a percentage of revenues from 17% to 12%, due to greater margins and decreased sales volumes offset to some degree by increased depreciation and amortization. Other Income (Expense). Other income (expense) decreased approximately ($22,000). This improvement was attributable to decreased foreign income tax expense; offset by increased interest expense and reduced interest income. Nine Months Ended April 30, 1999 Compared to Nine Months Ended April 30, 1998 Operating revenues. Operating revenues increased approximately $2.2 million, or 9%, due to growth in the 11 Company's network management and Internet e-commerce services. This growth was partially offset by declines in the Company's call services and direct dial services. Network management services, which includes both retail and wholesale transport services, increased approximately $6.8 million, or 92% between periods. This growth was principally due to the amount of wholesale network services provided to other carriers seeking transmission facilities or additional capacity. The Company processed approximately 25.2 million minutes of traffic for other carriers during the nine months ended April 30, 1998, as compared to approximately 53.1 million minutes during the period ended April 30, 1999. In April 1998, the Company completed its Monterrey Hub facility, which significantly increased the Company's ability to process additional carrier traffic. Additionally, in July 1998, the Company signed an agreement with Satelites Mexicanos, S.A. de C.V. ("SATMEX"), under which the Company was able to secure satellite capacity for resale purposes. The ability to manage and resell this capacity allowed the Company to increase billings to existing corporate clients who previously dealt directly with SATMEX, and to add additional retail, corporate customers more quickly. Call service revenues decreased approximately $5.2 million, or 50% between periods. This decline is principally the result of the Company's strategy to focus on core product offerings which best utilize its own network infrastructure. In an effort to improve overall gross margins and reduce selling, general and administrative costs, the Company ceased providing U.S.- based call services in July of last year, and decreased the level of call services business with third-party owned telephones and hotels in Mexico, Jamaica and the Dominican Republic. During the nine months ending April 30, 1999, the Company's operator center in San Antonio processed approximately 128,000 calls from Mexico, as compared to approximately 238,000 calls in the same period in 1998. Direct dial services revenues, which are generated by calls processed by the Company without live or automated operator assistance, decreased approximately $183,000, or 4%, between periods. The majority of these revenues, which are stated in U.S. dollars in the accompanying financial statements, are generated by the Company's public telephones and casetas in Mexico in exchange for immediate cash payment in pesos. While the number of these calls remained relatively flat between periods the pesos generated converted to fewer U.S. dollars due to the weakening of the peso vs. the dollar between periods from 8.2 pesos to the dollar to 9.9 pesos to the dollar. Revenues from GlobalSCAPE, Inc., the Company's e-commerce subsidiary increased approximately $803,000, or 76% between periods. This growth was primarily due to the increase in the number of downloads and subsequent purchases of CuteFTP, increasing revenues. In January 1999, GlobalSCAPE purchased the rights to the source code of CuteFTP, the company's flagship product. An enhanced version of CuteFTP was subsequently released which resulted in increased downloads and purchases of CuteFTP. Cost of Services. Cost of services increased from $14.4 million to $15. 5 million or 7% but decreased slightly as a percentage of total revenues from 61% to 60%. The increase in cost of services was attributable to the increased volume of business handled by the Company as discussed above. The decrease in cost of services, as a percentage of revenues was partially due to the Company's decision to cease providing U.S.-based call services in July of last year, and decrease the level of call services business with third-party owned telephones and hotels in Mexico, Jamaica and the Dominican Republic. Such calls did not fully utilize the Company's owned network and therefore produced relatively lower gross margins. The aforementioned purchase of the source code for CuteFTP by GlobalSCAPE also contributed to the decline in cost of services as a percentage of revenues. Prior to the purchase, the Company had an obligation to pay royalties to CuteFTP's original author in return for the right to sell and distribute CuteFTP. The purchase of the source code eliminated such royalty fees. Selling, General and Administrative (SG&A). SG&A expenses decreased 4%, or approximately $426,000, between periods. As a percentage of revenues, these expenses decreased from 43% to 38%. By decreasing the volume of retail call services traffic processed, the Company was able to eliminate overhead costs associated with the traffic. In addition, the Company continued to implement cost-cutting measures, consisting primarily of reductions in staff, which was initiated in July 1998. For the nine months ending April 30, 1998, the Company incurred approximately $500,000 of charges related to the Company's re- incorporation in Delaware. 12 Depreciation and Amortization. Depreciation and amortization rose approximately $841,000, or 56%, between periods, and increased as a percentage of revenues from 7% to 9%. This increase was caused by the addition of approximately $3.4 million in equipment between April 30, 1998 and April 30, 1999. The majority of the assets purchased consisted of equipment that added capacity to the Company's international network infrastructure including the Monterrey Hub installed in April 1998, the Network Equipment Technologies (N.E.T.) equipment purchased in December 1998 and the Company's new Nortel DMS 250/300 International Gateway switch purchased in January 1999. Operating Loss. The Company's operating loss improved $776,000, or 30%, between periods and improved as a percentage of revenues from 11% to 7%, primarily due to increased sales volumes, improved gross margins and reductions in the Company's SG&A expenses. Other Income (Expense). Other income (expense) increased approximately ($84,000). This increase was primarily attributable to an increase in interest expense and reduced interest income offset by reduced foreign income tax expense. Liquidity and Capital Resources During the nine month period ended April 30, 1999, the Company generated negative cash flows from operations of approximately $958,000. This compares with the approximate $1.2 million in negative cash flows from operations produced during the same time period in the prior year. Although the Company produced positive EBITDA of approximately $511,000 during the nine-month period ending April 30, 1999, it did not produce positive cash flows from operations principally because the rate at which it reduced payables exceeded the rate at which it collected on receivables. The Company purchased approximately $866,000 in equipment during the nine- month period ending April 30, 1999, primarily related to the expansion and upgrading of its international satellite-based network between the U.S. and Mexico. The equipment was partially paid for from cash flows generated internally by the Company, as well as some of the cash proceeds of $359,000 generated from the exercise of options and warrants during the period. A portion of the proceeds from the options and warrants was also applied to working capital needs during the period. On January 16, 1999, GlobalSCAPE purchased the rights to the source code for CuteFTP, the company's flagship product. Terms of the purchase called for a cash payment of approximately $171,000 to be made by January 31, 1999, and for monthly payments of $63,000 for a twelve-month period starting in February 1999. In order to make the cash payment due in January, GlobalSCAPE borrowed $180,000 from a bank at an interest rate of prime plus 1%. The note is to be paid back over a two year period in monthly principal installments of $5,000 plus interest for an initial twelve-month period, and in monthly principal amounts of $10,000, plus interest, over a subsequent twelve-month period. During December 1998, the Company ordered a DMS 250/300 international gateway switch from Northern Telecom, Inc. at a cost of approximately $1.8 million. In June 1999, the Company received a commitment to finance the purchase of this switch from a company over a five and one-half year period. The commitment is subject to, among other things, the completion of legal documents satisfactory to both the lender and the Company. In accordance with current accounting literature, the Company has recorded the obligation for the switch as a long-term note payable in the accompanying consolidated balance sheet and has treated the purchase of the switch as a non-cash transaction for cash flow purposes. Also during December 1998, the Company secured $500,000 in ATM equipment under another capital lease transaction. In an effort to improve its working capital position, the Company issued approximately $2.1 million in 10% Series A Cumulative Convertible Preferred Stock ("Preferred Stock") during March and April 1999. The Company also generated approximately $602,000 in proceeds during April 1999 through the private sale of common stock to various individuals. In May 1999, the Company restructured its capital lease arrangement with IBM de Mexico, extending payment of the total obligation owed as of June 30, 1999 over a 48 month period. The Company has $2.2 million of notes outstanding to various individuals that become due in March 2000. The notes, which total approximately $1.9 million net of unamortized debt discount in the accompanying balance 13 sheet, plus accrued interest have been classified as a current liability in the accompanying balance sheet. The net result of the above-described operating, investing and financing activities during the nine-month period was a working capital deficit of approximately $6.2 million and a cash balance of approximately $216,000 as of April 30, 1999. The Company's current ratio was .52:1 at April 30, 1999, compared to .49:1 at July 31, 1998. The Company did not generate sufficient cash flows from operations or financings to cover working capital, capital expenditure needs and debt service requirements during the nine-month period ending April 30, 1999 and keep the amount of cash maintained by the Company from decreasing. In an effort to alleviate its working capital deficit, the Company anticipates raising additional funds through the sale of equity securities. Dependent upon its ability to meet debt service requirements, the Company is also seeking additional debt financing which would enable it to shift short-term obligations to long-term. The Company believes that operating results in the near term will also allow it to obtain financing for needed capital expenditures from manufacturers of the equipment in the form of capital leases, similar to arrangements already obtained to finance the purchase of the Company's ATM equipment from NET. The Company is also considering the sale of all or a part of its ownership in GlobalSCAPE via a private or a public offering of GlobalSCAPE shares. No assurances may be given, however, that the Company will be able to generate additional cash proceeds through the above-mentioned debt and equity scenarios, or that the Company will be able to generate cash proceeds through the divestiture of any or all of its ownership position in GlobalSCAPE. In an effort to improve internal cash flows and to improve operating results, the Company's focus continues to be on generating traffic that will flow through its international network infrastructure between the U.S. and Mexico. The Company anticipates that the majority of near-term growth will be derived from providing wholesale network transport services from the U.S. to Mexico for carriers seeking termination of their traffic in Mexico. Historically, the Company has provided these services strictly through the utilization of its satellite-based infrastructure. In an effort to increase the capacity available for resale, and to enhance the reliability and quality of its infrastructure, in June 1999 the Company secured a fiber route between its international switching facilities in Dallas, Texas and its facilities in Mexico City, Mexico. Once operational, the Company will operate an international, hybrid (satellite and fiber-based) and redundant network which, when combined with its international gateway switch in Dallas, Texas, it believes will give it a foundation for near-term growth. However, no assurances may be given that the Company will be able to grow revenues in the near term. Although the Company believes that wholesale prices for such traffic between the U.S. and Mexico may continue to be volatile and may continue to decline, it believes that its current framework of licenses, agreements and infrastructure will allow it to achieve margins which, when combined with margins from call services and direct dial services, will produce positive cash flows sufficient to meet its debt service requirements. However, no assurances may be given that this will be the case. In an effort to continue to maintain overall corporate margins and to secure a less volatile overall customer base, the Company believes that it will need to continue to invest in the build-out of network infrastructure, primarily in Mexico, and that it must eventually grow a retail-oriented customer base. By continuing to build network to support its traffic patterns in Mexico, the Company believes it can reduce its costs by reducing its reliance on third-party vendors. Under its current licensing, the Company is able to transport traffic to, from and within Mexico, but must deliver or receive that traffic from a concessioned carrier that has the ability to interconnect into Mexico's local telecommunications infrastructure. The Company has applied for, and expects to receive, a 50-year long distance concession from the Mexican government that would give it the capability of interconnecting to the local infrastructure in Mexico. However, no assurances may be given that the Company will be able to obtain the financing or the concession necessary to further establish network infrastructure in Mexico. Subsequent to July 1999, the Company expects to invest funds, if available, into marketing retail services targeting Latinos in the U.S. and Mexico who frequently make international calls between the U.S. and Mexico. The Company feels that it is important to capture a portion of this market not only to generate higher retail revenues on a per-minute basis as compared to wholesale services, but to establish brand-name recognition among the consumers frequently making calls in the U.S.-Mexican corridor. By doing do, the Company feels that it can secure a less volatile, protectable customer base. No assurances may be given, however, that the Company will be able to obtain or 14 generate the funds necessary to do so, or that the Company will be able to successfully market such services if the funds are available. Inflation/Foreign Currency Inflation has not had a significant impact on the Company's operations. With the exception of direct dial services provided from the Company's casetas and public telephones, almost all of the Company's revenues are generated and collected in U.S. dollars. Direct dial services from the Company's casetas and public telephones are generally provided on a "sent-paid" basis at the time of the call in exchange for cash payment, so the Company does not maintain receivables on its books that are denominated in pesos. In an effort to reduce foreign currency risk, the Company attempts to convert pesos collected to U.S. dollars quickly, and attempts to maintain minimal cash balances denominated in pesos. Some expenses related to certain services provided by the Company are incurred in foreign currencies, primarily in pesos. The devaluation of the Mexican peso over the past several years has not had a material adverse impact on the Company's financial condition or operating results. PART II OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K (a) Exhibits: The exhibits listed below are filed as part of this report. Exhibit Number - ------ 11 Computation of Earnings per Share (filed herewith) 27 Financial Data Schedule (filed herewith) (b) Current Reports on Form 8-K. None. 15 SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. AMERICAN TELESOURCE INTERNATIONAL INC. (Registrant) Date: June 14, 1999 By: /s/ H. Douglas Saathoff -------------------------- Name: H. Douglas Saathoff Title: Chief Financial Officer 16 EX-11 2 COMPUTATION OF EARNINGS (LOSS) PER SHARE Exhibit 11 AMERICAN TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS (LOSS) PER SHARE
For the three months ended For the nine months ended ---------------------------------------- ----------------------------------------- April 30, 1998 April 30, 1999 April 30, 1998 April 30, 1999 ----------------- ------------------- ----------------- --------------------- COMPUTATION OF NET LOSS PER SHARE Net loss ($1,923) ($1,313) ($3,735) ($3,043) ------------- ------------- ------------ -------------- WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING 43,447 46,844 39,612 46,259 ------------- ------------- ------------ -------------- BASIC LOSS PER COMMON SHARE ($0.04) ($0.03) ($0.09) ($0.07) ------------- ------------- ------------ -------------- COMPUTATION OF DILUTED LOSS PER SHARE Net loss ($1,923) ($1,313) ($3,735) ($3,043) Interest not incurred upon assumed conversion of convertible note - - 6 - ------------- ------------- ------------ -------------- Preferred dividends - (31) - (31) ------------- ------------- ------------ -------------- Net loss applicable to common stockholders used for computation ($1,923) ($1,344) ($3,729) ($3,074) ------------- ------------- ------------ -------------- Weighted average number of shares of common stock outstanding 43,447 46,844 39,612 46,259 Weighted average incremental shares outstanding upon assumed conversion of options and warrants 9,332 3,575 12,834 3,060 Weighted average incremental shares outstanding upon assumed conversion of convertible debt - - 130 - ------------- ------------- ------------ -------------- WEIGHTED AVERAGE COMMON SHARES AND COMMON SHARE EQUIVALENTS USED FOR COMPUTATION 52,779 50,419 52,576 49,319 ------------- ------------- ------------ -------------- DILUTED LOSS PER COMMON SHARE AND COMMON ------------- ------------- ------------ -------------- SHARE EQUIVALENT ($0.04) ($0.03) ($0.07) ($0.06) ------------- ------------- ------------ --------------
(a) This calculation is submitted in accordance with Item 601 (b) (11) of Regulation S-K although it is not required by SFAS No. 128 because it is antidilutive. EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 9-MOS JUL-31-1999 JUL-31-1999 FEB-01-1999 AUG-01-1998 APR-30-1999 APR-30-1999 0 216 0 0 0 4,297 0 434 0 0 0 6,717 0 16,956 0 4,040 0 26,868 0 12,881 0 0 0 0 0 0 0 48 0 7,512 0 26,868 7,431 25,792 7,431 25,792 4,142 15,467 8,324 27,630 39 (18) 0 0 398 1,178 (1,330) (2,998) (17) 45 (1,313) (3,043) 0 0 0 0 0 0 (1,344) (3,074) (0.03) (0.07) (0.03) (0.07)
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