ITEM 2. PROPERTIES
Our executive offices, principal teleport facility and control center are located at our leased facilities in San Antonio, Texas, consisting of 23,100 square feet. The lease expires July 2008, and has two five-year renewal options. We pay annual rent of $244,850 (increasing to $282,705 for the remaining term) 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 14,553 square feet. The lease expires July 2008. GlobalSCAPE, Inc. pays annual rent of $174,636 per year and is responsible for taxes and insurance. Management believes our leased facilities are suitable and adequate for their intended use.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In January 1999, we terminated a wholesale carrier services contract with Twister Communications, Inc. for failure to pay for services rendered. On January 29, 1999, while we were attempting to collect payments from them, they filed a Demand for Arbitration seeking damages for breach of contract before the American Arbitration Association. 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 we filed a Demand for Arbitration seeking damages for breach of contract in an amount equal to the amounts due to us for services rendered plus interest, plus additional damages for fraud. Although an arbitration panel was initially selected, Twister has since filed for bankruptcy and has not pursued any discovery in this matter. We are monitoring the bankruptcy proceeding to determine whether we can recover a portion of the amount owed us.
We believe that we have a justifiable basis for our arbitration demand and that we will be able to resolve the dispute without a material adverse effect on our financial condition. Moreover, given the bankruptcy proceeding, we do not believe that Twister will pursue the arbitration. Until the arbitration proceedings are formally dropped or 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 signed in late 1998, PrimeTEC was to provide quality fiber optic capacity in January 1999. Mike Moehle is PrimeTEC's former president who negotiated the fiber lease and Vartec is PrimeTEC's parent, which was to provide the fiber capacity. The delivery of the route in early 1999 was a significant component of our operational and sales goal for the year and the failure of our vendor to provide the capacity led to our negotiating an alternative agreement with Bestel, S.A. de C.V. at a higher cost. 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.
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.
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 November 10, 2000. These price quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions.
At November 10, 2000, the closing price of our Common Stock as reported by AMEX was $1.50 per share. As of November 10, 2000, we had approximately 15,000 stockholders, including both beneficial and registered owners. The terms of our Series A 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 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 July 31, 1999, 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.
In our second and third quarter 10-Q's we noted additional sales of unregistered securities for additional Series A preferred stock, Series C preferred stock, Series D preferred stock and the conversion of certain notes. Further detail regarding these issuances can be found in the 2nd and 3rd quarter 10-Q's.
A Registration Statement on Form S-3 (File No. 333-89683) on which we registered 2,076,001 shares of common stock was declared effective September 8, 2000. This common stock was issuable under the terms of our 6% Series C Cumulative Convertible Preferred Stock and our 6% Series D Cumulative Convertible Preferred Stock. We did not receive any of the proceeds of the sale of common stock registered on this Form S-3. We received $500,000 and $3,000,000 of proceeds upon the issuance of the Series C Preferred Stock in September 1999 and the Series D Preferred Stock in February 2000. We incurred expenses in connection with the issuance of the Series C and Series D Preferred Stock and the registration of the underlying common stock as follows (approximate amounts):
A Registration Statement on Form S-3 (File No. 333-35846) on which we registered 3,227,845 shares of common stock was declared effective September 8, 2000. This common stock was issuable under the terms of our 10% Series A Cumulative Convertible Preferred Stock, $2.2 million of convertible notes plus accrued interest and the conversion of a note payable for approximately $440,000. We did not receive any of the proceeds of the sale of common stock registered on this Form S-3. We received $1,000,000, $2.2 million and $1,000,000 of proceeds upon the original issuance of the Series A Preferred Stock in February 2000, the convertible notes issued in March 1997 and the note payable issued in October 1997. We incurred expenses in connection with the issuance of the Series A Preferred Stock and the registration of the underlying common stock, of all the above shares, as follows (approximate amounts):
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.
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.
ITEM 7.
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, 1998, 1999, and 2000. 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, fiscal 1998 or 1998 refers to the year ended July 31, 1998, fiscal 1999 or 1999 refers to the year ended July 31, 1999 and fiscal 2000 or 2000 refers to the year ended July 31, 2000.
General
Our mission is to employ leading-edge technologies for delivery of exceptional telecommunication services to underserved Latino markets in the U.S. and Latin America emphasizing convenience, accessibility, quality, reliability, and affordability, while continually seeking to add value through new and innovative products and services. Utilizing a framework of licenses, interconnection and service agreements, network facilities and retail distribution channels (hereinafter collectively referred to as the "framework"), we are primarily focused on capturing market share in the international telecommunications corridor between the United States and Mexico. Even with poor phone-line penetration, our research indicates that Mexico and the U.S. may exchange more international traffic than any other two countries in the world within the next two years. As the regulatory environments allow, we also plan to establish framework in other Latin American countries as well. In addition to facilities we own or operate in the U.S. and Mexico, we currently own or have rights to use facilities in and have strategic relationships with carriers in Costa Rica, El Salvador, and Guatemala.
Utilizing the framework described above, we provide local, domestic long distance and international calls from our own public telephones and communication centers within Mexico, and provide similar services to some third party-owned casetas, public telephones and hotels in Mexico. Consumers visiting a Company-owned communication center or public telephone may dial directly to the desired party in exchange for cash payment, or can charge the call to a U.S. address (collect, person-to-person, etc.) or calling card, or to a U.S. dollar- denominated credit card with the assistance of an operator. In July 1998, we began providing domestic U.S. and international call services to Mexico to
residential customers on a limited basis in the U.S. Callers may either pre- subscribe to our one-plus residential service, or dial around their pre- subscribed carrier by dialing 10-10-624, plus the area code and desired number. Where possible, these retail calls are transported over our own network infrastructure.
Utilizing the same framework described above, we also serve as a retail and wholesale facilities-based provider of network services for corporate clients and U.S. and Latin American telecommunications carriers. These customers typically lack transmission facilities into certain markets, or require additional capacity into certain markets. We currently provide these services to and from the United States, Mexico, Costa Rica, El Salvador and Guatemala.
We also own approximately 70% of GlobalSCAPE, Inc., which is rapidly becoming a leader in electronic commerce of top Internet-based software, utilizing the Web as an integral component of its development, marketing, distribution and customer relationship strategies. Utilizing CuteFTP as its flagship product, GlobalSCAPE's downloads for products increased from approximately 7.5 million for the year ended July 31, 1999 to approximately 11.2 million for the year ended July 31, 2000.
As discussed in Note 12 to our consolidated financial statements we have determined that we have three reportable operating segments: 1) U.S Telco; 2) Mexico Telco; and 3) Internet e-commerce.
Additionally, we have determined that our U.S. and Mexican subsidiaries should be reported as separate segments although many of our products are borderless and utilize the operations of entities in both the U.S. and Mexico. Both the U.S. Telco and Mexico Telco segments include revenues generated from 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. 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, 2000. Additionally, we have had recurring negative cash flows from operations with the exception of the 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 the last half of fiscal 2001. However, we cannot assure you that this will be the case.
Results of Operations
The following table sets forth certain items included in our results of operations in thousands of dollar amounts and as a percentage of total revenues for the years ended July 31, 1998, 1999 and 2000.
Year ended July 31, 2000 Compared to Year Ended July 31, 1999
Operating Revenues. Consolidated revenues for fiscal 2000 totaled $39.4 million, a 14% increase over fiscal 1999's amount of $34.5 million. Telco revenues (all revenues other than e-commerce) and e-commerce revenues generated by GlobalSCAPE each increased by approximately $2.4 million between years. During fiscal 2000, we continued to shift our focus away from certain services, such as Postpaid Call Services and Satellite-based Private Network services, toward others services, such as Carrier and Integrated Prepaid Services. This shifting of revenues has been the result of the changing face of the telecommunications market in Mexico since the demonopolization of Telmex on January 1, 1997, as well as regulatory and technological advances made by the Company. Prior to January 1997, limited avenues existed for callers to make calls from Mexico to the United States. The vast majority of the calls placed in Mexico had to be made from either a subscribed Telmex line, from a Telmex payphone on a prepaid basis, or on a postpaid basis by accessing a U.S.-based operator and billing the call on collect to a valid U.S. address, or to a valid dollar-denominated credit card. Almost all calls utilized the Telmex local and long distance network infrastructure. Because of the limited calling options available in Mexico at the time, the Company set up its own operator center and processed calls from its own phones and casetas, as well as locations owned by others, and did so at premium prices. During this same time frame, we also focused on selling satellite-based private networks in an effort to establish a satellite-based network infrastructure between the U.S. and Mexico, which we felt we would eventually utilize to carry our own international calls at some point and decrease our dependence on the more expensive Telmex network infrastructure.
As of July 31, 2000, 19 long distance concessions had been granted to companies desiring to compete against the former Telmex monopoly. The entrance of these alternative long distance providers into the Mexican market has resulted in several changes, most notably more fiber optic capacity, particularly in the crystal triangle made up of Mexico City, Guadalajara and Monterrey; a steady
increase in the calling options available within Mexico; and a decrease in the cost of long distance phone calls on both a retail and wholesale basis due to more competition. Callers now have a variety of ways to make calls from public telephones or cellular telephones, many of which are made on a prepaid basis at lower premiums than postpaid calls used to be. As a result of the decreasing volumes of postpaid calls generated and processed by the Company, and lower margin associated with those calls, the Company stopped providing these services to most non-owned locations, closed its operator center in November 1999 and began utilizing the services of third-party owned operator centers. As such, revenues generated from postpaid services declined from $7.2 million in fiscal 1999 to $3.6 million in fiscal 2000. During fiscal 2000, we processed approximately 50,000 calls from Mexico as compared to approximately 160,000 in fiscal 1999.
Fiber optic lines installed during fiscal 2000 have also reduced satellite- based private network demand in Mexico, causing us to reduce our focus on selling satellite-based private networks within Mexico. Private network revenues declined from $5.1 million in fiscal 1999 to $2.5 million in fiscal 2000 due to the loss of customers upon expiration or termination of their contracts.
In 1997, the Company acquired Sinfra, which owns licenses allowing the Company to transport traffic internationally on a packet-switched basis. Utilizing these licenses, the Company set up a satellite-based network between San Antonio, Texas and Monterrey and Mexico City, Mexico. The Company also leased fiber optic capacity between San Antonio, Dallas, Monterrey and Mexico City in July 1999. Together, these two networks represent the Company's fixed costs of operation today. Armed with this hybrid network, the Company has focused its efforts during the past two years on maintaining its retail presence of payphones and communications centers in Mexico, and adding third party traffic to its network between the U.S. and Mexico. As such, integrated prepaid traffic from its Mexican locations has remained relatively constant during the past three years, and the amount of wholesale carrier traffic transported by the Company has increased dramatically during this time frame. However, increased fiber optic capacity into the major metropolitan areas of Mexico has resulted in pricing pressures and much lower per-minute revenues for carrier services. Large increases in volumes have resulted in comparatively smaller revenue increases, and lower margins on carrier services. While the number of minutes of carrier traffic processed by the Company increased by 146% from 78.6 million minutes in fiscal 1999 to 193.4 million minutes in fiscal 2000, revenues increased by only 57% from $14.1 million in fiscal 1999 to $22.2 million in fiscal 2000.
All of the above revenues are included in our U.S. Telco results in Footnote 12 in the accompanying financial statements as external revenues with the exception of approximately $483,000 of private network service revenues and $535,000 of postpaid service revenues included in our external Mexico Telco results.
Integrated prepaid service revenues, which are generated by calls processed by us without live or automated operator assistance, increased only 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 currency in Mexico. While the number of these calls and consequently the pesos collected increased slightly between years, those pesos converted into more U.S. dollars during fiscal 2000 as the average exchange rate between years went from 9.77 pesos to the dollar for fiscal 1999 to 9.50 pesos to the dollar for fiscal 2000. During fiscal 2000, we generated approximately $70,000 in revenues from the sale of other companies' services, primarily prepaid calling cards and prepaid cellular packages. These revenues, included in integrated prepaid, were generated in the U.S. and Mexico communication centers. With the exception of approximately $24,000 of retail service revenues included in our U.S. Telco results as external revenues, all of the above revenues are included in our Mexico Telco results.
Revenues from GlobalSCAPE, Inc., our e-commerce subsidiary, increased by approximately $2.5 million or 94% between years. This growth was due primarily to the increased number of downloads and registrations of products between periods. Downloads and registrations grew from nearly 4.1 million and 93,000 in fiscal 1999 to approximately 10.8 million and 183,000 in fiscal 2000, respectively. The increase in downloads has resulted in a corresponding increase in our revenues as downloads serve as the primary driver of revenues in coming months as well as increasing the target audience for banner advertisements.
Cost of Services. Cost of services increased approximately $5.5 million or 26% between years from $21.3 million in fiscal 1999 to $26.8 million in fiscal 2000, and increased as a percentage of revenues from 62% to 68%. The increase in cost of services was principally attributable to the increased volume of carrier service business. The shift toward prepaid services away from postpaid services, which historically were sold at high premiums, in Mexico has also contributed to lower margins. Our carrier services business is exclusively accounted for in our U.S. Telco segment. Carrier services revenues increased from 41% to 57% of overall corporate revenues, period to period. During this timeframe, variable and fixed costs associated with the Company's carrier services business increased, causing margins to decrease. This resultant change in our traffic mix was the primary contributor to an increase in the combined telco operations cost of services from 66% to 78% from fiscal 1999 to fiscal 2000. As long as wholesale carrier services comprise a large percentage of our revenues, the trend of decreasing margins as a percentage of revenues will continue unless the Company is able to negotiate lower costs with its underlying carriers in Mexico, or is able to extend its network under its long distance concession to decrease its reliance on the underlying carriers. As such, we continue to desire to produce retail growth, with a desired ultimate retail/wholesale mix of 70% retail and 30% wholesale. We cannot estimate when we will be able to achieve this desired mix.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses increased 18%, or approximately $2.2 million from fiscal 1999 to fiscal 2000. As a percentage of revenue, these expenses increased slightly from 37% to 38%. The increase in SG&A was primarily due to added costs incurred by GlobalSCAPE to support the introduction of new products into the market, professional fees related to SEC filings at both GlobalSCAPE and the Company, and personnel growth within GlobalSCAPE as it prepared to spin-off from ATSI. GlobalSCAPE's increase in SG&A costs from fiscal 1999 to fiscal 2000 was approximately $1.5 million. SG&A costs associated with our telco businesses increased approximately $748,000 between periods. The increase is attributable to the opening of communication centers in the U.S., costs related to our American Stock Exchange listing in February 2000, professional fees related to SEC filings and merger and acquisition services, and rent expense as a result of moving the corporate location. These costs have been included in the SG&A expenses of our U.S. Telco segment. Non-cash expenses, related to our option plans, decreased from approximately $545,00 in fiscal 1999 to $346,000 in fiscal 2000.
Bad Debt Expense. Bad Debt Expense significantly decreased from fiscal 1999 to fiscal 2000 by approximately $1.4 million. In the fourth quarter of fiscal 1999, we incurred approximately $1.5 million of bad debt expense through the establishment of reserves related to specific wholesale and private network customers.
Depreciation and Amortization. Depreciation and amortization rose approximately $1.4 million, or 44%, and rose as a percentage of revenues from 9% to 12% between years. The increased depreciation and amortization is attributable to an approximate $2.0 million increase in fixed assets between years as well as increased amortization related to acquisition costs, trademarks and goodwill. The Company also began providing additional depreciation expense as a result of a change in
accounting estimate for useful lives within its Mexican subsidiaries. Additionally, the Company fully depreciated approximately $165,000 of our fixed assets for which we believe there are no associated future benefits.
Operating Loss. Our operating loss increased approximately $2.8 million from 1999 due primarily due to increased cost of services as both a percentage and in actual dollars, increased SG&A and increased depreciation and amortization, all of which were discussed above.
Other Income(expense). Other income (expense) increased approximately $525,000 between years. This increase was principally attributable to additional debt discount expense associated with the Company's conversion of convertible notes and a note payable during fiscal 2000. Other increases in interest expense are a result of increased indebtedness and capital leases.
Preferred Stock Dividends. During fiscal 2000, we recorded approximately $7.1 million of non-cash expense related to cumulative convertible preferred stock. In addition to cumulative dividends on our Series A, Series B, Series C, and Series D Preferred Stock, which are accrued at 10%, 6%, 6%, and 6%, respectively, we have recorded approximately $6.7 million related to the discount or "beneficial conversion feature" associated with our various preferred stock issuances. Accounting rules call for us to amortize as a discount the difference between the market price and the most beneficial conversion price to the holder over the lesser of the period most beneficial to the holder or upon exercise of the conversion feature. Due to increases in our stock price at the time such issuances occurred this "beneficial conversion feature" has in some instances been substantial. The period over which this amortization is recorded ranges from immediately for our Series D Preferred Stock to one year for our various Series A Preferred Stock issuances. The proceeds of the preferred stock issuances during fiscal 2000 were approximately $5.7 million. As of July 31, 2000, we had approximately $335,000 of discount recorded related to the beneficial conversion features of our Series A Preferred Stock issued in December 1999 which will be amortized over the next four months.
Net income (loss.) Net loss increased from approximately $7.6 million to $17.1 million between years. The increase in net loss was due primarily to increased cost of services as a percentage of revenues, increased SG&A expense, increased depreciation and amortization and increased preferred stock dividend expense between years.
Year ended July 31, 1999 Compared to Year Ended July 31, 1998
Operating Revenues. Operating revenues were relatively flat between fiscal 1999 and fiscal 1998, due primarily to the decline in postpaid services, which was offset by the growth in carrier services, private network and Internet e- commerce services.
Network services, which includes both retail and wholesale transport services, increased 44%, or $5.9 million, from 1998 to 1999. Carrier service revenues derived 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 proportional increase in revenues as competitive and other market factors caused our revenue per minute to decline from period to period. Our fourth quarter 1998 agreement with Satelites Mexicanos, S.A. de C.V., or ("SATMEX"), 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 12 in the accompanying financial statements as
external revenues with the exception of approximately $467,000 of private network revenues included in our external Mexico Telco results.
Postpaid service revenues decreased approximately $6.7 million, or 48%, between fiscal 1998 and fiscal 1999. This decline is principally attributable to our strategy of focusing 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. During fiscal 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 12 in the accompanying consolidated financial statements with the exception of approximately $465,000 of postpaid service revenues included in our Mexico Telco results.
Integrated prepaid service revenues, which are generated by calls processed by us without live or automated operator assistance, declined approximately $350,000, or 6% 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. 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. All of the above revenues are included in our Mexico Telco results.
Revenues from GlobalSCAPE 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 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 a majority of our postpaid call services products are accounted for 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 the exchange of shares between ATSI-Canada and ATSI-Delaware. 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 as a result of the delay of fiber capacity available to us.
In the fourth quarter of 1999, we began to further integrate our two primary operating subsidiaries in our Mexico Telco segment, Computel and ATSI-Mexico, as we continued to seek ways to lower our SG&A expenses. 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 have reserved for these customers, we are 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 9% 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.
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 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 $197,000 included as private network revenues in our Mexico Telco results.
Postpaid service revenues increased approximately $1.3 million, or 10%, 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 $327,000 of revenues included in Mexico Telco results, all of the remaining revenues are included as external revenues in our U.S. Telco results.
Integrated prepaid services, calls processed in exchange for cash without utilizing our operator center in San Antonio, Texas, increased 306% from approximately $1.4 million in fiscal 1997 to approximately $5.8 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.
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 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.
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.
Because the Company has not been producing positive cash flows from operations, it is still reliant on outside debt and/or equity sources to fund its past and current operations, as well as its near term growth. Although the Company signed a $10.0 million funding commitment in October 2000 and immediately received $2.5 million in cash proceeds, the Company must achieve certain objectives, some of which are not in its direct control, in order to receive the remaining $7.5 million. One of the terms to be met is a $5 million equity investment by a second investor, acceptable to the first investor. The first investor also has the right to invest up to an additional $8.0 million during the term of the agreement. In summary, even though the Company has received only $2.5 million to date, total cash proceeds under the arrangement, ignoring warrants awarded as part of the arrangement, could reach $23.0 million. Company management is optimistic that additional funding will take place under the arrangement as
objectives are met. However, we cannot assure you that we will receive any of the funds beyond the original $2.5 million in proceeds.
Because of the uncertainties regarding the Company's current funding arrangement, as well as the current status of the public equities markets, particularly in regards to telecommunications companies, the Company has developed a business plan through January 31, 2001 designed to preserve cash balances. Subsequent to July 31, 2000, the Company has reduced the number of employees in both the U.S. and Mexico in an effort to minimize cash outflows for the near term. The majority of revenues under this plan will come from the future sale of wholesale carrier services.
As mentioned earlier, the Company is also evaluating the speed and the extent to which it will extend its network infrastructure in Mexico under its long distance concession. If additional cash inflows are not received under the current funding arrangement described above, or from alternative sources, the buildout will be limited. However, the Company has ordered equipment which will enable it to expand its available capacity to carry both retail and wholesale carrier traffic. Although margins on carrier traffic have continued to decline subsequent to July 31, 2000, as of November 2000 the Company has been able to negotiate lower rates with its underlying carriers in Mexico in order to reduce its cost of operating. Management is optimistic that this will enable it to enhance margins in the near term and thereby produce additional cash flows from operations. Additionally, under its long distance concession, the Company should be able to reduce its dependence over time on underlying carriers, and lower its costs by interconnecting directly to local service providers in Mexico. Mexican regulators recently announced that these interconnection rates will be lowered by more than 60% in calendar 2001. We cannot assure you that we will be able to sell any, or additional carrier services minutes at higher margins in the future.
The Company also anticipates that Genesis, based on historical results and current predictions, will produce positive cash flows from operations after being acquired by the Company. Near term growth of the Company's retail services offerings is, in large part, contingent upon the closing of the acquisition of Genesis.
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 fiscal 2000 of approximately $4.7 million. The amount of cash used in our operations is a result of the net loss incurred during the period, the timing of cash receipts from our customers, as well as activities related to payments to vendors. We have historically operated with negative cash flows and have sought to fund those losses and deficits by completing private equity placements.
For fiscal 2000, our net loss, after adjustments for non-cash items (depreciation and amortization, amortization of debt discount, deferred compensation and the provision for losses on accounts receivable) was approximately $3.7 million. Management of the operating assets and liabilities, which consists mainly of collections on accounts receivable and payments made on outstanding payables and accrued liabilities, produced negative cash flows of approximately $1.0 million, resulting in the negative cash flows for the period of $4.7 million. Although we have produced negative earnings before interest, taxes, depreciation and amortization ("EBITDA") of approximately $3.2 million during the year ended July 31, 2000, cash raised from private equity issuances (discussed below) has allowed us to reduce our combined accounts payable/accrued liabilities balance by approximately $1.1 million between July 31, 1999 and July 31, 2000.
Until we are able to produce positive cash flows from operations on a recurring basis, management will be faced with deciding whether to use available funds to pay vendors and suppliers for services necessary for operations, to service its debt requirements, or to purchase equipment to be used in the growth of our business. Until then, our operating activities may result in net cash being used, or provided, regardless of our income statement results. As noted in this Form 10-K 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.
During the year ended July 31, 2000, we received cash proceeds, net of issuance costs, of $5.7 million from the issuance of preferred stock, and $4.9 million from the issuance of common stock as a result of warrant and option exercises. These funds were used to pay down outstanding payables balances, to make payments on our debt and capital lease obligations, and to purchase approximately $2.0 million in equipment, including furniture, equipment and leasehold improvements associated with both ATSI and GlobalSCAPE's moves to new office space during fiscal 2000. Additionally, in January 31, 2000, we converted approximately $2.9 million in outstanding notes and accrued interest which had been classified as a current liability into common stock of the Company. The net result of our operating, investing and financing activities was an increase in cash during the period of $1.2 million and negative working capital at July 31, 2000 of approximately $5.3 million. This represents a $1.6 million improvement over our working capital deficit of $6.9 million at July 31, 1999.
Our current liabilities as of July 31, 2000 were approximately $10.7 million. Included in our current obligations, are notes payable and convertible debt of approximately $833,000, $500,000 of which was originally due October 31, 2000 but has been extended an additional 30 days. Additionally, we have approximately $3.4 million of current capital leases and approximately $6.3 million of accounts payable and accrued liabilities. 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.
As of July 31, 2000, we were in default of financial covenants related to revenues, gross margins and EBITDA with NTFC Capital Corporation, which provided a long-term capital lease of approximately $2.0 million for our international gateway switch in Dallas, Texas. We have requested and received a waiver of those requirements as of that date. Based upon our results before and after the period ended July 31, 2000, we will most likely be in default of these same covenants at the end of our next fiscal quarter October 31, 2000. As such, we have requested that NTFC review our current business plan, including expected results and capital requirements, in order to re-set the financial covenants applicable to its capital lease obligation and prevent events of default from occurring on a quarterly basis going forward. Based on discussions with NTFC, management believes it is probable that NTFC will re-set the financial covenants after it has completed its review of this information. As of July 31, 2000, we have classified the entire obligation due as a current liability in the accompanying financial statements.
On October 2000, we issued 2,500 shares of Series E Preferred Stock resulting in cash proceeds of approximately $2.5 million. Subject to the satisfaction of certain conditions, we may issue an additional 7,500 shares of Series E Preferred Stock resulting in additional cash proceeds of approximately $7.5 million. We cannot assure you that we will be able to fulfill the outstanding conditions and receive the additional $7.5 million of cash proceeds. The terms of the Series E Preferred Stock are very similar to that of our Series B, C and D Preferred Stock and are explained in more detail
in footnote 8 of the Notes to Consolidated Financial Statements. The terms of the series E preferred stock and the related warrants include many potentially adverse effects for us and our shareholders as described in the Risk Factors section of this Form 10-K. 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 the near term, we must continue to manage our costs of providing services and overhead costs as we begin focusing on optimizing use of our network. In July 2000, we announced that we had acquired a Mexican company which holds a long distance concession license in that country, which we believe will eventually allow us to significantly reduce our cost of transporting services. The terms of the agreement called for us and our Mexican affiliates to purchase 100% of the stock of Grupo Intelcom de Mexico, S.A. de C.V. from Alfonso Torres Roqueni (a 51% stockholder) and COMSAT Mexico, S.A. de C.V. (a 49% stockholder) for a total purchase price of approximately $4,176,000 consisting of $755,000 in cash, $500,000 in the form of a note payable, which was paid off prior to July 31, 2000, 400,000 shares of our common stock and 100,000 warrants at $6.00 for a period of three years. At July 31, 2000, Grupo Intelcom had total assets of approximately $10,000 and a net loss for the seven months ending July 31, 2000 of approximately $8,000. In order for us to significantly reduce costs with the concession, we will need to purchase a significant amount of hardware and software, allowing us to expand and operate our own network in Mexico. This expansion of our network will allow us to reduce our origination and termination costs through the elimination of interconnection costs we currently pay to other concessionaires. We are evaluating the speed, and the extent, of our planned network buildout in an effort not to overextend ourselves financially. Operationally, we can choose how and where to extend our network into niche areas with proven demand for services to provide the best impact on our financial condition, cash flows and earnings.
We believe that these capital expenditures may approximate up to $60 million over a five-year period. We will likely need to raise these funds through additional debt and/or equity capital.
On April 14, 2000, in anticipation of these and future funding requirements, and to meet our current cash flow needs, we signed an agreement with a private equity fund, under which the fund agreed to purchase up to 5,000,000 shares of our common stock over an eighteen-month period at 92% of the market price for our common stock at the time of purchase. We have no initial commitment to draw on the facility, but may do so based upon average trading volumes on an as-needed basis as often as every twenty days, subject to certain restrictions. If we use this facility we must issue the investor warrants for 1,500 shares of common stock for every $100,000 that is invested at an exercise price of 120% of the average of the five closing sale prices preceding the date of the investment, and an additional 1,000 warrants per $100,000 invested as a finder's fee on the same terms. The amount of funds to be generated under the facility for us will depend on the price of ATSI's common stock at the time each draw is executed. Before we can draw on the facility, any shares to be issued under the facility must be registered with the Securities and Exchange Commission. As of November 1, 2000, no registration statement had been filed to do so.
As planned, we continued to shift 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 63% of overall corporate revenues during the year. We continue to
experience market pressures on our carrier services business. In order to produce better cash flows, we must focus on keeping our international network between Mexico and the U.S. optimally utilized with a blend of retail and wholesale traffic. However, we anticipate that pricing pressures will continue in our wholesale transport market, so it will focus our efforts on implementing a retail strategy which targets the growing and underserved Latino markets in both the U.S. and Mexico. Although management does not expect improved results from this effort until the latter stages of fiscal 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.
Consistent with our shift towards a more retail-oriented strategy, on June 14, 2000, we announced that we signed a definitive agreement to acquire privately held San Diego, California-based Genesis Communications International, Inc. ("Genesis") in exchange for approximately $37.3 million in shares of ATSI common stock. Closing of the transaction is contingent upon, among other things, required U.S. regulatory approval and approval by the Genesis shareholders. In accordance with the agreement, the number of shares to be issued upon consummation of the transaction will vary depending on the average of the closing price of our common stock for the ten days preceding closing, between an agreed range of approximately 4.7 million to 9.6 million shares.
Over the past five years, Genesis has successfully penetrated the Latino markets in the United States and has captured a customer base consisting of 65,000 long distance customers and 10,000 local service customers. Genesis is certified as an inter-exchange carrier ("IXC") in California, Colorado, New Jersey, Nevada, New Mexico, Oregon, Illinois, Florida, New York, Utah and Texas. Genesis is also certified as a local exchange carrier ("CLEC") in California, Arizona, Nevada, New Mexico, New Jersey, Oregon, Florida, New York and Texas. For the year ended December 31, 1999, Genesis produced revenues of approximately $24.1 million, EBITDA of approximately $1.6 million and net income before taxes of approximately $570,000. Through July 31, 2000, Genesis has continued to produce positive EBITDA. We cannot assure that it will continue to produce positive EBITDA. Based on Genesis's historical performance, ATSI management believes that, if the transaction is consummated, the acquisition of Genesis will enhance our cash flows and will be accretive to earnings.
Going forward, the Company hopes to improve its performance during the next year primarily by consolidating the Genesis customer base and operations in the U.S. with its own Mexico-based retail customer base and operations, and by extending its own network between its customers utilizing its long distance concession in order to better control its costs of doing business. The Company would also like to increase and integrate its service offerings on a retail basis on both sides of the U.S.-Mexico border. However, neither of these objectives can be satisfied fully in the near term without first closing on the Genesis transaction.
On September 12, 2000, we completed the distribution of a portion of our ownership in our wholly owned subsidiary GlobalSCAPE to our shareholders. The distribution was part of a previously announced plan to distribute or spin-off a portion of our ownership in GlobalSCAPE contemporaneously with a public offering of GlobalSCAPE, in order to raise funds for GlobalSCAPE's growth and ATSI's general corporate purposes. GlobalSCAPE and ATSI decided not to make a public offering of GlobalSCAPE common stock contemporaneously with the distribution in light of current market conditions. We are still evaluating different ways to potentially benefit financially by giving up some, or all of our current ownership in GlobalSCAPE. Because GlobalSCAPE currently contributes significantly to our consolidated EBITDA results, we expect our consolidated operating and cash flow results to decline after the distribution and offering, if one is made.
Inflation/Foreign Currency
Inflation has not had a significant impact on our operations. With the exception of integrated prepaid services from our communication centers and coin operated public telephones, almost all of our revenues are generated and collected in U.S. dollars. 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 attempt to convert pesos collected to U.S. dollars quickly and attempt to maintain minimal cash balances denominated in pesos. Some expenses related to certain services provided by us are incurred in foreign currencies, primarily Mexican pesos. The devaluation of the Mexican peso over the past several years has not had a material adverse effect on our financial condition or operating results.
Seasonality
Although it is not a significant portion of our overall revenues our postpaid services revenues are typically higher on a per phone basis during January through July, the peak tourism months in Mexico.
Year 2000 Compliance
Prior to January 1, 2000 we initiated a program to identify and address issues associated with the ability of our date-sensitive information, telephony and business systems to properly recognize the year 2000 in order to avoid interruption of the operation of these systems at the turn of the century. We expended approximately $100,000 in our efforts to ensure readiness for year 2000 issues. As of October 31, 2000, we have experienced no problems associated with Year 2000 issues, that have caused a disruption in our normal business operations, within our internal systems or the systems of our external vendors or customers.
Market Risk
We are subject to several market risks. Specifically, we face commodity price risks, equity price risks and foreign currency exchange risk.
Commodity Price Risk --------------------
Certain of our businesses, namely wholesale carrier services, operate in an extremely price sensitive environment. The wholesale business over the past twelve months has seen significant reductions in the price per minute charged for transporting minutes of traffic. While we have been able to withstand these pricing pressures, certain of our competitors are much larger and better positioned to continue to withstand these price reductions. Our ability to further absorb these price reductions may be dependent on our ability to further reduce our costs of transporting these minutes.
Equity Price Risks ------------------
Until such time as we are able to consistently produce positive cash flows from operations, we will be dependent on our ability to continue to access debt and equity sources of capital. While recent history has shown us capable of raising equity sources of capital; future equity financings and the terms
of those financings will be largely dependent on our stock price, our operations and the future dilution to our shareholders.
Foreign Currency Exchange Risk ------------------------------
We face two distinct risks related to foreign currency exchange risk; transaction risk and translation risk.
As previously discussed under the caption "Inflation", we face risks related to certain of our revenue streams, namely, integrated prepaid services from our own Mexican communication centers and payphones and the transacting of business in pesos as opposed to U.S. dollars. Historically, we have been able to minimize foreign currency exchange risk by converting from pesos to U.S. dollars quickly and by maintaining minimal cash balances denominated in pesos. As we grow our retail business in Mexico it is likely that we will face increasing foreign currency transaction risks.
Historically, we have recorded foreign currency translation gains/losses due to the volatility of the peso exchange rate as compared to the U.S. dollar over time. We anticipate we will continue to experience translation gains/losses in our assets and liabilities, specifically in fixed assets which are accounted for at historical pesos amounts on the books of our Mexican subsidiaries but converted to U.S. dollars for consolidation purposes at current exchange rates.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American TeleSource International, Inc.:
We have audited the accompanying consolidated balance sheets of American TeleSource International, Inc. (a Delaware corporation) and subsidiaries (the Company) as of July 31, 1999 and 2000, and the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for the years ended July 31, 1998, 1999 and 2000. These financial statements are the responsibility of Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. 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, 1999 and 2000, and the results of their operations and their cash flows for the years ended July 31, 1998, 1999 and 2000, in conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company 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 the Company's ability to continue as a going concern. The Company'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 the Company be unable to continue as a going concern.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas September 29, 2000
AMERICAN TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share information)
The accompanying notes are an integral part of these consolidated financial statements.
AMERICAN TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
AMERICAN TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements
AMERICAN TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
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 American Stock Exchange ("AMEX") under the symbol "AI".
Through our subsidiaries, we provide retail and wholesale communications services within and between the United States (U.S.) and select markets within Latin America. Utilizing a framework of licenses, interconnection and service agreements, network facilities and distribution channels, our intentions are 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, 2000, our operating subsidiaries are as follows:
ATSI Comunicaciones, S.A. de C.V., ("ATSI-COM" a Mexican corporation) ---------------------------------------------------------------------
Utilizing our 30-year license which we acquired in July 2000, ATSI-COM provides long distance services and the right to interconnect with local providers in Mexico. See discussion of acquisition of this concession license in Note 11.
American TeleSource International, Inc. ("ATSI-Texas" a Texas corporation) --------------------------------------------------------------------------
ATSI-Texas contracts with third-party operator services for the providing of postpaid services from public telephones and communication centers owned by our subsidiaries in Mexico, as well as some third party-owned public telephones, communication centers and hotels in Mexico. Although these calls originate in Mexico, they are terminated and billed in the United States and Mexico through agreements that ATSI-Texas has with these third party entities. Additionally, ATSI-Texas contracts with third parties on behalf of TeleSpan and Sinfra for some carrier services and private network contracts.
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 which expires in February 2017, ATSI purchases telephone lines and resells local, long distance and international calls from public telephones connected to the lines. Direct dial, or integrated prepaid 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.
Sistema de Telefonia Computarizada, S.A. de C.V( "Computel"a Mexican -------------------------------------------------------------------- corporation) ------------
Computel is the largest private operator of communication centers in Mexico, operating approximately 136 casetas in 66 cities. Direct dial calls may be made from the communication centers 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.
Servicios de Infraestructura, S.A. de C.V ("Sinfra"a Mexican corporation) --------------------------------------------------------------------------
Utilizing our 15-year Teleport and Satellite Network license which expires in May 2009, 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 20-year Packet Switching Network license which expires in October 2014.
TeleSpan, Inc. ("TeleSpan" a Texas corporation) -----------------------------------------------
TeleSpan owns and operates our teleport facilities in the U.S. 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"). See Note 18 related to the distribution of a portion of ATSI's ownership in GlobalSCAPE.
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.
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, 2000, we have incurred cumulative net losses of $39.1 million. We had a working capital deficit of $6.9 million at July 31, 1999 and $5.3 million at July 31, 2000 and we had negative cash flows from operations of $.4 million, $3.9 million and $4.7 million for the years ended July 31, 1998, 1999 and 2000, 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 accounting principles generally accepted in the United States (GAAP). 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 accounting principles generally accepted in the U.S. 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 integrated prepaid and postpaid services as such services are performed, net of unbillable calls. Revenue from carrier services and private network contracts are 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 customer and from equipment installation projects when they are completed. Revenues related to our Internet products 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. Post-contract customer costs approximated $22,000, $33,000 and $58,000 at July 31, 1998, 1999 and 2000, respectively.
Foreign Currency Translation ----------------------------
Until January 1, 1999, Mexico's economy was designated as highly inflationary. GAAP requires the functional currency of highly inflationary economies to be the same as the reporting currency. Accordingly, the consolidated financial statements of all of our Mexican subsidiaries, 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 these subsidiaries 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 Mexico 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 the operating activity of these Mexican subsidiaries remeasured into U.S. dollars using a weighted average exchange rate. The effect of these translation adjustments are reflected in the other comprehensive income account shown in stockholders' equity.
Restricted Cash ---------------
In the year ended July 31, 2000, we issued a Letter of Credit (LOC) secured by Certificates of Deposit to our provider of satellite transmission capacity, SATMEX, S.A. de C.V., ("SATMEX") in the amount of $250,000 to secure outstanding amounts payable to them. As of July 31, 2000, SATMEX has not drawn down on the LOC.
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, 1999 and 2000. 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 1998, 1999, and 2000 were $11,127,221, $6,138,549 and $2,858,574 respectively. At July 31, 1998, 1999 and 2000, $484,381, $444,398 and $227,793 of such receivables were uncollected, respectively. See Note 5 for additional disclosure regarding advanced funding.
In fiscal 1998, the Company 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 servicing of financial assets, such as factoring receivables with recourse. The adoption of these statements has not had a material impact on the financial position or results of operations of the Company.
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 year ended July 31, 1999, this netting of IVA accounts resulted in the elimination of IVA payable, a corresponding reduction in IVA receivable of approximately $1.2 million and a net IVA receivable of $85,000. For the year ended July 31, 2000, this netting of IVA accounts resulted in the elimination of IVA receivable, a corresponding reduction in IVA payable of approximately $225,000 and a net IVA payable of $228,000.
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, 1998, 1999 and 2000. 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. We have also 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 three 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, 2000, 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, Concession License, Contracts, Trademarks and Other Assets --------------------------------------------------------------------
At July 31, 1999 and 2000, other assets consisted primarily of goodwill, trademarks and acquisition costs with the exception of concession license costs which were incurred for the first time in the year ended July 31, 2000. For the years ended July 31, 1999 and 2000, goodwill, primarily related to the purchase of Computel, was $5,296,646 and $5,310,490, respectively, net of accumulated amortization of $265,089 and $408,908, respectively. Goodwill is amortized over 40 years. Concession license costs related to our acquisition in the fourth quarter of fiscal 2000 of Grupo Intelcom, S.A. de C.V., a Mexican company that held a concession license, were approximately $4,421,931. The concession license costs are being amortized over 28 years, the remaining life of the concession license. As of July 31, 1999 and 2000, acquisition costs were $1,596,620, related to our acquisition of several independent marketing representatives, net of accumulated amortization of $893,212, and $1,596,620, respectively. Acquisition costs were fully amortized as of July 31, 2000. As of July 31, 1999 and 2000, other assets included $898,943 related to the purchase of the rights to CuteFTP, net of accumulated amortization of $110,352 and $329,096, respectively. This trademark is being amortized over an estimated five-year life. As of July 31, 1999 and 2000, other assets also included approximately $615,000 and
$502,000, not identified as goodwill, concession license, acquisition costs or trademarks. As it relates to SFAS 121, as of July 31, 2000, we have determined that the estimated future cash flows associated with our goodwill, concession license, 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, 1998, 1999 and 2000, we recorded amortization expense of $369,219, $925,440 and $1,075,566, 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.
Research and Development ------------------------
Our subsidiary, GlobalSCAPE, Inc. incurs Research and Development Expenses. These research and development expenses include all direct costs, primarily salaries for Company personnel and outside consultants, related to the development of new products and significant enhancements to existing products and are expensed as incurred until such time as technological feasibility is achieved. For the years ended July 31, 1998, 1999 and 2000, research and development expenses were $0, $101,716 and $414,541, respectively.
Statements of Cash Flows ------------------------
Cash payments and non-cash investing and financing activities during the periods indicated were as follows:
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.
New Accounting Pronouncements -----------------------------
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which provides the SEC's views in applying accounting principles generally accepted in the U.S. to selected revenue recognition issues. We have reviewed the guidance of this SAB and believe that our accounting policies and the disclosures in the consolidated financial statements and in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" are appropriate and adequately address the requirements of this SAB.
In June 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", an amendment of SFAS 133. SFAS 133 established accounting and reporting standards for derivative instruments, including certain derivative instruments imbedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS 138 amends the accounting and reporting standards of SFAS 133. The adoption of this statement has not had a material effect on the financial condition or results of operations of the Company.
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, 1999 and 2000:
Depreciation expense as reported in our Consolidated Statements of Operations includes depreciation expense related to our capital leases. For the years ended July 31, 1998, 1999 and 2000, we recorded approximately $1,453,000, $2,323,000 and $3,605,0000, respectively of depreciation expense related to our fixed assets. The Company reviewed its' depreciable lives among its telecommunication assets in Mexico and the U.S. and made a downward revision of the estimated lives of telecommunication assets in Mexico to conform with lives in the U.S. This change did not have a significant effect on the consolidated financial statements of the Company.
5. NOTES PAYABLE AND CONVERTIBLE DEBT
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. In November 1999, we paid off the remaining amounts due under the arrangement. The financing company now claims that we owe them an additional $14,000. We believe the amount claimed by the financing company is in error and that the billing clearinghouse has, in fact, paid approximately $183,000 more to the financing company than what it is owed. Accordingly, we have a receivable in the amount of approximately $169,000 as
of July 31, 2000, included as a part of accounts receivable in the accompanying consolidated balance sheet. We continue to work with the financing company to resolve this dispute.
During February 1999, we entered into a note payable with an individual, for working capital purposes, in the amount of $150,000. Interest accrued at an interest rate of 12% per year, principal and interest due at maturity. The note originally matured in May 1999, but was extended until November 1999. During the year ended July 31, 2000, the note was paid off in full, including accrued interest.
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/TM/". (See Note 11). 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, 2000, the Lender's "Prime Rate" was approximately 9.50%.
During October 1999, one of our subsidiaries entered into a note payable with a bank, for working capital purposes, in the amount of $50,000. The note calls for principal payments of $1,000 per month for six months and $3,667 per month for twelve months. Interest accrues monthly at an interest rate of the Lender's "Prime Rate" plus 1%. At July 31, 2000, the Lender's "Prime Rate" was approximately 9.50%.
During February 2000, one of our subsidiaries entered into a note payable with a bank, for working capital purposes, in the amount of $70,000. The note calls for principal plus interest payments of $6,142 per month for twelve months. The principal plus interest payments are subject to changes based on the Lender's "Prime Rate" plus 1%. At July 31, 2000, the Lender's "Prime Rate" was 9.50%.
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 accrued interest at a rate of 12% per year until paid in full. The notes were paid off in full prior to July 31, 2000.
In January 1999, one of our subsidiaries entered into an agreement with an individual related to an acquisition of a computer software program known as "CuteFTP/TM/". (See Note 11). 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. The note was paid off in full prior to July 31, 2000.
The Company, through its acquisition of Computel, assumed notes payables to a taxing entity for various past due taxes. The notes have interest rates ranging from 8% to 15%, with scheduled monthly principal and interest payments of approximately $19,224. The notes were scheduled to mature between July 1999 and July 2001 and are collaterized by the assets of Computel. The Company is in negotiations with the taxing entity to exchange certain assets for a partial reduction or total elimination of its indebtedness.
The Company, through its acquisition of Computel, assumed notes payables to various banks in Mexico. The notes have interest rates ranging from 8% to 15%, with monthly principal and interest payments of approximately $3,000. The notes were originally scheduled to 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 balance of $20,730 remaining at July 31, 2000 matures during the fiscal year ended July 2001.
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. In January 2000, the noteholder converted the remaining note payable balance inclusive of principal, accrued interest and other fees into approximately 370,603 shares of common stock at a conversion price of $1.1844 per share of common stock.
Convertible Debt - ----------------
In January 2000, the note holders converted $2.2 million of convertible notes, originally issued in March and May of 1997, which would have been due in March 2000. The convertible notes' face value and accrued interest at the time of conversion was approximately $2.2 million and $700,000, respectively. At issuance, the convertible notes had 4,776,176 warrants to the convertible debt holders at an exercise price of $0.27 per share. Unamortized debt discount associated with the warrants at the time of conversion was approximately $106,000, which the Company fully expensed in January 2000. In January 2000, conversion of the notes resulted in the issuance of 726,257 shares of Common Stock related to the warrants, 716,424 of which were the aforementioned $0.27 warrants and 9,833 of unrelated $0.85 warrants against the face value and accrued interest owed them. The remaining convertible notes and accrued interest were converted into 2,262,329 shares of Common Stock.
In July 2000, we entered into a convertible note in the amount of $500,000, for working capital purposes. Interest accrues at a rate of 12% per annum and is payable upon maturity or conversion. The note originally matured October 31, 2000 but was extended 30 days with the option to extend for two additional thirty-day periods. Additionally, the note holder received 50,000 warrants to purchase shares of American TeleSource International, Inc. priced at 115% of market price on the date of note issuance. The warrants are exercisable for 3 years from the date of issuance. The fair value of the warrants was determined to be $4.22 per share and the Company assigned $211,000 to the value of the warrants in stockholder's equity. The Company has recorded the $211,000 as debt discount and is amortizing the discount over the term of the debt based on the effective interest rate. Principal outstanding as of July 31, 2000, net of debt discount is $289,000. The terms of repayment of the note is contingent upon a financing arrangement, which allows the note holder to elect payment in cash for all outstanding principal and interest, or to convert into shares of preferred stock on terms equivalent to a financing
arrangement. If a financing arrangement does not take place by maturity of the note, then all unconverted principal and accrued interest will convert into shares of American TeleSource International, Inc at the rate of $5.00 per share.
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 1998, 1999 and 2000, we also leased certain equipment under capital leasing arrangements. Rental expense under operating leases for the years ended July 31, 1998, 1999 and 2000, was $942,750, $2,952,710 and $4,713,240, respectively. Future minimum lease payments under the noncancelable operating leases at July 31, 2000 are as follows:
2001 $3,064,757 2002 1,980,530 2003 1,833,244 2004 584,597 2005 476,549 Thereafter 1,347,935 ---------- Total minimum lease payments $9,287,612 ==========
Capital Leases --------------
Future minimum lease payments under the capital leases together with the present value of the net minimum lease payments at July 31, 2000 are as follows:
2001 $ 4,553,407 2002 1,553,250 2003 1,271,970 2004 50,151 Thereafter - ----------- Total minimum lease payments 7,428,778 Less: Amount representing taxes (14,483) ----------- Net minimum lease payments 7,414,295 Less: Amount representing interest (1,496,951) ----------- Present value of minimum lease payments $ 5,917,344 ===========
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, 1999 and July 31, 2000 was approximately $3,826,000 and $3,120,000, respectively. As of October 31, 2000, we had not yet made our July payment for approximately $108,000. Per the terms of our agreement with IBM de Mexico they have the right to call all of the outstanding capital lease facility should we be in arrears with our monthly payment. Subsequent to July 31, 2000, IBM has agreed not to call the capital lease facility and has restructured our capital lease obligation by increasing our monthly payments due in calendar 2001. For this reason, the Company has not reclassified the capital lease obligation to current liabilities as of July 31, 2000.
In December 1998, we ordered a DMS 250/300 International gateway switch from Northern Telecom, Inc. at a cost of approximately $1.8 million. As of July 31, 1999, we entered into a capital lease transaction with NTFC Capital Corporation, ("NTFC") to finance the switch and an additional approximate $200,000 of equipment over a five and a half-year period with payments deferred for six months. Quarterly payments approximate $141,000 and the capital lease has an interest rate of approximately 12%. The lease facility requires that we meet certain financial covenants on a quarterly basis beginning October 31, 1999, including minimum revenue levels, gross margin levels, EBITDA results and debt to equity ratios. As of July 31, 2000, we are not in compliance with the financial covenants related to revenues, gross margins and EBITDA results. We have classified the entire capital lease in our accompanying consolidated balance sheet as a current liability. As in previous quarters we have requested and received a waiver for the non-compliance of the financial covenants and are actively working to restructure the covenants. 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. The obligation outstanding under said facility at July 31, 2000 was approximately $2,039,000. The additional $39,000 is interest incurred during the deferment period.
We secured a capital lease for approximately $500,000 in December 1998 for the purchase of Asynchronous Transfer Mode ("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%. The obligation outstanding under said facility at July 31, 1999 and July 31, 2000 was approximately $468,000 and $306,000, respectively.
7. DEFERRED REVENUE
We record deferred revenue related to the private network services provided. 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 recognize the service commencement revenue. At July 31, 1999 and July 31, 2000 we had approximately $233,000 and $167,000 of deferred revenues outstanding, respectively.
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, 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.
During the year ended July 31, 2000, we issued 18,723,692 common shares. Of this total, 8,469,825 shares were issued for approximately $6.3 million of net cash through the exercise of 8,469,825 warrants and options, 6,802,013 shares were issued as a result of the conversion of preferred shares, 2,632,929 were issued as a result of the conversion of convertible notes, 387,359 shares were issued for services rendered to us, 31,566 shares were issued to a shareholder in exchange for a guarantee of up to $500,000 of Company debt, and 400,000 shares were issued related to our acquisition of Grupo Intelcom, S.A de C.V as noted in Note 11. The shares issued for services rendered, the guarantee of Company debt, and the shares issued for our acquisition of Grupo Intelcom, S.A. de C.V. have not been registered by us, nor do we have any obligation to register such shares.
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 accounting principles generally accepted in the U.S.
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 common stock during the years ended July 31, 1998, 1999 and 2000.
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, 2000.
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 24,145 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. During the first and second quarter of fiscal 2000, the holder elected to convert all 2000 shares of its Series B Preferred Stock and accumulated dividends into shares of common stock resulting in the issuance of approximately 2,625,214 shares of common stock. Additionally, the holders of the aforementioned Series A Preferred Stock elected to convert all of their outstanding preferred shares and accumulated dividends into shares of common stock resulting in the issuance of approximately 3,616,231 shares of common stock.
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. In the quarter ended April 30, 2000, the holder elected to convert all 500 shares of Series C Preferred Stock and accumulated dividends into shares of common stock resulting in the issuance of approximately 492,308 shares of common stock.
In December 1999 and February 2000, we issued 1,425 shares and 1,000 shares, respectively, of Series A Preferred Stock for cash proceeds of approximately $1.4 million and $1.0 million, respectively. The Series A Preferred Stock accrues cumulative dividends at the rate of 10% per annum payable quarterly. As of July 31, 2000, we have accrued approximately $128,000 for dividends.
In February 2000, we also issued 3,000 shares of Series D Preferred Stock for cash proceeds of approximately $3.0 million. The Series D Preferred Stock accrues cumulative dividends at the rate of 6% per annum payable quarterly. As of July 31, 2000, we have accrued approximately $90,000 for dividends.
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. As these conversion features are considered a "beneficial conversion feature" to the holder, we allocated approximately $3.6 million of the approximate $5.0 million in proceeds to additional paid-in capital as a discount to be amortized over various periods ranging from ninety days to a twelve month period. As of July 31, 2000, approximately $335,000 of beneficial conversion feature remains to be amortized related to our December 1999 Series A Preferred Stock. 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 terms of our Series B Preferred Stock allowed for the conversion of the preferred shares and any accumulated, unpaid dividends to 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 this conversion feature is considered a "beneficial conversion feature" to the holder, we allocated approximately $1.1 million, of the $2.4 million in proceeds to additional paid-in capital as a discount to be amortized over a three-month period. As of July 31, 2000, no beneficial conversion feature remains to be amortized.
The terms of our Series C Preferred Stock allowed for the conversion of the preferred shares and any accumulated, unpaid dividends to 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 allocated approximately $139,000 of the proceeds to additional paid-in capital as a discount to be amortized over a three-month period, all of which was amortized during the year ended July 31, 2000.
The Series D Preferred Stock and any accumulated, unpaid dividends may be converted into Common Stock for up to two years at the lesser of a) the market price on the day prior to closing or b) 83% of the five lowest closing bid prices on the ten days preceding conversion. Consistent with the accounting for our Series A, Series B and Series C Preferred Stock, this is considered a "beneficial conversion feature" to the holder. We allocated all of the $3,000,000 in proceeds to additional paid-in capital as a discount to be amortized over the lesser of the period most beneficial to the holder or upon exercise of the conversion feature. The discount was amortized in its entirety during the quarter ended April 30, 2000.
The terms of our Series A, Series B, Series C, and Series D Preferred Stock restrict us from declaring and paying dividends on our common stock until such time as all outstanding dividends have been fulfilled related to collectively, the Preferred Stock.
The terms of our Series D Preferred Stock allow for mandatory redemption by the holder upon certain conditions. The Series D Preferred Stock allows the holder to elect redemption upon the change of control of ATSI at 120% of the sum of $1300 per share and accrued and unpaid dividends. Additionally, the holder may elect redemption at $1270 per share plus accrued and unpaid dividends if we refuse to honor conversion notice or if a third party challenges conversion.
The outstanding Series A and Series D Preferred Stock have liquidation preference prior to common stock and ratably with our recently issued Series E Preferred Stock, as discussed in Note 18.
On April 14, 2000, we signed an agreement with a private equity fund, under which the fund agreed to purchase up to 5,000,000 shares of our common stock over an eighteen-month period at 92% of the market price for our common stock at the time of purchase. We also issued 175,000 warrants as a finder's fee to the entities that introduced us to the equity fund at an exercise price of $7.17 per warrant. These warrants expire March 31, 2003. We have no initial commitment to draw on the facility, but may do so based upon average trading volumes on an as- needed basis as often as every twenty days, subject to certain restrictions. If we use this facility we must issue the investor warrants for 1,500 shares of common stock for every $100,000 that is invested at an exercise price of 120% of the average of the five closing sale prices preceding the date of the investment, and an additional 1,000 warrants per $100,000 invested as a finder's fee on the same terms. The amount of funds to be generated under the facility for us will depend on the price of ATSI's common stock at the time each draw is executed. Before we can draw on the facility, any shares to be issued under the facility must be registered with the Securities and Exchange Commission. As of November 14, 2000, no registration statement had been filed to do so.
In May 2000, the Board of Directors of our subsidiary, GlobalSCAPE, Inc. amended their certificate of incorporation to increase the number of authorized shares of capital stock which they had the authority to issue to 50,000,000 shares consisting of 40,000,000 shares of common stock, par value $0.001 per share and 10,000,000 shares of preferred stock, par value $0.001 per share. The Board of Directors also declared a 7.6 for 1 stock split of the outstanding shares of the issued and outstanding common stock. The effect of the split was to increase the outstanding shares from 1,700,000 shares to 12,920,000. At July 31, 2000, we held all of the outstanding shares of GlobalSCAPE's outstanding stock.
9. STOCK PURCHASE WARRANTS AND STOCK OPTIONS
During the year ended July 31, 2000, certain shareholders and holders of convertible debt were issued warrants to purchase shares of common stock at exercise prices ranging from $0.94 to $7.17 per share. Following is a summary of warrant activity from August 1, 1997 through July 31, 2000:
Warrants outstanding at July 31, 2000 expire as follows:
Number of Warrants Exercise Price Expiration Date - ------------------ -------------- ---------------------- 150,000 $4.37 February 22, 2002 30,000 $3.09 March 9, 2002 175,000 $7.17 March 31, 2003 100,000 $6.00 July 21, 2003 50,000 $5.46 July 25, 2003 50,000 $1.25 July 2, 2004 20,000 $1.19 September 24, 2004 106,045 $0.94 December 8, 2004
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 under the 1997 Stock Option Plan. 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.
Since December 16, 1998, the Board of Directors have approved the granting of an additional 254,000 in options to employees of ATSI.
A summary of the status of our 1997 and 1998 Stock Option Plans for the years ended July 31, 1998, 1999 and 2000 and changes during the periods are presented below:
The weighted average remaining contractual life of the stock options outstanding at July 31, 2000 is approximately 6.5 years for options granted under the 1997 Stock Option Plan and approximately 8 years for options granted under the 1998 Stock Option Plan.
In January 1998, the Board of Directors of our subsidiary, GlobalSCAPE, Inc. approved the 1998 Stock Option Plan (the Plan) for officers, other employees, directors and consultants of GlobalSCAPE. Under the terms of the Plan, up to 728,571 shares of the Company's common stock may be granted in the form of incentive stock options or non-qualified stock options, awarded, or sold to officers, other employees, directors and consultants. The Company awarded approximately 384,000 options under the Plan, which were subsequently cancelled in February 2000. The Company is currently in discussions with the previous option holders regarding the issuance of replacement options.
In May 2000, the Board of Directors of our subsidiary, GlobalSCAPE approved the 2000 stock option plan (the "Plan") for key employees, non-employee directors, and advisors of GlobalSCAPE. Under the terms of the Plan, up to 3,660,000 shares of the Company's common stock may be granted in the form of incentive stock options or non-qualified stock options. The maximum aggregate number of shares of common stock which may be granted to any optionee during the term of the Plan shall not exceed 2,000,000. The Plan provides that the purchase price per share for incentive stock options and non-qualified stock options shall not be less than the fair market value of the common stock on the date of grant. The maximum term for an option granted is ten years from the date of grant. As of July 31, 2000, no options have been granted under the 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 deferred compensation expense 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. We recorded additional deferred compensation expense 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, 1999 and July 31, 2000, we had $465,487 and $119,449, 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:
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 1998, 1999 and 2000: Dividend yield of 0.0%, expected volatility of 46%, 62% and between 104% - 141%, (depending on the time of grant) respectively, risk- free interest rate of 5.10%, 6.50% and 6.25%, respectively, and an expected life of ten years. The fair value of these options is being amortized over the three-year vesting period of the options.
10. EMPLOYEE BENEFIT PLAN
In January 1, 1999, the Company established a Retirement Plan, which is a qualified employee profit-sharing program. The purpose of the Plan is to provide a program whereby contributions of participating employees and their employers are systematically invested to provide the employees an interest in the Company and to further their financial independence. Participation in the Plan is voluntary and is open to employees of the Company who become eligible to participate upon the completion of a half-year of continuous service. The term of each Plan Year begins January 1 and ends December 31.
Participating employees may contribute from 2% to 15% of their total annual compensation, including bonuses, subject to certain limitations, including a $7,000 annual limitation, subject to inflation. Participants may elect to make these contributions on a before-tax or after-tax basis, or both, with federal income taxes on before-tax contributions being deferred until a distribution is made to the participant. Participants' contributions of up to 3% of their elective deferrals are matched 25% by the Company. Participant's contributions in excess of 3% of their annual compensation are not matched by the Company. The Employer may also
contribute an additional amount determined in its sole judgement. Such additional contribution, if any, shall be allocated to each Participant in proportion to his or her Compensation for the Plan Year while a Participant.
Subsequent to December 31, 1999, the Company made a matching contribution of approximately $9,600. No discretionary contribution was made for the Plan Year 1999.
11. ACQUISITIONS
As announced in June 2000, we have signed a definitive agreement to acquire Genesis Communications International, Inc., a privately owned telecommunications company for approximately $37.3 million, to be paid in shares of our common stock. The number of shares to be issued will vary depending on the average of the closing price of our common stock for the ten days preceding closing, with a stated minimum of 4.7 million shares and a stated maximum of 9.6 million shares.
The following unaudited pro forma results of operations, for the three years ended July 31, 2000, assumes the acquisition of Genesis occurred as of August 1, 1997. Such pro forma information is not necessarily indicative of the results of future operations. Although the Company believes the acquisition may qualify for treatment as a pooling-of-interests, in accordance with generally accepted accounting principles the following pro forma results were prepared assuming the transaction was accounted for as a purchase.
These unaudited pro forma results have been prepared for comparative purposes only and include certain adjustments such as the amortization of goodwill, the elimination of intercompany transactions and the elimination of certain personnel costs and professional fees related to the acquisition. We have valued the acquisition at $14,327,343 based on the issuance of 9,551,562 shares of our common stock at a stock price of $1.50 (our closing price on November 8, 2000). For purposes of this pro-forma disclosure we have assumed that the entire valuation will be accounted for as goodwill to be amortized over a period of twenty years.
The unaudited pro forma information is not necessarily indicative of the results that would have occurred had such transactions actually taken place at the beginning of the period specified nor does such information purport to project the results of operations for any future date or period.
In January 1999, GlobalSCAPE acquired the rights to the source code of a computer software program known as "CuteFTP/TM/". 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/TM/ in exchange for cash payments totaling approximately $190,000 in January and February 1999 and an additional $756,000 to be paid in twelve monthly installments.
In July 2000, we acquired Grupo Intelcom, S.A. de C.V., a Mexican company, which owned a long distance license issued by the Mexican government. The terms of the agreement called for us to purchase 100% of the stock of Grupo Intelcom from Alfonso Torres Roqueni (a 51% stockholder) and COMSAT Mexico, S.A. de C.V., (a 49% stockholder) for a total purchase price of approximately $4,176,000 consisting of $755,000 in cash, $500,000 in the form of a note payable, which was paid off prior to July 31, 2000, 400,000 shares of our common stock valued at approximately $2.5 million and 100,000 warrants exercisable at $6.00 for a period of three years and valued at approximately $440,000.
12. 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 our 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 we have determined that we have three reportable operating segments: (1) U.S. Telco; (2) Mexico Telco; and (3) Internet e-commerce. 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 even though 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.
13. INCOME TAXES
As of July 31, 2000, we had net operating loss carryforwards of approximately $15,512,000 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, $2,028,000 will expire in 2019 and $5,588,000 will expire in 2020. 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. It is likely that we have experienced an additional change in ownership in excess of 50 percent, during or subsequent to fiscal year-end 2000 which may further limit the annual utilization of NOL's goingforward.
The tax effects of significant temporary differences representing deferred income tax assets and liabilities are as follows as of July 31, 1999 and 2000:
July 31, 1999 July 31, 2000 ------------------ ------------------ Net operating loss carryforward $ 3,174,000 $ 5,274,000
Other tax differences, net 839,000 467,000
Valuation allowance (4,013,000) (5,741,000) ------------------ ------------------ Total deferred income tax assets $ - $ - ================== ==================
A valuation reserve of $4,013,000 and $5,741,000, as of July 31, 1999 and 2000, respectively, representing the total of net deferred tax assets has been recognized as we 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, 1998, 1999 and 2000.
14. 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 or fiscal 2000.
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 and fiscal 2000.
During fiscal 2000, 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. A bonus of $25,000 was declared by the Board of Directors for one of these officers during fiscal year 2000. As of October 31, 2000, the bonus has not been paid.
During fiscal 2000, three additional officers whose employment agreements were to expire January 1, 2001 were informed that their agreements would not be renewed.
Additionally, during fiscal 2000, two additional officers entered into employment agreements with ATSI-Delaware each for a period of one year unless earlier terminated. The annual base salaries under such agreements may not be less than approximately $75,000 and $150,000, 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.
15. 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.
During the year ended July 31, 1998, none of our customers had aggregated revenues greater than 10%. During the years ended July 31, 1999 and 2000, our carrier services business had two customers, whose aggregated revenues approximated 10% and 40%, respectively, of our total revenues. In addition, one customer generated revenues greater than 5% during the year ended July 31, 2000.
16. RELATED PARTY TRANSACTIONS
In February 2000, our Board of Directors approved a plan to lend approximately $1.5 million, at a market interest rate, in the aggregate to certain key executive officers to allow them to exercise approximately 2,250,000 of their vested options. The executive officers who borrowed under the plan must adhere to the following conditions: 1) they must contribute 10% in cash of the amount borrowed; 2) the stock obtained with the exercises must be escrowed under a twelve month standstill agreement or until such time as the note is paid; and 3) any derivative equity obtained from the stock's ownership must be escrowed for a six-month period. As of April 30, 2000, we had lent approximately $1.2 million to key executive officers allowing them
to exercise vested options. We recognized the transaction by recording a note receivable for each executive officer. As of July 31, 2000, the note receivable balance was approximately $1.1 million.
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. Subsequent to February 2000, the agreement was continued on a month-to-month basis until July 2000 when it was terminated.
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 and 2000, the companies were paid for services rendered of approximately $180,000 and $160,000, respectively. 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 accrued interest at a rate of 12% per year until paid in full. As of July 31, 2000, the notes were paid in full.
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 and July 31, 2000, we had a payable to Technology Impact Partners of approximately $74,000 and approximately $112,000, respectively.
On August 1, 2000 we entered into a consulting agreement with Charles R. Poole, former President and Chief Operating Officer of ATSI-Delaware, to perform certain consulting services for the period beginning August 1, 2000 and ending December 31, 2000 in the amount of approximately $10,583 per month.
17. LEGAL PROCEEDINGS
In January 1999, we terminated a wholesale carrier services contract with Twister Communications, Inc. for failure to pay for services rendered. On January 29, 1999, while we were attempting to collect payments from them, they filed a Demand for Arbitration seeking damages for breach of contract before the American Arbitration Association. 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 we filed a Demand for Arbitration seeking damages for breach of contract in an amount equal to the amounts due to us for services rendered plus interest, plus additional damages for fraud. Although an arbitration panel was initially selected, Twister has since filed for bankruptcy and has not pursued any discovery in this matter. We are monitoring the bankruptcy proceeding to determine whether we can recover a portion of the amount owed us.
We believe that we have a justifiable basis for our arbitration demand and that we will be able to resolve the dispute without a material adverse effect on our financial condition. Moreover, given the bankruptcy proceeding, we do not believe that Twister will pursue the arbitration. Until the arbitration proceedings are formally dropped or 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 signed in late 1998, PrimeTEC was to provide quality fiber optic capacity in January 1999. Mike Moehle is PrimeTEC's former president who negotiated the fiber lease and Vartec is PrimeTEC's parent, which was to provide the fiber capacity. The delivery of the route in early 1999 was a significant component of our operational and sales goal for the year and the failure of our vendor to provide the capacity led to our negotiating an alternative agreement with Bestel, S.A. de C.V. at a higher cost. 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.
18. SUBSEQUENT EVENTS
On September 12, 2000, we completed the distribution of a portion of our ownership in our wholly owned subsidiary GlobalSCAPE to our shareholders. The distribution was part of a
previously announced plan to distribute or spin-off a portion of our ownership in GlobalSCAPE contemporaneously with a public offering of GlobalSCAPE, in order to raise funds for GlobalSCAPE's growth and ATSI's general corporate purposes. GlobalSCAPE and ATSI decided not to make a public offering of GlobalSCAPE common stock contemporaneously with the distribution in light of current market conditions. We distributed approximately 3,444,833 of our 12,920,000 shares to our shareholders. The distribution represented approximately 27% of our ownership and does not include approximately 500,000 additional shares reserved to be distributed to shareholders of Genesis Communications International, Inc. pending the close of our acquisition of Genesis. The distribution did not generate any proceeds to ATSI or GlobalSCAPE and resulted in approximately $300,000 of expense to GlobalSCAPE for legal and accounting fees, printing and distribution costs.
In October 2000, we issued 2,500 shares of Series E Preferred Stock and warrants to purchase 909,091 shares of common stock for cash proceeds of approximately $2.5 million. Subject to the completion of certain conditions, we may issue an additional 7,500 shares of Series E Preferred Stock and warrants to purchase 2,727,273 shares of common stock for cash proceeds of approximately $7.5 million. The Series E Preferred Stock does not accrue dividends.
The conditions referenced above include: a) the closing of the Company's acquisition of Genesis Communications International, Inc. b) registration of the Common Stock underlying the Series E Preferred Stock and Warrants and c) an investment in ATSI by an additional investor previously approved by the institutional investor. The Series E Preferred Stock also allows the investor to invest up to an additional $8 million, but restricts their ownership to no more than 5% of our common stock at any point in time.
The Series E Preferred Stock may be converted into Common Stock for up to three years at the lesser of a) the market price - defined as the average of the closing bid price for the five lowest of the ten trading days prior to conversion or b) the fixed conversion price - defined as 120% of the lesser of the average closing bid price for the ten days prior to closing or the October 12, 2000 closing bid price. The conversion price will be reset on the later of February 11, 2001 (four months from October 11, 2000) or the date of an effective registration statement. The reset price will be the lesser of the "market price" as defined above or the "fixed conversion price" defined above subject to a floor price of 75% of the fixed conversion price. If the closing bid price falls below the floor price for any ten trading days in a consecutive twenty-day trading period, the floor price will be terminated.
The terms of our Series E Preferred Stock restrict us from declaring and paying dividends on our common stock until such time as all outstanding dividends have been fulfilled related to collectively, the Preferred Stock.
The terms of our Series E Preferred Stock allow for mandatory redemption by the holder upon certain conditions. The Series E Preferred Stock allows the holder to elect redemption at $1250 per share plus 6% per annum if: 1) ATSI refuses conversion notice, 2) an effective registration statement is not obtained by prior to March 11, 2001, 3) bankruptcy proceedings are initiated against the Company, 4) the SCT limits or terminates the scope of the concession or, 5) if the Company fails to maintain a listing on NASDAQ, NYSE or AMEX.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III --------
ITEM 10.
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 2000 Annual Meeting of Stockholders.
ITEM 11.
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 2000 Annual Meeting of Stockholders.
ITEM 12.
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 2000 Annual Meeting of Stockholders.
ITEM 13.
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 2000 Annual Meeting of Stockholders.
PART IV -------
ITEM 14.
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)
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)
4.13 Form of letter dated December 30, 1999 from H. Douglas Saathoff, Chief Financial Officer of American TeleSource International, Inc. to holders of Convertible Notes (Exhibit 4.1 to Registration statement on Form S-3 (No. 333-35846) filed April 28, 2000
4.14 Form of letter dated January 24, 2000 from H. Douglas Saathoff, Chief Financial Officer of American TeleSource International, Inc. to holders of Convertible Notes (Exhibit 4.2 to Registration statement on Form S-3 (No. 333-35846) filed April 28, 2000)
4.15 Registration Rights Agreement between American TeleSource International, Inc. and Kings Peak, LLC dated February 4, 2000 (Exhibit 4.4 to Registration statement on Form S-3 (No. 333-35846) filed April 28, 2000)
4.16 Form of Convertible Note for $2.2 million principal issued March 17, 1997 (Exhibit 4.5 to Registration statement on Form S-3(No. 333-35846) filed April 28, 2000)
4.17 Form of Modification of Convertible Note (Exhibit 4.6 to Registration statement on Form S-3(No. 333-35846) filed April 28, 2000)
4.18 Promissory Note issued to Four Holdings, Ltd. dated October 17, 1997 (Exhibit 4.7 to Registration statement on Form S-3 (No. 333-35846) filed April 28, 2000)
4.19 Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI dated February 22, 2000 (Exhibit 4.5 to Registration statement on Form S-3 (No. 333-89683) filed April 13, 2000)
4.20 Certificate of Designation, Preferences and Rights of 6% Series D Cumulative Convertible Preferred Stock (Exhibit 4.6 to Registration statement on Form S-3 (No. 333-89683) filed April 13, 2000)
4.21 Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by ATSI dated February 22, 2000 (Exhibit 4.7 to Registration statement on Form S-3 (No. 333-89683) filed April 13, 2000)
4.22 Common Stock Purchase Warrant issued to Corporate Capital Management LLC by ATSI dated February 22, 2000 (Exhibit 4.8 to Registration statement on Form S-3 (No. 333-89683) filed April 13, 2000)
4.23 Registration Rights Agreement between The Shaar Fund Ltd. and ATSI dated February 22, 2000 (Exhibit 4.9 to Registration statement on Form S-3 (No. 333-89683) filed April 13, 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 10.3 to 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.
10.4 Amendment to Agreement #095-1 with SATMEX (Exhibit10.4 to 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.
10.5 Bestel Fiber Lease (Exhibit 10.5 to 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 10.6 to 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 between IBM de Mexico and ATSI-Mexico (to be filed)
10.9 Master Lease Agreement with NTFC (Exhibit 10.9 to Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 14, 2000)
10.10 BancBoston Master Lease Agreement (Exhibit 10.10 to Amended Annual Report on Form 10-K for year ended July31, 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 10.12 to Amended Annual Report on Form 10-K filed April 14, 2000)
10.13 Employment Agreement with Sandra Poole-Christal dated January 1, 1998 (Exhibit 10.15 to Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 14, 2000)
10.14 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)
10.15 Employment Agreement with H. Douglas Saathoff dated January 1, 2000 (Exhibit 10.19 to Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 14, 2000)
10.16 Office Space Lease Agreement (Exhibit 10.14 to Registration statement on Form S-4 (No. 333-05557) filed June 7, 1996)
10.17 Amendment to Office Space Lease Agreement (Exhibit 10.14 to Registration statement on Form S-4 (No. 333-05557) filed June 7, 1996)
10.18 Commercial Lease with ACLP University Park SA, L.P. (Exhibit 10.23 to Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 14, 2000)
10.19 Amendment to Commercial Lease with ACLP University Park SA, L.P. (Exhibit 10.24 to Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 14, 2000)
10.20 Commercial Lease between GlobalSCAPE, Inc. and ACLP University Park SA, L.P (Exhibit 10.25 to Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 14, 2000)
10.21 Amendment to Commercial Lease between GlobalSCAPE, Inc. and ACLP University Park SA, L.P (Exhibit10.26 to Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 14, 2000)
10.22 Compensation Agreement between ATSI-Texas and James McCourt 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)
10.23 Consulting Agreement with KAWA Consultores, S.A. de C.V. (Exhibit 10.28 to 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, 2000 filed November 14, 2000)
22 Subsidiaries of ATSI (Exhibit 22 to Annual Report on Form 10-K for year ended July 31, 2000 filed November 14, 2000)
23 Consent of Arthur Andersen LLP) (Exhibit to this Annual Report on Form 10-K for year ended July 31, 2000 filed November 14, 2000)
27 Financial Data Schedule (Exhibit 27 to Annual Report on Form 10-K for year ended July 31, 2000 filed November 14, 2000)
99.1 FCC Radio Station Authorization - C Band (Exhibit 10.10 to Registration statement on Form S-4 (No. 333-05557) filed June 7, 1996)
99.2 FCC Radio Station Authorization - Ku Band (Exhibit 10.11 to Registration statement on Form 10 (No. 333-05557) filed June 7, 1996)
99.3 Section 214 Certification from FCC (Exhibit 10.12 to Registration statement on Form 10 (No. 333-05557) filed June 7, 1996)
99.4 Comercializadora License (Payphone License) issued to ATSI-Mexico (Exhibit 10.24 to Registration statement on Form 10 (No. 000-23007) filed August 22, 1997)
99.5 Network Resale License issued to ATSI-Mexico (Exhibit 10.25 to Registration statement on Form 10 (No. 000-23007) filed August 22, 1997)
99.6 Shared Teleport License issued to Sinfra (Exhibit 99.7 to Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 14, 2000)
99.7 Packet Switching Network License issued to SINFRA (Exhibit 10.26 to Registration statement on Form 10 (No. 000-23007) filed August 22, 1997)
99.8 Value-Added Service License issued to SINFRA(Exhibit 99.9 to Amended Annual Report on Form 10-K for year ended July 31, 1999 filed April 13, 2000)
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 November 14, 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 and Chief Financial Officer
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 November 14, 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 and Senior ----------------------- Vice President (Principal Accounting and Finance Officer)
/s/ RICHARD C. BENKENDORF Director -------------------------
/s/ CARLOS K. KAUACHI Director ---------------------
/s/ MURRAY R. NYE Director -----------------
/s/ TOMAS REVESZ Director ----------------