-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DDiGtxLWLe8ZR4sMo/q8oubAJtW1fC+wJT+hfsnZ+/NdhI+8l5wt5c5qiiE00pQ1 Xjktm6LF074S74ZuHF+FLA== 0000930661-99-002445.txt : 19991027 0000930661-99-002445.hdr.sgml : 19991027 ACCESSION NUMBER: 0000930661-99-002445 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19991026 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN TELESOURCE INTERNATIONAL INC CENTRAL INDEX KEY: 0001014052 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 742698095 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23007 FILM NUMBER: 99733923 BUSINESS ADDRESS: STREET 1: 12500 NETWORK BLVD STREET 2: SUITE 407 CITY: SAN ANTONIO STATE: TX ZIP: 78249 BUSINESS PHONE: 2105586090 10-K 1 FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION ---------------------------------- Washington, D.C. 20549 _______________________ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended July 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to Commission File Number: AMERICAN TELESOURCE INTERNATIONAL, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 74-2849995 (State of Incorporation) (I.R.S. Employer Identification No.) 12500 Network Blvd. Suite 407, San Antonio, Texas (Address of Principal 78249 Executive Office) (Zip Code) (210) 558-6090 (Registrant's Telephone Number, Including Area Code) Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, Par Value $0.001 Per Share (Title of Class) _______________________ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] -- The aggregate market value of the Registrant's outstanding Common Stock held by non-affiliates of the Registrant at October 25, 1999, was approximately -- $41,558,696. There were 48,685,287 shares of Common Stock outstanding at - ----------- October 25, 1999, and the closing sales price on the NASDAQ/OTCB for the Company's Common Stock was $0.92 on such date. ----- DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders to be held in December 1999, are incorporated by reference in Part III hereof. 1 TABLE OF CONTENTS Page ---- PART I Item 1. Business......................................................... 3 Overview and Recent Developments................................ 3 Strategy and Competitive Conditions............................. 4 Retail Distribution Network..................................... 5 Services and Products........................................... 6 Network Management Services............................... 6 Call Services............................................. 6 Direct Dial Services...................................... 7 Sales..................................................... 8 Electronic Commerce Via Internet.......................... 8 Network......................................................... 9 Year 2000 Issue................................................. 9 Licenses/Regulatory............................................. 10 Employees....................................................... 11 Additional Risk Factors......................................... 11 Item 2. Properties....................................................... 15 Item 3. Legal Proceedings................................................ 15 Item 4. Submission of Matters to a Vote of Security Holders.............. 16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............................................. 16 Item 6. Selected Financial and Operating Data............................ 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 17 General......................................................... 17 Results of Operations........................................... 19 Liquidity and Capital Resources................................. 23 Inflation/Foreign Currency...................................... 25 Seasonality..................................................... 25 Year 2000 Compliance............................................ 25 Item 8. Financial Statements and Supplementary Data...................... 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures........................................... 52 PART III Item 10. Directors and Officers of the Registrant........................ 52 Item 11. Executive Compensation.......................................... 52 Item 12. Security Ownership of Certain Beneficial Owners and Management.. 52 Item 13. Certain Relationships and Related Transactions.................. 52 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................................ 52 2 This Annual Report on Form 10-K and the documents incorporated by reference in this Annual Report contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities and Exchange Act of 1934, as amended. "Forward looking statements" are those statements that describe management's beliefs and expectations about the future. We have identified forward-looking statements by using words such as "anticipate," "believe," "could," "estimate," "may," "expect," and "intend." Although we believe these expectations are reasonable, our operations involve a number of risks and uncertainties, including those described in the Additional Risk Factors section of this Annual Report and other documents filed with the Securities and Exchange Commission. Therefore, these types of statements may prove to be incorrect. We do not promise to update any forward-looking statements, even if new information or future events indicate that these statements will prove to be incorrect. PART I. ------- ITEM I. BUSINESS - ------- --------- Overview and Recent Developments - -------------------------------- The Company is a telecommunications provider, focusing on the market for wholesale and retail services between the United States and Latin America, and within Latin America. Most of the Company's current operations involve services between the U.S. and Mexico or within Mexico. The Company owns various transmission facilities, including teleports and switching facilities, and leases facilities of other providers as necessary to complete its network. The Company's subsidiary GlobalSCAPE, Inc. distributes Internet productivity software. The Company began operations in 1994 as a Canadian holding company, Latcomm International, Inc. with a Texas operating subsidiary, Latin America Telecomm, Inc. Both corporations were renamed "American TeleSource International, Inc." in 1994. In May 1998, the Canadian corporation completed a share exchange with a newly formed Delaware corporation, also called American TeleSource International, Inc., which resulted in the Canadian corporation becoming the wholly owned subsidiary of the Delaware corporation. The Company's principal operating subsidiaries are: . American TeleSource International de Mexico, S.A. de C.V. ("ATSI Mexico"), which was formed in 1995 to support the Company's operations in Mexico, and performs regulatory, sales, marketing, planning, and technical maintenance services. . Sistema de Telefonia Computarizada, S.A. de C.V. ("Sistecom"), which the Company acquired in August, 1997; this subsidiary owns 126 casetas in 66 cities in Mexico; . Servicios de Infraestructura, S.A. de C.V. ("Sinfra"), which the Company acquired in June, 1997; this subsidiary owns certain transmission equipment and valuable long term licenses in Mexico; . TeleSpan, Inc. ("TeleSpan"), which was formed in February, 1998 to carry the Company's wholesale and private network services traffic between the U.S. and Latin America; and . GlobalSCAPE, Inc. ("GlobalSCAPE"), which was formed in April 1996 to implement Internet strategies which are not currently consistent with the Company's core business. Recent Developments - ------------------- During its fiscal year ending July 31, 1999, the Company: . executed a Marketing Agreement with American Telephone and Telegraph Company ("AT&T"), providing for the Company's pay telephones in Mexico to be programmed with an AT&T "hot button." The Company receives a commission each time a pay telephone customer uses the hot button to access the AT&T network; . signed an Interconnection Agreement with Bestel S.A. de C.V., further diversifying the Company's route choices in Mexico; 3 . secured a three year lease of fiber optic cable from Bestel S.A. de C.V. and began transporting increased wholesale volume over this route; . commissioned its new Nortel/TM/ International Gateway DMS 300/250 switch located in Dallas; . executed an interconnection agreement with Radiografica Costarricense, S.A. ("RACSA"), a division of Instituto Costarricense de Electricidad, the Costa Rican telephone company enabling the Company to interconnect to the RACSA frame relay network "cloud" in Costa Rica, and provide high quality, low cost connectivity via this protocol throughout the Central American Region, Mexico and the United States . applied for a long distance concession from the Mexican government which, if granted, will permit the Company to carry its own intra-Mexico long distance traffic and interconnect directly with the local Mexican network, thereby substantially reducing costs In fiscal year 1999 GlobalSCAPE acquired the ownership of its flagship software product, CuteFTP/TM,, from its original author, and subsequently executed an agreement with Tech Data Corporation for distribution of CuteFTP in 209 CompUSA stores nationwide. GlobalSCAPE also released two new Internet productivity software products, CuteHTML/TM/ and CuteMAP/TM/. Subsequent to July 31, 1999, GloblaSCAPE signed an agreement with Lycos, Inc. ("Lycos") to distribute CuteFTP over the Lycos network. Strategy and Competitive Conditions - ----------------------------------- The Company's strategy is to position itself to take advantage of the de- monopolization of the Latin American telecommunications market, as well as the increasing demand for services in this market. Historically, telecommunications services in Latin America have been provided by state-run companies operating as a legal or de facto monopoly. Although these companies failed to satisfy the demand for services in their countries, the regulatory scheme effectively precluded competition by foreign carriers. Currently, there is a trend toward demonopolization of the telecommunications industry in Latin America, and many of these countries are in various stages of migration toward a competitive, multi-carrier market. At the same time that Latin American markets have been opening up, the demand for telecommunications services between the United States and Latin America (particularly Mexico) has been strengthened by: . rapid growth of the Latino segment of the United States population . increase in trade and travel between Latin America and the United States . increase in "line density" (the build out of local networks and corresponding increase in the number of telephones in homes and businesses) in Latin countries . proliferation of communications devices such as faxes, mobile phones, pagers, and personal computers . declining rates for services as a result of increased competition. In addition, technological advances have provided emerging carriers with the means to provide high quality transmission on a cost-effective basis. "Packet switching" networks, which allow voice and data to be carried on the same network, are replacing traditional circuit-switched systems. The Company has focused most of its efforts on Mexico, but has some operations in Costa Rica, El Salvador, and Guatemala and intends to expand its services as regulatory and market conditions permit. Ultimately the Company would like to provide services throughout Latin America. Strategy and Competitive Conditions - Mexican Market. Telefonos de Mexico ("Telmex") had a legal franchise to control the entire market for local and long distance telecommunications in Mexico until June of 1995, when new laws began to open the market to effective competition. In January 1997, the Mexican government began granting concessions to provide long distance service to competing companies, and has licensed at least 15 new long distance providers. Several of these new concessionaires are Mexican based affiliates of top tier U.S. Carriers (e.g. MCI/Worldcom, Inc. and AT&T). Although the Mexican government has also licensed nine new local competitors, the build out of additional local infrastructure is just beginning, and the local network in Mexico is still dominated by Telmex. The Company began assembling a framework of licenses, interconnection and service agreements, network facilities, and distribution channels in Mexico in 1994 in anticipation of the demonoplization of this market. In 1994, the Company began providing private network services between the U.S. and Mexico via satellite. Since then, the Company has established a retail distribution network in Mexico through the acquisition of public payphones and casetas, has entered the U.S. wholesale market for termination services to Mexico, and has begun implementation of a U.S. retail strategy through the introduction of its presubscribed and dial around services targeted to the Latino market in the U.S. The Company has also invested in its own 4 transmission facilities, beginning in 1994 with satellite teleport equipment, and most recently with the acquisition of a new Nortel International Gateway Switch and the deployment of packet switching technology in its network. As true competition has emerged, the Company has been able to negotiate increasingly more favorable rates for local network interconnection and long distance services with the newly licensed long distance carriers. In fiscal year 1999 the Company applied for its own long distance concession, which, if granted, will permit the Company to interconnect directly with the local network and build out its own long distance network, thereby reducing costs further. The Company believes that its establishment of a solid framework of licenses, proprietary network and favorable interconnection agreements has positioned it to take advantage of the benefits to be reaped as the Mexican telecommunications industry enters a truly competitive phase. The Company believes that it has a clear competitive advantage over pure resellers, and that it has overcome significant hurdles that are a barrier to entry in this market even for large carriers. The Company intends to use its framework to capture increased amounts of the communications traffic in the Mexican market. Retail. Although Telmex and several large U.S. based carriers (with their Mexican affiliates) are active participants in the Mexican retail market, the Company believes that these carriers will focus on the most lucrative sectors of the market, leaving many opportunities to further develop the large portion of the market that continues to be underserved, both in the U.S. and Mexico. The Company will devote most of its new resources on deploying innovative new public and prepaid services targeted to the consumer market, and in particular services which incorporate the Company's "borderless" concept of seamless function, regardless of the user's location north or south of the U.S./Mexico border. The Company will use its existing retail distribution network, and may pursue acquisitions of established distribution channels from others. The Company believes that its focus on a retail strategy, combined with the cost reductions that will follow the grant of a Mexican long distance license, will permit it to improve overall corporate profit margins and secure a stable customer base. Wholesale. The U.S. wholesale market for termination to Mexico has become increasingly dynamic as competition, call volumes and industry capacity along U.S. -Mexico routes have all increased. Although the Company increased the volume of wholesale minutes it transmitted to Mexico during fiscal year 1999, downward pricing pressure in this market resulted in little additional revenue for these minutes. The Company expects its wholesale volume of traffic transported to increase during the upcoming year as a result of the inauguration of its high quality ATM based fiber route to Mexico in July, 1999. In addition, the Company plans to explore ways to exploit its wholesale operation with out the investment of significant new resources (see Network Management Services- Carrier Services). Although the Company has succeeded in obtaining interconnection agreements with various Mexican-based providers that permit the Company to terminate northbound traffic in the U.S., it has not realized substantial revenue from these arrangements. The Company believes that the long distance concession, if obtained, will permit it to lower costs significantly, improving its competitive position in the wholesale market for both north and south bound services. Retail Distribution Network The Company's Mexican retail distribution network consists of communication centers, formerly referred to as casetas, and public pay telephones. Casetas. Casetas are indoor calling centers strategically located to serve travelers and the large population of the country who do not have personal telephones. Casetas are a widely recognized and utilized medium in Mexico, but do not currently have a real equivalent in the U.S. The Company's casetas offer local, domestic Mexico and international long distance calling, as well as facsimile service. The Company is the largest caseta operator in Mexico with approximately 126 casetas in 66 cities operating under the trade name "ComputelTM". Each location employs at least one attendant, who processes calls, monitors call duration, collects money and runs daily reports on call activity. As compared to public pay telephones, casetas offer privacy and comfort as well as the personalized attention needed by customers who are not accustomed to using a telephone. Key factors favoring the Company over competing caseta operators are the well-recognized Computel name, a reliable platform and billing system, the provision of facsimile services (which are not offered by many other operators) and a larger distribution network. The next largest competitor in Mexico has only 70 locations. Using these casetas as the cornerstone, the Company intends to further increase its retail presence in Mexico and the U.S. The next generation caseta will be a "Communication Center" and will offer additional services, such as Internet access and prepaid services. The Company intends to bring the Communication Center concept to strategic markets in the U.S., targeting Mexican nationals and U.S. citizens of Mexican origin who are familiar with the caseta concept and the ComputelTM name. The Communication Centers will be used to distribute "borderless" products that function in the same manner regardless of the users location north or south of the U.S./Mexico border. These products will be targeted to established Latino households, as well as to recent immigrants and transient Latinos who may have acculturation issues, or identity, credit or economic challenges. ATSI believes it will capture customer loyalty by serving these challenged consumers, and will keep their business as they establish households in the U.S. 5 The main source of competition for Communication Centers on both sides of the border will be prepaid card services, payphone and prepaid cellular, which are essentially designed for the same target market. There is already a robust market for prepaid calling cards in the U.S. Regulations in Mexico have only recently permitted the use of dial around products from payphones, and the Company expects many more prepaid card vendors to enter that market. The Company is aware of only a limited number of caseta-style call centers in the U.S. located on the East Coast, in Miami and Los Angeles. Pay Telephones. The Company also owns and operates approximately 574 pay telephones in various Mexican cities and resort areas, including Acapulco, Cancun, Cozumel, Mazatlan, Puerto Vallarta, Tijuana, Huatulco, Puerto Escondido, Cabo San Lucas, and Puerto Angel. The Company also has pay telephones in the Mexico City airport and Mexico City's mass transit metro system transfer stations. All of the Company's pay telephones are "intelligent" phones, meaning that certain features are fully automated, reducing operating costs. The Company's telephones accept pesos and U.S. quarters. Customers may also access a Company operator for assistance in placing collect, third party, person-to person calls or credit card calls. The Company markets its pay telephone services in Mexico through direct sales efforts as well as some independent marketing representatives working on a commission basis. The Company has targeted a significant portion of its pay telephone marketing efforts toward various resort areas in Mexico, specifically on locations with high tourist-traffic such as airports, ship ports and marinas, restaurants and bars. Approximately 16 million U.S. tourists visit Mexico each year, and the country's vacation destinations are major hubs for northern visitors via major U.S. airline carriers, and cruise ships. Although the Company targets the tourist market for payphones and operator-assisted calling, these services are available for Mexican nationals as well. As of October 1, 1999, there were 31 authorized payphone providers in Mexico, of which Telmex is the largest. The Company believes it is the second largest provider after Telmex in the tourist markets, where it has focused its efforts. The Company's multi-pay payphones give it a significant advantage over its largest competitor, Telmex, which accepts only pre-paid Telmex calling cards. Vendors of the cards are often difficult to locate and denominations tend to be higher than needed by consumers. Although other companies have plans to install pay telephones, the Company believes that it will be one of the few providers with its own network, allowing it to maintain flexibility with respect to rates. Services and Products - --------------------- In the presentation of its financial results, the Company divides its revenues into four categories: Network Management Services, Call Services, Direct Dial Services and Electronic Commerce. Network Management Services - --------------------------- The Company offers private network telecommunications services between the United States and Latin America and within Latin America. Carrier Services - ---------------- The Company offers wholesale termination services to U.S. and Latin American carriers who lack transmission facilities or require additional capacity. Revenues from this service accounted for approximately 41% of overall Company revenues in fiscal 1999. This market experienced tremendous downward pricing pressure during fiscal year 1999 due to a combination of several factors, most notably an increase in the activation of fiber optic cable along U.S.-Mexico routes and regulatory changes which permitted the top tier carriers to lower their international wholesale rates. Therefore, although the Company experienced increased volumes in this line of business during the year, it realized little additional revenue. The Company has seen a substantial increase in volume since it activated its high-quality fiber route in July, 1999, and believes this fiber network will continue to attract increased volumes from top tier carriers. In addition, the Company believes it will generate opportunities to transport traffic for Mexican carriers. The Company should be able to use the increased volumes to negotiate more favorable termination costs in Mexico, and if the Company receives a Mexican long distance concession, it will be able to substantially cut its costs for carrying this traffic. Private Networks The Company offers private communications links for multi-national and Latin American customers who use a high volume of telecommunications services and need greater dependability than is available through public networks. These services include data, voice, and fax transmission as well as videoconferencing and Internet. During fiscal 1999, the Company did not devote significant resources toward the development of this business in Mexico. However, expansion of 6 this line of business is consistent with the Company's plans to build out its network in Mexico, since many of the same facilities that would be used for delivery of retail consumer products could be used for private network services as well. The Company has and will continue to use the provision of private network services as an entry into new Latin markets that are in the process of migrating from state-run systems to competitive systems. The Company competes with MCI/Worldcom, Americatel, Pointe Communications Corporation, and Telscape International Inc., among others, in providing private network services. Factors contributing to the Company's competitiveness in the private network business include reliability, network quality, speed of installation, and in some cases, geography, network size, and hauling capacity. The Company believes it has the reputation as being a responsive service provider capable of processing all types of network traffic. Call Services - ------------- The Company's principal Call Service is operator-assistance for international collect, person-to-person, third party, calling card and credit card calls originating in Mexico. The primary source of demand for operator assistance are the Company's pay telephones and casetas in Mexico. The Company also provides operator services for calls originating from payphones and casetas owned by others, hotel and resort operators, and others who control the right to direct operator-assisted calling from groups of telephones. The Company pays these third parties a commission based on the revenue generated by the call traffic they send. The Company offers a service by which pin numbers are issued to Latin American travelers that enable them to use their credit cards to place calls through the Company's Call Services Center. (Latin Americans frequently do not have travel calling cards.) The Company also offers travel cards that enable Mexican travelers to use their cellular phones to place international calls to Mexico while in the United States. As part of its ongoing efforts to minimize costs, the Company began outsourcing its live operator services in July 1999, and executed an agreement with another operator service provider to handle the Company's call services traffic on a transaction basis. The vendor will continue the Company's practice of providing bilingual service 24 hours per day, 7 days per week. As of July 16, 1998, the Company ceased providing operator services for domestic U.S. calls and international calls originating in Jamaica and the Dominican Republic in order to focus on the more profitable Mexican market. The Company's owned retail distribution network will continue to generate call services traffic. Competition for traffic from third parties in this market revolves largely around the amount of commissions the operator services provider is willing to pay. The Company is currently focusing more on improving its profitability rather than simply generating additional revenues, and it has therefore lost ground to competitors willing to accept lower profit margins by paying higher commissions. However, the Company believes it has a reputation as a reliable provider, and it is also able to offer the value-added service of intelligent pay telephones in hotel lobbies. Direct Dial Services During fiscal 1999, the Company provided direct dial services (long distance calls which do not require live or automated operator assistance) in both Mexico and, to a lesser extent, the United States. Direct dial calls were generated in Mexico from the Company's own Communications Centers and pay telephones. Consumers visiting these locations can make calls on a "sent paid" basis by making a cash payment at the time the call is placed. In the U.S., the Company provided 1+ and MEXICOnnect (SM) service to residential and business customers in the San Antonio metropolitan area. MEXICOnnect allows customer to dial-around their presubscribed carrier by dialing 10-10-624 + the area code + the telephone number. Under the 1+ program, customers presubscribe to the Company's network for all long distance calls made from their telephone number, eliminating the need to dial any extra digits to reach the Company's network. In Mexico, the Company competes with other companies who have a comercializadora license for sent paid traffic. The comercializadora allows companies to interconnect with the local telecommunications infrastructure in order to resell local and long distance services from public telephones. In the U.S., the Company competes with large carriers such as AT&T, MCI/Worldcom, and Sprint Communications Company, L.P. ("Sprint") as well as numerous smaller companies for presubscribed long distance. Price remains a primary concern for many consumers since the technology is not distinguishable from one provider to another. The Company is focused on the Latino market and offers an aggressive international rate to Mexico as well as competitive domestic rates. Unlike many other long distance providers, the Company's charges are included on the customer's bill from the local phone company. The Company also offers the 7 convenience of bilingual customer service. The Company believes that it will be able to expand its presubscribed customer base by using U.S. Communication Centers as magnets to attract underserved Latino customers to the Company's products. There are numerous dial-around products on the market, offered by small and large companies, and by long distance resellers as well as facilities-based carriers. MEXICOnnect's competitive advantage is its focus on the Latino market, and the elimination of per call minimums, monthly access fees, surcharges, and other types of restrictions and small print that make dial- around discounts deceiving. In comparison to long distance resellers, the Company has greater flexibility in adjusting rates, as it has greater control over its own network. Sales Direct dial sales are supervised by the Senior Vice President, Sales and Marketing based in San Antonio. U.S. domestic carrier sales are supervised by the Senior Vice President, Sales and Marketing in San Antonio. Mexican carrier sales are also supervised by the Senior Vice President, Sales and Marketing in San Antonio, who is assisted by the Director General (President) of ATSI-Mexico. The Director of Central American operations, based in San Jose, Costa Rica, manages the Central American carrier and private network accounts under the supervision of the Senior Vice President, Sales and Marketing in San Antonio. Payphone, hospitality and aggregator sales are managed from ATSI-Mexico with supervision from the Senior Vice President, Sales and Marketing in San Antonio. Communication center's sales efforts are managed from Computel's offices in Guadalajara with oversight from ATSI-Mexico in Mexico City. The Company is in the process of consolidating the operations of Computel and ATSI-Mexico. Electronic Commerce via Internet GlobalSCAPE was formed in April 1996 to implement Internet related strategies that are not complementary to the Company's core business. GlobalSCAPE's revenues are attributable to sales of Internet productivity software, primarily its flagship product CuteFTP/TM/ which it has historically distributed via its web site. GlobalSCAPE operates autonomously, generating substantially all funds for its development and expansion internally from its own operations. In January 1999 GlobalSCAPE acquired ownership of CuteFTP from its original author, and subsequently released an enhanced new version. GlobalSCAPE also released two new products, CuteHTML/TM/ and CuteMAP/TM/. Also in fiscal 1999, GlobalSCAPE began distributing CuteFTP in CompUSA stores, and began realizing revenue from advertisements placed in its software. Subsequent to July 31, 1999, GlobalSCAPE has executed an agreement with Lycos to distribute a branded version of CuteFTP over the Lycos network. The Company announced in February, 1999 that it was considering a spin off or public offering of GlobalSCAPE's stock, and the Company has retained an investment banking firm to assist it in evaluating these options and other options to finance GlobalSCAPE's continued growth. GlobalSCAPE's market includes all computer users on the Internet. GlobalSCAPE's products are distributed as shareware, meaning that users may download and use the products for free on a trial basis for a limited time. After the expiration of the trial period, the user must register the product to be in compliance with the license and to obtain product support. GlobalSCAPE's primary source of revenue is generated through product registration, with additional revenues generated by advertising in the form of ad banners and sponsorships in its "live" software products and on its web site. On a monthly basis, GlobalSCAPE receives approximately 1.2 million unique visitors to its web site and displays more than 15 million in-product and web site ad banners. The Company's flagship product, CuteFTP, is a Windows-based file transfer protocol (FTP) utility allowing users the ability to transfer and manage files via the Internet, including MP3's, web pages, software, videos and graphics. The Company believes that CuteFTP has 30% of the U.S. market share for FTP programs. The Company's portfolio of products also includes CuteHTML, an advanced HTML editor for developing web sites, and CuteMAP, an image mapping utility for graphic navigation through web sites, and others in various stages of alpha and beta testing. GlobalSCAPE intends to leverage its strong brand recognition into a full suite of "Cute" products. GlobalSCAPE operates in a highly competitive environment with respect to all its products. CuteFTP's primary competitors are WSFTP, FTP Voyager and Bulletproof FTP. While many FTP products have mimicked CuteFTP's features, they are not commercially successful due to their late arrival to the marketplace and lack of support infrastructure. CuteHTML and CuteMAP, although relatively new to the market, have the advantage of being able to piggyback on the success of CuteFTP through product integration and cross-marketing efforts. 8 Network - -------- The Company has established a technologically advanced network having an ATM backbone with satellite and fiber optic arms. ATM (or Asynchronous Transfer Mode) is a packet switching technology that allocates bandwidth on demand for high-speed connection of voice, data and video services. This technology allows the Company to use its switch capacity more efficiently than a circuit-switched system that requires capacity to be dedicated to certain customers regardless of whether they are using it fully. The Company's network also employs compression technology to carry greater volumes on the same facilities. ATM is compatible with Internet protocols and Frame Relay, permitting the Company to explore even more cost-effective transmission methods in the future. Generally, the Company's strategy is to use the fiber optic arm to access major metropolitan areas in Mexico and the satellite arm to access semi-rural and smaller metropolitan areas. This hybrid network also offers redundancy that can minimize service interruptions. The Company's fiber route runs from its facility at the Infomart in Dallas, Texas to Mexico City, Mexico. The Company has satellite transmission and receiving equipment in 1) San Antonio, Texas, 2) Mexico City, Monterrey, and Cancun, Mexico, 3) Guatemala City, Guatemala, 4) San Salvador, El Salvador, and 5) San Jose, Costa Rica. The Company leases fiber capacity from third parties, primarily Bestel. The Company leases satellite capacity on the Mexican satellites Solidaridad I and II, from Satelites Mexicanos, S.A. de C.V. ("SATMEX"). The Company owns switching and other equipment in the U.S. and Mexico. In April 1999, the Company began using its new Nortel DMS 300/250 International Gateway Switch in its Dallas location. This advanced switch will permit the Company to deploy the new retail and wholesale products that are key to its competitive strategy. All aspects of the Company's owned network facilities are designed to allow for modular expansion, permitting the Company to increase capacity as needed. The Company must contract with others to complete the intra-Mexico and domestic U.S. portions of its network. The Company has interconnection and service agreements in place with four Mexican long distance concessionaires, Operadora Protel, S.A. de C.V., Avantel, S.A. de C.V., Miditel, S.A. de C.V. and Bestel, S.A. de C.V. The Company has applied for its own Mexican long distance concession, which will allow it to build out its network in Mexico and to interconnect directly with Telmex and other local carriers, thereby lowering its transmission costs. The Company has interconnection agreements with Radiografica Costarricense, S.A., FT&T, S.A. , and Corporacion Solares, S.A. de C.V. for transmission services in Costa Rica, Guatemala and El Salvador, respectively. In the U.S., the Company purchases long distance capacity from various companies. The Company purchases local line access in Mexico for its payphones and casetas from Telmex, and various cellular companies including SOS Telecomunicaciones, S.A. de C.V., Portatel del Sureste, S.A. de C.V., Movitel del Noreste, S.A. de C.V, and Baja Celular Mexicana, S.A. de C.V. Year 2000 Issue The Company initiated a program to identify and address issues associated with the ability of its date-sensitive information, telephony and business systems to properly recognize the year 2000 in order to avoid interruption of the operation of these systems at the turn of the century. This program is being conducted by the Company's Management Information Systems group, which is coordinating the efforts of internal resources as well as third party vendors in making all of the necessary changes for all management systems and product related infrastructure for the Company's divisions and subsidiaries. The Company believes it is 96% complete in achieving Year 2000 readiness, and will be Year 2000 ready by November 30, 1999. The only significant remaining item is an outstanding issue related to the payroll systems of the Company's Mexican subsidiaries. The Company expects to avoid disruption of its owned information, telephony and business systems as a result of these efforts. However, the Company must rely on the representations and warranties of third parties, including domestic U.S. and foreign carriers of its traffic, in testing for readiness for year 2000 issues and cannot ensure compliance by these parties. The Company has developed contingency plans in areas where it believes there is any significant risk or where a third party has not adequately responded to the Company's inquiries, which includes transitions to other providers. The Company believes that a worst case scenario resulting from a Year 2000 related failure would be a temporary disruption of normal business operations. Based upon the work completed to date, the Company believes that such an occurrence is unlikely. However, as stated above, the Company is relying on representations and warranties of third parties who are beyond the Company's control. A disruption of business operations could have a material adverse effect on the Company's financial performance. 9 The Company has expended approximately $100,000 in its Year 2000 program to date, and does not expect to experience any material additional cost. Licenses/Regulatory - -------------------- The Company's operations are subject to federal, state and foreign laws and regulations. Federal - ------- Pursuant to Section 214 of the Communications Act of 1934, the Federal Communications Commission ("FCC") has granted the Company global authority to provide switched international telecommunications services between the U.S. and certain other countries. The Company maintains informational tariffs on file with the FCC for its international retail rates and charges. In October 1996, the FCC issued an order that non-dominant interexchange carriers will no longer be required to file tariffs for interstate domestic long distance services. Under the terms of the FCC order, detariffing would be mandatory after a nine-month transition period. Interexchange carriers would still be required to retain and make available information as to the rates and terms of the services they offer. The FCC's order was appealed by several parties and, in February 1997, the D.C. Circuit issued a stay preventing the rules from taking effect pending judicial review. The Company is currently unable to predict what impact the FCC's order will have on the Company. The Telecommunications Act of 1996 ("Telecom Act"), which became law in February 1996, was designed to promote competition in all aspects of telecommunications. The FCC has promulgated and continues to promulgate major changes to their telecommunications regulations, many of which will have an impact on the Company. The Company cannot predict the ultimate effect of these various changes. One aspect of the Telecom Act that is of particular importance to the Company is that it allows Bell Operating Companies (BOCs) to offer in- region long distance service once they meet certain requirements. The rules for competition are still being decided by regulators and the courts. Although no BOCs has been permitted to provide in-region long distance service at this time, the Company anticipates that Southwestern Bell may be granted permission in the near term. Given their extensive resources and established customer bases, the entry of the BOCs into the long distance market, specifically the international market, will create increased competition for the Company. The International Settlements Policy (the "ISP") governs settlements between U.S. carriers and foreign carriers of the cost of terminating traffic over each other's networks. The FCC recently enacted certain changes in its rules designed to allow U.S. carriers to propose methods to pay for international call termination that deviate from traditional accounting rates and the ISP. The FCC has also established lower benchmarks for the rates that U.S. carriers can pay foreign carriers for the termination of international services. These rule changes have lowered the costs of the Company's top tier competitors and are contributing to the substantial downward pricing pressure facing the Company in the wholesale carrier market. State Many states require telecommunications providers operating within the state to maintain certificates and tariffs with the state regulatory agencies, and to meet various other requirements (e.g. reporting, consumer protection, notification of corporate events). The Company believes it is in compliance with all applicable State laws and regulations governing its services. Mexico The Secretaria de Comunicaciones y Transportes ("SCT") and COFETEL have issued the Company's Mexican subsidiaries the following licenses: Comercializadora License - a 20-year license issued in February 1997allowing for nationwide resale of local calling and long distance services from public pay telephones and casetas. Teleport and Satellite Network License - a 15-year license issued in May 1994 allowing for transport of voice, data, and video services domestically and internationally. The license allows for the operation of a network utilizing stand-alone VSAT terminals and/or teleport facilities, and interconnection to the public switched network via other licensed carriers. A shared teleport facility enables the Company to provide services to multiple users/customers through a single centralized satellite earth station. 10 Packet Switching Network License - a 20-year license issued in October 1994 allowing for the installation and operation of a network interconnecting packet switching nodes via the Company's proprietary network or circuits leased from other licensed carriers. The license supports any type of packet switching technology, and can be utilized in conjunction with the Teleport and Satellite Network License to build a hybrid nationwide network with international access to the U.S. Value-Added Service License - an indefinite license allowing the Company to provide a value added network service, such as delivering public access to the Internet. Mexico is in the process of revising its regulatory scheme consistent with its new competitive market. Various technical and pricing issues related to interconnections between carriers are the subject of regulatory actions which will effect the competitive environment in ways the Company is not able to determine at this time. Other Foreign Countries In addition to Mexico, the Company currently has operations in Costa Rica, El Salvador, and Guatemala. The telecommunications markets in these countries are in transition from monopolies to functioning, competitive markets. The Company has established a presence in those countries by providing a limited range of services, and intends to expand the services it offers as regulatory conditions permit. The Company does not believe that any of its current operations in those countries requires licensing, and it believes it is in compliance with applicable laws and regulations governing its operations in those countries. Employees - --------- At September 1, 1999, the Company (excluding ATSI-Mexico) had 85 full-time employees, of whom 10 were operators, 11 were sales and marketing personnel, and 64 performed operational, technical and administrative functions, and 9 part- time employees, 5 of whom were operators. Of the foregoing, 22 were employed by GlobalSCAPE, and 5 were employed by Sinfra. The Company believes its future success will depend to a large extent on its continued ability to attract and retain highly skilled and qualified employees. The Company considers its employee relations to be good. None of the aforementioned employees belong to labor unions. At September 1, 1999, ATSI-Mexico had 465 full-time employees of whom 375 were operators and 90 performed sales, marketing, operational, technical and administrative functions. A portion of ATSI-Mexico's employees, chiefly operators, belong to a union. ADDITIONAL RISK FACTORS ----------------------- In addition to the risks described above, management of the Company believes the following additional factors are significant. . The Company will probably incur losses The Company has never been profitable and will probably not become profitable in the near future. The Company has invested and will continue to invest significant amounts of money in its network and personnel in order to maintain and develop the infrastructure it needs to compete in its target markets. The Company must improve cash flow from operations to generate a profit, either by increasing sales or decreasing expenses, or both. . The Company may not achieve anticipated sales The Company has made a substantial investment in personnel and network equipment to position itself in its target markets and will continue to do so. The Company may not be able to achieve the sales volume needed to make this investment profitable. . The Company may not be able to raise additional capital In the past the Company has financed its operations almost exclusively through the private sales of securities. Since the Company is losing money, the Company must raise the money it needs to continue operations and expand its network either by selling more securities or borrowing money. The Company may not be able to sell additional securities or borrow money on acceptable terms. Without these additional funds, the Company will not be able to implement its strategy as described in this Annual Report on Form 10K for the future, and the Company will either have to scale back 11 or cease operations. If the Company sells more common stock (or convertible preferred stock) the interest of our existing shareholders will be diluted. . The Company's auditors have questioned its viability The auditors' opinion on the Company's financial statements as of July 31, 1999, calls attention to substantial doubts as to the Company's ability to continue as a going concern. Our financial statements are prepared on the assumption that the Company will continue in business. They do not contain any adjustments to reflect the uncertainty over our continuing in business. . The Company does not expect to pay dividends The Company has no plan to pay dividends in the near future. . The Company's stock has been a penny stock which is more difficult to sell The Company's common stock is a "penny stock," which is relatively more difficult for an investor to sell. A "penny stock" is any stock that falls below a selling price of $5.00 per share in the public market. Our common stock has traded below $5.00 per share since it began trading on the NASD Over-the-Counter Bulletin Board in January 1998. It is much more difficult to sell a penny stock than stock that trades on a national market or stock exchange because of the extra steps the broker/dealer must take before selling the stock. A sale of penny stock does not usually take place as quickly as a sale of shares that trade on a national market or stock exchange. An investor may decide to sell stock at a certain price, but by the time the sale is complete, the price of the stock may have fallen to the point that the investor does not achieve the desired result. Also, because of the difficulty in dealing in penny stocks, many broker/dealers are unwilling to participate in buying and selling these shares. . The Company's common stock price is volatile The Company's common stock price has historically been volatile. Volatility makes it more difficult for a shareholder to sell shares at the desired time and price. . The Company's stock price may fall if the Company fails to spin off GlobalSCAPE The Company announced it is considering a spin off or public offering (or combination of the two) of GlobalSCAPE, and the Company has retained an investment banking firm to evaluate the alternatives in achieving the appropriate value for GlobalSCAPE. If the Company does not complete this type of transaction (or if the Company takes too long to complete this transaction) the Company's stock price could fall. This transaction could be delayed or cancelled if the Company is unable to find an underwriter, is unable to negotiate a favorable offering price for the stock of GlobalSCAPE, there is a lack of public interest in such a transaction, or management and the Board determine that this transaction involves excessive operational and economic risk. . The Company may not successfully compete with others in the industry All of the Company's target markets are very competitive. The market for wholesale network services is very particularly competitive on the basis of price. The Company currently has seven customers for this service. The volume of business sent by each customer fluctuates, but this traffic is often heavily concentrated among three or four customers. In the past, two of these customers have been responsible for 50% of this traffic. If the Company is not able to continue to offer competitive prices, these customers will find some other suppliers, and the Company will lose a substantial portion of its revenue very quickly. Many of our competitors in this market have more extensive networks than the Company, as well as substantially greater financial, technical and marketing resources. For example, the Company competes with AT&T, MCI/WorldCom and Sprint Communications Company, L.P. ("Sprint") in this market, as well as numerous other large and small companies. Large competitors are able to take advantage of their established customer base to generate economies of scale, substantially lowering their costs. In addition, prices for this service have fallen dramatically in the recent past, and these pricing pressures could continue. 12 The Company expects there will continue to be mergers, acquisitions, and joint ventures in our industry creating more large and well-positioned competitors reducing the number of potential customers for the wholesale network services. The market for retail services is also extremely competitive. The Company competes with many other companies in this market, including AT&T, MCI/Worlcomm and Sprint. These companies have stronger name recognition and brand loyalty as well as a broader portfolio of services. The Company believes it can successfully compete by targeting the Latino population in the U.S. and by introducing innovative services. Certain larger companies, however, have also announced they intend to enter the Latino market in the U.S. as well. In Mexico, the Company will compete with Telmex which has substantially greater resources than the Company does. The telecommunications industry has been characterized by steady technological change. The Company may not be able to raise the money it needs to acquire the new technology necessary to keep its services competitive. . The Company may not be able to collect large receivables Wholesale network customers generate large receivable balances, often over $500,000 for a two-week period. The Company incurs substantial direct costs to provide this service. since the Company must pay its long distance carriers in Mexico to terminate these calls. If a customer fails to pay a large balance on time, the Company will have difficulty paying its carrier in Mexico on time. If long distance providers suspend services, the Company's retail services will be affected as well. . Reliance on key personnel The Company depends on a small number of key technical and managerial personnel. The Company may not be able to retain these personnel or attract the new personnel the Company needs to attain profitability. . The Company may not be able to lease transmission facilities The Company does not own all of the transmission facilities it needs to complete calls. For example, although the Company owns the switching and transport equipment needed to receive and transmit calls via satellite and fiber optic cable, the Company neither owns a satellite nor any fiber optic cable, and it must therefore lease transmission capacity from other companies. The Company may not be able to lease facilities at cost-effective rates in the future or enter into contractual arrangements necessary to expand or improve its network as necessary to keep up with technological change. There are a limited number of suppliers for the products and services the Company needs to complete its network. The Company may have difficulty finding alternate suppliers if any existing suppliers go out of business or are acquired by the Company's competitors. Also if certain current suppliers fail to honor their contractual commitments, the Company could be seriously affected. . The Company may not be able to pay suppliers on time The Company has not always paid all of its suppliers on time due to temporary cash shortfalls. These suppliers have given payment extensions in the past, but critical suppliers may discontinue service if the Company is not able to make payments on time in the future. In addition, equipment vendors may refuse to provide critical technical support for their products if they are not paid on time under the terms of support arrangements. The Company's ability to make payments on time depends on its ability to raise additional capital or improve cash flow from operations. . The Company may not be able to make debt payments on time The Company has borrowed money to purchase some of its significant equipment. The lenders have a security interest in the equipment to secure repayment of the debt. This means that the lenders may take possession of the equipment and sell it to repay the debt if the Company does not make payments on time. The Company has not always paid all of its equipment lenders on time due to temporary cash shortfalls. These lenders have given payment extensions in the past, but they may exercise their right to take possession of certain critical equipment if the Company is not able to make payments on time in the future. The Company's ability to make our payments on time depends on its ability to raise additional capital or improve cash flow from operations. 13 . The Company may have service interruptions and problems with the quality of transmission To retain and attract customers, the Company must keep its network operational 24 hours per day, 365 days per year. The Company has experienced service interruptions and other problems affecting the quality of voice and data transmission. To date, these problems have been temporary. The Company may experience more serious problems. In addition to the normal risks any telecommunications company faces (such fire, flood, power failure, equipment failure), the Company may have a serious problem if a meteor or space debris strikes the satellite that transmits our traffic, or a volcanic eruption or earthquake interferes with our operations in Mexico City. The Company has the ability to transmit calls via either the satellite or fiber optic portion of its network, and this redundancy should provide protection if there is a problem with one portion of the network. However, a significant amount of time could pass before the Company could re-route traffic from one portion of the network to the other, and there may not be sufficient capacity on only one portion of the network to carry all of the Company's traffic at any given time. To stay competitive, the Company will continue to integrate the latest technologies into its network. The risk of network problems increases during periods of expansion and transition to new technologies. . Changes in telecommunications regulations may harm our competitive position The telecommunications industry in the United States is regulated by the FCC and by the public utilities commissions in the various states. As a result of the deregulation required by the Telecommunications Act of 1996, the FCC has issued, and continues to issue, major changes to their regulations. These new regulations have significantly changed and will continue to change the competitive environment. For example, FCC regulations now permit the regional Bell operating companies (former local telephone monopolies such as Southwestern Bell) to enter the long distance market if certain conditions are met. The entry of these formidable competitors into the long distance market will make it more difficult for us to establish a retail customer base. Other new regulations affect the pricing for services the Company purchases from others. Pricing changes could put us at a relative disadvantage to larger competitors. The Company cannot predict what other changes there may be in the regulations or what effect these changes will have on the Company's targeted markets. The Mexican telecommunications industry has gone through the process of de- monopolization, and ongoing regulatory changes, and new laws and regulations there could affect the Company's target markets. These regulatory changes may not continue to improve market conditions and, even if they do, the Company may not have the opportunity to provide additional telecommunications services within Mexico and between Mexico and other countries. The international telecommunications industry is also governed by foreign laws and treaties between the United States and other countries. Changes in these laws or treaties may also affect the competitive environment. . Compliance with laws and regulations could be challenged The Company believes it and its subsidiaries are in compliance with all domestic and foreign telecommunications laws governing our current business. Government enforcement and interpretation of the telecommunications laws and licenses is, however, unpredictable and is often based on informal views of government officials and ministries. This is particularly true in Mexico and certain of our target Latin American markets, where government officials and ministries may be subject to influence by the former telecommunications monopoly, such as Telmex. This means compliance with the laws may be challenged. It could be very expensive to defend this type of challenge, and the Company might not win. If the Company were found to have violated the laws governing our business, the Company could be fined or denied the right to offer services. To our knowledge, the Company is not currently subject to any regulatory inquiry or investigation. . The Company may not be able to obtain new licenses the Company needs to reduce costs and expand our network Complete fulfillment of the Company's strategy requires a long distance concession from the Mexican government. The Company may not be able to obtain this concession, and if the Company does not obtain this concession, the Company may not be able to fully implement its strategy for the future or continue to offer services at competitive prices. The Company's strategy is to expand into other Latin American countries as regulatory conditions in those countries in permit. The Company may not be able to obtain the licenses the Company needs for this expansion. . Operations may be interrupted by the Year 2000 problem The Year 2000 problem is the result of computer programs that were designed to use two digits rather than four to specify the applicable year. As a result, date-sensitive software may recognize a date using "00" as the year 1900 rather 14 than the year 2000. This could result in miscalculations or major system failures that could cause disruptions in our operations, including the inability to process call billing records. The Company has implemented a comprehensive Year 2000 plan to assess our internal readiness and the readiness of our suppliers. The Company has identified some software applications that must be upgraded to avoid a disruption in our operations, but the Company expects to have those upgrades installed by November 30, 1999. Although the Company has received satisfactory responses from our suppliers regarding their Year 2000 readiness, the Company does not control them. Their systems may be affected by the Year 2000 problem. If any of our critical suppliers fails to perform because of the Year 2000 problem, the Company could suffer a serious interruption in service. . Operations may be affected by political changes in Mexico and other Latin American countries The majority of our foreign operations are in Mexico. The political and economic climate in Mexico and other Latin American countries is more uncertain than in the United States and unfavorable changes could have a direct impact on our operations in Mexico. For example, a newly elected set of government officials could decide to quickly reverse the deregulation of the Mexican telecommunications industry economy and take steps such as seizing our property, revoking our licenses, or modifying our contracts with Mexican suppliers. A period of poor economic performance could reduce the demand for our services in Mexico. There might be trade disputes between the United States and Mexico that result in trade barriers such as additional taxes on our services. The Mexican government might also decide to restrict the conversion of pesos into dollars or restrict the transfer of dollars out of Mexico. These types of changes, whether they occur or are only threatened, would also make it more difficult for us to obtain financing in the United States. . If the value of the Mexican Peso declines relative to the Dollar, the Company will have decreased earnings as stated Dollars Approximately 20% of ATSI's revenue is collected in Mexican Pesos. If the value of the Peso relative to the Dollar declines, (that is if Pesos are convertible into fewer Dollars) then our earnings, which are stated in dollars, will decline. The Company does not engage in any type of hedging transactions to minimize this risk and does not intend to do so. ITEM 2. PROPERTIES The Company's executive offices, principal teleport facility and control center are located at its leased facility in San Antonio, Texas, consisting of 11,819 square feet. The lease expires August 2002, and has two five-year renewal options. The Company pays annual rent of $98,452 (increasing to $107,789 per year for the last year) under the lease and is responsible for taxes and insurance. GlobalSCAPE, Inc.'s offices are located at its leased facility in San Antonio, Texas, consisting of 5,401 square feet. The lease expires January 31, 2001. GlobalSCAPE, Inc. pays annual rent of $87,496 per year and is responsible for taxes and insurance. Subsequent to year-end, the Company and GlobalSCAPE entered into agreements for new office space beginning in December of 1999. Both agreements are for a period of eight and a half-years with rent deferred for the first six months of the agreement. The Company's facility will consist of 26,250 square feet with annual rent of $311,850 per year while GlobalSCAPE's facility will consist of 14,553 square feet with annual rent of $174,636 per year. Management believes its leased facilities are suitable and adequate for their intended use. ITEM 3. LEGAL PROCEEDINGS On January 29, 1999, one of the Company's customers, Twister Communications, Inc. filed a Demand for Arbitration seeking damages for breach of contract. The customer claims that the Company wrongfully terminated an International Carrier Services Agreement executed by the parties in June 1998 under which the Company provided wholesale carrier services from June 1998 to January 1999. The customer's claims for damages represent amounts that it claims it had to pay in order to replace the service provided by the Company. The Company disputes that it terminated the contract wrongfully and asserts that the customer breached the agreement by failing to pay for services rendered and by intentionally making false representation regarding its traffic patterns and on March 3, 1999 filed a Demand for Arbitration seeking damages for breach of contract in an amount equal to the amounts due to the Company for services rendered plus interest, plus additional damages for fraud. An arbitration panel was selected and the parties are now completing written discovery. 15 While the Company believes that it has a justifiable basis for its arbitration demand and that it will be able to resolve the dispute without a material adverse effect on the Company's financial condition; until the arbitration proceedings take place, the Company can not reasonably estimate the possible loss, if any, and there can be no assurance that the resolution of this dispute would not have an adverse effect on the Company's results of operations. On June 16, 1999, the Company initiated a lawsuit against one of its vendors claiming misrepresentation and breach of conduct. Under an agreement the Company signed in late 1998, the vendor was to provide quality fiber optic capacity in January 1999. The delivery of the route in early 1999 was a significant component of the Company's operational and sales goal for the year and the failure of its vendor to provide the capacity led to the Company negotiating an alternative agreement with Bestel, S.A. de C.V. at a higher cost. While the total economic impact is still being assessed, the Company believes lost revenues and incremental costs are in excess of $15 million. While the Company's contract contains certain limitations regarding the type and amounts of damages that can be pursued, the Company has authorized its attorneys to pursue all relief to which it is entitled under law. As such, the Company can not reasonably estimate the ultimate outcome of this lawsuit nor the additional costs that may be incurred in the pursuit of its case. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no submission of matters to a vote of security holders during the fourth quarter of the Company's fiscal year. PART II. -------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is quoted on the NASD: OTCBB under the symbol "AMTI". Prior to December 1997, the Company's Common Stock was traded on the Canadian Dealing Network under the symbol ATIL.CDN. The table below sets forth the high and low bid prices for the Common Stock from August 1, 1997 through December 21, 1997 as reported by the Canadian Dealing Network and from December 22, 1997 through October 25, 1999 as reported by NASD: OTCBB. These price quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions. Fiscal 1998 High Low ---------------------------------------- First - .............$ 3 1/4 $ 1 3/8 Second - ............$ 3 7/16 $ 2 Third - .............$ 3 1/2 $ 1 5/7 Fourth - ............$ 2 1/4 $ 3/4 Fiscal 1999 High Low ---------------------------------------- First - .............$ 1 1/8 $ 15/32 Second - ............$ 1 9/32 $ 3/4 Third - .............$ 1 13/64 $ 5/8 Fourth - ............$ 1 53/64 $ 1 1/32 Fiscal 2000 High Low ---------------------------------------- First - through October 25, 1999)......$ 1 11/32 $ 45/64 At October 25, 1999 the closing price of the Company's Common Stock as reported by NSD:OTCBB was $0.92 per share. As of October 25, 1999, the Company had approximately 5,000 stockholders, including both beneficial and registered owners. ATSI has not paid dividends on its common stock the past three years and does not expect to do so in the foreseeable future. 16 ITEM 6. SELECTED FINANCIAL AND OPERATING DATA. The following selected financial and operating data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and the Notes thereto included elsewhere herein.
Years ended July 31, -------------------- 1995 1996 1997 1998 1999 ---------- ---------- ---------- --------- --------- (In thousands of $, except per share data) Consolidated Statement of Operations Data: Operating revenues: Call services $4,470 $10,807 $12,545 $13,547 $ 6,602 Direct dial services - - 1,421 6,085 6,024 Network management services 318 2,614 1,698 13,362 19,250 Internet e-commerce - 54 564 1,526 2,642 Total operating revenues 4,788 13,475 16,228 34,520 34,518 ---------- ---------- ---------- --------- --------- Operating expenses: Cost of services 4,061 10,833 12,792 22,287 21,312 Selling, general and administrative 2,196 3,876 6,312 12,853 12,652 Bad debt 340 554 735 1,024 2,346 Depreciation and amortization 141 281 591 1,822 3,248 ---------- ---------- ---------- --------- --------- Total operating expenses 6,738 15,544 20,430 37,986 39,558 Loss from operations (1,950) (2,069) (4,202) (3,466) (5,040) ---------- ---------- ---------- --------- --------- Net loss $(2,004) $(2,205) $(4,695) $(5,094) $(7,591) ---------- ---------- ---------- --------- --------- Per share information: Net loss $ (0.14) $ (0.11) $ (0.18) $ (0.12) $ (0.16) ---------- ---------- ---------- --------- --------- Weighted average common shares outstanding 13,922 19,928 26,807 41,093 47,467 ---------- ---------- ---------- --------- --------- Consolidated Balance Sheet Data: Working capital (deficit) $ (446) $ (592) $ 195 $(5,687) $(6,910) Current assets 1,088 1,789 5,989 5,683 5,059 Total assets 2,766 4,348 15,821 24,251 24,154 Long-term obligations, including current portion 133 604 3,912 8,303 10,168 Total stockholders' equity 1,231 1,629 6,936 7,087 6,137
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SPECIAL NOTE: Certain Statements set forth below under this caption constitute "forward-looking statements" within the meaning of the Securities Act. See page 2 for additional factors relating to such statements. The following is a discussion of the consolidated financial condition and results of operations of the Company for the three fiscal years ended July 31, 1997, 1998, and 1999. It should be read in conjunction with the Consolidated Financial Statements of the Company, the Notes thereto and the other financial information included elsewhere in this annual report on Form 10-K. For purposes of the following discussion, references to year periods refer to the Company's fiscal year ended July 31. General The Company's mission is to employ leading-edge technologies for delivery of exceptional telecommunication services to underserved Latino markets in the U.S. and Latin America emphasizing convenience, accessibility, quality, reliability, and affordability, while continually seeking to add value through new and innovative products and services. Utilizing a framework of licenses, interconnection and service agreements, network facilities and retail distribution channels (hereinafter collectively referred to as the "framework"), the Company is primarily focused on capturing market share in the international telecommunications corridor between the United States and Mexico. Even with poor phone-line penetration, the Company's research indicates that Mexico may exchange more international traffic with the U.S. than any other country 17 in the world within the next two years. As the regulatory environments allow, the Company also plans to establish framework in other Latin American countries as well. In addition to the U.S. and Mexico, the Company currently owns or has rights to use facilities in and has strategic relationships with carriers in Costa Rica, El Salvador, and Guatemala. Utilizing the framework described above, the Company provides local, domestic long distance and international calls from its own public telephones and casetas within Mexico, and provides similar services to some third party- owned casetas, public telephones and hotels in Mexico. Consumers visiting a Company-owned communication center or public telephone may dial directly to the desired party in exchange for cash payment, or can charge the call to a U.S. address (collect, person-to-person, etc.) or calling card, or to a U.S. dollar- denominated credit card with the assistance of an operator. In July 1998, the Company began providing domestic U.S. and international call services to Mexico to residential customers on a limited basis in the U.S. Callers may either pre- subscribe to the Company's one-plus residential service, or dial around their pre-subscribed carrier by dialing 10-10-624, plus the area code and desired number. Where possible, these retail calls are transported over the Company's own network infrastructure. Utilizing the same framework described above, the Company also serves as a retail and wholesale facilities-based provider of network services for corporate clients and U.S. and Latin American telecommunications carriers. These customers typically lack transmission facilities into certain markets, or require additional capacity into certain markets. The Company currently provides these services to and from the United States, Mexico, Costa Rica, El Salvador and Guatemala. The Company is also the sole owner of GlobalSCAPE, Inc., which is rapidly becoming a leader in electronic commerce of top Internet-based software, utilizing the Web as an integral component of its development, marketing, distribution and customer relationship strategies. Utilizing CuteFTP as its flagship product, GlobalSCAPE has a user base of approximately 7.5 million users as of July 31, 1999. The Company's consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred losses since inception and has a working capital deficit as of July 31, 1999. Additionally, the Company has had recurring negative cash flows from operations with the exception of a three month period ended January 31, 1998. For the reasons stated in Liquidity and Capital Resources and subject to the risks referred to in Liquidity and Capital Resources, the Company expects improved results of operations and liquidity in fiscal 2000. However, no assurance may be given that this will be the case. 18 Results of Operations The following table sets forth certain items included in the Company's results of operations in thousands of dollar amounts and as a percentage of total revenues for the years ended July 31, 1997, 1998 and 1999.
Year Ended July 31, ----------------------------------------------------------------------------------- 1997 1998 1999 ---------------------- ------------------------ ----------------------- $ % $ % $ % --- --- --- --- --- --- Operating revenues - ------------------ Network management services $ 1,698 11% $13,362 39% $19,250 56% Call services $12,545 77% $13,547 39% $ 6,602 19% Direct dial services $ 1,421 9% $ 6,085 18% $ 6,024 17% Internet e-commerce $ 564 3% $ 1,526 4% $ 2,642 8% ---------- ---------- ---------- Total operating revenues $16,228 100% $34,520 100% $34,518 100% Cost of services $12,792 79% $22,287 65% $21,312 62% ---------- ---------- ---------- Gross margin $ 3,436 21% $12,233 35% $13,206 38% Selling, general and Administrative expenses $ 6,312 39% $12,853 37% $12,652 37% Bad debt expenses $ 735 4% $ 1,024 3% $ 2,346 6% Depreciation and amortization $ 591 4% $ 1,822 5% $ 3,248 10% ---------- ---------- ---------- Operating loss $(4,202) -26% $(3,466) -10% $(5,040) -15% Other, net $ (493) -3% $(1,628) -5% $(1,696) -5% ---------- ---------- ---------- Net loss $(4,695) -29% $(5,094) -15% $(6,736) -20% Less: preferred stock dividends $ - 0% $ - 0% $ (855) -2% ---------- ---------- ---------- Net loss to common shareholders $(4,695) -29% $(5,094) -15% $(7,591) -22% ========== ========== ==========
Year ended July 31, 1999 Compared to Year Ended July 31, 1998 Operating Revenues. Operating revenues were flat between years, due primarily to declines in the Company's call services revenues offset by the growth in the Company's network management and Internet e-commerce services. Network management services, which includes both retail and wholesale transport services increased 44%, or $5.9 million from 1998 to 1999. Revenues from the wholesale transport of traffic for U.S.-based carriers increased as the Company processed approximately 78.6 million minutes in 1999 as compared to 46.1 million minutes in 1998. The 70% increase in minutes did not result in a corresponding increase in revenues as competitive and other market factors caused the Company's revenue per minute to decline from period to period. The Company's agreement with Satelites Mexicanos, S.A. de C.V. ("SATMEX"), secured in the fourth quarter of fiscal 1998 allowed the Company to secure and resell additional bandwidth capacity. This increased capacity and flexibility allowed the Company to increase billings to existing corporate clients who previously dealt with SATMEX directly and to add additional retail, corporate clients more quickly. Call services revenue decreased approximately $6.9 million, or 51%, between years. This decline is principally attributable to the Company's strategy to focus on providing international call services from its own payphones and communication centers (casetas). In July 1998, the Company 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 the Company's core business and the costs 19 associated with further provision of services did not justify keeping the business. For the year ended July 31, 1999, the Company 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. Direct dial service revenues, which are generated by calls processed by the Company without live or automated operator assistance, declined slightly between years. A majority of these revenues, stated in U.S. dollars in the accompanying consolidated financial statements are generated by calls processed by the Company's public telephones and casetas in Mexico in exchange for immediate cash payment in pesos, the local Mexican currency. While the number of these calls and consequently the pesos collected increased between years, those pesos converted into fewer U.S. dollars as the average exchange rate between years went from 8.33 pesos to the dollar for fiscal 1998 to 9.77 pesos to the dollar for fiscal 1999. Revenues from GlobalSCAPE, Inc., the Company's e-commerce subsidiary increased approximately $1.1 million or 73% between years. GlobalSCAPE's purchase of the rights to the source code of CuteFTP, its flagship product in January 1999, resulted in an enhanced version of CuteFTP which increased the 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 the Company's gross margins. Gross margins for the Company's telco operations remained flat at 34% between years, in spite of intense market pressures in the Company's wholesale network transport services. 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 the Company's own network infrastructure, the Company was able to move toward vertical integration of its services and operations and maximize its gross margins using its own network where possible. Selling, General and Administrative (SG&A) Expenses. SG&A expenses decreased 2%, or approximately $200,000 between year, as the Company did not incur expenses incurred in the prior year associated with its Plan of Arrangement. As a percentage of revenue, these expenses remained flat at 37%. The Company had anticipated that these expenses would decline as a percentage of revenues, but they did not do so in light of the circumstances surrounding the delay of fiber capacity available to the Company. In the fourth quarter of 1999, the Company began to further integrate its two primary operating subsidiaries in Mexico, Computel and ATSI-Mexico as the Company continues to seek ways to lower its SG&A expense levels. Net of non-cash expenses, related to the Company's 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, the Company established specific bad debt reserves of approximately $1.5 million related to retail and wholesale transport of network management services. While the Company has reserved for these customers, it is actively pursuing collection of amounts owed including legal proceedings specifically related to approximately $1.2 million of the accounts reserved. Excluding these specific reserves, bad debt expense declined both as a % of revenues and in actual dollars between years. Depreciation and Amortization. Depreciation and amortization rose approximately $1.4 millon, or 78%, and rose as a percentage of revenues from 5% to 10% between years. The increased depreciation and amortization is attributable to an approximate $2.4 million increase in fixed assets between years as well as increased amortization related to acquisition costs, trademarks and goodwill. The majority of the assets purchased consisted of equipment which added capacity to the Company's existing international network infrastructure including the Network Technologies (N.E.T.) equipment purchased in December 1998 and the Company's new Nortel DMS 250/300 International Gateway switch purchased in January 1999. Operating Loss. The Company's operating loss 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. 20 Preferred Stock Dividends. During fiscal 1999, the Company recorded approximately $855,000 of expense related to cumulative convertible preferred stock. In addition to cumulative dividends on its Series A and Series B Preferred Stock, which are accrued at 10% and 6%, respectively per month, the Company has recorded a discount or "beneficial conversion feature" associated with the issuance of its 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. Year ended July 31, 1998 Compared to Year Ended July 31, 1997 Operating Revenues. Operating revenues increased approximately $18.3 million, or 113%, as the Company experienced growth in each service category. Network management services increased 687% from $1.7 million in 1997 to $13.4 million in 1998. The majority of this growth was due to the amount of wholesale network services provided to other carriers seeking transmission facilities or additional capacity for their services. The Company began providing these services in October 1997, and produced approximately $10 million in revenues from this service during 1998. Call services revenue increased approximately $1.0 million, or 8%, primarily due to growth in the Company's 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, the Company 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, the Company de- emphasized these services due to relatively lower profit margins on this business. On July 16, 1998, the Company ceased providing these services altogether. Revenues from these services decreased from approximately $3.9 million in 1997 to approximately $2.9 million in 1998. The Company does not anticipate producing significant revenues from such services, if any, during fiscal 1999. Direct dial services, calls processed in exchange for cash without utilizing the company's operator center in San Antonio, Texas, increased 328% from approximately $1.4 million in fiscal 1997 to approximately $6.1 million in fiscal 1998. This increase was primarily due to the acquisition in May and August 1997 of Computel, the largest private caseta operator in Mexico. The Company also began processing local and domestic long distance calls within Mexico during the latter half of 1997 from its own intelligent payphones installed in resort areas of Mexico. These calls are made by depositing coins (pesos or quarters) in the Company's phones to initiate service. 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 the Company during 1998, as discussed above. The improvement in the Company's gross profit margin resulted from the change in the mix of services it provided during 1998 as described above, and its continuing efforts to decrease costs subsequent to the demonopolization of Telmex, which took place January 1, 1997. Subsequent to Telmex's demonopolization, the Company was able to negotiate with newly concessioned carriers in Mexico to transport its calls originating and terminating in Mexico, which has lowered the associated per minute rate to carry those calls. Additionally, the Company was one of the first four companies to receive a public payphone comercializadora license from the SCT in February 1997, which has allowed the Company to provide local, domestic and international calls from public telephones in Mexico. In November 1997, the Company 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 the Company's operator center for processing international calls. By purchasing the customer base, the Company was able to eliminate a layer of expense associated with the traffic and effectively lower its overall commission rate paid to public telephone location owners in Mexico. The Company has also improved its gross margin by utilizing its 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 the Company's ATSI-Mexico operations, the expensing of costs related to the Company's planned acquisition of additional concessions from the Mexican regulatory authorities, and the expensing of costs related to the Company's 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 its operations and began procuring, installing, operating and maintaining coin-operated, intelligent 21 payphones. During 1998, the Company expensed $631,000 in costs incurred relative to the Company's reincorporation. Approximately $268,000 in expenses were incurred during 1997 relative to the reincorporation. 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 millon, or 208%, and rose as a percentage of revenues from 4% to 5% between years. From July 31, 1997 through July 31, 1998, the Company 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 the Company's 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. The Company 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. The Company's 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, the Company 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. Year Ended July 31, 1997 Compared to Year Ended July 31, 1996 Operating Revenues. Operating revenues increased approximately $2.8 million or 20%, due mainly to increased revenues from call services. Approximately $1.4 million of revenues in fiscal 1996 were attributable to the sale and installation of a large network in Mexico to one of Mexico's largest milk producers. Subsequent to completing the sale and installation of the network, the Company began recognizing monthly revenues from the management of the network. The sale and installation of such a large network is not considered to be of a recurring nature by the Company; however, management of this and other networks is considered to be a recurring source of revenues for the Company. GlobalSCAPE had revenue of $500,000 in fiscal 1997, representing less than 4% of the Company's consolidated revenue. Operating revenues from call services increased 29%, or approximately $3.2 million, due almost entirely to increased call volumes from international call services provided from hotels and resorts in Jamaica, increased call volumes attributable to the Company's Brazilian calling card product, and the inclusion of Computel's revenues attributable to call services provided by Computel during the last quarter of fiscal 1997 (which represented approximately $1.4 million of consolidated revenues in fiscal 1997). Revenues from international calls originating in Mexico increased 5%, while call volumes and related revenues from calls originating in Mexico and from calls originating and terminating domestically within the U.S. remained relatively constant between periods. Although the Company continued to install Charge-a-Call telephones in Mexico throughout fiscal 1997, the number of calls per phone decreased slightly. The Company believes this was due to increasing costs to the consumer. The Company began to lower the price per call to the consumer from certain telephones in the first quarter of fiscal 1998 based on the decrease in the Company's cost of providing these calls through its agreement with Investcom. The increased volume of calls relating to Jamaica and Brazil increased the number of international calls processed by the Company as compared to domestic calls processed entirely within the United States. Because international calls typically generate higher revenues on a per call basis than domestic calls, the average revenue per completed call processed by the Company increased from $14.93 for fiscal 1996 to $17.88 for fiscal 1997. Excluding the $1.4 million of revenues recognized in fiscal 1996 attributable to the sale and installation of the network to the Mexican milk producer, revenues from network management services increased approximately $596,000, or 67%. This increase was largely due to recurring revenues from the Mexican milk producer and Investcom commencing in the early and latter part, respectively, of fiscal 1997. Cost of Services. Cost of services increased approximately $2.0 million, or 18%, resulting in an increase in the Company's overall gross margin from 20% in fiscal 1996 to 21% in fiscal 1997. If the approximately $1.4 million in revenues and the $960,000 in costs related to the sale and installation of the network to the Mexican milk producer were excluded from the Company's results for fiscal 1996, the Company's gross profit percentage would have been 18% for fiscal 1996. The increase in cost of services was primarily attributable to the increased volume of calls handled by the Company from Jamaica 22 to the U.S. and from the U.S. to Brazil, the inclusion of Computel's cost of services for the last quarter of fiscal 1997, and rising costs associated with transporting calls from Mexico to the Company's Switching/Operator Facility in San Antonio, Texas. Although Telmex officially lost its status as a monopoly on August 10, 1996, Investcom was not allowed connectivity to Telmex's local network in Mexico until January 1997 and did not have the switch capacity in Mexico to process the Company's traffic until May 1997. As a result, the Company was unable to commence processing any of its traffic at lower per-minute costs until May 1997. Subsequent to May 1997, the public phones serviced by the Company in Mexico were frequently only able to access the Company's operator center utilizing a cellular connection, since local connectivity had not yet been provided by Telmex. This added a per-minute air time charge to the Company's cost of transmitting calls from Mexico, resulting in a decline in the gross profit margin on international calls transmitted from the Company's public phones in Mexico. Selling, General and Administrative Expenses. SG&A expenses rose 63%, or approximately $2.4 million between years. If the revenues related to the sale and installation of the network to the Mexican milk producer in fiscal 1996 were excluded, SG&A expenses would have increased as a percentage of overall revenues from 29% to 32%. The increase in SG&A expense is almost entirely due to expanded operations within Mexico and the inclusion of Computel's SG&A expense for the last quarter of fiscal 1997. ATSI-Mexico had less than five employees at the beginning of fiscal 1996 as compared to 36 employees at the end of fiscal 1997. Computel operates 134 casetas in approximately 72 cities throughout Mexico, and has approximately 430 employees. Bad Debt Expense. Bad debt expense increased approximately $180,000 between years and remained flat as a percentage of revenues at 4%. The Company incurred greater bad debt expense due to the higher revenue levels between years. Depreciation and Amortization. Depreciation and amortization increased approximately $310,000, or 110%, due primarily to approximately $2.1 million in fixed asset additions principally for the development of the Company's teleport facilities in San Antonio, Texas, Cancun and Mexico City, Mexico, and San Jose, Costa Rica; the acquisition of intelligent payphones; and the inclusion of Computel's depreciation attributable to the acquisition of Computel. Other income (expense). Other income (expense) increased to a net expense of approximately $445,000 primarily as a result of interest expense incurred on capital lease obligations and convertible notes issued in 1997. Liquidity and Capital Resources Because the Company did not produce sufficient gross margin dollars to cover its selling, general and administrative costs, the Company generated negative cash flows from operations during the year ended July 31, 1999 of approximately $3.6 million. This shortfall includes the $1.5 million provision for specific accounts receivable generated during the year for which the Company may not receive any funds. The Company's payable and accrued liability position increased from July 31, 1998 to July 31, 1999 as the Company often utilized cash flows produced from financing activities to pay down debt and capital lease obligations before paying vendors or suppliers of services to the Company. When possible, the Company arranged capital lease obligations in order to obtain equipment necessary to expand or maintain its operations. During fiscal 1999, the Company was able to secure long-term capital lease arrangements of $2.0 million from NTFC Capital Corporation to cover the acquisition of its Nortel DMS 250/300 switch and $900,000 from Bank Boston Leasing to cover the cost of ATM equipment needed to upgrade its network to a packet-switching environment. As of July 31, 1999 the Company has only utilized approximately $500,000 of the Bank Boston Leasing facility. During the year ended July 31, 1999 the Company acquired approximately $1.0 million in equipment which was not financed. The majority of this equipment was used to maintain or upgrade its network between the U.S. and Mexico. In January 1999, GlobalSCAPE purchased the rights to the source code for CuteFTP, its flagship product. Terms of the purchase called for a cash payment of approximately $171,000, which the Company financed through a bank note of $180,000 at an interest rate of prime plus 1%, and twelve monthly payments of principal and interest of $63,000 beginning February 1999. The terms of the note called for principal and interest payments over a two-year period, comprised initially of twelve monthly principal payments of $5,000 plus interest to be followed by twelve monthly principal payments of $10,000 plus interest. GlobalSCAPE paid the monthly amounts owed for these obligations out of recurring cash flows produced from its operations during fiscal 1999, and management anticipates that it will continue to be able to do so during the next fiscal year. 23 In addition to the financing by GlobalSCAPE, the Company borrowed $250,000 from officers and directors of the Company that was used for working capital purposes. As of July 31, 1999, a total of $100,000 remained outstanding to two officers of the Company. During 1999, the Company stopped factoring a portion of its receivables. At that point, the Company had accumulated an approximate $319,000 balance due to the factoring company. As of July 31, 1999 approximately $137,000 remains outstanding on this balance, which is being paid monthly from cash generated by the Company's call services business. The Company paid approximately $941,000 toward its capital lease obligations during fiscal 1999. In an effort to reduce its cash outflows, in May 1999 the Company restructured its capital lease obligation with IBM de Mexico, extending payment of the total obligation over a forty-eight (48) month period. Monthly payments due under the facility with NTFC Capital Corporation are deferred until January 2000. In an effort to improve its working capital position, the Company raised approximately $4.2 million from March 1999 through July 1999, net of issuance costs, in private placements of preferred stock, and another $302,000 in a private placement of common stock. Exercises of warrants and options during fiscal 1999 generated an additional approximate $1.3 million in cash proceeds during the year. The majority of the proceeds from these private placements and warrant and option exercises were used to pay vendors and suppliers of services to the Company. The net result of the Company's operating, investing and financing activities during the year was a working capital deficit at July 31, 1999 of approximately $6.9 million and cash on hand of approximately $379,000. Included in the Company's current obligations, net of the associated debt discount, are notes payable of $2.2 million which will be due and payable, along with accrued interest of approximately $760,000 in March 2000. Although the Company generated cash flows from financings in excess of $6.2 million during fiscal 1999, these proceeds were not sufficient to cover the net cash used in operations, capital expenditures and debt service requirements of approximately $6.9 million incurred during the year. As planned, the Company shifted its focus during the year away from traffic generated outside of its core market of Mexico, and focused on generating and transporting traffic over its own international network infrastructure in order to produce better cash flow results. The result was an increase in wholesale network transport traffic flowing over the Company's network. Overall, network services contributed approximately 56% of overall corporate revenues during the year, as opposed to approximately 39% in fiscal 1998. However, market pressures caused the price at which wholesale network transport services could be sold to decline approximately 40% during fiscal 1999. Although the Company was able to reduce its costs associated with transporting the traffic, the Company produced less dollars of gross margin on a per minute basis than it had in fiscal 1998. GlobalSCAPE's gross margins increased during the year with the purchase of the source code to CuteFTP, but on a consolidated basis the Company was unable to generate the gross margin dollars necessary to cover SG&A costs and all of its debt service requirements. As of October 1999, the Company is continuing to experience market pressures on its wholesale network transport services business. In order to produce better cash flows, the Company must focus on keeping its international network between Mexico and the U.S. optimally utilized with a blend of retail and wholesale traffic. Because the Company upgraded its network during fiscal 1999 to an ATM packet-switching environment, the Company feels that it can transport traffic as efficiently as possible in an effort to minimize costs. However, the Company anticipates that pricing pressures will continue in its wholesale transport market, so it will focus its 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 its retail strategy combined with the deployment of leading edge technology for communications transport will ultimately bring about improved profitability and sustainable growth in the future. In the near term, the Company must continue to manage its costs of providing services and overhead costs as it begins focusing on optimizing use of its network. The Company has applied for a long distance concession in Mexico which, if obtained, the Company believes will eventually allow it to significantly reduce its cost of transporting services. In order for it to significantly reduce costs with the concession, the Company would need to purchase a significant amount of hardware and software, allowing it to expand and operate its own network in Mexico. Until the Company is able to produce positive cash flows from operations in an amount sufficient to meet its debt service and capital expenditure requirements, it must be able to access debt and/or equity capital to assist it in doing so, although no assurance may be given that it will be able to do so. In September 1999, the Company issued approximately $500,000 of 6% Series C Preferred Stock on terms substantially similar to those of the Series B Preferred Stock. In an effort to meet its financial needs going forward, the Company has engaged the investment banking firm of Gerard, Klauer Mattison 24 & Co. ("GKM"). GKM will assist the Company in finding and securing financial and strategic relationships. The Company has also engaged the investment banking firm of SunTrust Equitable Securities to assist it in, among other things, raising private or public funds for GlobalSCAPE. However, there can be no assurance that such funds will be raised. Inflation/Foreign Currency Inflation has not had a significant impact on the Company's operations. With the exception of direct dial services from the Company's casetas and coin operated public telephones, almost all of the Company's revenues are generated and collected in U.S. dollars. Direct dial services from the Company's casetas and public telephones are generally provided on a "sent-paid" basis at the time of the call in exchange for cash payment, so the Company does not maintain receivables on its books that are denominated in pesos. In an effort to reduce foreign currency risk, the Company attempts to convert pesos collected to U.S. dollars quickly and attempts to maintain minimal cash balances denominated in pesos. Some expenses related to certain services provided by the Company are incurred in foreign currencies, primarily Mexican pesos. The devaluation of the Mexican peso over the past several years has not had a material adverse effect on the Company's financial condition or operating results. Seasonality The Company's call service revenues are typically higher on a per phone basis during January through July, the peak tourism months in Mexico. Year 2000 Compliance The Company initiated a program to identify and address issues associated with the ability of its date-sensitive information, telephony and business systems to properly recognize the year 2000 in order to avoid interruption of the operation of these systems at the turn of the century. This program is being conducted by the Company's Management Information Systems group, which is coordinating the efforts of internal resources as well as third party vendors in making all of the necessary changes for all management systems and product related infrastructure for the Company's divisions and subsidiaries. The Company believes it is 96% complete in achieving Year 2000 readiness, and will be Year 2000 ready by November 30, 1999. The only significant remaining item is an outstanding issue related to the payroll systems of the Company's Mexican subsidiaries. The Company expects to avoid disruption of its owned information, telephony and business systems as a result of these efforts. However, the Company must rely on the representations and warranties of third parties, including domestic U.S. and foreign carriers of its traffic, in testing for readiness for year 2000 issues and cannot ensure compliance by these parties. The Company has developed contingency plans in areas where it believes there is any significant risk or where a third party has not adequately responded to the Company's inquiries, which includes transitions to other providers. The Company believes that a worst case scenario resulting from a Year 2000 related failure would be a temporary disruption of normal business operations. Based upon the work completed to date, the Company believes that such an occurrence is unlikely. However, as stated above, the Company is relying on representations and warranties of third parties who are beyond the Company's control. A disruption of business operations could have a material adverse effect on the Company's financial performance. The Company has expended approximately $100,000 in its Year 2000 program to date, and does not expect to experience any material additional cost. 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Consolidated Financial Statements of American TeleSource International, Inc. and Subsidiaries Report of Independent Public Accountants.................................. 27 Consolidated Balance Sheets as of July 31, 1998 and 1999.................. 28 Consolidated Statements of Operations for the Years Ended July 31, 1997, 1998 and 1999............................................................. 29 Consolidated Statements of Comprehensive Income (Loss) for the Years Ended July 31, 1997, 1998 and 1999........................................ 30 Consolidated Statements of Stockholders' Equity for the Years Ended July 31, 1997, 1998 and 1999.............................................. 31 Consolidated Statements of Cash Flows for the Years Ended July 31, 1997, 1998 and 1999............................................................. 32 Notes to Consolidated Financial Statements................................ 33 26 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of American TeleSource International, Inc.: We have audited the accompanying consolidated balance sheets of American TeleSource International, Inc. (a Delaware corporation) and subsidiaries (the Company) as of July 31, 1998 and 1999, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for the years ended July 31, 1997, 1998 and 1999. These financial statements are the responsibility of the 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American TeleSource International, Inc. and subsidiaries as of July 31, 1998 and 1999, and the results of their operations and their cash flows for the years ended July 31, 1997, 1998 and 1999, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that 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. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts including goodwill and other intangibles or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. /s/ ARTHUR ANDERSEN LLP San Antonio, Texas October 5, 1999 27 AMERICAN TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share information)
July 31, --------------------------- 1998 1999 ------------ ------------ ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents $1,091 $379 Accounts receivable, net of allowance of $209 and $1,600, respectively 3,748 3,693 Prepaid expenses and other 844 987 ------------ ------------ Total current assets 5,683 5,059 ------------ ------------ PROPERTY AND EQUIPMENT (At cost): 14,233 16,669 Less - Accumulated depreciation and amortization (2,418) (4,713) ------------ ------------ Net property and equipment 11,815 11,956 ------------ ------------ OTHER ASSETS, net Goodwill, net 5,091 5,032 Contracts, net 1,173 703 Trademarks, net - 789 Other assets 489 615 ------------ ------------ Total assets $24,251 $24,154 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Accounts payable $5,683 $4,164 Accrued liabilities 2,113 3,239 Current portion of notes payable 688 961 Current portion of convertible long-term debt - 1,942 Current portion of obligations under capital leases 2,351 1,430 Deferred revenue 535 233 ------------ ------------ Total current liabilities 11,370 11,969 ------------ ------------ LONG-TERM LIABILITIES: Notes payable, less current portion 719 312 Convertible long-term debt, less current portion 1,604 - Obligations under capital leases, less current portion 2,941 5,523 Other 530 213 ------------ ------------ Total long-term liabilities 5,794 6,048 ------------ ------------ COMMITMENTS AND CONTINGENCIES: (See Note 13) STOCKHOLDERS' EQUITY: Preferred stock, $0.001 par value, 10,000,000 shares authorized, Series A Cumulative Convertible Preferred Stock, 50,000 shares authorized, no shares issued and outstanding at July 31, 1998 24,145 shares issued and outstanding at July 31, 1999 - - Series B Cumulative Convertible Preferred Stock, 2,000 shares authorized, no shares issued and outstanding at July 31, 1998 2,000 shares issued and outstanding at July 31, 1999 - - Common stock, $0.001 par value, 100,000,000 shares authorized, 45,603,566 issued and outstanding at July 31, 1998 48,685,287 issued and outstanding at July 31, 1999 46 49 Additional paid in capital 22,248 29,399 Accumulated deficit (14,396) (21,987) Deferred compensation (667) (466) Cumulative translation adjustment (144) (858) ------------ ------------ Total stockholders' equity 7,087 6,137 ------------ ------------ Total liabilities and stockholders' equity $ 24,251 $ 24,154 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 28 AMERICAN TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
For the Years Ended July 31, 1997 1998 1999 ------------- ----------- --------- OPERATING REVENUES: Network management services $ 1,698 $ 13,362 $ 19,250 Call services 12,545 13,547 6,602 Direct dial services 1,421 6,085 6,024 Internet e-commerce 564 1,526 2,642 ------------- ----------- --------- Total operating revenues 16,228 34,520 34,518 ------------- ----------- --------- OPERATING EXPENSES: Cost of services 12,792 22,287 21,312 Selling, general and administrative 6,312 12,853 12,652 Bad debt expense 735 1,024 2,346 Depreciation and amortization 591 1,822 3,248 ------------- ----------- --------- Total operating expenses 20,430 37,986 39,558 ------------- ----------- --------- OPERATING LOSS (4,202) (3,466) (5,040) OTHER INCOME (EXPENSE): Interest income 27 76 59 Other income 68 32 - Other expense (27) (24) (10) Interest expense (513) (1,573) (1,745) ------------- ----------- --------- Total other income (expense) (445) (1,489) (1,696) ------------- ----------- --------- LOSS BEFORE INCOME TAX EXPENSE AND MINORITY INTEREST (4,647) (4,955) (6,736) FOREIGN INCOME TAX EXPENSE - (139) - MINORITY INTEREST (48) - - ------------- ----------- --------- NET LOSS ($4,695) ($5,094) ($6,736) LESS: PREFERRED STOCK DIVIDENDS - - (855) ------------- ----------- --------- NET LOSS TO COMMON SHAREHOLDERS ($4,695) ($5,094) ($7,591) ============= =========== ========= BASIC AND DILUTED LOSS PER SHARE ($0.18) ($0.12) ($0.16) ============= =========== ========= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 26,807 41,093 47,467 ============= =========== =========
The accompanying notes are an integral part of these consolidated financial statements. 29 AMERICAN TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands)
For the Years Ended July 31, ---------------------------------------------------------------- 1997 1998 1999 ------------ ------------ ------------ Net loss ($4,695) ($5,094) ($7,591) Other comprehensive income (loss), net of tax: Foreign currency translation adjustments $12 ($160) ($714) Comprehensive loss to common stockholders ($4,683) ($5,254) ($8,305)
The accompanying notes are an integral part of these consolidated financial statements. 30 AMERICAN TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
Preferred Shares Common Stock ----------------------- ---------------------- Additional Shares Amount Shares Amount Paid In Capital --------- --------- ---------- --------- --------------- BALANCE, July 31, 1996 - $ - 23,775 $ 6,288 $ - Issuances of common shares for cash - - 5,760 4,736 - Conversion of convertible debt to common shares - - 3,612 1,967 - Issuance of common shares for acquisition - - 2,716 1,847 - Issuances of common shares for services - - 925 154 - Deferred compensation - - - 1,394 - Compensation expense - - - - - Warrants issued with convertible long term debt - - - 990 - Cumulative effect of translation adjustment - - - - - Net loss - - - - - --------- --------- ---------- --------- --------------- BALANCE, July 31, 1997 - - 36,788 $ 17,376 - Issuances of common shares for cash - - 5,500 3,496 - Issuances of common shares for reduction in indebtedness - - 2,871 1,076 - Conversion of convertible debt to common shares - - 200 100 - Issuances of common shares for services - - 245 246 - Compensation expense - - - - - Cumulative effect of translation adjustment - - - - - Exchange of common shares for common stock - - - (22,248) 22,248 Net loss - - - - - --------- --------- ---------- --------- --------------- BALANCE, July 31, 1998 - - 45,604 $ 46 $ 22,248 Issuances of common shares for cash - - 2,706 3 1,637 Issuances of common shares for services - - 96 - 40 Issuances of common shares for acquisition - - 279 - 179 Issuances of preferred stock 26 - - - 4,176 Deferred compensation - - - - 344 Dividend expense - - - - - Amortization of equity discount - - - - 775 Compensation expense - - - - - Cumulative effect of translation adjustment - - - - - Net loss - - - - - --------- --------- ---------- --------- --------------- BALANCE, July 31, 1999 26 - 48,685 $ 49 $ 29,399 Cumulative Total Accumulated Translation Deferred Stockholders' Deficit Adjustment Compensation Equity ----------- ----------- ------------ ------------- BALANCE, July 31, 1996 ($4,607) $ 4 ($55) $ 1,630 Issuances of common shares for cash - - - 4,736 Conversion of convertible debt to common shares - - - 1,967 Issuance of common shares for acquisition - - - 1,847 Issuances of common shares for services - - - 154 Deferred compensation - - (1,394) 0 Compensation expense - - 295 295 Warrants issued with convertible long term debt - - - 990 Cumulative effect of translation adjustment - 12 - 12 Net loss (4,695) - - (4,695) ----------- ----------- ------------ ------------- BALANCE, July 31, 1997 ($9,302) $ 16 ($1,154) $ 6,936 Issuances of common shares for cash - - - 3,496 Issuances of common shares for reduction in indebtedness - - - 1,076 Conversion of convertible debt to common shares - - - 100 Issuances of common shares for services - - - 246 Compensation expense - - 487 487 Cumulative effect of translation adjustment - (160) - (160) Exchange of common shares for common stock - - - 0 Net loss (5,094) - - (5,094) ----------- ----------- ------------ ------------- BALANCE, July 31, 1998 ($14,396) ($144) ($667) $ 7,087 Issuances of common shares for cash - - - 1,640 Issuances of common shares for services - - - 40 Issuances of common shares for acquisition - - - 179 Issuances of preferred stock - - - 4,176 Deferred compensation - - (344) 0 Dividend expense (80) - - (80) Amortization of equity discount (775) - - 0 Compensation expense - - 545 545 Cumulative effect of translation adjustment - (714) - (714) ----------- ----------- ------------ ------------- Net loss (6,736) - - (6,736) BALANCE, July 31, 1999 ($21,987) ($858) ($466) $ 6,137 =========== =========== ============ =============
The accompanying notes are an integral part of consolidated these financial statements. 31 AMERICAN TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
For the Years Ended July 31, 1997 1998 1999 ----------- ---------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ($4,695) ($5,094) ($6,736) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization 591 1,822 3,248 Amortization of debt discount 87 307 346 Deferred compensation 295 487 545 Provision for losses on accounts receivable 735 1,024 2,346 Minority interest 48 - - Changes in operating assets and liabilities- Increase in accounts receivable (1,983) (2,723) (2,207) (Increase) decrease in prepaid expenses and other (849) 197 (1,632) Increase (decrease) in accounts payable (1,025) 3,479 (1,139) Increase (decrease) in accrued liabilities 884 (192) 1,857 Increase (decrease) in deferred revenue 378 71 (191) Other 4 - - ---------- -------- ---------- Net cash used in operating activities (5,530) (622) (3,563) ---------- -------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (590) (3,297) (956) Acquisition of business, net of cash acquired 73 (2,112) (171) Payments received on notes receivable 101 - - ---------- -------- ---------- Net cash used in investing activities (416) (5,409) (1,127) ---------- -------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt 3,632 2,547 437 Net increase (decrease) in short-term borrowings 281 353 (488) Payments on debt - (1,141) (679) Capital lease payments (401) (1,044) (941) Payments on long-term liabilities - (67) (123) Proceeds from issuance of preferred stock, net of issuance costs - - 4,176 Proceeds from issuance of common stock, net of issuance costs 3,699 4,553 1,596 ---------- -------- ---------- Net cash provided by financing activities 7,211 5,201 3,978 ---------- -------- ---------- NET INCREASE (DECREASE) IN CASH 1,265 (830) (712) CASH AND CASH EQUIVALENTS, beginning of period 656 1,921 1,091 ---------- -------- ---------- CASH AND CASH EQUIVALENTS, end of period $1,921 $1,091 $379 ========== ======== ==========
The accompanying notes are an integral part of these consolidated financial statements. 32 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 its subsidiaries ("ATSI" or the "Company"). The Company was 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 the Company. 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 the Company. The Company is publicly traded on the OTC Bulletin Board under the symbol "AMTI". The accompanying consolidated balance sheet dated July 31, 1998 includes the assets, liabilities and shareholders' equity of ATSI-Canada which were transferred to the Company on May 11, 1998, and the accompanying statements of operations for the years ended July 31, 1997 and 1998 include the consolidated operations of ATSI-Canada through May 11, 1998. In May 1997, ATSI-Canada entered into an agreement to purchase up to 100% of the outstanding shares of Sistema de Telefonia Computarizada, S.A. de C.V. ("Computel"), the largest privately owned operator of casetas (public calling stations) in Mexico. Under the terms of the agreement, ATSI-Canada acquired 55% of the shares of Computel effective May 1, 1997 and the remaining 45% effective August 28, 1997. As ATSI-Canada acquired majority ownership effective May 1, 1997, the Company has recorded 100% of the net assets and liabilities of Computel as of that date. The Company's consolidated financial statements for the period May 1, 1997 to July 31, 1997 include the impact of the 45% minority ownership interest. For the years ended July 31, 1998 and July 31, 1999, the Company's consolidated financial statements include 100% of the activities of Computel. In July 1997, American TeleSource International de Mexico, S.A. de C.V. ("ATSI-Mexico") acquired 100% of the outstanding stock of Servicios de Infraestructura, S.A. de C.V. ("Sinfra"). In April 1998, TeleSpan, Inc. ("Telespan") purchased 100% of the outstanding stock of Sinfra from ATSI-Mexico. In March 1998, ATSI-Delaware acquired 100% of the outstanding stock of Soluciones Internactionales de Mercadeo, S.A. and subsequently changed the name to ATSI de CentroAmerica, S.A. Through its subsidiaries, the Company provides retail and wholesale communications services within and between the United States and select markets within Latin America. Utilizing a framework of licenses, interconnection and service agreements, network facilities and distribution channels, the Company aims to provide U.S standards of reliability to Mexico and other markets within Latin America which have historically been underserved by telecommunications monopolies. As of July 31, 1999, the Company's operating subsidiaries are as follows: American TeleSource International, Inc. ("ATSI-Texas" a Texas corporation) -------------------------------------------------------------------------- ATSI-Texas owns and operates a switching facility and multilingual call center in San Antonio, Texas. This facility provides U.S. based call services to public telephones owned by ATSI-Mexico and casetas owned by Computel in Mexico, as well as to third party-owned public telephones, casetas and hotels in Mexico. Although these calls originate in Mexico, they are terminated and billed in the United States and Mexico by ATSI-Texas. In July 1998, ATSI-Texas also began providing domestic U.S. and international call services to residential customers in the U.S. American TeleSource International de Mexico, S.A. de C.V. --------------------------------------------------------- ("ATSI-Mexico" a Mexican corporation) ------------------------------------- ATSI-Mexico owns and operates coin-operated public telephones in Mexico. Utilizing its 20-year comercializadora license, ATSI purchases telephone lines and resells local, long distance and international calls from public telephones connected to the lines. Direct dial calls may be made from the telephones using pesos or quarters, and users may use the services of ATSI-Texas to place calls to the U.S. by billing calls to valid third parties, credit cards or calling cards. 33 Computel (a Mexican corporation) -------------------------------- Computel is the largest private operator of casetas in Mexico, operating approximately 126 casetas in 66 cities. Direct dial calls may be made from the casetas using cash or credit cards, and users may use the services of ATSI-Texas to place calls to the U.S. by billing calls to valid third parties, credit cards or calling cards. Computel utilizes telephone lines owned by ATSI-Mexico. Sinfra (a Mexican corporation) ------------------------------- Utilizing its 20-year Teleport and Satellite Network license, Sinfra owns and operates the Company's teleport facilities in Cancun, Monterrey and Mexico City, Mexico. These facilities are used for the provision of international private network services. Sinfra also owns a 15-year Packet Switching Network license. TeleSpan, Inc. ("TeleSpan" a Texas corporation) ----------------------------------------------- TeleSpan owns and operates the Company's teleport facilities in the United States and Costa Rica. TeleSpan contracts with U.S. based entities and carriers seeking facilities or increased capacity into Mexico, Costa Rica, El Salvador and Guatemala. For network services into Mexico, TeleSpan utilizes facilities owned by Sinfra. GlobalScape, Inc. ("GlobalSCAPE" a Texas corporation) ----------------------------------------------------- GlobalSCAPE markets CuteFTP and other digitally downloadable software products and distributes them over the Internet utilizing electronic software distribution ("ESD"). ATSI de CentroAmerica (a Costa Rican corporation) ------------------------------------------------- ATSI de CentroAmerica markets international private network services in Costa Rica and other Latin American countries and looks to develop corporate development opportunities in Latin American countries through joint ventures and interconnection agreements with existing telecommunication monopolies. 2. FUTURE OPERATIONS, LIQUIDITY, CAPITAL RESOURCES AND VULNERABILITY DUE TO CERTAIN CONDITIONS The accompanying consolidated financial statements of the Company have been prepared on the basis of accounting principles applicable to a going concern. For the period from December 17, 1993 to July 31, 1999, the Company has incurred cumulative net losses of $21.9 million. Further, the Company had a working capital deficit of $5.7 million at July 31, 1998 and $6.7 million at July 31, 1999. Further, the Company had negative cash flows from operations of $5.5 million, $.6 million and $3.6 million for the years ended July 31, 1997, 1998 and 1999, respectively. The Company has limited capital resources available to it, and these resources may not be available to support its ongoing operations until such time as the Company is able to generate positive cash flow from operations. There is no assurance the Company will be able to achieve future revenue levels sufficient to support operations or recover its investment in property and equipment, goodwill and other intangible assets. These matters raise substantial doubt about the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the ongoing support of its stockholders and customers, its ability to obtain capital resources to support operations and its ability to successfully market its services. The Company is likely to require additional financial resources in the near term and could require additional financial resources in the long-term to support its ongoing operations. The Company has retained various financial advisers to assist it in refining its strategic growth plan, defining its capital needs and obtaining the funds required to meet those needs. The plan includes securing funds through equity offerings and entering into lease or long-term debt financing agreements to raise capital. There can be no assurances, however, that such equity offerings or other 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 the Company is not successful in completing additional equity offerings or entering into other financial arrangements, or if the funds raised in such stock offerings or other financial arrangements are not adequate to support the Company until a successful level of operations is attained, the Company has limited additional sources of debt or equity capital and would likely be unable to continue operating as a going concern. 34 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared on the accrual basis of accounting under generally accepted accounting principles of the U.S. All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified for comparative purposes. Estimates in Financial Statements --------------------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Revenue Recognition Policies ---------------------------- The Company recognizes revenue from its call services and direct dial services as such services are performed, net of unbillable calls. Revenue from network management service contracts is recognized when service commences for service commencement fees and monthly thereafter as services are provided. The Company recognizes 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 the Company's Internet product are recognized at the point of delivery, as the Company bears no additional obligation beyond the provision of its software product other than post-contract customer service. Foreign Currency Translation ---------------------------- Until January 1, 1999, Mexico's economy was designated as highly inflationary. Generally Accepted Accounting Principles, "GAAP" require the functional currency of highly inflationary economies to be the same as the reporting currency. Accordingly, the consolidated financial statements of ATSI- Mexico and Computel, whose functional currency is the peso, were remeasured from the peso into the U.S. dollar for consolidation. Monetary and nonmonetary assets and liabilities were remeasured into U.S. dollars using current and historical exchange rates, respectively. The operating activities of ATSI-Mexico and Computel were remeasured into U.S. dollars using a weighted-average exchange rate. The resulting translation gains and losses were charged directly to operations. As of January 1, 1999, Mexico's economy was deemed to be no longer highly inflationary. According to GAAP requirements the change from highly inflationary to non-highly inflationary requires that the nonmonetary assets be remeasured using not the historical exchange rates, but the exchange rate in place as of the date the economy changes from highly inflationary to non-highly inflationary. As such, the Company's non-monetary assets in ATSI-Mexico and Computel have been remeasured using the exchange rate as of January 1, 1999. Subsequent to January 1, 1999, monetary assets and non-monetary assets are translated using current exchange rates and operating activity of ATSI-Mexico and Computel are remeasured in to U.S. dollars using a weighted average exchange rate. The effect of these translation adjustments are reflected in the cumulative translation account shown in equity. Accounts Receivable ------------------- The Company utilizes the services of credit card processing companies for the billing of commercial credit card calls. The Company receives 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 the Company and a billing clearinghouse. 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 the Company's long distance business. The allowance for doubtful accounts reflects the Company's estimate of uncollectible calls at July 31, 1998 and 1999 and includes $1.5 million of specific accounts identified by the Company as potentially uncollectible. ATSI currently pays a funding charge of prime plus 4% per annum on the amounts that are advanced to ATSI. Receivables sold with recourse during fiscal years 1997, 1998, and 1999 were $8,530,665, $11,127,221 and $6,138,549 respectively. At July 31, 1997, 1998 and 1999, $577,256, $484,381 and $444,398 of such receivables were uncollected, respectively. See Note 5 for additional disclosure regarding advanced funding. In fiscal 1998, 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 35 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") ---------------------------------------------------- The Company's 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, the Company nets its Mexican subsidiaries IVA receivable and IVA payable accounts as allowed by regulatory requirements in Mexico. For the years ended July 31, 1998 and 1999, this netting of IVA accounts resulted in the elimination of IVA payable and a corresponding reduction in IVA receivable of approximately $197,000 and $1.2 million, respectively. Basic and Diluted Loss Per Share -------------------------------- Loss per share was calculated using the weighted average number of common shares outstanding for the years ended July 31, 1997, 1998 and 1999. Common stock equivalents, which consist of the stock purchase warrants and options described in Note 9, were excluded from the computation of the weighted average number of common shares outstanding because their effect was antidilutive. Additionally, the Company has excluded the convertible preferred stock described in Note 8, from the computation of the weighted average number of common shares outstanding as their effect will also be antidilutive. Property and Equipment ---------------------- Property and equipment are stated at cost. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the related assets, which range from five to fifteen years. Expenditures for maintenance and repairs are charged to expense as incurred. Direct installation costs and major improvements are capitalized. Effective for the fiscal years beginning after July 31, 1996, the Company follows 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 the Company's 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 be estimated over their remaining useful lives and an impairment loss be recognized when the undiscounted future cash flows are less than the carrying value of such assets. As of July 31, 1999, the Company has determined that the estimated undiscounted future cash flows associated with its long-lived assets are greater than the carrying value of such assets and that no impairment loss needs to be recognized. Goodwill, Trademarks, Contracts and Other Assets ------------------------------------------------ As of the years ended July 31, 1998 and 1999, other assets include goodwill, primarily related to the purchase of Computel, of $5,216,646 and $5,296,646, respectively, net of accumulated amortization of $126,668 and $265,089, respectively. Goodwill is amortized over 40 years. As of July 31, 1998 and 1999 other assets include acquisition costs of $1,417,870, and $1,596,620, respectively, related to the Company's acquisitions of several of its independent marketing representatives, net of accumulated amortization of $244,652, and $893,212, respectively. These acquisition costs are being amortized over the life of the contracts, which approximates three years. As of July 31, 1999, other assets include $898,943 related to the purchase of the rights to CuteFTP, net of accumulated amortization of $110,352. This trademark is being amortized over an estimated five-year life. Additionally, as of July 31, 1998 and 1999, other assets include approximately $489,000 and $615,000 of other assets, not specifically identified as goodwill, acquisition costs or trademarks. As it relates to SFAS 121, as of July 31, 1999, the Company has determined that the estimated future cash flows associated with its goodwill and other intangible assets are greater than the carrying value of such assets and that no impairment loss needs to be recognized. For the years ended July 31, 1997, 1998 and 1999, the Company recorded amortization expense of $55,491, $369,219 and $925,440, respectively related to its other assets. Income Taxes ------------ The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". Under the provisions of SFAS 109, the Company recognizes 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. 36 Statements of Cash Flows ------------------------ Cash payments and non-cash investing and financing activities during the periods indicated were as follows:
For the Years Ended July 31, ----------------------------- 1997 1998 1999 --------------- --------------- --------------- Cash payments for interest $ 416,756 $1,349,679 $1,101,771 Cash payments for taxes $ - $ 148,097 $ - Common shares issued for services $ 153,885 $ 246,591 $ 40,000 Common shares issued for acquisition of Computel and other $1,846,569 $ - $ 178,750 Assets acquired in acquisition of Computel $3,418,753 $ - $ - Liabilities assumed in acquisition of Computel $4,205,404 $ - $ - Conversion of convertible debt to common shares $1,966,531 $ 100,000 $ - Capital lease obligations incurred $1,521,875 $4,635,693 $ - Common share subscriptions sold $1,113,170 $ - $ 42,500
For purposes of determining cash flows, the Company considers all temporary cash investments with an original maturity of three months or less to be cash and cash equivalents. New Accounting Pronouncements ----------------------------- In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and disclosure of comprehensive income and its components in a full set of financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997, and requires reclassification of comparative financial statements for earlier periods. The adoption of SFAS No. 130 has resulted in the presentation of comprehensive income (loss) that differs from net income (loss) as presented in the accompanying financial statements to the extent of foreign currency translation adjustments as shown in the accompanying consolidated statements of comprehensive income (loss). The Company presentation of its comprehensive income component, foreign currency translation adjustments, is presented net of tax, which is $0 for all periods presented, in light of the Company's current net operating loss carryforward position. Disclosures about Fair Value of Financial Instruments ----------------------------------------------------- The following methods and assumptions were used to estimate the fair value of each class of financial instrument held by the Company: 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 the Company's 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). The Company believes that the carrying amount does not differ materially from the fair value. 37 4. PROPERTY AND EQUIPMENT, NET (at cost) Following is a summary of the Company's property and equipment at July 31, 1998 and 1999:
July 31, 1998 July 31, 1999 ------------------- ------------------ Telecommunications equipment $ 6,084,771 $ 6,476,395 Land and buildings 892,507 447,748 Furniture and fixtures 882,449 902,873 Equipment under capital leases 5,585,291 7,758,739 Leasehold improvements 281,014 474,748 Other 517,192 608,914 ----------- ----------- 14,233,224 16,669,417 Less: accumulated depreciation and amortization (2,418,514) (4,712,671) ----------- ----------- Total - property and equipment, net $11,814,710 $11,956,746 =========== ===========
Depreciation expense as reported in the Company's Consolidated Statements of Operations includes depreciation expense related to the Company's capital leases. For the years ended July 31, 1997, 1998 and 1999, the Company recorded approximately $536,000, $1,453,000 and $2,323,0000, respectively of depreciation expense related to its fixed assets. 5. NOTES PAYABLE AND CONVERTIBLE DEBT
Notes Payable - ------------- Notes payable are comprised of the following: July 31, --------------- 1998 1999 --------------- --------------- Note payable to a company, see terms below. $ 25,320 $ 137,071 Note payable to an individual, see terms below. - 150,000 Note payable to a bank, see terms below. - 150,000 Notes payable to related parties, see terms below. - 100,000 Note payable to an individual, see terms below. - 368,768 Notes payable to various banks, see terms below. 416,846 56,878 Notes payable to a company, net of discount, see terms below. 364,803 309,588 ---------- ---------- $1,406,969 $1,272,305 Less: current portion $ 688,005 $ 960,523 ---------- ---------- $ 718,964 $ 311,782 Total non-current notes payable ========== ==========
38 During November 1996, the Company entered into an agreement with a financing company under which the Company is advanced an additional 13.75% of its 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 the Company as its receivables from long distance call services are collected. The Company was charged 4% per month for these fundings. When the agreement with the financing company expired in November 1998, it was renewed on a month-to- month basis, and the Company ceased using the factoring arrangement altogether in April 1999 as part of its ongoing effort to minimize costs. The approximate $137,000 outstanding represents advances to be repaid by the clearinghouse to the financing company upon its subsequent collection of its receivables from long distance call services. During February 1999, the Company entered into a note payable with an individual, for working capital purposes, in the amount of $150,000. Interest accrues at an interest rate of 12% per year, principal and interest due at maturity. The note originally matured in May 1999, but the Company has extended the note with the individual for an additional six months. During January 1999, one of the Company's subsidiaries entered into a note payable with a bank in the amount of $180,000 related to its acquisition of a computer software program known as "CuteFTP". (See Note 10). The note calls for principal payments of $5,000 per month for twelve months and $10,000 per month for twelve months. Interest accrues monthly at an interest rate of the Lender's "Prime Rate" plus 1%. At July 31, 1999, the Lender's "Prime Rate" was 8.00%. In February 1999, the Company entered into notes payable with related parties, all of whom were officers or directors of the Company in the amount of $250,000. The notes accrue interest at a rate of 12% per year until paid in full. As of July 31, 1999, $100,000 of the notes remain outstanding. In January 1999, one of the Company's subsidiaries entered into an agreement with an individual related to its acquisition of a computer software program known as "CuteFTP". (See Note 10). The agreement calls for twelve principal and interest payments of $63,000 per month beginning February 28, 1999. The Company has imputed interest using an interest rate of 12% per annum. As of July 31, 1998 and July 31, 1999, the Company through its acquisition of Computel had approximately $416,846 and $56,878, respectively, of bank notes payable to various banks in Mexico. The notes have interest rates ranging from 8% to 15%, with monthly principal and interest payments of approximately $7,500. The notes mature between October 1999 and December 2015 and are collaterized by the assets of Computel. In the year ended July 31, 1999, the Company through Computel exchanged certain assets collaterized by the notes for a reduction in its indebtedness. The notes remaining mature during the year ended July 2000. During October 1997, the Company 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. The Company 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 the Company related to the issuance of these warrants was $103,333. The fair value of the warrants was calculated on the date of issuance using an option pricing model with the following assumptions: Dividend yield of 0.0%, expected volatility of 30%, risk-free interest rate of 6.00%, and an expected life of three years. The warrants expire three years from their date of issuance, and are not exercisable for a period of one year after their initial issuance. In January 1998, the noteholder exercised 700,000 warrants at an exercise price of $0.70, unrelated to the warrants noted above, in consideration of a $490,000 reduction of the principal balance outstanding on the note. Convertible Debt - ---------------- In March and May 1997, the Company issued $2.2 million in convertible notes, interest at 10%. The principal and interest, which accrues quarterly, is due and payable three years from the date of issuance. The convertible notes convert into fully redeemable preferred stock at the Company's option. In addition, for each $50,000 unit of convertible debt, each holder was issued 108,549 warrants to purchase an equal number of shares of common stock at $0.27 per share. The fair value of the warrants was determined to be $0.37 per share and the Company assigned $990,000 to the value of the warrants in stockholders' equity. The fair value of the warrants was 39 calculated on the date of issuance using an option pricing model with the following assumptions: Dividend yield of 0.0%, expected volatility of 62%, risk- free interest rate of 6.35%, and an expected life of three years. The warrants expire three years from their date of issuance, and were not exercisable for a period of one year after their initial issuance. The Company has recorded the $990,000 as debt discount and is amortizing the discount over the term of the debt based on the effective interest method. Principal outstanding as of July 31, 1998 and July 31, 1999, net of debt discount, was $1,603,802 and $1,942,614, respectively. All of the outstanding principal at July 31, 1999, is reflected in the current portion of convertible long-term debt. Maturities of notes payable and convertible debt as of July 31, 1999 were as follows: Year Ending July 31, 2000 $2,903,137 2001 107,983 2002 56,949 2003 67,138 2004 78,718 Thereafter 994 ---------- Total $3,214,919 ==========
6. LEASES Operating Leases ---------------- The Company leases office space, furniture, equipment and network capacity under noncancelable operating leases and certain month-to-month leases. During fiscal 1997, 1998 and 1999, the Company also leased certain equipment under capital leasing arrangements. Rental expense under operating leases for the years ended July 31, 1997, 1998 and 1999, was $176,700, $942,750 and $2,952,710, respectively. Future minimum lease payments under the noncancelable operating leases at July 31, 1999, are as follows:
2000 $ 2,929,328 2001 3,284,740 2002 2,598,753 2003 583,524 2004 574,542 Thereafter 1,864,863 ----------- Total minimum lease payments $11,835,750 ===========
Capital Leases -------------- Future minimum lease payments under the capital leases together with the present value of the net minimum lease payments at July 31, 1999 are as follows: 2000 $ 2,295,036 2001 2,246,127 2002 2,022,825 2003 1,758,391 2004 562,335 Thereafter 277,435 ----------- Total minimum lease payments 9,162,149 Less: Amount representing taxes (45,302) ----------- Net minimum lease payments 9,116,847 Less: Amount representing interest (2,164,572) ----------- Present value of minimum lease payments $ 6,952,275 ===========
40 In April 1997, the Company, 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 the Company to install U.S. standard intelligent pay telephones in various Mexican markets. In April 1998, the Company 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, the Company restructured its capital lease obligation with IBM de Mexico by extending the payment of its total obligation. The restructured lease facility calls for monthly payments of principal and interest of approximately $108,000 beginning in July 1999 and extending through June 2003. Interest accrues on the facility at an interest rate of approximately 13% per year. The obligation outstanding under said facility at July 31, 1998 and July 31, 1999 was approximately $4,272,000 and $3,826,000, respectively. In December 1998, the Company 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, the Company entered into a capital lease transaction with NTFC Capital Corporation, ("NTFC") to finance the switch and an additional approximate $200,000 of equipment over a five and a half-year period with payments delayed for six months. Quarterly payments approximate $139,000 and the capital lease has an interest rate of approximately 11%. The lease facility requires that the Company meet certain financial covenants on a quarterly basis beginning October 31, 1999, including minimum revenue levels, gross margin levels, EBITDA results and debt to equity ratios. Due primarily to pricing pressures in the Company's network transport services business, the Company may not be able to meet some of the financial covenants in the facility, which, if not cured, would allow NTFC to demand payment in full of the amount outstanding. However, because management does not believe that non-compliance is a certainty, the majority of the amount outstanding under the facility has been classified as non-current in the accompanying balance sheet. The Company also has certain affirmative covenants under the facility, including a covenant on Year 2000 compliance, under which the Company gives assurance that the Company's systems will be able to process transactions effectively before, on and after January 1, 2000. The Company secured a capital lease for approximately $500,000 in December 1998 for the purchase of ATM equipment from Network Equipment Technologies ("N.E.T"). The capital lease is for thirty-six months with monthly payments of approximately $16,000 a month. The Company's capital leases have interest rates ranging from 11% to 14%. 7. DEFERRED REVENUE The Company records deferred revenue related to the private network services it provides. Customers may be required to advance cash to the Company 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 the Company, at which time the Company recognizes service commencement revenue. 8. SHARE CAPITAL As discussed in Note 1, in May 1998, the Company completed its 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 the Company's books of $0.001 par value stock and additional paid-in capital. During the year ended July 31, 1997, the Company issued 13,012,448 common shares. Of this total, 5,760,355 shares were issued for approximately $4,737,000 of net cash proceeds, 924,761 shares were issued for services rendered to the Company, 3,611,786 shares were issued for the conversion of convertible debt to common shares, and 2,715,546 shares were issued related to the Company's acquisition of Computel. (See Note 10). During the year ended July 31, 1998, the Company 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 41 services rendered to the Company, 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, the Company 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 the Company, 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 the Company's 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 the Company's 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 the Company, nor does the Company have any obligation to register such shares. At July 31, 1999, stock subscription receivables of $42,500, were outstanding related to sales of common stock. Such amounts were collected by the Company subsequent to said date. No dividends were paid on the Company's stock during the years ended July 31, 1997, 1998 and 1999. The shareholders of ATSI-Canada approved the creation of a class of preferred stock at the Company's 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 the Company's amended Articles of Incorporation, the Company's Board of Directors may issue, in series, an unlimited number of preferred shares, without par value. No preferred shares have been issued as of July 31, 1999. Pursuant to ATSI-Delaware's Certificate of Incorporation, the Company's 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, the Company issued a total of 24,146 shares of Series A Preferred Stock for cash proceeds of approximately $2.4 million and in July 1999 the Company issued 2,000 shares of Series B Preferred Stock for cash proceeds of approximately $2.0 million. The Series A Preferred Stock accrues cumulative dividends at the rate of 10% per annum payable quarterly, while the Series B Preferred Stock accrues cumulative dividends at the rate of 6% per annum. In September 1999, the Company issued 500 shares of Series C Preferred Stock for cash proceeds of approximately $500,000. The Series C Preferred Stock accrues cumulative dividends at the rate of 6% per annum. The Series A Preferred Stock and any accumulated, unpaid dividends may be converted into Common Stock for up to one year at the average closing price of the Common Stock for twenty (20) trading days preceding the Date of Closing (the "Initial Conversion Price"). On each Anniversary Date up to and including the fifth Anniversary Date, the Conversion price on any unconverted Preferred Stock, will be reset to be equal to 75% of the average closing price of the stock for the then twenty (20) preceding days provided that the Conversion price can not be reset any lower than 75% of the Initial Conversion Price. The Series B Preferred Stock and any accumulated, unpaid dividends may be converted into Common Stock for up to two years at the lesser of a) the market price on the day prior to closing or b) 78% of the five lowest closing bid prices on the ten days preceding conversion. As these conversion features are considered a "beneficial conversion feature" to the holder, the Company allocated approximately $1.6 million and $1.1 million, respectively of the approximate $2.4 million and $2.0 million, respectively, in proceeds to additional paid-in capital as a discount to be amortized over a twelve month and three month period, respectively. The Series A Preferred Stock is callable and redeemable by the Company at 100% of its face value, plus any accumulated, unpaid dividends at the Company's option any time after the Common Stock of the Company has traded at 200% or more of the conversion price in effect for at least twenty (20) consecutive trading days, so long as the Company does not call the Preferred Stock prior to the first anniversary date of the Date of Closing. The Series B Preferred Stock is callable and redeemable by the Company at 127% of its face value, plus any accumulated, unpaid dividends at the Company's option any time prior to the second anniversary date of the Date of Closing. The Series C Preferred Stock and any accumulated, unpaid dividends may be converted into Common Stock for up to two years at the lesser of a) the market price on the day prior to closing or b) 78% of the five lowest closing bid prices on the ten days preceding conversion. Consistent with the accounting for the Company's Series A and Series B Preferred Stock, this is considered a "beneficial conversion feature" to the holder. The Company will 42 allocate approximately $139,000 of the proceeds to additional paid-in capital as a discount to be amortized over a three-month period. The terms of the Company's Series A, Series B and Series C Preferred Stock restrict the Company from declaring and paying on its common stock until such time as all outstanding dividends have been fulfilled related to the Preferred Stock. 9. STOCK PURCHASE WARRANTS AND STOCK OPTIONS During the year ended July 31, 1999, certain shareholders and holders of convertible debt of the Company were issued warrants to purchase shares of common stock at exercise prices ranging from $0.70 to $1.06 per share. Following is a summary of warrant activity from August 1, 1996 through July 31, 1999:
Year Ending July 31, ------------------------------------------------------------- 1997 1998 1999 ------------------------------------------------------------- Warrants outstanding, beginning 8,097,463 14,489,942 7,562,168 Warrants issued 9,931,854 667,400 933,387 Warrants expired (777,200) - (2,386,470) Warrants exercised (2,762,175) (7,595,174) (1,905,160) ---------- ---------- ---------- Warrants outstanding, ending 14,489,942 7,562,168 4,203,925 ========== ========== ==========
Warrants outstanding at July 31, 1999 expire as follows:
Number of Warrants Exercise Price Expiration Date - ------------------ -------------- --------------- 80,000 $1.06 November 6, 1999 30,000 $0.50 December 31, 1999 367,400 $0.85 January 1, 2000 550,824 $0.85 February 7, 2000 1,030,060 $0.27 February 17, 2000 1,000,000 $0.70 February 28, 2000 192,254 $0.75 April 7, 2000 503,387 $0.70 April 13, 2000 50,000 $2.00 June 20, 2000 250,000 $3.56 October 14, 2000 50,000 $3.09 March 9, 2002 100,000 $1.25 July 2, 2004
The Company had two fixed stock plans during 1997. The Company had a stock option plan that was in existence since May 1994 (the Canadian Plan). No options were ever issued as part of the Canadian Plan, even though the Company had the ability to issue options to acquire approximately 2,800,000 shares of the Company's common stock. In February 1997, the Company's Board of Directors adopted the 1997 Stock Option Plan, which replaced the Canadian Plan. Under the 1997 Stock Option Plan, options to purchase up to 5,000,000 shares of common stock may be granted to employees, directors, consultants and advisers. The 1997 Stock Option Plan is intended to permit the Company to retain and attract qualified individuals who will contribute to the Company's 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 43 year beginning one year from the grant date with unexercised options expiring ten years after the date of the grant. On February 10, 1997, the Board of Directors granted a total of 4,488,000 options to purchase Common Shares to directors and employees of the Company. 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 the Company's Annual Meeting of Shareholders on May 21, 1997. In September 1998, the Company's 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 the Company to retain and attract qualified individuals who will contribute to the Company's 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 the Company. On December 16, 1998, the Board approved the granting of an additional 302,300 in options to employees of the Company. The 1998 Stock Option Plan was approved by a vote of the stockholders at the Company's Annual Meeting of Shareholders on December 17, 1998. A summary of the status of the Company's 1997 and 1998 Stock Option Plans for the years ended July 31, 1997, 1998 and 1999 and changes during the periods are presented below:
Years Ended July 31, --------------------------------------------------------------------- 1997 Stock Option Plan 1997 1998 --------------------------------------------------------------------- Weighted Weighed Average Average Shares Exercise Price Shares Exercise Price Outstanding, beginning of year - - 4,483,000 $0.58 Granted 4,488,000 $0.58 429,000 $2.33 Exercised - - (245,000) $0.58 Forfeited (5,000) $0.58 (11,667) $1.28 Outstanding, end of year 4,483,000 $0.58 4,655,333 $0.74 ========= ===== ========= ===== Options exercisable at end of year 1,786,332 $0.58 2,571,332 $0.58 ========= ===== ========= ===== Weighted average fair value of options granted during the year $0.45 $1.50 ===== =====
Year Ended July 31, ----------------------------------- 1997 Stock Option Plan 1999 ----------------------------------- Weighted Average Shares Exercise Price Outstanding, beginning of year 4,655,333 $0.74 Granted - - Exercised (298,000) $0.58 Forfeited (134,666) $0.71 Outstanding, end of year 4,222,667 $0.75 ========= ===== Options exercisable at end of year 3,271,333 $0.60 ========= ===== Weighted average fair value of options granted during the year $0.00 =====
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Year Ended July 31, ----------------------------------- 1999 ----------------------------------- 1998 Stock Option Plan Weighted Average Shares Exercise Price Outstanding, beginning of year - - Granted 1,843,300 $0.60 Exercised - - Forfeited (57,500) $0.78 Outstanding, end of year 1,785,800 $0.60 ========= ===== Options exercisable at end of year - - Weighted average fair value of options granted during the year $0.64 =====
The weighted average remaining contractual life of the stock options outstanding at July 31, 1999 is approximately 7.5 years for options granted under the 1997 Stock Option Plan and approximately 9 years for options granted under the 1998 Stock Option Plan. In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation" was issued. SFAS 123 defines a fair value based method of accounting for employee stock options or similar equity instruments and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period of the award, which is usually the vesting period. However, SFAS 123 also allows entities to continue to measure compensation costs for employee stock compensation plans using the intrinsic value method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company has adopted SFAS 123 effective August 1, 1996, and has elected to remain with the accounting prescribed by APB 25. The Company has made the required disclosures prescribed by SFAS 123. In accordance with APB 25, the Company recorded approximately $1.4 million in deferred compensation related to approximately 1.5 million of the options granted based on the increase in the Company's 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 the Company's shareholders. Additionally, the Company recorded approximately $340,000 in deferred compensation related to approximately 1.5 million of the options granted based on the increase in the Company's stock price from September 9, 1998 to December 17, 1998, when the underlying 1998 Stock Option Plan was approved by the Company's shareholders. As of July 31, 1998 and July 31, 1999, the Company had $666,899 and $465,487, respectively, of deferred compensation related to options granted. Because the Company has elected to remain with the accounting prescribed by APB 25, no compensation cost has been recognized for its fixed stock option plan based on SFAS 123. Had compensation cost for the Company's 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, the Company's net loss (in thousands) and loss per share would have been increased to the pro forma amounts indicated below:
Year Ended Year Ended Year Ended July 31, 1997 July 31, 1998 July 31, 1999 -------------- ------------------ ------------------- Net Loss to common stockholders - ------------------------------- As reported $(4,695) $(5,094) $(7,591) Pro forma $(5,235) $(5,936) $(7,312)
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Basic and Diluted Loss per share - -------------------------------- As reported $ (0.18) $ (0.12) $ (0.16) Pro forma $ (0.20) $ (0.14) $ (0.15)
The fair value of the option grant is estimated based on the date of grant using an option pricing model with the following assumptions used for the grants in 1997, 1998 and 1999: Dividend yield of 0.0%, expected volatility of 60%, 46% and 62%, respectively, risk-free interest rate of 6.41%, 5.10% and 6.50%, respectively, and an expected life of ten years. 10. ACQUISITIONS As discussed in Note 1, the Company acquired 55% of Computel in May 1997 and acquired the remaining shares in August 1997. The total purchase price for the acquisition of Computel was approximately $3.6 million, of which $1.1 million was paid in cash, $700,000 in a note receivable forgiven by the Company and approximately $1.8 million in common stock, representing 2,715,546 shares. The Company recorded the assets and liabilities of Computel as of May 1, 1997. As Computel had net liabilities at May 1, 1997, the Company recorded goodwill of $2,279,231 related to the acquisition. The remaining 45% ownership interest is reflected as minority interest at July 31, 1997. Per the terms of the agreement, the remaining shares of Computel were acquired in August 1997 for the previously mentioned cash payment of approximately $1.1 million and forgiveness of the aforementioned note receivable. The Company recorded additional goodwill of approximately $2,857,000. The following unaudited pro forma results of operations for the year ended July 31, 1997, assumes the acquisition of Computel occurred as of the beginning of the period. Such pro forma information is not necessarily indicative of the results of future operations.
Year Ended July 31, ------------------------- 1997 ---- (Unaudited) Operating revenues $ 20,312,000 Net loss ($5,408,000) Basic and Diluted net loss per share ($0.19)
These unaudited pro forma results have been prepared for comparative purposes only and include certain adjustments such as additional amortization of goodwill as a result of the acquisition, and the elimination of intercompany transactions. The unaudited pro forma information is not necessarily indicative of the results that would have occurred had such transactions actually taken place at the beginning of the period specified nor does such information purport to project the results of operations for any future date or period. Pro forma results of operations for the year ended July 31, 1998 have been omitted, as pro forma results would not materially differ from actual results of operations for the period. In January 1999, the Company acquired the rights to the source code of a computer software program known as "CuteFTP". Prior to January 1999, the Company had been the distributor of this software under an exclusive distribution agreement executed in June 1996 with the software's author. The Company acquired the rights to CuteFTP 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. 11. SEGMENT REPORTING In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which establishes standards for reporting information about operating segments in annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographic 46 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. The Company has three reportable operating segments: (1) U.S. Telco; (2) Mexico Telco; and (3) Internet e-commerce. The Company has included the operations of ATSI-Canada, ATSI-Delaware and all businesses falling below the reporting threshold in the "Other" segment. The "Other" segment also includes intercompany eliminations.
As of and for the years ending -------------------------------------------------------- July 31, 1997 July 31, 1998 July 31, 1999 U.S. Telco - ------------------------------------------------------------------------------------------------------- External revenues $ 13,714,251 $ 26,695,690 $ 25,516,665 Intercompany revenues $ 330,362 $ 1,300,000 $ 800,012 ------------ ------------ ------------ Total revenues $ 14,044,613 $ 27,995,690 $ 26,316,677 ============ ============ ============ Earnings before interest, taxes, depreciation and amortization (EBITDA) ($3,131,841) ($16,807) ($1,485,045) Operating loss ($3,603,447) ($1,294,037) ($3,342,035) Net loss ($3,806,889) ($1,819,986) ($3,866,051) Total assets $ 6,450,033 $ 10,049,021 $ 9,606,263 Mexico Telco - ------------------------------------------------------------------------------------------------------- External revenues $ 1,949,755 $ 6,298,620 $ 6,359,238 Intercompany revenues $ 1,359,891 $ 5,136,541 $ 5,052,890 ------------ ------------ ------------ Total revenues $ 3,309,646 $ 11,435,161 $ 11,412,128 ============ ============ ============ EBITDA ($183,002) ($1,434,261) ($1,071,502) Operating loss ($273,740) ($1,927,928) ($2,253,037) Net loss ($364,402) ($2,564,103) ($2,691,450) Total assets $ 9,097,780 $ 17,228,025 $ 13,236,868 Internet e-commerce - ------------------------------------------------------------------------------------------------------- External revenues $ 564,381 $ 1,525,517 $ 2,642,376 Intercompany revenues - 25,000 - ------------ ------------ ------------ Total revenues $ 564,381 $ 1,550,517 $ 2,642,376 ============ ============ ============ EBITDA $ 39,197 $ 215,051 $ 1,052,015 Operating income $ 36,483 $ 188,658 $ 873,832 Net income $ 38,282 $ 197,698 $ 854,068 Total assets $ 266,955 $ 537,289 $ 1,222,238
47
Other - ------------------------------------------------------------------------------------------------------- External revenues - - - Intercompany revenues ($1,690,253) ($6,461,541) ($5,852,902) ------------ ------------ ------------ Total revenues ($1,690,253) ($6,461,541) ($5,852,902) ============ ============ ============ EBITDA ($335,325) ($408,783) ($287,110) Operating loss ($361,013) ($433,683) ($318,274) Net loss ($562,119) ($907,570) ($1,887,651) Total assets $ 5,940 ($3,563,743) $ 88,924 Total - ------------------------------------------------------------------------------------------------------- External revenues $ 16,228,387 $ 34,519,827 $ 34,518,279 Intercompany revenues - - - ------------ ------------ ------------ Total revenues $ 16,228,387 $ 34,519,827 $ 34,518,279 ============ ============ ============ EBITDA ($3,610,971) ($1,644,800) ($1,791,642) Depreciation, Depletion and Amortization ($590,746) ($1,822,190) ($3,247,872) Operating loss ($4,201,717) ($3,466,990) ($5,039,514) Net loss ($4,695,128) ($5,093,961) ($7,591,084) Total assets $ 15,820,708 $ 24,250,592 $ 24,154,293
12. INCOME TAXES As of July 31,1999, the Company had net operating loss carryforwards of approximately $9,335,000 for U.S. federal income tax purposes which are available to reduce future taxable income of which $534,000 will expire in 2009, $2,385,000 will expire in 2010, $2,083,000 will expire in 2011, $2,894,000 will expire in 2012 and $1,439,000 will expire in 2019. The availability of the net operating loss (NOL) carryforwards to reduce U.S. federal taxable income is subject to various limitations in the event of an ownership change as defined in Section 382 of the Internal Revenue Code of 1986 (the "Code"). The Company 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 its ability to utilize its NOL's because the annual limitation under the Code would allow full utilization within the statutory carryforward period. The tax effects of significant temporary differences representing deferred income tax assets and liabilities are as follows as of July 31, 1998 and 1999:
July 31, 1998 July 31,1999 Net operating loss carryforward $ 2,919,000 $ 3,174,000 Other tax differences, net 628,000 839,000 Valuation allowance (3,547,000) (4,013,000) ------------ ------------ Total deferred income tax assets $ - $ - ============ ============
48 A valuation reserve of $3,547,000 and $4,013,000, as of July 31, 1998 and 1999, respectively, representing the total of net deferred tax assets has been recognized by the Company as it cannot determine that it is more likely than not that all of the deferred tax assets will be realized. Additionally, the Company's effective tax rate differs from the statutory rate as the tax benefits have not been recorded on the losses incurred for the years ended July 31, 1997, 1998 and 1999. 13. COMMITMENTS AND CONTINGENCIES During the years ended July 31, 1998 and 1999, nine officers of the Company entered into employment agreements with ATSI-Texas or ATSI-Delaware, generally for periods of up to three years (with automatic one-year extensions) unless terminated earlier in accordance with the terms of the respective agreements. The annual base salary under such agreements for each of these nine officers range from $75,000 to $100,000 per annum, and is subject to increase within the discretion of the Board. In addition, each of these officers is eligible to receive a bonus in such amount as may be determined by the Board of Directors from time to time. Bonuses may not exceed 50% of the executive's base salary in any fiscal year. No bonuses were paid during fiscal 1999. Effective August 1998, two of the aforementioned officers entered into employment agreements with ATSI-Delaware, which superceded their previous agreements, each for a period of three years (with automatic one-year extensions) unless terminated earlier in accordance with the terms of the respective agreements. The annual base salary under such agreements for each of these two officers may not be less than $127,000 and $130,000, respectively, per annum, and is subject to increase within the discretion of the Board. In addition, each of these officers is eligible to receive a bonus in such amount as may be determined by the Board of Directors from time to time. Bonuses may not exceed 50% of the executive's base salary in any fiscal year. No such bonuses were awarded for fiscal 1999. Subsequent to July 31, 1999, three officers whose employment agreements were to expire January 1, 2000 were informed that their agreements would not be renewed under the current terms and conditions. Two of the three officers have since entered into new employment agreements with ATSI-Delaware, each for a period of one year unless earlier terminated in accordance with the terms of the respective agreements. The annual base salaries under such agreements may not be less than approximately $101,000 and $105,000, respectively, per annum, and is subject to increase within the discretion of the Board. In addition, each of these officers is eligible to receive a bonus in such amount as may be determined by the Board of Directors from time to time. Bonuses may not exceed 50% of the executive's base salary in any fiscal year. 14. RISKS AND UNCERTAINTIES AND CONCENTRATIONS The Company's business is dependent upon key pieces of equipment, switching and transmission facilities, fiber capacity and the Solaridad satellites. Should the Company experience service interruptions from its 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 the Company's services which could adversely or materially affect the Company's operations. The Company believes that suitable arrangements could be obtained with other satellite or fiber optic network operators to provide transmission capacity. Additionally, the Company's 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, 1999, the Company's wholesale transport business had two customers, whose aggregated revenues approximated 10% of the Company's total revenues for the year. No other customer generated revenues individually greater than 5% during the year. 15. RELATED PARTY TRANSACTIONS In January 1997, ATSI-Canada entered into an agreement with an international consulting firm, of which ATSI-Delaware director Carlos K. Kauachi is president, for international business development support. Under the 49 terms of the agreement, the Company paid the consulting firm $8,000 per month for a period of twelve months. In January 1998, the agreement was renewed at $10,000 per month for a period of twelve months. In March 1999, the agreement was renewed at $6,000 per month for a period of twelve months. In April 1998, the Company engaged two companies for billing and administrative services related to network management services it provides. 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, the Company entered into an agreement with the two companies capping their combined monthly fees at $18,500 per month. For fiscal 1999, the companies were paid approximately $180,000 for their services. Additionally, the Company has a payable to Mr. Revesz of $90,000. In February 1999, the Company entered into notes payable with related parties, all of whom were officers or directors of the Company in the amount of $250,000. The notes accrue interest at a rate of 12% per year until paid in full. As of July 31, 1999, $100,000 of the notes remain outstanding. The Company has 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 the Company with various services that include strategic planning, business development and financial advisory services. Under the terms of the agreement, the Company pays the consulting firm $3,750 per month plus expenses. At July 31, 1999, the Company has a payable to Technology Impact Partners of approximately $74,000. 16. LEGAL PROCEEDINGS On January 29, 1999, one of the Company's customers, Twister Communications, Inc. filed a Demand for Arbitration seeking damages for breach of contract. The customer claims that the Company wrongfully terminated an International Carrier Services Agreement executed by the parties in June 1998 under which the Company provided wholesale carrier services from June 1998 to January 1999. The customer's claims for damages represent amounts that it claims it had to pay in order to replace the service provided by the Company. The Company disputes that it terminated the contract wrongfully and asserts that the customer breached the agreement by failing to pay for services rendered and by intentionally making false representation regarding its traffic patterns and on March 3, 1999 filed a Demand for Arbitration seeking damages for breach of contract in an amount equal to the amounts due to the Company for services rendered plus interest, plus additional damages for fraud. An arbitration panel was selected and the parties are now completing written discovery. While the Company believes that it has a justifiable basis for its arbitration demand and that it will be able to resolve the dispute without a material adverse effect on the Company's financial condition; until the arbitration proceedings take place, the Company can not reasonably estimate the possible loss, if any, and there can be no assurance that the resolution of this dispute would not have an adverse effect on the Company's results of operations. On June 16, 1999, the Company initiated a lawsuit against one of its vendors claiming misrepresentation and breach of contract. Under an agreement the Company signed in late 1998, the vendor was to provide quality fiber optic capacity in January 1999. The delivery of the route in early 1999 was a significant component of the Company's operational and sales goal for the year and the failure of its vendor to provide the capacity led to the Company negotiating an alternative agreement with Bestel, S.A. de C.V. at a higher cost, in addition to the lost revenues and incremental costs incurred. While the total economic impact is still being assessed, the Company believes lost revenues and incremental costs total well in excess of $15 million. While the Company's contract contains certain limitations regarding the type and amounts of damages that can be pursued, the Company has authorized its attorneys to pursue all relief to which it is entitled under law. As such, the Company can not reasonably estimate the ultimate outcome of this lawsuit nor the additional costs that may be incurred in the pursuit of its case. The Company is also a party to additional claims and legal proceedings arising in the ordinary course of business. The Company believes it is unlikely that the final outcome of any of the claims or proceedings to which the Company is a party would have a material adverse effect on the Company's financial statements; however, due 50 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 the Company's results of operations in the period in which it occurred. 51 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information called for by item 10 of Form 10-K is incorporated herein by reference to such information included in the Company' Proxy Statement of the 1999 Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION The information called for by item 11 of Form 10-K is incorporated herein by reference to such information included in the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders. 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 the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by item 13 of Form 10-K is incorporated herein by reference to such information included in the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders. PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 3 Plan of Arrangement between ATSI-Canada and ATSI-Delaware*** 3.1 Articles of Amalgamation of ATSI-Canada* 3.2 Bylaws of ATSI-Canada* 3.3 Amended and restated Certificate of Incorporation of ATSI-Delaware*** 3.4 Bylaws of ATSI-Delaware* 4 Form of Private Placement Warrant* 10.1 Form of Customer Service Agreement for Private Networks* 10.2 Telecommunications Agreement between ATSI-Texas and Long Distance Exchange Corp.* 10.3 Compensation Agreement between ATSI-Texas and James McCourt relating to Guarantee of Equipment Line of Credit by James McCourt** 10.4 Agreement for Investment Banking Services between ATSI-Texas and Joseph Charles & Associates, Inc.** 10.6 1997 Option Plan** 10.7 Form of Option Agreement** 10.8 Credit Card Processing Agreements with TBR Transaction Billing Resources and Card Service International* 52 10.9 Financing Agreement with Roger G. Watt and Convertible Notes issued to Robert G. Watt* 10.10 FCC Radio Station Authorization-C Band* 10.11 FCC Radio Station Authorization-Ku Band* 10.12 Section 214 Certification from FCC* 10.13 Carrier Termination Services Agreement between U.S. Long Distance, Inc. and ATSI-Texas* 10.14 Office Space Lease Agreement* 10.15 Amendment to Office Lease Agreement**** 10.16 Employment Agreement with Arthur L. Smith** 10.17 Employment Agreement with H. Douglas Saathoff** 10.18 Employment Agreement with Craig K. Clement** 10.19 Employment Agreement with Everett L. Waller** 10.20 Employment Agreement with Charles R. Poole** 10.21 Lease/Finance Agreements between IBM de Mexico and ATSI-Mexico**** 10.22 Primary Agreement with Computel** 10.23 Agreement with Investcom**** 10.24 Payphone License issued to ATSI-Mexico** 10.25 Shared Teleport/Network Resale License issued to ATSI-Mexico** 10.26 Agreement with Avantel** 10.27 Registration Rights Agreement between ATSI-Canada and James R. Leininger, M.D.** 10.28 Modification Agreement with Computel**** 10.29 Office Space Lease Agreement of GlobalSCAPE***** 10.30 Amended and Restated 1997 Option Plan***** 10.31 Agreement with SATMEX (Agreement #095-1)****** 10.32 Agreement with SATMEX (Agreement #094-1) ****** 10.33 Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI dated July 2, 1999******* 10.34 Certificate of Designation, Preferences and Rights of 6% Series B Cumulative Convertible Preferred Stock of American TeleSource International, Inc.******* 10.35 Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by American TeleSource International, Inc. dated July 2, 1999******* 10.36 Registration Rights Agreement between The Shaar Fund Ltd. and ATSI dated July 2, 1999******* 10.37 Warrant issued to Gary Wright dated November 6, 1998******* 10.38 Warrant issued to Gary Wright dated November 6, 1998******* 10.39 Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI dated September 24, 1999******** 10.40 Certificate of Designation, Preferences and Rights of 6% Series C Cumulative Convertible Preferred Stock of American TeleSource International, Inc.******** 10.41 Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by American TeleSource International, Inc. dated September 24, 1999******** 10.42 Registration Rights Agreement between The Shaar Fund Ltd. and ATSI dated September 24, 1999******** 10.43 Certificate of Designation, Preferences and Rights of 10% Series A Cumulative Convertible Preferred Stock of American TeleSource International, Inc.********* 10.44 Agreement with Bestel, S.A. de C.V.********* 11 Statement of Computation of Per Share Earnings********* 22 Subsidiaries of the Company********* 23 Consent of Arthur Andersen LLP********* 24 Power of Attorney (included on Signature Page to the Registration Statement)********* 27 Financial Data Schedule********* 99.1 Ruling issued by Ontario Securities Commission***** 99.2 ATSI Shareholder Newsletter********* * Contained in exhibits to Registration Statement on Form S-4 (No. 333-05557) of the Company filed June 7, 1996. 53 ** Contained in exhibits to Registration Statement on Form 10 (No. 000-23007) of the Company filed on August 22, 1997. *** Contained in exhibits to Amendment No. 2 to Registration Statement on FormS-4 (No. 333-05557) of the Company filed September 11, 1997. **** Contained in exhibits to Amendment No. 1 to Registration Statement on Form 10 (No. 023007) of the Company filed October 22, 1997. ***** Contained in exhibits to Registration Statement on Form S-4 (No. 333-47511) of the Company filed March 6, 1998. ****** Contained in exhibits to Registration Statement on Form 10-K (No. 000-23007) of the Company filed October 29, 1998. ******* Contained in exhibits to Registration Statement on Form S-3 (No. 333-84115) filed August 18, 1999 ******** Contained in exhibits to Registration Statement on Form S-3 dated October 26,1999 ********* filed herewith 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 October 26, 1999. AMERICAN TELESOURCE INTERNATIONAL, INC. By:/s/ Arthur L. Smith / ----------------------------------------------- Arthur L. Smith Chief Executive Officer By:/s/ H. Douglas Saathoff / --------------------------------------------------- H. Douglas Saathoff Senior Vice President, Chief Financial Officer and Corporate Secretary Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, this report has been signed below by the following persons in the capacities indicated on October 26, 1999. Signature Title --------- ---- /s/ ARTHUR L. SMITH Chairman of the Board, Chief Executive ------------------- Officer, Director /s/ H. DOUGLAS SAATHOFF Chief Financial Officer, Senior Vice ----------------------- President, and Corporate Secretary /s/ RICHARD C. BENKENDORF Director ------------------------- /s/ CARLOS K. KAUACHI Director --------------------- /s/ MURRAY R. NYE Director ----------------- /s/ TOMAS REVESZ Director ---------------- /s/ ROBERT B. WERNER Director -------------------- 54 EXHIBIT INDEX 3 Plan of Arrangement between ATSI-Canada and ATSI-Delaware*** 3.1 Articles of Amalgamation of ATSI-Canada* 3.2 Bylaws of ATSI-Canada* 3.3 Amended and restated Certificate of Incorporation of ATSI-Delaware*** 3.4 Bylaws of ATSI-Delaware* 4 Form of Private Placement Warrant* 10.1 Form of Customer Service Agreement for Private Networks* 10.2 Telecommunications Agreement between ATSI-Texas and Long Distance Exchange Corp.* 10.3 Compensation Agreement between ATSI-Texas and James McCourt relating to Guarantee of Equipment Line of Credit by James McCourt** 10.4 Agreement for Investment Banking Services between ATSI-Texas and Joseph Charles & Associates, Inc.** 10.6 1997 Option Plan** 10.7 Form of Option Agreement** 10.8 Credit Card Processing Agreements with TBR Transaction Billing Resources and Card Service International* 10.9 Financing Agreement with Roger G. Watt and Convertible Notes issued to Robert G. Watt* 10.10 FCC Radio Station Authorization-C Band* 10.11 FCC Radio Station Authorization-Ku Band* 10.12 Section 214 Certification from FCC* 10.13 Carrier Termination Services Agreement between U.S. Long Distance, Inc. and ATSI-Texas* 10.14 Office Space Lease Agreement* 10.15 Amendment to Office Lease Agreement**** 10.16 Employment Agreement with Arthur L. Smith** 10.17 Employment Agreement with H. Douglas Saathoff** 10.18 Employment Agreement with Craig K. Clement** 10.19 Employment Agreement with Everett L. Waller** 10.20 Employment Agreement with Charles R. Poole** 10.21 Lease/Finance Agreements between IBM de Mexico and ATSI-Mexico**** 10.22 Primary Agreement with Computel** 10.23 Agreement with Investcom**** 10.24 Payphone License issued to ATSI-Mexico** 10.25 Shared Teleport/Network Resale License issued to ATSI-Mexico** 10.26 Agreement with Avantel** 10.27 Registration Rights Agreement between ATSI-Canada and James R. Leininger, M.D.** 10.28 Modification Agreement with Computel**** 10.29 Office Space Lease Agreement of GlobalSCAPE***** 10.30 Amended and Restated 1997 Option Plan***** 10.31 Agreement with SATMEX (Agreement #095-1)****** 10.32 Agreement with SATMEX (Agreement #094-1) ****** 10.33 Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI dated July 2, 1999******* 10.34 Certificate of Designation, Preferences and Rights of 6% Series B Cumulative Convertible Preferred Stock of American TeleSource International, Inc.******* 10.35 Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by American TeleSource International, Inc. dated July 2, 1999******* 10.36 Registration Rights Agreement between The Shaar Fund Ltd. and ATSI dated July 2, 1999******* 10.37 Warrant issued to Gary Wright dated November 6, 1998******* 10.38 Warrant issued to Gary Wright dated November 6, 1998******* 10.39 Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI dated September 24, 1999******** 10.40 Certificate of Designation, Preferences and Rights of 6% Series C Cumulative Convertible Preferred Stock of American TeleSource International, Inc.******** 10.41 Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by American TeleSource International, Inc. dated September 24, 1999******** 55 10.42 Registration Rights Agreement between The Shaar Fund Ltd. and ATSI dated September 24, 1999******** 10.43 Certificate of Designation, Preferences and Rights of 10% Series A Cumulative Convertible Preferred Stock of American TeleSource International, Inc.********* 10.44 Agreement with Bestel, S.A. de C.V.********* 11 Statement of Computation of Per Share Earnings********* 22 Subsidiaries of the Company********* 23 Consent of Arthur Andersen LLP********* 24 Power of Attorney (included on Signature Page to the Registration Statement)********* 27 Financial Data Schedule********* 99.1 Ruling issued by Ontario Securities Commission***** 99.2 ATSI Shareholder Newsletter********* * Contained in exhibits to Registration Statement on Form S-4 (No. 333-05557) of the Company filed June 7, 1996. ** Contained in exhibits to Registration Statement on Form 10 (No. 000-23007) of the Company filed on August 22, 1997. *** Contained in exhibits to Amendment No. 2 to Registration Statement on FormS-4 (No. 333-05557) of the Company filed September 11, 1997. **** Contained in exhibits to Amendment No. 1 to Registration Statement on Form 10 (No. 023007) of the Company filed October 22, 1997. ***** Contained in exhibits to Registration Statement on Form S-4 (No. 333-47511) of the Company filed March 6, 1998. ****** Contained in exhibits to Registration Statement on Form 10-K (No. 000-23007) of the Company filed October 29, 1998. ******* Contained in exhibits to Registration Statement on Form S-3 (No. 333-84115) filed August 18, 1999 ******** Contained in exhibits to Registration Statement on Form S-3 dated October 26,1999 ********* filed herewith 56 EX-10.43 2 CERT. OF DESIGNATION, PREFERENCES AND RIGHTS Exhibit 10.43 CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF 10% SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK OF AMERICAN TELESOURCE INTERNATIONAL, INC. PURSUANT TO SECTIOxN 151 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE We, the undersigned, Arthur L. Smith and H. Douglas Saathoff, the Chief Executive Officer and Secretary, respectively, of American TeleSource International, Inc., a Delaware corporation (the "Corporation"), do hereby certify that by unanimous written consent of the Board of Directors of the Corporation pursuant to Section 141(f) of the General Corporation Law of the State of Delaware (the "DGCL"), on March 25, 1999, the following resolutions were duly approved and adopted, and such resolutions remain in full force and effect as of the date hereof: WHEREAS, pursuant to Article III of said Certificate of Incorporation of the Corporation, 10,000,000 shares of the Corporation's authorized capital stock are classified as preferred stock with a par value of $0.001 per share; WHEREAS, pursuant to Article III of said Certificate of Incorporation of the Corporation, authority was expressly vested in the Board of Directors pursuant to Section 151 of the General Corporation Law of the State of Delaware to authorize preferred stock with such powers, preference and relative participation, optional or other special rights, classifications, limitations or restrictions thereof as the Board of Directors may deem appropriate; and WHEREAS, the Board of Directors now desires to fix and deem such matters with respect to the Corporation's capital stock classified as preferred stock. NOW, THEREFORE BE IT RESOLVED, that pursuant to the authority vested in the Board of Directors by the Certificate of Incorporation of the Corporation, the Board of Directors does hereby designate, vest, authorize and provide for the issuance of 50,000 shares of preferred stock, each share having a par value of $0.001 per share, all of which shall be designated "10% Series A Cumulative Convertible Preferred Stock" (the "Series A Preferred Stock"); and FURTHER RESOLVED, that all shares of Series A Preferred Stock shall be identical with each other in all respects. DIVIDENDS ON SERIES A PREFERRED STOCK General Dividend Obligation. The Corporation shall pay to the holders of the Series A Preferred Stock, out of funds of the Corporation at anytime available for the payment of dividends under the provisions of the DGCL, preferential dividends at the times and in the amounts provided for in this Article 1. Accrual of Dividends. Dividends on each share of Series A Preferred Stock shall be cumulative from the date of issuance of such share, whether or not at the time such dividend shall accrue or become due or at any other time there shall be profits, surplus or other funds of the Corporation legally available for the payment of dividends. Dividends shall accrue on each share of Series A Preferred Stock at the rate and in the manner prescribed by this Article 1 from and including the date of issuance of such share to and including the date on which such share is redeemed, converted or is otherwise deemed no longer outstanding in accordance with this Certificate of Designation. For purposes of this Section 1.02, the date on which the Corporation shall initially issue a share Series A Preferred Stock shall be deemed to be the "date of issuance" of such share. Payment of Dividends. Dividends shall accrue on each share of Series A Preferred Stock at the rate of ten percent (10%) per annum of the Liquidation Value (as defined in Section 3.01). Dividends shall be payable on Series A Preferred Stock on the first day of each June, September, December, and March beginning June 1, 1999 and each such day is herein referred to as a "Dividend Payment Date." On each Dividend Payment Date all dividends which shall have accrued on each share of Series A Preferred Stock then outstanding during the calendar quarter ending upon such Dividend Payment Date shall be deemed to become "due" for all purposes of this Article 1, regardless of whether the Corporation shall be able or legally permitted to pay such dividend on such Dividend Payment Date. If any dividend on any share of Series A Preferred Stock shall for any reason not be paid at the time such dividend shall become due, then such dividend in arrears shall be paid as soon as payments of same shall be permissible under the provisions of the DGCL. Until such dividend in arrears is paid, dividends shall continue to accrue, but not compound, on each share of Series A Preferred Stock. Distribution of Partial Dividends Payments. If at any time the Corporation shall pay less than the total amount of dividends due on all outstanding shares of Series A Preferred Stock at the time of such payment, such payment shall be distributed among the holders of Series A Preferred Stock so that an equal amount shall be paid with respect to each outstanding share of Series A Preferred Stock. Participating Dividends. In the event the Corporation pays a dividend or other distribution (other than a distribution pursuant to Article 3 or a distribution constituting an Extraordinary Common Stock Event (as defined in Section 6.03)) to the holders of Common Stock (as defined in Section 6.01), each holder of Series A Preferred Stock shall fully participate in any such dividend or other distribution based on the largest number of whole shares of Common Stock into which such shares of Series A Preferred Stock could be converted under Article 6 on the record date of such dividend or other distribution. REDEMPTION Redemption. If at any time the Market Price (as defined in Section 6.02) is 200% or more of the then effective Conversion Price (as defined in Section 6.02) for 20 consecutive trading days, all or any part of the Series A Preferred Stock may be redeemed by the Corporation at its election, at any time and from time to time, in the manner prescribed in this Article 2; provided, however, the Corporation shall not redeem any shares of Series A Preferred Stock prior to the first anniversary of the date on which the first shares of Series A Preferred Stock is issued. Redemption Notice. Before causing any redemption pursuant to this Article 2, the Corporation shall mail by certified or registered mail, return receipt requested, or via confirmed facsimile to each record holder of any Series A Preferred Stock at the address or the facsimile number (as applicable) shown on the Corporation's records, a written notice (a "Redemption Notice") stating (a) the number of shares of Series A Preferred Stock held of record by such holder which the Corporation proposes to redeem, (b) the date (the "Redemption Date") on which the Corporation proposes to cause the redemption and pay the Redemption Price (as defined in Section 2.04(a)) for the shares to be redeemed, (c) the Redemption Price to be paid for each share to be redeemed, and (d) the place at which the shares to be redeemed may be surrendered in exchange for the Redemption Price. Each Redemption Notice under this Section 2.02 shall be mailed or transmitted (as applicable) at least ten (10) days before the Redemption Date; provided, however, if the Corporation fails to pay the Redemption Price on the Redemption Date (for a reason other than a holder's failure to deposit the Series A Preferred Stock certificates pursuant to section 2.04(b)), the Redemption Date shall be the date on which the Corporation actually pays the Redemption Price. Determination of Number of Each Holder's Shares to be Redeemed. The number of shares of Series A Preferred Stock to be redeemed from each holder thereof shall be determined by multiplying the total number of shares of Series A Preferred Stock to be redeemed times a fraction, the numerator of which shall be the total number of shares of Series A Preferred Stock held by such holder and the denominator of which shall be the total number of shares of Series A Preferred Stock outstanding. No fractional shares may be redeemed. Redemption Price. For each share of Series A Preferred Stock which shall be redeemed by the Corporation pursuant to this Article 2, the Corporation shall be obligated to pay the holder of such share an amount (the "Redemption Price") equal to the Liquidation Value, plus any accrued but unpaid dividends. Such payments which the Corporation shall be obligated to make on any Redemption Date shall be deemed to become "due" for purposes of this Article 2, regardless of whether the Corporation shall be able or legally permitted to make such payments on such Redemption Date. Each holder of Series A Preferred Stock shall be entitled to receive on the Redemption Date the full Redemption Price for each share of Series A Preferred Stock held by such holder which the Corporation redeems on such Redemption Date upon surrender by such holder at the Corporation's principal office of the certificate representing each such share duly endorsed in blank or accompanied by an appropriate form of assignment duly endorsed in blank. After the payment by the Corporation of the full Redemption Price, all rights of the holder of such shares of Series A Preferred Stock shall cease and terminate. Unless all of the shares of the Series A Preferred Stock evidenced by the certificate or certificates delivered shall have been redeemed, the Corporation shall prepare a new certificate, substantially identical to that surrendered, representing the balance of the Series A Preferred Stock formerly represented by the certificate or certificates that are not redeemed and shall deliver such certificate to the person designated as the holder thereof. Redeemed Series A Preferred Stock to be Cancelled. In the event any shares of Series A Preferred Stock are redeemed pursuant to this Article 2, the shares so redeemed shall be canceled, shall return to the status of unauthorized, but unissued preferred stock of no designated series, and shall not be issuable by the Corporation as Series A Preferred Stock. LIQUIDATION Rights of Holders of Series A Preferred Stock. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of Series A Preferred Stock shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, an amount in cash equal to the sum of $100 per share (the "Liquidation Value"), plus all accrued but unpaid dividends thereon to the date of final distribution. Except as provided herein, the holders of Series A Preferred Stock shall not be entitled to receive any further distribution upon such liquidation, dissolution or winding up of the Corporation. Allocation of Liquidation Payments Among Holders of Series A Preferred Stock. If upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation available for distribution to holders of Series A Preferred Stock (the "Total Amount Available") shall be insufficient to pay the holders of outstanding Series A Preferred Stock, the full amounts to which they shall be entitled under Section 3.01, each holder of Series A Preferred Stock shall be entitled to receive an amount equal to the product derived by multiplying the Total Amount Available times a fraction, the numerator of which shall be the number of shares of Series A Preferred Stock held by such holder and the denominator of which shall be the total number of shares of Series A Preferred Stock then outstanding. Effect of Consolidation, Mergers and Sales of Assets. A consolidation or merger of the Corporation into or with another corporation or entity or the sale of all or substantially all of the assets of the Corporation shall not be deemed a liquidation, dissolution or winding up of the Corporation within the meaning of this Article 3. DISTRIBUTIONS OTHER THAN CASH Whenever the distribution provided for in this Certificate of Designation shall be payable in property other than cash, the value of such distribution shall be the fair market value of such property as determined in good faith by the Board of Directors. VOTING POWER General. Except as required by law, each holder of Series A Preferred Stock - ------- shall be entitled to vote on all matters and shall be entitled to that number of votes equal to the largest number of whole shares of Common Stock into which such holder's shares of Series A Preferred Stock could be converted under Article 6, on the record date for the determination of stockholders entitled to vote on such matter or, if no such record date is established, at the date such vote is taken or any written consent of stockholders is solicited. Except as required by law or this Article 5, the holders of shares of Series A Preferred Stock and Common Stock shall vote together as a single class on all matters. Protective Provisions. So long as there is outstanding 50% or more of the total - --------------------- number of shares of Series A Preferred Stock issued from time to time by the Corporation, the Corporation shall not, without first obtaining the approval by vote or written consent of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, take or cause to be taken any of the following actions: (a) any consolidation or merger of the Corporation with or into another corporation or entity in which the Corporation will not be the surviving entity, (b) the sale of all or substantially all of the assets of the Corporation to a corporation or entity that is not an affiliate of the Corporation, (c) any voluntary liquidation, dissolution or winding up of the Corporation or (d) any amendment of this Certificate of Designation. CONVERSION RIGHTS Description and Conversion Procedure. The Series A Preferred Stock shall be convertible into shares of the common stock, par value $0.001 per share (the "Common Stock"), of the Corporation as follows: except as expressly herein provided otherwise, at the option of the holder, each share of the Series A Preferred Stock may be converted at any time or from time to time after the date of issuance and prior to February 28, 2005 (the "Mandatory Conversion Date"); any Series A Preferred Stock shall be deemed to have been converted (the "Conversion Date") when the Corporation shall have received the certificate or certificates evidencing such shares appropriately endorsed to reflect conversion thereof, and upon conversion as provided in this Article 6, the Corporation shall issue as soon as reasonably practical that number of shares of Common Stock ("Conversion Stock") as is equal to the Liquidation Value, plus all accrued but unpaid dividends through the Conversion Date, divided by the effective Conversion Price; on the Mandatory Conversion Date, all of the then outstanding shares of Series A Preferred Stock will be deemed automatically converted in accordance with the this Article 6; provided, however, the Corporation shall not be obligated to issue a certificate evidencing the Conversion Stock to the holder of Series A Preferred Stock, unless and until the Corporation receives from such holder the certificate or certificates evidencing such shares of Series A Preferred Stock; and unless all of the Series A Preferred Stock evidenced by the certificate or certificates delivered shall have been converted, the Corporation shall prepare a new certificate, substantially identical to that surrendered, representing the balance of the Series A Preferred Stock formerly represented by the certificate or certificates that are not converted and shall deliver such certificate to the person designated as the holder thereof. Conversion Price. For purposes of this Certificate of Designation, the "Conversion Price" of each share of Series A Preferred Stock shall initially mean the Average Market Price (as defined below) of the Common Stock on the date of issuance of the share of Preferred Stock. On each of the first five anniversary dates of the date of issuance, the Conversion Price of each share of Series A Preferred Stock will be reset to an amount equal to the greater of (a) 75% of the Average Market Price as of such anniversary of the date of issuance or (b) 75% of the initial Conversion Price. For purposes of this Certificate of Designation, the "Average Market Price" of the Common Stock on any date shall mean the average Market Price (as defined below) of the Common Stock for the 20 trading days immediately preceding such date. For purposes of this Certificate of Designation, the "Market Price" of the Common Stock on any date shall mean the closing sale price of the Common Stock on such date on the principal national securities exchange on which the shares are listed or admitted to trading, or, if the Common Stock is not so listed or admitted to trading, or the average of the highest closing bid price and lowest closing asked price on such date as quoted on the National Association of Securities Dealers Automated Quotation System or such other market in which such prices are regularly quoted, or, if there have been no published bid or asked quotations with respect to the Common Stock on such date, the Market Price shall be the fair market value per share of Common Stock as established by the Board of Directors in good faith. The Conversion Price, as reset from time to time as provided herein, is subject to further adjustment as provided in Sections 6.03 and 6.04. Adjustments to Conversion Price Upon Extraordinary Common Stock Event. Upon the happening of an Extraordinary Common Stock Event (as defined below) after the date of issuance, the Conversion Price shall, simultaneously with the happening of such Extraordinary Common Stock Event, be adjusted by multiplying the then effective Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such Extraordinary Common Stock Event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such Extraordinary Common Stock Event, and the product so obtained shall thereafter be the Conversion Price. The Conversion Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive Extraordinary Common Stock Event or Events. For purposes of this Certificate of Designation, "Extraordinary Common Stock Event" shall mean (i) the issue of additional shares of Common Stock as a dividend or other distribution on outstanding stock of this Corporation, (ii) a subdivision of outstanding shares of Common Stock into a greater number of shares of Common Stock, or (iii) a combination of outstanding shares of Common Stock into a smaller number of shares of Common Stock. Capital Reorganization or Reclassification. If the shares of Common Stock issuable upon the conversion of shares of Series A Preferred Stock shall be changed into the same or a different number of shares of any class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend provided for in Section 6.03), then and in each such event the holder of each share of Series A Preferred Stock shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such reorganization, reclassification or other change by holders of the number of shares of Common Stock into which such share of Series A Preferred Stock might have been converted immediately prior to such reorganization, reclassification or change, all subject to further adjustment as provided herein. Cash in Lieu of Fractional Shares. No fractional shares of Common Stock or scrip representing fractional shares shall be issued upon the conversion of shares of Series A Preferred Stock. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of Series A Preferred Stock, this Corporation shall make, to the holder of the shares of Series A Preferred Stock which were converted, a cash payment in respect of such fractional shares based on the then effective Market Price of the Common Stock. Reservation of Common Stock. This Corporation shall reserve and keep available out of its authorized but unissued shares of Common Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Series A Preferred Stock, and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Series A Preferred Stock, the Corporation shall take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. Converted Series A Preferred Stock to be Cancelled. In the event any shares of Series A Preferred Stock shall be converted pursuant to this Article 6, the shares so converted shall be canceled, shall return to the status of unauthorized, but unissued preferred stock of no designated series, and shall not be issuable by the Corporation as Series A Preferred Stock. IN WITNESS WHEREOF, the Corporation has caused this certificate to be duly executed by its Chief Executive Officer and Secretary this 25th day of March 1999. AMERICAN TELESOURCE INTERNATIONAL, INC. /s/ Arthur L. Smith ---------------------------------------- Arthur L. Smith, Chief Executive Officer /s/ H. Douglas Saathoff ---------------------------------------- H. Douglas Saathoff, Secretary EX-10.44 3 AGREEMENT WITH BESTAL, S.A. DE C.V. Exhibit 10.44 MASTER AGREEMENT FOR THE PROVISION OF TELECOMMUNICATION SERVICES EXECUTED BETWEEN "American TeleSource International, Inc." and BESTEL USA, Inc. Master Agreement for the provision of Telecommunication Services executed between BESTEL USA, Inc., represented by Ing. Manuel Vazquez Arroyo Aldrete, ("BESTEL") and "American TeleSource International, Inc." represented by Charles R. Poole, (the "Customer") in accordance with the following Recitals and Clauses. AGREEMENT NUMBER: 100948-0011 The telecommunication Services that BESTEL shall provide to the Customer will be those shown in the following table and the parties agree that the provision of said services are governed by the terms and conditions of this Master Agreement for the Provision of Telecommunication Services and by that established in the Addenda corresponding to those Services and/or Promotional Programs selected:
SERVICES AND ADDENDA OF THIS PRESENT CONTRACT DATE CUSTOMER'S SIGNATURE AGREEMENT LONG DISTANCE xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx OPERATOR SERVICES xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 800 SERVICES October 15, 1998 (Signature) PRIVATE LINE SERVICES xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx DATA SERVICES xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx LIT FIBER xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx DARK FIBER xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx COLLOCATION xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx INTERNET SERVICES xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx OTHER SERVICES (SPECIFY) xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
CONDITIONS THE CUSTOMER accepts and acknowledges that once the Addenda corresponding to the Services and/or Promotional Programs selected are executed, these shall form an integral part of this Master Agreement for the Provision of Telecommunication Services. The Addenda corresponding to the Services and/or Promotional Programs selected at a later date than the date of execution of this Master Agreement, shall have an effective date as of the date of execution and acceptance and shall become an integral part of this Agreement. RECITALS I. BESTEL states through its legal representative: That it represents a Corporation duly incorporated under the laws of the State of Nevada under the name of "Bestel USA, Inc.". That the personality and capacity of its legal representative as of this date has not been modified nor limited in any way. That it has executed with Bestel, S.A. de C.V. an interconnection agreement since said company has a concession dated January 8, 1996 granted by the Federal Government through the Ministry of Communications and Transportation ("Ministry") to install, operate and exploit a Public Telecommunications Network and therefore has the ability to provide the Services under this Agreement. That it desires to provide the Services under this Agreement to the Customer. That its address is 1890 N. Shoreline Drive, Mountain View, CA 94643 That it has the personnel and technical capacity, as well as its own infrastructure or that of a third party necessary to provide the Services under this Agreement. II. THE CUSTOMER states through its legal representative: That it represents a Corporation duly incorporated under the laws of the State of Texas under the name of "American TeleSource International, Inc.". That the personality and capacity of its legal representative as of this date has not been modified nor limited in any way. That its address is 12500 Network Boulevard, Suite 407, San Antonio, TX 78249. That its telecommunications terminal equipment to be utilized by the CUSTOMER is duly homologated before the competent authorities and can be interconnected to a public telecommunications network without causing interferences or any damages to said network and complies with the authorized signaling. That its objective, among others, is to provide long distance services, provided in the United States and has authorization granted by the government through the Federal Communications Commission (FCC). That it desires to contract with BESTEL the Services shown on the First Page of this Agreement which after its execution forms an integral part. That it desires to commit to the traffic corresponding to the Services under this Agreement in the percentages shown hereunder or in its Addenda. Based on the above, the parties agree to the following: CLAUSES 1. OBJECTIVE. .1 BESTEL shall provide to the CUSTOMER the Services shown on the First page of this Agreement (the "Services") and THE CUSTOMER agrees to pay the consideration for such Services as established in the corresponding Addenda. .1 In the event THE CUSTOMER receives the Services or opts for any of the Promotional Programs (modified from time to time) it is understood that THE CUSTOMER has accepted the applicable terms and conditions for those Services and/or Promotional Programs registered with the competent authorities. 2. CONSIDERATION. 2.1 THE CUSTOMER agrees to pay BESTEL for the Services provided by BESTEL the total value of the consideration specified in the corresponding Addenda for the Contracted Services (the "Price") by no later than the date agreed upon. 2.2 The Price for the Services agreed to by the parties shall be subject to modifications in accordance with the changes that could arise under the terms and conditions of the Promotional Program under which the Customer has subscribed. Such Promotional Program as established under this Agreement, shall form part of this Agreement. In the event of conflict between the terms and conditions of this Agreement and those of the Promotional Program selected by the CUSTOMER, those contained in the Promotional Program shall prevail. 2.3 The rates can be modified at any time by BESTEL with a thirty (30) day advance notice to the CUSTOMER and the CUSTOMER's acceptance. Such adjustments or discounts shall be given in BESTEL's invoices presented to the CUSTOMER on the effective date of such rates. BESTEL shall be able to apply any adjustments or discounts against any outstanding amounts that the CUSTOMER has. 2. FORM AND PLACE OF PAYMENT. 3.1 BESTEL shall send on a monthly basis an invoice to the CUSTOMER for the Services provided to the address shown in this Agreement. 3.2 Payment for the invoice(s) for the Services provided can be made in cash at the locations provided by BESTEL on such invoices or by check payable to BESTEL USA, Inc., by wire transfer or any other payment form specified by BESTEL. 3.3 Any differences that the CUSTOMER should have with the charges billed on the invoice should be directed to the Customer Service Center established by BESTEL .In the event the CUSTOMER wishes to dispute, CUSTOMER shall do so in writing by no later than the payment date shown on the invoice. 3.4 The invoices should be received by the CUSTOMER within the corresponding delivery time set for such CUSTOMER and can be modified by BESTEL from time to time. If the CUSTOMER does not receive the invoice, the CUSTOMER shall notify BESTEL so that a copy can be sent. Notwithstanding the above, the CUSTOMER shall pay immediately any outstanding amounts. 3.5 The CUSTOMER shall pay to BESTEL the amounts specified on the corresponding invoice by no later than the date established on the invoice which shall always be ten (10) days after the close of the billing period. 3.6 THE CUSTOMER agrees that BESTEL may apply the payment for one of more of the Services under this Agreement to any outstanding amount generated by the provision of any of the Services for an amount or in any invoice order established by BESTEL. 3.7 BESTEL shall be able to partially or totally suspend the provision of the Services under this Agreement upon previous notice to the CUSTOMER, in the event the CUSTOMER pays late or does not completely pay its outstanding amounts. In the event of suspension and in order to reestablish the Services, the CUSTOMER shall pay any outstanding amounts as well as pay any reconnection charges. As well, in the event BESTEL so determines, the CUSTOMER shall provide BESTEL any security requested. 3.8 The amounts owed by the CUSTOMER after the payment date of the invoice shall generate late payment fees calculated by multiplying the 30 day Libor Rate (or substituted rate) in use on the date of payment times 2.0. 3.9 BESTEL shall be able to request total payment of any amount owed by the CUSTOMER before continuing to provide the Services under this Agreement. In the event that BESTEL should omit in any invoice amounts referred to in this Paragraph, such charges can be invoiced in any subsequent invoice in order for the CUSTOMER to cover its outstanding amounts. Such omission does not constitute a waiver by BESTEL to collect any amounts nor shall it be interpreted as the CUSTOMER'S right to not pay such amounts. 4.0 TERM. 4.1 Except for the Promotional Program contracted by the CUSTOMER, or that established in the Addenda of the Services, this Agreement shall be indefinite for both parties and any party may terminate with ninety (90) days advance noticeto the other party its desire to terminate. However, BESTEL may terminate this Agreement at any time due to a justified cause at BESTEL's discretion. 4.2 In the event the CUSTOMER stops receiving BESTEL's services for any cause and receives them from another vendor or has terminated this Agreement, the parties agree that in the event the CUSTOMER desires to receive the SERVICES again and receive the Promotional Programs, it shall be understood that the CUSTOMER has accepted the terms and conditions established hereunder. 5. TERMINATION. 5.1 In the event the CUSTOMER does not fulfill any of its obligations under this Agreement, BESTEL shall terminate this Agreement without any liability. If this occurs, all amounts owed by the CUSTOMER to BESTEL at that time shall be due immediately. 5.2 BESTEL shall notify the CUSTOMER the termination of this Agreement indicating the amount owed and the due date in which such amount is to be paid. Those amounts owed by the CUSTOMER as of the termination date shall cause late fees as mentioned in 3.8 above. 5.3 In the event of default by BESTEL, the CUSTOMER shall notify BESTEL the cause(s) of such default so that BESTEL may correct to the CUSTOMER's satisfaction. After thirty (30) days and if such default persists, the CUSTOMER shall be able to terminate this Agreement, after paying any amounts owed to BESTEL without any liability. 6 SERVICE INTERRUPTIONS. 6.1 BESTEL shall not be responsible for the suspension or interruption of the Services because of force majeure or fortuitous cause or because of unforeseen circumstances including transmission failures as well as the suspension or interruption of communication by other networks through which the signals or traffic runs through. 6.2 BESTEL shall be able to interrupt for any necessary time the provision of the Services under this Agreement when an inspection or maintenance is needed for their facilities and/or equipment. BESTEL shall try to program such inspection or maintenance at hours that do not result inconvenient for the CUSTOMER. 6.3 Except for the stipulated in this Agreement, the CUSTOMER acknowledges that the equipment and the lines through which the switched or dedicated local service is to be provided are not owned by BESTEL; therefore BESTEL shall not be responsible for any failures attributable to such equipment or lines. BESTEL shall only be responsible for the Services provided through circuits, equipment and fiber optic network owned by BESTEL or affiliates. 6.4 Except for the stipulated in this Agreement, neither party shall be responsible for any damages, including indirect and/or consequential or for the loss of income derived or related with the provision of the Services under this Agreement. 7 LIABILITY. 7.1 BESTEL shall not be responsible for any wrong use, negligence, fraudulent use, use contrary to specifications and/or unauthorized use that the CUSTOMER makes of its facilities, line(s) and/or telecommunications equipment by any of its executives, or employees or any third party that could have direct or indirect access; as well, BESTEL shall not be responsible for calls and/or transmission or reception of information unrecognized by the CUSTOMER from such circumstances. The CUSTOMER shall adopt the necessary means to prevent such acts and shall be responsible for any claims against BESTEL. 7.2 BESTEL shall not be responsible for the contents of the information that the CUSTOMER transmits through its telecommunications network. 8 RELATIONSHIP OF PARTIES. 8.1 The nature of this Agreement is essentially commercial since BESTEL and THE CUSTOMER are companies of everyday business activities and in addition have the necessary elements to fulfill each and every obligation with their employees. As well, between the CUSTOMER' s employees and BESTEL's employees there does not exist any relationship whatsoever; therefore there is no labor relationship. THE CUSTOMER shall be the only party responsible of the obligations that the law establishes as an employer with regards to the personnel utilized and shall be responsible for each and every individual and collective claim that the CUSTOMER's employees could present against BESTEL assuming the liability of any claim presented and reimburse immediately any legal expense or of any other nature that BESTEL could incur for such concept. In the same fashion, BESTEL shall be the only responsible party of the obligations that the law establishes as an employer with regards to the personnel utilized and shall be responsible for each and every individual and collective claim that BESTEL's employees could present against the CUSTOMER assuming the liability of any claim presented. 9 TROUBLE REPORTS/REPAIRS 9.1 The CUSTOMER shall notify its trouble reports to BESTEL and BESTEL shall make available to the CUSTOMER a Customer Service Center that will be available 24 hours a day, 365 days per year where trouble tickets will be reported. BESTEL shall assign a confirmation number. 10 SERVICE GUARANTEES. 10.1 The guarantees offered by BESTEL are described and detailed in the Promotional Programs selected by the Customer and shall be attached to this Agreement forming an integral part of this Agreement. 11 CREDIT INVESTIGATION. 11.1 THE CUSTOMER states that the information provided regarding its solvency and payment capacity is correct and based on that information BESTEL has made the decision to provide the Services under this Agreement. THE CUSTOMER hereby authorizes BESTEL to verify such information. As well, the CUSTOMER agrees that this authorization shall continue in force during the term of this Agreement for BESTEL's benefit. 12 NOTICES. 12.1 The parties agree that all notices, communications and notifications regarding this Agreement shall be directed to the addresses mentioned in the recitals of this Agreement. Such notices shall be made in writing through certified mail or courier with a return receipt, facsimile or any other method that the other party has received such notification. In the event of address change, the parties agree to notify the other party with at least fifteen (15) days advance notice; otherwise the latest address shall prevail. In addition, the CUSTOMER agrees to send a copy of each notification to the following address: Av. Lopez Cotilla, 1976-A, Col. Obrera Centro, Guadalajara,, Mexico. 13 ASSIGNMENT; MODIFICATION. 13.1 THE CUSTOMER agrees that the rights and obligations derived under this Agreement shall not be assigned, transferred, negotiated nor modified in any way without the previous consent in writing from BESTEL. As well, BESTEL may assign its rights and obligations derived under this Agreement to any of its subsidiaries or affiliates or guarantee any obligation through notification to the CUSTOMER. 13.3 THE CUSTOMER shall notify BESTEL with sixty (60) days advance notice any modification to its corporate name, otherwise all documentation shall be generated using the previous name. 14 DISPUTE RESOLUTION. 14.1 The parties express their firm conviction that in good faith in the event there are differences or disputes because of the interpretation, fulfillment and execution of this Agreement and in unlimited form for any technical aspect, service provision, application and collection of consideration and any other that require specific technical capacity, they shall reasonably try to resolve in a friendly fashion through mediation and/or conciliation, voluntarily and previous to any other procedure that the parties could have and take place during a term of thirty (30) days in which the parties promote a mutual consulting process in order to resolve or avoid any controversy or dispute without waiving their rights. 14.2 It shall be considered that the attempts to reach a friendly solution have failed when one of the parties notifies the other party at the termination of such term that the negotiations have not been satisfactory; therefore the parties may execute their rights or effect any action as specified in this Agreement. 15. ENTIRE AGREEMENT. 15.1 The parties agree that this Agreement and its Addenda constitute the only agreement and agree that this Agreement supersedes any agreement, communication, or proposal previously related with the objective of this Agreement. The parties hereby agree and acknowledge this Agreement is subject to the terms and conditions of any applicable regulations. In the event such regulations are not followed, the responsible party shall cure such failure without terminating this Agreement unless such cure is not done in a reasonable time. The parties execute this Agreement in duplicate in San Antonio, Texas on September 28, 1998. `THE CUSTOMER' "BESTEL" "American TeleSource International, Inc." BESTEL USA, Inc. /s/ Charles R. Poole /s/ Manuel Vazquez Arroyo By: Charles R. Poole By: Manuel Vazquez Arroyo Title: President Title: President EX-11 4 STATEMENT OF COMPUTATION OF EPS EXHIBIT 11 AMERICAN TELESOURCE INTERNATIONAL INC. AND SUBSIDIARIES COMPUTATIONS OF LOSS PER SHARE (in thousands) For the Year Ended ------------------------------------------------- July 31, 1997 July 31, 1998 July 31, 1999 ------------------------------------------------- COMPUTATION OF BASIC LOSS PER SHARE Net loss ($4,695) ($5,094) ($7,591) ========== ========== ========== WEIGHED AVERAGE NUMBER OF SHARES COMMON STOCK OUTSTANDING 26,807 41,093 47,467 ========== ========== ========== BASIC LOSS PER COMMON SHARE ($0.18) ($0.12) ($0.16) ========== ========== ========== COMPUTATION OF DILUTED LOSS PER SHARE Net loss ($4,695) ($5,094) ($7,591) Dividends not incurred upon assumed conversion of convertible preferred stock 0 0 70 Interest not incurred assumed conversion of convertible note 9 0 0 ---------- ---------- ---------- Not loss applicable to common stockholders used for computation ($4,686) ($5,094) ($7,521) ========== ========== ========== Weighted average number of shares of common stock outstanding 26,807 41,093 47,467 Weighted average incremental shares outstanding upon assumed conversion of options and warrants 3,061 10,228 4,272 Weighted average incremental shares outstanding upon assumed conversion of preferred stock 0 0 264 Weighted average incremental shares outstanding upon assumed conversion of convertible note 200 0 0 ---------- ---------- ---------- WEIGHT AVERAGE COMMON SHARES AND COMMON SHAE EQUIVALENTS USED FOR COMPUTATION 30,068 51,321 52,003 ========== ========== ========== DILUTED LOSS PER COMMON SHARE AND COMMON EQUIVALENT ($0.16) ($0.10) ($0.14) ========== ========== ========== EX-22 5 SUBSIDIARIES OF ATSI EXHIBIT 22 The subsidiaries of American TeleSource International, Inc. are as follows: State or other Company Jurisdiction of Incorporation ---------------------- ----------------------------- American TeleSource International, Inc. Canada American TeleSource International, Inc. Texas American TeleSource International de Mexico, S.A. de C.V. Mexico GlobalSCAPE, Inc. Delaware Sistema de Telefonia Computarizada, S.A. de C.V. ("Computel") Mexico Servicios de Infraestructura, S.A. de C.V. ("Sinfra") Mexico TeleSpan, Inc. ("TeleSpan") Texas ATSI de CentroAmerica, S.A. Costa Rica EX-23 6 CONSENT OF ARTHUR ANDERSON Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement on Form S-8 (File No. 333-50259). San Antonio, Texas /s/ ARTHUR ANDERSEN LLP October 22, 1999 EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 YEAR JUL-31-1999 AUG-01-1998 JUL-31-1999 379 0 5,293 1,600 0 5,059 16,669 4,713 24,154 11,969 0 0 0 49 6,088 24,154 34,518 34,518 21,312 39,558 (49) 0 1,745 (6,736) 0 (6,736) 0 0 0 (7,591) (0.16) (0.16)
EX-99.2 8 ATSI SHAREHOLDER NEWSLETTER Exhibit 99.2 American TeleSource International, Inc. STOCKholder Newsletter October 1999 Dear Stockholder, [PHOTO APPEARS HERE] I am pleased to present you with ATSI's first stockholder newsletter. My objective is to perio dically update you on our progress and provide current information on the Mexican telecommunications market, as well as the regulatory environment and various global trends affecting ATSI. More importantly, I wish to communicate our vision and strategy in such a way that our stockholders will be informed as to the long-term goals and objectives of the ATSI organization. ATSI has established itself as an emerging international carrier, focusing on niche, underserved telecommunication markets within and between the U.S. and Latin America, primarily Mexico. An indisputable barrier to entry for other competitors is the time required in duplicating the accomplishments of ATSI to date. Our positioning strategy has been to develop a solid corporate framework consisting of unique licenses, interconnection and service agreements, a network footprint and retail distribution - not just to grow top-line revenues, but to build a platform for supporting a stronger telecommunications company of tomorrow. Through the utilization of this valuable framework, we are ahead in the race to penetrate lucrative Latino markets. Why Mexico? Of all the countries in the world, Mexico is the second leading producer of long distance traffic with the U.S. The numbers of telephone and access lines are increasing. Mexico is expected to surpass Canada and become the number one international route with the U.S. for long distance traffic within the next few years. As a result of NAFTA, the U.S. and Mexico enjoy even stronger cultural and trade ties, with a significant flow of immigrants coming north primarily for work. Another factor is Mexico's popularity among U.S. tourists looking for an exotic getaway on a tight budget. Thirty-eight years ago, my mom was one of those northbound immigrants seeking work and a new lifestyle in the U.S. She eventually settled in South Texas. Due to family ties in Mexico, she calls south of the border on a regular basis. I have often said that my mom typifies the ATSI customer profile; she reads Spanish newspapers and magazines, watches Spanish television, listens to Spanish radio and stays on the telephone for extended periods of time. More importantly, she is underserved when it comes to basic telephone services. Like most Latinos north and south of the border, my mom is seeking convenient, accessible and high-quality communication services at competitive rates. The uniqueness of our borderless strategy is that ATSI's targeted customer profile exists on both sides of the border. Whether in Los Angeles, California, San Antonio, Texas, or Morelia, Michoacan, Mexico, Spanish-speaking consumers seek the same basic communication services and, in most cases, prepay for quality, affordability and convenience. With a highly recognized distribution network of 127 Communication Centers (formerly referred to as casetas) in Mexico, we are well positioned to offer our targeted niche market, highly specialized, new and innovative services. Technology also plays a key role in serving our borderless market. Although transparent to the user, technology is vital in meeting a simple consumer demand to communicate with friends and family. We recently installed an Asynchronous Transfer Mode (ATM) transborder network, incorporating the latest in packet switching and compression technology. A state-of-the-art proprietary network allows us to transport customer calls on our own network, thereby gaining a cost advantage and giving us greater control of overall call quality. Cost management and quality control are fundamental to providing our Latino marketplace with affordable and reliable services. ATSI's retail strategy focused on the growing and underserved Latino market, combined with deployment of technology for efficient communication transport, is expected to bring about profitable growth well into the future. We believe our borderless strategy will set us apart from the competition, allowing us the opportunity to increase stockholder value that is sustainable over the long- term. In this newsletter I will discuss the emerging marketplace in which we operate, the market and regulatory environments, global trends, ATSI's retail focus, our exciting Strategic Direction, expansion plans and various current events. For additional information about the Company, please visit our web site at www.atsi.net. THE LATIN AMERICAN TELECOMMUNICATIONS MARKET - -------------------------------------------- The Latin American telecommunications market, with a population of 488 million strong, generated $50 billion in revenues in 1998, which are projected to grow to $113 billion by the year 2005. Pent-up and growing demand exists for telecommunication services throughout this underserved region. The average time a person must wait to acquire a telephone line ranges from three months to several years, with an average telephone line penetration of about 10 per 100 persons, and this penetration is growing. We believe the following trends in the Latin American telecommunications market will continue to drive growth: (.) Continuing deregulation and privatization of markets (.) Reduced international long distance rates driven by competition in deregulated markets (.) The increase in the availability of telephone and access lines (.) The increasing globalization of commerce, trade and travel (.) The proliferation of communication devices such as faxes, cellular telephones and pagers (.) Increasing demand for data transmission services, including the Internet (.) More cost-efficient technological methods for transporting calls such as packet switching THE MEXICAN TELECOMMUNICATIONS MARKET ATSI focuses on the international long distance market, particularly within the U.S. - Mexico corridor, the second busiest international long distance route in the world. U.S. billed revenues for international long distance [PHOTO APPEARS HERE] traffic with Mexico increased from $1.4 billion in 1993 to approximately $3.0 billion in 1997. In addition, from 1995 to 1996, call-traffic between the U.S. and Mexico increased 16% compared with 13.2% for the rest of the world. Analysts expect the market to continue outpacing the rest of the world with growth rates estimated at 15% to 20% annually. During the year 2000, Mexico is projected to increase telephone line penetration from a current level of 9 to 12.5 per 100 persons. The local and long distance telecommunications markets in Mexico had been a Telefonos de Mexico (Telmex) monopoly until January 1, 1997, when the government opened its market to competition. Since then, the Mexican Government has licensed 16 alternative facilities-based long distance carriers or "Concessionaires" and 8 competitive local carriers. Telmex and the newly licensed operators have focused on providing additional and improved services to the residential and business markets. ATSI has focused its efforts in areas underserved by the former monopoly and other emerging competitive carriers. ATSI's services will be in greater demand as communication needs grow beyond the ability of other carriers to meet them. I believe Telmex, as well as the top tier competitive carriers (e.g., Alestra/AT&T, Avantel/MCIWorldcom), will prioritize their resources to compete in the most lucrative, yet capital intensive sectors, leaving many niche opportunities for players like ATSI. While many telecommunications service providers are capable of transporting calls between the U.S. and Mexico, only a few have the retail distribution channels needed to reach consumers and generate call volumes like ATSI. Early on, we developed a two-pronged approach designed to capture both retail and wholesale traffic: 1) The Company originates retail traffic in Mexico through its network of Communication Centers and public pay telephones. Retail traffic in the U.S. is originated through ATSI's MEXICOnnect service (a "dial around" 10-10-624 product) and One Plus long distance, both targeting the Latino community. These U.S. services are only offered in San Antonio, Texas, at this time. 2) ATSI captures wholesale traffic by offering network termination capabilities into Mexico for U.S. carriers either lacking transmission facilities or requiring additional capacity. Similarly, the Company provides these same services to Mexican carriers requiring U.S. and global network termination. Consequently, ATSI is uniquely positioned as a facilities-based carrier able to originate, transport and terminate network traffic in both the U.S. and Mexico, and ATSI is well poised to increase its retail market share within the growing telecommunications corridor between the U.S. and Mexico. THE MEXICAN REGULATORY ENVIRONMENT Mexico is considered one of the Latin American leaders in telecommunications. Development in Mexico's communications industry began in the 1940's, as there was tremendous growth in radio broadcasting and an expansion in telephone service. In the 1970's, large manufacturing facilities (maquiladoras) were constructed throughout the country, creating a significant demand for more cost- effective and reliable communications. On August 9, 1996, President Zedillo's administration issued a decree creating the Comision Federal the Telecomunicaciones (COFETEL), the Mexican Government's regulator responsible for overseeing the liberalization of the telecommunications industry. COFETEL's primary objectives include: (.) Promoting competition in all sectors of telecommunications (.) Providing a judicially secure environment for private investment (.) Ensuring end users non-discriminatory access to all types of telecommunication services Until August 1996, the Secretaria de Comunicaciones y Transportes (SCT) was the exclusive authority for regulation of the Mexican telecommunications industry. COFETEL operates under the SCT; however, since inception, COFETEL has taken increased responsibility in both the reform and regulatory processes. Mexico's Regulatory Structure [FLOW CHART OF REGULATORY STRUCTURE APPEARS HERE] Although Mexico leads most of its Latin American peers in creating a competitive market, the telephone infrastructure is still "catching up" to other countries such as the U.S. It is anticipated that telecommunications sector will continue contributing a larger percentage of the Mexican GDP as the government implements new laws and regulations. We believe that the recent and planned privatization of many of the region's major telephone companies together with the overall trend toward deregulation, particularly in Mexico where the majority of our efforts have been focused, present significant opportunities to provide specialized services to, from, and within this fast-growing market. GLOBAL TRENDS Carrier Opportunity Estimates indicate that worldwide telecommunications deregulation is creating a $600 billion revenue opportunity for international carriers. Emerging international carriers, like ATSI, are expected to capture 40% of this revenue over the next 10-year period. Technological Advancements Improvements in technology used in the transmission of telecommunication services continues to occur rapidly; newer and better switches, fiber optic cables with enormous capacity to move traffic at a fraction of historical costs, and a variety of methods for consumers to access carrier networks, such as prepaid and Voice over Internet Protocol (VoIP). Investment Community The investment community is searching for companies that possess both plans to differentiate themselves from others in the international long distance group, and a viable strategy to compete with the incumbent or former government owned Telephone Company. The investment community prefers companies striving for a balance favoring retail over wholesale traffic. While wholesale is an effective method for utilizing a company's network, and for obtaining volume discounts from other carriers, an over-reliance on wholesale produces long-term risks due to declining margins and a lack of customer loyalty. ATSI'S RETAIL SERVICES WITHIN MEXICO ATSI entered the Mexican markets by establishing retail distribution channels (Communication Centers and public pay telephones) offering local calling, domestic and international long distance, facsimile and in some cases, Internet connectivity. [PICTURE APPEARS HERE] Communication Centers The Communication Center market segment is generally fragmented with dozens of small operators. Currently, we are aware of 12 multi-location caseta operators competing with ATSI. Location and brand recognition are key factors for competing effectively. ATSI maintains a market leadership position, with 127 Communication Centers located in prime high-traffic areas in 66 Mexican cities. ATSI operates its Communication Centers under the name of Computel, a highly recognized brand throughout Mexico. ATSI's Communication Centers are strategically located to serve the "in- country" traveler, tourists and the predominantly large population of Mexico that does not have a telephone. ATSI Centers utilize on average four telephone lines, with six to eight telephones available to customers. Every location employs an attendant who processes calls, monitors call duration, collects fees and generates daily call activity reports. [PICTURE APPEARS HERE] Moving into fiscal year 2000, ATSI has begun the process of transitioning its retail distribution locations into "next generation" Communication Centers. As we enter the new millennium, ATSI's Communication Centers will offer a variety of enhanced telecommunication services beyond basic telephony, including prepaid services and Internet connectivity. ATSI Communication Centers will also play an important role as we expand our retail presence in the U.S. (see "Expanding the ATSI Retail Presence"). The Communication Center concept, together with the experience gained from serving target markets within Mexico, will be brought to the U.S. to serve the needs of the nearly 18 million Latino Americans of Mexican origin, the more than 350,000 new Mexican immigrants who arrive each year, and the more than 54.4 million international travelers who traverse between Mexico and the U.S. annually. Cancun, Mexico Key differentiators that keep customers coming back to ATSI: (,) Comfort, convenience and innovation - Communication Centers are air- conditioned, centrally located and staffed with operators providing new and enhanced services with personalized attention. (.) Accurate billing - aside from tive rates, ATSI's proprietary call accounting system offers higher reliability. (.) Provision of receipts - so that business calls may be expensed for reimbursement or tax purposes. The competition does not typically offer this service, which is important to the traveling business customer. Public Pay Telephones The Company has 574 public pay telephones in targeted niche markets such as resort cities and ship ports of call. ATSI is currently the only payphone operator with network facilities capable of transporting and billing its own long distance calls originating in Mexico. Additionally, the Company's "multi- pay" telephones offer consumers a variety of convenient payment methods, including coin, credit card and collect. Telmex telephones are not as user- friendly, because they only accept hard-to-find Telmex prepaid smart-chip calling cards. [PICTURES APPEARS HERE] ATSI'S STRATEGIC DIRECTION Maintain Focus on Underserved Latino Markets While many of ATSI's competitors in the international long distance arena attempt to be "all things to all people," ATSI will maintain focus on specific retail and wholesale call-traffic generators within the U.S. - Mexico corridor, while placing a stronger emphasis on retail services. Increase Retail Distribution in the U.S. and Mexico The cornerstone of our retail services includes the expansion of Communication Centers in both the U.S. and Mexico, creating a borderless network of distribution outlets (see "Expanding the ATSI Retail Presence"). Communication Centers are an ideal platform for creating additional revenue streams from new and innovative services, thereby improving ATSI's return on invested capital. Due to the stranglehold Telmex has over providing local phone lines, and the poor quality of cellular alternatives, ATSI will not expand its public pay telephone network in Mexico. ATSI will transport traffic for other payphone operators or consider expansion through franchise programs. Efforts will be focused on increasing the productivity of our existing pay telephone assets. Deploy Seamless Transborder Services The U.S. - Mexico border is one of the most traversed in the world, with immigrant flow between the countries continuing to increase. Borderless services will not only meet the practical needs and offer convenience to the consumer, but will allow us to differentiate our services from other providers. Increase the "Value Proposition" of the Wholesale Carrier Product The value of our wholesale carrier services will be enhanced through: (.) Termination to additional countries with an emphasis on Latin America (.) Increase points-of-presence by leveraging on the excess capacity of fiber and switching facilities that currently exist in the U.S. (.) Data transport on high capacity ATM network (e.g. virtual private networks and VoIP) Reduce Transport and Termination Costs ATSI is pursuing a long distance license in Mexico that will allow for a significant reduction in termination and origination costs within that country. Prior to building out the network under the license, we will leverage current call volumes for increased discounts from our current Mexican carrier vendors. ATSI will also execute additional interconnection and service agreements for multiple traffic routing alternatives. In the U.S., we will aggressively pursue carrier agreements that allow for profitable resale of termination services into other countries in addition to Mexico. Construct a State-of-the-Art Network Due to an over-capacity of fiber and switches in the U.S., we expect to lease and partition facilities rather than construct our own. In Mexico, ATSI has adopted a "smart-build" modular strategy, allowing us to scale up the network when customers are added, emphasizing reliability and flexibility. Our smart build approach incorporates a hybrid network, using fiber optic technology to access major metropolitan areas and satellite technology to access semi-rural and smaller metropolitan areas. In addition, we will seek strategic technological partnerships (such as those we have secured with Northern Telecom and Network Equipment Technologies) to minimize technological dependence on third parties, and extend the reach and efficiency of our network (see "ATSI Current Events - Long Distance License"). EXPANDING ATSI'S RETAIL PRESENCE (U.S. - MEXICO CORRIDOR) In order to sustain growth in revenues and improvement in margins, ATSI must meet the challenge facing emerging international carriers by migrating away from shrinking wholesale markets into more profitable retail markets. ATSI plans to invest a majority of its new resources developing retail programs targeting the growing Latino market. In the U.S., the Latino population is growing four times faster than the general population. By the year 2010, it is estimated that Latinos in the U.S. will reach 41.5 million, with 25.6% of Mexican origin. Of particular interest is the fact that 60% of the U.S. Latino households live in 10 Metropolitan areas. It has also been reported that 80% of the U.S. long distance minutes to Mexico originate in the 6 market areas of Los Angeles-Long Beach, San Francisco-San Jose, Chicago, New York, Houston and San Antonio. The Communication Center is a widely recognized and utilized medium in Mexico. It is our belief that the Communication Center concept will find acceptance by familiar and new consumers in the U.S. A key to the successful offering of retail services must include an acceptable, easy and efficient method for consumers to purchase telecommunication services. Our Communication Centers will serve as magnets to attract customers to services designed to meet the needs of the Latino. Through use of these services, the consumer will develop ATSI brand loyalty to which they will adhere when transitioning to more [PHOTO APPEARS HERE] traditional applications such as residential direct dial and dial-up Internet services. Generally speaking, recent immigrants and those with economic challenges are served through "prepaid" accounts, while the more established households tend to subscribe to "post-paid" services. ATSI CURRENT EVENTS Network Enhancements ATSI focused a great deal of its resources and efforts this past year in deploying technological enhancements to the network. With the addition of a transborder fiber optic link and a state-of-the-art Northern Telecom gateway switch, we operate a highly efficient ATM "pipe" between Dallas, Texas, and Mexico City, Mexico. The new fiber link and switch include some of the most advanced compression and packet switching technology available today. The new hardware results in lower transport costs for the Company and exceptional quality for the consumer. As we expand the network in Mexico and throughout Latin America, we will continue deploying the latest in technology for applications such as VoIP. Gerard Klauer Mattison & Co., Inc. In July, we secured a relationship with the investment-banking firm of Gerard Klauer Mattison & Co., Inc. (GKM). GKM has successfully established a reputation as a research-driven firm serving many large institutional investors. GKM has managed over $3.5 billion of public offerings and private placements, and advised in $2.2 billion of transactions including mergers and acquisitions. Their equity division consists of 25 traders making markets in a large number of stocks. We have worked closely with GKM's high-energy team in positioning ATSI for the financial markets and potential strategic relationships. GKM is also providing us with advisory relating to certain financial strategies. Having become intimate with ATSI over the last few months, GKM supports both the management team and our Strategic Direction. We are excited about the future opportunities that exist to utilize GKM's full service capabilities. Long Distance License In November 1998, ATSI applied to the Mexican Government for a long distance license. We are in the final stages of the process and remain confident that a license will be obtained. This particular license will enable the Company to expand its operations and services to both urban and rural locations, while simultaneously decreasing its operating costs for both wholesale and retail service offerings. [PHOTO APPEARS HERE] [LOGO APPEARS HERE] GlobalSCAPE, Inc. The prospects are exceptional for ATSI's wholly owned e-corporation, GlobalSCAPE, Inc., an industry leader in providing Internet-based software utilities. GlobalSCAPE offers "best of breed" products in various categories, including file management, applications development and multimedia utilities. The Company's business model allows it to continually market and deliver software products to end users who want them on a "just in time" basis. To complement its own software development efforts, GlobalSCAPE also intends to seek the distribution rights of third-party authored software. The Company's products are available online and distributed as shareware, meaning, "free to download and use on a trial basis." However, GlobalSCAPE's primary source of revenue derives from product registration. Additionally, the Company generates revenue from advertising in the form of ad banners and sponsorships, which are promoted through its "live" software products and on its vertical portal web site. For more information, please visit the GlobalSCAPE web site at www.globalscape.com. GlobalSCAPE's programs are consistently touted on leading shareware sites' top download lists. CNET's Download.com currently ranks Company products as the "Top 10 Most Frequently Downloaded Programs" within their respective categories. On a monthly basis, the Company receives approximately 1.2 million unique visitors and displays more than 15 million in-product and web site ad banners. Because of this exposure, GlobalSCAPE is diligently working to leverage its name brand recognition into a full suite of "Cute" products. The Company's flagship product, CuteFTP, is a Windows/(R)/ [PHOTO APPEARS HERE] -based file transfer protocol (FTP) utility that allows users the ability to transfer and manage files via the Internet, including files such as MP3's, web pages, software, videos and graphics. CuteFTP/TM/ is a market leader, with an estimated 30% of the U.S. market share as reported by Media Metrix. The Company's portfolio of products also includes CuteHTML/TM/, an advanced HTML editor for developing web sites, and CuteMAP/TM/, an image mapping utility for graphic navigation through web sites, as well as products in various stages of alpha and beta testing. GlobalSCAPE's goal is to accelerate the growth of its revenue streams from software registrations and advertising. To accomplish this goal, the strategy is to (i) grow the user base and, (ii) maximize the value of the user base. Certain components of the Company's strategy include accelerating core product development, distributing complementary third-party authored products, offering complementary products to users based on product category, implementing aggressive marketing plans, and continually improving the support infrastructure. GlobalSCAPE's market essentially includes all computer users on the Internet. In July 1999, GlobalSCAPE engaged the investment-banking firm of SunTrust Equitable Securities, Inc. to determine the best path for unleashing value for ATSI stockholders. Since its engagement, SunTrust has assisted GlobalSCAPE in refining its Strategic Plan, corporate marketing materials, and financial model for the best possible representation in executing a financing strategy. ATSI PEER GROUP COMPARISON ATSI monitors the peer group shown on the following table for measuring corporate performance and identifying trends within our sector of the telecommunications industry. I encourage each of our stockholders to follow this peer group of companies for accomplishing these same objectives.
Shares Recent Closing Outstanding/ 1998 Quarter Paid in Profit Price 52 Week YTD Market Cap Revenues Revenues Year Capital Margin Market Company Symbol (10-5-99) High/Low Return (millions) (millions) (millions) Founded (millions) (ttm) Presence ATSI ATSI.OB $ 1.00 $1.84/$0.44 8% 48.4/345 $ 34.5 $ 8.7 1994 $ 25 -12.0% U.S., Mexico, Central A FirstCom FCLX 9.38 12.75/0.84 249% 22.6/212 19.1 11.6 1997 73 -92.0% Chile, Peru, Colombia IDT Corp IDTC 21.58 35.00/9.50 41% 23.9/615 335.4 191.8 1990 277 -0.1% Worldwide PointeCom PCOM.OB 2.40 2.78/0.69 201% 45.4/109 27.6 13.2 1995 73 -37.0% U.S., CENTRAL AM., S.A. Pacific Gateway PGEX 16.13 50.31/13.13 -66% 19.5/315 466.3 140.0 1991 72 3.3% U.S. & Europe Primus PRTL 18.19 25.13/6.88 15% 28.7/522 421.6 185.6 1086 243 -18.0% N.Am., Asia-Pacific, Eur Startec Global STGC 14.00 18.75/3.38 38% 9.39/131 161.2 61.9 1989 44 -19.0% U.S., Europe Star Telecom STRX 5.19 18.00/5.08 -59% 58.6/304 696.5 272.3 1994 364 -3.3% Worldwide Teleglobe TGO 19.31 40.94/14.81 -44% 252.8/4.86 3,388.9 709.9 1950 1,240 4.2% Worldwide Telscope TSCP 6.75 10.38/5.38 -9% 6.66/44 132.2 32.4 1992 44 -6.1% Latin America Vistel VYTL 27.25 58.88/7.88 27% 32.6/888 135.2 68.7 1994 129 -66.0% U.S. W. Europe, U.K., Lat. WorldPort WRDP.OB $ 0.69 $12.38/$0.49 -93% 22.7/$16 $28.5 $24.5 1997 $111 -184.0% Netherlands, Europe, N. Footnotes: (1) FirstCom was previously named interAmericas Communication Corp., which was founded in 1994 (2) Paid in Capital is calculated through most recently reported quarter (3) YTD Return utilizing closing price as of 1/1/99
LOOKING TO THE FUTURE The liberalization of a telecom market typically begins with the privatization of the government owned Telephone Company. Privatization is followed by a demonopolization process, which strips the former monopoly of its status, and allows competitive carriers to enter the marketplace. Subsequent to demonopolization, markets typically migrate through three stages of development. The first is the protective stage, where the former monopoly vigorously protects its market share and revenue streams to the extent allowed under the newly established regulations. This particular stage is the most difficult for emerging carriers, as the former Phone Company continues operating as a de facto monopoly, exercising its significant market power. During the second stage, the competitive stage, newly licensed carriers attempt to establish themselves and capture market share. The third stage is the consolidation stage, where carriers seek alliances, joint ventures or mergers with former competitors to create critical mass. Due to the market power exhibited in Mexico by Telmex over the past few years, I believe we just recently entered the competitive stage. We have developed clear advantages over our competition, as a result of the proper licensing, execution of carrier interconnection and service agreements, investment in and deployment of network facilities and retail distribution channels - a solid corporate framework. These advantages enhance ATSI's ability to compete in the long-term by ensuring our ability to be a low-cost provider of services. While the competition acquires the tools to effectively compete, ATSI expects to have acquired significant market share. ATSI has assembled an experienced management team that understands the markets in which we operate, is bilingual and bicultural, has a focused vision, is entrepreneurial, and has successful career histories. The management team has thoroughly positioned the Company to capitalize on the opportunities by having established a solid corporate framework during the difficult protective stage. As a result, our Company is transitioning into a retail-oriented, growth opportunity, beginning to capitalize on the competitive stage. Make no mistake about it...our vision is big. Over the next several years, ATSI intends to expand its network under the long distance license to consist of nearly 1,400 miles of fiber optics and 101 satellite terminals, covering 115 Mexican cities. Our retail distribution in Mexico will more than double, and "next generation" Communication Centers will appear in select U.S. communities. Peering even further into the future, ATSI will duplicate its strategy in other Latin American countries as regulatory environments permit. This is an incredible opportunity when considering that two-thirds of the Western Hemisphere's population is Latino. As we continue to penetrate the underserved and underdeveloped telecommunications marketplace of Latinos, I remain confident that our commitment to further strengthen the corporate framework will lead to a greater return on investment. I expect value to be realized as more and more competitors attempt market entry, undoubtedly facing a multitude of barriers and challenges that ATSI has already overcome. Our future looks bright and we maintain focused on creating value for you, the ATSI stockholder. STOCKHOLDER CONTACT Karen R. Mella Director, Investor Relations American TeleSource International, Inc. [ATSI LOGO APPEARS HERE] 12500 Network Blvd., Suite 407 San Antonio, Texas 78249 Voice: (210) 558-6090, ext. 1161 Fax: (210) 558-6095 E-mail: kmella@atsi.net STOCK SYMBOL OTCBB: AMTI This Newsletter contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities and Exchange Act of 1934, as amended. "Forward looking statements" are those statements, which describe management's beliefs and expectations about the future. We have identified forward-looking statements by using words such as "anticipate," "believe," "could," "estimate," "may," "could," "expect," and "intend." Although we believe these expectations are reasonable, our operations involve a number of risks and uncertainties, including those described in our Annual Report on Form 10-K and other documents filed with the Securities and Exchange Commission. Therefore, these types of statements may prove to be incorrect. We do not promise to update any forward-looking statements, even if new information or future events indicate that these statements will prove to be incorrect. [PICTURE APPEARS HERE] ATSI's teleport facility in San Antonio, Texas, provides satelitte-based communication services within and between the U.S. and Latin America. 18 -----END PRIVACY-ENHANCED MESSAGE-----