<PAGE> 1
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 31, 1997
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from to
Commission File Number 0-23007
AMERICAN TELESOURCE INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CANADA 74-2698095
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
12500 NETWORK BLVD., SUITE 407
SAN ANTONIO, TEXAS 78249
(210) 558-6090
(ADDRESS, INCLUDING ZIP CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES
AND TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
---
The number of shares outstanding of the registrant's common stock, at
December 10, 1997, was 38,259,235.
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<PAGE> 2
AMERICAN TELESOURCE INTERNATIONAL INC
AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 1997
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
Page
<S> <C> <C>
Item 1. Interim Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of July 31, 1997 and October 31, 1997 . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Loss for the Three Months Ended October 31, 1996 and 1997 . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the Three Months Ended October 31, 1996 and 1997 . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
2
<PAGE> 3
AMERICAN TELESOURCE INTERNATIONAL INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Presented in U.S. dollars)
<TABLE>
<CAPTION>
July 31, October 31,
1997 1997
------------- ------------
(audited) (unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,921,426 $ 1,497,965
Accounts receivable, net of allowance of $ 187,457
and $ 162,017, respectively 2,207,917 1,617,033
Stock subscriptions receivable 1,113,170 21,025
Prepaid expenses 461,920 418,094
Other 284,173 330,596
------------ ------------
Total current assets 5,988,606 3,884,713
------------ ------------
PROPERTY AND EQUIPMENT (At cost): 7,498,589 8,867,923
Less - Accumulated depreciation and amortization (926,601) (1,215,790)
------------ ------------
Net property and equipment 6,571,988 7,652,133
------------ ------------
OTHER ASSETS, net
Goodwill, net 2,264,986 4,569,839
Organization costs, net 63,277 56,567
Other 931,851 1,336,952
------------ ------------
Total assets $ 15,820,708 $ 17,500,204
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,932,174 $ 2,909,910
Accrued liabilities 2,285,601 1,910,223
Current portion of notes payable 316,425 516,532
Current portion of convertible long-term debt 100,000 100,000
Current portion of obligations under capital leases 695,742 858,494
Deferred revenue 463,788 112,258
------------ ------------
Total current liabilities 5,793,730 6,407,417
------------ ------------
LONG-TERM LIABILITIES:
Obligations under capital leases, less current portion 1,005,256 1,282,320
Notes payable, less current portion 498,053 973,033
Convertible long-term debt, less current portion 1,296,560 1,820,459
Other long-term liabilities 597,053 129,316
------------ ------------
Total long-term liabilities 3,396,922 4,205,128
------------ ------------
MINORITY INTEREST (305,780) --
------------ ------------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Preferred shares, no par value, unlimited shares authorized, no shares issued
and outstanding at July 31, 1997 and
October 31, 1997
Common shares, no par value, unlimited shares authorized, -- --
36,787,105 issued and outstanding at July 31, 1997,
38,258,315 issued and outstanding at October 31, 1997 16,221,856 17,465,538
Accumulated deficit (9,302,375) (10,599,924)
Cumulative translation adjustment 16,355 22,045
------------ ------------
Total stockholders' equity 6,935,836 6,887,659
Total liabilities and stockholders' equity $ 15,820,708 $ 17,500,204
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
AMERICAN TELESOURCE INTERNATIONAL INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
(Presented in U.S. dollars)
(unaudited)
<TABLE>
<CAPTION>
Three months ended October 31,
1996 1997
------------ ------------
<S> <C> <C>
OPERATING REVENUES:
Long distance services $ 2,580,929 $ 4,433,435
Network management services 387,521 1,597,884
------------ ------------
Total operating revenues 2,968,450 6,031,319
------------ ------------
OPERATING EXPENSES:
Cost of services 2,594,083 3,876,081
Selling, general and administrative 1,155,086 2,792,532
Depreciation and amortization 128,629 338,552
------------ ------------
Total operating expenses 3,877,798 7,007,165
------------ ------------
Operating loss (909,348) (975,846)
OTHER INCOME(EXPENSE):
Interest income 729 15,975
Other income 1,349 27,282
Interest expense (43,697) (364,960)
------------ ------------
Total other income (41,619) (321,703)
------------ ------------
NET LOSS $ (950,967) $ (1,297,549)
============ ============
NET LOSS PER SHARE (0.04) (0.04)
============ ============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 23,779,005 37,068,013
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
AMERICAN TELESOURCE INTERNATIONAL INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Presented in U.S. dollars)
(unaudited)
<TABLE>
<CAPTION>
Three months ended October 31,
1996 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (950,967) $(1,297,549)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 128,630 338,552
Amortization of debt discount -- 73,899
Deferred compensation 8,334 124,464
Provision for losses on accounts receivable 136,007 187,251
Changes in operating assets and liabilities
net of effects from acquisition of Computel
(Increase) Decrease in accounts receivable (103,032) 403,633
Increase in other assets-current and long-term (43,877) (433,990)
Increase in accounts payable 735,117 1,104,519
Decrease in accrued liabilities (106,265) (375,378)
Increase (Decrease) in deferred revenue 1,930 (351,530)
Other 9,370 5,690
----------- -----------
Net cash used in operating activities (184,753) (220,439)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (154,840) (1,619,540)
Net cash paid in Computel acquisition -- (1,088,775)
Payments received on note receivable 11,516 --
----------- -----------
Net cash used in investing activities (143,324) (2,708,315)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt -- 675,087
Capital lease payments (45,741) (360,812)
Proceeds from issuance of common stock, net
of issuance costs 117,450 2,191,018
----------- -----------
Net cash provided by financing activities 71,709 2,505,293
----------- -----------
Net decrease in cash (256,368) (423,461)
Cash, beginning of period 655,955 1,921,426
----------- -----------
Cash, end of period $ 399,587 $ 1,497,965
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE> 6
AMERICAN TELESOURCE INTERNATIONAL INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The financial information utilized in the following Notes is presented
in U.S. dollars.
1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements, which
include the accounts of ATSI-Canada, ATSI-Texas, ATSI-Mexico, GlobalSCAPE and
Computel for the first quarter of fiscal 1997, have been prepared in accordance
with Rule 10-01 of Regulation S-X, "Interim Financial Statements,"and
accordingly do not include all information and footnotes required under
generally accepted accounting principles for complete financial statements. In
the opinion of management, these interim financial statements contain all
adjustments, without audit, necessary to present fairly the consolidated
financial position of ATSI and its subsidiaries ("ATSI" or the "Company") as of
July 31, 1997 and October 31, 1997 and the results of their operations and cash
flows for the three months ended October 31, 1996 and 1997. All adjustments
are of a normal recurring nature. There are no significant differences related
to the Company's financial position or results of operations for the periods
ended July 31, 1997 and October 31, 1996 and 1997 between U.S. generally
accepted accounting principles and those of Canada. All significant
intercompany balances and transactions have been eliminated in consolidation.
It is recommended that these interim consolidated financial statements be read
in conjunction with the consolidated financial statements and the notes thereto
for the year ended July 31, 1997 included in the Company's Amendment No. 1 to
the Form 10 filed with the SEC on October 22, 1997. Certain prior period
amounts have been reclassified for comparative purposes. The results of
operations for any interim period are not necessarily indicative of the
results to be expected for the full year.
2. FUTURE OPERATIONS
The consolidated financial statements of the Company have been
prepared on the basis of accounting principles applicable to a going concern.
For the period from inception to October 31, 1997, the Company has incurred
cumulative net losses of $10,545,100. Further, the Company has a working
capital deficit of $2,522,704 at October 31, 1997. Although the Company has
capital resources available to it, these resources are limited and may not be
available to support its ongoing operations until such time as the Company is
able to 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. The Company's
future ability to generate revenues is also subject to uncertainty with regards
to certain regulatory matters. 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, the ultimate outcome of certain regulatory matters 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's strategic growth 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.
6
<PAGE> 7
3. ACQUISITION
In May 1997, the Company entered into an agreement to purchase up to
100% of the outstanding shares of Sistema de Telefonia Computarizada, S.A. de
C.V. ("Computel"), a privately owned caseta (public calling station) operator
in Mexico. Computel, based in Guadalajara, Mexico owns and operates 134
casetas in 72 cities throughout Mexico. Under the terms of the agreement, the
Company acquired 55% of the shares of Computel effective May 1, 1997. The
total purchase price for the acquisition of Computel was approximately $3.6
million, of which $1.1 million was to be paid in cash, $700,000 in a note
receivable forgiven by the Company and the balance in common stock. On August
28, 1997, the Company acquired the remaining 45% ownership interest in Computel
in exchange for the aforementioned cash payment of approximately $1.1 million
and the aforementioned note receivable. The Company has accounted for this
acquisition as a "purchase".
The following unaudited pro forma results of operations for the three
months ended October 31, 1996 assumes the acquisition had occurred as of the
beginning of the period. Such pro forma information is not necessarily
indicative of the results of future operations. Pro forma results of
operations for the quarter ended October 31, 1997, have been omitted as pro
forma results would not materially differ from actual results of operations for
the period ended.
<TABLE>
<CAPTION>
Three Months Ended
October 31, 1996
<S> <C>
Operating Revenues $ 4,799,267
===========
Net Loss $(1,293,748)
===========
Net Loss per Share $ (0.05)
===========
</TABLE>
4. NOTES PAYABLE
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.
At October 31, 1997, the Company had received approximately $450,000 related to
said note. Subsequent to the end of the quarter, the Company received the
additional balance consisting of $550,000. The Company also issued 250,000
warrants to the noteholder which carry an exercise price of $3.56. These
warrants expire in October 2000. The amount of debt discount recorded by the
Company related to the issuance of these warrants is immaterial.
5. REGISTRATION STATEMENT
The Company filed a Form 10 Registration Statement ("Form 10") and
Amendment No.1 thereto with the United States Securities and Exchange
Commission ("SEC") on August 21, 1997 and October 22, 1997, respectively, for
the purpose of registering its shares of common stock under the Securities
Exchange Act of 1934, as amended. Such Registration Statement became effective
on October 20, 1997.
The Company filed a Form S-4 Registration Statement ("S-4"), No.
333-5557, with the SEC on June 7, 1996, Amendment No.1 to the S-4 on November
20, 1996, Amendment No.2 to the S-4 on September 11, 1997, Amendment No. 3 to
the S-4 on December 3, 1997 and Amendment No. 4 to the S-4 on December 11,
1997. Such Registration Statement became effective on December 11, 1997. The
S-4 filings are in conjunction with a proposed "Plan of Arrangement." The Plan
of Arrangement contemplates a share exchange with ATSI-Canada. If all
requisite approvals are obtained, this share exchange will result in the
current stockholders of ATSI-Canada exchanging their shares on a one-for-one
basis for shares of ATSI-Delaware, and ATSI-Delaware will become the
publicly-traded parent entity of the Company. The Plan of Arrangement must be
approved by the Canadian court
7
<PAGE> 8
system and the Company's stockholders before it can be effected. The shares of
ATSI-Delaware to be issued in the Plan of Arrangement will be registered
pursuant to the Form S-4.
The Company filed Amendment No.3 to the S-4 with the Ontario
Securities Commission ("OSC") on December 5, 1997 in order to comply with the
preliminary prospectus requirements of the OSC.
6. SUBSEQUENT EVENTS
During the month of November, the Company purchased certain assets of
Comunicaciones del Caribe, S.A. de C.V. (CDC), one of the Company's
independent marketing representatives in the Cancun/Cozumel area of Mexico.
Under the purchase agreement, the Company paid $600,000 in cash and agreed to
pay another $450,000 to CDC in equal monthly installments over a twelve-month
period. The Company will make the monthly payments with shares of the Company's
Common Stock. The number of shares issued will equal the monthly payment
divided by the fair value of the Company's stock on the date of payment. The
assets purchased consist primarily of contracts with private property owners
under which ATSI will provide call services over a three year period. The cost
of these contracts will be amortized over their contract period.
In November 1997, the Company exercised the call feature on
approximately 2.8 million warrants which were outstanding. Each warrant holder
must exercise the warrant on or before February 28, 1998 or the Company may
redeem the warrants at $0.01 per warrant. If all of the warrants are
exercised, an additional $2.0 million in cash proceeds will be available to the
Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain "forward-looking
statements" within the meaning of Section 27A. of the Securities Act of 1933,
as amended (the "Securities Act"), and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Specifically, all statements
other than statements of historical facts included in the report regarding the
Company's financial position, business strategy and plans and objectives of
management of the Company for future operations are forward-looking statements.
These forward-looking statements are based on the beliefs of the Company's
management, as well as assumptions made by and information currently available
to the Company's management. When used in this report, the words "anticipate,"
"believe," "could," "estimate," "expect," and "intend" and words or phrases of
similar import, as they relate to the Company or Company's management, are
intended to identify forward-looking statements. Such statements reflect the
current view of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions related to certain factors
including, without limitations, competitive factors, general economic
conditions, customer relations, relationships with vendors, the interest rate
environment, governmental regulation and supervision, seasonality, the
operation of the Company's network, transmission costs, product introductions
and acceptance, technological change, changes in industry practices, on-time
events and other factors described herein ("cautionary statements"). Although
the Company believes that the expectations are reasonable, it can give no
assurance that such expectations will prove to be correct. Based upon changing
conditions, should any one or more of these risks or uncertainties materialize,
or should any underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the applicable cautionary statements.
8
<PAGE> 9
GENERAL
The Company is principally engaged in providing call services within
and between the United States and Mexico, utilizing its own satellite network
infrastructure where possible in order to transport calls. Although the
Company processes calls for private property and telephone owners in the United
States, the focus of its retail business is on generating local, domestic long
distance and international calls through its own distribution channels within
Mexico, such as public telephones and casetas. The Company also utilizes its
own infrastructure to serve as a facilities-based provider of network services
for other telecommunications companies, as well as for providing private
communication network services for corporate clients operating in Latin
America.
The Company's intent is to provide reliable and affordable services to
areas in Latin America that have been under served by telecommunications
monopolies. Although the Company's revenues have historically been produced
principally from calls going to or from Mexico, the Company also provides
services to and/or from Jamaica, Brazil and Costa Rica, and is positioning
itself in other Latin American countries to provide services in the future.
RESULTS OF OPERATIONS
The following table sets forth certain items included in the Company's
results of operations in dollar amounts and as a percentage of total revenues
for the three month periods ended October 31, 1996 and 1997.
<TABLE>
<CAPTION>
Three Months Ended October 31,
------------------------------
(unaudited)
1996 1997
---- ----
$ % $ %
------ ------ ------- ------
<S> <C> <C> <C> <C>
Operating revenues
------------------
Operator services $2,581 93% $2,863 47%
Direct dial services - 0% 1,571 26%
Network management services 388 7% 1,597 26%
------ ------ ------- ------
Total operating revenues 2,969 100% 6,031 100%
------ ------ ------- ------
Cost of services 2,594 87% 3,876 64%
------ ------ ------- ------
Gross margin 375 13% 2,155 36%
Selling, general and
administrative expense 1,181 40% 2,792 46%
Depreciation and amortization 129 4% 339 6%
------ ------ ------- ------
Operating loss (935) (31%) (976) (16%)
Other, net (16) (1%) (322) (5%)
------ ------ ------- ------
Net loss $ (951) (32%) $ (1,298) (22%)
====== ====== ======= ======
</TABLE>
Revenues more than doubled in the first quarter of fiscal 1998 as
compared to the first quarter of fiscal 1997, primarily as a result of the
purchase of Computel, which was completed on August 28, 1997. Computel, which
provides direct dial services from casetas, (public calling stations) located
throughout Mexico in exchange for cash payment, generated approximately $1.4
million of direct dial revenues in the quarter ended October 31, 1997.
Computel also generates operator assisted international calls to the United
States, which are processed and billed by
9
<PAGE> 10
ATSI-Texas. Operator assisted revenues increased approximately 11%, or
$282,000, between the first quarters of fiscal 1996 and 1997 as the Company's
mix of calls changed significantly. The Company experienced an increase in the
number of international calls which originated in Mexico and were terminated
and billed in the United States from approximately 34,500 calls during the
first quarter of 1996 to approximately 57,000 calls in the first quarter of
1997. These additional calls were attributable from new public telephones
installed by ATSI in resort areas of Mexico, as well as from the casetas owned
by Computel.
As the Company focused more on the production of calls from within
Mexico between quarters, it decreased its focus on calls originating from
within the United States and other countries. As a result, the number of calls
processed from these areas decreased.
Network management services revenues increased approximately $1.2
million, or 312% from the first quarter of fiscal 1996 to the first quarter of
fiscal 1997. The number of private network customers nearly doubled from 10 to
18 between quarters, and the Company sold approximately $200,000 of equipment
to one of its customers during October 1997. In addition, the Company began
providing network services to other telecommunications companies during the
1997 quarter, which accounted for approximately $380,000 in additional revenues
over the same quarter in the previous year.
Cost of Services. Cost of services increased approximately 49%
between quarters, but decreased as a percentage of total revenues from 87% to
64%. The increase in cost of services is attributable to the increased volume
of business handled by the Company as discussed above. The improvement in the
Company's gross margin from 13% in the period ending October 1996 to 36% in the
quarter ended October 1997 is the result of the change in mix of the Company's
revenues, and the Company's ability to lower the cost of providing call
services from within Mexico. The Company is able to provide direct dial
services from Computel's casetas and from its coin-operated public telephones
at higher margins than its operator services. With the recent changes in the
regulatory environment in Mexico, and the receipt of its comercializadora
license, the Company has been able to enter into agreements with newly formed
carriers within Mexico which allow the Company to transmit its calls made from
within Mexico at lower per minute costs. The Company is also able to take
advantage of volume related discounts as a result of the purchase of Computel,
which produces a large volume of calls within Mexico. As previously mentioned,
the Company began utilizing its own network infrastructure to provide network
services to other telecommunications companies, and increased the number of
private communications network customers that is services. By utilizing its
own infrastructure for the production of revenues, rather than network owned by
third parties, the Company was able to improve its margins.
Selling, General and Administrative (SG&A). SG&A expenses rose 136%,
or approximately $1.6 million between quarters. Approximately half of this
increase is due to the acquisition of Computel. Computel operates
approximately 134 retail-based casetas in approximately sixty cities throughout
Mexico, and employs in excess of 400 people. With the receipt of its
comercializadora license in February 1997, ATSI-Mexico extended its operations
to include the procuring of contracts to install and operate public telephones
within Mexico. ATSI-Mex also began installing coin-operated public telephones
in August 1997. New employees were hired to procure the contracts, and to
assist in the installation and maintenance of the telephones, thus increasing
the personnel and related costs of ATSI-Mexico. The Company anticipates that
SG&A expenses will grow at a slower rate than revenues over the last three
quarters of fiscal 1998, due in part to the seasonal fluctuations of the
Company's revenues, and the increased revenues from network services provided
to other telecommunication companies. Management anticipates that these
additional network services revenues can be provided with relatively little
additional overhead expenses.
Depreciation and Amortization. Depreciation and amortization rose
approximately $210,000, or 163%, between quarters, and rose slightly as a
percentage of revenues from 4% to 6%. This increase was caused by the addition
of approximately $6.1 million in equipment between October 31, 1996 and October
31, 1997, of which approximately $1.7 million was added with the acquisition of
Computel.
Operating Loss. The Company's operating loss increased slightly from
the first quarter of fiscal 1997 to the first quarter of fiscal 1998, due
primarily to increased selling, general and administrative expenses discussed
above. With the acquisition of Computel in August 1998, these expenses
increased at a faster rate than revenues did.
10
<PAGE> 11
However, the effect of these additional expenses on the Company's earnings is
magnified during the first quarter of fiscal 1998 because the Company's revenue
levels are affected by seasonality factors. The Company's revenues are at their
lowest levels in the months of August, September and October because fewer
tourists are visiting the resort areas of Mexico during these months.
Other Income (Expense). Other income (expense) increased to a net
expense of approximately $322,000 during the quarter ended October 31, 1997 as
opposed to net expense of approximately $42,000 during the quarter ended
October 31, 1996. This was primarily attributable to an increase in interest
expense as a result of increased levels of indebtedness.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at October 31, 1997 was approximately $1.5
million as compared to $1.9 million at July 31, 1997. The Company's working
capital position declined from approximately $205,000 at July 31, 1997 to a
deficit of $2.5 million at October 31, 1997. The Company continued to suffer
monthly cash flow deficits from operations, but these deficits were partially
offset with proceeds it received from the exercise of warrants. The Company
received approximately $1.1 million from the exercise of such warrants during
the quarter. During the quarter ended October 31, 1997, the Company received
an additional $1.1 million in cash in exchange for stock which had been
subscribed for as of July 31, 1997. These proceeds were used during the
quarter to purchase the remaining 45% of Computel on August 28, 1997. The net
result of this acquisition was the recording of additional goodwill on ATSI's
books, as Computel's liabilities exceeded its net assets at the acquisition
date. In addition, during the first quarter of fiscal 1998 the Company
committed to purchase approximately $1.5 million in equipment under short-term
vendor financing arrangements. This equipment was installed during the quarter
in order to begin providing network services to other telecommunications
companies. Approximately half of the amount of equipment financed with vendors
had been paid for as of October 31, 1997 utilizing funds received from the
exercise of the warrants mentioned above.
During October and November 1997, the Company borrowed a total of $1.0
million from a shareholder. The Company used approximately half of the
proceeds to pay down on balances owed to vendors for the purchase of the
equipment mentioned above. The remainder of the cash borrowed from the
investor was used to purchase certain assets of Comunicaciones del Caribe
(CDC), one of the Company's independent marketing representatives in the Cancun
and cozumel area of Mexico, on November 1, 1997. Under the purchase agreement,
the Company paid $600,000 in cash and agreed to pay another $450,000 to CDC
over a twelve-month period. The Company will make the monthly payments with
shares of the Company's common stock. The number of shares will equal the
monthly payment divided by the fair value of the Company's stock on the date of
payment. The assets purchased consist primarily of contracts with private
property owners under which ATSI will provide call services over a three year
period. The cost of these contracts will be amortized over their contract
period. By purchasing the assets of CDC, the Company lowered its monthly cash
cost of providing services in the Cancun/Cozumel area of Mexico, which has
historically been the region of Mexico which has produced the most revenues for
the Company. The amount borrowed from the shareholder is payable by the
Company over a seven year period in quarterly payments of principal and
interest, which accrues at the rate of 13% annually. Upon funding of the note,
the Company also issued the shareholder 250,000 warrants to purchase an equal
number of shares of the Company's common stock at an exercise price of $3.56
which was above the trading price of the Company's stock on the date the
agreement was made.
The Company continued to expand its customer base in Mexico during the
quarter ended October 31, 1997. Overall, long distance services revenues were
up 11% over the same period in the prior year, but the amount of revenues
generated out of Mexico increased in excess of 50%. The Company considers this
to be a positive trend, as it has taken steps to improve the profitability of
providing services from within Mexico by reducing the cost of transporting
calls to its switching facilities in San Antonio, and has reduced its
commission cost by purchasing the customer base of CDC. In addition, the
Company began providing network services to telecommunications companies during
the quarter ended October 31, 1997, and believes that this revenue base will
continue to expand throughout the current fiscal year.
11
<PAGE> 12
Based upon the anticipated improved results in its Mexico operations,
and new network services provided to other telecommunications companies, the
Company believes that cash flows anticipated to be generated by operations in
the last three quarters of fiscal 1998 could be sufficient to meet its
anticipated operating cash needs over that period. In addition, in November
1997 the Company exercised the call feature on approximately 2.8 million
warrants which were outstanding. Each warrant holder must exercise the warrant
on or before February 28, 1998 or the Company may redeem the warrants at $0.01
per warrant. If all of the warrants are exercised, an additional $2.0 million
in cash proceeds will be available to the Company. The Company anticipates
that the majority of the warrants will be exercised on or before February 28,
1998.
Until the Company is able to generate positive cash flows from
operations or to obtain a credit facility with a financial institution, on
acceptable terms, to provide sufficient working capital to attain positive cash
flows, the Company will remain dependent upon private sales of debt and/or
equity securities to fund its working capital and expansion needs. There can
be no assurance that the Company will ever be able to generate positive cash
flows from operations or obtain a credit facility which would provide
sufficient working capital to attain positive cash flows from operations, or
that it will be able to sell equity or debt securities sufficient to fund such
working capital and expansion needs.
INFLATION/FOREIGN CURRENCY
Inflation has not had a significant impact on the Company's
operations. With the exception of a portion of the contract entered into with
the Mexican milk producer in April 1996 and a portion of the services provided
by Computel, all of the Company's contracts to date have been denominated in,
and have called for payment in, U.S. dollars. Some expenses directly related
to certain contracts have been denominated in foreign currencies, primarily
Mexican pesos. Such expenses consist primarily of costs incurred in
transmitting long distance calls from Mexico to the Company's switching
facilities in San Antonio, Texas, and payroll and other administrative costs
associated with ATSI-Mexico. The devaluation of the Mexican peso over the past
two years has not had a material adverse effect on the Company's financial
condition or operating results. In fact, the devaluation has had certain
positive effects such as favorable conversion rates in connection with the
payment of certain expenses and stimulated tourism, which is a principal source
of the Company's call services revenues.
SEASONALITY
The Company's call services revenues are typically higher on a per
phone basis during January through July, the peak tourism months in Mexico.
PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The exhibits listed below are filed as part of this report.
EXHIBIT
NUMBER
- ------
11 Computation of Earnings per Share (filed herewith)
27 Financial Data Schedule (filed herewith)
(b) Current Reports on Form 8-K.
None.
12
<PAGE> 13
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AMERICAN TELESOURCE INTERNATIONAL INC.
(Registrant)
Date: December 15, 1997 By: /s/ H. Douglas Saathoff
-------------------------
Name: H. Douglas Saathoff
Title: Chief Financial Officer
13
<PAGE> 14
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
11 Computation of Earnings per Share (filed herewith)
27 Financial Data Schedule (filed herewith)
<PAGE> 1
Exhibit 11
AMERICAN TELESOURCE INTERNATIONAL INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the Quarter Ended
------------------------------
October 31, October 31,
1996 1997
------------ ------------
<S> <C> <C>
Primary
Net loss $ (950,967) $ 1,297,549)
============ ============
Shares:
Weighted average number of common shares
outstanding 23,779,005 37,068,013
Incremental shares assuming conversion of
warrants and options (a) -- --
------------ ------------
Weighted average number of common shares
outstanding as adjusted 23,779,005 37,068,013
============ ============
Net loss per common share $ (0.04) $ (0.04)
============ ============
Fully Diluted (b)
Net loss $ (950,967) $ (1,297,549)
Add: Interest expense applicable to
convertible debt (a) -- --
Net loss - as adjusted $ (950,967) $ (1,297,549)
============ ============
Shares:
Weighted average number of common shares
outstanding 23,779,005 37,068,013
Incremental shares assuming conversion of
convertible debt (a) -- --
Incremental shares assuming conversion of
warrants and options (a) -- --
------------ ------------
Weighted average number of common shares
outstanding as adjusted 23,779,005 37,068,013
============ ============
Net loss per common share $ (0.04) $ (0.04)
============ ============
</TABLE>
(a) Common stock equivalents related to convertible debt warrants and options
are excluded as their effect would be
anti-dilutive.
(b) This calculation is submitted in accordance with paragraph 601 (b) (11) of
Regulation S-K although it is contrary to
APB Opinion No. 15 because it produces an anti-dilutive effect.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JUL-31-1997 JUL-31-1998
<PERIOD-START> AUG-01-1996 AUG-01-1997
<PERIOD-END> OCT-31-1996 OCT-31-1997
<CASH> 0 1,497,965
<SECURITIES> 0 0
<RECEIVABLES> 0 1,800,075
<ALLOWANCES> 0 162,017
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 3,884,713
<PP&E> 0 8,867,923
<DEPRECIATION> 0 1,215,790
<TOTAL-ASSETS> 0 17,500,204
<CURRENT-LIABILITIES> 0 6,407,417
<BONDS> 0 0
0 0
0 0
<COMMON> 0 17,465,538
<OTHER-SE> 0 (10,577,879)
<TOTAL-LIABILITY-AND-EQUITY> 0 17,500,204
<SALES> 2,968,450 6,031,319
<TOTAL-REVENUES> 2,968,450 6,031,319
<CGS> 2,594,083 3,876,081
<TOTAL-COSTS> 3,877,798 7,007,165
<OTHER-EXPENSES> (2,078) (43,257)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 43,697 364,960
<INCOME-PRETAX> (950,967) (1,297,549)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (950,967) (1,297,549)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (950,967) (1,297,549)
<EPS-PRIMARY> (.04) (.04)
<EPS-DILUTED> (.04) (.04)
</TABLE>
