<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 January 31, 1998
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 (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
12500 NETWORK BLVD., SUITE 407
SAN ANTONIO, TEXAS 78249
(210) 558-6090
(ADDRESS, INCLUDING ZIP CODE, OF REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICES AND
TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the registrant's common stock at
March 17, 1998 were 44,365,257.
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AMERICAN TELESOURCE INTERNATIONAL INC.
AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JANUARY 31, 1998
INDEX
PART I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Interim Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of July 31, 1997 and January 31, 1998......................................... 3
Consolidated Statements of Loss for the Three and Six Months Ended January 31, 1997 and 1998................. 4
Consolidated Statements of Cash Flows for the Six Months Ended January 31, 1997 and 1998..................... 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............................................................................. 14
</TABLE>
2
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AMERICAN TELESOURCE INTERNATIONAL INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
<TABLE>
<CAPTION>
July 31, January 31,
1997 1998
---------- ------------
(audited) (unaudited)
ASSETS
- ------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,921 $ 1,355
Accounts receivable, net of allowance of $ 187 and $ 302, respectively 2,208 3,154
Stock subscriptions receivable 1,113 -
Prepaid expenses 462 410
Other 285 716
-------- --------
Total current assets 5,989 5,635
-------- --------
PROPERTY AND EQUIPMENT (At cost): 7,499 11,425
Less - Accumulated depreciation and amortization (927) (1,674)
-------- --------
Net property and equipment 6,572 9,751
-------- --------
OTHER ASSETS, net
Goodwill, net 2,265 4,228
Contracts, net - 883
Other 995 801
-------- --------
Total assets $ 15,821 $ 21,298
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,932 $ 4,082
Accrued liabilities 2,286 2,911
Current portion of notes payable 316 1,484
Current portion of convertible long-term debt 100 -
Current portion of obligations under capital leases 696 784
Deferred revenue 464 260
-------- --------
Total current liabilities 5,794 9,521
-------- --------
LONG-TERM LIABILITIES:
Obligations under capital leases, less current portion 1,005 1,176
Notes payable, less current portion 498 976
Convertible long-term debt, less current portion 1,297 1,447
Other 597 533
-------- --------
Total long-term liabilities 3,397 4,132
-------- --------
MINORITY INTEREST (306) -
-------- --------
COMMITMENTS AND CONTINGENCIES:
SHAREHOLDERS' EQUITY:
Preferred shares, no par value, unlimited shares authorized, no shares
issued and outstanding at July 31, 1997 and January 31, 1998 - -
Common shares, no par value, unlimited shares authorized,
36,787,105 issued and outstanding at July 31, 1997,
39,001,641 issued and outstanding at January 31, 1998 16,222 18,723
Accumulated deficit (9,302) (11,115)
Cumulative translation adjustment 16 37
-------- --------
Total shareholders' equity 6,936 7,645
-------- --------
Total liabilities and shareholders' equity $ 15,821 $ 21,298
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
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AMERICAN TELESOURCE INTERNATIONAL INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
-------------------- ------------------
1997 1998 1997 1998
--------- -------- ---------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Call services $ 2,781 $ 3,644 $ 5,362 $ 6,506
Direct dial services - 1,570 - 3,141
Network management services 399 3,490 815 5,088
-------- -------- -------- --------
Total operating revenues 3,180 8,704 6,177 14,735
-------- -------- -------- --------
OPERATING EXPENSES:
Cost of services 2,622 5,027 5,240 8,903
Selling, general and administrative 1,399 3,293 2,558 6,085
Depreciation and amortization 118 541 247 880
-------- -------- -------- --------
Total operating expenses 4,139 8,861 8,045 15,868
-------- -------- -------- --------
Operating loss (959) (157) (1,868) (1,133)
OTHER INCOME(EXPENSE):
Interest income - 13 - 29
Other income 3 - 5 27
Other expense (10) (7) (10) (7)
Interest expense (51) (364) (95) (729)
-------- -------- -------- --------
Total other income (expense) (58) (358) (100) (680)
-------- -------- -------- --------
NET LOSS $ (1,017) $ (515) $ (1,968) $ (1,813)
======== ======== ======== ========
NET LOSS PER SHARE $ (0.04) $ (0.01) $ (0.08) $ (0.05)
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 23,944 38,446 23,862 37,757
======== ======== ======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
</TABLE>
4
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AMERICAN TELESOURCE INTERNATIONAL INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
January 31,
------------------
1997 1998
------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,968) $(1,813)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Depreciation and amortization 247 880
Amortization of debt discount - 150
Deferred compensation 17 249
Provision for losses on accounts receivable 275 464
Changes in operating assets and liabilities
net of effects from acquisitions
Increase in accounts receivable (707) (1,392)
Increase in other assets-current and long-term (12) (418)
Increase in accounts payable 488 2,105
Increase (Decrease) in accrued liabilities (233) 632
Increase (Decrease) in deferred revenue 47 (204)
Other 7 (25)
------- -------
Net cash provided by (used in) operating activities (1,839) 628
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (273) (3,560)
Net cash paid in acquisitions - (1,724)
Payments received on note receivable 13 -
------- -------
Net cash used in investing activities (260) (5,284)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares, net
of issuance costs 171 2,612
Proceeds from issuance of debt 1,491 2,366
Capital lease payments (92) (657)
Payments on debt - (231)
Deposits 250 -
------- -------
Net cash provided by financing activities 1,820 4,090
------- -------
Net decrease in cash (279) (566)
Cash, beginning of period 656 1,921
------- -------
Cash, end of period $ 377 $ 1,355
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
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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 six months of fiscal 1998, 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 January 31, 1998 and the results of their operations and cash
flows for the three and six months ended January 31, 1997 and 1998. 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 January 31, 1997 and 1998
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 January 31, 1998, the Company has incurred
cumulative net losses of $11,060,340. Further, the Company has a working
capital deficit of $3,885,805 at January 31, 1998. Although the Company has
capital resources available to it, these resources are limited and may not be
available to support its ongoing operations until such time as the Company is
able to maintain positive cash flow from operations. There is no assurance the
Company will be able to achieve future revenue levels sufficient to support
operations or recover its investment in property and equipment. 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
entering into lease or long term debt financing agreements to raise capital.
There can be no assurances, however, that such financing arrangements will
actually be consummated or that such funds, if received, will be sufficient to
support existing operations until revenue levels are achieved sufficient to
maintain positive cash flow from operations. If the Company is not successful
in entering into other financial arrangements, or if the funds raised in such
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.
3. ACQUISITION
In August 1997, the Company completed its acquisition of Sistema de
Telefonia Computarizada, S.A. de C.V. ("Computel"), a privately owned caseta
(public calling station) operator in Mexico. The Company acquired 45% of
Computel in exchange for a cash payment of approximately $1.1 million and the
forgiveness of a $700,000 note
6
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receivable held by the Company. The Company previously acquired 55% of the
shares of Computel, in May 1997, in exchange for common stock valued at
approximately $1.8 million.
The following unaudited pro forma results of operations for the six
months ended January 31, 1997 assume 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 six months ended January 31, 1998, have been omitted, as pro forma
results would not materially differ from actual results of operations for the
period ended.
<TABLE>
<CAPTION>
Six Months Ended
January 31, 1997
----------------
<S> <C>
Operating Revenues $ 9,400,000
Net Loss $ (2,580,000)
Net Loss per Share $ (0.10)
</TABLE>
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 $100,000 in
Common Stock and agreed to pay another $200,000 in cash and $350,000 in Common
Stock, during the following twelve months. 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.
4. NOTES PAYABLE
In November 1997, the Company received approximately $550,000 related
to a $1,000,000 note it had entered into in October, $450,000 of which had been
funded during the month of October. 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. In
January 1998, the noteholder exercised previously issued warrants, unrelated to
this note, and called by the Company, by an approximate $500,000 reduction in
the amount due under the note.
In November 1997, the Company entered into a short-term note payable
with one of its shareholders in the amount of approximately $360,000. Interest
accrues at the rate of 10% per year. Subsequent to January 31, 1998, the note
and accrued interest were paid in full.
In December 1997, the Company entered into a short-term note payable
with a company in the amount of $574,000. The note accrues interest at 13% per
year and is payable in full in February 1998. In February 1998, the noteholder
exercised previously issued warrants, unrelated to this note, by canceling all
outstanding principal and interest due on the note.
5. REGISTRATION STATEMENT
The Company filed Amendment No. 3 to the S-4 Registration Statement on
December 3, 1997 and Amendment No. 4 to the S-4 on December 11, 1997. Such
Registration Statement, as amended, became effective on December 11, 1997. On
March 6, 1998, the Company filed a new Registration Statement on Form S-4,
containing a combined prospectus, pursuant to Rule 429 (b) under the Securities
Act of 1933, as amended, which also relates to the previously filed
Registration Statement (No. 333-05557). Such Registration Statement became
effective on March 13, 1998. No shares were sold under Registration Statement
No. 333-05557.
7
<PAGE> 8
6. SUBSEQUENT EVENTS
In November 1997, the Company exercised the call feature on
approximately 2.8 million outstanding warrants. Subsequent to January 31, 1998,
all such warrants were exercised, resulting in cash proceeds of approximately
$1.5 million and an approximate $500,000 reduction of indebtedness.
In February 1998, the Company ceased providing network services
between Mexico and the United States to other telecommunication carriers for a
period of approximately three weeks, as the Company took steps to ensure
compliance with Mexican regulations. Such services were resumed after the three
week period utilizing the Company's existing Secretaria de Comunicaciones y
Transportes ("SCT") licenses.
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 limitation, the inability to obtain capital, changes in the
Mexican political or economic environment; the adoption by Mexico of new laws or
regulations, or changes effected by Mexico to existing laws affecting the
communications industry generally or the Company specifically; increased or
redirected competition efforts, targeting the Company's services or operations,
by competitors, general economic conditions, customer relations, relationships
with vendors, the interest rate environment, seasonality, the operation of the
Company's network, the ability of the Company's direct sales force to
successfully replace its independent marketing representatives or the failure of
said direct sales force to produce anticipated results, transmission costs,
product introductions and acceptance, the inability to continue to generate new
sources of revenue, technological change, changes in industry practices, on-time
events and other factors described herein ("cautionary statements"). Reference
is made to the risks and uncertainties contained in the Company's Form 10 and
Registration Statement on Form S-4, as amended. Although the Company believes
that the expectations are reasonable, it can give no assurance that such
expectations will prove to be correct. Based upon changing conditions, should
any one or more of these risks or uncertainties materialize, or should any
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the applicable cautionary statements.
GENERAL
The Company 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 payphone 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, Costa Rica, El Salvador and
Guatemala.
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The Company's historical 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 January 31, 1998. Additionally, the Company has had recurring negative
cash flows from operations with the exception of the three-month period ended
January 31, 1998. For the reasons stated in Liquidity and Capital Resources and
subject to the risks referred to in Liquidity and Capital Resources the Company
expects improved results of operations and liquidity in fiscal 1998.
RESULTS OF OPERATIONS
The following table sets forth certain items included in the Company's
results of operations in dollar amounts and as a percentage of total revenues
for the three and six-month periods ended January 31, 1997 and 1998.
<TABLE>
<CAPTION>
Three Months Ended January 31, Six Months Ended January 31,
------------------------------ ----------------------------
1997 1998 1997 1998
---- ---- ---- ----
(unaudited)
$ % $ % $ % $ %
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues
Call services ................ $ 2,781 87% $ 3,644 42% $ 5,362 87% $ 6,506 44%
Direct dial services ......... - 0% 1,570 18% - 0% 3,141 21%
Network management services... 399 13% 3,490 40% 815 13% 5,088 35%
-------- -------- -------- -------- -------- -------- -------- --------
Total operating revenues ..... 3,180 100% 8,704 100% 6,177 100% 14,735 100%
-------- -------- -------- -------- -------- -------- -------- --------
Cost of services ............. 2,622 82% 5,027 58% 5,240 85% 8,903 60%
-------- -------- -------- -------- -------- -------- -------- --------
Gross Margin ................. 558 18% 3,677 42% 937 15% 5,832 40%
Selling, general and
administrative expense ....... 1,399 44% 3,293 38% 2,558 41% 6,085 41%
Depreciation and
amortization ................. 118 4% 541 6% 247 4% 880 6%
-------- -------- -------- -------- -------- -------- -------- --------
Operating loss ............... (959) (30)% (157) (2)% (1,868) (30)% (1,133) (7)%
Other, net ................... (58) (2)% (358) (4)% (100) (2)% (680) (5)%
-------- -------- -------- -------- -------- -------- -------- --------
Net loss ..................... $ (1,017) (32)% $ (515) (6)% $ (1,968) (32)% $ (1,813) (12)%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
THREE MONTHS ENDED JANUARY 31, 1998 COMPARED TO THREE MONTHS ENDED JANUARY 31,
1997
Operating revenues. Operating revenues increased approximately $5.5
million or 174%, due to growth in the Company's call services, direct dial
services and network management customer bases.
Call service revenues increased approximately $900,000 or 31%,
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. Through
the implementation of a direct sales strategy, the Company has been able to
increase its presence in the resort areas of Mexico. The Company began
processing calls for several hotels in Mexico subsequent to January 1997,
including those operated by Grupo Posadas, the largest operator of hotels in
Latin America. The Company also began installing intelligent public telephones
in Puerto Vallarta and Acapulco during this time. In addition, the Company
began processing international calls for Computel in January 1997. As a result
of these factors, the Company processed 81,000 international calls originating
in Mexico during the three months ended January 31, 1998 as compared to
approximately 37,000 calls in the same period of the prior year. As the Company
increased its focus on Mexico, it has decreased its focus on domestic and
international calls originated within the United States and other countries,
resulting
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in decreased calls and revenues from these areas.
Direct dial services, calls processed in exchange for cash without
utilizing the Company's operator center, increased to $1.6 million primarily due
to the acquisition of Computel in August 1997. The Company also began processing
domestic long distance and local calls within Mexico during the latter half of
1997 from intelligent public telephones installed in Puerto Vallarta and
Acapulco. These calls are made by depositing coins (pesos or quarters) in the
Company's phones.
Network management services increased approximately $3.1 million or
775%, principally due to the growth of the Company's provision of network
services to other telecommunications companies. The Company began providing
these services between the United States and Mexico in October 1997. In February
1998, the Company ceased providing such services for a period of approximately
three weeks while it took steps to ensure compliance with Mexican regulations.
The services were resumed utilizing the Company's existing Secretaria de
Comunicaciones y Transportes ("SCT") licenses.
Cost of Services. Cost of services increased approximately $2.4 million
or 92% between quarters, but decreased as a percentage of total revenues from
82% to 58%. The increase in cost of services was attributable to the increased
volume of business handled by the Company as discussed above. The improvement
in the Company's gross profit margin resulted from the implementation of the
Company's plan to decrease costs subsequent to the demonopolization of
Telefonos de Mexico (Telmex), which took place in January 1, 1997. Subsequent
to that date, the Company was able to negotiate with newly concessioned
competitors of Telmex to transport its calls originating in Mexico, which has
lowered the associated per minute rate to carry those calls. In addition, 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, the Company purchased the customer contracts
of an independent marketing representative in the Cancun/Cozumel area of Mexico
which did not have a payphone 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
telecommunication companies.
Selling, General and Administrative (SG&A). SG&A expenses rose 135%,
or approximately $1.9 million between quarters, but decreased as a percentage
of revenues from 44% to 38%. This increase was caused by the acquisition of
Computel, the growth of the Company's ATSI-Mexico operations and the expensing
of costs related to certain SEC filings. Approximately, $970,000 of the
increase was 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-Mexico 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 personnel and related costs. In the three months ended January 31,
1998, the Company expensed approximately $290,000 of costs incurred relative to
certain SEC filings.
Depreciation and Amortization. Depreciation and amortization rose
approximately $423,000, or 358%, between quarters, and rose slightly as a
percentage of revenues from 4% to 6%. This increase was caused by the addition
of approximately $8.6 million in equipment between January 31, 1997 and January
31, 1998, of which approximately $1.7 million was added with the acquisition of
Computel. Additional equipment additions included the Company's purchase of 450
public payphones, which the Company began installing in August 1997, and the
acquisition of equipment for the Company's teleport facilities in Mexico City
and Monterrey. The Company also began amortizing goodwill related to its
acquisition of 45% of the shares of Computel in May 1997.
Operating Loss. The Company's operating loss decreased $802,000, or
84%, between quarters and improved as a percentage of revenues from 30% to 2%,
primarily due to increased sales volumes and improvements in the Company's
gross margins.
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<PAGE> 11
Other Income (Expense). Other income (expense) increased approximately
$300,000. This increase was primarily attributable to an increase in interest
expense as a result of increased indebtedness and capital leases.
SIX MONTHS ENDED JANUARY 31, 1998 COMPARED TO SIX MONTHS ENDED JANUARY 31, 1997
Operating revenues. Operating revenues increased approximately $8.6
million or 139%, due to growth in the Company's call services, direct dial
services and network management customer bases.
Call service revenues increased approximately $1.1 million or 21%,
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. Through
the implementation of a direct sales strategy, the Company has been able to
increase its presence in the resort areas of Mexico. The Company began
processing calls for several hotels in Mexico subsequent to January 1997,
including those operated by Grupo Posadas, the largest operator of hotels in
Latin America. The Company also began installing intelligent public telephones
in Puerto Vallarta and Acapulco during this time. In addition, the Company began
processing international calls for Computel in January 1997. As a result of
these factors, the Company processed 138,000 international calls originating in
Mexico during the six months ended January 31, 1998 as compared to approximately
71,500 calls in the same period of the prior year. As the Company increased its
focus on Mexico, it has decreased its focus on domestic and international calls
originated within the United States and other countries, resulting in decreased
calls and revenues from these areas.
Direct dial services, calls processed in exchange for cash without
utilizing the Company's operator center, increased to $3.1 million primarily due
to the acquisition of Computel in August 1997. The Company also began processing
domestic long distance and local calls within Mexico during the latter half of
1997 from intelligent public telephones installed in Puerto Vallarta and
Acapulco. These calls are made by depositing coins (pesos or quarters) in the
Company's phones.
Network management services increased approximately $4.3 million or
524%, principally due to the growth of the Company's provision of network
services to other telecommunications companies. The Company began providing
these services between the United States and Mexico in October 1997. In
February 1998, the Company ceased providing such services for a period of
approximately three weeks while it took steps to ensure compliance with Mexican
regulations. The services were resumed utilizing the Company's existing
Secretaria de Comunicaciones y Transportes ("SCT") licenses.
Cost of Services. Cost of services increased approximately $3.7 million
or 70% between periods, but decreased as a percentage of total revenues from 85%
to 60%. The increase in cost of services was attributable to the increased
volume of business handled by the Company as discussed above. The improvement in
the Company's gross profit margin resulted from the implementation of the
Company's plan to decrease costs subsequent to the demonopolization of Telefonos
de Mexico (Telmex), which took place in January 1, 1997. Subsequent to that
date, the Company was able to negotiate with newly concessioned competitors of
Telmex to transport its calls originating in Mexico, which has lowered the
associated per minute rate to carry those calls. In addition, 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, the Company purchased the customer contracts of 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 telecommunication companies.
Selling, General and Administrative (SG&A). SG&A expenses rose 138%,
or approximately $3.5 million between periods, but remained constant at 41% as
a percentage of revenues. This increase was caused by the acquisition of
Computel, the growth of the Company's ATSI-Mexico operations and the expensing
of costs related to certain SEC filings. Approximately $2.0 million of the
increase was due to the acquisition of Computel. Computel
11
<PAGE> 12
operates approximately 134 retail-based casetas in approximately sixty cities
throughout Mexico, and employs in excess of 400 people. With the receipt of its
payphone 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-Mexico 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 personnel and related costs. In the six months ended January 31,
1998, the Company expensed approximately $310,000 of costs incurred relative to
certain SEC filings.
Depreciation and Amortization. Depreciation and amortization rose
approximately $633,000, or 256%, between periods, and rose slightly as a
percentage of revenues from 4% to 6%. This increase was caused by the addition
of approximately $8.6 million in equipment between January 31, 1997 and January
31, 1998, of which approximately $1.7 million was added with the acquisition of
Computel. Additional equipment additions included the Company's purchase of 450
public payphones, which the Company began installing in August 1997, and the
acquisition of equipment for the Company's teleport facilities in Mexico City
and Monterrey. The Company also began amortizing goodwill related to its
acquisition of 45% of the shares of Computel in May 1997.
Operating Loss. The Company's operating loss decreased $735,000, or
39%, between periods and improved as a percentage of revenues from 30% to 7%,
primarily due to increased sales volumes and improvements in the Company's
gross margins.
Other Income (Expense). Other income (expense) increased approximately
$580,000. This increase was primarily attributable to an increase in interest
expense as a result of increased indebtedness and capital leases.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended January 31, 1998, the Company generated
positive cash flows from operations of approximately $630,000. These cash flows
were the result of the increased volume of business handled by the Company,
coupled with improved gross margins on that business as mentioned earlier.
Although the Company ceased providing some network services for approximately a
three week period during February 1998 as mentioned above, management
anticipates that its existing customer base should allow the Company to
maintain positive cash flows on a quarterly basis going forward. However, there
can be no assurances that this will occur.
The positive cash flows generated by the Company were used to fund
working capital needs of the Company during the period. In order to further
implement its growth strategy in Mexico, the Company purchased approximately
$3.6 million in equipment during the six months ended January 31, 1998. The
majority of the equipment purchased is used to support the Company's network
services business provided to other telecommunications companies.
The Company used approximately $1.1 million in cash to complete the
acquisition of Computel in August 1997. Additionally, the Company used
approximately $600,000 in cash to acquire the customer base of the independent
marketing representative mentioned above.
The Company used proceeds from equity and debt issuances to pay for the
acquisitions previously mentioned. The Company received $1.1 million in cash
proceeds from an equity offering which was subscribed to on July 31, 1997 in
order to fund the acquisition of Computel. To fund the acquisition of the
independent marketing representative, the Company issued a $1.0 million
long-term note to a shareholder. The note accrues interest at the annual rate of
13%, and is payable in equal quarterly installments of principal and interest
over a seven-year period. In connection with the loan, the shareholder received
warrants to purchase 250,000 shares of Common Stock at a price of $3.56 per
share. Subsequent to January 31, 1998, the shareholder effectively converted
approximately $490,000 in outstanding principal under this note to equity by
exercising outstanding warrants, unrelated to this note.
The Company used proceeds from debt issuances, vendor financing, and
proceeds from warrant exercises to fund its working capital needs and capital
expenditures during the period. The Company borrowed approximately $574,000 from
the same shareholder mentioned above during the period under a short-term note,
which was also effectively converted to equity subsequent to January 31, 1998
through the exercise of outstanding warrants. In October and November 1997, the
Company borrowed approximately $200,000 and $360,000, respectively, from a
shareholder
12
<PAGE> 13
under short-term notes. The notes, which accrued interest at the annual rate of
10%, were paid in full by the Company in November 1997 and February 1998,
respectively. During the six-month period, the Company received cash proceeds
of approximately $1.2 million from the exercise of warrants and options.
The net result of the Company's operating, financing and investing
activities of the Company during the period was a working capital deficit of
approximately $3.9 million and cash on hand of approximately $1.4 million at
January 31, 1998. Approximately $1.0 million of this deficit was in the form of
short-term debt, which was effectively converted to equity subsequent to January
31, 1998. The Company also owed approximately $2.0 million to vendors under
short-term financing arrangements at January 31, 1998, and had accrued
approximately $1.7 million to cover costs to its carriers in Mexico.
Subsequent to January 31, 1998, the Company has received approximately
$1.6 million in cash proceeds from the exercise of warrants and an additional
$1.1 million reduction in indebtedness from the exercise of warrants. The
majority of these proceeds were used to pay the Company's carriers in Mexico.
The Company is currently negotiating with several parties in order to finance
the $2.0 million in equipment purchased under the short-term vendor
arrangements, and to finance future capital expenditures necessary for the
Company to continue the expansion of its services. No assurance can be given
that the Company will be able to obtain such necessary capital.
Although the Company has shown the ability to increase revenues, it
has yet to obtain profitable operations. However, the Company did begin to
produce positive cash flows from operations during the period ending January 31,
1998. This is largely due to the implementation of its plan within Mexico, which
called for increased revenues and lowering of the associated direct costs
subsequent to the demonopolization of Telmex in January 1997.
The Company anticipates that it will be able to continue to produce
positive cash flows from operations on a quarterly basis from its existing
customer basis for the remainder of fiscal 1998, although no such assurance can
be given, that this will occur. The Company believes that cash on hand; the
anticipated cash flows from operations, and anticipated financing arrangements
could be sufficient to fund its cash needs for the remainder of fiscal 1998.
Subject to obtaining financing arrangements, the Company believes that it can
continue to grow its customer base and improve its margins. However, no
assurances can be given that such financing arrangements will be available, or
that favorable operating results will be attained as a result.
Unless the Company is able to maintain positive cash flows from
operations or to obtain a credit facility with a financial institution, on
acceptable terms, to provide sufficient working capital to maintain its
positive cash flows, the Company will remain dependent upon private sales of
debt and/or equity securities and borrowings from stockholders and others to
fund its working capital and expansion needs. There can be no assurance that
the Company will be able to maintain positive cash flows from operations or
obtain a credit facility which would provide sufficient working capital to
maintain positive cash flows from operations, or that it will be able to sell
equity or debt securities or obtain borrowings 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 and
Computel. 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
13
<PAGE> 14
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.
14
<PAGE> 15
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AMERICAN TELESOURCE INTERNATIONAL INC.
(Registrant)
Date: March 17, 1998 By: /s/ H. DOUGLAS SAATHOFF
-------------------------
Name: H. Douglas Saathoff
Title: Chief Financial Officer
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
Ex. 11 Computation of Earnings per Share
Ex. 27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11
AMERICAN TELESOURCE INTERNATIONAL INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the Three Month Periods Ended For the Sixth Month Periods Ended
----------------------------------- -----------------------------------
January 31, 1997 January 31, 1998 January 31, 1997 January 31, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Primary
Net loss $ (1,017) $ (515) $ (1,968) $ (1,813)
======== ======== ======== ========
Shares:
Weighted average number of common shares
outstanding 23,944 38,446 23,862 37,757
Incremental shares assuming conversion of
warrants and options (a) - - - -
-------- -------- -------- --------
Weighted average number of common shares
outstanding as adjusted 23,944 38,446 23,862 37,757
======== ======== ======== ========
Net loss per common share $ (0.04) $ (0.01) $ (0.08) $ (0.05)
======== ======== ======== ========
Fully Diluted
Net loss $ (1,017) $ (515) $ (1,968) $ (1,813)
Add: Interest expense applicable to convertible
debt (a) - - - -
-------- -------- -------- --------
Net loss - as adjusted $ (1,017) $ (515) $ (1,968) $ (1,813)
======== ======== ======== ========
Shares:
Weighted average number of common shares
outstanding 23,944 38,446 23,862 37,757
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 23,944 38,446 23,862 37,757
======== ======== ======== ========
Net loss per common share $ (0.04) $ (0.01) $ (0.08) $ (0.05)
======== ======== ======== ========
</TABLE>
(a) Common stock equivalents related to convertible debt warrants and options
are excluded as their effect would be anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 6-MOS 6-MOS
<FISCAL-YEAR-END> JUL-31-1997 JUL-31-1998 JUL-31-1997 JUL-31-1998
<PERIOD-START> NOV-01-1996 NOV-01-1997 AUG-01-1996 AUG-01-1997
<PERIOD-END> JAN-31-1997 JAN-31-1998 JAN-31-1997 JAN-31-1998
<CASH> 0 0 0 1,355
<SECURITIES> 0 0 0 0
<RECEIVABLES> 0 0 0 3,456
<ALLOWANCES> 0 0 0 302
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 0 0 0 5,635
<PP&E> 0 0 0 11,425
<DEPRECIATION> 0 0 0 1,674
<TOTAL-ASSETS> 0 0 0 21,298
<CURRENT-LIABILITIES> 0 0 0 9,521
<BONDS> 0 0 0 3,599
0 0 0 0
0 0 0 0
<COMMON> 0 0 0 18,723
<OTHER-SE> 0 0 0 (11,078)
<TOTAL-LIABILITY-AND-EQUITY> 0 0 0 21,298
<SALES> 3,180 8,704 6,177 14,735
<TOTAL-REVENUES> 3,180 8,704 6,177 14,735
<CGS> 2,622 5,027 5,240 8,903
<TOTAL-COSTS> 4,139 8,861 8,045 15,868
<OTHER-EXPENSES> 7 (6) 5 (49)
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 51 364 95 729
<INCOME-PRETAX> (1,017) (515) (1,968) (1,813)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (1,017) (515) (1,968) (1,813)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (1,017) (515) (1,968) (1,813)
<EPS-PRIMARY> (.04) (0.01) (0.08) (0.05)
<EPS-DILUTED> (.04) (0.01) (0.08) (0.05)
</TABLE>
