<PAGE>
- --------------------------------------------------------------------------------
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, 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)
DELAWARE 74-2849995
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
12500 NETWORK BLVD., SUITE 407
SAN ANTONIO, TEXAS 78249
(210) 558-6090
(ADDRESS, INCLUDING ZIP CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES
AND TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the registrant's common stock at
December 11, 1998 were 46,214,526.
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 1998
INDEX
PART I FINANCIAL INFORMATION
Page
----
Item 1. Interim Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of July 31, 1998 and
October 31, 1998.............................................. 3
Consolidated Statements of Operations for the Three Months
Ended October 31, 1997 and 1998............................... 4
Consolidated Statements of Cash Flows for the Three Months
Ended October 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..................................... 7
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K............................... 11
2
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AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
<TABLE>
<CAPTION>
July 31, October 31,
1998 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,091 $319
Accounts receivable, net of allowance of $ 209 and $ 278, respectively 3,748 3,617
Prepaid expenses and other assets 844 656
------------ ------------
Total current assets 5,683 4,592
------------ ------------
PROPERTY AND EQUIPMENT (At cost): 14,233 14,458
Less - Accumulated depreciation and amortization (2,418) (2,696)
------------ ------------
Net property and equipment 11,815 11,762
------------ ------------
OTHER ASSETS, net
Goodwill, net 5,091 5,057
Contracts, net 1,173 1,041
Other assets 489 423
------------ ------------
Total assets $24,251 $22,875
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $5,683 $5,527
Accrued liabilities 2,113 1,956
Current portion of notes payable 688 460
Current portion of obligations under capital leases 2,351 2,568
Deferred revenue 535 465
------------ ------------
Total current liabilities 11,370 10,976
------------ ------------
LONG-TERM LIABILITIES:
Notes payable, less current portion 719 662
Convertible long-term debt, less current portion 1,604 1,685
Obligations under capital leases, less current portion 2,941 2,352
Other long-term liabilities 530 583
------------ ------------
Total long-term liabilities 5,794 5,282
------------ ------------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Preferred shares, no par value, unlimited shares authorized,
no shares issued and outstanding at July 31, 1998 and October 31, 1998 -- --
Common stock, $0.001 par value, 100,000,000 shares authorized, 45,603,566
issued and outstanding at July 31, 1998,
45,687,316 issued and outstanding at October 31, 1998 46 46
Additional paid in capital 22,248 22,272
Accumulated deficit (14,396) (15,038)
Deferred compensation (667) (551)
Cumulative translation adjustment (144) (112)
------------ ------------
Total stockholders' equity 7,087 6,617
Total liabilities and stockholders' equity $24,251 $22,875
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended October 31,
1997 1998
---------- ----------
<S> <C> <C>
OPERATING REVENUES:
Call services $2,863 $1,553
Direct dial services 1,571 1,340
Network management services 1,352 6,788
Internet E-commerce 245 555
---------- ----------
Total operating revenues 6,031 10,236
---------- ----------
OPERATING EXPENSES:
Cost of services 3,876 6,501
Selling, general and administrative 2,792 3,333
Depreciation and amortization 339 649
---------- ----------
Total operating expenses 7,007 10,483
---------- ----------
Operating loss (976) (247)
OTHER INCOME(EXPENSE):
Interest income 16 13
Other income 27 18
Interest expense (365) (415)
---------- ----------
Total other income (expense) (322) (384)
---------- ----------
LOSS BEFORE INCOME TAX EXPENSE (1,298) (631)
FOREIGN INCOME TAX EXPENSE - (11)
NET LOSS ($1,298) ($642)
========== ==========
BASIC AND DILUTED LOSS PER SHARE ($0.04) ($0.01)
========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 37,068 45,627
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION> Three months ended October 31,
1997 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($1,298) ($642)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Depreciation and amortization 339 649
Amortization of debt discount 74 82
Deferred compensation 124 116
Cumulative translation adjustment 6 32
Provision for losses on accounts receivable 187 224
Changes in operating assets and liabilities
(Increase) Decrease in accounts receivable 404 (94)
Increase in other assets (435) 274
Increase (Decrease) in accounts payable 1,105 (156)
Increase (Decrease) in accrued liabilities (375) (157)
Decrease in deferred revenue (351) (70)
---------- ----------
Net cash provided by (used in) operating activities (220) 258
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,619) (297)
Acquisition of business, net of cash acquired (1,089) -
---------- ----------
Net cash used in investing activities (2,708) (297)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 645 59
Net increase (decrease) in short-term borrowings 30 (188)
Payments on debt - (49)
Capital lease payments (361) (525)
Payments on long-term liabilities - (53)
Proceeds from issuance of common stock, net
of issuance costs 2,191 23
---------- ----------
Net cash provided by (used in) financing activities 2,505 (733)
---------- ----------
Net decrease in cash (423) (772)
Cash, beginning of period 1,921 1,091
---------- ----------
Cash, end of period $1,498 $319
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements, which include
the accounts of ATSI-Delaware, ATSI-Canada, ATSI-Texas, ATSI-Mexico, Computel,
Telespan, Sinfra and GlobalSCAPE 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, 1998 and October
31, 1998, the results of their operations for the three months ended October 31,
1997 and 1998 and cash flows for the three months ended October 31, 1997 and
1998. All adjustments are of a normal recurring nature. All significant
intercompany balances and transactions have been eliminated in consolidation.
It is recommended that these interim consolidated financial statements be read
in conjunction with the consolidated financial statements and the notes thereto
for the year ended July 31, 1998 included in the Company's annual report on Form
10-K filed with the SEC on October 29, 1998. Certain prior period amounts have
been reclassified for comparative purposes. The results of operations for any
interim period are not necessarily indicative of the results to be expected for
the full year.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements. This
statement is effective for fiscal years beginning after December 15, 1997.
Because the Company's component of comprehensive income, foreign currency
translation adjustment, is immaterial to the financial condition or results of
operations for the three months ended October 31, 1998 and 1997, the amounts are
not reported or displayed in a separate financial statement.
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share", which establishes standards for
computing and presenting earning per share ("EPS") with entities with publicly
held common stock or potential common stock. SFAS No. 128 simplifies the
standards for computing EPS previously found in Accounting Principles Board
Opinion No. 15, "Earnings per Share, " and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS, which excludes dilution. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with a complex capital structure. As the Company had a net loss
for the three months ended October 31, 1997 and 1998, diluted EPS equals basic
EPS, as potentially dilutive common stock equivalents are antidilutive in loss
periods. Prior period EPS data has been restated as required by SFAS No. 128.
2. FUTURE OPERATIONS
The consolidated financial statements of the Company have been prepared on
the basis of accounting principles applicable to a going concern. For the
period from December 17, 1993 to October 31, 1998, the Company has incurred
cumulative net losses of approximately $14,984. Further, the Company has a
working capital deficit of approximately $6,384 at October 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,
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
6
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to assist it in refining its strategic growth plan, defining its capital needs
and obtaining the funds required to meet those needs. The plan includes securing
funds through equity offerings and entering into lease or long-term debt
financing agreements to raise capital. There can be no assurances, however, that
such equity offerings or other long-term debt financing arrangements will
actually be consummated or that such funds, if received, will be sufficient to
support existing operations until revenue levels are achieved sufficient to
maintain positive cash flow from operations. If the Company is not successful in
completing additional equity offerings or entering into other financial
arrangements, or if the funds raised in such stock offerings or other financial
arrangements are not adequate to support the Company until a successful level 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 receivable held by the Company. The Company
previously acquired 55% of the shares of Computel, in May 1997, in exchange for
2,715,546 shares of common stock valued at approximately $1.8 million.
4. SUBSEQUENT EVENTS
In December 1998, the Company signed an agreement with Network Equipment
Technologies, Inc. (N.E.T.) for the purchase, financing and installation of an
ATM (asynchronous transfer mode) "next generation" network between the U.S. and
Mexico. This equipment is being purchased through a capital lease transaction
covering thirty-six months and carrying an interest rate of 9.5%. Monthly
payments of principal and interest total approximately $26,000.
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 operation,
by competitors; general economic conditions, customer relations, relationships
with vendors, the interest rate environment, seasonality, the operation of the
Company's network, the ability of the Company's direct sales force to
successfully replace its independent marketing representatives or the failure of
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 annual report
on Form 10-K. Although the Company believes that the expectations are
reasonable, it can give no assurance that such expectations will prove to be
correct. Based upon changing conditions, should any one or more of these risks
or uncertainties materialize, or should any underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected or intended. All subsequent written
and oral forward-looking statements
7
<PAGE>
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 retail and wholesale
communications services within and between the United States and select markets
within Latin America. In December of 1993, utilizing a bilingual and bicultural
team, the Company began assembling a framework of licenses, interconnection and
service agreements, network facilities, and distribution channels (collectively
referred to hereinafter as "framework") in Mexico and the United States. The
Company feels that this framework will allow it to provide domestic and
international communications services with U.S. standards of reliability to the
Mexican market which has historically been underserved by the national telephone
monopoly, Telefonos de Mexico ("Telmex"). The Company also plans to establish a
framework in other Latin American countries as the regulatory environments in
those countries allow. In addition to the United States and Mexico, the Company
currently has rights to use facilities and has strategic relationships with
domestic 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 the third party-
owned casetas, public telephones and hotels in Mexico as well. Consumers
visiting a Company-owned caseta or public telephone may dial directly to the
desired party in exchange for cash payment, or can charge the call to a U.S.
address (collect, person-to-person, etc.) or calling card, or to a U.S. dollar-
denominated credit card with the assistance of an operator. In July 1998, the
Company began providing domestic U.S. and international call services to Mexico
to residential customers in the U.S., and intends to provide services to
business customers in the U.S. in fiscal 1999. 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'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 October 31, 1998.
For the reasons stated in Liquidity and Capital Resources and subject to the
risks referred to in Liquidity and Capital, the Company expects improved results
of operations and liquidity in fiscal 1999.
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, 1997 and 1998.
<TABLE>
<CAPTION>
Three Months Ended October 31,
-----------------------------
1997 1998
---- ----
$ % $ %
------------- ------------ ------------- ----------
<S> <C> <C> <C> <C>
Operating revenues
- -----------------
Call services $ 2,863 48% $ 1,553 15%
Direct dial services 1,571 26% 1,340 13%
Network management services 1,352 22% 6,788 66%
Internet e-commerce 245 4% 555 6%
------------- ------------ ------------- ----------
Total operating revenues 6,031 100% 10,236 100%
Cost of services 3,876 64% 6,501 64%
------------- ------------ ------------- ----------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Gross Margin 2,155 36% 3,735 36%
Selling, general and administrative expense
2,792 46% 3,333 33%
Depreciation and amortization 339 6% 649 6%
------------- ------------ ------------- ----------
Operating loss (976) (16%) (247) (3%)
Other, net (322) (5%) (395) (3%)
------------- ------------ ------------- ----------
Net loss ($1,298) (21%) ($642) (6%)
============= ============ ============= ==========
</TABLE>
THREE MONTHS ENDED OCTOBER 31, 1998 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
1997
Operating revenues. Operating revenues increased approximately $4.2
million, or 70%, due to growth in the Company's network management and internet
e-commerce services. This growth was offset by declines in the Company's call
services and direct dial services.
Call service revenues decreased approximately $1.3 million, or 46%,
primarily due to the cessation of domestic and international operator-assisted
calls originating in the United States and Jamaica in late July 1998. These
calls generated approximately $826,000 in revenues during the quarter ended
October 31, 1997. The Company ceased providing these services due to
relatively low profit margins realized on the services. The revenue per call
on operator-assisted calls originating in Mexico and terminating in the U.S.
also declined period to period, in part as a result of the Company's purchase of
Communicaciones del Caribe ("CDC") in November 1997. The purchase of CDC
allowed the Company to eliminate a layer of expense associated with calls from
CDC-operated properties, and the Company also lowered rates to consumers at
these locations.
Direct dial services, calls processed in exchange for cash without
utilizing the Company's operator center, decreased to $1.3 million from $1.6
million for the periods ended October 31, 1998 and October 31, 1997,
respectively. The calls are paid for almost exclusively in pesos, and the
resulting revenues are translated to U.S. dollars in the accompanying
consolidated financial statements. The average conversion rate of pesos to
dollars during the quarters ended October 31, 1997 and October 31, 1998, was 7.8
and 9.9 respectively. Although call volumes remained relatively even between
periods, the pesos generated converted to fewer U.S. dollars.
Network management services increased approximately $5.4 million, or 402%.
This growth was principally due to the amount of wholesale network services
provided to other carriers seeking transmission facilities or additional
capacity. The Company processed approximately 1.8 million minutes of traffic
for other carriers during the quarter ended October 31, 1997, as compared to
approximately 26.9 million minutes during the quarter ended October 31, 1998.
Cost of Services. Cost of services increased approximately $2.6 million,
or 68%, between quarters, but remained constant as a percentage of total
revenues at 64%. The increase in cost of services was attributable to the
increased volume of business handled by the Company as discussed above. The
Company was able to maintain its gross margin percentage by eliminating services
provided in the United States and Jamaica, which produced lower relative margins
as discussed above.
Selling, General and Administrative (SG&A). SG&A expenses rose 19%, or
approximately $540,000, between quarters. As a percentage of revenues, these
expenses decreased from 46% to 33% between quarters. The increase in SG&A was
attributable to the hiring of additional sales, marketing and technical
personnel, between quarters, as well as increases in other personnel related
expenses. In July 1998, the Company implemented a company-wide cost reduction
program designed to reduce SG&A expenses as a percentage of revenues.
9
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Depreciation and Amortization. Depreciation and amortization rose
approximately $310,000, or 91%, between quarters, but remained steady as a
percentage of revenues at 6%. This increase was caused by the addition of
approximately $5.6 million in equipment between October 31, 1997 and October 31,
1998. The majority of the assets purchased consisted of equipment that added
capacity to the Company's international network infrastructure and intelligent
coin telephones, which were installed in Mexico.
Operating Loss. The Company's operating loss improved $729,000, or 75%,
between quarters and improved as a percentage of revenues from 16% to 3%,
primarily due to increased sales volumes and improvements in the Company's SG&A
expenses as a percentage of revenues.
Other Income (Expense). Other income (expense) increased approximately
($73,000). 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 three months ended October 31, 1998, the Company generated cash
flows from operations of approximately $258,000. This compares favorably to
the negative cash flows from operations of $220,000 produced during the same
period a year earlier. The improvement is the result of the increased revenue
levels and reductions in SG&A expenses discussed earlier.
The Company purchased approximately $300,000 in equipment during the three
months ended October 31, 1998. Additional uses of cash during the quarter
ended October 31, 1998, included capital lease payments and net reductions in
debt instruments of approximately $756,000.
The net result of the Company's operating, financing and investing
activities during the three months was a working capital deficit of
approximately $6.4 million and cash on hand of $319,000 as of October 31, 1998.
As a result of the increased revenue and reduced SG&A expenses, the Company
was able to generate positive cash flows from operations during the quarter.
Although no assurance can be given, the Company believes that this positive
trend will continue. For this to happen, management must be able to continue to
increase revenue levels, maintain or improve gross margins, and reduce SG&A
expenses as a percentage of revenue.
Management believes that the offering of new direct dial and wholesale
services during the remaining nine months of fiscal 1999 will allow it to
maintain revenue growth, although it may be slower than historical growth rates.
Additionally, the Company believes the recent reductions in SG&A expenses can be
maintained and that SG&A expenses will continue to be reduced as a percentage of
revenues. The Company has continued to analyze and monitor SG&A costs and will
do so on an ongoing basis. No assurances, may be given, however, that the
Company's revenue levels will continue, that gross margins will remain constant,
or that selling, general and administrative expenses will decrease during the
rest of fiscal 1999.
In order to meet its current obligations and debt service requirements, the
Company will likely need to find additional long-term sources of working capital
or produce adequate positive cash flows from operations to satisfy those
obligations. As of October 31, 1998, the Company has approximately 3.4 million
warrants outstanding which expire on or before July 31, 1999. If exercised,
these options will provide approximately $3.6 million in additional cash
proceeds to the Company. In July 1998, the Company engaged the investment
banking firm of Houlihan Lokey Howard & Zukin Capital to assist it in arranging
financing to support the Company's current and future operations. The Company
is currently attempting to obtain a senior debt facility to assist it with its
working capital needs, and is exploring opportunities with potential financial
partners.
During December 1998, the Company agreed to purchase approximately $900,000
of equipment from Network Equipment Technologies, Inc. (NET) which will
transform the Company's current network to a packet-switching network. A
leading provider of this type of "next generation" networking equipment, NET
analyzed the Company's strategic business plan and assisted the Company in
obtaining financing for the purchase. The Company expects to utilize financing
from these "technical/financial partners" for major equipment purchases related
to its network in the future. The Company also contracted for fiber capacity
between the United States and Mexico in
10
<PAGE>
December 1998, which will allow the Company to operate a fully-redundant, hybrid
network between the United States and Mexico beginning in January 1999.
As a result of the above-mentioned upgrades to the Company's international
network, in December 1998 the Company signed contracts with two major U.S.
carriers that were seeking transmission facilities into Mexico from the U.S.
Although these contracts contain cancellation clauses, these contracts call for
the carriers to provide the Company with a minimum of $14.4 million revenues
over a one-year period beginning in January 1999. The Company will incur
minimal additional selling, general and administrative costs related to these
contracts. As a result, these contracts are expected to generate cash flows for
the Company in excess of any related debt service related to the equipment
purchases described above. The Company also anticipates that the upgrading of
its facilities will also allow it to attract additional carrier customers.
No assurance may be given that the Company will obtain any financing to
assist it in meeting its short term and long term obligations, or that the
Company will generate cash flows sufficient to meet those obligations, or that
any of the warrants outstanding as of October 31, 1998 will be exercised.
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 a Mexican milk
producer in April 1996 and direct dial services from the Company's casetas and
coin operated public telephones, almost 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. The Company
maintains balances in several bank accounts in Mexico, which are denominated in
Mexican pesos, however, such balances are kept at minimum levels.
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.
11
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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, 1998 By: /s/ H. Douglas Saathoff
-----------------------------
Name: H. Douglas Saathoff
Title: Chief Financial Officer
12
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL INC. AND SUBSIDIARIES Exhibit 11
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(In thousands)
<TABLE>
<CAPTION>
For the three months ended
October 31, 1997 October 31, 1998
---------------- ----------------
<S> <C> <C>
COMPUTATION OF BASIC LOSS PER SHARE
Net loss ($1,298) ($642)
=============== ===============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 37,068 45,627
=============== ===============
BASIC LOSS PER COMMON SHARE ($0.04) ($0.01)
=============== ===============
COMPUTATION OF DILUTED LOSS PER SHARE
Net loss ($1,298) ($642)
Interest not incurred upon assumed conversion
of convertible note 3 0
--------------- ---------------
Net loss applicable to common stockholders
used for computation ($1,295) ($642)
=============== ===============
Weighted average number of shares of common
stock outstanding 37,068 45,627
Weighted average incremental shares outstanding
upon assumed conversion of options and warrants 14,936 1,611
Weighted average incremental shares outstanding
upon assumed conversion of convertible note 200 0
--------------- ---------------
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS USED FOR
COMPUTATION 52,204 47,238
=============== ===============
DILUTED LOSS PER COMMON SHARE AND
COMMON SHARE EQUIVALENT ($0.02) ($0.01)
=============== ===============
</TABLE>
(a) This calculation is submitted in accordance with Item 601(b)(11) of
Regulation S-K although it is not required by SFAS No. 128 because it is
antidilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 319
<SECURITIES> 0
<RECEIVABLES> 3,895
<ALLOWANCES> 278
<INVENTORY> 0
<CURRENT-ASSETS> 4,592
<PP&E> 14,458
<DEPRECIATION> 2,696
<TOTAL-ASSETS> 22,875
<CURRENT-LIABILITIES> 10,976
<BONDS> 0
0
0
<COMMON> 46
<OTHER-SE> 6,571
<TOTAL-LIABILITY-AND-EQUITY> 22,875
<SALES> 10,236
<TOTAL-REVENUES> 10,236
<CGS> 6,501
<TOTAL-COSTS> 10,483
<OTHER-EXPENSES> (31)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 415
<INCOME-PRETAX> (631)
<INCOME-TAX> 11
<INCOME-CONTINUING> (642)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (642)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
