<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 April 30, 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
June 8, 1998 were 45,540,156.
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<PAGE> 2
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 1998
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 April 30, 1998.......................................... 3
Consolidated Statements of Operations for the Three and Nine Months Ended April 30, 1997 and 1998........... 4
Consolidated Statements of Cash Flows for the Nine Months Ended April 30, 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
<PAGE> 3
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
<TABLE>
<CAPTION>
July 31, April 30,
1997 1998
------------ ------------
(audited) (unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,921 $ 1,844
Accounts receivable, net of allowance of $ 190 and $ 215, respectively 2,208 2,911
Stock subscriptions receivable 1,113 --
Prepaid expenses 462 438
Other 285 629
------------ ------------
Total current assets 5,989 5,822
------------ ------------
PROPERTY AND EQUIPMENT (At cost): 7,499 13,365
Less - Accumulated depreciation and amortization (927) (2,181)
------------ ------------
Net property and equipment 6,572 11,184
------------ ------------
OTHER ASSETS, net
Goodwill, net 2,265 4,508
Contracts, net -- 1,244
Other 995 1,235
------------ ------------
Total assets $ 15,821 $ 23,993
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,932 $ 4,133
Accrued liabilities 2,286 2,171
Current portion of notes payable 316 928
Current portion of convertible long-term debt 100 --
Current portion of obligations under capital leases 696 2,217
Deferred revenue 464 290
------------ ------------
Total current liabilities 5,794 9,739
------------ ------------
LONG-TERM LIABILITIES:
Obligations under capital leases, less current portion 1,005 3,035
Notes payable, less current portion 498 908
Convertible long-term debt, less current portion 1,297 1,525
Other 597 702
------------ ------------
Total long-term liabilities 3,397 6,170
------------ ------------
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 April 30, 1998 -- --
Common shares, no par value, unlimited shares authorized,
36,787,105 issued and outstanding at July 31, 1997,
44,943,002 issued and outstanding at April 30, 1998 16,222 21,129
Accumulated deficit (9,302) (13,038)
Cumulative translation adjustment 16 (7)
------------ ------------
Total shareholders' equity 6,936 8,084
------------ ------------
Total liabilities and shareholders' equity $ 15,821 $ 23,993
============ ============
</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 OPERATIONS
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
------------------------------ ------------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Call services $ 3,568 $ 3,875 $ 8,958 $ 10,382
Direct dial services -- 1,516 -- 4,657
Network management services 673 3,442 1,460 8,530
------------ ------------ ------------ ------------
Total operating revenues 4,241 8,833 10,418 23,569
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Cost of services 3,532 5,532 8,773 14,435
Selling, general and administrative 1,446 4,154 4,004 10,240
Depreciation and amortization 187 628 433 1,508
------------ ------------ ------------ ------------
Total operating expenses 5,165 10,314 13,210 26,183
------------ ------------ ------------ ------------
Operating loss (924) (1,481) (2,792) (2,614)
OTHER INCOME (EXPENSE):
Interest income 4 64 5 94
Other income 1 3 5 23
Other expense -- (152) (10) (152)
Interest expense (115) (357) (210) (1,086)
------------ ------------ ------------ ------------
Total other income (expense) (110) (442) (210) (1,121)
------------ ------------ ------------ ------------
NET LOSS $ (1,034) $ (1,923) $ (3,002) $ (3,735)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER SHARE $ (0.04) $ (0.04) $ (0.12) $ (0.09)
============ ============ ============ ============
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 27,009 43,447 24,980 39,612
============ ============ ============ ============
</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
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
April 30,
------------------------------
1997 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,002) $ (3,735)
Adjustments to reconcile net loss to net cash
used in operating activities--
Depreciation and amortization 433 1,508
Amortization of debt discount 16 228
Deferred compensation 25 373
Provision for losses on accounts receivable 503 739
Changes in operating assets and liabilities
net of effects from acquisitions
Increase in accounts receivable (937) (1,443)
Increase in other assets-current and long-term (108) (635)
Increase in accounts payable 643 2,133
Increase (Decrease) in accrued liabilities 65 (196)
Decrease in deferred revenue -- (174)
Other 6 82
------------ ------------
Net cash used in operating activities (2,356) (1,120)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (531) (2,890)
Net cash paid in acquisitions -- (2,111)
Issuance of notes receivable (518) --
Payments received on note receivable 13 --
------------ ------------
Net cash used in investing activities (1,036) (5,001)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares, net
of issuance costs 2,105 4,271
Proceeds from issuance of debt 2,125 3,122
Capital lease payments (139) (949)
Payments on debt -- (400)
------------ ------------
Net cash provided by financing activities 4,091 6,044
------------ ------------
Net increase (decrease) in cash 699 (77)
Cash, beginning of period 656 1,921
------------ ------------
Cash, end of period $ 1,355 $ 1,844
============ ============
Supplemental Cash Flow Disclosure
Capital lease obligations incurred $ 97 $ 3,107
</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, Telespan,
GlobalSCAPE and Computel for the first nine 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 April 30, 1998, the results of their
operations for the three and nine months ended April 30, 1998 and cash flows for
the nine months ended April 30, 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 April 30, 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.
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." SFAS No. 128 replaces the presentation of Primary Earnings Per Share
(EPS) with Basic EPS and requires dual presentation of Basic and Diluted EPS on
the face of the consolidated statements of operations. Basic EPS excludes
dilution and is computed by dividing income (loss) available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company. SFAS No. 128 is effective for financial
statements issued after December 15, 1997 and, accordingly, the accompanying
financial statements reflect the adoption of SFAS No. 128. As the Company had a
net loss for the three and nine months ended April 30, 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 inception to April 30, 1998, the Company has incurred cumulative net
losses of approximately $13.0 million. Further, the Company has a working
capital deficit of approximately $3.9 million at April 30, 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
6
<PAGE> 7
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 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 nine
months ended April 30, 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 nine months ended April 30, 1998, have been omitted, as pro forma
results would not materially differ from actual results of operations for the
period ended.
<TABLE>
<CAPTION>
Nine Months Ended
April 30, 1997
-----------------
<S> <C>
Operating Revenues $15,163,000
===========
Net Loss $(3,738,000)
============
Net Loss per Share $(0.13)
=======
</TABLE>
During the month of November, the Company purchased certain assets of
Communications 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 originally 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 consisted 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. During the quarter ended April 30, 1998, the Company agreed to
amend the purchase agreement to reflect total cash obligations of $935,000,
$600,000 of which was paid at the date of acquisition and $335,000 of which was
paid during the quarter ended April 30, 1998. No payments have been made to date
related to the additional $350,000 in Common Stock due under the purchase
agreement.
4. CAPITAL LEASES
In April 1998, the Company, through ATSI-Mexico secured an approximate
$2.9 million capital lease facility with IBM de Mexico to increase network
capacity and to fund the purchase and installation of public telephones in
Mexico. The lease facility calls for monthly principal and interest payments
beginning in April 1998 and continuing through March 2001. Interest accrues on
the facility at an interest rate of approximately 11% per year.
5. PLAN OF ARRANGEMENT
The Company filed Amendment No. 3 and Amendment No. 4 to the S-4
Registration Statement (No. 333-05557) during December 1997. Amendment No. 4 was
declared effective by the SEC on December 11, 1997. The S-4 filings were made in
conjunction with the Company's plan to effect a "Plan of Arrangement" whereby
current stockholders of ATSI-Canada would, on a one-for-one basis, exchange
their shares for shares of American TeleSource International, Inc.
(ATSI-Delaware), a Delaware Corporation. The Plan of Arrangement would result in
ATSI-Delaware becoming the publicly-traded parent of the Company, and
ATSI-Canada becoming a wholly-owned subsidiary of ATSI-Delaware.
7
<PAGE> 8
Subsequent to December 11, 1997, the Company received comments from the
Ontario Securities Commission related to the prospectus included in the
effective S-4. As a result of addressing those comments, and to register
additional shares issued by the Company subsequent to December 11, 1997, the
Company filed a new Registration Statement on Form S-4 (No. 333-47511) on March
6, 1998. This Registration Statement was declared effective on March 13, 1998.
No shares were sold under either S-4 Registration Statement. During December
1997, the shares of ATSI-Canada began trading on the NASD OTC Bulletin Board
under the symbol "AMTI", and continued to be traded on the Canadian Dealing
Network under the symbol "ATIL".
On April 30, 1998, the Plan of Arrangement was approved by the
Company's shareholders, and the Plan of Arrangement was declared effective by
Canadian regulatory authorities on May 11, 1998. During May 1998, the Company
delisted the shares of ATSI-Delaware from the Canadian Dealing Network.
6. SHARE CAPITAL
During the nine months ended April 30, 1998, the Company
issued 8,155,897 shares of common stock. Of this total, 7,302,405 were
issued for approximately $2.8 million in cash and reductions in
indebtedness of approximately $1.1 million through the exercise of
7,302,405 warrants and options, 200,000 were issued resulting from the
conversion of a $100,000 convertible note, 606,271 were issued for
approximately $333,000 in net cash proceeds and 47,221 were issued for
services rendered 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 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 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.
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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 Salavador and Guatemala.
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
April 30, 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 the last quarter of fiscal 1998
and 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 and nine-month periods ended April 30, 1997 and 1998.
<TABLE>
<CAPTION>
Three Months Ended April 30, Nine Months Ended April 30,
--------------------------------------------- ---------------------------------------------
1997 1998 1997 1998
-------------------- -------------------- -------------------- --------------------
(unaudited)
$ % $ % $ % $ %
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues
Call services $ 3,568 84% $ 3,875 44% $ 8,958 86% $ 10,382 44%
Direct dial services -- 0% 1,516 17% -- 0% 4,657 20%
Network management services 673 16% 3,442 39% 1,460 14% 8,530 36%
-------- -------- -------- -------- -------- -------- -------- --------
Total operating revenues 4,241 100% 8,833 100% 10,418 100% 23,569 100%
Cost of services 3,532 83% 5,532 63% 8,773 84% 14,435 61%
-------- -------- -------- -------- -------- -------- -------- --------
Gross Margin 709 17% 3,301 37% 1,645 16% 9,134 39%
Selling, general and
administrative expense 1,446 34% 4,154 47% 4,004 39% 10,240 44%
Depreciation and amortization 187 4% 628 7% 433 4% 1,508 6%
-------- -------- -------- -------- -------- -------- -------- --------
Operating loss (924) (21)% (1,481) (17)% (2,792) (27)% (2,614) (11)%
Other, net (110) (3)% (442) (5)% (210) (2)% (1,121) (5)%
-------- -------- -------- -------- -------- -------- -------- --------
Net loss $ (1,034) (24)% $ (1,923) (22)% $ (3,002) (29)% $ (3,735) (16)%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
9
<PAGE> 10
THREE MONTHS ENDED APRIL 30, 1998 COMPARED TO THREE MONTHS ENDED APRIL 30, 1997
Operating revenues. Operating revenues increased approximately $4.6
million, or 108%, due to growth in the Company's call services, direct dial
services and network management customer bases.
Call service revenues increased approximately $300,000, or 9%,
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 processed
100,000 international calls originating in Mexico during the three months ended
April 30, 1998 as compared to approximately 60,500 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 $1.5 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 $2.8 million, or
411%, 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 the first quarter of
fiscal 1998. 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 during the quarter utilizing
the Company's existing Secretaria de Comunicaciones y Transportes ("SCT")
licenses.
Cost of Services. Cost of services increased approximately $2.0
million, or 57%, between quarters, but decreased as a percentage of total
revenues from 83% to 63%. 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 its continuing
efforts to decrease costs subsequent to the demonopolization of Telefonos de
Mexico (Telmex), which took place in January 1, 1997. Subsequent to Telmex's
demonopolization, 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. Additionally, the
Company was one of the first four companies to receive a public payphone
comercializadora license from the SCT in February 1997, which has allowed the
Company to provide local, domestic and international calls from public
telephones in Mexico. In November 1997, the Company purchased the customer
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 187%, or
approximately $2.7 million, between quarters. This increase was caused by the
acquisition of Computel, the continuing growth of the Company's ATSI-Mexico
operations, the expensing of costs related to the Company's planned acquisition
of additional concessions from the Mexican regulatory authorities and the
expensing of costs related to the Company's reincorporation from Canada to
Delaware, which was approved by the Company's shareholders on April 30, 1998 and
declared effective by regulators on May 11, 1998. Approximately $890,000 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 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 three months ended April 30, 1998, the Company
expensed approximately $225,000 of costs incurred relative to the Company's
reincorporation.
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<PAGE> 11
SG&A expenses also rose as a percentage of revenues, increasing from
34% to 47% between quarters, partially as a result of the factors mentioned
above. Also, management estimates indicate that SG&A expenses would have been
approximately 40% of revenue during the quarter ended April 30, 1998 had the
Company not ceased providing network services for a portion of the period as
discussed above.
Depreciation and Amortization. Depreciation and amortization rose
approximately $441,000, or 236%, between quarters, and rose slightly as a
percentage of revenues from 4% to 7%. This increase was caused by the addition
of approximately $10.6 million in equipment between April 30, 1997 and April 30,
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 increased $557,000, or
60%, between quarters but improved as a percentage of revenues from 21% to 17%,
primarily due to increased sales volumes and improvements in the Company's gross
margins.
Other Income (Expense). Other income (expense) increased approximately
$330,000. This increase was primarily attributable to an increase in interest
expense as a result of increased indebtedness and capital leases.
NINE MONTHS ENDED APRIL 30, 1998 COMPARED TO NINE MONTHS ENDED APRIL 30, 1997
Operating revenues. Operating revenues increased approximately $13.2
million, or 126%, due to growth in the Company's call services, direct dial
services and network management customer bases.
Call service revenues increased approximately $1.4 million, or 16%,
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 processed
238,000 international calls originating in Mexico during the nine months ended
April 30, 1998 as compared to approximately 132,000 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 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 $4.7 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 $7.1 million, or
484%, 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 the first quarter of
fiscal 1998. 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 $5.7
million, or 64%, between periods, but decreased as a percentage of total
revenues from 84% to 61%. 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 its continuing
efforts to decrease costs subsequent to the demonopolization of Telefonos de
Mexico (Telmex), which took place in January 1, 1997. Subsequent to Telmex's
demonopolization, 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
11
<PAGE> 12
the Company to provide local, domestic and international calls from public
telephones in Mexico. In November 1997, 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 156%, or
approximately $6.2 million, between periods and increased from 39% to 44% as a
percentage of revenues. This increase was caused by the acquisition of Computel,
the continuing growth of the Company's ATSI-Mexico operations, the expensing of
costs related to the Company's planned acquisition of additional concessions
from the Mexican regulatory authorities and the expensing of costs related to
the Company's reincorporation from Canada to Delaware, which was approved by the
Company's shareholders on April 30, 1998 and declared effective by regulators on
May 11,1998. Approximately $2.9 million 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 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 nine months ended April 30, 1998, the Company expensed approximately
$535,000 of costs incurred relative to the Company's reincorporation.
SG&A expenses also rose as a percentage of revenues, increasing from
34% to 47% between quarters, partially as a result of the factors mentioned
above. Also, management estimates indicate that SG&A expenses would have been
approximately 41% of revenue during the quarter ended April 30, 1998 had the
Company not ceased providing network services for a portion of the period as
discussed above.
Depreciation and Amortization. Depreciation and amortization rose
approximately $1.1 million, or 248%, between periods, and rose slightly as a
percentage of revenues from 4% to 6%. This increase was caused by the addition
of approximately $10.6 million in equipment between April 30, 1997 and April 30,
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 $178,000, or 6%,
between periods and improved as a percentage of revenues from 27% to 11%,
primarily due to increased sales volumes and improvements in the Company's gross
margins.
Other Income (Expense). Other income (expense) increased approximately
$911,000. 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 nine months ended April 30, 1998, the Company generated
negative cash flows from operations of approximately $1.1 million. This compares
favorably to the negative cash flows from operations of $2.4 million produced
during the same period a year earlier. The improvement is the result of the
increased revenue levels and improved margins discussed earlier.
The Company purchased approximately $2.9 million in equipment during
the nine-month period ending April 30, 1998, and added approximately $3.0
million more under capital lease arrangements, allowing the Company to further
implement its growth strategy in Mexico. The majority of the equipment purchased
has been used to support the Company's network services business and for
additional intelligent payphone installations in Mexico.
The Company used proceeds of approximately $2.8 million from the
exercise of warrants and options for the
12
<PAGE> 13
purchase of the aforementioned equipment, and to fund working capital needs. As
of April 30, 1998, approximately $717,000 in capitalized costs related to the
completion of the Company's Monterrey teleport facility remained under
short-term vendor financing arrangements.
In August 1997, the Company used $1.1 million in proceeds from an
equity offering, which was subscribed to on July 31, 1997 to complete the
purchase of Computel. To fund the acquisition of the customer base of an
independent marketing representative in November 1997, the Company issued a $1.0
million long-term note to a shareholder. The note accrues interest at an annual
rate of 13%, and is payable in equal quarterly installments of principal and
interest over a seven-year period. In connection with this note, the shareholder
received warrants to purchase 250,000 shares of common stock of the Company at a
price of $3.56 per share. In February 1998, the shareholder converted
approximately $490,000 in outstanding principal under this note to equity by
exercising warrants which had been issued previously.
The net result of the Company's operating, financing and investing
activities during the nine months was a was a working capital deficit of
approximately $3.9 million and cash on hand of $1.8 million as of April 30,
1998.
Although the Company has continued to use more cash in its operations
than it has produced from its operations, it has reduced the rate at which is
doing so. 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.
The Company currently has the infrastructure and capacity available to
increase revenues, but will need to continue to find long-term sources of funds
in order to sustain its historical revenue growth rates and to improve its
current working capital position. Unless the Company is able to achieve and
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 operations, 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 achieve and 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 see 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 a 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 tourism months in Mexico.
13
<PAGE> 14
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.
The Company filed a report on Form 8-K on May 11, 1998, related to the
effectiveness of its Plan of Arrangement and the registration of the securities
of American TeleSource International, Inc., a Delaware corporation, a "successor
issuer" within the meaning of Rule 12g-3(a).
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: June 15, 1998 By: /s/ H. DOUGLAS SAATHOFF
--------------------------------
Name: H. Douglas Saathoff
Title: Chief Financial Officer
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
11 Computation of Earnings per Share (filed herewith)
27 Financial Data Schedule (filed herewith)
</TABLE>
<PAGE> 1
Exhibit 11
AMERICAN TELESOURCE INTERNATIONAL INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(In thousands)
<TABLE>
<CAPTION>
For the Three Month Periods Ended For the Nine Months Ended
--------------------------------- --------------------------------
April 30, 1997 April 30, 1998 April 30, 1997 April 30, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
COMPUTATION OF BASIC LOSS PER SHARE
Net loss $ (1,034) $ (1,923) $ (3,002) $ (3,735)
============== ============== ============== ==============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 27,009 43,447 24,980 39,612
============== ============== ============== ==============
BASIC LOSS PER COMMON SHARE $ (0.04) $ (0.04) $ (0.12) $ (0.09)
============== ============== ============== ==============
COMPUTATION OF DILUTED LOSS PER SHARE
Net loss $ (1,034) $ (1,923) $ (3,002) $ (3,735)
Interest not incurred upon assumed conversion
of convertible note 3 -- 9 6
-------------- -------------- -------------- --------------
Net loss applicable to common stockholders
used for computation $ (1,031) $ (1,923) $ (2,993) $ (3,729)
============== ============== ============== ==============
Weighted average number of shares of common
stock outstanding 27,009 43,447 24,980 39,612
Weighted average incremental shares outstanding
upon assumed conversion of options and warrants 2,387 10,008 875 13,150
Weighted average incremental shares outstanding
upon assumed conversion of convertible note 200 -- 200 133
-------------- -------------- -------------- --------------
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS USED FOR
COMPUTATION 29,596 53,455 26,055 52,895
============== ============== ============== ==============
DILUTED LOSS PER COMMON SHARE AND
COMMON SHARE EQUIVALENT $ (0.03) $ (0.04) $ (0.12) $ (0.07)
============== ============== ============== ==============
</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>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> JUL-31-1997 JUL-31-1998
<PERIOD-START> AUG-01-1996 AUG-01-1997
<PERIOD-END> APR-30-1997 APR-30-1998
<CASH> 0 1,844
<SECURITIES> 0 0
<RECEIVABLES> 0 3,126
<ALLOWANCES> 0 215
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 5,822
<PP&E> 0 13,365
<DEPRECIATION> 0 2,181
<TOTAL-ASSETS> 0 23,993
<CURRENT-LIABILITIES> 0 9,739
<BONDS> 0 5,468
0 0
0 0
<COMMON> 0 21,129
<OTHER-SE> 0 (13,045)
<TOTAL-LIABILITY-AND-EQUITY> 0 23,993
<SALES> 10,418 23,569
<TOTAL-REVENUES> 10,418 23,569
<CGS> 8,773 14,435
<TOTAL-COSTS> 13,210 26,183
<OTHER-EXPENSES> 0 35
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 210 1,086
<INCOME-PRETAX> (3,002) (3,735)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,002) (3,735)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,002) (3,735)
<EPS-PRIMARY> (.12) (0.09)
<EPS-DILUTED> (.12) (0.09)
</TABLE>
