--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QA
(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, 2002
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 1-15687
ATSI COMMUNICATIONS, 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.)
8600 WURZBACH ROAD, SUITE 700W
SAN ANTONIO, TEXAS 78240
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(210) 614-7240
(REGISTRANT'S 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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes No X
--- ---
--------------------------------------------------------------------------------
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK AT DECEMBER
31, 2003 WAS 103,638,690
--------------------------------------------------------------------------------
================================================================================
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-QA
FOR THE QUARTER ENDED OCTOBER 31, 2002
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of July 31, 2002 and
October 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Three Months
Ended October 31, 2001 and 2002. . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Comprehensive Loss for the Three
Months Ended October 31, 2001 and 2002 . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the Three Months
Ended October 31, 2001 and 2002. . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . .24
Item 4. Control and procedures. . . . . . . . . . . . . . . . . . . . . . .25
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . .25
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . .25
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share information)
October 31,
July 31, 2002
---------- -------------
2002 (unaudited)
ASSETS
------
CURRENT ASSETS:
Cash $ 27 $ 403
Accounts receivable, net of allowance of $198 and $159, respectively 1,082 607
Inventory 59 32
Prepaid & Other current assets 634 626
---------- -------------
Total current assets 1,802 1,668
---------- -------------
PROPERTY AND EQUIPMENT 19,901 19,412
Less - Accumulated depreciation and amortization (14,785) (15,215)
---------- -------------
Net property and equipment 5,116 4,197
---------- -------------
OTHER ASSETS, net
Goodwill, net 1,393 1,300
Concession License, net 2,000 2,000
Other 146 140
---------- -------------
Total assets $ 10,457 $ 9,305
========== =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable 7,523 8,780
Accrued liabilities 2,657 3,116
Note payable 1,473 1,450
Current portion of obligations under capital leases 3,207 3,133
Deferred revenue 111 40
---------- -------------
Total current liabilities 14,971 16,519
---------- -------------
LONG-TERM LIABILITIES:
Obligations under capital leases, less current portion 67 55
Advance payables 275 275
Other 75 40
---------- -------------
Total long-term liabilities 417 370
---------- -------------
COMMITMENTS AND CONTINGENCIES - -
REDEEMABLE PREFERRED STOCK:
Series D Cumulative Preferred Stock, 3000 shares authorized, 742 shares
issued and Outstanding. 765 776
Series E Cumulative Preferred Stock, 10,000 shares authorized, 1,455
and 1,170 shares issued, respectively. 1,415 1,157
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $0.001 par value, 10,000,000 shares authorized,
Series A Cumulative Convertible Preferred Stock, 50,000 shares authorized,
4,370 shares issued and outstanding. - -
Series F Cumulative Convertible Preferred Stock, 10,000 shares and 8,510
shares issued and outstanding, respectively. - -
Series G Cumulative Convertible Preferred Stock, 42,000 shares authorized,
6,500 shares issued and outstanding. - -
Common stock, $0.001, 200,000,000 shares authorized, 94,790,855 and
100,395,120 issued and outstanding, respectively. 95 100
Additional Paid in Capital 59,891 60,186
Accumulated deficit (67,493) (70,421)
Warrants Outstanding 1,031 1,031
Other Comprehensive Loss (636) (413)
---------- -------------
Total stockholders' deficit (7,112) (9,517)
---------- -------------
Total liabilities and stockholders' deficit $ 10,457 $ 9,305
========== =============
The accompanying notes are an integral part of these consolidated financial statements
3
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
Three months ended October 31,
------------------------------
2001 2002
------------ ------------
OPERATING REVENUES:
Services
Carrier services $ 8,975 $ 5,410
Network services 664 211
Retail services 1,725 1,644
------------ ------------
Total operating revenues 11,364 7,265
OPERATING EXPENSES:
Cost of services 9,097 5,985
Selling, general and administrative 2,842 2,703
Impairment loss - 89
Bad debt expense - 13
Depreciation and Amortization 984 795
------------ ------------
Total operating expenses 12,923 9,585
------------ ------------
OPERATING LOSS (1,559) (2,320)
OTHER INCOME (EXPENSE):
Other income (expense), net (33) (339)
Interest expense (509) (244)
------------ ------------
Total other income (expense) (542) (583)
LOSS FROM CONTINUING
OPERATIONS BEFORE INCOME TAX (2,101) (2,903)
INCOME TAX EXPENSE (27) (25)
------------ ------------
NET LOSS FROM CONTINUING
OPERATIONS (2,128) (2,928)
NET LOSS FROM DISCONTINUED
OPERATIONS - -
------------ ------------
NET LOSS (2,128) (2,928)
LESS: PREFERRED DIVIDENDS (145) (96)
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS ($2,273) ($3,024)
============ ============
BASIC AND DILUTED LOSS PER SHARE ($0.03) ($0.03)
============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 78,086 96,678
============ ============
The accompanying notes are an integral part of these consolidated financial
statements
4
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(unaudited)
Three months ended October 31,
------------------------------
2001 2002
------------- -------------
Net loss to common stockholders
Other comprehensive income (loss), net of tax: ($2,273) ($3,024)
Foreign currency translation adjustment (45) 224
------------- -------------
Comprehensive loss to common stockholders ($2,318) ($2,800)
============= =============
The accompanying notes are an integral part of these consolidated financial
statements
5
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
Three months ended October 31,
------------------------------
2001 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($2,128) ($2,929)
Adjustments to reconcile net income to net cash used in
operating activities-
Impairment loss - 89
Depreciation and amortization 1,126 795
Deferred compensation 12 -
Foreign currency loss - 326
Provision for losses on accounts receivable 26 13
Changes in operating assets and liabilities
Decrease in accounts receivable 559 453
(Increase) in prepaid expenses and other (89) (2)
Increase in accounts payable 509 1,075
Increase in accrued liabilities 442 741
Increase (Decrease) in deferred revenue 36 (72)
------------ ------------
Net cash provided by operating activities 493 489
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment (148) (25)
------------ ------------
Net cash used in investing activities (148) (25)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 11 -
Payments on debt (43) -
Capital Lease payments (169) (87)
Payment of expenses related to the issuance of preferred stock (8) (6)
Proceeds from issuance of common stock, net
of issuance costs 100 5
------------ ------------
Net cash used in/provided by financing activities (109) (88)
------------ ------------
NET INCREASE (DECREASE) IN CASH 236 376
CASH AND CASH EQUIVALENTS, beginning of period 103 27
------------ ------------
TOTAL CASH AND CASH EQUIVALENTS 339 403
------------ ------------
CASH AND CASH EQUIVALENTS- Allocated to discontinued operations (199) -
CASH AND CASH EQUIVALENTS, end of period $ 140 $ 403
============ ============
The accompanying notes are an integral part of these consolidated financial statements
6
ATSI COMMUNICATIONS, 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 following subsidiaries: ATSI-Delaware, ATSI-Canada, ATSI-Texas, ATSI-Mexico,
ATSICOM, Computel, ATSI de CentroAmerica, TeleSpan and SINFRA, 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 accounting principles generally accepted in the United States of
America 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, 2002 and October 31, 2002,
the results of their operations for the three months ended October 31, 2001 and
2002, comprehensive loss for the three months ended October 31, 2001 and 2002,
and cash flows for the three months ended October 31, 2001 and 2002. 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, 2002 included in the Company's annual report on Form
10-K filed with the SEC on February 3, 2003. 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. SOURCES OF REVENUE, DIRECT COST AND REVENUE RECOGNITION
Sources of revenue:
-------------------
Carrier Services: We provide termination services to U.S and Latin
American telecommunications companies who lack transmission facilities, require
additional capacity or do not have the regulatory licenses to terminate traffic
in Mexico. Typically these telecommunications companies offer their services to
the public for local and international long distance. In December 2002, we were
forced to idle our carrier network capacity and have therefore been unable to
generate revenue from carrier services since that date.
Network Services: We offer private communication links for multi-national
and Latin American corporations or enterprise customers who use a high volume of
telecommunications services to their U.S. offices or businesses and need greater
dependability than is available through public networks. These services include
data, voice and fax transmission as well as Internet services between the
customers' multiple international offices and branches. We do not have any
current network services customers, however we currently provide network
management services to Latin Group Ventures L.L.C. (LGV), a non-related party.
Under the agreement with LGV we manage one of their network services customers.
This management agreement initiated on July 1, 2003 and we will generate
approximately $6,500 per month in management fees during fiscal 2004.
7
Retail Services: The retail services consisted of communication centers
and public pay telephones. The communication centers or call centers consist of
retail centers strategically located in Mexico to serve the travelers and the
large Mexican population who typically do not have personal or home telephones.
At these communication centers we previously offered local, domestic and
international long distance and enhanced services, such as prepaid calling cards
and Internet services. As of July 2, 2003, we sold certain assets of our
principal operating subsidiaries and no longer own or operate the communications
centers. Thus, in the near future, management does not expect any revenue to be
generated from this source.
Direct Cost:
------------
Carrier Services: Under these services the company incurs termination
charges. These charges are related to the fees that we are charged by our
carriers / vendors for the termination of phone calls into their infrastructure
and network, primarily in Mexico.
Network Services: Under the network services, the company incurs satellite
and fiber optic charges. The satellite and fiber optic charges are incurred as
part of the connection links between the customers' different remote locations
and sites to transmit data, voice and Internet services.
Retail Services: Under the retail services, the company incurred, fixed
cost, local and long distance cost. The fixed cost / rent is the cost charged by
the local exchange carrier for the access to the phone lines and is based on the
number of telephone lines at each of the communication centers. The local and
long distance cost is based on the per minute basis charged by the carrier /
vendor to transport the telephone calls between the destinations points. The
rates per minute varies based on the location of the telephone call. As of July
2, 2003, we sold certain assets of our principal operating subsidiaries and no
longer own or operate the communications centers.
Revenue recognition:
--------------------
Carrier Services: We recognize revenue from our carrier services in the
form of service commencement fees and carrier service fees. Service
commencement fees are charged for the right to connect to the Company's network
and are recognized and collected at the time a customer is connected to the
Company's network and service is commenced. Carrier service fees are based on
the volume of communications traffic over our network and are recognized as they
are generated.
Network Service: We recognize revenue from our network services in the
form of service commencement fees and network capacity fees. Service
commencement fees are charged for the right to connect to the Company's network
and are recognized and collected at the time a customer is connected to the
Company's network and service is commenced. Network capacity fees are charged
for providing network capacity over a period of time and are recognized as they
are earned.
Retail Services: Retail services revenue is recognized at the point of sale,
when the services are provided and rendered to the end-user.
3. BASIC AND DILUTED LOSS PER SHARE
Basic earnings or loss per share is calculated using the weighted average
number of common shares outstanding during each period reported. The
computation of diluted earnings or loss per share is based on the weighted
average number of shares outstanding during the year plus common stock
8
equivalents that would result from the conversion of convertible debt or equity
securities into common stock and stock options and warrants outstanding using
the treasury stock method and the average market price per share during the
period. If the effect on earnings or loss per share resulting from the common
stock equivalents is antidilutive, such common stock equivalents are excluded
from the calculation. Preferred stock convertible into 42,990,537 and
19,766,162 shares of common stock, were outstanding as of October 31, 2002 and
2001, respectively, but were excluded from the computation of diluted loss per
share because their effect was antidilutive.
4. NOTES PAYABLES
Notes Payable are comprised of the following (in thousands):
July 31, October 31,
2002 2002
--------- ------------
Notes payable to taxing entity, see terms below. $ 480 $ 457
Note payable to a related party, see terms below. 250 250
Note payable to a company, see terms below. 386 386
Note payable to individuals, see terms below 357 357
--------- ------------
Total current notes payable $ 1,473 $ 1,450
========= ============
The Company, through its acquisition of Computel, assumed notes payables to
a taxing entity for various past due taxes. The notes have interest rates
ranging from 8% to 15%, with scheduled monthly principal and interest payments
of approximately $18,121. The notes were originally scheduled to mature between
July 1999 and July 2001 and are collaterized by the assets of Computel. The
taxing entities can pursue foreclosure on the notes against the assets of
Computel, which consist of a telecommunications concession license to operate
coin operated public telephones and retail communication centers throughout
Mexico and the equipments utilized in the operations of the retail
communications centers, such as computers, faxes and billing equipment. The
Company continues to work with the taxing entities to extent the term of this
note payable, but as of filing this quarterly report no payments have been made
and we are in default of the agreement.
In March 2001, the Company entered into a note payable with a related
party, a director of ATSI, in the amount of $250,000, for a period of 90 days,
renewable at the note holder's option. The note, which accrues interest at a
rate of 9.75% per annum payable monthly until the note is paid in full, was
extended throughout fiscal 2001 and 2002. During the first quarter of fiscal
2003 we did not make any principal and interest payments, and as a result we are
in default on this note. The note is collateralized by approximately 357,000
shares of the Company's common stock. As of the date of this quarterly report
the holder has not demanded nor requested redemption of the collateral. The
Company intends to seek additional extensions of the note but there can be no
assurance that favorable terms will be agreed to or that an agreement will be
reached with the note holder.
In May 2002, the Company entered into a note payable with a vendor for
equipment it had originally purchased commencing in June 2000 in the amount of
$386,362. The note, which accrues interest beginning July 15, 2002 at the rate
of 18%, matured October 15, 2002. As of the date of this quarterly filing the
Company has not made any payments and is in default of the agreement. The note
is collateralized by the Nortel DMS 300/250 International Gateway Switch in our
Dallas location and other
9
telecommunication equipment owned by our subsidiary. Since February 4, 2003, the
note has been subject to administration in the bankruptcy of our subsidiary. In
May 15, 2003 the bankruptcy court lifted the stay on the execution of the note
and the creditor took possession of the security and released the Company from
this debt.
In November 2001, the Company entered into a note payable, in the amount of
$357,000 with the former owners of the concession license it purchased in July
2002. The note called for principal payments of $51,000 per month plus accrued
interest. The note, which accrues interest at the rate of prime plus 2%, matured
July 19, 2002. On October 1, 2002, the note was amended in its entirety with a
revised maturity date of February 2006 and an amended interest rate of 7.75%.
The revised note calls for equal monthly payments of principal and interest in
the amount of $8,925. As of the date of this filing, no monthly payments have
been made and the note is in technical default and has been classified as
current. This note is collateralized by the rights to the concession license. We
are in negotiations with the note holder to satisfy this note through the
issuance of the Company's common stock but there can be no assurance that any
agreement will be reached with the note holder. Additionally, there can be no
assurance that if such agreement is reached the terms of the agreement will be
favorable for the Company.
5. GOING CONCERN
The Company has incurred substantial cumulative net losses, working capital
deficits, and negative cash flows since the Company's inception. Our two primary
operating subsidiaries filed for protection under the U.S. Bankruptcy Code and
are currently being liquidated. In addition, the auditor's opinion on the
consolidated financial statements as of July 31, 2002, calls attention to
substantial doubt about the Company's ability to continue as a going concern.
For the period from December 17, 1993 to October 31, 2002, the Company has
incurred cumulative net losses of approximately $70.5 million. Further, the
Company has a working capital deficit of approximately $14.9 million at October
31, 2002. We will continue to seek equity funding from our previous funding
sources to maintain the Company in operations and support our ongoing
operations. However there can be no assurance the we will be able to obtain the
required equity funding or, if the resources are made available to us, that they
will be sufficient to support our ongoing operations until such time as we are
able to continuously generate earnings from operations.
In addition, there can be no assurance that we will be able to achieve
future revenue levels sufficient to support our operations and recover our
investment in property and equipment, goodwill and other intangible assets.
These matters raise substantial doubt about our ability to continue as a going
concern. Our ability to continue as a going concern is dependent upon the
ongoing support of our stockholders and customers, our ability to obtain capital
resources to support operations and our ability to successfully market our
services.
We will require additional financial resources in the near term and could
require additional financial resources in the long-term to support our ongoing
operations. We plan on securing funds through equity offerings and entering into
lease or long-term debt financing agreements to raise capital. There can be no
assurances, however, that such equity offerings or other financing arrangements
will actually be consummated or that such funds, if received, will be sufficient
to support existing operations until revenue levels are achieved sufficient to
generate income from operations. If we are 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 us until a
10
successful level of operations is attained, we have limited additional sources
of debt or equity capital and would likely be unable to continue operating as a
going concern.
6. DISCONTINUED OPERATIONS
On June 12, 2002 we discontinued our e-commerce operations through the sale
of our majority-owned subsidiary, GlobalSCAPE, Inc. for approximately $2.25
million.
Income statement presentation for the three months ended October 31, 2001
reflects the elimination of e-commerce revenues and the expenses of GlobalSCAPE
as follows: (in thousands).
FOR THE THREE MONTHS ENDED OCTOBER 31, 2001
E-commerce revenues $1,239
Costs and expenses $1,239
Net loss before taxes $ 0
Net loss $ 0
7. SEGMENT REPORTING
In an attempt to identify our reportable operating segments, we considered
a number of factors or criteria. These criteria included segmenting based upon
geographic boundaries only, segmenting based on the products and services
provided, segmenting based on legal entity and segmenting by business focus.
Based on these criteria we have determined that we have two reportable operating
segments: (1) U.S. Telco and (2) Mexico Telco. We believe that our U.S. and
Mexican subsidiaries should be separate segments even though many of the
products are borderless. Both the U.S. Telco and Mexico Telco segments include
revenues generated from Retail Services and Network Services. Our Carrier
Services revenues, generated as a part of our U.S. Telco segment, are the only
revenues not currently generated by both the U.S. Telco and Mexico Telco
segments. We have included the operations of ATSI-Canada, ATSI-Delaware and all
businesses falling below the reporting threshold in the "Other" segment. The
"Other" segment also includes intercompany eliminations.
During the quarter ended October 2002 and 2001, U.S. Telco generated net
losses to common shareholders as percentage of total consolidated losses to
common shareholders of approximately 45% and 35%, respectively. Additionally,
U.S. Telco's total assets for the same period as a percentage of total
consolidated assets were 52% and 40%, respectively. Mexico Telco net losses to
common shareholders for the quarter ended October 2002 and 2001 as a percentage
of total consolidated losses to shareholders were 52% and 59%, respectively. And
Mexico Telco total assets as a percentage of total consolidated assets were 48%
and 60%, respectively.
IN THOUSANDS
For the three months ended
October 31, October 31,
2001 2002
U.S. TELCO
-----------------------------------------------------------------
External revenues $ 9,477 $ 5,576
Intercompany revenues $ 147 $ 262
------------- -------------
Total revenues $ 9,624 $ 5,812
============= =============
11
Operating loss ($707) ($1,154)
Net loss to common shareholders ($798) ($1,361)
Total assets $ 8,037 $ 4,855
MEXICO TELCO
-----------------------------------------------------------------
External revenues $ 1,887 $ 1,689
Intercompany revenues $ 456 $ 492
------------- -------------
Total revenues $ 2,343 $ 2,181
============= =============
Operating loss ($852) ($1,166)
Net loss to common shareholders ($1,336) ($1,568)
Total assets $ 12,271 $ 4,450
\
OTHER
-----------------------------------------------------------------
External revenues - -
Intercompany revenues ($603) ($754)
------------- -------------
Total revenues ($602) ($754)
============= =============
Operating loss $ 0 $ 0
Net loss to common shareholders ($139) ($95)
Total assets $ 0 $ 0
TOTAL
-----------------------------------------------------------------
External revenues $ 11,364 $ 7,265
Intercompany revenues - -
------------- -------------
Total revenues $ 11,364 $ 7,265
============= =============
Depreciation and Amortization ($984) ($795)
Operating loss ($1,559) ($2,320)
Net loss (Excluding discontinued
Operations) ($2,128) ($2,928)
Net loss to common shareholders
(Excluding discontinued Operations) ($2,273) ($3,024)
Total assets $ 20,308 $ 9,305
12
8. SUBSEQUENT EVENTS
On November 1, 2002, we filed a lawsuit in the United States District Court
for the Southern District of New York against Rose Glen Capital, The Shaar Fund,
and others for stock fraud and manipulation, as well as violations of SEC
Section 10(b) and Rule 10b-5.
In December 2002 and January 2003, we made a number of strategic decisions
to further conserve our limited resources and maintain certain operations going
forward. These decisions included the termination of a number of employees in
our corporate offices as well as the restriction and ultimately, idling of our
carrier services network capacity. We believe that idling the carrier services
network will significantly impair our ability to generate revenue but will
offset by significant savings from reductions in payments to third persons for
services, reductions in personnel costs, and other costs of operating the
carrier services network. In addition, the idling of such network is expected
to make certain equipment and other assets surplus to the Company's needs and
provide a source of payment for indebtedness relating to the carrier services
network. Management intends to re-start the carrier services network if it is
able to obtain sufficient funding from external sources but no assurance can be
given that such funding will be available at the time or in the amount
necessary.
On January 15, 2003 the American Stock Exchange halted trading in our stock
pending the filing of our Form 10-K for the year ended July 31, 2002, which was
subsequently filed on February 3, 2003, and this Form 10-Q for the quarter ended
October 31, 2002.
On February 4, 2003, two of our subsidiaries, American Telesource
International, Inc. (ATSI-Texas) and TeleSpan , Inc. (TeleSpan ) filed for
protection under Chapter 11 of the U.S. Bankruptcy Code. On April 9, 2003, the
court ordered joint administration of both cases and on May 14, 2003 the court
converted the case to a Chapter 7 case. The two bankrupt subsidiaries were our
two primary operating companies and they have ceased operations and are in the
process of liquidation. ATSI Communications, Inc., the Delaware incorporated
holding company, was not included in the bankruptcy filings.
On February 7, 2003, we announced that our Board of Directors had approved
a strategic merger with CCC GlobalCom of Houston, Texas. After many
conversations, both parties agreed that currently, under the market conditions,
it was not the ideal time for this merger. As a result, we ceased any further
strategic merger negotiations on July 23, 2003.
On February 7, 2003 we announced that Stephen M. Wagner, President, Chief
Executive Officer and Director had resigned to pursue other business
opportunities. The Board of Directors appointed Raymond G. Romero to serve as
Interim Chief Executive Officer. Additionally, Carlos Kauachi and Darrell
Kirkland resigned as members of the Board of Directors.
On June 16, 2003 we announced that Raymond G. Romero, Interim CEO and J.
Christopher Cuevas, Interim CFO both resigned to pursue other business
opportunities. Additionally, we announced that Arthur L. Smith was appointed as
CEO and Director and Antonio Estrada as corporate controller.
On May 22, 2003 we entered into a Share Purchase Agreement with
Telemarketing de Mexico, S.A. de C.V. ("Telemarketing') whereby we agreed to
sell Telemarketing 51% of our Mexican subsidiary, ATSI Comunicaciones, S.A. de
C.V. ("ATSICOM"). The agreement provides that there will be an initial payment
of $194,000 plus payment of approximately $200,000 of ATSICOM's liabilities and
the remaining purchase price of $747,000 will be paid as follows:
13
- Beginning in May 2003 Telemarketing will pay ATSI $20,750 per month
for 12 months.
- Additionally, beginning in May 2004, Telemarketing will pay ATSI
$20,750 per month for the next 24 months, contingent on ATSI
generating 20,750,000 minutes of monthly traffic through ATSICOM's
network. In the event the company does not reach the above-mentioned
volume of monthly minutes, the monthly payment will be adjusted based
on the same percentage of the shortfall in minutes, until
Telemarketing pays the total purchase price. On the other hand, if
ATSI exceeds the volume of monthly traffic, Telemarketing can make
additional payments, without penalty.
On July 02, 2003, the U.S. Bankruptcy Court approved the sale of
ATSI-Mexico and SINFRA's shares of stock to Latin Group Ventures, L.L.C. (LVG).
Under the purchase agreement LVG acquired all the communication centers and
assumed all related liabilities. In addition, under the agreement, LGV acquired
the Comercializadora License owned by ATSI-Mexico and the Teleport and Satellite
Network License owned by SINFRA. The Chapter 7 Trustee received all the proceeds
from the sale of these entities.
9. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142, which supercedes APB Option No. 17, "Intangible Assets"
provides financial accounting and reporting for acquired goodwill and other
intangible assets. SFAS 142 changes the accounting for goodwill and other
intangible assets with indefinite lives from an amortization method to an
impairment approach. The Company has adopted SFAS 142 as of August 1, 2002.
Accordingly, the concession license, will continue to be amortized over 26
years, the remaining life of the concession license. The amortization of
goodwill ceased on August 1, 2002. The Company's has determined that no further
impairment is necessary.
The Financial Accounting Standards Board issued Statement No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" in October
2001. SFAS 144 addresses financial accounting and reporting for the impairment
or disposal of long-lived assets, and is effective for fiscal years beginning
after December 15, 2001. The Statement also extends the reporting requirements
to report separately as discontinued operations, components of an entity that
have either been disposed of or classified as held for sale. The adoption of
SFAS 144 has not had a material effect on the consolidated financial statements
of the Company.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity.
(Including Certain Costs Incurred in a Restructuring)." The provisions of SFAS
146 are effective for exit or disposal activities that are initiated after
December 31, 2002. The adoption of SFAS 146 has not had a material effect on the
consolidated financial statements of the Company.
In December 2002, the FASB issued SFAS No. 148 (SFAS 148), "Accounting for
Stock-Based Compensation-Transition and Disclosure", amending FASB Statement No.
123 (SFAS 123), "Accounting for Stock-Based Compensation. SFAS 148 provides two
additional alternative transition methods for recognizing an entity's voluntary
decision to change its method of accounting for stock-based employee
compensation to the fair-value method. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 so that entities will have to (1) make
more-prominent disclosures regarding
14
the pro forma effects of using the fair-value method of accounting for
stock-based compensation, (2) present those disclosures in a more accessible
format in the footnotes to the annual financial statements, and (3) include
those disclosures in interim financial statements. SFAS 148's transition
guidance and provisions for annual disclosures are effective for fiscal years
ending after December 15, 2002; earlier application is permitted. The adoption
of SFAS 148 will require additional disclosure in the Company's interim
consolidated financial statements. However, management anticipates the adoption
of SFAS 148 will not have a material impact on the Company's consolidated
financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. For public enterprises with a variable
interest in a variable interest entity created before February 1, 2003, the
Interpretation is applied to that enterprise no later than the beginning of the
first interim or annual reporting period beginning after June 15, 2003. The
Company does not expect the adoption of Interpretation No. 46 to have a material
impact on the Company's results of operations or financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 provides for certain
changes in the accounting treatment of derivative contracts. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003, except for
certain provisions that relate to SFAS No. 133 Implementation Issues that have
been effective for fiscal quarters that began prior to June 15, 2003, which
should continue to be applied in accordance with their respective effective
dates. The guidance should be applied prospectively. Management anticipates that
the adoption of SFAS No. 149 will not have a material impact on the Company's
consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This new
statement changes the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity. It requires that those
instruments be classified as liabilities in balance sheets. Most of the guidance
in SFAS 150 is effective for all financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the Company's
third quarter of fiscal 2003. Management anticipates that the adoption of SFAS
No. 150 will not have a material impact on the Company's consolidated financial
statements.
The Emerging Issues Task Force issued EITF No. 00-21, Revenue Arrangements
with Multiple Deliverables addressing the allocation of revenue among products
and services in bundled sales arrangements. EITF 00-21 is effective for
arrangements entered into in fiscal periods after June 15, 2003. The Company
does not expect the adoption of EITF No. 00-21 to have a material impact on the
Company's future results of operations or financial position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE: This Quarterly Report on Form 10-QA contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities and Exchange Act of 1934, as amended.
"Forward looking statements" are those statements that describe management's
beliefs and expectations about the future. We have identified forward-looking
statements by using words such as "anticipate," "believe," "could," "estimate,"
"may," "expect," and "intend." Although we believe these expectations are
reasonable, our operations involve a number of risks and uncertainties,
including those described in the Additional Risk Factors section
15
of the Annual Report Form 10-K and other documents filed with the Securities and
Exchange Commission. Therefore, these types of statements may prove to be
incorrect.
The following is a discussion of the consolidated financial condition and
results of operations of ATSI for the three months ended October 31, 2001 and
2002. It should be read in conjunction with our Consolidated Financial
Statements, the Notes thereto and the other financial information included in
the annual report on Form 10-K filed with the SEC on February 3, 2003.
SOURCES OF REVENUE AND DIRECT COST
Sources of revenue:
-------------------
Carrier Services: We provide termination services to U.S and Latin
American telecommunications companies who lack transmission facilities, require
additional capacity or do not have the regulatory licenses to terminate traffic
in Mexico. Typically these telecommunications companies offer their services to
the public for local and international long distance services. In December 2002,
we were forced to idle our carrier network capacity and have therefore been
unable to generate revenue from carrier services since that date. In May 2003
we sold 51% of ATSI Comunicaciones, S.A. de C.V. (ATSICOM) to Telemarketing de
Mexico, S.A. de C.V. (Telemarketing). We believe that our agreement with
Telemarketing and its owner, Dialmex, LLC (Dialmex), will allow us to recommence
providing carrier services via the VoIP network owned by Dialmex.
Network Services: We offer private communication links for multi-national
and Latin American corporations or enterprise customers who use a high volume of
telecommunications services to their U.S. offices or businesses and need greater
dependability than is available through public networks. These services include
data, voice and fax transmission as well as Internet services between the
customers' multiple international offices and branches. We do not have any
present network services customers. Two of our subsidiaries, American
Telesource International, Inc. (ATSI-Texas) and TeleSpan, Inc. (TeleSpan), filed
for protection under Chapter 11 of the U.S. Bankruptcy Code in February 2003 and
ceased operations in May 2003. Under agreement for the sale of the certain
assets of ATSI-Texas and TeleSpan, we are providing network management services
to Latin Group Ventures L.L.C. (LVG), a non-related entity. Under the agreement
we manage one of their network services customers. This management agreement is
for twelve months and initiated on July 1, 2003. Under this agreement we will
generate approximately $6,500 per month in management fees during fiscal 2004.
Retail Services: The retail services consisted of communication centers
and public pay telephones. The communication centers or call centers consist of
retail centers strategically located in Mexico to serve the travelers and the
large Mexican population who typically do not have personal or home telephones.
At these communication centers we previously offered local, domestic and
international long distance and enhanced services, such as prepaid calling cards
and Internet services. As of July 2, 2003, we sold certain assets of our
principal operating subsidiaries and no longer own or operate the communications
centers. Thus, in the near future, management does not expect any revenue to be
generated from this source.
Direct Cost:
------------
Carrier Services: Under these services the company incurs termination
charges. These charges are related to the fees that we are charged by our
carriers / vendors for the termination of phone calls into their infrastructure
and network, primarily in Mexico.
16
Network Services: Under the network services, the company incurs satellite
and fiber optic charges. The satellite and fiber optic charges are incurred as
part of the connection links between the customers' different remote locations
and sites to transmit data, voice and Internet services.
Retail Services: Under the retail services, the company incurred, fixed
cost, local and long distance cost. The fixed cost / rent is the cost charged by
the local exchange carrier for the access to the phone lines and is based on the
number of telephone lines at each of the communication centers. The local and
long distance cost is based on the per minute basis charged by the carrier /
vendor to transport the telephone calls between the destinations points. The
rates per minute varies based on the location of the telephone call. As of July
2, 2003, we sold certain assets of our principal operating subsidiaries and no
longer own or operate the communications centers
GENERAL
We have had operating losses for almost every quarter since we began
operations in 1994. Due to such prior losses, the anticipated continuation of
such losses for the foreseeable future, and our substantial working capital
deficit, the auditor's opinion on our financial statements as of July 31, 2002
calls attention to substantial doubts about our ability to continue as a going
concern. This means that there is substantial doubt that we will be able to
continue in business through the end of our next fiscal year. We have
experienced difficulty in paying our vendors and lenders on time in the past,
and, as a result, in December 2002 our carrier network capacity was idled and
the majority of the employees from the US Telco segment were terminated. This
means that we were not be able to generate revenues from carrier services during
the second half of the fiscal year ended July 31, 2003.The loss of revenue from
idling the carrier services network was offset by significant savings from the
reductions in payments to third parties for services, personnel cost and other
operating cost related to operating a network
During the first quarter management continued to pursue different venues
for funding. Unfortunately during the last several years the telecommunications
industry has experienced a great deal of instability. As a result of not being
able to raise the necessary capital to re-start our network, two of our
subsidiaries, ATSI-Texas and TeleSpan filed for protection under Chapter 11 of
the U.S. Bankruptcy Code on February 4, 2003 and February 18, 2003 respectively.
The court ordered joint administration of both cases on April 9, 2003 and
subsequently on May 14, 2003 the court converted the cases to a Chapter 7. The
two bankrupt subsidiaries were our two primary operating companies and they have
ceased operations. These bankruptcies did not include the reporting entity. As
a result of the Chapter 7 bankruptcy of our two main operating subsidiaries
combined with the termination of the majority of our US Telco employees and the
idling of the carrier network capacity, our ability to generate any revenue from
our historical revenue generation sources was severely limited.
On May 22, 2003 we entered into a Share Purchase Agreement with
Telemarketing whereby we sold to Telemarketing 51% of our Mexican subsidiary,
ATSICOM. ATSICOM holds a 30-year long distance concession in Mexico. The
principal owners of Telemarketing are also the principal owners of Dialmex, a
U.S. based international telecommunications carrier. Under the agreement with
Telemarketing we will jointly enhance the existing data network operated by
Dialmex to permit the network to carry voice transmissions using the same system
and software as is used to transmit data. This system is known as Voice over
Internet Protocol or "VoIP" and can transmit voice transmissions at much lower
costs then our historical network. We believe that this will lower the network
cost and allowed the companies to be more competitive and attract more
customers. Additionally, ATSICOM, Telemarketing and Dialmex will combine their
respective interconnection agreements with the various
17
Mexican telecommunications companies to obtain greater market leverage and
higher call volumes, thus decreasing the cost of providing such services.
Through our interconnection agreement with Telefonos de Mexico S.A de C.V.
(Telmex) we will have access to the only nationwide voice and data network in
Mexico with more than 14.1 million phone lines in over 105,000 communities
throughout Mexico. Our interconnection agreement with Bestel S.A de C.V (Bestel)
will allow us to have access to their fiber optic network that extends over
6,356 kilometers with points of presence in 19 Mexican metropolitan areas. Under
these agreements our cost of providing telecommunication services will be based
on a per minute rate and the volume of minutes transported through their
respective networks.
On July 2, 2003, the U.S. Bankruptcy Court overseeing the Chapter 7 cases
for ATSI Texas and TeleSpan, Inc. approved the sale of two of subsidiaries,
American TeleSource International de Mexico, S.A. de C.V. (ATSI-Mexico), a
Mexican corporation wholly owned by ATSI Texas and Servicios de Infraestructura,
S.A. de C.V (SINFRA), a Mexican corporation wholly owned by TeleSpan, Inc. to
Latingroup Ventures, L.L.C. (LGV), a non-related party. Under the purchase
agreement, LGV acquired all the communication centers operated by the Company
and assumed all related liabilities of ATSI-Mexico and SINFRA. Additionally,
under the agreement, LGV acquired the Comercializadora License owned by
ATSI-Mexico and the Teleport and Satellite Network License owned by SINFRA.
Our limited cash flow, historical losses from operations, and the
bankruptcies of our two main operating subsidiaries have caused substantial
barriers to growth and the continuation of our business strategy. We believe
that the sale of 51% of ATSICOM to Telemarketing provides us with working
capital while the agreement with Dialmex will provide us with access to a
reliable and flexible state-of-the-art VoIP network without incurring the
expense of operating such a network. We believe that the agreements with
Telemarketing and Dialmex will allow the company to restart its carrier network
services during the first quarter of Fiscal year 2004. Even if we are able to
restart our carrier services during the fiscal year 2004 we will be limited in
the volume of revenue and the resources available for the Company to succeed. We
cannot predict the revenues trends or the reaction of market that we currently
compete with other carriers. We believe that currently we require operating
revenue of approximately $2,400,000 to reach break even and external financing
in the amount of approximately $450,000 to continue in operations during the
following fiscal year. There can be no assurance that if we restart our carrier
services that the cash inflows from operations, the monthly cash payments from
the sale to Telemarketing and the external financing if acquired will be
sufficient to cover our monthly operating expenses, thus we might be forced to
terminate all operations and liquate the Company.
OUR HISTORY OF OPERATING LOSSES AND DEFICIENCIES IN CASH FLOW
We have incurred operating losses and deficiencies in operating cash flows
in each year since our inception and expect our losses to continue through July
31, 2003. Our operating losses were $15,777,077, $9,717,287 and $11,545,493 for
the years ending July 31, 2002, 2001 and 2000, respectively. We had an operating
loss of $2,928,774, for the first quarter of fiscal 2003 and a working capital
deficit of $14,849,917, at October 31, 2002.
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, 2001 and 2002.
18
Three Months Ended October 31,
-----------------------------------
2001 2002
----------------- ----------------
$ % $ %
--------- ------ --------- -----
Operating revenues
------------------
Services
Carrier services $ 8,975 79% $ 5,410 75%
Network services 664 6% 210 3%
Retail services 1,725 15% 1,620 22%
--------- ------ --------- -----
Total operating revenues 11,364 100% 7,240 100%
Cost of services 9,097 80% 5,960 82%
--------- ------ --------- -----
Gross Margin 2,267 20% 1,280 18%
Selling, general and administrative
expenses 2,842 25% 2,703 37%
Impairment loss - 0% 89 1%
Bad debt expense - 0% 13 0%
Depreciation and amortization 984 9% 795 12%
--------- ------ --------- -----
Operating loss (1,559) (14%) (2,320) (32%)
Other income (expense), net (542) (5%) (584) (8%)
--------- ------ --------- -----
Net loss from continuing operations
before income tax expense (2,101) (19%) (2,904) (40%)
Income tax expense 27 0% 25 (1%)
--------- ------ --------- -----
Net loss from continuing operations (2,128) (19%) (2,929) (40%)
Income (loss) from discontinuing operations - 0% - 0%
Net loss (2,128) (19%) (2,929) (40%)
Less: preferred stock dividends (145) (1%) (96) (1%)
--------- ------ --------- -----
Net loss to common shareholders ($2,273) (20%) ($3,025) (41%)
========= ====== ========= =====
THREE MONTHS ENDED OCTOBER 31, 2002 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
2001
Operating Revenues. Consolidated operating revenues decreased 37% between
periods from $11.4 million for the first quarter ended 2002 to $7.2 million for
the first quarter ended 2003. Revenues from the U.S. Telco segment decreased
39% from $9,624,000 for the first quarter of 2002 to $5,812,000
19
for the first quarter of 2003. Revenues from the Mexico Telco segment decreased
7% from $2,343,000 for the first quarter of 2002 to $2,181,000 for the first
quarter of 2003.
Carrier services revenues decreased approximately $3.6 million, or 40% from
the quarter ended October 2001 to the quarter ended October 2002. As the
telecom sector has continued to suffer financially and operationally more and
more of our carriers require substantial deposits and/or prepayments. Primarily
as a result of these tighter cash requirements by our carriers the traffic we
were able to carry during the quarter declined from approximately 93.6 million
minutes in the prior year quarter to approximately 68.9 million minutes in the
quarter ended October 31, 2002. This trend has continued until December 31,
2002, when we were forced to idle our network. Since that time we have not been
carrying any carrier traffic and have not generated any revenues related to this
product.
Network services revenues continued to decline from the previous period due
to a continued loss of customers and a de-emphasizing of the product going
forward. The decline from the previous year's quarter was approximately 68% or
$450,000. Due to our current financial condition, we do not have any network
services customers. Certain assets of our principal operating subsidiaries,
including the Comercializadora License owned by ATSI-Mexico and the Teleport and
Satellite Network License owned by SINFRA, were sold to LGV on July 2, 2003 and
we entered a network management agreement with LGV. Under the agreement with
LGV we will provide customer service, technical support and manage the
collections process of their private network customer. This management agreement
was initiated on July 1, 2003 and we will generate approximately $6,500 per
month in management fees through June 30, 2004.
Retail services revenues were relatively flat between periods, declining by
approximately $105,000. During the latter half of fiscal 2002, we focused our
efforts on becoming more competitive in the products we offered and
strategically relocating communication centers to concentrated areas where
growth would be realized and closing communication centers that were no longer
cost efficient. Although revenues declined slightly between periods, the
revenues were achieved with 112 communication centers as opposed to 136
communication centers in the prior year. As of July 02, 2003, we sold certain
assets of our principal operating subsidiaries and no longer own or operate the
communication centers. Thus, in the near future management does not expect any
revenue to be generated from this source.
Cost of Services. The consolidated cost of services decreased by
approximately $3.1 million between quarters or 34% from the quarter ended
October 31, 2001 to the quarter ended October 31, 2002. Cost of Service for the
U.S. Telco segment decreased by 40% from approximately $8,237,000 for the
quarter ended October 31, 2001 to approximately $4,479,000 for the quarter ended
October 31, 2002. Cost of Service for the Mexico Telco segment increased by14%
from approximately $861,000 for the quarter ended October 31, 2001 to
approximately $981,000 for the quarter ended October 31, 2002. The decrease in
cost of services in the U.S. Telco segment is a direct result of the decrease in
carrier services revenue and private network revenue during the quarter ended
October 31, 2002. The increase in the cost of the Mexico Telco segment is the
direct result of the increase on the per-minute rate from our Mexican carriers
during the quarter ended October 31, 2002.Nevertheless, the cost of services as
a percentage of revenue stayed relatively flat at approximately 80% for the
quarter ended October 31, 2001 as compared to 82% for the quarter ended October
31, 2002.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
decreased approximately $139,000, or 5% between periods, mainly because of the
reduction in salaries and commissions during the first quarter of fiscal 2003.
SG&A allocated to the U.S. Telco segment
20
decreased 5% from approximately $1,581,000 for the quarter ended October 31,
2001 to approximately $1,506,000 for the quarter ended October 31, 2002. SG&A
allocated to the Mexico Telco segment decreased 5% from approximately $1,261,000
for the quarter ended October 31, 2001 to approximately $1,197,000 for the
quarter ended October 31, 2002.
Impairment loss. During the first quarter of fiscal 2003, we determined
that the estimated future cash inflows from a retail base company were less than
the goodwill associated with the acquisition and recognized an impairment charge
of $89,000 during the quarter ended October 31, 2002. No impairment loss was
recorded in the first quarter of fiscal 2002. All of the impairment charge
during the quarter ended October 31, 2002 related to the Company's U.S. Telco
segment.
Depreciation and Amortization. Depreciation and amortization decreased by
approximately 19% or $189,000 between periods. The decline is related to the
adoption of SFAS 142 as of August 1, 2002. As a result, there was no
amortization of goodwill during the first quarter of fiscal 2003 compared to a
charge of approximately $140,000 relating to the amortization of good will
during the quarter ended October 31, 2001. Depreciation and amortization
allocated to the U.S. Telco segment declined by 12% from approximately $514,000
for the quarter ended October 31, 2001 to approximately $454,000 for the quarter
ended October 31, 2002. Depreciation and amortization allocated to the Mexico
Telco segment declined by 27% from approximately $471,000 for the quarter ended
October 31, 2001 to approximately $342,000 for the quarter ended October 31,
2002.
Operating Loss. The Company's operating loss increased approximately
$761,000 or 49% from the first quarter of fiscal 2002, primarily due to
decreased revenues and decreased in gross margins offset slightly by reductions
in selling, general and administrative expenses and depreciation and
amortization. Operating loss for the U.S. Telco segment increased by 63% from
$707,000 for the quarter ended October 31, 2001 to $1,154,000 for the quarter
ended October 31, 2002. Operating loss for the Mexico Telco segment increased
by 37% from $852,000 for the quarter ended October 31, 2001 to $1,166,000 for
the quarter ended October 31, 2002.
Other Income (expense). Other expense increased approximately $42,000
between quarters from $542,000 to $584,000 primarily due to increased foreign
currency transaction losses between periods offset by reduced interest expense
period to period.
Preferred Stock Dividends. During the quarter ended October 2002, we
recorded approximately $96,000 of non-cash dividends related to our cumulative
convertible preferred stock. This compares favorably to the approximately
$145,000 of non-cash dividends recognized during the quarter ended October 2001
and is primarily the result of redemptions of outstanding shares of preferred
stock in the interim.
Net loss to Common Stockholders. The net loss for the quarter ended
October 2002 increased to $3.0 million from $2.3 million for the quarter ended
October 2001. The increase in net loss was due primarily to a reduction in
revenues and a reduction in gross margin dollars.
LIQUIDITY AND CAPITAL RESOURCES
The Company has limited capital resources, and these resources may not be
available to support our ongoing operations until such time as we are able to
generate income from operations. These matters raise substantial doubt about our
ability to continue as a going concern. Our ability to continue as a going
concern is dependent upon the ongoing financial support of our stockholders and
customers, our ability to obtain capital resources to support operations and our
ability to increase our revenues to a break-even level.
21
Cash used in / provided by operating activist: During the quarter ended
October 31, 2002, cash from operations provided approximately $489,000. Cash
from operations in the Company's U.S. Telco segment for the quarter ended
October 31, 2002 was approximately $417,000 and cash from operations in the
Company's Mexico Telco segment for the quarter ended October 31, 2002 was
approximately $72,000. The Company provided this positive cash flow from
operations primarily as a result of an increase in accrued liabilities and
accounts payables of approximately $771,000 and $1,075,000, respectively.
Additionally, we generated positive cash flow form operations as a result of a
decrease in accounts receivable of approximately $453,000.
Cash used in / provided by investing activities: During the quarter ended
October 31, 2002, the Company acquired approximately $25,000 in equipment, which
was not financed through capital lease or financing arrangements.
Cash flows used in / provided by financing activities: During the quarter
ended October 31, 2002, we used approximately $87,000 in cash outflows towards
our capital lease obligations.
Overall, the Company's net operating, investing and financing activities
during the quarter ended October 2002 provided approximately $376,000 in cash.
The Company's working capital deficit at October 31, 2002 was approximately
$14.9 million. This represents a decrease of approximately $1.7 million from our
working capital deficit at July 31, 2002.
Currently we are not generating sufficient revenues from operations to
cover our monthly operating salaries and general and administrative expense of
approximately $65,000 per month. We estimate that we must generate revenues of
at least $2,400,000 per month at current gross margins to cover our operating
expenses. We expect this financial instability and lack of liquidity to
continue during the fiscal year 2003. As a result over the next twelve months
we estimate requiring additional funding of approximately $450,000 to compensate
for the deficiencies in cash inflows. We have sought investment in the company
from various sources without success and we will continue to seek additional
equity investment in the Company. If no such investors are found, we may seek to
sell additional assets to generate funds or liquidate the Company.
In May 2003, the Company entered into a Share Purchase Agreement with
Telemarketing whereby we agreed to sell Telemarketing 51% of our Mexican
subsidiary, ATSICOM. The agreement provides that there will be an initial
payment of $194,000 plus payment of approximately $200,000 of ATSICOM'S
liabilities and the remaining purchase price of $747,000 will be paid as
follows:
- Beginning in May 2003 Telemarketing will pay ATSI $20,750 per month
for 12 months; and
- Beginning in May 2004, Telemarketing will pay ATSI $20,750 per month
for the next 24 months, contingent on ATSI generating 20,750,000
minutes of monthly traffic through ATSICOM's network. In the event the
Company does not reach the above-mentioned volume of monthly minutes,
the monthly payment will be adjusted based on the same percentage of
the shortfall in minutes, until Telemarketing pays the total purchase
price. On the other hand, if ATSI exceeds the volume of monthly
traffic, Telemarketing can make additional payments, without penalty.
We intend to utilize the funds from the sale of ATSICOM to fund operations.
There can be no assurance that we will be able to continue to operate with these
funds over the next twelve months or that we will be able to generate sufficient
cash from operations to cover our monthly operating expenses.
22
Additionally, there is no assurance that we will be able to raise the additional
capital from equity of debt sources required to continue in operations.
EFFECT OF PENDING BANKRUPTCY:
The Company's two principal operating subsidiaries, ATSI-Texas and
TeleSpan, filed for protection under Chapter 11 of the U.S. Bankruptcy Code on
February 4, 2003 and February 18, 2003 respectively. The court ordered joint
administration of both cases on April 9, 2003 and on May 14, 2003 the court
converted the cases to Chapter 7. Under the Chapter 7 bankruptcy case, the
trustee is responsible for these entities and its liabilities and operations. As
a result the Company does not receive any of the proceeds from the disposition
of the assets of these subsidiaries and has no responsibility for liabilities or
operations of ATSI-Texas or TeleSpan, Inc.
TERMINATION OR EXPIRATION OF CONCESSION LICENSE
We are substantially dependent upon the operations of ATSICOM, the holder
of the 30-year concession license (the "Concession") to install and operate a
public telecommunication network in Mexico, for the installation and operation
of a telecommunications network in Mexico. The Mexican government has (1)
authority to temporarily seize all assets related to the Concession in the event
of natural disaster, war, significant public disturbance and threats to internal
peace and for other reasons of economic or public order and (2) the statutory
right to expropriate the Concession and claim all related assets for public
interest reasons. Although Mexican law provides for compensation in connection
with losses and damages related to temporary seizure or expropriation, we cannot
assure you that the compensation will be adequate or timely.
Under the Concession, ATSICOM must meet the following requirements:
General requirements
--------------------
- Maintain approximately 10 millions dollars in registered and
subscribed capital
- Install and operate a network in Mexico, obtain approval of the
operating plan and any changes in it before implementation
- Continuously develop and conduct training programs for its staff
- Assign an individual responsible for the technical functions to
operate the concession
Concession services requirements
--------------------------------
- Provide continuous and efficient services at all times to its
customers
- Establish a complaint center and correction facilities center and
report to the Mexican Government on a monthly basis the complaints
received and the actions taken to resolve the problems
Tariff Requirements
-------------------
- Invoice its customer's at tariffs rates that have been approved by the
Mexican government
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Verification and Information requirements
-----------------------------------------
- Provide audited financial statements on a yearly basis that includes a
detailed description of the fixed assets utilized in the network and
accounting reporting by region and location of where the services are
being provided
- Provide quarterly reports and updates on the expansion of the network
in Mexico and a description of the training programs and research and
development programs
- Provide statistic reports of traffic, switching capacity and other
parameters in the network
Guarantee requirements
----------------------
- Maintain a bond/ insurance policy for approximately $500,000 dollars
payable in the event the Mexican government revokes the Concession
On May 23, 2003, the Company sold 51% of ATSICOM to Telemarketing. We
cannot assure you that we and our partner, Telemarketing, will be able to obtain
financing to finish the Mexican network; if we or our partners obtain financing
it will be in a timely manner or on favorable terms; or if we or our partners
will be able to comply with the Mexican concession's conditions. If our
partners or we fail to comply with the terms of the concession, the Mexican
government may terminate it without compensation to our partners or us. A
termination would prevent us from engaging in our proposed business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to several market risks. Specifically, we face commodity
price risks, equity price risks and foreign currency exchange risk.
Commodity Price Risk
--------------------
Certain of our businesses, namely carrier services, operate in an extremely
price sensitive and volatile environment. While we have been able to withstand
these pricing volatilities, certain of our competitors are much larger and
better positioned. Our ability to continue to operate in this environment may be
dependent on our ability to further reduce our costs of transporting these
minutes.
Equity Price Risks
------------------
Until such time as we are able to consistently produce earnings from
operations, we will be dependent on our ability to continue to access debt and
equity sources of capital. While recent history has shown us capable of raising
equity sources of capital; future equity financings and the terms of those
financings will be largely dependent on our stock price, our operations and the
future dilution to our shareholders.
Foreign Currency Exchange Risk
------------------------------
Most of our services are billed and collected in U.S. Dollars. We faced
foreign exchange risks in connection with retail services from the Mexican
communication centers and payphones and the transacting of business in pesos as
opposed to U.S. Dollars. Historically, we have been able to minimize foreign
currency exchange risk by converting from pesos to U.S. Dollars quickly and by
maintaining minimal cash balances denominated in pesos. We anticipate that in
the future this risk will be minimized, since we no longer own and operate the
communication centers.
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We record foreign currency translation gains/losses due to the volatility
of the peso exchange rate as compared to the U.S. Dollar over time. We
anticipate we will continue to experience translation gains/losses in our assets
and liabilities, specifically in fixed assets which are accounted for at
historical pesos amounts on the books of our Mexican subsidiaries but converted
to U.S. Dollars for consolidation purposes at current exchange rates.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Principal
Financial Officer, the Company has evaluated the effectiveness of the design and
operation of its disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14(c) as of the date of this report. Based on that evaluation, the
Chief Executive Officer and Principal Financial Officer have concluded that
these disclosure controls and procedures are effective. There were no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to the date of their
evaluation. Potential investors should be aware that the design of any system of
controls and procedures is based in part upon certain assumptions about the
likelihood of future events. There can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions,
regardless of how remote.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER
------
10.1 Interconnection Agreement TELMEX and ATSICOM (Exhibit 10.26 to Annual
Report on Form 10-K for the year ended July 31, 2003 filed November 12,
2003)
10.2 Bestel Fiber Lease (Exhibit 10.5 to Amended Annual Report on form 10-K for
the year ended July 31, 1999 filed April 14, 2000)
10.3 Carrier Service Agreement Dialmex and ATSI (Exhibit 10.27 to Annual Report
on Form 10-K for the year ended July 31, 2003 filed November 12, 2003)
10.4 Stock Purchase Agreement with Telemarketing (Sale of ATSICOM) (Exhibit 10.1
to Form 8-K filed June 16, 2003)
31.1 Certification of our Chief Executive Officer, under Section 302 of the
Sarbanes-Oxley Act of 2002. *
31.2 Certification of our Corporate Controller, under Section 302 of the
Sarbanes-Oxley Act of 2002. *
32.1 Certification of our Chief Executive Officer, under Section 906 of the
Sarbanes-Oxley Act of 2002. *
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32.2 Certification of our Corporate Controller, under Section 906 of the
Sarbanes-Oxley Act of 2002. *
* Filed herewith
(b) The following Current Reports on Form 8-K were filed during the first
quarter of fiscal 2003:
On October 29, 2002 we announced that a member of our Board of Directors
had resigned under Item 6 of Current Report on Form 8-K.
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.
ATSI COMMUNICATIONS, INC.
(Registrant)
Date: December 31, 2003 By: /s/Arthur L. Smith
----------------- ------------------
Name: Arthur L. Smith
Title: Chief Executive Officer
Date: December 31, 2003 By: /s/Antonio Estrada
----------------- ------------------
Name: Antonio Estrada
Title: Corporate Controller
(Principal Accounting and
Financial Officer)
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