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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 January 31, 2003
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) 614-2740
(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
--- ---
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THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK AT DECEMBER
31, 2003 WAS 103,638,690
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ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-QA
FOR THE QUARTER ENDED JANUARY 31, 2003
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of July 31, 2002 and January 31, 2003 . . . . . . . . . . . 3
Consolidated Statements of Operations for the Three and Six Months Ended January 31, 2002
and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended
January 31, 2002 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the Six Months Ended January 31, 2002
and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . .25
Item 4. Controls and procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share information)
July 31, January 31,
2002 2003
---------- -------------
(unaudited)
ASSETS
------
CURRENT ASSETS:
Cash $ 27 $ 466
Accounts receivable, net of allowance of $198 and $53, respectively 1,082 319
Inventory 59 28
Prepaid & Other current assets 634 465
---------- -------------
Total current assets 1,802 1,278
---------- -------------
PROPERTY AND EQUIPMENT 19,901 19,144
Less - Accumulated depreciation and amortization (14,785) (15,171)
---------- -------------
Net property and equipment 5,116 3,973
---------- -------------
OTHER ASSETS, net
Goodwill, net 1,393 1,300
Concession License, net 2,000 1,972
Other 146 112
---------- -------------
Total assets $ 10,457 $ 8,636
========== =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable 7,523 10,705
Accrued liabilities 2,657 3,582
Note payable 1,472 1,448
Current portion of obligations under capital leases 3,207 2,865
Deferred revenue 111 3
---------- -------------
Total current liabilities 14,971 18,603
---------- -------------
LONG-TERM LIABILITIES:
Obligations under capital leases, less current portion 67 -
Advance Payables 275 275
Other 75 40
---------- -------------
Total long-term liabilities 417 315
---------- -------------
COMMITMENTS AND CONTINGENCIES - -
REDEEMABLE PREFERRED STOCK:
Series D Cumulative Preferred Stock, 3000 shares authorized, 742 shares issued and
outstanding. 765 787
Series E Cumulative Preferred Stock, 10,000 shares authorized, 1,455 shares issued and
outstanding. 1,415 1,175
STOCKHOLDERS' 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 authorized, 8,510 shares
issued and outstanding. - -
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
103,638,690 issued and outstanding, respectively. 95 104
Additional paid in capital 59,891 60,267
Accumulated deficit (67,493) (73,813)
Warrants Outstanding 1,031 1,031
Other Comprehensive Loss (636) 166
---------- -------------
Total stockholders' deficit (7,112) (12,245)
---------- -------------
Total liabilities and stockholders' deficit $ 10,457 $ 8,636
========== =============
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 January 31, Six months ended January 31,
------------------------------------ ------------------------------------
2002 2003 2002 2003
----------------- ----------------- ----------------- -----------------
OPERATING REVENUES:
Services
Carrier services $ 11,051 $ 1,096 $ 20,027 $ 6,506
Network services 612 122 1,276 332
Retail Services 1,932 1,347 3,657 2,991
----------------- ----------------- ----------------- -----------------
Total operating revenues 13,595 2,565 24,960 9,829
OPERATING EXPENSES:
Cost of services 11,191 1,798 20,289 7,783
Selling, general and administrative 3,083 3,001 5,925 5,704
Impairment expense - - - 88
Bad debt expense 65 - 65 13
Depreciation and Amortization 1,021 526 2,005 1,321
----------------- ----------------- ----------------- -----------------
Total operating expenses 15,360 5,325 28,284 14,909
----------------- ----------------- ----------------- -----------------
OPERATING LOSS (1,765) (2,760) (3,324) (5,080)
OTHER INCOME (EXPENSE):
Other income (expense), net (20) (360) (53) (705)
Interest expense (574) (248) (1,083) (486)
----------------- ----------------- ----------------- -----------------
Total other income (expense) (594) (608) (1,136) (1,191)
LOSS FROM CONTINUING
OPERATIONS BEFORE INCOME TAX (2,359) (3,368) (4,460) (6,271)
INCOME TAX EXPENSE (28) (25) (55) (50)
----------------- ----------------- ----------------- -----------------
NET LOSS FROM CONTINUING
OPERATIONS (2,387) (3,393) (4,515) (6,321)
NET INCOME FROM DISCONTINUED
OPERATIONS 24 - 24 -
----------------- ----------------- ----------------- -----------------
NET LOSS (2,363) (3,393) (4,491) (6,321)
LESS: PREFERRED DIVIDENDS (132) (91) (277) (187)
----------------- ----------------- ----------------- -----------------
NET LOSS TO COMMON STOCKHOLDERS ($2,496) ($3,484) ($4,768) ($6,508)
================= ================= ================= =================
BASIC AND DILUTED LOSS PER SHARE ($0.03) ($0.03) ($0.06) ($0.07)
================= ================= ================= =================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 83,127 103,172 80,607 99,926
================= ================= ================= =================
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)
For the three months For the six months
ended January 31, ended January 31,
------------------------------ ------------------------------
2002 2003 2002 2003
-------------- -------------- -------------- --------------
Net loss to common stockholders
Other comprehensive income (loss), net of tax: ($2,496) ($3,484) ($4,769) ($6,508)
Foreign currency translation adjustment 1 579 (44) 802
-------------- -------------- -------------- --------------
Comprehensive loss to common stockholders ($2,495) ($2,905) ($4,813) ($5,704)
============== ============== ============== ==============
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)
Six months ended January 31,
----------------------------------
2002 2003
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($4,491) ($6,321)
Adjustments to reconcile net loss
operating activities-
Impairment loss - 88
Depreciation and amortization 2,289 1,321
Loss on disposition of property & equipment 33
Deferred compensation 12 -
Minority Interest 17 -
Foreign currency loss - 658
Provision for losses on accounts receivable 114 13
Changes in operating assets and liabilities:
Decrease in accounts receivable 484 734
Decrease in prepaid expenses and other 117 463
Increase in accounts payable 1,912 2,794
Increase in accrued liabilities 553 1,222
Increase (decrease) in deferred revenue 11 (108)
---------------- ----------------
Net cash provided by operating activities 1,018 897
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment (624) (289)
---------------- ----------------
Net cash used in investing activities (624) (289)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 11 25
Payments on debt (65) -
Capital Lease payments (376) (87)
Payment of expenses related to the issuance of preferred stock (14) (12)
Proceeds from issuance of common stock, net
of issuance costs 180 (95)
---------------- ----------------
Net cash used in financing activities (264) (169)
---------------- ----------------
NET INCREASE IN CASH 131 439
CASH AND CASH EQUIVALENTS, beginning of period 103 27
---------------- ----------------
TOTAL CASH AND CASH EQUIVALENTS 234 466
---------------- ----------------
CASH AND CASH EQUIVALENTS- Allocated to discontinued operations (122) -
CASH AND CASH EQUIVALENTS, end of period $ 111 $ 466
================ ================
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 U.S. 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 January 31, 2003, the results of their
operations for the three and six months ended January 31, 2002 and 2003,
comprehensive loss for the three and six months ended January 31, 2002 and 2003,
and cash flows for the six months ended January 31, 2002 and 2003. 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 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.
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
rate per minute varies based on the destination 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 8,383,000
shares of common stock, were outstanding as of January 31, 2003 and 2002,
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, January 31,
2002 2003
--------- ------------
Notes payable to taxing entity, see terms below. $ 480 $ 456
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 356 356
--------- ------------
Total current notes payable $ 1,472 $ 1,448
========= ============
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 collateralized 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 six months 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
9
collateralized by the Nortel DMS 300/250 International Gateway Switch in our
Dallas location and other 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 of the related liability.
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, a working
capital deficit, 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 January 31, 2003, the Company has
incurred cumulative net losses of approximately $73.8 million. Further, the
Company has a working capital deficit of approximately $17.3 million at January
31, 2003. 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 six months ended January 31, 2002
reflects the elimination of e-commerce revenues and the expenses of GlobalSCAPE
as follows: (in thousands).
FOR THE SIX MONTHS ENDED JANUARY 31,2002
E-commerce revenues $2,474
Costs and expenses $2,439
Net income before taxes & minority interest $35
Net income before minority interest $32
Net income $24
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 January 2003 and 2002, U.S. Telco generated net
losses as a percentage of total consolidated losses of approximately 61% and 37
%, respectively. Additionally, U.S. Telco's total assets for the same period as
a percentage of total consolidated assets were 79% and 59%, respectively. Mexico
Telco net losses for the quarter ended January 2003 and 2002 as a percentage of
total consolidated losses were 39% and 63%, respectively. And Mexico Telco total
assets as a percentage of total consolidated assets were 21% and 41%,
respectively.
IN THOUSANDS
For the three months ended For the six months ended
January 31, January 31, January 31, January 31,
2002 2003 2002 2003
U.S. TELCO
-------------------------------------------------------------------------------------------------
External revenues $ 11,502 $ 1,149 $ 20,980 $ 6,699
Intercompany revenues $ 153 $ 69 $ 299 $ 331
------------- ------------- ------------- -------------
Total revenues $ 11,655 $ 1,218 $ 21,280 $ 7,030
============= ============= ============= =============
Operating loss ($947) ($2,408) ($1,653) ($3,562)
Net loss to common shareholders ($975) ($2,633) ($1,764) ($3,994)
Total assets $ 16,731 $ 9,198 $ 16,731 $ 9,198
11
MEXICO TELCO
-------------------------------------------------------------------------------------------------
External revenues $ 2,093 $ 1,416 $ 3,980 $ 3,130
Intercompany revenues $ 484 $ 469 $ 940 $ 954
------------- ------------- ------------- -------------
Total revenues $ 2,577 $ 1,885 $ 4,920 $ 4,084
============= ============= ============= =============
Operating loss ($818) ($221) ($1,671) ($1,315)
Net loss to common shareholders ($1,355) ($629) ($2,699) ($2,124)
Total assets $ 11,873 $ 2,303 $ 11,873 $ 2,303
OTHER
-------------------------------------------------------------------------------------------------
External revenues - - - -
Intercompany revenues ($637) ($538) ($1,239) ($1,285)
------------- ------------- ------------- -------------
Total revenues ($637) ($538) ($1,239) ($1,285)
============= ============= ============= =============
Operating loss - ($131) - ($203)
Net loss to common shareholders ($190) ($222) ($329) ($390)
Total assets ($8,800) ($2,865) ($8,800) ($2,865)
TOTAL
-------------------------------------------------------------------------------------------------
External revenues $ 13,595 $ 2,565 $ 24,960 $ 9,829
Intercompany revenues - - - -
------------- ------------- ------------- -------------
Total revenues $ 13,595 $ 2,565 $ 24,960 $ 9,829
============= ============= ============= =============
Depreciation and Amortization ($1,021) ($526) ($2,005) ($1,321)
Operating loss ($1,765) ($2,760) ($3,324) ($5,080)
Net loss (Excluding discontinued
operations) ($2,387) ($3,393) ($4,515) ($6,321)
Net loss to common shareholders
(Excluding discontinued operations) ($2,520) ($3,484) ($4,792) ($6,508)
Total assets (Excluding discontinued
operations) $ 19,804 $ 8,636 $ 19,804 $ 8,636
8. SUBSEQUENT EVENTS
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
12
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. ("ATISCOM"). 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.
- 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 supersedes 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
13
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 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.
14
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 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 and six months ended January 31,
2002 and 2003. 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 the management 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
15
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
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 this period 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.
16
On May 22, 2003 we entered into a Share Purchase Agreement with
Telemarketing whereby we sold 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 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
17
operating loss of $3,392,478, for the quarter ended January 31, 2003 and
$6,321,250 for the six months ended January 31, 2003. Additionally we had a
working capital deficit of $17,325,653, at January 31, 2003.
RESULTS OF OPERATIONS
The following table sets forth certain items included in the Company's
results of operations in dollar amounts and as a percentage of total revenues
for the three and six-month periods ended January 31, 2002 and 2003.
Three months ended January 31, Six months Ended January 31,
--------------------------------- --------------------------------
2002 2003 2002 2003
---- ---- ---- ----
(Unaudited)
-----------
$ % $ % $ % $ %
--------- ---- --------- ----- --------- ---- --------- ----
Operating revenues
------------------
Services
Carrier services $ 11,051 81% $ 1,096 43% $ 20,027 80% $ 6,506 66%
Network services 612 5% 122 5% 1,276 5% 332 3%
Retail services 1,932 14% 1,347 52% 3,657 15% 2,991 31%
--------- ---- --------- ----- --------- ---- --------- ----
Total operating revenues 13,595 100% 2,565 100% 24,960 100% 9,829 100%
Cost of services 11,191 82% 1,798 70% 20,289 81% 7,783 79%
--------- ---- --------- ----- --------- ---- --------- ----
Gross Margin 2,404 18% 767 30% 4,671 19% 2,046 21%
Selling, general and administrative
Expense 3,083 23% 3,001 117% 5,925 24% 5,704 58%
Impairment loss - 0% 0 0% - 0% 88 1%
Bad debt expense 65 0% 0 0% 65 0% 13 0%
Depreciation and amortization 1,021 8% 526 20% 2,005 8% 1,321 13%
--------- ---- --------- ----- --------- ---- --------- ----
Operating loss (1,765) -13% (2,760) -108% (3,323) -13% 5,080) -52%
Other income (expense), net (594) -4% (608) -24% (1,136) -5% (1,191) -12%
--------- ---- --------- ----- --------- ---- --------- ----
Net loss from continuing operations before
income tax expense (2,359) -17% (3,368) -131% (4,459) -18% (6,271) -64%
Income tax expense (28) 0% (25) -1% (55) 0% (50) -1%
--------- ---- --------- ----- --------- ---- --------- ----
Net loss from continuing operations (2,387) -18% (3,393) -132% (4,515) -18% (6,321) -64%
Income from discontinued
Operations 24 0% - 0% 24 0% - 0%
Net loss (2,363) -17% (3,393) -132% (4,491) -18% (6,321) -64%
Less: preferred stock dividends (132) -1% (91) -4% (277) -1% (187) -2%
--------- ---- --------- ----- --------- ---- --------- ----
Net loss to common shareholders ($2,496) -18% ($3,484) -136% ($4,768) -19% ($6,508) -66%
========= ==== ========= ===== ========= ==== ========= ====
THREE MONTHS ENDED JANUARY 31, 2003 COMPARED TO THREE MONTHS ENDED JANUARY 31,
2002
Operating Revenues. Consolidated operating revenues decreased 81% between
periods from $13.6 million for the quarter ended January 31, 2002 to $2.6
million for the quarter ended January 31, 2003. Revenues from the U.S. Telco
segment decreased 90% from $11,655,000 for the second quarter of 2002 to
$1,218,000 for the second quarter of 2003 primarily as a result of the idling of
the Company's network during the second quarter. Revenues from the Mexico Telco
segment decreased 27% from $2,577,000 for the second quarter of 2002 to
$1,885,000 for the second quarter of 2003 primarily as a result of the decrease
in network services customers and reductions in the number of retail
communication centers operated by the Company.
18
Carrier services revenues decreased approximately $10.0 million, or 90%
from the quarter ended January 2002 to the quarter ended January 2003. As the
telecom sector has continued to suffer financially and operationally more and
more of our carriers require substantial deposits and/or prepayments. During the
quarter ended January 31, 2003 the Company was not able to meet these cash
requirements by our vendors and restricted the amount of network services that
it could provide. In December 2002 the Company idled its network and was not
able to restart it during the quarter.
Network services revenues continued to decline from the previous period due
to a continued loss of customers. The decline from the previous year's quarter
was approximately 80% or $490,000. Due to our current financial condition, we do
not presently 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 provide customer service, technical
support and manage the collections process with respect to one of their network
services customers. This management agreement was initiated on July 1, 2003 and
we will generate approximately $6,500 per month in management fees during fiscal
2004.
Retail services revenues decreased approximately $585,000, or 30% from the
quarter ended January 2002 to the quarter ended January 2003. During the quarter
we continued to close down those communication centers that were no longer cost
efficient. The total number of communication centers decreased from 136 during
the quarter ended January 31, 2002 to 107 during the quarter ended January 31,
2003. 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 we do not expect any revenue to be generated from this source.
Cost of Services. The consolidated cost of services decreased by $9.4
million, or 84% from the quarter ended January 2002 to the quarter ended January
2003. Cost of Service for the U.S. Telco segment decreased by 89% from
approximately $10,239,000 for the quarter ended January 31, 2002 to
approximately $1,121,000 for the quarter ended January 31, 2003. The decrease
in cost of services in the U.S. Telco segment is a direct result of the idling
of the Company's network and cessation of providing carrier services during the
second quarter. Cost of Service for the Mexico Telco segment decreased by 29%
from approximately $952,000 for the quarter ended January 31, 2002 to $677,000
for the quarter ended January 31, 2003. The decrease in the cost of the Mexico
Telco segment is the result of closure of approximately 5 communications centers
during the second quarter. Cost of service as a percent of revenue declined from
82% for the quarter ended January 31, 2002 to 70% for the quarter ended January
31, 2003 primarily because of the reduction and ultimate termination of carrier
services, which have a higher cost of sales factor.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
decreased approximately $82,000, or 3% between periods. SG&A allocated to the
U.S. Telco segment increased by 6% from approximately $1,918,000 for the quarter
ended January 31, 2002 to approximately $2,040,000 for the quarter ended January
31, 2003. The primary reason for the increase between quarters can be
attributed to the recognition of approximately $1.0 million in professional fees
during the quarter ended January 31, 2003 related to the 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 Section 10(b) under the Securities Exchange Act of 1934 and Rule
10b-5. Additionally, the SG&A allocated to the Mexico Telco segment decreased by
17% from approximately $1,165,000 for the quarter ended January 31, 2002 to
approximately $961,000 for the quarter ended
19
January 31, 2003.
Depreciation and Amortization. Depreciation and amortization decreased by
approximately 49% or $495,000 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 second quarter of fiscal 2003 compared to a
charge of approximately $138,000 relating to the amortization of goodwill during
the quarter ended January 31, 2002. Additionally, much of our equipment had
been fully depreciated. Depreciation and amortization allocated to the U.S.
Telco segment declined by 14% from approximately $540,000 for the quarter ended
January 31, 2002 to approximately $465,000 for the quarter ended January 31,
2003. Depreciation and amortization allocated to the Mexico Telco segment
declined by 87% from approximately $480,000 for the quarter ended January 31,
2002 to approximately $61,000 for the quarter ended January 31, 2003.
Operating Loss. The Company's operating loss increased approximately
$995,000 or 56% from the quarter ended January 2002 to the quarter ended January
2003. relating to litigation filed by the Company during the second quarter.
Operating loss for the U.S. Telco segment increased by 154% from $947,000 for
the quarter ended January 31, 2002 to $2,408,000 for the quarter ended January
31, 2003 as a result of the professional fees incurred in litigation filed by
the Company during the second quarter, reduced network services revenue and
narrower gross profit margins. Operating loss for the Mexico Telco segment
decreased by 73% from $818,000 for the quarter ended January 31, 2002 to
$221,000 for the quarter ended January 31, 2003 as a result of reduced network
services revenue, narrower gross profit margins and the closures of retail
communications centers.
Other Income (expense). Other expense increased approximately $14,000
between quarters from $594,000 to $608,000.
Preferred Stock Dividends. During the quarter ended January 2003, we
recorded approximately $91,000 of non-cash dividends related to our cumulative
convertible preferred stock. This compares favorably to the approximately
$132,000 of non-cash dividends recognized during the quarter ended January 2002
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
January 2003 increased to $3.5 million from $2.5 million for the quarter ended
January 2002. The increase in net loss was due primarily to increase in
operating loss during the second quarter.
SIX MONTHS ENDED JANUARY 31, 2003 COMPARED TO SIX MONTHS ENDED JANUARY 31, 2002
Operating Revenues. Consolidated operating revenues decreased 61% between
periods from $24.9 million for the six-months ended January 31, 2002 to $9.8
million for the six-months ended January 31, 2003. Revenues from the U.S. Telco
segment decreased 67% from $21,280,000 for the six months ended January 31, 2002
to $7,030,000 for the six months ended January 31, 2003 primarily as a result of
the idling of the Company's network in December 2002. Revenues from the Mexico
Telco segment decreased 17% from $4,920,000 for the six months ended January 31,
2002 to $4,083,000 for the six months ended January 31, 2003 primarily as a
result of the decrease in network services customers and reductions in the
number of retail communication centers operated by the Company.
Carrier services revenues decreased approximately $13.5 million, or 68%
from the six months ended January 31, 2002 to the six months ended January 31,
2003 and reflect the idling of the Company's carrier network in December 2002.
20
Network services revenues decreased approximately 74% or $944,000 from the
six months ended January 31, 2002 to the six months ended January 31, 2003. The
decrease can be attributed to the continued loss of our customer base during the
first and second quarters of the current fiscal year.
Retail services revenues decreased approximately $666,000, or 18%, from the
six months ended January 31, 2002 to the six months ended January 31, 2003.
During the fist half of fiscal year 2003, we continued to close down those
communication centers that were no longer cost efficient.
Cost of Services. The consolidated cost of services decreased by $12.5
million, or 62% from the six months ended January 31, 2002 to the six months
ended January 31, 2003. Cost of Service for the U.S. Telco segment decreased by
67% from approximately $18,476,000 for the six months ended January 31, 2002 to
approximately $6,125,000 for the six months ended January 31, 2003. The
decrease in cost of services in the U.S. Telco segment is a direct result of the
idling of the Company's network and termination of carrier services during the
second quarter. Cost of Service for the Mexico Telco segment decreased by 9%
from approximately $1,813,000 for the six months ended January 31, 2002 to
approximately $1,659,000 for the six months ended January 31, 2003. The decrease
in the cost of services in the Mexico Telco segment is the result of the closure
of approximately 10 communications centers during the first half of fiscal 2003.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
decreased approximately $221,000, or 4% between periods. SG&A allocated to the
U.S. Telco segment decreased by 5% from approximately $3,686,000 for the six
months ended January 31, 2002 to approximately $3,510,000 for the six months
ended January 31, 2003. The decline is primarily the result of the reduction in
revenues during the first quarter of fiscal 2003 and the idling the Company's
carrier network and terminating the U.S. Telco employees during the second
quarter of fiscal 2003. These savings are offset by the recognition of
approximately $1.0 million in professional fees related to the 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 Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5. SG&A allocated to the Mexico Telco segment decreased by 2% from
approximately $2,239,000 for the six months ended January 31, 2002 to
approximately $2,194,000 for the six months ended January 31, 2003. The decrease
in the Mexico Telco SG&A can be attributed to the closure of approximately 10
communication centers during the six-month period ended January 31, 2003.
Impairment loss. During the first quarter of fiscal 2003, we recorded
approximately $89,000 related the impairment of goodwill associated with an
acquisition made by ATSI Mexico during fiscal 2002. All of such impairment loss
related to Mexico Telco. No impairment loss was recorded during the six months
ended January 31, 2002.
Depreciation and Amortization. Depreciation and amortization decreased by
approximately 34% or $684,000 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 half of fiscal 2003. Additionally,
much of our equipment had been fully depreciated. Depreciation and amortization
allocated to the U.S. Telco segment declined by 13% from approximately
$1,054,000 for the six months ended January 31, 2002 to approximately $919,000
for the six months ended January 31, 2003. Depreciation and amortization
allocated to the Mexico Telco segment declined by 58% from approximately
$952,000 for the six months ended January 31, 2002 to approximately $402,000 for
the six months ended January 31, 2003. The decrease in depreciation between
periods in the Mexico Telco segment can be attributed to the
21
depreciation of most of the assets during the prior year, as a result during the
six-month period ended January 31. 2003 the depreciation was less than the same
period for fiscal 2002.
Operating Loss. The Company's operating loss increased approximately $1.76
million or 53% from the six months ended January 31, 2002 to the six months
ended January 31, 2003. The increase is primarily due to the reduced levels of
revenue during the first half of fiscal 2003 and the recognition of $1.0 million
in professional fees relating to litigation filed by the Company. Operating
loss for the U.S. Telco segment increased by 115% from $1,653,000 for the six
months ended January 31, 2002 to $3,562,000 for the six months ended January 31,
2003 as a result of reduced operating levels during the first half of fiscal
2003 and litigation expenses incurred during the second quarter of 2003.
Operating loss for the Mexico Telco segment decreased by 21% from $1,671,000 for
the six months ended January 31, 2002 to $1,315,000 for the six months ended
January 31, 2003.
Other Income (expense). Other expense increased approximately $65,000
between periods from $1.13 million to $1.19 million.
Preferred Stock Dividends. During the six months ended January 31, 2003,
we recorded approximately $187,000 of non-cash dividends related to our
cumulative convertible preferred stock. This compares favorably to the
approximately $277,000 of non-cash dividends recognized during the six months
ended January 31, 2002 and is the result of redemptions of preferred stock in
the interim.
Net loss to Common Stockholders. The net loss for the six months ended
January 31, 2003 increased to $6.5 million from $4.8 million for the six months
ended January 31, 2002. The increase in net loss was due primarily to the
increase in operating loss.
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.
During the six months ended January 31, 2003, we generated positive cash
from operations of approximately $864,000. Cash from operations in the
Company's U.S. Telco segment for the six months ended January 31, 2003 was
approximately $663,000 and cash from operations in the Company's Mexico Telco
segment for the six months ended January 31, 2003 was approximately $201,000.
The Company generated this positive cash flow from operations primarily as a
result of an increase in accrued liabilities and accounts payables of
approximately $1,222,000 and $2,794,000, respectively. Additionally, we
generated positive cash flow form operations as a result of a decrease in
accounts receivable of approximately $734,000.
Cash used in/provided by investing activities: During the six months ended
January 31, 2003, the Company acquired approximately $289,000 in equipment which
was not financed by capital lease or financing arrangements.
Cash used in/provided by financing activities: Additional cash outflows
included the payment of approximately $87,000 towards our capital lease
obligations.
22
Overall, the Company's net operating, investing and financing activities
during the six months ended January 31, 2003 provided approximately $439,000 in
cash. The Company's working capital deficit at January 31, 2003 was
approximately $17.3 million. This represents an increase of approximately $4.1
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. 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.
23
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
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
24
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. QUALITATIVE AND QUANTITATIVE 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.
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
25
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 1. LEGAL PROCEEDINGS
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 Section
10(b) of the Securities Exchange Act of 1934 (the "Act") and Rule 10b-5 under
the Act. As of the date of this filing, we do not know the likelihood of a
favorable outcome or the range of potential recoveries. In the event of an
unfavorable outcome, we will be required to issue a significant number of shares
of our common stock pursuant to the terms of the financing arrangements.
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. *
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 second
quarter of fiscal 2003.
26
On November 15, 2002 we announced that our Board of Directors had approved
the dismissal of Ernst & Young LLP and the hiring of Tanner + Co. pursuant
to Item 4 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)
27