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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 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) 614-7240
(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. X Yes 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
--- ---
There were 103,638,690 shares of Common Stock outstanding at December 15,
2003.
2
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 2003
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of July 31, 2003 and
October 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Consolidated Statements of Operations for the Three
Months Ended October 31, 2002 and 2003 . . . . . . . . . . . . . . . . .5
Consolidated Statements of Comprehensive Loss for the
Three Months Ended October 31, 2002 and 2003 . . . . . . . . . . . . . .6
Consolidated Statements of Cash Flows for the Three
Months Ended October 31, 2002 and 2003 . . . . . . . . . . . . . . . . .7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . .8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . .9
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . 15
Item 4. Control and procedures. . . . . . . . . . . . . . . . . . . . . . . 17
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . 18
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share information)
October 31, July 31,
2003 2003
------------- ----------
ASSETS (unaudited)
------
CURRENT ASSETS:
Cash and cash equivalents $ 120 $ 140
Accounts receivable 3 7
Note Receivable-current portion 125 187
Prepaid & Other current assets 12 6
------------- ----------
Total current assets 260 340
------------- ----------
OTHER ASSETS, net
Note Receivable 100 100
Investment in joint venture 692 663
------------- ----------
Total assets $ 1,052 $ 1,103
============= ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Pre-petition liabilities of bankrupt subsidiaries, net of assets $ 12,355 $ 12,350
Accounts payable 366 356
Accrued liabilities 2,654 2,559
Notes payable 495 445
Convertible debentures 275 275
Series D Cumulative Preferred Stock, 3,000 shares authorized, 742 shares issued and
outstanding. 1,104 1,093
Series E Cumulative Preferred Stock, 10,000 shares authorized and 1,170 shares issued and
Outstanding 1,226 1,209
Liabilities from discontinued operations, net of assets 1,152 1,152
------------- ----------
Total current liabilities 19,627 19,439
------------- ----------
LONG-TERM LIABILITIES:
Other 57 9
------------- ----------
Total long-term liabilities 57 9
------------- ----------
COMMITMENTS AND CONTINGENCIES - -
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, 7,260 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 and 103,638,690
issued and outstanding 104 104
Additional paid in capital 61,044 61,124
Accumulated deficit (80,282) (80,075)
Other Comprehensive (Loss) Income 502 502
------------- ----------
Total stockholders' deficit (18,632) (18,345)
------------- ----------
Total liabilities and stockholders' deficit $ 1,052 $ 1,103
============= ==========
4
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
Three months ended October 31,
------------------------------
2003 2002
-------------- ------------
OPERATING REVENUES:
Services
Carrier services $ 33 $ 5,423
Network services 42 197
-------------- ------------
Total operating revenues 75 5,620
OPERATING EXPENSES:
Cost of services (exclusive of depreciation and
amortization, shown below) 50 5,004
Selling, general and administration 196 1,269
Bad debt expense 4 13
Depreciation and Amortization - 406
-------------- ------------
Total operating expenses 250 6,692
-------------- ------------
OPERATING LOSS (175) (1,072)
OTHER INCOME (EXPENSE):
Other income (expense), net 1 (13)
Loss on an unconsolidated affiliate (7) -
Interest expense (26) (193)
-------------- ------------
Total other income (expense) (32) (206)
LOSS FROM CONTINUING
OPERATIONS (207) (1,278)
NET LOSS FROM DISCONTINUED
OPERATIONS - (1,651)
NET LOSS (207) (2,929)
============== ============
LESS: PREFERRED DIVIDENDS (94) (96)
-------------- ------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS ($301) ($3,025)
============== ============
BASIC AND DILUTED LOSS PER SHARE ($0.00) ($0.03)
============== ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 103,639,000 96,679,000
============== ============
5
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(unaudited)
Three months ended October 31,
------------------------------
2003 2002
------------- --------------
Net loss to common stockholders
Other comprehensive loss, net of tax: ($301) ($3,025)
Foreign currency translation adjustment - 224
------------- --------------
Comprehensive loss to common stockholders ($301) ($2,801)
============= ==============
6
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
Three months ended October 31,
------------------------------
2003 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS ($207) ($2,929)
Adjustments to reconcile net income to net cash used in
operating activities-
Impairment loss - 89
Depreciation and amortization - 795
Foreign currency loss - 326
Loss on an unconsolidated affiliate 7 -
Issuance of Warrants for services 14 -
Provision for losses on accounts receivable 4 13
Changes in operating assets and liabilities:
Decrease in accounts receivable 5 453
(Increase) in prepaid expenses and other (6) (2)
Increase in accounts payable 58 1,075
Increase in accrued liabilities 29 741
(Decrease) in deferred revenue - (72)
------------- -------------
Net cash used in / provided by operating activities (96) 489
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment - (25)
Cash proceeds sale of ATSICOM 62 -
Investment in ATSICOM (36) -
------------- -------------
Net cash provided by / used in investing activities 26 (25)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 50 -
Capital lease Payments - (87)
Payment of expenses related to the issuance of preferred stock - (6)
Proceeds from issuance of common stock, net
of issuance costs - 5
------------- -------------
Net cash provided by / used in financing activities 50 (88)
------------- -------------
NET INCREASE (DECREASE) IN CASH (20) 376
CASH AND CASH EQUIVALENTS, beginning of period 140 27
CASH AND CASH EQUIVALENTS- Allocated to discontinued operations - (94)
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 120 $ 309
============= =============
7
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of ATSI
Communications, Inc. have been prepared in accordance with accounting principles
generally accepted in the United States of America and the rules of the
Securities and Exchange Commission ("SEC"), and should be read in conjunction
with the audited financial statements and notes thereto contained in ATSI
Communications Inc. filed with the SEC on Form 10-K. In the opinion of
management, these interim financial statements contain all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
financial position and the results of operations for the interim periods
presented have been reflected herein. The results of operations for interim
periods are not necessarily indicative of the results to be expected for the
full year. Notes to the financial statements, which would substantially
duplicate the disclosure contained in the audited financial statements for the
most recent fiscal year ended July 31, 2003, as reported in the Form 10-K, have
been omitted.
2. PRE-PETITION LIABILITIES (NET OF ASSETS) OF THE BANKRUPT SUBSIDIARIES
ATSI (Texas), Inc. and TeleSpan, Inc. 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. The two
bankrupt subsidiaries were our primary operating companies and they have ceased
operations. These bankruptcies did not include ATSI Communications, Inc., the
reporting entity (the SEC registrant). On July 2, 2003, the U.S. Bankruptcy
Court handling the Chapter 7 cases for ATSI Texas and TeleSpan, Inc. approved
the sale of two of their subsidiaries, ATSI-Mexico and SINFRA, to Latingroup
Ventures, L.L.C. (LGV), a non-related party. Under the purchase agreement LGV
acquired all the communication centers and assumed all related liabilities.
Additionally, under the agreement, LGV acquired the Comercializadora License
owned by ATSI-Mexico and the Teleport and Satellite Network License and the
20-year Packet Switching Network license owned by SINFRA. The Chapter 7
Bankruptcy Trustee received all the proceeds from the sale of these entities of
approximately $17,500. The Chapter 7 Bankruptcy Trustee will manage the
designation of these funds. Upon liquidation of all the assets owned by ATSI
Texas and TeleSpan, Inc., the Chapter 7 Trustee will negotiate all claims with
creditors.
The following represents the pre-petition liabilities (net of assets) in the
Chapter 7 case:
ATSI Texas and TeleSpan
Pre petition Liabilities, net of assets
(in thousands)
October 31, 2003 July 31, 2003
--------------------- --------------
CURRENT LIABILITIES:
Accounts payable $ 7,497 $ 7,492
Accrued liabilities 2,015 2,015
Notes payable 636 636
Capital leases 2,207 2,207
--------------------- --------------
Total current liabilities $ 12,355 $ 12,350
--------------------- --------------
8
3. NOTES PAYABLE
On October 14, 2003, we signed a consulting agreement with Recap Marketing
& Consulting, LLP and we also borrowed and entered into an unsecured convertible
promissory note payable in the amount of $50,000. Additionally, on November 25,
2003 we also borrowed $25,000 from Recap Marketing & Consulting, LLP and
entered into an unsecured convertible promissory note payable. These notes are
secured by the conversion of the Company's warrants to common stock and have an
annual interest rate of 12% and maturity dates of April 20, 2004 and May 25,
2004, respectively. Under the consulting agreement we shall pay the Consultant
as a fee for their services warrants to purchase up to 1,500,000 shares of the
Company's common stock at a predetermined price per share, as follows:
Common Exercise
Shares Price
--------- ---------
1,000,000 $ 0.01
250,000 $ 0.25
125,000 $ 0.50
125,000 $ 0.75
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE: This Quarterly Report on Form 10-Q 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 months ended October 31, 2003 and
2002. It should be read in conjunction with our Consolidated Financial
Statements, the Notes thereto and the other financial information included
elsewhere in the annual report on Form 10-K filed with the SEC on November 13,
2003.
GENERAL
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 domestic and international long distance services. The Company
incurs termination charges, charges which 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.
9
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 communicate with 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. The Company
incurs satellite and fiber optic charges. The satellite and fiber optic charges
are incurred as part of the connection links between the customer's different
remote locations and sites to transmit data, voice and Internet services.
We have incurred operating losses and deficiencies in operating cash flows
in each year since our inception in 1994 and expect our losses to continue
through July 31, 2003. Our operating losses were $5,780,000 $8,259,000 and
$4,850,000 for the years ending July 31, 2003, 2002 and 2001, respectively. We
had an operating loss of $175,000, for the quarter ended October 31, 2003 and a
working capital deficit of $19,367,000, at October 31, 2003. Due to such
losses as well as our recurring losses, as well as the negative cash flows
generated from our operations and our substantial working capital deficit, the
auditor's opinion on our financial statements as of July 31, 2003 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, July 31, 2004.
We have experienced difficulty in paying our vendors and lenders on time in
the past, and as a result on December 31, 2002 our carrier network capacity was
idled and all of the US employees were terminated. This means that we were not
able to generate revenues from carrier services during the second half of the
fiscal year ending July 31, 2003. During the quarter ended October 31, 2003 we
signed up four new carrier customers and generated approximately $33,000 in
revenue. However, there can be no assurance that such revenue will continue to
be generated at these levels from these customers.
Additionally, during the quarter ended October 31, 2003 management
continued to pursue different avenues for funding and during the quarter we
entered into a short-term promissory note for $50,000. These funds have allowed
the Company to pay those operating and corporate expenses that were not covered
by our current cash inflows from operations. We will continue to require
additional funding until the cash inflows from operations are sufficient to
cover the monthly operating expenses. However, there can be no assurance that
we will be successful in securing additionally funding over the next twelve
months.
ATSI was founded in 1993. We are an international carrier, serving the
rapidly expanding communications markets in and between Latin America and the
United States. Our mission is to connect the Americas with exceptional
communication services. Our strategy is to become a leading provider of
communication services to carriers and businesses in the U.S./Latin American
corridor through a high quality, 'next generation' VoIP network established
through our partnership with Dialmex.
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, 2002 and 2003.
10
Three months ended October 31,
-------------------------------
2003 2002
-------------- ---------------
$ % $ %
------- ----- --------- ----
Operating revenues
------------------
Services
Carrier services $ 33 44% $ 5,423 96%
Network services 42 56% 197 4%
------- ----- --------- ----
Total operating revenues 75 100% 5,620 100%
Cost of services (exclusive of depreciation and
amortization, shown below) 50 67% 5,004 89%
------- ----- --------- ----
Gross Margin 25 33% 616 11%
Selling, general and
administrative expense 196 261% 1,269 23%
Bad debt expense 4 5% 13 0%
Depreciation and amortization - 0% 406 7%
------- ----- --------- ----
Operating loss (175) (2) (1,072) (0)
Other income (expense), net (32) -43% (206) -4%
------- ----- --------- ----
Net loss from continuing operations (207) -276% (1,278) -23%
Net loss from discontinued operations - 0% (1,651) -29%
Net loss (207) -276% (2,929) -52%
Less: preferred stock dividends (94) -125% (96) -2%
------- ----- --------- ----
Net loss applicable to common shareholders ($301) -401% ($3,025) -54%
======= ===== ========= ====
THREE MONTHS ENDED OCTOBER 31, 2003 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
2002
Operating Revenues. Consolidated operating revenues decreased 99% between
periods from $5.6 million for the quarter ended October 31, 2002 to
approximately $75,000 for the quarter ended October 31, 2003.
Carrier services revenues decreased approximately $5.4 million, or 99% from
the quarter ended October 31, 2002 to the quarter ended October 31, 2003. Our
carrier traffic declined from approximately 68.9 million minutes in the prior
fiscal first quarter to approximately 680,480 minutes in the first quarter ended
October 31, 2003. The decrease in revenue and carrier traffic can mainly be
attributed to the idling of our network during December 2002. During the first
quarter of fiscal year 2004, we signed four new customers and generated
approximately $33,000 in carrier services revenue. However, there can be no
assurance that such revenue will continue to be generated at these levels from
these customers.
11
Network services revenues decreased approximately 79% or $155,000 from the
quarter ended October 31, 2002 to the quarter ended October 31, 2003. During
the quarter ended October 31, 2003 we signed up one network service customer and
generated approximately $3,705 in revenues from this customer during the
quarter. Additionally we also provided network management services to Latin
Group Ventures L.L.C. (LGV), a non-related party. Under the agreement with LGV
we provide customer service, technical support and manage the collections
process of their private network customers. This management agreement initiated
on July 1, 2003 and we will generate approximately $12,700 per month in
management fees through June 30, 2004. During the quarter ended October 31,
2003 we generated approximately $42,000 in network services revenue. However,
there can be no assurance that such revenue will continue to be generated at
these levels from these customers.
Cost of Services. (Exclusive of depreciation and amortization) The
consolidated cost of services deceased by approximately $5.0 million, or 99%
from the quarter ended October 31, 2002 to the quarter ended October 31, 2003.
The decrease in cost of services is a direct result of the decrease in carrier
revenue and network services revenue. As mentioned above, we idled our network
in December 2002 and our carrier traffic declined from approximately 68.9
million minutes in the first quarter of the prior fiscal year to approximately
680,480 minutes in the quarter ended October 31, 2003, thus reducing our cost of
services between quarters.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
decreased approximately $1.1 million, or 85% from the quarter ended October 31,
2002 to the quarter ended October 31, 2003. The decrease can mainly be
attributed to the termination of all of the employees associated with the
carrier services business unit and network services in January 2003. The
termination of these employees resulted in a decrease in salaries and wages of
approximately $195,000 per month or $585,000 per quarter. Additionally, as a
result of the termination of these employees, during the quarter ended October
31, 2003, the company did not incur health and business insurance expense of
approximately $96,000 per month or $288,000 associated with these employees.
Depreciation and Amortization. Depreciation and amortization decreased by
approximately 100% or $406,000 from the quarter ended October 31, 2002 to the
quarter ended October 31, 2003. The decrease is attributed to the disposition
of all capital equipment before the commencement of the quarter ended October
31, 2003.
Operating Loss. The Company's operating loss decreased by approximately
$897,000 or 84% from the quarter ended October 31, 2002 to the quarter ended
October 31, 2003. The decrease in operating loss is attributed to the decrease
between periods of SG&A of $1.1 million and the decrease in depreciation and
amortization of approximately $406,000. The decrease in SG&A and depreciation
and amortization were offset slightly by the reduction in gross margin of
approximately $591,000.
Other Income (expense). Other expense decreased approximately $174,000
from the quarter ended October 31, 2002 to the quarter ended October 31, 2003.
The decrease in other income and expense is attributed to the decrease in
interest expense of approximately $169,000 recognized during the quarter ended
October 31, 2003 associated with various capital leases. During the quarter
ended October 31, 2003 the Company did not have any capital leases, thus we did
not incur any interest expense associated with capital leases.
Loss from discontinued operations. Loss from discontinued operations
decreased by $1.7 million between periods, from $1.7 million for the quarter
ended October 31, 2002 to $0 during the quarter ended
12
October 31, 2003. During the quarter ended October 31, 2002, we recognized loss
from discontinued operations of approximately $1.7 associated with Mexico Telco
operations. The Mexico Telco loss from discontinued operations during the
quarter ended October 31, 2002 can mainly be attributed to the recognition of
approximately $320,000 in severance expense related to the termination of three
executives from the Mexico operations, the recognition of $326,000 of foreign
currency loss on exchange rate and the recognition of approximately $88,000 of
impairment loss of ATSIMEX's goodwill.
Preferred Stock Dividends. During the quarter ended October 31, 2003, we
recorded approximately $94,000 of non-cash dividends related to our cumulative
convertible preferred stock compared to the non-cash dividends recognized during
the quarter ended 31, October 2002 of approximately $96,000.
Net loss to Common Stockholders. The net loss for the quarter ended
October 31, 2003 decreased to $301,000 from $3,025,000 for the quarter ended
October 31, 2002. The decrease in net loss to common stockholders was due
primarily to the idling of our network and not incurring any fixed costs
associated with the leasing of satellite sites, connectivity fees and operating
a network site during the quarter ended October 31, 2003. During the quarter
ended October 31, 2002, we incurred approximately $450,000 of fixed costs.
Additionally, as mentioned above SG&A expenses and loss from discontinued
operations decreased from the quarter ended October 31, 2002 to the quarter
ended October 31, 2003 by approximately $1.1 million and $1.7 million,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by / used in operating activities: During the quarter ended
October 31, 2003, operations consumed approximately $96,000 in cash. This cash
consumed by operations is primarily due to operating losses of approximately
$207,000. The net loss was somewhat offset by the increase in accounts payable,
accrued liabilities and the issuance of warrants for services of approximately
$58,000, $29,000 and $14,000, respectively. The increase in accrued liabilities
and accounts payable is primarily due to the company recognizing approximately
$48,000 in customer deposits from LVG for future services and the accrual of
professional fees, board fees and interest expense of approximately $39,000.
Additionally, we recognized approximately $14,000 in the issuance of warrants
for services related to the consulting agreement entered into with Recap
Marketing and Consulting, LLP. Currently we are not generating sufficient
revenues from operations to cover our monthly operating salaries and general and
administrative expense. We depend on the monthly payments of approximately
$20,750 from the sale of 51% of ATSI Comunicaciones S.A de C.V. to Telemarketing
S.A de C.V. to pay for our monthly SG&A expenses. Currently we generate
approximately $65,000 in SG&A expenses. We expect this financial instability
and lack of liquidity to continue during the fiscal year 2004. As a result over
the next twelve months we estimate requiring additional funding of approximately
$445,000 to compensate for the deficiencies in cash inflows.
Cash provided by / used in investing activities: During the quarter ended
October 31, 2003, the Company received approximately $62,000 in payments from
the sale of 51% of ATSI Comunicaciones S.A de C.V. to Telemarketing S.A de C.V.
Additionally, during the quarter ended we invested approximately $36,000 in ATSI
Comunicaciones S.A de C.V. ATSI Comunicaciones S.A de C.V. utilized these
proceeds to pay off payroll taxes and professional fees previously agreed upon
the sale of ATSICOM to Telemarketing.
Cash flows used in / provided by financing activities: During the quarter ended
October 31, 2003 we received approximately $50,000 for the issuance of debt and
warrant options.
Overall, the Company's net operating, investing and financing activities
during the fiscal quarter
13
ended October 31, 2003 provided a decrease of approximately $20,000 in cash
balances. We intend to cover our monthly operating expenses with our remaining
available cash. However, as discussed previously we are also dependent on the
monthly cash payments from the sale of ATSICOM to cover monthly operating
expenses.
The Company's working capital deficit at October 31, 2003 was approximately
$19,367,000. This represents an increase of approximately $268,000 from our
working capital deficit at July 31, 2003. The increase is primarily attributed
to our deficiency of cash and the accrual of various professional services and
interest expense. The Company's working capital deficit at October 31, 2003
included approximately $12,355,000 related to the pre-petition liabilities (net
of assets), associated with the Chapter 7 Bankruptcy cases, ATSI Texas and
TeleSpan Inc. The adjusted Company's working capital deficit after exclusion of
the pre-petition liabilities is approximately $7,012,000.
The Company's current liabilities include approximately $12,355,000
associated with the pre-petition liabilities related to the two subsidiaries
under the Chapter 7 Bankruptcy, ATSI Texas and TeleSpan, Inc. The pre-petition
liability balance is composed of the following major liabilities:
- approximately $3 million in debt owed to IBM Corporation related to a
capital lease;
- approximately $1.3 million debt to Northern Telecom, a subsidiary of Nortel
Networks associated with some telecommunications equipment acquired during
fiscal year 2001;
- approximately $5.1 million in debt to various international and domestic
telecommunications carriers for services provided during fiscal year 2002
and 2003;
- approximately $250,000 in property taxes to various taxing entities,
approximately $550,000 to Universal Service Fund for telecommunication
taxes;
- approximately $250,000 in a note payable; and
- approximately $2.4 million associated with rent expense, salaries and wages
and professional services to various entities.
The Company's current obligations also include approximately $1,367,000
owed to the former owners of Grupo Intelcom, S.A. de C.V., the entity purchased
by the Company in July 2000 and through which the Company obtained its Mexican
long distance concession. Of this amount, $357,000 is included in notes payable
and the additional $1,030,000 is included in accrued liabilities.
Furthermore, the Company's current liabilities also include approximately
$1.1 million associated with the Series D Cumulative preferred stock. During
the year ended July 31, 2003, we received a redemption letter from the Series D
holder requesting the redemption of all the outstanding Series D preferred
stock. As a result the full redemption amount of approximately $942,000 and
dividends of approximately $158,000 were reclassed to current liabilities.
Additionally, the Company's current liability includes approximately $1.3
million associated with the Series E Cumulative preferred stock. During the
fiscal year ended July 31, 2003, the Company was de-listed from AMEX and
according to the terms of the Series E Cumulative preferred stock Certificate of
Designation, if the Company fails to maintain a listing on NASDAQ, NYSE or AMEX
the Series E preferred stockholder could request a mandatory redemption of the
total outstanding preferred stock. As of the date of this filing we have not
received such redemption notice.
On October 31, 2002 we filed a filed a lawsuit in the Southern District
Court of New York against two financial institutions, Rose Glen Capital and
Shaar Fund, the holders of Series D and E Redeemable
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Preferred Stock, for what we believe to be "Stock fraud and manipulation". These
liabilities combined for a total of approximately $2.4 million. Accounting rules
dictate that these liabilities remain in our books under Current Liabilities
until the lawsuit is resolved in the judicial system or otherwise. At this time
we cannot predict the outcome or the time frame for this to occur.
In addition, we also have approximately $1.2 million of current liabilities
(net of assets) associated to the discontinued operations of the retails
services unit. This balance is mainly composed of approximately $453,000 owed
to the Mexican taxing authorities related to a note assumed through the
acquisition of Computel and approximately $944,000 related to income taxes owed
as of the quarter ending October 31, 2003.
We believe that, based on our limited availability to capital resources and
our current cash balances, that these resources may not be available to support
our ongoing operations for the next twelve months or until 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 support of our stockholders and customers,
our ability to obtain capital resources to support operations and our ability to
successfully market our services.
As previous discussed, in May 2003, the company 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; 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.
Management intends 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to several market risks. Specifically, we face commodity
price risks and equity price risks.
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
------------------
positive cash flows from
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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.
MEXICAN FACILITIES-BASED LICENSE POSES RISKS
Currently we own 49% of ATSICOM that holds the Concession License. This
license is for 30 years, and it can be renewed at the end of the term. This
concession is the major asset of the Company and is regulated by the Mexican
government. The Mexican government could grant similar concessions to our
competitors, which will affect the value of our concession. In addition, the
Mexican government also has (1) authority to temporarily seize all assets
related to the Mexican 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
any 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 this license, ATSI Comunicaciones de Mexico S.A de C.V. is required
to meet the following:
General requirements:
---------------------
- Maintain approximately 10 millions dollars in registered and
subscribed capital;
- Install and operate a network in Mexico, the Mexican government has
the right to approve the operating plan before is implemented and any
future changes to the operating plan before it can be implemented;
- Continuously develop and conduct training programs for its staff; and
- Have an assigned 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 only 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; and
- Provide statistical reports of traffic, switching capacity and other
parameters in the network.
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Other requirements: The Concessionaire is required to have a bond/ insurance
-------------------
policy for approximately $500,000 dollars, naming the Mexican Federal Treasury
Department as beneficiary in the event the Mexican government revokes the
concession license.
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 4. CONTROLS AND PROCEDURES
The Company has adopted and implemented disclosure controls and procedures
designed to provide reasonable assurance that all reportable information will be
recorded, processed, summarized and reported within the time period specified in
the SEC's rules and forms. The Company's President and Chief Executive Officer
and the Company's Controller and Principal Financial have concluded that these
disclosures and procedures are effective at the reasonable assurance level.
Under the supervision and with the participation of the Company's management,
including the Company's President and Chief Executive Officer and the Company's
Controller 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-15(e) as of the end of the quarter
covered by this report. Based on that evaluation, the President and Chief
Executive Officer and the Controller and Principal Financial Officer have
concluded that these disclosure controls and procedures are effective as of the
end of the period covered by this report. There were no changes in the Company's
internal control over financial reporting during the quarter covered by this
report that have had a material affect or are reasonably likely to have a
material affect on internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On December 10, 2004, we announced ATSI's reincorporation plan to Nevada.
Additionally we announced that the Annual Stockholders Meeting is scheduled to
be held on January 15, 2004.
On December 09, 2003, the Board of Directors approved the recommendation of
its Audit Committee that the firm of Tanner + Co. be dismissed as its
independent public accountants and that the firm of Malone and Bailey, PLLC be
engaged as the independent auditors of the Company. The Company is not aware of
any disagreements regarding accounting or financial disclosure, or auditing
scope or procedure with Tanner + Co. The opinion of Tanner + Co. for fiscal
2002 and fiscal 2003 contained a qualification as to the uncertainty of the
Company's ability to continue as a going concern but was not otherwise qualified
or limited.
On December 13, 2001, the Board of Directors approved the recommendation of
its Audit Committee that the firm of Arthur Andersen LLP be dismissed as its
independent public accountants and that the firm of Ernst & Young, LLP be
engaged as the independent auditors of the Company. On November 14, 2002, the
Company's Board of Directors approved the recommendation of its Audit Committee
that the firm of Ernst & Young, LLP be dismissed as its independent public
accountants and that the firm of Tanner + Co. be hired
17
as its independent public accountants for the fiscal year ending July 31, 2002.
The Company was not aware of any disagreements regarding accounting or financial
disclosure, or auditing scope or procedure with either Arthur Andersen LLP or
Ernst & Young. The opinion of Arthur Andersen LLP for fiscal 2001 contained a
qualification as to the uncertainty of the Company's ability to continue, as a
going concern but was not otherwise qualified or limited.
The Company did not consult Malone and Bailey, PLLC with respect to the
application of accounting principles to a specified transaction, proposed or
completed, or the type of audit opinion that might be rendered on the Company's
financial statements, or any other matters or reportable events pursuant to Item
304(a).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The exhibits listed below are filed as part of this report.
EXHIBIT
NUMBER
------
31.1 Certification of our President and Chief Executive Officer, under Section
302 of the Sarbanes-Oxley Act of 2002. *
31.2 Certification of our Corporate Controller and Principal Financial Officer,
under Section 302 of the Sarbanes-Oxley Act of 2002. *
32.1 Certification of our President and Chief Executive Officer, under Section
906 of the Sarbanes-Oxley Act of 2002. *
32.2 Certification of our Corporate Controller and Principal Financial Officer,
under Section 906 of the Sarbanes-Oxley Act of 2002. *
* Filed herewith
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ATSI COMMUNICATIONS, INC.
(Registrant)
Date: March 1, 2004 By: /s/Arthur L. Smith
------------- ------------------
Name: Arthur L. Smith
Title: President and
Chief Executive Officer
Date: March 1, 2004 By: /s/Antonio Estrada
------------- -------------------
Name: Antonio Estrada
Title: Corporate Controller
(Principal Accounting and Financial
Officer)
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