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SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549
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FORM 10-K
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(mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended July 31, 20022003
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) (I.R.S. Employerincorporation or organization) Identification No.)
6000 Northwest Parkway,8600 Wurzbach, Suite 110700W
San Antonio, Texas 78240
(210) 614-7240
(Address, including zip code, of Principal 78249
Executive Office) (Zip Code)
(210) 547-1000
(Registrant's Telephone Number, Including Area Code)registrant's
principal executive offices and telephone
number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g)12(b) of the Act:
Common Stock, Par Value $0.001 Per Share
(Title of Class)
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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 X No_____No__
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [_][ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act) Yes __ No _X_
The aggregate market value of the Registrant's outstanding Common Stock
held by non-affiliates of the Registrant at January 14,November 12, 2003, was approximately
$8,019,563.$1,977,000. There were 103,638,690 shares of Common Stock outstanding at
January
14,November 12, 2003, and the closing sales price on the American Stock Exchange for our Common Stock was $0.08$0.02 on
such date. 1Our Common Stock is an OTC security traded on the PINK.SHEETS under
the symbol of ATSC.PK.
TABLE OF CONTENTS
Page
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PART I
PART I
Item 1. Business ..............................................................................................Business................................................................................. 3
Overview ......................................................................... 3
History ............................................................................. 4
Recent Developments.................................................................. 5
Services and Recent Developments ..................................................................... 3Products................................................................ 5
Carrier Services............................................................... 6
Network Services............................................................... 6
Network........................................................................... 7
Strategy and Competitive Conditions .................................................................. 4
Retail Distribution Network .......................................................................... 6
Services and Products ................................................................................Conditions............................................... 7
Carrier Services ................................................................................ 7
Network Services ................................................................................ 8
Retail Services .................................................................................Licenses/Regulatory............................................................... 9
Network .............................................................................................. 9
Licenses/Regulatory ..................................................................................Employees......................................................................... 10
Employees ............................................................................................ 12
Additional Risk Factors .............................................................................. 12Factors........................................................... 10
Item 2. Properties ............................................................................................ 23Properties.............................................................................. 19
Item 3. Legal Proceedings ..................................................................................... 23Proceedings....................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders ................................................... 24Holders..................................... 20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ................................. 24Matters................... 20
Item 6. Selected Financial and Operating Data ................................................................. 26Data................................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition and
Sources of revenue and direct cost ............................................... 22
General .......................................................................... 23
History of operating losses....................................................... 24
Results of Operations ................. 26
General .............................................................................................. 27
Results of Operations ................................................................................ 27Operations............................................................. 25
Liquidity and Capital Resources ...................................................................... 35
Inflation/Foreign Currency ........................................................................... 37
Seasonality .......................................................................................... 37Resources................................................... 30
Market Risk .......................................................................................... 37Risk....................................................................... 32
Item 8. Financial Statements and Supplementary Data ........................................................... 39Data............................................. 33
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures ................. 78Disclosures.............................................................. 70
PART III
Item 10. Directors and Officers of the Registrant .............................................................. 79Registrant............................................... 71
Item 11. Executive Compensation ................................................................................ 82Compensation................................................................. 74
Item 12. Security Ownership of Certain Beneficial Owners and Management ........................................ 85Management......................... 77
Item 13. Certain Relationships and Related Transactions ........................................................ 86Transactions......................................... 78
PART IV
Item 14. Controls and Procedures................................................................ 79
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ...................................... 878-K....................... 80
2
This Annual Report on Form 10-K and the documents incorporated by
reference in this Annual Report contain "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 this Annual Report and other
documents filed with the Securities and Exchange Commission. Therefore, these
types of statements may prove to be incorrect.
PART I.
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ITEM I.I BUSINESS
Overview and Recent Developments
We are a telecommunications provider, focusing on the market for carrier and
retailnetwork management services between the United States and Latin America, and within
Latin America. Most of ourOur
current operations involve services between the U.S. and Mexico or within Mexico. We own various transmission facilitiesprovide
carrier services to our customers utilizing VoIP gear, or Voice over Internet
Protocol. We utilize this VoIP technology to transmit digital voice
communication over the Internet and lease
facilitiesother leased data networks.
We have had operating losses for almost every quarter since we began
operations in 1994. Our operating losses from continuing operations were
approximately $4,850,000, $8,259,000 and $5,780,000, for the years ending July
31, 2001, 2002 and 2003, respectively. Additionally we had a working capital
deficit of approximately $17,796,000, at July 31, 2003. 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 27 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. Revenues from carrer services accounted for approximately 91% of our
overall revenues in fiscal 2001, 95% in fiscal 2002 and 94% in fiscal 2003.
During the fiscal year ending July 31, 2003 management continued to
pursue different avenues for funding, through the issuance of debt or company
stock. We were not successful during the year ended July 31, 2003 in raising the
necessary capital to re-start our network, and as a result, two of our
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. Additionally, the court ordered joint administration of both cases
on April 9, 2003 and subsequently on May 14, 2003 the court converted the cases
to 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 (the SEC registrant)(the Company). As a result of the
Chapter 7 bankruptcy of our two main operating subsidiaries, combined with the
termination of all our US employees and the idling of the carrier network
capacity, our ability to generate any revenue from our historical revenue
generation sources was severely limited.
Due to the bankruptcies, 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. In
order to remain a going concern, we intend to attract new customers and/or
generate cash from debt or equity offerings. We cannot make any assurance that
the Company will attain sufficient additional customers or funding to continue
as a going concern. However, the Company's plan to remain a going concern is
discussed in the following two paragraphs.
We intend to generate new customers. Subsequent to the year-ended July
31, 2003 we have signed agreements with three new carrier customers from which
we have generated revenues of approximately $36,000 during the first quarter of
fiscal year 2004., In addition, the Company has signed agreements with two
communications companies, Telemarketing de Mexico S.A de C.V. (Telemarketing)
and Dialmex, LLC. ("Dialmex") Under the agreements with Telemarketing and
Dialmex, we will have access to their VoIP network and their different
underlying carriers. These agreements will provide us the capacity to terminate
and transport through their network approximately 80 million minutes on a
monthly basis. We believe that these agreements will create a lower cost
structure that will enable us to offer lower prices and allow us to attract new
customers.
The agreements with Telemarketing and Dialmex are as follows. On May
22, 2003 we entered into a Share Purchase Agreement with Telemarketing de
Mexico, S.A. de C.V. ("Telemarketing') whereby we sold Telemarketing 51% of our
Mexican subsidiary, ATSI Comunicaciones, S.A. de C.V. ("ATSICOM"). ATSICOM holds
3
a 30-year long distance concession in Mexico. The concession allows for the sale
of voice and data services, long distance transport, and the operation of a
telecommunications network in Mexico. The principal owners of Telemarketing are
also the principal owners of Dialmex, LLC ("Dialmex") a U.S. based international
telecommunications carrier. On May 22, 2003 we also signed an agreement with
Dialmex and under the agreement with Dialmex we will be allowed to use Dialmex's
VoIP network to transport and terminate voice and fax communications over the
Internet. Our fees under the Dialmex agreement will be based on a per minute
rate on the volume of minutes sent through their VoIP network. Telemarketing and
ATSI will enhance the VoIP network by linking Dialmex's VoIP network with other
providerscarriers, which will enable us to reduce our transportation and termination
costs, while simultaneously increasing and expanding destination points
available to our customers. We believe that this lower network cost structure
will allow the companies to be more competitive and attract more customers.
Additionally, we will combine our respective interconnection agreements with the
major carriers in Mexico to lower our termination costs and allow for a more
attractive cost structure. The sale of 51% of our Mexican subsidiary to
Telemarketing provides us with working capital while the agreement with Dialmex
provides us with access to a reliable and flexible state-of-the-art VoIP network
without incurring the expense of operating such a network. Due to the financial
condition of the Company, there can be no assurance that the enhancements can be
made or that the costs will be decreased. However, there can be no assurance
that the Company will be successful in attracting new customers and remain a
going concern. In addition, the Company is pursuing additional sources of equity
and debt financing. However, there can be no assurance that such financing will
become available or that it will be available on terms acceptable to the
Company.
On July 02, 2003, the U.S. Bankruptcy Court overseeing the Chapter 7
cases for ATSI Texas and TeleSpan, Inc. approved the sale of two Mexican
subsidiaries owned by ATSI Texas and TeleSpan, Inc. As a result, ATSI de Mexico
S.A de C.V. (ATSI-Mexico) and Servicios de Infraestructura S.A de C.V. (SINFRA)
were sold 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 associated with ATSI-Mexico and SINFRA. Additionally, under
the agreement, LGV acquired the Comercializadora License held by ATSI-Mexico and
the Teleport and Satellite Network License held by SINFRA. The Chapter 7
Bankruptcy Trustee received all the proceeds from the sale of these entities.
Due to the sale of ATSI-Mexico and SINFRA, the Mexico-Telco segment, consisting
primarily of retail call center operations, has been discontinued and in the
future we will not able to generate revenues from retail services offered at the
communication centers.
Our limited cash flow, historical losses from operations, the
bankruptcies of our two main operating subsidiaries and sale of our retail
services business have caused substantial barriers to growth and the
continuation of our business strategy. Operationally, ATSI's strength lies in
our interconnection agreements with carriers such as necessaryTelefonos de Mexico S.A de
C.V. (Telmex) and Bestel S.A de C.V. and our 49% interest in ATSICOM, which owns
a long distance concession license. Our interconnection agreements with these
long-distance concessionaires provide us with nationwide network coverage at a
competitive cost structure. Currently, Telmex owns and operates the only
nationwide network in Mexico with more than 14.1 million phone lines in over
105,000 communities throughout Mexico. Bestel operates a fiber optic network
that extends over 6,356 kilometers with points of presence in 19 Mexican
metropolitan areas. Under these interconnection agreements the cost to complete our network.
Specifically,the
Company is based on a per minute rate and the volume of minutes transported
through their respective networks. Additionally, we own teleports, which49% of a Mexican
company, ATSI Comunicaciones, S.A. de C.V., that holds a 30 year concession,
allowing for the sale of voice and data services, long distance transport, and
the operation of a telecommunications network. Through interconnection
agreements established by ATSI Comunicaciones, S.A de C.V. and our partnership
with Dialmex, LLC, we are able to utilize the earth stations where satellite
transmission and receiving equipment are located, and switches, which are
computers which route calls to their intended destination by opening and closing
appropriate circuits. Historically, we have leased fiber optic cable and
satellite capacity to connect our teleports and switches in the United States to
our teleports and switchesnetworks of third parties in
Mexico, such as Alestra and other Latin countries, and rely on
other carriersMarcatel to complete the long distance portion of ourbuild a reliable international network
to support carrier-generated traffic withinbetween the U.S. and Mexico.
During fiscal 2003, we anticipate beginning the installation of
a Voice over Internet Protocol (VoIP) network which will allow us to further
expand the outreaches of our current network, reduce fixed costs, speed up
provisioning of new customers and provide us with greater flexibility. The
installation of the VoIP network is contingent upon our ability to obtain equity
or debt financing to purchase the necessary equipment.History
We began operations in 1994 as a Canadian holding company, Latcomm
International, Inc. with a Texas operating subsidiary, Latin America Telecomm,
Inc. Both corporations were renamed "American TeleSource International, Inc." in
4
1994. In May 1998, the Canadian corporation completed a share exchange with a
newly formed Delaware corporation, also called American TeleSource
International, Inc., which resulted in the Canadian corporation becoming the
wholly owned subsidiary of the Delaware corporation. In February 2001, our
shareholders voted to change our name from American TeleSource International,
Inc. to ATSI Communications, Inc.
We have had operating losses for almost every quarter since we began
operations in 1994. The auditor's opinion onCurrently, 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 they question whether we can continue in
business. We have experienced difficulty in paying our vendors and lenders on
time in the past, and may continue to experience difficulty in the future. If we
are unable to pay our vendors and lenders on time, they may stop providing
critical services or repossess critical equipment that we need to stay in
business. In recent months we have made a number of decisions to allow us to
conserve our resources
3
including the termination of a number of employees both at the corporate level
as well as in Mexico and reducing and then eventually idling our carrier network
capacity.
Our principal operating subsidiaries are:
.entity is:
o ATSI Comunicaciones, S.A. de C.V. or ATSI Comunicaciones, which we
acquired in 2000, possessesCommunications Inc., a concession from the Mexican government to
provide long distance services and the right to interconnect with local
providers in Mexico;
. American TeleSource International de Mexico, S.A. de C.V. or
ATSI-Mexico,Delaware corporation, which was formed
in 1995 to support our operations in
Mexico,1996 and perform regulatory, sales, marketing, planning,is the owner of 49% of ATSI Comunicaciones S.A de
C.V., a Mexican corporation, that holds a 30 year concession,
allowing for the sale of voice and technical
maintenance services; this subsidiary possessesdata services, long distance
transport, and the operation of a comercialazidora
license;
. Sistema de Telefonia Computarizada, S.A. de C.V. or Sistecom,
which we acquired in August 1997; at year-end this subsidiary owned 125
communication centers in 63 cities in Mexico;
. Servicios de Infraestructura, S.A. de C.V. or Sinfra, which we
acquired in June 1997; this subsidiary owns certain transmission
equipment and valuable long term licenses in Mexico;
. TeleSpan, Inc. which was formed in February 1998 to transport our
carrier and network services traffic between the U.S. and Latin Americatelecommunications network.
Recent Developments
During our fiscal year ending July 31, 2002, we:
. Hired2003, we announced that:
o Effective January 31, 2003 Stephen M. Wagner resigned as President
and Chief OperatingExecutive Officer
. Signed strategic deals in Mexicoo On December 31, 2002 our carrier network capacity was idled and 27
US employees were terminated.
o Two of our 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.
Additionally, the court ordered joint administration of both cases
on April 9, 2003 and subsequently on May 14, 2003 the court
converted the cases to Chapter 7.
o Effective April 30, 2003 J. Christopher Cuevas resigned as Interim
CFO and on May 1, 2003 Raymond G. Romero resigned as Interim CEO.
Additionally, we announced that Arthur L. Smith was appointed as
CEO and Director and Antonio Estrada as the Corporate Controller.
o On May 22, 2003 we entered into a Share Purchase Agreement with
four other concessionaires
(including TelefonosTelemarketing de Mexico, S.A. de C.V. ("Telemarketing') whereby we
sold Telemarketing 51% of our Mexican subsidiary, ATSI
Comunicaciones, S.A. De C.V. ("ATSICOM").
o On July 02, 2003, the U.S. Bankruptcy Court overseeing the Chapter
7 cases for ATSI Texas and TeleSpan, Inc. approved the sale of two
of its Mexican subsidiaries, ATSI-Mexico and SINFRA's 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 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. These entities were
owned by our two subsidiaries ATSI (Texas) and TeleSpan, Inc. that
filed for protection under Chapter 11 of the U.S. Bankruptcy Code
in February 2003 and subsequently on May 14, 2003, were converted
to Chapter 7 liquidation cases. Due to the bankruptcies and
related sales of ATSI-Mexico and SINFRA we determined to
discontinue the Mexico Telco operating segment, consisting
primarily of retail call center operations.
Services and Products
In the presentation of our historical financial results, we have
divided our revenues into two categories: Carrier services and network services.
5
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. Revenues from
this service accounted for approximately 91% of our overall revenues in fiscal
2001, 95% in fiscal 2002 and 94% in fiscal 2003. The percentage of our total
volume of carrier services traffic sent by customers can fluctuate dramatically,
on a quarterly, and sometimes, daily basis. Historically, a handful of customers
have accounted for a majority of the total carrier services volume, although not
necessarily the same customers. During fiscal year 2003, our agreements with
customers were not for a specific period of time, but rather the customer was
given a set rate for services and the customer would decide the volume of
traffic it would send to us to terminate. Therefore on a month-to-month basis
there was not a required volume commitment from them, so they were free to
re-route their traffic away from us to a lower priced carrier.
During the year ended July 31, 2003, as the telecommunications sector
has continued to suffer financially and operationally, we have seen a trend
towards more and more of our carriers requiring substantial deposits and / or
prepayments. Required deposits and prepayments may total as much as 25% or
$600,000, which represented the weekly average cost of services during fiscal
year 2002. As a result, of the substantial deposits and prepayment requirements
and our lack of liquidity, in December 2002, we were forced to idle our network
and we were not able to restart our network during the fiscal year ending July
31, 2003. We did not generate any revenue from this source during the second
half of the fiscal year ending July 31, 2003. Subsequent to year-end we have
signed three new carrier customers and we have generated revenues of
approximately $36,000 during the first quarter of fiscal year 2004. However,
there can be no assurance that revenue will continue to be generated at this
level from these customers.
Going forward, the company will rely on the Share Purchase Agreement
with Telemarketing de Mexico, S.A. de C.V. to continue to increase the carrier
services business. Under the agreement entered on May 22, 2003, Telemarketing
acquired 51% of our Mexican Subsidiary, ATSI Comunicaciones, S.A. de C.V.
("ATSICOM"). The principal owners of Telemarketing are also the principal owners
of Dialmex, LLC ("Dialmex") a U.S. based international telecommunications
carrier. Under our agreement with Dialmex we will be allowed to use Dialmex's
VoIP network primarily to transport and terminate voice and fax communications
over the Internet. Additionally, under the agreement with Telemarketing we will
enhance its network by linking Dialmex's VoIP network with other carriers
allowing us to reduce our transportation and termination costs, while
simultaneously increasing and expanding our destination points available to our
customers. We believe that this lower network cost structure will allow the
Company to be more competitive and attract more customers. Additionally, we will
combine our respective interconnection agreements with the major carriers in
Mexico, such as Telefonos de Mexico S.A de C.V. (Telmex) and a CLEC
(competitive local exchange carrier).
. RestructuredBestel S.A de C.V.
As previously mentioned, our debtinterconnection agreements with IBMthese long-distance
concessionaires provide us with nationwide network coverage. Currently, Telmex
owns and GE Capital
. Upgraded switching platformoperates the only nationwide network in DallasMexico with more than 14.1
million phone lines in over 105,000 communities throughout Mexico. Bestel
operates a fiber optic network that extends over 6,356 kilometers with points of
presence in 19 Mexican metropolitan areas. In addition, 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. Due to the financial condition of the Company, there can be no
assurance that the enhancements can be made or that the costs will be decreased.
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
installation6
customers multiple international offices and branches. Currently we do not have
any network services customers; however, we provide network management services
to Latingroup Ventures L.L.C.(LGV), a non-related party. Under the agreement
with LGV we will provide customer service, technical support and manage the
collections process of a Nortel Supernode
. Sold our majority ownership of GlobalSCAPE, Inc., an e-commerce
entity whichtheir private network customers. This management
agreement was not vitalinitiated on July 1, 2003 and we will generate approximately
$12,700 per month in management fees. This management agreement will terminate
on June 30, 2004.
Currently we compete with MCI and Americatel, as well as the former
telecommunication monopolies in the Latin American countries in providing
network services. Factors contributing to our core businesscompetitiveness include
reliability, network quality, speed of installation, and in some cases,
geography, network size, and hauling capacity. We are at a competitive
disadvantage with respect to larger carriers who are able to provide networks
for corporations that encompass more countries in Latin America, as well as
Europe, Asia and other parts of the globe. As a result of these disadvantages we
do not expect a significant increase in revenue from this source in the near
future.
Network
As previously disclosed, we entered into an agreement with the
principal owners of Telemarketing and principal owners of Dialmex, a U.S. based
international telecommunications carrier. The objective of the agreement with
Telemarketing, is that ATSI and Telemarketing will jointly enhance the VoIP
network, which is currently operating under Dialmex. Under our agreement with
Dialmex, we will use the VoIP network primarily to transport telephone calls and
fax transmissions over the Internet. We believe that using the VoIP network will
lower our network costs and allow the companies to be more competitive and
attract more customers. Additionally, we will combine our respective
interconnection agreements with the major carriers in Mexico, including Telmex
and Bestel. We believe our interconnection agreements with these long-distance
concessionaires provide us with nationwide network coverage. Currently, Telmex
owns and operates the only nationwide network with more than 14.1 million phone
lines in over 105,000 communities throughout Mexico. Bestel operates a fiber
optic network that extends over 6,356 kilometers with points of presence in 19
Mexican metropolitan areas. In addition, the sale of 51% of ATSICOM to
Telemarketing provides us with working capital while the carrier service
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. Due to the financial condition of the Company, there can be no
assurance that the enhancements can be made or that the costs will be decreased.
Currently we are also leasing satellite capacity and space segment on a
month-to-month basis directly from Satellites Mexicanos, S.A. de C.V. (Satmex)
for the connectivity for our network management customer. Under the
month-to-month agreement we are currently incurring monthly fixed charges of
approximately $6,300 for the space segment. Under the monthly agreement with
Satmex we can increase or decrease capacity as the customer usage changes with
demand. Additionally we can terminate this agreement at any time without any
penalties from Satmex.
Strategy and Competitive Conditions
Our strategy is to position ourselves to take advantage of the
demonopolization of the Latin American telecommunications markets, as well as
the increasing demand for international communications services between these
markets and the United States. Historically, telecommunications services in
Latin America have been provided by state-run companies, operating as a legal or
de facto monopoly. Although these companies failed to satisfy the demand for
services in their countries, the regulatory scheme effectively precluded
competition by foreign carriers. Currently, there is a trend toward
demonopolization of the telecommunications industry in Latin America, and many
of these 4
countries are in various stages of migration toward a competitive,
multi-carrier market. Many Latin American countries produce a significant number
of immigrants to the United States, or are becoming homes to U.S. based
corporations serving seeking lower labor costs. At the same time that Latin American
markets have been opening up, the demand for telecommunications services between
the United States and Latin America (particularly Mexico) has been strengthened
by:
.7
o the rapid growth of the Latino segment of the United States
population
.o Mexico's status as the # 1top calling partner with the United States
.o increase in trade and travel between Latin America and the United
States
.o the build-out of local networks and corresponding increase in the
number of telephones in homes and businesses in Latin countries
.o proliferation of communications devices such as faxes, mobile
phones, pagers, and personal computers
.o declining rates for services as a result of increased competition.
Our strengths include our knowledge of, and relationships within, the
telecommunications industry in the United States and certain countries within
Latin America.America, particularly Mexico. Our management and employees have in-depth
knowledge of the Mexican culture, business environment and telecommunications
industry. As a result, we have been able to produce steadily increasing volumes of
communications traffic between the United States and Mexico, and have been able
to obtain severala key licenseslong distance
concession through our 49% ownership in ATSI Comunicaciones S.A de C.V.
(ATSICOM) that allowallows us to both generate and carry traffic within Mexico. It has always been our strategy to build a customer base first,Mexico and
then smart-build a network underneath those customers' calling patterns in
an effort to maximize returns on invested capital.between Mexico and the United States. Technological advances have provided
emerging carriers with the means to provide high quality transmission on a
cost-effective basis. Most notably, we as well as other emerging carriers now
use packet switchingvoice over Internet protocol or VoIP technology, which is a method of
transmitting telecommunications trafficvoice communications by breaking the information into packets. The packets
can then be organized in a way that permits the information to be transmitted
over long distances more quickly and using less capacity than traditional
methods. The packets are reassembled at the receiving end to re-create the
message. We have also incorporated asynchronous transfer mode or "ATM"
technology into our network. ATM is a high-speed, packet switching technology
that allows voice, facsimile, video and data packets
to be carried
simultaneously onand transporting them over the same network.Internet. Under our agreement with Dialmex, LLC,
ATSI is utilizing a low-cost VoIP network in Mexico previously deployed by
Dialmex. We have focused most of our efforts on Mexico. As regulatory and market
conditions permit, we would like to provide services throughoutin other Latin America.American
countries.
Strategy and Competitive Conditions - Mexican Market. Telefonos de
Mexico (orS.A de C.V.(or Telmex) had a legal franchise to control the entire market
for local and long distance telecommunications in Mexico until June of 1995,
when new laws began to open the market to competition. This means that Telmex
owned or controlled all of the physical infrastructure needed to transport
telecommunications traffic, including the local network of telephone lines to
homes and business in a given area, and the long distance network of lines
between the local networks. In January 1997, the Mexican government began
granting licenses to provide long distance service to competing companies, and
has licensed at least 2129 new long distance providers. Two of these license
holders are Mexican based affiliates of top tier U.S. carriers MCI/WorldcomMCI and AT&T.
Although the Mexican government has also licensed additional local competitors,
the build out of additional local infrastructure is just beginning, and the
local network in Mexico is still dominated by Telmex. WeIn 1994 we began
assembling a framework of licenses, reciprocal services agreements with other
carriers, other service agreements, network facilities, and distribution
channels in Mexico in 1994, in anticipation of the demonopolization of this market.
In 1994,During the same year we also began
5
providing private network services between
the U.S. and Mexico via satellite.
Since then, we have established a retail distribution network in Mexico through
the acquisition and/or installation of public payphones and communication
centers and have entered the U.S. market for carrier termination services to
Mexico. We have also invested in our own transmission facilities, beginning in
1994 with satellite teleport equipment and in the last several years the
acquisition of a new Nortel International Gateway Switch and the deployment of
packet switching technology in our network. As true competition has emerged in
Mexico, we have been able to negotiate increasingly more favorable rates for
local network access and long distance services with the newly licensed long
distance carriers. In fiscal year 2000 we secured our own long
distance license, which will permitpermits us to interconnect directly with the local
network and build out our own long distance network, further reducing our costs.
In May 2003, we sold 51% of our subsidiary that owns a long distance concession
in Mexico, ATSI Comunicaciones, S.A. de C.V. to a group of Mexican investors,
Telemarketing S.A de C.V. and secured an agreement with the same group to
utilize their VoIP network for transporting services to, from, and within
Mexico. We believe that our establishment of a solid framework of licenses, proprietary networklong distance concession and favorable services agreements have positionedpartnership with the
Mexican investment group will position us to take advantage of the benefits to
be reaped as the Mexican telecommunications industry enters a truly
competitive phase.continues to evolve and
creates opportunities for emerging carriers. We believe that we have a clear
competitive advantage over purenon-licensed resellers, and that we have overcome
significant hurdles that are a barrier to entry in this market even for large
carriers. We intend to use our frameworklicense and partnership to capture increased
amounts of the communications traffic in the Mexican market.
Retail. Although Telmex and the Mexican affiliates of several large U.S.
based carriers are active participants in the Mexican retail market, we believe
that these carriers will focus on the most lucrative sectors of the market,
leaving many opportunities to further develop the large portion of the market
that continues to be underserved, both in the U.S. and Mexico. We will devote
most of our new resources on deploying innovative new public and prepaid
services that will function in the same manner regardless of the consumer's
location north or south of the U.S./Mexico border, such as enhanced prepaid
calling services. Our marketing term for these types of services is
"borderless." We will use our existing retail distribution network, and may
pursue acquisitions of established distribution channels from others. We believe
that our focus on a retail strategy, combined with the cost reductions to come
from additional network build-out under our Mexican long distance license, will
permit us to improve overall corporate profit margins and secure a stable
customer base.
Carrier. The U.S. market for termination to Mexico has become
increasingly dynamic as competition, call volumes and industry capacity along
U.S. -MexicoU.S.-Mexico routes have all increased. Although the volume of carrier services
minutes we transmitted to Mexico increased during fiscal year 2002,experienced downward pricing
pressure for traffic between the U.S. and Mexico over the last fiscal year,
prices have begun to stabilize in this market resulted in a less than proportional increase in
revenues.recent months. We expect that the market will continue to experience downward pricing
pressures. Additionally, we plan to explore ways to
exploit our carrier services operation without the investment of significant new
resources (see Telco
Services - Carrier Services).by utilizing our partners', Dialmex, LLC, VoIP network in Mexico.
8
Although we have succeeded in obtaining reciprocal services agreementssecuring an agreement with variousWorld Data
Technology, S.A de C.V., a Mexican-based providersVoIP provider that permitpermits us to
terminate northbound traffic in the U.S., we have not realized substantial
revenue from these
arrangements.this arrangement. We believe that the additional network build-out
under our own long distance license will permit us and our Mexican partners' to
lower our costs significantly, improving our competitive position in the carrier
services market for both north and southbound services.
Retail Distribution Network
Our Mexican retail distribution network currently consists of
communication centers and public pay telephones.
Communication centers. Communication centers, formerly called casetas,
are calling centers strategically located to serve travelers and the large
population of the country who typically do not have
6
personal telephones. Communications centers are a widely recognized and utilized
medium in Mexico, but do not currently have a real equivalent in the U.S. Our
centers have traditionally offered local, domestic Mexico and international long
distance calling and two years ago, we began offering additional enhanced
services such as prepaid and Internet services. We are the largest communication
center operator in Mexico with approximately 125 communication centers in 63
cities, at year-end, operating under the trade name "Computel(TM)". Each
location employs at least one attendant, who processes calls, monitors call
duration, collects money and runs daily reports on call activity. As compared to
public pay telephones, our centers offer privacy and comfort as well as the
personalized attention needed by customers who are not accustomed to using a
telephone. Key factors favoring us over competing communication centers
operators are the well-recognized Computel name, a reliable platform and billing
system, the provision of facsimile services (which are not offered by many other
operators) and a larger distribution network. The next largest competitor in
Mexico has only 70 locations. Using these communication centers as the
cornerstone, we intend to further increase our retail presence in Mexico and the
U.S.
Pay Telephones. We also own and operate approximately 370 pay telephones
in various Mexican cities and resort areas, including Acapulco, Cancun, Cozumel,
Mazatlan, Puerto Vallarta, Tijuana, Huatulco, Puerto Escondido, Cabo San Lucas,
and Puerto Angel. All of our pay telephones are "intelligent" phones, meaning
that certain features are fully automated, reducing operating costs. Our
telephones accept pesos and U.S. quarters. Subsequent to year-end, we entered
into a management services agreement, with a former employee, to manage our
public pay telephone business.
Services and Products
In the presentation of our historical financial results, we have divided
our revenues into three categories: Carrier services, network services and
retail services.
Carrier Services
We offer termination services to U.S. and Latin American carriers who
lack transmission facilities, require additional capacity or do not have
regulatory permission to terminate traffic in Mexico. Revenues from this service
accounted for approximately 65% of our overall revenues in fiscal 2000,
approximately 74% in fiscal 2001 and 81% in fiscal 2002. The percentage of our
total volume of carrier services traffic sent by customers can fluctuate
dramatically, on a quarterly, and sometimes, daily basis. Historically, a
handful of customers have accounted for a majority of the total carrier services
volume, although not necessarily the same customers. In general, our agreements
with these customers do not require significant volume commitments from them, so
they are free to re-route their traffic away from us to a lower priced carrier
at will. While we are the primary route choice for certain customers and certain
segments of some customer's traffic, we are a secondary route choice for other
customers, meaning that they send us their overflow traffic if their primary
route choice does not have sufficient capacity to meet their demand. The volume
of this overflow traffic may fluctuate dramatically from day to day. During
fiscal 2001 we had two customers and during fiscal 2002 we had one customer,
respectively, whose traffic accounted for more than 10% of our consolidated
revenues. Through the high quality and reliability of our service and the
underlying infrastructure we were able to maintain the combined volume of
traffic carried with these large customers during a period in which the market
continued to experience downward pricing pressure. This pricing pressure is due
to a combination of several factors, most notably an increase in the activation
of fiber optic cable along U.S.-Mexico routes and regulatory changes which
permitted the top tier carriers to lower their international carrier services
rates. Therefore, although we experienced significant increased volumes in this
line of business during the year, the increased additional revenue was not
proportional. Additionally, we believe we can create
7
opportunities to transport traffic for Mexican carriers. We should be able to
use the increased volumes to negotiate more favorable termination costs in
Mexico, and with the receipt of our Mexican long distance license, we should be
able to cut our costs for carrying this traffic by further extending our own
network facilities in Mexico.
Over the last few quarters, as the telecommunications sector has continued
to suffer financially and operationally, we have seen a trend towards more and
more of our carriers requiring substantial deposits and or prepayments. As a
result, in December 2002, we were forced to idle our network until such time as
we can secure letters-of-credit or obtain sufficient cash to meet the
prepayments and deposit requirements of many of our carriers. Since that time we
have not been carrying any carrier traffic and have not generated any revenues
related to this product.
We occupy a unique position in the market for carrier services. Our unique
licenses from the Mexican government allow us to transport traffic from the
United States to Mexico as data/IP or packetized data and outside of the
International Settlement Policy, which is the international accounting and
settlements policy governing the methods that U.S. and foreign carriers use to
settle the cost of carrying traffic over each other's network. The International
Settlements Policy causes other concessionaires to charge higher rates than they
might otherwise charge. Additionally, the receipt of our Mexican long distance
license should help with a historical disadvantage we had when competing with
several of these larger carriers. At the other end of the spectrum, we compete
with numerous small companies who illegally carry traffic into and within
Mexico. These companies do not pay the fees charged by Mexican-licensed carriers
and are therefore able to offer very low prices. However, these companies do not
typically own their own transmission facilities, and are not able to control
costs or transport large volumes of traffic as effectively as us for long
periods of time because they may also be subject to having their operations shut
down by Mexican regulators.
We believe that we have less than 1% of the market for carrier termination
services. See our Risk Factor captioned "We may not successfully compete with
others in the industry" for additional description of the competition in this
market.
Network Services
We offer private communications links for multi-national and Latin American
corporate or enterprise customers who use a high volume of telecommunications
services and need greater dependability than is available through public
networks. These services include data, voice, and fax transmission as well as
Internet. During fiscal 2001 and 2002, we did not devote significant resources
toward the development of this business in Mexico.
We have and will continue to use the provision of private network services
as an entry into new Latin markets that are in the process of migrating from
state-run systems to competitive systems.
We compete with MCI/Worldcom and Americatel, as well as the former
telecommunication monopolies in the Latin American countries in providing
private network services. Factors contributing to our competitiveness include
reliability, network quality, speed of installation, and in some cases,
geography, network size, and hauling capacity. We believe we have a reputation
as a responsive service provider capable of processing all types of network
traffic. We are at a competitive disadvantage with respect to larger carriers
who are able to provide networks for corporations that encompass more countries
in Latin America, as well as Europe, Asia and other parts of the globe. Prices
in this market are also generally declining as fiber optic cable is activated.
8
We believe that we have less than 1% of the market for private network
services.
Retail Services
Our principal retail services product during fiscal 2001 and 2002 was
integrated prepaid services, which are generated by calls processed by us
without live or automated operator assistance. A majority of these calls were
generated by our payphones and communication centers in Mexico in exchange for
immediate cash payment in pesos.
In Mexico, we compete with other companies who have a comercializadora
license for integrated prepaid traffic. The comercializadora license allows
companies to interconnect with the local telecommunications infrastructure in
order to resell local and long distance services from public telephones or
calling stations.
An additional product is operator-assistance for international collect,
person-to-person, third party, calling card and credit card calls originating in
Mexico. Again the primary sources of demand for operator assistance are our pay
telephones and communication centers in Mexico.
Our postpaid services product has declined due to lower volumes of
operator-assisted calls originating in Mexico and terminating in the U.S, new
services such as prepaid cellular being introduced into the market by our
competitors, and Mexican cellular providers introducing the concept of "calling
party pays." In spite of these declines we believe our owned retail distribution
network will continue to generate call services traffic. Competition for traffic
from third parties in this market revolves largely around the amount of
commissions the operator services provider is willing to pay. We are currently
focusing more on improving our profitability rather than simply generating
additional revenues, and we have therefore lost ground to competitors willing to
accept lower profit margins by paying higher commissions. However, we believe we
have a reputation as a reliable provider, and we are also able to offer the
value-added service of intelligent pay telephones in hotel lobbies.
Other than Telmex we compete with BBG Communications, Servitel, Sendetel,
Ahorratel and Modutel in the Call Services area.
We believe that we have less than 1% of the market for retail services.
Network
We have established a technologically advanced network capable of using
both satellite and fiber optic cable to transmit telecommunications traffic
between the U.S. and Mexico. Our network incorporates ATM technology, which is
compatible with other transmission technologies such as frame relay and Internet
protocols, permitting us to explore even more cost-effective transmission
methods in the future. See page 4, "Strategy and Competitive Conditions" for a
description of ATM technology. Frame relay is a method of allocating capacity on
demand so that a customer's needs may be filled with less capacity than the
traditional system of dedicating a certain amount of capacity to a particular
purpose. Internet protocol refers to a method of organizing information such
that it may be carried on the Internet. Our network also employs compression
technology to carry greater volumes on the same facilities.
Historically, our strategy has been to lease the fiber optic capacity to
access major metropolitan areas in Mexico and satellite to access semi-rural and
smaller metropolitan areas. If there is a problem in either portion of the
network, we will be able to minimize service interruptions by transferring
traffic
9
to the other portion until the problem is resolved. During fiscal 2003, we plan
to enhance our existing network with the purchase of VOIP gear, which will allow
us to reduce our fixed costs as well as increase the flexibility of the network.
The installation of the VoIP network is contingent upon our ability to obtain
equity or debt financing to purchase the necessary equipment.
Historically, we have leased fiber capacity from third parties, primarily
Bestel USA, Inc. and Iusacel, S.A. de C.V. and satellite capacity on the Mexican
satellites Solidaridad I and II, from COMSAT, S.A. de C.V. or "COMSAT. ATSI has
leased a fixed amount of capacity from each of these vendors for a fixed monthly
price. Each of these vendors has the right to terminate service for non-payment.
Subsequent to year-end, Bestel USA, Inc. terminated service on our fiber route
to Mexico City due to non-payment. While we have maintained our fiber capacity
with Iusacel, S.A. de C.V. into Monterrey, we are not currently using this
capacity. In November 2002, we began leasing satellite capacity directly from
SATMEX or Satelites Mexicanos, S.A. de C.V.
We own switching and other equipment in the U.S. and Mexico. In April 1999,
we began using our new Nortel DMS 300/250 International Gateway Switch in our
Dallas location. This advanced switch will permit us to deploy the new retail
and wholesale products that are key to our competitive strategy. During fiscal
2002, we purchased and installed a super node in our Dallas location -
increasing the capabilities of our existing switch.
All aspects of our owned network facilities are designed to allow for
modular expansion, permitting us to increase capacity as needed.
Until we have completed the build-out of our own network under the terms of
our recently acquired long distance concession license we must contract with
others to complete the intra-Mexico and domestic U.S. portions of our network.
We have reciprocal service agreements in place with five Mexican long distance
license holders, Operadora Protel, S.A. de C.V., Avantel, S.A. de C.V., Miditel,
S.A. de C.V., Iusacell, S.A. de C.V. and Bestel, S.A. de C.V. Our Mexican long
distance license will allow us to interconnect directly with Telmex and other
local carriers and should lower our transmission costs. We have reciprocal
service agreements with Radiografica Costarricense, S.A. for transmission
services in Costa Rica and El Salvador. In the U.S., we purchase long distance
capacity from various companies.
We purchase local line access in Mexico for our payphones and communication
centers from Telmex, and various cellular companies including SOS
Telecomunicaciones, S.A. de C.V., Portatel del Sureste, S.A. de C.V., Iusacell,
S.A. de C.V., Movitel del Noreste, S.A. de C.V, and Baja Celular Mexicana, S.A.
de C.V.
Licenses/Regulatory
Our operations are subject to federal, state and foreign laws and
regulations.
Federal
Pursuant to Section 214 of the Communications Act of 1934, the Federal
Communications Commission ("FCC") has granted us global authority to provide
switched international telecommunications services between the U.S. and certain
other countries. We maintain informational tariffs on file with the FCC for our
international retail rates and charges.
10
The Telecommunications Act of 1996, which became law in February 1996,
was designed to dismantle the monopoly system and promote competition in all
aspects of telecommunications. The FCC has promulgated and continues to
promulgate major changes to their telecommunications regulations. One aspect of
the Telecom Act that is of particular importance to us is that it allows Bell
Operating Companies or BOCs to offer in-region long distance service once they
have taken certain steps to open their local service monopoly to competition.
Given their extensive resources and established customer bases, the entry of the
BOCs into the long distance market, specifically the international market, will
create increased competition for us. Southwestern Bell's application to offer in
region long distance was approved in June 2000.
Although we do not know of any other specific new or proposed
regulations that will affect our business directly, the regulatory scheme for
competitive telecommunications market is still evolving and there could be
unanticipated changes in the competitive environment for communications in
general. For example, the FCC is currently considering rules that govern how
Internet providers share telephone lines with local telephone companies and
compensate local telephone companies. These rules could affect the role that the
Internet ultimately plays in the telecommunications market.
The International Settlements Policy governs settlements between top
tier U.S. carriers' and foreign carriers' costs of terminating traffic over each
other's networks. The FCC recently enacted certain changes in our rules designed
to allow U.S. carriers to propose methods to pay for international call
termination that deviate from traditional accounting rates and the International
Settlement Policy. The FCC has also established lower benchmarks for the rates
that U.S. carriers can pay foreign carriers for the termination of international
services and these benchmarks may continue to decline. These rule changes have
lowered the costs of our top tier competitors and are contributing to the
substantial downward pricing pressure facing us in the carrier market.
State
Many states require telecommunications providers operating within the
state to maintain certificates and tariffs with the state regulatory agencies,
and to meet various other requirements (e.g. reporting, consumer protection,
notification of corporate events). We believe we are in compliance with all
applicable State laws and regulations governing our services.
9
Mexico
The Secretaria de Comunicaciones y Transportes or the SCT and COFETEL
(Comision Federal de Telecomunicaciones or Federal Telecommunications
Commission) have issued our Mexican subsidiariesATSICOM the following licenses:
Comercializadora License - a 20-year license issued in February 1997
allowing for nationwide resale of local calling and long distance services from
public pay telephones and communication centers.
Teleport and Satellite Network License - a 15-year license issued in May
1994 allowing for transport of voice, data, and video services domestically and
internationally. The license allows for the operation of a network utilizing
stand-alone VSAT terminals and/or teleport facilities, and connection to the
local network via carriers having a long distance license. A shared teleport
facility enables us to provide services to multiple customers through a single
teleport.
Packet Switching Network License - a 20-year license issued in October 1994
allowing for the installation and operation of a network interconnecting packet
switching nodes via our proprietary
11
network or circuits leased from other licensed carriers. The license supports
any type of packet switching technology, and can be utilized in conjunction with
the Teleport and Satellite Network License to build a hybrid nationwide network
with international access to the U.S.
Value-Added Service License - an indefinite license allowing us to provide
a value added network service, such as delivering public access to the Internet.license:
Concession License - a 30-year license granted in June 1998 to install
and operate a public network.
Like the United States, Mexico is in the process of revising its
regulatory scheme consistent with its new competitive market. Various technical
and pricing issues related to connections between carriers are the subject of
regulatory actions, which will effect the competitive environment in ways we are
not able to determine at this time.
Other Foreign Countries
In addition to Mexico,Employees
As of July 31, 2003, we had operations in Costa Rica and El Salvador. The
telecommunications markets in these countries are in transition from monopolies
to functioning, competitive markets. We have established a presence in those
countries by providing a limited range of services, and intend to expand the
services we offer as regulatory conditions permit. We do not believe that any of
our current operations in those countries require licensing, and we believe we
will be in compliance with applicable laws and regulations governing our
operations in those countries. In October 2002 we completed the sale of a
handful of network services customers reducing our operations in Costa Rica.
Employees
At January 15, 2003, we (excluding ATSI-Mexico) had 64 employees, all of whom performed
operational, technical and administrative functions.
We believe our future success will depend to a large extent on our
continued ability to attract and retain highly skilled and qualified employees.
We consider our employee relations to be good. None of these aforementioned
employees belong to labor unions.
At December 15, 2002, ATSI-Mexico had 358 full-time employees of whom 310
were operators and 48 performed sales, marketing, operational, technical and
administrative functions. A portion of ATSI-Mexico's employees, chiefly
operators, belong to a union.
ADDITIONAL RISK FACTORS
The purchase of our common stock is very risky. You should not invest
any money that you cannot afford to lose. Before you buy our stock, you should
carefully read our entire 10-K. We have highlighted for you below all of our periodic reports, including our 10-Q's and the material risks to our business of which we are aware.entire
Form 10-K.
RISKS RELATED TO OPERATIONS
..o Our auditors have questioned our viability
12
Our auditors' opinion on our financial statements as of July 31, 20022003 calls
attention to substantial doubts as to our ability to continue as a going
concern. This means that they question whether we can continue in business.
If we cannot continue in business, our common stockholders would likely
lose their entire investment. Our financial statements are prepared on the
assumption that we will continue in business. They do not contain any
adjustments to reflect the uncertainty over our continuing in business.
..o We expect to incur losses, so if we do not raise additional capital we
may go out of business
We have never been profitable and may not become profitable in the near
future. We have invested and will continue to invest money in our networksales and marketing and
personnel in order to maintain and develop the infrastructurecustomer base we need to
compete in the markets for our services and achieve profitability. Our investment in our network may not generate the savings and
revenues that we anticipate because of a variety of factors, such as:
- delays in negotiating acceptable interconnection agreements with
Telmex, the former monopoly carrier in Mexico;
- delays in construction of our network; and
- operational delays caused by our inability to obtain additional
financing in a timely fashion.
In the past we have financed our operations almost exclusively through the
private sales of securities. Since we are losing money, we must raise the
money we need to continue operations and expand our network either by selling more securities or
borrowing money. We are not currently able to sell additional securities or
borrow money on terms as desirable as those available to profitable
companies, and may not be able to raise money on any acceptable terms. If
we are not able to raise additional money, we will not be able to implement
our strategy for the future, and we will either have to scale back our
operations or stop operations.
As of July 31, 2002, we had negative working capital of approximately $13.2
million. In order to maintain our financial position going forward it will
be necessary for us to raise funds necessary to cover our recurring
negative cash flows from operations. We cannot estimate what that amount
will be with reasonable certainty. For the twelve months10
During fiscal year ended July 31, 2002,2003 our negative cash flows from operations priortwo primary operating
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. Additionally, the court ordered joint
administration of both cases on April 9, 2003 and subsequently on May 14,
2003 the court converted the cases to debt service and
capital expenditures were approximately $519,000. Conservatively, we will
need to be able to raise similar capital overChapter 7. These subsidiaries have
terminated all operations. And the next nine to twelve
months.
.. We must expand and operate our network
Our success and ability to increase our revenues depends upon our ability
to deliver telecommunication services which, in turn, depends on our
ability to integrate new and emerging technologies and equipment into our
network and to successfully expand our network. Our ability to continue to
expand, operate and develop our network will depend on, among other
factors, our ability to accomplishBankruptcy is managing the following:
- obtain switch sites;
- interconnect withliquidation
process of all the local, public switched telephone network
and/or other carriers; and
- obtain access to or ownership of transmission facilities that link
our switches to other network switches.
When we expand our network, we will incur additional fixed operating costs
that will exceed
13
revenues until we generate additional traffic. We may not be able to expand
our network in a cost-effective manner, generate additional revenues, which
cover or exceed the expansion costs or operate the network efficiently.
Our network and operations face risks that we cannot control, such as
damages causedassets held by fire, power loss and natural disasters. Any failure of
our network or other systems our hardware could damage our reputation,
result in loss of customers and harm our ability to obtain new customers.
..these entities.
o It is difficult for us to compete with much larger companies such as
AT&T, Sprint, MCI-WorldcomMCI and Telmex
The large carriers such as AT&T, Sprint and MCI/WorldcomMCI in the U.S., and Telmex in
Mexico, have more financial resources and extensive owned networks than we
do, which enables them to control costs more easily than we can. They are
also able to take advantage of their large customer base to generate
economies of scale, substantially lowering their per-call costs. Therefore,
they are better able than we are to lower their prices as needed to retain
customers; additionally they are better able to offer flexible payment
terms to their customers. In addition, these companies have stronger name
recognition and brand loyalty, as well as a broader portfolio of services,
making it difficult for us to attract new customers. Our competitive
strategy in the U.S. revolves around targeting markets that are largely
underserved by the big carriers. However, some larger companies are
beginning efforts or have announced that they plan to begin efforts to
capture these markets.
Mergers, acquisitions and joint ventures in our industry have created and
may continue to create more large and well-positioned competitors. These
mergers, acquisitions and joint ventures could increase competition and
reduce the number of customers that purchase carrier service from us.
..o Competition could harm us
International telecommunications providers like us compete based on price,
customer service, transmission quality and breadth of service offerings.
Our carrier and prepaid card customers are especially price sensitive.
Many of our larger competitors enjoy economies of scale that can result in
lower termination and network costs. This could cause significant pricing
pressures within the international communications industry. In recent
years, prices for international and other telecommunications services have
decreased as competition continues to increase in most of the markets in
which we currently compete or intend to compete. If these pricing pressures
continue, we must continue to lower our costs in order to maintain
sufficient profits to continue in this market. We believe competition will
intensify as new entrants increase as a result of the new competitive
opportunities created by the Telecommunications Act of 1996, implementation
by the Federal Communications Commission of the United States' commitment
to the World Trade Organization, and privatization, deregulation and
changes in legislation and regulation in many of our foreign target
markets. We cannot assure you that we will be able to compete successfully
in the future, or that such intense competition will not have a material
adverse effect on our business, financial condition and results of
operations.
..o Competition in Mexico is increasing
Mexican regulatory authorities have granted concessions to 21at least 30
companies, including Telmex, to construct and operate public, long distance
telecommunications networks in Mexico. Some of these new competitive
entrants have as their partners major U.S. telecommunications providers
including AT&T (Alestra), MCIWorldcom and MCI (Avantel) and Verizon. (Iusatel). Mexican regulatory authorities
have also granted concessions to provide local exchange services to several
telecommunications 14
providers, including Telmex and Telefonia Inalambrica del NorteRed de Servicios de
Telecomunicaciones, S.A. de C.V., Megacable Comunicaciones de Mexico and
several of Mexico's long distance concessionaires. We compete or will
compete to provide services in Mexico with numerous other systems
integration, value-added and voice and data services providers, some of
which focus their efforts on the same customers we target. In addition to
these competitors, recent and pending deregulation in Mexico may encourage
new entrants.
11
Moreover, while the WTO Agreement could create opportunities to enter new
foreign markets, the United States' and other countries' implementation of
the WTO Agreement could result in new competition from operators previously
banned or limited from providing services in the United States. This could
result in increased competition, which could materially and adversely
affect our business, financial condition and results of operations.
..o Our Mexican facilities-based license poses risks
Our MexicanCurrently we own 49% of ATSICOM that holds the Concession . 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, orwhich 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
- --------------------
o Maintain approximately 10 millions dollars in registered and subscribed
capital
o Install and operate a network in Mexico, the Mexican government will
need to approve the operating plan before is implemented, additionally
the Mexican government will need to approve any future changes to the
operating plan before it can be implemented.
o Continuously develop and conduct training programs for its staff
o The Concessionaire, at all times needs to have an assigned individual
responsible for the technical functions to operate the concession.
Concession services requirements
- --------------------------------
o The Concessionaire is required to provide continuous and efficient
services at all times to its customers.
o The Concessionaire must establish a complaint center and correction
facilities center. We are required to report to the Mexican concession contains several restraints. Specifically, it limitsGovernment
on a monthly basis the scopecomplaints received and the actions taken to
resolve the problems.
Tariff Requirements
- -------------------
o The Concessionaire will only be authorized to invoice its customer's
tariffs rates that have been approved by the Mexican government.
Verification and Information requirements
- -----------------------------------------
o The Concessionaire is required to 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 ourwhere the services are being provided.
12
o The Concessionaire is required to 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.
o The Concessionaire is required to provide statistic reports of traffic,
switching capacity and other parameters in the network.
Guarantee requirements
- ----------------------
The Concessionaire is required to have a bond/ insurance policy for
approximately $500,000 dollars, where the Mexican network and has minimum invested
capital requirements and specific debt to equity requirements.Federal Treasury
Department will be the beneficiary in the event the Mexican government
revokes the concession license.
We cannot assure you that:that we and our partner, Telemarketing:
- we 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.
..o The telecommunications industry has been characterized by steady
technological change. We may not be able to raise the money we need to
acquire the new technology necessary to keep our services competitive.
To complete successfully in the carrier and retailnetwork services markets, we
must maintain the highest quality of service. Therefore we must continually
rely on our partners, Dialmex and Telemarketing to upgrade ourtheir network to
keep pace with technological change.changes. This is expensive, and weour partners,
Dialmex and Telemarketing do not have substantial resources that our large
competitors have.
.. We may not be able to collect large receivables, which could create serious
cash flow problems
From time to time some of our carrier services network customers generate
large receivable balances. We incur substantial direct costs to provide
this service since we must pay our carriers to terminate these calls. If a
customer fails to pay a large balance on time, our cash flow may be
15
substantially reduced and we would have difficulty paying our carriers on
time. If our carriers suspend services to us, it may affect all our
customers.
..o We may not be able to pay our suppliers on time, causing them to
discontinue critical services
WeHistorically, we have not always paid all of our suppliers on time due to
temporary cash shortfalls. Our critical suppliers are SATMEXSatmex for satellite transmission
capacityour
network management services and for our carrier services we depend on
various Mexican and U.S. long distance companies to complete the
intra-Mexico and intra-U.S. long distance portion of our calls. For
fiscal 2002, the monthly average amount due to these suppliers as a group
was approximately $2.9 million. Critical
carriers and suppliers may discontinue serviceour services, if we are not able to
make payments on time in the future. In addition,
equipment vendors may refuse to provide critical technical support for
their products if they are not paid on time under the terms of support
arrangements. Our ability to make payments on time
depends on our ability to raise additional capital or improve our cash flow
from operations.
.. We may not be able to make our debt payments on time or meet financial
covenants in our loan agreements, causing our lenders to repossess critical
equipment
We purchased some of our equipment with borrowed money. This equipment
includes our DMS 250/350 International gateway switch from Nortel,
additional DMS equipment from Nortel and certain equipment in Mexico from
IBM. Under our restructured debt agreements we are required to pay these
three lenders approximately $186,000 on a monthly basis. The Notes to our
Consolidated Financial Statements included in this Form 10-K include more
information about our equipment, equipment debt and capital lease
obligations. The lenders have a security interest in the equipment to
secure repayment of the debt. This means that the lenders may take
possession of the equipment and sell it to repay the debt if we do not make
our payments on time. We have not always paid all of our equipment lenders
on time due to temporary cash shortfalls. These lenders may exercise their
right to take possession of certain critical equipment if we are not able
to make payments on time in the future. Our ability to make our payments on
time depends on our ability to raise additional capital or improve our cash
flow from operations. We are in default of our Nortel switch loan agreement
as of the end of our fiscal year, July 31, 2002, due to our failure to meet
financial covenants related to revenues, gross margins and EBITDA. We have
had ongoing conversations with our lender about re-setting the covenants
but have not as of the date of this filing finalized new covenants.
Subsequent to July 31, 2002 we have not made quarterly payments totaling
approximately $282,000. Accordingly, we have accounted for this capital
lease as a current liability in our accompanying consolidated financial
statements. For more information on this default, you should see the
Liquidity and Capital Resources section of this 10-K for the year ending
July 31, 2002. As of January 31, 2003, we had not yet made payments
totaling approximately $325,000 related to our capital lease with IBM. For
more information on our other loans and capital leases you should see the
footnotes of this 10-K for the year ended July 31, 2002.
.. A large portion of our revenue is concentrated among a few customers,
making us vulnerable to sudden revenue declines
At year-end, our revenues from carrier services comprised about 81% of our
total revenues. The volume of business sent by each customer fluctuates,
but this traffic is often heavily concentrated amongst a handful of
customers. During some periods in the past, two of these customers have
been responsible for 60%-80% of this traffic. Generally, our customers are
able to re-route their traffic to other carriers very quickly in response
to price changes. If we are not able to continue to offer competitive
prices, these customers will find some other supplier and we will lose a
substantial
16
portion of our revenue very quickly. In addition, mergers and acquisitions
in our industry may reduce the already limited number of customers for our
carrier services.
..o We may not be able to lease transmission facilities we need at
cost-effective rates
We do not own all of theany transmission facilities we needneeded to complete our calls.
Therefore, we depend on contractual arrangements with other
telecommunications companies to completeprovide our network. For example, although
weservices. We do not own any
VoIP network, switching network and the switching and transport equipment neededrequired to receive and
transmit calls via satellitecalls; we depend on our carriers for these services and fiber optic lines, we do not own a satellite or any
fiber optic linesour
carrier service agreement with our partners, Telemarketing and must therefore lease transmission capacity from other
companies. We mayDialmex. Our
carriers' and partners' might not be able to lease facilities at
cost-effective rates in the future or enter into contractual arrangements
necessary for us to expandprovide competitive services to our network or improve our network as necessary to keep up with
technological change.
..carrier customers.
13
o The carriers on whom we rely for intra-Mexico long distance may not
stay in business leaving us fewer and more expensive options to
complete calls
There are only 21-licensed30-licensed Mexican long distance companies,companies. Through our
partners and our Concession license we currently have agreements with five
of them. If the number of carriers who provide intra-Mexico long distance
is reduced, we will have fewer route choices and may have to pay more for
this service.
..o We may have service interruptions and problems with the quality of
transmission, causing us to lose call volume and customers
To retain and attract customers, we must keep our networkservices operational 24
hours per day, 365 days per year. We have experienced service interruptions
and other problems that affect the quality of voice and data transmission.
We may experience more serious problems. In addition to the normal risks
that any telecommunications company faces (such as fire, flood, power
failure, equipment failure), we may have a serious problem if a meteor or
space debris strikes the satellite that transmits our traffic, or a
volcanic eruption or earthquake interferes with our operations in Mexico
City. If a portion of our suppliers network is effected by such an event, a
significant amount of time could pass before we could re-route traffic from
one portion of our networkcarrier to the other,another, and there may not be sufficient capacity on only one portion of the network to carry
all of ourthe traffic at any given time.
..o Changes in telecommunications regulations may harm our competitive
position
Historically, telecommunications in the U.S. and Mexico have been closely
regulated under a monopoly system. As a result of the Telecommunications
Act of 1996 in the U.S. and new Mexican laws enacted in the 1990's, the
telecommunications industry in the U.S. and Mexico are in the process of a
revolutionary change to a fully competitive system. U.S. and Mexican
regulations governing competition are evolving as the market evolves. For
example, FCC regulations now permit the regional Bell operating companies
(former local telephone monopolies such as Southwestern Bell) to enter the
long distance market if certain conditions are met. The entry of these
formidable competitors into the long distance market will make it more
difficult for us to establish a consumer customer base. There may be
significant regulatory changes that we cannot even predict at this time. We
cannot be sure that the governments of the U.S. and Mexico will even
continue to support a migration toward a competitive telecommunications
market.
..o Regulators may challenge our compliance with laws and regulations
causing us considerable expense and possibly leading to a temporary or
permanent shut down of some operations
17
Government enforcement and interpretation of the telecommunications laws
and licenses is unpredictable and is often based on informal views of
government officials and ministries. This is particularly true in Mexico
and certain of our target Latin American markets, where government
officials and ministries may be subject to influence by the former
telecommunications monopoly, such as Telmex. This means that our compliance
with the laws may be challenged. It could be very expensive to defend this
type of challenge and we might not win. If we were found to have violated
the laws that govern our business, we could be fined or denied the right to
offer services.
..o Our operations may be affected by political changes in Mexico and other
Latin American countries
The majority of our foreign operations are in Mexico. The political and
economic climate in Mexico is more uncertain than in the United States and
unfavorable changes could have a direct impact on our operations in Mexico.
The Mexican government exercises significant influence over many aspects of
the Mexican economy. For example, a newly elected set of government
officials could decide to quickly reverse the deregulation of the Mexican
telecommunications industry economy and take steps such as seizing our
property, revoking our licenses, or modifying our contracts with Mexican
suppliers. A period of poor economic performance could reduce the demand
for our services in Mexico. There might be trade disputes between the
United States and Mexico that result in trade barriers such as additional
14
taxes on our services. The Mexican government might also decide to restrict
the conversion of pesos into dollars or restrict the transfer of dollars
out of Mexico. These types of changes, whether they occur or are only
threatened, could have a material adverse effect on our results of
operations and would also make it more difficult for us to obtain financing
in the United States.
.. If the value of the Mexican Peso declines relative to the Dollar, we will
have decreased revenues as stated Dollars
Approximately 15% of ATSI's revenue is collected in Mexican Pesos. If the
value of the Peso relative to the Dollar declines, that is, if Pesos are
convertible into fewer Dollars, then our revenues, which are stated in
dollars, will decline. We do not engage in any type of hedging transactions
to minimize this risk and do not intend to do so.
RISKS RELATED TO FINANCING
..o The terms of our preferred stock include disincentives to a merger or
other change of control, which could discourage a transaction that
would otherwise be in the interest of our stockholders
In the event of a change of control of ATSI, the terms of the Series D
Preferred Stock permit the holder to choose either to receive whatever cash
or stock the common stockholders receive in the change of control
transaction as if the Series D stock Preferred Stock had been converted, or
to require us to redeem the Series D Preferred Stock at $1,560 per share.
If all 742 shares currently outstanding were outstanding at the time of a
change of control, this could result in a payment to the holder of
approximately $1.2 million. The possibility that we might have to pay this
large amount of cash would make it more difficult for us to agree to a
merger or other opportunity that might arise even though it would otherwise
be in the best interest of the stockholders.
..o We may have to redeem the Series D and Series E Preferred Stock for a
substantial amount of cash, which would severely restrict the amount of
cash available for our operations.
18
The terms of the Series D Preferred Stock require us to redeem the stock
for cash in two circumstances in addition to the change of control
situation described in the immediately preceding risk factor.
First, the terms of the Series D Preferred Stock prohibit the holder from
acquiring more than 11,509,944 shares of our common stock, which is 20% of
the amount of shares of common stock outstanding at the time we issued the
Series D Preferred Stock. The terms of the Series D Preferred Stock also
prohibit the holder from holding more than 5% of our common stock at any
given time. Due to the floating conversion rate, the number of shares of
common stock that may be issued on the conversion of the Series D Preferred
Stock increases as the price of our common stock decreases, so we do not
know the actual number of shares of common stock that the Series D
Preferred Stock will be convertible into.
Second, if we refuse to honor a conversion notice or a third party
challenges our right to honor a conversion notice by filing a lawsuit, the
holder may require us to redeem any shares it then holds for $1,270 per
share. If all 742 shares currently outstanding were outstanding at the time
of redemption, this would result in a cash payment of approximately
$942,000 plus accrued and unpaid dividends. If we were required to make
a
cash payment of this size, it would severely restrict our ability to fund
our operations. On January 26,24, 2003 we received a demandredemption letter from
the Series D holder requesting that we redeem all of their outstanding
shares. As of the date of this filing no common stock has been issued to
satisfy this demand. However, we have adjusted the Series D Preferred Stock
to the full redemption amount of approximately $942,000 by recording a
dividend of approximately $284,000. In addition the redemption amount was
reclassed to accrued liabilities. It is the position of the Company that no
additional investor shares are owed; further the Company has filed a
lawsuit against one or more parties to whom the alleged additional shares
are owed. We are currently seeking damages from these parties.
Similarly, the Series E Preferred Stock requires mandatory redemption if
(a) we fail to: issue shares of common stock upon conversion, remove
legends on certificates representing shares of common stock issued upon
conversion or to fulfill certain covenants set forth in the Securities
Purchase Agreement between ATSI and the holders of the Series E Preferred
Stock; (b) we fail to obtain effectiveness of the registration statement
covering the shares of common stock to be issued upon the conversion of the
Series E Preferred Stock prior to March 11, 2001; (c) certain bankruptcy
and similar events occur; (d) we fail to maintain the listing of the common
stock on the Nasdaq National Market, the Nasdaq Small Cap Market, the AMEX
15
or the NYSE; or (e) our long distance concession license from the Republic
of Mexico is terminated or limited in scope by any regulatory authorities.
The Redemption Price equals the greater of (x) 125% of the stated value
($1,000) plus 6% per annum of the stated value plus any conversion default
payments due and owing by ATSI and (y) the product of (i) the highest
number of shares of common stock issuable upon conversion times (ii) the
highest closing price for the common stock during the period beginning on
the date of first occurrence of the mandatory redemption event and ending
one day prior to the date of redemption minus the amount of money we
receive upon the exercise of the investment options provided in the Series
E Preferred Stock which, upon conversion allows the holders to purchase an
additional 0.8 share of ATSI common stock for each share of ATSI common
stock received upon conversion. While we have not received a formal demand
letter from the holder of the Series E Preferred Stock requesting
redemption we have received conversion notices for which we have not issued
common stock. ..However, during the fiscal year 2003, the additional
"beneficial conversion feature" of approximately $292,500 related to the
remaining 1,170 Series E Preferred Stock was allocated to additional
paid-in capital as a discount.
o We may redeem our preferred stock only under certain circumstances, and
redemption requires us to pay a significant amount of cash and issue
additional warrants; therefore we are limited as to what steps we may
take to prevent further dilution to the common stock if we find
alternative forms of financing
19
We may redeem the Series A Preferred Stock only after the first anniversary
of the issue date, and only if the market price for our common stock is
200% or more of the conversion price for the Series A Preferred Stock. The
redemption price for the Series A stock is $100 per share plus accrued and
unpaid dividends. We may redeem the Series D Preferred Stock only if the
price of our common stock falls below $9.00, the price on the date of
closing the Series D Preferred Stock. The redemption price is $1,270 per
share, plus accrued but unpaid dividends, plus an additional warrant for
the purchase of 150,000 shares of common stock at a price of $4.37 per
share. Subject to certain conditions, we have the right to redeem the
Series E Preferred Stock if, at any time after October 11, 2001, on any
trading day and for a period of 20 consecutive trading days prior thereto,
the closing bid price is less than $1.24. In the event that we are able to
find replacement financing that does not require dilution of the common
stock, these restrictions would make it difficult for us to "refinance" the
preferred stock and prevent dilution to the common stock.
RISKS RELATING TO MARKET FOR OUR COMMON STOCK
.. Trading ino Our common stock was delisted from AMEX
The company was de-listed from AMEX on April 24, 2003 and currently we are
trading our common stock has been halted and may not be resumedas an Over The AMEX halted trading in our stock pending the filing of our Form 10-K
and Form 10-Q. There has been no guarantee from the AMEX as to when the
halting of trading in our stock will be lifted. If we do not resume tradingCounter (OTC) security on the AMEX, trading in our common stock would be conducted in the
over-the-counter market on the electronic bulletin board or in the pink
sheets, administeredwhich is regulated by the NASD. This would likelyhas adversely affectaffected the
liquidity of the common stock because it would beis more difficult for stockholders
to obtain accurate stock quotations. ..In addition, since our stock is
currently not being traded on a national exchange, sales of our stock would
likely be subject to the SEC's penny stock rules, which generally create a
delay between the time that a stockholder decides to sell shares and the
time that the sale may be completed.
o The price of our common stock has been volatile and could continue to
fluctuate substantially
Our common stock is traded on the AMEX.pink sheets and is regulated by the NASD.
The market price of our common stock has been volatile and could fluctuate
substantially based on a variety of factors, including the following:
- announcements of new products or technologies innovations by us or
others;
- variations in our results of operations;
- the gain or loss of significant customers;
- the timing of acquisitions of businesses or technology licenses;
16
- legislative or regulatory changes;
- general trends in the industry;
- market conditions; and
- analysts' estimates and other events in our industry.
..o Future sales of our common stock in the public market could lower our
stock price
Future sales of our common stock in the public market could lower our
stock price and impair our ability to raise funds in new stock offerings.
As of January 15,July 31, 2003, we had 103,638,690111,883,134 shares of common stock outstanding
and 13,750,6628,673,659 shares issuable upon exercise of outstanding options and
warrants. In addition, we have shares which could be issued upon
conversion of our outstanding Series A, D and E, F and G Preferred Stock
(subject to adjustment). Additionally, we may issue a significant number
of additional shares of common stock as consideration for acquisitions or
other investments as well as for working capital. Sales of a substantial
amount of common stock in the public market, or the perception that these
sales may occur, could adversely affect the market price of our common
stock prevailing from time to time in the public market and could impair
our ability to raise funds in additional stock offerings.
20
..o We will likely continue to issue common stock or securities convertible
into common stock to raise funds we need, which will further dilute
your ownership of ATSI and may put additional downward pricing pressure
on the common stock
Since we continue to operate at a cash flow deficit, we will continue to
need additional funds to stay in business. At this time, we are not likely
to be able to borrow enough money to continue operations on terms we find
acceptable so we expect to have to sell more shares of common stock or more
securities convertible in common stock. Convertible securities will likely
have similar features to our existing preferred stock, including conversion
at a discount to market. The sale of additional securities will further
dilute your ownership of ATSI and put additional downward pricing pressure
on the stock.
..o The potential dilution of your ownership of ATSI will increase as our
stock price goes down, since our preferred stock is convertible at a
floating rate that is a discount to the market price
Our Series A, D, E, F and G Preferred Stock is convertible into common
stock based on a conversion price that is a discount to the market price
for ATSI's common stock. The conversion price for the Series A, Series F
and Series G Preferred Stock is reset each year on the anniversary of the
issuance of the stock, and the conversion price for the Series D and Series
E Preferred Stock floats with the market on a day-to-day basis. For each
series, the number of shares of common stock that will be issued on
conversion increases as the price of our common stock decreases. Therefore,
as our stock price falls, the potential dilution to the common stock
increases, and the amount of pricing pressure on the stock resulting from
the entry of the new common stock into the market increases.
..o Sales of common stock by the preferred holders may cause the stock
price to decrease, allowing the preferred stock holders to convert
their preferred stock into even greater amounts of common stock, the
sales of which would further depress the stock price
The terms of the preferred stock may amplify a decline in the price of our
common stock since sales of the common stock by the preferred holders may
cause the stock price to fall, allowing them to convert into even more
shares of common stock, the sales of which would further depress the stock
price.
..17
o The holders of convertible subordinated debentures issued by the
Company during the year ended July 31, 2003 may convert those
debentures into common stock at a conversion rate of $0.135 per share
In January 2003 we issued 275 9% Convertible Subordinated Debentures with a
face value of $1,000, due January 2005. The debentures convert into common
stock at a conversion price of $0.135. The terms of the convertible
debentures require us to adjust the conversion price if we sell common
stock or securities convertible into common stock at a discount to market.
Therefore, if we sell common stock or securities convertible into common
stock in the future on more favorable terms than those granted to the
debenture holders, we will have to issue even more shares of common stock
to the holders than initially agreed on. At July 31, 2003, the Company was
in default of the terms of the debentures for non-payment.
o The potential dilution of your ownership of ATSI resulting from our
Series D and Series E Preferred Stock will increase if we sell
additional common stock for less than the conversion price applicable
to the Series D and Series E Preferred Stock
The terms of the Series D and Series E Preferred Stock require us to adjust
the conversion price if we sell common stock or securities convertible into
common stock at a greater discount to market than that provided for the
Series D Preferred Stock and at less than the lower of the market price or
the conversion price with respect to the Series E Preferred Stock.
Therefore, if we sell common stock or securities convertible into common
stock in the future on more favorable terms than the discounted terms, we
will have to issue even more shares of common stock to the holders than
initially agreed on.
..o We expect to issue additional shares of common stock to pay dividends
on the preferred stock, further diluting your ownership of ATSI and
putting additional downward pricing pressure on the common stock
21
The Series A and Series D Preferred Stock require quarterly dividends of
10% and 6% per annum, while our Series F and Series G Preferred Stock
requires quarterly dividends of 15% per annum. We have the option of paying
these dividends in shares of common stock instead of cash and we expect to
use that option. The number of shares of common stock that are required to
pay the dividends is calculated based on the same floating conversion price
applicable to the conversion of the preferred stock, so the lower our
common stock price, the more shares of common stock it takes to pay the
dividends. The issuance of these additional shares of common stock will
further dilute your ownership of ATSI and put additional downward pricing
pressure on the common stock. The amount of dividends accrued as of July
31, 20022003 is approximately $330,233$918,000 for our Series A, D, E, F and G
Preferred Stock.
..o You will almost certainly not receive any cash dividends on the common
stock in the foreseeable future
Sometimes investors buy common stock of companies with the goal of
generating periodic income in the form of dividends. You may receive
dividends from time to time on stock you own in other companies. We have no
plan to pay dividends in the near future.
.. The AMEX may delist our common stock
The AMEX has in the past-delisted stock that traded at a minimal price per
share for an extended period of time. Additionally, as a part of our annual
review by the American Stock Exchange we were required to submit a plan as
to how we would continue to be in compliance with the listing requirements
as of April 30, 2003. If our common stock falls to this level or is not in
compliance with the listing requirements as of April 30, 2003 and is
delisted, trading in our common stock would be conducted in the
over-the-counter market on the electronic bulletin board or in the pink
sheets administered by the NASD. This would likely adversely affect the
liquidity of the common stock because it would be more difficult for
stockholders to obtain accurate stock quotations. In addition, if our stock
were not traded on a national exchange, sales of our stock would likely be
subject to the SEC's penny stock rules, which generally create a delay
between the time that a stockholder decides to sell shares and the time
that the sale may be completed.
..o Our Certificate of Incorporation and Bylaws and Delaware law could make
it less likely that our stockholders receive a premium for their shares
in an unsolicited takeover attempt
Certain provisions of our certificate of incorporation, our bylaws and the
Delaware General Corporation Law could, together or separately, discourage
potential acquisition proposals or delay or prevent a change in control.
Currently, those provisions include a classified board of directors, a
prohibition on written consents in lieu of meetings of the stockholders and
the authorization to issue up to 10,000,000 shares of preferred stock and
up to 200,000,000 shares of common stock. Our board of directors has the
power to issue any or all of these additional shares without stockholder
approval, subject to the rules of the AMEX that require stockholder
approval of the issuance of common stock or securities convertible into
common stock equal to or in excess of 20.0% of the number of shares of
common stock or the voting power outstanding before the issuance.approval. The preferred shares can be issued with such rights, preferences
and limitations as may be determined by the board. The rights of the
holders of common stock will be subject to, and may be adversely affected
by, the commitments or contracts to issue any additional shares of common
stock or any shares of preferred stock. Authorized and unissued preferred
stock and common stock could delay, discourage, hinder or preclude our
18
unsolicited acquisition, could make it less likely that the stockholders
receive a premium for their shares as a result of any such attempt and
could adversely 22
affect the market price of, and the voting and other rights
of, the holders of outstanding shares of common stock.
.. The impact of our lawsuit against two of our preferred stock holders is
unknown
As of the date of this filing, we do not know what the impact, positive or
negative, of our filing a lawsuit against certain preferred stock holders
will have on the trading of our stock as well as the price of our stock. If
we were to lose the lawsuit, it is likely we would have to issue a
substantial amount of shares to our Series D and Series E holders diluting
your ownership of ATSI and putting substantial pressure on the common stock
ITEM 2. PROPERTIES
Our executive offices, principal teleport facility and control center areoffice is located at our leased facilities in San
Antonio, Texas, consisting of 23,1003,042 square feet. The lease expires July 2008, and has two five-year renewal options.September
2004. We pay annual rent of $282,705$41,040 under the lease and are responsible for taxes and
insurance. In August 2003, we obtained a six-month reduction in our monthly rent
of approximately $12,000 in exchange for an additional three months of rent at
the end of our current lease. Management believes that
our leased facilities are suitable and adequate for their intended use.
As of the date of this filing, we
are in arrears to our landlord at our executive offices for the months of
November, December and January.
ITEM 3. LEGAL PROCEEDINGS
In March 2001, ATSI-Texas wasComdisco sued by ComdiscoATSI-Texas for breach of contract for
failing to pay lease amounts due under a lease agreement for telecommunications
equipment. Comdisco claims that the total amount loaned pursuant to the lease
was $926,185 and that the lease terms called for 36 months of lease payments.
Comdisco is claiming that ATSI only paid thirty months of lease payments. ATSI
disputes that the amount loaned was $926,185 since we only received $375,386 in
financing. We have paid over $473,000 in lease payments and, thus, believe that
we have satisfied our obligation under the lease terms. AlthoughCurrently Comdisco has
since filed fora claim with the United States Bankruptcy Court of the Western District of
Texas. We believe that this liability under ATSI Texas will be discharged upon
the completion of the Chapter 7 case. The Chapter 7 bankruptcy protection, we have negotiated a cash resolution with
Comdisco for an amount deemed totrustee estimates
that this case will be immaterial.completed by December 2004, although there can be no
assurance that such deadline will be met.
In July 2002, we were notified by the Dallas Appraisal District that
our administrative appeal of the appraisal of our office in the Dallas InfoMart
was denied. The property was appraised at over $6 million dollars. The property
involved includesincluded our Nortel DMS 250/300 switch, associated telecommunications
equipment and office furniture and computers. ATSI was unable to proceed in its
appeal of the appraisal due to its failure to pay the taxes under protest.
During fiscal 2002 we recorded approximately $260,000 of property tax expense
related to our Dallas office. AsCurrently the Dallas County taxing authority has
filed claim with the United States Bankruptcy Court of the dateWestern District of
Texas for approximately $783,843. This amount also included a property tax
estimate of approximately $230,572 for calendar year 2003. We believe this
amount is incorrect; all of the property was removed and impaired from our
Dallas site as a result of ATSI Texas filing no payments have
been made.for protection under Chapter 11 of
the Bankruptcy code. We believe that this liability under ATSI Texas will be
discharged upon the completion of the Chapter 7 case.
In December 2002, ATSI-Delaware and ATSI the Texas corporation,Corporation were
both sued in Mexico for an alleged breach of a promissory note. The U.S.
companies were guarantors on a promissory note to a Mexican telecommunications
carrier. ATSI is vigorously defending the suits in Mexico, which are claiming
approximately $200,000. ATSI believes it has a justifiable basis for its
position in the litigation and believes that we will be able to resolve the
dispute without suffering a material adverse effect on our financial position.
ATSI has also filed a lawsuit in the Southern District of New York
against several financial parties for what ATSI believes is "stock fraud and
manipulation". The case is based on convertible 23
preferred stock financing
transactions involving primarily two firms, Rose Glen Capital and the Shaar
Fund. In both of those transactions, ATSI believes it was defrauded and its
stock was manipulated. As of the date of this filing, we do not know what the
impact, positive or negative, of our filing a lawsuit against certain preferred
stock holders will have on the trading of our stock as well as the price of our
stock. If we were to lose the lawsuit, it is likely we would have to issue a
substantial amount of shares to our Series D and Series E holders diluting your
ownership of ATSI and putting substantial pressure on the common stock.
On June 20, 2003 ATSI filed a claim against NIFTI Communications for
breach of contract, fraudulent misrepresentation, and negligent
misrepresentation. ATSI and NIFTI had executed a Letter of Intent for NITFI to
acquire ATSI's concession in Mexico. The transaction was never consummated and
19
in May 2003 ATSI sold 51% of ATSICOM to Telemarketing. NIFTI in turn has filed a
counter-claim against ATSI. As of this filing the lawsuit is ongoing; however,
the Company does not believe the outcome will have a material adverse effect on
our financial statements
We are also a party to additional claims and legal proceedings arising
in the ordinary course of business. We believe it is unlikely that the final
outcome of any of the claims or proceedings to which we are a party would have a
material adverse effect on our financial statements; however, due to the
inherent uncertainty of litigation, the range of possible loss, if any, cannot
be estimated with a reasonable degree of precision and there can be no assurance
that the resolution of any particular claim or proceeding would not have an
adverse effect on our results of operations in the period in which it occurred.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no submissions of matters to a vote of security holders
during the fourth quarter of our fiscal year.
PART II.
--------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock iswas quoted on the AMEX under the symbol "AI". until
January 15, 2003 when the trading of our common stock was halted. The table
below sets forth the high and low bid prices for the Common Stock from August 1,
2000 through January 14, 2003 as reported by AMEX. On January 15,As of May 9, 2003 trading
in our common
stock was halted pendingis traded in the filing of our Form 10-Kpink sheets under the symbol "ATSC". The table below sets
forth the high and Form
10-Q.low bid prices for the Common Stock from May 9, 2003 through
July 31, 2003 as reported by OTC bulletin board. These price quotations reflect
inter-dealer prices, without retail mark-up, markdown or commission, and may not
necessarily represent actual transactions.
Fiscal 2001 High Low
-----------------------------------------------------------------------------------------------------------------------------
First - ......................................$ 4 $1$ 1 3/8
Second - .....................................$ 1 13/16 $3/$ 3/8
Third - ......................................$ 1.34 $0.40$ 0.40
Fourth - .....................................$ 0.70 $0.36$ 0.36
Fiscal 2002 High Low
-----------------------------------------------------------------------------------------------------------------------------
First - ......................................$ 0.42 $0.30$ 0.30
Second - .....................................$ 0.37 $0.24$ 0.24
Third - ......................................$ 0.28 $0.21$ 0.21
Fourth - .....................................$ 0.25 $0.07$ 0.07
Fiscal 2003 High Low
-----------------------------------------------------------------------------------------------------------------------------
First - -.......................................$ 0.12 $0.03$ 0.03
Second - (through January 14, 2003)...........$ 0.16 $0.07$ 0.07
Third - (Trading Halted )................... ----- -----
Fourth - .....................................$ 0.07 $ 0.01
At January 14,July 31, 2003, the closing price of our Common Stock as reported by
AMEXOTC bulletin board was $0.08$0.04 per share. As of January 14,July 31, 2003, we had
approximately 15,000 stockholders, including both beneficial and registered
owners. The terms of our Series A, Series D, Series E, Series F and Series G
Preferred Stock restrict us from paying dividends on our Common Stock until such
time as all outstanding dividends have been fulfilled related to the Preferred
Stock. ATSI has not paid dividends on our common stock the past three years and
does not expect to do so in the foreseeable future.
2420
During the three most recent fiscal years, we have had sales of
unregistered securities as follows:
A Registration Statement on Form S-3 (File No. 333-89683) on which we
registered 2,076,001 shares of common stock was declared effective September 8,
2000. This common stock was issuable under the terms of our 6% Series C
Cumulative Convertible Preferred Stock and our 6% Series D Cumulative
Convertible Preferred Stock. We did not receive any of the proceeds of the sale
of common stock registered on this Form S-3. We received $500,000 and $3,000,000
of proceeds upon the issuance of the Series C Preferred Stock in September 1999
and the Series D Preferred Stock in February 2000. We incurred expenses in
connection with the issuance of the Series C and Series D Preferred Stock and
the registration of the underlying common stock as follows (approximate
amounts):
Legal fees $ 25,000.00
Registration fees 2,910.94
Printing & Miscellaneous 13,500.00
-----------
Total $ 41,410.94
A Registration Statement on Form S-3 (File No. 333-35846) on which we
registered 3,227,845 shares of common stock was declared effective September 8,
2000. This common stock was issuable under the terms of our 10% Series A
Cumulative Convertible Preferred Stock, $2.2 million of convertible notes plus
accrued interest and the conversion of a note payable for approximately
$440,000. We did not receive any of the proceeds of the sale of common stock
registered on this Form S-3. We received $1,000,000, $2.2 million and $1,000,000
of proceeds upon the original issuance of the Series A Preferred Stock in
February 2000, the convertible notes issued in March 1997 and the note payable
issued in October 1997. We incurred expenses in connection with the issuance of
the Series A Preferred Stock and the registration of the underlying common
stock, of all the above shares, as follows (approximate amounts):
Legal fees $ 25,000.00
Registration fees 4,306.51
Printing & Miscellaneous 10,500.00
-----------
Total $ 39,806.51
In our second and third quarter 10-Q's for fiscal 2000 and the first,
second and third quarter 10-Q's for fiscal 2001 we noted additional sales of
unregistered securities. Further detail regarding these issuances can be found
in the 2/nd/ and 3/rd/ quarter 10-Q's for fiscal 2000 and the 1/st/, 2/nd/ and
3/rd/ quarter 10-Q's for fiscal 2001.
In June 2001, we issued 6,500 shares of our Series G preferred stock
for approximately $650,000 of cash proceeds. As noted in Note 11 of our consolidated
financial statements, ourOur Series G preferred stock
converts to common stock at a discount to market originally defined as the
Initial Conversion Price. On each Anniversary Date up to and including the
second Anniversary Date, the Conversion Price on any unconverted Preferred Stock
plus any accumulated, unpaid dividends will be reset to be equal to the average
closing price of the stock for the five (5) preceding trading days. The Series G
preferred stock accrues dividends at 15% per annum. To date we have not filed a
Registration statement on Form S-3 to register these shares. The cash proceeds
were used for working capital needs.
For those securities not registered with the SEC exemptions are claimed
according to Section 4(2) of the Securities Act of 1933 and SEC Regulation (D).
25
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA.
The following selected financial and operating data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and The Company's Consolidated Financial Statements
and the Notes thereto included elsewhere herein.
Years ended July 31,
--------------------
1998 1999 2000 2001 2002 ---- ---- ---- ---- ----2003
------------ ------------ ----------- ----------- ------------
(In thousands of $, except per share data)
Consolidated Statement of Operations
Data:
Operating revenues:revenues
Carrier services $ 10,047 $ 14,123 $ 22,19122,192 $ 26,349 $ 40,92241,190 $ 6,532
Network services 3,315 5,127 2,5382,539 2,714 2,223
Retail services 19,632 12,626 9,572 6,836 7,556
--------- --------- --------- --------- ---------1,956 417
------------ ------------ ----------- ----------- ------------
Total operating revenues 32,963 31,876 34,301 35,899 50,701
Operating expenses:19,250 24,731 29,063 43,146 6,949
Cost of services 21,898 21,141 26,654 28,297 42,862(exclusive of depreciation and
Amortization, as shown below) 13,751 20,463 24,802 39,077 6,244
------------ ------------ ----------- ----------- ------------
Gross Margin 5,499 4,268 4,261 4,069 705
Selling, general and administrative 11,934 11,303 12,013 12,449 12,285expense 5,101 6,724 6,924 6,866 4,803
Impairment loss - - - - 6,4323,119 418
Bad debt 997 2,276 755 150expense 2,295 756 142 388 35
Depreciation and amortization 1,796 3,070 4,296 3,920 4,115
--------- --------- --------- --------- ---------
Total operating expenses 36,625 37,790 43,718 44,816 66,082
Loss from operations (3,278) (5,914) (9,417) (8,917) (15,381)
--------- --------- --------- --------- ---------1,882 2,020 2,045 1,955 1,229
------------ ------------ ----------- ----------- ------------
Operating loss (3,779) (5,232) (4,850) (8,259) (5,780)
Other income (expense), net (1,240) (1,388) (300) 1,475 (2,922)
------------ ------------ ----------- ----------- ------------
Net loss from continuing operations before income
tax expense (5,019) (6,620) (5,150) (6,784) (8,702)
Income tax expense - - - - -
------------ ------------ ----------- ----------- ------------
Net loss from continuing operations (5,019) (6,620) (5,150) (6,784) (8,702)
Net loss from discontinued operations (1,716) (3,432) (5,403) (8,816) (2,919)
Net loss from sale of discontinued operations - - - 1,082 (962)
Net loss (6,735) (10,052) (10,553) (14,518) (12,583)
Less: preferred stock dividends (856) (7,085) (2,231) (472) (653)
------------ ------------ ----------- ----------- ------------
Net loss applicable to common shareholders $ (5,292)(7,591) $ (8,445)(17,137) $ (17,138)(12,784) $ (12,785)(14,990) $ (14,989)
========= ========= ========= ========= =========(13,236)
============ ============ =========== =========== ============
21
Per shareShare information:
Net loss - basicloss-basic and diluted $ (0.13) $ (0.18)(0.16) $ (0.30) $ (0.18) $ (0.17) --------- --------- --------- --------- ---------$ (0.13)
------------ ------------ ----------- ----------- ------------
Weighted average common shares
outstanding - basicoutstanding-basic and diluted 41,093 47,467 56,851 71,180 86,275
--------- --------- --------- --------- ---------47,467,000 56,852,000 71,180,000 86,275,000 101,767,000
------------ ------------ ----------- ----------- ------------
Consolidated Balance Sheet Data:
Working capitalCapital (deficit) $ (5,687)946 $ (6,910)5,076 $ (5,251)1,936 $ (9,236)(10,094) $ (13,169)(17,796)
Current assets 5,683 5,059 5,441 3,342 1,802Assets from continuing operations 3,738 3,274 2,447 1,184 465
Current Assets from discontinued operations 14,637 13,498 11,042 3,694 245
Total assets 24,251 24,154Assets 25,267 26,894 23,36023,112 10,457 Long-term obligations, including
current portion 8,303 10,168 6,750 6,540 5,0971,530
Current Liabilities from continuing operations 9,044 6,630 5,757 12,528 17,109
Current Liabilities from discontinued operations 8,385 5,066 5,796 2,444 1,397
Redeemable Preferred Shares - - 3,529 2,180 1,360
Total stockholders'Liabilities 19,130 13,544 13,329 15,389 18,515
Total Stockholders' equity (deficit) 7,087 6,137 10,978 5,61813,350 6,254 (7,112) (18,345)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE: Certain Statements set forth below under this caption constituteThis Annual Report on Form 10-K contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act. See page
3 for additional factors relatingAct 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 this Annual
Report Form 10-K and other documents filed with the Securities and Exchange
Commission. Therefore, these types of statements may prove to such statements.be incorrect.
The following is a discussion of the consolidated financial condition
and results of operations of ATSI for the three fiscal years ended July 31,
2000,
2001, 2002, and 2002.2003. It should be read in conjunction with our Consolidated
Financial Statements, the Notes thereto and the other financial information
26
included elsewhere in this annual report on Form 10-K. For purposes of the
following discussion, fiscal 2000 or 2000 refers to the year ended July 31,
2000, fiscal 2001 or 2001 refers to the year ended July 31,
2001, and fiscal 2002 or 2002 refers to the year ended July 31, 2002.2002 and fiscal 2003
or 2003 refers to the year ended July 31, 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. Revenues from
this service accounted for approximately 91% of our overall revenues in fiscal
2001, approximately 95% in fiscal 2002 and 94% in fiscal 2003. As discussed in
the business section of this report, in December 2002, we were forced to idle
22
our network and we were not able to restart our network during the fiscal year
ending July 31, 2003. As a result we did not generate any revenue from this
source during the second half of the fiscal year ending July 31, 2003.
Subsequent to year-end we have signed three new carrier customers and we have
generated revenues of approximately $36,000 during the first quarter of fiscal
year 2004. However, there can be no assurance that revenue will continue to be
generated at this level from these customers.
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. Currently we
do not have any network services customers; however, we provide network
management services to Latingroup Ventures L.L.C. (LGV), a non-related entity.
Under the agreement with LGV we will provide customer service, technical support
and manage the collections process of their private network customer. This
management agreement was initiated on July 1, 2003 and we will generate
approximately $12,700 per month in management fees through June 30, 2004.
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. The cost is based on a per minute rate and
volume. We additionally incur installation charges from our various carriers;
this cost is passed to our customers for the connection to the VoIP network from
our carriers.
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 customer's different remote
locations and sites to transmit data, voice and Internet services.
General
We have had operating losses for almost every quarter since we began
operations in 1994. Due to such lossesas 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 27 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. Revenues from carrier services accounted
for approximately 91% of our overall revenues in fiscal 2001, 95% in fiscal 2002
and 94% in fiscal 2003.
During the fiscal year ending July 31, 2003 management continued to
pursue different avenues for funding, but unfortunately, we were not able to
raise the capital necessary to re-start our network, and as a result two of our
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. Additionally, the court ordered joint administration of both cases
on April 9, 2003 and subsequently on May 14, 2003 the court converted the cases
to 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 (the SEC registrant). 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.
23
On July 02, 2003, the U.S. Bankruptcy Court overseeing the Chapter 7
cases for ATSI Texas and TeleSpan approved the sale of two of its foreign
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 related to 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. Due to the bankruptcies and the resulting sales
of ATSI Mexico and SINFRA, we no longer had Mexico Telco operations, consisting
primarily of retail call center operations, and determined to discontinue this
operating segment.
On May 22, 2003 we entered into a Share Purchase Agreement with
Telemarketing de Mexico, S.A. de C.V. (Telemarketing) whereby we sold
Telemarketing 51% of our Mexican subsidiary, ATSI Comunicaciones, S.A. de C.V.
(ATSICOM). ATSICOM holds a 30-year long distance concession in Mexico. The
concession allows for the sale of voice and data services, long distance
transport, and the operation of a telecommunications network. The principal
owners of Telemarketing are also the principal owners of Dialmex, LLC (Dialmex)
a U.S. based international telecommunications carrier. The agreement with
Telemarketing provides that ATSI and Telemarketing will jointly enhance
Dialmex's VoIP network. On May 22, 2003, we also signed a carrier service
agreement with Dialmex, under the agreement with Dialmex we will be allowed to
use Dialmex's VoIP network to transport and terminate voice and fax
communications over the Internet. Our fees under the Dialmex agreement will be
based on a per minute rate on the volume of minutes sent through their VoIP
network. Telemarketing and ATSI will enhance the VoIP network by linking
Dialmex's VoIP network with other carriers, which will enable us to reduce our
transportation and termination costs, while simultaneously increasing and
expanding destination points available to our customers. We believe that this
lower network cost structure will allow the companies to be more competitive and
attract more customers. Additionally, we will combine our respective
interconnection agreements with the major carriers in Mexico to lower our
termination cost and allow for a more attractive cost structure. The sale of our
Mexican subsidiary to Telemarketing provides us with working capital while the
agreement with Dialmex provides us with access to a reliable and flexible
state-of-the-art VoIP network without incurring the expense of operating such a
network. Due to the financial condition of the Company, there can be no
assurance that the enhancements can be made or that the costs will be decreased.
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
communications services
guided by our core values that drive everything we do.communication services. Our strategy is to become a dominantleading provider of
communication services to businessescarriers and consumersbusinesses in this American/U.S./Latin American
corridor through the deployment of a high quality, `next generation' network. Founded in 1993, we generateVoIP network established
through our traffic from retail points
of presence throughout Mexico, as well as from relationshipspartnership with major carriers
based in the United States.Dialmex.
ATSI's focus today is on the communications corridor between the United
States and Mexico. Already one of the two largest international communications
corridors in the world, this corridor is growing due to increasing phone density
in Mexico and large-scale emigration of Mexicans to the United States.
We are
uniquely positioned within this growing market niche as oneOur limited cash flow, historical losses from operations, the
bankruptcies of only a handfulour two main operating subsidiaries and sale of viable carriers,our retail
services business have caused substantial barriers to growth and the
only operating company whose focus is international
services, as opposed to domestic services.continuation of our business strategy. Operationally, ATSI's strength lies in
our framework of licenses,
interconnection agreements with carriers such as Telefonos de Mexico S.A de
C.V. (Telmex) and business relationshipsBestel S.A de C.V. and our 49% interest in ATSICOM, which owns
a long distance concession license. Our interconnection agreements with these
long-distance concessionaires provide us with nationwide network coverage at a
competitive cost structure. Currently, Telmex owns and operates the only
nationwide network in Mexico as well aswith more than 14.1 million phone lines in our customer relationshipsover
105,000 communities throughout Mexico. Bestel operates a fiber optic network
that extends over 6,356 kilometers with points of presence in 19 Mexican
metropolitan areas. Under these agreements the cost will be based on a per
minute rate and industry knowledge in the United States. We have
over 300 employees based in Mexico,volume of minutes transported through their respective
networks. Additionally, we own 49% of a Mexican company, ATSI Comunicaciones,
S.A. de C.V., that holds a 30 year concession, allowing for the sale of voice
and operate Mexican subsidiaries with
licenses that allow them to sell local anddata services, long distance traffic, transport, long
distance traffic, and operatethe operation of a
network utilizing packet-switching technology.
Utilizing these strengths,telecommunications network. Through interconnection agreements established by
ATSI Comunicaciones, S.A de C.V. and our partnership with Dialmex, LLC, we have leveragedare
leveraging off of the networks of third parties in Mexico, such as Alestra and
Marcatel to build a reliable customer base, and have established our own
international satellite and fiber-based network to long haul consumer, corporate
andsupport carrier-generated
traffic between the U.S. and Mexico.
As discussed24
Our History of Operating Losses and Deficiencies in Note 16 to our consolidated financial statements we have
determined that we have two reportable operating segments: 1) U.S Telco and 2)
Mexico Telco.
We have determined that our U.S. and Mexican subsidiaries should be
reported as separate segments although many of our products are borderless and
utilize the operations of entities in both the U.S. and Mexico. Both the U.S.
Telco and Mexico Telco segments include revenues generated from Network services
and Retail services. All of the carrier services revenue is recorded in the U.S.
Telco segment.
Our consolidated financial statements have been prepared assuming that we
will continue as a going concern.Cash Flow
We have incurred operating losses and deficiencies in operating cash
flows in each year since inceptionour inception. Our operating losses from continuing
operations were approximately $4,850,000, $8,259,000 and have$5,780,000 for the
years ending July 31, 2001, 2002 and 2003, respectively. We had an operating
loss of approximately $1,579,000 for the quarter ended July 31, 2003.
Additionally we had a working capital deficit as of approximately $17,796,000, at
July 31, 2002. Additionally, we have had
recurring negative cash flows from operations over the past few fiscal years.
For the reasons stated in Liquidity and Capital Resources and subject to the
risks referred to in Liquidity and Capital Resources, we expect improved results
of operations and liquidity in fiscal 2003. However, we cannot assure you that
this will be the case.
Results of Operations
The following table sets forth certain items included in our results of
operations in thousands of dollar amounts and as a percentage of total revenues
for the years ended July 31, 2000, 2001, 2002 and 2002.
27
2003.
Year Endedended July 31,
---------------------------------------------------
2000--------------------------------------------------------------------------------
2001 2002 ---------------------------------------------------2003
-------------------------- -----------------------------------------------------
$ % $ % $ %
- - - - - -
Operating revenues
- ------------------
Telco servicesServices
Carrier services $ 22,191 65%26,349 91% $ 26,349 74%41,190 95% $ 40,922 81%6,532 94%
Network services 2,538 7% 2,714 7% 2,223 4%
Retail services 9,572 28% 6,836 19% 7,556 15%
-------- --------- ---------9% 1,956 5% 417 6%
-------------------------- -------------------------------------------------
Total operating revenues 34,30129,063 100% 35,89943,146 100% 50,7016,949 100%
Cost of services 26,654 78% 28,297 79% 42,86224,802 85% -------- --------- ---------39,077 91% 6,244 90%
-------------------------- -------------------------------------------------
Gross margin 7,647 22% 7,602 21% 7,839Margin 4,261 15% 4,069 9% 705 10%
Selling, general and
administrative expenses 12,013 35% 12,449 35% 12,285expense 6,924 24% 6,866 16% 4,803 69%
Impairment loss - 0% - 0% 6,432 13%3,119 7% 418 6%
Bad debt expenses 755 2% 150expense 142 0% 388 0%1% 35 1%
Depreciation and amortization 4,296 12% 3,920 11% 4,115 8%
-------- --------- ---------2,045 7% 1,955 5% 1,229 18%
-------------------------- -------------------------------------------------
Operating loss (9,417) -27% (8,917) -25% (15,381) -30%(4,850) -17% (8,259) -19% (5,780) -83%
Other income (expense), net (2,169) -8% (887) -2% (492)(300) -1% -------- --------- ---------1,475 3% (2,922) -42%
-------------------------- -------------------------------------------------
Net loss from continuing operations before
income tax and minority interests (11,586) -34% (9,804) -27% (15,873) -31%
Minority interests - 0% 245 0% 203 0%expense (5,150) -18% (6,784) -16% (8,702) -125%
Income tax expense (benefit) - 0% (223)- 0% (110)- 0%
-------- --------- ----------------------------------- -------------------------------------------------
Net loss from continuing operations (11,586) -34% (9,782) -27% (15,780) -31%
Income (loss)(5,150) -18% (6,784) -16% (8,702) -125%
Net loss from discontinuingdiscontinued operations net of tax 1,533 4% (771) -2% 194 0%
Gain on disposition(5,403) -19% (8,816) -20% (2,919) -42%
Net loss from sale of discontinued operations net of tax - 0% - 0% 1,069 2%1,082 3% (962) -14%
Net loss (10,553) -36% (14,518) -34% (12,583) -181%
Less: preferred stock dividends (7,085) -20% (2,232) -6%(2,231) -8% (472) -1% -------- --------- ---------(653) -9%
-------------------------- -------------------------------------------------
Net loss applicable to common shareholders $(17,138) -50% $ (12,785)(12,784) -44% $ (14,990) -35% $ (14,989) -30%
======== ========= =========(13,236) -190%
========================== =================================================
2825
Year Ended July 31, 2003 Compared to Year ended July 31, 2002
Operating Revenues. Consolidated operating revenues decreased 84%
between periods from $43 million for the year ended July 31, 2002 to $7 million
for the year ended July 31, 2003.
Carrier services revenues decreased approximately $34.7 million, or 84% from the
year ended July 31, 2002 to the year ended July 31, 2003. As the telecom sector
has continued to suffer financially and operationally, more and more of our
carriers require substantial deposits and/or prepayments. As a result of the
substantial deposits and prepayment requirements and our lack of liquidity, in
December 31, 2002, the Company idled its network and during the second half of
the year ended July 31, 2003 we were not able to generate revenue from carrier
services. During the same six-month period in fiscal year 2002, we generated
approximately $21 million or approximately 50% of the total yearly carrier
services revenue. Subsequent to year-end we have signed three new carrier
customers and we have generated revenues of approximately $36,000 during the
first quarter of fiscal year 2004. However, there can be no assurance that such
revenue will continue to be generated at these levels from these customers.
Network services revenues decreased approximately 79% or $1.5 million
from the year ended July 31, 2002 to the year ended July 31, 2003. Currently we
do not have any network services customers; however, we currently provide
network management services to Latingroup Ventures L.L.C. (LGV), a non-related
party. Under the agreement with LGV we will provide customer service, technical
support and manage the collections process of their private network customer.
This management agreement was initiated on July 1, 2003 and we will generate
approximately $12,700 per month in management fees through June 30, 2004.
Cost of Services. The consolidated cost of services decreased by $32.8
million, or 84% from the year ended July 31, 2002 to the year ended July 31,
2003. The decrease in cost of services is a direct result of the decrease in
carrier services revenues and private network revenue. As mentioned above, we
idled our network in December 2002 and as a result did not generate any revenue
or cost of services related to carrier services during the second half of fiscal
year 2003. During the same six-month period in fiscal year 2002, we incurred
approximately $19.9 million in carrier services cost of services.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
decreased approximately $2.1 million, or 30% between periods. The decrease can
mainly be attributed to the termination of approximately 27 employees associated
with 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 $1.2 million over the second half of fiscal
year 2003. Additionally, as a result of the termination of these employees,
during the second half of fiscal year 2003, the company recognized a significant
decrease in health and business insurance expense of approximately $96,000 per
month or $576,000 during the period.
26
Impairment losses. During the year ended July 31, 2003, we recorded an
impairment loss totaling approximately $418,000. The impairment losses during
the fiscal year 2003 can be attributed to the impairment of leasehold
improvements and other equipment as a result of idling our network during the
second half of fiscal year 2003. In addition during the year ended July 31, 2002
we determined that the estimated future cash flows expected from the concession
license and certain equipment and other assets was less than its carrying value.
Therefore, we recorded an impairment of approximately $2,039,000 to reduce the
recorded value of the concession license and approximately $1,080,000 to reduce
the recorded value of equipment and other assets.
Depreciation and Amortization. Depreciation and amortization decreased
by approximately 37% or $726,000 between periods. The decline is related to the
fact that much of our equipment had been fully depreciated or impaired.
Operating Loss. The Company's operating loss decreased approximately
$2.5 million or 30% from the year ended July 31, 2002 to the year ended July 31,
2003. The decrease is attributed to the decrease between periods in SG&A of $2.1
million and a decrease between periods of impairment expense of approximately
$2.7 million. These decreases were offset somewhat by the decrease in gross
margin dollars of approximately $3.3 million between periods.
Other Income (expense). Other income decreased approximately $4.4
million between periods from $1.5 million in other income to $2.9 million on
other expense during the fiscal year ended July 31, 2003. This change can be
attributed to various factors, during the fiscal year 2003, we incurred
approximately $1,009,000 in loss from the sale of various telecommunications
assets from continuing operations; this loss is attributed to the sale of ATSI
Texas and TeleSpan telecommunication equipment by the Chapter 7 Bankruptcy
trustee. Additionally, during the fiscal year 2003 we recognized a loss of
approximately $511,000 related to the sale of 51% of our ownership in one of our
subsidiaries, ATSICOM. We also recognized during fiscal year 2003 additional
interest expense of approximately $401,000 associated with the default of ATSI
Texas in its capital lease with IBM. We also recognized during fiscal year 2003
approximately $924,000 in interest expense associated with other capital leases
and we recognized approximately $52,000 in interest expense associated with
various notes payables.
Loss from discontinued operations. Loss from discontinued operations
decreased by $5.9 million between periods, from $8.8 million to $2.9 million
during the fiscal year ended July 31, 2003. During fiscal year 2003, we
recognized loss from discontinued operations of approximately $2.9 associated
with Mexico Telco operations. During fiscal year 2002 we recognized a gain from
discontinued operations of approximately $399,000 related to the discontinued
operations of the E-commerce operations. Additionally, during fiscal year 2002,
we also recognized approximately $9,215,000 of loss from discontinued operations
related to the Mexico Telco operations. The Mexico Telco loss from discontinued
operations during fiscal year 2002 can mainly be attributed to the recognition
of the impairment loss of Computel's goodwill of approximately $3.3 million.
Additionally, in fiscal year 2002 we incurred $1.5 million in interest expense
associated with the IBM capital lease
Net gain or loss from sale of discontinued operations. During fiscal
year 2003, we recognized a loss from sale of discontinued operations of
approximately $962,000 attributable to the loss on the sale of ATSI Mexico and
Sinfra. Additionally, during fiscal year 2002, we recognized a gain from the
sale of discontinued operations of approximately $1,082,000 associated with gain
on sale of GlobalScape.
Preferred Stock Dividends. During the year ended July 31, 2003, we
recorded approximately $653,000 of non-cash dividends related to our cumulative
convertible preferred stock. This compares unfavorably to the approximately
$472,000 of non-cash dividends recognized during the year ended July 31, 2002.
The increase is mainly attributed to the accrual of approximately $284,000 of
preferred stock dividends in relation to the redemption letter received from the
Series D Preferred Shareholder during fiscal year ended July 31, 2003.
27
Net loss to Common Stockholders. The net loss for the year ended July
31, 2003 decreased to $13,236,000 million from $14,990,000 million for the year
ended July 31, 2002. The decrease in net loss was due primarily to the idling of
our network, not incurring any fixed and variable costs associated with the
leasing of satellite sites, connectivity fees and operating a network site
during the second half of fiscal year 2003. During the same six-month period in
fiscal year 2002, we incurred approximately $20 million or 53 % of the total
yearly carrier services variable and fixed costs. Additionally, during the same
period we terminated approximately 27 employees associated with the carrier
services and network services business unit. The termination of these employees
resulted in a decrease in salaries and wages of approximately $195,000 per month
or $1.2 million over the second half of fiscal year 2003.
Year Ended July 31, 2002 Compared to Year ended July 31, 2001
Operating Revenues. Consolidated operating revenues increased 41%48%
between periods from $35.9$29 million for the year ended July 31, 2001 to $50.7$43.2
million for the year ended July 31, 2002. As demand for our services increased,
we began adding capacity to both the switch and the network backbone in October
2001. The net effect of our efforts during the year was three of the four
highest quarters of revenues in our history.
Carrier services revenues increased approximately $14.6$14.9 million, or 56%
from 2001 to 2002. As a result of our efforts to add capacity, the units
transported via our network increased from approximately 277 million unitsminutes of
traffic during the year ended July 2001 to approximately 458 million unitsminutes of
traffic during the period ended AprilJuly 2002.
Network services decreased by approximately $491,000$758,000 or 18%28% between
years. The decline is attributable to a decreased volume of units transported
via our network and the loss of customers in our private network services
business between years. In October 2002, we completed the sale of our Costa Rica
private network services, which will further reducereduced our networks services revenues
in fiscal 2003.
Retail services revenues increased approximately $720,000 between periods.
The improved revenues between years resulted from our efforts to become more
competitive in the products we offered as we evaluated our core business to
strategically relocate communication centers to concentrated areas where growth
would be realized.
Cost of Services. Cost of services increased as a percentage of revenue58% between periods from
79%$24 million for the year ended July 31, 2001 to 85%,$39 million for the year to year.ended
July 31, 2002. The increase in carrier services traffic as a
percentage of overall revenues from 74% to 81% contributed greatly to the
increased cost of services both as a percentageis directly attributed to the
increase in demand of revenues andservices from our customers. As discuss in actual
dollars. Ourthe carrier
servicesrevenue section, our units of traffic has a higher cost per revenue dollar than
either network or retail services. The Company continues to try to improve its
carrier services margins through reductions in variable costs and improvements
realizedcarried during fiscal year 2002 grew by
181 million minutes from the installation of Nortel Passport equipment in the latter half
of fiscal 2001. Due to the substandard performance of the Nortel passport gear
we decommissioned it subsequent toyear ended July 31, 2002.2001.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
decreased approximately $164,000,$58,000, or 1% between periods. The improvement, which
resulted from management's efforts to cut excess spending by each department
would have been even larger if not for approximately $500,000 of severance costs
recognized during fiscal 2002. In the first quarter of fiscal 2003, we incurred
additional severance expense related to our operations in Mexico. As a percentage of revenues, SG&A declined from 35%24% to 24%16%
period to period.
Impairment loss. During fiscal 2002 we recorded approximately $6.4$3.1
million of impairment loss related to certain fixed assets,loss. During the year ended July 31, 2002 we determined
that the estimated future cash flows expected from the concession license and
goodwill associated with Computel.certain equipment and other assets was less than its carrying value. Therefore,
we recorded an impairment of approximately $2,039,000 to reduce the recorded
value of the concession license and approximately $1,080,000 to reduce the
recorded value of equipment and other assets related to ATSI Comunicaciones
concession license. No impairment expense was recorded in fiscal 2001.
Bad Debt Expense. Bad Debt Expense increased by approximately $238,000$246,000
between periods due primarily to expense related to two of our carrier service
customers and the write-off of certain
of our network services customersreceivable from Global Crossing and WorldCom, these two companies filed for
bankruptcy and the receivables were consider not collectable during the year.fiscal year
2002.
Depreciation and Amortization. Depreciation and amortization increaseddecreased
by approximately 5%4% or $195,000$90,000 between periods due to some of the equipment
purchases.
29being fully depreciated during early periods of fiscal 2002.
28
Operating Loss. The Company's operating loss increased by approximately
$6.4$3.4 million due to the impairment loss recorded in fiscal 2002.
Other Income(expense)Income (expense). Other expense decreased approximately $395,000$1.8
million between years. The decrease wasprimary reason for the net result of increased other income,
decreased interest expense and decreased interest income from 2001 to 2002.
The increasedecrease in other income was primarily duecan
be attributed to the restructuring of the IBM capital lease in the fourthforth quarter of
fiscal 2002. This restructuring resulted in a gain of approximately $1,860,000.
Income (loss)$1.9
million.
Loss from discontinuingdiscontinued operations. The net incomeloss from our e-commerce
operations and retail services (Mexico Telco) net of taxes, during fiscal 2002
was $194,000$8,816,000 as compared to a net loss of $771,000$5,403,000 for fiscal 2001. Gain on dispositionDuring
fiscal year 2002 we recognized a gain from discontinued operations of
approximately $399,000 related to the discontinued operations of the E-commerce
operations. Additionally, during fiscal year 2002, we also recognized
approximately $9,215,000 of loss from discontinued operations related to the
Mexico Telco business unit. The Mexico Telco loss from discontinued operations
during fiscal year 2002 can mainly be attributed to the recognition of the
impairment loss of Computel's goodwill of approximately $3.3 million.
Additionally, in fiscal year 2002 we incurred $1.5 million in interest expense
associated with the IBM capital lease.
Net gain or loss from sale of discontinued operations. The disposition in JuneDuring fiscal year
2002, of our e-commerce operations resulted inwe recognized a gain from the sale of discontinued operations of
approximately $1.1
million, net$1,082,000 associated with gain on sale of tax.GlobalScape.
Preferred Stock Dividends. During the year ended July 31, 2002, we
recorded approximately $472,000 of non-cash dividends related to our cumulative
convertible preferred stock. This compares favorably to the approximate $2.2
million of non-cash dividends and beneficial conversion feature expense
recognized during the year ended July 2001.
Net loss to Common Stockholders. The net loss for the year increased by
approximately $2.2 million to $15.0 million from the $12.8 million net loss for
the year ended July 2001. The increase was due primarily to the impairment loss
of $6.4$3.1 million recorded in fiscal 2002 offset somewhat by a significant
increase in revenues, which improved our gross margin dollars. An additional
offset between years was the reduction in selling, general and administrative
expenses and preferred dividends.
Year Ended July 31, 2001 Compared to Year ended July 31, 2000
Operating revenues. Operating revenues increased each successive quarter
during the last three quarters of the year to total $35.9 million for fiscal
2001, a 5% increase over the prior year's total. Each of the last two quarters
during the year produced record revenue results since the Company began29
Liquidity and Capital Resources
Cash provided by / used in operating in 1994 as the Company experienced increasing demand for its services.
In order for this revenue trend to continue, the Company will need to expand its
network and switch capacity to allow it to process additional volumes of
traffic, as it was operating at near-peak capacity as of July 31, 2001. In
October 2001, the Company began adding capacity to both its switch and its
network backbone to allow it to do so. The Company will also need to increase
its terminating capacity with third party carriers to process traffic outside of
its own network backbone in Mexico. Because some of these third party carriers
experienced network problems during August 2001, total revenues for the quarter
ending October 31, 2001 will not be as high as for the quarter ending July 31,
2001. However, monthly revenues for both September and October 2001 returned to
the same levels experienced during the quarter ended July 31, 2001.
Carrier services revenues increased approximately $4.2 million, or 19% from
2000 to 2001. Although the average price per unit decreased approximately $0.02
between years our international communications traffic increased approximately
34.0 million units, or 43%. This increase in units somewhat offset the declining
average price per unit caused by competitive market pressures. Beginning in
January 2001, the Company began to experience a stabilization of its underlying
cost structure, and the prices at which it could provide its services. During
the last two quarters of 2001, the Company did not experience a decline in the
average price of its carrier services revenues.
30
Retail services revenues significantly decreased by approximately $2.7
million, or 29% between periods. This decrease was primarily a result of the
decline in postpaid revenues, as the Company's integrated prepaid revenues
increased approximately $176,000 between years.
Cost of Services. Cost of services increased approximately $1.6 million, or
6%, between years and increased slightly as a percentage of revenues from 78% to
79%. During the first half of fiscal 2001, the variable cost associated with our
carrier services product was a much higher percentage of revenues. In response
to this trend, management focused its efforts on improving carrier services
margins. Two key responses were the installation of Nortel Passport equipment,
which allowed us to increase the capacity of our packet-switching network
backbone, and the addition of alternate carriers of our traffic in Mexico, which
allowed us to lower our cost per unit for international traffic. Each alternate
carrier offers additional capacity to the Company, as well as lower variable
costs of transporting traffic into areas into which they have their own
proprietary network. As a result of the reductions in cost and the improvements
realized from the installation of the Nortel Passport equipment, the Company
recognized improved carrier service gross margins during the latter half of 2001
as compared to the first half of 2001. In an effort to maintain or improve
margins, management is focusing its efforts on increasing the terminating
capacity within Mexico and enhancing routing diversity so that it can provide
additional carrier services and do so in a more cost efficient manner.
Management believes its efforts will allow the Company to offer a competitively
priced service to our existing and potential customers as well as manage our
costs. In addition, the Company will increase its efforts to utilize its long
distance concession in Mexico. In order to do so, the Company will need to
extend its network beyond its current backbone to extend to the local
telecommunications infrastructure available in Mexico. By doing so, it should be
able to lower its cost per call by reducing its reliance on third party long
distance carriers. Due to the substandard performance of the Nortel passport
gear, we decommissioned it subsequent to July 31, 2002.
Selling, General and Administrative (SG&A) Expense. SG&A expenses increased
4%, or approximately $436,000, between periods. As a percentage of revenues,
these expenses remained flat at 35%. SG&A increased due primarily to expenses of
approximately $1.0 million related to severance packages and professional fees
related to SEC filings, strategic research services and the terminated Genesis
transaction. Exclusive of these non-recurring transactions SG&A decreased
approximately $600,000 between the two periods compared. This decrease is
attributable to management implementing expense cutting measures as well as
maintaining its focus on necessary SG&A spending.
Depreciation and Amortization. Depreciation and amortization decreased
approximately $376,000, or 9%, between periods and declined slightly as a
percentage of revenues from 12% to 11%. The principal reason for the decrease is
related to the Company fully amortizing acquisition cost during fiscal 2000.
This decrease was offset somewhat by depreciation expense associated with new
capital expenditures and amortization related to the purchase of our concession
license.
Operating Loss. Our operating loss decreased approximately $500,000, or 5%
between periods and decreased as a percentage of revenues from 27% to 25%, due
primarily to increased bad debt and depreciation and amortization.
Other Income (Expense). Other expense improved approximately $1.3 million,
or 59% between periods. The improvement was primarily a result of three factors.
The first was approximately $495,000 of debt discount expense recognized in
fiscal 2000 associated with our convertible notes and a note payable that was
fully converted in fiscal 2000. Second, in fiscal 2001, we recognized a gain of
$500,000 as a result of a settlement regarding a litigation case with one of our
carrier customers. And
31
finally, in fiscal 2001 we recorded a gain related to the extinguishment of a
liability of approximately $184,000.
Income (loss) from discontinuing operations. The net loss from our
e-commerce operations, net of taxes, during fiscal 2001 was $771,000 as compared
to a net income of $1.5 million for fiscal 2000.
Preferred Dividends.activities:
During the year ended July 31, 2001,2003, we recordedgenerated cash from operations
of approximately $650,000$29,000. We generated this positive cash flow from operations
as a result of non-cash dividends alongan increase in accrued liabilities and accounts payables of
approximately $2.9 million and $3.2 million, respectively. The increase in
accrued liabilities and accounts payable is primarily due to the company not
being able to generate sufficient cash inflows from operations to cover
operating expense, for example direct cost and SG&A expenses. As a result of the
company not being able to meet its obligations with approximately $1.6
millionvarious vendors, on December
31, 2002, the Company idled its network and during the second half of beneficial conversion feature expense related to our cumulative
convertible preferred stock. This compares to approximately $400,000 of non-cash
dividends and approximately $6.7 million of beneficial conversion feature
expense recognized during the year
ended July 31, 2000.
Net loss2003 we were not able to Common Stockholders. The net loss for 2001 improved bygenerate revenue from carrier services.
During the same six-month period in fiscal year 2002, we generated approximately
$4.4$21 million or approximately 50% of the total yearly carrier services revenue.
Subsequent to $12.8 millionyear-end we have signed three new carrier customers and we have
generated revenues of approximately $36,000 during the first quarter of fiscal
year 2004. However, there can be no assurance that such revenue will continue to
be at this level from the $17.1 million net loss for
2000. The improvement was due primarilythese customers. We believe that these levels of revenue
will not be sufficient to a significant decrease in preferred
dividends recognized during 2001, as well as the improvements in other income
year to year. These improvements were somewhat offset by the increase in
selling,cover operating salaries and general and
administrative expenses from 2000 to 2001expense. Currently, as well as the
loss from our e-commerce operations in 2001 as compared to net income during
fiscal 2000.
Year ended July 31, 2000 Compared to Year Ended July 31, 1999
Operating Revenues. Consolidated revenues for fiscal 2000 totaled $34.3
million, an 8% increase over fiscal 1999's amount of $31.9 million. During
fiscal 2000,stated below, we continued to shift our focus away from certain services, such as
Retail Services and Network Services, toward others services, such as Carrier
Services. This shifting of revenues has been the result of the changing face of
the telecommunications market in Mexico since the demonopolization of Telmex on
January 1, 1997, as well as regulatory and technological advances made by the
Company. Prior to January 1997, limited avenues existed for callers to make
calls from Mexico to the United States. The vast majority of the calls placed in
Mexico had to be made from either a subscribed Telmex line, from a Telmex
payphone on a prepaid basis, or on a postpaid basis by accessing a U.S.-based
operator and billing the call on collect to a valid U.S. address, or to a valid
dollar-denominated credit card. Almost all calls utilized the Telmex local and
long distance network infrastructure. Because of the limited calling options
available in Mexico at the time, the Company set up its own operator center and
processed calls from its own phones and communication centers, as well as
locations owned by others, and did so at premium prices. During this same time
frame, we also focused on selling satellite-based private networks in an effort
to establish a satellite-based network infrastructure between the U.S. and
Mexico, which we felt we would eventually utilize to carry our own international
calls at some point and decrease our dependencedepend on the more expensive Telmex
network infrastructure.
As of July 31, 2000, 19 long distance concessions had been granted to
companies desiring to compete against the former Telmex monopoly. The entrance
of these alternative long distance providers into the Mexican market has
resulted in several changes, most notably more fiber optic capacity,
particularly in the crystal triangle made up of Mexico City, Guadalajara and
Monterrey; a steady increase in the calling options available within Mexico; and
a decrease in the cost of long distance phone calls on both a retail and
wholesale basis due to more competition. Callers now have a variety of ways to
make calls from public telephones or cellular telephones, many of which are made
on a prepaid basis at lower premiums than postpaid calls used to be. As a result
of the decreasing volumes of postpaid calls generated and processed by the
Company, and lower margin associated with those calls, the Company stopped
providing these services to most non-owned locations, closed its operator center
in November 1999 and began utilizing the services of third-party owned operator
centers. As such,
32
revenues generated from postpaid services declined from $7.2 million in fiscal
1999 to $3.6 million in fiscal 2000. During fiscal 2000, we processed
approximately 50,000 calls from Mexico as compared to approximately 160,000 in
fiscal 1999.
Fiber optic lines installed during fiscal 2000 have also reduced
satellite-based private network demand in Mexico, causing us to reduce our focus
on selling satellite-based private networks within Mexico. Network services
revenues declined from $5.1 million in fiscal 1999 to $2.5 million in fiscal
2000 due to the loss of customers upon expiration or termination of their
contracts.
In 1997, the Company acquired Sinfra, which owns licenses allowing the
Company to transport traffic internationally on a packet-switched basis.
Utilizing these licenses, the Company set up a satellite-based network between
San Antonio, Texas and Monterrey and Mexico City, Mexico. The Company also
leased fiber optic capacity between San Antonio, Dallas, Monterrey and Mexico
City in July 1999. Together, these two networks represent the Company's fixed
costs of operation today. Armed with this hybrid network, the Company has
focused its efforts during the past two years on maintaining its retail presence
of payphones and communications centers in Mexico, and adding third party
traffic to its network between the U.S. and Mexico. As such, integrated prepaid
traffic from its Mexican locations has remained relatively constant during the
past three years, and the amount of carrier traffic transported by the Company
has increased dramatically during this time frame. However, increased fiber
optic capacity into the major metropolitan areas of Mexico has resulted in
pricing pressures and much lower per-minute revenues for carrier services. Large
increases in volumes have resulted in comparatively smaller revenue increases,
and lower margins on carrier services. While the number of minutes of carrier
traffic processed by the Company increased by 146% from 78.6 million minutes in
fiscal 1999 to 193.4 million minutes in fiscal 2000, revenues increased by only
57% from $14.1 million in fiscal 1999 to $22.2 million in fiscal 2000.
All of the above revenues are included in our U.S. Telco results in
Footnote 16 in the accompanying financial statements as external revenues with
the exceptionmonthly
payments of approximately $483,000 of Network services revenues and
$535,000 of Retail services revenues included in our external Mexico Telco
results.
Integrated prepaid service revenues, which are generated by calls processed
by us without live or automated operator assistance, increased only slightly
between years. A majority of these revenues, stated in U.S. dollars in the
accompanying consolidated financial statements, are generated by calls processed
by our public telephones and communication centers in Mexico in exchange for
immediate cash payment in pesos, the currency in Mexico. While the number of
these calls and consequently the pesos collected increased slightly between
years, those pesos converted into more U.S. dollars during fiscal 2000 as the
average exchange rate between years went from 9.77 pesos to the dollar for
fiscal 1999 to 9.50 pesos to the dollar for fiscal 2000. During fiscal 2000, we
generated approximately $70,000 in revenues$20,000 from the sale of other companies'
services, primarily prepaid calling cards and prepaid cellular packages. These
revenues, included in integrated prepaid, were generated in the U.S. and Mexico
communication centers. With the exception51% of approximately $24,000 of retail
service revenues included inATSI Comunicaciones
S.A de C.V. to Telemarketing S.A de C.V. to pay for our U.S. Telco results as external revenues, all of
the above revenues are included in our Mexico Telco results.
Cost of Services. Cost of services increased approximately $5.6 million
or 26% between years from $21.1 million in fiscal 1999 to $26.7 million in
fiscal 2000, and increased as a percentage of revenues from 66% to 78%. The
increase in cost of services was principally attributable to the increased
volume of carrier service business. The shift toward prepaid services away from
postpaid services, which historically were sold at high premiums, in Mexico has
also contributed to lower margins. Our
33
carrier services business is exclusively accounted for in our U.S. Telco
segment. Carrier services revenues increased from 44% to 65% of overall
corporate revenues, period to period. During this timeframe, variable and fixed
costs associated with the Company's carrier services business increased, causing
margins to decrease. As long as carrier services comprise a large percentage of
our revenues, the trend of decreasing margins as a percentage of revenues will
continue unless the Company is able to negotiate lower costs with its underlying
carriers in Mexico, or is able to extend its network under its long distance
concession to decrease its reliance on the underlying carriers. As such, we
continue to desire to produce retail growth, with a desired ultimate
retail/wholesale mix of 70% retail and 30% wholesale. We cannot estimate when we
will be able to achieve this desired mix.
Selling, General and Administrative (SG&A) Expenses.monthly SG&A expenses
increased 6%, orexpenses.
Currently we generate approximately $710,000 from fiscal 1999 to fiscal 2000. As a
percentage of revenue, these expenses remained flat at 35%. The increase$45,000 in SG&A is attributableexpenses. We expect this
financial instability and lack of liquidity to continue during the opening of communication centers in the U.S., costs
related to our American Stock Exchange listing in February 2000, professional
fees related to SEC filingsfirst and
merger and acquisition services, and rent
expense as a result of moving the corporate location. These costs have been
included in the SG&A expenses of our U.S. Telco segment. Non-cash expenses,
related to our option plans, decreased from approximately $545,000 in fiscal
1999 to $346,000 in fiscal 2000.
Bad Debt Expense. Bad Debt Expense significantly decreased from fiscal 1999
to fiscal 2000 by approximately $1.5 million. In the fourthsecond quarter of fiscal 1999, we incurred approximately $1.5 million of bad debt expense through the
establishment of reserves related to specific carrier services and private
network customers.
Depreciation and Amortization. Depreciation and amortization rose
approximately $1.2 million, or 39%, and rose asyear 2004. As a percentage of revenues from
10% to 13% between years. The increased depreciation and amortization is
attributable to an approximate $2.0 million increase in fixed assets between
years as well as increased amortization related to acquisition costs, trademarks
and goodwill. The Company also began providing additional depreciation expense
as a result of a change in accounting estimate for useful lives within its
Mexican subsidiaries. Additionally, the Company fully depreciated approximately
$165,000 of our fixed assets for which we believe there are no associated future
benefits.
Operating Loss. Our operating loss increased approximately $3.5 million
from 1999 due primarily due to increased cost of services as both a percentage
and in actual dollars, increased SG&A and increased depreciation and
amortization, all of which were discussed above.
Other Income(expense). Other income (expense) increased approximately
$493,000 between years. This increase was principally attributable to additional
debt discount expense associated with the Company's conversion of convertible
notes and a note payable during fiscal 2000. Other increases in interest expense
are a result of increased indebtedness and capital leases.
Preferred Stock Dividends. During fiscal 2000, we recorded approximately
$7.1 million of non-cash expense related to cumulative convertible preferred
stock. In addition to cumulative dividends on our Series A, Series B, Series C,
and Series D Preferred Stock, which are accrued at 10%, 6%, 6%, and 6%,
respectively, we have recorded approximately $6.7 million related to the
discount or "beneficial conversion feature" associated with our various
preferred stock issuances. Accounting rules call for us to amortize as a
discount the difference between the market price and the most beneficial
conversion price to the holder over the lesser of the period most beneficial to
the holder or upon exercise of the conversion feature. Due to increases in our
stock price at the time such issuances occurred this
34
"beneficial conversion feature" has in some instances been substantial. The
period over which this amortization is recorded ranges from immediately for our
Series D Preferred Stock to one year for our various Series A Preferred Stock
issuances. The proceeds of the preferred stock issuances during fiscal 2000 were
approximately $5.7 million. As of July 31, 2000, we had approximately $335,000
of discount recorded related to the beneficial conversion features of our Series
A Preferred Stock issued in December 1999 which will be amortized over the next four months.
Net income (loss.) Net loss increased fromtwelve months we
estimate requiring additional funding of approximately $8.4 million$300,000 to $17.1 million between years. The increasecompensate
for the deficiencies in net loss was due primarily to
increased cost of services as a percentage of revenues, increased SG&A expense,
increased depreciation and amortization and increased preferred stock dividend
expense between years.
Liquidity and Capital Resourcescash inflows.
Cash provided by / used in investing activities:
During the year ended July 31, 2002, we generated negative cash flows from
operations of approximately $509,000. The Company was able to minimize its
negative cash flow from operations primarily by working with customers to
shorten the cash conversion of receivables and working with vendors related to
payments.
For the year, after adjustments for non-cash items (depreciation and
amortization, amortization of debt discount, deferred compensation, provision
for losses on accounts receivable and minority interest), we had a net loss of
approximately $6.2 million. Management of the operating assets and liabilities,
which consist mainly of collections on accounts receivable and payments made on
outstanding payables and accrued liabilities, produced positive cash flows of
approximately $5.7 million, resulting in the negative operating cash flows for
the period of approximately $509,000. This represents an approximate $5.5
million improvement over the negative operating cash flows of $6.0 million for
fiscal 2001.
Although we were able to produce positive cash flows from operations during
three of the four quarters of fiscal 2002, we must produce positive cash flows
on a recurring basis, and reduce or eliminate our working capital deficit. Until
that time, management will be faced with deciding whether to use available funds
to pay vendors and suppliers for services necessary for operations, to service
our debt requirements, or to purchase equipment to be used in the growth of our
business. Should our available funds not be sufficient to pay vendors and
suppliers, to service debt requirements and purchase equipment, we will need to
continue to raise additional capital. As noted in the risk factors of this Form
10-K we have not always paid all of our suppliers on time. Some of these
suppliers are critical to our operations. These suppliers have given us payment
extensions in the past, although there is no guarantee they will do so in the
future.
During the year ended July 31, 2002,2003, the Company acquired approximately
$1.1 million$281,000 in equipment. This equipment which was acquired by our operating entities,
ATSI Texas and TeleSpan, Inc during the first quarter for fiscal year 2003.
Subsequently this equipment was retained by the bankruptcy trustee when these
entities filed for Chapter 11 protection during the third quarter of fiscal year
2003. As previously discussed 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. Additionally, the court ordered joint
administration of both cases on April 9, 2003 and subsequently on May 14, 2003
the court converted the cases to Chapter 7 bankruptcies. The two bankrupt
subsidiaries were our two primary operating companies and they have ceased
operations. Currently the Chapter 7 trustee controls and manages these two
entities. The Chapter 7 trustee administers the liquidation of all of the assets
of these entities and the negotiations with all the creditors of record under
the bankruptcy. In July 2003, the Chapter 7 trustee enforced its rights under
the bankruptcy and sold ATSIMEX and SINFRA, the two foreign subsidiaries owned
by ATSI Texas and TeleSpan. The bankruptcy judge approved the sale of these
entities to Latingroup Ventures, LLC. The sale price for these entities was
$17,500; the Chapter 7 trustee received the funds and is restricting its use to
liquidate and close these entities. These bankruptcies did not financed through capital lease orinclude the
reporting entity (the SEC registrant), and it is excluded from any matters
related to these entities. These entities are the sole responsibility of the
Chapter 7 trustee.
Additionally, during the fourth quarter of fiscal year 2003, as
discussed below; ATSI Delaware received approximately $440,000 from the sale of
51% of ATSICOM. Of the funds received from the sale of ATSICOM, $200,000 were
restricted to pay off ATSICOM's liabilities; the remaining funds were utilized
to cover the monthly selling, general and administrative expense associated with
restarting carrier services.
Cash flows used in / provided by financing arrangements. Additional materialactivities:
During the fiscal year 2003, we had cash outflows included the payment
of approximately
$1.2 million$87,000 towards our capital lease obligations and an
additional $65,000 towards debt.
During the year,obligations. Additionally, we received
cash proceedsapproximately $25,000 for the issuance of $2.25 million fromdebt during fiscal year 2003. (See
footnote No: 11 to the saleconsolidated financial statements) Furthermore, during
fiscal year 2003, we recognized payments related to the issuance of GlobalSCAPE, Inc., $275,000 in advance payables, approximately $220,000 from
thepreferred
stock and issuance of common stock as a result of an investment option exerciseapproximately $12,000 and approximately $83,000 from the issuance of debt. These funds were used to pay
payables, to make payments on our debt and capital lease obligations, and to
purchase additional equipment used in our network operations.
35
$95,000
respectively.
Overall, the Company's net operating, investing and financing
activities during the year resulted in negative cash flowsended July 31, 2003 provided an increase of
approximately $76,000.$137,000 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.
30
The Company's working capital deficit at July 31, 20022003 was
approximately $13.2$17.8 million. This represents an increase of approximately $4.0$7.7
million from theour working capital deficit of $9.2 million at July 31, 2001.2002. The increase is
primarily attributed to our deficiency of cash and the accumulation of debt from
our various carriers and creditors.
In May 2002, the Company announced that it had renegotiated its capital
lease agreement with IBM. The modification resulted in a reduction in our
capital lease obligations of approximately $663,000 and a reduction in current
liabilities of approximately $2.4 million from April 30, 2002. The agreement calls for forty-two payments commencing
July 31, 2002, consisting of six payments of $50,000 and thirty-six payments of
$75,000. As of the date of this filing, we have made one payment totaling
$50,000. As we arecontinue to be in default of the agreement as of July 31, 2002,2003,
the entire principal balance of $2.3 million is reflected in current
liabilities. As of the date of this filing, IBM Corporation filed a claim
against ATSI Texas and TeleSpan, Inc, the two subsidiaries under the Chapter 7
case for the total outstanding balance. The Chapter 7 Bankruptcy trustee is
managing the relationship with this creditor and we believe that this liability
will be discharged upon termination of the Chapter 7 cases for these entities.
In May 2002, the Company entered into a Forbearance Agreement with NTFC
Capital Corporation related to its capital lease facility. In exchange for a
payment of approximately $500,000 NTFC agreed to release GlobalSCAPE, Inc. as a
co-borrower under the facility. Additionally, on May 12, 2003 the United States
Bankruptcy Court Judge handling the Chapter 7 cases of ATSI Texas and TeleSpan,
Inc. ordered the enforcement of the security interest. As a result, NTFC agreed to waivetook
possession of the default
of covenants until the earliest of 1) July 31, 2002, 2) a default by the Companyequipment under the Forbearance Agreement, 3)capital lease and was ordered to release
ATSI Texas and ATSI Delaware from any other defaultliability. As a result of this judgment we
reduced our liabilities under the facilityChapter 7 case by approximately $1.1 million
including accrued interest. As a result, we recognized an impairment loss on the
Company or 4) the date an amended agreement is executed. Both parties agreedequipment related to make their best efforts to negotiate the terms of an amended agreement, the
purpose being to restructure the current facility including the financial
covenants. Although we have not been successful to date in completing a
restructuring of the current facility we continue to work towards that
objective. At year-end we have classified the entire capital lease obligation,this transaction of approximately $811,000, in current liabilities. A portion$232,000 and reduced
assets of the proceeds of
$2.25 million, resulting from the sale of GlobalSCAPE on June 12, 2002, were
used to make payment to NTFC in accordance with the forbearance agreement
thereby releasing GlobalSCAPE as a co-borrower on the facility.approximately $1,316,000.
The Company's current liabilities include approximately $1.3 million of
equipment purchased from Northern Telecom, a subsidiary of Nortel Networks in
fiscal 2001. Approximately $386,000 of the amount due Northern Telecom is in the
form of a note payable, the remaining $850,000 is in accounts payable. In June
2002, the Company reached an agreement with Nortel related to this payable. In
return for a reduction of $314,000 in the price of the equipment and additional
technical support related to the equipment, ATSI agreed to make payments over a
ten-month period beginning July 15, 2002 totaling approximately $936,000. As of
the date of this filing, no payments have been made and we have removed the
equipment with an original value of approximately $850,000 from our network with
the intent of returning the equipment to Northern Telecom. As of the date of
this filing, Northern Telecom filed a claim against ATSI Texas and TeleSpan,
Inc, the two subsidiaries under the Chapter 7 case, for the total outstanding
balance. The Chapter 7 Bankruptcy trustee is managing the relationship with this
creditor and we believe that this liability will be discharged upon termination
of the Chapter 7 cases for these 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 $980,000$1,030,000 is included in accrued liabilities.
In addition, toAdditionally, we also have a note with the notes payable due Northern Telecom and the former
owners of Grupo Intelcom, S.A. de C.V., we have additional current notes payable
outstanding of approximately $730,000 as detailed in Note 7.
We continue to focus on enhancing the capacity and efficiency of our
international network backbone between the U.S. and Mexico, adding alternate
carriers to transport our traffic outside of that backbonetaxing authorities in Mexico
for $452,459 related to a note assumed through the acquisition of Computel, (see
note 23) and changing the mix of our traffic to better utilize our network capabilities. A
direct result of our producing positive cash flows from operations relates to
the Company's focus on its core revenue streama note payable with two related parties for $250,000 and reducing the cash conversion
cycle of its primary customers. To allow these trends to continue,$25,000,
respectively. In July 2003, the Company needs to expand its network and switch capacityentered into a note payable with a
non-related company, in order to provide additional
capacity to existing and potential customers.
36
The Company hasthe amount of $62,500. (See footnote No: 11 of the
consolidated financial statements for details on these notes payable)
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 such time
as we are able
to generate positive cash flowsincome from operations. There is no
assurance we will be able to achieve future revenue levels sufficient to support
operations or 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. SubsequentCurrently, management will utilize the funds
from the sale of ATSICOM to year-endfund operations. As previous discussed, in May 2003,
the company entered into a Share Purchase Agreement with Telemarketing de
31
Mexico, S.A. de C.V. (Telemarketing) whereby we have made a numberagreed to sell Telemarketing 51%
of decisions to further conserve our limited resources and maintain certain
operations going forward. These decisions include the recent terminationMexican subsidiary, ATSI Comunicaciones, S.A. de C.V. (ATISCOM). The
agreement provides that there will be an initial payment of a
number$194,000 plus
payment of employees in our corporate offices, strategic terminations in our
Mexico operationsapproximately $200,000 of ATSICOM'S liabilities and the restriction and ultimately, idlingremaining
purchase price of our carrier
services network capacity.
As was recently announced,$747,000 will be paid as follows:
o Beginning in May 2003 Telemarketing will pay ATSI $20,750 per
month for 12 months.
o Additionally, beginning in May 2004, Telemarketing will pay ATSI
$20,750 per month for the Company is reviewing expressionsnext 24 months, contingent on ATSI
generating 20,750,000 minutes of interest
received from various parties for a strategic combination. Shouldmonthly traffic through ATSICOM's
network. In the Companyevent the company does not reach the
above-mentioned volume of monthly minutes, the monthly payment
will be successfuladjusted based on the same percentage of the shortfall in
structuring a combination it is likely one component would include
a portionminutes, until Telemarketing pays the total purchase price. On the
other hand, if ATSI exceeds the volume of working capital infusion to allow usmonthly traffic,
Telemarketing can make additional payments, without penalty.
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 operations both domesticallymonthly 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.
Off-Balance Sheet Arrangements and internationally.
Inflation/Foreign Currency
Inflation has not hadContractual Obligations
In April 2003, we entered into a significant impact on our operations. Withsix-month operating lease with BDRC,
INC., for the exception of integrated prepaid services from our communication centers and coin
operated public telephones, almost alllease of our revenues are generatedexecutive office. In September 2003 we renewed this
lease for one more year and collectedwill expire in U.S. dollars. Services from our communication centers and public
telephones are generally provided on a "sent-paid" basis atOctober 2004. Under the timelease we will
pay annual rent of the call
in exchangeapproximately $42,000 for cash payment, so we do not maintain receivables on our books
that are denominated in pesos. In an effort to reduce foreign currency risk, we
attempt to convert pesos collected to U.S. dollars quickly and attempt to
maintain minimal cash balances denominated in pesos. Some expenses related to
certain services provided by us are incurred in foreign currencies, primarily
Mexican pesos. The devaluation3,040 square feet of the Mexican peso over the past several years
has not had a material adverse effect on our financial condition or operating
results.
Seasonality
Although it is not a significant portion of our overall revenues our
postpaid services revenues are typically higher on a per phone basis during
January through July, the peak tourism months in Mexico.office space.
Market Risk
We are subject to several market risks. Specifically, we face commodity
price risks and equity price risks and foreign currency exchange risk.risks.
Commodity Price Risk
Certain of our businesses, namely--------------------
The carrier services operate inmarket is an extremely price sensitive
environment. The carrier services business over the past twelve months has seen
significant reductions in the price per minute charged for transporting minutes
of traffic. While we have beenWe might not be able to withstand these pricing pressures as certain
of our competitors are much larger and better positioned to continue to withstand these
price reductions. Our ability to
further absorb these price reductions may be dependent
on our ability to further reduce our costs of transporting these minutes.
37
Equity Price Risks
------------------
Until such time as we are able to consistently produce positive cash
flows 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
We face two distinct risks related to foreign currency exchange risk;
transaction risk and translation risk.
As previously discussed under the caption "Inflation", we face risks
related to certain of our revenue streams, namely, integrated prepaid services
from our own 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. As we
grow our retail business in Mexico it is likely that we will face increasing
foreign currency transaction risks.
Historically, we have recorded 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.
3832
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Page
Consolidated Financial Statements of ATSI Communications, Inc. and Subsidiaries
Report of Tanner + Co. ................................................................................ 40Co....................................................................................................34
Report of Arthur Andersen LLP ......................................................................... 41LLP............................................................................................35
Consolidated Balance Sheets as of July 31, 20012002 and 2002 .............................................. 422003.................................................................36
Consolidated Statements of Operations for the Years Ended July 31, 2000, 2001, 2002 and 2002 ................ 432003...................................37
Consolidated Statements of Comprehensive Loss for the Years Ended July 31, 2000, 2001, 2002 and 2002 ........ 442003...........................38
Consolidated Statements of Stockholders' EquityDeficit for the Years Ended July 31, 2000, 2001, 2002 and 2002 ...... 452003........................39
Consolidated Statements of Cash Flows for the Years Ended July 31, 2000, 2001, 2002 and 2002 ................ 462003...................................40
Notes to Consolidated Financial Statements ............................................................ 47Statements...............................................................................41
3933
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of ATSI Communications, Inc.
We have audited the consolidated balance sheetsheets of ATSI Communications, Inc. and
subsidiaries as of July 31, 2003 and 2002, and the related consolidated
statements of operations, comprehensive loss, stockholders' deficit and cash
flows for the yearyears then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.audits. The
financial statements of ATSI Communications, Inc. and subsidiaries as of July 31, 2001 and
for the yearsyear
ended July 31, 2001 and 2000 were audited by other auditors who have ceased operations
and whose report dated October 18, 2001 on those statements included an
explanatory paragraph describing conditions that raised substantial doubt about
the Company's ability to continue as a going concern. As described in Note 1823
the Company has restated its 2001 and 2000consolidated financial statements during the current year to report
discontinued operations, in conformity with accounting principles generally
accepted in the United States of America. The other auditors reported on the
2001 and 2000 financial statements before the restatement.
We conducted our auditaudits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit providesaudits provide a
reasonable basis for our opinion.
As discussed above, the consolidated financial statements of ATSI
Communications, Inc. and subsidiaries as of July 31, 2001 and for the years
ended July 31, 2001 and 2000 were audited by other
auditors who have ceased operations. As described in Note 18,23, these consolidated
financial statements have been restated. We audited the adjustments described in
Note 1823 that were applied to restate the 2001 and 2000 consolidated financial statements.
In our opinion, such adjustments are appropriate and have been properly applied.
However, we were not engaged to audit, review, or apply any procedures to the
2001 and 2000 consolidated financial statements of the Company other than with respect to
such adjustments and, accordingly, we do not express an opinion or any other
form of assurance on the 2001 and 2000 consolidated financial statements taken as a
whole.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ATSI
Communications, Inc. and subsidiaries as of July 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for the year thenyears
ended July 31, 2003 and 2002 in conformity with accounting principles generally
accepted in the United States of America.
The accompanying 2002 consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 34 to the
consolidated financial statements, the Company has a working capital deficit,
has suffered recurring losses has negative cash flows from operations and has a stockholders' deficit. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 3.4. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Tanner + Co.
Salt Lake City, Utah
January 24,October 3, 2003
4034
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Management, Directors and Shareholders of ATSI Communications, Inc.:
We have audited the accompanying consolidated balance sheet of ATSI
Communications, Inc. (a Delaware corporation) and subsidiaries (the Company) as
of July 31, 2000 and 2001, and the related consolidated statements of
operations, comprehensive loss, stockholders' equity and cash flows for the
years ended July 31, 1999, 2000 and 2001. These financial statements are the
responsibility of Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ATSI Communications, Inc. and
subsidiaries as of July 31, 2000 and 2001, and the results of their operations
and their cash flows for the years ended July 31, 1999, 2000 and 2001, in
conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has a working capital deficit,
has suffered recurring losses from operations since inception, has negative cash
flows from operations and has limited capital resources available to support
further development of its operations. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 3. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts including goodwill
and other intangibles or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
October 18, 2001
NOTE:
This report is a copy of the report previously issued by Arthur
Andersen LLP as of and for the periods indicated above. Arthur Andersen LLP has
not reissued this report.
4135
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In(in thousands except share information)
July 31,
--------------------------
2001---------------------
2002 ---------- ----------2003
---------------------
ASSETS
------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 423 $ 27140
Cash-restricted - 88
Accounts receivable, net of allowance of $22$189 and $276,$102, respectively 2,474 1,082836 44
Note Receivable-current portion - 187
Inventory 75 5914 -
Prepaid expenses and other 751 634
---------- ----------& Other current assets 331 6
Assets from discontinued operations 3,694 245
---------------------
Total current assets 3,342 1,802
---------- ----------4,878 710
---------------------
PROPERTY AND EQUIPMENT: 20,568 19,901EQUIPMENT 10,671 -
Less - Accumulated depreciation (11,588) (14,785)
---------- ----------and amortization (7,166) -
---------------------
Net property and equipment 8,980 5,116
---------- ----------3,505 -
---------------------
OTHER ASSETS:
Goodwill,ASSETS, net
4,846 1,393Note Receivable - 100
Investment in unconsolidated subsidiary - 663
Concession license,License, net 4,208 2,000 -
Other assets 393 146
Net discontinued assets 1,591 -
---------- ----------74 57
---------------------
Total assets $ 23,36010,457 $ 10,457
========== ==========1,530
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 4,6186,082 $ 7,5238,029
Accrued liabilities 2,299 2,6572,134 5,518
Notes payable 677 1,473993 1,080
Convertible debentures - 275
Current portion of obligations under capital leases 4,865 3,207 2,207
Deferred revenue 119 111 ---------- -----------
Liabilities from discontinued operations 2,444 1,397
---------------------
Total current liabilities 12,578 14,971
---------- ----------14,972 18,506
---------------------
LONG-TERM LIABILITIES:
Obligations under capital leases, less current portion 18 67 -
Long Term Advances payable - 275
Net discontinued liabilities 852 -
Other 128 75 ---------- ----------9
---------------------
Total long-term liabilities 998 417 ---------- ----------9
---------------------
COMMITMENTS AND CONTINGENCIES:CONTINGENCIES - -
REDEEMABLE PREFERRED STOCK:
Series D Cumulative Preferred Stock, 3,0003000 shares authorized, 1,642
shares issued and outstanding at July 31, 2001, 742 shares
issued and
outstanding at July 31, 2002 1,302outstanding. 765 151
Series E Cumulative Preferred Stock, 10,000 shares authorized, 3,4901,455 and
1,170 shares issued and
outstanding, at July 31, 2001, 1,455 shares issued
and outstanding at July 31, 2002 2,864respectively 1,415 1,209
STOCKHOLDERS' EQUITY (DEFICIT):DEFICIT:
Preferred stock,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 at July 31, 2001 and July 31, 2002outstanding. - -
Series F Cumulative Convertible Preferred Stock, 10,000 shares authorized,
9,2107,260 shares issued and outstanding at July 31, 2001, 8,510 shares issued
and outstanding at July 31, 2002outstanding. - -
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, at July 31, 2001 and 2002
Common stock, $0.001 par value, 200,000,000 shares authorized, 77,329,379
issued and outstanding at July 31, 2001, 94,994,067 issued and
outstanding at July 31, 2002 77respectively 95 104
Additional paid in capital 57,935 59,891 60,093
Accumulated deficit (52,504) (67,493) (80,076)
Warrants outstanding 1,369Outstanding 1,031 Deferred compensation (12) -1,031
Other comprehensive loss (1,247)Comprehensive (Loss) Income (636) ---------- ----------503
---------------------
Total stockholders' equity (deficit) 5,618deficit (7,112) ---------- ----------(18,345)
---------------------
Total liabilities and stockholders' equity (deficit) $ 23,360deficit $ 10,457 ========== ==========$ 1,530
=====================
The accompanying notes are an integral part of these consolidated
financial statements.
4236
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Years Ended July 31,
2000 2001 2002 ------------- ---------------- ----------------2003
----------------------------------------------------
OPERATING REVENUES:
OPERATING REVENUES:
Telco servicesServices
Carrier services $ 22,191 $ 26,349 $ 40,92241,190 $ 6,532
Network services 2,538 2,714 2,223
Retail services 9,572 6,836 7,556
------------- ---------------- ----------------1,956 417
----------------------------------------------------
Total operating revenues 34,301 35,899 50,701
------------- ---------------- ----------------29,063 43,146 6,949
OPERATING EXPENSES:
Cost of services 26,654 28,297 42,862(exclusive of depreciation and
Amortization, shown below) 24,802 39,077 6,244
Selling, general and administrative 12,013 12,449 12,285administration 6,924 6,866 4,803
Impairment lossexpense - - 6,4323,119 418
Bad debt expense 755 150142 388 35
Depreciation and amortization 4,296 3,920 4,115
------------- ---------------- ----------------Amortization 2,045 1,955 1,229
----------------------------------------------------
Total operating expenses 43,718 44,816 66,082
------------- ---------------- ----------------33,913 51,405 12,729
----------------------------------------------------
OPERATING LOSS (9,417) (8,917) (15,381)(4,850) (8,259) (5,780)
OTHER INCOME (EXPENSE):
Other income (expense), net 70 986 (501)
Gain on restructuring562 1,868 (25)
Interest expense (862) (393) (1,377)
Loss from the sale of IBM debtassets - - 1,860
Interest expense (2,239) (1,873) (1,851)
------------- ---------------- ----------------(1,520)
----------------------------------------------------
Total other income (expense) (2,169) (887) (492)
------------- ---------------- ----------------(300) 1,475 (2,922)
LOSS FROM CONTINUING
OPERATIONS BEFORE INCOME TAX AND MINORITY
INTEREST (11,586) (9,804) (15,873)
MINORITY INTEREST - 245 203
CURRENT(5,150) (6,784) (8,702)
INCOME TAX BENEFIT (EXPENSE) BENEFIT - (223) (110)
------------- ---------------- ----------------- -
----------------------------------------------------
NET LOSS FROM CONTINUING
OPERATIONS (11,586) (9,782) (15,780)
INCOME (LOSS)(5,150) (6,784) (8,702)
NET LOSS FROM DISCONTINUED
OPERATIONS (5,403) (8,815) (2,919)
NET OF TAX 1,533 (771) 194
GAIN ON DISPOSITION(LOSS) FROM SALE OF DISCONTINUED
OPERATIONS NET OF TAX - - 1,069
------------- ---------------- ----------------1,082 (962)
----------------------------------------------------
NET LOSS (10,053)$ (10,553) $ (14,517) ------------- ---------------- ----------------$ (12,583)
====================================================
LESS: PREFERRED STOCK DIVIDENDS (7,085) (2,232) (472) ------------- ---------------- ----------------(653)
----------------------------------------------------
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS ($17,138) ($12,785) ($14,989)
============= ================ ================STOCKHOLDERS $ (12,785) $ (14,989) $ (13,236)
====================================================
BASIC AND DILUTED LOSS PER COMMON
SHARE ($0.30) ($0.18) ($0.17)
============= ================ ================$ (0.18) $ (0.17) $ (0.13)
====================================================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 56,851 71,180 86,275
============= ================ ================OUTSTANDING-BASIC AND DILUTED 71,180,000 86,275,000 101,767,000
====================================================
The accompanying notes are an integral part of these consolidated
financial statements.
4337
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
For the the Years Endedended July 31,
2000 2001 2002 ---- ---- ----2003
---------------- ------------- -------------
Net loss to common shareholders ($17,138) ($12,785) ($14,989)stockholders
Other comprehensive (loss) income,loss, net of tax of $0:tax: $ (12,784) $ (14,990) $ (13,236)
Foreign currency translation adjustments $ 79 ($467) $ 610
-------- -------- --------adjustment (467) 611 1,139
---------------- ------------- -------------
Comprehensive loss to common stockholders $ (13,251) $ (14,379) $ (12,097)
================ ============= =============
38
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY / (DEFICIT)
(In thousands)
Notes Total
Additional Accumu- Warrants receivable Cumulative Deferred Stock
Preferred Stock Common Stock Paid In lated Out- from Translation Compen- holders'
Shares Amount Shares Amount Capital Deficit standing officers Adjustment sation (DEFICIT)
------ ---- ------ ----- --------- --------- ------- ---------- --------- -------- ---------
BALANCE, July 31, 2000 24 - 67,409 $ 67 $ 51,625 $ (39,125) $ 417 $ (1,108) $ (779) $ (119) $ 10,978
Issuances of common shares
for cash 1,942 2 931 933
Issuances of common shares
for services 80 33 33
Issuances of common shares
for liquidating damages 150 250 250
Issuances of common shares
for acquisition (457) (457)
Issuances of preferred
stock 16 1,104 1,104
Conversion of preferred
stock (20) 8,181 8 2,485 2,493
Notes receivable from
shareholders ($17,059) ($13,252) ($14,379)(2,033) (2) (1,106) 1,108 0
Conversion of convertible
debt to common shares 1,600 2 802 804
Dividends (1,214) (1,214)
Amortization of equity
discount 1,612 (1,612) 0
Compensation expense 661 107 768
Warrants issued with
redeemable preferred stock 952 952
Warrants issued with
liquidating damages (5) (5)
Cumulative effect of
translation adjustment (468) (468)
Net loss (10,553) (10,553)
------ ---- ------ ----- --------- --------- ------- ---------- --------- -------- ---------
BALANCE, July 31, 2001 20 - 77,329 $ 77 $ 57,935 $ (52,504) $ 1,369 $ 0 $ (1,247) $ (12) $ 5,618
Issuances of common shares
for cash 773 1 219 220
Issuances of common shares
for services 48 10 10
Issuances of common shares
for acquisition 1,062 1 (981) (980)
Issuances of preferred stock (26) (26)
Conversion of preferred
stock 15,454 16 2,384 2,400
Notes receivable from
shareholders 328 0 12 12
Dividends (472) (472)
Compensation expense 0 12 12
Expiration of warrants 338 (338) 0
Cumulative effect of
translation adjustment 611 611
Net loss (14,517) (14,517)
------ ---- ------ ----- --------- --------- ------- ---------- --------- -------- ---------
BALANCE, July 31, 2002 20 - 94,994 $ 95 $ 59,891 $ (67,493) $ 1,031 $ 0 $ (636) $ 0 $ (7,112)
Issuances of common shares
for services 3,319 3 171 174
Conversion of redemable
preferred stock 5,326 6 685 691
Dividends (653) (653)
Cumulative effect of
translation adjustment 1,139 1,139
Net loss (12,583) (12,583)
------ ---- ------ ----- --------- --------- ------- ---------- --------- -------- ---------
BALANCE, July 31, 2003 20 - 103,639 $ 104 $ 60,093 $ (80,076) $ 1,031 $ 0 $ 503 $ 0 $ (18,345)
====== ==== ======= ===== ========= ======== ======= ========== ========= ======== =================
The accompanying notes are an integral part of these
consolidated financial statements.
4439
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTSSTATEMENT OF STOCKHOLDERS' EQUITYCASH FLOWS
(In thousands)
Additional
Preferred Stock Common Stock Paid In Accumulated Warrants
--------------- ---------------
Shares Amount Shares Amount Capital Deficit Outstanding
------ ------ ------- ------ ----------- ------------ -----------For the Years Ended July 31,
2001 2002 2003
----------------------------------------------------
BALANCE, July 31, 1999 26 0 48,685NET LOSS $ 49(10,553) $ 29,399 ($21,987) 0
Issuances(14,517) $ (12,583)
Gain on the sale of GlobalSCAPE - (1,082) -
Loss on the sale of 51% of ATSICOM - - 511
Gain on the restructuring of IBM debt - (1,860) -
Loss on sale of ATSIMEX & SINFRA - - 962
Loss on disposal of property & equipment - - 1,009
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash used in
operating activities-
Restricted Cash - - (88)
Impairment loss - 6,432 418
Depreciation and amortization 4,434 4,599 1,739
Differed Compensation 372 - -
Deferred compensation 768 12 -
Issuance of common shares for cash 8,470 8 6,279
Issuances of common sharesstock for services 419- 10 -
Foreign currency (Gain) loss (326) - 661
Minority Interest (246) (244)
Loss on investment in ATSICOM - - 14
Provision for losses on accounts receivable 241 433 106
Changes in operating assets and liabilities:
(Increase) Decrease in accounts receivable 121 786 719
(Increase) Decrease in prepaid expenses and other (482) 248 583
Increase (Decrease) in accounts payable (267) 3,911 3,267
Increase (Decrease) in accrued liabilities (3) 780 2,919
Increase (Decrease) in deferred revenue (47) (17) (108)
----------------------------------------------------
Net cash provided by operating activities (5,988) (509) 129
----------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment (1,122) (1,092) (281)
Sale of GlobalSCAPE - 2,250 -
Cash proceeds sale of ATSICOM - - 440
Sale of ATSIMEX and SINFRA - - 18
Acquisition of business, net of cash acquired (102) (54) -
----------------------------------------------------
Net cash used in investing activities (1,224) 1,104 177
----------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 776 83 25
IssuancesNet increase in Short term borrowing 116 - -
Payments on debt (560) (65) -
Capital lease Payments (1,106) (1,158) (87)
Proceeds from advance payables - 275 -
Proceeds from issuance of common shares for acquisition 400 2,921
Issuancespreferred stock. 5,639 - -
Payment of expenses related to the issuance of preferred stock 25 2,646
Conversion of preferred stock (27) 6,802 7 287
Conversion of convertible debt to common shares 2,633 3 3,115
Dividends (432)
Amortization of equity discount - 6,653 (6,653)
Compensation expense
Warrants issued with redeemable preferred stock 417
Warrants issued with debt 300
Notes receivable(26) (12)
Proceeds from shareholders
Cumulative effect of translation adjustment
Net loss (10,053)
------ ------ ------- ------ ----------- ------------ -----------
BALANCE, July 31, 2000 24 0 67,409 67 51,625 (39,125) 417
Issuancesissuance of common shares forstock, net
of issuance costs 900 220 (95)
----------------------------------------------------
Net cash 1,942 2 931
Issuancesused in/provided by financing activities 5,765 (671) (169)
----------------------------------------------------
NET INCREASE (DECREASE) IN CASH (1,447) (76) 137
CASH AND CASH EQUIVALENTS, beginning of common shares for services 80 33
Issuancesperiod 1,550 12 3
CASH AND CASH EQUIVALENTS- Allocated to discontinued operations (91) 67 0
----------------------------------------------------
CASH AND CASH EQUIVALENTS, end of common shares for liquidating damages 150 250
Issuances of common shares for acquisition (457)
Issuances of preferred stock 16 1,104
Conversion of preferred stock (20) 8,181 8 2,485
Notes receivable from shareholders (2,033) (2) (1,106)
Conversion of convertible debt to common shares 1,600 2 802
Dividends (1,214)
Amortization of equity discount 1,612 (1,612)
Compensation expense 661
Warrants issued with redeemable preferred stock 952
Warrants issued with liquidating damages (5)
Cumulative effect of translation adjustment
Net loss (10,553)
------ ------ ------- ------ ----------- ------------ -----------
BALANCE, July 31, 2001 20 0 77,329 77 57,935 (52,504) 1,369
Issuances of common shares for cash 773 1 219
Issuances of common shares for services 48 10
Issuances of common shares for acquisition 1,062 1 (981)
Issuances of preferred stock (26)
Conversion of preferred stock 15,454 16 2,384
Notes receivable from shareholders 328 0period 12 Dividends (472)
Compensation expense 0
Expiration of warrants 338 (338)
Cumulative effect of translation adjustment
Net loss (14,517)
------ ------ ------- ------ ---------- ------------ -----------
BALANCE, July 31, 2002 20 0 94,994 $ 95 $ 59,891 ($67,493) $ 1,031
====== ====== ======= ====== =========== ============ ===========
Notes
receivable Cumulative Total
from Translation Deferred Stockholders'
officers Adjustment Compensation Equity
------------ ------------ ------------ --------------
BALANCE, July 31, 1999 0 ($858) ($466) $ 6,137
Issuances of common shares for cash 6,287
Issuances of common shares for services 25
Issuances of common shares for acquisition 2,921
Issuances of preferred stock 2,646
Conversion of preferred stock 294
Conversion of convertible debt to common shares 3,118
Dividends (432)
Amortization of equity discount 0
Compensation expense 347 347
Warrants issued with redeemable preferred stock 417
Warrants issued with debt 300
Notes receivable from shareholders (1,108) (1,108)
Cumulative effect of translation adjustment 79 79
Net loss (10,053)
------------ ------------ ------------ --------------
BALANCE, July 31, 2000 (1,108) (779) (119) 10,978
Issuances of common shares for cash 933
Issuances of common shares for services 33
Issuances of common shares for liquidating damages 250
Issuances of common shares for acquisition (457)
Issuances of preferred stock 1,104
Conversion of preferred stock 2,493
Notes receivable from shareholders 1,108 0
Conversion of convertible debt to common shares 804
Dividends (1,214)
Amortization of equity discount 0
Compensation expense 107 768
Warrants issued with redeemable preferred stock 952
Warrants issued with liquidating damages (5)
Cumulative effect of translation adjustment (468) (468)
Net loss (10,553)
------------ ------------ ------------ --------------
BALANCE, July 31, 2001 0 (1,247) (12) 5,618
Issuances of common shares for cash 220
Issuances of common shares for services 10
Issuances of common shares for acquisition (980)
Issuances of preferred stock (26)
Conversion of preferred stock 2,400
Notes receivable from shareholders 12
Dividends (472)
Compensation expense 12 12
Expiration of warrants 0
Cumulative effect of translation adjustment 611 611
Net loss (14,517)
------------ ------------ ------------ --------------
BALANCE, July 31, 2002 $ 0 ($636) $ 0 ($7,112)
============ ============ ============ ==============3 140
====================================================
The accompanying notes are an integral part of these consolidated
financial statements.
45
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended July 31,
2000 2001 2002
---------- ---------- ----------
NET LOSS (BEFORE ADJUSTMENT FROM DISCONTINUED OPERATIONS
AND NON-OPERATING GAINS/(LOSSES)): ($10,053) ($10,553) ($14,517)
Gain on the sale of GlobalSCAPE - - (1,082)
Gain on the restructuring of IBM debt - - (1,860)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($10,053) ($10,553) ($17,459)
Adjustments to reconcile net loss to net cash used in
operating activities-
Impairment loss - - 6,432
Depreciation and amortization 4,681 4,434 4,599
Amortization of debt discount 442 372 -
Deferred compensation 347 768 12
Issuance of common stock for services - - 10
Foreign currency gain - (326) -
Minority Interest - (246) (244)
Provision for losses on accounts receivable 898 241 433
Changes in current assets and liabilities-
Decrease (increase) in accounts receivable (678) 121 786
(Increase) decrease in prepaid expenses and other 88 (482) 248
(Increase) decrease in accounts payable (776) (267) 3,911
Increase (decrease) in accrued liabilities 462 (3) 780
Decrease in deferred revenue (66) (47) (17)
-------- -------- --------
Net cash used in operating activities (4,655) (5,988) (509)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,993) (1,122) (1,092)
Sale of GlobalSCAPE - - 2,250
Acquisition of business, net of cash acquired (1,334) (102) (54)
-------- -------- --------
Net cash provided by (used in) investing activities (3,327) (1,224) 1,104
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 745 776 83
Net increase in short-term borrowings 80 116 0
Payments on debt (781) (560) (65)
Capital lease payments (1,424) (1,106) (1,158)
Proceeds from convertible debentures - - 275
Proceeds from issuance of preferred stock,
net of issuance costs 5,646 5,639 (26)
Proceeds from issuance of common stock,
net of issuance costs 4,887 900 220
-------- -------- --------
Net cash provided by (used in) financing activities 9,153 5,765 (671)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH 1,171 (1,447) (75)
CASH AND CASH EQUIVALENTS, beginning of year 379 1,550 42
CASH AND CASH EQUIVALENTS, allocated to discontinued operations - (61) 61
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $ 1,550 $ 42 $ 27
======== ======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
4640
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The accompanying consolidated financial statements are those of ATSI
Communications, Inc., a Delaware Corporation and ourmajority owned subsidiaries
("ATSI"(ATSI or the "Company"). We, as listed below. All significant intercompany
transactions and balances were formed on June 6, 1996 under the laws of the state of Delaware for the express
purpose of affecting a "Plan of Arrangement" with American TeleSource
International, Inc., whicheliminated in consolidation. Our Common Stock was
incorporated under the laws of the province of
Ontario, Canada (hereinafter referred to as "ATSI-Canada"). The Plan of
Arrangement called for the stockholders of ATSI-Canada to exchange their shares
on a one-for-one basis for shares of ATSI. On April 30, 1998, shareholders of
ATSI-Canada approved the Plan of Arrangement, and on May 11, 1998, ATSI-Canada
became a wholly owned subsidiary of ATSI. ATSI is publicly tradedquoted on the American Stock Exchange ("AMEX")(AMEX) under the symbol "AI" until January
15, 2003 when the trading of our common stock was halted. On April 24, 2003, the
company was delisted by AMEX. As of November 13, 2003 our common stock is traded
on the Pink Sheets under the symbol "ATSC".
Through our subsidiaries,Prior to December 31, 2002, we provideprovided retail and carrier
communications services within and between the United States (U.S.) and select
markets within Latin America. Utilizing a frameworkUnfortunately, due to our limited resources we
idled our carrier network capacity on December 31, 2002. Additionally, on
February 4, 2003 and February 18, 2003, respectively, two of licenses, interconnection and service
agreements, network facilities and distribution channels, our intentions are to
provide U.S standards of reliability to Mexico and other markets within Latin
America which have historically been underserved by telecommunications
monopolies. As of July 31, 2002, our operating
subsidiaries, ATSI-Texas and TeleSpan, Inc. filed for reorganization protection
under Chapter 11 of the U.S Bankruptcy Code. Additionally, the court ordered
joint administration of both cases on April 9, 2003 and on May 14, 2003 the
court converted the case to Chapter 7.
On May 22, 2003 we entered into a Share Purchase Agreement with
Telemarketing de Mexico, S.A. de C.V. (Telemarketing) whereby we agreed to sell
Telemarketing 51% of our Mexican subsidiary, ATSI Comunicaciones, S.A. de C.V.
(ATSICOM).
On July 02, 2003, the U.S. Bankruptcy Court handling the Chapter 7
cases for ATSI Texas and TeleSpan, Inc. approved the sale of two of its foreign
subsidiaries, ATSI-Mexico and SINFRA, to Latingroup Ventures, L.L.C. (LGV), a
non-related entity. 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 owned by SINFRA. The Chapter 7
Bankruptcy Trustee received all the proceeds from the sale of these entities.
Due to the bankruptcies and related sales of ATSI Mexico and SINFRA we
determined to discontinue the Mexico Telco segment, which consisted primarily of
the retail call centers operations.
The following entities are as follows:subsidiaries in which we had ownership
-----------------------------------------------------------------
during the periods presented.
- ----------------------------
ATSI Comunicaciones, S.A. de C.V., ("ATSI-COM"(ATSI-COM, a Mexican corporation)
Utilizing our- --------------------------------------------------------------------
Currently, we own 49% of ATSI Comunicaciones, S.A de C.V. Under this
entity we hold a 30-year concession license. Under the concession license which we acquired in July 2000,
ATSI-COM providescan
provide long distance services and the right to interconnect with local
providers in Mexico. As previously mentioned, in May 2003, we sold 51% of
ATSICOM to Telemarketing de Mexico, S.A de C.V. See discussion of acquisition of this concession
license in Note 15.note 20 to the consolidated
financial statements.
American TeleSource International, Inc. ("ATSI-Texas"(ATSI-Texas, a Texas corporation) ATSI-Texas contracts with third-party operatorand
- -----------------------------------------------------------------------------
TeleSpan, Inc. (TeleSpan, a Texas corporation)
- ----------------------------------------------
Prior to December 31, 2002, these companies operated carrier and
network services, companiesbut on February 4, 2003 and February 18, 2003 we filed for
reorganization protection under Chapter 11 of the provisionU.S Bankruptcy Code.
Additionally, the court ordered joint administration of postpaid services from public telephonesboth cases on April 9,
2003 and communication
centerson May 14, 2003 the court converted the case to Chapter 7. Currently
these two entities are not operating, and the bankruptcy trustee is managing the
liquidation of all assets owned by our subsidiaries in Mexico, as well as some third party-owned
public telephones, communication centersunder these entities and hotels in Mexico. Although these
calls originate in Mexico, they are terminated and billed inall matters related to
the United States
and Mexico through agreements that ATSI-Texas has with these third party
entities. Additionally, ATSI-Texas contracts with third parties on behalf of
TeleSpan and Sinfra for some carrier services and private network contracts.Chapter 7 liquidation process.
41
American TeleSource International de Mexico, S.A. de C.V. ("ATSI-Mexico"(ATSI-Mexico,
- -------------------------------------------------------------------------
a Mexican corporation) and Servicios de Infraestructura, S.A. de C.V (Sinfra,
- -----------------------------------------------------------------------------
a Mexican corporation)
- ----------------------
ATSI-Mexico owns and operates coin-operated public telephones and the
communication centers in Mexico. Utilizing ourMexico utilizing a 20-year comercializadora license,
which expires in February 2017,2017. On July 2, 2003, the U.S. Bankruptcy Court
handling the Chapter 7 cases for ATSI purchases telephone linesTexas and resells local, long distanceTeleSpan, Inc. approved the sale
of two of its subsidiaries, ATSI-Mexico and international calls from public telephones connectedSINFRA, to Latingroup Ventures,
L.L.C. (LGV). Under the lines. Direct
dial, or integrated prepaid calls may be madepurchase 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 telephones
47
using pesos or quarters, and users may use the servicessale of ATSI-Texas to place
calls to the U.S. by billing calls to valid third parties, credit cards or
calling cards.these entities.
Sistema de Telefonia Computarizada, S.A. de C.V( "Computel"Computel, a Mexican corporation)
- --------------------------------------------------------------------------------
Prior to July 2, 2003, Computel isadministrated the largest private operatoroperation of the
communication centers in Mexico, operating approximately 125 communication centers in 63 cities,but as a result of July 31, 2002. Direct dial calls may be made fromthe sale of ATSI-Mexico to
LGV by the Chapter 7 bankruptcy trustee, all the communication centers using cash or credit cards,are now
being managed and users may use the services of ATSI-Texas to
place calls to the U.S.operated by billing calls to valid third parties, credit cards or
calling cards.Latingroup Ventures, L.L.C (LGV). Currently,
Computel utilizes telephone lines owned by ATSI-Mexico.
Servicios de Infraestructura, S.A. de C.V ("Sinfra"a Mexican
corporation)
Utilizing our 15-year Teleportis not operating and Satellite Network license, which
expires in May 2009, Sinfra owns and operates our teleport facilities in
Monterrey and Mexico City, Mexico. These facilities are used for the provision
of international private network services. Sinfra also owns a 20-year Packet
Switching Network license, which expires in October 2014.
TeleSpan, Inc. ("TeleSpan" a Texas corporation)
TeleSpan owns and operates our teleport facilitieswe do not foresee this entity restarting any
business any time in the U.S. and
Costa Rica. TeleSpan contracts with U.S. based entities and carriers seeking
facilities or increased capacity into Mexico, Costa Rica and El Salvador. For
network services into Mexico, TeleSpan utilizes facilities owned by Sinfra.near future.
ATSI de CentroAmerica (a Costa Rican corporation)
ATSI de CentroAmerica markets international- -------------------------------------------------
In October 2002 the sale of our Costa Rica private network services was
completed. As a result this entity is no longer operating and we do not foresee
this entity restarting any business any time in Costa Rica and other Latin American countries and looks to develop business
opportunities in Latin American countries through joint ventures and
interconnection agreements with existing telecommunication companies.the near future.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared on the accrual
basis of accounting under accounting principles generally accepted in the United
States (GAAP). All significant intercompany balances and transactions have been
eliminated in consolidation. Certain prior period amounts have been reclassified
for comparative purposes.
A) STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation under the recognition
and measurement principals of APB Opinion No 25, Accounting for Stock Issued to
Employees, and related interpretations. The Company has adopted SFAS No. 123,
"Accounting for Stock-based Compensation". In accordance with the provisions of
SFAS 123, the Company has elected to continue to apply Accounting Principles
Board Opinion No.25, "Accounting for Stock Issued to Employees" ("APB Opinion
No. 25") and related interpretations in accounting for its stock option plans.
In accordance with APB Opinion. 25, no compensation cost for these plans has
been determined. Based upon the fair value at the grant date consistent with the
methodology prescribed under SFAS No. 123, the Company's net earnings would have
been changed by the following:
42
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
STOCK BASED COMPENSATION
(In thousands, except per share amounts)
For the Years Ended July 31,
-------------------------------------------------
2001 2002 2003
-------------------------------------------------
Net loss applicable to common
Stockholders (12,784) (14,990) (13,236)
Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects - - -
Deduct: Total stock based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects - (794) (313)
-------------------------------------------------
Pro forma net loss (12,784) (15,784) (13,549)
=================================================
Earnings per share
Basis - as reported ($0.18) ($0.17) ($0.13)
=================================================
Basis - pro forma ($0.18) ($0.18) ($0.12)
=================================================
The fair value of each option and warrant granted is estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions:
For the Years Ended July 31,
-------------------------------------------------
2001 2002 2003
-------------------------------------------------
Expected dividends yield 0.0% 0.0% 0.0%
Expected stock price volatility 136%-156% 123% 256%
Risk-free interest rate 5.45% 4.92% 2.7%
Expected life of options 3-10 years 3-10 years 3-10 years
-------------------------------------------------
The weighted average fair value of options granted during 2001, 2002 and 2003
was $.55, $.50 and $.08, respectively
B) 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. Revenues from
this service accounted for approximately 91% of our overall revenues in fiscal
2001, approximately 95% in fiscal 2002 and 94% in fiscal 2003. As discussed in
the business section of this report, in December 2002, we were forced to idle
our network and we were not able to restart our carrier services network during
the fiscal year ending July 31, 2003. As a result we did not generate any
revenue from this source during the second half of the fiscal year ending July
31, 2003.
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.
43
Direct Cost:
------------
Carrier 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: 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.
Revenue recognition:
--------------------
Carrier services revenue is derived through transporting and
terminating minutes of telecommunications traffic over our leased VoIP network,
or Voice over Internet Protocol. Network services revenue is derived from the
network capacity provided to our customers to connect their multiple sites or
locations throughout Latin America to transport data, voice and fax
transmissions. Revenue is recognized when persuasive evidence of an arrangement
exists, service or network capacity has been provided, the price is fixed or
determinable, collectibility is reasonably assured and there are no significant
obligations remaining.
C) IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recovered through undiscounted future cash flows. If it is
determined that an impairment has occurred based on expected cash flows, such
loss is recognized in the statement of operations.
D) INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
On May 22, 2003 the Company sold 51% of its interest in ATSI
Comunicaciones S.A de C.V., (ATSI COM) As of July 31, 2003, the Company has a
49% interest in the profits and equity of ATSICOM, a Mexican Corporation,
engaged in providing telecommunications services. The Company has recorded the
investment in the unconsolidated subsidiary in conformity with the equity method
of accounting. Summarized financial information for this unconsolidated
subsidiary is included in Note 6 to the consolidated financial statements.
E) OTHER ACCOUNTING POLICIES
Estimates in Financial Statements
---------------------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the U.S.United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actualdisclosures. Accordingly, actual results may differ from those estimates.
48
Foreign Currency Translation
----------------------------
Until January 1, 1999, Mexico's economy was designated as highly
inflationary. GAAP requires the functional currency of highly inflationary
economies to be the same as the reporting currency. Accordingly, the
consolidated financial statements of all of our Mexican subsidiaries, whose
functional currency is the peso, were remeasured from the peso into the U.S.
dollar for consolidation. Monetary and nonmonetary assets and liabilities were
remeasured into U.S. dollars using current and historical exchange rates,
respectively. The operating activities of these subsidiaries were remeasured
into U.S. dollars using a weighted-average exchange rate. The resulting
44
translation gains and losses were charged directly to operations. As of January
1, 1999, Mexico's economy was deemed to be no longer highly inflationary.
According to GAAP requirements the change from highly inflationary to non-highly
inflationary requires that the nonmonetary assets be remeasured using not the
historical exchange rates, but the exchange rate in place as of the date the
economy changes from highly inflationary to non-highly inflationary. As such,
our non-monetary assets in Mexico have been remeasured using the exchange rate
as of January 1, 1999. Subsequent to January 1, 1999, monetary assets and
non-monetary assets are translated using current exchange rates and the
operating activity of these Mexican subsidiaries remeasured into U.S. dollars
using a weighted average exchange rate. The effect of these translation
adjustments are reflected in the other comprehensive incomeloss account shownincluded in
stockholders'equity.
Impuesto al Valor Agregado (Value-Added Tax) ("IVA")
Our Mexican subsidiaries are required to report a value-added tax related
to both purchases and salesstockholders' deficit section of services and assets, for local tax reporting.
Accordingly, each subsidiary maintains both an IVA receivable and IVA payable
account on their subsidiary ledgers. For consolidated reporting purposes, we net
our Mexican subsidiaries IVA receivable and IVA payable accounts as allowed by
regulatory requirements in Mexico. For the year ended July 31, 2001, this
netting of IVA accounts resulted in the elimination of IVA payable, a
corresponding reduction in IVA receivable of approximately $2,101,000 and a net
IVA receivable of $289,000. For the year ended July 31, 2002, this netting of
IVA accounts resulted in the elimination of IVA payable, a corresponding
reduction in IVA receivable of approximately $1,533,000 and a net IVA receivable
of $265,000.
Revenue Recognition Policies
We recognize revenue from our retail services as such services are
performed, net of unbillable calls. Revenue from carrier services and network
services are recognized when service commences for service commencement fees and
monthly thereafter as services are provided.balance sheet.
Concentration of Credit Risk
----------------------------
Financial instruments that potentially subject the Company to
concentration of credit risk consist primarily of trade receivables. In the
normal course of business, the Company provides credit terms to its customers.
Accordingly, the Company performs ongoing credit evaluations of 49
its customers
and maintains allowances for possible losses, which, when realized, have been
within the range of management's expectations. The Company maintains cash in
bank deposits accounts, which, at times, may exceed federally insured limits.
The Company has not experienced any losses in such accounts and we do not
believe we are exposed to any significant credit risk on cash and cash
equivalents.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with an initial
maturity of three months or less to be cash equivalents.
Restricted Cash
---------------
This is the cash that has been collected by the Chapter 7 Bankruptcy
Trustee from the sale of various assets from ATSI Texas and TeleSpan Inc. This
cash will be utilized by the Bankruptcy Trustees to pay those expense associated
with the liquidation of ATSI Texas and TeleSpan, Inc.
Property and Equipment
----------------------
Property and equipment are stated at cost.cost, less accumulated
depreciation and amortization. Depreciation and amortization are computed on a
straight-line basis over the estimated useful lives of the related assets, which
range from one to fifteen years. Expenditures for maintenance and repairs are
charged to expense as incurred.
Direct installation
costsIncome Taxes
------------
Deferred taxes are computed using the asset and major improvementsliability method. Under
the asset and liability method, deferred tax assets and liabilities are
capitalized.
Impairmentrecognized for future tax consequences attributable to differences between the
financial statement carrying amounts of Long-livedexisting assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
Company reviews its long-livedeffect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Disclosures about Fair Value of Financial Instruments
-----------------------------------------------------
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument held by us:
Current assets and liabilities: The carrying value approximates fair
value due to the short maturity of these items.
Convertible debt: Since our debt is not quoted, estimates are based on
each obligations' characteristics, including remaining maturity, interest rate,
credit rating, collateral, amortization schedule and liquidity (without
consideration for impairment whenever events or
changes in circumstances indicatethe convertibility of the notes). We believe that the carrying
amount of the assets maydoes not be recovered through undiscounted future cash flows. If it is determined that an
impairment has occurred based on expected cash flows, such loss is recognized in
the statement of operations.
Income Taxes
We account for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes". Under the provisions of SFAS 109, we recognize deferred tax
liabilities and assets based on enacted income tax rates that are expected to be
in effect in the period in which the deferred tax liability or asset is expected
to be settled or realized. A change in the tax laws or rates results in
adjustments in the period in which the tax laws or rates are changed.
Basic and Diluted Loss Per Share
Loss per share was calculated using the weighted average number of common
shares outstanding for the years ended July 31, 2000, 2001 and 2002. Common
stock equivalents, which consist of the stock purchase warrants and options
described in Note 12, were excludeddiffer materially from the computation of the weighted average
number of common shares outstanding because their effect was antidilutive.
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142, which supercedes APB Option No. 17, "Intangible Assets"
provides financial accounting and reporting for acquired goodwill and other
intangible assets. While SFAS 142 is effective for fiscal years beginning after
December 15, 2001, early adoption is permitted for companies whose fiscal years
begin after March 15, 2001. SFAS 142 addresses how intangible assets that are
acquired individually or with a group of assets should be accounted for in
financial statements upon their acquisition as well as after they have been
initially recognized in the financial statements. While the Company is not
required to adopt SFAS 142 until August 1, 2002
50fair value.
45
we do not believe the adoption will have a material effect on the financial
condition or results of the Company unless we determine going forward that
further impairment of our intangible assets exist.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143, which amends SFAS No. 19, "Financial
Accounting and Reporting by Oil and Gas Producing Companies" is applicable to
all companies. SFAS 143, which is effective for fiscal years beginning after
June 15, 2002, addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. It applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and (or) the normal operation of a long-lived asset, except for
certain obligations of lessees. As used in this Statement, a legal obligation is
an obligation that a party is required to settle as a result of an existing or
enacted law, statute, ordinance, or written or oral contract or by legal
construction of a contract under the doctrine of promissory estoppel. While the
Company is not yet required to adopt SFAS 143, it believes the adoption will not
have a material effect on the financial condition or results of the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets." SFAS No. 144, which supercedes
SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed Of" and amends ARB No. 51, "Consolidated
Financial Statements," addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 144 is effective for fiscal
years beginning after December 15, 2001, and interim financials within those
fiscal years, with early adoption encouraged. The provisions of this Statement
are generally to be applied prospectively. As of the date of this filing, the
Company is still assessing the requirements of SFAS 144 and has not determined
the impact the adoption will have on the financial condition or results 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 Company does not expect the adoption of SFAS 146 to have
a material impact on the Company's future results of operations or financial
position.F) RECENT ACCOUNTING PRONOUNCEMENTS
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.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. Management is assessing the effectsThe adoption of SFAS 148 required additional disclosure in the
Company's interim 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 December 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 statementsposition.
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
company.
Disclosures about Fair Valueguidance in SFAS 150 is effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective as of Financial InstrumentsAugust 1, 2003.
Management anticipates that the adoption of SFAS No. 150 will require that the
Series D and Series E Redeemable Preferred Stock will have to be reported as a
liability on the balance sheet.
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.
46
3. BANKRUPTCY OF TWO OF OUR OPERATING ENTITIES
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. Additionally, the court ordered joint administration of both cases
on April 9, 2003 and subsequently on May 14, 2003 the court converted the cases
to Chapter 7 bankruptcies. The two bankrupt subsidiaries were our two primary
operating companies and they have ceased operations. These bankruptcies did not
include ATSI Delaware, 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 its 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 methods and assumptions were used to estimaterepresents the fair value
of each class of financial instrument held by us:
Currenttotal assets and liabilities:liabilities in the
Chapter 7 case:
ATSI Texas and TeleSpan
Assets and liabilities under Chapter 7 liquidation
(in thousands)
July 31, 2003
-------------------
CURRENT ASSETS:
Cash-restricted 88
Accounts receivable, net of allowance $103 37
Other current assets 57
-------------------
Total current assets 182
-------------------
CURRENT LIABILITIES:
Accounts payable 7,673
Accrued liabilities 2,015
Notes payable 636
Capital leases 2,207
-------------------
Total current liabilities 12,531
-------------------
4. GOING CONCERN
The carrying value approximates fair value
due toCompany has incurred substantial cumulative net losses, working
capital deficits, and negative cash flows since the short maturity of these items.
Convertible debt: Since our debt is not quoted, estimates are basedCompany's inception. The
auditor's opinion on each
obligations' characteristics, including remaining maturity, interest rate,
credit rating, collateral, amortization schedule and liquidity (without
consideration for the convertibility of the notes). We believe that the carrying
amount does not differ materially from the fair value.
51
3. FUTURE OPERATIONS, LIQUIDITY, CAPITAL RESOURCES AND VULNERABILITY DUE
TO CERTAIN CONDITIONS
The accompanying consolidated financial statements have been prepared onas of July 31, 2003,
calls attention to substantial doubt about the basis of accounting principles applicableCompany's ability to continue as
a going concern. For the period from December 17, 1993 to July 31, 2002, we have2003, the
Company has incurred cumulative net losses of $67.5approximately $80.1 million.
We hadFurther, the Company has a working capital deficit of $9.2approximately $17.8
million at July 31, 2001 and $13.2 million at July 31, 2002 and we had negative cash flows from
operations of $4.7 million, $6.0 million and $519,000 for the years ended July
31, 2000, 2001 and 2002, respectively. As of July 31, 2002, we are in default on
our leases with IBM de Mexico and NTFC Capital Corporation. See further
discussion regarding these leases in Note 9.2003. We have limited capital resources available to us, and
these resources may not be available to support our ongoing operations until
such time as we are able to continuously generate positive cash flows from
operations. There is no assurance we will be able to achieve future revenue
levels sufficient to support operations or recover our investment in property
and equipment, goodwill and other intangible assets.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.
47
We are likely to 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 positive cash flow 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
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.
Duringconcern
5. BASIC AND DILUTED LOSS PER SHARE
Basic earnings or loss per share is calculated using the latter halfweighted
average number of fiscalcommon 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
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. At July 31, 2001, 2002 and most2003, there were 8,106,668,12,476,164 and
8,673,659 total options and warrants outstanding, respectively. 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 82,810,912, 42,990,537 and 17,867,925 shares of
fiscalcommon stock, were outstanding as of July 31, 2001, 2002 we focused
our energies on maximizing revenues through increased capacity and efficiencies2003, respectively.
For the periods ended July 31, 2001, 2002 and 2003 common stock equivalents were
excluded from the computation of diluted loss per share because their effect was
antidilutive.
6. SIGNIFICANT UNCONSOLIDATED AFFILIATE
The following is the summarized financial information for the Company's
unconsolidated affiliate, ATSI Comunicaciones S.A de C.V. (ATSICOM) (in
thousands):
July 31,
-------------------
2003
-------------------
Results For Year:
Gross Revenues $ -
Gross profit $ -
Net loss $ (29)
Year-End Financial Position:
Current Assets $ 64
Non-current assets $ 1,445
Current liabilities $ 124
Non-current liabilities $ -
We recorded a loss in our international network. The result was an increase in the volume of
carrier services traffic and three of the four highest revenue quartersinvestment in our history. While overall demand for termination services remains high the
uncertainty in the telecom sector in the last quarter of 2002 and the first half
of 2003, our limited resources and the payment requirements of most of our
carriers have led to reduced terminating capacity and correspondingly, reduced
revenues. As a result, we have focused our efforts on maximizing our gross
margins by carrying the most profitable minutes possible and reducing our direct
costs. Additionally, we have worked where possible to reduce our SG&A costs.
Subsequent to year-end we have made a number of decisions to further conserve
our limited resources including terminating a number of employees in our
corporate office, strategic terminations in our Mexico operations and the
constriction and ultimately, idling of our carrier network capacity.
On June 12, 2002 we discontinued our e-commerce operations through the sale
of our majority-owned subsidiary, GlobalSCAPE, Inc. The sale, which was done to
strengthen our
52
balance sheet and facilitate future growth of our core telecommunications
business, resulted in a gain of approximately $1.1 million.
Income statement presentation for the years ended July 2000, 2001 and 2002
reflects the e-commerce revenues and the expenses of GlobalSCAPE as discontinued
operations.
Balance sheet presentationsignificant unconsolidated
affiliate (ATSICOM) for the year ended July 31, 2001 reflects the
accumulation of the net assets of GlobalSCAPE consisting primarily of cash,
accounts receivable, intercompany receivables, prepaid and other current assets,
property, plant and equipment, goodwill, trademarks and development costs which
we have classified as net discontinued assets. We have also accumulated the net
liabilities of GlobalSCAPE, which consist primarily of trade payables, accrued
liabilities and capital lease obligations and classified them as net
discontinued liabilities.
4. IMPAIRMENT OF ASSETS
During the fourth quarter of fiscal 2002, we evaluated the carrying value
of the goodwill and other intangible assets, as well as property and equipment.
Based on this evaluation and the anticipated undiscounted cash flows related to
such assets, we determined that the goodwill, the concession license, certain
telecom equipment, and certain other assets were impaired. Accordingly, we
recorded impairment of goodwill2003 of approximately $3.3 million, impairment$14,000.
The share of income or loss in our investment is recognized using the concession license of approximately $2 million, impairment of telecom equipment
of approximately $977,000 and impairment of approximately $103,000 of other
assets.
5.equity
method.
48
7. PROPERTY AND EQUIPMENT, NET (at cost)
Following is a summary of our property and equipment at July 31, 20012002
and 2002:2003 (in thousands):
Depreciable lives July 31, 20012002 July 31, 2002
----------------- -------------2003
-------------- ------------ -------------
Telecommunication equipment 10-15 years $9,886,154 $11,977,635$ 5,580 -
Land and buildings 10 years 560,088 575,333- -
Furniture and fixtures 3-5 years 1,353,741 1,370,424894 -
Equipment under capital leases 5-7 years 6,193,945 3,391,0243,391 -
Leasehold improvements 1-5 years 765,762 765,628303 -
Computer equipment 3 years 1,753,976 1,770,349503 -
Other 3-5 years 54,784 51,444
------------------ ------------------
20,568,840 19,901,837- -
------------- ----------
Total 10,671 -
Less: accumulated depreciation (11,587,670) (14,784,981)
------------------ ------------------(7,166) -
------------- ----------
Total - property and equipment, net $8,980,780 $5,116,856
================== ==================$ 3,505 -
============ ==========
Depreciation and amortization expense as reported in our Consolidated
Statements of Operations includes depreciation expense related to our capital
leases. For the years ended July 31, 2000, 2001, 2002 and 2002,2003, we recorded
approximately $3,483,719, $3,567,567$2,045,000, $1,955,000 and $3,758,592,$1,229,000 respectively of depreciation
expense related to our fixed assets.
During the second half of fiscal 2000, the
Company reviewed its depreciable lives among its telecommunication assets in
Mexico2003, two of our operating
subsidiaries, ATSI-Texas and the
53
U.S. and made a downward revisionTeleSpan, Inc. filed for reorganization protection
under Chapter 11 of the estimated livesU.S Bankruptcy Code, on February 4, 2003 and February
18, 2003, respectively. Additionally, the court ordered joint administration of
telecommunication
assetsboth cases on April 9, 2003 and on May 14, 2003 the court converted the case to
Chapter 7. The two bankrupt subsidiaries were our two primary operating
companies and they have ceased operations. As a result of these entities being
converted to Chapter 7, the bankruptcy trustee sold all the company's property
and equipment in Mexico to conform to lives inaccordance with the U.S. This change did not have a
significant effect onChapter 7 liquidation plan. Accordingly,
during the consolidated financial statements of the Company.
During fiscal 2002,year ended July 31, 2003 we recorded a loss on disposal of assets by
the trustee on furniture and fixtures for approximately $977,000$179,000 and a loss on
disposal of expense related to
equipment that had been decommissioned or deemed impaired.
6. GOODWILL ANDof approximately $830,000.
8. CONCESSION LICENSE
Following is a summary of our material intangible assets:
July 31, 2001 July 31, 2002
--------------- ---------------
Goodwill $ 5,363,735 $ 5,357,495
Less: accumulated amortization ($517,630) ($651,477)
Less: impairment - ($3,312,626)
----------- -----------
$ 4,846,105 $ 1,393,392
Concession License $ 4,428,931 $ 4,482,931
Less: accumulated amortization ($221,097) ($443,842)
Less: impairment - ($2,039,089)
----------- -----------
$ 4,207,834 $ 2,000,000
Throughasset (in thousands):
July 31, 2002 goodwill has been amortized overJuly 31, 2003
------------ ---------------
Concession License $ 4,482 -
Less: accumulated amortization $ (443) -
Less: impairment $ (2,039) -
------------ ---------------
Total $ 2,000 -
On May 22, 2003 we entered into a 40 year life.
As disclosed in Note 2, asShare Purchase Agreement with
Telemarketing de Mexico, S.A. de C.V. (Telemarketing) whereby we agreed to sell
Telemarketing 51% of August 1, 2002 the Company will adopt SFAS 142
"Goodwill and Other Intangible Assets"our Mexican subsidiary, ATSI Comunicaciones, S.A. de C.V.
(ATSICOM). SFAS 142 changes the accounting for
goodwill and other intangible assets with indefinite lives from an amortization
method to an impairment approach. Other intangible assets will continue to be
amortized over their estimated useful lives. Amortization of goodwill will cease
on August 1, 2002. The concession license costs are being amortized over 26
years, the remaining lifeATSICOM owns 100% of the concession license. As it relatesa result of the sale,
we no longer consolidate the individual assets and liabilities of ATSICOM, such
as the concession license. Instead, we account for our 49% ownership using the
equity method. Under the equity method, we record our share of ATSICOM's equity
as an investment in joint venture. Our investment is reduced or increased for
our share of ATSICOM's income or loss or for our share of equity distributions
or contributions.
9. IMPAIRMENT OF ASSETS
During the second half of fiscal 2003, two of our operating
subsidiaries, ATSI-Texas and TeleSpan, Inc. filed for reorganization protection
under Chapter 11 of the U.S Bankruptcy Code, on February 4, 2003 and February
49
18, 2003, respectively. Additionally, the court ordered joint administration of
both cases on April 9, 2003 and on May 14, 2003 the court converted the case to
SFAS 121,
asChapter 7. The two bankrupt subsidiaries were our two primary operating
companies and they have ceased operations. As a result of these entities ceasing
operations and based on our evaluation and the anticipated undiscounted cash
flows related to such entities, we determined that certain telecom equipment and
leasehold improvements were impaired. Accordingly, during the year ended July
31, 2003 we recorded impairment of telecom equipment of approximately $266,000
and impairment of leasehold improvements of approximately $152,000. In addition,
during the year ended July 31, 2002 we determined that the estimatedexpected future cash
flows associated with our goodwill andrelated to the concession license, werecertain equipment and other assets was
less than its carrying value. Therefore, during the carrying
value of such assets and impairment losses of $3,312,626 and $2,039,089 were
recorded for the year. As of July 31, 2001 and 2002, other assets also included
approximately $392,956 and $146,398, not identified as goodwill or concession
license. For the yearsyear ended July 31, 2000, 2001 and 2002, we
recorded amortization expense of $812,217, $352,766 and $356,592, respectivelyan impairment loss related to telecom equipment and other assets
totaling approximately $1,080,000 and an impairment loss related to the
concession license totaling approximately $2,039,000.
10. ACCRUED LIABILITIES
Following is a summary of our other assets.
7.accrued liabilities (in thousands):
July 31, 2002 July 31, 2003
-----------------------------
Alfonso Torres (Concession) $980 $1,003
Christian, Wukoson, Smith & Jewell - $869
Dividends Series "D" - $284
Redeemable Preferred Shares Series "D" - $658
Dividends Series "A", "F" and "G" $200 $332
Audit fees, penalties, rent and wages $102 $105
Bankruptcy-COMDISCO, NTFC & IBM $7 $852
Bankruptcy-Rent, Property Taxes & Other $109 $612
Bankruptcy-Salaries & Wages $435 $426
Bankruptcy-Universal Fund Fees $301 $301
Bankruptcy-Professional fees - $45
Convertible Debenture Interest - $31
------------- --------------
Accrued Liabilities Total: $2,134 $5,518
============= ==============
11. NOTES PAYABLE
Notes payable are comprised of the following:
July 31, 2001 July 31, 2002
------------- -------------
Notes payable to taxing entity, see terms below. $361,089 $479,376
Note payable to a related party, see terms below. 250,000 250,000
Note payable to a company, see terms below. 65,734 -
54
following (in thousands) (See terms below):
July 31, 2002 July 31, 2003
------------------------------
Note payable to a related party $250 $250
Note payable to a company see terms below - 386,362$386 $386
Note payable to individuals, see terms belowan individual $357 $357
- 357,000
---------- ----------$25
Note payable to a related party
Note payable to a company - $62
------------- -------------
Total current notes payable $ 676,823 $1,472,738
========== ==========
The Company, through its acquisition of Computel, assumed notes
payables to a taxing entity for various past due taxes. The notes have interest
rates ranging from 8% to 15%, with scheduled monthly principal and interest
payments of approximately $18,121. The notes were originally scheduled to mature
between July 1999 and July 2001 and are collaterized by the assets of Computel.
The Company continues to work with the taxing entities but as of year-end no
payments have been made and we are in default of the agreement.$993 $1,080
============ =============
50
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, has beenwas
extended throughout fiscal 2001 and 2002. Subsequent to year-endDuring fiscal 2003, the director
resigned from our Board of Directors. During December 2000,Currently, the Company, through one of its subsidiaries,
assumed a note payable, to a company, of approximately $120,000 related to the
acquisition of an Internet business. The note has an interest rate of
approximately 1.4%, with scheduled monthly principal and interest payments of
approximately $10,400. The note was paid offis in fiscal 2002.default.
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.approximately $386,000. The note, which accrues interest beginning July 15, 2002
at the rate of 18%, matured October 15, 2002. As of the date of this filingDuring fiscal 2003, the Company
hasdid not mademake any payments and the note is in defaultdefault. The creditor filed a claim
against ATSI Texas in the U.S. Bankruptcy Court for the Western District of
Texas; currently the agreement.Chapter 7 bankruptcy trustee is managing the case.
In November 2001, the Company entered into a note payable, in the
amount of $357,000 with the former owners of the concession license itthat was
purchased in July 2002.2000. The note called for principal payments of approximately
$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 ofapproximately $9,000. During
Fiscal 2003, the date of this filing, no monthly
payments have been madeCompany did not make any payments; therefore the note is in
technical default and has been classified as current. 8. ADVANCES PAYABLEThe holders of this note
can demand full payment of the total outstanding principal balance and accrued
interest. As of November 13, 2003, the holders of this note have not demanded
full payment on this note. Currently we are in negotiations with the note
holders to satisfy this obligation in an exchange for equity in the Company.
However can me no assurance that a favorable agreement will be reached.
In December 2002, the Company entered into a note payable with a
related party, a director of ATSI, in the amount of $25,000. The note called for
12 monthly payments of approximately $2,000 including interest, commencing on
February 1, 2003. The note has an annual interest rate of 7% and a maturity date
of January 1, 2004. During Fiscal 2003, the company did not make any payments on
this note and the note is in default. The holders of this note can demand full
payment of the total outstanding principal balance and accrued interest. As of
November 13, 2003, the holder of this note has not demanded full payment on this
note. Currently we are in negotiations with the note holder to extend the terms
of the no for an additional 12 months. However can me no assurance that a
favorable agreement will be reached.
In July 2003, the Company entered into a note payable with a company,
in the amount of approximately $62,000. The note called for 12 monthly payments
of approximately $6,000 including interest, commencing on October 1, 2003. The
note has an annual interest rate of 12% and a maturity date of September 31,
2004. As of the date of this filing the company has not made any payment towards
this debt; therefore, we are in default on the note and has been classified as
current. The holders of this note can demand full payment of the total
outstanding principal balance and accrued interest. As of November 13, 2003, the
holder of this note has not demanded full payment on this note. Currently we are
in negotiations with the note holder to satisfy this obligation in an exchange
for equity in the Company. However can me no assurance that a favorable
agreement will be reached.
12. CONVERTIBLE SUBORDINATED DEBENTURES
During fiscal 2002 we received $275,000 of advances without specific
terms of repayment or interest. Subsequent to year-end inIn January 2003 we issued 275 9% Convertible
Subordinated Debentures with a face value of $1,000, due January 2005 and
warrants to purchase 137,500 shares of common stock in exchange for the $275,000
previously advanced. Each debenture accrues interest at the rate of 9% per annum
payable quarterly. The debentures convert into common stock at a conversion
price of $0.135 and the warrants are priced at $0.112. 55
9.At July 31, 2003, the
Company was in default of the terms of the debentures for non-payment of
quarterly interest.
13. LEASES
Operating Leases
We lease----------------
During the first half of fiscal 2003, we leased office space,
furniture, equipment and network capacity under noncancelable operating leases
and certain month-to-month leases. During the second half of fiscal 2000, 20012003, ATSI
Texas and 2002,TeleSpan ceased operations and subsequently filed for Chapter 11
protection in February 2003 and later in May 2003 the case was converted to
Chapter 7. As a result of these events, the Company was forced into terminating
all operating and capital leases. However, in April 2003, we also leased certain equipmententered into a
six-month operating lease for the Company's new office space. In September 2003
we renewed this lease for one more year and it will expire in October 2004. The
monthly rent payment under capital leasing
arrangements.this operating lease is approximately $3,500.
Rental expense under operating leases for the years ended July 31,
2000, 2001, 2002 and 2002,2003, was $4,522,847, $4,308,501approximately $3,194,000, $2,718,000 and $3,689,597,$637,000,
respectively. Future minimum lease payments of approximately $42,000 are due
under the noncancelable operatingnew office space lease during the year ended July 31, 2004.
51
Capital Leases
--------------
The Company has defaulted on capital leases, which were entered into
through its subsidiaries ATSI Texas and TeleSpan. As stated in Note 3, ATSI
Texas and TeleSpan filed for Chapter 11 protection in February 2003 and later in
May 2003 the case was converted to Chapter 7. Management believes that these
leases obligations will be discharged in bankruptcy. However, there can be no
assurance that these liabilities will be completely discharged.
Capital leases comprised as follows (in thousands):
Leases July 31, 2002 July 31, 2003
----------------------- -----------------------
Heller Financial $ 9 $ 11
Granite Financial LLC 1 -
Imperial Business Credit 1 -
IBM Corporation 2,384 2,196
NTFC Corporation 812 -
----------------------- -----------------------
$ 3,207 $ 2,207
======================= =======================
Heller Financial
----------------
In May 1999, we secured a capital lease with Heller Financial with a
principal balance of approximately $38,000. The proceeds form this lease were
you used to acquire a generator set. The lease calls for monthly payments of
approximately $1,000 for 45 months and the capital lease called for an annual
interest rate of approximately 12%. The total obligation outstanding under said
facility at July 31, 2002 are as follows:and July 31, 2003 $ 374,396
2004 367,161
2005 367,161
2006 282,705
2007 282,705
Thereafter 259,147
----------
Total minimumwere approximately $9,000 and
$11,000, respectively. During fiscal 2003, we did not make any payments, and
subsequently the creditor filed a claim with the U.S. Bankruptcy Court for the
Western District Court of Texas. Currently, the Chapter 7 bankruptcy trustee is
managing any negotiations with this creditor.
Granite Financial LLC
---------------------
In September 1997, we secured a capital lease with Granite Financial
with a principal balance of approximately $40,000. The proceeds form this lease
were you used to acquire a generator set. The lease calls for monthly payments
$1,933,275
==========
Capital Leases
Future minimum lease payments underof approximately $1,000 for 60 months and the capital leases togetherlease called for an annual
interest rate of approximately 11%. This lease was paid in full in August 2002.
Imperial Business Credit
------------------------
In September 1997, we secured a capital lease with Imperial Business
Credit with a principal balance of approximately $50,000. The proceeds form this
lease were you used to acquire a some hardware and software. The lease calls for
monthly payments of approximately $1,000 for 60 months and the present valuecapital lease
called for an annual interest rate of the net minimum lease paymentsapproximately 11%. The total obligation
outstanding under said facility at July 31, 2002 are as
follows:
2003 $ 3,896,560
2004 56,412
2005 17,013
2006 -
-----------
Total minimumwas approximately $1,000. This
lease payments 3,969,985
Less: Amount representing taxes (151)
-----------
Net minimum lease payments 3,969,834
Less: Amount representing interest (695,866)
-----------
Present value of minimum lease payments $ 3,273,968
===========was paid in full in August 2002.
IBM Corporation.
----------------
In fiscal 1997 and in fiscal 1998, we through ATSI-Mexico, secured
capital lease facilities with IBM de Mexico. These facilities in total
approximated $4.625 million and were used to install U.S. standard intelligent
pay telephones in various Mexican markets and to increase network capacity. In
May 1999 and again in October 2000 we restructured our capital lease obligation
52
with IBM de Mexico by extending the payment of our total obligation. The latest
restructuring of October 2000 increased the monthly payments during calendar
year 2001 from approximately $108,000 to approximately $159,000 per month.
Interest continued to accrue at the rate of approximately 13% per year, with the
facility scheduled to be paid off in June 2003. In May 2002, the Company
announced that it had completed an additional restructuring of its capital lease
agreement with IBM. This restructuring resulted in a reduction in obligations
under capital leases of approximately $640,000, a reduction in accrued interest
and value added tax of approximately $1.7 million, a reduction in equipment of
$487,500 and a gain on restructuring of approximately $1,860,000. The agreement
called for forty-two payments 56
commencing August 1, 2002, consisting of six
payments of $50,000 and thirty-six payments of $75,000. The principaltotal obligation
outstanding under said facility at July 31, 20012002 and July 31, 20022003 was
approximately $3,009,840$3,040,000, including accrued interest of approximately $843,000.
During fiscal 2003, we did not make any payments, and $2,346,126,
respectively. Assubsequently the creditor
filed a claim with the U.S. Bankruptcy Court for the Western District Court of
Texas. Currently, the date ofChapter 7 bankruptcy trustee is managing any negotiations
with this filing we had not made payments due
totaling approximately $325,000 and therefore were in default under the lease
agreement.creditor.
NTFC Corporation.
----------------
In December 1998, we ordered a DMS 250/300 International gateway switch
from Northern Telecom, Inc. at a cost of approximately $1.8 million. As of July
31, 1999, we entered into a capital lease transaction with NTFC Capital
Corporation, ("NTFC")(NTFC) to finance the switch and an additional approximate $200,000
of equipment over a five and a half-year period with payments deferred for six
months. Quarterly payments approximate $141,000 and the capital lease has an
interest rate of approximately 12%. The lease facility requires that we meet
certain financial covenants on a quarterly basis beginning October 31, 1999,
including minimum revenue levels, gross margin levels, EBITDA results and debt
to equity ratios. As of July 31, 2002, we are not in compliance with the
financial covenants related to revenues, gross margins and EBITDA results,
although we are current with our payments. Subsequent to year-end we have not
made quarterly payments totaling $282,000 and are in default of our agreement.
Accordingly, we have classified the entire capital lease in our accompanying
consolidated balance sheet as a current liability. The obligation outstanding under said facility at July 31,
20012002 and July 31, 20022003 was approximately $ 1,697,000812,000 and $812,000,$0, respectively. In May
2002,2003, the Company entered intoJudge managing the Chapter 7 case, ordered a Forbearance Agreement with NTFC
Capital Corporationmotion for relief from
automatic stay. Under this court order, the creditor enforced its right to take
possession of the secured equipment releasing ATSI Delaware and ATSI Texas of
this obligation. The total amount of the obligation released was approximately
$1,084,000. As a result, we recognized an impairment loss on the equipment
related to its capital lease facility. In exchange for a
paymentthis transaction of approximately $500,000 NTFC agreed to release GlobalSCAPE, Inc. as a
co-borrower under the facility. Additionally, NTFC agreed to waive the default
of covenants until the earliest of 1) July 31, 2002, 2) a default by the Company
under the Forbearance Agreement, 3) any other default under the facility by the
Company or 4) the date an amended agreement is executed. Both parties have
agreed to make their best efforts to negotiate the terms of an amended
agreement, the purpose of which will be to restructure the current facility
including the financial covenants. On June 12, 2002, the Company completed the
sale of its majority ownership of GlobalSCAPE, our Internet e-commerce segment,
for $2.25 million resulting in a gain. A portion of the proceeds were used to
make payment to NTFC in accordance with the forbearance agreement to release
GlobalSCAPE as a co-borrower on the facility.
We secured a capital lease for approximately $500,000 in December 1998
for the purchase of Asynchronous Transfer Mode ("ATM") equipment from Network
Equipment Technologies ("N.E.T"). The capital lease is for thirty-six months
with monthly payments$232,000 and reduced assets of
approximately $16,000 a month. The obligation
outstanding under said facility at July 31, 2001 and July 31, 2002 was
approximately $128,395 and $0, respectively.
Our capital leases have interest rates ranging from 11% to 14%. Annual
interest expense under our capital leases was $736,252, $1,028,177 and
$1,028,177, respectively, for the years ending July 31, 2000, 2001 and 2002.
57
10.$1,316,000.
14. DEFERRED REVENUE
We record deferred revenue related to theThe Company collects cash from private network customers in advance of
providing services provided. Customers may be required to advance cash to us prior to service
commencementin order to partially cover the cost ofnecessary equipment and
related installation costs. AnyThese advance cash received prior to the actual commencement of services ispayments are recorded as deferred
revenue until such time as the Company has performed services are provided by us, at which time we
recognizeand there is no
further significant obligation pertaining to the service commencement revenue.advance payments. At July 31,
20012002 and July 31, 20022003 we had approximately $119,000$111,000 and $111,000$0 of deferred revenues
outstanding, respectively.
11.15. SHARE CAPITAL
Common stock
As discussed in Note 1, in May 1998, we completed our Plan of Arrangement
whereby the shareholders of ATSI-Canada exchanged their shares on a one-for-one
basis for shares of ATSI-Delaware stock. The exchange of shares resulted in the
recording on our books of $0.001 par value stock and additional paid-in capital.
During the year ended July 31, 2000, we issued 18,723,692 common shares. Of
this total, 8,469,825 shares were issued for approximately $6.3 million of net
cash through the exercise of 8,469,825 warrants and options, 6,802,013 shares
were issued as a result of the conversion of preferred shares, 2,632,929 were
issued as a result of the conversion of convertible notes, 387,359 shares were
issued for services rendered to us, 31,566 shares were issued to a shareholder
in exchange for a guarantee of up to $500,000 of Company debt, and 400,000
shares were issued related to our acquisition of Grupo Intelcom, S.A de C.V as
noted in Note 15. The shares issued for services rendered, the guarantee of
Company debt, and the shares issued for our acquisition of Grupo Intelcom, S.A.
de C.V. have not been registered by us, nor do we have any obligation to
register such shares.------------
During the year ended July 31, 2001, we issued 11,953,734 common
shares. Of this total, 244,999 shares were issued for approximately $102,000 of
net cash through the exercise of 244,999249,999 warrants and options, 1,758,663 shares
were issued for approximately $832,000 of net cash through the investment option
of our Series E Preferred Stock holder, 8,180,379 shares were issued as a result
of the conversion of preferred shares, 1,600,000 shares were issued as a result
of the conversion of convertible debt and 169,693 shares were issued for
services rendered to us. The shares issued for services rendered have not been
registered by us, nor do we have any obligation to register such shares.
During the year ended July 31, 2002, we issued 17,664,688 common
shares. Of this total, 773,142 shares were issued for approximately $220,000 of
net cash through the investment option of our Series E Preferred Stock holder,
15,454,922 shares were issued as a result of the conversion of preferred shares,
1,062,791 were issued related to our acquisition in July 2000 of Grupo Intelcom,
53
S.A. de C.V., 328,333 shares were issued related to the settlement of officer
notes and 47,500 shares were issued for services rendered to us. The shares
issued for services rendered and the shares issued related to our acquisition of
Grupo Telecom, S.A. de C.V. have not been registered by us, nor do we have any
obligation to register such shares.
58
During the year ended July 31, 2003, we issued 8,644,839 common shares.
Of this total, 3,918,680 shares were issued as a result of the conversions of
our Series E Preferred Stock and accumulated dividends, 1,272,170 shares were
issued as a result of the conversion of our Series F Preferred Stock and
accumulated dividends, 135,420 shares were issued as a result of the accumulated
dividends of our Series G Preferred Stocks and 3,318,569 shares were issued for
services rendered to us. The shares issued for services rendered have not been
registered by us, nor do we have any obligation to register such shares.
As noted in the previous paragraphs we have on occasion granted shares
of our common stock in lieu of cash for services rendered by both employees and
non-employees. These services have included bonuses, employee commissions and
professional fees. The fair value of these services was determined using
invoiced amounts and, in lieu of cash, we distributed shares to these parties
based upon the market price of our common stock when the services were rendered.
These services were expensed in the period in which the services were performed
according to the terms of invoices and/or contracted agreements in compliance
with accounting principles generally accepted in the U.S.United Sates of America.
Additionally, we have from time to time issued shares in lieu of cash
for services rendered related to private equity placements. The contracts with
the various parties called for a designated number of shares to be issued based
upon the total shares distributed in the private placements.
No dividends were paid on our common stock during the years ended July
31, 2000, 2001, 2002 and 2002.2003.
Preferred Stock
The---------------
Our shareholders of ATSI-CanadaATSI Canada approved the creation of a class of
preferred stock at our annual shareholders meeting on May 21, 1997. Effective
June 25, 1997, theThis class
of preferred stock was authorized, under the Ontario
Business Corporations Act.effective June 25, 1997. According to our
amended Articles of Incorporation, our board of directors may issue, in series,
an unlimited number of preferred shares, without par value. No preferred shares
of ATSI Canada have been issued as of July 31, 2002.2003.
Pursuant to ATSI's Certificate of Incorporation, our board of directors
may issue, in series, an unlimited number10,000,000 of preferred shares, with a par value of
$0.001.
The terms of our Series A, Series B, Series C, Series D, Series E,
Series F and Series G preferred stock restrict us from declaring and paying
dividends on our common stock until such time as all outstanding dividends have
been fulfilled related to the preferred stock. The outstanding Series A, Series
D, Series E, Series F and Series G preferred stock have liquidation preference
prior to common stock and ratably with each other.
Series A Preferred Stock
------------------------
In March and April 1999, we issued a total of 24,145 shares of Series A
Preferred Stock for cash proceeds of approximately $2.4 million. The Series A
Preferred Stock accrues cumulative dividends at the rate of 10% per annum
payable quarterly. During fiscal 2000, the holders of the aforementioned Series
A Preferred Stock elected to convert all of their outstanding preferred shares
and accumulated dividends resulting in the issuance of approximately 3,616,231
shares of common stock.
59
In December 1999 and February 2000, we issued 14,370 shares (two
issuances of 10,000 shares and 4,370 shares) and 10,000 shares, respectively, of
Series A Preferred Stock for cash proceeds of approximately $1.4 million and
$1.0 million, respectively. The Series A Preferred Stock accrues cumulative
dividends at the rate of 10% per annum payable quarterly. In fiscal 2001, the
holder of the 10,000 shares issued in February 2000 elected to convert all their
shares and accumulated dividends of approximately $66,000 resulting in the
54
issuance of 576,633 shares of common stock. Additionally, in fiscal 2001, the
holder of the 10,000 shares issued in December 1999 elected to convert all their
shares and accumulated dividends of approximately $125,000 into shares of common
stock resulting in the issuance of 1,458,955 shares of common stock. As of July
31, 2002,2003, 4,370 shares of Series A Preferred Stock remain outstanding for which
we have accrued approximately $110,000$153,000 for dividends.
The Series A Preferred Stock and any accumulated, unpaid dividends may
be converted into Common Stock for up to one year at the average closing price
of the Common Stock for twenty (20) trading days preceding the Date of Closing
(the "Initial Conversion Price"). On each Anniversary Date up to and including
the fifth Anniversary Date, the Conversion price on any unconverted Preferred
Stock, will be reset to be equal to 75% of the average closing price of the
stock for the then twenty (20) preceding days provided that the Conversion price
can not be reset any lower than 75% of the Initial Conversion Price. As these
conversion features are considered a "beneficial conversion feature" to the
holder, we allocated approximately $3.6 million of the approximate $5.0 million
in proceeds to additional paid-in capital as a discount to be amortized over
various periods ranging from ninety days to a twelve-month period. During fiscal
year 2001 the remaining beneficial conversion feature was fully amortized. The
Series A Preferred Stock is callable and redeemable by us at 100% of its face
value, plus any accumulated, unpaid dividends at our option any time after the
Common Stock of ATSI has traded at 200% or more of the conversion price in
effect for at least twenty (20) consecutive trading days, so long as we do not
call the Preferred Stock prior to the first anniversary date of the Date of
Closing.
Series B Preferred Stock
------------------------
In July 1999 we issued 2,000 shares of Series B Preferred Stock for
cash proceeds of approximately $2.0 million. The Series B Preferred Stock
accrues cumulative dividends at the rate of 6% per annum. During fiscal 2000,
the holder elected to convert all 2,000 shares of its Series B Preferred Stock
and accumulated dividends resulting in the issuance of approximately 2,625,214
shares of common stock.
The terms of our Series B Preferred Stock allowed for the conversion of the
preferred shares and any accumulated, unpaid dividends to be converted into
Common Stock for up to two years at the lesser of a) the market price on the day
prior to closing or b) 78% of the five lowest closing bid prices on the ten days
preceding conversion. As this conversion feature is considered a "beneficial
conversion feature" to the holder, we allocated approximately $1.1 million, of
the $2.4 million in proceeds to additional paid-in capital as a discount to be
amortized over a three-month period. The entire beneficial conversion feature
was fully amortized during fiscal year 2000.
60
Series C Preferred Stock
------------------------
In September 1999, we issued 500 shares of Series C Preferred Stock for
cash proceeds of approximately $500,000. The Series C Preferred Stock accrues
cumulative dividends at the rate of 6% per annum. In fiscal 2000, the holder
elected to convert all 500 shares of Series C Preferred Stock and accumulated
dividends resulting in the issuance of approximately 492,308 shares of common
stock.
The terms of our Series C Preferred Stock allowed for the conversion of the
preferred shares and any accumulated, unpaid dividends to be converted into
Common Stock for up to two years at the lesser of a) the market price on the day
prior to closing or b) 78% of the five lowest closing bid prices on the ten days
preceding conversion. Consistent with the accounting for our Series A and Series
B Preferred Stock, this is considered a "beneficial conversion feature" to the
holder. We allocated approximately $139,000 of the proceeds to additional
paid-in capital as a discount to be amortized over a three-month period, all of
which was amortized during the year ended July 31, 2000.
Series D Preferred Stock
------------------------
In February 2000, we issued 3,000 shares of Series D Preferred Stock
for cash proceeds of approximately $3.0 million.$3,000,000. The Series D Preferred Stock
accrues cumulative dividends at the rate of 6% per annum payable quarterly.
During fiscal 2001, the holder elected to convert 1,358 shares and accumulated
dividends of approximately $73,000 resulting in the issuance of 3,946,464 shares
of common stock. During fiscal 2002, the holder elected to convert 900 shares
and accumulated dividends of approximately $103,000 resulting in the issuance of
4,384,990 shares of common stock. As of July 31, 2002,2003, 742 shares of Series D
Preferred Stock remain outstanding, for which we have accrued approximately
$109,000$151,000 for dividends. Additionally, on January 24, 2003 we received a
redemption letter from the Series D Preferred holder, requesting redemption of
the remaining 742 outstanding Series D Redeemable Preferred Shares. We have not
issued these shares; it is the position of the Company that the investor's
shares are not owed. Further the Company has filed a lawsuit against one or more
parties to whom the investors share are allegedly owed. We are seeking damages
from the parties involved for stock manipulation and fraud.
55
The Series D Preferred Stock and any accumulated, unpaid dividends may
be converted into Common Stock for up to two years at the lesser of a) the
market price on the day prior to closing or b) 83% of the five lowest closing
bid prices on the ten days preceding conversion. Consistent with the accounting
for our Series A, Series B and Series C Preferred Stock, this is considered a
"beneficial conversion feature" to the holder. We allocated all of the
$3,000,000 in proceeds to additional paid-in capital as a discount to be
amortized over the lesser of the period most beneficial to the holder or upon
exercise of the conversion feature. The discount was amortized in its entirety
during the quarter ended April 30, 2000.
The terms of our Series D Preferred Stock allow for mandatory
redemption by the holder upon certain conditions. The Series D Preferred Stock
allows the holder to elect redemption upon the change of control of ATSI at 120%
of the sum of $1,300 per share and accrued and unpaid dividends. Additionally,
the holder may elect redemption at $1,270 per share plus accrued and unpaid
dividends if we refuse to honor conversion notice or if a third party challenges
conversion. 61
During the year ended July 31, 2003, we received a redemption
letter. As a result we adjusted Series D Preferred Stock to the full redemption
amount of approximately $942,000 by recording a dividend of approximately
$284,000. In addition the redemption amount was reclassed to accrued
liabilities.
Series E Preferred Stock
------------------------
In October 2000, March 2001 and June 2001 we issued a total of 4,500
shares of Series E Preferred Stock and warrants to purchase 1,636,364 shares of
common stock for cash proceeds of approximately $4.5 million. The Series E
Preferred Stock does not accrue dividends. In addition, we are obligated to
issue 175,000 warrants as a finder's fee to an entity that introduced us to the
equity fund at an exercise price of $1.72 per warrant. These warrants expire
October 2004. The fair value of the warrants was determined to be $1.27 per
warrant and we assigned approximately $868,000 of the proceeds to warrants
outstanding in stockholders' equity. The warrants contain a reset provision
which call for the exercise price to be reset in October 2001, should the
closing bid price on AMEX for the ten days preceding the reset date be lower
than the original exercise price. During fiscal 2001, the holder converted 1,010
of the shares outstanding and accumulated interest resulting in the issuance of
2,198,329 shares of common stock. In accordance with the terms of the Investment
Option of the Series E Preferred Stock, the holder purchased an additional
1,758,663 shares of common stock for $832,415. DuringIn fiscal 2002, the holder
converted 2,035 of the shares outstanding and accumulated interest resulting in
the issuance of 10,166,006 shares of common stock. In accordance with the terms
of the Investment Option of the Series E Preferred Stock, the holder also
purchased an additional 773,142 shares of common stock for $220,000.
During Fiscal 2003, the holder converted 285 of the shares outstanding
and accumulated interest resulting in the issuance of 4,121,680 shares of common
stock. As of July 31, 2002, 1,4552003, 1,170 shares of Series E Preferred Stock remain
outstanding.
The Series E Preferred Stock may be converted into Common Stock for up
to three years at the lesser of a) the market price - defined as the average of
the closing bid price for the five lowest of the ten trading days prior to
conversion or b) the fixed conversion price - defined as 120% of the lesser of
the average closing bid price for the ten days prior to closing or the October
12, 2000 closing bid price. Consistent with the accounting for our Series A,
Series B, Series C and Series D Preferred Stock, this is considered a
"beneficial conversion feature" to the holder. Of the approximate $1.5 million
of proceeds assigned to the first issuance of Series E Preferred Stock
approximately $802,000 was allocated to additional paid-in capital as a discount
to be amortized over the lesser of the period most beneficial to the holder or
upon exercise of the conversion feature. The discount was amortized in its
entirety during the quarter. In accordance with the agreement, the conversion
price was reset on February 11, 2001 to the then defined "market price". The
reset of the conversion price resulted in additional "beneficial conversion
feature" of approximately $188,000, which was allocated to additional paid-in
capital as a discount and recognized during fiscal 2001. No beneficial
conversion expense was required to be recognized related to the second and third
issuance of Series E Preferred Stock.
56
The terms of our Series E Preferred Stock allow for mandatory
redemption by the holder upon certain conditions. The Series E Preferred Stock
allows the holder to elect redemption at $1,250 per share plus 6% per annum if:
1) ATSI refuses conversion notice, 2) an effective registration statement was
not obtained by prior to March 11, 2001, 3) bankruptcy proceedings are initiated
against the Company, 4) The Secretaria de Comunicaciones y Transportes of the
SCT limits or terminates the scope of the concession or, 5) if the Company fails
to maintain a listing on NASDAQ, NYSE or AMEX.
62
Series F Preferred Stock
------------------------
In March 2001, we issued 8,175 shares of Series F Preferred Stock for
cash proceeds of $817,500approximately $818,000 and 1,035 shares for services rendered,
535 of which specifically related to the Series F private placement. The Series
F Preferred Stock accrues cumulative dividends at the rate of 15% per annum. DuringIn
fiscal 2002, holders of 700 of the shares outstanding converted into 274,278
shares of common stock. Additionally,stock and we issued 320,994 shares of common stock for
accumulated dividends during the same year. During fiscal 2003, holders of 1,250
of the shares outstanding converted into 480,770 shares of common stock and we
issued 1,272,170 of common stock for accumulated dividends. As of July 31, 20022003
we have 8,5107,260 shares of Series F Preferred Stock outstanding for which we have
accrued approximately $74,000$90,000 for dividends.
The Series F Preferred Stock and any accumulated, unpaid dividends may
be converted into Common Stock for up to one year (the "Anniversary Date") from
the Date of Closing at a conversion price of $0.54. On each Anniversary Date up
to and including the second Anniversary Date, the Conversion Price on any
unconverted Preferred Stock plus any accumulated, unpaid dividends will be reset
to be equal to the average closing price of the stock for the five (5) preceding
trading days. The initial beneficial conversion feature, which represents the
difference between the Initial Conversion Price and the market price on the
Commitment Date, is $247,991, which the Company recognized in March 2001 as
preferred dividends. In addition, we issued 852,778 warrants at a price of 133%
of the original conversion price. The warrants are exercisable for a period of
three years from the Date of Closing.
The Series F Preferred Stock is callable and redeemable by us at 100%
of its face value, plus any accumulated, unpaid dividends at our option any time
after our Common Stock has traded at 200% or more of the conversion price in
effect for at least twenty (20) consecutive trading days, so long as we do not
call the Preferred Stock prior to the first anniversary date of the Date of
Closing.
Series G Preferred Stock
------------------------
In June 2001, we issued 6,500 shares of Series G Preferred Stock for
cash proceeds of $650,000. The Series G Preferred Stock accrues cumulative
dividends at the rate of 15% per annum. During fiscal 2002, we issued 301,606
shares of common stock for accumulated dividends. As of July 31, 2002,2003, the
entire balance of 6,500 shares of Series G Preferred Stock remains outstanding
for which we have accrued approximately $16,250$89,375 for dividends.
The Series G Preferred Stock and any accumulated, unpaid dividends may
be converted into Common Stock for up to one year (the "Anniversary Date") from
the Date of Closing at a conversion price of $0.44. On each Anniversary Date up
to and including the second Anniversary Date, the Conversion Price on any
unconverted Preferred Stock plus any accumulated, unpaid dividends will be reset
to be equal to 85% of the Market Price on the first Anniversary Date and at all
times from and after the second Anniversary Date, the Conversion Price shall
equal 85% of the Market Price on the second Anniversary Date. The initial
beneficial conversion feature, which represents the difference between the
Initial Conversion Price and the market price on the Commitment Date, is
$479,576, which we amortized during the fourth quarter of fiscal 2001. In
addition, we issued 738,636 warrants at a price of 133% of the original
conversion price. The warrants are exercisable for a period of three years from
the Date of Closing.
63
The Series G Preferred Stock is callable and redeemable by us at 100%
of its face value, plus any accumulated, unpaid dividends at our option any time
after our Common Stock has traded at 200% or more of the conversion price in
effect for at least twenty (20) consecutive trading days, so long as we do not
call the Preferred Stock prior to the first anniversary date of the Date of
Closing.
12.57
16. STOCK PURCHASE WARRANTS AND STOCK OPTIONS
During the year ended July 31, 2002, we did not issue any warrants to
purchase shares of common stock.
Following is a summary of warrant activity from August 1, 19992000 through
July 31, 2002:
Year Ending July 31,
----------------------------------------------------
2000 2001 2002
----------------------------------------------------
Warrants outstanding, beginning 4,203,925 681,045 5,013,826
Warrants issued 601,045 4,332,781 -
Warrants expired (80,000) - (180,000)
Warrants exercised (4,043,925) - -
---------- ---------- ----------
Warrants outstanding, ending 681,045 5,013,826 4,833,826
========== ========== ==========
2003:
Year Ending July 31,
------------------------------------------
2001 2002 2003
------------------------------------------
Warrants outstanding, beginning 681,045 5,013,826 4,833,826
Warrants issued 4,332,781 - -
Warrants expired - (180,000) (325,000)
Warrants exercised - - -
Warrants outstanding, ending 5,013,826 4,833,826 4,508,826
Warrants outstanding at July 31, 20022003 expire as follows:
Number of Warrants Exercise Price Expiration Date
------------------ -------------- ---------------
175,000 $7.17 March 31, 2003
100,000 $6.00 July 21, 2003
50,000 $5.46 July 25, 2003
5,000 $1.72 November 1, 2003
75,000 $1.06 November 16, 2003
852,778 $0.72 March 23, 2004
738,636 $0.58 June 11, 2004
50,000 $1.25 July 2, 2004
800,000 $0.41 July 31, 2004
20,000 $1.19 September 24, 2004
909,091 $1.72 October 11, 2004
181,819 $1.72 October 11, 2004
545,457 $1.72 October 11, 2004
50,000 $1.72 October 11, 2004
175,000 $1.72 October 11, 2004
106,045 $0.94 December 8, 2004
64
- ------------------------
4,508,826 Total warrants
- ------------------------
On February 10, 1997, the board of directors granted a total of
4,488,000 options to purchase Common Shares to directors and employees of ATSI
under the 1997 Stock Option Plan. Certain grants were considered vested based on
past service as of February 10, 1997. The 1997 Stock Option Plan was approved by
a vote of the stockholders at our Annual Meeting of Shareholders on May 21,
1997.
In September 1998, our board of directors adopted the 1998 Stock
Option Plan. Under the 1998 Stock Option Plan, options to purchase up to
2,000,000 shares of common stock may be granted to employees, directors and
certain other persons. The 1997 and 1998 Stock Option Plans are intended to
permit us to retain and attract qualified individuals who will contribute to our
overall success. The exercise price of all of the options is equal to the market
price of the shares of common stock as of the date of grant. The options vest
pursuant to the individual stock option agreements, usually 33 percent per year
beginning one year from the grant date with unexercised options expiring ten
years after the date of the grant. During the yearsyear ending July 31, 1999, 2000 and 2001 the
board of directors granted a total of 1,942,300, 155,000 and 117,500 options
respectively, to purchase common stock
to directors and employees of ATSI under the 1998 Stock Option Plan. During the
years ending July 31, 2002 and 2003 no options were issued under the 1998 Stock
Option Plan.
58
In December 2000, our board of directors adopted the 2000 Incentive
Stock Option Plan. Under the 2000 Incentive Stock Option Plan, options to
purchase up to 9,800,000 shares of common stock may be granted to employees,
directors and certain other persons. Like the 1997 and 1998 Stock Option Plans,
the 2000 Incentive Stock Option Plan is intended to permit us to retain and
attract qualified individuals who will contribute to our overall success. The
exercise price of all of the options is equal to the market price of the shares
of common stock as of the date of grant. The options vest pursuant to the
individual stock option agreements, usually 33 percent per year beginning one
year from the grant date with unexercised options expiring ten years after the
date of the grant. The 2000 Incentive Stock Option Plan was approved by a vote
of the stockholders at our Annual Meeting of Shareholders on February 7, 2001.
On May 7, 2001, the board of directors granted a total of 1,864,000 options to
purchase common stock to employees of ATSI. In August 2001, the board approved
the granting of an
additional 3,050,000 in options to directors, officers and
employees of ATSI. The Board further approved the granting of aan aggregate total
of 2,227,499 options to directors, officers and employees in September 2001,
December 2001, March 2002 and June 2002. The Board also approved the granting of
an additional 630,000 options to directors, officers and employees in September
2002.
A summary of the status of our 1997, 1998 and 2000 Stock Option Plans
for the years ended July 31, 2000, 2001, 2002 and 20022003 and changes during the periods
are presented below:
Years Ended July 31,
--------------------------------------------------------------------------------------------
1997 Stock Option Plan
2000 2001 2002 2003
Weighted Weighted Weighted
Average Average Average
Exercise Price Exercise Exercise
Shares Price Shares Price Shares Price
--------------- --------------- --------------- ------------- ---------------- -------------
Outstanding, beginning
of year 4,222,667 $0.75 312,003312,004 $1.59 202,002 $1.87 202,002 $1.87
Granted - - - - - -
Exercised (3,907,331) $0.66 (13,000) $0.58 - - - -
-
65
Forfeited (3,333) $0.58 (97,002) $2.15 - - ------- ----- -------(200,002) $1.87
-------- ----- - - --------- -----
Outstanding, end of year 312,003 $1.59 202,001202,002 $1.87 202,002 $1.87 2,000 $0.58
======= ===== ======= ===== ============ =====
Options exercisable at
end of year 171,667 $1.55 202,001202,002 $1.87 202,002 $1.87 2,000 $0.58
======= ===== ======= ===== ============ =====
Weighted average fair
value of options
granted during the year N/A N/A N/A
=== === ===
See Note 21 for a discussion of options exercised in the year ending
July 31, 2000 in connection with a note arrangement with certain officers of the
Company.
Years Ended July 31,
--------------------------------------------------------------------------------------------
1998 Stock Option Plan
2000 2001 2002 2003
------------------------------- ----------------------------- ------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Price Exercise Exercise
Shares Price Shares Price Shares Price
-------------- ---------------- --------------- ------------- ---------------- -------------
Outstanding,
beginning of year 1,881,800 $0.63 1,379,211 $0.70 1,026,840 $0.91 1,015,172 $0.91
========= =====
Granted 155,000 $2.57 117,500 $0.90 - - - -
Exercised (525,255) $0.57 (231,999) $0.55 - - - -
Forfeited (132,334) $0.69 (237,872) $0.84 (11,668) $0.78 (662,338) $0.91
--------- ----- ----------------- ----- --------- -----
Outstanding, end of year 1,379,211 $0.70 1,026,840 $0.91 1,015,5721,015,172 $0.91 352,834 $0.56
========= ===== ========= ===== ========= =====
Options exercisable at
end of year 85,499 $0.60 417,043 $0.83 891,840 $0.82 =========342,834 $0.56
======= ===== ================ ===== ========= =====
Weighted average fair
value of options
granted during the year $1.92 $0.87 N/A N/A
===== ===== ======== ===
59
YearYears Ended July 31,
--------------------------------------------------------------------------------------------------------------------------------------------------------------
2000 Stock Option Plan
2001 2002 ---------------------------- ----------------------------------2003
-------------------------------- ------------------------------- ------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Price Exercise Exercise
Shares Shares Price Shares Price
--------------- ---------------- ---------------- -------------- ------------- ---------------------------------- --------------
Outstanding, beginning
of year - $ - 1,864,000 $0.56 6,425,165 $0.48
========= =====
5,277,499
Granted 1,864,000 $0.56 5,277,499 $0.44 630,000 $0.08
Exercised - $ - - $- - -
Forfeited - $ - (716,334) $0.49 (3,245,166) $0.48
--------- ----- --------- -----
66
----------- =====
Outstanding, end of year 1,864,000 $0.56 6,425,165 $0.48 3,809,999 $0.45
========= ===== ========= ===== ========= =====
Options exercisable at
end of year - N/A 1,876,998 $0.59 1,832,222 $0.55
=== --------- ===== ========= =====
Weighted average fair
value of options
granted during the year $0.55 $0.27 $0.08
===== ===== =====
The weighted average remaining contractual life of the stock options
outstanding at July 31, 20022003 is approximately 4.5.4 years for options granted under
the 1997 Stock Option Plan, approximately 65.3 years for options granted under
the 1998 Stock Option Plan and approximately 88.6 years for options granted under
the 2000 Incentive Stock Option Plan.
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation"
was issued. SFAS 123 defines a fair value based method of accounting for
employee stock options or similar equity instruments and encourages all entities
to adopt that method of accounting for all of their employee stock compensation
plans. Under the fair value based method, compensation cost is measured at the
grant date based on the value of the award and is recognized over the service
period of the award, which is usually the vesting period. However, SFAS 123 also
allows entities to continue to measure compensation costs for employee stock
compensation plans using the intrinsic value method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). We
adopted SFAS 123 effective August 1, 1996, and have elected to remain with the
accounting prescribed by APB 25.
In accordance with APB 25, we recorded deferred compensation expense
related to approximately 1.5 million of the options granted based on the
increase in our stock price from February 10, 1997, when the options were
granted, to May 21, 1997, when the underlying 1997 Stock Option Plan was
approved by our shareholders. We recorded additional deferred compensation
expense related to approximately 1.5 million of the options granted based on the
increase in our stock price from September 9, 1998 to December 17, 1998, when
the underlying 1998 Stock Option Plan was approved by our shareholders.
Because we have elected to remain with the accounting prescribed by APB 25,
no compensation cost has been recognized for our fixed stock option plans based
on SFAS 123. Had compensation cost for our stock-based compensation plans been
determined on the fair value of the grant dates for awards under the fixed stock
option plans consistent with the method of SFAS 123, our net loss (in thousands)
and loss per share would have been increased to the pro forma amounts indicated
below:
Year Ended July 31,
-----------------------------------------------------------------------
2000 2001 2002
---- ---- ----
Net loss to common shareholders
- -------------------------------
As reported ($17,138) ($12,785) ($14,989)
Pro forma ($17,657) ($13,384) ($15,931)
Basic and diluted loss per share
- --------------------------------
As reported ($0.30) ($0.18) ($0.17)
Pro forma ($0.31) ($0.19) ($0.18)
The fair value of the option grant is estimated based on the date of grant
using an option pricing model with the following assumptions used for the grants
in 2000, 2001 and 2002: Dividend yield of 0.0%, expected volatility of between
104% - 141%, 136% - 156% and 123%,
67
(depending on the time of grant) respectively, risk-free interest rate of 6.25%,
5.45% and 4.92% respectively, and an expected life of ten years. The fair value
of these options is being amortized over the three-year vesting period of the
options.
The following table summarizes information about stock options and
warrants outstanding for all plans at July 31, 2002:2003:
Options and Warrants Exercisable
Options and Warrants Outstanding
Exercisable
------------------------------------------------------------------------------------------------------------------------- --------------------------------------
Weighted Average
Weighted Remaining Weighted
Range of Exercise Number Weighted Average Contractual Life Weighted Average
Price Outstanding Exercise Number Exercise Life Number Exercise
Prices Outstanding Price (Years) Number Exercisable Exercise Price
- --------------------------------------------------------------------------------
--------------------- ------------------ ------------------- ------------------ ------------------- ------------------
$0.25-0.41 3,977,500 $0.38 7.64 1,000,000 $0.40
$0.53-0.64 4,802,804 $0.57 7.69 3,163,803 $0.57
$0.72-1.25 1,269,492 $0.81 2.37 1,247,626 $0.81
$1.72-7.17 2,426,368 $2.49 2.41 2,393,036 $2.47
$0.08 - --------------------------------------------------------------------------------
$0.25-7.17 12,476,164 $0.91 6.10 7,604,665 $1.17
================================================================================0.94 6,662,292 $0.51 5.73 4,818,958 $0.53
$1.09 - 1.72 2,011,367 $1.68 1.13 2,011,367 $1.68
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
$0.08 - 1.72 8,673,659 $0.78 4.66 6,830,325 $0.87
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
13.60
17. STATEMENT OF CASH FLOWS
Cash payments and non-cash investing and financing activities during
the periods indicated were as follows:
For the Years Ended July 31,
----------------------------------------------------
2000 2001 2002
---- ---- ----
Cash payments for interest $ 2,272,111 $ 910,863 $ 742,225
Cash payments for taxes $ - $ 64,416 $ 109,843
Non-cash:
Common shares issued for services $ 24,968 $ 33,000 $ 9,502
Common shares issued for liquidating damages $ - $ 250,000 $ -
Notes receivable and accrued interest issued to
Exercise options for common shares $ 1,107,898 $ 101,416 $ -
Common shares issued for acquisition $ 2,921,008 $ - $ (981,063)
Note incurred in conjunction with acquisition $ - $ 120,000 $ -
Conversion of convertible debt to common shares $ 3,333,664 $ 803,271 $ -
Capital lease obligations incurred $ 275,096 $ - $ 122,088
14.follows (in thousands):
For the Years Ended July 31,
-----------------------------
2001 2002 2003
---- ---- ----
Cash payments for interest $ 911 $ 742 $ 76
Cash payment for income taxes $ 64 $ 110 -
Non-cash:
Notes receivable and accrued interest issued to
Exercise options for common shares $ 101 - -
Common shares issued for acquisition - $(981) -
Note incurred in conjunction with acquisition $ 120 - -
Conversion of convertible debt to common shares $ 803 - -
Capital lease obligations incurred - $ 122 -
18. EMPLOYEE BENEFIT PLAN
InOn January 1, 1999, the Company established a Retirement Plan, which
iswas a qualified employee profit-sharing program. In February 2003, ATSI - Texas
and TeleSpan, Inc. filed for reorganization protection under Chapter 11 of the
U.S Bankruptcy Code. Additionally, the court ordered joint administration of
both cases on April 9, 2003 and on May 14, 2003 the court converted the case to
Chapter 7. Currently, the Chapter 7 trustee is managing this plan.
During the year ended July 31, 2001 and 2002 we made matching
contributions of approximately $17,600 and $10,400, respectively. We did not
make any contributions during the year ended July 31, 2003. Additionally, no
discretionary contributions were made for the fiscal years 2001, 2002 and 2003.
Following are the terms of the Retirement plan that was in effect
during Fiscal year 2002:
The purpose of the Plan iswas to provide a program whereby contributions
of participating employees and their employers arewere systematically invested to
provide the employees an interest in the Company and to further their financial
independence. Participation in the Plan iswas voluntary and iswas open to employees
of the Company who becomebecame eligible to participate upon the completion of a
half-year of continuous service. The term of each Plan Year beginsbegan January 1 and
endsended December 31.
Participating employees maycould contribute from 2% to 15% of their total
annual compensation, including bonuses, subject to certain limitations,
including a $7,000 annual limitation, subject to inflation. Participants may electcould
have elected to make thesethose contributions on a before-tax or after-tax basis, or
both, with federal income taxes on before-tax contributions being deferred until
a distribution iswas made to the participant. Participants' contributions of up to
3% of their elective deferrals arewere matched 25% by the Company. Participant'sThe Company did
not match participant's contributions in excess of 3% of their annual
compensation are not matched by the Company.compensation. The Employer maycould also contributehave contributed an additional amount
determined in its sole judgement.judgment. Such additional contribution, if any, shall bewas
allocated to each Participant in proportion to his or her Compensation for the
Plan Year while a Participant.
68
Subsequent to December 31, 2000 and December 31, 2001, the Company made
matching contributions of approximately $17,600 and $10,400, respectively. No
discretionary contribution was made for the Plan Years 2000 and 2001.
15.19. ACQUISITIONS
In July 2000, we acquired Grupo Intelcom, S.A. de C.V., a Mexican
company, which owned a long distance license issued by the Mexican government.
The terms of the agreement called for us to purchase 100% of the stock of Grupo
Intelcom from Alfonso Torres Roqueni (a 51% stockholder) and COMSAT Mexico, S.A.
61
de C.V., (a 49% stockholder) for a total purchase price of approximately
$4,176,000 consisting of $755,000 in cash, $500,000 in the form of a note
payable, which was paid off prior to July 31, 2000, 400,000 shares of our common
stock valued at approximately $2.5 million and 100,000 warrants exercisable at
$6.00 for a period of three years and valued at approximately $440,000. The
agreement also provided for an additional payment should the value of ATSI's
stock be lower than $5.00 on the first anniversary date. In October 2001, we
renegotiated the reset provisions of the original agreement resulting in: 1) a
cash liability of approximately $457,000 payable to Mr. Torres, 2) the issuance
of 1,062,791 shares of ATSI common stock equivalent to $457,000, 3) 100,000
warrants at an exercise price of $0.32 to be issued and 4) an extension of the
original reset provision to the second anniversary date in July 2002. On the
second anniversary date the closing stock price was $0.10 resulting in an
additional liability of $980,000, which we have recorded as of July 31, 2002. We
are currently negotiating with Mr. Torres to satisfy a portion of the
outstanding liability in exchange for equity and a note payable over approximately 36-48 months.equity. There can be no assurances,
however, that the negotiations will be successful.
16. SEGMENT REPORTING20. SALE 51% OF ATSI COMUNICACIONES S.A DE C.V.
In June 1997,May 2003, the FASB issued SFAS No. 131, "Disclosures About Segmentscompany entered into a Share Purchase Agreement with
Telemarketing de Mexico, S.A. de C.V. (Telemarketing) whereby we agreed to sell
Telemarketing 51% of our Mexican subsidiary, ATSI Comunicaciones, S.A. de C.V.
(ATSICOM). The agreement provides that there will be an Enterpriseinitial payment of
$194,000 plus payment of approximately $200,000 of ATSICOM'S liabilities and Related Information," which establishes standardsthe
remaining purchase price of $747,000 will be paid as follows:
o Beginning in May 2003 Telemarketing will pay ATSI $20,750 per
month for reporting information about operating segments12 months. As of July 31, 2003, the remaining balance
totaled approximately $187,000. This obligation is secured with
the stock of ATSICOM and is a non-interest bearing note.
o Beginning in annual and interim financial
statements. It also establishes standardsMay 2004, Telemarketing will pay ATSI $20,750 per
month for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 supersedes SFAS
No. 14, "Financial Reporting for Segmentsthe next 24 months, contingent on ATSI generating
20,750,000 minutes of a Business Enterprise." Generally,
financial information is required tomonthly 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 reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. 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, segmentingadjusted based on
the productssame 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.
Additionally, starting in October 2004, Telemarketing will pay ATSI $2,886 per
month for the next 18 months and services provided, segmenting baseda payment of $48,048 on legal entitythe 19th month. These
payments will reimburse ATSI for payments made on ATSICOM's liabilities, as
agreed in the Share Purchase Agreement. As of July 31, 2003, the remaining
balance of payments totals approximately $100,000 and segmentingis recorded as a long-term
non-interest bearing note receivable, secured by business focus. Basedthe stock of ATSICOM.
Currently the Company is primarily dependent on these criteria we have determined that we have two
reportable operating segments: (1) U.S. Telco and (2) Mexico Telco.
Additionally, we believe that our U.S. and Mexican subsidiaries should be
separate segments even though many of the products are borderless. Bothfunds to supplement any
cash from operations.
21. SALE OF ATSI MEXICO AND SINFRA
On July 02, 2003, the U.S. TelcoBankruptcy Court overseeing the Chapter 7
cases for ATSI Texas and Mexican Telco segments include revenues generatedTeleSpan approved the sale of two of its foreign
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 owned by SINFRA. The Chapter 7
Bankruptcy Trustee received all the proceeds from Integrated
Prepaid, Postpaid,the sale of these entities of
approximately $17,500 and Network Services. Our Carrier Services revenues,
generated asthe use of these funds is restricted for the Chapter 7
case related expenses. As a partresult of our U.S. Telco segment, isthis transaction, we recognized in ATSI
Texas and TeleSpan a loss on the only revenues not
currently generated by bothsale of assets of approximately $452,123 on the
U.S. Telcosale of ATSIMexico and Mexico Telco segments. We have
included$510,502 on the operationssale of ATSI-Canada, ATSI-
69SINFRA.
62
Delaware and all businesses falling below the reporting threshold in the "Other"
segment. The "Other" segment also includes intercompany eliminations.
We have used earnings before interest, taxes, depreciation and amortization
(EBITDA) in our segment reporting, as it is the chief measure of profit or loss
used in assessing the performance of each of our segments.
In Thousands As of and for the years ending
--------------------------------------------------------
July 31, 2000 July 31, 2001 July 31, 2002
U.S. Telco
- ---------------------------------------------------------------------------------------------
External revenues $ 27,359 $ 28,919 $ 42,590
Intercompany revenues $ 2,618 $ 1,422 $ 1,468
--------- --------- ---------
Total revenues $ 29,977 $ 30,341 $ 44,055
========= ========= =========
EBITDA ($4,374) ($3,300) ($3,538)
Operating loss ($6,607) ($5,305) ($6,568)
Net loss ($6,526) ($5,791) ($5,039)
Total assets $ 12,556 $ 15,844 $ 12,009
Mexico Telco
- ---------------------------------------------------------------------------------------------
External revenues $ 6,942 $ 6,980 $ 8,111
Intercompany revenues $ 2,428 $ 1,886 $ 1,975
--------- --------- ---------
Total revenues $ 9,370 $ 8,866 $ 10,086
========= ========= =========
EBITDA ($742) ($1,685) ($1,059)
Operating loss ($2,797) ($3,332) ($6,228)
Net loss ($3,563) ($4,065) ($8,301)
Total assets $ 9,808 $ 8,097 $ 2,781
Other
- ---------------------------------------------------------------------------------------------
External revenues - - -
Intercompany revenues ($5,046) ($3,308) ($3,443)
--------- --------- ---------
Total revenues ($5,046) ($3,308) ($3,471)
========= ========= =========
EBITDA ($5) ($12) ($227)
Operating loss ($13) ($281) ($2,585)
Net loss ($7,048) ($2,928) ($1,649)
Total assets $ 4,530 ($581) ($4,333)
70
Total
- ----------------------------------------------------------------------------------------------------------
External revenues $ 34,301 $ 35,899 $ 50,701
Intercompany revenues - - -
--------- --------- ---------
Total revenues $3 4,301 $ 35,899 $ 50,701
========= ========= =========
EBITDA ($5,121) ($4,997) ($4,834)
Depreciation and Amortization ($4,296) ($3,920) ($4,115)
Operating loss ($9,417) ($8,917) ($15,381)
Net loss to common shareholders ($17,138) ($12,785) ($14,989)
Total assets $ 26,894 $ 23,360 $ 10,457
17.22. INCOME TAXES
Income tax expense from continuing operations differs from the amount
computed at federal statutory rates as follows:
Year Ended July 31,
2000 2001 2002
Federal income tax benefit (expense) at
statutory rate $ 3,418,000 $ 3,596,000 $ 4,967,000
Permanent tax differences in connection
with sale of GlobalSCAPEYear Ended July 31,
-------------------
2001 2002 2003
---- ---- ----
Federal income tax benefit (expense)
at statutory rate $1,751,000 $2,307,000 $2,959,000
Other - (338,000) -
Permanent tax differences in connection
with bankrupt subsidiaries - - 1,764,000
Change in valuation allowance (1,751,000) (1,969,000) (1,195,000)
Income tax benefit (expense) - - - (503,000)
Other - - (338,000)
Change in valuation allowance $(3,418,000) (3,819,000) (4,236,000)
Income tax benefit (expense) $ 0 $ (223,000) $ (110,000)
Deferred tax assets (liabilities) are comprised of the following:
July 31,
2001 2002
Net operating loss carryforward $ 6,596,000 $ 7,223,000
Impairment of Mexican intangible assets 1,779,000
Impairment of U.S. intangible assets and equipment 408,000
Losses accrued in Mexican subsidiaries 4,966,000 7,022,000
Other 728,000 94,000
Valuation allowance (12,290,000) (16,526,000)July 31,
2002 2003
---- ----
Net operating loss carryforward $7,223,000 $15,403,000
Impairment of Mexican intangible assets 1,779,000 -
Impairment of U.S. intangible assets and
equipment 408,000 -
Losses accrued in Mexican subsidiaries 4,739,000 -
Other 94,000 35,000
Valuation allowance (14,243,000) (15,438,000)
Total deferred tax asset (liability) $ - $ -
The Company conducts a periodic examination of its valuation allowance.
Factors considered in the evaluation include recent and expected future earnings
and the Company's liquidity and equity positions. As of July 31, 20012002 and 2002,2003,
the Company has determined that a valuation allowance is necessary for the
entire amount of deferred tax assets.
71
At July 31, 20012002 and 2002,2003, the Company had net operating loss
carryforwardcarryforwards related to U.S. operations of approximately $19,401,000$21,246,000 and
$21,246,000$45,303,000 with expiration dates ranging from 2009 through 2022.2023.
The availability of the net operating loss carryforwards to reduce U.S.
federal taxable income is subject to various limitations in the event of an
ownership change as defined in Section 382 of the Internal Revenue Code of 1986
(the "Code"). We experienced a change in ownership in excess of 50% as defined
in the Code, during the year ended July 31, 1998. This change in ownership
limits the annual utilization of NOL under the code to $1,284,000 per year, but
does not impact our ability to utilize our NOL's because the annual limitation
under the Code would allow full utilization within the statutory carryforward
period.
18.Code.
23. DISCONTINUED OPERATIONS
On June 12, 2002 we discontinued our e-commerceE-commerce operations through the
sale of our majority-owned subsidiary, GlobalSCAPE, Inc. for approximately
$2.25
million.$2,250,000. The sale which was done to strengthen our balance sheet and facilitate
future growth of our core telecommunications business,this segment resulted in a gain of approximately
$1.1 million.$1,100,000.
63
Additionally, on July 2, 2003, the bankruptcy Trustee for ATSI Texas &
TeleSpan under the Chapter 7 liquidation case sold the stock of ATSI Texas and
TeleSpan, Inc. subsidiaries, ATSIMEX and SINFRA; see footnote 21. The trustee
received the funds of approximately $18,000 from the sale of these entities.
These funds will be used by the trustee to pay those fees associated with
managing ATSI Texas and TeleSpan Chapter 7 cases. The sale of these assets
resulted in a loss of approximately $963,000.
For the years ended July 31, 2002 and 2003 assets and liabilities from
discontinued operations consist of the following (in thousands):
July 31,
--------------------------
2002 2003
--------------------------
ASSETS FROM DISCONTINUED OPERATIONS
CURRENT ASSETS:
Cash and cash equivalents $17 $0
Accounts receivable, net of allowance of $8 245 -
Note Receivable-current portion - -
Inventory 45 -
Prepaid & Other current assets 310 -
--------------------------
Total current assets 617 -
--------------------------
PROPERTY AND EQUIPMENT 9,231 245
Less - Accumulated depreciation and amortization (7,619) -
Net property and equipment 1,612 245
--------------------------
OTHER ASSETS, net
Goodwill, net 1,392 -
Other 73 -
--------------------------
Total assets from discontinued operations: $3,694 $245
==========================
LIABILITIES FROM DISCONTINUED OPERATIONS
CURRENT LIABILITIES:
Accounts payable 1,442 944
Accrued liabilities 523 -
Notes payable 479 453
--------------------------
Total current liabilities 2,444 1,397
--------------------------
Total liabilities from discontinued operations: $2,444 $1,397
==========================
Consolidated Income statement presentation for the years ended July 2000,31,
2001, 2002 and 20022003 reflects the elimination of e-commercethe following E-commerce
revenues and the expenses of GlobalSCAPE. Balance sheet presentation for the year ended July 31, 2001 reflectsAnd the elimination of the net assetsretail services
revenue and expenses of GlobalSCAPE as follows: (in thousands)
Assets:
Current assets $ 286
PP&E, net $ 810
Goodwill, net $ 10
Trademarks, net $ 390
Development costs, net $ 73
Other assets $ 22
--------
Total assets $ 1,591
========
Liabilities:
Current liabilities other than capital leases $ 322
Current capital lease obligations $ 74
Long-term capital lease obligations $ 105
Minority interest $ 351
--------
Total liabilities $ 852
========
Income statement presentationATSIMEX for the years ended July 2000,31, 2001, 2002 and 2002
reflects the elimination of e-commerce revenues and the expenses of GlobalSCAPE
as follows:2003
(in thousands)
72:
64
E-commerce
For the Year endedEnding July 31,
-------------------
2000----------------------------------------------------------
2001 2002 ---- ---- ----2003
------------------- ------------------- ------------------
E-commerce revenues $5,128 $5,445 $4,404$ 5,445 $ 4,404 $ -
Costs and expenses $3,595 $6,216 $4,2106,217 4,208 -
Net (loss) income (loss) before taxes $1,533 ($771)& (772) 196 -
minority interest
Net (loss) income before minority (836) 195 -
interest
Net (loss) income $ 194
Net income (loss) $1,533 ($771)(591) $ 194399 $ -
- ------------------------------------------------------------------------------------------------
The years ended July 31, 2000 and 2001 were audited by Arthur Andersen LLP.
Such periods have been restated to reflect the discontinued operations as
follows: (In thousands)
Balance SheetRetail Services
For the Year Ending July 31,
----------------------------------------------------------
2001 Discontinued 2001
Assets Andersen Restatement Restated
------ -------- ----------- --------2002 2003
------------------- ------------------- ------------------
Current assetsRetail Services revenue $ 3,6286,837 $ (286)7,555 $ 3,3424,543
Costs and expenses 11,490 16,660 7,383
Net discontinued assets(loss) income before taxes & (4,653) (9,105) (2,840)
minority interest
Net (loss) income before minority (4,812) (9,215) (2,919)
interest
Net loss $ (4,812) $ (9,215) $ (2,919)
- 1,591 1,591
Long-term assets 19,732 (1,305) 18,427
-------- --------
$ 23,360 $ 23,360
Liabilities and Stockholders Equity
- -----------------------------------
Current liabilities $ 12,974 $ (396) $ 12,578
Net discontinued liabilities - 852 852
Long-term liabilities 251 (105) 146
Total liabilities 13,225 - 13,225
Minority interest 351 (351) -
Equity and Redeemable Preferred Stock 9,784 - 9,784
-------- --------
$ 23,360 - $ 23,360------------------------------------------------------------------------------------------------
Statement ofTotal Discontinued Operations
2000 Discontinued 2000
Andersen Restatement RestatedFor the Year Ending July 31,
----------------------------------------------------------
2001 2002 2003
------------------- ------------------- ------------------
RevenuesRetail Services revenue $ 39,42912,282 $ (5,128)11,959 $ 34,3014,543
Costs and expenses 47,261 (3,543) 43,718
Operating loss (7,832) (1,585) (9,417)
Other17,707 20,868 7,383
Net income (expense) (2,221) 52 (2,169)
Loss from continuing operations before provision for income tax (10,053) (1,533) (11,586)taxes & minority (5,425) (8,909) (2,840)
interest
Net loss from continuing operations (10,053) (1,533) (11,586)
Gain from discontinued operations, net of tax - 1,533 1,533before minority interest (5,648) (9,020) (2,919)
Net loss $ (10,053)(5,403) $ (10,053)(8,816) $ (2,919)
- ------------------------------------------------------------------------------------------------
73
2001 Discontinued 2001
Andersen Restatement Restated
Revenues $ 41,344 $ (5,445) $ 35,899
Costs and expenses 50,999 (6,183) 44,816
Operating loss (9,655) 738 (8,917)
Other income (expense) (920) 33 (887)
Loss from continuing operations before
provision for income tax (10,575) 771 (9,804)
Income tax expense (223) - (223)
Minority interest 245 - 245
Net loss from continuing operations (10,553) (9,782)
Gain from discontinued operations, net of tax - (771) (771)
Net loss $ (10,553) $ (10,553)
19. COMMITMENTS AND CONTINGENCIES
During the year ended July 31, 2001, two of our officers entered into
employment agreements with ATSI-Delaware, for periods of one year unless
terminated earlier in accordance with the terms of the respective agreements.
The annual base salary under such agreements range from $100,000 to $115,000 per
annum, and is subject to increase within the discretion of the Board. In
addition, each of these officers is eligible to receive a bonus in such amount
as may be determined by the Board of directors from time to time. Bonuses may
not exceed 50% of the executive's base salary in any fiscal year. No bonuses
were paid during fiscal 2001. During the year ended July 31, 2002, one of the
officers was terminated upon completion of his employment agreement and the
other was notified that his employment agreement would not be renewed.
During the year ended July 31, 2001, an additional officer entered into an
employment agreement for a period of one year (with an automatic one-year
extension) unless terminated earlier in accordance with the terms of agreement.
The annual base salary under such agreement may not be less than $140,000 and
subject to increase within the discretion of the Board. In addition, the officer
is eligible to receive a bonus in such amount as may be determined by the Board
of directors from time to time. Bonuses may not exceed 100% of the executive's
base salary in any fiscal year. No such bonuses were awarded for fiscal 2001.
Subsequent to July 31, 2002, said officer's employment agreement was revised to
reflect the change in his responsibilities and a corresponding decrease in
compensation.
Subsequent to July 31, 2001, we entered into an employment agreement with
an additional officer for a period of one year (with an automatic one-year
extension) unless terminated earlier in accordance with the terms of agreement.
The annual base salary under such agreement may not be less than $185,000 and
subject to increase within the discretion of the Board. In addition, the officer
is eligible to receive a bonus in such amount as may be determined by the Board
of directors from time to time. Bonuses may not exceed 100% of the executive's
base salary in any fiscal year. In accordance with the terms of the agreement,
the officer gave notice of his desire to terminate the agreement.
74
20.24. RISKS AND UNCERTAINTIES AND CONCENTRATIONS
The Company is subject to regulations by the United States and Mexican
Government. And according to our concession requirements, the company is
required to maintain approximately $10 million in capital. As of July 31, 2003,
ATSICOM does not meet this requirement; as a result we are not in compliance
with the concession requirements. Currently, Telemarketing, our partner in the
joint venture on ATSICOM is in negotiations with the Mexican government on
meeting this requirement.
Our business is dependent upon key pieces of equipment, switching and
transmission facilities fiber capacity and the Solaridad satellites.from our carriers. Should we experience service
interruptions from our underlying carriers, equipment failures or should there
be damage or destruction to the Solaridad satellites or
leased fiber lines there would likely be a
temporary interruption of our services, which could adversely or materially
affect our operations. We believe that suitable arrangements could be obtained
with other satellite or fiber optic
network operators to provide transmission capacity. Additionally, our network
control center is protected by an uninterruptible power supply system, which,
upon commercial power failure, utilizes battery back up until an on-site
generator is automatically triggered to supply power.Although there
can be no assurance that such arrangement could be obtained or obtained when
needed.
During the years ended July 31, 2000 and 2001 our carrier services business
had two customers whose aggregated revenues approximated 40% and 54%
respectively, of our total revenues. Individually, both customers generated
revenues greater than 10% during the year ended July 31, 2001. For the year
ended July 31,2001 and 2002 our carrier services
business had aone customer, Qwest Communications whose aggregated revenuesrevenue
approximated 54%70% and 72%, respectively of our total revenues.
21.carrier services revenue.
Subsequent to December 31, 2002 our carrier services network was idled, and as a
result two of our operating subsidiaries, ATSI-Texas and TeleSpan, Inc. filed
for reorganization protection under Chapter 11 of the U.S Bankruptcy Code, on
February 4, 2003 and February 18, 2003, respectively. Additionally, the Court
ordered joint administration of both cases on April 9, 2003 and on May 14, 2003
the Court converted the case to Chapter 7. The two bankrupt subsidiaries were
our two primary operating companies and they have ceased operations.
65
25. RELATED PARTY TRANSACTIONS
In February 2000, our board of directors approved a plan, in which $1.1
million was loaned, at a market interest rate, in the aggregate to certain key
executive officers to allow them to exercise approximately 2,033,332 of their
vested options. During fiscal 2001, the board of directors modified the
agreements by extending them for an additional year and changing them to
non-recourse notes. As the accounting treatment for non-recourse notes is
consistent with the treatment for options outstanding, the Company excluded the
shares from its outstanding common stock as of the date of the modification.
Upon maturity in fiscal 2002, the Company elected not to renew the notes again
and called the notes due. The officers were unable to pay off the notes so the
Company retained the shares it had held as collateral upon the original issuance
of the note. In June 2002, the Company issued options in the amount of 933,333
and 866,666 to two of the executive officers at an exercise price of $0.58. The
options were to vest over a one-year period quarterly and were subject to being
accelerated in the event of early termination. In July 2002, upon the
termination of one of the officers 933,333 options vested immediately. In March 1999, we renewed an agreement with an international consulting
firm, of which ATSI-Delaware director Carlos K. Kauachi is president, for
international business development support. Under the terms of the agreement, we
paid the consulting firm $6,000 per month for a period of twelve months. Upon
expiration, the agreement was extended on a month-to-month basis until July 2000
when it was terminated. As of
July 31, 2002, we have a payable2003 all of approximately
$52,000 outstanding.the 933,333 options are still outstanding, these options
will be forfeited if the recipient fails to exercise these options by July 2004.
During fiscal 2000 and fiscal 2001, we contracted with two companies
for billing and administrative services related to carrier services we provide.
The companies, which are owned by Tomas Revesz, an ATSI-Delaware director until
October 2002, were paid approximately $160,000$77,361 and $77,361$55,500 for their services
during fiscal 20002001 and 2001.2002. The monthly fees are capped by the agreement at
$18,500 per month. AsDuring fiscal 2003, these services were terminated, and as of
July 31, 2002 and 2003, the payable due these 75
companies was approximately
$78,276. Mr. Revesz, has filed a claim with the U.S. Bankruptcy Court for the
Western District of Texas for these payables. Currently the Bankruptcy Trustee
under the Chapter 7 case is reviewing the claims filed against the two
subsidiaries and will decide how the matters will be handled. Additionally, as
of July 31, 2002 and 2003 the Company has a note payable due Mr. Revesz in the
amount of $250,000 as detailed in Note 7.11 to the consolidated financial
statements.
We have entered into a month-to-month agreement with Technology Impact
Partners, a consulting firm of which Company director Richard C. Benkendorf is
principal and owner. Under the agreement, Technology Impact Partners provides us
with various services that include strategic planning, business development and
financial advisory services. Under the terms of the agreement, we pay the
consulting firm $3,750 per month plus expenses. In November 2000 the agreement
was modified and the Company is now billed solely for expenses. At July 31, 20012002
and July 31, 2002,2003, we had a payable to Technology Impact Partners of
approximately $115,000$71,207 and approximately $71,207,$79,794, respectively.
As of July 31,In December 2002, we had an outstandingthe Company entered into a note payable to Vianet Technologies,
Inc.,with a
telecom company of which Stephen M. Wagner, Chief Executive Officer and
Director, served asrelated party, a director from January 1, 2002 until his resignation
effective June 30, 2002,of ATSI, Mr. John R. Fleming, in the amount of
$25,000. The note called for 12 monthly payments of $2,163.17 including
interest, commencing on February 1, 2003. The note has an interest rate of 7%
annually and a maturity date of January 1, 2004. During Fiscal 2003, the company
did not make any payments on this note. Currently, we are in default on the
note. Additionally, at July 31, 2003, we had a payable of approximately $1.3 million. Mr. Wagner
owns less than 5% of the outstanding stock of Vianet.
22.$35,377
for board fees and related expenses.
26. LEGAL PROCEEDINGS
In March 2001, ATSI-Texas was sued by Comdisco for breach of contract
for failing to pay lease amounts due under a lease agreement for
telecommunications equipment. Comdisco claims that the total amount loaned
pursuant to the lease was $926,185 and that the lease terms called for 36 months
of lease payments. Comdisco is claiming that ATSI only paid thirty months of
lease payments. ATSI disputes that the amount loaned was $926,185 since we only
received $375,386 in financing.
We have paid over $473,000 in lease payments and, thus, believe that
we have satisfied our obligation under the lease terms. Although Comdisco has
since filed for bankruptcy protection, we have negotiated a cash resolution with
Comdisco for an amount deemed to be immaterial.66
In July 2001, we were notified by the Dallas Appraisal District that
our administrative appeal of the appraisal of our office in the Dallas InfoMart
was denied. The property was appraised at over $6 million dollars. The property
involved includesincluded our Nortel DMS 250/300 switch, associated telecommunications
equipment and office furniture and computers. ATSI was unable to proceed in its
appeal of the appraisal due to its failure to pay the taxes under protest.
During fiscal 2002 we recorded approximately $260,000 of property tax expense
related to our Dallas office. AsSubsequent to July 31, 2003, the creditor filed a
claim with the U.S. Bankruptcy Court for the Western District of the date ofTexas for this
filing, no payments have
been made.liability.
In December 2002, ATSI-Delaware and ATSI the Texas corporationCorporation were
both sued in Mexico for an alleged breach of a promissory note. The U.S.
companies were guarantors on a promissory note to a Mexican telecommunications
carrier. ATSI is vigorously defending the suits in Mexico, which are claiming
approximately $200,000. ATSI believes it has a justifiable basis for its
position in the litigation and believes that we will be able to resolve the
dispute without suffering a material adverse effect on our financial position.position,
although there can be no assurance.
ATSI has also filed a lawsuit in the Southern District of New York
against several financial parties for what ATSI believes is "stock fraud and
manipulation". The case is based on 76
convertible preferred stock financing
transactions involving primarily two firms, Rose Glen Capital and the Shaar
Fund. In both of those transactions, ATSI believes it was defrauded and its
stock was manipulated.
WeManagement has disputes with various vendors, but does not believe that
the outcome of the disputes will have a material effect on the financial
statements. Also, we are also a party to additional claims and legal proceedings
arising in the ordinary course of business. We believe it is unlikely that the
final outcome of any of the claims or proceedings to which we are a party would
have a material adverse effect on our financial statements; however, due to the
inherent uncertainty of litigation, the range of possible loss, if any, cannot
be estimated with a reasonable degree of precision and there can be no assurance
that the resolution of any particular claim or proceeding would not have an
adverse effect on our results of operations in the period in which it occurred.
23.67
27. QUARTERLY FINANCIAL DATA (Net of GlobalSCAPE, Inc.)
(unaudited) - inthousands -except per share information, ATSIMEX and
SINFRA)
Quarter ended Quarter ended Quarter ended Quarter ended
Fiscal 2001ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Quarters Ended
-----------------------------------------------------------------
10/31/00 01/2002 1/31/01 04/2003 4/30/01 07/2003 7/31/01
----------- -------- -------- -------- --------2003
-----------------------------------------------------------------
OperatingOPERATING REVENUES:
Services
Carrier services $5,436 $1,096 $0 $0
Network services 185 122 70 40
-----------------------------------------------------------------
Total operating revenues $ 6,077 $ 6,796 $ 10,019 $ 13,0075,621 1,218 70 40
OPERATING EXPENSES:
Cost of services 5,481 5,353 7,556 9,907
------- ------- -------- --------
Gross margin 596 1,443 2,463 3,100
SG&A 3,853 2,867 2,785 2,944
Net loss(exclusive of
depreciation and amortization,
as shown below) 5,005 1,120 86 33
Selling, general and administration 1,269 2,073 310 1,151
Impairment expense - - - 418
Bad debt expense 13 - 22 -
Depreciation and Amortization 407 442 363 17
-----------------------------------------------------------------
Total operating expenses 6,694 3,635 781 1,619
-----------------------------------------------------------------
OPERATING LOSS (1,073) (2,417) (711) (1,579)
OTHER INCOME (EXPENSE):
Other income (expense), net (13) (6) - (6)
Interest expense (193) (191) (228) (765)
Loss from the sale of assets - (28) - (1,492)
-----------------------------------------------------------------
Total other income (expense) (206) (225) (228) (2,263)
LOSS FROM CONTINUING
OPERATIONS BEFORE INCOME TAX (1,279) (2,642) (939) (3,842)
INCOME TAX BENEFIT (EXPENSE) - - - -
-----------------------------------------------------------------
NET LOSS FROM CONTINUING
OPERATIONS (1,279) (2,642) (939) (3,842)
NET LOSS FROM DISCONTINUED
OPERATIONS (1,650) (750) (421) (98)
NET LOSS FROM SALE OF DISCONTINUED
OPERATIONS - - - (962)
-----------------------------------------------------------------
NET LOSS (2,929) (3,392) (1,360) (4,902)
LESS: PREFERRED DIVIDENDS (96) (91) (91) (375)
-----------------------------------------------------------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS ($4,683)3,025) ($2,401)3,483) ($1,829)1,451) ($1,640)
Net loss to common shareholders ($5,571) ($2,634) ($2,304) ($2,276)
Net loss per share ($0.08) ($0.04)5,277)
=================================================================
BASIC AND DILUTED LOSS PER SHARE ($0.03) ($0.03) ($0.01) ($0.05)
=================================================================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 96,679,000 103,173,000 103,639,000 103,639,000
=================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
68
Quarter ended Quarter ended Quarter ended Quarter ended
Fiscal ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Quarters Ended
-------------------------------------------------------------
10/31/2001 1/31/2002 10/4/30/2002 7/31/01 01/31/02 04/30/02 07/31/02
----------- -------- -------- -------- --------2002
-------------------------------------------------------------
OperatingOPERATING REVENUES:
Services
Carrier services $9,058 $11,127 $10,827 $10,178
Network services 580 537 442 397
-------------------------------------------------------------
Total operating revenues $11,364 $ 13,596 $ 13,251 $ 12,4909,638 11,664 11,269 10,575
OPERATING EXPENSES:
Cost of services 9,097 11,191 11,314 11,260
Gross margin 2,267 2,405 1,937 1,230
------- ------- -------- --------
SG&A 2,842 3,083 2,994 3,366
Net loss(exclusive of
depreciation and amortization,
as shown below) 8,237 10,240 10,380 10,220
Selling, general and administration 1,538 1,711 1,712 1,905
Impairment expense - - - 3,119
Bad debt expense - 65 8 315
Depreciation and Amortization 437 464 508 546
-------------------------------------------------------------
Total operating expenses 10,212 12,480 12,608 16,105
-------------------------------------------------------------
OPERATING LOSS (574) (816) (1,339) (5,530)
OTHER INCOME (EXPENSE):
Other income (expense), net (14) 42 (5) 1,845
Interest expense (63) (111) (34) (185)
Loss from the sale of assets - - - -
-------------------------------------------------------------
Total other income (expense) (77) (69) (39) 1,660
LOSS FROM CONTINUING
OPERATIONS BEFORE INCOME TAX (651) (885) (1,378) (3,870)
INCOME TAX BENEFIT (EXPENSE) - - - -
-------------------------------------------------------------
NET LOSS FROM CONTINUING
OPERATIONS (651) (885) (1,378) (3,870)
NET LOSS FROM DISCONTINUED
OPERATIONS (1,478) (1,479) (1,012) (4,847)
NET LOSS FROM SALE OF DISCONTINUED
OPERATIONS - - - 1,082
-------------------------------------------------------------
NET LOSS (2,129) (2,364) (2,390) (7,635)
LESS: PREFERRED DIVIDENDS (145) (132) (96) (99)
-------------------------------------------------------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS ($2,128)2,274) ($2,363) ($2,390) ($7,636)
Net loss to common shareholders ($2,273) ($2,495)2,496) ($2,486) ($7,735)
Net loss per share7,734)
=============================================================
BASIC AND DILUTED LOSS PER SHARE ($0.03) ($0.03) ($0.03) ($0.03) ($0.08)
=============================================================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 78,086,000 83,128,000 91,486,000 91,917,000
=============================================================
24. SUBSEQUENT EVENTS
Subsequent to the endThe accompanying notes are an integral part of the fiscal year, the holder of the Series E
Preferred Stock converted 285 of the 1,455 shares outstanding and accumulated
interest into common stock resulting in the issuance of 4,121,685 shares of
common stock.
Additionally, we issued 335,495 shares as payment for dividends for the
quarters ended March 31, 2002 and June 30, 2002 for holders of our Series F
Preferred Stock.
77these consolidated
financial statements.
69
Subsequent to year-end we have made a number of decisions to further
conserve our limited resources and maintain certain operations going forward.
These decisions include the recent termination of a number of employees in our
corporate offices, strategic terminations in our Mexico operations and the
restriction and ultimately, idling of our carrier services network capacity.
Additionally, the Company is reviewing expressions of interest received
from various parties for a strategic combination. Should the Company be
successful in structuring a combination it is likely one component would include
a portion of working capital infusion to allow us to continue to operate our
operations both domestically and internationally.
On January 15, 2003 the American Stock Exchange halted trading in our stock
pending the filing of our Form 10-K for the year ended July 31, 2002 and our
Form 10-Q for the quarter ended October 31, 2002.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 13, 2001, ATSI Communications, Inc.'s Board of Directors
approved the recommendation of its Audit Committee that the firm of Arthur
Andersen LLP be dismissed as its independent public accountants. A discussion
was also held by the Audit Committee with H. Douglas Saathoff, CFO and J.
Christopher Cuevas, V.P. - Corporate Controller and Treasurer.
The Company was not aware of any disagreements regarding accounting or
financial disclosure with Arthur Andersen LLP. The auditor's opinion for fiscal
2000 and 2001 contained a qualification as to the uncertainty of the Company's
ability to continue as a going concern.
On.On December 13, 2001, the Company also engaged Ernst & Young to audit
the financial statements for the year ended July 31, 2002. During the year ended
July 31, 2002 and through the date hereof, there were no disagreements with
Ernst & Young on any matters of accounting principle or practice, financial
statement disclosure, or auditing scope or procedure, which, if not resolved to
the satisfaction of the former auditors, would have been referred to in the
auditors' report had such a report been issued.
On November 14, 2002, ATSI Communications, Inc.'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.
A discussion was
also held by the Audit Committee with J. Christopher Cuevas, Interim Chief
Financial Officer.70
On November 14, 2002, ATSI Communications, Inc.'s Board of Directors
approved the recommendation of its Audit Committee that the firm of Tanner + Co.
be hired as its independent public accountants for the fiscal year ending July
31, 2002.
The recommendation of the Audit Committee was made after discussions
with J. Christopher Cuevas, Interim Chief Financial Officer.
78
During the year ended July 31, 2000, 2001 and 2001,2002, and through the
date hereof, the Company did not consult Tanner + Co. 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).
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Current as of July 31, 2003:
- ----------------------------
Name Age Position Held
---- --- -------------
Arthur L. Smith 38 President, Chief Executive Officer and Director
Ruben Caraveo 36 Vice President, Sales and Operations
Antonio Estrada 29 Corporate Controller
John R. Fleming 48 Interim Executive Chairman of the Board
Richard C. Benkendorf 63 Director
Murray R. Nye 50 Director
Directors and Officers that resigned During Fiscal 2003:
- --------------------------------------------------------
Stephen M. Wagner 46 President, Chief Executive Officer and Director
Arthur L. Smith 38 President, ATSI de Mexico(Resigned, January 2003)
J. Christopher Cuevas 37 Interim Chief Financial Officer (Resigned,
April 2003)
Raymond G. Romero 48 Interim CEO and Director (Feb 2003 to May 2003)
Vice President, General Counsel and Business Development and Corporate
Secretary Richard C. Benkendorf 63 Director
John R. Fleming 48 Interim Chairman of the Board(Resigned, May 2003)
Carlos K. Kauachi 62 Director (Resigned, February 2003)
Darrell O. Kirkland 61 Director Murray R. Nye 50 Director
Stephen M. Wagner(Resigned, February 2003)
Current as of July 31, 2003:
- ----------------------------
Arthur L. Smith has served as Chief Executive Officer and Director
since October 2002,
as a director of the Company since October 2001, and as President since August
2001. HeMay 2003. Mr. Smith also served as Chief Operating Officer from August 2001 to October
2002. Prior to joining ATSI, Mr. Wagner served as President of Qwest
Communications International's Local Broadband, Southern Region from November
1999 to March 2001. From December 1997 until June 1998, Mr. Wagner served as
Vice President of Wholesale Markets for LCI International and from June 1998
until November 1999, he served in that same role for Qwest Communications upon
their acquisition of LCI International. Prior to December 1997, Mr. Wagner
served in various senior management positions with USLD Communications including
Vice President of Sales, Marketing and Business Development until their
acquisition by LCI International on December 31, 1997.
Arthur L. Smith has served as President of ATSI-Mexico since Octoberfrom August
2002 to January 2003, as Chief Executive Officer and a director of the Company
71
from June 1996 to OctoberAugust 2002 and as President of the Company since its
formation in June 1996 to July 1998. Mr. Smith also served
79
as President, Chief
Operating Officer and a director of ATSI-Canada since its formation in May 1994.
From December 1993 until May 1994, Mr. Smith served in the same positions with
Latcomm International Inc., which company amalgamated with Willingdon Resources
Ltd. to form ATSI-Canada in May 1994. Mr. Smith has also served as President and
Chief Executive Officer of American TeleSource International, Inc., a Texas
corporation ("ATSI-Texas"), one of the Company's principal operating
subsidiaries, since December 1993. From June 1989 to December 1993, Mr. Smith
was employed as director of international sales by GeoComm Partners, a
satellite-based telecommunications company located in San Antonio, providing
telecommunications services to Latin America. Mr. Smith has over eleventhirteen years
experience in the telecommunications industry.
J. Christopher CuevasRuben R. Caraveo has served as Interim Chief Financial OfficerVice President of Sales and Operations
since July 2002. From April 2000 through July 2002,May 2003. Mr. CuevasCaraveo is responsible for Carrier Sales and the delivery of
Carrier Services for both the U.S. and Mexico. Mr. Caraveo served as V.P. -Vice
President of Operations from May 2001 to January 2003. Prior to joining ATSI,
Mr. Caraveo served as Vice President of Operations and Engineering at Vycera
Communications where he was responsible for overseeing all daily operations,
including network engineering, marketing, and the network trouble reporting and
resolution departments. Ruben's prior experience also includes positions with
Worldtel Interactive, Frontier, and WorldCom. Mr. Caraveo is armed with more
than fourteen years telecommunications industry experience, specializing in the
areas of Network Engineering, Data and Systems Analysis, Product Marketing, and
Systems Development. Mr. Caraveo attended California State University,
Northridge, School of Engineering
Antonio Estrada has served as Corporate Controller since May 2003. From
January 2002 through January 2003, Mr. Estrada served as Director of
International Accounting and Treasurer. From December 1994 through April 2000,January 2001 to January 2002, Mr.
CuevasEstrada served in various roles within ATSI, including Corporate Controller,
Director of ReportingInternational Accounting
Manager and Manager of Financial Reporting.general Accountant. Prior to joining ATSI in December 1994 he served in a variety of roles including; Manager of Financial
Reporting for Eastex Energy, Inc., an energy company, from 1991 through 1994,
Assistant Controller for King, Chapman, Broussard and Gallagher from 1989
through 1991 and as an auditor with Price Waterhouse LLP from 1987 through 1989.
Raymond G. Romero has served as Vice President, General Counsel and
Corporate Secretary since July 2000. From October 1999 through April 2000, Mr.
Romero was employed as Vice President, Business Development for Open World
Communications, Inc. and from April 1999 through September 1999 he was employed
as President of Eurotech International, Inc., both Internet companies. Prior to
that time he served in a variety of roles including serving as a Partner with
Competitive Strategies Group, Ltd., a telecommunications consulting firm from
April 1997 through April 1999 and as Vice President and General Counsel for
Ameritech International, an international telecommunications company, from April
1991 through December 1995.
Richard C. Benkendorf has served as a
directorSenior Accountant for the Epilepsy Association of San Antonio and South Texas.
Mr. Estrada graduated from the Company since October
1996. From 1991 to present, Mr. Benkendorf has beenUniversity of Texas at San Antonio, with a
principalBachelors of Technology
Impact Partners, which provides advisory and investment services. From
1989-1991, Mr. Benkendorf served as Senior Vice President Investment, Planning,
Mergers & Acquisitions and Venture Capital for Ameritech,Business Administration, with a communications
services company.concentration in Accounting.
John R. Fleming has served as Interim Executive Chairman of the Board
since OctoberAugust 2002 and as a Director of ATSI since January 2001. Mr. Fleming is
the principal and founder of Vision Corporation, an early-stage investment
company that focuses on communications technologies, service and hardware. Prior
to forming Vision Corporation, Mr. Fleming served as President, International of
IXC Communications, Inc. from April 1998 to December 1999. Immediately prior to
that he served as IXC's President of Emerging Markets from December 1997, as
Executive Vice President of IXC from March 1996 through November 1997 and as
Senior Vice President of IXC from October 1994 through March 1996. He served as
Vice President of Sales and Marketing of IXC from its formation in July 1992
until October 1994. Prior to that, Mr. Fleming served as Director of Business
Development and Director of Carrier Sales of CTI from 1986 to March 1990 and as
Vice President -- Marketing and Sales of CTI from March 1990 to 80
July 1992. Mr.
Fleming was a Branch Manager for Satellite Business Systems from 1983 to 1986.
Carlos K. KauachiRichard C. Benkendorf has served as a director of the Company since
October 1996. From 19961991 to present, Mr. KauachiBenkendorf has been self-employed as a consultant.principal of
Technology Impact Partners, which provides advisory and investment services.
From 1962 until 1996,1989-1991, Mr. Kauachi served in various positions with Telefonos de
Mexico, the then privately owned telecommunications monopoly in Mexico,
including Vice President-Telephone Business Development, Vice
President-Marketing and Sales and, most recently, Vice President-International
Business Development.
Darrell O. Kirkland hasBenkendorf served as a director of the Company since October
2002. Mr. Kirkland is the principal of Kirkland and Associates, a telecom
consulting firm. Prior to starting his own consulting firm, Mr. Kirkland was the
President of Superwire Communications, Inc., an Internet access provider. Mr.
Kirkland previously served as the President of Discovery Communications, Inc., a
regional designer of call processing and voice mail platforms. Mr. Kirkland was
also theSenior Vice President Investment,
Planning, Mergers & Acquisitions and Regional ManagerVenture Capital for MCI Air Signal (a subsidiary of
MCI Telecommunications.) Mr. Kirkland started his telecommunications career as
the Regional Manager of Sales at MCI Telecommunications, where he opened the
first MCI offices in Austin and San Antonio.Ameritech, a
communications services company.
Murray R. Nye has served as a director of the Company since its
formation in June 1996. Mr. Nye also served as Chief Executive Officer and a
director of ATSI-Canada from its formation in May 1994. From December 1993 until
May 1994, Mr. Nye served in the same positions with Latcomm International Inc.,
which company amalgamated with Willingdon Resources Ltd. to form ATSI-Canada in
May 1994. From 1992 to 1995, Mr. Nye served as President of Kirriemuir Oil & Gas
Ltd. From 1989 until 1992, Mr. Nye was self-employed as a consultant and Mr. Nye
is again currently self-employed as a consultant. Mr. Nye serves as a director
of D.M.I. Technologies, Inc., an Alberta Stock Exchange-traded company.
72
Directors and Officers that resigned During Fiscal 2003:
- -------------------------------------------------------
Stephen M. Wagner resigned as Chief Executive Officer and Director in
January 2003. Mr. Wagner served as CEO from August 2002 to January 2003. He also
served as a director of the Company from October 2001 to January 2003, and as
President from August 2001 to January 2003. He also served as Chief Operating
Officer from August 2001 to August 2002. Prior to joining ATSI, Mr. Wagner
served as President of Qwest Communications International's Local Broadband,
Southern Region from November 1999 to March 2001. From December 1997 until June
1998, Mr. Wagner served as Vice President of Wholesale Markets for LCI
International and from June 1998 until November 1999, he served in that same
role for Qwest Communications upon their acquisition of LCI International. Prior
to December 1997, Mr. Wagner served in various senior management positions with
USLD Communications including Vice President of Sales, Marketing and Business
Development until their acquisition by LCI International on December 31, 1997.
J. Christopher Cuevas resigned as Interim Chief Financial Officer in
April 2003. Mr. Cuevas served as Interim Chief Financial Officer since July 2002
to April 2003. From April 2000 through July 2002, Mr. Cuevas served as V.P. -
Corporate Controller and Treasurer. From December 1994 through April 2000, Mr.
Cuevas served in various roles within ATSI including Corporate Controller,
Director of Reporting and Manager of Financial Reporting. Prior to joining ATSI
in December 1994 he served in a variety of roles including; Manager of Financial
Reporting for Eastex Energy, Inc., an energy company, from 1991 through 1994,
Assistant Controller for King, Chapman, Broussard and Gallagher from 1989
through 1991 and as an auditor with Price Waterhouse LLP from 1987 through 1989.
Raymond G. Romero resigned as Interim Chief Executive Officer in May
2003. Mr. Romero served as Interim Chief Executive Officer from February 2003 to
May 2003. He also served as Vice President, General Counsel and Corporate
Secretary from July 2000 to May 2003. From October 1999 through April 2000, Mr.
Romero was employed as Vice President, Business Development for Open World
Communications, Inc. and from April 1999 through September 1999, he was employed
as President of Eurotech International, Inc., both Internet companies. Prior to
that time he served in a variety of roles including serving as a Partner with
Competitive Strategies Group, Ltd., a telecommunications consulting firm from
April 1997 through April 1999 and as Vice President and General Counsel for
Ameritech International, an international telecommunications company, from April
1991 through December 1995.
Carlos K. Kauachi served as a director of the Company from October 1996
to February 2003.
Darrell O. Kirkland served as a director of the Company from October
2002 to February 2003.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers and persons who own more
than 10% of a registered class of the Company's equity securities to file
various reports with the Securities and Exchange Commission concerning their
holdings of, and transactions in, securities of the Company. Copies of these
filings must be furnished to the Company.
Based on a review of the copies of such forms furnished to the Company
and other information, the Company believes that, during the fiscal year ended
July 31, 2002,2003, all of its directors and executive officers were in compliance
with the applicable filing requirements.
73
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning the compensation
earned during the Company's last three fiscal years by the Company's Chief
Executive Officer and each of the Company's other four most highly compensated
executive officers whose total cash
81
compensation exceeded $100,000 for services
rendered in all capacities for the fiscal year ended July 31, 20022003
(collectively, the "Named Executive Officers").
Annual Compensation Long-Term Compensation
------------------- ----------------------
----------------------------------------------------------------------------------------------------------------------- ---------------------------------------------
Awards Payouts
------ -------
------------------------------------------------------ ----------
Securities
Other Securities
Name And Principal Fiscal Annual Restricted Underlying LTIP All Other
- ------------------Name and Fiscal Compensation Stock Options/ Payout Compensation
Principal Position Year Salary ($) Bonus ($) ($)(1) Awards ($) SARs (#) ($) ($)
-------------------------- ---- ---------- --------- ----------------- ---------- -------- --- ------------ ------- ------------
Stephen M. Wagner (2) 2003 $71,154 $30,833 - - - - -
Chief Executive Officer 2002 $174,327 - - - 500,000 - -
Chief Executive Officer 2001 - - - - - - -
2000 - - - - - - -
Arthur L. Smith (3) 2003 $90,808 $14,105 - - 300,000 - -
CEO of ATSI Delaware, and 2002 $184,058 $25,004184,058 25,004 - - 1,166,666 - -
President, ATSI-Mexico 2001 190,000 - - - - - -
2000 124,915 $ 4,500 - - - - -
Raymond G. Romero (4) 2003 $56,923 - - - 0 - -
Interim CEO & VP, General 2002 $137,008137,008 - - - 150,000 - -
Vice President, General 2001 140,000 - - - 50,000 - -
Counsel and Business 2000 10,7692001 140,000 - - - 50,000 - -
Development
Ruben Caraveo (4)(5) 2003 $71,154 - - - 150,000 - -
Vice President, Operations 2002 $110,504110,504 - - - - - -
Vice President, Operations
2001 28,308 - - - 300,000 - -
2000 - - - - - - -
- ----------
(1) Certain of the Company's executive officers receive personal benefits
in addition to salary; however, the Company has concluded that the
aggregate amount of such personal benefits does not exceed the lesser
of $50,000 or 10% of annual salary and bonus for any Named Executive
Officer.
(2) Resigned as CEO and President in January 2003. Also servesserved as Chief
Executive Officer of American TeleSource International, Inc., a Texas
corporation ("ATSI-Texas"), the Company's principal operating
subsidiary.subsidiary during the first half of fiscal 2003. Mr. Wagner's
compensation iswas paid by ATSI-Texas.
(3) ServedIn May 2003, Mr. Smith was appointed as Chief Executive Officer until October 2002.CEO and Director of ATSI
Delaware. From August 2002 to January April 2003, Mr. Smith served as
President of ATSI Mexico. Mr. Smith's compensation iswas paid by
ATSI-Texas.ATSI-Texas until December 2002 and is being paid by ATSI Delaware since
May 2003.
(4) Resigned as Interim CEO in May 2003, position he held since February
2003. Mr. Romero andRomero's compensation was paid by ATSI-Texas until December
2002. No other compensation was paid.
(5) Served as Vice President of Operations, Mr. Caraveo's compensation are allwas
paid by ATSI-Texas.
82ATSI Texas until December 2002, and is being paid by ATSI
Delaware since May 2003.
74
Employment Agreements
The Company has entered into employment agreements with certain of its
executive officers as follows:
Minimum
Name Term Minimum Annual Salary
---- ---- ---------------------
Stephen M. Wagner (1) August 20, 2001 - August 19, 2002 $185,000
Arthur L. Smith (1)(2) August 1, 2001 - July 31, 2002 $140,000
Ruben Caraveo (2)(3) May 1, 2001 - April 30, 2002 $115,000
- ----------
(1) The employment agreement was not renewed during fiscal 2003.
Additional, in January 2003, Mr. Wagner resigned from his
responsibilities.
(2) The agreement provides for an automatic renewal for an additional
one-year term unless notice of termination is given 120 days prior to
end of initial term. (2)This employment agreement was not renewed,
Currently this individual is still employed with the Company, but as of
the year ending July 31, 2003 there is no employment agreement in
effect.
(3) The agreement provides for an automatic renewal for an additional
one-year term unless notice of termination is given 30 days prior to
end of initial term. This employment agreement was not renewed,
Currently this individual is still employed with the Company, but as of
the year ending July 31, 2003 there is no employment agreement in
effect.
The Board may increase each officer's salary, and may pay a
bonus to each of them from time to time. Each of the employment
agreements provides for early termination under certain conditions, and
restricts each executive from various competing and other potentially
damaging activities during employment and for a specified time after
termination of employment.
Stock Option Plans
1997 Option Plan
The American TeleSource International Inc. 1997 Stock Option Plan (the
"1997 Option Plan") was adopted in February 1997 by the Board of Directors of
the Company and approved in May 1997 by the Company's stockholders.
The 1997 Option Plan terminated on February 10, 1998. No further
options will be granted under the 1997 Option Plan. All options outstanding
under the 1997 Option Plan on the date of termination will remain outstanding
under the 1997 Option Plan in accordance with their respective terms and
conditions.
As of July 31, 2002,2003, options for 202,0012,000 shares were outstanding under
the 1997 Option Plan at a weighted average exercise price of $1.87,$.58, all of which
were exercisable. As of July 31, 2002,2003, 4,463,331 options had been exercised.exercised and
451,668 options were forfeited.
1998 Option Plan
83
The American TeleSource International, Inc. 1998 Stock Option Plan (the
"1998 Option Plan") was adopted in September 1998 by the Board of Directors of
the Company and approved December 1998 by the Company's stockholders.
75
The 1998 Option Plan authorizesterminated on September 9, 2001. No further
options will be granted under the grant of up to two million incentive stock1998 Option Plan. All options and non-qualified stock options to employees, directors and certain other
persons. As of July 31, 2002, the Board had granted options to purchase
2,214,800 shares of common stockoutstanding
under the 1998 Option Plan at exercise prices
as follows: (i) 1,541,000 at $0.55 per share, (ii) 302,300 at $0.78 per share,
(iii) 371,500 at $0.63 - $4.63.on the date of termination will remain outstanding
under the 1998 Option Plan in accordance with their respective terms and
conditions.
As of July 31, 2002,2003, options for 1,015,172352,834 shares were outstanding
under the 1998 Option Plan at a weighted average exercise price of $0.91.$0.56. As of
July 31, 2002, 891,8402003, 340,334 options were exercisable at a weighted average exercise
price of $0.82,$0.56, 757,254 options had been exercised and 442,3741,104,712 options had
been forfeited.
2000 Option Plan
The ATSI Communications, Inc. 2000 Incentive Stock Option Plan (the
"2000 Option Plan") was adopted in December 2000 by the Board of Directors of
the Company and approved February 2001 by the Company's stockholders.
The 2000 Option Plan authorizes the grant of up to 9.8 million
incentive stock options and non-qualified stock options to employees, directors
and certain other persons. As of July 31, 2002,2003, the Board had granted options to
purchase 7,141,4997,771,499 shares of common stock under the 2000 Option Plan at an
exercise price range of $0.47.$.08-$0.64. As of July 31, 2002, 1,876,9982003, 1,976,665 options were
exercisable at a weighted average exercise price of $0.48,$0.55, no options had been
exercised and 716,3343,961,500 options had been forfeited.
Stock Option Grants in Fiscal 20022003
A total of 500,000, 1,166,666300,000,150,000 and 150,000 options90,000 were granted to Mr. Wagner,Smith, Mr.
SmithCaraveo and Mr. Romero,Estrada, respectively, during the Company's fiscal year ended
July 31, 2002.2003.
Aggregate Option Exercises in Fiscal 20022003 and Fiscal Year-End Option Values
The following table shows stock options exercised by the Named
Executive Officers during the fiscal year ended July 31, 2002,2003, including the
aggregate value of gains on the date of exercise. In addition, the table
includes the number of shares covered by both exercisable and unexercisable
stock options as of July 31, 2002.2003. Also reported are the values of
"in-the-money" options, which represent the positive spread between the exercise
price of any such existing stock options and the Common Stock price as of July
31, 2002.2003.
Shares
Acquired
On Value Number of Securities Value of Unexercised
In-the-
Underlying Unexercised MoneyOptions In-the-Money Options at FYE ($)
Exercise Realized Options at FYE(#)
-------- --------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- --- --- ----------- ------------- ----------- -------------
84
Stephen M. Wagner (1) - - - 500,000- - -
Arthur L. Smith - - 350,000 950,0001,099,999 500,000 - -
Raymond G. Romero (2) - - 50,000 200,000- - - -
Ruben Caraveo - - 100,000 200,000 250,000 - -
Antonio Estrada - - 50,000 130,000 - -
- ----------76
(1) In January 2003, Mr. Wagner resigned as CEO and Director of the Company. As
a result 950,000 shares/stock options were forfeited.
(2) In May 2003, Mr. Romero resigned as Interim CEO and Director of the
company. As a result 350,000 shares/stock options were forfeited.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding ownership
of the Common Stock as of January 24,July 31, 2003 by (i) each person known by the Company
to be the beneficial owner of more than 5% of the outstanding shares of Common
Stock, (ii) each director of the Company, that served during Fiscal 2003, (iii)
the Chief Executive Officer and each other executive officer of the Company
named in the Summary Compensation Table, and (iv) all executive officers and
directors of the Company as a group.
Amount and Nature of
Beneficial Ownership of
Name Common Stock(1) Percent of Class
---- --------------- ----------------
Stephen M. Wagner (2) .............................. 341,667Amount and Nature of
Beneficial Ownership of
Name Common Stock(1) Percent of Class
Stephen M. Wagner (2)................. - *
Arthur L. Smith (3)................... 3,488,448 3.27%
Raymond G. Romero (4)................. - *
Ruben Caraveo (5)..................... 200,000 *
Richard C. Benkendorf (6)............. 313,334 *
John R. Fleming (7)................... 153,334 *
Carlos K. Kauachi (8)................. - *
Murray R. Nye (9)..................... 448,344 *
Darrell O. Kirkland (10).............. - *
All other directors and executive
officers as a group (2 persons)
(11)............................... 207,500 *
Arthur L. Smith (3) ................................ 2,978,449 2.86%
Raymond G. Romero (4) .............................. 106,000 *
Ruben Caraveo (4) .................................. 100,000 *
Richard C. Benkendorf (5) .......................... 316,666 *
John R. Fleming (6) ................................ 101,366 *
Carlos K. Kauachi (7) .............................. 232,089 *
Murray R. Nye (8) .................................. 647,166 *
Darrell O. Kirkland ................................ - *
All directors and executive officers as a group
(14 persons) (9) .................................. 5,202,070 4.94%
- ----------
* Less than 1%
(1) To the knowledge of the Company, each person named in the table has sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by him. Shares of Common Stock that are not
outstanding but that may be acquired by a person upon exercise of options
within 60 days of January 24,July 31, 2003 are deemed outstanding for the purpose of
computing the percentage of outstanding shares beneficially owned by such
person but are not deemed outstanding for the purpose of computing the
percentage of outstanding shares beneficially owned by any other person.
(2) In January 2003, Mr. Wagner resigned as CEO and Director of the Company.
As a result 950,000 shares/stock options were forfeited. According to the
2000 Stock Option Plan in effect, if the optionee's employment is
terminated either by the optionee or by the Company, then the option may
be exercised only during the period ending one day prior to three-months
following such termination. Since the employee did not exercise those
vested options within the permissible time frame all options issued were
forfeited as of July 31, 2003.
(3) Includes 166,667200,000 shares issuable upon exercise of presently exercisable
options or options exercisable within 60 days of January 24,July 31, 2003.
(3) Includes 450,000 shares issuable upon(4) In May 2003, Mr. Romero resigned as Interim CEO of the Company. As a
result 350,000 shares/stock options were forfeited. According to the 2000
Stock Option Plan in effect, if the optionee's employment is terminated
either by the optionee or by the Company, then the option may be
exercised only during the period ending one day prior to three-months
following such termination. Since the employee did not exercise those
vested options within the permissible time frame all options issued were
forfeited as of presently exercisable
options or options exercisable within 60 daysthe date of January 24, 2003.
85this filing.
77
(4)(5) Includes 100,000 shares issuable upon exercise of presently exercisable
options or options exercisable within 60 days of January 24,July 31, 2003.
(5)(6) Includes 136,66666,666 shares issuable upon exercise of presently exercisable
options or options exercisable within 60 days of January 24,July 31, 2003.
(6) Includes 76,666(7) Included 66,666 shares issuable upon exercise of presently exercisable
options or options exercisable within 60 days of January 24,July 31, 2003.
(7)(8) In February 2003, Mr. Kauachi resigned as a Director of the Company. As a
result 290,000 shares/stock options were forfeited. According to the 1998
and 2000 Stock Option Plans in effect, if the optionee's term of service
is terminated either by the optionee or by the Company, then the option
may be exercised only during the period ending one day prior to
three-months following such termination. Since Mr. Kauachi did not
exercise those vested options within the permissible time frame all
options issued were forfeited as of July 31, 2003.
(9) Includes 96,66666,666 shares issuable upon exercise of presently exercisable
options or options exercisable within 60 days of January 24,July 31, 2003.
(8)(10) In February 2003, Mr. Kirkland resigned as a Director of the Company.
No stock options were granted to Mr. Kirkland.
(11) Includes 176,66660,000 shares issuable upon exercise of presently exercisable
options or options exercisable within 60 days of January 24, 2003.
(9) Includes 1,672,499 shares issuable upon exercise of presently exercisable
options or options exercisable within 60 days of January 24,July 31, 2003.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 2000, our board of directors approved a plan, in which
$1.1$1,040,000 million was loaned at a market interest rate, in the aggregate to certaintwo key executive officers, Mr. Douglas
Saathoff and Art Smith to allow them to exercise approximately 2,033,332 of
their vested options. The principal balance of the loans to Mr. Saathoff and Mr.
Smith were for approximately $540,000 and $500,000, respectively. The note was
for a term of 1 year and had annual interest rate of 6%, with a maturity date of
February 10, 2001, with an initial payment in cash of 10% of the value of the
loan. The initial cash payment received by the Company from Mr. Saathoff and Mr.
Smith was approximately $54,000 and $50,000 respectively. During fiscal 2001,
the board of directors modified the agreements by extending themthe agreements for
an additional year and changing them to non-recourse notes. As the accounting treatment for non-recourse notes is
consistent with the treatment for options outstanding, the Company excluded the
shares from its outstanding common stock as of the date of the modification. Upon maturity in
fiscal 2002, the Company elected not to renew the notes again and called the
notes due. The officers were unable to pay off the notes so the Company retained
the shares it had held as collateral upon the original issuance of the note.note,
additionally the Company retained the initial cash payment received from these
officers of approximately $104,000. In June 2002, the Company issued options in
the amount of 933,333 and 866,666 to two of the executive officersMr. Saathoff and Mr. Smith, respectively at
an exercise price of $0.58. The options were to vest over a one-year period
quarterly and were subject to being accelerated in the event of early
termination. In July 2002, upon the termination of one of the officersMr. Saathoff, 933,333 options
vested immediately. As of July 31, 2003 all of the 933,333 options are still
outstanding, these options will be forfeited if the recipient fails to exercise
these options by July 2004.
In March 1999, we renewed an agreement with an international consulting
firm, of which ATSI-Delaware director Carlos K. Kauachi is president, for
international business development support. Under the terms of the agreement, we
paid the consulting firm $6,000 per month for a period of twelve months. Upon
expiration, the agreement was extended on a month-to-month basis until July 2000
when it was terminated. As of July 31, 2002 and 2003, we have a payable of
approximately $52,000 outstanding.and $51,000 outstanding, respectively.
During fiscal 2000 and fiscal 2001, we contracted with two companies
for billing and administrative services related to carrier services we provide.
The companies, which are owned by Tomas Revesz, an ATSI-Delaware director until
October 2002, were paid approximately $160,000$77,361 and $77,361$55,500 for their services
78
during fiscal 20002001 and 2001.2002. The monthly fees are capped by the agreement at
$18,500 per month. AsDuring fiscal 2003, these services were terminated, and as of
July 31, 2002 and 2003, the payable due these companies was approximately
$78,276. Mr. Revesz, has filed a claim with the U.S. Bankruptcy Court for the
Western District of Texas for these payables. Currently the Bankruptcy Trustee
under the Chapter 7 case is reviewing the claims filed against the two
subsidiaries and expects these liabilities to be discharged, upon the completion
of the Chapter 7 case.
Additionally, as of July 31, 2002 and 2003 the Company has a note
payable due Mr. Revesz in the amount of $250,000 as detailed in Note 7.
86
11 to the
consolidated financial statements.
We have entered into a month-to-month agreement with Technology Impact
Partners, a consulting firm of which Company director Richard C. Benkendorf is
principal and owner. Under the agreement, Technology Impact Partners provides us
with various services that include strategic planning, business development and
financial advisory services. Under the terms of the agreement, we pay the
consulting firm $3,750 per month plus expenses. In November 2000 the agreement
was modified and the Company is now billed solely for expenses. At July 31, 20012002
and July 31, 2002,2003, we had a payable to Technology Impact Partners of
approximately $115,000$71,207 and approximately $71,207,$79,794, respectively.
AsIn December 2002, the Company entered into a note payable with a
related party, a director of ATSI, Mr. John R. Fleming, in the amount of
$25,000, the note called for 12 monthly payments of $2,163.17 including
interest, commencing on February 1, 2003. The note has an interest rate of 7%
annually and a maturity date of January 1, 2004. During Fiscal 2003, the Company
did not make any payments on this note. Currently, we are in negotiations with
this individual and expect to complete a new agreement by the end of the fist
quarter of Fiscal 2004. Additionally, at July 31, 20022003, we had an outstandinga payable to Vianet
Technologies, Inc., a telecom company of
which Stephen M. Wagner,approximately $35,377 for board fees and related expenses.
ITEM 14. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Director, servedPrincipal
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 a director from January 1, 2002 until
his resignation effective June 30, 2002,of July 31, 2003. 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 amountCompany's internal controls or in other factors that could
significantly affect internal controls subsequent to the date of approximately $1.3
million. Mr. Wagner owns less than 5%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
outstanding stocklikelihood of Vianet.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.
ITEM 14.15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) Financial Statements
Index to Financial Statements appears on Page 39.38.
(b) Reports on Form 8-K
On December 18, 2001 we announced that our Board of Directors had
approved the dismissal of Arthur Andersen LLP and the hiring of Ernst &
Young LLP.
On January 24, 2002 and January 31, 2002 we amended our filings to
include an exhibit from Arthur Andersen.o On October 29, 2002 we announced that a member of our Board of
Directors had resigned.
o 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.
o On June 16, 2003 we announced that 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).
79
o On June 16, 2003 we announced that Raymond G. Romero, Interim CEO
and J. Christopher Cuevas, Interim CFO both resigned. Additionally
the Company announced the appointment of Arthur L. Smith as CEO
and Director and Antonio Estrada as corporate controller.
o On June 16, 2003, we announced that on February 4, 2003, two of
our subsidiaries, ATSI-Texas and TeleSpan, Inc. filed for
protection under Chapter 11 of the U.S. Bankruptcy Code.
Additionally, on April 9, 2003, the court ordered joint
administration of both cases. And on May 14, 2003 the Ccourt
converted the case to Chapter 7. The two bankrupt subsidiaries
were our two primary operating companies and they have ceased
operations. ATSI Communications, Inc., the Delaware incorporated
holding company was not included in the bankruptcy.
(c) Exhibits
3.1 Amended and Restated Certificate of Incorporation of American
TeleSource International, Inc., a Delaware corporation (Exhibit 3.3 to
Amendment No. 2 to Registration statement on Form 10 (No. 333-05557)
of ATSI filed on September 11, 1997)
3.2 Amended and Restated Bylaws of American TeleSource International, Inc.
(Exhibit to Amended Annual Report on Form 10-K for year ended July 31,
1999 filed April 13, 2000)
3.3 Amended and Restated Bylaws of American TeleSource International, Inc.
(Exhibit to Annual Report on Form 10-K for year ended July 31, 2003
filed November 13, 2003)
4.1 Certificate of Designation, Preferences and Rights of 10% Series A
Cumulative Convertible Preferred Stock (Exhibit 10.43 to Annual Report
on Form 10-K for year ending July 31, 1999 filed on October 26, 1999)
87
4.2 Certificate of Designation, Preferences and Rights of 6% Series B
Cumulative Convertible Preferred Stock (Exhibit 10.34 to Registration
statement on Form S-3 (No. 333-84115) filed August 18, 1999)
4.3 Certificate of Designation, Preferences and Rights of 6% Series C
Cumulative Convertible Preferred Stock (Exhibit 10.40 to Registration
statement on Form S-3 (No. 333-84115) filed October 26, 1999)
4.4 Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI
dated July 2, 1999 (Exhibit 10.33 to Registration statement on Form
S-3 (No. 333-84115) filed August 18, 1999)
4.5 Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by ATSI
dated July 2, 1999 (Exhibit 10.35 to Registration statement on Form
S-3 (No. 333-84115) filed August 18, 1999)
4.6 Registration Rights Agreement between The Shaar Fund Ltd. and ATSI
dated July 2, 1999 (Exhibit 10.36 to Registration statement on Form
S-3 (No. 333-84115) filed August 18, 1999)
4.7 Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI
dated September 24, 1999 (Exhibit 10.39 to Registration statement on
Form S-3 (No. 333-84115) filed October 26, 1999)
4.8 Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by ATSI
dated September 24, 1999 (Exhibit 10.41 to Registration statement on
Form S-3 (No. 333-84115) filed October 26, 1999)
4.9 Registration Rights Agreement between The Shaar Fund Ltd. and ATSI
dated September 24, 1999 (Exhibit 10.42 to Registration statement on
Form S-3 (No. 333-84115) filed October 26, 1999)
4.10 Amended and Restated 1997 Option Plan (Exhibit 10.30 to Registration
statement on Form S-4 (No. 333-47511) filed March 6, 1998)
80
4.11 Form of 1997 Option Plan Agreement (Exhibit 10.7 to Registration
statement on Form 10 (No. 000-23007) filed August 22, 1997)
4.12 American TeleSource International, Inc. 1998 Stock Option Plan
(Exhibit 4.7 to Registration statement on Form S-8 filed January 11,
2000)
4.13 Form of letter dated December 30, 1999 from H. Douglas Saathoff, Chief
Financial Officer of American TeleSource International, Inc. to
holders of Convertible Notes (Exhibit 4.1 to Registration statement on
Form S-3 (No. 333-35846) filed April 28, 2000
88
4.14 Form of letter dated January 24, 2000 from H. Douglas Saathoff, Chief
Financial Officer of American TeleSource International, Inc. to
holders of Convertible Notes (Exhibit 4.2 to Registration statement on
Form S-3 (No. 333-35846) filed April 28, 2000)
4.15 Registration Rights Agreement between American TeleSource
International, Inc. and Kings Peak, LLC dated February 4, 2000
(Exhibit 4.4 to Registration statement on Form S-3 (No. 333-35846)
filed April 28, 2000)
4.16 Form of Convertible Note for $2.2 million principal issued March 17,
1997 (Exhibit 4.5 to Registration statement on Form S-3 (No.
333-35846) filed April 28, 2000)
4.17 Form of Modification of Convertible Note (Exhibit 4.6 to Registration
statement on Form S-3 (No. 333-35846) filed April 28, 2000)
4.18 Promissory Note issued to Four Holdings, Ltd. dated October 17, 1997
(Exhibit 4.7 to Registration statement on Form S-3 (No. 333-35846)
filed April 28, 2000)
4.19 Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI
dated February 22, 2000 (Exhibit 4.5 to Registration statement on Form
S-3 (No. 333-89683) filed April 13, 2000)
4.20 Certificate of Designation, Preferences and Rights of 6% Series D
Cumulative Convertible Preferred Stock (Exhibit 4.6 to Registration
statement on Form S-3 (No. 333-89683) filed April 13, 2000)
4.21 Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by ATSI
dated February 22, 2000 (Exhibit 4.7 to Registration statement on Form
S-3 (No. 333-89683) filed April 13, 2000)
4.22 Common Stock Purchase Warrant issued to Corporate Capital Management
LLC by ATSI dated February 22, 2000 (Exhibit 4.8 to Registration
statement on Form S-3 (No. 333-89683) filed April 13, 2000)
4.23 Registration Rights Agreement between The Shaar Fund Ltd. and ATSI
dated February 22, 2000 (Exhibit 4.9 to Registration statement on Form
S-3 (No. 333-89683) filed April 13, 2000)
4.24 Securities Purchase Agreement between ATSI and RGC International
Investors, LDC dated October 11, 2000 (Exhibit 10.1 to Form 8-K filed
October 18, 2000)
4.25 Certificate of Designation, Preferences and Rights of 6% Series E
Cumulative Convertible Preferred Stock (Exhibit 10.2 to Form 8-K filed
October 18, 2000)
4.26 Certificate of Correction of Certificate of Designation, Preferences
and Rights of 6% Series E Cumulative Convertible Preferred Stock
(Exhibit 10.3 to Form 8-K filed October 18, 2000)
89
4.27 2/nd/2nd Certificate of Correction of Certificate of Designation,
Preferences and Rights of 6% Series E Cumulative Convertible Preferred
Stock (Exhibit 10.4 to Form 8-K filed October 18, 2000)
81
4.28 Registration Rights Agreement between ATSI and RGC International
Investors, LDC dated October 11, 2000 (Exhibit 10.5 to Form 8-K filed
October 18, 2000)
4.29 Stock Purchase Warrant between ATSI and RGC International Investors,
LDC dated October 11, 2000 (Exhibit 10.6 to Form 8-K filed October 18,
2000)
4.30 Certificate of Designation, Preferences and Rights of 15% Series F
Cumulative Convertible Preferred Stock (Exhibit 4.30 to Annual Report
on Form 10-K for the year ended July 31, 2001 filed October 30, 2001)
4.31 Securities Purchase Agreement between ATSI and "Buyers" dated March
21, 2001(Exhibit 4.31 to Annual Report on Form 10-K for the year ended
July 31, 2001 filed October 30, 2001)
4.32 Stock Purchase Warrant between ATSI and "Buyers" dated March 23, 2001
(Exhibit 4.32 to Annual Report on Form 10-K for the year ended July
31, 2001 filed October 30, 2001)
4.33 Certificate of Designation, Preferences and Rights of 15% Series G
Cumulative Convertible Preferred Stock (Exhibit 4.33 to Annual Report
on Form 10-K for the year ended July 31, 2001 filed October 30, 2001)
4.34 Securities Purchase Agreement between ATSI and "Buyers"dated March 21,
2001(Exhibit 4.34 to Annual Report on Form 10-K for the year ended
July 31, 2001 filed October 30, 2001
4.35 Stock Purchase Warrant between ATSI and "Buyers" dated March 21, 2001
(Exhibit 4.35 to Annual Report on Form 10-K for the year ended July
31, 2001 filed October 30, 2001)
4.36 2000 Option Plan (Exhibit 4.36 to annual Report on Form 10-K for the
year ended July 31, 2003 filed November 13, 2003.
4.37 Convertible Debenture Agreement (Exhibit 4.37 to Annual Report on Form
10-K for the year ended July 31, 2003 filed November 13, 2003)
10.1 Agreement with SATMEX (Agreement #095-1) (Exhibit 10.31 to Annual
Report on Form 10-K for year ended July 31, 1998 (No. 000-23007))
filed October 29, 1998)
10.2 Agreement with SATMEX (Agreement #094-1) (Exhibit 10.32 to Annual
Report on Form 10-K for year ended July 31, 1998 (No. 000-23007))
filed October 29, 1998)
10.3 Amendment to Agreement #094-1 with SATMEX (Exhibit 10.3 to Amended
Annual Report on Form 10-K for year ended July 31, 1999 filed August
25, 2000)
10.4 Amendment to Agreement #095-1 with SATMEX (Exhibit10.4(Exhibit 10.4 to Amended
Annual Report on Form 10-K for year ended July 31, 1999 filed August
25, 2000)
10.5 Bestel Fiber Lease (Exhibit 10.5 to Amended Annual Report on Form 10-K
for year ended July 31, 1999 filed April 14, 2000)
9082
10.6 Addendum to Fiber Lease with Bestel, S.A. de C.V. (Exhibit 10.6 to
Amended Annual Report on Form 10-K for year ended July 31, 1999 filed
August 25, 2000)
10.7 Lease Finance Agreements between IBM de Mexico and ATSI-Mexico
(Exhibit 10.21 to Amendment No. 1 to Registration statement on Form 10
(No. 023007) filed September 11, 1997)
10.8 Agreement between IBM de Mexico and ATSI-Mexico (Exhibit 10.8 to
Annual Report on Form 10-K for year ended July 31, 2001 filed November
14, 2000)
10.9 Master Lease Agreement with NTFC (Exhibit 10.9 to Amended Annual
Report on Form 10-K for year ended July 31, 1999 filed April 14, 2000)
10.10 BancBoston Master Lease Agreement (Exhibit 10.10 to Amended Annual
Report on Form 10-K for year ended July31, 1999 filed August 25, 2000)
10.11 Employment Agreement with Arthur L. Smith dated - February 28,
1997(Exhibit 10.16 to Registration statement on Form 10 (No.
333-05557) filed August 22, 1997)
10.12 Employment Agreement with Arthur L. Smith dated September 24, 1998
(Exhibit 10.12 to Amended Annual Report on Form 10-K filed April 14,
2000)
10.13 Employment Agreement with Sandra Poole-Christal dated January 1, 1998
(Exhibit 10.15 to Amended Annual Report on Form 10-K for year ended
July 31, 1999 filed April 14, 2000)
10.14 Employment Agreement with H. Douglas Saathoff dated February 28,
1997(Exhibit 10.17 to Registration statement on Form 10 (No.
333-05557) filed August 22, 1997)
10.15 Employment Agreement with H. Douglas Saathoff dated January 1, 2000
(Exhibit 10.19 to Amended Annual Report on Form 10-K for year ended
July 31, 1999 filed April 14, 2000)
10.16 Office Space Lease Agreement (Exhibit 10.14 to Registration statement
on Form S-4 (No. 333-05557) filed June 7, 1996)
10.17 Amendment to Office Space Lease Agreement (Exhibit 10.14 to
Registration statement on Form S-4 (No. 333-05557) filed June 7, 1996)
10.18 Commercial Lease with ACLP University Park SA, L.P. (Exhibit 10.23 to
Amended Annual Report on Form 10-K for year ended July 31, 1999 filed
April 14, 2000)
10.19 Amendment to Commercial Lease with ACLP University Park SA, L.P.
(Exhibit 10.24 to Amended Annual Report on Form 10-K for year ended
July 31, 1999 filed April 14, 2000)
91
10.20 Commercial Lease between GlobalSCAPE, Inc. and ACLP University Park
SA, L.P (Exhibit 10.25 to Amended Annual Report on Form 10-K for year
ended July 31, 1999 filed April 14, 2000)
10.21 Amendment to Commercial Lease between GlobalSCAPE, Inc. and ACLP
University Park SA, L.P (Exhibit10.26 to Amended Annual Report on Form
10-K for year ended July 31, 1999 filed April 14, 2000)
10.22 Compensation Agreement between ATSI-Texas and James McCourt relating
to Guarantee of Equipment Line of Credit by James McCourt (Exhibit
10.3 to Registration statement on Form 10 (No. 000-23007) filed on
August 22, 1997)
83
10.23 Consulting Agreement with KAWA Consultores, S.A. de C.V. (Exhibit
10.28 to Amended Annual Reportreport on Form 10-K for year ended July 31,
1999 filed April 14, 2000)
11 Statement of Computation of Per Share Earnings10.24 Commercial Lease with BDRC, Inc (Exhibit 1110.24 to this Annual Report on
Form 10-K for year ended July 31, 20022003 filed February
3,November 13, 2003)
10.25 Stock Purchase Agreement with Telemarketing (Sale of ATSICOM) (Exhibit
10.1 to Form 8-K filed June 16, 2003)
10.26 Interconnection Agreement TELMEX and ATSICOM (Exhibit 10.26 to Annual
Report on Form 10-K for year ended July 31, 2003 filed November 13,
2003)
10.27 Carrier Service Agreement Dialmex and ATSI (Exhibit 10.27 to Annual
Report on Form 10-K for year ended July 31, 2003 filed November 13,
2003)
22 Subsidiaries of ATSI (Exhibit 22 to this Annual Report on Form 10-K
for year ended July 31, 20022003 filed February 3,November 13, 2003)
31.1 Certification of our Chief Executive Officer, under Section 302 of the
Sarbanes-Oxley Act of 2002. (Exhibit 31.1 to this from 10-K filed on
November 13, 2003)
31.2 Certification of our Corporate Controller, under Section 302 of the
Sarbanes-Oxley Act of 2002. (Exhibit 31.2 to this from 10-K filed on
November 13, 2003)
32.1 Certification of our Chief Executive Officer, under Section 906 of the
Sarbanes-Oxley Act of 2002. (Exhibit 32.1 to this from 10-K filed on
November 13, 2003)
32.2 Certification of our Corporate Controller, under Section 906 of the
Sarbanes-Oxley Act of 2002. (Exhibit 32.2 to this from 10-K filed on
November 13, 2003)
99.1 FCC Radio Station Authorization - C Band (Exhibit 10.10 to
Registration statement on Form S-4 (No. 333-05557) filed June 7, 1996)
99.2 FCC Radio Station Authorization - Ku Band (Exhibit 10.11 to
Registration statement on Form 10 (No. 333-05557) filed June 7, 1996)
99.3 Section 214 Certification from FCC (Exhibit 10.12 to Registration
statement on Form 10 (No. 333-05557) filed June 7, 1996)
99.4 Comercializadora License (Payphone License) issued to ATSI-Mexico
(Exhibit 10.24 to Registration statement on Form 10 (No. 000-23007)
filed August 22, 1997)
99.5 Network Resale License issued to ATSI-Mexico (Exhibit 10.25 to
Registration statement on Form 10 (No. 000-23007) filed August 22,
1997)
99.6 Shared Teleport License issued to Sinfra (Exhibit 99.7 to Amended
Annual Report on Form 10-K for year ended July 31, 1999 filed April
14, 2000)
99.7 Packet Switching Network License issued to SINFRA (Exhibit 10.26 to
Registration statement on Form 10 (No. 000-23007) filed August 22,
1997)
99.8 Value-Added Service License issued to SINFRA (Exhibit 99.9 to Amended
Annual Report on Form 10-K for year ended July 31, 1999 filed April
13, 2000)
99.9 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act (Exhibit 99.9 to this Form 10-K filed on February 3,
2003.)
9284
99.10 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act (Exhibit 99.10 to this Form 10-K filed on February
3, 2003.)
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto authorized, in San Antonio, Texas on
February 3,November 13, 2003.
AMERICAN TELESOURCE INTERNATIONAL, INC.
By: /s/ Stephen M. Wagner
-----------------------------
Stephen M. WagnerArthur L. Smith
--------------------
Arthur L. Smith
Chief Executive Officer
By: /s/ J. Christopher Cuevas
-----------------------------
J. Christopher Cuevas
Chief Financial OfficerAntonio Estrada
-------------------
Antonio Estrada
Corporate Controller
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, this report has been signed below by the following persons in the
capacities indicated on February 3,November 13, 2003.
Signature Title
--------- -----
/s/ STEPHEN M. WAGNERArthur L. Smith Chief Executive Officer, Director
----------------------------------------------
(Principal Executive Officer)
/s/ J.CHRISTOPHER CUEVAS Chief Financial OfficerAntonio Estrada Corporate Controller (Principal
----------------------------------------------
Accounting and Finance Officer)
/s/ JOHN R. FLEMING Interim Executive Chairman of Board, Director
---------------------------------------------
/s/ RICHARD C. BENKENDORF Director
--------------------------
/s/ CARLOS K. KAUACHI Director
---------------------------------------------------
/s/ MURRAY R. NYE Director
--------------------------
/s/ DARRELL KIRKLAND Director
---------------------------
93
CERTIFICATION ACCOMPANYING PERIODIC REPORT PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Stephen M. Wagner, certify that:
1. I have reviewed this annual report on Form 10-K of ATSI
Communications, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing of this annual report (July 31, 2002); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing
the equivalent function):
. all significant deficiencies in the design or operation
of internal controls which would adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
. any fraud, whether or not material, that management or
other employees who have a significant role in the
registrant's internal controls; and
94
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were any significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
By /s/ Stephen M. Wagner
Stephen M. Wagner
Chief Executive Officer
February 3, 2003
95
CERTIFICATION ACCOMPANYING PERIODIC REPORT PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, J. Christopher Cuevas, certify that:
7. I have reviewed this annual report on Form 10-K of ATSI
Communications, Inc.;
8. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
9. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
10. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing of this annual report (July 31, 2002); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
11. The registrant's certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing
the equivalent function):
. all significant deficiencies in the design or operation of
internal controls which would adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
96
. any fraud, whether or not material, that management or other
employees who have a significant role in the registrant's
internal controls; and
12. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were any significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
By /s/ J. Christopher Cuevas
J. Christopher Cuevas
Chief Financial Officer
February 3, 2003
97-----------------
85