--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QA/2
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2003
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-15687
ATSI COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-2849995
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8600 WURZBACH ROAD, SUITE 700W
SAN ANTONIO, TEXAS 78240
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(210) 614-7240
(REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes No X
--- ---
--------------------------------------------------------------------------------
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK AT
DECEMBER 31, 2003 WAS 103,638,690
================================================================================
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-QA
FOR THE QUARTER ENDED APRIL 30, 2003
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of July 31, 2002 and April 30, 2003 3
Consolidated Statements of Operations for the Three and Nine Months Ended April 30, 2002
and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended
April 30, 2002 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the Nine Months Ended April 30, 2002
and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . 24
Item 4. Control and procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share information)
July 31, April 30,
2002 2003
---------- ------------
(unaudited)
ASSETS
------
CURRENT ASSETS:
Cash $ 27 $ 381
Accounts receivable, net of allowance of $198 and $189, respectively 1,082 134
Inventory 59 29
Prepaid & Other current assets 634 500
---------- ------------
Total current assets 1,802 1,044
---------- ------------
PROPERTY AND EQUIPMENT 19,901 19,079
Less - Accumulated depreciation and amortization (14,785) (15,532)
---------- ------------
Net property and equipment 5,116 3,547
---------- ------------
OTHER ASSETS, net
Goodwill, net 1,393 1,300
Concession License, net 2,000 1,944
Other 146 102
---------- ------------
Total assets $ 10,457 $ 7,937
========== ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable 7,523 11,097
Accrued liabilities 2,657 4,125
Note payable 1,473 1,470
Current portion of obligations under capital leases 3,207 2,810
Deferred revenue 111 -
---------- ------------
Total current liabilities 14,971 19,502
---------- ------------
LONG-TERM LIABILITIES:
Obligations under capital leases, less current portion 67 -
Advance Payables 275 275
Other 75 -
---------- ------------
Total long-term liabilities 417 275
---------- ------------
COMMITMENTS AND CONTINGENCIES - -
REDEEMABLE PREFERRED STOCK:
Series D Cumulative Preferred Stock, 3000 shares authorized, 742 shares issued and
outstanding. 765 798
Series E Cumulative Preferred Stock, 10,000 shares authorized, 1,455 shares issued and
outstanding. 1,415 1,192
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $0.001 par value, 10,000,000 shares authorized,
Series A Cumulative Convertible Preferred Stock, 50,000 shares authorized, 4,370 shares
issued and outstanding. - -
Series F Cumulative Convertible Preferred Stock, 10,000 shares authorized, 8,510 shares
issued and outstanding. - -
Series G Cumulative Convertible Preferred Stock, 42,000 shares authorized, 6,500 shares
issued and outstanding. - -
Common stock, $0.001, 200,000,000 shares authorized, 94,790,855 issued and outstanding at
July 31, 2002, 103,638,690 issued and outstanding at April 30, 2003 95 104
Additional paid in capital 59,891 60,176
Accumulated deficit (67,493) (75,174)
Warrants Outstanding 1,031 1,031
Other Comprehensive Loss (636) 33
---------- ------------
Total stockholders' deficit (7,112) (13,830)
---------- ------------
Total liabilities and stockholders' deficit $ 10,457 $ 7,937
========== ============
The accompanying notes are an integral part of these consolidated financial statements.
3
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
Three months ended April 30, Nine months ended April 30,
---------------------------------- ---------------------------------
2002 2003 2002 2003
---------------- ---------------- ---------------- ---------------
OPERATING REVENUES:
Services
Carrier services $ 10,758 $ 0 $ 30,784 $ 6,506
Network services 510 70 1,787 402
Retail Services 1,983 1,147 5,640 4,138
---------------- ---------------- ---------------- ---------------
Total operating revenues 13,251 1,217 38,211 11,046
OPERATING EXPENSES:
Cost of services 11,314 696 31,602 8,479
Selling, general and administration 2,994 1,082 8,919 6,786
Impairment expense - - - 88
Bad debt expense 8 93 72 106
Depreciation and Amortization 1,067 401 3,073 1,721
---------------- ---------------- ---------------- ---------------
Total operating expenses 15,383 2,272 43,666 17,180
---------------- ---------------- ---------------- ---------------
OPERATING LOSS (2,132) (1,055) (5,455) (6,134)
OTHER INCOME (EXPENSE):
Other income (expense), net (101) (2) (154) (708)
Interest expense (514) (280) (1,597) (766)
---------------- ---------------- ---------------- ---------------
Total other income (expense) (615) (282) (1,751) (1,474)
LOSS FROM CONTINUING
OPERATIONS BEFORE INCOME TAX (2,747) (1,337) (7,206) (7,608)
INCOME TAX BENEFIT (EXPENSE) 918 (24) 862 (74)
---------------- ---------------- ---------------- ---------------
NET LOSS FROM CONTINUING
OPERATIONS (1,829) (1,361) (6,344) (7,682)
NET LOSS FROM DISCONTINUED
OPERATIONS (561) - (537) -
---------------- ---------------- ---------------- ---------------
NET LOSS (2,390) (1,361) (6,881) (7,682)
LESS: PREFERRED DIVIDENDS (96) (91) (373) (277)
---------------- ---------------- ---------------- ---------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS ($2,486) ($1,452) (7,254) ($7,959)
================ ================ ================ ===============
BASIC AND DILUTED LOSS PER SHARE ($0.03) ($0.01) ($0.09) ($0.08)
================ ================ ================ ===============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 91,486 103,639 84,271 101,136
================ ================ ================ ===============
The accompanying notes are an integral part of these consolidated financial statements.
4
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(unaudited)
For the three months ended April 30, For the nine months ended April 30,
---------------------------------------- ---------------------------------------
2002 2003 2002 2003
------------------ -------------------- ------------------ -------------------
Net loss to common stockholders
Other comprehensive loss, net of tax: ($2,486) ($1,452) ($7,255) ($7,959)
Foreign currency translation adjustment 30 (134) (14) 669
------------------ -------------------- ------------------ -------------------
Comprehensive loss to common stockholders ($2,456) ($1,586) ($7,269) ($7,290)
================== ==================== ================== ===================
The accompanying notes are an integral part of these consolidated financial statements.
5
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
Nine months ended April 30,
---------------------------------
2002 2003
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($6,881) ($7,682)
Adjustments to reconcile net income to net cash used in
operating activities-
Impairment loss - 88
Depreciation and amortization 3,494 1,721
Loss on disposal of property & equipment - 33
Deferred compensation 12 -
Minority Interest (242) -
Foreign currency loss - 656
Provision for losses on accounts receivable 106 106
Changes in operating assets and liabilities:
(Increase) Decrease in accounts receivable (140) 783
Decrease in prepaid expenses and other 210 440
Increase in accounts payable 3,774 3,355
Increase in accrued liabilities 1,284 1,459
Increase (Decrease) in deferred revenue 43 (108)
---------------- ---------------
Net cash provided by operating activities 1,660 851
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment (854) (328)
---------------- ---------------
Net cash used in investing activities (854) (328)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 11 25
Payments on debt (65) -
Capital Lease payments (510) (87)
Payment of expenses related to the issuance of preferred stock (20) (12)
Proceeds from issuance of common stock, net
of issuance costs 180 (95)
---------------- ---------------
Net cash used in financing activities (404) (169)
---------------- ---------------
NET INCREASE (DECREASE) IN CASH 402 354
CASH AND CASH EQUIVALENTS, beginning of period 103 27
---------------- ---------------
---------------- ---------------
TOTAL CASH AND CASH EQUIVALENTS 505 381
---------------- ---------------
CASH AND CASH EQUIVALENTS- Allocated to discontinued operations (359) -
CASH AND CASH EQUIVALENTS, end of period $ 146 $ 381
================ ===============
The accompanying notes are an integral part of these consolidated financial statements.
6
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements, which include
the following subsidiaries: ATSI-Delaware, ATSI-Canada, ATSI-Texas, ATSI-Mexico,
ATSICOM, Computel, ATSI de CentroAmerica, TeleSpan and SINFRA have been prepared
in accordance with Rule 10-01 of Regulation S-X, "Interim Financial Statements,"
and accordingly do not include all information and footnotes required under
accounting principles generally accepted in the U.S. for complete financial
statements. In the opinion of management, these interim financial statements
contain all adjustments, without audit, necessary to present fairly the
consolidated financial position of ATSI and its subsidiaries ("ATSI" or "the
Company") as of July 31, 2002 and April 30, 2003, the results of their
operations for the three and nine months ended April 30, 2002 and 2003,
comprehensive loss for the three and nine months ended April 30, 2002 and 2003,
and cash flows for the three and nine months ended April 30, 2002 and 2003. All
adjustments are of a normal recurring nature. All significant intercompany
balances and transactions have been eliminated in consolidation. It is
recommended that these interim consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes thereto for
the year ended July 31, 2002 included in the Company's annual report on Form
10-K filed with the SEC on February 3, 2003. Certain prior period amounts have
been reclassified for comparative purposes. The results of operations for any
interim period are not necessarily indicative of the results to be expected for
the full year.
2. 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 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:
STOCK -BASED COMPENSATION
(In thousands, except per share amounts)
(unaudited)
For the three months ended April 30, For the nine months ended April 30,
------------------------------------------ -----------------------------------------
2002 2003 2002 2003
------------------ ---------------------- ------------------ ---------------------
Net loss applicable to common
stockholders (2,486) (1,452) (7,254) (7,959)
Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects - - - -
7
Deduct: Total stock based employee
compensation expense determined
under fair value based method for all
Awards, net of related tax effects - (2) (794) (313)
------------------ ---------------------- ------------------ ---------------------
Pro forma net loss (2,486) (1,454) (8,048) (8,272)
================== ====================== ================== =====================
Earnings per share
Basis - as reported $ (0.03) $ (0.01) $ (0.09) $ (0.08)
================== ====================== ================== =====================
Basis - pro forma $ (0.03) $ (0.01) $ (0.10) $ (0.08)
================== ====================== ================== =====================
3. BASIC AND DILUTED LOSS PER SHARE
Basic earnings or loss per share is calculated using the weighted average
number of common shares outstanding during each period reported. The
computation of diluted earnings or loss per share is based on the weighted
average number of shares outstanding during the year plus common stock
equivalents that would result from the conversion of convertible debt or equity
securities into common stock and stock options and warrants outstanding using
the treasury stock method and the average market price per share during the
period. If the effect on earnings or loss per share resulting from the common
stock equivalents is antidilutive, such common stock equivalents are excluded
from the calculation. Preferred stock convertible into 42,990,537 and
11,377,000 shares of common stock, were outstanding as of April 30, 2003 and
2002, respectively. Additionally, options and warrants to purchase 24,000 shares
of common stock, were outstanding as of April 30, 2002, none were outstanding as
of April 30, 2003. For the periods ended April 30, 2003 and 2002 these common
stock equivalents were excluded from the computation of diluted loss per share
because their effect was antidilutive.
4. SOURCES OF REVENUE, DIRECT COST AND REVENUE RECOGNITION
Sources of revenue:
-------------------
Carrier Services: We provide termination services to U.S and Latin
American telecommunications companies who lack transmission facilities, require
additional capacity or do not have the regulatory licenses to terminate traffic
in Mexico. Typically these telecommunications companies offer their services to
the public for local and international long distance services. In December 2002,
we were forced to idle our carrier network capacity and have therefore been
unable to generate revenue from carrier services since that date.
Network Services: We offer private communication links for multi-national
and Latin American corporations or enterprise customers who use a high volume of
telecommunications services to their U.S. offices or businesses and need greater
dependability than is available through public networks. These services include
data, voice and fax transmission as well as Internet services between the
customers' multiple international offices and branches. We do not have any
current network services customers, however we currently provide network
management services to Latin Group Ventures L.L.C. (LGV),a non-related party.
Under the agreement with LGV we manage one of their network services customers.
This management agreement is for twelve months and initiated on July 1, 2003.
Under the
8
agreement we will generate approximately $6,500 per month in management fees
during fiscal 2004.
Retail Services: The retail services consisted of communication centers
and public pay telephones. The communication centers or call centers consist of
retail centers strategically located in Mexico to serve the travelers and the
large Mexican population who typically do not have personal or home telephones.
At these communication centers we previously offered local, domestic and
international long distance and enhanced services, such as prepaid calling cards
and Internet services. As of July 2, 2003, we sold certain assets of our
principal operating subsidiaries and no longer own or operate the communications
centers. Thus, in the near future, management does not expect any revenue to be
generated from this source.
Direct Cost:
------------
Carrier Services: Under these services the company incurs termination
charges. These charges are related to the fees that we are charged by our
carriers / vendors for the termination of phone calls into their infrastructure
and network, primarily in Mexico.
Network Services: Under the network services, the company incurs satellite
and fiber optic charges. The satellite and fiber optic charges are incurred as
part of the connection links between the customers' different remote locations
and sites to transmit data, voice and Internet services.
Retail Services: Under the retail services, the company incurred, fixed
cost, local and long distance cost. The fixed cost / rent is the cost charged by
the local exchange carrier for the access to the phone lines, the cost is based
on the number of telephone lines at each of the communication centers. The local
and long distance cost is based on the per minute basis charged by the carrier /
vendor to transport the telephone calls between the destinations points. The
rates per minute varied based on the location of the telephone call. As of July
2, 2003, we sold certain assets of our principal operating subsidiaries and no
longer own or operate the communications centers.
Revenue recognition:
--------------------
Carrier Services: We recognize revenue from our carrier services in the
form of service commencement fees and carrier service fees. Service
commencement fees are charged for the right to connect to the Company's network
and are recognized and collected at the time a customer is connected to the
Company's network and service is commenced. Carrier service fees are based on
the volume of communications traffic over our network and are recognized as they
are generated.
Network Service: We recognize revenue from our network services in the
form of service commencement fees and network capacity fees. Service
commencement fees are charged for the right to connect to the Company's network
and are recognized and collected at the time a customer is connected to the
Company's network and service is commenced. Network capacity fees are charged
for providing network capacity over a period of time and are recognized as they
are earned.
Retail Services: Retail services revenue is recognized at the point of
sale, when the services are provided and rendered to the end-user.
5. NOTES PAYABLES
Notes Payable are comprised of the following (in thousands):
9
July 31, April 30,
2002 2003
--------- ----------
Notes payable to taxing entity, see terms below. $ 480 $ 477
Note payable to a related party, see terms below. 250 250
Note payable to a company, see terms below. 386 386
Note payable to individuals, see terms below 357 357
--------- ----------
Total current notes payable $ 1,473 $ 1,470
========= ==========
The Company, through its acquisition of Computel, assumed notes payables to
a taxing entity for various past due taxes. The notes have interest rates
ranging from 8% to 15%, with scheduled monthly principal and interest payments
of approximately $18,121. The notes were originally scheduled to mature between
July 1999 and July 2001 and are collateralized by the assets of Computel. The
taxing entities can pursue foreclosure on the notes against the assets of
Computel, which consist of a telecommunications concession license to operate
coin operated public telephones and retail communication centers throughout
Mexico and the equipments utilized in the operations of the retail
communications centers, such as computers, faxes and billing equipment. The
Company continues to work with the taxing entities to extent the term of this
note payable, but as of filing this quarterly report no payments have been made
and we are in default of the agreement.
In March 2001, the Company entered into a note payable with a related
party, a director of ATSI, in the amount of $250,000, for a period of 90 days,
renewable at the note holder's option. The note, which accrues interest at a
rate of 9.75% per annum payable monthly until the note is paid in full, was
extended throughout fiscal 2001 and 2002. During the first nine months of
fiscal 2003 we did not make any principal and interest payments, and as a result
we are in default on this note. The note is collateralized by approximately 357,
000 shares of the Company's common stock. As of the date of this quarterly
report the holder has not demanded nor requested redemption of the collateral.
The Company intends to seek additional extensions of the note but there can be
no assurance that favorable terms will be agreed to or that an agreement will be
reached with the note holder.
In May 2002, the Company entered into a note payable with a vendor for
equipment it had originally purchased commencing in June 2000 in the amount of
$386,362. The note, which accrues interest beginning July 15, 2002 at the rate
of 18%, matured October 15, 2002. As of the date of this quarterly filing the
Company has not made any payments and is in default of the agreement. This note
is collateralized by the Nortel DMS 300/250 International Gateway Switch in our
Dallas location and other telecommunication equipment owned by our subsidiary.
Since February 4, 2003, the note has been subject to administration in the
bankruptcy of our subsidiary. In May 15, 2003 the bankruptcy court lifted the
stay on the execution of the note and the creditor took possession of the
security and released the company of the related liability.
In November 2001, the Company entered into a note payable, in the amount of
$357,000 with the former owners of the concession license it purchased in July
2002. The note called for principal payments of $51,000 per month plus accrued
interest. The note, which accrues interest at the rate of prime plus 2%, matured
July 19, 2002. On October 1, 2002, the note was amended in its entirety with a
revised maturity date of February 2006 and an amended interest rate of 7.75%.
The revised note calls for equal monthly payments of principal and interest in
the amount of $8,925. As of the date of this filing,
10
no monthly payments have been made and the note is in technical default and has
been classified as current. This note is collateralized by the rights to the
concession license. We are in negotiations with the note holder to satisfy this
note through the issuance of the Company's common stock but there can be no
assurance that any agreement will be reached with the note holder. Additionally,
there can be no assurance that if such agreement is reached the terms of the
agreement will be favorable for the Company.
6. GOING CONCERN
The Company has incurred substantial cumulative net losses, working capital
deficits, and negative cash flows since the Company's inception. Our two primary
operating subsidiaries filed for protection under the U.S. Bankruptcy Code and
are currently being liquidated. In addition, the auditor's opinion on the
consolidated financial statements as of July 31, 2002, calls attention to
substantial doubt about the Company's ability to continue as a going concern.
For the period from December 17, 1993 to April 30, 2003, the Company has
incurred cumulative net losses of approximately $75.2 million. Further, the
Company has a working capital deficit of approximately $18.5 million at April
30, 2003. We will continue to seek equity funding from our previous funding
sources to maintain the Company in operations and support our ongoing
operations. However there can be no assurance the we will be able to obtain the
required equity funding or, if the resources are made available to us, that they
will be sufficient to support our ongoing operations until such time as we are
able to continuously generate earnings from operations.
In addition, there can be no assurance that we will be able to achieve
future revenue levels sufficient to support 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.
We will require additional financial resources in the near term and could
require additional financial resources in the long-term to support our ongoing
operations. We plan on securing funds through equity offerings and entering into
lease or long-term debt financing agreements to raise capital. There can be no
assurances, however, that such equity offerings or other financing arrangements
will actually be consummated or that such funds, if received, will be sufficient
to support existing operations until revenue levels are achieved sufficient to
generate income from operations. If we are not successful in completing
additional equity offerings or entering into other financial arrangements, or if
the funds raised in such stock offerings or other financial arrangements are not
adequate to support us until a 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.
7. DISCONTINUED OPERATIONS
On June 12, 2002 we discontinued our e-commerce operations through the sale
of our majority-owned subsidiary, GlobalSCAPE, Inc. for approximately $2.25
million.
Income statement presentation for the nine months ended April 30, 2002
reflects the elimination of e-commerce revenues and the expenses of GlobalSCAPE
as follows: (in thousands).
11
FOR THE NINE MONTHS ENDED APRIL 30,2002
E-commerce revenues $3,809
Costs and expenses $3,598
Net income before taxes & minority interest $ 211
Net loss before minority interest ($736)
Net loss ($537)
8. SEGMENT REPORTING
In an attempt to identify our reportable operating segments, we considered
a number of factors or criteria. These criteria included segmenting based upon
geographic boundaries only, segmenting based on the products and services
provided, segmenting based on legal entity and segmenting by business focus.
Based on these criteria we have determined that we have two reportable operating
segments: (1) U.S. Telco and (2) Mexico Telco. We believe that our U.S. and
Mexican subsidiaries should be separate segments even though many of the
products are borderless. Both the U.S. Telco and Mexico Telco segments include
revenues generated from Retail Services and Network Services. Our Carrier
Services revenues, generated as a part of our U.S. Telco segment, are the only
revenues not currently generated by both the U.S. Telco and Mexico Telco
segments. We have included the operations of ATSI-Canada, ATSI-Delaware and all
businesses falling below the reporting threshold in the "Other" segment. The
"Other" segment also includes intercompany eliminations.
During the quarter ended April 2003 and 2002, U.S. Telco generated net
losses as a percentage of total consolidated net losses to common shareholders
of approximately 50% and 27%, respectively. Additionally, U.S. Telco's total
assets for the same period as a percentage of total consolidated assets were 47%
and 41%, respectively. Mexico Telco net losses for the quarter ended April 2003
and 2002 as a percentage of total consolidated net losses to common shareholders
were 26% and 68%, respectively. And Mexico Telco total assets as a percentage of
total consolidated assets were 50% and 59%, respectively.
IN THOUSANDS
For the three months ended For the nine months ended
April 30, April 30, April 30, April 30,
2002 2003 2002 2003
U.S. TELCO
----------------------------------------------------------------------------------------------------
External revenues $ 11,113 $ 3 $ 32,093 $ 6,702
Intercompany revenues $ 790 $ 0 $ 1,089 $ 330
--------------- -------------- -------------- --------------
Total revenues $ 11,903 $ 3 $ 33,182 $ 7,032
=============== ============== ============== ==============
Operating loss ($1,436) ($518) ($3,088) ($4,080)
Net loss to common shareholders ($529) ($694) ($2,302) ($4,686)
Total assets $ 7,802 $ 3,975 $ 7,802 $ 3,975
MEXICO TELCO
----------------------------------------------------------------------------------------------------
External revenues $ 2,138 $ 1,214 $ 6,118 $ 4,344
Intercompany revenues $ 533 $ 447 $ 1,473 $ 1,408
--------------- -------------- -------------- --------------
Total revenues $ 2,671 $ 1,661 $ 7,591 $ 5,752
=============== ============== ============== ==============
Operating loss ($696) ($293) ($2,367) ($1,764)
Net loss to common shareholders ($1,300) ($371) ($3,999) ($2,653)
Total assets $ 11,183 $ 3,947 $ 11,183 $ 3,947
OTHER
----------------------------------------------------------------------------------------------------
External revenues - - - -
Intercompany revenues ($1,323) ($447) ($2,562) ($1,738)
--------------- -------------- -------------- --------------
Total revenues ($1,323) ($447) ($2,562) ($1,738)
=============== ============== ============== ==============
12
Operating loss $ 0 ($244) $ 0 ($290)
Net loss to common shareholders ($96) ($387) ($416) ($620)
Total assets $ 58 $ 15 $ 58 $ 15
TOTAL
----------------------------------------------------------------------------------------------------
External revenues $ 13,251 $ 1,217 $ 38,211 $ 11,046
Intercompany revenues - - - -
--------------- -------------- -------------- --------------
Total revenues $ 13,251 $ 1,217 $ 38,211 $ 11,046
=============== ============== ============== ==============
Depreciation and Amortization ($1,067) ($401) ($3,073) ($1,721)
Operating loss ($2,132) ($1,055) ($5,455) ($6,134)
Net loss (Excluding discontinued
Operations) (1,829) (1,361) (6,344) (7,682)
Net loss to common shareholders
(Excluding discontinued operations) ($1,925) ($1,452) ($6,717) ($7,959)
Total assets $ 19,043 $ 7,937 $ 19,043 $ 7,937
9. SUBSEQUENT EVENTS
On May 14, 2003 the bankruptcy court in the bankruptcy of American
Telesource International, Inc. (ATSI-Texas) and Telespan, Inc. (Telespan)
converted the pending Chapter 11 case to a Chapter 7 case. The two bankrupt
subsidiaries were our two primary operating companies and they have ceased
operations and are in the process of liquidation. ATSI Communications, Inc., the
Delaware incorporated holding company, was not included in the bankruptcy
filings.
On June 16, 2003 we announced that Raymond G. Romero, Interim CEO and J.
Christopher Cuevas, Interim CFO both resigned to pursue other business
opportunities. Additionally, we announced that Arthur L. Smith was appointed as
CEO and Director and Antonio Estrada as corporate controller.
On May 22, 2003 we entered into a Share Purchase Agreement with
Telemarketing de Mexico, S.A. de C.V. ("Telemarketing') whereby we agreed to
sell Telemarketing 51% of our Mexican subsidiary, ATSI Comunicaciones, S.A. de
C.V. ("ATISCOM"). The agreement provides that there will be an initial payment
of $194,000 plus payment of approximately $200,000 of ATSICOM's liabilities and
the remaining purchase price of $747,000 will be paid as follows:
- Beginning in May 2003 Telemarketing will pay ATSI $20,750 per month for 12
months.
- Additionally, beginning in May 2004, Telemarketing will pay ATSI $20,750
per month for the next 24 months, contingent on ATSI generating 20,750,000
minutes of monthly traffic through ATSICOM's network. In the event the
company does not reach the above-mentioned volume of monthly minutes, the
monthly payment will be adjusted based on the same percentage of the
shortfall in minutes, until Telemarketing pays the total purchase price. On
the other hand, if ATSI exceeds the volume of monthly traffic,
Telemarketing can make additional payments, without penalty.
On July 02, 2003, the U.S. Bankruptcy Court approved the sale of
ATSI-Mexico and SINFRA's shares of stock to Latin Group Ventures, L.L.C. (LGV).
Under the purchase agreement LGV acquired all the communication centers and
assumed all related liabilities. In addition, under the agreement, LGV acquired
the Comercializadora License owned by ATSI-Mexico and the Teleport and Satellite
Network License owned by SINFRA. The Chapter 7 Bankruptcy Trustee received all
the proceeds from the sale of these entities.
13
10. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142, which supersedes APB Option No. 17, "Intangible Assets"
provides financial accounting and reporting for acquired goodwill and other
intangible assets. SFAS 142 changes the accounting for goodwill and other
intangible assets with indefinite lives from an amortization method to an
impairment approach. The Company has adopted SFAS 142 as of August 1, 2002.
Accordingly, the concession license, will continue to be amortized over 26
years, the remaining life of the concession license. The amortization of
goodwill ceased on August 1, 2002. The Company's has determined that no further
impairment is necessary.
The Financial Accounting Standards Board issued Statement No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" in October
2001. SFAS 144 addresses financial accounting and reporting for the impairment
or disposal of long-lived assets, and is effective for fiscal years beginning
after December 15, 2001. The Statement also extends the reporting requirements
to report separately as discontinued operations, components of an entity that
have either been disposed of or classified as held for sale. The adoption of
SFAS 144 has not had a material effect on the consolidated financial statements
of the Company.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity.
(Including Certain Costs Incurred in a Restructuring)." The provisions of SFAS
146 are effective for exit or disposal activities that are initiated after
December 31, 2002. The adoption of SFAS 146 has not had a material effect on the
consolidated financial statements of the Company.
In December 2002, the FASB issued SFAS No. 148 (SFAS 148), "Accounting for
Stock-Based Compensation-Transition and Disclosure", amending FASB Statement No.
123 (SFAS 123), "Accounting for Stock-Based Compensation. SFAS 148 provides two
additional alternative transition methods for recognizing an entity's voluntary
decision to change its method of accounting for stock-based employee
compensation to the fair-value method. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 so that entities will have to (1) make
more-prominent disclosures regarding the pro forma effects of using the
fair-value method of accounting for stock-based compensation, (2) present those
disclosures in a more accessible format in the footnotes to the annual financial
statements, and (3) include those disclosures in interim financial statements.
SFAS 148's transition guidance and provisions for annual disclosures are
effective for fiscal years ending after December 15, 2002; earlier application
is permitted. The adoption of SFAS 148 required additional disclosure in the
Company's interim consolidated financial statements. See Note 2 for application
of SFAS 123.
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
14
beginning after June 15, 2003. The Company does not expect the adoption of
Interpretation No. 46 to have a material impact on the Company's results of
operations or financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 provides for certain
changes in the accounting treatment of derivative contracts. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003, except for
certain provisions that relate to SFAS No. 133 Implementation Issues that have
been effective for fiscal quarters that began prior to June 15, 2003, which
should continue to be applied in accordance with their respective effective
dates. The guidance should be applied prospectively. Management anticipates that
the adoption of SFAS No. 149 will not have a material impact on the Company's
consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This new
statement changes the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity. It requires that those
instruments be classified as liabilities in balance sheets. Most of the guidance
in SFAS 150 is effective for all financial instruments entered into or modified
after May 31, 2003, and otherwise is effective as of August 1, 2003. Management
anticipates that the adoption of SFAS No. 150 will not have a material impact on
the Company's consolidated financial statements.
The Emerging Issues Task Force issued EITF No. 00-21, Revenue Arrangements
with Multiple Deliverables addressing the allocation of revenue among products
and services in bundled sales arrangements. EITF 00-21 is effective for
arrangements entered into in fiscal periods after June 15, 2003. The Company
does not expect the adoption of EITF No. 00-21 to have a material impact on the
Company's future results of operations or financial position.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SPECIAL NOTE: This Quarterly Report on Form 10-QA contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities and Exchange Act of 1934, as amended.
"Forward looking statements" are those statements that describe management's
beliefs and expectations about the future. We have identified forward-looking
statements by using words such as "anticipate," "believe," "could," "estimate,"
"may," "expect," and "intend." Although we believe these expectations are
reasonable, our operations involve a number of risks and uncertainties,
including those described in the Additional Risk Factors section of the Annual
Report Form 10-K and other documents filed with the Securities and Exchange
Commission. Therefore, these types of statements may prove to be incorrect.
The following is a discussion of the consolidated financial condition and
results of operations of ATSI for the three and nine months ended April 30, 2002
and 2003. It should be read in conjunction with our Consolidated Financial
Statements, the Notes thereto and the other financial information included in
the annual report on Form 10-K filed with the SEC on February 3, 2003.
SOURCES OF REVENUE AND DIRECT COST
Sources of revenue:
-------------------
Carrier Services: We provide termination services to U.S and Latin
American telecommunications companies who lack transmission facilities, require
additional capacity or do not have the regulatory licenses to terminate traffic
in Mexico. Typically these telecommunications companies offer their services to
the public for local and international long distance services. In
15
December 2002, we were forced to idle our carrier network capacity and have
therefore been unable to generate revenue from carrier services since that date.
In May 2003 we sold 51% of ATSI Comunicaciones, S.A. de C.V. (ATSICOM) to
Telemarketing de Mexico, S.A. de C.V. (Telemarketing). We believe that our
agreement with Telemarketingand its owner, Dialmex, LLC (Dialmex) will allow us
to recommence providing carrier services via the VoIP network owned by Dialmex.
Network Services: We offer private communication links for multi-national
and Latin American corporations or enterprise customers who use a high volume of
telecommunications services to their U.S. offices or businesses and need greater
dependability than is available through public networks. These services include
data, voice and fax transmission as well as Internet services between the
customers' multiple international offices and branches. We do not have any
present network services customers. Two of our subsidiaries, American
Telesource International, Inc. (ATSI-Texas) and Telespan, Inc. (Telespan), filed
for protection under Chapter 11 of the U.S. Bankruptcy Code in February 2003 and
ceased operations in May 2003. Under agreement for the sale of the certain
assets of ATSI-Texas and Telespan, we are providing network management services
to Latin Group Ventures L.L.C. (LVG), a non-related party. Under the agreement
we manage one of their network services customers. This management agreement is
for twelve months and initiated on July 1, 2003. Under the agreement we will
generate approximately $6,500 per month in management fees during fiscal 2004.
Retail Services: The retail services consisted of communication centers
and public pay telephones. The communication centers or call centers consist of
retail centers strategically located in Mexico to serve the travelers and the
large Mexican population who typically do not have personal or home telephones.
At these communication centers we previously offered local, domestic and
international long distance and enhanced services, such as prepaid calling cards
and Internet services. As of July 2, 2003, we sold certain assets of our two
principal operating subsidiaries and no longer own or operate the communications
centers. Thus, in the near future, management does not expect any revenue to be
generated from this source.
Direct Cost:
------------
Carrier Services: Under these services the company incurs termination
charges. These charges are related to the fees that we are charged by our
carriers / vendors for the termination of phone calls into their infrastructure
and network, primarily in Mexico.
Network Services: Under the network services, the company incurs satellite
and fiber optic charges. The satellite and fiber optic charges are incurred as
part of the connection links between the customers' different remote locations
and sites to transmit data, voice and Internet services.
Retail Services: Under the retail services, the company incurred, fixed
cost, local and long distance cost. The fixed cost / rent is the cost charged by
the local exchange carrier for the access to the phone lines and is based on the
number of telephone lines at each of the communication centers. The local and
long distance cost is based on the per minute basis charged by the carrier /
vendor to transport the telephone calls between the destinations points. The
rates per minute varies based on the location of the telephone call. As of July
2, 2003, we sold certain assets of our principal operating subsidiaries and no
longer own or operate the communications centers
16
GENERAL
We have had operating losses for almost every quarter since we began
operations in 1994. Due to such prior losses, the anticipated continuation of
such losses for the foreseeable future, and our substantial working capital
deficit, the auditor's opinion on our financial statements as of July 31, 2002
calls attention to substantial doubts about our ability to continue as a going
concern. This means that there is substantial doubt that we will be able to
continue in business through the end of our next fiscal year. We have
experienced difficulty in paying our vendors and lenders on time in the past,
and, as a result, in December 2002 our carrier network capacity was idled and
the majority of the employees from the US Telco segment were terminated. This
means that we were not be able to generate revenues from carrier services during
the second half of the fiscal year ended July 31, 2003. The loss of revenue
from idling the carrier services network was offset by significant savings from
the reductions in payments to third parties for services, personnel cost and
other operating cost related to operating a network .
During the quarter management continued to pursue different venues for
funding. Unfortunately during the last several years the telecommunications
industry has experienced a great deal of instability. As a result of not being
able to raise the necessary capital to re-start our network, two of our
subsidiaries, ATSI-Texas and Telespan, filed for protection under Chapter 11 of
the U.S. Bankruptcy Code on February 4, 2003 and February 18, 2003 respectively.
The court ordered joint administration of both cases on April 9, 2003 and
subsequently on May 14, 2003 the court converted the cases to a Chapter 7. The
two bankrupt subsidiaries were our two primary operating companies and they have
ceased operations. These bankruptcies did not include the reporting entity. As
a result of the Chapter 7 bankruptcy of our two main operating subsidiaries
combined with the termination of the majority of our US Telco employees and the
idling of the carrier network capacity, our ability to generate any revenue from
our historical revenue generation sources was severely limited.
On May 22, 2003 we entered into a Share Purchase Agreement with
Telemarketing whereby we sold Telemarketing 51% of our Mexican subsidiary,
ATSICOM. ATSICOM holds a 30-year long distance concession in Mexico. The
principal owners of Telemarketing are also the principal owners of Dialmex, a
U.S. based international telecommunications carrierUnder the agreement with
Telemarketing we will jointly enhance the existing data network operated by
Dialmex to permit the network to carry voice transmissions using the same system
and software as is used to transmit data. This system is known as Voice over
Internet Protocol or "VoIP" and can transmit voice transmissions at much lower
costs then our historical network. We believe that this will lower the network
cost and allowed the companies to be more competitive and attract more
customers. Additionally, ATSICOM, Telemarketing and Dialmex will combine their
respective interconnection agreements with the various Mexican
telecommunications companies to obtain greater market leverage and higher call
volumes, thus decreasing the cost of providing such services. Through our
interconnection agreement with Telefonos de Mexico S.A de C.V. (Telmex) we will
have access to the only nationwide voice and data network in Mexico with more
than 14.1 million phone lines in over 105,000 communities throughout Mexico.
Our interconnection agreement with Bestel S.A de C.V (Bestel) will allow us to
have access to their fiber optic network that extends over 6,356 kilometers with
points of presence in 19 Mexican metropolitan areas. Under these agreements our
cost of providing telecommunication services will be based on a per minute rate
and the volume of minutes transported through their respective networks.
On July 2, 2003, the U.S. Bankruptcy Court overseeing the Chapter 7 cases
for ATSI Texas and TeleSpan, Inc. approved the sale of two of subsidiaries,
American TeleSource International de Mexico, S.A. de C.V. (ATSI-Mexico), a
Mexican corporation wholly owned by ATSI Texas and Servicios de Infraestructura,
S.A. de C.V (SINFRA), a Mexican corporation wholly owned by TeleSpan, Inc. to
17
Latingroup Ventures, L.L.C. (LGV), a non-related party. Under the purchase
agreement, LGV acquired all the communication centers operated by the Company
and assumed all related liabilities of ATSI-Mexico and SINFRA. Additionally,
under the agreement, LGV acquired the Comercializadora License owned by
ATSI-Mexico and the Teleport and Satellite Network License owned by SINFRA.
Our limited cash flow, historical losses from operations, and the
bankruptcies of our two main operating subsidiaries have caused substantial
barriers to growth and the continuation of our business strategy. We believe
that the sale of 51% of ATSICOM to Telemarketing provides us with working
capital while the agreement with Dialmex will provide us with access to a
reliable and flexible state-of-the-art VoIP network without incurring the
expense of operating such a network. We believe that the agreements with
Telemarketing and Dialmex will allow the company to restart its carrier network
services during the first quarter of Fiscal year 2004. Even if we are able to
restart our carrier services during the fiscal year 2004 we will be limited in
the volume of revenue and the resources available for the Company to succeed. We
cannot predict the revenues trends or the reaction of market that we currently
compete with other carriers. We believe that currently we require operating
revenue of approximately $2,400,000 to reach break even and external financing
in the amount of approximately $450,000 to continue in operations during the
following fiscal year. There can be no assurance that if we restart our carrier
services that the cash inflows from operations, the monthly cash payments from
the sale to Telemarketing and the external financing if acquired will be
sufficient to cover our monthly operating expenses, thus we might be forced to
terminate all operations and liquate the Company.
OUR HISTORY OF OPERATING LOSSES AND DEFICIENCIES IN CASH FLOW
We have incurred operating losses and deficiencies in operating cash flows
in each year since our inception and expect our losses to continue through July
31, 2003. Our operating losses were $15,777,077, $9,717,287 and $11,545,493 for
the years ending July 31, 2002, 2001 and 2000, respectively. We had an operating
loss of $1,360,549, for the quarter ended April 30, 2003 and $7,681,800 for the
nine months ended April 30, 2003. Additionally we had a working capital deficit
of $18,458,286, at April 30, 2003.
RESULTS OF OPERATIONS
The following table sets forth certain items included in the Company's
results of operations in dollar amounts and as a percentage of total revenues
for the three and nine-month periods ended April 30, 2002 and 2003.
Three months ended April 30, Nine months ended April 30,
---------------------------- ---------------------------
2002 2003 2002 2003
---- ---- ---- ----
(Unaudited)
$ % $ % $ % $ %
--------- ------- --------- ---------- --------- ------- --------- ----------
Operating revenues
------------------
Services
Carrier services $ 10,758 81% $ 0 0% $ 30,784 81% $ 6,506 59%
Network services 510 4% 70 6% 1,787 5% 402 4%
Retail services 1,983 15% 1,147 94% 5,640 15% 4,138 37%
--------- ------- --------- ---------- --------- ------- --------- ----------
Total operating revenues 13,251 100% 1,217 100% 38,211 100% 11,046 100%
18
Cost of services 11,314 85% 696 57% 31,602 83% 8,479 77%
--------- ------- --------- ---------- --------- ------- --------- ----------
Gross Margin 1,937 15% 521 43% 6,609 17% 2,568 23%
Selling, general and
administrative expense 2,994 23% 1,082 89% 8,919 23% 6,786 61%
Impairment loss - 0% 0 0% - 0% 88 1%
Bad debt expense 8 0% 93 8% 72 0% 106 1%
Depreciation and amortization 1,067 8% 401 33% 3,073 8% 1,721 16%
--------- ------- --------- ---------- --------- ------- --------- ----------
Operating loss (2,132) -16% (1,055) -87% (5,455) -14% (6,134) -56%
Other income (expense), net (615) -5% (282) -23% (1,751) -5% (1,474) -13%
--------- ------- --------- ---------- --------- ------- --------- ----------
Net loss from continuing operations
before income tax expense (2,747) -21% (1,337) -110% (7,206) -19% (7,608) -69%
Income tax expense 918 7% (24) -2% 862 2% (74) -1%
--------- ------- --------- ---------- --------- ------- --------- ----------
Net loss from continuing operations (1,829) -14% (1,361) -112% (6,343) -17% (7,682) -70%
Income from discontinued operations (561) -4% - 0% (537) -1% - 0%
Net loss (2,389) -18% (1,361) -112% (6,880) -18% (7,682) -70%
Less: preferred stock dividends (96) -1% (91) -7% (373) -1% (278) -3%
--------- ------- --------- ---------- --------- ------- --------- ----------
Net loss to common shareholders ($2,486) -19% ($1,451) -119% ($7,253) -19% ($7,959) -72%
========= ======= ========= ========== ========= ======= ========= ==========
THREE MONTHS ENDED APRIL 30, 2003 COMPARED TO THREE MONTHS ENDED APRIL 30, 2002
Operating Revenues. Consolidated operating revenues decreased 91% between
periods from $13.3 million for the quarter ended April 30, 2002 to $1.2 million
for the quarter ended April 30, 2003. Revenues from the U.S. Telco segment
decreased 100% from $11,903,000 for the third quarter of 2002 to $3,000 for the
third quarter of 2003 as a result of the inability to restart the Company's
carrier network during the third quarter. Revenues from the Mexico Telco
segment decreased 38% from $2,671,000 for the third quarter of 2002 to
$1,661,000 for the third quarter of 2003 primarily as a result of the reduction
in network customers and closures of retail communication centers.
Carrier services revenues decreased approximately $10.8 million, or 100%
from the quarter ended April 30, 2002 to the quarter ended April 30, 2003. The
Company idled its carrier network and
19
during the quarter ended January 31, 2003 and we were not able to restart this
line of business during the third quarter of fiscal 2003. No carrier services
revenue was generated during the quarter.
Network services revenues continued to decline from the previous period due
to a continued loss of customers. The decline from the previous year's quarter
was approximately 86% or $440,000. Due to our current financial condition, we
do not presently have any network services customers. Certain assets of our
principal operating subsidiaries, including the Comercializadora License owned
by ATSI-Mexico and the Teleport and Satellite Network License owned by SINFRA,
were sold to LGV on July 2, 2003 and we entered a network management agreement
with LGV. Under the agreement with LGV we provide customer service, technical
support and manage the collections process with respect to one of their network
services customers. This management agreement was initiated on July 1, 2003 and
we will generate approximately $6,500 per month in management fees during fiscal
2004.
Retail services revenues decreased approximately $836,000, or 42% from the
quarter ended April 2002 to the quarter ended April 2003. During the quarter we
continue to close down those communication centers that were no longer cost
efficient. The total number of communication centers decrease from 133 during
the quarter ended April 30, 2002 to 90 during the quarter ended April 30, 2003.
As of July 02, 2003, we sold certain assets of our principal operating
subsidiaries and no longer own or operate the communication centers. Thus, in
the near future management does not expect any revenue to be generated from this
source.
Cost of Services. The consolidated cost of services decreased by $10.6
million, or 94% from the quarter ended April 2002 to the quarter ended April
2003. Cost of Service for the U.S. Telco segment decreased by 99% from
approximately $10,380,000 for the quarter ended April 30, 2002 to approximately
$107,000 for the quarter ended April 30, 2003. The decrease in cost of services
in the U.S. Telco segment is a direct result of the decrease in carrier services
revenue and private network revenue during the quarter ended April 30, 2003.
Additionally, in December 2002 we the idled the Company's network and as a
result we only incurred the fixed cost for the period until the services were
completely terminated. The Cost of Service for the Mexico Telco segment
decreased by 37% from approximately $934,000 for the quarter ended April 30,
2002 to approximately $589,000 for the quarter ended April 30, 2003. The
decrease in the cost of service for the Mexico Telco segment is the result of
the reduction of approximately 10 communication centers during the quarter ended
April 30, 2003.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
decreased approximately $1.9 million, or 64% between periods. SG&A allocated to
the U.S. Telco segment decreased 82% from approximately $1,788,000 for the
quarter ended April 30, 2002 to approximately $322,000 for the quarter ended
April 30, 2003. The primary reason for the decrease in SG&A is the reflection of
the termination of all the US Telco employees during the quarter ended January
31, 2003. The SG&A allocated to the Mexico Telco segment decreased 37% from
approximately $1,206,000 for the quarter ended April 30, 2002 to approximately
$761,000 for the quarter ended April 30, 2003. The decrease can be attributed to
reduction of approximately 10 communication centers during the quarter ended
April 30, 2003. As a result we incurred less SG&A in comparison to the same
period for fiscal 2002.
Depreciation and Amortization. Depreciation and amortization decreased by
approximately 62% or $666,000 between periods. The decline is related to the
adoption of SFAS 142 as of August 1, 2002. As a result, there was no
amortization of goodwill during the third quarter of fiscal 2003 compared to a
charge of approximately $90,000 related to the amortization of good will during
the quarter ended April 30, 2002. Additionally, much of our equipment had been
fully depreciated. Depreciation and
20
amortization allocated to the U.S. Telco segment declined by 38% from
approximately $585,000 for the quarter ended April 30, 2002 to approximately
$363,000 for the quarter ended April 30, 2003. The depreciation and
amortization allocated to the Mexico Telco segment declined by 92% from
approximately $482,000 for the quarter ended April 30, 2002 to approximately
$38,000 for the quarter ended April 30, 2003. The primary reason for the
decrease in depreciation and amortization in the Mexico Telco segment can be
attributed to fully amortization of the majority of the equipment from this
segment during fiscal 2002.
Operating Loss. The Company's operating loss decreased approximately $1.1
million or 51% from the quarter ended April 2002 to the quarter ended April
2003. The decrease is primarily due to the ceasing of operations of the carriers
services segment and the termination of the majority of the corporate employees
during the quarter. Operating loss for the U.S. Telco segment decreased by 64%
from $1,436,000 for the quarter ended April 30, 2002 to $518,00 for the quarter
ended April 30, 2003 because of the reduction in third party fees and personnel
costs that were realized when the Company's network was idled. Operating loss
for the Mexico Telco segment decreased by 58% from $696,000 for the quarter
ended April 30, 2002 to $293,000 for the quarter ended April 30, 2003.
Other Income (expense). Other expense decreased approximately $333,000
between quarters from $615,000 to $282,000.
Preferred Stock Dividends. Is comparable between the quarters ended April
2003, and 2002 we recognized approximately $91,000 and $96,000, respectively.
Net loss to Common Stockholders. The net loss for the quarter ended April
2003 decreased to $1.5 million from $2.5 million for the quarter ended April
2002. The decrease is primarily due to reduction in operating losses.
NINE MONTHS ENDED APRIL 30, 2003 COMPARED TO NINE MONTHS ENDED APRIL 30, 2002
Operating Revenues. Consolidated operating revenues decreased 71% between
periods from $38.2 million for the nine months ended April 30, 2002 to $11
million for the nine months ended April 30, 2003. Revenues from the U.S. Telco
segment decreased 78% from $33,182,000 for the nine months ended April 30, 2002
to $7,032,000 for the nine months ended April 30, 2003 primarily as a result of
the idling of the Company's network during the second quarter and the inability
to restart the carrier services network in the third quarter. Revenues from the
Mexico Telco segment decreased 24% from $7,591,000 for the nine months ended
April 30, 2002 to $5,752,000 for the nine months ended April 30, 2003 primarily
as a result of the decrease in network services customers and reductions in the
number of retail communication centers operated by the Company.
Carrier services revenues decreased approximately $24.3 million, or 79%
from the nine months ended April 30, 2002 to the nine months ended April 30,
2003 and reflect the idling of the Company's carrier services network in
December 2002.
Network services revenues decreased approximately 78% or $1.4 million from
the nine months ended April 30, 2002 to the nine months ended April 30, 2003.
The decrease can be attributed to the continued loss of our customer base during
the first nine months of the current fiscal year.
21
Retail services revenues decreased approximately $1.5 million, or 27% from
the nine months ended April 30, 2002 to the nine months ended April 30, 2003.
During the fiscal year 2003, we continued to close down those communication
centers that were no longer cost efficient.
Cost of Services. The consolidated cost of services decreased by $23.1
million, or 73% from the nine months ended April 30, 2002 to the nine months
ended April 30, 2003. The decrease in cost of services is a direct result of the
decrease in carrier services revenues, private network revenue and retail
services revenue. Cost of services for the U.S. Telco segment decreased by 78%
from approximately $28,856,000 for the nine months ended April 30, 2002 to
approximately $ 6,231,000 for the nine months ended April 30, 2003. The
decrease in cost of services in the U.S. Telco segment is a direct result of the
idling of the Company's network and cessation of the carrier services product in
December 2002. The Cost of services for the Mexico Telco segment decreased by
18% from approximately $2,746,000 for the nine months ended April 30, 2002 to
approximately $2,247,000 for the nine months ended April 30, 2003. The decrease
in the cost of service for the Mexico Telco segment is the result of the
reduction of approximately 20 communication centers during the nine months ended
April 30, 2003.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
decreased approximately $2.1 million, or 24% between periods. SG&A allocated to
the U.S. Telco segment decreased 34% from approximately $5,808,000 for the nine
months ended April 30, 2002 to approximately $3,831,000 for the nine months
ended April 30, 2003. The decrease can be attributed to the termination of most
of the employees associated with the U.S. Telco carrier services business unit
and network services business unit. The SG&A allocated to the Mexico Telco
segment decreased by 5% from approximately $3,111,000 for the nine months ended
April 30, 2002 to approximately $2,955,000 for the nine months ended April 30,
2003. The decrease in SG&A for the Mexico Telco segment is the result of the
reduction of approximately 20 communication centers during the nine months ended
April 30, 2003.
Impairment loss. During the first quarter of fiscal 2003, we recorded
approximately $88,000 related the impairment of goodwill associated with an
acquisition made by ATSI Mexico during fiscal 2002. No impairment loss was
recorded during the nine months ended April 30, 2002.
Depreciation and Amortization. Depreciation and amortization decreased by
approximately 44% or $1.4 million between periods. The decline is related to the
adoption of SFAS 142 as of August 1, 2002. As a result, there was no
amortization of goodwill during the first nine months of fiscal 2003.
Additionally, much of our equipment had been fully depreciated. Depreciation
and amortization allocated to the U.S. Telco segment declined by 22% from
approximately $1,639,000 for the nine months ended April 30, 2002 to
approximately $1,282,000 for the nine months ended April 30, 2003. Depreciation
and amortization allocated to the Mexico Telco segment declined by 69% from
approximately $1,434,000 for the nine months ended April 30, 2002 to
approximately $440,000 for the nine months ended April 30, 2003.
Operating Loss. The Company's operating loss increased approximately
$679,000 or 13% from the nine months ended April 30, 2002 to the nine months
ended April 30, 2003. The increase is primarily due to the recognition of $1.0
million in professional fees relating to litigation filed by the Company during
the second quarter of fiscal 2003, and the decrease in network services and
retail services revenue during the first nine months of fiscal 2003. Operating
loss for the U.S. Telco segment increased by 32% from $2,088,000 for the nine
months ended April 30, 2002 to $4,080,000 for the nine months ended April 30,
2003 as a result of the costs incurred in connection with litigation filed
during the second quarter and losses incurred to provide carrier services prior
to idling the carrier services network.
22
Operating loss for the Mexico Telco segment decreased by 25% from $2,367,000 for
the nine months ended April 30, 2002 to $1,764 for the nine months ended April
30, 2003 and reflect the lower revenues for network services and retail
services.
Other Income (expense). Other expense decreased approximately $278,000
between periods from $1.8 million to $1.5 million.
Preferred Stock Dividends. During the nine months ended April 30, 2003, we
recorded approximately $277,000 of non-cash dividends related to our cumulative
convertible preferred stock. This compares favorably to the approximately
$373,000 of non-cash dividends recognized during the nine months ended April 30,
2002 and is the result of redemptions of preferred stock during the first two
quarters of the fiscal year.
Net loss to Common Stockholders. The net loss for the nine months ended
April 30, 2003 increased to $8 million from $7.3 million for the nine months
ended April 30, 2002. The increase in net loss was due primarily to the
recognition of $1.0 million in professional fees related the lawsuit filed in
the second quarter and the decrease in carrier services revenues during the
period.
LIQUIDITY AND CAPITAL RESOURCES
The Company has limited capital resources, and these resources may not be
available to support our ongoing operations until such time as we are able to
generate income from operations. These matters raise substantial doubt about our
ability to continue as a going concern. Our ability to continue as a going
concern is dependent upon the ongoing financial support of our stockholders and
customers, our ability to obtain capital resources to support operations and our
ability to increase our revenues to a break-even level.
During the nine-months ended April 30, 2003, we generated positive cash
from operations of approximately $851,000. Cash from operations in the
Company's U.S. Telco segment for the nine months ended April 30, 2003 was
approximately $578,000 and cash from operations in the Company's Mexico Telco
segment for the nine months ended April 30, 2003 was approximately $273,000. The
Company generated this positive cash flow from operations primarily as a result
of an increase in accrued liabilities and accounts payables of approximately
$1,459,000 and $3,355,000, respectively. Additionally, we generated positive
cash flow form operations as a result of a decrease in accounts receivable of
approximately $783,000.
Cash used in/provided by investing activities: During the nine months ended
April 30, 2003, the Company acquired approximately $328,000 in equipment which
was not financed by capital lease or financing arrangements.
Cash used in/provided by financing activities: Additional cash outflows
included the payment of approximately $87,000 towards our capital lease
obligations.
Overall, the Company's net operating, investing and financing activities
during the nine months ended April 30, 2003 provided approximately $381,000 in
cash. The Company's working capital deficit at April 30, 2003 was approximately
$18.5 million. This represents an increase of approximately $5.2 million from
our working capital deficit at July 31, 2002.
Currently we are not generating sufficient revenues from operations to
cover our monthly operating salaries and general and administrative expense of
approximately $65,000 per month. We
23
estimate that we must generate revenues of at least $2,400,000 per month at
current gross margins to cover our operating expenses. We expect this financial
instability and lack of liquidity to continue during the fiscal year 2003. As a
result over the next twelve months we estimate requiring additional funding of
approximately $450,000 to compensate for the deficiencies in cash inflows. We
have sought investment in the company from various sources without success and
we will continue to seek additional equity investment in the Company. If no such
investors are found, we may seek to sell additional assets to generate funds or
liquidate the Company.
In May 2003, the Company entered into a Share Purchase Agreement with
Telemarketing whereby we agreed to sell Telemarketing 51% of our Mexican
subsidiary, ATSICOM. The agreement provides that there will be an initial
payment of $194,000 plus payment of approximately $200,000 of ATSICOM'S
liabilities and the remaining purchase price of $747,000 will be paid as
follows:
- Beginning in May 2003 Telemarketing will pay ATSI $20,750 per month
for 12 months; and
- Beginning in May 2004, Telemarketing will pay ATSI $20,750 per month
for the next 24 months, contingent on ATSI generating 20,750,000
minutes of monthly traffic through ATSICOM's network. In the event the
Company does not reach the above-mentioned volume of monthly minutes,
the monthly payment will be adjusted based on the same percentage of
the shortfall in minutes, until Telemarketing pays the total purchase
price. On the other hand, if ATSI exceeds the volume of monthly
traffic, Telemarketing can make additional payments, without penalty.
We intend to utilize the funds from the sale of ATSICOM to fund operations.
There can be no assurance that we will be able to continue to operate with these
funds over the next twelve months or that we will be able to generate sufficient
cash from operations to cover our monthly operating expenses. Additionally,
there is no assurance that we will be able to raise the additional capital from
equity of debt sources required to continue in operations.
EFFECT OF PENDING BANKRUPTCY:
The Company's two principal operating subsidiaries, ATSI-Texas and
TeleSpan, filed for protection under Chapter 11 of the U.S. Bankruptcy Code on
February 4, 2003 and February 18, 2003 respectively. The court ordered joint
administration of both cases on April 9, 2003 and on May 14, 2003 the court
converted the cases to Chapter 7. Under the Chapter 7 bankruptcy case, the
trustee is responsible for these entities and its liabilities and operations. As
a result the Company does not receive any of the proceeds from the disposition
of the assets of these subsidiaries and has no responsibility for liabilities or
operations of ATSI-Texas or Telespan.
TERMINATION OR EXPIRATION OF CONCESSION LICENSE
We are substantially dependent upon the operations of ATSICOM, the holder
of the 30-year concession license (the "Concession") to install and operate a
public telecommunication network in Mexico, for the installation and operation
of a telecommunications network in Mexico. The Mexican government has (1)
authority to temporarily seize all assets related to the Concession in the event
of natural disaster, war, significant public disturbance and threats to internal
peace and for other reasons of economic or public order and (2) the statutory
right to expropriate the Concession and claim all related assets for public
interest reasons. Although Mexican law provides for compensation in connection
with losses and damages related to temporary seizure or expropriation, we cannot
assure you that the
24
compensation will be adequate or timely.
Under the Concession, ATSICOM must meet the following requirements:
General requirements
--------------------
- Maintain approximately 10 millions dollars in registered and subscribed
capital
- Install and operate a network in Mexico, obtain approval of the operating
plan and any changes in it before implementation
- Continuously develop and conduct training programs for its staff
- Assign an individual responsible for the technical functions to operate the
concession
Concession services requirements
--------------------------------
- Provide continuous and efficient services at all times to its
customers
- Establish a complaint center and correction facilities center and
report to the Mexican Government on a monthly basis the complaints
received and the actions taken to resolve the problems
Tariff Requirements
-------------------
- Invoice its customer's at tariffs rates that have been approved by the
Mexican government
Verification and Information requirements
-----------------------------------------
- Provide audited financial statements on a yearly basis that includes a
detailed description of the fixed assets utilized in the network and
accounting reporting by region and location of where the services are
being provided
- Provide quarterly reports and updates on the expansion of the network
in Mexico and a description of the training programs and research and
development programs
- Provide statistic reports of traffic, switching capacity and other
parameters in the network
Guarantee requirements
----------------------
- Maintain a bond/ insurance policy for approximately $500,000 dollars
payable in the event the Mexican government revokes the Concession
On May 23, 2003, the Company sold 51% of ATSICOM to Telemarketing. We
cannot assure you that we and our partner, Telemarketing, will be able to obtain
financing to finish the Mexican 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.
25
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
We are subject to several market risks. Specifically, we face commodity
price risks, equity price risks and foreign currency exchange risk.
Commodity Price Risk
--------------------
Certain of our businesses, namely carrier services, operate in an extremely
price sensitive and volatile environment. While we have been able to withstand
these pricing volatilities, certain of our competitors are much larger and
better positioned. Our ability to continue to operate in this environment may be
dependent on our ability to further reduce our costs of transporting these
minutes.
Equity Price Risks
------------------
Until such time as we are able to consistently produce earnings from
operations, we will be dependent on our ability to continue to access debt and
equity sources of capital. While recent history has shown us capable of raising
equity sources of capital; future equity financings and the terms of those
financings will be largely dependent on our stock price, our operations and the
future dilution to our shareholders.
Foreign Currency Exchange Risk
------------------------------
Most of our services are billed and collected in U.S. Dollars. We faced
foreign exchange risks in connection with retail services from the Mexican
communication centers and payphones and the transacting of business in pesos as
opposed to U.S. Dollars. Historically, we have been able to minimize foreign
currency exchange risk by converting from pesos to U.S. Dollars quickly and by
maintaining minimal cash balances denominated in pesos. We anticipate that in
the future this risk will be minimized, since we no longer own nor operate the
communication centers.
We record foreign currency translation gains/losses due to the volatility
of the peso exchange rate as compared to the U.S. Dollar over time. We
anticipate we will continue to experience translation gains/losses in our assets
and liabilities, specifically in fixed assets which are accounted for at
historical pesos amounts on the books of our Mexican subsidiaries but converted
to U.S. Dollars for consolidation purposes at current exchange rates.
ITEM 4. CONTROLS AND PROCEDURES
The Company has adopted and implemented disclosure controls and procedures
designed to provide reasonable assurance that all reportable information will be
recorded, processed, summarized and reported within the time period specified in
the SEC's rules and forms. The Company's President and Chief Executive Officer
and the Company's Controller and Principal Financial have concluded that these
disclosures and procedures are effective at the reasonable assurance level.
Under the supervision and with the participation of the Company's management,
including the Company's President and Chief Executive Officer and the Company's
Controller and Principal Financial Officer, the Company has evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15(e) as of the end of the quarter
covered by this report. Based on that evaluation, the President and Chief
Executive Officer and the Controller and Principal Financial Officer have
concluded that these disclosure controls and procedures are effective as of the
end of the period covered by this report. There were no changes in the Company's
internal control over financial reporting
26
during the quarter covered by this report that have had a material affect or are
reasonably likely to have a material affect on internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER
------
10.1 Interconnection Agreement TELMEX and ATSICOM (Exhibit 10.26 to Annual Report on Form
10-K for the year ended July 31, 2003 filed November 12, 2003)
10.2 Bestel Fiber Lease (Exhibit 10.5 to Amended Annual Report on form 10-K for the year ended
July 31, 1999 filed April 14, 2000)
10.3 Carrier Service Agreement Dialmex and ATSI (Exhibit 10.27 to Annual Report on Form 10-K
for the year ended July 31, 2003 filed November 12, 2003)
10.4 Stock Purchase Agreement with Telemarketing (Sale of ATSICOM) (Exhibit 10.1 to Form 8-K
filed June 16, 2003)
31.1 Certification of our President and Chief Executive Officer, under Section 302 of the Sarbanes-
Oxley Act of 2002. *
31.2 Certification of our Corporate Controller and Principal Financial Officer, under Section 302 of
the Sarbanes-Oxley Act of 2002. *
32.1 Certification of our President and Chief Executive Officer, under Section 906 of the Sarbanes-
Oxley Act of 2002. *
32.2 Certification of our Corporate Controller and Principal Financial Officer, under Section 906 of
the Sarbanes-Oxley Act of 2002. *
* Filed herewith
(b) The following Current Reports on Form 8-K were filed during the third
quarter of fiscal 2003.
On June 16, 2003 we filed a current report on Form 8-K announcing in
Item 2 the signature of 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"); in Item 3, the filing for protection under Chapter 11 of
the U.S. Bankruptcy Code of our principal operating subsidiaries, American
Telesource International, Inc. and TeleSpan, Inc.; and in Item 5, the
resignation of Raymond G. Romero and Christopher Cuevas and the appointment
of Arthur L. Smith as CEO and Antonio Estrada as Corporate Controller.
27
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ATSI COMMUNICATIONS, INC.
(Registrant)
Date: March 1, 2004 By: /s/ Arthur L. Smith
------------- -------------------
Name: Arthur L. Smith
Title: President and
Chief Executive Officer
Date: March 1, 2004 By: /s/ Antonio Estrada
------------- -------------------
Name: Antonio Estrada
Title: Corporate Controller
(Principal Accounting and Financial
Officer)
28