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SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
FORM 10-K/A
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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, 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, SUITE 700W
SAN ANTONIO, TEXAS 78240
(210) 614-7240
(ADDRESS, INCLUDING ZIP CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES
AND TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities Registered Pursuant to Section 12(b) of the Act:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
--- ---
Indicate by check mark 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 November 12, 2003, was approximately
$1,977,000. There were 103,638,690 shares of Common Stock outstanding at
November 12, 2003, and the closing sales price on our Common Stock was $0.02 on
such date. Our 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
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
History. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Recent Developments. . . . . . . . . . . . . . . . . . . . . . 4
Services and Products. . . . . . . . . . . . . . . . . . . . . 5
Carrier Services. . . . . . . . . . . . . . . . . . . . . 5
Network Services. . . . . . . . . . . . . . . . . . . . . 6
Voice over Internet Protocol Network . . . . . . . . . . . . . 7
Strategy and Competitive Conditions. . . . . . . . . . . . . . 9
Licenses/Regulatory. . . . . . . . . . . . . . . . . . . . . . 11
Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Additional Risk Factors. . . . . . . . . . . . . . . . . . . . 13
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 21
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . 22
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . . 22
Item 6. Selected Financial and Operating Data. . . . . . . . . . . . . . 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Sources of revenue and direct cost . . . . . . . . . . . . 25
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
History of operating losses. . . . . . . . . . . . . . . . . . 27
Results of Operations. . . . . . . . . . . . . . . . . . . . . 27
Liquidity and Capital Resources. . . . . . . . . . . . . . . . 32
Off Balance Sheet Arrangements and Contractual Obligations . . 34
Market Risk. . . . . . . . . . . . . . . . . . . . . . . . . . 35
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . 36
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures. . . . . . . . . . . . . . . . . . . . . . 73
PART III
Item 10. Directors and Officers of the Registrant. . . . . . . . . . . . 73
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . 76
Item 12. Security Ownership of Certain Beneficial Owners and Management. 79
Item 13. Certain Relationships and Related Transactions. . . . . . . . . 81
PART IV
Item 14. Controls and Procedures . . . . . . . . . . . . . . . . . . . . 82
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 82
2
PART I.
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ITEM I. BUSINESS
OVERVIEW
We are a telecommunications provider, focusing on the carrier and network
management services between the United States and Latin America. Our current
operations involve services between the U.S. and Mexico. We provide 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 other 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. Under our carrier service agreement with DialMex we will be
invoiced weekly on a per minute rate basis and our termination cost will based
on the destination of the call by our customers. We will be required to prepay
for the estimated weekly usage based on estimated traffic from our customers.
We believe that the lower network cost structure available under the agreements
with DialMex will allow us to be more competitive, market our services to new
customers and allow us to increase our revenue from the carrier services
business.
3
Additionally, we will combine our interconnection agreements with the major
carriers in Mexico with the interconnection agreements between the carriers and
DialMex to lower our termination costs and allow for a more attractive cost
structure.
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 Telefonos 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 the Company is based on a per minute rate
and the 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 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
networks of third parties in Mexico, such as Alestra and Marcatel to build a
reliable international network to support carrier-generated traffic between the
U.S. and Mexico.
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
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.
Currently, our principal operating entity is:
- ATSI Communications Inc., a Delaware corporation, which was formed in
1996 and 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 data services, long distance transport, and the
operation of a telecommunications network.
RECENT DEVELOPMENTS
During our fiscal year ending July 31, 2003, we announced that:
4
- Effective January 31, 2003 Stephen M. Wagner resigned as President and
Chief Executive Officer
- On December 31, 2002 our carrier network capacity was idled and 27 US
employees were terminated.
- 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.
- 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.
- 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").
- 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.
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
5
prepayments. Due to our limited resources and lack of a line of credit with our
carriers, our carriers required prepayment and deposits to minimize their risk
as they provide us with their services. During fiscal 2003 our carriers required
deposits and prepayments equal to 25% or $600,000 of our weekly estimated
traffic, this deposit requirements were calculated by our carriers using
historical weekly traffic volumes and estimated future weekly traffic. 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 signed and carrier services
agreement with DialMex. Under this agreement we are able to interconnect to
DialMex's network and this has allowed us to be able to restart our carrier
services network. We have signed three new carrier services customers and we
have generated revenues of approximately $36,000 during the first quarter of
fiscal year 2004. We were able to meet our prepayment requirements with DialMex
by also requiring prepayments from our customers for weekly-expected traffic.
However, there can be no assurance that we will continue to generate these
levels of revenues from our customers in the future.
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. We have entered a three-year service agreement with
DialMex under which 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. Under the
agreement with DialMex, we are invoiced weekly for transmission charges and
termination charges and required to prepay for the estimated weekly usage based
on estimated traffic from 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 Bestel S.A de C.V. As previously mentioned, our
interconnection agreements with these long-distance concessionaires provide us
with nationwide network coverage. 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. 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 or that we will be able to continue to
make prepayments to DialMex.
NETWORK SERVICES
Private Network is a secure satellite communication connection or link
between various remote locations. This connection is accomplished by having all
of the various remote locations from one customer connected to a common
satellite destination, were information is allowed to be exchange, transported
and shared. We provide these services to 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 the transportation
of 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 party. Under the agreement
with LGV we will provide customer service, technical support and manage the
collections process of their private network customers. This management
agreement was initiated 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.
6
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 competitiveness 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.
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.
VOICE OVER INTERNET PROTOCOL NETWORKS
The basic technology of traditional telecommunications was designed for
slow mechanical switches. Communications over the traditional telephone network
are routed through circuits that must dedicate resources to each call from its
inception until the call ends, regardless of whether anyone is actually talking
on the circuit. This circuit-switching technology incurs a significant cost per
call and does not efficiently support the integration of voice with data
services. Data networks, however, were designed for electronic switching. They
break the data stream into small, individually addressed packages of data
("packets") that are routed independently of each other from the origin to the
destination. Therefore, they do not require a fixed amount of bandwidth to be
reserved between the origin and destination of each call and they do not waste
bandwidth when it is not being used for actual transmission of information.
This allows multiple voice or voice and data calls to be pooled, resulting in
these networks being able to carry more calls with an equal amount of bandwidth.
Moreover, they do not require the same complex switching methods required by
traditional voice telephone networks, instead using a multiplicity of routers to
direct each packet in the direction of its destination and they automatically
route packets around blockages, congestion or outages.
Packet switching is a method of transmitting messages that can be used
within a data network or across networks, including the public Internet. The
Internet itself is not a single data network owned by any single entity, but
rather a loose interconnection of networks belonging to many owners that
communicate using the Internet Protocol (IP). By converting voice signals to
digital data and handling the voice signals as data, it can be transmitted
through the more efficient switching networks designed for data transmissions
and through the Internet using the IP. The transmission of voice signals as
digitalized data streams over the Internet is known as Voice over Internet
Protocol or VoIP. The following are the advantages of using VoIP compared to
traditional networks:
- INTEGRATION OF VOICE AND DATA: VoIP networks allows for the
integration of voice, data traffic and images into the same network.
- SIMPLIFICATION: An integrated infra structure that supports all forms
of communication allows more standardization and less equipment
management. The result is a fault tolerant design.
- NETWORK EFFICIENCY: The integration of voice and data fills up the
data communication channels efficiently, thus providing bandwidth
consolidation and reduction of the costs associated with idle
band-with. The sharing of equipment and operations costs across both
data and voice users can also improve network efficiency since excess
bandwidth on one network can be used by the other, thereby creating
economies of scale for voice (especially given the rapid growth in
data traffic). An integrated infrastructure that supports all forms of
communication allows more standardization and reduces the total
equipment complement. This combined infrastructure can support dynamic
bandwidth optimization and a fault
7
tolerant design. The differences between the traffic patterns of voice
and data offer further opportunities for significant efficiency
improvements.
- CO-EXISTENCE WITH TRADITIONAL COMMUNICATION MEDIUMS: The final
advantage of VoIP is that it is additive to today's communications
networks. IP telephony can be used in conjunction with existing PSTN
switches, leased and dial-up lines, PBXs and other customer premise
equipment (CPE), enterprise LANs, and Internet connections. IP
telephony applications can be implemented through dedicated gateways,
which in turn can be based on open standards platforms for reliability
and scalability.
- COST REDUCTION: Under the VoIP network, the connection is directly to
the Internet backbone and as a result the telephony access charges and
settlement fees are avoided.
The growth of voice on the Internet was limited in the past due to poor
sound quality caused by technical issues such as delays in packet transmission
and by bandwidth limitations related to Internet network capacity and local
access constraints. However, the continuing addition of data network
infrastructure, recent improvements in packet switching and compression
technology, new software algorithms and improved hardware have substantially
reduced delays in packet transmissions and the effect of these delays.
Nevertheless, certain VoIP routes into countries with limited or poor Internet
infrastructure continue to lack the consistent quality required for voice
transport and termination.
A number of large long distance carriers have announced Internet telephony
service offerings. Smaller Internet telephony service providers have also begun
to offer low-cost Internet telephony services from personal computers to
telephones and from telephones to telephones. Traditional carriers have
substantial investments in traditional telephone network technology, and
therefore have been slow to embrace Internet technology.
We believe that the infrastructure required for a global network is too
expensive for most companies to deploy on their own. This mandates that the
network be a combination of gateways owned by different operators. For a
network to achieve optimal functionality and quality, however, the gateways need
to be interoperable, or able to communicate with one another. Interoperability
continues to be a challenge for VoIP providers and recently, technological
solutions have emerged that support interoperability between different protocols
and/or gateways. Cisco appears to have emerged as a dominant supplier of VoIP
gateways and other manufacturers often seek to make their equipment
interoperable with Cisco.
Long distance telephone calls transported over the Internet are less
expensive than similar calls carried over the traditional telephone network
primarily because the cost of using the Internet is not determined by the
distance those calls need to travel. Also, routing calls over the Internet is
more cost-effective than routing calls over the traditional telephone network
because the technology that enables Internet telephony is more efficient than
traditional telephone network technology. The greater efficiency of the
Internet creates cost savings that can be passed on to the consumer in the form
of lower long distance rates or retained by the carrier as higher margins.
By using the public Internet, VoIP providers like ATSI are able to avoid
direct payment for transport of communications, instead paying for large "pipes"
into the public Internet, billed by bandwidth rather than usage, which transmits
calls to a distant gateway. The Internet, which has its origins in programs
devised by the Department of Defense to provide multiple routes and therefore
redundancy which was largely immune from the failure of a single network
element, provides great redundancy and can be "self healing" in the event of an
outage in a particular network element or transmission path. Moreover, adding
an additional entry or exit point (a Point of Presence or "PoP") does not
require any expensive or time consuming reconfiguration or reprogramming of
existing network elements. The new element is simply installed with a specific
IP address and it can send or receive information from any other IP address on
the Internet."
8
STRATEGY AND COMPETITIVE CONDITIONS
The long distance telephony market and the Internet telephony market are
highly competitive. There are several large and numerous small competitors, and
we expect to face continuing competition based on price and service offerings
from existing competitors and new market entrants in the future. The principal
competitive factors in our market include price, quality of service, coverage,
customer service, reliability, and network size/capacity. Our competitors
include major and emerging telecommunications carriers in the U.S. and foreign
telecommunications carriers. The financial difficulties of many
telecommunications providers are rapidly altering the number, identity and
competitiveness of the marketplace, and we are unable to determine with
certainty the eventual result of the consolidation occurring in our industry.
During the past several years, a number of companies have introduced
services that make Internet telephony or voice services over the Internet
available to other carriers. All major telecommunications companies either
presently or could potentially route traffic to destinations worldwide and
compete or can compete directly with us. Other Internet telephony service
providers focus on a retail customer base and may in the future compete with us
in the carrier services business. In addition, companies currently in related
markets have begun to provide voice over the Internet services or adapt their
products to enable voice over the Internet services. These related companies
may potentially migrate into the Internet telephony market as direct
competitors.
Carriers buying wholesale termination into Mexico, while cost conscious,
are increasingly demanding high reliability and quality in service delivery.
Sustainability and growth in this segment depends on specific competitive
advantages that companies may possess in specific markets. Competitive
advantages like proper licenses, network redundancy, favorable termination
agreements, or the presence of a business infrastructure and relationships in
the specific terminating market. The Company competes with the dominant
providers, such as Qwest and MCI, as well as other, smaller providers for
international long distance services to Mexico. The Company believes that in
contrast to the dominant providers, it has a much more focused and cost
competitive strategy that targets selected higher margin telecommunications
niches. Certain carriers provide termination services in Mexico at lower prices
(e.g., $0.03 to $0.07) because they contract with other carriers that "leak"
into the local network using unlicensed IP points of presence. These carriers,
however, have several disadvantages including: (i) generally poor quality, (ii)
limited capacity, and (iii) poor reliability, since Mexican authorities
periodically shut down their operations. Additionally, there are a few market
trends that affect our wholesale product's competitiveness in the market.
First, unauthorized, non-conventional operators continue to have a major impact
by offering prices below real costs. Second, reduced settlement rates in Mexico
continue to drive down costs. The result of this trend is a significant
reduction in revenue per minute. The combination of non-conventional
termination and the new settlement rates have reduced U.S to Mexico termination
prices from an average price of $0.27 per minute in 1998 to a current $0.045 per
minute.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than we
have. As a result, certain of these competitors may be able to adopt more
aggressive pricing policies that could hinder our ability to market our
services. We believe that our key competitive advantages are our ability to
deliver reliable, high quality voice service over the Internet in a
cost-effective manner. We cannot provide assurances, however, that these
advantages will enable us to succeed against comparable service offerings from
our competitors. A large number of telecommunications companies, including
AT&T, WorldCom, Qwest and Sprint currently provide wholesale voice
telecommunications service which competes with our business. These companies,
which tend to be large entities with substantial resources, generally have large
budgets available for research and development, and therefore may further
enhance the quality and acceptance of the transmission of voice over the
Internet.
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
9
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 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 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:
- the rapid growth of the Latino segment of the United States population
- Mexico's status as the top calling partner with the United States
- increase in trade and travel between Latin America and the United
States
- the build-out of local networks and corresponding increase in the
number of telephones in homes and businesses in Latin countries
- proliferation of communications devices such as faxes, mobile phones,
pagers, and personal computers
- 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, 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 obtain a key long distance
concession through our 49% ownership in ATSI Comunicaciones S.A de C.V.
(ATSICOM) that allows us to both generate and carry traffic within Mexico and
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 voice over Internet protocol or VoIP technology, which is a method of
transmitting voice communications by breaking the information into data packets
and transporting them over the 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 in other Latin American
countries.
Telefonos de Mexico S.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 29 new long distance providers. Two of these license
holders are Mexican based affiliates of top tier U.S. carriers MCI 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. In 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 anticipation of the demonopolization of this market.
During the same year we also began providing private network services between
the U.S. and Mexico via satellite. In fiscal year 2000 we secured our own long
distance license, which permits 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 long distance concession and partnership with the
Mexican investment group will position us to take advantage of the benefits to
be reaped as the Mexican telecommunications industry continues to evolve and
creates opportunities for emerging carriers. We believe that we have a clear
competitive advantage over non-licensed resellers, and that we have overcome
significant hurdles that are
10
a barrier to entry in this market even for large carriers. We intend to use our
license and partnership to capture increased amounts of the communications
traffic in the Mexican market.
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.
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 to terminate traffic in the United
States and are contributing to the substantial downward pricing pressure facing
us in the carrier market. And as a result of these substantial downward pricing
pressures we have been forced to significantly reduce our terminations rates to
our customers to match the termination rates offered by our competitors in order
to be competitive, retain and attract new customers. Additionally, as a result
of the reduction in our termination rates to our customers our margins have
diminished by approximately 1-2%.
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.
11
Mexico
The Secretaria de Comunicaciones y Transportes or the SCT and COFETEL (Comision
Federal de Telecomunicaciones or Federal Telecommunications Commission) have
issued ATSICOM a 30-year license granted in June 1998 to install and operate a
public network. Under this license, ATSI Comunicaciones de Mexico S.A de C.V.
is required to meet the following:
General requirements
--------------------
- Maintain approximately 10 millions dollars in registered and
subscribed capital
- Install and operate a network in Mexico, the Mexican government 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.
- Continuously develop and conduct training programs for its staff
- The Concessionaire, at all times needs to have an assigned individual
responsible for the technical functions to operate the concession.
Concession services requirements
--------------------------------
- The Concessionaire is required to provide continuous and efficient
services at all times to its customers.
- The Concessionaire must establish a complaint center and correction
facilities center. We are required to report to the Mexican Government
on a monthly basis the complaints received and the actions taken to
resolve the problems.
Tariff Requirements
-------------------
- 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
-----------------------------------------
- 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 where the services are being provided.
- 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.
- 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 Federal Treasury
Department will be the beneficiary in the event the Mexican government
revokes the concession license.
SUPPLIERS
We rely on various suppliers to provide services in connection with our
communication services. SATMEX provides us with network management services in
connection with our network. We also depend on various U.S. long
12
distance companies to complete the intra-U.S. portion and on various Mexican
long distance companies to complete the intra-Mexico portion of our voice
transmissions. Other critical suppliers include TelMex, Bestel, DialMex and
Advance Global Communications.
EMPLOYEES
As of July 31, 2003, we had 4 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.
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 all of our periodic reports, including our 10-Q's and the entire
Form 10-K.
RISKS RELATED TO OPERATIONS
- OUR AUDITORS HAVE QUESTIONED OUR VIABILITY
Our auditors' opinion on our financial statements as of July 31, 2003 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.
- 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 will continue to invest money in sales and marketing and
personnel in order to maintain and develop the customer base we need to
achieve profitability. Our investment 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; 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 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.
During fiscal year ended July 31, 2003 our two 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
13
subsequently on May 14, 2003 the court converted the cases to Chapter 7.
These subsidiaries have terminated all operations. And the Bankruptcy is
managing the liquidation process of all the assets held by these entities.
- IT IS DIFFICULT FOR US TO COMPETE WITH MUCH LARGER COMPANIES SUCH AS
AT&T, SPRINT, MCI AND TELMEX
The large carriers such as AT&T, Sprint and MCI 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.
- COMPETITION COULD HARM US
International telecommunications providers like us compete based on price,
customer service, transmission quality and breadth of service offerings.
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.
- COMPETITION IN MEXICO IS INCREASING
Mexican regulatory authorities have granted concessions to at 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) and MCI (Avantel) Mexican regulatory authorities
have also granted concessions to provide local exchange services to several
telecommunications providers, including Telmex and Red 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.
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
14
operations.
- OUR MEXICAN FACILITIES-BASED LICENSE POSES RISKS
Currently 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, which will affect the value of our concession. In addition,
the Mexican government also has (1) authority to temporarily seize all
assets related to the Mexican concession in the event of natural disaster,
war, significant public disturbance and threats to internal peace and for
other reasons of economic or public order and (2) the statutory right to
expropriate any concession and claim all related assets for public interest
reasons. Although Mexican law provides for compensation in connection with
losses and damages related to temporary seizure or expropriation, we cannot
assure you that the compensation will be adequate or timely.
In addition, the concession requires us to meet a number of financial and
operational requirements, and to invest in the installation of a
communications network in Mexico. 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.
- 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 network services markets, we
must maintain the highest quality of service. Therefore we must continually
rely on our partners, DialMex and Telemarketing to upgrade their network to
keep pace with technological changes. This is expensive, and our partners,
DialMex and Telemarketing do not have substantial resources that our large
competitors have.
- WE MAY NOT BE ABLE TO PAY OUR SUPPLIERS ON TIME, CAUSING THEM TO
DISCONTINUE CRITICAL SERVICES
Historically, we have not always paid all of our suppliers on time due to
temporary cash shortfalls. Critical carriers and suppliers may discontinue
our services, if we are not able to make payments on time in the future.
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 LEASE TRANSMISSION FACILITIES WE NEED AT
COST-EFFECTIVE RATES
We do not own any transmission facilities needed to complete our calls.
Therefore, we depend on contractual arrangements with other
telecommunications companies to provide our services. We do not own any
VoIP network, switching network and the equipment required to receive and
transmit calls; we depend on our carriers for these services and our
carrier service agreement with our partners, Telemarketing and DialMex. 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 provide competitive services to our carrier customers.
- 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 30-licensed Mexican long distance 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.
15
- 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 services 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 carrier to another, and there may not be sufficient capacity to carry
all the traffic at any given time.
- 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.
- 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
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.
- 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
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.
16
RISKS RELATED TO FINANCING
- 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.
- 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.
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
cash payment of this size, it would severely restrict our ability to fund
our operations. On January 24, 2003 we received a redemption 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
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
17
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.
- 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
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
- 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 as an Over The Counter (OTC) security on the pink
sheets, which is regulated by the NASD. This has adversely affected the
liquidity of the common stock because it is 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.
- THE PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE AND COULD CONTINUE TO
FLUCTUATE SUBSTANTIALLY
Our common stock is traded on the 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;
- legislative or regulatory changes;
- general trends in the industry;
- market conditions; and
- analysts' estimates and other events in our industry.
18
- 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
July 31, 2003, we had 103,638,690 shares of common stock outstanding and
8,673,659 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.
- 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.
- 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.
- 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.
- 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
19
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.
- 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.
- 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
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, 2003 is approximately $918,000 for our Series A, D, E, F and G
Preferred Stock.
- 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.
- 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. 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
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 affect the market price of, and the voting and other rights
of, the holders of outstanding shares of common stock.
20
ITEM 2. PROPERTIES
Our executive office is located at our leased facilities in San Antonio,
Texas, consisting of 3,042 square feet. The lease expires September 2004. We
pay annual rent of $41,040 under the lease. Management believes that our leased
facilities are suitable and adequate for their intended use.
ITEM 3. LEGAL PROCEEDINGS
In March 2001, Comdisco sued ATSI-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. Currently Comdisco has
filed a 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 trustee estimates
that this case will be 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 included 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. Currently the Dallas County taxing authority has
filed claim with the United States Bankruptcy Court of the Western 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 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 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.
On October 31, 2002, we 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 preferred stock financing
transactions involving primarily two firms, Rose Glen Capital and the Shaar
Fund. We believe that Rose Glenn and the Shaar Fund engaged in a scheme to
defraud ATSI into selling multiple series of convertible preferred stock and to
manipulate the price of our stock downward in order to take advantage of
increased conversion rates resulting from the decline in stock price. 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.
In June 20, 2003, we filed a lawsuit in the 150th Judicial District Court,
Bexar County, Texas against NIFTI Communications Systems, LLC. for breach of
contract, fraudulent misrepresentation, and negligent misrepresentation. On
February 28, 2003 ATSI and NIFTI executed a Letter of Intent for NITFI to
acquire ATSI's concession license in Mexico. NIFTI failed to provide proof of
funding to consummate this transaction, lacked interest in the transaction and
failed commit to a definite date for the completion of this transaction. As a
result this transaction was never
21
consummated and in May 2003 ATSI sold 51% of ATSICOM to Telemarketing. In July
21, 2003, NIFTI in turn filed a counter-claim against ATSI. Under the counter
claim NIFTI states that ATSI failed to provide all the proper documentation
related to the concession license liabilities, accounting and requirements by
the Mexican Government. As of the date of this filing the lawsuit is ongoing.
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 was 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. As of May 9, 2003 our common
stock is traded in the pink sheets under the symbol "ATSC". The table below sets
forth the high and 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 3/8
SECOND -. . . . . . . . . . . . . . $ 1 13/16 $ 3/8
THIRD - . . . . . . . . . . . . . . $ 1.34 $ 0.40
FOURTH -. . . . . . . . . . . . . . $ 0.70 $ 0.36
FISCAL 2002 HIGH LOW
=========================================================
FIRST - . . . . . . . . . . . . . . $ 0.42 $ 0.30
SECOND -. . . . . . . . . . . . . . $ 0.37 $ 0.24
THIRD - . . . . . . . . . . . . . . $ 0.28 $ 0.21
FOURTH -. . . . . . . . . . . . . . $ 0.25 $ 0.07
FISCAL 2003 HIGH LOW
=========================================================
FIRST - . . . . . . . . . . . . . . $ 0.12 $0.03
SECOND - (THROUGH JANUARY 14, 2003) $ 0.16 $0.07
THIRD - (TRADING HALTED ) . . . . ----- -----
FOURTH -. . . . . . . . . . . . . . $ 0.07 $0.01
The following table provides information relating to the grant of stock,
options, and warrants pursuant to equity based compensation plans as of July 31,
2003.
22
-------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE EQUITY COMPENSATION
BE ISSUED UPON EXERCISE EXERCISE PRICE OF PLANS (EXCLUDING
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES REFLECTED IN
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN (a))
--------------------- ------------------------ ---------------------- ------------------------
(a) (b) (c)
--------------------- ------------------------ ---------------------- ------------------------
--------------------- ------------------------ ---------------------- ------------------------
EQUITY COMPENSATION
PLANS APPROVED BY
SECURITY HOLDERS 8,673,659 $ 0.78 5,990,001
--------------------- ------------------------ ---------------------- ------------------------
--------------------- ------------------------ ---------------------- ------------------------
EQUITY COMPENSATION
PLANS NOT APPROVED BY
SECURITY HOLDERS - - -
--------------------- ------------------------ ---------------------- ------------------------
--------------------- ------------------------ ---------------------- ------------------------
TOTAL 8,673,659 $ 0.78 5,990,001
-------------------------------------------------------------------------------------------------
At July 31, 2003, the closing price of our Common Stock as reported by OTC
bulletin board was $0.04 per share. As of 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.
In June 2001, we issued 6,500 shares of our Series G preferred stock for
approximately $650,000 of cash proceeds. Our 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. And from the at all times
from and after the Second Anniversary, the Conversion Price shall equal (A) .85
multiplied by (B) the Market Price of the Common Stock on the Second
Anniversary. The amount of accrued and unpaid dividends as of the Conversation
Date shall be paid in Common Stock valued at the Market Price on the Conversion
Date. The Series G preferred stock was issued without any public solicitation to
a limited number of investors. Each investor represented to us that the
securities were being acquired for investment purposes only and not with an
intention to resell or distribute such securities. Each of the investors had
access to information about our business and financial condition and was deemed
capable of protecting their own interests and were issued pursuant to the
private placement exemption provided by Section 4(2) of the Securities Act of
1933. These are deemed to be "restricted securities" as defined in Rule 144
under the 1933 Act and the certificates representing shares of the Series G
preferred stock bear a legend limiting the resale thereof.
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.
23
Years ended July 31,
--------------------
1999 2000 2001 2002 2003
------------ ------------ ------------ ------------ -------------
(In thousands of $, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Operating revenues
Carrier services $ 14,123 $ 22,192 $ 26,349 $ 41,190 $ 6,532
Network services 5,127 2,539 2,714 1,956 417
------------ ------------ ------------ ------------ -------------
Total operating revenues 19,250 24,731 29,063 43,146 6,949
Cost of services (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 expense 5,101 6,724 6,924 6,866 4,803
Impairment loss - - - 3,119 418
Bad debt expense 2,295 756 142 388 35
Depreciation and amortization 1,882 2,020 2,045 1,955 1229
------------ ------------ ------------ ------------ -------------
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) (8,815) (2,919)
Net loss from sale of discontinued operations - - - 1,082 (962)
Net loss (6,735) (10,052) (10,553) (14,517) (12,583)
Less: preferred stock dividends (856) (7,085) (2,232) (472) (653)
------------ ------------ ------------ ------------ -------------
Net loss applicable to common shareholders ($7,591) ($17,137) ($12,785) ($14,989) ($13,236)
============ ============ ============ ============ =============
PER SHARE INFORMATION:
Net loss-basic and diluted ($0.16) ($0.30) ($0.18) ($0.17) ($0.13)
------------ ------------ ------------ ------------ -------------
Weighted average common shares
outstanding-basic and diluted 47,467,000 56,852,000 71,180,000 86,275,000 101,767,000
------------ ------------ ------------ ------------ -------------
CONSOLIDATED BALANCE SHEET DATA:
Working Capital (deficit) $ 946 $ 5,076 $ 1,936 ($10,094) ($17,796)
Current Assets 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 25,267 26,894 23,112 10,457 1,530
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 Liabilities 19,130 13,544 13,329 15,389 18,515
Total Stockholders' equity (deficit) 6,137 13,350 6,254 (7,112) (18,345)
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SPECIAL NOTE: This Annual Report on Form 10-K/A 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 this Annual
Report Form 10-K/A 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 fiscal years ended July 31, 2001,
2002, and 2003. It should be read in conjunction with our Consolidated
Financial Statements, the Notes thereto and the other financial information
included elsewhere in this annual report on Form 10-K/A. For purposes of the
following discussion, fiscal 2001 or 2001 refers to the year ended July 31,
2001, fiscal 2002 or 2002 refers to the year ended July 31, 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
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
25
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.
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
26
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
communication services. Our strategy is to become a leading provider of
communication services to carriers and businesses in this U.S./Latin American
corridor through a high quality, 'next generation' VoIP network established
through our partnership with 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.
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 Telefonos 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 agreements
the cost will be based on a per minute rate and the 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 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 leveraging off the networks of third
parties in Mexico, such as Alestra and Marcatel to build a reliable
international network to support carrier-generated traffic between the U.S. and
Mexico.
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. 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. We had an operating
loss of approximately $1,579,000 for the quarter ended July 31, 2003.
Additionally we had a working capital deficit of approximately $17,796,000, at
July 31, 2003.
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, 2001, 2002 and 2003.
27
Year ended July 31,
-----------------------------------------------------
2001 2002 2003
---------------- ---------------- -----------------
$ % $ % $ %
Operating revenues
------------------
Services
Carrier services $ 26,349 91% $ 41,190 95% $ 6,532 94%
Network services 2,714 9% 1,956 5% 417 6%
---------- ---- ---------- ---- ---------- -----
Total operating revenues 29,063 100% 43,146 100% 6,949 100%
Cost of services (exclusive of depreciation
and amortization shown below) 24,802 85% 39,077 91% 6,244 90%
---------- ---- ---------- ---- ---------- -----
Gross Margin 4,261 15% 4,069 9% 705 10%
Selling, general and
administrative expense 6,924 24% 6,866 16% 4,803 69%
Impairment loss - 0% 3,119 7% 418 6%
Bad debt expense 142 0% 388 1% 35 1%
Depreciation and amortization 2,045 7% 1,955 5% 1,229 18%
---------- ---- ---------- ---- ---------- -----
Operating loss (4,850) -17% (8,259) -19% (5,780) -83%
Other income (expense), net (300) -1% 1,475 3% (2,922) -42%
---------- ---- ---------- ---- ---------- -----
Net loss from continuing operations before
income tax expense (5,150) -18% (6,784) -16% (8,702) -125%
Income tax expense - 0% - 0% - 0%
---------- ---- ---------- ---- ---------- -----
Net loss from continuing operations (5,150) -18% (6,784) -16% (8,702) -125%
Net loss from discontinued operations (5,403) -19% (8,815) -20% (2,919) -42%
Net loss from sale of discontinued operations - 0% 1,082 3% (962) -14%
Net loss (10,553) -36% (14,517) -34% (12,583) -181%
Less: preferred stock dividends (2,232) -8% (472) -1% (653) -9%
---------- ---- ---------- ---- ---------- -----
Net loss applicable to common shareholders
($12,785) -44% ($14,989) -35% ($13,236) -190%
========== ==== ========== ==== ========== =====
28
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.
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.
29
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.
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
30
Operating Revenues. Consolidated operating revenues increased 48% between
periods from $29 million for the year ended July 31, 2001 to $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 $14.9 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 minutes of
traffic during the year ended July 2001 to approximately 458 million minutes of
traffic during the period ended July 2002.
Network services decreased by approximately $758,000 or 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 further reduced our networks services revenues in fiscal
2003.
Cost of Services. Cost of services increased 58% between periods from $24
million for the year ended July 31, 2001 to $39 million for the year ended July
31, 2002. The increase in cost of services is directly attributed to the
increase in demand of services from our customers. As discuss in the carrier
revenue section, our units of traffic carried during fiscal year 2002 grew by
181 million minutes from the fiscal year ended July 31, 2001.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
decreased approximately $58,000, or 1% between periods. The improvement,
resulted from management's efforts to cut excess spending by each department
during fiscal 2002. As a percentage of revenues, SG&A declined from 24% to 16%
period to period.
Impairment loss. During fiscal 2002 we recorded approximately $3.1 million
of impairment loss. 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 related to ATSI Comunicaciones concession
license. No impairment expense was recorded in fiscal 2001.
Bad Debt Expense. Bad Debt Expense increased by approximately $246,000
between periods due primarily to expense related to write-off of certain
receivable from Global Crossing and WorldCom, these two companies filed for
bankruptcy and the receivables were consider not collectable during fiscal year
2002.
Depreciation and Amortization. Depreciation and amortization decreased by
approximately 4% or $90,000 between periods due to some of the equipment being
fully depreciated during early periods of fiscal 2002.
Operating Loss. The Company's operating loss increased by approximately
$3.4 million due to the impairment loss recorded in fiscal 2002.
Other Income (expense). Other expense decreased approximately $1.8
million between years. The primary reason for the decrease in other income can
be attributed to the restructuring of IBM capital lease in the forth quarter of
fiscal 2002. This restructuring resulted in a gain of approximately $1.9
million.
Loss from discontinued operations. The net loss from our e-commerce
operations and retail services (Mexico Telco) net of taxes, during fiscal 2002
was $8,816,000 as compared to a net loss of $5,403,000 for fiscal 2001. 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 business unit. The Mexico
31
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
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, 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 $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.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by / used in operating activities:
During the year ended July 31, 2003, we generated cash from operations of
approximately $129,000. We generated this positive cash flow from operations as
a result of an 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 various vendors, on 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 at this level from these customers. We believe that these levels of revenue
will not be sufficient to cover operating salaries and general and
administrative expense. Currently, as stated below, we depend on the monthly
payments of approximately $20,000 from the sale of 51% of ATSI Comunicaciones
S.A de C.V. to Telemarketing S.A de C.V. to pay for our monthly SG&A expenses.
Currently we generate approximately $45,000 in SG&A expenses. We expect this
financial instability and lack of liquidity to continue during the first and
second quarter of fiscal year 2004. As a result over the next twelve months we
estimate requiring additional funding of approximately $300,000 to compensate
for the deficiencies in cash inflows.
Cash provided by / used in investing activities:
During the year ended July 31, 2003, the Company acquired approximately
$281,000 in equipment. This equipment 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
32
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 include 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 activities:
During the fiscal year 2003, we had cash outflows of approximately $87,000
towards our capital lease obligations. Additionally, we received approximately
$25,000 for the issuance of debt during fiscal year 2003. (See footnote No: 11
to the consolidated financial statements) Furthermore, during fiscal year 2003,
we recognized payments related to the issuance of preferred stock and issuance
of common stock of approximately $12,000 and $95,000 respectively.
Overall, the Company's net operating, investing and financing activities
during the year ended July 31, 2003 provided an increase of approximately
$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.
The Company's working capital deficit at July 31, 2003 was approximately
$17.8 million. This represents an increase of approximately $7.7 million from
our working capital deficit at July 31, 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 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 continue to be in default of the agreement as of July 31, 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 took
possession of the equipment under the capital lease and was ordered to release
ATSI Texas and ATSI Delaware from any liability. As a result of this judgment we
reduced our liabilities under the Chapter 7 case by approximately $1.1 million
including accrued interest. As a result, we recognized an impairment loss on the
equipment related to this transaction of approximately $232,000 and reduced
assets of 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
33
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 $1,030,000 is included in accrued liabilities.
Additionally, we also have a note with the taxing authorities in Mexico for
$452,459 related to a note assumed through the acquisition of Computel, (see
note 23) and a note payable with two related parties for $250,000 and $25,000,
respectively. In July 2003, the Company entered into a note payable with a
non-related company, in the 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 we are able to
generate income from operations. These matters raise substantial doubt about our
ability to continue as a going concern. Our ability to continue as a going
concern is dependent upon the ongoing support of our stockholders and customers,
our ability to obtain capital resources to support operations and our ability to
successfully market our services. Currently, management will utilize the funds
from the sale of ATSICOM to fund operations. As previous discussed, in May 2003,
the company entered into a Share Purchase Agreement with Telemarketing de
Mexico, S.A. de C.V. (Telemarketing) whereby we agreed to sell Telemarketing 51%
of our Mexican subsidiary, ATSI Comunicaciones, S.A. de C.V. (ATISCOM). The
agreement provides that there will be an initial payment of $194,000 plus
payment of approximately $200,000 of ATSICOM'S liabilities and the remaining
purchase price of $747,000 will be paid as follows:
- Beginning in May 2003 Telemarketing will pay ATSI $20,750 per month
for 12 months.
- 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.
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.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
In April 2003, we entered into a six-month operating lease with BDRC, INC.,
for the lease of our executive office. In September 2003 we renewed this lease
for one more year and will expire in October 2004. Under the lease we will pay
annual rent of approximately $42,000 for 3,040 square feet of office space.
34
MARKET RISK
We are subject to several market risks. Specifically, we face commodity price
risks and equity price risks.
Commodity Price Risk
--------------------
The carrier services market 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.
We might not be able to withstand these pricing pressures as certain of our
competitors are much larger and better positioned to withstand these price
reductions. Our ability to absorb these price reductions may be dependent on our
ability to further reduce our costs of transporting these minutes.
Equity Price Risks
------------------
Until such time as we are able to consistently produce positive cash flows from
operations, we will be dependent on our ability to continue to access debt and
equity sources of capital. While 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.
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
CONSOLIDATED FINANCIAL STATEMENTS OF ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES
Report of Tanner + Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
Report of Arthur Andersen LLP. . . . . . . . . . . . . . . . . . . . . . . . .38
Consolidated Balance Sheets as of July 31, 2002 and 2003 . . . . . . . . . . .39
Consolidated Statements of Operations for the Years Ended
July 31, 2001, 2002 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . .40
Consolidated Statements of Comprehensive Loss for the Years
Ended July 31, 2001, 2002 and 2003 . . . . . . . . . . . . . . . . . . . . . .41
Consolidated Statements of Stockholders' Deficit for the Years
Ended July 31, 2001, 2002 and 2003 . . . . . . . . . . . . . . . . . . . . . .42
Consolidated Statements of Cash Flows for the Years Ended
July 31, 2001, 2002 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . .43
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . .44
36
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ATSI COMMUNICATIONS, INC.
We have audited the consolidated balance sheets 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 years 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 audits. The
financial statements of ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES for the year
ended July 31, 2001 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 23
the Company has restated its 2001 consolidated financial statements to report
discontinued operations, in conformity with accounting principles generally
accepted in the United States of America. The other auditors reported on the
2001 financial statements before the restatement.
We conducted our audits 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 audits 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 were audited by other
auditors who have ceased operations. As described in Note 23, these
consolidated financial statements have been restated. We audited the
adjustments described in Note 23 that were applied to restate the 2001
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 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 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 years
ended July 31, 2003 and 2002 in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 4 to
the consolidated financial statements, the Company has a working capital
deficit, has suffered recurring losses 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 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
OCTOBER 3, 2003
37
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.
38
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share information)
July 31,
--------------------
2002 2003
--------- ---------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 3 $ 140
Cash-restricted - 88
Accounts receivable, net of allowance of $189 and $102, respectively 836 44
Note Receivable-current portion - 187
Inventory 14 -
Prepaid & Other current assets 331 6
Assets from discontinued operations 3,694 245
--------- ---------
Total current assets 4,878 710
--------- ---------
PROPERTY AND EQUIPMENT 10,671 -
Less - Accumulated depreciation and amortization (7,166) -
--------- ---------
Net property and equipment 3,505 -
--------- ---------
OTHER ASSETS, net
Note Receivable - 100
Investment in unconsolidated subsidiary - 663
Concession License, net 2,000 -
Other 74 57
--------- ---------
Total assets $ 10,457 $ 1,530
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 6,082 $ 8,029
Accrued liabilities 2,134 5,518
Notes payable 993 1,080
Convertible debentures - 275
Current portion of obligations under capital leases 3,207 2,207
Deferred revenue 111 -
Liabilities from discontinued operations 2,444 1,397
--------- ---------
Total current liabilities 14,972 18,506
--------- ---------
LONG-TERM LIABILITIES:
Obligations under capital leases, less current portion 67 -
Long Term Advances payable 275 -
Other 75 9
--------- ---------
Total long-term liabilities 417 9
--------- ---------
COMMITMENTS AND CONTINGENCIES - -
REDEEMABLE PREFERRED STOCK:
Series D Cumulative Preferred Stock, 3000 shares authorized, 742 shares issued and
outstanding. 765 151
Series E Cumulative Preferred Stock, 10,000 shares authorized, 1,455 and 1,170 shares issued and
outstanding, respectively 1,415 1,209
STOCKHOLDERS' DEFICIT:
Preferred Stock, $0.001 par value, 10,000,000 shares authorized,
Series A Cumulative Convertible Preferred Stock, 50,000 shares authorized, 4,370 shares
issued and outstanding. - -
Series F Cumulative Convertible Preferred Stock, 10,000 shares authorized, 7,260 shares
issued and outstanding. - -
Series G Cumulative Convertible Preferred Stock, 42,000 shares authorized, 6,500 shares
issued and outstanding. - -
Common stock, $0.001, 200,000,000 shares authorized, 94,790,855 and 103,638,690
issued and outstanding, respectively 95 104
Additional paid in capital 59,891 60,093
Accumulated deficit (67,493) (80,076)
Warrants Outstanding 1,031 1,031
Other Comprehensive (Loss) Income (636) 503
--------- ---------
Total stockholders' deficit (7,112) (18,345)
--------- ---------
Total liabilities and stockholders' deficit $ 10,457 $ 1,530
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
39
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Years Ended July 31,
2001 2002 2003
------------ ------------ -------------
OPERATING REVENUES:
Services
Carrier services $ 26,349 $ 41,190 $ 6,532
Network services 2,714 1,956 417
------------ ------------ -------------
Total operating revenues 29,063 43,146 6,949
OPERATING EXPENSES:
Cost of services (exclusive of depreciation and
Amortization, shown below) 24,802 39,077 6,244
Selling, general and administration 6,924 6,866 4,803
Impairment expense - 3,119 418
Bad debt expense 142 388 35
Depreciation and Amortization 2,045 1,955 1,229
------------ ------------ -------------
Total operating expenses 33,913 51,405 12,729
------------ ------------ -------------
OPERATING LOSS (4,850) (8,259) (5,780)
OTHER INCOME (EXPENSE):
Other income (expense), net 562 1,868 (25)
Interest expense (862) (393) (1,377)
Loss from the sale of assets - - (1,520)
------------ ------------ -------------
Total other income (expense) (300) 1,475 (2,922)
LOSS FROM CONTINUING
OPERATIONS BEFORE INCOME TAX (5,150) (6,784) (8,702)
INCOME TAX BENEFIT (EXPENSE) - - -
------------ ------------ -------------
NET LOSS FROM CONTINUING
OPERATIONS (5,150) (6,784) (8,702)
NET LOSS FROM DISCONTINUED
OPERATIONS (5,403) (8,815) (2,919)
NET GAIN (LOSS) FROM SALE OF DISCONTINUED
OPERATIONS - 1,082 (962)
------------ ------------ -------------
NET LOSS ($10,553) ($14,517) ($12,583)
============ ============ =============
LESS: PREFERRED DIVIDENDS (2,232) (472) (653)
------------ ------------ -------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS ($12,785) ($14,989) ($13,236)
============ ============ =============
BASIC AND DILUTED LOSS PER SHARE ($0.18) ($0.17) ($0.13)
============ ============ =============
WEIGHTED AVERAGE COMMON
SHARES 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.
40
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
For the Years ended July 31,
2001 2002 2003
--------- --------- ---------
Net loss to common stockholders
Other comprehensive loss, net of tax: ($12,785) ($14,989) ($13,236)
Foreign currency translation adjustment (467) 611 1,139
--------- --------- ---------
Comprehensive loss to common stockholders ($13,252) ($14,378) ($12,097)
========= ========= =========
41
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY / (DEFICIT)
(In thousands)
Preferred Stock Common Stock
--------------- ------------------ Additional Accumulated
Shares Amount Shares Amount Paid In Capital Deficit
------- ------ -------- -------- ----------------- ---------
BALANCE, July 31, 2000 24 - 67,409 $ 67 $ 51,625 ($39,125)
Issuances of common shares for cash 1,942 2 931
Issuances of common shares for services 80 33
Issuances 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
Warrants issued with liquidating damages (5)
Cumulative effect of translation adjustment
Net loss (10,553)
------- ------ -------- -------- ----------------- ---------
BALANCE, July 31, 2001 20 - 77,329 $ 77 $ 57,935 ($52,504)
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 0 12
Dividends (472)
Compensation expense 0
Expiration of warrants 338
Cumulative effect of translation adjustment
Net loss (14,517)
------- ------ -------- -------- ----------------- ---------
BALANCE, July 31, 2002 20 - 94,994 $ 95 $ 59,891 ($67,493)
Issuances of common shares for services 3,319 3 171
Conversion of redemable preferred stock 5,326 6 685
Dividends (653)
Cumulative effect of translation adjustment
Net loss (12,583)
------- ------ -------- -------- ----------------- ---------
BALANCE, July 31, 2003 20 - 103,639 $ 104 $ 60,093 ($80,076)
======= ====== ======== ======== ================= =========
Notes
receivable Cumulative Total
Warrants from Translation Deferred Stockholders'
Outstanding officers Adjustment Compensation (DEFICIT)
------------- ---------- ------------ -------------- ----------
BALANCE, July 31, 2000 $ 417 ($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 952 952
Warrants issued with liquidating damages (5)
Cumulative effect of translation adjustment (468) (468)
Net loss (10,553)
------------- ---------- ------------ -------------- ----------
BALANCE, July 31, 2001 $ 1,369 $ 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 (338) 0
Cumulative effect of translation adjustment 611 611
Net loss (14,517)
------------- ---------- ------------ -------------- ----------
BALANCE, July 31, 2002 $ 1,031 $ 0 ($636) $ 0 ($7,112)
Issuances of common shares for services 174
Conversion of redemable preferred stock 691
Dividends (653)
Cumulative effect of translation adjustment 1,139 1,139
Net loss (12,583)
------------- ---------- ------------ -------------- ----------
BALANCE, July 31, 2003 $ 1,031 $ 0 $ 503 $ 0 ($18,345)
============= ========== ============ ============== ==========
The accompanying notes are an integral part of these consolidated financial statements.
42
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
For the Years Ended July 31,
2001 2002 2003
---------- ---------- ----------
NET LOSS ($10,553) ($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 stock for services - 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
Net 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 preferred stock. 5,639 - -
Payment of expenses related to the issuance of preferred stock - (26) (12)
Proceeds from issuance of common stock, net
of issuance costs 900 220 (95)
---------- ---------- ----------
Net cash used in/provided by financing activities 5,765 (671) (169)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH (1,447) (76) 137
CASH AND CASH EQUIVALENTS, beginning of period 1,550 12 3
CASH AND CASH EQUIVALENTS- Allocated to discontinued operations (91) 67 -
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 12 $ 3 $ 140
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
43
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 majority owned subsidiaries
(ATSI or the "Company"), as listed below. All significant intercompany
transactions and balances were eliminated in consolidation. Our Common Stock was
quoted on the American Stock Exchange (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".
Prior to December 31, 2002, we provided retail and carrier communications
services within and between the United States (U.S.) and select markets within
Latin America. Unfortunately, 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 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 SUBSIDIARIES IN WHICH WE HAD OWNERSHIP DURING THE
----------------------------------------------------------------------------
PERIODS PRESENTED.
------------------
ATSI Comunicaciones, S.A. de C.V., (ATSI-COM, a Mexican corporation)
--------------------------------------------------------------------
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 we can
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 note 20 to the consolidated
financial statements.
American TeleSource International, Inc. (ATSI-Texas, a Texas corporation) and
--------------------------------------------------------------------------------
TeleSpan, Inc. (TeleSpan, a Texas corporation)
---------------------------------------------------
Prior to December 31, 2002, these companies operated carrier and network
services, but on February 4, 2003 and February 18, 2003 we 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
these two entities are not operating, and the bankruptcy trustee is managing the
liquidation of all assets owned under these entities and all matters related to
the Chapter 7 liquidation process.
44
American TeleSource International de Mexico, S.A. de C.V. (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 a 20-year comercializadora license,
which expires in February 2017. 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). 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.
Sistema de Telefonia Computarizada, S.A. de C.V(Computel, a Mexican corporation)
--------------------------------------------------------------------------------
Prior to July 2, 2003, Computel administrated the operation of the
communication centers in Mexico, but as a result of the sale of ATSI-Mexico to
LGV by the Chapter 7 bankruptcy trustee, all the communication centers are now
being managed and operated by Latingroup Ventures, L.L.C (LGV). Currently,
Computel is not operating and we do not foresee this entity restarting any
business any time in the near future.
ATSI de CentroAmerica (a Costa Rican corporation)
-------------------------------------------------------
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 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:
45
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 (12,785) (14,989) (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 (12,785) (15,783) (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.
Direct Cost:
------------
46
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 United States of America requires
management to make estimates and assumptions that affect reported amounts and
disclosures. Accordingly, actual results may differ from those estimates.
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
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
47
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 loss
account included in stockholders' deficit section of the 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 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, 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.
Income Taxes
------------
Deferred taxes are computed using the asset and liability method. Under
the asset and liability method, deferred tax assets and liabilities are
recognized for future tax consequences attributable to differences between the
financial statement carrying amounts of existing 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
effect 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,
48
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.
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". 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.
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 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 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.
3. BANKRUPTCY OF TWO OF OUR OPERATING ENTITIES
49
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 represents the total assets and 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 Company has incurred substantial cumulative net losses, working capital
deficits, and negative cash flows since the Company's inception. The auditor's
opinion on the consolidated financial statements as of July 31, 2003, calls
attention to substantial doubt about the Company's ability to continue as a
going concern. For the period from December 17, 1993 to July 31, 2003, the
Company has incurred cumulative net losses of approximately $80.1 million.
Further, the Company has a working capital deficit of approximately $17.8
million at July 31, 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. 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.
50
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
5. 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. At July 31, 2001, 2002 and 2003, 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
common stock, were outstanding as of July 31, 2001, 2002 and 2003, 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 investment in our significant unconsolidated
affiliate (ATSICOM) for the year ended July 31, 2003 of approximately $14,000.
The share of income or loss in our investment is recognized using the equity
method.
7. PROPERTY AND EQUIPMENT, NET (AT COST)
Following is a summary of our property and equipment at July 31, 2002 and
2003 (in thousands):
51
Depreciable lives July 31, 2002 July 31, 2003
----------------- --------------- -------------
Telecommunication equipment 10-15 years $ 5,580 -
Land and buildings 10 years - -
Furniture and fixtures 3-5 years 894 -
Equipment under capital leases 5-7 years 3,391 -
Leasehold improvements 1-5 years 303 -
Computer equipment 3 years 503 -
Other 3-5 years - -
--------------- -------------
Total 10,671 -
Less: accumulated depreciation (7,166) -
--------------- -------------
Total - property and equipment, net $ 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, 2001, 2002 and 2003, we recorded
approximately $2,045,000, $1,955,000 and $1,229,000 respectively of depreciation
expense related to our fixed 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 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. As a result of these entities being converted to
Chapter 7, the bankruptcy trustee sold all the company's property and equipment
in accordance with the Chapter 7 liquidation plan. Accordingly, during the year
ended July 31, 2003 we recorded a loss on disposal of assets by the trustee on
furniture and fixtures for approximately $179,000 and a loss on disposal of
equipment of approximately $830,000.
8. CONCESSION LICENSE
Following is a summary of our material intangible asset (in thousands):
July 31, 2002 July 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 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). ATSICOM owns 100% of the concession license. As a 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 18, 2003,
respectively. Additionally, the court ordered joint administration of both cases
on April 9,
52
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 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. During the year
ended July 31, 2002 we performed an analysis of the concession license carrying
value in comparison to the estimated future cash inflows from the concession
license operations and conducted a market valuation analysis of the concession
license. Because of these evaluations we determined that the expected future
cash inflows and market value related to the concession license were less than
its carrying book value and recognized an impairment expense of approximately
$2,039,000 related to the concession license. Additionally, during fiscal 2002,
we concluded that the Nortel Passport telecommunications equipment was not
efficient and was not cost effective to operate and there was no future benefit
from this equipment. Based on such determination we recognized approximately
$1,080,0000 of impairment expense associated with the Nortel Passport equipment
and the associated importation cost.
10. ACCRUED LIABILITIES
Following is a summary of our 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 (in thousands) (See terms below):
July 31, 2002 July 31, 2003
-------------- --------------
Note payable to a related party $ 250 $ 250
Note payable to a company $ 386 $ 386
Note payable to an individual $ 357 $ 357
Note payable to a related party - $ 25
Note payable to a company - $ 62
-------------- --------------
Total current notes payable $ 993 $ 1,080
============== ==============
53
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 fiscal 2003, the director
resigned from our Board of Directors. Currently, the note is in 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
approximately $386,000. The note, which accrues interest beginning July 15, 2002
at the rate of 18%, matured October 15, 2002. During fiscal 2003, the Company
did not make any payments and the note is in default. The creditor filed a claim
against ATSI Texas in the U.S. Bankruptcy Court for the Western District of
Texas; currently the 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 that was purchased in
July 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 approximately $9,000. During Fiscal
2003, the Company did not make any payments; therefore the note is in technical
default 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 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, there can be
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, there can be 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, there can be no assurance that a favorable
agreement will be reached.
12. CONVERTIBLE SUBORDINATEDDEBENTURES
During fiscal 2002 we received $275,000 of advances without specific terms
of repayment or interest. In 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. At July 31,
54
2003, the Company was in default of the terms of the debentures for non-payment
of quarterly interest.
13. LEASES
Operating Leases
----------------
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 2003, ATSI Texas and
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 entered 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 this operating lease is approximately $3,500.
Rental expense under operating leases for the years ended July 31, 2001,
2002 and 2003, was approximately $3,194,000, $2,718,000 and $637,000,
respectively. Future minimum lease payments of approximately $42,000 are due
under the new office space lease during the year ended July 31, 2004.
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 from this lease were
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 and July 31, 2003 were 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
55
approximately $40,000. The proceeds from this lease were used to acquire a
generator set. The lease calls for monthly payments of approximately $1,000 for
60 months and the capital lease 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 capital lease
called for an annual interest rate of approximately 11%. The total obligation
outstanding under said facility at July 31, 2002 was approximately $1,000. This
lease 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 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 commencing August 1, 2002, consisting of six
payments of $50,000 and thirty-six payments of $75,000. The total obligation
outstanding under said facility at July 31, 2002 and July 31, 2003 was
approximately $3,040,000, including accrued interest of approximately $843,000.
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.
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) 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. The obligation outstanding under said facility at July 31,
2002 and July 31, 2003 was approximately $ 812,000 and $0, respectively. In May
2003, the Judge managing the Chapter 7 case, ordered a motion 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 this transaction of approximately $232,000 and reduced assets of
approximately $1,316,000.
14. DEFERRED REVENUE
The Company collects cash from private network customers in advance of
providing services in order to partially cover the cost necessary equipment and
related installation costs. These advance cash payments are recorded as deferred
revenue until such time as the Company has performed services and there is no
further significant obligation pertaining to the advance payments. At July 31,
2002 and July 31, 2003 we had
56
approximately $111,000 and $0 of deferred revenues outstanding, respectively.
15. SHARE CAPITAL
COMMON STOCK
------------
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 249,999 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, 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.
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 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,
2001, 2002 and 2003.
PREFERRED STOCK
---------------
Our shareholders of ATSI Canada approved the creation of a class of
preferred stock at our annual shareholders meeting on May 21, 1997. This class
of preferred stock was authorized, 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, 2003.
Pursuant to ATSI's Certificate of Incorporation, our board of directors may
issue, in series, 10,000,000 of preferred shares, with a par value of $0.001.
57
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.
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 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,
2003, 4,370 shares of Series A Preferred Stock remain outstanding for which we
have accrued approximately $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.
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
58
dividends resulting in the issuance of approximately 492,308 shares of common
stock.
SERIES D PREFERRED STOCK
------------------------
In February 2000, we issued 3,000 shares of Series D Preferred Stock for
cash proceeds of approximately $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, 2003, 742 shares of Series D
Preferred Stock remain outstanding, for which we have accrued approximately
$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.
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.
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. In 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
59
resulting in the issuance of 4,121,680 shares of common stock. As of July 31,
2003, 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.
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.
SERIES F PREFERRED STOCK
------------------------
In March 2001, we issued 8,175 shares of Series F Preferred Stock for cash
proceeds of approximately $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. In
fiscal 2002, holders of 700 of the shares outstanding converted into 274,278
shares of common 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, 2003
we have 7,260 shares of Series F Preferred Stock outstanding for which we have
accrued approximately $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
60
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, 2003, the entire balance of 6,500 shares
of Series G Preferred Stock remains outstanding for which we have accrued
approximately $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.
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.
16. STOCK PURCHASE WARRANTS AND STOCK OPTIONS
Following is a summary of warrant activity from August 1, 2000 through July
31, 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, 2003 expire as follows:
NUMBER OF EXERCISE PRICE EXPIRATION DATE
--------- --------------- ------------------
WARRANTS
---------
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
---------
4,508,826 TOTAL WARRANTS
---------
61
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 year ending July 31, 2001 the board of
directors granted a total of 117,500 options 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.
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 additional 3,050,000 in options to directors, officers and employees
of ATSI. The Board further approved the granting of an 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, 2001, 2002 and 2003 and changes during the periods are
presented below:
Years Ended July 31,
---------------------------------------------------------
1997 Stock
Option Plan 2001 2002 2003
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- --------- -------- ------ --------- ------
Outstanding,
beginning of year 312,004 $ 1.59 202,002 $ 1.87 202,002 $ 1.87
Granted - - - - - -
Exercised (13,000) $ 0.58 - - - -
Forfeited (97,002) $ 2.15 - - (200,002) $ 1.87
--------- --------- -------- ------ --------- ------
Outstanding, end
of year 202,002 $ 1.87 202,002 $ 1.87 2,000 $ 0.58
========= ========= ======== ====== ========= ======
62
Options
exercisable at end
of year 202,002 $ 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
========= ====== ======
Years Ended July 31,
--------------------------------------------------------------
1998 Stock
Option Plan 2001 2002 2003
--------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- --------- ---------- ------ ---------- ------
Outstanding,
beginning of year 1,379,211 $ 0.70 1,026,840 $ 0.91 1,015,172 $ 0.91
========== ======
Granted 117,500 $ 0.90 - - - -
Exercised (231,999) $ 0.55 - - - -
Forfeited (237,872) $ 0.84 (11,668) $ 0.78 (662,338) $ 0.91
----------- --------- ---------- ------ ---------- ------
Outstanding, end
of year 1,026,840 $ 0.91 1,015,172 $ 0.91 352,834 $ 0.56
=========== ========= ========== ====== ========== ======
Options
exercisable at end
of year 417,043 $ 0.83 891,840 $ 0.82 342,834 $ 0.56
=========== ========= ========== ====== ========== ======
Weighted average
fair value of
options granted
during the year $ 0.87 N/A N/A
========= ====== ======
Years Ended July 31,
---------------------------------------------------------------
2000 Stock
Option Plan 2001 2002 2003
---------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- ----------- ------ ----------- ------
Outstanding,
beginning of year - $ - 1,864,000 $ 0.56 6,425,165 $ 0.48
=========== ======
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
----------- ------ ----------- ======
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
========= ====== ======
63
The weighted average remaining contractual life of the stock options
outstanding at July 31, 2003 is approximately .4 years for options granted under
the 1997 Stock Option Plan, approximately 5.3 years for options granted under
the 1998 Stock Option Plan and approximately 8.6 years for options granted under
the 2000 Incentive Stock Option Plan.
The following table summarizes information about stock options and warrants
outstanding for all plans at July 31, 2003:
Options and Warrants
Options and Warrants Outstanding Exercisable
------------------------------------------------------------------------
Weighted
Average
Weighted Remaining Weighted
Range of Number Average Contractual Number Average
Exercise Price Outstanding Exercise Price Life (Years) Exercisable Exercise Price
-----------------------------------------------------------------------------------------
$0.08 - 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
-----------------------------------------------------------------------------------------
17. STATEMENT OF CASH FLOWS
Cash payments and non-cash investing and financing activities during the
periods indicated were as 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
On January 1, 1999, the Company established a Retirement Plan, which was 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.
64
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 was to provide a program whereby contributions of
participating employees and their employers were systematically invested to
provide the employees an interest in the Company and to further their financial
independence. Participation in the Plan was voluntary and was open to employees
of the Company who became eligible to participate upon the completion of a
half-year of continuous service. The term of each Plan Year began January 1 and
ended December 31.
Participating employees could 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 could
have elected to make those contributions on a before-tax or after-tax basis, or
both, with federal income taxes on before-tax contributions being deferred until
a distribution was made to the participant. Participants' contributions of up
to 3% of their elective deferrals were matched 25% by the Company. The Company
did not match participant's contributions in excess of 3% of their annual
compensation. The Employer could also have contributed an additional amount
determined in its sole judgment. Such additional contribution, if any, was
allocated to each Participant in proportion to his or her Compensation for the
Plan Year while a Participant.
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. 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. There can be no assurances, however, that the negotiations
will be successful.
20. SALE 51% OF ATSI COMUNICACIONES S.A DE C.V.
In May 2003, the company entered into a Share Purchase Agreement with
Telemarketing de Mexico, S.A. de C.V. (Telemarketing) whereby we agreed to sell
Telemarketing 51% of our Mexican subsidiary, ATSI Comunicaciones, S.A. de C.V.
(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. 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.
- 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
65
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 a payment of $48,048 on the 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 is recorded as a long-term
non-interest bearing note receivable, secured by the stock of ATSICOM.
Currently the Company is primarily dependent on these funds to supplement any
cash from operations.
21. SALE OF ATSI MEXICO AND SINFRA
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. 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 of
approximately $17,500 and the use of these funds is restricted for the Chapter 7
case related expenses. As a result of this transaction, we recognized in ATSI
Texas and TeleSpan a loss on the sale of assets of approximately $452,123 on the
sale of ATSIMexico and $510,502 on the sale of SINFRA.
22. INCOME TAXES
Income tax expense from continuing operations differs from the amount
computed at federal statutory rates as follows:
Year 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) - - -
Deferred tax assets (liabilities) are comprised of the following:
July 31,
--------
2002 2003
------------- -------------
Net operating loss carry-forward $ 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
66
evaluation include recent and expected future earnings and the Company's
liquidity and equity positions. As of July 31, 2002 and 2003, the Company has
determined that a valuation allowance is necessary for the entire amount of
deferred tax assets.
At July 31, 2002 and 2003, the Company had net operating loss
carry-forwards related to U.S. operations of approximately $21,246,000 and
$45,303,000 with expiration dates ranging from 2009 through 2023.
The availability of the net operating loss carry-forwards 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.
23. DISCONTINUED OPERATIONS
On June 12, 2002 we discontinued our E-commerce operations through the sale
of our majority-owned subsidiary, GlobalSCAPE, Inc. for approximately
$2,250,000. The sale of this segment resulted in a gain of approximately
$1,100,000.
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
======== ======
67
Consolidated Income statement presentation for the years ended July 31,
2001, 2002 and 2003 reflects the elimination of the following E-commerce
revenues and the expenses of GlobalSCAPE. And the elimination of retail services
revenue and expenses of ATSIMEX for the years ended July 31, 2001, 2002 and 2003
(in thousands):
---------------------------------------------------------------
E-COMMERCE
For the Year Ending July 31,
----------------------------
2001 2002 2003
-------- -------- --------
E-commerce revenues $ 5,445 $ 4,404 $ -
Costs and expenses 6,217 4,208 -
Net (loss) income before taxes &
minority interest (772) 196 -
Net (loss) income before minority
interest (836) 195 -
Net (loss) income $ (591) $ 399 $ -
---------------------------------------------------------------
---------------------------------------------------------------
RETAIL SERVICES
For the Year Ending July 31,
----------------------------
2001 2002 2003
-------- -------- --------
Retail Services revenue $ 6,837 $ 7,555 $ 4,543
Costs and expenses 11,490 16,660 7,383
Net (loss) income before taxes &
minority interest (4,653) (9,105) (2,840)
Net (loss) income before minority
interest (4,812) (9,215) (2,919)
Net loss $(4,812) $(9,215) $(2,919)
---------------------------------------------------------------
---------------------------------------------------------------
TOTAL DISCONTINUED OPERATIONS
For the Year Ending July 31,
----------------------------
2001 2002 2003
-------- -------- --------
Retail Services revenue $12,282 $11,959 $ 4,543
Costs and expenses 17,707 20,868 7,383
Net income before taxes &
minority interest (5,425) (8,909) (2,840)
Net loss before minority interest (5,648) (9,020) (2,919)
Net loss $(5,403) $(8,815) $(2,919)
---------------------------------------------------------------
68
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 capacity 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 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 operators to provide transmission capacity. Although there
can be no assurance that such arrangement could be obtained or obtained when
needed.
During the year ended July 31, 2001 and 2002 our carrier services business
had one customer, Qwest Communications whose aggregated revenue approximated 70%
and 72%, respectively of our total 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.
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. 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.
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 $77,361 and $55,500 for their services
during fiscal 2001 and 2002. The monthly fees are capped by the agreement at
$18,500 per month. During 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 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 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
69
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, 2002 and July 31, 2003, we had a payable to Technology
Impact Partners of approximately $71,207 and approximately $79,794,
respectively.
In 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 default on the note.
Additionally, at July 31, 2003, we had a payable of approximately $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.
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 included 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. Subsequent to July 31, 2003, the creditor filed a
claim with the U.S. Bankruptcy Court for the Western District of Texas for this
liability.
In December 2002, ATSI-Delaware and ATSI the Texas 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,
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 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.
Management 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 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.
27. QUARTERLY FINANCIAL DATA (NET OF GLOBALSCAPE, INC., ATSIMEX AND
SINFRA)
70
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Quarters Ended
---------------------------------------------------------
10/31/2002 1/31/2003 4/30/2003 7/31/2003
------------ ------------- ------------- -------------
OPERATING REVENUES:
Services
Carrier services $ 5,436 $ 1,096 $ 0 $ 0
Network services 185 122 70 40
------------ ------------- ------------- -------------
Total operating revenues 5,621 1,218 70 40
OPERATING EXPENSES:
Cost of services (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 ($3,025) ($3,483) ($1,451) ($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.
71
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 4/30/2002 7/31/2002
------------ ------------ ------------ ------------
OPERATING REVENUES:
Services
Carrier services $ 9,058 $ 11,127 $ 10,827 $ 10,178
Network services 580 537 442 397
------------ ------------ ------------ ------------
Total operating revenues 9,638 11,664 11,269 10,575
OPERATING EXPENSES:
Cost of services (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 ($2,274) ($2,496) ($2,486) ($7,734)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER SHARE ($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
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
72
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 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.
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.
During the year ended July 31, 2000, 2001 and 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
73
Directors and Officers that resigned During Fiscal 2003:
--------------------------------------------------------
Stephen M. Wagner 46 President, Chief Executive Officer and Director (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 Corporate Secretary
(Resigned, May 2003)
Carlos K. Kauachi 62 Director (Resigned, February 2003)
Darrell O. Kirkland 61 Director (Resigned, February 2003)
Current as of July 31, 2003:
---------------------------------
Arthur L. Smith has served as Chief Executive Officer and Director since
May 2003. Mr. Smith also served as President of ATSI-Mexico from August 2002
to January 2003, as Chief Executive Officer and a director of the Company from
June 1996 to August 2002 and as President of the Company since its formation in
June 1996 to July 1998. Mr. Smith also served 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 thirteen years
experience in the telecommunications industry.
Ruben R. Caraveo has served as Vice President of Sales and Operations since
May 2003. Mr. Caraveo is responsible for Carrier Sales and the delivery of
Carrier Services for both the U.S. and Mexico. Mr. Caraveo served as 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 January 2001 to January 2002, Mr.
Estrada served in various roles within ATSI, including International Accounting
Manager and general Accountant. Prior to joining ATSI in 1999 he served as a
Senior Accountant for the Epilepsy Association of San Antonio and South Texas.
Mr. Estrada graduated from the University of Texas at San Antonio, with a
Bachelors of Business Administration, with a concentration in Accounting.
John R. Fleming has served as Interim Executive Chairman of the Board since
August 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
74
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 July 1992. Mr. Fleming was a Branch Manager
for Satellite Business Systems from 1983 to 1986.
Richard C. Benkendorf has served as a director of the Company since October
1996. From 1991 to present, Mr. Benkendorf has been a principal 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, 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.
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.
75
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, 2003, all of its directors and executive officers were in compliance with
the applicable filing requirements.
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 most highly compensated
executive officers whose total cash compensation exceeded $100,000 for services
rendered in all capacities for the fiscal year ended July 31, 2003
(collectively, the "Named Executive Officers").
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-----------------------------------------------------------------------------------
AWARDS PAYOUTS
---------------------------------
SECURITIES
NAME AND PRINCIPAL RESTRICTED UNDERLYING LTIP ALL OTHER
------------------ FISCAL OTHER STOCK OPTIONS/ Payout COMPENSAT
POSITION YEAR SALARY ($) BONUS ($) ANNUAL AWARDS SARS (#) ($) ION ($)
-------- ------ ----------- ---------- COMPENSATI ----------- ----------- ------- ----------
ON ($)(1) ($)
----------- -----------
Stephen M. Wagner (2) 2003 $ 71,154 $ 30,833 - - - - -
Chief Executive Officer 2002 $ 174,327 - - - 500,000 - -
2000 - - - - - - -
Arthur L. Smith (3) 2003 $ 90,808 $ 14,105 - - 300,000 - -
CEO of ATSI Delaware, 2002 184,058 25,004 - - 1,166,666 - -
and President, ATSI- 2001 190,000 - - - - - -
Mexico
Raymond G. Romero (4) 2003 $ 56,923 - - - 0 - -
Interim CEO & VP, 2002 137,008 - - - 150,000 - -
General Counsel and 2001 140,000 - - - 50,000 - -
Business Development
Ruben Caraveo (5) 2003 $ 71,154 - - - 150,000 - -
Vice President, Operations 2002 110,504 - - - - - -
2001 28,308- - - - 300,000 - -
_______________
(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 served as Chief Executive Officer of American TeleSource
International, Inc., a Texas corporation ("ATSI-Texas"), the Company's principal operating subsidiary during the
First half of fiscal 2003. Mr. Wagner's compensation was paid by ATSI-Texas.
(3) In May 2003, Mr. Smith was appointed as 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 was paid by ATSI-Texas until December
2002 and is being paid by ATSI Delaware since May 2003.
76
(4) Resigned as Interim CEO in May 2003, position he held since February 2003. Mr. Romero'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 was paid by ATSI Texas until December 2002,
and is being paid by ATSI Delaware since May 2003.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain of its
executive officers as follows:
NAME TERM MINIMUM ANNUAL SALARY
---- ---------------------
Stephen M. Wagner (1) August 20, 2001 - August 19, 2002 $ 185,000
Arthur L. Smith (2) August 1, 2001 - July 31, 2002 $ 140,000
Ruben Caraveo (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. 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, 2003, options for 2,000 shares were outstanding under the
1997 Option Plan at a weighted average exercise price of $.58, all of which were
exercisable. As of July 31, 2003, 4,463,331 options had been exercised and
451,668 options were forfeited.
77
1998 Option Plan
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.
The 1998 Option Plan terminated on September 9, 2001. No further options
will be granted under the 1998 Option Plan. All options outstanding under the
1998 Option Plan 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, 2003, options for 352,834 shares were outstanding under the
1998 Option Plan at a weighted average exercise price of $0.56. As of July 31,
2003, 340,334 options were exercisable at a weighted average exercise price of
$0.56, 757,254 options had been exercised and 1,104,712 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, 2003, the Board had granted options to
purchase 7,771,499 shares of common stock under the 2000 Option Plan at an
exercise price range of $.08-$0.64. As of July 31, 2003, 1,976,665 options were
exercisable at a weighted average exercise price of $0.55, no options had been
exercised and 3,961,500 options had been forfeited.
STOCK OPTION GRANTS IN FISCAL 2003
A total of 300,000,150,000 and 90,000 were granted to Mr. Smith, Mr.
Caraveo and Mr. Estrada, respectively, during the Company's fiscal year ended
July 31, 2003.
AGGREGATE OPTION EXERCISES IN FISCAL 2003 AND FISCAL YEAR-END OPTION VALUES
The following table shows stock options exercised by the Named Executive
Officers during the fiscal year ended July 31, 2003, including the aggregate
value of gains on the date of exercise. In addition, the table includes the
number of shares covered by both exercisable and unexercisable stock options as
of July 31, 2003. Also reported are the values of "in-the-money" options, which
represent the positive spread between the exercise price of any such existing
stock options and the Common Stock price as of July 31, 2003.
SHARES
ACQUIRED NUMBER OF SECURITIES
ON VALUE UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
EXERCISE REALIZED OPTIONS AT FYE(#) MONEY OPTIONS AT FYE ($)
-------- --------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------------- ------- ------ ----------- ------------- ----------- -------------
Stephen M. Wagner (1) - - - - - -
Arthur L. Smith - - 1,099,999 500,000 - -
78
Raymond G. Romero (2) - - - - - -
Ruben Caraveo - - 200,000 250,000 - -
Antonio Estrada - - 50,000 130,000 - -
(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 lists the beneficial ownership of shares of the
Company's Common Stock and Series A Preferred Stock by (i) all persons and
groups known by the Company to own beneficially more than 5% of the outstanding
shares of the Company's Common Stock or Series A Preferred Stock, (ii) each
director and nominee, (iii) each person who held the office of Chief Executive
Officer during the last fiscal year or at any time during the year ended July
31, 2003, (iv) the four highest compensated executive officers who were serving
as executive officers on July 31, 2003, (v) each person who would have been one
of the four highest compensated executive officers but was not serving as an
executive officer on July 31, 2003, and (vi) all directors and officers as a
group. None of the directors, nominees or officers of the Company owned any
equity security issued by the Company's subsidiaries other than director's
qualifying shares. Information with respect to officers, directors and their
families is as of July 31, 2003 and is based on the books and records of the
Company and information obtained from each individual. Information with respect
to other stockholders is based upon the Schedule 13D or Schedule 13G filed by
such stockholders with the Securities and Exchange Commission. Unless otherwise
stated, the business address of each individual or group is the same as the
address of the Company's principal executive office and solely the person
indicated beneficially owns all shares.
---------------------------------------------------------------------------------------------------------------------------------
NAME OF COMMON % OF SERIES A % OF TOTAL VOTING % OF
INDIVIDUAL OR GROUP STOCK CLASS (1) PREFERRED STOCK CLASS (2) INTEREST CLASS (3)
------------------------------------------ --------------- --------- --------------- --------- ------------------ ---------
5% STOCKHOLDERS
Peter Blindt 0 * 500 11.4% 74,500 *
30 E. Huron #5407
Chicago, IL 60611
Edward Corcoran 0 * 500 11.4% 74,500 *
6006 W. 159th Street
Bldg. C 1-W
Oak Forest, IL 60452
Gerald Corcoran 0 * 500 11.4% 74,500 *
11611 90th Avenue
St. John, IN 46373
Joseph Migilio 0 * 1,005 23.0% 149,745 (4) *
13014 Sandburg Ct.
Palos Park, IL 60464
Rocky Dazzo 0 * 620 14.2% 92,300 (4) *
9931 W. Mission Dr.
Palos Park, IL 60464
79
Jeffrey Tessiatore 0 * 500 11.4% 74,500 *
131 Settlers Dr.
Naperville, IL 60565
Albert Vivo 0 * 500 11.4% 74,500 *
9830 Circle Parkway
Palos Park, IL 60464
Gary Wright 0 * 750 17.2% 111,750 *
3404 Royal Fox Dr.
St. Charles, IL 60174
INDIVIDUAL OFFICERS,
DIRECTORS AND NOMINEES
Arthur L. Smith 3,488,448 (7) 3.3% 0 * 3,488,448 (7) 3.3%
President, Chief Executive Officer
Director
Stephen M. Wagner 0 * 0 * 0 *
Former Chief Executive Officer (5)
Raymond G. Romero 0 * 0 * 0 *
Former Interim Chief Executive Officer (6)
Ruben R. Caraveo 200,000 (8) * 0 * 200,000 (8) *
Vice President, Sales and Operations
John R. Fleming 153,334 (9) * 0 * 153,334 (9) *
Director
Richard C. Benkendorf 320,834 (10) * 0 * 320,834 (10) *
Director
Murray R. Nye 455,844 (11) * 0 * 455,844 (11) *
Director
Darrell O. Kirkland 0 (12) * 0 * 0 (12) *
Former Director
ALL OFFICERS AND
DIRECTORS AS A GROUP 4,810,960 (13) 4.6% 0 * 4,810,960 (13) 4.6%
---------------------------------------------------------------------------------------------------------------------------------
* Less than 1%
(1) Based on 103,638,690 shares of Common Stock outstanding as of July 31, 2003. Any shares represented by options exercisable
within 60 days after July 31 2003 are treated as being outstanding for the purpose of computing the percentage of class for
such person but not for any other purpose.
(2) Based on 4,370 shares of Series A Preferred Stock outstanding as of July 31, 2003.
(3) Based on 104,289,820 voting interests outstanding as of July 31, 2003. Any shares represented by options exercisable
within 60 days after July 31, 2003 are treated as being outstanding for the purpose of computing the percentage of class
for such person but not for any other purpose.
(4) Includes 505 shares owned by a partnership in which Messrs. Dazzo and Migilio are partners.
(5) Resigned as of January 2003.
(6) Resigned as of May 2003.
(7) Includes 200,000 shares subject to options exercisable within 60 days after July 31, 2003.
(8) Includes 100,000 shares subject to options exercisable within 60 days after July 31, 2003.
80
(9) Includes 66,666 shares subject to options exercisable within 60 days after July 31, 2003.
(10) Includes 66,666 shares subject to options exercisable within 60 days after July31, 2003 and 7,500 shares accrued for
Director fees that have not been issued.
(11) Includes 66,666 shares subject to options exercisable within 60 days after July 31, 2003 and 7,500 shares accrued for
Director fees that have not been issued.
(12) In February 2003, Mr. Kirkland resigned as a Director of the Company. No stock options were granted to Mr. Kirkland.
(13) Includes 559,999 shares subject to options exercisable within 60 days after July 31, 2003.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 2000, our board of directors approved a plan, in which
$1,040,000 million was loaned to two 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 the agreements for
an additional year and changing them to non-recourse notes. 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,
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 Mr. 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 Mr. 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 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 $77,361 and $55,500 for their services
during fiscal 2001 and 2002. The monthly fees are capped by the agreement at
$18,500 per month. During 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 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, 2002
and July 31, 2003, we had a payable to Technology Impact Partners of
81
approximately $71,207 and approximately $79,794, respectively.
In 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, 2003, we had a payable of
approximately $35,377 for board fees and related expenses.
ITEM 14. 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 year
covered by this report. Based on that evaluation, the President and Chief
Executive Officer and the Controller and Principal Financial Officer have
concluded that these disclosure controls and procedures are effective as of the
end of the period covered by this report. There were no changes in the Company's
internal control over financial reporting during the fourth fiscal quarter that
have had a material affect or are reasonably likely to have a material affect on
internal control over financial reporting.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements Index to Financial Statements appears on Page 38.
(b) Reports on Form 8-K
- On October 29, 2002 we announced that a member of our Board of
Directors had resigned.
- 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.
- 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).
- 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.
- 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 Court 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
82
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)
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)
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)
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
83
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)
4.27 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)
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,
84
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 12. 2000.)
4.37 Convertible Debenture Agreement (Exhibit 4.37 to Annual Report on Form
10-K for the year ended July 31, 2003 filed November 12, 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))
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))
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 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)
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)
85
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)
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)
10.23 Consulting Agreement with KAWA Consultores, S.A. de C.V. (Exhibit
10.28 to Amended Annual report on Form 10-K for year ended July 31,
1999 filed April 14, 2000)
10.24 Commercial Lease with BDRC, Inc (Exhibit 10.24 to Annual Report on
Form 10-K for year ended July 31, 2003 filed November 12, 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 (English summary)
(Exhibit 10.26 to Annual Report on Form 10-K for year ended July 31,
2003 filed November 12, 2003)
86
10.27 Interconnection Agreement TELMEX and ATSICOM (English Translation)
(Exhibit 10.27 to Amended Annual Report on Form 10-K/A for the year
ended July 31, 2003 filed March 2, 2004)
10.28 Carrier Service Agreement DialMex and ATSI (Exhibit 10.27 to Annual
Report on Form 10-K for year ended July 31, 2003 filed November 12,
2003)
22 Subsidiaries of ATSI (Exhibit 22 to this Annual Report on Form 10-K
for year ended July 31, 2003 filed November 12, 2003)
31.1 Certification of our President and Chief Executive Officer, under
Section 302 of the Sarbanes-Oxley Act of 2002. (Exhibit 31.1 to this
from 10-K filed on November 12, 2003)
31.2 Certification of our Corporate Controller and Principal Financial
Officer, under Section 302 of the Sarbanes-Oxley Act of 2002. (Exhibit
31.2 to this from 10-K filed on November 12, 2003)
32.1 Certification of our President and Chief Executive Officer, under
Section 906 of the Sarbanes-Oxley Act of 2002. (Exhibit 32.1 to this
from 10-K filed on November 12, 2003)
32.2 Certification of our Corporate Controller and Principal Financial
Officer, under Section 906 of the Sarbanes-Oxley Act of 2002. (Exhibit
32.2 to this from 10-K filed on November 12, 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)
87
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
March 2, 2004.
ATSI COMMUNICATIONS, INC.
By: /s/ Arthur L. Smith
-------------------
Arthur L. Smith
President and Chief Executive Officer
By: /s/ Antonio Estrada
-------------------
Antonio Estrada
Corporate Controller and Principal Financial Officer
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 March 2, 2004.
SIGNATURE TITLE
--------- -----
/s/ Arthur L. Smith President and Chief Executive Officer, Director
------------------- (Principal Executive Officer)
/s/ Antonio Estrada Corporate Controller (Principal
------------------- Accounting and Finance Officer)
/s/ JOHN R. FLEMING Interim Executive Chairman of Board, Director
-------------------
/s/ RICHARD C. BENKENDORF Director
-------------------------
/s/ MURRAY R. NYE Director
-----------------
88