UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2004
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-15687
ATSI COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-2849995
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8600 WURZBACH ROAD, SUITE 700W
SAN ANTONIO, TEXAS 78240
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(210) 614-7240
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes No X
--- ---
THERE WERE 103,655,190 SHARES OF COMMON STOCK OUTSTANDING AT MARCH 15,
2004.
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JANUARY 31, 2004
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of July 31, 2003 and January 31, 2004 . . . . . . . . 3
Consolidated Statements of Operations for the Three and Six Months Ended January
31, 2003 and 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended
January 31, 2003 and 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the Six Months Ended January 31, 2003
and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . 18
Item 4. Controls and procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share information)
January 31, July 31,
2004 2003
------------- ----------
ASSETS (unaudited)
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 87 $ 140
Accounts receivable 37 7
Note Receivable-current portion 62 187
Prepaid & Other current assets 12 6
------------- ----------
Total current assets 198 340
------------- ----------
OTHER ASSETS, net
Note Receivable 100 100
Investment in joint venture 649 663
------------- ----------
Total assets $ 947 $ 1,103
============= ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
CURRENT LIABILITIES:
Pre-petition liabilities of bankrupt subsidiaries, net of assets $ 12,355 $ 12,350
Accounts payable 453 356
Accrued liabilities 2,719 2,559
Notes payable 570 445
Convertible debentures 275 275
Series D Cumulative Preferred Stock, 3,000 shares authorized,
742 shares issued and outstanding. 1,115 1,093
Series E Cumulative Preferred Stock, 10,000 shares authorized
and 1,170 shares issued and outstanding 1,242 1,209
Liabilities from discontinued operations, net of assets 1,152 1,152
------------- ----------
Total current liabilities 19,881 19,439
------------- ----------
LONG-TERM LIABILITIES:
Other 50 9
------------- ----------
Total long-term liabilities 50 9
------------- ----------
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,
103,655,190 and 103,638,690 issued and outstanding, respectively 104 104
Additional paid in capital 60,969 61,124
Accumulated deficit (80,559) (80,075)
Other Comprehensive Income 502 502
------------- ----------
Total stockholders' deficit (18,984) (18,345)
------------- ----------
Total liabilities and stockholders' deficit $ 947 $ 1,103
============= ==========
The accompanying notes are an integral part of these consolidated financial
statements
3
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
Three months ended January 31, Six months ended January 31,
------------------------------------ ----------------------------------
2004 2003 2004 2003
----------------- ----------------- --------------- -----------------
OPERATING REVENUES:
Services
Carrier services $ 209 $ 1,096 $ 242 $ 6,532
Network services 42 122 84 307
----------------- ----------------- --------------- -----------------
Total operating revenues 251 1,218 326 6,839
OPERATING EXPENSES:
Cost of services (exclusive of depreciation
and amortization, shown below) 218 1,120 267 6,125
Selling, general and administrative 231 2,073 428 3,342
Bad debt expense - - 4 13
Depreciation and Amortization - 442 - 849
----------------- ----------------- --------------- -----------------
Total operating expenses 449 3,635 699 10,329
----------------- ----------------- --------------- -----------------
OPERATING LOSS (198) (2,417) (373) (3,490)
OTHER INCOME (EXPENSE):
Other income (expense), net - (6) 1 (19)
Loss on an unconsolidated affiliate (53) - (60) -
Interest expense (25) (191) (52) (384)
Loss from sale of assets - (28) - (28)
----------------- ----------------- --------------- -----------------
Total other income (expense) (78) (225) (111) (431)
LOSS FROM CONTINUING
OPERATIONS BEFORE INCOME TAX (276) (2,642) (484) (3,921)
NET INCOME FROM DISCONTINUED
OPERATIONS - (750) - (2,400)
----------------- ----------------- --------------- -----------------
NET LOSS (276) (3,392) (484) (6,321)
LESS: PREFERRED DIVIDENDS (93) (91) (186) (187)
----------------- ----------------- --------------- -----------------
NET LOSS TO COMMON STOCKHOLDERS ($369) ($3,483) ($670) ($6,508)
================= ================= =============== =================
BASIC AND DILUTED LOSS PER SHARE ($0.00) ($0.00) ($0.00) ($0.00)
================= ================= =============== =================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 103,655,000 103,173,000 103,655,000 99,926,000
================= ================= =============== =================
The accompanying notes are an integral part of these consolidated financial
statements.
4
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(unaudited)
For the three months ended January 31, For the six months ended January 31,
------------------------------------------ ----------------------------------------
2004 2003 2004 2003
--------------------- ------------------- ------------------- -------------------
Net loss to common stockholders
Other comprehensive income (loss), ($369) ($3,483) ($670) ($6,508)
net of tax:
Foreign currency translation adjustment - 579 - 803
--------------------- ------------------- ------------------- -------------------
Comprehensive loss to common stockholders ($369) ($2,904) ($670) ($5,705)
===================== =================== =================== ===================
The accompanying notes are an integral part of these consolidated financial
statements.
5
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
Six months ended January 31,
-----------------------------------
2004 2003
---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($484) ($6,321)
Adjustments to reconcile net loss
operating activities-
Impairment loss - 88
Depreciation and amortization - 1,321
Gain on disposition of property & equipment - 33
Loss on an unconsolidated affiliate 60 -
Issuance of Common Stock for services 2 -
Issuance of Warrants for services 30 -
Foreign currency loss - 658
Provision for losses on accounts receivable 4 13
Changes in operating assets and liabilities:
(Increase) Decrease in accounts receivable (29) 734
(Increase) Decrease in prepaid expenses and other (6) 463
Increase in accounts payable 139 2,794
Increase in accrued liabilities 28 1,222
(Decrease) in deferred revenue - (108)
---------------- -----------------
Net cash used / provided by operating activities (256) 897
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment - (289)
Cash proceeds from sale of ATSICOM 125 -
Investment in joint Venture in ATSICOM (47) -
---------------- -----------------
Net cash provided by / used in investing activities 78 (289)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 125 25
Capital Lease payments - (87)
Payment of expenses related to the issuance of preferred stock - (12)
Payment of expenses related to the issuance of common stock - (95)
---------------- -----------------
Net cash provided by / used in financing activities 125 (169)
---------------- -----------------
NET (DECREASE) INCREASE IN CASH (53) 439
CASH AND CASH EQUIVALENTS, beginning of period 140 27
CASH AND CASH EQUIVALENTS, Allocated to discontinued operations - (127)
---------------- -----------------
CASH AND CASH EQUIVALENTS, end of period $ 87 $ 339
================ =================
The accompanying notes are an integral part of these consolidated financial
statements.
6
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of ATSI
Communications, Inc. have been prepared in accordance with accounting principles
generally accepted in the United States of America and the rules of the
Securities and Exchange Commission ("SEC"), and should be read in conjunction
with the audited financial statements and notes thereto contained in ATSI
Communications Inc. Annual Report filed with the SEC on Form 10-K. In the
opinion of management, these interim financial statements contain all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of financial position and the results of operations for the interim
periods presented. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year. Notes
to the financial statements, which would substantially duplicate the disclosure
contained in the audited financial statements for the most recent fiscal year
ended July 31, 2003, as reported in the Form 10-K, have been omitted.
2. PRE-PETITION LIABILITIES (NET OF ASSETS) OF THE BANKRUPT SUBSIDIARIES
Our subsidiaries, American TeleSource International, Inc. (ATSI Texas) and
TeleSpan, Inc. (TeleSpan) filed for protection under Chapter 11 of the U.S.
Bankruptcy Code on February 4, 2003 and February 18, 2003 respectively. The
court ordered joint administration of both cases on April 9, 2003 and on May 14,
2003 the court converted the cases to Chapter 7. The two bankrupt subsidiaries
were our primary operating companies and they have ceased operations. These
bankruptcies did not include ATSI Communications, Inc., the reporting entity.
On July 2, 2003, the U.S. Bankruptcy Court handling the Chapter 7 cases for ATSI
Texas and TeleSpan approved the sale of two of their subsidiaries, ATSI de
Mexico S.A de C.V. (ATSI Mexico) and Servicios de Infraestructura S.A de C.V.
(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 $17,500, which are all the
proceeds from the sale of these entities. The Chapter 7 Bankruptcy Trustee will
manage the designation of these funds for the benefit of the creditors of ATSI
Texas and TeleSpan. Upon liquidation of all the assets owned by ATSI Texas and
TeleSpan, the Chapter 7 Trustee will negotiate all claims with creditors.
The following represents the pre-petition liabilities (net of assets) in the
Chapter 7 case:
7
ATSI Texas and TeleSpan
Pre petition Liabilities, net of assets
(in thousands)
January 31, 2004 July 31, 2003
----------------- --------------
CURRENT LIABILITIES:
Accounts payable $ 7,497 $ 7,492
Accrued liabilities 2,015 2,015
Notes payable 636 636
Capital leases 2,207 2,207
----------------- --------------
Total current liabilities $ 12,355 $ 12,350
----------------- --------------
3. NOTES PAYABLE
We have borrowed a total of $150,000 from Recap Marketing & Consulting, LLP
and entered into a series of unsecured convertible promissory notes bearing
interest at the rate of 12% per annum, with the following maturity dates:
ORIGINATION DATE AMOUNT MATURITY DATE
----------------- -------- ---------------
October 14, 2003 $ 50,000 April 20, 2004
November 25, 2003 25,000 May 25, 2004
December 15, 2003 25,000 June 15, 2004
January 15, 2004 25,000 July 15, 2004
February 19, 2004 25,000 August 19, 2004
--------
TOTAL: $150,000
========
4. WARRANTS
On October 13, 2003, we entered into a consulting agreement with Recap
Marketing & Consulting, LLP that provides for the issuance of compensation
warrants to purchase a total of 3,000,000 shares of our common stock at the
following prices per share:
Common Exercise
Shares Price
--------- ---------
2,000,000 $ 0.01
500,000 $ 0.25
250,000 $ 0.50
250,000 $ 0.75
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE: This Quarterly Report on Form 10-Q contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities and Exchange Act of 1934, as amended.
"Forward looking statements" are those statements that describe management's
beliefs and expectations about the future. We have identified forward-looking
statements by using words such as "anticipate," "believe," "could," "estimate,"
"may," "expect," and "intend." Although we believe these expectations are
reasonable, our operations involve a number of risks and uncertainties,
including those described in the Additional Risk Factors section of the Annual
Report Form 10-K and other documents filed with the Securities and Exchange
Commission. Therefore, these types of statements may prove to be incorrect.
The following is a discussion of the consolidated financial condition and
results of operations of ATSI for the three and six months ended January 31,
2003 and 2004. It should be read in conjunction with our Consolidated Financial
Statements, the Notes thereto and the other financial information included in
the amended annual report on Form 10-KA filed with the SEC on March 3, 2004.
8
GENERAL
ATSI was founded in 1993. We are an international carrier, serving the
rapidly expanding communications markets in and between Latin America and the
United States. Our mission is to connect the Americas with exceptional
communication services. Our strategy is to become a leading provider of
communication services to carriers and businesses in the U.S./Latin American
corridor through a high quality, 'next generation' Voice Over Internet Protocol
(VoIP) network established through our partnership with DialMex, LLC, a U.S.
based international telecommunications company. We operate two principal
business segments.
Carrier Services: We provide termination services to United States and
Latin American telecommunications companies who lack transmission
facilities, require additional capacity or do not have the regulatory
licenses to terminate traffic in Mexico. Typically these telecommunications
companies offer their services to the public for domestic and international
long distance services.
Network Services: We offer private communication links for multi-national
and Latin American corporations or enterprise customers who use a high
volume of telecommunications services to communicate with their U.S.
offices or businesses and need greater dependability than is available
through public networks. These services include data, voice and fax
transmission as well as Internet services between the customers multiple
international offices and branches.
We have incurred operating losses and deficiencies in operating cash flows
in each year since our inception in 1994 and expect our losses to continue
through July 31, 2004. Our operating losses were $5,780,000, $8,259,000 and
$4,850,000 for the years ending July 31, 2003, 2002 and 2001, respectively. We
had an operating loss of $198,000, for the quarter ended January 31, 2004 and
operating loss of $373,000 for the six-month period ended January 31, 2004.
Also we have a working capital deficit of $19,682,000, at January 31, 2004. Due
to such losses, the negative cash flows generated from our operations, and our
substantial working capital deficit, our 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. On December 31, 2002 our carrier network capacity was idled and all
of the US employees were terminated. This means that we were not able to
generate revenues from carrier services during the second half of the fiscal
year ending July 31, 2003. During the six month period ended January 31, 2004
were able to restart our carrier network and generated approximately $242,000 in
revenue. However, there can be no assurance that such revenue will continue to
be generated at these levels from these customers.
Additionally, during the quarter ended January 31, 2004 we entered into
three short-term promissory notes for a total of $75,000. These funds have
allowed the Company to pay those operating and corporate expenses that were not
covered by our current cash inflows from operations, specially those expenses
associated with our year-end audit and preparation of preliminary proxy
materials. We will continue to require additional funding until the cash
inflows from operations are sufficient to cover the monthly operating expenses.
However, there can be no assurance that we will be successful in securing
additionally funding over the next twelve months.
9
Three months ended January 31, Six months Ended January 31,
-------------------------------- -------------------------------
2004 2003 2004 2003
-------------- ---------------- -------------- ---------------
(Unaudited)
-----------
$ % $ % $ % $ %
------- ----- --------- ----- ------- ----- --------- ----
Operating revenues
- ------------------
Services
Carrier services $ 209 83% $ 1,096 90% $ 242 74% $ 6,532 96%
Network services 42 17% 122 10% 84 26% 307 4%
------- ----- --------- ----- ------- ----- --------- ----
Total operating revenues 251 100% 1,218 100% 326 100% 6,839 100%
Cost of services (Exclusive of depreciation
and amortization, shown below) 218 87% 1,120 92% 267 82% 6,125 90%
------- ----- --------- ----- ------- ----- --------- ----
Gross Margin 33 13% 98 8% 59 18% 714 10%
Selling, general and administrative
expense 231 92% 2,073 170% 428 131% 3,342 49%
Bad debt expense - 0% - 0% 4 1% 13 0%
Depreciation and amortization - 0% 442 36% - 0% 849 12%
------- ----- --------- ----- ------- ----- --------- ----
Operating loss (198) -79% (2,417) -199% (373) -114% (3,490) -51%
Other income (expense), net (78) -31% (225) -18% (111) -34% (431) -6%
------- ----- --------- ----- ------- ----- --------- ----
Net loss from continuing operations (276) -110% (2,642) -217% (484) -148% (3,921) -57%
Income from discontinued
operations - 0% (750) -62% - 0% (2,400) -35%
Net loss (276) -110% (3,392) -279% (484) -148% (6,321) -92%
------- ----- --------- ----- ------- ----- --------- ----
Less: preferred stock dividends (93) -37% (91) -7% (186) -57% (187) -3%
------- ----- --------- ----- ------- ----- --------- ----
Net loss to applicable to
common shareholders ($369) -147% ($3,483) -286% ($670) -206% ($6,508) -95%
======= ========= ======= =========
RESULTS OF OPERATIONS
The following table sets forth certain items included in the Company's
results of operations in dollar amounts and as a percentage of total revenues
for the three and six-month period ended January 31, 2003 and 2004.
THREE MONTHS ENDED JANUARY 31, 2004 COMPARED TO THREE MONTHS ENDED JANUARY 31,
2003
10
Operating Revenues. Consolidated operating revenues decreased 79% between
periods from $1.2 million for the quarter ended January 31, 2003 to $251,000 for
the quarter ended January 31, 2004.
Carrier services revenues decreased approximately $887,000, or 81% from the
quarter ended January 2003 to the quarter ended January 2004. Our carrier
traffic declined from approximately 16.3 million minutes in the quarter ended
January 31, 2003 to approximately 4.9 million minutes during the quarter ended
January 31, 2004. The decrease in revenue and carrier traffic can mainly be
attributed to the idling of our network during December 2002. We were able to
restart our network during fiscal 2004 and during the quarter ended January
2004; we generated approximately $209,000 in carrier services revenue.
Network services revenues decreased approximately 65% or $80,000 from the
quarter ended January 31, 2003 to the quarter ended January 31, 2004. During
the quarter ended January 31, 2004 we provided network services to one customer
and generated approximately $3,705 in revenues from this customer during the
quarter. We also provided network management services to Latingroup Ventures
L.L.C. (LGV), a non-related party. Under the agreement with LGV we provide
customer service, technical support and manage the collections process of their
private network customers. This management agreement initiated on July 1, 2003
and we will generate approximately $12,700 per month in management fees through
June 30, 2004. During the quarter ended January 31, 2004 we generated
approximately $42,000 in network services revenue.
Cost of Services. (Exclusive of depreciation and amortization) The
consolidated cost of services deceased by approximately $902,000, or 81% from
the quarter ended January 31, 2003 to the quarter ended January 31, 2004. The
decrease in cost of services is a direct result of the decrease in carrier
revenue and network services revenue. As mentioned above, we idled our network
in December 2002 and our carrier traffic declined from approximately 16.3
million minutes during the quarter ended January 31, 2003 to approximately 4.9
million minutes during the quarter ended January 31, 2004, thus reducing our
cost of services between quarters.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
decreased approximately $1.8 million, or 89% from the quarter ended January 31,
2003 to the quarter ended January 31, 2004. The decrease was offset slightly by
approximately $80,000 of professional fees recognized during the quarter ended
January 31, 2004 associated with the quarter review, proxy preparation and
annual shareholder meeting. The decrease can mainly be attributed to the
termination of all of the employees associated with the carrier services
business unit and network services in January 2003. The termination of these
employees resulted in a decrease in salaries and wages of approximately $195,000
per month or $585,000 per quarter. Additionally, as a result of the termination
of these employees, during the quarter ended January 31, 2004, the company did
not incur health and business insurance expense of approximately $96,000 per
month or $288,000 per quarter. Additionally, as a result of the termination of
all of the employees we reduced our rent expense by approximately $40,000 per
month or $120,000 per quarter.
Depreciation and Amortization. Depreciation and amortization decreased by
100% or $442,000 from the quarter ended January 31, 2003 to the quarter ended
January 31, 2004. The decrease is attributed to the disposal of all capital
equipment during Fiscal 2003.
Operating Loss. The Company's operating loss decreased by approximately
$2.2 million or 92% from the quarter ended January 31, 2003 to the quarter ended
January 31, 2004. The decrease in operating loss is attributed to the decrease
between periods of SG&A of $1.8 million and the decrease in depreciation and
amortization of approximately $442,000. The decrease in SG&A and depreciation
and amortization were offset slightly by the reduction in gross margin of
approximately $65,000.
11
Other Income (expense). Other expense decreased approximately $147,000 or
65% from the quarter ended January 31, 2003 to the quarter ended January 31,
2004. The decrease in other income and expense is attributed to the decrease in
interest expense of approximately $189,000 recognized during the quarter ended
January 31, 2003 associated with various capital leases. During the quarter
ended January 31, 2004 the Company did not have any capital leases, thus we did
not incur any interest expense associated with capital leases.
Loss from discontinued operations. Loss from discontinued operations
decreased by $750,000 between periods, from $750,000 for the quarter ended
January 31, 2003 to $0 during the quarter ended January 31, 2004. During the
quarter ended January 31, 2003, we recognized loss from discontinued operations
of approximately $750,000 associated with Mexico Telco operations. The Mexico
Telco loss from discontinued operations during the quarter ended January 31,
2003 can mainly be attributed to the recognition of approximately $927,000 in
selling, general and administrative expenses and the recognition of $322,000 of
foreign currency loss on exchange rate related to the Mexico Telco operations.
Additionally, the Mexico Telco operations also recognized $84,000 of
depreciation and amortization and approximately $76,000 of interest expense and
income tax expense during the quarter ended January 31, 2003. These expenses
were offset slightly by the recognition of approximately $670,000 of gross
profit margin from the Mexico Telco Operations.
Preferred Stock Dividends. During the quarter ended January 31, 2003, we
recorded approximately $91,000 of non-cash dividends expense related to our
cumulative convertible preferred stock. This expense was comparable to the
non-cash dividends expense recognized during the quarter ended January 31, 2004
of approximately $93,000.
Net loss to Common Stockholders. The net loss for the quarter ended
January 31, 2004 decreased to $369,000 from $3,483,000 for the quarter ended
January 31, 2003. The decrease in net loss to common stockholders was due
primarily to the idling of our network and not incurring any fixed costs
associated with the leasing of satellite sites, connectivity fees and operating
a network site during the quarter ended January 31, 2004. During the quarter
ended January 31, 2003, we incurred approximately $175,000 of fixed costs.
Additionally, as mentioned above SG&A expenses and loss from discontinued
operations decreased from the quarter ended January 31, 2003 to the quarter
ended January 31, 2004 by approximately $1.8 million and $750,000, respectively.
Also, there was a decrease in depreciation and amortization of approximately
$422,000 from the quarter ended January 31, 2003 to the quarter ended January
31, 2004.
SIX MONTHS ENDED JANUARY 31, 2004 COMPARED TO SIX MONTHS ENDED JANUARY 31, 2003
Operating Revenues. Consolidated operating revenues decreased 95% between
periods from $6.8 million for the six months ended January 31, 2003 to $326,000
for the six months ended January 31, 2004.
Carrier services revenues decreased approximately $6.3 million, or 96% from
the six months ended January 2003 to the six months ended January 2004. Our
carrier traffic declined from approximately 85.2 million minutes during the six
months ended January 31, 2003 to approximately 5.7 million minutes during the
six months ended January 31, 2004. The decrease in revenue and carrier traffic
can mainly be attributed to the idling of our network during December 2002. We
were able to restart our network during fiscal 2004 and during the six-month
period ending January 2004, we generated approximately $242,000 in carrier
services revenue.
Network services revenues decreased approximately 73% or $223,000 from the
six-month period ended January 31, 2003 to the six-month period ended January
31, 2004. During the six-month period ended
12
January 31, 2004 we provided network services to one customer and generated
approximately $7,400 in revenues from this customer. We also provided network
management services to Latingroup Ventures L.L.C. (LGV), a non-related party.
Under the agreement with LGV we provide customer service, technical support and
manage the collections process of their private network customers. This
management agreement initiated on July 1, 2003 and we will generate
approximately $12,700 per month in management fees through June 30, 2004. During
the six-month ended January 31, 2004 we generated approximately $84,000 in
network services revenue.
Cost of Services. (Exclusive of depreciation and amortization) The
consolidated cost of services decreased by approximately $5.9 million, or 96%
from the six months ended January 31, 2003 to the six months ended January 31,
2004. The decrease in cost of services is a direct result of the decrease in
carrier revenue and network services revenue. As mentioned above, we idled our
network in December 2002 and our carrier traffic declined from approximately
85.2 million minutes during the six months ended January 31, 2003 to
approximately 5.7 million minutes during the six months ended January 31, 2004,
thus reducing our cost of services between periods.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
decreased approximately $2.9 million, or 87% from the six months ended January
31, 2003 to the six months ended January 31, 2004. The decrease was offset
slightly by approximately $80,000 of professional fees recognized during the six
months ended January 31, 2004 associated with the quarter review, proxy
preparation and annual shareholder meeting. The decrease can mainly be
attributed to the termination of all of the employees associated with the
carrier services business unit and network services in January 2003. The
termination of these employees resulted in a decrease in salaries and wages of
approximately $195,000 per month or $1.2 million during the six-month period. As
a result of the termination of these employees, during the six months ended
January 31, 2004, the company did not incur health and business insurance
expense of approximately $96,000 per month or $576,000 during the six-month
period. Additionally, as a result of the termination of all of the employees, we
reduced our rent expense by approximately $40,000 per month or $240,000 during
the six-month period.
Depreciation and Amortization. Depreciation and amortization decreased by
100% or $849,000 from the six months ended January 31, 2003 to the six months
ended January 31, 2004. The decrease is attributed to the disposal of all
capital equipment during Fiscal 2003.
Operating Loss. The Company's operating loss decreased by approximately
$3.1 million or 89% from the six months ended January 31, 2003 to the six months
ended January 31, 2004. The decrease in operating loss is attributed to the
decrease between periods of SG&A of $2.9 million and the decrease in
depreciation and amortization of approximately $849,000. The decrease in SG&A
and depreciation and amortization were offset slightly by the reduction in gross
margin of approximately $655,000.
Other Income (expense). Other expense decreased approximately $320,000
from the six months ended January 31, 2003 to the six months ended January 31,
2004. The decrease in other income and expense is attributed to the decrease in
interest expense of approximately $358,000 recognized during the six months
ended January 31, 2003 associated with various capital leases. During the
quarter ended January 31, 2004 the Company did not have any capital leases, thus
we did not incur any interest expense associated with capital leases.
Loss from discontinued operations. Loss from discontinued operations
decreased by $2.4 million between periods, from $2.4 million for the six-month
period ended January 31, 2003 to $0 during the six-month period ended January
31, 2004. During the six-month period ended January 31, 2003, we recognized
13
loss from discontinued operations of approximately $2.4 million associated with
Mexico Telco operations. The Mexico Telco loss from discontinued operations
during the quarter ended January 31, 2003 can mainly be attributed to the
recognition of approximately $2.4 million in selling, general and administrative
expenses and the recognition of $657,000 of foreign currency loss on exchange
rate related to the Mexico Telco operations. Additionally, the Mexico Telco
operations also recognized $473,000 of depreciation and amortization and
approximately $152,000 of interest expense and income tax expense during the
six-month period ended January 31, 2003. These expenses were offset slightly by
the recognition of approximately $1.3 million of gross profit margin from the
Mexico Telco Operations.
Preferred Stock Dividends. During the six months ended January 31, 2003,
we recorded approximately $187,000 of non-cash dividends expense related to our
cumulative convertible preferred stock, this expense was comparable to the
non-cash dividends expense recognized during the six months ended January 31,
2004 of approximately $186,000.
Net loss to Common Stockholders. The net loss for the six months ended
January 31, 2004 decreased to $670,000 from $6.5 million for the six months
ended January 31, 2003. The decrease in net loss to common stockholders was due
primarily to the idling of our network and not incurring any fixed costs
associated with the leasing of satellite sites, connectivity fees and operating
a network site during the six months ended January 31, 2004. During the six
months ended January 31, 2003, we incurred approximately $625,000 of fixed
costs. Additionally, as mentioned above, SG&A expenses and loss from
discontinued operations decreased from the six months ended January 31, 2003 to
the six months ended January 31, 2004 by approximately $2.9 million and $2.4
million, respectively. Also, there was a decrease in depreciation and
amortization of approximately $849,000 from the six months ended January 31,
2003 to the six months ended January 31, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in / provided by operating activities: During the six months
ended January 31, 2004, operations consumed approximately $256,000 in cash.
This cash consumed by operations is primarily due to operating losses of
approximately $484,000. The net loss was somewhat offset by the increase in
accounts payable, accrued liabilities and the exercise of warrants issued for
services of approximately $139,000, $28,000 and $30,000, respectively. The
increase in accrued liabilities and accounts payable is primarily due to the
company recognizing approximately $41,000 in customer deposits from LGV for
future services and the accrual of professional fees, board fees and interest
expense of approximately $54,000. Additionally, we recognized approximately
$30,000 in the issuance of warrants for services related to the consulting
agreement entered into with Recap Marketing & Consulting, LLP. Currently we are
not generating sufficient revenues from operations to cover our monthly
operating salaries and general and administrative expense. We depend on the
monthly payments of approximately $20,750 from the sale of 51% of ATSI
Comunicaciones S.A de C.V. to Telemarketing S.A de C.V. to pay for our monthly
SG&A expenses. Currently we incur approximately $71,000 in SG&A expenses per
month, including corporate expenses associated with the quarter reviews, proxy
preparation and annual shareholder meeting. We expect this financial
instability and lack of liquidity to continue during the fiscal year 2004. As a
result over the next twelve months we estimate requiring additional funding of
approximately $745,000 to compensate for the deficiencies in cash inflows.
Cash provided by / used in investing activities: During the six months
ended January 31, 2004, the Company received approximately $125,000 in payments
from the sale of 51% of ATSI Comunicaciones S.A de C.V. to Telemarketing S.A de
C.V. Additionally, during the six months ended we invested approximately
$47,000 in ATSI Comunicaciones S.A de C.V. ATSI Comunicaciones S.A de C.V.
utilized these proceeds
14
to pay off payroll taxes and professional fees previously agreed upon the sale
of ATSICOM to Telemarketing.
Cash flows provided by / used in financing activities: During the six
months ended January 31, 2004 we received approximately $125,000 for the
issuance of debt and warrant options.
Overall, the Company's net operating, investing and financing activities
during the six months ended January 31, 2004 provided a decrease of
approximately $53,000 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 January 31, 2004 was approximately
$19,682,000. This represents an increase of approximately $583,000 from our
working capital deficit at July 31, 2003. The increase is primarily attributed
to our deficiency of cash and the accrual of various professional services and
interest expense. The Company's working capital deficit at January 31, 2004
included approximately $12,355,000 related to the pre-petition liabilities (net
of assets), associated with the Chapter 7 Bankruptcy cases, ATSI Texas and
TeleSpan. The adjusted Company's working capital deficit after exclusion of the
pre-petition liabilities is approximately $7,327,000.
The Company's current liabilities include approximately $12,355,000
associated with the pre-petition liabilities related to the two subsidiaries
under the Chapter 7 Bankruptcy, ATSI Texas and TeleSpan. The pre-petition
liability balance is composed of the following major liabilities:
- approximately $3 million in debt owed to IBM Corporation related to a
capital lease;
- approximately $1.3 million debt to Northern Telecom, a subsidiary of
Nortel Networks, associated with some telecommunications equipment
acquired during fiscal year 2001;
- approximately $5.1 million in debt to various international and
domestic telecommunications carriers for services provided during
fiscal year 2002 and 2003;
- approximately $250,000 in property taxes to various taxing entities,
approximately $550,000 to Universal Service Fund for telecommunication
taxes;
- approximately $250,000 in a note payable; and
- approximately $2.4 million associated with rent expense, salaries and
wages and professional services to various entities.
The Company's current obligations also include approximately $1,367,000
owed to the former owners of Grupo Intelcom, S.A. de C.V., the entity purchased
by the Company in July 2000 and through which the Company obtained its Mexican
long distance concession. Of this amount, $357,000 is included in notes payable
and the additional $1,030,000 is included in accrued liabilities.
The Company's current liabilities also include approximately $1.1 million
associated with the Series D Cumulative preferred stock. During the year ended
July 31, 2003, we received a redemption letter from the Series D holder
requesting the redemption of all the outstanding Series D preferred stock. As a
result the full redemption amount of approximately $942,000 and dividends of
approximately $300,000 were reclassed to current liabilities.
The Company's current liability includes approximately $1.1 million
associated with the Series E Cumulative preferred stock. During the fiscal year
ended July 31, 2003, the Company was de-listed from AMEX and according to the
terms of the Series E Cumulative preferred stock Certificate of Designation, if
15
the Company fails to maintain a listing on NASDAQ, NYSE or AMEX the Series E
preferred stockholder could request a mandatory redemption of the total
outstanding preferred stock. As of the date of this filing we have not received
such redemption notice.
On October 31, 2002 we filed a lawsuit in the Southern District Court of
New York against two financial institutions, Rose Glen Capital and Shaar Fund,
the holders of Series D and E Redeemable Preferred Stock, for what we believe to
be "Stock fraud and manipulation". These liabilities combined for a total of
approximately $2.4 million. Accounting rules dictate that these liabilities
remain in our books under Current Liabilities until the lawsuit is resolved in
the judicial system or otherwise. At this time we cannot predict the outcome or
the time frame for this to occur.
We also have approximately $1.2 million of current liabilities (net of
assets) associated to the discontinued operations of the retails services unit.
This balance is mainly composed of approximately $453,000 owed to the Mexican
taxing authorities related to a note assumed through the acquisition of Computel
and approximately $944,000 related to income taxes owed as of the quarter ending
October 31, 2003.
We believe that, based on our limited availability to capital resources and
our current cash balances, that these resources may not be available to support
our ongoing operations for the next twelve months or until we are able to
generate income from operations. These matters raise substantial doubt about
our ability to continue as a going concern. Our ability to continue as a going
concern is dependent upon the ongoing support of our stockholders and customers,
our ability to obtain capital resources to support operations and our ability to
successfully market our services.
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 paid ATSI $20,750 per month for 12
months; and
- Beginning in May 2004, Telemarketing will pay ATSI $20,750 per month
for the next 24 months, contingent on ATSI generating 20,750,000
minutes of monthly traffic through ATSICOM's network. In the event the
Company does not reach the above-mentioned volume of monthly minutes,
the monthly payment will be adjusted based on the same percentage of
the shortfall in minutes, until Telemarketing pays the total purchase
price. On the other hand, if ATSI exceeds the volume of monthly
traffic, Telemarketing can make additional payments, without penalty.
Management intends to utilize the funds from the sale of ATSICOM to fund
operations. There can be no assurance that we will be able to continue to
operate with these funds over the next twelve months or that we will be able to
generate sufficient cash from operations to cover our monthly operating
expenses. Additionally, there is no assurance that we will be able to raise the
additional capital from equity of debt sources required to continue in
operations.
MEXICAN FACILITIES-BASED LICENSE RISKS
We are substantially dependent upon the operations of ATSICOM, the holder
of the 30-year concession license (the "Concession") to install and operate a
public telecommunication network in
16
Mexico, for the installation and operation of a telecommunications network in
Mexico. The Mexican government has (1) authority to temporarily seize all assets
related to the Concession in the event of natural disaster, war, significant
public disturbance and threats to internal peace and for other reasons of
economic or public order and (2) the statutory right to expropriate the
Concession and claim all related assets for public interest reasons. Although
Mexican law provides for compensation in connection with losses and damages
related to temporary seizure or expropriation, we cannot assure you that the
compensation will be adequate or timely.
Under the Concession, ATSICOM must meet the following requirements:
General requirements
- --------------------
- - Maintain approximately 10 millions dollars in registered and subscribed
capital
- - Install and operate a network in Mexico, obtain approval of the operating
plan and any changes in it before implementation
- - Continuously develop and conduct training programs for its staff
- - Assign an individual responsible for the technical functions to operate the
concession
Concession services requirements
- --------------------------------
- - Provide continuous and efficient services at all times to its customers
- - Establish a complaint center and correction facilities center and report to
the Mexican Government on a monthly basis the complaints received and the
actions taken to resolve the problems
Tariff Requirements
- -------------------
- - Invoice its customer's at tariffs rates that have been approved by the
Mexican government
Verification and Information requirements
- -----------------------------------------
- - Provide audited financial statements on a yearly basis that includes a
detailed description of the fixed assets utilized in the network and
accounting reporting by region and location of where the services are being
provided
- - Provide quarterly reports and updates on the expansion of the network in
Mexico and a description of the training programs and research and
development programs
- - Provide statistic reports of traffic, switching capacity and other
parameters in the network
Guarantee requirements
- ----------------------
- - Maintain a bond/ insurance policy for approximately $500,000 dollars
payable in the event the Mexican government revokes the Concession
On May 23, 2003, the Company sold 51% of ATSICOM to Telemarketing. We
cannot assure you that we and our partner, Telemarketing, will be able to obtain
financing to finish the Mexican network; if we or our partners obtain financing
it will be in a timely manner or on favorable terms; or if we or our partners
will be able to comply with the Mexican concession's conditions. If our
partners or we fail to comply with the terms of the concession, the Mexican
government may terminate it without compensation to our partners or us. A
termination would prevent us from engaging in our proposed business.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk: Our carrier services and network services businesses
---------------------
rely on the availability and pricing of carrier and network capacity and are
subject to fluctuations in the cost of such capacity based on the availability
and demand. Customers select carrier services and network services based on
perceived price and reliability. As a result of these factors, these businesses
operate in an extremely price sensitive and volatile environment. While we have
been able to withstand these pricing volatilities, certain of our competitors
are much larger and better positioned, own some or all of their network capacity
and may not be as susceptible to fluctuations in price and availability. Our
ability to continue to operate in this environment may be dependent on our
ability to further reduce our costs of transporting these minutes and our
ability to obtain long-term contracts with the owners of transmission
facilities.
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
access debt and equity sources of capital. While recent history has shown us
capable of raising equity sources of capital; future equity financings and the
terms of those financings will be largely dependent on our stock price, our
operations and the future dilution to our shareholders.
ITEM 4. CONTROLS AND PROCEDURES
The Company has adopted and implemented disclosure controls and procedures
designed to provide reasonable assurance that all reportable information will be
recorded, processed, summarized and reported within the time period specified in
the SEC's rules and forms. The Company's President and Chief Executive Officer
and the Company's Controller and Principal Financial Officer have concluded that
these disclosures and procedures are effective at the reasonable assurance
level. Under the supervision and with the participation of the Company's
management, including the Company's President and Chief Executive Officer and
the Company's Controller and Principal Financial Officer, the Company has
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of the end of
the quarter covered by this report. Based on that evaluation, the President and
Chief Executive Officer and the Controller and Principal Financial Officer have
concluded that these disclosure controls and procedures are effective as of the
end of the period covered by this report. There were no changes in the
Company's internal control over financial reporting during the quarter covered
by this report that have had a material affect or are reasonably likely to have
a material affect on internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 7, 2004, we filed a petition in the 150th Judicial District of
Bexar County, Texas against Inter-tel.net, Inc. and Vianet Communications, Inc.
D/B/A Inter-tel.net seeking declaratory relief that ATSI Communications, Inc. is
not bound by the Carrier Services Agreement between Vianet Communications, Inc.
and ATSI Texas. On February 27, 2004 the Bankruptcy Court allowed Vianet
Communications, Inc. to amend its claim against ATSI Texas that was pending in
the Bankruptcy of ATSI Texas and assert its claims for breach of contract
against the Company. The Bankruptcy Court then ordered the lawsuit to be
remanded back to state court for hearing. The Company is vigorously defending
any claim for liability in this matter and pursuing its claim for declaratory
relief and believes that any liability in this matter will not have a
18
material adverse effect on its financial condition or results of operations.
On December 30, 2003, the Company filed a cause of action in the 407th
Judicial District of Bexar County, Texas against James C. Cuevas, Raymond G.
Romero, Texas Workforce Commission, ATSI Communications, Inc. (Texas) and Martin
W. Seidler seeking judicial review on the decision issued by the Texas Workforce
Commission awarding a claim for unpaid wages against the Company. The Company
is vigorously pursuing its claim and believes that any liability in this matter
will not have a material adverse effect on its financial condition or results of
operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K/A
(a) Exhibits: The following documents are filed as exhibits to this
report.
EXHIBIT
NUMBER
- ------
31.1 Certification of our President and Chief Executive Officer, under Section
302 of the Sarbanes-Oxley Act of 2002.*
31.2 Certification of our Corporate Controller and Principal Financial Officer,
under Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1 Certification of our President and Chief Executive Officer, under Section
906 of the Sarbanes-Oxley Act of 2002. *
32.2 Certification of our Corporate Controller and Principal Financial Officer,
under Section 906 of the Sarbanes-Oxley Act of 2002.*
(b) The following Current Reports on Form 8-K were filed during the second
quarter of fiscal 2004.
On December 12, 2003 we filed a Current Report on Form 8-K reporting under
Item 4 the dismissal of Tanner + Co. and the hiring of Malone & Bailey,
PLLC.
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ATSI COMMUNICATIONS, INC.
(Registrant)
Date: March 15, 2004 By: /s/ Arthur L. Smith
-------------- -------------------
Name: Arthur L. Smith
Title: President and
Chief Executive Officer
Date: March 15, 2004 By: /s/ Antonio Estrada
-------------- -------------------
Name: Antonio Estrada
Title: Corporate Controller
(Principal Accounting and
Financial Officer)
20