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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 2004
[_] 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.
(Name of Small Business Issuer as Specified in its Charter)
NEVADA 74-2849995
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
8600 WURZBACH, SUITE 700W
SAN ANTONIO, TEXAS 78240
(Address of Principal Executive Offices) (Zip Code)
(210) 614-7240
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
SERIES H CONVERTIBLE PREFERRED 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
--- ---
As of October 25, 2004, the aggregate market value of the voting common
equity held by non-affiliates of the Registrant was $3,128,727 based on the
closing price of $0.68 per share on October 25, 2004 as reported on the
over-the-counter bulletin board.
There were 4,601,069 shares of Registrant's Common Stock outstanding as of
October 25, 2004.
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TABLE OF CONTENTS
PAGE
PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Services and Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Carrier Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Network Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Voice over Internet Protocol Network. . . . . . . . . . . . . . . . . . . . . . . 5
Strategy and Competitive Conditions . . . . . . . . . . . . . . . . . . . . . . . 7
Government Regulations/ Concession License. . . . . . . . . . . . . . . . . . . . 9
Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . 14
Item 6. Selected Financial and Operating Information. . . . . . . . . . . . . . . 15
Item 7. Management's Discussion and Analysis or Plan of Operations. . . . . . . . 16
Item 7A. Quanitative and Qualitative Disclosures about Market Risk . . . . . . . . 25
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . 26
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . 55
PART III
Item 10 Directors, Executive Officers, Promoters and Control Persons, Compliance
with Section 16(A) of the Exchange Act. . . . . . . . . . . . . . . . . . 55
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . 57
Item 12. Security Ownership of Certain Beneficial Owners and Management. . . . . . 58
Item 13. Certain Relationships and Related Transactions. . . . . . . . . . . . . . 60
Item 14. Principal Accountant Fees and Services. . . . . . . . . . . . . . . . . . 60
PART IV
Item 15. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . 60
2
PART I
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ITEM I. BUSINESS.
OVERVIEW
We are an international telecommunications carrier that utilizes the
Internet to provide economical international telecommunications services. Our
current operations consist of providing digital voice communications over data
networks and the Internet using Voice-over-Internet-Protocol ("VoIP"). We
provide high quality voice and enhanced telecommunication services to carriers,
telephony resellers and others through various agreements with local service
providers in the United States, Mexico, Asia, the Middle East and Latin America
utilizing VoIP telephony services.
We have had operating losses for almost every quarter since we began
operations in 1994. Our operating losses from continuing operations were
approximately $8,529,000 and $5,780,000, for the years ending July 31, 2004 and
2003, respectively. Additionally, we had a working capital deficit of
approximately $18,948,000 at July 31, 2004. We have experienced difficulty in
paying our vendors and lenders on time in the past, and we expect this trend to
continue over the next 12 months as we continue to rebuild our operations.
Moreover, we are currently pursuing various alternatives including equity
offerings, exchanging some portion or all of our debt for equity, and
restructuring our debt to extend the maturity. However, in the event we fail to
execute on our current plan or that circumstances currently unknown or
unforeseen by us arise, we may not succeed in re-capitalizing the Company or be
able to obtain additional funding to allow us to meet our obligations.
Two of our subsidiaries, ATSI (Texas), 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 these cases on April 9, 2003 and on May 14, 2003
converted the cases to a Chapter 7 proceeding. The two bankrupt subsidiaries
were our two primary operating companies and they have ceased operations. These
bankruptcies did not include the reporting entity ATSI Communications, Inc. (the
"Company").
Due to the bankruptcies of our principal operating subsidiaries, recurring
losses, 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, 2004 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, 2005. In order to remain a going concern, we intend to attract new
customers to generate additional revenues and/or generate cash from debt or
equity offerings. There is no assurance that we will be able to obtain
sufficient additional customers or funding to continue as a going concern.
Our strength is based on our interconnection agreement with carriers such
as Telefonos de Mexico S.A de C.V. ("Telmex") and Bestel S.A de C.V. ("Bestel").
Our interconnection agreements with these Mexican 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 our cost to provide service over these networks
is based on a per minute rate and the volume of minutes transported through
their respective networks. We also own 49% of a Mexican company, ATSI
Comunicaciones, S.A. de C.V. ("ATSICOM"), that holds a 30 year concession
license, allowing for the sale of voice and data services, long distance
transport, and the operation of a telecommunications network throughout Mexico.
Additionally, during the fourth quarter of Fiscal year 2004, we acquired a
NexTone Communications Session Controller (soft-switch) to enhance our VoIP
network. This enhancement has allowed us to route our traffic more efficiently,
improve our call processing, monitor quality of service and enable us to share
port resources with
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our customers. We expect that the NexTone technology will allow us to be more
competitive and allow us to obtain higher margins in our wholesale international
telecommunication services. As a result of these enhancements to our VoIP
Network our customer base has grown to approximately 26 customers and generated
revenues of approximately $125,000 during the last month of fiscal year 2004.
HISTORY
ATSI Communications, Inc., a Nevada corporation, was formed in 2004 as the
successor to the business originally incorporated 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. Our
stockholders voted to change our name from American TeleSource International,
Inc. to ATSI Communications, Inc in 2003 and to reincorporate in the State of
Nevada by merger into our wholly owned subsidiary in 2004. We own 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, 2004:
- We acquired a NexTone Communications Session Controller (soft-switch)
to enhance our Voice over Internet Protocol (VoIP) network. The
acquisition of the NexTone(TM) Communication Session Controller
(soft-switch) will allow us to expand our network, allow for more
efficient routing of traffic and improve our call processing and
quality.
- Our stockholders approved the reincorporation of the Company in the
State of Nevada by merger with and into a wholly owned subsidiary,
ATSI Merger Corporation. Stockholders of record as of May 24, 2004
were entitled to receive one (1) share of New ATSI Common Stock and
ten (10) shares of New ATSI Series H Convertible Preferred Stock for
each 100 shares of Old ATSI Common Stock surrendered.
SERVICES AND PRODUCTS
We provide two types of services: Carrier Services and Network Services.
Carrier Services
We provide transmission and termination services to U.S. and Foreign
telecommunications companies who lack transmission facilities, require
additional capacity or do not have the regulatory licenses to terminate traffic
in Mexico, Asia, the Middle East and Latin America. Typically these
telecommunications companies offer their services to the public for local and
international long distance services. Revenues from this service accounted for
approximately 94% of our total revenue in the year ended July 31, 2003 ("fiscal
2003") and 81% of our total revenue in the year ended July 31, 2004 ("fiscal
2004"). 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
from period to period. During fiscal 2004, our agreements with customers were
not for a specific period of time or volume of minutes. The customer was given a
set rate for services and the customer would decide the volume of minutes it
would send to us to terminate. Therefore on a month-to-month basis there was
not a required volume commitment from any customer and customers were free to
re-route their traffic away from us to a lower priced carrier.
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Due to our limited resources and lack of a line of credit with our
carriers, we were required to prepay or maintain substantial deposits with our
carriers to minimize their risk as they provide us with their services. During
fiscal 2004 our carriers required deposits and prepayments equal to 25% or
$30,000 of our weekly estimated traffic. These deposit requirements were
calculated by our carriers using historical weekly traffic volumes and estimated
future weekly traffic. We have attempted to minimize the amount of deposits
that are required by our carriers by entering into various reciprocal agreements
with our customers that permit them to transport and terminate traffic over our
network and allow us to transmit and terminate traffic over their networks, thus
reducing the prepayment requirements. However, there can be no assurance that
we will able to enter into reciprocal agreements in the future and we may be
required to prepay for services in the future.
During the fourth quarter of 2004 we were able to utilize our
interconnection agreement with Bestel S.A de C.V. ("Bestel"), to reduce our cost
per minute to access the local carriers networks in Mexico. Bestel operates a
fiber optic network that extends over 6,356 kilometers with points of presence
in 19 Mexican metropolitan areas. We believe that this broad range of coverage
through our interconnection agreement with Bestel provides us with the tools to
be competitive and attract additional customers.
Network Services
A private satellite network is a secure communication connection or link
between various remote locations for the transmission of voice or data. This
connection is accomplished by having all of the various remote locations from
one customer connected to a common satellite destination, where information is
allowed to be exchanged, transported and shared. We provide these services to
multi-national and Latin American corporations or enterprise customers who
require a high volume of communications 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 and Internet services between the customers multiple international
offices and branches. We currently provide network services to Bell Canada, a
Canadian corporation on a month-to-month basis and generate approximately
$23,000 per month in revenue. There is no assurance that we will continue to
generate this level of revenue in the future or that we will be able to enter
into a long-term contract with Bell Canada or any other customer.
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.
We lease our 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 services customer. We also have a monthly Termination Agreement
with Telecomunicaciones de M xico S.A de C.V. ("Telecomm"). Under the
month-to-month agreements with these two vendors we incur fixed charges of
approximately $5,600 and $2,200, respectively, for the space segment and
termination services. Under the monthly agreements with Satmex and Telecomm we
can increase or decrease capacity as the customer usage changes with demand and
can terminate these agreements at any time without any penalties.
VOICE OVER INTERNET PROTOCOL NETWORKS
The basic technology of traditional telecommunications systems 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
5
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". A VoIP network has the following advantages over
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 infrastructure 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
bandwidth. 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 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: 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.
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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.
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
7
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 select higher margin
telecommunication niches utilizing VoIP technology. Certain carriers provide
termination services in Mexico at lower prices (e.g., $0.015 to $0.06) 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, the elimination of settlement rates in Mexico
continues 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 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 ATSICOM that allows us to both generate
and carry traffic within Mexico and between Mexico and the United States.
8
GOVERNMENT REGULATION / CONCESSION LICENSE
REGULATION OF INTERNET TELEPHONY
Our operations are subject to federal, state and foreign laws and
regulations. The use of the Internet to provide telephone service is a fairly
recent market development. At present, ATSI is not aware of any domestic, and
is only aware of a few foreign, laws or regulations that prohibit voice
communications over the Internet.
United States.
ATSI believes that, under U.S. law, the Internet-related services that ATSI
provides constitute information services as opposed to regulated
telecommunications services, and, as such, are not currently actively regulated
by the FCC or any state agencies charged with regulating telecommunications
carriers. Nevertheless, aspects of ATSI's operations may be subject to state or
federal regulation, including regulation governing universal service funding,
disclosure of confidential communications and excise tax issues. ATSI cannot
provide assurances that Internet-related services will not be actively regulated
in the future. Several efforts have been made in the U.S. to enact federal
legislation that would either regulate or exempt from regulation services
provided over the Internet. Increased regulation of the Internet may slow its
growth, particularly if other countries also impose regulations. Such
regulation may negatively impact the cost of doing business over the Internet
and materially adversely affect ATSI's business, operating results, financial
condition and future prospects.
The FCC has considered whether to impose surcharges or other common carrier
regulations upon certain providers of Internet telephony, primarily those which,
unlike ATSI, provide Internet telephony services directly to end users. While
the FCC has presently refrained from such regulation, the regulatory
classification of Internet telephony remains unresolved. Additionally, the FCC
has expressed an intention to further examine the question of whether certain
forms of phone-to-phone VoIP services are information services or
telecommunications services. The two are treated differently in several
respects, with certain information services being regulated to a lesser degree.
The FCC has noted that certain forms of phone-to-phone VoIP services bear many
of the same characteristics as more traditional voice telecommunications
services and lack the characteristics that would render them information
services. The FCC has indicated that the mechanisms for contributing to the
Universal Service Fund, issues as to applicability of access charges and other
matters will be considered in that context.
If the FCC were to determine that certain Internet-related services
including Internet telephony services are subject to FCC regulations as
telecommunications services, the FCC could subject providers of such services to
traditional common carrier regulation, including requirements to make universal
service contributions, and pay access charges to local telephone companies. A
decision to impose such charges could also have retroactive effect, which could
materially adversely affect the Company. It is also possible that the FCC may
adopt a regulatory framework other than traditional common carrier regulation
that would apply to Internet telephony providers. Any such determinations could
materially adversely affect ATSI's business, financial condition, operating
results and future prospects to the extent that any such determinations
negatively affect the cost of doing business over the Internet or otherwise slow
the growth of the Internet. Congressional dissatisfaction with FCC conclusions
could result in requirements that the FCC impose greater or lesser regulation,
which in turn could materially adversely affect ATSI's business, financial
condition, operating results and future prospects.
State regulatory authorities may also retain jurisdiction to regulate
certain aspects of the provision of intrastate Internet telephony services.
Several state regulatory authorities have initiated proceedings to examine the
regulation of such services. Others could initiate proceedings to do so.
9
Other regulations affecting the Internet in the United States.
Congress has recently adopted legislation that regulates certain aspects of
the Internet, including online content, user privacy and taxation. In addition,
Congress and other federal entities are considering other legislative and
regulatory proposals that would further regulate the Internet. Congress has;
for example, considered legislation on a wide range of issues including Internet
spamming, database privacy, gambling, pornography and child protection, Internet
fraud, privacy and digital signatures. Various states have adopted and are
considering Internet-related legislation. Increased U.S. regulation of the
Internet may slow its growth, particularly if other governments follow suit,
which may negatively impact the cost of doing business over the Internet and
materially adversely affect our business, financial condition, results of
operations and future prospects. Legislation has also been proposed that would
clarify the regulatory status of VoIP service. The Company has no way of
knowing whether legislation will pass or what form it might take.
International.
The regulatory treatment of Internet telephony outside of the U.S. varies
widely from country to country. A number of countries that currently prohibit
competition in the provision of voice telephony also prohibit Internet
telephony. Other countries permit but regulate Internet telephony. Some
countries will evaluate proposed Internet telephony service on a case-by-case
basis and determine whether it should be regulated as a voice service or as
another telecommunications service. Finally, in many countries, Internet
telephony has not yet been addressed by legislation or regulation. Increased
regulation of the Internet and/or Internet telephony providers or the
prohibition of Internet telephony in one or more countries could materially
adversely affect our business, financial condition, operating results and future
prospects.
Other General regulations
The Telecommunications Act of 1996 (the "Telecom Act"), 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
10
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 declined slightly.
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
S.A de C.V. is required to meet the following:
General requirements
--------------------
- Maintain approximately 10 million 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 and Telecomm provide us with the network
required for our network services. We also depend on various Global
11
VoIP companies to complete our voice over Internet (VoIP) traffic between US,
Mexico, Asia, the Middle East and Latin America. Our critical suppliers
include, Bestel, DialMex and Advance Global Communications.
EMPLOYEES
As of July 31, 2004, we had 6 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.
ITEM 2. PROPERTIES.
Our executive office is located at our leased facilities in San Antonio,
Texas, consisting of 3,042 square feet. The lease expired September 2004 and we
continue to occupy the facility on a month-to-month basis. We pay annual rent
of $41,040. Management believes that our leased facilities are suitable and
adequate for their intended use.
ITEM 3. LEGAL PROCEEDINGS.
In March 2001, Comdisco sued our subsidiary, 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 owed
pursuant to the lease was $926,185 and that the lease terms called for 36 months
of lease payments. Comdisco is claiming that ATSI-Texas only paid thirty months
of lease payments. ATSI-Texas disputes that the amount owed was $926,185 since
it received only $375,386 in financing and has paid over $473,000 in lease
payments and, thus, believe that it has satisfied its obligation under the lease
terms. Comdisco has filed a claim with the United States Bankruptcy Court of
the Western District of Texas in which the bankruptcy of ATSI-Texas is pending.
The Company does not have a liability for the lease payments and expects the
obligation of ATSI-Texas will be discharged in the pending Chapter 7 case.
In July 2002, we were notified by the Dallas Appraisal District that the
administrative appeal from the appraisal of the ATSI-Texas office in the Dallas
InfoMart was denied. The property was appraised at over $6 million dollars.
The property involved included a Nortel DMS 250/300 switch, associated
telecommunications equipment and office furniture and computers. ATSI-Texas 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 the ATSI-Texas 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 the Dallas site as a result of ATSI-Texas filing for
protection under Chapter 11 of the Bankruptcy code. We believe that this
liability ATSI-Texas will be discharged upon the completion of the pending
Chapter 7 case.
In October 2002, we filed a lawsuit in the Southern District of New York
against several financial parties for 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 us 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. If we receive an adverse decision in this suit, it is likely we
would be required to issue a substantial amount of our common shares to our
Series D and Series E holders and the current owners of our common shares would
be substantially diluted.
In June 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
12
relating to a letter of intent for NIFTI to acquire the concession license in
Mexico owned by ATSICOM. 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 consummated and in May 2003 we sold 51% of ATSICOM to
Telemarketing. In July 21, 2003, NIFTI counterclaimed for damages allegedly
arising from our failed to provide all the proper documentation related to the
concession license liabilities, accounting and requirements by the Mexican
Government. During fiscal 2004, the parties reached a settlement and agreed to
dismiss both lawsuits without compensation.
In December 2003, we 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-Texas and Martin W. Seidler seeking judicial review
on the decision issued by the Texas Workforce Commission awarding a claim for
unpaid wages against us. We are vigorously pursuing this action but cannot
predict the outcome of this litigation or the financial impact on our ongoing
operations.
In January 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 in the ATSI-Texas
Bankruptcy case allowed Vianet Communications, Inc. to amend its claim against
ATSI-Texas that was pending in the Bankruptcy of ATSI-Texas and assert its claim
for breach of contract against ATSI. The Bankruptcy Court then ordered the
lawsuit to be remanded back to state court for hearing. We are a plaintiff in
this case and are seeking declaratory relief from the Bexar County court.
Currently we cannot predict the outcome of this litigation or the financial
impact on our ongoing operations.
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.
On May 6, 2004, during the 2004 Annual Stockholders meeting our
stockholders approved the following:
The election of Murray R. Nye and Richard C. Benkendorf as Class B members
of our Board of Directors, with their terms expiring at the Annual Meeting
of Stockholders to be held in 2007. Arthur L. Smith and John R. Fleming
continued to serve as directors after the meeting. The results of the vote
on this item follow:
FOR WITHHELD
--- --------
Murray R. Nye 130,283,400 6,886,458
Richard C. Benkendorf 130,642,345 6,527,513
The selection of Malone & Bailey, PLLC as independent public accountants
for the fiscal year ending July 31, 2004. The results of the vote on this
item follow:
FOR AGAINST ABSTAIN
--- ------- -------
136,075,890 864,847 229,121
The reincorporation of the Company in Nevada by merger with and into its wholly
owned subsidiary. The results of the vote on this item follow:
13
FOR AGAINST ABSTAIN
--- ------- -------
78,125,374 1,454,326 226,406
PART II.
--------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is quoted on the OTC Bulletin Board under the symbol
"ATSX". From May 9, 2003 through July 31, 2004 our common stock traded in the
pink sheets under the symbol "ATSC". Prior to January 15, 2003, our common
stock was quoted on the AMEX under the symbol "AI". Our Series H Preferred
Stock is not traded on any market. The following table sets forth the high and
low bid prices for our common stock from August 1, 2002 through January 15, 2003
as reported by AMEX and the high and low bid prices for our common stock from
May 9, 2003 through July 31, 2004 as reported by OTC bulletin board. Price
quotations on the OTC bulletin board reflect inter-dealer prices, without retail
mark-up, markdown or commission, and may not necessarily represent actual
transactions. All prices have been adjusted for the 1:100 reverse split
effective as of May 24, 2004.
FISCAL 2003 HIGH LOW
==============================================================
FIRST QUARTER. . . . . . . . . . . . . . . $ 12.00 $ 3.00
SECOND QUARTER (THROUGH JANUARY 14, 2003). $ 16.00 $ 7.00
THIRD QUARTER (TRADING HALTED) . . . . . . ------- -------
FOURTH QUARTER . . . . . . . . . . . . . . $ 7.00 $ 1.00
FISCAL 2004. . . . . . . . . . . . . . . . HIGH LOW
==============================================================
FIRST QUARTER. . . . . . . . . . . . . . . $ 2.00 $ 2.00
SECOND QUARTER . . . . . . . . . . . . . . $ 1.00 $ 1.00
THIRD QUARTER. . . . . . . . . . . . . . . $ 1.00 $ 1.00
FOURTH QUARTER . . . . . . . . . . . . . . $ 6.00 $ 1.25
The following table provides information relating to the grant of stock,
options, and warrants pursuant to equity based compensation plans as of July 31,
2004. A description of each equity compensation plan adopted by the Company is
included in the Notes to the Consolidated Financial Statements contained in this
report.
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 42,341 $ 103.47 20,285
EQUITY COMPENSATION
PLANS NOT APPROVED BY
SECURITY HOLDERS 3,333,426 $ 0.25 3,570,715
TOTAL 3,375,767 $ 1.54 3,591,000
14
As of July 31, 2004, we had approximately 11,067 common shareholders of
record. This amount does not include shares held in street name.
We have never paid any cash dividends on our common stock. Additionally,
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 each series of
preferred stock. There are presently a total of $587,467 in unpaid dividends
payable on outstanding series of preferred stock. Consequently, we do not
anticipate paying any cash dividends in the foreseeable future.
During the year ended July 31, 2004, prior to the reincorporation to the
state of Nevada, ATSI issued 400,965 common shares. Of this total, 101,786
shares were issued as a result of the conversions of ATSI's Series F Preferred
Stock and accumulated dividends, 297,974 shares were issued as a result of the
conversion of ATSI's Series G Preferred Stock and accumulated dividends, and
1,205 shares were issued as a result of the conversion of ATSI's Series A
Preferred Stock. All shares were exempt from registration pursuant to Section
3(a)(9) of the Securities Act of 1933 as an exchange for other securities issued
by the Company in which no person was paid any consideration.
Also during the year ended July 31, 2004, 165 shares were issued for
services rendered to ATSI. These shares were exempt from registration pursuant
to Section 4(2) of the Securities Act of 1933 since they were issued in a
transaction not involving a public offering.
On May 6, 2004 ATSI's stockholders approved the reincorporation of ATSI in
Nevada through the merger of the Company into a wholly owned subsidiary, ATSI
Merger Corporation. As a result of the merger, ATSI's stockholders of record as
of May 24, 2004 received one (1) share of New ATSI Common Stock and ten (10)
shares of New ATSI Series H Convertible Preferred Stock for each 100 shares of
Old ATSI Common Stock surrendered. As a result of the merger ATSI exchanged
143,751,710 common shares of the Old ATSI for 1,437,517 shares of the New ATSI
Common stock and 14,385,000 shares of the New ATSI Series H Convertible
Preferred Stock. These shares were exempt from registration pursuant to Rule 145
and Rule 414 under the Securities Act of 1933 as an exchange for the purpose of
changing the domiciling the Company.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and The Company's Consolidated Financial Statements and the Notes
thereto included elsewhere herein.
Years ended July 31,
--------------------
2004 2003 2002 2001 2000
------------ ----------- ------------ ---------- ----------
(In thousands of $, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Operating revenues
Carrier services $ 1,020 $ 6,532 $ 41,190 $ 26,349 $ 22,192
Network services 234 417 1,956 2,714 2,539
------------ ----------- ------------ ---------- ----------
Total operating revenues 1,254 6,949 43,146 29,063 24,731
Cost of services (exclusive of depreciation and
amortization) 1,071 6,244 39,077 24,802 20,463
------------ ----------- ------------ ---------- ----------
Gross Margin 183 705 4,069 4,261 4,268
Selling, general and administrative expense 7,942 4,803 6,866 6,924 6,724
Impairment loss 702 418 3,119 - -
Bad debt expense 4 35 388 142 756
15
Years ended July 31,
--------------------
2004 2003 2002 2001 2000
------------ ----------- ------------ ---------- ----------
(In thousands of $, except per share data)
Depreciation and amortization 20 1,229 1,955 2,045 2,020
------------ ----------- ------------ ---------- ----------
Operating loss (8,485) (5,780) (8,259) (4,850) (5,232)
Debt forgiveness income 257 - - - -
Other income (expense), net (241) (2,922) 1,475 (300) (1,388)
------------ ----------- ------------ ---------- ----------
Net loss from continuing operations before income
tax expense
(8,469) (8,702) (6,784) (5,150) (6,620)
Income tax expense - - - - -
------------ ----------- ------------ ---------- ----------
Net loss from continuing operations (8,469) (8,702) (6,784) (5,150) (6,620)
Net loss from discontinued operations - (2,919) (8,815) (5,403) (3,432)
Net (loss)/income from sale of discontinued operations - (962) 1,082 - -
Net loss (8,469) (12,583) (14,517) (10,553) (10,052)
Less: preferred stock dividends (306) (653) (472) (2,232) (7,085)
------------ ----------- ------------ ---------- ----------
Net loss applicable to common shareholders ($8,775) ($13,236) ($14,989) ($12,785) ($17,137)
============ =========== ============ ========== ==========
PER SHARE INFORMATION:
Net loss-basic and diluted ($7.31) ($13.01) ($17.37) ($17.96) ($30.14)
------------ ----------- ------------ ---------- ----------
Weighted average common shares
outstanding-basic and diluted 1,199,892 1,017,670 862,750 711,800 568,520
------------ ----------- ------------ ---------- ----------
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit) ($18,948) ($19,099) ($10,094) $ 1,936 $ 5,076
Current assets 149 340 1,184 2,447 3,274
Total Assets 270 1,103 6,763 12,070 13,396
Pre-petition liabilities of bankrupt
subsidiaries, net of assets 12,354 12,350 - - -
Current liabilities (Net of pre-petition liabilities) 3,177 3,635 12,528 5,757 6,630
Current liabilities from discontinued operations 1,152 1,152 2,444 5,796 5,066
Redeemable preferred shares 2,413 2,302 2,180 3,529 -
Total Liabilities 19,116 19,448 15,389 13,329 13,544
Total Stockholders' equity (deficit) (18,846) (18,345) (7,112) 6,254 13,350
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
SPECIAL NOTE: This Annual Report on Form 10-K 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 and other documents filed with the Securities and Exchange
Commission. Therefore, these types of statements may prove to be incorrect.
16
The following is a discussion of the consolidated financial condition and
results of operations of ATSI Communications, Inc., for the fiscal years ended
July 31, 2004, 2003 and 2002. It should be read in conjunction with our
Consolidated Financial Statements, the Notes thereto and the other financial
information included elsewhere in this annual report on Form 10-K. For purposes
of the following discussion, fiscal 2004 or 2004 refers to the year ended July
31, 2004, fiscal 2003 or 2003 refers to the year ended July 31, 2003 and fiscal
2002 or 2002 refers to the year ended July 31, 2002
SOURCES OF REVENUE AND DIRECT COST
Sources of revenue:
Carrier Services: We currently provide transmission and termination
-----------------
services to U.S. and Foreign telecommunications companies who lack transmission
facilities, require additional capacity or do not have the regulatory licenses
to terminate traffic in Mexico, Asia, the Middle East and Latin America.
Typically these telecommunications companies offer their services to the public
for local 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 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:
Carrier Services: We incur transmission and termination charges from our
-----------------
suppliers and the providers of the infrastructure and network. The cost is
based on a per minute rate and volume of minutes transported and terminated
through the network. Additionally, we incur installation charges from certain
carriers; this cost is passed on to our customers for the connection to our VoIP
network.
Network Services: Under the network services, we incur 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.
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, 2004, 2003 and 2002.
Year ended July 31,
---------------------------------------------------------
2004 2003 2002
-------------------- ----------------- ----------------
$ % $ % $ %
Operating revenues
- ------------------
Services
Carrier services $ 1,020 81% $ 6,532 94% $ 41,190 95%
Network services 19% 417 6% 1,956 5%
234
--------- ---------- --------- ------ --------- ----
Total operating revenues 1,254 100% 6,949 100% 43,146 100%
Cost of services (exclusive of depreciation and
amortization, shown below) 1,071 85% 6,244 90% 39,077 91%
--------- ---------- --------- ------ --------- ----
17
Gross Margin 183 15% 705 10% 4,069 9%
Selling, general and
administrative expense 7,942 633% 4,803 69% 6,866 16%
Impairment expense 56% 418 6% 3,119 7%
702
Bad debt expense 0% 35 1% 388 1%
4
Depreciation and amortization 2% 1,229 18% 1,955 5%
20
--------- ---------- --------- ------ --------- ----
Operating loss (8,485) -677% (5,780) -83% (8,259) -19%
Debt forgiveness income 257 20% - 0% - 0%
Other income (expense), net (241) -19% (2,922) -42% 1,475 3%
--------- ---------- --------- ------ --------- ----
Net loss from continuing operations before income tax expense
(8,469) -675% (8,702) -125% (6,784) -16%
Income tax expense - 0% - 0% - 0%
--------- ---------- --------- ------ --------- ----
Net loss from continuing operations (8,469) -675% (8,702) -125% (6,784) -16%
Net loss from discontinued operations - 0% (2,919) -42% (8,815) -20%
Net loss from sale of discontinued operations - 0% (962) -14% 1,082 3%
Net loss (8,469) -675% (12,583) -181% (14,517) -34%
Less: preferred stock dividends -24% (653) -9% (472) -1%
(306)
--------- ---------- --------- ------ --------- ----
Net loss applicable to common shareholders ($8,775) -700% ($13,236) -190% ($14,989) -35%
========= ========== ========= ====== ========= ====
See accompanying summary of accounting policies and notes to financial statements
YEAR ENDED JULY 31, 2004 COMPARED TO YEAR ENDED JULY 31, 2003
Operating revenues. Consolidated operating revenues decreased 82% between
periods from $6.9 million for the year ended July 31, 2003 to $1,254,000 for the
year ended July 31, 2004.
Carrier services revenues decreased approximately $5.5 million, or 84% from
the year ended July 31, 2003 to the year ended July 31, 2004. Our carrier
traffic declined from approximately 95 million minutes during the year ended
July 31, 2003 to approximately 25.8 million minutes during the year ended July
31, 2004. The decrease in carrier services revenue can mainly be attributed to
the idling of our network during December 2002. During fiscal 2004 we were able
to restart our carrier services network and we generated approximately
$1,020,000 in carrier services revenue.
18
Network services revenues decreased approximately 44% or $183,000 from the
year ended July 31, 2003 to the year ended July 31, 2004. During the year ended
July 31, 2004 we provided network services to one customer and generated
approximately $14,820 in revenues from this customer. Additionally, in February
2004, we purchased a network services contract from American TeleSource
International de Mexico S.A de C.V. (ATSIMEX). Under the assignment and
purchase agreement with ATSIMEX, we acquired the remaining term of a network
services contract, from February 2004 through June 2004. Under the assignment
of this contract we generated approximately $23,000 per month in network
services revenue for the remaining term of the contract. Currently we are
providing service to this customer on a month-to-month basis. As of the date of
this filing we have not been able to negotiate a long-term contract with the
customer.
Cost of services. (exclusive of depreciation and amortization) The
consolidated cost of services decreased by approximately $5.2 million, or 83%
from the year ended July 31, 2003 to the year ended July 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 95 million minutes
during the year ended July 31, 2003 to approximately 25.8 million minutes during
the year ended July 31, 2004, thus reducing our cost of services between
periods.
Selling, general and administrative (SG&A) expenses. SG&A expenses
increased by approximately $3.1 million from the year ended July 31, 2003 to the
year ended July 31, 2004. This increase is primarily due to recognition of
approximately $7.1 million in non-cash compensation expense as a result of the
issuance of warrants for legal and consulting services rendered by Recap
Marketing & Consulting, LLP. However, as a result of various cost-cutting
measures, we reduced operating expenses from the prior year by the following
amounts:
Salaries & Wages $1,871,141
Rent 212,923
Professional fees 1,255,025
Insurance 154,257
Repairs & Maintenance 45,621
Telephone 52,665
Travel 55,961
----------
TOTAL: $3,647,593
----------
Impairment losses. Impairment expense increased by 68% or $284,000 from
the year ended July 31, 2003 to the year ended July 31, 2004. During the year
ended July 31, 2004, in accordance with U.S. GAAP we determined that the
estimated cash flows expected from the concession license would be less than the
recorded value. As a result we recorded an impairment loss of approximately
$702,000 to reduce the recorded value of the concession license. 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.
Bad debt expense. Bad debt expense decreased by 89% or $31,000 from the
year ended July 31, 2003 to the year ended July 31, 2004. During the year ended
July 31, 2003 we recognized $35,000 in bad debt expense associated with the
write-off of network services customer receivables in Central America. During
the year ended July 31, 2004 we recognized $4,000 in bad debt expense associated
with the write-off of network services revenue related to a customer that ceased
operations.
Depreciation and amortization. Depreciation and amortization decreased by
98% or $1.2 million from the year ended July 31, 2003 to the year ended July 31,
2004. The decrease is attributed to the disposal of substantially all capital
equipment during Fiscal 2003.
19
Operating loss. Our operating loss increased approximately $2.7 million or
47% from the year ended July 31, 2003 to the year ended July 31, 2004. The
increase in operating loss is attributed to the increase in SG&A by
approximately $3.2 million. The increase in SG&A was slightly offset by the
decreases in bad debt expense of approximately $31,000 and the decrease in
depreciation and amortization expense of approximately $1.2 million.
Debt forgiveness income. Our debt forgiveness income increased
approximately $257,000 from the year ended July 31, 2003 to the year ended July
31, 2004. During fiscal 2004, we negotiated various liabilities with our
creditors by issuing ATSI's equity to the creditors. The settlement of debt with
the creditors was for legal services previously provide to us during fiscal 2003
and 2004. The debt forgiveness income was based on the difference between the
market price of ATSI equity at the time of issuance and the exercise price
calculated at the time of the settlement of debt.
Other expense, net. Other expense decreased approximately $2.7 million or
92% from the year ended July 31, 2003 to the year ended July 31, 2004. The
decrease in other expense is attributed to the decrease in interest expense of
approximately $1.3 million recognized during the year ended July 31, 2003
associated with various capital leases. During the year ended July 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 $2.9 million between periods; from $2.9 million for the year ended
July 31, 2003 to $0 during the year ended July 31, 2004. During the year ended
July 31, 2003, we recognized loss from discontinued operations of approximately
$2.9 million associated with Mexico Telco operations. The Mexico Telco loss
from discontinued operations during the year ended July 31, 2003 can mainly be
attributed to the recognition of approximately $3.2 million in selling, general
and administrative expenses and the recognition of $660,000 of foreign currency
loss on exchange rate related to the Mexico Telco operations. Additionally, the
Mexico Telco operations also recognized $510,000 of depreciation and
amortization and approximately $228,000 of interest expense and income tax
expense during the year ended April 30, 2003. These expenses were offset
slightly by the recognition of approximately $1.9 million of gross profit margin
from the Mexico Telco Operations.
Preferred stock dividends. Preferred Stock Dividends expense decreased by
approximately $347,000 between periods, from $653,000 for the year ended July
31, 2003 to $306,000 during the year ended July 31, 2004. During the quarter
ended April 30, 2004 we converted all Redeemable preferred Series F and Series G
shares to common. As a result of these conversions, no dividends were incurred
during the forth quarter of fiscal 2004, thus resulting in a decrease in
Preferred Stock dividends expense during the period.
Net loss to common stockholders. The net loss for the year ended July 31,
2004 decreased to $8.8 million from $13.2 million for the year ended July 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 year ended July 31, 2004. Additionally, as mentioned above, loss from
discontinued operations decreased from the year ended July 31, 2003 to the year
ended July 31, 2004 by approximately $2.9 million. Also, there was a decrease in
depreciation and amortization expense of approximately $1.2 million from the
year ended July 31, 2003 to the year ended July 31, 2004. These decrease in
various expenses were somewhat offset by the increase in SG&A by approximately
$3.1 million.
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. The decrease
in carrier services revenue during fiscal 2003 can mainly be attributed to the
idling of our network during December 2002. As result we did not generate any
revenue from this source
20
during the last six months of fiscal year 2003. 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.
Network services revenues decreased approximately 79% or $1.5 million from
the year ended July 31, 2002 to the year ended July 31, 2003. The primary
reason for the decrease in revenue is attributed to the decrease in network
services customers from 25 customers during fiscal 2002 to 1 customer during
fiscal 2003. The decrease in customers is attributed to the sale of our network
services customer base during the second quarter of fiscal 2003.
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 decrease in depreciation and
amortization can be attributed to the complete depreciation and impairment of
our equipment during fiscal 2003.
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.
21
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, during 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 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash (used in)/ provided by operating activities: During the year ended
July 31, 2004, operations consumed approximately $457,000 in cash. This cash
consumed by operations is primarily due to net losses of approximately
$8,469,000 incurred during fiscal 2004. The net losses were somewhat offset by
the increase in accounts payable of approximately $272,000, increase in accrued
liabilities of approximately $162,000 and the recognition of approximately
$107,000 of losses on an unconsolidated affiliate. The increase in accrued
liabilities and accounts payable is primarily due to the company recognizing
approximately $122,000 in interest expense associated with various notes and the
accrual of professional fees and board fees of approximately $125,000.
Additionally, we recognized approximately $7,053,000 in non-cash compensation
expense associated with the issuance of warrants for services related to the
consulting agreements entered into with two individuals. In addition, during the
year ended July 31, 2004, we determined that the estimated future cash flows
expected from the concession license would be less than its carrying value. As a
result we recorded an impairment loss of approximately $702,000 to reduce the
record value of the concession license. Currently we are not generating
sufficient revenues from operations to cover our monthly operating salaries and
general and administrative expense.
Cash provided by investing activities: During the year ended July 31, 2004,
the Company acquired the NexTone Communications Session Controller (soft-switch)
for $130,000. The NexTone soft-switch includes a network analysis and reporting
system that provides a comprehensive set of management tools to engineer and
translate VoIP traffic routing tables and is also capable of processing
approximately 30 million minutes per month of VoIP traffic.
22
Additionally, during fiscal 2004 we received $187,000 in payments from
Telemarketing de Mexico S.A de C.V. associated with the agreed amounts under the
"Share purchase Agreement" dated May 22, 2003 where we agreed to sell 51% of our
ownership in ATSI Comunicaciones S.A de C.V., which owns a 30 year concession
license. The concession license allows for the installation and operation of a
public telecommunications network throughout Mexico.
Furthermore, during the year ended July 31, 2004 we invested approximately
$47,000 in ATSI Comunicaciones S.A. de C.V. The proceeds were utilized by
ATSICOM to pay payroll taxes and professional services, which were previously
agreed to in the sale of ATSICOM to Telemarketing.
Cash provided by / (used in) financing activities: During the fiscal year
ended July 31, 2004 we received approximately $410,000 for the issuance of debt
and warrant options. Additionally, during the fiscal year ended July 31, 2004 we
made debt payments of approximately $9,000 to our creditors, for an outstanding
note.
Overall, our net operating, investing and financing activities during the
year ended July 31, 2004 provided a decrease of approximately $46,000 in cash
balances. We intend to cover our monthly operating expenses with our remaining
available cash. Additionally, we will continue to pursue additional equity
offerings to cover our deficiencies in cash reserves. However, there is no
assurance that we will be able to secure the equity offerings required to
supplement our deficiencies in cash reserves.
Working Capital and liabilities
Our working capital deficit at July 31, 2004 was approximately $18,948,000.
This represents a decrease of approximately $151,000 from our working capital
deficit at July 31, 2003. The decrease can primarily be attributed to the
settlement of various liabilities through the issuance of common stock, these
liabilities were mainly associated with professional services incurred during
fiscal 2003. Our working capital deficit at July 31, 2004 included approximately
$12,354,000 related to the pre-petition liabilities (net of assets), associated
with ATSI-Texas and TeleSpan, the two subsidiaries under Chapter 7 Bankruptcy.
The pre-petition liability balance is composed primarily of the following:
- $3 million in debt owed to IBM Corporation associated to a capital
lease;
- $1.3 million in debt to Northern Telecom, a subsidiary of Nortel
Networks, associated with some telecommunications equipment acquired
during fiscal year 2001;
- $5.1 million in debt to various international and domestic
telecommunications carriers for services provided during fiscal year
2002 and 2003;
- $250,000 in property taxes to various taxing entities,
- $550,000 to Universal Service Fund for telecommunication taxes;
- $250,000 in a note payable; and
- $2.4 million associated with rent expense, salaries and wages and
professional services to various entities.
Our working capital deficit after exclusion of the pre-petition liabilities is
approximately $6,594,000.
Our current obligations also include approximately $1,403,000 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 $1,046,000 is included in accrued liabilities.
Our current liabilities also include approximately $1,138,000 associated
with the Series D Cumulative preferred stock. Of this balance, $942,000 is
associated with the full redemption of this security and $196,000 is related to
the accrued dividends as of July 31, 2004.
23
Our current liabilities include approximately $1,275,000 associated with
the Series E Cumulative preferred stock. Of this balance, $1,058,000 is
associated with the full redemption of this security and $217,000 is related to
the accrued dividends as of July 31, 2004. During the fiscal year ended July
31, 2003, the Company was de-listed from AMEX and according to the terms of the
Series E Cumulative preferred stock Certificate of Designation, if the Company
fails to maintain a listing on NASDAQ, NYSE or AMEX the Series E preferred
stockholder could request a mandatory redemption of the total outstanding
preferred stock. As of the date of this filing we have not received such
redemption notice.
On October 31, 2002 we filed a 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 stock fraud and
manipulation. These liabilities combined for a total of approximately
$2,413,000. 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 $1,152,000 of current liabilities (net of
assets) associated to the discontinued operations of the retail 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 $699,000 related to income taxes owed as of July 31, 2004.
Ongoing operations
We believe that, based on our limited availability to capital resources and
our current cash balances, that these resources may not be available to support
our ongoing operations for the next twelve months or until we are able to
generate income from operations. These matters raise substantial doubt about
our ability to continue as a going concern. Our ability to continue as a going
concern is dependent upon the ongoing support of our stockholders and customers,
our ability to obtain capital resources to support operations and our ability to
successfully market our services.
As outlined in Note 6 to the financial statements, we have incurred amounts
of debt to finance our working capital requirements. During fiscal 2004, we
borrowed a total of $410,500 from Recap Marketing & Consulting, LLP, to fund our
operating expenses, reincorporation related expenses and other corporate
expenses. This debt will be applied to the payment of warrants issued to Recap
Marketing & Consulting, LLP.
Furthermore, during fiscal 2004, we also relied on cash payments received
of $187,000 from Telemarketing de Mexico S.A de C.V. (Telemarketing) to fund our
operating expenses. These funds were received in accordance with the "Share
Purchase Agreement" entered with Telemarketing on May 22, 2004. Under the
agreement we sold to Telemarketing 51% of our Mexican subsidiary, ATSI
Comunicaciones, S.A. de C.V. (ATSICOM), which owns a 30-year concession license
to install and operate a public telecommunications network throughout Mexico.
Under the agreement we received an initial payment of $194,000. The agreement
also required, a $200,000 payment associated with ATSICOM'S liabilities and the
remaining purchase price of $747,000 to be paid as follows:
- From May 2003 Telemarketing paid ATSI $20,750 per month for 12 months;
and
- In May 2004, ATSI was scheduled to receive from Telemarketing $20,750
per month for 24 months, contingent on ATSI generating 20,750,000
minutes of monthly traffic through ATSICOM's network. In the event the
Company did not reach the above-mentioned volume of monthly minutes,
the monthly payment were to be adjusted based on the percentage of the
shortfall in minutes, until Telemarketing pays the total purchase
price.
In addition to the signing of the "Share Purchase Agreement" on May 22,
2003 with Telemarketing we also entered into a three-year Carrier Service
Agreement with DialMex, LLC ("DialMex"), a U.S.-based telecommunications
carrier, and Telemarketing. Under the Carrier Service Agreement we had access to
DialMex's VoIP network to transport and terminate voice and fax communications
over the Internet. This agreement was
24
intended to allow us to meet the requirement of generating and transporting
20,750,000 minutes of monthly traffic through ATSICOM's network, as stipulated
under the Share Purchase Agreement with Telemarketing.
During fiscal 2004 we experienced difficulties with DialMex's network, due
primarily to deficiencies in their network capacity, call interruptions and
limited traffic routing selections. Additionally ATSI Comunicaciones S.A de C.V.
has not been able to complete the required interconnections with other Mexican
carriers, to process domestic and international VoIP traffic. As a result, we
have not been able to generate the monthly minutes required under the
Telemarketing agreement. Consequently, we have not received any payments from
Telemarketing since May 2004. Currently we are in negotiations with
Telemarketing to amend the Share Purchase Agreement for the remaining balance
owed to us of approximately $498,000. Additionally, we are currently in
discussions with DialMex and the principal owners of Telemarketing to join
resources and network expertise for the purpose of correcting the problems with
DialMex's network and build a more robust and efficient network.
During the fourth quarter of fiscal 2004, we initiated our efforts to
correct the various problems experienced with the DialMex network by acquiring a
VoIP soft-switch from NexTone Communications, Inc. The acquisition of the
NexTone soft-switch has allowed us to interconnect directly to foreign and US
carriers and diversify our traffic. During fiscal 2005 we initiated the
interconnection of our soft-switch to DialMex's network for routes into Mexico
that meet our standards for cost and quality. The NexTone soft-switch is capable
of processing approximately 30 million minutes per month, it also includes a
network analysis and reporting system that provides a comprehensive set of
management tools to engineer, translate VoIP traffic routing tables and route
our traffic efficiently. We believe that the acquisition of the VoIP soft-switch
will allow us to correct the various network problems experienced with the
DialMex network.
The following summarizes the Company's contractual obligations at July 31,
2004, and the effect such obligations are expected to have on its liquidity and
cash flow in future periods.
LESS THAN MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
- ----------------------- ------ ---------- ---------- ---------- ----------
Operating Lease
Obligations 6,840 6,840 - - -
------ ---------- ---------- ---------- ----------
Total $6,840 $ 6,840 $ - $ - $ -
====== ========== ========== ========== ==========
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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 stockholders.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
CONSOLIDATED FINANCIAL STATEMENTS OF ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES
Report of Malone and Bailey, PLLC. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Report of Tanner + Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Consolidated Balance Sheet as of July 31, 2004 and 2003. . . . . . . . . . . . . . . . 29
Consolidated Statements of Operations for the Years Ended July 31, 2004, 2003 and 2002 30
Consolidated Statements of Comprehensive Loss for
the Years Ended July 31, 2004, 2003 and 2002 . . . . . . . . . . . . . . . . . . . . 31
Consolidated Statements of Stockholders' Deficit for
the Years Ended July 31, 2004, 2003 and 2002 . . . . . . . . . . . . . . . . . . . . 32
Consolidated Statements of Cash Flows for the Years Ended July 31, 2004, 2003 and 2002 33
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . 34
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ATSI COMMUNICATIONS, INC.
We have audited the consolidated balance sheet of ATSI COMMUNICATIONS, INC. AND
SUBSIDIARIES as of July 31, 2004 and the related consolidated statements of
operations, comprehensive loss, stockholders' deficit and cash flows for the
year ended July 31, 2004. These consolidated financial statements are the
responsibility of ATSI's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (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 audit provides a
reasonable basis for our opinion.
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, 2004 and the consolidated
results of their operations and their cash flows for the year ended July 31,
2004 in conformity with accounting principles generally accepted in the United
States of America.
The accompanying consolidated financial statements have been prepared assuming
that ATSI will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, ATSI has a working capital deficit, has
suffered recurring losses and has a stockholders' deficit. These conditions
raise substantial doubt about ATSI's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
MALONE & BAILEY, PLLC
www.malone-bailey.com
Houston, Texas
October 25, 2004
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ATSI COMMUNICATIONS, INC.
We have audited the consolidated balance sheet of ATSI COMMUNICATIONS, INC. AND
SUBSIDIARIES as of July 31, 2003, and the related consolidated statements of
operations, comprehensive loss, stockholders' deficit and cash flows for the
years ended July 31, 2003 and 2002. 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.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (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 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 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 2 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 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/S/ TANNER+ CO.
SALT LAKECITY, UTAH
OCTOBER 3, 2003
28
ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information, which have been adjusted to reflect the reverse split)
July 31, July 31,
2004 2003
---------- ----------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 94 $ 140
Accounts receivable 29 7
Note receivable-current portion - 187
Prepaid & other current assets 26 6
---------- ----------
Total current assets 149 340
---------- ----------
PROPERTY AND EQUIPMENT 130 -
Less - Accumulated depreciation and amortization (9) -
---------- ----------
Net property and equipment 121 -
---------- ----------
OTHER ASSETS, net
Note receivable - 100
Investment in joint venture - 663
---------- ----------
Total assets $ 270 $ 1,103
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
CURRENT LIABILITIES:
Pre-petition liabilities of bankrupt subsidiaries, net of assets $ 12,354 $ 12,453
Accounts payable 503 356
Accrued liabilities 1,622 2,559
Notes payable 778 445
Convertible debentures 275 275
Series D Cumulative Preferred Stock, 3,000 shares authorized, 742 shares issued and outstanding 1,138 1,093
Series E Cumulative Preferred Stock, 10,000 shares authorized and 1,170 shares issued and outstanding 1,275 1,209
Liabilities from discontinued operations, net of assets 1,152 1,152
---------- ----------
Total current liabilities 19,097 19,542
---------- ----------
Total long-term liabilities 20 9
STOCKHOLDERS' DEFICIT:
Preferred stock, $0.001 par value, 10,000,000 shares authorized,
Series A Cumulative Convertible Preferred Stock, 50,000 shares authorized, 3,750 and 4,370 shares
issued and outstanding, respectively - -
Series F Cumulative Convertible Preferred Stock, 10,000 shares authorized, 0 and 7,260 shares
issued and outstanding, respectively - -
Series G Cumulative Convertible Preferred Stock, 42,000 shares authorized, 0 and 6,500 shares
issued and outstanding, respectively - -
Series H Convertible Preferred Stock, 16,000,000 shares authorized, 14,385,661 and 0 shares
issued and outstanding, respectively 14 -
Common stock, $0.001, 150,000,000 shares authorized, 2,918,532 and 1,036,386 (Adjusted to reflect
reverse-split) issued and outstanding, respectively 3 1
Additional paid in capital 69,178 61,124
Accumulated deficit (88,544) (80,075)
Other comprehensive Income 502 502
---------- ----------
Total stockholders' deficit (18,847) (18,448)
---------- ----------
Total liabilities and stockholders' deficit $ 270 $ 1,103
========== ==========
See accompanying summary of accounting policies and notes to financial statements
29
ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve months ended July 31,
2004 2003 2002
-------------- -------------- ----------------
OPERATING REVENUES:
Services
Carrier services $ 1,020 $ 6,532 $ 41,190
Network services 234 417 1,956
-------------- -------------- ----------------
Total operating revenues 1,254 6,949 43,146
OPERATING EXPENSES:
Cost of services (exclusive of depreciation
and amortization, shown below) 1,071 6,244 39,077
Selling, general and administrative 7,942 4,803 6,866
Impairment expense 702 418 3,119
Bad debt expense 4 35 388
Depreciation and amortization 20 1,229 1,955
-------------- -------------- ----------------
Total operating expenses 9,739 12,729 51,405
-------------- -------------- ----------------
OPERATING LOSS (8,485) (5,780) (8,259)
OTHER INCOME (EXPENSE):
Other income (expense), net 7 (25) 1,868
Debt forgiveness income 257 - -
Loss on an unconsolidated affiliate (107) - -
Interest expense (166) (1,377) (393)
Gain/(loss) from sale of assets 25 (1,520) -
-------------- -------------- ----------------
Total other income (expense) 16 (2,922) 1,475
LOSS FROM CONTINUING
OPERATIONS BEFORE INCOME TAX (8,469) (8,702) (6,784)
NET LOSS FROM DISCONTINUED
OPERATIONS - (2,919) (8,815)
NET LOSS FROM THE SALE OF DISCONTINUED
OPERATIONS - (962) 1,082
-------------- -------------- ----------------
NET LOSS (8,469) (12,583) (14,517)
LESS: PREFERRED DIVIDENDS (306) (653) (472)
-------------- -------------- ----------------
NET LOSS TO COMMON STOCKHOLDERS ($8,775) ($13,236) ($14,989)
============== ============== ================
BASIC AND DILUTED LOSS PER SHARE ($7.31) ($13.01) ($17.37)
============== ============== ================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 1,199,892 1,017,670 862,750
============== ============== ================
See accompanying summary of accounting policies and notes to financial statements
30
ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
For the twelve months ended July 31,
2004 2003 2002
----------------- --------------- ----------------
Net loss to common stockholders
Other comprehensive income (loss), net of tax: ($8,775) ($13,236) ($14,989)
Foreign currency translation adjustment - 1,139 611
----------------- --------------- ----------------
Comprehensive loss to common stockholders ($8,775) ($12,097) ($14,378)
================= =============== ================
See accompanying summary of accounting policies
and notes to financial statements
31
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Preferred Stock Common Stock Additional Accumulated
------------------ ---------------
Shares Amount Shares Amount Paid In Capital Deficit
--------------------------------------------------------------------
BALANCE, JULY 31, 2001 18 - 773 $ 1 $ 58,011 ($52,503)
Issuances of common shares for cash 8 220
Issuances of common shares for services 0 10
Issuances of common shares for acquisition 11 (980)
Issuances of preferred stock (26)
Conversion of preferred stock 155 2,400
Notes receivable from shareholders 3 12
Dividends (472)
Compensation expense 0
Expiration of warrants 338
Cumulative effect of translation adjustment
Net loss (14,517)
--------------------------------------------------------------------
BALANCE, JULY 31, 2002 18 - 950 $ 1 $ 59,985 ($67,492)
--------------------------------------------------------------------
Issuances of common shares for services 33 174
Conversion of redeemable preferred stock 53 691
Dividends (653)
Cumulative effect of translation adjustment
Net loss (12,583)
--------------------------------------------------------------------
BALANCE, JULY 31, 2003 18 - 1,036 $ 1 $ 60,197 ($80,075)
--------------------------------------------------------------------
Issuances of common shares for preferred shares 913 1 859
Issuance of common shares for services 2
Issuances of common shares for cash 567 1 5
Conversion of redeemable preferred stock (14) 401 353
Preferred stock dividend in conjunction with split 14,385 14 (14)
Dividends (306)
Warrant expense 7,053
Net loss (8,469)
--------------------------------------------------------------------
BALANCE, JULY 31, 2004 14,389 14 2,917 $ 2 $ 68,148 ($88,544)
====================================================================
Cumulative
Warrants Translation Deferred Total
Outstanding Adjustment Compensation Stockholders'
-------------------------------------------------------------
BALANCE, JULY 31, 2001 $ 1,369 ($1,247) ($12) $ 5,619
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) -
Cumulative effect of translation adjustment 611 611
Net loss (14,517)
-------------------------------------------------------------
BALANCE, JULY 31, 2002 $ 1,031 ($636) $ 0 ($7,111)
-------------------------------------------------------------
Issuances of common shares for services 174
Conversion of redeemable preferred stock 691
Dividends (653)
Cumulative effect of translation adjustment 1,139 1,139
Net loss (12,583)
-------------------------------------------------------------
BALANCE, JULY 31, 2003 $ 1,031 $ 503 $ 0 ($18,344)
-------------------------------------------------------------
Issuances of common shares for preferred shares 860
Issuance of common shares for services 2
Issuances of common shares for cash 6
Conversion of redeemable preferred stock 353
Preferred stock dividend in conjunction with split -
Dividends (306)
Warrant expense 7,053
Net loss (8,469)
-------------------------------------------------------------
BALANCE, JULY 31, 2004 $ 1,031 $ 503 $ 0 ($18,846)
=============================================================
See accompanying summary of accounting policies and notes to the financial statements
32
ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Twelve months ended July 31,
2004 2003 2002
--------- ---------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS ($8,469) ($12,583) ($14,517)
Adjustments to net loss
Issuance of warrants for services 7,053 - -
Impairment loss 702 418 6,432
Loss on an unconsolidated affiliate 107 - -
Depreciation and amortization 19 1,739 4,599
Provision for losses on accounts receivable 4 106 433
Issuance of common stock for services 2 - 10
Debt forgiveness income (257) - -
Loss on the disposal of property & equipment - 1,009 -
Loss on the sale of ATSIMEX & SINFRA - 962 -
Foreign currency loss - 661 -
Loss on the sale of 51% of ATSICOM - 511 -
Loss on investment in ATSICOM - 14 -
Deferred compensation - - 12
Minority interest - - (244)
Gain on the sale of GlobalScape - - (1,082)
Gain on the restructuring of the IBM debt (1,860)
Changes in operating assets and liabilities:
(Increase) Decrease in accounts receivable (21) 719 786
(Increase) Decrease in prepaid expenses and other (31) 583 248
Increase in accounts payable 272 3,179 3,911
Increase in accrued liabilities 162 2,919 780
(Decrease) in deferred revenue - (108) (17)
--------- ---------- ----------------
Net cash (used in) / provided by operating activities (457) 129 (509)
--------- ---------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash proceeds from sale of ATSICOM 187 440 -
Investment in joint venture in ATSICOM (47) - -
Purchases of property & equipment (130) (281) (1,092)
Cash proceeds from sale of ATSIMEX & SINFRA - 18 -
Acquisition of business, net of assets - - (54)
Cash proceeds from sale of GlobalScape - - 2,250
--------- ---------- ----------------
Net cash provided by investing activities 10 177 1,104
--------- ---------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 410 25 358
Debt payments (9) - (65)
Capital lease payments - (87) (1,158)
Payment of expenses related to the issuance of preferred stock - (12) (26)
Proceeds from issuance of common stock - - 220
Payment of expenses related to the issuance of common stock - (95) -
--------- ---------- ----------------
Net cash provided by / (used in) financing activities 401 (169) (671)
--------- ---------- ----------------
NET (DECREASE) INCREASE IN CASH (46) 137 (76)
CASH AND CASH EQUIVALENTS, beginning of period 140 3 12
CASH AND CASH EQUIVALENTS, Allocated to discontinued operations - - 67
--------- ---------- ----------------
CASH AND CASH EQUIVALENTS, end of period $ 94 $ 140 $ 3
========= ========== ================
See accompanying summary of accounting policies and notes to financial statements
33
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: ATSI Communications, Inc. ("ATSI") was incorporated in
Nevada on May 24, 2004. ATSI is an international telecommunications carrier that
utilizes the Internet to provide economical international telecommunications
services to carriers and telephony resellers around the world. ATSI's continuing
operations consist of VoIP wholesale business and network services. ATSI
provides transmission and termination services to U.S. and Foreign
telecommunications companies who lack transmission facilities, require
additional capacity or do not have the regulatory licenses to terminate traffic
in Mexico, Asia, the Middle East and Latin America.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to conform
with the current year presentation.
PRINCIPLES OF CONSOLIDATION. 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.
USE OF ESTIMATES. In preparing financial statements, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities in
the balance sheet and revenue and expenses in the statement of expenses. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS. For purposes of the statement of cash flows, ATSI
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
REVENUE RECOGNITION. ATSI derives revenue from both Carrier Services and Network
Services. 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.
Carrier Service: ATSI provides transmission and termination services to
U.S. and Foreign telecommunications companies who lack transmission facilities,
require additional capacity or do not have the regulatory licenses to terminate
traffic in Mexico, Asia, the Middle East and Latin America. Typically these
telecommunications companies offer their services to the public for local and
international long distance services. Carrier service revenue is derived through
transporting and terminating minutes of telecommunications traffic over ATSI's
owned or leased VoIP network (Voice over Internet Protocol). ATSI recognizes
revenue in the period the service is provided, net of revenue reserves for
potential billing credits. Such disputes can result from disagreements with
customers regarding the duration, destination or rates charged for each call.
Network Service: ATSI offers 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. Network service revenue
is derived from the network capacity provided to customers to connect their
multiple sites or locations throughout Latin America to transport data, voice
and fax transmissions.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. Bad debt expense is recognized based on
management's estimate of likely losses per year, based on past experience and an
estimate of current year uncollectible amounts. There was no allowance for
doubtful accounts as of July 31, 2004.
NOTE RECEIVABLE. ATSI has an unrecorded note receivable from Telemarketing de
Mexico S.A de C.V. for the sale of 51% of ATSI Comunicaciones S.A de C.V. Under
the terms of the "Share Purchase Agreement" dated May 24, 2003, ATSI is
scheduled to receive from Telemarketing $20,750 per month for 24 months
beginning in May 2004, contingent on ATSI generating 20,750,000 minutes of
monthly traffic through ATSICOM's network. In the event
34
the ATSI does not reach the above-mentioned volume of monthly minutes, the
monthly payments were to be adjusted based on the percentage of the shortfall in
minutes, until Telemarketing pays the total remaining purchase price of
$498,000. Currently, ATSI has as a collateral on this note 10% of ATSICOM's
stock, which was part of the "Share Purchase Agreement" with Telemarketing.
During fiscal 2004 ATSI experienced difficulties with DialMex's network, due
primarily to deficiencies in DialMex's network capacity, call interruptions and
limited traffic routing selections. Additionally ATSI Comunicaciones S.A de C.V.
has not been able to complete the required interconnections with other Mexican
carriers, to process domestic and international VoIP traffic. As result, ATSI
has not been able to generate the monthly minutes required under the
Telemarketing agreement. Consequently, ATSI has not received any payments from
Telemarketing since May 2004. Currently ATSI is in negotiations with
Telemarketing to amend the "Share Purchase Agreement" for the remaining balance
owed to us of approximately $498,000. Currently ATSI is in discussions with
DialMex and the principal owners of Telemarketing to join resources and network
expertise to correct the problems experienced with the DialMex Network and
build a more robust and efficient network.
DIRECT COST OF REVENUE:
Carrier Services: Under carrier services ATSI incurs termination charges.
These charges are related to the fees that ATSI is charged by carriers / vendors
for the termination of phone calls into their infrastructure and network to
terminate traffic in Mexico, Asia, the Middle East and Latin America. The cost
is based on a per minute rate and volume. ATSI also incurs installation charges
from various carriers; this cost is passed on to customers for the connection to
the VoIP network from ATSI's carriers.
Network Services: Under network services, ATSI 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.
PROPERTY AND EQUIPMENT is valued at cost. Additions are capitalized and
maintenance and repairs are charged to expense as incurred. Gains and losses on
dispositions of equipment are reflected in operations. Depreciation is provided
using the straight-line method over the estimated useful lives of the assets,
which are one to five years.
IMPAIRMENT OF LONG-LIVED ASSETS. ATSI reviews the carrying value of its
long-lived assets annually or whenever events or changes in circumstances
indicate that the historical cost-carrying value of an asset may no longer be
appropriate. ATSI assesses recoverability of the carrying value of the asset by
estimating the future net cash flows expected to result from the asset,
including eventual disposition. If the future net cash flows are less than the
carrying value of the asset, an impairment loss is recorded equal to the
difference between the asset's carrying value and fair value.
- During the year ended July 31, 2004, in accordance with U.S. GAAP we
determined that the estimated cash flows expected from the concession
license would be less than the recorded value. As a result we recorded
an impairment loss of approximately $702,000 to reduce the recorded
value of the concession license.
INVESTMENT IN UNCONSOLIDATED SUBSIDIARY. On May 22, 2003 ATSI sold 51% of its
interest in ATSI Comunicaciones S.A de C.V., (ATSI COM) As of July 31, 2003,
ATSI has a 49% interest in the profits and equity of ATSICOM, a Mexican
Corporation, engaged in providing telecommunications services. During fiscal
2003 ATSI recorded the investment in the unconsolidated subsidiary in conformity
with the equity method of accounting. During the year ended July 31, 2004, we
have taken a conservative approach and determined that the estimated future cash
flows expected from the concession license will be less than its carrying value.
As a result ATSI recorded an impairment loss of approximately $702,000 to reduce
the record value of the concession license. Although there is no assurance of
future value appreciation, the company will conduct a valuation of its
investment in the concession license annually and record the determined value,
if any, in its financial statements.
35
INCOME TAXES. ATSI recognizes deferred tax assets and liabilities based on
differences between the financial reporting and tax bases of assets and
liabilities using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to be recovered. ATSI provides a
valuation allowance for deferred tax assets for which it does not consider
realization of such assets to be more likely than not.
BASIC AND DILUTED NET LOSS PER SHARE. The basic net loss per common share is
computed by dividing the net loss by the weighted average number of common
shares outstanding. Diluted net loss per common share is computed by dividing
the net loss adjusted on an "as if converted" basis, by the weighted average
number of common shares outstanding plus potential dilutive securities. For the
years ended July 31, 2004, 2003 and 2002, potential dilutive securities had an
anti-dilutive effect and were not included in the calculation of diluted net
loss per common share.
STOCK BASED COMPENSATION. ATSI adopted the disclosure requirements of Financial
Accounting Standard No. 123, Accounting for Stock-Based Compensation (FAS No.
123) and FAS No. 148 with respect to pro forma disclosure of compensation
expense for options issued. For purposes of the pro forma disclosures, the fair
value of each option grant is estimated on the grant date using the
Black-Scholes option-pricing model.
ATSI applies APB No. 25 in accounting for its stock option plans and,
accordingly, no compensation cost has been recognized in ATSI financial
statements for stock options under any of the stock plans which on the date of
grant the exercise price per share was equal to or exceeded the fair value per
share. However, compensation cost has been recognized for warrants and options
granted to non-employees for services provided. The following table illustrates
the effect on net loss and net loss per share if ATSI had applied the fair value
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation.
For the Years Ended July 31,
-----------------------------------------------------
2004 2003 2002
--------------- ---------------------- ------------
(In thousands, except per share amounts)
Net loss applicable to common
Stockholders $ (8,775) $ (13,236) $ (14,989)
Deduct: Total stock based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects - (313) (794)
--------------- ---------------------- ------------
Pro forma net loss (8,775) (13,549) (15,783)
=============== ====================== ============
Earnings per share
Basis - as reported $ (7.31) $ (13.01) $ (17.00)
=============== ====================== ============
Basis - pro forma $ (7.31) $ (13.01) $ (18.00)
=============== ====================== ============
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,
-------------------------------------
2004 2003 2002
---------- ------------ -----------
Expected dividends yield 0.00% 0.00% 0.00%
Expected stock price volatility 248% 256% 123%
Risk-free interest rate 2% 2.70% 4.92%
Expected life of options 1-2 years 3-10 years 3-10 years
---------- ------------ -----------
36
There were no options granted to employees during fiscal 2004.The weighted
average fair value of options granted during 2003 and 2002 were $8.00 and $5.00,
respectively.
CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject ATSI
to concentration of credit risk consist primarily of trade receivables. In the
normal course of business, ATSI provides credit terms to its customers.
Accordingly, ATSI 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. ATSI maintains cash in bank deposits
accounts, which, at times, may exceed federally insured limits. ATSI has not
experienced any losses in such accounts and ATSI does not believe ATSI is
exposed to any significant credit risk on cash and cash equivalents.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. ATSI does not expect the adoption of
recently issued accounting pronouncements to have a significant impact on ATSI's
results of operations, financial position or cash flow.
NOTE 2 - GOING CONCERN
As shown in the accompanying financial statements, ATSI incurred recurring net
losses from operations of $8,469,000, $8,702,000 and $6,784,000 in fiscal 2004,
2003 and 2002, respectively, has an accumulated deficit of $89 million and a
working capital deficit of $18.9 million as of July 31, 2004. These conditions
create substantial doubt as to ATSI's ability to continue as a going concern.
Management will continue to pursue financings that may include raising
additional capital through sale of common stock, preferred stock, or warrants.
The financial statements do not include any adjustments that might be necessary
if ATSI is unable to continue as a going concern.
NOTE 3 - PRE-PETITION LIABILITIES (NET OF ASSETS) OF THE BANKRUPT SUBSIDIARIES
ATSI's 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 ATSI's 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 represents 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.
ATSI has not received any creditor objections to these court proceedings.
37
The following represents the pre-petition liabilities of bankrupt subsidiaries, net of assets:
ATSI Texas and TeleSpan
(in thousands)
July 31, 2004 July 31, 2003
----------------- -----------------
CURRENT LIABILITIES:
Accounts payable $ 7,496 $ 7,492
Accrued liabilities 2,015 2,015
Notes payable 636 636
Capital leases 2,207 2,207
----------------- -----------------
Total current liabilities $ 12,354 $ 12,350
----------------- -----------------
NOTE 4 - PROPERTY AND EQUIPMENT
Following is a summary of ATSI's property and equipment at July 31, 2004
and 2003 (in thousands):
Depreciable lives July 31, 2004 July 31, 2003
----------------- --------------- -------------
Telecom equipment & Software 1-5 years $ 130 -
Total 130 -
Less: accumulated depreciation (9) -
--------------- -------------
Net-property and equipment $ 121 -
=============== =============
For the years ended July 31, 2004 and 2003, depreciation and amortization
totaled approximately $20,000 and $1,229,000, respectively.
NOTE 5 - ACCRUED LIABILITIES
Following is a summary of ATSI's accrued liabilities (in thousands):
July 31, 2004 July 31, 2003
-------------- --------------
Alfonso Torres (Mexican concession license) $ 1,047 $ 1,003
Christian, Wukoson, Smith & Jewell - 869
Dividends series "A", "F" and "G" 239 396
Audit fees, penalties, rent, wages & payroll taxes 266 260
Convertible debenture interest 55 31
Recap Marketing interest 15 -
------------------------------
TOTAL: $ 1,622 $ 2,559
=============== =============
NOTE 6 - NOTES PAYABLE
38
During fiscal 2004, ATSI borrowed a total of $410,500 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 December 15, 2004
November 25, 2003 25,000 December 15, 2004
December 15, 2003 25,000 December 15, 2004
January 15, 2004 25,000 December 15, 2004
February 19, 2004 25,000 July 31, 2005
March 17, 2004 25,000 July 31, 2005
April 22, 2004 40,000 July 31, 2005
May 10, 2004 47,500 July 31, 2005
June 1, 2004 25,000 July 31, 2005
June 21, 2004 47,500 January 21, 2005
July 7, 2004 25,000 January 7, 2005
July 30, 2004 50,000 January 30, 2005
--------
TOTAL: $410,000
--------
In November 2001, ATSI 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 April 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 2004 and 2003,
ATSI 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 the date
of this filing, the holders of this note have not demanded full payment on this
note. Currently ATSI is in negotiations with the note holders to satisfy this
obligation in an exchange for equity in ATSI. However, there can be no assurance
that a favorable agreement will be reached.
In December 2002, ATSI 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. Additionally, during fiscal 2004 ATSI made payments towards this note
for approximately $9,000.Currently ATSI is in negotiations with the note holders
to extend its maturity date. However, there can be no assurance that a favorable
agreement will be reached.
NOTE 7 - WARRANTS
On October 13, 2003, ATSI entered into consulting agreements with Recap
Marketing & Consulting, LLP that provide for the issuance of compensation
warrants to purchase a total of 3,900,000 shares of ATSI's common stock at
prices as indicated in the following table. These warrants expire on November
30, 2005. During fiscal 2004 ATSI recognized $7,052,999 of non-cash compensation
expense associated with the issuance of these warrants.
Common Exercise
Shares Price
--------- ---------
2,000,000 $ 0.01
800,000 $ 0.25
850,000 $ 0.50
250,000 $ 0.75
39
During fiscal 2004, Recap Marketing & Consulting, LLP exercise the following
warrants:
Exercise Common
Exercise Date Price Shares
------------- ---------- -------
June 21, 2004 $ 0.01 150,000
July 12, 2004 $ 0.01 208,000
July 27, 2004 $ 0.01 208,574
-------
TOTAL: 566,574
-------
MODIFICATION OF NON-EMPLOYEE AWARDS ACCOUNTED FOR UNDER FAS 123
- -----------------------------------------------------------------------
ATSI granted 3,900,000 warrants to outsiders in 2004 where the warrant
agreements contained a provision whereby the number of neither the warrant
amount nor the exercise price would be adjusted by reverse splits. Effective May
24, 2004, ATSI authorized a 1 for 100 reverse split. This triggered a
modification for this award. A modification of the terms of an award that makes
it more valuable shall be treated as an exchange of the original award for a new
award. In substance, the entity repurchases the original instrument by issuing a
new instrument of greater value, incurring additional compensation cost for that
incremental value. The incremental value shall be measured by the difference
between (a) the fair value of the modified option determined in accordance with
the provisions of this section and (b) the value of the old option immediately
before its terms are modified, determined based on the shorter of (1) its
remaining expected life or (2) the expected life of the modified option. As of
July 31, 2004, the additional value totaled $7,052,999, which was recorded as
non-cash compensation expense.
NOTE 8 - CONVERTIBLE SUBORDINATED DEBENTURES
During fiscal 2002 ATSI received $275,000 of advances without specific terms of
repayment or interest. In January 2003 ATSI issued 275 9% Convertible
Subordinated Debentures with a face value of $1,000 each, 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 $13.50 and the warrants are priced at $11.20. At July 31, 2004, ATSI
was in default of the terms of the debentures for non-payment of quarterly
interest. As of July 31, 2004 ATSI had approximately $55,000 in accrued interest
related to these debentures.
NOTE 9 COMMITMENTS AND CONTINGENCIES
In March 2001, Comdisco sued ATSI's subsidiary, 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 owed
pursuant to the lease was $926,185 and that the lease terms called for 36 months
of lease payments. Comdisco is claiming that ATSI-Texas only paid thirty months
of lease payments. ATSI-Texas disputes that the amount owed was $926,185 since
it received only $375,386 in financing and has paid over $473,000 in lease
payments and, thus, believe that it has satisfied its obligation under the lease
terms. Comdisco has filed a claim with the United States Bankruptcy Court of the
Western District of Texas in which the bankruptcy of ATSI-Texas is pending. We
believe that ATSI does not have a liability for the lease payments; additionally
we believe that the obligation by ATSI-Texas will be discharged upon completion
of the pending Chapter 7 case.
In July 2002, ATSI-Texas was notified by the Dallas Appraisal District that the
administrative appeal from the appraisal of the office in the Dallas InfoMart
location was denied. The property was appraised at over $6 million dollars. The
property involved included a Nortel DMS 250/300 switch, other telecommunications
equipment and office furniture and computers. ATSI-Texas 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 the ATSI-Texas InfoMart location. Currently the Dallas County
taxing authority has filed a claim with the United
40
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; since all
of the property was removed and impaired from the Dallas site as a result of
ATSI-Texas filing for protection under Chapter 11 of the Bankruptcy code. We
believe that this obligation by ATSI-Texas will be discharged upon the
completion of the pending Chapter 7 case.
In October 2002, ATSI filed a lawsuit in the Southern District of New York
against several financial parties for 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. ATSI believes 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 ATSI's
stock downward in order to take advantage of increased conversion rates
resulting from the decline in stock price. If we receive an adverse decision in
this lawsuit, it is likely we would be required to issue a substantial amount of
our common shares to our Series D and Series E preferred holders and the current
owners of our common shares would be substantially diluted.
In June 2003, ATSI 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 relating to a
letter of intent for NIFTI to acquire the concession license in Mexico owned by
ATSICOM. NIFTI failed to provide proof of funding to consummate this
transaction, lacked interest in the transaction and failed to commit to a
definite date for the completion of this transaction. As a result this
transaction was never consummated and in May 2003 we sold 51% of ATSICOM's stock
to Telemarketing de Mexico S.A de C.V. In July 21, 2003, NIFTI counterclaimed
for damages allegedly arising from ATSI failing to provide all the proper
documentation associated with concession license liabilities, accounting and
requirements by the Mexican Government. During fiscal 2004, the parties reached
a settlement and agreed to dismiss both lawsuits without compensation.
In December 2003, ATSI 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-Texas and Martin W. Seidler seeking judicial review on the
decision issued by the Texas Workforce Commission awarding a claim for unpaid
wages against ATSI. ATSI is vigorously pursuing this action but cannot predict
the outcome of this litigation or the financial impact on our ongoing
operations.
In January 2004, ATSI 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 in the ATSI-Texas
Bankruptcy case 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 ATSI. The Bankruptcy Court then ordered
the lawsuit to be remanded back to the state court for hearing. ATSI is the
plaintiff in this case and is seeking a declaratory relief from the Bexar County
court. Currently we cannot predict the outcome of this litigation or the
financial impact on our ongoing operations.
ATSI is 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 ATSI's 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.
NOTE 10 - EQUITY
COMMON STOCK
- -------------
During the year ended July 31, 2004, prior to the reincorporation to the state
of Nevada ATSI issued 401,130 common shares. Of this total, 101,786 shares were
issued as a result of the conversions of ATSI's Series F Preferred
41
Stock and accumulated dividends, 297,974 shares were issued as a result of the
conversion of ATSI's Series G Preferred Stock and accumulated dividends, 1,205
shares were issued as a result of the conversion of ATSI's Series A Preferred
Stock and 165 shares were issued for services rendered to ATSI. ATSI has not
registered the shares issued for services rendered, nor does ATSI have any
obligation to register such shares.
On May 6, 2004 ATSI's stockholders approved the reincorporation of ATSI into a
wholly owned subsidiary, ATSI Merger Corporation in the state of Nevada. And as
a result of the merger, ATSI's Stockholders of record as of May 24, 2004
received one (1) share of New ATSI Common Stock and ten (10) shares of New ATSI
Series H Convertible Preferred Stock for each 100 shares of Old ATSI Common
Stock surrendered. As a result of the merger ATSI exchanged 143,751,710 common
shares of the Old ATSI for 1,437,517 shares of the New ATSI Common stock and
14,385,000 shares of the New ATSI Series H Convertible Preferred Stock.
Additionally, after the reincorporation ATSI issued 566,574 shares of the New
ATSI Commons stock related to the exercise of warrants. (See footnote 7)
Furthermore, ATSI issued 912,800 shares for debt conversion. ATSI has not
registered the shares issued for services rendered, nor does ATSI have any
obligation to register such shares
During the fiscal 2003, ATSI issued 86,449 common shares. Of this total, 39,187
shares were issued as a result of the conversions of ATSI's Series E Preferred
Stock and accumulated dividends, 12,722 shares were issued as a result of the
conversion of ATSI's Series F Preferred Stock and accumulated dividends, 1,354
shares were issued as a result of the accumulated dividends of ATSI's Series G
Preferred Stocks and 33,186 shares were issued for services rendered to ATSI.
ATSI has not registered the shares issued for services rendered, nor does ATSI
have any obligation to register such shares.
No dividends were paid on ATSI's common stock during fiscal 2004 and 2003.
PREFERRED STOCK
- ----------------
On May 6, 2004 ATSI's stockholders approved the reincorporation of ATSI into a
wholly owned subsidiary, ATSI Merger Corporation in Nevada. As a result of the
merger, ATSI's Stockholders of record as of May 24, 2004 received one (1) share
of New ATSI Common Stock and ten (10) shares of New ATSI Series H Convertible
Preferred Stock for each 100 shares of Old ATSI Common Stock surrendered. During
fiscal 2004, 14,385,000 shares of the New ATSI Series H Convertible Preferred
Stock were then issued.
Pursuant to ATSI's Certificate of Incorporation, ATSI's board of directors may
issue, in series, 16,000,000 of the New ATSI Series H Convertible Preferred
shares, with a par value of $0.001.
At ATSI's annual stockholders meeting held May 21, 1997, ATSI's stockholders of
ATSI Canada approved the creation of a class of preferred stock at ATSI's annual
stockholders meeting on May 21, 1997. This class of preferred stock was
authorized, effective June 25, 1997. According to ATSI's amended Articles of
Incorporation, ATSI's 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, 2004.
Pursuant to ATSI's Certificate of Incorporation, ATSI's board of directors may
issue, in series, 10,000,000 of preferred shares, with a par value of $0.001.
The terms of ATSI's Series A, Series B, Series C, Series D, Series E, Series F,
Series G and Series H preferred stock restrict ATSI from declaring and paying
dividends on ATSI's 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 2004, the holder of 620 Series A Preferred shares elected to convert
all their shares into 1,206 shares of common. As of July 31, 2004, 3,750 shares
of Series A Preferred Stock remain outstanding for which ATSI has accrued
approximately $175,000 for dividends.
42
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, ATSI
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 ATSI at 100% of its face value,
plus any accumulated, unpaid dividends at ATSI's 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 ATSI does
not call the Preferred Stock prior to the first anniversary date of the Date of
Closing.
SERIES D PREFERRED STOCK
- ---------------------------
The Series D Preferred Stock accrues cumulative dividends at the rate of 6% per
annum payable quarterly. As of July 31, 2004, 742 shares of Series D Preferred
Stock remain outstanding, for which ATSI accrued approximately $196,000 for
dividends. Additionally, on January 24, 2003 ATSI received a demand redemption
letter from the Series D Preferred holders. ATSI has not issued these shares; it
is the position of ATSI that the investor's shares are not owed. Further ATSI
has filed a lawsuit against one or more parties to whom the investors share are
allegedly owed. ATSI is 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.
The terms of ATSI's 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
ATSI refuses to honor conversion notice or if a third party challenges
conversion. During the year ended July 31, 2003, ATSI received a redemption
letter. As a result ATSI adjusted Series D Preferred Stock to the full
redemption amount of approximately $942,000 by recording an additional amount of
dividend expense of approximately $284,000.
SERIES E PREFERRED STOCK
- ---------------------------
During Fiscal 2003, the holder converted 285 of the shares outstanding and
accumulated interest resulting in the issuance of 41,217 shares of common stock.
As of July 31, 2004, 1,170 shares of Series E Preferred Stock remain outstanding
and accrued dividends of approximately $216,000.
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. 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. 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.
43
The terms of ATSI's 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 ATSI, 4) The Secretaria de Comunicaciones y Transportes of the SCT
limits or terminates the scope of the concession or, 5) if ATSI fails to
maintain a listing on NASDAQ, NYSE or AMEX.
SERIES F PREFERRED STOCK
- ---------------------------
The Series F Preferred Stock accrues cumulative dividends at the rate of 15% per
annum. During fiscal 2003, holders of 1,250 of the shares outstanding converted
into 4,808 shares of common stock and ATSI issued 12,722 of common stock for
accumulated dividends.
In fiscal 2004, holders of the total 7,260 shares of Series F Preferred Stock
outstanding were converted into 90,750 shares of common stock and ATSI issued
11,036 shares of common stock for $163,357 of accumulated 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 $54.00. 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 ATSI recognized in March 2001 as preferred
dividends. In addition, ATSI issued 8,528 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 ATSI at 100% of its
face value, plus any accumulated, unpaid dividends at ATSI's option any time
after ATSI's 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 ATSI does
not call the Preferred Stock prior to the first anniversary date of the Date of
Closing.
SERIES G PREFERRED STOCK
- ------------------------
The Series G Preferred Stock accrues cumulative dividends at the rate of 15% per
annum. In fiscal 2004, holders of the total 6,500 shares of Series G Preferred
Stock outstanding were converted into 254,900 shares of common stock and ATSI
issued 43,072 shares of common stock for $170,627 of accumulated 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 $44.00. 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 Series G Preferred Stock is callable and redeemable by ATSI at 100% of its
face value, plus any accumulated, unpaid dividends at ATSI's option any time
after ATSI's 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 ATSI does
not call the Preferred Stock prior to the first anniversary date of the Date of
Closing.
NOTE 11 - STOCK PURCHASE WARRANTS AND STOCK OPTIONS
Following is a summary of warrant activity from August 1, 2001 through July 31,
2004: (Excluding warrants issued under the 2004 Stock Compensation plan)
44
YEAR ENDING JULY 31,
----------------------------
2004 2003 2002
-------- ------- ---------
Warrants outstanding, beginning 45,088 48,338 50,138
Warrants issued - - -
Warrants expired (25,214) (3,250) (1,800)
Warrants exercised - - -
-------- ------- ---------
Warrants outstanding, ending 19,874 45,088 48,338
======== ======= =========
Warrants outstanding at July 31, 2004 expire as follows:
NUMBER OF EXERCISE EXPIRATION
WARRANTS PRICE DATE
--------- -------- ---------
200 119 Sep-24-04
9,090 172 Oct-11-04
1,818 172 Oct-11-04
5,454 172 Oct-11-04
500 172 Oct-11-04
1,750 172 Oct-11-04
1,062 94 Dec-08-04
---------
19,874 TOTAL WARRANTS
=========
No shares have been issued during fiscal 2004, 2003 or 2002 under the 1997 or
1998 Stock Option Plans adopted during those years.
In December 2000, ATSI's board of directors adopted the 2000 Incentive Stock
Option Plan. Under the 2000 Incentive Stock Option Plan, options to purchase up
to 98,000 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 ATSI to retain and attract
qualified individuals who will contribute to ATSI's 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 ATSI's Annual Meeting of Stockholders on February 7,
2001. On May 7, 2001, the board of directors granted a total of 18,640 options
to purchase common stock to employees of ATSI. In August 2001, the board
approved the granting of additional 30,500 in options to directors, officers and
employees of ATSI. The Board further approved the granting of an aggregate total
of 22,275 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 6,300 options to directors, officers and employees in September
2002. During the year ending July 31, 2004 no options were issued under the 2000
Stock Option Plan.
In May 2004, ATSI's board of directors adopted the 2004 Stock Compensation Plan.
The 2004 Stock Compensation Plan authorizes the grant of up to 7.5 million of
warrants, stock options, restricted common stock, non-restricted common stock
and other awards, or a combination, to employees, directors, consultants and
certain other persons. The 2004 Stock Compensation Plan is intended to permit
ATSI to retain and attract qualified individuals who will contribute to ATSI's
overall success of ATSI. The exercise price of all of the warrants, stock
options, restricted
45
common stock, non-restricted common stock and other awards will vary based on
the market price of the shares of common stock as of the date of grant. The
warrants, stock options, restricted common stock, non-restricted common stock
and other awards vest pursuant based in the individual security granted.
During the year ending July 31, 2004, the Board of directors granted the
issuance of 3,900,000 warrants to consultants for services rendered, the
warrants exercise price range from $0.01 to $0.75. As of July 31, 2004, 566,574
warrants have been exercised at an average exercised price of $0.01 and
3,333,426 warrants remained outstanding at an average exercise price of $0.25.
These warrants expired on November 30, 2005. Additionally, the board granted the
issuance of 57,786 non-restricted common stock for professional services
rendered during fiscal 2003 and 2004, the non-restricted common stock exercise
price range from $0.71 to $1.08. During fiscal year ending July 31, 2004 no
stock options or restricted common stock were issued to employees, board of
director or any other individual.
A summary of the status of ATSI's 1997, 1998, 2000 and 2004 Stock Option Plans
for the fiscal 2004, and 2003 changes during the periods are presented below:
(All options and exercise prices have been adjusted to reflect the 1:100 reverse
split effective as of May 24, 2004.)
Years Ended July 31,
-----------------------------------------------------------------------
1997 Stock
Option Plan 2004 2003 2002
Weighted
Weighted Weighted Average
Average Average Exercise
Shares Exercise Price Shares Exercise Price Shares Price
-----------------------------------------------------------------------
Outstanding,
beginning of year 20 $ 58 2,020 $ 187 2,020 $ 187
Granted - - - - - -
Exercised - - - - - -
Forfeited (20) $ 58 (2,000) $ 187 - -
------ --------------- ------- --------------- -------- ---------
Outstanding, end
of year - - 20 $ 58 2,020 $ 187
= = == ============== ===== =========
Options exercisable at end
of year - - 20 $ 58 2,020 $ 187
= = == ============== ===== =========
Weighted average
fair value of
options granted
during the year N/A N/A N/A
=== === ===
Years Ended July 31,
-----------------------------------------------------------
1998 Stock
Option Plan 2004 2003 2002
-----------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-----------------------------------------------------------
Outstanding,
Beginning of year 3,559 $ 56 10,152 $ 91 10,268 $ 91
Granted - - - - - -
Exercised - - - - - -
Forfeited - - (6,593) $ 91 (116) $ 78
------ --------- ------- --------- --------- ---------
46
Outstanding, end
of year 3,559 $ 56 3,559 $ 56 10,152 $ 91
===== ========= ===== ========= ====== =========
Options
exercisable at end
of year 3,559 $ 56 3,458 $ 56 8,918 $ 82
===== ========= ===== ========= ====== =========
Weighted average
fair value of
options granted
during the year $ N/A N/A N/A
========= === ===
Years Ended July 31,
------------------------------------------------------------
2000 Stock
Option Plan 2004 2003 2002
------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------------------------------------------------
Outstanding,
beginning of year 38,100 $ 45 64,251 $ 48 18,640 $ 56
Granted - - 6,300 $ 8 52,774 -
Exercised - - - - - -
Forfeited (9,333) $ 48 (32,451) $ 48 (7,163) $ 49
------- --------- ------- --------- ------- ---------
Outstanding, end
of year 28,767 $ 48 38,100 $ 45 64,251 $ 48
======= ========= ======= ========= ======= =========
Options
exercisable at end
of year 22,466 $ 47 18,322 $ 55 18,769 $ 59
======= ========= ======= ========= ======= =========
Weighted average
fair value of
options granted
during the year $ N/A $ 8 $ 27
========= ========= =========
Years Ended July 31,
-------------------------------------------------------------------
2004 Stock
Compensation
Plan 2004 2003 2002
-------------------------------------------------------------------
Weighted Weighted
Average Weighted Average
Exercise Average Exercise
Warrants Price Warrants Exercise Price Warrants Price
-------------------------------------------------------------------
Outstanding,
beginning of year - - - - - -
Granted 3,900,000 $ 0.21 - - - -
Exercised (566,574) $ 0.21 - -
Forfeited - - - - - -
---------- --------- -------- -------------- -------- --------
Outstanding, end of
year 3,333,426 $ 0.25 - - - -
========== ========= = = = =
47
Weighted average fair
value of warrants
granted during the
year $ 0.21 - -
========= = =
Years Ended July 31,
----------------------------------------------------------------------------------
2004 Stock
Compensation
Plan 2004 2003 2002
----------------------------------------------------------------------------------
Weighted
Non- Weighted Weighted Non- Average
Restricted Average Non-restricted Average Restricted Exercise
Shares Exercise Price Shares Exercise Price Shares Price
----------------------------------------------------------------------------------
Outstanding,
beginning of year - - - - - -
Granted 57,786 $ 0.95 - - - -
Exercised (57,786) $ 0.95 - -
Forfeited - - - - - -
----------- --------------- -------------- -------------- ---------- --------
Outstanding, end of
year - - - - - -
= = = = = =
Weighted average fair
value of non-restricted
shares granted during
the year $ 0.95 - -
=============== = =
During the year ending July 31, 2004 all options granted but not exercised under
the 1997 Stock Option Plan expired. The weighted average remaining contractual
life of the stock options outstanding at July 31, 2004 is approximately 4.3
years for options granted under the 1998 Stock Option Plan, approximately 7.6
years for options granted under the 2000 Incentive Stock Option Plan and 1.1
years for warrants issued under the 2004 Stock Compensation plan.
The following table summarizes information about stock options and warrants
outstanding for all plans at July 31, 2004:
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
- ----------------------------------------------------------------------------------------
Options
- -------
8 - 94 32,325 $ 42 7.00 26,025 $ 49
Warrants
- ---------
1.09 - 1.72 3,353,300 $ 1.24 0.90 3,353,300 $ 1.24
- ----------------------------------------------------------------------------------------
0.08 - 1.72 3,385,625 $ 1.63 3.20 3,379,325 $ 1.61
- ----------------------------------------------------------------------------------------
48
NOTE 12 - SALE 51% OF ATSI COMUNICACIONES S.A DE C.V.
In May 2003, ATSI sold 51% of ATSI's Mexican subsidiary, ATSI Comunicaciones,
S.A. de C.V. (ATSICOM) to Telemarketing de Mexico, S.A. de C.V. (Telemarketing).
The agreement provided for an initial payment of $194,000 plus payment of
approximately $200,000 of ATSICOM'S liabilities and the remaining purchase price
of $747,000 to be paid as follows:
- Beginning in May 2003, ATSI was schedule to receive from Telemarketing
$20,750 per month for 12 months.
- Beginning in May 2004, ATSI was scheduled to receive from
Telemarketing $20,750 per month for 24 months, contingent on ATSI
generating 20,750,000 minutes of monthly traffic through ATSICOM's
network. In the event ATSI 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.
As of the date of this filing, ATSI has been experiencing difficulties with
DialMex's network. Additionally ATSI Comunicaciones S.A de C.V. has not been
able to complete the required interconnections with other Mexican carriers, such
as Telmex, to process domestic and international VoIP traffic. As result, ATSI
has not been able to generate the monthly minutes required under the
Telemarketing agreement. Consequently, ATSI has not received any more payments
from Telemarketing since May 2004. Currently ATSI is in negotiations with
Telemarketing to amend the Share purchase agreement for the remaining balance
owed to ATSI of approximately $498,000. However, there can be no assurance that
will be able to reach a favorable agreement with Telemarketing in the near
future.
Currently ATSI has an unrecorded note receivable associated with the $498,000
still owed to ATSI by Telemarketing. This note is secured by 10% of ATSICOM
stock, which originally was sold to Telemarketing under the "Share Purchase
Agreement" dated May 2003.
Since Telemarketing may not have the resources to perform, because there is no
agreement to modify the "Share purchase agreement" dated May 2003 and because
ATSI may not have sufficient resources to realize its remaining investment in
the Mexican concession license, all recorded investment and unpaid balance of
$702,000 have been impaired as of July 31, 2004.
NOTE 13 - SALE OF ATSI MEXICO AND SINFRA
On July 2, 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, ATSI 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.
NOTE 14 - INCOME TAXES
Deferred tax assets (liabilities) are comprised of the following:
49
July 31,
--------
2004 2003
---- ----
Net operating loss carry-forward $ 15,714,000 $ 15,438,000
Valuation allowance (15,714,000) (15,438,000)
Total deferred tax asset (liability) $ - $ -
ATSI conducts a periodic examination of its valuation allowance. Factors
considered in the evaluation include recent and expected future earnings and
ATSI's liquidity and equity positions. As of July 31, 2004 and 2003, ATSI has
determined that a valuation allowance is necessary for the entire amount of
deferred tax assets.
At July 31, 2004 and 2003, ATSI had net operating loss carry-forwards related to
U.S. operations of approximately $45,614,000 and $45,303,000 with expiration
dates ranging from 2009 through 2023.
NOTE 15 - DISCONTINUED OPERATIONS
On June 12, 2002 ATSI discontinued ATSI's E-commerce operations through the sale
of ATSI's 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, 2004 and 2003 assets and liabilities from
discontinued operations consist of the following (in thousands):
July 31,
-------------
2004 2003
----- ------
PROPERTY AND EQUIPMENT, net $ - $ 245
----- ------
CURRENT LIABILITIES:
Accounts payable - 944
Notes payable - 453
----- ------
Total current liabilities - 1,397
----- ------
----- ------
Total liabilities from discontinued operations: $ - $1,397
===== ======
Consolidated Income statement presentation for the years ended July 31, 2004 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, 2004 and 2003 (in thousands):
- -----------------------------------------------------------------------------------------
E-COMMERCE
For the Year Ending July 31,
-------------------------------------
2004 2003 2002
-------- ----------- --------------
E-commerce revenues $ - $ - $ 4,404
Costs and expenses - - 4,208
Net (loss) income before taxes - - 196
& minority interest
50
Net (loss) income before minority interest - - 195
Net (loss) income $ - $ - $ 399
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
RETAIL SERVICES
For the Year Ending July 31,
-------------------------------------------
2004 2003 2002
-------- ----------------- --------------
Retail Services revenue $ - $ 4,543 $ 7,555
Costs and expenses - 7,383 16,660
Net (loss) income before taxes & minority interest - (2,840) (9,105)
Net (loss) income before minority interest - (2,919) (9,214)
Net loss $ - $ (2,919) $ (9,214)
- -----------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
TOTAL DISCONTINUED OPERATIONS
For the Year Ending July 31,
----------------------------------------
2004 2003 2002
----------- ---------- ---------------
Retail Services revenue $ - $ 4,543 $ 11,959
Costs and expenses - 7,383 20,868
Net income before taxes & minority interest - (2,840) (8,909)
Net loss before minority interest - (2,919) (9,019)
Net loss $ - $ (2,919) $ (8,815)
- -------------------------------------------------------------------------------------
NOTE 16 - QUARTERLY FINANCIAL DATA
ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Quarters Ended
--------------------------------------------------------
7/31/2004 4/30/2004 1/31/2004 10/31/2003
51
OPERATING REVENUES:
Services
Carrier services $ 294 $ 484 $ 209 $ 33
Network services 73 77 42 42
------------- ------------- ------------ ------------
Total operating revenues 367 561 251 75
OPERATING EXPENSES:
Cost of services (exclusive of depreciation
and amortization, shown below) 304 501 218 48
Selling, general and administrative 7,297 216 231 198
Impairment expense 702 - - -
Bad debt expense - - - 4
Depreciation and amortization 13 6 - 1
------------- ------------- ------------ ------------
Total operating expenses 8,316 723 449 251
------------- ------------- ------------ ------------
OPERATING LOSS (7,949) (162) (198) (176)
OTHER INCOME (EXPENSE):
Other income (expense), net 6 - - 1
Debt forgiveness income 257 - - -
Loss on an unconsolidated affiliate (22) (25) (53) (7)
Interest expense (86) (29) (25) (26)
Gain/(loss) from sale of assets - 25 - -
------------- ------------- ------------ ------------
Total other income (expense) 155 (29) (78) (32)
LOSS FROM CONTINUING
OPERATIONS BEFORE INCOME TAX (7,794) (191) (276) (208)
NET LOSS FROM DISCONTINUED
OPERATIONS - - - -
NET LOSS FROM THE SALE OF
DISCONTINUED OPERATIONS - - - -
------------- ------------- ------------ ------------
NET LOSS (7,794) (191) (276) (208)
LESS: PREFERRED DIVIDENDS (38) (82) (93) (93)
------------- ------------- ------------ ------------
NET LOSS TO COMMON STOCKHOLDERS ($7,832) ($273) ($369) ($301)
============= ============= ============ ============
BASIC AND DILUTED LOSS PER SHARE ($5.05) ($0.23) ($0.36) ($0.26)
============= ============= ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 1,551,581 1,174,662 1,036,550 1,174,662
============= ============= ============ ============
See accompanying summary of accounting policies and notes to financial statements
52
ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Quarters Ended
---------------------------------------------------
7/31/2003 4/30/2003 1/31/2003 10/31/2002
----------- ----------- ----------- ------------
OPERATING REVENUES:
Services
Carrier services $ 0 $ 0 $ 1,096 $ 5,436
Network services 40 70 122 185
----------- ----------- ----------- ------------
Total operating revenues 40 70 1,218 5,621
OPERATING EXPENSES:
Cost of services (exclusive of depreciation 33 86 1,120 5,005
And amortization, as shown below)
Selling, general and administration 1,151 310 2,073 1,269
Impairment expense 418 - - -
Bad debt expense - 22 - 13
Depreciation and Amortization 17 363 442 407
----------- ----------- ----------- ------------
Total operating expenses 1,619 781 3,635 6,694
----------- ----------- ----------- ------------
OPERATING LOSS (1,579) (711) (2,417) (1,073)
OTHER INCOME (EXPENSE):
Other income (expense), net (6) - (6) (13)
Interest expense (765) (228) (191) (193)
Loss from the sale of assets (1,492) - (28) -
----------- ----------- ----------- ------------
Total other income (expense) (2,263) (228) (225) (206)
LOSS FROM CONTINUING
OPERATIONS BEFORE INCOME TAX (3,842) (939) (2,642) (1,279)
INCOME TAX BENEFIT (EXPENSE) - - - -
----------- ----------- ----------- ------------
NET LOSS FROM CONTINUING
OPERATIONS (3,842) (939) (2,642) (1,279)
NET LOSS FROM DISCONTINUED
OPERATIONS (98) (421) (750) (1,650)
53
NET LOSS FROM THE SALE OF
DISCONTINUED OPERATIONS (962) - - -
----------- ----------- ----------- ------------
NET LOSS (4,902) (1,360) (3,392) (2,929)
LESS: PREFERRED DIVIDENDS (375) (91) (91) (96)
----------- ----------- ----------- ------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS ($5,277) ($1,451) ($3,483) ($3,025)
=========== =========== =========== ============
BASIC AND DILUTED LOSS PER SHARE ($5.09) ($1.40) ($3.38) ($3.13)
=========== =========== =========== ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 1,036,390 1,036,390 1,031,730 966,790
=========== =========== =========== ============
See accompanying summary of accounting policies and notes to financial statements
NOTE 17 - RISKS AND UNCERTAINTIES AND CONCENTRATIONS
ATSI is subject to regulations by the United States and Mexican Government. And
according to ATSI's concession requirements, ATSI is required to maintain
approximately $10 million in capital. As of July 31, 2004, ATSICOM has not met
this requirement. Currently, Telemarketing, ATSI's partner in the joint venture
on ATSICOM is in negotiations with the Mexican government on meeting this
requirement.
ATSI's business is dependent upon key pieces of equipment, switching and
transmission facilities capacity from ATSI's carriers. Should ATSI experience
service interruptions from ATSI's underlying carriers, equipment failures there
would likely be a temporary interruption of ATSI's services, which could
adversely or materially affect ATSI's operations. ATSI believes 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.
NOTE 18 - RELATED PARTY TRANSACTIONS
ATSI 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 ATSI with
various services that include strategic planning, business development and
financial advisory services. Under the terms of the agreement, ATSI pay the
consulting firm $3,750 per month plus expenses. In November 2000 the agreement
was terminated and ATSI is now billed solely for expenses related to board
meetings. At July 31, 2004 and July 31, 2003, ATSI had a payable to Technology
Impact Partners of approximately $82,329 and approximately $79,794,
respectively.
In December 2002, ATSI 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. Subsequent to yearend, ATSI renegotiated the note to extend its
maturity date to September 2005; all other terms remained the same.
Additionally, during fiscal 2004 ATSI made payments towards this note in the
amount of $9,000. Additionally, at July 31, 2004, ATSI had a payable of
approximately $41,583 for board fees and related expenses.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
54
Information regarding changes in the Company's Accountants has been provided in
previously filed reports on Form 8-K.
ITEM 9A. 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. 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 period 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 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. The registered public accounting firm that audited the
financial statements included in this report has issued an attestation report on
management's assessment of the Company's internal control over financial
reporting.
PART III
--------
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
BUSINESS EXPERIENCE
The following table contains the name, age of our directors and executive
officers.
NAME AGE POSITION HELD
---- --- -------------
Arthur L. Smith 39 President, Chief Executive Officer and Director
Ruben Caraveo 36 Vice President, Sales and Operations
Antonio Estrada 30 Corporate Controller
John R. Fleming 50 Interim Executive Chairman of the Board
Murray R. Nye 51 Director
Michael G. Santry 56 Director
Arthur L. Smith has served as our Chief Executive Officer and Director
since May 2003. Mr. Smith also served as the President of ATSI de Mexico S.A de
C.V. from August 2002 to April 2003, as our Chief Executive Officer and a
Director from June 1996 to August 2002 and as our President since our 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 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 our 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 13 years' experience in the
telecommunications industry.
Ruben R. Caraveo has served as our 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 our 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. His prior experience also includes positions with
Worldtel Interactive, Frontier, and WorldCom. Mr.
55
Caraveo is armed with more than 14 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 our Corporate Controller since May 2003.
From January 2002 through January 2003, Mr. Estrada served as our 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 our Interim Executive Chairman of the Board
since August 2002 and as one of our Directors since January 2001. Mr. Fleming
is the principal and founder of Vision Corporation, an early-stage investment
company that focuses on communications technologies, service and hardware.
Prior to forming Vision Corporation, Mr. Fleming served as President,
International of IXC Communications, Inc. from April 1998 to December 1999.
Immediately prior to that he served as IXC's President of Emerging Markets from
December 1997, as Executive Vice President of IXC from March 1996 through
November 1997 and as Senior Vice President of IXC from October 1994 through
March 1996. He served as Vice President of Sales and Marketing of IXC from its
formation in July 1992 until October 1994. Prior to that, Mr. Fleming served as
Director of Business Development and Director of Carrier Sales of CTI from 1986
to March 1990 and as Vice President - Marketing and Sales of CTI from March 1990
to July 1992. Mr. Fleming was a Branch Manager for Satellite Business Systems
from 1983 to 1986.
Murray R. Nye has served as one of our Directors since its formation in
June 1996. Mr. Nye also served as of the 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.
Michael G. Santry has served as one of our Directors since May 2004. Mr.
Santry is President of Bishopsgate Investment Corporation, providing consulting
services to companies in a variety of industries. Mr. Santry is also a director
of a privately held publisher of children's books and educational materials.
AUDIT COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERT
The Company has established an Audit Committee of the Board of Directors
consisting of three external independent directors. As of the date of this
report, one of the positions on the Audit Committee is vacant as a result of the
removal on October 21, 2004 of Mr. Richard C. Benkendorf because of a potential
conflict of interest. Mr. Benkendorf was serving as the Audit Committee
Financial Expert. The Company intends to replace Mr. Benkendorf with a director
that meets the requirements of an Audit Committee Financial Expert.
RECENT DEVELOPMENTS WITH ATSI BOARD OF DIRECTORS
On October 21, 2004 the majority of the Board of Directors voted to remove
a Director, Mr. Richard C. Benkendorf. The Bylaws of the corporation provide
that a majority of the Board of Directors may remove a director for cause. Mr.
Benkendorf was removed due to a conflict of interest. The vacancy caused by the
removal will either be filled by a candidate receiving a vote of a majority of
the Board or the seat could remain vacant until the next election of directors
at the corporation's next annual stockholder meeting.
56
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, 2004, all of its directors and executive
officers were in compliance with the applicable filing requirements.
CODE OF ETHICS
ATSI is currently developing an Executive Code of Ethics to be applied to
our Chief Executive Officer, Chief Financial Officer, Controller and other
members of our management team. The Board of Directors has not completed a
review of the best practices relating to the adoption of Codes of Ethics or
acted to adopt the Code of Ethics proposed by members of management. When
adopted, the code will be available for viewing on our Website, www.atsi.net.
Upon request, a copy of the code of ethics will be provided without charge upon
written request to ATSI Communications, Inc., 8600 Wurzbach Road, Suite
700W.,San Antonio, TX 78240
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 four most highly compensated
executive officers whose total cash compensation exceeded $100,000 for services
rendered in all capacities for the fiscal year ended July 31, 2004
(collectively, the "Named Executive Officers").
Annual Compensation Long- Term Compensation
--------------------------------------------------------------------------------------------------
Awards Payouts
--------------------------------------
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
NAME AND PRINCIPAL FISCAL COMPENSATION STOCK OPTIONS/ LTIP PAYOUT COMPENS-
-----------------
POSITION YEAR SALARY ($) BONUS ($) ($)(1) AWARDS ($) SARS (#) ($) ATION ($)
-------- ---- ---------- --------- ------ ---------- -------- --- ---------
2004 $ 128,000 $ - - - - - -
Arthur L. Smith (2) 2003 90,808 14,105 - - 3,000 (4) - -
CEO 2002 184,058 25,004- - - 11,666 (4) - -
2004 $ 115,000 - - - - - -
Ruben Caraveo (3) 2003 71,154 - - - 1,500 (4) - -
Vice President, Operations 2002 110,504 - - - - - -
- -----------------------------
(1) Certain of the Company's executive officers receive personal benefits in
addition to salary. The Company has concluded that the aggregate amount of
such personal benefits does not exceed the lesser of $50,000 or 10% of
annual salary and bonus for any Named Executive Officer.
(2) Mr. Smith has served as CEO and Director of ATSI Nevada (Formerly a
Delaware Corp.) since May 2003. From August 2002 to April 2003, Mr. Smith
served as President of ATSI de Mexico S.A de C.V. Since May 2003, Mr.
Smith's compensation has been paid by ATSI Nevada. Prior to December 2002,
Mr. Smith's Compensation was paid by ATSI-Texas.
(3) Mr. Caraveo has served as Vice President of Sales and Operations of ATSI
Nevada since May 2003. Mr. Caraveo served as Vice President of Operations
of ATSI Texas from May 2001 to January 2003. Since May 2003, Mr. Caraveo's
compensation has been paid by ATSI Nevada. Prior to December 2002, Mr.
Caraveo's compensation was paid by ATSI-Texas.
(4) Represents underlying options that have been adjusted to reflect the
reverse split of 1:100 effective May 24, 2004
57
AGGREGATE OPTIONS EXERCISABLE AND UNEXERCISABLE DURING FISCAL 2004
The following table shows the Company's officers shares covered by both
exercisable and unexercisable stock options as of July 31, 2004. (All options
have been adjusted to reflect the reverse split of 1:100 effective May 24, 2004)
SHARES
ACQUIRED NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
ON VALUE UNDERLYING UNEXERCISED MONEY OPTIONS AT FYE ($)
EXERCISE REALIZED OPTIONS AT FYE(#)
-------- --------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --- --- ----------- ------------- ----------- -------------
Arthur L. Smith - - 13,999 2,000 - -
Ruben Caraveo - - 3,500 1,000 - -
COMPENSATION OF DIRECTORS
ATSI Directors are reimbursed their reasonable out-of-pocket expenses in
connection with their travel to and attendance at meetings of the Board of
Directors. In addition, each Director that is not an officer of the Company
receives 1,500 shares of Common Stock for each meeting of the Board attended in
person and $250 for each meeting attended by telephone. In January 2004 we
issued a total of 16,500 shares of our common stock, valued at $2,115, to
outside directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table lists the beneficial ownership of shares of our 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 our Common
Stock or Series A Preferred Stock, (ii) each director and nominee, (iii) the
Named Executive Officers, and (vi) all directors and officers as a group.
Information with respect to officers, directors and their families is as of July
31, 2004 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. (All options have been adjusted to reflect the reverse split of 1:100
effective May 24, 2004)
- ---------------------------------------------------------------------------------------------------------------------------------
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 13.3% 743 *
30 E. Huron #5407
Chicago, IL 60611
Edward Corcoran 0 * 500 13.3% 743 *
6006 W. 159th Street
Bldg. C 1-W
Oak Forest, IL 60452
Gerald Corcoran 0 * 500 13.3% 743 *
11611 90th Avenue
St. John, IN 46373
Joseph Migilio 0 * 500 23.0% 743 *
13014 Sandburg Ct.
58
Palos Park, IL 60464
Jeffrey Tessiatore 0 * 500 13.3% 743 *
131 Settlers Dr.
Naperville, IL 60565
Albert Vivo 0 * 500 13.3% 743 *
9830 Circle Parkway
Palos Park, IL 60464
Gary Wright 0 * 750 20.0% 1,115 *
3404 Royal Fox Dr.
St. Charles, IL 60174
INDIVIDUAL OFFICERS,
DIRECTORS AND NOMINEES
Arthur L. Smith 36,884 (4) 1.3% 0 * 36,884 (4) 1.3%
President, Chief Executive Officer
Director
Ruben R. Caraveo 4,000 (5) * 0 * 4,000 (5) *
Vice President, Sales and Operations
John R. Fleming 3,724 (6) * 0 * 3,724 (6) *
Director
Murray R. Nye 3,100 (7) * 0 * 3,100 (7) *
Director
Michael G. Santry - (8) * 0 * - (8) *
Director
ALL OFFICERS AND
DIRECTORS AS A GROUP
53,69850,708 (9) 1.81.7% 0 * 53,69850,708 (9) 1.81.7%
- ---------------------------------------------------------------------------------------------------------------------------------
* Less than 1%
(1) Based on 2,948,365 shares of Common Stock outstanding as of July 31, 2004.
Any shares represented by options exercisable w
(2) Based on 3,750 shares of Series A Preferred Stock outstanding as of July
31, 2004.
(3) Based on 2,953,940 voting interests outstanding as of July 31, 2004. Any
shares represented by options exercisable within 6 (4) Includes 1,000
shares subject to options exercisable within 60 days after July 31, 2004.
(5) Includes 500 shares subject to options exercisable within 60 days after
July 31, 2003.
(6) Includes 667 shares subject to options exercisable within 60 days after
July31, 2004.
(7) Includes 667 shares subject to options exercisable within 60 days after
July 31, 2004.
(8) Mr. Santry was elected as a Director in May 2004; no options have been
awarded as of July 31, 2004
(9) Includes 3,801 shares subject to options exercisable within 60 days after
July 31, 2004.
59
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
We have entered into a month-to-month agreement with Technology Impact
Partners, a consulting firm of which Company former 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 terminated and the Company is now billed solely
for expenses related to board meetings. At July 31, 2004 and July 31, 2003, we
had a payable to Technology Impact Partners of approximately $82,329 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. Currently we are in negotiations with the note
holder to extend the maturity date of the note, however there can be any
assurance that we will that a favorable agreement will be reached in the near
future. Additionally, during fiscal 2004 we made payments towards this note in
the amount of $9,000. Additionally, at July 31, 2004, we had a payable of
approximately $41,583 for board fees and related expenses.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The Company paid the following fees to its principal independent
accountants for services during the fiscal years ended July 31, 2004 and July
31, 2003.
Year Ended , July 31
Description of Fees 2004 2003
Audit Fees $ 14,000 $ 46,000
Audit Related Fees -0- -0-
Tax Fees -0- -0-
All Other Fees -0- -0-
The Audit Committee has instructed Malone and Bailey PLLC that any fees for
non-audit services must be approved before being incurred.
PART IV
ITEM 15. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following documents are exhibits to this report.
2.1 Plan and Agreement of Merger of ATSI Communications, Inc. with and into ATSI Merger Corporation,
dated as of March 24, 2004. (Exhibit 2.1 to Form 8-K of ATSI filed on May 24, 2004)
3.1 Articles of Incorporation of ATSI Merger Corporation. (Exhibit 3.1 to Form 8-K of ATSI filed on May 24,
2004)
3.2 Bylaws of ATSI Merger Corporation. (Exhibit 3.2 to Form 8-K of ATSI filed on May 24, 2004)
3.3 Articles of Merger of ATSI Communications, Inc. with and into ATSI Merger Corporation. (Exhibit 3.3 to
Form 8-K of ATSI filed on May 24, 2004)
4.1 Certificate of Designations relating to the Series A, Series D, Series E, and Series H Convertible Preferred
Stock of ATSI Merger Corporation *
4.2 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)
60
4.3 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)
4.4 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)
4.5 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)
4.6 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)
4.7 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)
4.8 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
4.9 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)
4.10 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)
4.11 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)
4.12 Form of Modification of Convertible Note (Exhibit 4.6 to Registration statement on Form S-3 (No. 333-
35846) filed April 28, 2000)
4.13 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)
4.14 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)
4.15 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)
4.16 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)
4.17 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)
4.18 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)
4.19 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)
61
4.20 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)
4.21 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)
4.22 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)
4.23 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
4.24 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)
4.25 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 American TeleSource International, Inc. 1998 Stock Option Plan (Exhibit 4.7 to Registration statement on
Form S-8 filed January 11, 2000)
10.2 2000 Option Plan (Exhibit 4.36 to annual Report on Form 10-K for the year ended July 31, 2003 filed
November 12. 2000.)
10.3 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))
10.4 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))
10.5 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)
10.6 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)
10.7 Bestel Fiber Lease (Exhibit 10.5 to Amended Annual Report on Form 10-K for year ended July 31, 1999
filed April 14, 2000)
10.8 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)
10.9 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)
10.10 Stock Purchase Agreement with Telemarketing (Sale of ATSICOM) (Exhibit 10.1 to Form 8-K filed June
16, 2003)
10.11 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)
10.12 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)
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10.13 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)
21 Subsidiaries of ATSI (Exhibit 21 to Annual Report on Form 10-K for year ended July 31, 2004 filed
November 9, 2004)*
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. *
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)
(b) Reports on Form 8-K
- On May 13, 2004, we filed a Current Report on Form 8-K announcing the
voting results from the Annual Meeting of Stockholders under Items 5
and 7.
- On June 18, 2004, we filed a Current Report on Form 8-K announcing the
completion of the merger of ASTI Communications, Inc. with and into
ATSI Merger Corporation under Items 5 and 7.
63
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ATSI COMMUNICATIONS, INC.
By: /s/ Arthur L. Smith
--------------------------
Arthur L. Smith
President and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Arthur L. Smith Principal Executive Officer and Director November 9, 2004
- -------------------
Arthur L. Smith
/s/ Antonio Estrada Principal Accounting Officer November 9, 2004
- -------------------
Antonio Estrada Principal Finance Officer
/s/ John R. Fleming Director November 9, 2004
- -------------------
John R. Fleming
/s/ Murray R. Nye Director November 9, 2004
- -------------------
Murray R. Nye
/s/ Michael G. Santry Director November 9, 2004
- -------------------
Michael G. Santry
64