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.
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
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.
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:
FOR AGAINST ABSTAIN --- ------- ------- 78,125,374 1,454,326 226,406
PART II. --------
ITEM 5.
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.
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.
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.
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.
ITEM 7.
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.
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 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.
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.
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
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.
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.
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.
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
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.
ITEM 7A.
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.
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
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
See accompanying summary of accounting policies and notes to financial statements
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
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.
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.
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:
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.
NOTE 4 - PROPERTY AND EQUIPMENT
Following is a summary of ATSI's property and equipment at July 31, 2004 and 2003 (in thousands):
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):
NOTE 6 - NOTES PAYABLE
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:
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.
During fiscal 2004, Recap Marketing & Consulting, LLP exercise the following warrants:
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
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
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.
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.
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)
Warrants outstanding at July 31, 2004 expire as follows:
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
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.)
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:
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:
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):
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):
NOTE 16 - QUARTERLY FINANCIAL DATA
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Information regarding changes in the Company's Accountants has been provided in previously filed reports on Form 8-K.
ITEM 9A.
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.
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.
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.
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.
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.
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").
- -----------------------------
(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
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)
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.
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)
* 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.
ITEM 13.
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.
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.
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.
ITEM 15. EXHIBITS AND 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.
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.