| x |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934 FOR THE FISCAL YEAR ENDED JULY 31,
2005
|
| o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934 FOR THE TRANSITION PERIOD
FROM
_______TO _________
|
|
Nevada
(State
or Other Jurisdiction of Incorporation or Organization)
|
74-2849995
(IRS
Employer Identification No.)
|
|
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8600
Wurzbach, Suite 700W
San
Antonio, Texas
(Address
of Principal Executive Offices)
|
78240
(Zip
Code)
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Page
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Liquidity
and Capital Resources
The
Company’s financials statements for the year ended July 31, 2005 have been
prepared on a going concern basis, which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of
business. For the year ended July 31, 2005, the Company reported a net income
of
$9,587,000 and has a stockholders deficit as of July 31, 2005 of approximately
$5.8 million. In addition, the Company has a working capital deficiency of
$5.4
million as of July 31, 2005.
Cash
used in operating activities:
During
the year ended July 31, 2005, operations consumed approximately $561,000 in
cash, although, the Company recognized a net income of $10.3 million for 2005.
The net income for fiscal 2005 is attributed to the recognition of $12,104,000
associated with a gain on disposal of investment and the recognition of $460,000
of debt forgiveness income associated with the settlement of various debts.
Additionally, the company recognized $474,000
in non-cash compensation expense associated with the stock grants and stock
options awarded to the employees and board of directors. And we recognized
$1,047,000 in non-cash warrant expense associated with the consulting services
agreement entered into during fiscal 2005. We also recognized an increase in
accounts payable and accrued liabilities of approximately $73,000 and $160,000,
respectively; these increases are related to the recognition of various invoices
associated with the carrier services cost of goods. Also, we recognized an
increase in accounts receivables of $145,000 associated with the billing to
our
customers during the last week of fiscal 2005. We also recognized an increase
in
prepaid expenses for $18,000 related to the prepayments/retainers to our
attorneys for legal services.
Cash
provided used in investing activities:
During
the year ended July 31, 2005, the Company made various payments for $8,000
related to the acquisition of some telecommunications equipment acquired during
fiscal 2005. Additionally, during the quarter ended October 31, 2004,
ATSI
entered into an Asset Purchase Agreement with Hinotel, Inc., a Hispanic owned
Competitive Local Exchange Carrier (“CLEC”) based in South Texas. The assets
purchase under the agreement included Hinotel’s customer base, a customer
management and billing system, and supplier contracts. The transaction also
included the assignment and transfer of the CLEC license in the State of Texas.
The purchase price of the assets was $31,500, paid in 40,000 shares of ATSI
common stock and $7,500 in cash.
Cash
provided by financing activities:
During
the year ended July 31, 2005 we made principal payments on our capital lease
obligation for approximately $2,000 and we received $918,000 from the exercise
of warrants and $514,000 from proceeds from various notes payables. In addition,
as result of the exercise of warrants we also recognized payments of $918,000
on
our notes payable.
Overall,
our net operating, investing and financing activities during the year ended
July
31, 2005 provided a decrease of approximately $65,000 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.
Our
working capital deficit at July 31, 2005 was approximately $5.4 million. This
represents a decrease of approximately $13,519,000 from our working capital
deficit at July 31, 2004. The decrease can primarily be attributed to the
recognition of a gain on disposal of investment of $12,104,000. The gain on
disposal of investment was associated with the disposal of ATSI’s subsidiaries,
American TeleSource International, Inc. (ATSI Texas) and TeleSpan, Inc.
(TeleSpan). These entities filed for protection under Chapter 11 of the U.S.
Bankruptcy Code on February 4, 2003 and February 18, 2003 respectively, these
bankrupt subsidiaries ceased all operations. Additionally, the decrease in
working capital deficit is also attributed to the settlement of various
liabilities through the issuance of common stock. These
settlements were associated with the settlement of $859,500 liability with
Alfonso Torres Roqueni, the former owner of the concession license acquired
in
July 2000 and the settlement of a $250,000 note payable with Infraestructura
Espacial, S.A de C.V. and Tomas Revesz, a former ATSI director.
Our
current liabilities include:
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
composed primarily 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,
2005.
Ongoing
operations
We
believe that, based on our limited access to capital resources and our current
cash balances, financial 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 4 to the financial statements, we have incurred amounts of
debt
to finance our working capital requirements. During the year ended July 31,
2005, we borrowed a total of $984,000 from Recap Marketing & Consulting, LLP
to fund our operating expenses and other corporate expenses. This debt was
applied to the payment of warrants issued to certain individual affiliates
of
Recap Marketing & Consulting, LLP.
We
will
continue to pursue cost cutting or expense deferral strategies in order to
conserve working capital. These strategies will limit the implementation of
our
business plan and increase our future liabilities. We are dependent on our
operations and the proceeds from future debt or equity investments to fund
our
operations and fully implement our business plan. If we are unable to raise
sufficient capital, we will be required to delay or forego some portion of
our
business plan, which will have a material adverse effect on our anticipated
results from operations and financial condition. Alternatively, we may seek
interim financing in the form of private placement of debt or equity securities.
Such interim financing may not be available in the amounts or at the time when
is required, and will likely not be on the terms favorable to the
Company.
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14
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PART
II
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46
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PART
I
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29
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30
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ITEM
I. BUSINESS.
We
are an
international telecommunications carrier that utilizes the Internet to provide
cost-efficient and economical international telecommunications services. Our
current operations consist primarily of providing digital voice communications
over the Internet using Voice-over-Internet-Protocol ("VoIP"). We
provide high quality voice and enhanced telecommunication services to carriers,
telephony resellers and other VoIP carriers through various agreements with
service providers in the United States, Mexico, Asia, the Middle East and Latin
America utilizing VoIP telephony services. Our services are as
follows:
Carrier
Services: We
provide VoIP termination services to United States and Latin American
telecommunications companies who lack transmission facilities, require
additional capacity or do not have the regulatory licenses to terminate traffic
in Mexico, Asia, the Middle East and Latin America. Typically these
telecommunications companies offer their services to the public for domestic
and
international long distance services.
31
|
|
ATSI
COMMUNICATIONS, INC.
|
<
our
ability to continue as a going concern. This means that there is substantial
doubt that we will be able to continue in business through the end of our next
fiscal year, July 31, 2006. In order to remain a going concern, we intend to
attract new customers to generate additional revenues and/or generate cash
from
debt or equity offerings. There is no assurance that we will be able to obtain
sufficient additional customers or funding to continue as a going concern.
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| · |
On
August 1, 2004, we acquired a
Competitive Local Exchange Carrier (“CLEC”) based in South Texas. This
acquisition served as a gateway to reach out to the Hispanic communities
residing along the US and Mexico border. Our strategy is to provide
reliable and affordable local and long distance services to the
underserved Hispanic community through Texas utilizing our VoIP
infrastructure.
|
| · |
We
expanded our NexTone’
Communications S/tr>
|
AND
SUBSIDIARIES
|
|
(in
thousands, except share
information)
| ||||||||||||
|
July
31,
|
||||||||||||||
|
2005
|
||||||||||||||
| ASSETS | ||||||||||||||
| CURRENT ASSETS: | ||||||||||||||
|
Cash
and cash equivalents
|
$
|
29
|
||||||||||||
|
We
provide three types of services: Carrier Services, Network Services and
Communication Services.
We
provide VoIP termination services to United States and Latin American
telecommunications companies who lack transmission facilities, require
additional capacity or do not have the regulatory licenses to terminate traffic
in Mexico, Asia, the Middle East and Latin America. We also provide 800
toll-free voice origination services from Mexico.
Typically these telecommunications companies offer their services to the public
for local and international long distance services. Revenues from this service
accounted for approximately 81% of our total revenue in the year ended July
31,
2004 (“fiscal 2004”) and 96% of our total revenue in the year ended July 31,
2005 (“fiscal 2005”). The percentage of our total volume of carrier services
traffic sent by customers can fluctuate dramatically, on a quarterly, and
sometimes, daily basis. Historically, a handful of customers have accounted
for
a majority of the total carrier services volume, although not necessarily the
same customers from period to period. During fiscal 2005, we entered into
various reciprocal agreements with our customers that allow them to transport
and terminate traffic over our network and allowed us to transmit and terminate
traffic over their networks. These reciprocals agreements with our customers
were not for a specific period of time or volume of minutes. Under the
reciprocal agreements, both parties were given a set of rates for services
and
each party would decide the volume of minutes it would send to be process.
Therefore on a month-to-month basis there was not a required volume commitment
of minutes from each party and the parties were free to re-route their traffic
away to a lower priced provider.
We
provide private communication links and VoIP gateway services to multi-national
and Latin American carriers and enterprise customers who use a high volume
of
telecommunications services to communicate with their U.S. offices or businesses
and need greater dependability than is currently available through the foreign
telecommunication networks. These services include data, voice and fax
transmission between multiple international offices and branches as well as
Internet and collocation services in the United States. During
fiscal 2005 we provided network services to Bell Canada, a Canadian corporation
on a month-to-month basis and generated approximately $23,000 per month in
revenue. As of May 2005 we are no longer providing these services to the Bell
Canada. We currently provide network Services to World Data, a Mexican
corporation on a month-to-month basis and generate approximately $1,500 per
month in revenue. There is no assurance that we will continue to generate this
level of revenue in the future or that we will be able to enter into a long-term
contract with World Data or any other customer.
We
compete with MCI and AT&T,
as well as the former telecommunication monopolies in the Latin American
countries, in providing network services. Factors contributing to our
competitiveness include reliability, network quality, speed of installation,
and
in some cases, geography, network size, and hauling capacity. We are at a
competitive disadvantage with respect to larger carriers who are able to provide
networks for corporations that encompass more countries in Latin America, as
well as Europe, Asia and other parts of the globe. As a result of these
disadvantages we do not expect a significant increase in revenue from this
source in the near future.
We
provide local phone service and international VoIP long distance service to
the
U.S. Hispanic market in Texas, through our wholly owned subsidiary, Telefamilia
Communications, Inc. Our local phone service includes value-added services
such
a caller ID and call waiting.
On
August
1, 2004, we acquired a
Competitive Local Exchange Carrier (“CLEC”) based in South Texas. This
acquisition served as a gateway to reach out to the Hispanic communities
residing along the US and Mexico border. Revenues
from this service accounted for approximately 1.5% of our total revenue in
the
year ended July 31, 2005. We
have
deployed various postpaid and prepaid retail services and generated
approximately $94,500 in retail services revenue during the fiscal year ended
July 31, 2005
The
basic
technology of traditional telecommunications systems was designed for slow
mechanical switches. Communications over the traditional telephone network
are
routed through circuits that must dedicate resources to each call from its
inception until the call Roman">Accounts
receivable
|
170
|
|||||||||||||
|
Prepaid
& other current assets
|
44
|
|||||||||||||
|
Total
current assets
|
243
|
|||||||||||||
|
PROPERTY
AND EQUIPMENT
|
228
|
|||||||||||||
|
Less
- Accumulated depreciation
|
(90
|
)
|
||||||||||||
|
Net
property and equipment
|
138
|
|||||||||||||
|
Total
assets
|
$
|
381
|
||||||||||||
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
||||||||||||||
|
CURRENT
LIABILITIES:
|
||||||||||||||
|
Accounts
payable
|
604
|
|||||||||||||
|
Accrued
liabilities
|
986
|
|||||||||||||
|
Current
portion of obligation under capital leases
|
3
|
|||||||||||||
|
Notes
payable
|
104
|
|||||||||||||
|
Note
payable - related party
|
16
|
|||||||||||||
|
Convertible
debentures
|
ends, regardless of whether anyone is actually talking
on the circuit. This circuit-switching technology incurs a significant cost
per
call and does not efficiently support the integration of voice with data
services. Data networks, however, were designed for electronic switching. They
break the data stream into small, individually addressed packages of data
(“packets”) that are routed independently of each other from the origin to the
destination. Therefore, they do not require a fixed amount of bandwidth to
be
reserved between the origin and destination of each call and they do not waste
bandwidth when it is not being used for actual transmission of information.
This
allows multiple voice or voice and data calls to be pooled, resulting in these
networks being able to carry more calls with an equal amount of bandwidth.
Moreover, they do not require the same complex switching methods required by
traditional voice telephone networks, instead using a multiplicity of routers
to
direct each packet in the direction of its destination and they automatically
route packets around blockages, congestion or outages.
Packet
switching is a method of transmitting messages that can be used within a data
network or across networks, including the public Internet. The Internet itself
is not a single data network owned by any single entity, but rather a loose
interconnection of networks belonging to many owners that communicate using
the
Internet Protocol (“IP”). By converting voice signals to digital data and
handling the voice signals as data, it can be transmitted through the more
efficient switching networks designed for data transmissions and through the
Internet using the IP. The transmission of voice signals as digitalized data
streams over the Internet is known as Voice over Internet Protocol or “VoIP”. A
VoIP network has the following advantages over traditional
networks:
The
growth of voice on the Internet was limited in the past due to poor sound
quality caused by technical issues such as delays in packet transmission and
by
bandwidth limitations related to Internet network capacity and local access
constraints. However, the continuing addition of data network infrastructure,
recent improvements in packet switching and compression technology, new software
algorithms and improved hardware have substantially reduced delays in packet
transmissions and the effect of these delays. Nevertheless, certain VoIP routes
into countries with limited or poor Internet infrastructure continue to lack
the
consistent quality required for voice transport and termination.
A
number
of large long distance carriers have announced Internet telephony service
offerings. Smaller Internet telephony service providers have also begun to
offer
low-cost Internet telephony services from personal computers to telephones
and
from telephones to telephones. Traditional carriers have substantial investments
in traditional telephone network technology, and therefore have been slow to
embrace Internet technology.
We
believe that the infrastructure required for a global network is too expensive
for most companies to deploy on their own. This mandates that the network be
a
combination of gateways owned by different operators. For a network to achieve
optimal functionality and quality, however, the gateways need to be
interoperable, or able to communicate with one another. Interoperability
continues to be a challenge for VoIP providers and recently, technological
solutions have emerged that support interoperability between different protocols
and/or gateways. Cisco appears to have emerged as a dominant supplier of VoIP
gateways and other manufacturers often seek to make their equipment
interoperable with Cisco.
275
|
|||||||||||||
|
Series
D Cumulative Preferred Stock, 3,000 shares authorized, 742 shares
issued
and outstanding
|
1,182
|
|||||||||||||
|
Series
E Cumulative Preferred Stock, 10,000 shares authorized, 1,170 shares
issued and outstanding
|
1,345
|
|||||||||||||
|
Liabilities
from discontinued operations, net of assets
|
1,152
|
|||||||||||||
|
Total
current liabilities
|
5,667
|
|||||||||||||
|
LONG-TERM
LIABILITIES:
|
||||||||||||||
|
Notes
payable
|
500
|
|||||||||||||
|
Obligation
under capital leases, less current portion
|
9
|
|||||||||||||
|
Other
|
8
|
|||||||||||||
|
Total
long-term liabilities
|
517
|
|||||||||||||
|
Total
liabilities
|
6,184
|
|||||||||||||
|
STOCKHOLDERS'
DEFICIT:
|
||||||||||||||
|
Preferred
stock, $0.001 par value, 10,000,000 shares authorized
|
||||||||||||||
|
Series
A Cumulative Convertible Preferred Stock, 50,000 shares authorized,
3,750
issued and outstanding
|
–
|
|||||||||||||
|
Series
H Convertible Preferred Stock, 16,000,000 shares authorized,
13,912,372
issued and outstanding
|
14
0pt; TEXT-INDENT: 36pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="justify">Long
distance telephone calls transported over the Internet are less expensive than
similar calls carried over the traditional telephone network primarily because
the cost of using the Internet is not determined by the distance those calls
need to travel. Also, routing calls over the Internet is more cost-effective
than routing calls over the traditional telephone network because the technology
that enables Internet telephony is more efficient than traditional telephone
network technology. The greater efficiency of the Internet creates cost savings
that can be passed on to the consumer in the form of lower long distance rates
or retained by the carrier as higher margins.
By
using
the public Internet, VoIP providers like ATSI are able to avoid direct payment
for transport of communications, instead paying for large “pipes” into the
public Internet, billed by bandwidth rather than usage, which transmits calls
to
a distant gateway. The Internet, which has its origins in programs devised
by
the Department of Defense to provide multiple routes and therefore redundancy
which was largely immune from the failure of a single network element, provides
great redundancy and can be “self healing” in the event of an outage in a
particular network element or transmission path. Moreover, adding an additional
entry or exit point (a Point of Presence or “PoP”) does not require any
expensive or time consuming reconfiguration or reprogramming of existing network
elements. The new element is simply installed with a specific IP address and
it
can send or receive information from any other IP address on the
Internet.
The
long
distance telephony market and the Internet telephony market are highly
competitive. There are several large and numerous small competitors, and we
expect to face continuing competition based on price and service offerings
from
existing competitors and new market entrants in the future. The principal
competitive factors in our market include price, quality of service, coverage,
customer service, reliability, and network size/capacity. Our competitors
include major and emerging telecommunications carriers in the U.S. and foreign
telecommunications carriers. The financial difficulties of many
telecommunications providers are rapidly altering the number, identity and
competitiveness of the marketplace, and we are unable to determine with
certainty the eventual result of the consolidation occurring in our
industry.
|
|||||||||||||
|
Common
stock, $0.001, 150,000,000 shares authorized, 10,397,222 issued
and
outstanding
|
10
|
|||||||||||||
|
Additional
paid in capital
|
71,916
|
|||||||||||||
|
Accumulated
deficit
|
(78,249
|
)
|
||||||||||||
|
Other
comprehensive income
|
502
|
|||||||||||||
|
Total
stockholders' deficit
|
(5,803
|
)
|
||||||||||||
|
Total
liabilities and stockholders' deficit
|
$
|
During
the past several years, a number of companies have introduced services that
make
Internet telephony or voice services over the Internet available to other
carriers. All major telecommunications companies either presently or could
potentially route traffic to destinations worldwide and compete or can compete
directly with us. Other Internet telephony service providers focus on a retail
customer base and may in the future compete with us in the carrier services
business. In addition, companies currently in related markets have begun to
provide voice over the Internet services or adapt their products to enable
voice
over the Internet services. These related companies may potentially migrate
into
the Internet telephony market as direct competitors.
Carriers
buying wholesale termination into Mexico, while cost conscious, are increasingly
demanding high reliability and quality in service delivery. Sustainability
and
growth in this segment depends on specific competitive advantages that companies
may possess in specific markets. Competitive advantages like proper licenses,
network redundancy, favorable termination agreements, or the presence of a
business infrastructure and relationships in the specific terminating market.
The Company competes with the dominant providers, such as Qwest and MCI, as
well
as other, smaller providers for international long distance services to Mexico.
The Company believes that in contrast to the dominant providers, it has a much
more focused and cost competitive strategy that targets select higher margin
telecommunication niches utilizing VoIP technology. Certain carriers provide
termination services in Mexico at lower prices (e.g., $0.015 to $0.06) because
they contract with other carriers that “leak” into the local network using
unlicensed IP points of presence. These carriers, however, have several
disadvantages including: (i) generally poor quality, (ii) limited
capacity, and (iii) poor reliability, since Mexican authorities
periodically shut down their operations. Additionally, there are a few market
trends that affect our wholesale product’s competitiveness in the market. First,
unauthorized, non-conventional operators continue to have a major impact by
offering prices below real costs. Second, the elimination of settlement rates
in
Mexico continues to drive down costs. The result of this trend is a significant
reduction in revenue per minute. The combination of non-conventional termination
and the new settlement rates have reduced U.S to Mexico termination prices
from
an average price of $0.27 per minute in 1998 to a current $0.045 per minute.
Many
of
our competitors have substantially greater financial, technical and marketing
resources, larger customer bases, longer operating histories, greater name
recognition and more established relationships in the industry than we have.
As
a result, certain of these competitors may be able to adopt more aggressive
pricing policies that could hinder our ability to market our services. We
believe that our key competitive advantages are our ability to deliver reliable,
high quality voice service over the Internet in a cost-effective manner. We
cannot provide assurances, however, that these advantages will enable us to
succeed against comparable service offerings from our competitors. A large
number of telecommunications companies, including MCI and Qwest currently
provide wholesale voice telecommunications service which competes with our
business. These companies, which tend to be large entities with substantial
resources, generally have large budgets available for research and development,
and therefore may further enhance the quality and acceptance of the transmission
of voice over the Internet.
Our
strategy is to position ourselves to take advantage of the demonopolization
of
the Latin American telecommunications markets, as well as the increasing demand
for international communications services between these markets and the United
States. Historically, telecommunications services in Latin America have been
provided by state-run companies, operating as a legal or
de
facto
monopoly. Although these companies failed to satisfy the demand for services
in
their countries, the regulatory scheme effectively precluded competition by
foreign carriers. Currently, there is a trend toward demonopolization of the
telecommunications industry in Latin America, and many of these countries are
in
various stages of migration toward a competitive, multi-carrier market. Many
Latin American countries produce a significant number of immigrants to the
United States, or are becoming homes to U.S. based corporations seeking lower
labor costs. At the same time that Latin American markets have been opening
up,
the demand for telecommunications services between the United States and Latin
America (particularly Mexico) has been strengthened by:
381
|
||||||||||||
|
See
accompanying summary of accounting policies and notes to financial
statements.
ble cellpadding="0" cellspacing="0" id="list" width="100%" style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt">
| ||||||||||||||
| · |
the
rapid growth of the Latino segment of the United States population
|
|||||||||||||
| · |
Mexico’s
status as the top calling partner with the United States
|
| · |
increase
in trade and travel between Latin America and the United States
|
| · |
the
build-out of local networks and corresponding increase in the number
of
telephones in homes and businesses in Latin countries
|
| · |
proliferation
of communications devices such as faxes, mobile phones, pagers, and
personal computers
|
| · |
declining
rates for services as a result of increased competition.
|
|
ATSI
COMMUNICATIONS, INC.
|
||||||
|
AND
SUBSIDIARIES
|
||||||
|
(In
thousands, except per share
amounts)
|
|
Years
ended July 31,
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
2005
|
2004
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
OPERATING
REVENUES:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Services
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Carrier
services
|
$
|
5,782
|
$
|
1,020
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Network
services
|
229
|
234
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Total
operating revenues
|
6,011
|
1,254
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
OPERATING
EXPENSES:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Our
strengths include our knowledge of, and relationships within, the
telecommunications industry in the United States and certain countries within
Latin America, particularly Mexico. Our management and employees have in-depth
knowledge of the Mexican culture, business environment and telecommunications
industry. As a result, we have been able to obtain a key long distance
concession through our 49% ownership in ATSICOM that allows us to both generate
and carry traffic within Mexico and between Mexico and the United States.
Regulation
of Internet Telephony
|
5,664
|
1,071
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Selling,
general and administrative
|
517
|
584
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
Our
operations are subject to federal, state and foreign laws and regulations.
The
use
of the Internet to provide telephone service is a fairly recent market
development. At present, we are not aware of any domestic, and only aware of
a
few foreign, laws or regulations that prohibit voice communications over the
Internet.
United
States.
We
believe that, under U.S. law, the Internet-related services that we provide
constitute information services as opposed to regulated telecommunications
services, and, as such, are not currently actively regulated by the Federal
Communications Commission (FCC) or any state agencies charged with regulating
telecommunications carriers. Nevertheless, aspects of our operations may be
subject to state or federal regulation, including regulation governing universal
service funding, disclosure of confidential communications and excise tax
issues. We cannot provide assurances that Internet-related services will not
be
actively regulated in the future. Several efforts have been made in the U.S.
to
enact federal legislation that would either regulate or exempt from regulation
services provided over the Internet. Increased regulation of the Internet may
slow its growth, particularly if other countries also impose regulations. Such
regulation may negatively impact the cost of doing business over the Internet
and materially adversely affect our business, operat |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Legal
and professional fees
|
417
|
303
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Non-cash
issuance of common stock and warrants for services
|
1,047
|
7,055
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Non-cash
stock-based compensation, employees
|
.
The
FCC
has considered whether to impose surcharges or other common carrier regulations
upon certain providers of Internet telephony, primarily those which, unlike
us,
provide Internet telephony services directly to end users. While the FCC has
presently refrained from such regulation, the regulatory classification of
Internet telephony remains unresolved. Additionally, the FCC has expressed
an
intention to further examine the question of whether certain forms of
phone-to-phone VoIP services are information services or telecommunications
services. The two are treated differently in several respects, with certain
information services beinght" valign="bottom" width="11%" style="BORDER-BOTTOM: #ccffcc">
474
|
–
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Impairment
expense
|
–
|
702
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Bad
debt expense
|
4
|
4
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Depreciation
and amortization
|
112
|
20
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Total
operating expenses
|
If
the
FCC were to determine that certain Internet-related services including Internet
telephony services are subject to FCC regulations as telecommunications
services, the FCC could subject providers of such services to traditional common
carrier regulation, including requirements to make universal service
contributions, and pay access charges to local telephone companies. A decision
to impose such charges could also have retroactive effect, which could
materially adversely affect us. It is also possible that the FCC may adopt
a
regulatory framework other than traditional common carrier regulation that
would
apply to Internet telephony providers. Any such determinations could materially
adversely affect our business, financial condition, operating results and future
prospects to the extent that any such determinations negatively affect the
cost
of doing business over the Internet or otherwise slow the growth of the
Internet. Congressional dissatisfaction with FCC conclusions could result in
requirements that the FCC impose greater or lesser regulation, which in turn
could materially adversely affect our business, financial condition, operating
results and future prospects.
|
8,235
|
9,739
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
State
regulatory authorities may also retain jurisdiction to regulatebottom" width="11%" style="BORDER-BOTTOM: #ccffcc"> |
Other
regulations affecting the Internet in the United States.
Congress
has recently adopted legislation that regulates certain aspects of the Internet,
including online content, user privacy and taxation. In addition, Congress
and
other federal entities are considering other legislative and regulatory
proposals that would further regulate the Internet. Congress has; for example,
considered legislation on a wide range of issues including Internet spamming,
database privacy, gambling, pornography and child protection, Inte" style="BORDER-BOTTOM: #ccffcc"> |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
OPERATING
LOSS
|
(2,224
|
)
|
(8,485
|
)
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
OTHER
INCOME (EXPENSE):
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Other
income (expense)
|
27
|
7
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Debt
forgiveness income
|
460
|
257
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Gain
on disposal of investment
|
12,104
|
0
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Gain/(loss)
from sale of assets
|
–
|
25
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Loss
on an unconsolidated affiliate
|
–
|
(107
|
)
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Interest
expense
|
(71
|
)
|
(166
|
)
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Total
other income
|
12,520
|
16
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Regulations
pertaining to our retail operations.
In
the
United States, services provided through our retail operations are subject
to
the provisions of the Communications Act oISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">NET
INCOME (LOSS)
|
10,296
|
(8,469
|
)
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
As
a
carrier offering services to the public, we must comply with the requirements
of
common carriage under the Communications Act of 1934, including the offering
of
service on a nondiscriminatory basis at just and reasonable rates, and obtaining
FCC approval prior to any assignment of authorizations or any transfer of legal
or actual control of the company.
We
are
subject to various specific common carrier telecommunications requirements
set
forth in the FCC’s rules, including operating, reporting and fee requirements.
Both federal and state regulatory agencies have broad authority to impose
monetary and other penalties on us for violations of regulatory
requirements.
Domestic
Service Regulation. We are considered a non-dominant
domestic interstate carrier subject to minimal regulation by the FCC. We are
not
required to obtain FCC authority to initiate or expand our domestic interstate
operations, but we are required to obtain FCC approval to transfer control
or
discontinue service and to file various reports and pay various fees and
assessments. Among other things, interstate common carriers must offer service
on a nondiscriminatory basis at just and reasonable rates. In addition, as
a
non-dominant carrier, we are subject to the FCC’s complaint jurisdiction.
All
interstate telecommunications carriers are required to contribute to the federal
universal service programs. The FCC currently is considering revising its
universal service funding mechanism. We cannot predict the outcome of these
proceedings or their potential effect on us. Although we currently do not
provide VoIP services to the end user or consumer, VOIP services we may provide
to the consumer in the future is not currently subject to direct regulation
by
the FCC or state regulatory commissions to the extent that they qualify as
“enhanced” or “information” services. The FCC defines enhanced services as
services that (1) employ computer processing applications that act on the
format, content, code, protocol or similar aspects of the subscriber’s
transmitted information, (2) provide the subscriber additional, different or
restructured information, or (3) involve subscriber interaction with stored
information. In 1998, in a non-binding report, the FCC observed that
“computer-to-computer” VOIP may be appropriately considered to be unregulated
but that “phone-to-phone” VOIP may lack the characteristics that would render
them unregulated “information” services. In February 2004, the FCC ruled that
free computer-to-computer VOIP service is not “telecommunications service” and
that it is an interstate “information service.” Although this order clarifies
some of the relevant VOIP issues, the FCC has not yet issued a formal decision
as to whether other variations of VOIP services should be subject to traditional
common carrier telecommunications service regulation or whether any of the
VOIP
services should be subject to universal service contribution and access charge
obligations. In March 2004, the FCC released a Notice of Proposed Rulemaking
(“NPRM”) regarding VOIP service. The NPRM specifically addresses the regulatory
classification and jurisdiction of VOIP; the application of access charges;
and
how to preserve key public policy objectives such as universal service,
911/emergency services, law enforcement surveillance requirements, and the
needs
of persons with disabilities. In November 2004, the FCC ruled that services
provided by a particular VOIP provider are interstate in nature, and not subject
to entry regulations of the various state Public Service Commissions. The FCC,
however, declined to rule on whether the service is a regulated
telecommunications service or an unregulated information service. In addition,
in December 2004, the United States Court of Appeals for the 8th
Circuit
ruled that such VOIP provider’s service is an information service and not
subject to state regulation. The FCC continues to examine the appropriate
regulatory treatment of VOIP. While initial indications from the FCC suggest
that any regulation of VOIP will be limited in nature, the future regulatory
treatment of other variations of VOIP by the FCC and state regulatory bodies
continues to be uncertain. Furthermore, Congressional dissatisfaction with
the
FCC’s treatment of IP telephony could result in legislation requiring the FCC to
impose greater or lesser regulation. Changes to, and further clarifications
of,
the treatment of VOIP serviFAMILY: Times New Roman">LESS:
PREFERRED DIVIDENDS
|
(709
|
)
|
State
Regulation. Our intrastate long distance operations
are
subject to various state laws and regulations, including, in most jurisdictions,
certification and tariff filing requirements. Telefamilia Communications, Inc.
(Telefamilia), a wholly owned subsidiary of ours, maintains the necessary
certificate and tariff approvals, where approvals are necessary, to provide
intrastate long distance service in Texas. Telefamilia also maintains the
necessary certificate to provide local services in Texas. Texas requires prior
approval or notification for certain stock or asset transfers or
for
the issuance of securities, debt or for name changes. As a certificated carrier,
consumers may file complaints against us at the public service commissions.
Certificates of authority can generally be conditioned, modified, canceled,
terminated, or revoked by state regulatory authorities for failure tNE-HEIGHT: 1.25; MARGIN-RIGHT: 0px">(306
|
)
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
NET
INCOME (LOSS) TO COMMON STOCKHOLDERS
|
$
|
9,587
|
($8,775
|
)
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
BASIC
INCOME (LOSS) PER SHARE
|
$
|
1.34
International.
The
regulatory treatment of Internet telephony outside of the U.S. varies widely
from country to country. A number of countries that currently prohibit
competition in the provision of voice telephony also prohibit Internet
telephony. Other countries permit but regulate Internet telephony. Some
countries will evaluate proposed Internet telephony service on a case-by-case
basis and determine whether it should be regulated as a voice service or as
another telecommunications service. Finally, in many countries, Internet
telephony has not yet been addressed by legislation or regulation. Increased
regulation of the Internet and/or Internet telephony providers or the
prohibition of Internet telephony in one or more countries could materially
adversely affect our business, financial condition, operating results and future
prospects.
Other
General regulations
The
Telecommunications Act of 1996 (the “Telecom Act”), which became law in February
1996, was designed to dismantle the monopoly system and promote competition
in
all aspects of telecommunications. The FCC has promulgated and continues to
promulgate major changes to their telecommunications regulations. One aspect
of
the Telecom Act that is of particular importance to us is that it allows Bell
Operating Companies or BOCs to offer in-region long distance service once they
have taken certain steps to open their local service monopoly to competition.
Given their extensive resources and established customer bases, the entry of
the
BOCs into the long distance market, specifically the international market,
will
create increased competition for us.
Although
we do not know of any other specific new or proposed regulations that will
affect our business directly, the regulatory scheme for competitive
telecommunications market is still evolving and there could be unanticipated
changes in the competitive environment for communications in general. For
example, the FCC is currently considering rules that govern how Internet
providers share telephone lines with local telephone companies and compensate
local telephone companies. These rules could affect the role that the Internet
ultimately plays in the telecommunications market.
The
International Settlements Policy governs settlements between top tier U.S.
carriers’ and foreign carriers’ costs of terminating traffic over each other’s
networks. The FCC recently enacted certain changes in our rules designed to
allow U.S. carriers to propose methods to pay for international call termination
that deviate from traditional accounting rates and the International Settlement
Policy. The FCC has also established lower benchmarks for the rates that U.S.
carriers can pay foreign carriers for the termination of international services
and these benchmarks may continue to decline. These rule changes have lowered
the costs of our top tier competitors to terminate traffic in the United States
and are contributing to the downward pricing pressure facing us in the carrier
market.
Mexico
The
Secretaría de Comunicaciones y Transportes or the SCT and COFETEL (Comisión
Federal de Telecomunicaciones or Federal Telecommunications Commission) have
issued ATSICOM a 30-year license granted in June 1998 to install and operate
a
public network. Under this license, ATSI Comunicaciones S.A de C.V. is required
to meet the following:
|
($7.31
|
)
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
DILUTED
INCOME (LOSS) PER SHARE
|
$
|
0.41
|
($7.31
|
)
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| le="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 36pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="left">General requirements | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| · |
Maintain
approximately $10 million in registered and subscribed capital.
|
| · |
Install
and operate a network in Mexico. The Mexican government will need
to
approve the operating plan before it is implemented; additionally
the
Mexican government will need to approve any future changes to the
operating plan before it can be implemented.
|
| · |
Continuously
develop and conduct training programs for its staff.
|
|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING
|
7,128,847
|
1,199,892
|
|||||
| · |
The
Concessionaire at all times needs to have an assigned individual
responsible for the technical functions to operate the concession.
|
| · |
The
Concessionaire is required to provide continuous and efficient services
at
all times to its customers.
|
|
See
accompanying summary of accounting policies and notes to financial
statements
|
|
ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES
|
|||||
|
(In
thousands)
|
|
Years
ended July 31,
|
|||||||
|
2005
|
2004
|
||||||
|
Net
income (loss) to common stockholders
|
$
|
9,587
|
($8,775
|
)
|
|||
|
Foreign
currency translation adjustment
|
–
|
–
|
|||||
|
Comprehensive
income (loss) to common stockholders
|
$
|
9,587
|
($8,775
|
)
|
|||
|
See
accompanying summary of accounting policies and notes to financial
statements.
|
|||||||
|
ATSI
COMMUNICATIONS, INC.
|
||||||||||||||||||||||||||||||||||
|
AND
SUBSIDIARIES
|
||||||||||||||||||||||||||||||||||
|
(
in thousands)
|
| · |
The
Concessionaire must establish a complaint center and correction facilities
center. We are required to report to the Mexican Government on a
monthly
basis the complaints received and the actions taken to resolve the
problems.
|
|||||||||
| · |
The
Concessionaire will only be authorized to invoice its customer’s tariffs
rates that have been approved by the Mexican
government.
|
| · |
The
Concessionaire is required to provide audited financial statements
on a
yearly basis that includes a detailed description of the fixed assets
utilized in the network and accounting reporting by region and location
of
where the services are being provided.
|
| · |
The
Concessionaire is required to provide quarterly reports and updates
on the
expansion of the network in Mexico and a description of the training
programs and research and development programs.
|
| · |
The
Concessionaire is required to provide statistic reports of traffic,
switching capacity and other parameters in the
network.
|
| (a) |
Market
for Common Equity
|
|
Fiscal
2004
|
High
|
Low
|
||||||||||||||||||||||||||||||||||||
|
First Quarter
|
1,036,393
|
$
|
1
|
$
|
61,125
|
($80,076
|
)
|
$
|
0
|
|
$
|
2.00
|
$
|
2.00
|
||||||||||||||||||||||||
|
Second
Quarter
|
$
|
1.00
|
$ |
502
|
(18,445
|
)
|
||||||||||||||||||||||||||||||||
|
Shares
issued for services
|
ER-BOTTOM: #ffffff"> |
$
|
1.00
|
|||||||||||||||||||||||||||||||||||
|
Third
Quarter
|
$
|
1.00
|
$
|
1.00
|
||||||||||||||||||||||||||||||||||
|
Fourth
Quarter
|
$
|
6.00
|
|
929
|
1
|
861
|
862
|
|||||||||||||||||||||||||||||||
|
Shares
issued for cash
|
$ |
1.25
|
||||||||||||||||||||||||||||||||||||
|
Fiscal
2005
|
High
|
567
|
1
|
5
|
|
Low
|
||||||||||||||||||||||||||||||||
|
First Quarter
|
$
|
1.20
|
$
|
0.56
|
||||||||||||||||||||||||||||||||||
|
Second
Quarter
|
$
|
1.25
|
$
|
0.48
|
||||||||||||||||||||||||||||||||||
|
Third
Quarter
|
$
|
style="DISPLAY: inline; FONT-SIZE: 7pt; FONT-FAMILY: Times New Roman, serif">6
|||||||||||||||||||||||||||||||||||||
|
Conversion
of redeemable preferred stock
|
401
|
0
|
313
|
313
|
||||||||||||||||||||||||||||||||||
|
Reincorporation
to Nevada
|
0.92
|
$
|
0.21
|
|||||||||||||||||||||||||||||||||||
|
Fourth
Quarter
|
$
|
0.32
|
$
|
0.16
|
||||||||||||||||||||||||||||||||||
| (b) |
Holders
|
| (c) |
Dividends
|
|
Plan
Category
|
Number
of Securities to be Issued upon Exercise of Outstanding Options,
Warrants
and Rights
|
Weighted-average
Exercise Price of Outstanding Options, Warrants and
Rights
|
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans (excluding securities reflected in column
(a))
|
|||||||||||||||||||||||||||||||||||
|
(a)
|
(b)
|
(c)
|
||||||||||||||||||||||||||||||||||||
|
Equity
Compensation Plans Not
Approved
by Security Holders
|
303,140
|
|
(306
|
)
|
||||||||||||||||||||||||||||||||||
|
Warrant
expense
|
$0.25
|
|
7,053
|
7,053
|
||||||||||||||||||||||||||||||||||
|
Net
loss
|
1,054,149 | |||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||
|
Total
|
303,140
|
|
|
(8,469
|
)
|
; MARGIN-RIGHT: 0px" align="center">
$0.25
|
1,054,149
|
|||||||||||||||||||||||||||||||
| (e) |
Sales
of Unregistered Securities
|
|
|
Years
ended July 31,
|
|||||||||||||||||||||||||||||||||||||||
|
|
2005
|
2004
|
||||||||||||||||||||||||||||||||||||||
|
|
$
|
%
|
$
|
%
|
||||||||||||||||||||||||||||||||||||
|
Operating
revenues
|
|
|
|
|
||||||||||||||||||||||||||||||||||||
|
Services
|
|
|
|
|
||||||||||||||||||||||||||||||||||||
|
Carrier
services
|
$
|
5,782
|
96
|
%
|
$
|
1,020
|
81
|
%
|
||||||||||||||||||||||||||||||||
|
Network
t>
|
)
|
(0
|
)
|
473
|
0
|
0
|
0
|
|||||||||||||||||||||||||||||||||
|
Shares
issued for Debt Conversion
|
services |
229
|
4
|
|
1,188
|
1
|
943
|
944
|
||||||||||||||||||||||||||||||||
|
Exercise
of Warrants
|
4,280
|
4
|
%
|
234
|
19
|
%
|
||||||||||||||||||||||||||||||||||
|
Total
operating revenues
|
6,011
|
100
|
%
|
1,254
|
100
|
%
|
||||||||||||||||||||||||||||||||||
| GHT: 1.25; MARGIN-RIGHT: 0px">914 |
918
|
|||||||||||||||||||||||||||||||||||||||
|
Warrant
expense
|
||||||||||||||||||||||||||||||||||||||||
|
Cost
of services (exclusive of depreciation and amortization, shown
below
|
5,664
|
94
|
%
|
1,071
|
85
|
%
|
||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Gross
Margin
|
347
|
6
|
%
|
183
|
15
|
%
|
||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Selling,
general and administrative Expense
|
517
|
9
|
%
|
584
|
47
|
%
|
||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Legal
and professional fees
|
417
|
7
|
%
|
303
|
24
|
%
|
||||||||||||||||||||||||||||||||||
|
|
872
|
872
|
||||||||||||||||||||||||||||||||||||||
|
Dividends
declared
|
(709
|
)
|
(709
|
)
|
||||||||||||||||||||||||||||||||||||
|
Option
Expense
|
42
|
42
|
||||||||||||||||||||||||||||||||||||||
|
Net
income
|
||||||||||||||||||||||||||||||||||||||||
|
Non-cash
issuance of common stock and warrants for services
|
1,047
|
17
|
%
|
7,055
|
563
|
%
|
||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Non-cash
stock-based compensation, employees
|
0 thin solid">
10,296
|
10,296
|
||||||||||||||||||||||||||||||||||||||
|
BALANCE,
JULY 31, 2005
|
4
|
0
|
13,912
|
14
|
474
|
8
|
RDER-BOTTOM: black double">
1,045,754
|
$
|
10
|
$
|
71,916
|
($78,249
|
)
|
$
|
0
|
$
|
502
|
(5,803
|
)
|
|||||||||||||||||||||
|
–
|
0
|
%
|
||||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Impairment
expense
|
–
|
0
|
%
|
702
|
ER-BOTTOM: #ffffff"> | |||||||||||||||||||||||||||||||||||
|
See
accompanying summary of accounting policies and notes to financial
statements.
|
||||||||||||||||||||||||||||||||||||||||
|
ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES
|
||||
|
(In
thousands)
|
|
Years
ended July 31,
|
|||||||||||||||||
|
2005
|
2004
|
||||||||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||||||||||||
|
NET
INCOME (LOSS)
|
$
|
10,296
|
$
|
(8,469
|
)
|
||||||||||||
|
|
Adjustments
to net income (loss):
|
||||||||||||||||
|
Gain
on disposal of investment
|
(12,104
|
)
|
|||||||||||||||
|
Debt
forgiveness income
|
(460
|
)
|
(257
|
)
|
|||||||||||||
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
|||||||||||||||||
|
Depreciation
and amortization
|
112
|
2
|
%
|
20
|
2
|
%
|
|||||||||||
|
|
|||||||||||||||||
|
Operating
loss
|
TOM: #ccffcc"> | ||||||||||||||||
|
Impairment
Loss
|
–
|
702
|
|||||||||||||||
|
Depreciation
and amortization
|
|
(2,224
|
)
|
-37
|
%
|
(8,485
|
)
|
-677
|
%
|
||||||||
|
|
112 |
19
|
|||||||||||||||
|
Loss
on an unconsolidated affiliate
|
–
|
107
|
|||||||||||||||
|
Non-cash
issuance of stock grants and options, employees
|
474
|
–
|
|||||||||||||||
|
Non-cash
issuance of common stock and warrants for services
|
1,047
|
7,055
|
|||||||||||||||
|
Non-cash
issuance of common stock for interest
|
|
||||||||||||||||
|
Debt
forgiveness income
|
&mes New Roman">61 |
–
|
|||||||||||||||
|
Provision
for losses on accounts receivable
|
4
|
4
|
|||||||||||||||
|
Changes
in operating assets and liabilities:
|
|||||||||||||||||
|
Increase
in
|
|||||||||||||||||
|
Accounts
receivable
|
(145
|
)
|
(21
|
)
|
|||||||||||||
|
Prepaid
expenses and other
|
(18
|
)
|
(31
|
)
|
|||||||||||||
|
Increase
/ (Decrease) in
|
|||||||||||||||||
|
Accounts
payable
|
73
|
272
|
|||||||||||||||
|
Accrued
liabilities
|
160
|
162
|
|||||||||||||||
|
Net
cash used in operating activities
|
(561
|
)
|
(457
|
460
|
8
|
%
|
257
|
0
|
%
|
||||||||
|
Gain
on disposal of investment
|
12,104
|
201
|
%
|
–
|
0
|
%
|
|||||||||||
|
Other
income (expense)
|
(44
|
)
|
-1
|
%
|
(241
|
)
|
-19
|
%
|
|||||||||
|
|
|||||||||||||||||
|
Net
income (loss)
|
10,296
|
171
|
%
|
(8,469
|
)
|
-675
|
%
|
||||||||||
|
|
)
|
||||||||||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||||||||||||
|
Purchases
of property & equipment
|
(8
|
)
|
(130
|
)
|
|||||||||||||
|
Cash
proceeds from sale of ATSICOM
|
–
|
187
|
|||||||||||||||
|
Investment
in joint venture in ATSICOM
|
–
|
(47
|
)
|
||||||||||||||
|
Acquisition
of business
|
(8
|
)
|
–
|
||||||||||||||
|
Net
cash (used in) provided by investing activities
|
(16
|
)
|
10
|
||||||||||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||||||||||||
|
Proceeds
from notes payable
|
918
|
410
|
|||||||||||||||
|
Payments
on notes payable
|
(918
|
)
|
(9
|
)
|
|||||||||||||
|
|
|||||||||||||||||
|
Less:
preferred stock dividends
|
(709
|
)
|
-12
|
%
|
(306
|
)
|
-24
|
%
|
|||||||||
|
Net
income (loss) to applicable to common shareholders
|
Proceeds
from the exercise of warrants
|
514
|
–
|
||||||||||||||
|
Principal
payments on capital lease obligation
|
(2
|
)
|
–
|
||||||||||||||
|
Net
cash provided by financing activities
|
512
|
401
|
|||||||||||||||
|
$
|
9,587
|
159
|
%
|
($8,775
|
)
|
-700
|
%
|
||||||||||
| · |
$103,454
owed to Attorneys for legal services rendered during fiscal 2004.
|
| · |
$1,186,000
associated with the Series D Cumulative preferred stock. Of this
balance,
$94nd platform access.
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, ATSI determined
that the estimated cash flows expected from the concession license would be
less
than the recorded value. As a result, ATSI recorded
an impairment loss of approximately $702,000 to reduce the recorded value of
the
concession license.
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$1,351,000
associated with the Series E Cumulative preferred stock. Of this
balance,
$1,058,000 is associated with the full redemption of this security
and
$293,000 is related to the accrued dividends as of July 31, 2005.
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 United States District
Court
for the Southern District Court of New York against several individuals
and financial institutions, including Rose Glen Capital and Shaar
Fund,
the holders of our Series D and E Redeemable Preferred Stock, for,
among
other things, stock fraud and manipulation. On February 25, 2005,
Judge
Lewis A. Kaplan issued a memorandum opinion and order dismissing
the
complaint as to defendants that included the holders of our Series
D and E
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">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, ATSI has 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 recorded value of the concession
license. Although
there is no assurance of future value appreciation, ATSI 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 year ended July 31, 2004, 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.
During
fiscal 2005 no options were granted or exercised under the 2003, 2002, 1998
and
1997 Stock Option Plans adopted during those years. Additionally, all options
previously granted under these plans were forfeited during fiscal
2005.
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.
In
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862
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Shares
issued for cash
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Additionally,
during fiscal 2005 the Board of Directors granted the issuance of 516,780 common
shares for legal services and consulting services performed during the year.
The
average exercise price of the common stock issued was set at $0.34.
During
fiscal 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. During fiscal 2004 566,574 warrants were exercised at an average
exercised price of $0.01.
A
summary
of the status of ATSI’s 1997, 1998, 2000 and 2004 Stock Option Plans for the
fiscal 2005, and 2004 changes during the periods are presented
below:
28,767
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$
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48
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Options
exercisable at end of year
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NOTE
12 - INCOME TAXES
Deferred
tax assets are comprised of the following as of July 31, 2005:
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, 2005, ATSI has determined that
a
valuation allowance is necessary for the entire amount of deferred tax assets.
At
July
31, 2005, ATSI had net operating loss carry-forwards related to U.S. operations
of approximately $35 million with expiration dates ranging from 2009
through 2024.
NOTE
13 - EARNINGS (LOSS) PER SHARE
In
accordance with SFAS No. 128, “Earnings Per Share,” basic earnings per share has
been computed based upon the weighted average of common shares outstanding.
Diluted earnings per share gives effect to outstanding convertible preferred
shares, warrants and stock options, unless their effect is anti-dilutive.
Earnings (loss) per common share has been computed as follows:
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:
Code
of Ethics
ATSI
Communications, Inc. adopted an
Executive Code of Ethics that applies to the Chief Executive Officer, Chief
Financial Officer, Controller and other members of our management team. The
Board of Directors approved the code of Ethics on December 7, 2004. The
Executive Code of Ethics may be viewed on our Website, www.atsi.net.
Upon
request, a copy of the Executive Code of Ethics will be provided without charge
upon written request to ATSI Communications, Inc., 8600
Wurzbach Road, Suite 700W., San Antonio, TX 78240
Summary
Compensation Table
During
the year ended July 31, 2005, ATSI borrowed a total of $514,000 from
Recap
Marketing & Consulting, LLP (“Recap”) and entered into a series of unsecured
convertible promissory notes bearing interest at the rate of 12% per annum,
with
the following maturity dates:
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 2005, ATSI issued a total
of
400,000 shares of our common stock as part of the stock grant, valued at
$84,000, to outside directors.
Aggregate
options exercisable and unexercisable during Fiscal 2005
The
following table reflects the Company’s director’s shares covered by both
exercisable and unexercisable stock options as of July 31, 2005.
-49-
Series
E Preferred Stock
As
of
July 31, 2005, 1,170 shares of Series E Preferred Stock remain outstanding
and
accrued dividends of approximately $287,000.
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, 2005
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.
During
the year ended July 31, 2005, individual affiliates of Recap elected to exercise
4,280,290 warrants and Recap forgave notes in the amount of $918,000 as the
conversion price. The exercise price of the warrants ranged from $0.01 per
share
to $0.50 per share.
On
November 1, 2004, ATSI extended the consulting agreements for an additional
six
months with certain individual affiliates of Recap that provided for the
issuance of compensation warrants to purchase a total of 1,000,000 shares of
ATSI’s common stock at price of $0.50 per share. These warrants expire on
October 31, 2005. At signing of the extension to the consulting agreements
ATSI
recognized $591,000 of non-cash compensation expense associated with the
issuance of these warrants.
On
March
1, 2005, ATSI amended the extension to the consulting agreement with certain
individuals’ affiliates of Recap and extended the agreement for an additional 12
months. The amendment to the agreements allows for the repricing of 1,250,000
compensation warrants at a new exercise price’s ranging from $0.30 per share to
$0.40 per share. At signing of the amendment to the extension of the consulting
agreement, ATSI recognized $220,000 of
non-cash compensation expense associated with the issuance of these
warrants.
On
June
1, 2005, ATSI entered into mutual release and termination agreement with certain
individuals’ affiliates of Recap. The mutual release and termination agreement
allows for the repricing of 783,500 compensation warrants at a new exercise
price’s ranging from $0.17 per share to $0.25 per share. At signing of the
mutual release and termination agreement, ATSI recognized $61,375 of
non-cash compensation expense associated with the issuance of these
warrants.
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Oak
Fnt style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Modification
of Non-Employee Awards Accounted for Under FAS 123
ATSI
granted 1,250,000 warrants to outsiders in March 2005 and the amendment to
the
agreement allowed for the repricing of the warrants, as a result of the
modification of these warrants ATSI recognized $220,000 of
non-cash compensation expense. Additionally,
on June 1, 2005, ATSI entered into a mutual release and termination agreement
with certain individuals’ affiliates of Recap. The mutual release and
termination agreement allows for the repricing of 783,500 compensation warrants.
At signing of the mutual release and termination agreement, ATSI recognized
$61,375 of
non-cash compensation expense associated with the issuance of these
warrants.
The
repricing of these warrants in March 2005 and June 2005 triggered a modification
of the original awarded warrants. 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.
Following
is a summary of warrant activity for the years ended July 31, 2005
and 2004
(Excluding warrants issued under the 2004 Stock Compensation plan):
During
fiscal 2005 no options were granted or exercised under the 2003, 2002, 1998
and
1997 Stock Option Plans adopted during those years. Additionally, all options
previously granted under these plans were forfeited during fiscal
2005.
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.
In
January 2005, the Board of directors granted the issuance of 2,104,000 stock
options to ATSI’s employees and Board of Directors. The exercise price of the
stock options granted was set at $0.46 per option. In addition, 60% of the
options vested immediately and the remaining options will vest over the next
three years. Additionally, the Board of Directors granted 900,000 stock grants
to ATSI’s employees and Board of Directors. Furthermore, during the year ended
July 31, 2005, the Board of Directors granted the issuance and repricing of
3,033,500 warrants to consultants for services rendered, the warrants exercise
price range from $0.17 to $0.50. As of July 31, 2005 4,280,286 warrants have
been exercised at an average exercised price of $0.21 and 303,140 warrants
remained outstanding at an average exercise price of $0.25
Additionally,
during fisorest, IL 60452
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During
fiscal 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. During fiscal 2004 566,574 warrants were exercised at an average
exercised price of $0.01.
A
summary
of the status of ATSI’s 1997, 1998, 2000 and 2004 Stock Option Plans for the
fiscal 2005, and 2004 changes during the periods are presented
below:
w Roman">$
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0.21
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During
the year ending July 31, 2005 all options granted but not exercised under the
1997, 1998 and 2000 Stock Option Plan were forfeited. The weighted average
remaining contractual life of the stock options outstanding at July 31, 2005
is
approximately 9 years and for warrants granted under the 2004 Stock Option
Plan
is 1 year.
The
following table summarizes information about stock options and warrants
outstanding for all plans at July 31, 2005:
Options
and Warrants Outstanding
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Options
and Warrants Exercisable
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Range
of Exercise Price
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Number
Outstanding
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Weighted
Average Exercise Price
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Weighted
Average Remaining Contractual Life (Years)
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Number
Exercisable
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Weighted
Average Exercise Price
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Options
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$0.46
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2,140,000
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$
ITEM
12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.
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. During fiscal 2004 ATSI made payments towards this note in
the
amount of $9,000. As of July 31, 2005 the principal balance is $16,000 and
the
accrued interest is $3,700. Additionally, at July 31, 2005, ATSI had a payable
of approximately $42,519 for board fees and related expenses.
NOTE
12 - INCOME TAXES
Deferred
tax assets are comprised of the following as of July 31, 2005:
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, 2005, ATSI has determined that
a
valuation allowance is necessary for the entire amount of deferred tax assets.
At
July
31, 2005, ATSI had net operating loss carry-forwards related to U.S. operations
of approximately $35 million with expiration dates ranging from 2009
through 2024.
NOTE
13 - EARNINGS (LOSS) PER SHARE
In
accordance with SFAS No. 128, “Earnings Per Share,” basic earnings per share has
been computed based upon the weighted average of common shares outstanding.
Diluted earnings per share gives effect to outstanding convertible preferred
shares, warrants and stock options, unless their effect is anti-dilutive.
Earnings (loss) per common share has been computed as follows:
-53-
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$
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0.45
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$
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(7.31
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)
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NOTE 14 - 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, 2005, ATSICOM has not
met
this requirement. Currently, Telemarketing, ATSI’s equity partner in 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 failu id="GLHDR" style="WIDTH: 100%" align="left">Table
of Contents
The
Company paid the following fees to its principal independent accountants for
services during the fiscal years ended July 31, 2005 and July 31,
2004.
The
Audit
Committee has instructed Malone and Bailey PC that any fees for non-audit
services must be approved before being incurred.
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.
Audit
Committee and Audit Committee Financial Expert
The
Company does not presently have an audit or compensation committee or other
board committee performing equivalent functions. All functions of the audit
committee and compensation committee are performed by the Company’s Board of
Directors. The Company does not have an audit committee financial expert because
none of its current directors have the necessary training or experience to
qualify as a financial expert.
Recent
developments with ATSI Board of Directors
On
October 20, 2005 the Board of Directors accepted the voluntary resignation
of
Michael G. Santry as a member of the board. Mr. Santry resigned to pursue other
business interests. There were no disagreements with Mr. Santry. The vacancy
caused by Mr. Santry’s resignation 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, 2005, the following individuals failed
to
report transactions in the Company’s equity securities or reported transactions
late:
-55-
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