--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
-
ACT OF 1934
For the quarterly period ended January 31, 2002
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 0-23007
ATSI COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2849995
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
6000 Northwest Parkway, Suite 110
San Antonio, Texas 78249
(210) 547-1000
(Address, including zip code, of registrant's principal executive
offices and telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-
The number of shares outstanding of the registrant's common stock at March
10, 2002 was 91,070,380
--------------------------------------------------------------------------------
1
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JANUARY 31, 2002
INDEX
Part I FINANCIAL INFORMATION
Page
----
Item 1. Interim Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of July 31, 2001 and January 31, 2002 .................. 3
Consolidated Statements of Operations for the Three and Six Months
Ended January 31, 2001 and 2002 ....................................................... 4
Consolidated Statements of Comprehensive Loss for the Three and Six
Months Ended January 31, 2001 and 2002 ................................................ 5
Consolidated Statements of Cash Flows for the Six Months Ended
January 31, 2001 and 2002 ............................................................. 6
Notes to Consolidated Financial Statements ............................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................................. 10
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ...................................................... 19
2
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
July 31, January 31,
2001 2002
--------- -----------
(unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents 103 233
Accounts receivable, net of allowance of $92 and $124, respectively 2,667 2,012
Inventory 75 96
Prepaid expenses & other current assets 786 771
-------- --------
Total current assets 3,631 3,112
-------- --------
PROPERTY AND EQUIPMENT (At cost): 21,784 22,283
Less - Accumulated depreciation and amortization (11,993) (13,851)
-------- --------
Net property and equipment 9,791 8,432
-------- --------
OTHER ASSETS, net
Goodwill, net 4,856 4,779
Concession cost, net 4,208 4,151
Cute FTP costs, net 390 300
Other 487 370
-------- --------
Total assets 23,363 21,144
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------
CURRENT LIABILITIES:
Accounts payable 4,714 6,554
Accrued liabilities 2,528 3,355
N/P current 677 609
Current portion of obligations under capital
leases 4,938 4,631
Deferred revenue 119 116
-------- --------
Total current liabilities 12,976 15,265
======== ========
LONG-TERM LIABILITIES:
Obligations under capital leases, less current portion 123 133
Customer deposits 128 90
-------- --------
Total long-term liabilities 251 223
-------- --------
Minority Interest 351 368
COMMITMENTS AND CONTINGENCIES:
REDEEMABLE PREFERRED STOCK
Series D Cumulative Convertible Preferred Stock, 3,000 shares authorized,
1,642 shares issued and outstanding at July 31, 2001, 742 shares issued
and outstanding at January 31, 2002 1,302 346
Series E Cumulative Convertible Preferred Stock, 10,000 shares authorized,
3,490 shares issued and outstanding at July 31, 2001, 1,655 shares issued
and outstanding at January 31, 2002 2,227 1,271
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 10,000,000 shares authorized
Series A Cumulative Convertible Preferred Stock, 50,000 shares authorized, 4,370
shares issued and outstanding at July 31, 2001 and January 31, 2002, respectively - -
Series F Cumulative Convertible Preferred Stock, 10,000 shares authorized, 9,210
shares issued and outstanding at July 31, 2001 and January 31, 2002, respectively - -
Series G Cumulative Convertible Preferred Stock, 42,000 shares authorized, 6,500
shares issued and outstanding at July 31, 2001 and January 31, 2002, respectively - -
Common stock, $0.001 par value, 200,000,000 shares authorized, 77,329,379 issued
and outstanding at July 31, 2001 91,070,308 issued and outstanding at January
31, 2002 77 91
Additional paid in capital 58,105 61,225
Accumulated deficit (52,503) (57,272)
Warrants outstanding 1,835 917
Deferred compensation (12) -
Other comprehensive loss (1,246) (1,290)
-------- --------
Total stockholders' equity 6,256 3,671
-------- --------
Total liabilities and stockholders' equity $ 23,363 $ 21,144
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
3
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
Three months ended January 31, Six months ended January 31
----------------------------- ---------------------------
2001 2002 2001 2002
----------- --------- --------- ----------
OPERATING REVENUES:
Telco services
Carrier services 4,422 $ 11,051 8,068 $ 20,026
Network services 700 612 1,406 $ 1,276
Retail services 1,674 1,932 3,399 $ 3,657
Internet e-commerce 1,254 1,235 2,676 2,474
---------- --------- --------- ---------
Total operating revenues $ 8,050 $ 14,830 $ 15,549 $ 27,433
OPERATING EXPENSES:
Cost of services 5,417 11,319 10,945 20,501
Selling, general and administrative 4,057 3,996 9,278 7,827
Bad debt expense 79 88 130 114
Depreciation and
amortization 1,087 1,163 2,236 2,289
---------- --------- --------- ---------
Total operating expenses 10,640 16,566 22,589 30,731
---------- --------- --------- ---------
Operating loss (2,590) (1,736) (7,040) (3,298)
OTHER INCOME(EXPENSE):
Other income (expense), net 477 (49) 701 (64)
Interest expense (377) (539) (810) (1,063)
---------- --------- --------- ---------
Total other income (expense) 100 (588) (109) (1,127)
LOSS BEFORE INCOME TAX EXPENSE (BENEFIT) (2,490) (2,324) (7,149) (4,425)
INCOME TAX EXPENSE (BENEFIT) (1) 31 64 58
MINORITY INTEREST 88 (9) 129 (9)
---------- --------- --------- ---------
NET LOSS (2,401) (2,364) (7,084) (4,492)
LESS: PREFERRED DIVIDENDS (233) (132) (1,121) (277)
---------- --------- --------- ---------
NET LOSS TO COMMON STOCKHOLDERS $ (2,634) $ (2,496) $ (8,205) $ (4,769)
========== ========= ========= =========
BASIC AND DILUTED LOSS PER SHARE $ (0.04) $ (0.03) $ (0.12) $ (0.06)
========== ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 69,071 83,127 67,654 80,607
========== ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(unaudited)
For the three months ended January 31, For the six months ended January 31,
-------------------------------------- ------------------------------------
2001 2002 2001 2002
-------- ------------ -------- ------------
Net loss to common stockholders ($2,634) ($2,496) ($8,205) ($4,769)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments ($245) $ 1 ($285) ($44)
------- ------- ------- -------
Comprehensive loss to common stockholders ($2,879) ($2,495) ($8,490) ($4,813)
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
5
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
Six months ended January 31,
2001 2002
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,084) $(4,492)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities-
Depreciation and amortization 2,236 2,289
Amortization of debt discount 129 --
Deferred compensation 277 12
Minority Interest (127) 17
Provision for losses on accounts receivable 130 114
Changes in operating assets and liabilities-
net of effects from acquisition
Change in accounts receivable 721 484
Change in other assets-current and long-term (362) 117
Change in accounts payable 2,310 1,912
Change in accrued liabilities (179) 553
Change in deferred revenue (90) 12
------- -------
Net cash (used in) provided by operating activities (2,039) 1,018
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment (604) (624)
------- -------
Net cash used in investing activities (604) (624)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 428 11
Principal payments under capital lease obligations (602) (376)
Payments on debt (417) (65)
Net increase in advanced funding arrangements 106 --
Proceeds (costs) from issuance of preferred stock, net 2,249 (14)
Proceeds from issuance of common stock, net 86 180
------- -------
Net cash provided by (used in) financing activities 1,850 (264)
------- -------
Net (decrease) increase in cash (793) 130
Cash, beginning of period 1,550 103
------- -------
Cash, end of period $ 757 $ 233
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
6
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements, which include
the following subsidiaries: ATSI-Delaware, ATSI-Canada, ATSI-Texas, ATSI-Mexico,
ATSI-COM, Computel, ATSI de CentroAmerica, Telespan, Sinfra and GlobalSCAPE have
been prepared in accordance with Rule 10-01 of Regulation S-X, "Interim
Financial Statements," and accordingly do not include all information and
footnotes required under accounting principles generally accepted in the U.S.
for complete financial statements. In the opinion of management, these interim
financial statements contain all adjustments, without audit, necessary to
present fairly the consolidated financial position of ATSI and its subsidiaries
("ATSI" or "the Company") as of January 31, 2002, the results of their
operations for the three and six months ended January 31, 2001 and 2002,
comprehensive loss for the three and six months ended January 31, 2001 and 2002,
and cash flows for the six months ended January 31, 2001 and 2002. All
adjustments are of a normal recurring nature. All significant intercompany
balances and transactions have been eliminated in consolidation. It is
recommended that these interim consolidated financial statements be read in
conjunction with the audited consolidated financial statements and the notes
thereto for the year ended July 31, 2001 included in the Company's annual report
on Form 10-K filed with the SEC on October 30, 2001. Certain prior period
amounts have been reclassified for comparative purposes. The results of
operations for any interim period are not necessarily indicative of the results
to be expected for the full year.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142, which supercedes APB Option No. 17, "Intangible Assets"
provides financial accounting and reporting for acquired goodwill and other
intangible assets. While SFAS 142 is effective for fiscal years beginning after
December 15, 2001, early adoption is permitted for companies whose fiscal years
begin after March 15, 2001. SFAS 142 addresses how intangible assets that are
acquired individually or with a group of assets should be accounted for in
financial statements upon their acquisition as well as after they have been
initially recognized in the financial statements. While the Company is not yet
required to adopt SFAS 142, it believes the adoption will not have a material
effect on the financial condition or results of the Company unless at some
future time it is determined that an impairment of its intangible assets exists.
2. FUTURE OPERATIONS
The consolidated financial statements of the Company have been prepared on
the basis of accounting principles applicable to a going concern. For the period
from December 17, 1993 to January 31, 2002, the Company has incurred cumulative
net losses of approximately $57.3 million. Further, we have a working capital
deficit of approximately $12.2 million at January 31, 2002. We have limited
capital resources available to us, and these resources may not be available to
support our ongoing operations until such time as we are able to continuously
generate positive cash flows from operations. There is no assurance we will be
able to achieve future revenue levels sufficient to support operations or
recover our investment in property and equipment, goodwill and other intangible
assets. These matters raise substantial doubt about our ability to continue as a
going concern. Our ability to continue as a
7
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.
We are likely to require additional financial resources in the near term
and could require additional financial resources in the long-term to support our
ongoing operations. We plan on securing funds through equity offerings and
entering into lease or long-term debt financing agreements to raise capital.
There can be no assurances, however, that such equity offerings or other
financing arrangements will actually be consummated or that such funds, if
received, will be sufficient to support existing operations until revenue levels
are achieved sufficient to generate positive cash flow from operations. If we
are not successful in completing additional equity offerings or entering into
other financial arrangements, or if the funds raised in such stock offerings or
other financial arrangements are not adequate to support us until a successful
level of operations is attained, we have limited additional sources of debt or
equity capital and would likely be unable to continue operating as a going
concern.
3. PREFERRED STOCK
During the quarter, the holder of the Series E Preferred Stock converted
1,485 of the 3,140 shares outstanding and accumulated interest into common stock
resulting in the issuance of 6,295,080 shares of common stock. In accordance
with the terms of the Investment Option of the Series E Preferred Stock, the
holder purchased an additional 279,720 shares of common stock for $70,000.
Additionally, the holder of the Series D Preferred Stock converted 900 of
the 1,642 shares outstanding and accumulated interest into common stock
resulting in the issuance of 4,384,990 shares of common stock during the
quarter.
4. SEGMENT REPORTING
We have determined that we have three reportable segments: (1) U.S. Telco;
(2) Mexico Telco; and (3) Internet e-commerce. Our Internet e-commerce
subsidiary, GlobalSCAPE, Inc. and its operations can be differentiated from the
telecommunication focus of the rest of ATSI. Additionally, we believe that our
U.S. and Mexican subsidiaries should be separate segments even though many of
the products are borderless. Both the U.S. Telco and Mexican Telco segments
include revenues generated from Retail Services and Network Services. Our
Carrier Services revenues, generated as a part of our U.S. Telco segment, are
the only revenues not currently generated by both the U.S. Telco and Mexico
Telco segments. We have included the operations of ATSI-Canada, ATSI-Delaware
and all businesses falling below the reporting threshold in the "Other" segment.
The "Other" segment also includes intercompany eliminations.
We have used earnings (loss) before interest, taxes, depreciation and
amortization (EBITDA) in our segment reporting as it is the chief measure of
profit or loss used in assessing the performance of each of our segments.
For the three months ended For the six months ended
January 31, January 31, January 31, January 31,
2001 2002 2001 2002
U.S. Telco
--------------------------------------------------------------------------------------------------
External revenues $5,040,444 $11,502,404 $9,491,712 $20,979,758
Intercompany revenues $ 342,140 $ 152,528 $ 870,650 $ 298,711
8
----------- ----------- ----------- -----------
Total revenues $ 5,382,584 $11,654,932 $10,362,362 $21,278,469
=========== =========== =========== ===========
EBITDA ($944,277) ($483,484) ($3,668,193) ($753,367)
Operating loss ($1,440,697) ($946,480) ($4,752,887) ($1,653,021)
Net loss ($1,049,436) ($974,835) ($4,449,802) ($1,772,361)
Total assets $15,683,730 $16,731,394 $15,683,730 $16,731,394
Mexico Telco
--------------------------------------------------------------------------------------------------------------
External revenues $ 1,755,505 $ 2,092,912 $ 3,381,406 $ 3,979,652
Intercompany revenues $ 468,549 $ 483,950 $ 975,795 $ 940,141
----------- ----------- ----------- -----------
Total revenues $ 2,224,054 $ 2,576,862 $ 4,357,201 $ 4,919,793
=========== =========== =========== ===========
EBITDA ($517,173) ($260,056) ($1,061,004) ($565,222)
Operating loss ($924,405) ($818,252) ($1,851,928) ($1,670,910)
Net loss ($1,146,910) ($1,363,071) ($2,250,472) ($2,699,334)
Total assets $ 8,766,249 $11,873,607 $ 8,766,249 $11,873,607
Internet e-commerce
--------------------------------------------------------------------------------------------------------------
External revenues $ 1,254,048 $ 1,234,815 $ 2,675,880 $ 2,473,620
Intercompany revenues - - - -
Total revenues $ 1,254,048 $ 1,234,815 $ 2,675,880 $ 2,473,620
=========== =========== =========== ===========
EBITDA ($35,992) $ 170,562 ($69,012) $ 309,145
Operating income (loss) ($161,797) $ 28,839 ($314,802) $ 26,098
Net income (loss) ($173,016) $ 32,403 ($404,550) $ 32,279
Total assets $ 1,709,694 $ 1,339,921 $ 1,709,694 $ 1,339,921
Other
--------------------------------------------------------------------------------------------------------------
External revenues - - - -
Intercompany revenues ($810,689) ($636,478) ($1,846,445) ($1,238,852)
----------- ----------- ----------- -----------
Total revenues ($810,689) ($636,478) ($1,846,445) ($1,238,852)
=========== =========== =========== ===========
EBITDA ($5,769) - ($5,769) -
Operating loss ($62,841) - ($120,435) -
Net loss ($264,707) ($190,028) ($1,100,006) ($328,937)
Total assets ($1,415,501) ($8,800,482) ($1,415,501) ($8,800,482)
Total
--------------------------------------------------------------------------------------------------------------
External revenues $ 8,049,997 $14,830,131 $15,548,998 $27,433,030
Intercompany revenues - - - -
----------- ----------- ----------- -----------
Total revenues $ 8,049,997 $14,830,131 $15,548,998 $27,433,030
=========== =========== =========== ===========
EBITDA ($1,503,211) ($572,978) ($4,803,978) ($1,009,444)
9
Depreciation and Amortization ($1,086,529) ($1,162,915) ($2,236,074) ($2,288,389)
Operating loss ($2,589,740) ($1,735,893) ($7,040,052) ($3,297,832)
Net loss to Common Stockholders ($2,634,069) ($2,495,531) ($8,205,307) ($4,768,353)
Total assets $24,744,172 $21,144,440 $24,744,172 $21,144,440
5. CAPITAL LEASES
The Company's current liabilities include a total of $5.8 million owed to
NTFC Capital Corporation and IBM de Mexico. The Company classified all amounts
as current under the note obligations due to being in technical default on both
notes. As such, each lender could call their notes as immediately due and
payable. The Company believes the lenders will not call the notes. NTFC has
expressed a desire to reset the covenants under the note in an effort to cure
past defaults and avoid future defaults, and IBM and the Company have had
limited conversations concerning restructuring their note. Although the note
terms or covenants could be reset, we can give no assurances that the notes will
not be called. All scheduled payments have been made to NTFC as of January 31,
2002; but the Company is approximately $1.6 million behind in payments to IBM.
6. SUBSEQUENT EVENTS
In February 2000, our board of directors approved a plan, in which $1.1
million was loaned, at a market interest rate, in the aggregate to certain key
executive officers to allow them to exercise approximately 2,033,332 of their
vested options. During fiscal 2001, the board of directors modified the
agreements by extending them for an additional year and changing them to
non-recourse notes. As the accounting treatment for non-recourse notes is
consistent with the treatment for options outstanding, the Company excluded the
shares from its outstanding common stock as of the date of the modification. As
of January 31, 2002, $51,000 of interest income has been accrued for the period
from February 2000 to the date the notes were modified.
In February 2002 the notes expired. The Board of Directors is currently
considering either renewing the notes or issuing replacement options.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE: Certain Statements set forth below under this caption
constitute "forward-looking statements" within the meaning of the Securities
Act.
The following is a discussion of the consolidated financial condition and
results of operations of ATSI for the three and six months ended January 31,
2001 and 2002. It should be read in conjunction with our Consolidated Financial
Statements, the Notes thereto and the other financial information included
elsewhere in the annual report on Form 10-K filed with the SEC on October 30,
2001.
10
General
ATSI Communications, Inc. is an international carrier serving the rapidly
expanding communications markets in and between Latin America and the United
States. The Company's mission is to connect the Americas with exceptional
communications services guided by our core values that drive everything we do.
The Company's strategy is to become a dominant provider of services to
businesses and consumers in this American/Latin American corridor through the
deployment of a high quality, `next generation' network. Founded in 1993, the
Company's traffic is generated from more than 650 retail points of presence
throughout Mexico, as well as from relationships with major carriers based in
the United States. ATSI carries the traffic generated from these sources over a
hybrid, redundant satellite and fiber-based ATM network between the United
States and Mexico, as well as a satellite-based network between the United
States, Costa Rica and El Salvador.
The Company's current core focus today is on the communications corridor
between the United States and Mexico. Already one of the two largest
international communications corridors in the world, this corridor is growing
due to increasing phone density in Mexico and large-scale emigration of Mexicans
to the United States. The Company is uniquely positioned within this growing
market niche as one of only a handful of viable carriers, and the only operating
company whose focus is international services, as opposed to domestic services.
Operationally, the Company's strength lies in its framework of licenses,
interconnection agreements and business relationships in Mexico, as well as in
its customer relationships and industry knowledge in the United States. The
Company has over 400 employees based in Mexico, and operates Mexican
subsidiaries with licenses that allow it to sell local and long distance
traffic, transport long distance traffic, and operate a network utilizing
packet-switching technology. Utilizing these strengths, the Company has
leveraged off of the networks of third parties to build a reliable customer
base, and has established its own international satellite and fiber-based
network to long haul consumer, corporate and carrier-generated traffic between
the U.S. and Mexico.
We also own approximately 70% of GlobalSCAPE, Inc., which is rapidly
becoming a leader in electronic commerce of top Internet-based software,
utilizing the Web as an integral component of its development, marketing,
distribution and customer relationship strategies.
As discussed in Note 4 to our consolidated financial statements we have
determined that we have three reportable segments: 1) U.S Telco; 2) Mexico
Telco; and 3) Internet e-commerce.
Additionally, we have determined that our U.S. and Mexican subsidiaries
should be reported as separate segments although many of our products are
borderless and utilize the operations of entities in both the U.S. and Mexico.
Both the U.S. Telco and Mexico Telco segments include revenues generated from
Network Services and Retail Services. All of the carrier services revenues are
recorded in the U.S. Telco segment. GlobalSCAPE, Inc. and its operations are
accounted for exclusively as a part of the Internet e-commerce operating
segment.
Our consolidated financial statements have been prepared assuming that we
will continue as a going concern. We have incurred losses since inception and
have a working capital deficit as of January 31, 2002. Additionally, we have had
recurring negative cash flows from operations with the exception of the quarters
ended January 31, 1998, October 31, 2001 and January 31, 2002. For the reasons
stated in Liquidity and Capital Resources and subject to the risks referred to
in Liquidity and Capital Resources,
11
we expect improved results of operations and liquidity in the latter half of
fiscal 2002. However, we cannot assure you that this will be the case.
Results of Operations
The following table sets forth certain items included in our results of
operations in dollar amounts and as a percentage of total revenues for the three
and six-month periods ended January 31, 2001 and 2002.
Three months ended January 31, Six months ended January 31,
------------------------------- ----------------------------
2001 2002 2001 2002
---- ---- ---- ----
(unaudited)
$ % $ % $ % $ %
---------- -------- ---------- -------- ------------ -------- ------------ --------
Operating revenues:
-------------------
Telco Services
Carrier services $ 4,422 55% $ 11,051 75% $ 8,068 52% $20,026 73%
Network services 700 9% 612 4% 1,406 9% 1,276 5%
Retail services 1,674 21% 1,932 13% 3,399 22% 3,657 13%
Internet e-commerce 1,254 15% 1,235 8% 2,676 17% 2,474 9%
---------- -------- ---------- -------- ------------ -------- ------------ --------
Total operating revenues 8,050 100% 14,830 100% 15,549 100% 27,433 100%
---------- -------- ---------- -------- ------------ -------- ------------ --------
Cost of services 5,417 67% 11,319 76% 10,945 70% 20,501 75%
---------- -------- ---------- -------- ------------ -------- ------------ --------
Gross margin 2,633 33% 3,511 24% 4,604 30% 6,932 25%
Selling, general and administrative
expense 4,057 50% 3,996 27% 9,278 60% 7,827 29%
Bad debt expense 79 1% 88 1% 130 1% 114 0%
Depreciation and amortization 1,087 14% 1,163 8% 2,236 14% 2,289 8%
---------- -------- ---------- -------- ------------ -------- ------------ --------
Operating loss (2,590) (32%) (1,736) (12%) (7,040) (45%) (3,298) (12%)
Other, net 100 1% (588) (4%) (109) (1%) (1,127) (4%)
---------- -------- ---------- -------- ------------ -------- ------------ --------
Loss before income tax expense and
minority interest (2,490) (31%) (2,324) (16%) (7,149) (46%) (4,425) (16%)
Income tax & minority interest, net 89 1% (40) (0%) 65 0% (67) (0%)
Net loss (2,401) (30%) (2,364) (16%) (7,084) (46%) (4,492) (16%)
Less: preferred dividends (233) (3%) (132) (1%) (1,121) (7%) (277) (1%)
---------- -------- ---------- -------- ------------ -------- ------------ --------
Net loss to common stockholders ($2,634) (33%) ($2,496) (17%) ($8,205) (53%) ($4,769) (17%)
========== ======== ========== ======== ============ ======== ============ ========
Three Months ended January 31, 2002 Compared to Three Months ended January 31,
2001
Operating Revenues. Consolidated operating revenues increased 84% between
quarters from $8.1 million to $14.8 million. During the quarter the Company
continued to add capacity to its switch and its network backbone in response to
the growing demand for its services. The Company also began
12
its efforts to increase its terminating capacity with third party carriers to
process traffic outside of its own network backbone in Mexico.
Telco revenues (all revenues other than e-commerce) increased from $6.8
million to $13.6 million while e-commerce revenues generated by GlobalSCAPE
declined by approximately $19,000 between periods.
Carrier services revenues increased approximately $6.6 million, or 150%
from the quarter ended January 2001 to the quarter ended January 2002. The
increased revenue resulted from an increase in the units transported from
approximately 50.3 million units during the quarter ended January 31, 2001 to
113.9 million units during the quarter ended January 31, 2002 and an increase of
approximately $0.01 per average unit between quarters.
Network services declined by approximately $88,000 or 13% between periods.
Our 800- service business declined between periods by approximately $80,000. The
decline is attributed to decreased volume of units transported via our network.
Units transported declined from 1.8 million to 1.2 million, period to period.
Our private network services remained relatively flat between periods.
Retail services revenues increased approximately $258,000 between periods.
Our integrated prepaid revenues within Mexico increased approximately $315,000
between quarters, but this increase was somewhat offset by the continuing
decline in postpaid, primarily operated-assisted service revenues. The improved
revenues between quarters resulted from our efforts to become more competitive
in the products we offered as we evaluated our core business to strategically
relocate communication centers to concentrated areas where growth would be
realized. As for the declining operated-assisted services, management does not
expect postpaid revenues to contribute significantly to the Company's operating
results in fiscal 2002.
Our Internet e-commerce services decreased approximately $19,000 between
periods.
Cost of Services. Cost of services increased as a percentage of revenue
from 67% to 76%, period to period. Cost of services for e-commerce slightly
increased from 5% for the quarter ended January 2001 to 10% for the period ended
January 2002. The increase was a result of royalty expense being recognized
related to the distribution agreement with Trellix Corporation announced on June
6, 2001. Cost of services as a percentage of revenues on the Company's telco
business increased slightly from 79% to 82% between quarters. The Company
continued to focus on improving carrier services margins quarter to quarter
through reductions in variable costs, improvements in the average price per unit
and improvements realized from the installation of Nortel Passport equipment in
the latter half of fiscal 2001. While the Company recognized higher carrier
service margins during the quarter than for the quarter ended January 31, 2001,
the increase in carrier services traffic as a percentage of overall revenues
from 55% to 75%, between quarters, contributed to the increased cost of
services.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
decreased approximately $61,000, or 1.5% between periods. SG&A expenses
associated with our e-commerce subsidiary decreased approximately $276,000, or
23% between periods due to the decline in expenses related to research and
development, professional fees, recruiting and compensation expense associated
with the granting of options. SG&A expenses associated with our telco operations
increased approximately 8% or $216,000 between periods but decreased as a
percentage of revenues from 42% to 23%.
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Bad Debt Expense. Bad Debt Expense increased by approximately 11% or $9,000
between periods due to the recording of an allowance of $37,000 associated with
one of the Company's carrier services customers offset by the decline in the
Company's postpaid call services business between quarters.
Depreciation and Amortization. Depreciation and amortization increased by
approximately 7% or $76,000 between periods.
Operating Loss. The Company's operating loss improved significantly by
approximately 33% or $854,000 from the second quarter of fiscal 2001, primarily
due to increased revenues and consequently improved gross margins.
Other Income(expense). Other expense increased approximately $688,000
between quarters primarily due to two factors. First, during the quarter ended
January 2001, the Company recognized a gain of $500,000 related to the
settlement of a litigation case with one of our carrier customers. Secondly,
during the quarter ended January 2002, the Company recognized incremental
interest expense related to its IBM capital lease of approximately $316,000.
Preferred Stock Dividends. During the quarter ended January 2002, we
recorded approximately $132,000 of non-cash dividends related to our cumulative
convertible preferred stock. This compares favorably to the approximate $233,000
of non-cash dividends and beneficial conversion feature expense recognized
during the quarter ended January 2001.
Net loss to Common Stockholders. The net loss for the quarter ended January
2002 improved by approximately $138,000 to $2.5 million from the $2.6 million
net loss for the quarter ended January 2001. The improvement was due primarily
to a significant increase in revenues, which improved our gross margin dollars
offset by the increase in other expense between quarters.
Six Months Ended January 31, 2002 Compared to Six Months Ended January 31, 2001
Operating Revenues. Consolidated operating revenues increased 76% between
periods from $15.5 million for the six months ended January 31, 2002 to $27.4
million for the six months ended January 31, 2002. In response to the increasing
demand for its services, the Company began adding capacity to both its switch
and its network backbone in October 2001. The Company is also working to
increase its terminating capacity with third party carriers to process traffic
outside of its own network backbone in Mexico. The net effect of our efforts
during the six months led to the highest and third highest quarters of revenues
in our history.
Telco revenues (all revenues other than e-commerce) increased from $12.9
million to $25.0 million while e-commerce revenues generated by GlobalSCAPE
declined by approximately $202,000 between periods.
Carrier services revenues increased approximately $12.0 million, or 148%
from the six months ended January 2001 to the six months ended January 2002. As
a result of the Company's effort to add capacity, the units transported via our
network more than doubled from approximately 95.7 million units during the
period ended January 2001 to approximately 207.5 million units during the period
ended January 2002. Additionally, our average price per unit increased
approximately $0.01 between periods.
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Network services decreased slightly by approximately $130,000 or 9% between
periods. Our 800- service business declined between periods by approximately
$121,000. The decline is attributed to decreased volume of units transported via
our network. Units transported declined from 3.3 million to 2.4 million, period
to period. Our private network services remained relatively flat between
periods.
Retail services revenues increased approximately $258,000 between periods.
Our integrated prepaid revenues within Mexico increased approximately $509,000
between quarters, but this increase was somewhat offset by the continuing
decline in postpaid, primarily operated-assisted service revenues.
The improved revenues between quarters resulted from our efforts to become
more competitive in the products we offered as we evaluated our core business to
strategically relocate communication centers to concentrated areas where growth
would be realized. As for the declining operated-assisted services, management
does not expect postpaid revenues to contribute significantly to the Company's
operating results in fiscal 2002.
Our Internet e-commerce services decreased approximately $202,000, or 8%
between periods. The expected elimination of advertising revenue accounted for
approximately $27,000 of the decline. As for the remaining decline, it was
attributed to a decline in CuteFTP site license sales between periods. This
decline, however, was partially offset by the sales of a desktop web-site
creation and management tool, and the introduction of CuteFTP Pro. Additionally,
other product sales, such as CuteHTML, CuteMAP, and CuteZIP, increased between
periods to contribute to the offset.
Cost of Services. Cost of services increased as a percentage of revenue
from 70% to 75%, period to period. Cost of services for e-commerce increased
from 4% for the six months ended January 2001 to 9% for the six months ended
January 2002. This increase was a result of royalty expense being recognized
related to the distribution agreement with Trellix Corporation announced on June
6, 2001. Cost of services as a percentage of revenues on the Company's telco
business decreased from 84% to 81% between periods. The Company continued to
focus on improving carrier services margins period to period through reductions
in variable costs, improvements in the average price per unit and improvements
realized from the installation of Nortel Passport equipment in the latter half
of fiscal 2001.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
decreased approximately $1.5 million, or 16% between periods. SG&A expenses
associated with our e-commerce subsidiary decreased approximately $655,000, or
26% between periods due to the decline in expenses related to research and
development, recruiting, professional fees and compensation expense associated
with the granting of stock options. SG&A expenses associated with our telco
operations decreased approximately 12% or $800,000 between periods. This
improvement resulted from management's efforts to cut excess spending by each
department. Also, during the quarter ended October 2000, telco operations
recognized significant expenses related to severance packages, professional fees
associated with the Genesis transaction, and strategic research services. As a
percentage of revenues, telco SG&A declined from 52% to 24% period to period.
Bad Debt Expense. Bad Debt Expense declined by approximately 12% or $16,000
between periods due primarily to the decline in the Company's postpaid call
services business between periods offset by approximately $37,000 of expense
related to one of its carrier service customers.
Depreciation and Amortization. Depreciation and amortization slightly
increased by approximately 2% or $53,000 between periods.
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Operating Loss. The Company's operating loss improved significantly by
approximately 53% or $3.7 million period to period, primarily due to increased
revenues and consequently increased gross margins and reductions in selling,
general and administrative expenses.
Other Income(expense). Other expense increased $1.0 million between periods
primarily due to three factors. First, during the quarter ended January 2001,
the Company recognized a gain of $500,000 related to the settlement of a
litigation case with one of our carrier customers. Secondly, during the six
months ended January 31, 2001, the Company recognized a gain related to the
extinguishment of a liability for approximately $184,000. Finally, during the
six months ended January 31, 2002, the Company recognized approximately $610,000
of incremental interest expense associated with its IBM capital lease.
Preferred Stock Dividends. During the six months ended January 31, 2002, we
recorded approximately $277,000 of non-cash dividends related to our cumulative
convertible preferred stock. This compares favorably to the approximately $1.1
million of non-cash dividends and beneficial conversion feature expense
recognized during the six months ended January 2001.
Net loss to Common Stockholders. The net loss for the six months ended
January 2002 improved by approximately $3.4 million to $4.8 million from the
$8.2 million net loss for the six months ended January 2001. The improvement was
due primarily to a significant increase in revenues, which improved our gross
margin dollars. Additionally, the reduction in selling, general and
administrative expenses and preferred dividends contributed to our improved net
loss to stockholders between periods.
Liquidity and Capital Resources
During the six months ended January 31, 2002, we generated positive cash
flows from operations of approximately $1.0 million. The Company was able to
generate this positive cash flow from operations by reducing the net loss
incurred during the period, shortening the cash conversion cycle of customer
receivables, and working with vendors related to payments. As a result, the
Company had the ability to operate with minimal assistance from private equity
placements or issuances of debt.
For the six months ended January 31, 2002, after adjustments for non-cash
items (depreciation and amortization, amortization of debt discount, deferred
compensation, provision for losses on accounts receivable and minority
interest), we had a net loss of approximately $2.1 million. Management of the
operating assets and liabilities, which consist mainly of collections on
accounts receivable and payments made on outstanding payables and accrued
liabilities, produced positive cash flows of approximately $3.1 million,
resulting in positive operating cash flows for the period of $1.0 million. By
generating positive cash flows during the six months ended January 31, 2002, we
improved over the six months ended January 31, 2001 by $3.1 million or 150% in
operating cash flows. Due primarily to the positive operating cash flows
produced during the first six months of fiscal 2002, our net loss, after
adjustments for non-cash items, significantly improved over the six months ended
January 31, 2001, when our net loss, after adjustments for non-cash items, was
$4.4 million.
Although we were able to produce positive cash flows from operations during
the quarters ended October 31, 2001 and January 31, 2002, we must produce
positive cash flows on a recurring basis, and reduce or eliminate our working
capital deficit. Until that time, management will be faced with deciding whether
to use available funds to pay vendors and suppliers for services necessary for
operations, to
16
service our debt requirements, or to purchase equipment to be used in the growth
of our business. Should our available funds not be sufficient to pay vendors and
suppliers, to service debt requirements and purchase equipment, we will need to
continue to raise additional capital. As noted in the risk factors of the Form
10-K filed with the SEC on October 30, 2001, we have not always paid all of our
suppliers on time. Some of these suppliers are critical to our operations. These
suppliers have given us payment extensions in the past, although there is no
guarantee they will do so in the future.
During the six months ended January 31, 2002, the Company acquired
approximately $624,000 in equipment which was not financed through capital lease
or financing arrangements. Additional cash outflows included the payment of
approximately $376,000 towards our capital lease obligations and an additional
$65,000 towards debt.
During the six months ended January 2002, we received cash proceeds, net of
issuance costs, of approximately $180,000 from the issuance of common stock as a
result of an investment option exercise. These funds along with the cash flows
generated from operations were used to pay down payable balances as mentioned
above, to make payments on our debt and capital lease obligations, and to
purchase additional equipment used in our network operations.
Overall, the Company's net operating, investing and financing activities
during the six months ended January 2002 provided approximately $130,000 in cash
flows. The Company's working capital deficit at January 31, 2002 was
approximately $12.2 million. This represents an increase of approximately $2.9
million from the working capital deficit of $9.3 million at July 31, 2001. The
Company's current liabilities include a total of $5.8 million owed to NTFC
Capital Corporation and IBM de Mexico. The Company classified all amounts as
current under the note obligations due to being in technical default on both
notes. As such, each lender could call their notes as immediately due and
payable. The Company believes the lenders will not call the notes. NTFC has
expressed a desire to reset the covenants under the note in an effort to cure
past defaults and avoid future defaults, and IBM and the Company have had
limited conversations concerning restructuring their note. Although the note
terms or covenants could be reset, we can give no assurances that the notes will
not be called. All scheduled payments have been made to NTFC as of January 31,
2002; but the Company is approximately $1.6 million behind in payments to IBM.
The Company's current obligations also include notes payable of
approximately $609,000, approximately $1.2 million owed to Northern Telecom for
the purchase of equipment during fiscal 2001, and approximately $437,000 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.
We continue to focus on enhancing the capacity and efficiency of our
international network backbone between the U.S. and Mexico, adding alternate
carriers to transport our traffic outside of that backbone in Mexico, and
changing the mix of our traffic to better utilize our network capabilities. A
direct result of our producing positive cash flows from operations relates to
the Company's focus on its core revenue stream and reducing the cash conversion
cycle of its primary customers. To allow these trends to continue, the Company
needs to expand its network and switch capacity in order to provide additional
capacity to existing and potential customers.
The Company has limited availability to capital resources, and these
resources may not be available to support our ongoing operations until such time
as we are able to generate positive cash
17
flows from operations. There is no assurance we will be able to achieve future
revenue levels sufficient to support operations or recover our investment in
property and equipment, goodwill and other intangible assets. 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.
Inflation/Foreign Currency
Inflation has not had a significant impact on the Company's operations.
With the exception of integrated prepaid revenues from the Company's
communication centers and payphones, almost all of the Company's revenues are
generated and collected in U.S. dollars. Integrated prepaid services from the
Company's communication centers and payphones are provided at the time of the
call in exchange for cash payment, so the Company does not maintain receivables
on its books that are denominated in pesos. In an effort to reduce foreign
currency risk, the Company attempts to convert pesos collected to U.S. dollars
quickly and attempts to maintain minimal cash balances denominated in pesos.
Some expenses related to certain services provided to the Company are incurred
in foreign currencies, primarily Mexican pesos. The devaluation of the Mexican
peso over the past several years has not had a material adverse effect on the
Company's financial condition or operating results.
Seasonality
The Company's integrated prepaid revenues are typically higher on a per
phone and per communication center basis during January through July, the peak
tourism months in Mexico.
Market Risk
We are subject to several market risks. Specifically, we face commodity
price risks, equity price risks and foreign currency exchange risk.
Commodity Price Risk
--------------------
Certain of our businesses, namely network services, operate in an extremely
price sensitive environment. The network services business over the past twelve
months has seen significant reductions in the price per unit charged for
transporting traffic. While we have been able to withstand these pricing
pressures, certain of our competitors are much larger and better positioned to
continue to withstand these price reductions. Our ability to further absorb
these price reductions may be dependent on our ability to further reduce our
costs of transporting this traffic.
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 recent history has shown us capable of
raising equity sources of capital; future equity financings and the terms of
those financings will be largely dependent on our stock price, our operations
and the future dilution to our shareholders.
Foreign Currency Exchange Risk
------------------------------
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We face two distinct risks related to foreign currency exchange risk;
transaction risk and translation risk.
As previously discussed under the caption "Inflation", we face risks
related to certain of our revenue streams, namely, integrated prepaid services
from our own Mexican communication centers and payphones and the transacting of
business in pesos as opposed to U.S. dollars. Historically, we have been able to
minimize foreign currency exchange risk by converting from pesos to U.S. dollars
quickly and by maintaining minimal cash balances denominated in pesos. As we
grow our retail business in Mexico it is likely that we will face increasing
foreign currency transaction risks.
Historically, we have recorded foreign currency translation gains/losses in
our assets and liabilities due to the volatility of the peso exchange rate as
compared to the U.S. dollar over time. We anticipate we will continue to
experience translation gains/losses in our assets and liabilities, specifically
in fixed assets which are accounted for at historical pesos amounts on the books
of our Mexican subsidiaries but converted to U.S. dollars for consolidation
purposes at current exchange rates.
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
The exhibits listed below are filed as part of this report.
Exhibit Number
--------------
11 Computation of Earnings per Share (Exhibit to this Form 10-Q filed
March 18, 2002)
(b) Current Reports on Form 8-K.
On December 18, 2001 the Company filed a Form 8-K announcing
that its Board of Directors had approved the recommendation of
the Audit Committee that Arthur Andersen LLP be dismissed as
independent public accountants. On January 24, 2002 and
January 31, 2002 the Company filed Form 8-K/A's noting that
the Company was not aware of any disagreements regarding
accounting or financial disclosure with Arthur Andersen LLP.
On December 18, 2001 the Company filed a Form 8-K announcing
that its Board of Directors had approved the recommendation of
the Audit Committee that Ernst & Young LLP be approved as
independent public accountants for the fiscal year ending July
31, 2002.
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ATSI COMMUNICATIONS, INC.
(Registrant)
Date: March 18, 2002 By: /s/ H. Douglas Saathoff
-----------------------
Name: H. Douglas Saathoff
Title: Chief Financial Officer
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