-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F9qpOzXxnY1U+AgQH56eNp/RXL815MvP6YFikHVcTLvN1W1k3sjm/wqdxmHif7P7 Z6TssWN92UXOP053eHMRTw== 0001015402-04-005440.txt : 20041215 0001015402-04-005440.hdr.sgml : 20041215 20041215154803 ACCESSION NUMBER: 0001015402-04-005440 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20041031 FILED AS OF DATE: 20041215 DATE AS OF CHANGE: 20041215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATSI COMMUNICATIONS INC/DE CENTRAL INDEX KEY: 0001014052 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 742849995 STATE OF INCORPORATION: NV FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-15687 FILM NUMBER: 041204868 BUSINESS ADDRESS: STREET 1: 8600 WURZBACH STREET 2: SUITE 700 WEST CITY: SAN ANTONIO STATE: TX ZIP: 78240 BUSINESS PHONE: 210-614-7240 MAIL ADDRESS: STREET 1: 8600 WURZBACH STREET 2: SUITE 700 WEST CITY: SAN ANTONIO STATE: TX ZIP: 78240 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN TELESOURCE INTERNATIONAL INC DATE OF NAME CHANGE: 19960511 10QSB 1 doc1.txt - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 - -------------------------------------------------------------------------------- FORM 10-QSB (mark one) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2004 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______TO _________ Commission File Number: 1-15687 ATSI COMMUNICATIONS, INC. (Exact Name of Small Business Issuer as Specified in its Charter) NEVADA 74-2849995 (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 8600 WURZBACH, SUITE 700W SAN ANTONIO, TEXAS 78240 (Address of Principal Executive Offices) (210) 614-7240 (ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ] As of December 08, 2004, there were outstanding 6,180,787 shares of the registrant's common stock, $.001 par value per share. Transitional Small Business Disclosure Format: Yes [ ] No [X] 2 ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTER ENDED OCTOBER 31, 2004 INDEX PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets as of October 31, 2004 . . . . . . 4 Consolidated Statements of Operations for the Three Months Ended October 31, 2004 and 2003 . . . . . . . . . . . . . . . . . . . 5 Consolidated Statements of Comprehensive Loss for the Three Months Ended October 31, 2004 and 2003. . . . . . . . . . . . . 6 Consolidated Statements of Cash Flows for the Three Months Ended October 31,2004 and 2003. . . . . . . . . . . . . . . . . . . . 7 Notes to Consolidated Financial Statements. . . . . . . . . . . . . . 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 10 Item 3. Control and procedures. . . . . . . . . . . . . . . . . . . . . . . . 16 PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . 16 Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Item 2. Unregistered sales of equity securities and use of proceeds . . . . . 17 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . 18 3
PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share information) (unaudited) October 31, 2004 ------------- ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents $ 14 Accounts receivable 160 Prepaid & other current assets 46 ------------- Total current assets 220 ------------- PROPERTY AND EQUIPMENT 150 Less - Accumulated depreciation and amortization (25) ------------- Net property and equipment 125 ------------- OTHER ASSETS, net Intangible Assets, net 24 ------------- Total assets $ 369 ============= LIABILITIES AND STOCKHOLDERS' DEFICIT - ------------------------------------- CURRENT LIABILITIES: Pre-petition liabilities of bankrupt subsidiaries, net of assets $ 12,104 Accounts payable 595 Accrued liabilities 659 Current portion of obligation under capital leases 3 Notes payable 707 Convertible debentures 275 Series D Cumulative Preferred Stock, 3,000 shares authorized, 742 shares issued and outstanding. 1,149 Series E Cumulative Preferred Stock, 10,000 shares authorized and 1,170 shares issued and outstanding 1,292 Liabilities from discontinued operations, net of assets 1,152 ------------- Total current liabilities 17,936 ------------- LONG-TERM LIABILITIES: Notes payable 500 Obligation under capital leasses, less current portion 11 Other 9 ------------- Total long-term liabilities 520 ------------- 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, 14,114,716 issued and outstanding 14 Common stock, $0.001, 150,000,000 shares authorized, 5,478,340 issued and outstanding 6 Additional paid in capital 69,948 Accumulated deficit (88,557) Other comprehensive Income 502 ------------- Total stockholders' deficit (18,087) ------------- Total liabilities and stockholders' deficit $ 369 =============
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ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (unaudited) Three months ended October 31, ------------------------------ 2004 2003 -------------- -------------- OPERATING REVENUES: Services Carrier services $ 769 $ 33 Network services 73 42 -------------- -------------- Total operating revenues 842 75 OPERATING EXPENSES: Cost of services (exclusive of depreciation and amortization, shown below) 772 50 Selling, general and administrative 250 196 Legal and professional fees 239 - Bad debt expense - 4 Depreciation and amortization 23 - -------------- -------------- Total operating expenses 1,284 250 -------------- -------------- OPERATING LOSS (442) (175) OTHER INCOME (EXPENSE): Other income (expense), net - 1 Debt forgiveness income 460 - Loss on an unconsolidated affiliate - (7) Interest expense (31) (26) Gain/(loss) from sale of assets - - -------------- -------------- Total other income (expense) 429 (32) NET INCOME / (LOSS) (13) (207) LESS: PREFERRED DIVIDENDS (38) (94) -------------- -------------- NET INCOME / (LOSS) TO COMMON STOCKHOLDERS ($51) ($301) ============== ============== BASIC AND DILUTED GAIN / (LOSS) PER SHARE ($0.01) ($0.29) ============== ============== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 3,598,383 1,036,390 ============== ==============
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ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands) (unaudited) For the three months ended October 31, ------------------------------------------ 2004 2003 ------------------- --------------------- Net loss to common stockholders Other comprehensive income (loss), net of tax: ($51) ($301) Foreign currency translation adjustment - - ------------------- --------------------- Comprehensive loss to common stockholders ($51) ($301) =================== =====================
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ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) (unaudited) Three months ended October 31, ------------------------------ 2004 2003 -------------- -------------- NET INCOME (LOSS) ($13) ($207) Adjustments to net income (loss) Debt forgiveness income (460) - CASH FLOWS FROM OPERATING ACTIVITIES: Adjustments to reconcile net loss operating activities- Depreciation and amortization 23 - Loss on an unconsolidated affiliate - 7 Issuance of common stock for services 40 - Issuance of warrants for services - 14 Provision for losses on accounts receivable - 4 Changes in operating assets and liabilities: (Increase) decrease in Accounts receivable (131) 5 Prepaid expenses and other (20) (6) Increase (decrease) in Accounts payable 90 58 Accrued liabilities 105 29 -------------- -------------- Net cash used in operating activities (366) (96) -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property & equipment (6) - Cash proceeds from sale of ATSICOM - 62 Investment in joint venture in ATSICOM - (36) Acquisition of business, net of assets (8) - -------------- -------------- Net cash (used in) provided by investing activities (14) 26 -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable 286 50 Proceeds from the exercise of warrants 14 - -------------- -------------- Net cash provided by financing activities 300 50 -------------- -------------- NET (DECREASE) INCREASE IN CASH (80) (20) CASH AND CASH EQUIVALENTS, beginning of period 94 140 CASH AND CASH EQUIVALENTS, Allocated to discontinued operations - - -------------- -------------- CASH AND CASH EQUIVALENTS, end of period $ 14 $ 120 ============== ============== NON-CASH TRANSACTIONS Issuance of common stock for conversion of debts $ 733 Issuance of common stock for purchase of Intangible assets 24
7 ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited interim financial statements of ATSI Communications, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC"), and should be read in conjunction with the audited financial statements and notes thereto of ATSI Communications Inc. filed with the SEC on Form 10-K for the year ended July 31, 2004. In the opinion of management, these interim financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements, which would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year ended July 31, 2004, as reported in the Form 10-K, have been omitted. NOTE 2 - PRE-PETITION LIABILITIES (NET OF ASSETS) OF THE BANKRUPT SUBSIDIARIES ATSI's subsidiaries, American TeleSource International, Inc. (ATSI Texas) and TeleSpan, Inc. (TeleSpan) filed for protection under Chapter 11 of the U.S. Bankruptcy Code on February 4, 2003 and February 18, 2003 respectively. The court ordered joint administration of both cases on April 9, 2003 and on May 14, 2003 the court converted the cases to Chapter 7. The two bankrupt subsidiaries were ATSI's primary operating companies and they have ceased operations. These bankruptcies did not include ATSI Communications, Inc., the reporting entity. On July 2, 2003, the U.S. Bankruptcy Court handling the Chapter 7 cases for ATSI Texas and TeleSpan approved the sale of two of their subsidiaries, ATSI de Mexico S.A de C.V. (ATSI Mexico) and Servicios de Infraestructura S.A de C.V. (SINFRA), to Latingroup Ventures, L.L.C. (LGV), a non-related party. Under the purchase agreement LGV acquired all the communication centers and assumed all related liabilities. Additionally, under the agreement, LGV acquired the "Comercializadora" License owned by ATSI Mexico and the Teleport and Satellite Network License and the 20-year Packet Switching Network license owned by SINFRA. The Chapter 7 Bankruptcy Trustee received $17,500, which represents all the proceeds from the sale of these entities. The Chapter 7 Bankruptcy Trustee will manage the designation of these funds for the benefit of the creditors of ATSI Texas and TeleSpan. Upon liquidation of all the assets owned by ATSI Texas and TeleSpan, the Chapter 7 Trustee will negotiate all claims with creditors. ATSI has not received any creditor objections to these court proceedings. The following represents the pre-petition liabilities of the bankrupt subsidiaries, net of assets (in thousands): CURRENT LIABILITIES: October 31, 2004 --------------------- ----------------- Accounts payable $ 7,496 Accrued liabilities 2,015 Notes payable 386 Capital leases 2,207 ----------------- TOTAL CURRENT LIABILITIES: $ 12,104 ================= 8 NOTE 3 - NOTES PAYABLE During the first quarter of fiscal 2005, ATSI borrowed a total of $300,000 from Recap Marketing & Consulting, LLP and entered into a series of unsecured convertible promissory notes bearing interest at the rate of 12% per annum, with the following maturity dates: ORIGINATION DATE AMOUNT MATURITY DATE ------------------ -------- ------------------ August 23, 2004 $ 25,000 August 23, 2005 August 30, 2004 25,000 August 30, 2005 September 15, 2004 25,000 September 15, 2005 September 20, 2004 150,000 September 20, 2005 October 8, 2004 25,000 October 8, 2005 October 12, 2004 25,000 October 12, 2005 October 15, 2004 10,000 October 15, 2005 October 25, 2004 15,000 October 25, 2005 -------- $300,000 ======== Additionally, during the first quarter of fiscal 2005, individual affiliates of Recap Marketing & Consulting LLP elected to exercise 1,348,000 warrants and Recap Marketing & Consulting LLP forgave notes in the amount of $13,473 as the conversion price. As a result ATSI issued 1,348,000 common shares. NOTE 4 - WARRANTS On October 13, 2003, ATSI entered into consulting agreements for twelve months with certain individual affiliates of Recap Marketing & Consulting, LLP that provided for the issuance of compensation warrants to purchase a total of 3,900,000 shares of ATSI's common stock at prices as indicated in the following table. These warrants expire on November 30, 2005. At issuance ATSI recognized $7,052,999 of non-cash compensation expense associated with the issuance of these warrants. COMMON SHARES EXERCISE PRICE ------------- --------------- 2,000,000 $ 0.01/share 800,000 $ 0.25/share 850,000 $ 0.50/share 250,000 $ 0.75/share During fist quarter of fiscal 2005, individual affiliates of Recap Marketing & Consulting, LLP or their assignees exercised the following warrants: EXERCISE DATE EXERCISE PRICE COMMON SHARES ------------------ --------------- ------------- September 21, 2004 $ 0.01/share 762,000 October 14, 2004 $ 0.01/share 436,000 October 15, 2004 $ 0.01/share 150,000 ------------- 1,348,000 ============= NOTE 5 - SETTLEMENT AND RESTRUCTURING OF DEBT On October 1, 2004, ATSI entered into a Settlement Agreement and Mutual release with Alfonso Torres Roqueni, the former owner of the concession license purchased by ATSICOM in July 2000. Under the settlement 9 agreement all amounts owed of $1,359,500 were restructured and settled in exchange for the issuance by ATSI of 687,600 common shares for the payment of $859,500 of the related obligation. The common shares were considered issued at $1.25 per share. However, if on the measurement date of April 1, 2005, the average closing price of the ATSI common stock for the ten (10) trading days immediately preceding the measurement date is below $1.15, ATSI will be required to issue an additional 59,791 common shares. If, however, the average closing price of the ATSI common stock for the ten (10) trading days immediately preceding the measurement date is at or above $1.15, no other consideration will be given and the 687,600 shares issued will be considered as the final consideration. Additionally as part of the settlement, ATSI issued a promissory note for the remaining balance of $500,000. The note accrues interest at the rate of 6% per annum and has a maturity date of October 1, 2007, with no monthly payments. On October 26, 2004, ATSI entered into a Settlement Agreement and Mutual release with Infraestructura Espacial, S.A de C.V. and Tomas Revesz, a former ATSI director. Under the settlement agreement, ATSI issued 30,000 shares of its common stock for the settlement of all principal and interest owed under a note payable in the amount of $250,000. This note was originally entered into on March 22, 2001 and subsequently restructured on September 12, 2002. NOTE 6 - ACQUISITION OF A LOCAL EXCHANGE CARRIER COMPANY On August 1, 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 purchased under the agreement included Hinotel's customer base, a customer management and billing system, and supplier contracts. Additionally, the transaction 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. NOTE 7 - SUBSEQUENT EVENTS NOTES PAYABLE - ------------- Subsequent to October 31, 2004, ATSI borrowed a total of $50,000 from Recap Marketing & Consulting, LLP and entered into a series of unsecured convertible promissory notes bearing interest at the rate of 12% per annum, with the following maturity dates: ORIGINATION DATE AMOUNT MATURITY DATE ----------------- ------- ----------------- November 5, 2004 $25,000 November 5, 2005 November 15, 2004 15,000 November 15, 2005 December 1, 2004 10,000 December 1, 2005 ------- $50,000 ======= Additionally, subsequent to October 31, 2004, individual affiliates of Recap Marketing & Consulting, LLP or their assignees exercise the following warrants: EXERCISE DATE EXERCISE PRICE COMMON SHARES ----------------- --------------- ------------- November 2, 2004 $ 0.01/share 50,000 November 11, 2004 $ 0.01/share 36,100 November 11, 2004 $ 0.25/share 495,072 ------------- 581,172 ============= 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SPECIAL NOTE: This Quarterly Report on Form 10-QSB contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities and Exchange Act of 1934, as amended. "Forward looking statements" are those statements that describe management's beliefs and expectations about the future. We have identified forward-looking statements by using words such as "anticipate," "believe," "could," "estimate," "may," "expect," and "intend." Although we believe these expectations are reasonable, our operations involve a number of risks and uncertainties, including those described in the Additional Risk Factors section of the Annual Report Form 10-K and other documents filed with the Securities and Exchange Commission. Therefore, these types of statements may prove to be incorrect. The following is a discussion of the consolidated financial condition and results of operations of ATSI for the three months ended October 31, 2004 and 2003. It should be read in conjunction with our Consolidated Financial Statements, the Notes thereto and the other financial information included in the annual report on Form 10-K filed with the SEC on November 8, 2004. As used in this section, the term "fiscal 2005" means the year ending July 31, 2005 and "fiscal 2004" means the year ended July 31, 2004. GENERAL We are an international telecommunications carrier that utilizes the Internet to provide economical international telecommunications services. Our current operations consist of providing digital voice communications over data networks and the Internet using Voice-over-Internet-Protocol ("VoIP"). We provide high quality voice and enhanced telecommunication services to carriers, telephony resellers and others through various agreements with local service providers in the United States, Mexico, Asia, the Middle East and Latin America utilizing VoIP telephony services. On August 1, 2004, we acquired a Local Exchange Carrier ("CLEC") based in South Texas. This acquisition will serve 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. Our entry to the retail services arena will allow us to leverage our existing international VoIP network with additional services that have the potential to deliver higher margins than our wholesale international VoIP services. We have deployed various postpaid and prepaid retail services and generated approximately $19,000 in retail services revenue during the first quarter of fiscal 2005. We have incurred operating losses and deficiencies in operating cash flows in each year since our inception in 1994 and expect our losses to continue through July 31, 2005. Our operating losses were $8,485,000, for the year ending July 31, 2004. We had an operating loss of $442,000, for the quarter ended October 31, 2004 and a working capital deficit of $17,716,000 at October 31, 2004. Due to such losses and our recurring losses, as well as the negative cash flows generated from our operations and our substantial working capital deficit, the auditor's opinion on our financial statements as of July 31, 2004 calls attention to substantial doubts about our ability to continue as a going concern. This means that there is substantial doubt that we will be able to continue in business through July 31, 2005. We have experienced difficulty in paying our vendors and lenders on time in the past. As a result, during the quarter ended October 31, 2004 management continued to pursue different avenues for funding and we entered into various short-term convertible promissory notes in the aggregate amount of $300,000. These funds have allowed the Company to pay those operating and corporate expenses that were not covered by our current cash inflows from operations. We will continue to require additional funding until the cash inflows from operations are sufficient to cover the monthly operating expenses. There is no assurance that we will be successful in securing additionally funding over the next twelve months. 11 RESULTS OF OPERATIONS The following table sets forth certain items included in the Company's results of operations in dollar amounts and as a percentage of total revenues for the three-month periods ended October 31, 2004 and 2003.
Three months ended October 31, -------------------------------- 2004 2003 ---- ---- (Unaudited) ----------- $ % $ % ------- ------ ------- ------ Operating revenues - ------------------ Services Carrier services $ 769 91% $ 33 44% Network services 73 9% 42 56% ------- ------ ------- ------ Total operating revenues 842 100% 75 100% Cost of services (Exclusive of depreciation and amortization, shown below) 772 92% 50 67% ------- ------ ------- ------ Gross Margin 70 8% 25 33% Selling, general and administrative expense 250 30% 196 261% Legal and professional fees 239 28% - 0% Bad debt expense - 0% 4 5% Depreciation and amortization 23 3% - 0% ------- ------ ------- ------ Operating loss (442) -52% (175) -233% Debt forgiveness income 460 55% - 0% Other income (expense), net (31) -4% (32) -43% ------- ------ ------- ------ Net loss (13) -2% (207) -276% ------- ------ ------- ------ Less: preferred stock dividends (38) -5% (94) -125% ------- ------ ------- ------ Net loss to applicable to common shareholders ($51) -6% ($301) -401% ======= =======
12 THREE MONTHS ENDED OCTOBER 31, 2003 COMPARED TO THREE MONTHS ENDED OCTOBER 31, 2002 Operating Revenues. Consolidated operating revenues increased 1,023% between periods from $75,000 for the quarter ended October 31, 2003 to approximately $842,000 for the quarter ended October 31, 2004. Carrier services revenues increased approximately $736,000, or 100% from the quarter ended October 31, 2003 to the quarter ended October 31, 2004. Our carrier traffic increased from approximately 680,480 minutes in the first quarter of fiscal 2004 to approximately 16,304,526 minutes in the first quarter ended October 31, 2004. The increase in revenue and carrier traffic can mainly be attributed to the growth in carrier services revenue since implementation of the NexTone VoIP soft-switch during the last quarter of fiscal 2004. Network services revenues increased approximately 74% or $31,000 from the quarter ended October 31, 2003 to the quarter ended October 31, 2004. The increase in network services revenue is primarily due to the purchase and assignment of a network services contract from American TeleSource International de Mexico S.A de C.V. (ASTIMEX). Under the assignment and purchase agreement with ATSIMEX, we acquired the remaining term of the contract, from February 2004 through June 2004 and generated monthly revenues of approximately $22,000. The agreement has expired and we are providing service to this customer on a month-to-month basis at the same rate. Cost of Services. (Exclusive of depreciation and amortization) The consolidated cost of services increased by approximately $722,000 from the quarter ended October 31, 2003 to the quarter ended October 31, 2004. The increase in cost of services is a direct result of the increase in carrier services revenue and network services revenue. As mentioned above, our carrier traffic increased from approximately 680,480 minutes in the first quarter of fiscal 2004 to approximately 16,304,526 minutes in the quarter ended October 31, 2004, thus increasing our cost of services between quarters. Selling, General and Administrative (SG&A) Expenses. SG&A expenses increased approximately $54,000, or 28% from the quarter ended October 31, 2003 to the quarter ended October 31, 2004. The increase is attributable to the recognition of approximately $45,000 in wages and contract labor associated with the operations of the retail services acquired during the first quarter of fiscal 2005. Legal and professional Fees. Legal and professional fees increased approximately $240,000, or 100% from the quarter ended October 31, 2003 to the quarter ended October 31, 2004. The increase is attributable to the recognition of approximately $150,000 in professional fees associated with a marketing campaign that commenced during the first quarter of fiscal 2005. Additionally, during the quarter we recognized approximately $90,000 in legal fees associated to the lawsuit for stock fraud and manipulation by various institutions, as describe in the legal preceding section of this report. Depreciation and Amortization. Depreciation and amortization increased by approximately 100% or $23,000 from the quarter ended October 31, 2003 to the quarter ended October 31, 2004. The increase is attributed to the recognition of depreciation expense and amortization on the NexTone VoIP soft-switch that was acquired at the last quarter of fiscal 2004. Operating Loss. The Company's operating loss increased by approximately $267,000 or 153% from the quarter ended October 31, 2003 to the quarter ended October 31, 2004. The increase in operating loss is attributed to the increase of $293,000 in SG&A and the increase of approximately $23,000 in depreciation and amortization in the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004. The increase in SG&A and depreciation and amortization were offset slightly by the increase in gross margin of approximately $45,000. Debt forgiveness income. Our debt forgiveness income increased approximately $460,000 from the 13 quarter ended October 31, 2003 to the quarter ended October 31, 2004. During the quarter ended October 31, 2004, we negotiated an exchange of various liabilities for equity. These settlements were related to the settlement of the $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. The debt forgiveness income was based on the difference between the market price of ATSI equity at the time of issuance and the market price calculated at the time of the settlement of the debt. Other Income (expense). Other income and expense is comparable between quarter at approximately $31,000 for the quarter ended October 31, 2004 and $32,000 for the quarter ended October 31, 2003. Preferred Stock Dividends. Preferred Stock Dividends expense decreased by approximately $56,000 between periods, from $94,000 for the quarter ended October 31, 2003 to $38,000 during the quarter ended October 31, 2004. During fiscal 2004 we converted all Redeemable Preferred Series F and Series G shares to common. As a result of these conversions no dividends were incurred during the quarter ended October 2004 related to these securities. Net loss to Common Stockholders. The net loss for the quarter ended October 31, 2004 decreased to $51,000 from $301,000 for the quarter ended October 31, 2003. The decrease in net loss to common stockholders was due primarily to the recognition of debt forgiveness income of $460,000 during the quarter and the $56,000 reduction of preferred stock dividends payable. LIQUIDITY AND CAPITAL RESOURCES Cash used in operating activities: During the quarter ended October 31, 2004, operations consumed approximately $366,000 in cash. This cash consumed by operations is primarily due to net losses of approximately $13,000 incurred during the quarter ending October 31, 2004 and the non-cash income of $460,000 arising from the forgiveness of debts. We recognized an increase in accounts payable of approximately $90,000, increase in accrued liabilities of approximately $105,000. The increase in accrued liabilities and accounts payable is primarily due to the company recognizing approximately $31,000 in interest expense associated with various notes, the accrual of preferred stock dividends of $38,000 and the accrual of professional fees of approximately $16,000 associated with the first quarter review and legal consulting work rendered during the quarter. Also, we recognized an increase in accounts receivables of $131,000 associated with the billing to our customers at the end of the quarter, which we collected subsequent to the quarter ending October 31, 2004. We also recognized an increase in prepaid expenses for $20,000 related to the prepayments made to our vendors for the additional services and additional capacity required form our vendors. Cash provided used in investing activities: During the quarter ended October 31, 2004, the Company acquired a new router, copier and printer for $20,000. During the quarter we paid $6,000 in cash towards this acquisition. The new router was acquired to compensate the increase in volume of minutes processed through our network during the quarter ending October 31, 2004. Additionally, during 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 (used in)/ provided by financing activities: During the quarter ended October 31, 2004 we received approximately $286,000 for the issuance of debt and received $14,000 from the exercise of warrants. 14 Overall, our net operating, investing and financing activities during the quarter ended October 31, 2004 provided a decrease of approximately $80,000 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 October 31, 2004 was approximately $17,716,000. This represents a decrease of approximately $1,232,000 from our working capital deficit at July 31, 2004. The decrease can primarily be attributed to the settlement of various liabilities through the issuance of common stock. These settlement were related to 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 working capital deficit at October 31, 2004 included approximately $12,104,000 related to the pre-petition liabilities (net of assets), associated with ATSI-Texas and TeleSpan, the two subsidiaries currently under Chapter 7 Bankruptcy. The pre-petition liability balance is composed primarily of the following: - $3 million in debt owed to IBM Corporation associated to a capital lease; - $1.3 million in debt to Northern Telecom, a subsidiary of Nortel Networks, associated with some telecommunications equipment acquired during fiscal year 2001; - $5.1 million in debt to various international and domestic telecommunications carriers for services provided during fiscal year 2002 and 2003; - $250,000 in property taxes to various taxing entities, - $550,000 to Universal Service Fund for telecommunication taxes; and - $2.4 million associated with rent expense, salaries and wages and professional services to various entities. Our working capital deficit after exclusion of the pre-petition liabilities is approximately $5,612,000. Our current obligations include $690,861 owed to Recap Marketing & Consulting; LLP related various unsecured convertible promissory notes bearing interest at the rate of 12% per annum. We entered into these promissory notes during fiscal 2004 and the first quarter of fiscal 2005. Our current liability includes approximately $1,149,000 associated with the Series D Cumulative preferred stock. Of this balance, $942,000 is associated with the full redemption of this security and $207,000 is related to the accrued dividends as of October 31, 2004. Our current liabilities include approximately $1,292,000 associated with the Series E Cumulative preferred stock. Of this balance, $1,058,000 is associated with the full redemption of this security and $234,000 is related to the accrued dividends as of October 31, 2004. During the fiscal year ended July 31, 2003, the Company was de-listed from AMEX and according to the terms of the Series E Cumulative preferred stock Certificate of Designation, if the Company fails to maintain a listing on NASDAQ, NYSE or AMEX the Series E preferred stockholder could request a mandatory redemption of the total outstanding preferred stock. As of the date of this filing we have not received such redemption notice. On October 31, 2002 we filed a lawsuit in the Southern District Court of New York against two financial institutions, Rose Glen Capital and Shaar Fund, the holders of Series D and E Redeemable Preferred Stock, for stock fraud and manipulation. These liabilities combined for a total of approximately $2,441,000. Accounting rules dictate that these liabilities remain in our books under Current Liabilities until the lawsuit is resolved in the judicial system or otherwise. At this time we cannot predict the outcome or the time frame for this to occur. 15 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 October 31, 2004. ONGOING OPERATIONS We believe that, based on our limited access to capital resources and our current cash balances, that 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 3 and 7 to the financial statements, we have incurred amounts of debt to finance our working capital requirements. During the quarter ended October 31, 2004, we borrowed a total of $300,000 and subsequent to the quarter ended October 31, 2004 we barrowed an additional $50,000 from Recap Marketing & Consulting, LLP; to fund our operating expenses and other corporate expenses. This debt will be 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. ITEM 3. CONTROLS AND PROCEDURES The Company has adopted and implemented disclosure controls and procedures designed to provide reasonable assurance that all reportable information will be recorded, processed, summarized and reported within the time period specified in the SEC's rules and forms. Under the supervision and with the participation of the Company's management, including the Company's President and Chief Executive Officer and the Company's Controller and Principal Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of the end of the fiscal quarter covered by this report. Based on that evaluation, the President and Chief Executive Officer and the Controller and Principal Financial Officer have concluded that these disclosure controls and procedures are effective as of the end of the fiscal quarter covered by this report. There were no changes in the Company's internal control over financial reporting during the fiscal quarter covered by this report that have had a material affect or are reasonably likely to have a material affect on internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PRECEDINGS In March 2001, Comdisco sued our subsidiary, ATSI-Texas, for breach of contract for failing to pay lease amounts due under a lease agreement for telecommunications equipment. Comdisco claims that the total amount owed pursuant to the lease was $926,185 and that the lease terms called for 36 months of lease payments. Comdisco is claiming that ATSI-Texas only paid thirty months of lease payments. ATSI-Texas disputes that the 16 amount owed was $926,185 since it received only $375,386 in financing and has paid over $473,000 in lease payments and, thus, believe that it has satisfied its obligation under the lease terms. Comdisco has filed a claim with the United States Bankruptcy Court of the Western District of Texas in which the bankruptcy of ATSI-Texas is pending. The Company does not have a liability for the lease payments and expects the obligation of ATSI-Texas will be discharged in the pending Chapter 7 case. In July 2002, we were notified by the Dallas Appraisal District that the administrative appeal from the appraisal of the ATSI-Texas office in the Dallas InfoMart was denied. The property was appraised at over $6 million dollars. The property involved included a Nortel DMS 250/300 switch, associated telecommunications equipment and office furniture and computers. ATSI-Texas was unable to proceed in its appeal of the appraisal due to its failure to pay the taxes under protest. During fiscal 2002 we recorded approximately $260,000 of property tax expense related to the ATSI-Texas Dallas office. Currently the Dallas County taxing authority has filed claim with the United States Bankruptcy Court of the Western District of Texas for approximately $783,843. This amount also included a property tax estimate of approximately $230,572 for calendar year 2003. We believe this amount is incorrect. All of the property was removed and impaired from the Dallas site as a result of ATSI-Texas filing for protection under Chapter 11 of the Bankruptcy code. We believe that this liability ATSI-Texas will be discharged upon the completion of the pending Chapter 7 case. In October 2002, we filed a lawsuit in the Southern District of New York against several financial parties for stock fraud and manipulation. The case is based on convertible preferred stock financing transactions involving primarily two firms: Rose Glen Capital and the Shaar Fund. We believe that Rose Glenn and the Shaar Fund engaged in a scheme to defraud us into selling multiple series of convertible preferred stock and to manipulate the price of our stock downward in order to take advantage of increased conversion rates resulting from the decline in stock price. We are not able to determine the likelihood of an adverse outcome or the amount or range of any losses that could result from this matter. If we receive an adverse decision in this suit, it is likely we would be required to issue a substantial amount of our common shares to our Series D and Series E holders and the current owners of our common shares would be substantially diluted. In December 2003, we filed a cause of action in the 407th Judicial District of Bexar County, Texas against James C. Cuevas, Raymond G. Romero, Texas Workforce Commission, ATSI-Texas and Martin W. Seidler seeking judicial review on the decision issued by the Texas Workforce Commission awarding a claim for $81,092 against us for unpaid wages. The District Court has set a trial date for July 11, 2005. We are vigorously pursuing this action but cannot predict the outcome of this litigation or the amount or range of a potential loss. An adverse decision in this matter would have a material adverse effect on our financial condition in the period in which it is entered. In January 2004, we filed a petition in the 150th Judicial District of Bexar County, Texas against Inter-tel.net, Inc. and Vianet Communications, Inc. d/b/a Inter-tel.net seeking declaratory relief that ATSI Communications, Inc. is not bound by the Carrier Services Agreement between Vianet Communications, Inc. and ATSI-Texas. On February 27, 2004 the Bankruptcy Court in the ATSI-Texas Bankruptcy case allowed Vianet Communications, Inc. to amend its claim pending in the Bankruptcy of ATSI-Texas and assert against ATSI its claim for $1,720,387 arising from an alleged breach of contract by ATSI-Texas. The Bankruptcy Court then ordered the lawsuit to be remanded back to state court for hearing. The District Court has set a trial date for March 9, 2005. We cannot predict the outcome of this litigation or the amount or range of a potential loss. An adverse decision in our declaratory judgment action and in the claim by Vianet Communications, Inc. would have a material adverse effect on our financial condition in the period in which it is entered. We are also a party to additional claims and legal proceedings arising in the ordinary course of business. We believe it is unlikely that the final outcome of any of the claims or proceedings to which we are a party would have a material adverse effect on our financial statements; however, due to the inherent uncertainty of litigation, the range of possible loss, if any, cannot be estimated with a reasonable degree of precision and there can be no 17 assurance that the resolution of any particular claim or proceeding would not have an adverse effect on our results of operations in the period in which it occurred. ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The following table contains the names, number of shares, dates and consideration paid for common stock by persons who purchased securities in private placements during the three months ended October 31, 2004. All such transactions were exempt from registration under the Securities Act under Section 4(2) as transactions not involving a public offering because of the limited number of persons involved in each transaction, the access of such persons to information about the Company that would have been available in a public offering, and the absence of any public solicitation or advertising.
NUMBER PURCHASE OF SHARES CONSIDERATION DATE - ---------------------- --------- ----------------------------------- ---------------- Alexandro Hinojosa Sr. 40,000 Acquisition of Hinotel for $24,000 August 1, 2004 Alfonso Torres Roqueni 687,600 Settlement of debt for $859,500 October 1, 2004 Tomas Revesz 30,000 Settlement of debt for $250,000 October 26, 2004
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: The exhibits listed below are filed as part of this report. EXHIBIT NUMBER - --------------- 4.1 Convertible Promissory Notes issued to Recap Marketing & Consulting, LLP. * 10.1 Confidential Settlement Agreement and Mutual Release, Note Payable and Lock out agreement between ATSI and Alfonso Torres Roqueni, dated October 1, 2004. * 10.2 Confidential Settlement Agreement and Mutual Release between ATSI and Infraestructura Especial and Tomas Revesz, dated October 26, 2004. * 31.1 Certification of our President and Chief Executive Officer, under Section 302 of the Sarbanes-Oxley Act of 2002. * 31.2 Certification of our Corporate Controller and Principal Financial Officer, under Section 302 of the Sarbanes-Oxley Act of 2002. * 32.1 Certification of our President and Chief Executive Officer, under Section 906 of the Sarbanes-Oxley Act of 2002. * 32.2 Certification of our Corporate Controller and Principal Financial Officer, under Section 906 of the Sarbanes-Oxley Act of 2002. * 99.1 Public Utility Commission of Texas ("PUC") approval of transfer of the Service Provider Certificate of Authority ("SPCOA") from Hinotel, Inc. to ATSI's subsidiary, Telefamilia Communications, Inc. Dated October 25, 2004. * * Filed herewith 18 (b) Reports on Form 8-K - On August 1, 2004, we filed a Current Report on Form 8-K under Items 1.01, 2.01, 3.02 and 9.01, we announced that ATSI Communications, Inc. and Hinotel, Inc. entered into an asset purchase agreement under which ATSI acquired all of Hinotel's retail customer base, a customer management and billing system, certain supplier contracts and the Competitive Local Exchange Carrier (CLEC) license in exchange for $7,500 in cash and 40,000 shares of ATSI common stock. SIGNATURE In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ATSI COMMUNICATIONS, INC. (Registrant) Date: December 15, 2004 By: /s/ Arthur L. Smith ------------------- ------------------- Name: Arthur L. Smith Title: President and Chief Executive Officer Date: December 15, 2004 By: /s/ Antonio Estrada ----------------- ------------------- Name: Antonio Estrada Title: Corporate Controller (Principal Accounting and Financial Officer) 19 EX-4.1 2 doc2.txt EXHIBIT 4.1 EXHIBIT 4.1 ----------- FORM OF CONVERTIBLE PROMISSORY NOTES ------------------------------------ Houston, Texas FOR VALUE RECEIVED, ATSI, Inc., a Nevada Corporation (Maker), promises to pay to RECAP MARKETING & CONSULTING LLP (Holder) the principal sum of [amount] with - -------------------------------- interest from date at the rate of twelve percent (12%), per year, until applied to warrants converted under a separate agreement. Holder or Maker has the right to convert the Principal at the price per share (rate) identified in Exhibit 4.1 of the Consulting Agreement ("Conversion"). Such Conversion shall occur only after approval of a reverse split, and authorization by the SEC of the Maker, and approval by the Board of Directors, which shall not be unreasonably withheld. Principal is payable in lawful money, or stock if converted, of the United States of America at 12000 Westheimer, Suite 340, Houston, Texas 77077, or at such place as may later be designated by written notice from the Holder to the Maker hereof, on the date and in the manner following: All principal and accrued interest is due on or before twelve (12) months from the date the principal amount is received. This Note is not secured, other than by conversion of warrants to common stock. Both parties understand that the amount or value above does not exceed the maximum interest allowed by law, under the statutes of the state of Texas, and acknowledge that the terms are reasonable given the nature of the loan. ATSI, Inc. a Nevada Corporation By: /s/ Arthur L. Smith -------------------- Arthur L. Smith Its President and Chief Executive Officer Amount: $25,000 Received on: AUGUST 23, 2004 ------- ----------------- Amount: $25,000 Received on: AUGUST 30, 2004 ------- ----------------- Amount: $25,000 Received on: SEPTEMBER 15, 2004 ------- -------------------- Amount: $150,000 Received on: SEPTEMBER 20, 2004 -------- -------------------- Amount: $25,000 Received on: OCTOBER 08, 2004 ------- ------------------ Amount: $25,000 Received on: OCTOBER 12, 2004 ------- ------------------ Amount: $10,000 Received on: OCTOBER 15, 2004 ------- ------------------ Amount: $15,000 Received on: OCTOBER 25, 2004 ------- ------------------ EX-10.1 3 doc3.txt EXHIBIT 10.1 Exhibit 10.1 ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ DOCUMENTS INCLUDED: - -------------------- 1) Confidential Settlement Agreement and Mutual Release, dated October 1, 2004 2) Promissory note payable, dated October 1, 2004 3) Lock-out Agreement, dated October 1, 2004 ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ CONFIDENTIAL SETTLEMENT AGREEMENT AND MUTUAL RELEASE ---------------------------------------------------- ATSI Communications, Inc., a Nevada corporation ("ATSI"), formerly a Delaware corporation, and Alfonso Torres Roqueni, an individual residing in Mexico City, Mexico, ("Torres") (collectively, the "Parties"), hereby enter into this Confidential Settlement Agreement and Mutual Release (the "Settlement Agreement"). RECITALS WHEREAS, the Parties are AGREED that certain relationships between and among the Parties should be ended and any and all claims or liabilities between and among them be held for naught; and WHEREAS, the Parties entered into an agreement on June 7, 2000 regarding the sale by Torres of the 3% stock and the 48% stock as defined in such Agreement; and WHEREAS, the Parties amended such Agreement on July 19, 2001; and WHEREAS, ATSI executed a Promissory Note for $357,000 on November 1, 2001; and WHEREAS, ATSI has defaulted in its obligations of the Amended Agreement and Promissory Note; and WHEREAS, all Parties wish to reach a full and final settlement of all matters and all causes and potential causes of action arising from any of their relationships with Page 1 each other, including any and all disputes or rights or potential rights between or among the Parties arising from any transactions between or among them prior to the execution date of this Agreement, and now desire to set forth their agreement in writing. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth herein, and further good and valuable consideration, the Parties hereby agree and covenant as follows: 1. PAYMENT. As consideration for all amounts owed up to and including September 30, 2004 of $1,359,500 including any and all accrued interest, ATSI shall deliver to Torres a total of 687,600 shares of ATSI's common stock post-split (the "Payment"), for $859,500 and a promissory note for $500,000 payable on October 1, 2007. The Shares will be considered issued at $1.25 per share; however, if on the Measurement Date the price per share is below $1.15, ATSI shall issue an additional 59,791 shares of ATSI's common stock; if, however, the share price is at or above $1.15 on the Measurement Date, there shall be no additional consideration paid and the amount of shares issued (687,600) shall be considered as final consideration. Measurement Date shall be defined as the arithmetic mean of the average closing prices of the Common Shares for the ten (10) trading days immediately preceding April 1, 2005. This Payment is subject to the approval of the Board of Directors whose approval shall be sought as soon as practicable. 2. RELEASE BY TORRES. In consideration of the receipt of the Payment, Torres, with the intention of binding itself, and its officers, directors, shareholder, employees, representatives, attorneys-in-fact, predecessors, successors and assigns, (the "Torres Releasing Parties") expressly releases, acquits, and discharges ATSI and its respective officers, directors, shareholders, representatives, attorneys, successors, and assigns (the "ATSI Released Parties") from all claims, demands, causes of action and potential Page 2 claims or causes of action, of whatever nature that the Torres Releasing Parties may have or claim to have against the ATSI Released Parties arising from or connected with, directly or indirectly, any and all claims the Torres Releasing Parties may have or claim to have against the ATSI Released Parties accruing before the execution date of this Release. Notwithstanding the foregoing paragraph, the ATSI Released Parties are not released from the obligations or indemnities set forth in this Settlement Agreement. 3. RELEASE BY ATSI. In further consideration of the foregoing, ATSI, with the intention of binding itself and its respective officers, directors, shareholders, employees, representatives, attorneys-in-fact, predecessors, successors, assigns, and subsidiaries (the "ATSI Releasing Parties") expressly release, acquit, and discharge Torres and its officers, directors, shareholders, representatives, attorneys, successors, and assigns, (the "Torres Released Parties") from all claims, demands, and causes of action or potential claims and causes of action of whatever nature that the ATSI Releasing Parties may have or claim to have against the Torres Released Parties arising from or connected with, directly or indirectly, any relationship or transaction between or among the Parties, as well as any and all other or potential claims that the ATSI Releasing Parties may have or claim to have against the Torres Released Parties accruing before the execution date of this Settlement Agreement. Notwithstanding the foregoing paragraph, the Torres Released Parties are not released from the obligations of this Settlement Agreement. 4. NO ADMISSION OF LIABILITY. This settlement and the Payment made hereunder do not constitute an admission of liability by any Party hereto, and liability is expressly denied by all Parties. 5. CONFIDENTIALITY. The Parties agree that they will not disclose the terms of this Settlement Agreement, unless necessary to enforce the terms of this Settlement Agreement or after receipt of judicial process or lawful discovery procedures. In the Page 3 event that any Party is served with notice to disclose such information by subpoena or otherwise, that Party agrees promptly to notify the other Parties in writing of such notice. The Party or Parties so notified in writing shall thereafter undertake the cost and obligation to maintain the propriety and confidentiality of the terms of such information. 6. NON-DISPARAGEMENT. The Parties agree to use reasonable effort not to disparage or interfere with any other Party's agreements or prospective agreements with any third party. 7. ENTIRE AGREEMENT. This Settlement Agreement contains the entire understanding and agreement of the Parties hereto with respect to the subject matters herein, and may not be amended or modified in any respect other than in a writing which specifically refers to this Settlement Agreement and which is signed by all of the Parties hereto. 8. GOVERNING LAW. This Settlement Agreement was negotiated in, and shall be governed by and construed according to, the laws of the State of Texas. In the event that any provision herein is deemed not enforceable, the remainder of this Settlement Agreement will remain unaffected. Venue for any action relating to the provisions of this Agreement shall be in Bexar County, Texas. 9. NO ASSIGNMENT. By signing this Settlement Agreement, each of the Parties represents and warrants that it has not assigned or subrogated any of its claims or potential claims, in whole or in part, to any third party. 10. MODIFICATION AND ATTORNEY'S FEES. This Settlement Agreement shall not be suspended, amended, or modified in any manner except by an instrument in writing signed by all Parties to be bound. Should it become necessary to enforce this Settlement Agreement, or any portion of it, or to declare the effect of any provision of this Settlement Agreement, the prevailing Party shall be entitled to recover costs incurred including reasonable attorney's fees. Page 4 11. INFORMED CONSENT. The Parties acknowledge that they have had the opportunity to consult with their respective attorneys regarding the meaning and effect of this Settlement Agreement, and that none of the Parties has made any representations, written or oral, upon which another Party relies in executing this Settlement Agreement. 12. COUNTERPARTS. This Settlement Agreement may be executed in multiple counterparts. A set of counterpart copies which collectively contains the signature and acknowledgment of all Parties shall constitute an original. EXECUTED by an authorized representative of ATSI Communications, Inc., a Nevada corporation, on the date written below. ATSI COMMUNICATIONS, INC. By: /S/ Arthur L. Smith ------------------- Its: PRESIDENT AND CHIEF EXECUTIVE OFFICER ------------------------------------- Date: October 1, 2004 --------------- EXECUTED by Alfonso Torres Roqueni on the date written below. ALFONSO TORRES ROQUE-I By: /s/ Alfonso Torres Roqueni -------------------------- Its: President --------- Date: October 1, 2004 --------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Page 5 PROMISSORY NOTE --------------- PRINCIPAL AMOUNT: $500,000.00 DATED: OCTOBER 1, 2004 This Promissory Note ("Note") is made and entered into as of this 1st day of October, 2004 by and between ATSI Communications, Inc., a Nevada corporation ("ATSI") with its principal place of business located at 8600 Wurzbach, Suite 700W, San Antonio, Texas, 78240 and Dr. Alfonso Torres Roque i, ("Lender") of Blvd. Miguel Avila Camacho No. 184, Piso 16, Col. Lomas de San Isidro, Mexico City, Mexico. For value received, ATSI promises to pay FIVE HUNDRED THOUSAND U.S. Dollars ($500,000) to the order of Lender at Blvd. Miguel Avila Camacho No. 184, Piso 16, Col. Lomas de San Isidro, Mexico City, Mexico, or such other location as Lender may designate in writing, on October 1, 2007. Interest shall accrue at 6% (six percent) per annum. Lender shall not impose any penalty for ATSI's pre-payment of this Note. Upon and at any time after any Default (as defined below) all amounts due under this Note, at the option of Lender and without demand, notice or legal process of any kind, may be declared and immediately shall become due and payable. "Default" shall mean the occurrence or existence of any one or more of the following events or conditions: (i) ATSI fails to pay when due any amount due under this Note and fails to cure such late payment within five (5) days following written receipt of notice of the late payment; or (ii) ATSI makes an assignment for the benefit of creditors, or any proceeding is filed or commenced by or against ATSI under any bankruptcy, reorganization, arrangement of debt insolvency, readjustment of debt or receivership law or statute, and any such proceeding remains undismissed or unstayed for a period of 30 days, or any of the actions sought in any such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, ATSI or for any substantial part of its property) shall occur, or ATSI shall take any action to authorize any of the actions set forth above in this subsection. ATSI hereby waives presentment, demand of payment, protest or notice with respect to the indebtedness evidenced by this Note including, without limitation, notice that the Note or any portion thereof, is due. If Lender prevails in any action to collect on or enforce this Note or claims arising from the execution of this Note, then Lender's reasonable attorneys' fees and costs will also be payable under this Note. Neither party may assign this Note without the prior written consent of the other, which shall not be unreasonably withheld. This Note may be modified only by a written document that refers specifically to this Note and is signed by both parties. A party's failure or delay in enforcing any provision of this Note will not be deemed a waiver of that party's rights with respect to that provision or any other Page 6 provision of this Note. A party's waiver of any of its rights under this Note is not a waiver of any of its other rights with respect to a prior, contemporaneous or future occurrence, whether similar in nature or not. This Note shall be binding upon and inure to the benefit of the successors and assigns of the parties hereto. THIS NOTE SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS, AND LENDER AGREES TO SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF TEXAS FOR ALL PURPOSES. SOLE AND EXCLUSIVE VENUE FOR ANY DISPUTE OR DISAGREEMENT ARISING UNDER OR RELATING TO THIS NOTE SHALL BE IN A COURT SITTING IN BEXAR COUNTY, SAN ANTONIO, TEXAS. MADE this 1st day of October, 2004. ATSI COMMUNICATIONS, INC. ALFONSO TORRES ROQUE I/GEORGE KAUSS By: /s/ Arthur L. Smith By: /s/Alfonso Torres Roqueni -------------------------------- ---------------------------- ARTHUR L. SMITH ALFONSO TORRES ROQUENI PRESIDENT & CEO By: /s/ George Kauss ---------------------------- GEORGE KAUSS ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Page 7 LOCK-OUT AGREEMENT ATSI Communications, Inc. October 1, 2004 8600 Wurzbach, Suite 700W San Antonio, TX 78240 Re: ATSI Communications, Inc. (the "Company") Ladies and Gentlemen: The undersigned stock holder or warrant holder hereby agrees that for a period of twelve (12) months (such period being a "Restricted Period") the undersigned may only offer to sell, contract to sell, or otherwise sell, dispose of, pledge or grant any rights with respect to (collectively, a "Disposition") up to 5,000 shares of Common Stock per calendar month or a total of 60,000 total shares, any options or warrants to purchase any shares of Common Stock or any securities convertible into or exchangeable for shares of, or enter into any hedging or derivatives transaction related to the Common Stock of the Company (collectively, "Securities") resulting from the Confidential Settlement Agreement and Mutual Release dated October 1, 2004 or hereafter acquired directly by such person or with respect to which such person has or hereafter acquires the power of disposition. The foregoing restriction has been expressly agreed to preclude the undersigned during the Restricted Period from engaging in any hedging or other transaction that is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-out Period, even if such Securities would be disposed of by someone other than such holder. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that included, relates to or derives any significant part of its value from Securities. The undersigned agrees and consents to the entry of stop transfer instructions with the Company's transfer agent and registrar against the transfer of shares of Common Stock or Securities held by the undersigned except in compliance with the foregoing restrictions. This agreement is irrevocable and will be binding on the undersigned and the respective successors, heirs, personal representatives, and assigns of the undersigned. Dated October 1, 2004 --------------- Alfonso Torres Roqueni ------------------------ Printed Name of Holder /S/ Alfonso Torres Roqueni ---------------------------- Signature George Kauss ------------ Printed Name of Person Signing /s/ George Kauss ---------------- Signature Page 8 EX-10.2 4 doc4.txt EXHIBIT 10.2 Exhibit 10.2 ------------ CONFIDENTIAL SETTLEMENT AGREEMENT AND MUTUAL RELEASE ---------------------------------------------------- ATSI Communications, Inc., a Nevada corporation ("ATSI"), formerly a Delaware corporation, and Infraestructura Espacial, S.A. de C.V., a Mexican corporation ("Infraestructura") (collectively, the "Parties"), hereby enter into this Confidential Settlement Agreement and Mutual Release (the "Settlement Agreement"). RECITALS WHEREAS, the Parties are AGREED that certain relationships between and among the Parties should be ended and any and all claims or liabilities between and among them be held for naught; and WHEREAS, ATSI executed on March 22, 2001 a Pledge Agreement with Infraestructura; and WHEREAS, ATSI executed a replacement Pledge Agreement on September 12, 2002; and WHEREAS, Infraestructura agreed to loan ATSI $250,000; and WHEREAS, ATSI failed to pay Infraestructura; and WHEREAS, Infraestructura therefore collected the security interest under such Agreement consisting of 357,104 shares of old ATSI (ATSI Delaware) treasury stock; and WHEREAS, all Parties wish to reach a full and final settlement of all matters and all causes and potential causes of action arising from any of their relationships with each other, including any and all disputes or rights or potential rights between or among the Parties arising from any transactions between or among them prior to the execution date of this Agreement, and now desire to set forth their agreement in writing. CONFIDENTIAL SETTLEMENT AGREEMENT AND MUTUAL RELEASE Page 1 NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth herein, and further good and valuable consideration, the Parties hereby agree and covenant as follows: 1. PAYMENT. As consideration for all amounts owed including any accrued interest, ATSI shall deliver to Infraestructura 30,000 shares of ATSI's common stock (Nevada) post-split (the "Payment"). This Payment is subject to the approval of the Board of Directors whose approval shall be sought as soon as practicable. 2. RELEASE BY INFRAESTRUCTURA. In consideration of the receipt of the Payment, Infraestructura, with the intention of binding itself, and its officers, directors, shareholder, employees, representatives, attorneys-in-fact, predecessors, successors and assigns, (the "Infraestructura Releasing Parties") expressly releases, acquits, and discharges ATSI and its respective officers, directors, shareholders, representatives, attorneys, successors, and assigns (the "ATSI Released Parties") from all claims, demands, causes of action and potential claims or causes of action, of whatever nature that the Infraestructura Releasing Parties may have or claim to have against the ATSI Released Parties arising from or connected with, directly or indirectly, any and all claims the Infraestructura Releasing Parties may have or claim to have against the ATSI Released Parties accruing before the execution date of this Release. Notwithstanding the foregoing paragraph, the ATSI Released Parties are not released from the obligations or indemnities set forth in this Settlement Agreement. 2. RELEASE BY ATSI. In further consideration of the foregoing, ATSI, with the intention of binding itself and its respective officers, directors, shareholders, employees, representatives, attorneys-in-fact, predecessors, successors, assigns, and subsidiaries (the "ATSI Releasing Parties") expressly release, acquit, and discharge Infraestructura and its officers, directors, shareholders, representatives, attorneys, CONFIDENTIAL SETTLEMENT AGREEMENT AND MUTUAL RELEASE Page 2 successors, and assigns, (the "Infraestructura Released Parties") from all claims, demands, and causes of action or potential claims and causes of action of whatever nature that the ATSI Releasing Parties may have or claim to have against the Infraestructura Released Parties arising from or connected with, directly or indirectly, any relationship or transaction between or among the Parties, as well as any and all other or potential claims that the ATSI Releasing Parties may have or claim to have against the Infraestructura Released Parties accruing before the execution date of this Settlement Agreement. Notwithstanding the foregoing paragraph, the Infraestructura Released Parties are not released from the obligations of this Settlement Agreement. 3. NO ADMISSION OF LIABILITY. This settlement and the Payment made hereunder do not constitute an admission of liability by any Party hereto, and liability is expressly denied by all Parties. 4. CONFIDENTIALITY. The Parties agree that they will not disclose the terms of this Settlement Agreement, unless necessary to enforce the terms of this Settlement Agreement or after receipt of judicial process or lawful discovery procedures. In the event that any Party is served with notice to disclose such information by subpoena or otherwise, that Party agrees promptly to notify the other Parties in writing of such notice. The Party or Parties so notified in writing shall thereafter undertake the cost and obligation to maintain the propriety and confidentiality of the terms of such information. 5. NON-DISPARAGEMENT. The Parties agree to use reasonable effort not to disparage or interfere with any other Party's agreements or prospective agreements with any third party. 6. ENTIRE AGREEMENT. This Settlement Agreement contains the entire understanding and agreement of the Parties hereto with respect to the subject matters herein, and may not be amended or modified in any respect other than in a writing which specifically refers to this Settlement Agreement and which is signed by all of the CONFIDENTIAL SETTLEMENT AGREEMENT AND MUTUAL RELEASE Page 3 Parties hereto. 7. GOVERNING LAW. This Settlement Agreement was negotiated in, and shall be governed by and construed according to, the laws of the State of Texas. In the event that any provision herein is deemed not enforceable, the remainder of this Settlement Agreement will remain unaffected. Venue for any action relating to the provisions of this Agreement shall be in Bexar County, Texas. 8. NO ASSIGNMENT. By signing this Settlement Agreement, each of the Parties represents and warrants that it has not assigned or subrogated any of its claims or potential claims, in whole or in part, to any third party. 9. MODIFICATION AND ATTORNEY'S FEES. This Settlement Agreement shall not be suspended, amended, or modified in any manner except by an instrument in writing signed by all Parties to be bound. Should it become necessary to enforce this Settlement Agreement, or any portion of it, or to declare the effect of any provision of this Settlement Agreement, the prevailing Party shall be entitled to recover costs incurred including reasonable attorney's fees. 10. INFORMED CONSENT. The Parties acknowledge that they have had the opportunity to consult with their respective attorneys regarding the meaning and effect of this Settlement Agreement, and that none of the Parties has made any representations, written or oral, upon which another Party relies in executing this Settlement Agreement. 11. COUNTERPARTS. This Settlement Agreement may be executed in multiple counterparts. A set of counterpart copies which collectively contains the signature and acknowledgment of all Parties shall constitute an original. EXECUTED by an authorized representative of ATSI Communications, Inc., a Nevada corporation, on the date written below. CONFIDENTIAL MUTUAL RELEASE Page 4 ATSI COMMUNICATIONS, INC. By: /s/ Arthur L. Smith ------------------- Its: President and CEO ----------------- Date: October 26, 2004 ----------------- EXECUTED by an authorized representative of Infraestructura Espacial, S.A. de C.V., a Mexican corporation, on the date written below. INFRAESTRUCTURA ESPACIAL, S.A. DE C.V. By: /s/ Tomas Revesz ---------------- Its: President and CEO ----------------- Date: October 26, 2004 ----------------- CONFIDENTIAL MUTUAL RELEASE Page 5 EX-31.1 5 doc5.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PERSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Arthur L. Smith, certify that: 1. I have reviewed this Quarterly Report on Form 10-QSB of ATSI Communications, Inc., a Nevada Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. By /s/ Arthur L. Smith Arthur L. Smith President and Chief Executive Officer December 15, 2004 EX-31.2 6 doc6.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PERSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Antonio Estrada, certify that: 1. I have reviewed this Quarterly Report on Form 10-QSB of ATSI Communications, Inc., a Nevada Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. By /s/ Antonio Estrada Antonio Estrada Corporate Controller and Chief Financial Officer December 15, 2004 EX-32.1 7 doc7.txt EXHIBIT 32.1 Exhibit 32.1 CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. ss. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of ATSI Communications, Inc. on Form 10-QSB for the period ending October 31, 2004, as filed with the Securities and Exchange Commission on the date hereof, I, Arthur L. Smith, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C, ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, 1) the Report complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) the information in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. By /s/ Arthur L. Smith Arthur L. Smith President and Chief Executive Officer December 15, 2004 EX-32.2 8 doc8.txt EXHIBIT 32.2 Exhibit 32.2 CERTIFICATION OF CORPORATE CONTROLLER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. ss. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of ATSI Communications, Inc. on Form 10-QSB for the period ending October 31, 2004, as filed with the Securities and Exchange Commission on the date hereof, I, Antonio Estrada, Corporate Controller and Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C, ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 1) the Report complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) the information in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. By /s/ Antonio Estrada Antonio Estrada Corporate Controller and Principal Financial Officer December 15, 2004 EX-99.1 9 doc9.txt EXHIBIT 99.1 EXHIBIT 99.1 JULIE PARSLEY [GRAPHIC OMITTED] COMMISSIONER PAUL HUDSON RECEIVED CHAIRMAN 04 OCT-4 PM 12:01 PUBLIC UTILITY COMMISSION BARRY T. SMITHERMAN FILING CLERK COMMISSIONER W. LANE LANFORD EXECUTIVE DIRECTOR PUBLIC UTILITY COMMISSION OF TEXAS - -------------------------------------------------------------------------------- TO: Alejandro Hinojosa, Jr. Hinotel 2759 West Business 83 Harlingen, TX. 78552 Telecommunications Division Legal and Enforcement Division RE: DOCKET NO. 30130 - APPLICATION OF HINOTEL FOR AN AMENDMENT TO ITS SERVICE PROVIDER CERTIFICATE OF OPERATING AUTHORITY NOTICE OF APPROVAL ------------------ This Notice approves the application of Hinotel (the Applicant) filed on August 27, 2004, for an amendment to its service provider certificate of operating authority (SPCOA) No. 60359(1) to reflect a change in ownership/control as well as a name change to Telefamilia Communications, Inc. The docket was processed in accordance with applicable statutes and Commission rules. The Commission provided notice of the application to interested parties. More than 15 days have passed since the completion of notice. No protests, motions to intervene, or requests for hearing were filed. The Applicant and the Commission Staff (Staff) are the only parties to the proceeding. Staff recommended approval of the application. The application is approved. - --------------- 1 Granted in Application of Hinotel, Inc. for a Service Provider Certificate of Operating Authority, Docket No 22330 (May 18, 2000); and amended in Application of Hinotel for an Amendment to its Service Provider Certificate of Operating Authority, Docket No. 23331 (Jan. 22, 2001). O PRINTED ON RECYCLED PAPER AN EQUAL OPPORTUNITY EMPLOYER 1701 N. CONGRESS AVENUE PO BOX 13326 AUSTIN, TX 78711 512/936-7000 FAX: 512/936-7003 WEB SITE: WWW.PUC.STATE.TX.US DOCKET NO. 30130 NOTICE OF APPROVAL PAGE 2 OF 6 STATUTORY FINDINGS - ------------------ 1. Telefamilia Communications, Inc. is a Texas corporation formed on April 22, 2004. 2. Telefamilia Communications, Inc.'s parent company is ATSI Communications, Inc., a Nevada corporation formed on May 24, 2004. 3. Telefamilia Communications, Inc. has no affiliates that are public utilities or that are providing telecommunications services. 4. The Applicant does not currently have authority to provide local or long distance telecommunications services in any other state. However, a now bankrupt subsidiary of the owner of Telefamilia Communications, Inc., known as American Telesource International Inc., held authorization to provide long distance services in the following states: California, Colorado, Delaware, Florida, Kansas, Louisiana, Maryland, Massachusetts, Missouri, New Hampshire, New Jersey, New York, North Carolina, Rhode Island, South Carolina, Texas, Vermont, and West Virginia. 5. All operator services certifications as shown above were revoked with the bankruptcy of American Telesource International Inc. in May 2003. 6. American Telesource International, Inc. provided interexchange long distance service in Texas, and operator services in the states shown above. DOCKET NO. 30130 NOTICE OF APPROVAL PAGE 3 OF 6 7. The Applicant requests to amend its SPCOA to reflect a change in ownership control and a name change to Telefamilia Communications, Inc. (proposed services). 8. The application complies with PURA (2) Sec. 54.154(b). 9. The Applicant is not precluded by PURA Sec.Sec. 54.201 or 54.152 from providing service under an SPCOA. 10. The Applicant is entitled to approval of this application, having demonstrated the financial and technical qualifications to provide the proposed services, and the ability to provide the necessary quality of service to its customers, as required by PURA Sec.Sec. 54.154(b) and 54.155(b). COMPLAINT HISTORY - ----------------- 11. The Office of the Texas Attorney General reported no complaints registered against the Applicant. 12. A check of the Commission's Customer Protection Division complaint database revealed no complaints registered against the Applicant or Telefamilia Communications. 13. A check of the Commission's Enforcement & Investigations database revealed no outstanding notices of violation against the Applicant or Telefamilia Communications. 14. The Applicant committed in its responses to the Commission's Service Quality Questionnaire to continue to meet the quality of service standards. DOCKET NO. 30130 NOTICE OF APPROVAL PAGE 4 OF 6 ORDERING PARAGRAPHS - ------------------- 1. The application of Hinotel to amend its facilities-based, data, and resale telecommunications service provider certificate of operating authority (SPCOA) is approved.(3) Hinotel's SPCOA No. 60359 is amended to reflect a change in ownership/control and a name change to Telefamilia Communications, Inc. 2. The Applicant shall be bound by requirements of P.U.C. SUBST. R. 26.111. Service under this certificate shall be provided exclusively in the name under which the certificate was granted by the Commission. 3. The Applicant shall file any future changes in address, contact representative, and/or telephone numbers in an annual report with the Commission by June 30th of each year using the form Annual Information Reporting Requirements for a Service Provider Certificate of Operating Authority and/or a Certificate of Operating Authority, Docket No. 27357. If the SPCOA holder has any change during the year in the information requested in Section One of the annual report form, then the SPCOA holder shall file an updated form correcting the information in Section One within 30 days of the change. 4. The Applicant shall provide a copy of its application and/or the Commission's Notice of Approval, in accordance with the individual entity's requirements, to all affected Commission on State Emergency Communications (9-1-1) entities prior to providing service to those entities. - -------------------------------------------------------------------------------- 2 The Public Utility Regulatory Act, TEX. UTIL. CODE ANN. Sec.Sec. 11.001 - 64.158 (Vernon 2000 & Supp. 2005) (PURA). 3 Administrative approval of this uncontested application has no precedential value in a future proceeding. DOCKET NO. 30130 NOTICE OF APPROVAL PAGE 5 OF 6 5. The Applicant's provision of local telephone service to end-users, whether by its own facilities, flat-rate resale, or usage sensitive loop, must also include "9-1-1" emergency telephone service at a level required by the applicable regional plan followed by local telephone service providers under Chapters 771 and 772 of the Texas Health and Safety Code, TEX. HEALTH & SAFETY CODE ANN. Sec.Sec. 771.001 et seq. (Vernon 2003) (the Code) or other applicable law, and any applicable rules and regulations implementing those chapters. The Applicant shall diligently work with the Commission on State Emergency Communications, local "9-1-1" entities, and any other agencies or entities authorized by Chapters 771 and 772 of the Code to ensure that all "9-1-1" emergency services, whether provided through the certificate holder's own facilities, flat-rate resale, or usage sensitive loop, are provided in a manner consistent with the applicable regional plan followed by local telephone service providers under Chapters 771 or 772 of the Code or other applicable law and any applicable rules and regulations implementing those chapters. The Applicant shall diligently work with the "9-1-1" entities to pursue, in good faith, the mutually agreed goal that the local "9-1-1" entities and emergency service providers experience no increase in their current level of rates and, to the extent technically feasible, no degradation in services as a result of the certification granted herein and the involvement of the certificate holder in the provision of "9-1-1" emergency service. 6. The Applicant shall notify all affected 9-1-1 administrative entities at least 30 days prior to activating or using a new NXX in a rate center or upon the commencement of providing local telephone service in any rate center in compliance with P.U.C. SUBST. R. 26.433(d)(3). 7. The Applicant shall execute a separate service agreement with each 9-1-1 entity and remit the required 9-1-1 emergency service fee to the 9-1-1 entity pursuant to such agreement in compliance with P.U.C. SUBST. R. 26.435(e)(4). DOCKET NO. 30130 NOTICE OF APPROVAL PAGE 6 OF 6 8. The Applicant has committed to and is bound by the quality of service requirements set forth in the Quality of Service Questionnaire. The underlying incumbent local exchange companies (ILECs) continue to be bound by the quality of service requirements contained in P.U.C. SUBST. R. 26.51. Approval of the SPCOA application does not expand the scope of the underlying ILEC's obligation to its own customers. 9. All other motions, requests for entry of specific findings of fact and conclusions of law, and any other requests for general or specific relief, if not expressly granted herein, are hereby denied. SIGNED AT AUSTIN, TEXAS THE 4TH DAY OF OCTOBER 2004. --- PUBLIC UTILITY COMMISSION OF TEXAS /S/ IRENE MONTELONGO ---------------------------------------------- IRENE MONTELONGO ADMINISTRATIVE LAW JUDGE POLICY DEVELOPMENT DIVISION -----END PRIVACY-ENHANCED MESSAGE-----