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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission File Number: 000-21381
TERRA TELECOMMUNICATIONS CORP.
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(Exact name of small business issuer as specified in its charter)
Nevada 84-1349551
- ------------------------------- ---------------------------------
(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1101 Brickell Avenue, Suite 200, Miami, Florida 33131
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(Address of principal executive offices including zip code)
(305) 577-9700
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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___
As of September 30, 1998, 10,000,000 shares of common stock, $.0001 par value
per share, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes__ No X
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INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Balance Sheet as of September 30,
1998 (Unaudited)........................................ 3
Consolidated Statements of Operations for the three
and nine months ended September 30, 1998 and 1997
(Unaudited)............................................. 4
Consolidated Statements of Cash Flows for nine months
ended September 30, 1998 and 1997 (Unaudited)........... 5
Notes to Unaudited Consolidated Financial Statements.... 6
ITEM 2. Management's Discussion and Analysis Or Plan of
Operations.............................................. 10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................... 17
ITEM 2. Changes in Securities........................... 17
ITEM 3. Default Upon Senior Securities.................. 17
ITEM 4. Submission of Matters to a Vote of Security
Holders......................................... 17
ITEM 5. Other Information............................... 18
ITEM 6. Exhibits and Reports on Form 8-K................ 18
SIGNATURES.............................................. 18
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TERRA TELECOMMUNICATIONS CORP.
CONSOLIDATED BALANCE SHEET
September 30,
1998
-------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 803,085
Accounts receivable, net of allowance for
doubtful accounts of $31,573 373,043
Note receivable 600,000
Capital lease receivable 230,495
Other current assets 121,857
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Total current assets 2,128,480
Property and equipment, net 4,987,525
Investments in unconsolidated affiliates at
equity, net of advances 360,954
Capital lease receivable, net of current portion 338,322
Deferred taxes 864,470
Other assets 654,485
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Total assets $9,334,236
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,401,793
Accrued expenses 128,916
Income taxes payable 110,000
Current portion of long-term debt 803,048
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Total current liabilities 2,443,757
Notes payable, net of current portion 3,590,764
Deferred taxes payable 1,421,165
Stockholders' equity:
Preferred stock, $.0001 par value, 5,000,000 shares
authorized, none issued and outstanding -
Common stock, $.0001 par value, 100,000,000 shares
authorized, 10,000,000 shares issued and outstanding 1,000
Retained earnings 2,627,290
Less notes receivable - stockholders (749,740)
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Total stockholders' equity 1,878,550
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Total liabilities and stockholders' equity $9,334,236
==========
See accompanying notes.
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TERRA TELECOMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
---------- ----------- ----------- -----------
(Pro forma) (Pro forma)
Revenues $ 212,076 $ 190,422 $ 820,066 $ 1,114,051
Costs of services 137,993 198,864 982,767 1,474,578
--------- --------- ----------- -----------
Gross profit (loss) 74,083 (8,442) (162,701) (360,527)
Selling, general and
administrative expenses 726,513 579,224 2,077,949 1,263,875
--------- --------- ----------- -----------
Operating loss (652,430) (587,666) (2,240,650) (1,624,402)
Other income (expenses):
Gain on sale of
affiliate - - 2,773,564 -
Gain on sale of
software - - 1,150,000 -
Other income 160,541 11,317 583,662 34,296
Interest income, net 25,519 1,217 53,244 3,687
Undistributed losses
from unconsolidated
affiliates (84,175) (52,410) (286,527) (158,819)
--------- --------- ----------- -----------
Total other income
(expense) 101,885 (39,876) 4,273,943 (120,836)
--------- --------- ----------- -----------
Income (loss) from
operations before
income taxes (550,545) (627,542) 2,033,293 (1,745,238)
Provision (benefit)
for income taxes -
deferred (93,653) (95,488) 353,952 (261,036)
--------- --------- ----------- -----------
Net income (loss) $(456,892) $(532,054) $ 1,679,341 $(1,484,202)
========= ========= =========== ===========
Weighted average number
of shares outstanding 1,535,326 10,000,000 1,346,154 10,000,000
--------- ---------- ----------- -----------
Net income (loss) -
per common share $ (0.30) $ (0.05) $ 1.25 $ (0.15)
--------- --------- ----------- -----------
See accompanying notes.
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TERRA TELECOMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30,
1998 1997
------------ ------------
(Pro forma)
Cash flows from operating activities:
Net income (loss) $ 1,679,341 $(1,484,202)
Adjustments to reconcile net income (loss)
to cash used in operating activities:
Depreciation and amortization 173,845 130,384
Deferred income taxes 260,097 (965,273)
Provision for doubtful accounts 31,573 -
Gain on sales of investment securities (20,858) -
Gain on sale of fixed assets (16,600) -
Gain on sale of affiliate (2,773,564) -
Gain on sale of software (1,150,000) -
Other non-cash items (22,754) (45,625)
Equity in losses from uncombined affiliates 286,527 158,819
Provision for discontinued operations 110,000 -
Changes in operating assets and liabilities,
net of effect of acquisition:
Accounts receivable (313,380) (65,540)
Prepaid expenses and other current assets (45,361) -
Other receivable - 82,124
Other assets (127,485) -
Accounts payable and accrued expenses 3,809 (1,073,306)
Income tax payable (110,000) -
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Net cash used in operating activities (2,034,810) (1,116,007)
----------- -----------
Investing activities:
Purchases of property and equipment (2,271,087) (144,162)
Purchases of certificates of deposit - 21,125
Proceeds from maturities of certificates of
deposit 114,980 -
Purchases of marketable securities - (104,153)
Proceeds from sales of investment securities 371,531 -
Proceeds from sale of fixed assets 16,600 -
Proceeds from sale of affiliate 2,173,564 -
Proceeds from sale of software 1,150,000 -
Investments in and receivables from
uncombined affiliates (493,894) -
----------- -----------
Net cash provided by (used in) investing
activities 1,061,694 (227,190)
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Financing activities:
Bank overdraft (183,786) -
Proceeds from equipment loans 1,889,942 -
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Net cash provided by financing activities 1,706,156 -
----------- -----------
Net change in cash and cash equivalents 733,040 (1,343,197)
Cash and cash equivalents and beginning of year 70,045 2,376,746
----------- -----------
Cash and cash equivalents at end of year $ 803,085 $ 1,033,549
=========== ===========
See accompanying notes.
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TERRA TELECOMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- UNAUDITED -
1. GENERAL
Organization and Basis of Presentation
On September 28, 1998, Terra Telecommunications Corp. (formerly "Cypress
Capital, Inc.") (the "Company") completed the acquisition of 100% of the
outstanding common stock of Terra Telecommunications Corp., a Florida
corporation ("Terra-Florida"), in exchange for 9,500,000 shares of the
Company's Common Stock (approximately 95% of the shares now outstanding). The
Company previous to the foregoing acquisition was a non-operating shell.
The acquisition is considered to be a capital transaction, in substance
equivalent to the issuance of stock by Terra-Florida for the net monetary
assets of Cypress Capital, Inc., accompanied by a recapitalization of
Terra-Florida. The accompanying Pro-forma Consolidated Statements of
Operations and Cash Flows for the Three and Nine Months ended September 30,
1997 have been prepared as if the acquisition had been consummated on January
1, 1997.
The Company is a facilities-based long-distance telecommunications
carrier focused on international long-distance traffic. The Company offers
telecommunications services, including direct dial "1 plus" and toll-free long
distance, calling and debit cards, international toll-free service, Internet
and Voice over Internet Services, private lines, frame relay, international
inbound service, international country to country calling services and
international call-through from selected markets.
These financial statements are unaudited and have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and Securities and Exchange Commission regulations. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such regulations. In the opinion of
management, the information contained herein reflects all adjustments
necessary to make the financial position, results of operations and cash flows
for the interim periods a fair presentation. All such adjustments are of a
normal recurring nature. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
These financial statements should be read in conjunction with the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997. The
results of operations for the interim periods shown are not necessarily
indicative of results of operations to be expected for the entire fiscal year.
Management's Assumptions and Estimates
The accompanying financial statements are prepared in conformity with
generally accepted accounting principles which require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and, disclosure of contingent assets and liabilities at the date
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of the financial statements and, the reported amounts of revenues and expense
during the reported period. The Company reviews all significant estimates
affecting the financial statements on a recurring basis and records the effect
of any necessary adjustments prior to their issuance. The actual results could
differ from those estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reference should be made to the Notes to Consolidated Financial
Statements in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, specifically Note 2, for a summary of the Company's
significant accounting policies, and Form 8K/A dated November 13, 1998,
containing the financial statements of Terra-Florida, the newly acquired
business.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
New Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 130, "REPORTING
COMPREHENSIVE INCOME," establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS No. 130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements. For the three months and nine months ended September 30,
1997 and 1998, respectively, comprehensive income is the same as net income.
SFAS No. 131, "DISCLOSURE ABOUT SEGMENTS OF A BUSINESS ENTERPRISE,"
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosures
regarding products and services, geographic areas and major customers. SFAS
No. 131 defines operating segments as components of an enterprise about which
separate financial information is available that are evaluated regularly by
the chief operating decision makers in deciding how to allocate resources and
in assessing performance. SFAS No.'s 130 and 131 are effective for financial
statements for the periods beginning after December 15, 1997 and require
comparative information for earlier years to be restated. Adoption of these
statements is not expected to have a material effect on the Company's
financial statement disclosures.
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES requires companies to recognize all derivatives contracts as either
assets or liabilities in the balance sheet and to measure them at fair value.
If certain conditions are met, a derivative may be specifically designated as
a hedge, the objective of which is to match the timing of gain or loss
recognition on the hedging derivative with the recognition of (i) the changes
in the fair value of the hedged asset or liability that are attributable to
the hedged risk or (ii) the earnings effect of the hedged forecasted
transaction. For a derivative not designated as a hedging instrument, the gain
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or loss is recognized in income in the period of change. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Historically, the Company has not entered into derivatives contracts
either to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard to have a material effect
on its financial statements.
3. LONG-TERM OBLIGATIONS
On June 30, 1998, the Company's subsidiary, World Access Communications
Corp ("WACC") entered into a network development and management agreement (the
"Network Agreement") with Cherry Communications, Inc. d/b/a Resurgens
Communications Group, Inc. ("Resurgens"), a long distance telephone service
provider. Under the Network Agreement, the Company agreed to develop and
manage for Resurgens a telecommunications network (the "Network") to eight
Latin American countries. During the six year term of the Network Agreement,
Resurgens is granted priority use of the Network. The Company is also
entitled to use the Network subject to Resurgens' priority. Resurgens is
solely responsible for billings and collections from its subscribers, has
agreed to prepay certain minimum usage amounts in advance on a weekly basis,
and has committed to purchase a minimum number of minutes from the Company at
an agreed upon price.
In order to finance the Network, Nextelcom Corp. ("NTC"), another wholly
owned subsidiary of the Company agreed to purchase from World Access, Inc.
("WAX") (an entity unrelated to the Company), a telecommunications switch and
related equipment necessary to service the Network for $2,503,870.
Additionally, WAX agreed to finance other equipment and the cost of services
necessary to complete the Network in the amount of $4,048,070. The total
amount of financing required to create the Network is covered by a secured
financing arrangement between NTC and WAX.
NTC's obligations under this financing arrangement are collateralized by
three promissory notes issued by NTC to WAX. The first of these notes, in the
amount of $2,503,870, represents the price of a Nortel switch sold to NTC by
WAX and is payable in equal monthly installments of $53,412 beginning October
1998 and ending September 2003. The note is collateralized by the equipment
purchased and has been guaranteed by WACC. The second note, in the amount of
$1,730,070, represents the cost of certain additional equipment necessary to
create the Network. The note is payable in equal monthly installments of
$53,036 beginning in October 1998 and ending in September 2001. The note is
collateralized by a pledge of all of the outstanding capital stock of NTC and
a guaranty of payment by WACC. The third note, in the amount of $2,318,000,
represents the cost of services such as leases on premises, local telephone
lines and bandwidth necessary to operate the Network. The note is payable in
equal monthly installments of $59,600 beginning October 1998 through September
2001, at which time a balloon payment of $550,000 is due. The note is
collateralized by the assignment of the Network to WAX in the event of default
and a guarantee of payment by WACC. The notes bear interest at 9.5% per
annum.
As of September 31, 1998, the first note for $2,503,870 and $1,889,942 of
the remaining two notes have been recorded as current and long-term debt in
the accompanying financial statements.
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4. NON-RECURRING ITEMS
Sale of Foreign Affiliate
On April 14, 1998, pursuant to a Stock Sale agreement, Terra-Florida sold
all the shares of its Peru affiliate, ACC de Peru, S.A., representing a 50%
stock interest in the affiliate, for $2,800,000, and recognizing a gain of
$2,773,564. The sale was payable $2,000,000 in cash at closing and a
promissory note for $800,000 payable quarterly in four equal installments at a
6% annual interest rate, with the first payment due 90 days after closing.
The sale agreement also provided for the buyer to assume any and all
liabilities including an existing switch equipment lease held between the
Company and its Peru affiliate. The equipment lease requires monthly lease
payments of $22,950 for 36 months. The promissory note and equipment lease
were discounted and collected on November 12, 1998 (see Note 5).
Sale of Proprietary Software.
On February 20, 1998, the Company entered into an agreement to sell the
source code to certain telecommunications processing software to an
unaffiliated third party. As a result of this sale, on March 2, 1998, the
Company received $1,225,000, and recorded a gain of approximately $1,150,000.
5. SUBSEQUENT EVENTS
On November 6, 1998 the Company, through a wholly owned corporation,
Terra Telecommunications Realty Corp., acquired a commercial building for
$655,000. This property was purchased from cash funds of the Company and will
become the new switching facility and headquarters for the Company. The
Company anticipates that it will move to this new premises in December 1998.
On November 12, 1998, WACC, entered into an agreement under which WACC
discounted the amounts due under a note and lease (see Note 4) by
approximately $92,000 resulting in a net payment to WACC of $824,000. This
discount will be repaid to WACC in the event that WACC and the purchaser are
able to finalize certain new business possibilities. There can be no
assurance that the new business arrangements will be consummated or that WACC
will recoup the amount of the discount, because any final agreement is subject
to numerous conditions precedent, many of which may (or not) be satisfied in
the sole discretion of either party.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
Certain statements in this Quarterly Report on Form 10-Q made herein that
are not historical are forward-looking within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements can be identified by
the use of forward-looking terminology such as "believes", "expects", "may",
"estimates", "will", "should", "plans", or "anticipates" or the negative
thereof or other variations thereon or comparable terminology, or by
discussions of strategy. These statements are based on numerous assumptions
about future conditions that could prove not to be accurate. Actual events,
transactions and results may materially differ from the anticipated events,
transactions or results described in such statements. Investors are cautioned
that all forward-looking statements are not guarantees of future performance
and that actual results could vary materially from those in the
forward-looking statements. Investors are also cautioned that forward-looking
statements involve risks and uncertainties including, without limitation,
risks related to the effectiveness of management's strategies and decisions,
market acceptance of and demand for the Company's products and services by
customers, continued relationships with and pricing dependence on third party
suppliers, economic conditions, results of financing efforts and regulatory
approvals and developments. This report identifies other factors that could
cause such differences. No assurance can be given that these are all of the
factors that could cause actual results to vary materially from the
forward-looking statements. Statements with respect to acquisitions and
continued trends are forward-looking and involve risks and uncertainties.
Furthermore, the Company's current plans call for it to create significant
operations in Latin America and the Carribean, subjecting the Company to
certain political and commercial risk. The Company undertakes no obligation
and does not intend to update, revise or otherwise publicly release the result
of any revisions to these forward-looking statements that may be made to
reflect future events or circumstances.
Summary
On September 28, 1998, the Company completed the acquisition of 100% of
the outstanding common stock of Terra Telecommunications Corp., a Florida
corporation ("Terra-Florida"), in exchange for 9,500,000 shares of the
Company's Common Stock (approximately 95% of the shares now outstanding).
Terra-Florida was formed as a holding company in 1998 to manage certain
telecommunications companies in which Terra-Florida had ownership interests.
The Company previous to the foregoing acquisition was a non-operating public
shell.
As a result of the acquisition, the Company succeeded to Terra-Florida's
business as an emerging multi-national carrier focused primarily on providing
integrated and competitively priced long-distance telecommunications services,
Internet access, and Internet Telephony services. The Company operates a
telecommunications network of switches and leased lines with interconnections
to other domestic and foreign carriers. The Company also offers discounted
international and national value-added wholesale, and enhanced
telecommunications services to small and medium-sized businesses, as well as
to residential and wholesale customers. The Company is also an Internet
Service Provider providing its customers various Internet services, including
Voice Over Internet (voice telecommunications over the Internet).
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The Company derives its revenues by providing international and domestic
long-distance services on a wholesale basis to other telecommunications
carriers and resellers. Service revenues are based on minutes of use and
charged at a rate per minute which varies according to the termination point
of the traffic and time of day. All revenues are billed in United States
dollars.
The Company also has an investment interest in various internationally
based joint ventures through which it is beginning to sell various services in
certain countries in Latin America and the Carribean. None of these joint
ventures on an individual basis currently contributes a material portion of
the Company's revenues.
The Company, prior to the Terra-Florida acquisition, had no revenues for
the nine months ended September 30, 1997. The following compares the revenues
of Terra-Florida and the predecessor company for the 1997 periods indicated on
a pro forma basis as if the acquisition occurred at the beginning of 1997. The
acquisition was considered to be a capital transaction, in substance
equivalent to the issuance of stock by Terra-Florida for the net monetary
assets of Cypress Capital, the predecessor company.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES. Revenues increased 11% or $21,654, from $190,422 in the third
quarter of 1997, to $212,076 in the third quarter of 1998. The increase is
principally due to the Company's increasing emphasis on wholesale sales to
carriers.
COSTS OF SERVICES. Costs of services decreased 31%, or $60,871, from
$198,864 in the third quarter of 1997, to $137,993 in the third quarter of
1998. Costs of services decreased because, due to increasing experience in the
international arena, the Company was successful in negotiating more favorable
rates from vendors.
GROSS PROFIT. Gross profit increased 978%, or $82,525, from negative
$8,442 in the third quarter of 1997, to positive $74,083 in the third quarter
of 1998. As a percentage of revenues, gross profit increased from
approximately negative 4% in the third quarter of 1997 to approximately
positive 35% in the third quarter of 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased 25%, or $147,289, from $579,224 in the
third quarter of 1997, to $726,513 in the third quarter of 1998. This increase
was due primarily to increased personnel and professional expenses. The
expenses incurred reflect the demands of the Company's expansion, an increase
in the volume and sophistication of corporate transactions, and the Company's
ongoing efforts to raise additional capital for its proposed expansion.
OTHER INCOME (EXPENSE). Other income increased by 355% or $141,761 from
a net other expense of $39,876 in the third quarter of 1997, to net other
income of $101,885 in the third quarter of 1998, due to the Company's more
effective auditing procedures for its supplier's invoices which resulted in
the discovery of substantial billing errors and overcharges, the amounts of
which were settled with the carriers and credited to the Company.
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DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 50%, or $17,554, from $34,946 in the third quarter of 1997, to
$52,500 in the third quarter of 1998. This increased expense is principally
due to the depreciation of assets acquired by the Company to support continued
expansion of the Company's network.
NET LOSS. Net loss decreased 14%, or $75,162 from a net loss of $532,054
in the third quarter of 1997, to $456,892 in the third quarter of 1998, due to
the above factors.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES. Revenues decreased 26%, or $293,985, from $1,114,051 in the
third quarter of 1997, to $820,066 in the third quarter of 1998. The decrease
is principally due to the Company's change in emphasis from international
call-back sales to the commencement of volume sales to carriers through the
Company's network. An additional contributing factor to the decline in
revenues was a decrease in revenues resulting from the uncertainties of global
markets.
COSTS OF SERVICES. Costs of services decreased 33%, or $491,811, from
$1,474,578 in the third quarter of 1997, to $982,767 in the third quarter of
1998. Costs of services decreased because, due to increasing experience in the
international arena, the Company was successful in negotiating more favorable
rates from vendors.
GROSS PROFIT (LOSS). Gross loss decreased 55%, or $197,826, from negative
$360,527 in the third quarter of 1997, to negative $162,701 in the third
quarter of 1998. As a percentage of revenues, gross loss decreased from
approximately negative 34% in the third quarter of 1997 to approximately
negative 19% in the third quarter of 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased 64%, or $814,074, from $1,263,875 in the
third quarter of 1997, to $2,077,949 in the third quarter of 1998. This
increase was due primarily to increased personnel and professional expenses.
The expenses incurred reflect the demands of the Company's expansion, an
increase in the volume and sophistication of corporate transactions, and the
Company's ongoing efforts to raise additional capital for its proposed
expansion.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 64%, or $67,948, from $105,897 in the third quarter of 1997, to
$173,845 in the third quarter of 1998. This increased expense is principally
due to the depreciation of assets acquired by the Company to support continued
expansion of the Company's network.
INTEREST EXPENSE. As of September 30, 1998, except with respect to the
various notes incurred by the Company in connection with the Resurgens Network
Management Agreement (which notes do not become payable until November, 1998),
the Company had no material long or short term capital leases or borrowings.
The Company is working to develop additional sources of working capital to
expand its operations. There can be no assurance that any such sources of
working capital will become available, or if available will be available upon
terms acceptable to the Company.
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OTHER INCOME (EXPENSE). Other income increased by 3637% or $4,394,779
from a net other expense of $120,836 in the third quarter of 1997, to net
other income of $4,273,943 in the third quarter of 1998, due to sales of
certain of the Company's assets. Specifically, In February 1998, the Company
sold the source code to certain telecommunications processing software to an
unaffiliated third party at a gain of approximately $1,150,000. Additionally,
in April 1998 the Company sold all the shares of its Peru affiliate, ACC de
Peru, S.A., representing a 50% stock interest in the affiliate at a gain of
$2,773,564. Finally, due to the Company's more effective auditing procedures
for its supplier's invoices which resulted in the discovery of substantial
billing errors and overcharges, the amounts of which were settled with the
carriers and credited to the Company in an approximate amount of $546,000.
NET INCOME (LOSS). Net income increased 213% or $3.16 million, from a
loss of $1.48 million in the third quarter of 1997, to income of $1.68 million
in the third quarter of 1998, due to the above factors.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was $2,034,810 for the nine months
ended September 30, 1998, as compared to $1,116,007 for the nine months ended
September 30, 1997. The increase in net cash used by operations in 1998 as
compared to 1997 was due primarily to the increase in cash required to fund
the expansion of the Company's operations, including the purchase of
substantial additional equipment and the employment of additional personnel
required to implement and begin deployment of an international
telecommunications system. Additional factors impacting the increased cash
use in 1998 as compared to 1997 were professional expenses and payment of
carrier invoices.
Net cash provided by investing activities was $1,061,694 for the nine
months ended September 30, 1998, as compared to net cash of $(227,190) used in
investing activities for the nine months ended September 30, 1997. In the
nine months ended September 30, 1998, the Company expended approximately $2.3
million on the purchase of computer and telecommunications equipment and
$500,000 in investments in affiliates as part of the company's network
expansion strategy, as compared to $144,000 in investing activities for the
nine months ended September 30, 1997. In the nine months ended September 30,
1998, the Company received proceeds of $3.3 million from the sales of an
affiliate and software, and $371,000 from the sale of investment securities.
Net cash provided by financing activities was $1,706,156 for the nine
months ended September 30, 1998. A significant amount of these borrowings
related to the equipment financing arrangements necessary to create the
Company's international telecommunications system. The Company had no
financing activities for the nine months ended September 30, 1997.
As of September 30, 1998, the company had cash and cash equivalents of
approximately $803,000 and negative working capital of $315,000. Included in
working capital is $803,000 of the current portion of long-term debt and $1.4
million in accounts payable related primarily to the Company's purchases of
equipment for the Company's Network expansion and operations.
In the first three quarters of 1998, the Company continued to use working
capital to purchase additional equipment necessary to the expansion of the
Company's facilities and capacity. During this period, the Company also used
working capital to fund the creation of joint ventures in Latin America and
the Caribbean.
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SOURCES OF CAPITAL
In the third quarter of 1998, the Company financed the purchase of $6.9
million of equipment by entering into three notes with the seller, another
telecommunications company with which the Company has also entered into
agreements for the development of a telecommunications network in eight South
American countries. These notes provide for monthly payments of principal and
interest of approximately $167,000 including principal and interest, through
2003. These notes are secured by the financed equipment as well as by pledges
of securities of various of the Company's subsidiaries. The Company has
available under these financing arrangements approximately $2.0 million in
additional funding, all of which is committed to the purchase of additional
equipment and start-up expenses related to the continuing implementation of
the Company's international telecommunications network.
The development and expansion of the Company's network facilities,
including construction of the Company's international telecommunications
network, together with acquisitions and joint ventures to enter into new
markets or expand in existing markets, funding of working capital needs and
investment in the Company's management information systems will require
significant additional investment. The Company is currently negotiating with
investment bankers and other lenders to obtain additional funding to provide
the Company with sufficient capital to fund planned capital expenditures.
There can be no assurance, however, that the Company will consummate any
particular financing. If the Company is unable to raise additional funds,
there can be no assurance that the Company's business strategy will be
successful. There can also be no assurance that the Company will not need
additional financing sooner than anticipated. The need for additional
financing will depend on factors such as the rate and extent of the Company's
international expansion, increased expenditures for equipment and for
personnel necessary for the Company's development, development of the
Company's foreign joint venture operations, and increased sales and marketing
expenses. Also, the amount of the Company's actual future capital requirements
will depend upon many factors that are not within the Company's control,
including competitive conditions (particularly with respect to the Company's
ability to attract incremental traffic or acquire new operations at favorable
prices) and regulatory or other government actions. In the event that the
Company's plans or assumptions change or prove to be inaccurate or the net
proceeds of available financing, together with internally generated funds,
prove to be insufficient to fund the Company's growth and operations, then
some or all of the Company's operations and/or development and expansion plans
could be curtailed, delayed, or abandoned.
UNCERTAINTIES
The Company continues to face many risks and uncertainties, including
general and specific market economic risks. The exploitation of the
opportunities presented by the Company's foreign operations and the completion
of the System being developed for Resurgens will require substantial capital.
In the event that Resurgens fails to comply with its agreements under the
Resurgens contract, and the Company is unable to obtain a substitute purchaser
for its services, the Company would have to fund the resulting shortfall from
its working capital. The result of this funding would reduce the funds
available to finance and expand the Company's strategy to compete in the
international long distance services business. Also, any economic, political
or other crisis in any of the Company's principal markets could result in a
curtailment of revenues available to the Company.
14
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The international long distance market, although large and rapidly
growing, is also very competitive. The Company generates a significant amount
of its revenues from providing international long distance services.
Additionally, the Company's plans call for the Company to deploy significant
assets in Latin America and the Carribean. The Company will continue to
compete in this market with companies that have greater experience and
substantially greater resources, both financial and otherwise. In addition,
the Company faces certain additional risks in competing in this market,
including changes in U.S. and foreign government regulations and
telecommunications standards, dependence on strategic partners, tariffs, taxes
and other trade barriers, the potential for nationalization and economic
downturns and political instability in foreign countries. The Company will be
increasingly exposed to these risks as the Company expands its presence in
this market and in foreign countries.
The Company's operations and growth in this business is dependent on its
ability to expand its capacity through investments in additional facilities or
entering into termination arrangements with other carriers. There can be no
assurance that the Company will be successful in raising the capital required
to fund the additional facilities or to enter into such arrangements with
other carriers, in which case the Company's operations, the future growth in
this business and the ability to compete effectively against competitors with
significantly more resources could be materially adversely affected.
FOREIGN CURRENCY RISK
The general economic conditions of all of Latin America and the Carribean
(the Company's principal markets) are greatly affected by the fluctuations in
exchange rates and inflation. The Company's foreign currency risk is mitigated
to some extent due to the fact that many of the Company's customers are
multinational firms that transact and pay in U.S. dollars. However, as the
Company expects to generate increasing amounts of its revenues from foreign
operations, the Company will be forced to transact business in the local
currency and will therefore be subject to foreign currency risk with respect
to these transactions. The Company may choose to limit its exposure to foreign
currency risk through the purchase of forward foreign exchange contracts or
similar hedging strategies. There can be no assurance that any foreign
currency hedging strategy would be successful in avoiding exchange-related
losses.
YEAR 2000 ("Y2K") COMPLIANCE
The Company has reviewed its operating equipment and applications
software to determine its exposure to any Y2K disruptions. The operating
equipment includes:
1. the telephone switching hardware;
2. the computers that run the Company's VoIP (Voice over Internet
Protocol) traffic and the connection to the Internet;
3. the backup equipment (uninterrupted power supplies, redundant
components, etc.); and
4. the computer systems used to operate the business applications.
15
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The applications software includes:
1. the customer billing software package, generated from the original
call detail records, which the Company installed in September of
1998;
2. the accounting software package, which encompasses the general
ledger, accounts payable and receivable, fixed asset, etc.; and
3. all office automation package software, from word processing through
project management, the Company strives to use the latest version of
commercially available packages.
In the opinion of senior management, all significant Y2K issues have been
addressed and resolved with respect to the operating equipment and
applications software. To better respond to the Y2K issues, the Company has
changed its current telephone switching processor in favor of a newer
architecture Nortel DMS switch which is expected to be available in January
1999.
The Company may be vulnerable to the failure of its customers to be Y2K
compliant, which may adversely affect their ability to pay their bills on
time. Although the Company fully expects to be Y2K complaint with regards to
its internal operating equipment and applications software, the failure of any
of the Company's significant suppliers or customers to correct a material Y2K
problem could result in an interruption of service or normal business
activities. Due to the general uncertainty pertaining to the Y2K problem, and
the ability of vendors and customers to ready themselves, the Company is
unable to determine at this time whether the consequences of a failure related
to Y2K problems will have a material adverse impact on the Company.
16
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
World Access Communications Corp. ("WACC"), a subsidiary of the Company,
has sued Boston Communications Inc. ("Boston") for failing to provide support
and maintenance for pre-paid cellular switching platforms sold to WACC and for
interfering with a contract between WACC and one of its customers. Boston has
countersued for approximately $400 Thousand it claims it is due with respect
to the equipment sale. The case is pending in the U.S. District Court for the
Southern District of Florida. WACC believes that it has complied in all
respects with the equipment purchase contract and that the amounts claimed by
Boston are not yet due. This matter is presently in the initial stages of
discovery. Consequently, the Company cannot yet make an analysis of any
liability WACC may be subject to thereunder, if any.
Telecommunications Services, Inc. ("TSI"), a subsidiary of the Company,
has been sued by, and has countersued, Advanced Telecommunications Corp. and
Transcall America, Inc. ("ATC"). The case was formerly pending in Dade County
Florida Circuit Court, and has been referred to the Florida Public Service
Commission ("FPSC") for resolution of various matters. The FPSC held
commission hearings in the matter on November 3, 1998, but has not yet issued
its written ruling. ATC is seeking from TSI the amount of $640 Thousand, plus
interest. In its counterclaim, TSI asserts errors in connection with billing
by ATC that could reduce, expunge, or exceed the amount allegedly owed, along
with damages for lost profits for wrongful termination of services by ATC and
Transcall. An audit by a C.P.A. retained by TSI indicates that a credit of
approximately $470 Thousand plus interest is due. An audit performed by a
C.P.A. within the FPSC indicates that a credit of approximately $139,000 is
due. In the event of an adverse ruling, TSI has the right either to file an
immediate appeal to the Florida First District Court of Appeal or to continue
the case in the Circuit Court with respect to its counterclaim. The Company
is currently evaluating TSI's options in this matter. The Company does not
believe that an adverse ruling would have a material adverse effect on the
Company's operations because TSI is a non-operating entity without assets and
is not involved in any of the Company's businesses.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On September 28, 1998, the Company issued 9,500,000 shares of its common
stock to the two shareholders of Terra Telecommunications Corp. ("Terra-
Florida") in connection with the acquisition of 100% of the outstanding shares
of Terra-Florida. The two shareholders of Terra-Florida are also officers and
directors of Terra-Florida and they participated in the negotiations of the
transaction and they executed the Agreement with the Company and in the
Agreement they represented that they were purchasing the shares for investment
only and not for the purpose of resale or distribution. The appropriate
restrictive legend was placed on the certificates and stop transfer orders
were issued to the transfer agent. The Company relied on the exemption
provided by Section 4(2).
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
17
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ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
27.1 Financial Data Schedule for the Filed electronically
quarterly period ended September 30, herewith
1998
(b) REPORTS ON FORM 8-K. On September 28, 1998, the Company filed form
8-K (amended by form 8-K/A filed on November 13, 1998), which reported on
Items 1, 2 and 7. In the Form 8-K, the Company announced the acquisition of
all of the issued and outstanding common stock of Terra-Florida in exchange
for shares of the Company's Common Stock. The acquisition of Terra-Florida
(accounting acquirer) by the Company (nonoperating shell) is considered in
substance to be a capital transaction and is accounted for in a manner similar
to a reverse acquisition.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Miami, State of
Florida, on the 20th of November, 1998.
TERRA TELECOMMUNICATIONS CORP.
(Registrant)
By:/s/ Joel Esquenazi
Joel Esquenazi, President and
Chief Executive Officer
By:/s/ David C. Langle
David C. Langle, Principal Financial
and Accounting Officer
18
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
27.1 Financial Data Schedule for the quarterly Filed electronically
period ended September 30, 1998. herewith
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheet and statements of operations found on pages 3 and 4 of the
Company's Form 10-QSB for the year to date, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 803,085
<SECURITIES> 0
<RECEIVABLES> 1,203,538
<ALLOWANCES> (31,573)
<INVENTORY> 0
<CURRENT-ASSETS> 2,128,480
<PP&E> 4,987,525
<DEPRECIATION> (573,509)
<TOTAL-ASSETS> 9,334,236
<CURRENT-LIABILITIES> 2,443,757
<BONDS> 0
0
0
<COMMON> 1,000
<OTHER-SE> 1,877,550
<TOTAL-LIABILITY-AND-EQUITY> 9,334,236
<SALES> 820,066
<TOTAL-REVENUES> 820,066
<CGS> 982,767
<TOTAL-COSTS> 982,767
<OTHER-EXPENSES> 2,077,949
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,033,293
<INCOME-TAX> 353,952
<INCOME-CONTINUING> 1,679,341
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,679,341
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 0
</TABLE>
