<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 8, 1998
REGISTRATION NO. 333-46197
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
URSUS TELECOM CORPORATION
(Exact Name Of Registrant As Specified In Its Charter)
<TABLE>
<S> <C> <C>
FLORIDA 4825 65-0398306
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
------------------------
440 SAWGRASS CORPORATE PARKWAY
SUITE 112
SUNRISE, FLORIDA 33325
(954) 846-7887
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------------
LUCA M. GIUSSANI
PRESIDENT AND CEO
URSUS TELECOM CORPORATION
440 SAWGRASS CORPORATE PARKWAY
SUITE 112
SUNRISE, FLORIDA 33325
(954) 846-7887
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
JAMES R. TANENBAUM, ESQ. RALPH V. DE MARTINO, ESQ.
M. ST. JOHN DAUGHERTY, ESQ. NEIL R.E. CARR, ESQ.
STROOCK & STROOCK & LAVAN LLP DE MARTINO FINKELSTEIN ROSEN & VIRGA
200 SOUTH BISCAYNE BOULEVARD, 1818 N STREET, N.W.,
33RD FLOOR SUITE 400
MIAMI, FLORIDA 33131-2385 WASHINGTON, DC 20036-2492
(305) 789-9384 (202) 659-0494
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended ("Securities Act"), check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8 OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8, MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 8, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
[URSUS LOGO]
1,500,000 SHARES
URSUS TELECOM CORPORATION
COMMON STOCK
------------------
Ursus Telecom Corporation ("Ursus" or the "Company") is hereby offering (the
"Offering") 1,500,000 shares of common stock, par value $.01 per share (the
"Common Stock"). Prior to the Offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price (the "Offering Price") will be between $9.00 and $11.00 per
share. See "Underwriting" for a discussion of the factors considered in
determining the Offering Price. Application has been made for quotation of the
Common Stock on the Nasdaq National Market under the symbol "UTCC."
An additional 200,000 shares of Common Stock are being registered herewith
on behalf of certain shareholders of the Company (the "Registering
Shareholders"). These shares are subject to a holdback agreement with Joseph
Charles & Associates, Inc. (the "Representative") and may not be sold by the
Registering Shareholders without the consent of the Representative until 12
months after the date of this Prospectus. See "Principal and Registering
Shareholders" and "Underwriting." The Company will not receive any of the
proceeds of the sale of shares of Common Stock by the Registering Shareholders.
The Company is paying all costs incurred in the registration of shares of Common
Stock.
--------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1)(2) COMPANY(3)(4)
<S> <C> <C> <C>
Per Share.......................................... $ $ $
Total(3)........................................... $ $ $
</TABLE>
(1) Does not include additional compensation to be paid to the Representative in
the form of: (a) warrants to purchase an aggregate of 150,000 shares of
Common Stock (the "Representative's Warrants") at a price of $ per
share exercisable over four years, commencing one year from the date of this
Prospectus, (b) a 3% non-accountable expense allowance ($50,000 of which has
been advanced) and (c) a consulting agreement for a period of twenty-four
months for an aggregate consideration of $72,000 payable on the closing of
the Offering.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(3) Before deducting expenses of the Offering payable by the Company estimated
to be $ .
(4) The Company has granted the Underwriters a 45-day option ("Over-Allotment
Option") to purchase up to 225,000 additional shares of Common Stock, on the
same terms and conditions as set forth above, solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."
--------------------------
The shares of Common Stock are being offered, subject to prior sale, when,
as, and if delivered to and accepted by the several Underwriters and subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters reserve the right to withdraw, cancel or modify the offering
and to reject any order in whole or in part. It is expected that delivery of
certificates therefor will be made at the offices of the Representative, in
Beverly Hills, California or through the facilities of The Depository Trust
Company on or about , 1998.
--------------------------
JOSEPH CHARLES & ASSOCIATES, INC.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET
PRICE, PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN
THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY
BIDS. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL EVENTS OR RESULTS MAY DIFFER SIGNIFICANTLY FROM THE EVENTS
OR RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE SET FORTH IN "RISK
FACTORS" AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS
SHOULD CONSIDER CAREFULLY THE INFORMATION SET FORTH UNDER "RISK FACTORS." EXCEPT
AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES (I) THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION AND THE REPRESENTATIVE'S WARRANTS ARE NOT
EXERCISED, AND (II) THE CONSUMMATION OF THE SPLIT (THE "STOCK SPLIT") OF FOUR
SHARES OF THE COMPANY'S CLASS A COMMON STOCK INTO 3,692.32 SHARES OF COMMON
STOCK AND ONE SHARE OF SERIES A PREFERRED STOCK, FOUR SHARES OF THE COMPANY'S
CLASS B STOCK INTO 3,692.32 SHARES OF COMMON STOCK AND ONE SHARE OF SERIES A
PREFERRED STOCK, AND OF EACH SHARE OF ITS CLASS C COMMON STOCK INTO 923.08
SHARES OF COMMON STOCK, WHICH WAS APPROVED ON FEBRUARY 12, 1998. TECHNICAL TERMS
AND ACRONYMS USED IN THIS PROSPECTUS ARE DEFINED IN THE "GLOSSARY OF TERMS."
THE COMPANY
Ursus is an international telecommunications company that exploits favorable
market niches by providing competitive and technologically advanced
telecommunications services. The Company focuses on small and medium-sized
businesses located in emerging or deregulating markets, including South Africa,
Latin America, the Middle East (primarily Lebanon and Egypt), Russia and France.
The Company serves these markets through a network of independent exclusive
agents. The Company believes that it derives a significant competitive advantage
from this exclusive agent network. Each agent provides marketing, customer
support, billing and collections, in local language and time, utilizing a
proprietary turn-key agent support system developed and provided by the Company.
Each agent is supplied near real time data for customer management, usage
analysis and billing from the Company's local and wide area network. Through its
agent network, the Company develops and maintains close relationships with
vendors of telephone systems such as Siemens, Plessey, AT&T, Northern Telecom
and Alcatel in key markets in order to promote the Ursus line of
telecommunications services, allowing the Company to offer competitively priced
and value added services that compare favorably to the pricing and service
offerings of the local incumbent telecommunication operators ("ITOs").
Ursus has traditionally entered a particular market using call
reorigination, a system that provides the Company's overseas customers the
opportunity to access a U.S.-based switching center by means of a manual or
transparent automated dialing procedure, or other methods that provide a U.S.
dial tone to its foreign customers. Call reorigination provides a customer with
the convenience and rate economies provided by a U.S. dial tone, as opposed to
locally imposed international rates, which may be substantially higher. The
Company derives approximately 76% of its revenues from call reorigination. In
order to remain price competitive and to mitigate the high proportion of
variable costs per minute associated with call reorigination, the Company plans
to expand its direct access services by locating switching platforms at network
centers of major telecommunications providers, such as MCI WorldCom, Cable and
Wireless and France Telecom, and by deploying smaller network access nodes in
less populated service areas. This network topology, which the Company will
first use in France, provides subscribers with direct access service for voice
and fax. Ultimately, where regulatory conditions are favorable and calling
volumes are adequate to cover the associated fixed costs, the Company intends to
migrate some of its customers from call reorigination to direct access service.
Ursus plans to expand by increasing sales to existing customers; by
expanding the business generated by its existing agents; by providing wholesale
services to other carriers; and through selected acquisitions. Except as
disclosed herein, Ursus is not currently engaged in any negotiations to acquire
any business. See "Business--Purchase of Equity Interest in South African Agent"
and "Business--Formation of French Subsidiary." The Company believes that its
proprietary enterprise software system provides an efficient infrastructure for
back room processing, giving it a strategic advantage over its competitors. The
Company's computerized back office systems handle traditionally labor intensive
processing tasks such as call rating, customer registration, billing and network
management, with a high degree of efficiency and short
3
<PAGE>
turn-around time. Management believes that these efficiencies would facilitate
the rapid and economical consolidation of acquired competitors.
The Company operates a digital, switch-based telecommunications network (the
"Network") from its technical facilities in Sunrise, Florida, and, using a
hybrid network of Internet, Intranet and circuit-based facilities, plans to use
a portion of the Offering proceeds to expand its primary digital switching
platform and secondary network access nodes, thereby expanding its services in
what the Company believes is a reliable, flexible and cost-effective manner. The
Company also plans to exploit its market penetration and technological
sophistication through the application of Internet Protocol ("IP") telephony
technology, particularly for fax transmissions. Faxing represents a large
portion of the overall international telecommunications business, and IP faxing
offers significant cost savings and favorable regulatory treatment. IP telephony
creates the opportunity to bypass the switched telephone network by using
cost-effective packet switched networks such as private Intranets and/or the
public Internet for the delivery of fax and voice communications. To exploit
these opportunities and to further reduce its costs, the Company plans to use a
portion of the Offering proceeds to establish a hybrid network for IP fax and
voice services. The Company believes this application could increase the gross
margins of its existing and future retail business and allow it to accelerate
its growth strategy.
The Company expects that call reorigination will continue to serve as a low
cost and profitable method of opening new markets and expects to continue this
method of business development in certain regulated markets in Africa, the
Middle East, Europe and Asia. Reoriginating a U.S. dial tone requires little
investment in equipment and limited capital deployment in a foreign territory,
thus allowing the Company to develop a viable customer base by effectively
exploiting the difference between the local International Direct Dial ("IDD")
rate and the generally more favorable rates the Company enjoys in the U.S. The
Company has successfully used this strategy to develop foreign markets, thereby
creating a revenue stream with little more than marketing and incremental call
costs. In addition, using IP telephony technology, concurrently with call
reorigination, could significantly improve the profitability of this business
segment, without requiring the substantial investments in switches of a direct
access network. Accordingly, the Company's strategy is to deploy IP telephony
technology where feasible in order to create a hybrid network capable of
carrying significant amounts of customer traffic on a low cost platform with a
modest initial capital investment. This strategy mitigates the risk that the
Company will not attain, in some of its markets, the critical mass of business
required to amortize the fixed costs of a direct access network and affords the
Company the opportunity to develop a market with a relatively small financial
risk.
In summary, the Company intends to become a significant provider of
international telecommunications services within emerging and deregulating
markets. The Company intends to maximize its profit potential by leveraging its
existing infrastructure, market penetration, expanding customer base and growing
U.S. wholesale business. By using its independent agent network, efficient back
office systems, and favorable vendor relationships with some of the major U.S.
telecommunications carriers, the Company believes it can gain strategic
advantages while capitalizing on the opportunities presented by deregulation and
technological advances in the global telecommunications industry.
Ursus provides an array of basic and value added services to its customers,
which include:
- long distance international telephone services
- direct dial access for corporate customers
- dedicated access for high volume users
- calling cards
- abbreviated dialing
- international fax store and forward
4
<PAGE>
- switched Internet services
- itemized and multicurrency billing
- follow me calling
- enhanced call management and reporting services
The Company's growth strategy has increased revenues from $13.2 million to
$20.8 million in the fiscal years ended March 31, 1996 and March 31, 1997,
respectively; and from $15.0 million to $21.0 million in the nine months ended
December 31, 1996 and December 31, 1997, respectively. The Company's pretax
profits have grown from $1.3 million in the fiscal year ended March 31, 1996 to
$2.0 million in the fiscal year ended March 31, 1997, while remaining relatively
flat at $1.4 million for the nine months ended December 31, 1997 compared to the
nine months ended December 31, 1996.
The Company is a Florida corporation that was formed in March 1993. The
Company's principal executive offices are located at 440 Sawgrass Corporate
Parkway, Suite 112, Sunrise, Florida 33325, and its telephone number is (954)
846-7887.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company(1)....... 1,500,000 shares
Common Stock to be outstanding after the
Offering(2)................................ 6,500,000 shares
Use of Proceeds(3)........................... The estimated net proceeds of the Offering of
approximately $13 million will be used: (i)
to acquire businesses operating in the same
industry segment as the Company; (ii) to
acquire equity interests in the Company's
existing independent sales agents; (iii) to
expand the Network by acquiring switches and
other equipment and facilities; and (iv) for
general working capital purposes. See "Use of
Proceeds."
Nasdaq National Market Symbol................ "UTCC"
Risk Factors................................. Prospective investors should carefully
consider all of the information set forth in
this Prospectus, and, particularly, should
consider the factors set forth in "Risk
Factors."
</TABLE>
- ------------------------
(1) Does not include (a) 200,000 shares of Common Stock offered for sale by the
Registering Shareholders which are subject to a holdback agreement between
each of the Registering Shareholders and the Representative and are not
being offered on an underwritten basis and may not be sold by the
Registering Shareholders without the consent of the Representative, until 12
months after the date of this Prospectus, (b) an additional 225,000 shares
of Common Stock which may be offered pursuant to the Over-Allotment Option
and (c) an additional 150,000 shares of Common Stock issuable upon exercise
of the Representative's Warrants. See "Principal and Registering
Shareholders" and "Underwriting."
(2) Excludes approximately 425,000 shares of Common Stock subject to options to
be granted to certain of the Company's directors, officers and employees
upon the consummation of the Offering at an exercise price equal to the
Offering Price. See "Management--Stock Incentive Plan" and "Shares Eligible
for Future Sale."
(3) If the Underwriters exercise their Over-Allotment Option in full, the net
proceeds to the Company from the sale of the 225,000 shares of Common Stock
offered pursuant to the Underwriters' Over-Allotment Option are estimated to
be $2,000,000, after deducting the underwriting discount and commissions,
the Underwriters' non-accountable expense allowance and estimated expenses
and assuming an Offering Price of $10.00 per share (the midpoint of the
estimated range for the Offering Price).
6
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth certain summary financial information for the
Company for (i) the fiscal years ended March 31, 1995, 1996 and 1997, which have
been derived from the Company's audited financial statements and notes thereto
included elsewhere in this Prospectus, (ii) the fiscal year ended March 31,
1994, which have been derived from unaudited financial statements of the Company
which are not included herein and (iii) the nine months ended December 31, 1996
and 1997, which have been derived from unaudited financial statements of the
Company which are included herein. In the opinion of management, the unaudited
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments, which consist only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and the results of operations for these periods. The results of
operations for the nine months ended December 31, 1997 are not necessarily
indicative of the results which may be expected for the full year. The following
financial information should be read in conjunction with "Selected Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Company's financial statements and notes thereto
appearing elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1996 1997
--------- --------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA AND OTHER OPERATING
DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Retail.......................................... $ 848 $ 6,291 $ 13,228 $ 20,523 $ 14,988 $ 18,421
Wholesale....................................... -- -- -- 315 -- 2,608
--------- --------- --------- --------- --------- ---------
Total revenues................................ $ 848 $ 6,291 $ 13,228 $ 20,838 $ 14,988 $ 21,029
Gross profit...................................... $ 344 $ 2,544 $ 5,553 $ 8,643 $ 6,412 $ 7,240
Operating income (loss)........................... $ (814) $ 159 $ 1,369 $ 2,004 $ 1,488 $ 1,414
Net income (loss)................................. $ (813) $ 382 $ 790 $ 1,253 $ 910 $ 890
Pro forma net income (loss) per share--basic and
dilutive (1).................................... $ (.18) $ .08 $ .16 $ .25 $ .18 $ .18
Weighted average shares outstanding (1)........... 4,615 4,869 5,000 5,000 5,000 5,000
OTHER OPERATING DATA (AT END OF PERIOD):
Retail customers (2).............................. 833 4,456 9,791 15,729 14,408 29,048
Wholesale customers (3)........................... -- -- -- 1 -- 3
Number of employees............................... 9 10 12 17 17 21
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF MARCH 31 DECEMBER 31, 1997
------------------------------------------ -------------------------
<S> <C> <C> <C> <C> <C> <C>
AS ADJUSTED
1994 1995 1996 1997 ACTUAL (4)
--------- --------- --------- --------- --------- --------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total current assets............................. $ 381 $ 1,273 $ 2,363 $ 4,578 $ 5,647 $ 18,683
Working capital (deficiency)..................... (129) 150 811 1,658 1,442 14,478
Total assets..................................... 683 1,720 2,797 5,243 7,042 19,907
Total current liabilities........................ 510 1,122 1,552 2,920 4,205 4,205
Long term debt, less current portion............. 729 730 580 425 -- --
Total shareholders' equity (capital
deficiency).................................... (563) (162) 609 1,861 2,771 15,771
</TABLE>
- ------------------------
(1) Pro forma net income (loss) per common share--basic and dilutive, is
computed based on the weighted average number of common shares outstanding
during each period, and gives retroactive effect to the Stock Split. See
Note 13 of Notes to Financial Statements.
(2) Consists of active Company subscribers that were billed in the final month
of the respective periods.
(3) Consists of wholesale customers that had active accounts with the Company in
the respective periods.
(4) As adjusted to give effect to the Offering. See "Use of Proceeds."
7
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK OF THE COMPANY INVOLVES CERTAIN RISKS AND
SUBSTANTIAL DILUTION. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS, IN EVALUATING AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
TECHNICAL TERMS AND ACRONYMS USED IN THIS PROSPECTUS ARE DEFINED IN THE
"GLOSSARY OF TERMS." THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS, WHICH
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,
THOSE SET FORTH IN THE FOLLOWING RISK FACTORS AND IN "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
COMPANY RISKS
OPERATING RISKS
Historically, the Company has derived a significant portion of its revenues
by providing call reorigination services. The Company believes that as
deregulation occurs and competition increases in certain international markets,
the pricing advantage of call reorigination relative to conventional
international long distance service will diminish and may disappear in certain
markets. To maintain its existing customer base and attract new business in such
markets, the Company anticipates that it will have to offer direct access
services to certain destinations at prices significantly below the current
prices charged for call reorigination. The Company will seek to satisfy this
requirement in selected target markets by migrating its existing call
reorigination customers and attracting new business through deployment of direct
access and other call-through access methods, including IP telephony. There can
be no assurance that the Company will succeed in such efforts. Failure to
accomplish this objective could have a material adverse effect on the Company's
business, financial condition and results of operations.
In many of the Company's existing and target markets, the Company offers or
intends to offer new services or services that have previously been provided
only by the local ITOs. Accordingly, there can be no assurance that such
operations will generate operating or net income, and the Company's prospects
must therefore be considered in light of the risks, expenses, problems and
delays inherent in establishing a new business in a rapidly changing industry.
The Company's overall gross margins may fluctuate in the future based on its mix
of wholesale (selling minutes to other carriers) and retail (selling directly to
end-user customers) international long distance services and the percentage of
calls using direct access compared to call reorigination, in addition to the
reaction to any significant international long distance rate reductions imposed
by ITOs to counter external competitive threats.
As a strategic response to a changing competitive environment, the Company
may elect from time to time to make certain pricing, service or marketing
decisions or enter into acquisitions, investments and strategic alliances that
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company believes that its industry has
reached a stage of development insofar as the gross profit margins associated
with its early stages have yielded to a more moderated profit margin structure
on an industry-wide basis. Furthermore, the Company's strategic decisions to
reduce its pricing structure in particular markets to gain additional market
share and achieve operating efficiencies may materially adversely affect the
profitability of the Company's operations in such markets. As a result of the
foregoing factors, the Company may in the future experience materially adverse
circumstances that could reduce the price of the Company's Common Stock. See
"-Risks Associated with Expansion by Acquisitions, Strategic Alliances and
Similar Transactions," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
RISKS OF INTERNATIONAL TELECOMMUNICATIONS BUSINESS
The Company's international telecommunications business is subject to
certain risks, such as changes in foreign governmental regulations and
telecommunications standards, licensing requirements, tariffs, taxes, customs,
duties and other trade barriers, as well as political and economic instability.
In addition, the Company's revenues and cost of long distance services are
sensitive to changes in international settlement
8
<PAGE>
rates, changes in the ratios between outgoing and incoming traffic, and the
Company's ability to obtain international transmission facilities. International
rates charged to customers are likely to decrease in the future for a variety of
reasons, including increased competition between existing carriers, entry of new
carriers into niche markets and the consummation of joint ventures among large
international carriers that facilitate targeted pricing and cost reductions. In
addition, the Company's business could be adversely affected by a reversal in
the current trend toward deregulation of government-owned telecommunications
carriers. There can be no assurance that the Company will be able to increase
its traffic volume or reduce its operating costs sufficiently to offset any
resulting rate decreases.
RISKS RELATING TO EMERGING MARKETS
For the nine months ended December 31, 1997, the Company derived
approximately 79% of its revenues from operations in emerging markets, where the
Company's businesses are subject to numerous risks and uncertainties, including
political, economic and legal risks, such as unexpected changes in regulatory
requirements, tariffs, customs, duties and other trade barriers, difficulties in
staffing and managing foreign operations, problems in collecting accounts
receivable, foreign exchange controls which restrict or prohibit repatriation of
funds, technology export and import restrictions or prohibitions, delays from
customs brokers or government agencies, seasonal reductions in business
activity, and potentially adverse tax consequences resulting from operating in
multiple jurisdictions with different tax laws, which could materially adversely
impact the Company's business, results of operations and financial condition.
The political systems of many of the emerging market countries in which the
Company operates or plans to operate are slowly emerging from a legacy of
totalitarian rule. Political conflict and, in some cases, civil unrest and
ethnic strife may continue in some of these countries for a period of time. Many
of the economies of these countries are weak, volatile and reliant on
substantial foreign assistance. Expropriation of private businesses in such
jurisdictions remains a possibility, whether by an outright taking or by
confiscatory tax or other policies. There can be no assurance that the Company's
operations will not be materially and adversely affected by such factors.
Legal systems in emerging market countries frequently have little or no
experience with commercial transactions between private parties. The extent to
which contractual and other obligations will be honored and enforced in emerging
market countries is largely unknown. Accordingly, there can be no assurance that
difficulties in protecting and enforcing rights in emerging market countries
will not have a material adverse effect upon the Company and its operations.
Additionally, the Company's businesses operate in uncertain regulatory
environments. The laws and regulations applicable to the Company's activities in
emerging market countries are in general new and subject to arbitrary change
and, in some cases, incomplete. There can be no assurance that local laws and
regulations will become stable in the future, or that changes thereto will not
materially adversely affect the Company's operations or financial condition.
DEPENDENCE ON INDEPENDENT EXCLUSIVE AGENTS
The Company provides its services through a network of independent and
exclusive agents. Its international market penetration primarily reflects the
marketing, sales and customer service activities of these agents, who market the
Company's services on a commission basis. As of December 31, 1997, the Company
had 15 agents located in approximately 27 countries. The use of these agents
exposes the Company to significant risks, including dependence on the continued
viability and financial stability of its agents. In fiscal year 1997, the four
major agents generated approximately 57% of the Company's revenues and these
agents in the aggregate accounted for approximately 64% of the Company's
revenues for the nine months ended December 31, 1997. In particular, the
Company's single South African agent accounted for approximately 28% of revenues
during the nine months ended December 31, 1997. Although the Company has not
historically experienced significant attrition in agencies, there can be no
assurance that it will not suffer the loss of one or more significant agents in
the future. If one or more of these agents were to suffer financial problems,
terminate its relationship with the Company, or were unable to satisfy
customers, this could create a material adverse effect on the Company's
business, financial condition or
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results of operations, including, but not limited to lost revenues, bad debt
expense, lost customers, potential liability under contracts the agents commit
the Company to perform, and damage to the Company's business reputation.
The Company's continuing success depends in substantial part on its ability
to recruit, maintain and motivate its agents. The Company is subject to
competition in the recruiting of agents from other organizations that use agents
to market their products and services, including those that market
telecommunications services. Because the Company enters into exclusive
relationships with its agents, the success of the Company's business within the
exclusive territory largely depends on the effectiveness of the local agent in
conducting its business. If an agent were to become ineffective in conducting
its business, the Company might seek to terminate its relationship with the
agent, and under certain local laws the Company's exclusive arrangements with
such agent might be difficult or expensive to terminate. The Company has entered
into non-compete agreements with its agents prohibiting their competition with
the Company during their engagement and for a period of time after its
termination, however, there can be no assurance that any such non-compete
agreement would be enforceable as a practical matter or under the applicable
laws of the jurisdiction in which an agent operates. See "Use of Proceeds" and
"Business-- Purchase of Equity Interest in South African Agent." However, such
measures entail other risks. See "-Credit Risks," "-Risks Associated with
Expansion by Acquisitions, Strategic Alliances and Similar Transactions" and
"-Foreign Exchange Rate Risks."
COMPETITION
The international telecommunications industry is highly competitive and
subject to the introduction of new services facilitated by advances in
technology. International telecommunications providers compete on the basis of
price, customer service, transmission quality, breadth of service offerings and
value-added services. The Company competes with a variety of international long
distance telecommunications providers in each of its markets, including the
respective ITO in each country in which the Company operates, various
independent providers similar to the Company in size and resources, and, to a
lesser extent, major international carriers and their global alliances. Other
potential competitors include cable television companies, wireless telephone
companies, Internet access providers and large-end users which have dedicated
circuits or private networks. Many of the Company's current or potential
competitors have substantially greater financial, marketing and other resources
than the Company. If the Company's competitors were to devote significant
additional resources to the provision of international long distance
telecommunications services to the Company's target customer base of small and
medium-sized businesses in the Company's targeted geographic markets, then the
Company's business, financial condition and results of operations could be
materially adversely affected. The Company's principal method of competition is
to provide competitive service to its customers at a reasonable price. The
Company believes it is able to provide competitive service to its customers
primarily by providing value-added services, such as detailed billing, and by
utilizing a network of agents who maintain close relationships with vendors of
telephone hardware and who are knowledgeable about the telecommunications
business in their geographic markets, making them better able to respond to
customer needs. The Company maintains competitive pricing by keeping its own
costs down, principally by using its proprietary software to handle back office
billing and record keeping. There can be no assurance that the Company will be
able to compete successfully against new or existing competitors. See "-Risks of
International Telecommunications Business."
LESSENING OF BARRIERS TO ENTRY IN MARKETS WHERE COMPANY OPERATES
The call reorigination business has a small capital requirement and
regulatory limitations often form the most significant barrier to entry. The
Company anticipates that as the markets in which it operates or will operate
continue to deregulate, the Company will increase its investments in
telecommunications infrastructure and the Company or its relevant agency will
increase marketing expenditures to address increased competition resulting from
decreased regulatory difficulties of entry into those markets, particularly
since the cost of providing telecommunications services is relatively low and
not a significant barrier
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to entry into the markets where Ursus provides services. As a result, the
Company may experience increased operating costs in those markets. Additional
competitors with greater resources than the Company could enter these markets
and acquire customers of the Company or force the Company to reduce its prices
to maintain its customer base which could materially adversely affect the
Company's business operations.
RAPID CHANGES IN TECHNOLOGY AND CUSTOMER REQUIREMENTS
Rapid and significant technological advancements and introductions of new
products and services utilizing new technologies characterize the
telecommunications industry. As new technologies develop, the Company may be
placed at a competitive disadvantage, and competitive pressures may force the
Company to implement new technologies at substantial cost. In addition,
competitors may implement new technologies before the Company is able to
implement such technologies, allowing those competitors to provide enhanced
services and quality, or services at more competitive costs, compared with that
which the Company is able to provide. There can be no assurance that the Company
will be able to respond to such competitive pressures and implement such
technologies on a timely basis or at an acceptable cost. One or more of the
technologies currently utilized by the Company, or which it may implement in the
future, may not be preferred by its customers or may become obsolete. If the
Company is unable to respond to competitive pressures, implement new
technologies on a timely basis, or penetrate new markets in a timely manner in
response to changing market conditions or customer requirements, or if new or
enhanced services offered by the Company do not achieve a significant degree of
market acceptance, then the Company's business, financial condition and results
of operations could be materially adversely affected. See "--Risks of
International Telecommunications Business" and "--Competition."
RISK OF NETWORK FAILURE
The success of the Company largely depends upon its ability to deliver high
quality, uninterrupted telecommunication services, and on its ability to protect
its software and hardware against damage from fire, earthquake, power loss,
telecommunications failure, natural disaster such as hurricanes and similar
events. Any systems or hardware failure that causes interruptions in the
Company's operations could have a material adverse effect on the Company.
Because the Company at the present time operates only one switch, located in
Florida, physical damage to this facility (including damage by hurricane) could
not be remedied by using redundant facilities of the Company located elsewhere,
and could have a material adverse effect on the Company. As the Company expands
and call traffic grows, there will be increased stress on hardware, circuit
capacity and traffic management systems. There can be no assurance that the
Company will not experience system failures. The Company's operations also
depend on its ability to successfully expand and integrate new and emerging
technologies and equipment, which could increase the risk of system failure and
result in further strains. The Company attempts to mitigate customer
inconvenience in the event of a system disruption by routing traffic to other
circuits and switches which may be owned by other carriers and to minimize its
own risk of loss in the event of Network failure by maintaining insurance in
commercially reasonable amounts. However, significant or prolonged system
failures, or difficulties for customers in accessing and maintaining connection
would result in an uninsurable risk, including damage to the Company's
reputation, attrition and financial loss. Any damage to the Company's operations
center would have a negative impact on the Company and its ability to maintain
its operations and generate accurate call detail reports.
CREDIT RISKS
Many of the foreign countries in which the Company operates do not have
established credit bureaus, thereby making it more difficult to ascertain the
creditworthiness of potential customers. Under the Company's exclusive agency
arrangements, the agent, and not the Company is responsible for analyzing the
creditworthiness of the customer and assumes this credit risk. The Company
believes that using this local platform for its business minimizes its credit
risk, and the Company's bad debt expenses have historically been minimal.
However, the Company has in certain circumstances supported its agency
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relationships by bearing some credit losses. Also, there is a credit risk
inherent in the use of independent agents by the Company; because the agent, and
not the ultimate user of the Company's services, is responsible for the payment.
There can be no assurance that, with regard to any particular time period or
periods, particular geographic location or locations or any particular agent or
agents, the Company's bad debt expense will not rise significantly above
historic or anticipated levels. While the Company continually seeks to minimize
bad debt, the Company's experience indicates that a certain portion of past due
receivables will never be collected and that such bad debt is a necessary cost
of conducting business in the telecommunications industry. As the Company
implements its plans to expand its customer base and wholesale business and move
into new territories, whether directly, through arrangements with agents, equity
investments in agents, acquisitions or otherwise, the credit risk to which the
Company is exposed will increase. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH AND IMPLEMENTING EXPANSION STRATEGY
The Company has experienced significant growth in recent periods. The
Company's ability to manage and respond to growth will be critical to its
success. The Company anticipates that future growth will depend on a number of
factors, including the effective and timely development of customer
relationships, the ability to enter new markets and expand in existing markets,
and the recruitment, motivation and retention of qualified agents. Sustaining
growth will require the continuing enhancement of the Company's operational
systems and additional management, operational and financial resources. If the
Company is successful in its growth strategy, there will be additional demands
on its customer support, marketing, distribution and other resources. There can
be no assurance that the Company will be able to manage its expanding operations
effectively or that it will be able to maintain or accelerate its rate of
growth. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business."
The Company's strategy is to continue its growth by expanding its service
offerings and principal geographic markets in Africa, the Middle East, Latin
America and targeted areas of Europe and Russia, especially in deregulating
markets. To accommodate its growth strategy, the Company will be required to
invest additional capital and resources to enhance its information systems by
replacing or upgrading certain existing systems and integrating new systems.
There can be no assurance that the Company can add services or expand its
geographic markets or that existing regulatory barriers to its current or future
operations will be reduced or eliminated. Even if the Company succeeds in adding
services or expanding into new markets, there can be no assurance that its
administrative, operational, infrastructure and financial resources and systems
will remain adequate. See "--Dependence on Effective Information Systems."
As the Company grows, it may have difficulty accurately forecasting its
telecommunications traffic. Inaccuracies in such forecasts could result in the
Company making investments in insufficient or excessive transmission facilities
and incurring disproportionate fixed expenses, as well as cause it to route
excessive overflow traffic to other carriers. The Company would not be able to
assure that the quality of services routed to other carriers would be
commensurate with the transmission quality provided by the Company.
Interruptions of or a decline in the quality of the Company's services resulting
from expansion difficulties could have a material adverse effect on the
Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH EXPANSION BY ACQUISITIONS, STRATEGIC ALLIANCES AND SIMILAR
TRANSACTIONS
As part of its growth strategy, the Company intends to reduce its exposure
to risks associated with the use of exclusive independent agents in existing and
new markets, by acquiring some or all of the equity interest in, entering into
joint venture arrangements with, or forming strategic alliances with, agents and
other strategic partners whose businesses complement that of the Company. If the
Company's investments in or alliances with third parties do not result in a
controlling interest or are nonexclusive arrangements,
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the Company may be subject to additional business and operating risks outside of
its management's control. The Company has not entered into any such
arrangements, except with Central Call and Mondial Telecom, with which the
Company has entered into a memorandum of understanding with respect to the
acquisition of customer lists, and with Orion Telecom in South Africa where the
Company will acquire an equity interest in the South African agent. See
"Business--Purchase of Equity Interest in South African Agent," and
"Business--Formation of French Subsidiary." Any future acquisition, investment,
strategic alliance or related effort will be accompanied by the risks commonly
encountered in such transactions or efforts. Such risks include, among others,
the difficulty of identifying appropriate acquisition candidates or partners,
the difficulty of assimilating the operations of the respective entities, the
potential disruption of the Company's ongoing business, possible costs
associated with the development and integration of such operations, the
potential inability of management to maximize the Company's financial and
strategic position by successfully incorporating licensed or acquired technology
into the Company's service offerings, the failure to maintain uniform standards,
controls, procedures and policies, the impairment of relationships with
employees, customers and agents as a result of changes in management, and higher
customer attrition with respect to customers obtained through acquisitions.
There can be no assurance that the Company would be successful in overcoming
these risks or any other problems encountered with such acquisitions,
investments, strategic alliances or related efforts.
Acquisitions also involve other risks, including changes in pricing due to
competition, difficulties in integrating the acquired operations, diversion of
management resources, obtaining any required regulatory approvals, increased
foreign exchange risk and the risks associated with entering new markets. There
can be no assurance that acquisitions, strategic alliances or any other similar
events will result in increased sales or an expanded customer base, give the
Company the presence in new territories that it seeks, or enable the Company to
effectively penetrate its target markets.
Acquisitions by the Company could entail potentially dilutive issuances of
equity securities of the Company, as well as significant transaction expenses
and interest expense, which could have a material adverse effect on the
Company's operating results.
GOVERNMENT REGULATION
The Company is required to file periodic reports with the United States
Department of Commerce, due to the ownership interest of Fincogest, S.A., a
Swiss corporation, in the Company. See "Principal and Registering Shareholders."
The Company has failed to comply with this reporting requirement and is in the
process of preparing these reports for filing with the Department of Commerce.
The international telecommunications industry is subject to international
treaties and agreements, and to laws and regulations that vary from country to
country. Enforcement and interpretation of these laws and regulations can be
unpredictable and are often subject to informal views of government officials
and ministries that regulate telecommunications in each country. In some cases,
such government officials and ministries are subject to influence by ITOs.
In some countries where the Company operates or plans to operate, local laws
or regulations limit or require prior government approval for the provision of
international telecommunications service in competition with state-authorized
carriers. For example, the Company's provision of services over facilities in
its Network or by purchasing minutes from other carriers for resale to its
customers, or its ownership of facilities may be affected by increased
regulatory requirements in a foreign jurisdiction. Moreover, the Company's use
of transit agreements or arrangements, if any, may be affected by laws or
regulations in either the transited or terminating foreign jurisdiction. There
can be no assurance that future regulatory, judicial, legislative or political
changes will permit the Company to offer to residents of such countries all or
any of its services or will not have a material adverse effect on the Company,
that regulators or third parties will not raise material issues regarding the
Company's compliance with applicable laws or regulations, or that regulatory
decisions will not have a material adverse effect on the Company. If the Company
is unable to provide the services which it presently provides or intends to
provide, or to use its existing or contemplated transmission methods due to its
inability to obtain or retain the requisite
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governmental approvals for such services or transmission methods, or for any
other reason related to regulatory compliance or lack thereof, such developments
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company has pursued, and expects to continue to pursue, a strategy of
providing its services to the maximum extent it believes to be permissible under
applicable laws and regulations. To the extent that the interpretation or
enforcement of applicable laws and regulations is uncertain or unclear, the
Company's aggressive strategy may result in the Company's (i) providing services
or using transmission methods that are found to violate local laws or
regulations or (ii) failing to obtain approvals required under such laws or
regulations to which the Company believes that it is subject, or the Company
otherwise discovers that it is in violation of local laws and regulations and
believes that it is subject to enforcement actions by the FCC or the local
authority, it would seek to modify its operations or discontinue operations so
as to comply with such laws and regulations. There can be no assurance, however,
that the Company will not be subject to fines, penalties or other sanctions as a
result of violations even though such violations are corrected. If the Company's
interpretation of applicable laws and regulations proves incorrect, it could
lose, or be unable to obtain, regulatory approvals necessary to provide certain
of its services or to use certain of its transmission methods. The Company also
could have substantial monetary fines and penalties imposed against it.
CALL REORIGINATION The services provided by the Company consist primarily
of call reorigination services. In some countries, use of call reorigination is
restricted or prohibited. If it is demonstrated that the law of a foreign
jurisdiction expressly prohibits call reorigination using uncompleted call
signaling, and that the foreign government attempted but failed to enforce its
laws against U.S. service providers, the FCC may require U.S. carriers to cease
providing call reorigination services using uncompleted call signaling. To date,
the FCC has ordered carriers to cease providing call reorigination using
uncompleted call signaling to customers in the Philippines, and it is expected
that the FCC will take this action with respect to carriers providing call
reorigination using uncompleted call signaling to customers in Saudi Arabia.
Prior to taking such action, the FCC permits countries to submit information to
the FCC regarding the legal status of call reorigination services in their
respective countries. According to FCC records, 30 countries thus far have
submitted such information to the FCC, including the Bahamas, Egypt, Lebanon and
South Africa. Submission of this information does not imply that the FCC
believes that the country's laws expressly prohibit call reorigination using
uncompleted call signaling. Revenues attributable to call reorigination
represented 76% of the Company's revenues during the nine months ended December
31, 1997. A substantial number of countries have prohibited certain forms of
call reorigination as a mechanism to access telecommunications services. Such
actions have caused the Company to cease providing call reorigination services
in the Bahamas and may require it to do so in other jurisdictions in the future.
As of November 20, 1997, reports had been filed with the FCC and/or the ITU that
the laws of 79 countries prohibit call reorigination. There can be no assurance
that certain of the Company's services and transmission methods will not
continue to be or will not become prohibited in certain jurisdictions, and,
depending on the jurisdictions, services and transmission methods may become
affected, which could result in a material adverse effect on the Company's
business, financial condition and results of operations. To the extent that a
country that has expressly prohibited call reorigination using uncompleted call
signaling is unable to enforce its laws against call reorigination using
uncompleted call signaling, it can request that the FCC enforce such laws in the
United States, by requiring the Company to cease providing call reorigination
services to such country or, in extreme circumstances, by revoking the Company's
authorizations. To date, except as indicated herein, the Company has not been
notified by any regulator or government agency that its provision of services is
not in compliance with applicable regulations.
In South Africa, the Company's agent's future provision of certain services
will be, and its current provision of call reorigination services may be,
subject to the Telecommunications Act of 1996 (the "SA-Telecommunications
Act")and the Post Office Act of 1958. The SA Telecommunications Act permits a
party to provide a range of services other than public switched services under,
and in accordance with, a telecommunications license issued to that party in
accordance with the SA Telecommunications Act.
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Although the Company believes that South African law does not prohibit its agent
from providing call reorigination services to customers in South Africa without
a license, the telecommunications regulator in South Africa ("SATRA") has ruled
that the provision of call reorigination services to customers in South Africa
without a license violates the SA Telecommunications Act. Several entities,
including the Company's agent, filed a lawsuit to stay and reverse SATRA's
ruling on the basis that SATRA lacks the authority to issue such a ruling and
that the SA Telecommunications Act does not prohibit the provision of call
reorigination services. SATRA has agreed not to prosecute any person in the call
reorigination industry unless the South African courts rule that it may. It is
anticipated that final adjudication of this lawsuit could take up to four years
to occur. If the Company's agent is determined to be providing a
telecommunications service without a required license, it could be subject to
fines, to the termination of its call reorigination service to customers in
South Africa and, potentially, to the denial of license applications to provide
liberalized services. There can be no guarantee that the courts in South Africa
will not rule that call reorigination is illegal, that they will not do so soon,
or that the South African legislature will not promulgate an explicit
prohibition on call reorigination. For the nine months ended December 31, 1997,
South Africa comprised the Company's most significant single market and
accounted for approximately 28% of the Company's total revenues. Any such
adverse legal action could therefore have a material adverse effect on the
Company's business, financial condition and results of operation.
The Company's interstate and international facilities-based and resale
services are subject to regulation by the Federal Communications Commission
("FCC"), and regulations promulgated by the FCC are subject to change in the
future. See "Business--Government Regulation--United States."
THE FCC'S POLICIES ON TRANSIT AND REFILE. The FCC is currently considering
a 1995 request (the "1995 Request") to limit or prohibit the practice whereby a
carrier routes, through its facilities in a third country, traffic originating
from one country and destined for another country. The FCC has permitted third
country calling where all countries involved consent to the routing arrangements
(referred to as "Transiting"). Under certain arrangements referred to as
"Refiling," the carrier in the destination country does not consent to receiving
traffic from the originating country and does not realize the traffic it
receives from the third country is actually originating from a different
country. While the Company's revenues attributable to Refiling arrangements are
minimal, Refiling may constitute a larger portion of the Company's operations in
the future. The FCC to date has made no pronouncement as to whether Refiling
arrangements are inconsistent with U.S. or International Telecommunications
Union ("ITU") regulations. It is possible that the FCC will determine that
Refiling violates U.S. and/or international law, which could have a material
adverse effect on the Company's future business, financial condition and results
of operations.
THE FCC'S INTERNATIONAL SETTLEMENTS POLICY. The Company is also required to
conduct its facilities-based international business in compliance with the FCC's
international settlements policy (the "ISP"). The ISP establishes the
permissible arrangements for facilities-based carriers that are based in the
U.S. and their foreign counterparts to compensate each other for terminating
each other's traffic over their respective networks. Several of the Company's
arrangements with foreign carriers are subject to the ISP and it is possible
that the FCC could take the view that one or more of these arrangements do not
comply with the existing ISP rules. The FCC recently enacted certain changes in
its rules designed to permit alternative arrangements outside of its ISP as a
means of encouraging competition and achieving lower, cost-based accounting and
collection rates as more facilities-based competition is permitted in foreign
markets. If the Company enters into a traffic agreement with a foreign carrier
for the provision of telecommunications services that does not comply with the
ISP, it may be required to obtain FCC approval under this alternative
arrangements mechanism. If the FCC, on its own initiative or in response to a
challenge filed by a third party, determines that the Company's foreign carrier
arrangements do not comply with FCC rules, among other measures, it may issue a
cease and desist order, impose fines on the Company or, in extreme
circumstances, revoke or suspend its FCC authorizations. See "--Recent and
Potential FCC Actions." Such action could have a material adverse effect on the
Company's business, financial condition and results of operations.
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THE FCC'S TARIFF REQUIREMENTS FOR INTERNATIONAL LONG DISTANCE SERVICES. The
Company is also required to file with the FCC a tariff containing the rates,
terms and conditions applicable to its international telecommunications
services. The Company is also required to file with the FCC any agreements with
customers containing rates, terms, and conditions for international
telecommunications services, if those rates, terms, or conditions are different
than those contained in the Company's tariff. If the Company charges rates other
than those set forth in, or otherwise violates, its tariff or a customer
agreement filed with the FCC, or fails to file with the FCC carrier-to-carrier
agreements, the FCC or a third party could bring an action against the Company,
which could result in a fine, a judgment or other penalties against the Company.
Such action could have a material adverse effect on the Company's business,
financial condition and results of operations.
RECENT AND POTENTIAL FCC ACTIONS. Regulatory action that has been and may
be taken in the future by the FCC may enhance the intense competition faced by
the Company. In addition to its new policy on alternative arrangements, the FCC
has also established lower ceilings ("benchmarks") for the rates that U.S.
carriers will pay foreign carriers for the termination of international
services. Moreover, the FCC recently changed its rules to implement the WTO
Agreement, in part by allowing U.S. carriers to accept certain exclusive
arrangements with certain foreign carriers. While these rule changes may provide
the Company with more flexibility to respond more rapidly to changes in the
global telecommunications market, they will also provide similar flexibility to
the Company's competitors. The implementation of these changes could have a
material adverse effect on the Company's business, financial condition and
results of operations.
U.S. DOMESTIC LONG DISTANCE SERVICES. The Company currently carries a DE
MINIMIS amount of U.S. domestic long distance traffic, if any, for its
foreign-billed customers. Such traffic generally would be limited to incidental
interstate or intrastate calls made by payphone users in the United States that
are billed in foreign countries but that brought their calling cards to the
United States while traveling. The Company's ability to provide domestic long
distance service in the United States is subject to regulation by the FCC and
relevant state Public Service Commissions ("PSCs") which regulate interstate and
intrastate rates, respectively, ownership of transmission facilities, and the
terms and conditions under which the Company's domestic U.S. services are
provided. In general, neither the FCC nor the relevant state PSCs exercise
direct oversight over prices charged for the Company's services or the Company's
profit levels, but either or both may do so in the future. The Company, however,
is required by federal and state law and regulations to file tariffs listing the
rates, terms and conditions of services provided. Any failure to maintain proper
federal and state tariffing or certification or file required reports, or any
difficulties or delays in obtaining required authorizations, could have a
material adverse effect on the Company's business, financial condition and
results of operations. The FCC also imposes some requirements for marketing of
telephone services and for obtaining customer authorization for changes in the
customer's primary long distance carrier. If these requirements are not met, the
Company may be subject to fines and penalties.
To originate and terminate calls in connection with providing their
services, long distance carriers such as the Company may have to purchase access
services from local exchange carriers ("LECs") or competitive local exchange
carriers ("CLECs"). Access charges represent a significant portion of the
Company's cost of U.S. domestic long distance services and, generally, such
access charges are regulated by the FCC for interstate services and by PSCs for
intrastate services. The FCC has undertaken a comprehensive review of its
regulation of LEC access charges to better account for increasing levels of
local competition. While the resolution of these issues is uncertain, if these
proposed rate structures are adopted, many long distance carriers, including the
Company, could be placed at a significant cost disadvantage to larger
competitors. In addition, the FCC has adopted certain measures to implement the
1996 Telecommunications Act that will impose new regulatory requirements,
including the requirement that the Company contribute some portion of its
telecommunications revenues to a universal service fund designated to fund
affordable telephone service for consumers, schools, libraries and rural
healthcare providers. These contributions will become payable beginning in 1998
for all interexchange carriers but not for providers of
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solely international services. The Company believes that it is not subject to
universal service contribution requirements, but there can be no guarantee that
the FCC will not find that the Company is subject to such requirements.
In some instances, the Company may be responsible for city sales taxes on
calls made within the jurisdiction of certain U.S. cities. The Company is
implementing software to track and bill for this tax liability. However, the
Company may be subject to sales tax liability for calls transmitted prior to the
implementation of such tax software and against which it has no corresponding
customer compensation. While the Company believes that any such liability will
not be significant, there can be no assurance that such tax liability, if any,
will not have a material adverse effect on the Company's business, financial
condition and results of operations.
The FCC issued an order on October 9, 1997, concluding that interexchange
carriers must compensate payphone owners at a rate of $.284 per call for all
calls using their payphones. This compensation method will be effective from
October 7, 1997 through October 7, 1999. After this time period, interexchange
carriers will be required to compensate payphone owners at a market-based rate
minus $0.066 per call. A number of carriers have appealed this FCC order to the
U.S. Court of Appeals for the D.C. Circuit or have sought FCC reconsideration of
this order. Although the Company cannot predict the outcome of the FCC's
proceedings on the Company's business, it is possible that such proceedings
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The FCC and certain state agencies also impose prior approval requirements
on transfers of control, including pro forma transfers of control (without
public notice), and corporate reorganizations, and assignments of regulatory
authorizations. Such requirements may delay, prevent or deter a change in
control of the Company or the Company's acquisition of another company. The FCC
also imposes certain restrictions on U.S.-licensed telecommunications companies
that are affiliated with foreign telecommunications carriers, especially if the
foreign telecommunications carrier obtains a 25% or greater interest in a
company. If the Company becomes controlled by or under common control with a
foreign telecommunications carrier, or if the Company obtains a greater than 25%
interest in or control over a foreign telecommunications carrier, the FCC could
restrict the Company's ability to provide service on certain international
routes.
BAHAMAS. The Company has entered into an operating agreement with the
Bahamas Telephone Company ("Batelco") to provide, among other things,
international telecommunications services to customers in the Bahamas. Recently,
Batelco has taken several actions designed to block the Company's ability to
offer services to customers in the Bahamas. The Company believes these actions
violate the terms of its operating agreement with Batelco. The Company also
believes that Batelco's actions are inconsistent with U.S. policy and is working
with the U.S. government, including the U.S. Embassy in the Bahamas and the FCC
to restore the Company's circuits to full capacity. If Batelco is permitted to
block permanently or over a protracted period of time the Company's provision of
service to customers in the Bahamas, such action could have a material adverse
impact on the Company's business, financial condition and results of operation.
For the nine months ended December 31, 1997, the Company derived approximately
5.6% of its revenues from services it provided in the Bahamas; however, the
Company's revenues from services it provided in the Bahamas decreased by
approximately 26% during the nine months ended December 31, 1997 compared to the
nine months ended December 31, 1996.
DEPENDENCE ON ARRANGEMENTS WITH CARRIERS
The Company obtains most of its transmission capacity under volume-based
resale arrangements with facilities-based and other carriers, including ITOs,
however, the majority of these services are provided by only two carriers. Under
these arrangements, the Company is subject to the risk of unanticipated price
fluctuations and service restrictions or cancellations. The Company generally
has not experienced sudden or unanticipated price fluctuations, service
restrictions or cancellations imposed by such facilities-based carriers, except
in the Bahamas. See "Government Regulation--Bahamas." Although the Company
17
<PAGE>
believes that its arrangements and relationships with such carriers generally
are satisfactory, the deterioration or termination of the Company's arrangements
and relationships, or the Company's inability to enter into new arrangements and
relationships with one or more of such carriers, could have a material adverse
effect upon the Company's cost structure, service quality, network coverage,
results of operations and financial condition.
The Company's growth strategy in new markets is to some extent based on its
ability to enter into operating agreements with domestic and foreign carriers.
In accordance with industry practices, operating agreements entered into by the
Company will be terminable upon short notice. While the Company successfully
negotiates and maintains operating agreements, none of which has been terminated
to date, the trend toward deregulation of telephone communications in many
countries and a significant reduction in outgoing traffic carried by the
Company, among other things, could cause foreign partners to decide to terminate
their operating agreements, or could cause such operating agreements to have
substantially less value to the Company. Termination of these operating
agreements could have a material adverse effect on the Company's business,
results of operations and financial condition.
EXPOSURE TO FRAUD
The telecommunications industry has historically been exposed to fraud
losses. The Company has implemented anti-fraud measures, such as employment
agreements with its employees, limiting and monitoring access to its information
systems and monitoring use of its services in order to minimize losses relating
to fraudulent practices. However, there can be no assurance that the Company
will effectively control fraud when operating in the international
telecommunications arena. Fraud has historically been a more significant problem
for large providers of telecommunications services than it has for the Company,
whose few employees and switching facilities are relatively easier to monitor
than those of the large providers. As the Company continues to grow and hire new
employees and implement its plans to increase the number of switching facilities
that it owns, its exposure to fraud losses will increase. The Company's failure
to control fraud effectively could have a material adverse effect on the
Company's business, financial condition and results of operations.
DISCRETION OF MANAGEMENT AS TO USE OF CERTAIN OFFERING PROCEEDS
Approximately $10,000,000 of the proceeds from this Offering are allocated
for unspecified acquisitions, investments in foreign agencies, joint ventures
and strategic alliances. Identification of candidates for these transactions,
the decision whether to proceed with such transactions and with whom, and the
terms of the transactions, will be in management's discretion. Therefore,
purchasers in this Offering will not have the opportunity to evaluate the
specific merits or risks of any one or more such transactions, some of which may
be significant, but instead will depend on the discretion and judgment of
management in such matters. There can be no assurance that determinations
ultimately made by the Company's management will permit the Company to achieve
its business objectives, or that the decisions made by management will not have
a material adverse effect on the Company's business, financial condition or
results of operations. See "Use of Proceeds."
DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS
While the Company believes its information systems are sufficient for its
current operations, such systems will require enhancements, replacements and
additional investments to continue their effectiveness in the future,
particularly to enable the Company to manage an expanded Network. There can be
no assurance that the Company will not encounter difficulties in enhancing its
systems or integrating new technology into its systems. The inability of the
Company to implement any required system enhancement, to acquire new systems or
to integrate new technology in a timely and cost effective manner could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Management Information Systems."
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<PAGE>
RISKS ASSOCIATED WITH THE YEAR 2000
The Company is currently in the process of evaluating whether it will
encounter any problems related to the year 2000. These problems, which have been
widely reported in the media, could cause malfunctions in certain software and
databases with respect to dates on or about 2000. Most of the Company's computer
systems, software and databases are proprietary to the Company and are year 2000
compliant. The Company is in the process of evaluating if carriers and other
third parties with which it contracts for services anticipate any year 2000
difficulties, and if so whether those problems would be of a nature that could
adversely affect the Company. The Company will request that such third parties
advise the Company as to whether or not they anticipate any difficulties in
addressing year 2000 problems and, if so, whether or not the Company would be
adversely affected by any of such problems. Until such time as these parties
respond to the Company, the impact of year 2000 on the Company's business,
results of operations and financial condition cannot be assessed with certainty,
although the Company does not believe year 2000 issues will have a material
adverse impact on it. The Company will continue to monitor the impact on the
Company of issues related to the year 2000.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its senior officers and on its
ability to hire and retain qualified management personnel. The loss of the
services of any of these individuals could materially and adversely affect the
business of the Company and its future prospects. The Company has entered into
employment agreements with certain of its senior officers. The Company maintains
key person life insurance, of which the Company is the beneficiary, on the lives
of each of Messrs. Giussani and Chaskin in the amount of $2 million. The
Company's future success will also depend on its ability to attract and retain
additional management, technical, marketing, sales, financial and other
personnel required in connection with the growth and development of its
business. See "Management."
LEGAL PROCEEDINGS INVOLVING THE COMPANY'S CHIEF EXECUTIVE OFFICER
Mr. Luca Giussani, the Company's president and chief executive officer, was
the subject of a criminal proceeding in Italy under Italian law, which was part
of a series of indictments issued against numerous people. Specifically, about
May 1996 Mr. Giussani was charged with transmitting an invoice in 1991 to a
corporation pursuant to an existing consulting contract for consulting services
which it is alleged he did not perform. It was alleged that the invoice was used
to disguise a political contribution made by that corporation which was unlawful
under Italian law. Mr. Giussani was not charged with making an unlawful
political contribution; but rather it is alleged that through the use of this
invoice, Mr. Giussani facilitated the corporation's falsification of corporate
records to disguise the contribution. Mr. Giussani consistently denied any
improper conduct in connection with this matter and believed that he would
ultimately be vindicated. In October 1997, the trial judge dismissed the claim
against Mr. Giussani for lack of evidence. There is currently no criminal
proceeding pending against Mr. Giussani; although he has been advised that the
investigating magistrates are currently contemplating refiling charges against
him and the other former defendants in this case in order to prevent the running
of the applicable statute of limitations. There can be no assurance that Mr.
Giussani will prevail on the merits with respect to any charges brought against
him. See "Management--Certain Legal Proceedings."
FOREIGN CORRUPT PRACTICES ACT
As a result of the Offering, the Company will become subject to the Foreign
Corrupt Practices Act ("FCPA"), which generally prohibits U.S. companies and
their intermediaries from bribing foreign officials for the purpose of obtaining
or keeping business. The Company may be exposed to liability under the FCPA as a
result of past or future actions taken without the Company's knowledge by
agents, strategic partners or other intermediaries. Violations of the FCPA may
also call into question the credibility and integrity of the Company's financial
reporting systems. The Company's focus on certain emerging markets may tend to
increase this risk. Such liability under the FCPA could have a material adverse
effect on the Company's business, financial condition and results of operations.
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<PAGE>
FOREIGN EXCHANGE RATE RISKS
The Company currently bills primarily in United States Dollars and generally
is paid by customers outside of the United States either in United States
Dollars or in local currency at predetermined exchange rates. Substantially all
of the costs to develop and improve the Company's switching facilities and the
Network have been, and will continue to be, denominated in United States
Dollars. If the United States Dollar appreciates relative to the local currency,
then the Company may suffer a competitive disadvantage because its services will
grow more expensive than those of its competitors, such as the ITOs, that deal
only in the local currency. Any depreciation of the value of the United States
Dollar relative to the local currency may adversely affect the Company by
effectively increasing the cost of the Company's capital expenditures made in
such local currency. As the Company's business develops and expands, the Company
anticipates that in many countries it may bill and receive payment in local
currency at prevailing exchange rates. The Company's focus on emerging markets
may tend to increase the risks that currency fluctuations pose. Although the
Company has minimal operations in the Asian countries affected by recent
substantial currency fluctuations, there can be no assurance that currency
speculation and fluctuation will not affect the Company in Latin America, South
Africa, the Middle East or its other emerging markets. The Company monitors
exposure to currency fluctuations, and may, as appropriate, use certain
financial hedging instruments in the future. However, there can be no assurance
that the use of financial hedging instruments will successfully offset exchange
rate risks, or that such currency fluctuations will not have a material adverse
effect on the Company's business, results of operations and financial condition.
See "-- Risks of International Telecommunications Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
CAPITAL EXPENDITURES
The Company believes that the proceeds of this Offering, combined with other
existing and anticipated sources of liquidity, will be sufficient to fund its
capital requirements for approximately 12 to 18 months after consummation of the
Offering. Certain events could occur that would require the Company to obtain
additional financing. Such events could include faster than expected growth or
lower than anticipated funds generated from operations. In such case, the
Company could require additional capital to continue to expand and upgrade the
Network, fund the acquisition of businesses or investments in joint ventures and
strategic alliances, or to otherwise implement its growth strategy. The Company
may in the near future seek additional equity or debt financing, which could
include a high-yield debt offering, to provide flexibility for potential
acquisitions and network expansion. The exact amount of the Company's future
capital requirements will depend upon many factors, including the cost, timing
and extent of upgrades to and expansion of the Network and existing and new
services, the Company's ability to penetrate new markets, regulatory changes,
the status of competing services, the magnitude of potential acquisitions,
investments and strategic alliances and the Company's results of operations.
Individually or collectively, variances in these and other factors could
materially change the Company's actual capital requirements. If additional
capital is required, there can be no assurance that the Company will be able to
raise such capital, or, if raised, that the terms of such financing will be
favorable to the Company or will not be dilutive to the investments of
purchasers of Common Stock in the Offering. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have fluctuated and may continue
to fluctuate due to various factors, including the timing of investments,
general economic conditions, specific economic conditions in the
telecommunications industry, the effects of governmental regulation and
regulatory changes, user demands, capital expenditures, costs relating to the
expansion of operations, the introduction of new services by the Company or its
competitors, the mix of services sold and the mix of channels through which
those services are sold, changes in prices charged by the Company's competitors,
and other factors outside of the Company's control. Any combination of such
factors, or any one of such factors, may
20
<PAGE>
in the future cause fluctuations in quarterly operating results. Variations in
the Company's operating results could materially affect the price of the
Company's Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
PROTECTION OF INTELLECTUAL PROPERTY
The Company relies on unpatented proprietary know-how and continuing
technological advancements to maintain its competitive position. Although the
Company has entered into confidentiality and invention agreements with certain
of its employees and consultants, no assurance can be given that such agreements
will be honored or that the Company will be able to effectively protect its
rights to its unpatented trade secrets and know-how. Moreover, no assurance can
be given that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
trade secrets and know-how. See "Business--The Network" and
"Business--Management Information Systems."
The Company has not registered or trademarked "Ursus" and the Company's logo
in any jurisdiction. The Company is filing registrations of its name and logo in
the United States, but there can be no assurance that it will obtain adequate
trademark, service mark or similar protection of its name and logo.
CONTROL BY EXISTING SHAREHOLDERS
Immediately after the Offering, the Company's current shareholders (the
"Existing Shareholders") will beneficially own an aggregate of 76.9% of the
outstanding shares of the Company's Common Stock (or 74.3% if the Underwriters'
Over-Allotment Option is exercised in full) and 100% of the Company's Series A
Preferred Stock. The Series A Preferred Stock has the exclusive rights to elect
two (2) of the five (5) members of the Company's Board of Directors, and one
member less than a numerical majority of any expanded Board. Moreover, the
Common Stock votes cumulatively for the election of Directors, which means that
the Existing Shareholders have the power to elect at least one member of the
Board of Directors so long as they control at least 33.3% of the outstanding
Common Stock (or an even smaller percentage if the size of the Board is
expanded). Accordingly, the Existing Shareholders will retain voting control of
the Company after the consummation of the Offering, with the ability to elect a
majority of the members of the Board of Directors and to approve certain
fundamental corporate transactions, including mergers, consolidations and sales
of assets. As long as the Existing Shareholders are the controlling shareholders
of the Company, third parties will not be able to gain control of the Company
through purchases of Common Stock not beneficially owned or otherwise controlled
by the Existing Shareholders. Accordingly, the price of the Common Stock offered
hereby would not reflect any premium which may be attributable to such ability
to exercise or obtain control over the Company. While each of the Existing
Shareholders has advised the Company that their current intention is to continue
to hold all of the shares of Series A Preferred Stock and substantially all of
the Common Stock beneficially owned following the Offering, there can be no
assurance that any of the Existing Shareholders will not decide to sell all or a
portion of their holdings at some future date after the applicable hold back
period or that in any transfer by any of the Existing Shareholders of a
controlling interest in the Company that any other holders of Common Stock will
be allowed to participate in such transaction or will realize any premium with
respect to their shares of Common Stock. See "Offering Risks--Effects of Certain
Anti-Takeover Provisions," "Principal and Registering Shareholders" and
"Description of Capital Stock--Certain Provisions of the Company's Amended and
Restated Articles of Incorporation, Bylaws and Certain Statutory Provisions."
21
<PAGE>
OFFERING RISKS
ABSENCE OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock.
The Company has applied for quotation of the Common Stock on the Nasdaq National
Market. However, there can be no assurance that, upon approval of the
application, an active public trading market for the Common Stock will develop
after the Offering or that, if developed, such market will be sustained. The
Offering Price of the Common Stock offered hereby was determined by negotiations
between the Company and the Representative, and may not be indicative of the
price at which the Common Stock will trade after the Offering. Consequently,
there can be no assurance that the market price for the Common Stock will not
fall below the initial public offering price. See "Underwriting."
The market price of the Common Stock may experience fluctuations unrelated
to the Company's operating performance. In particular, the price of the Common
Stock may be affected by general market price movements as well as developments
specifically related to the telecommunications industry such as, among other
things, announcements concerning the Company or its competitors, technological
innovations, government regulations, and litigation concerning proprietary
rights or other matters.
DILUTION
Upon completion of the Offering, and assuming no exercise of the
Underwriter's Over-Allotment Option, purchasers of the Common Stock offered
hereby will experience immediate and substantial dilution in net tangible book
value of Common Stock of $7.61 per share, assuming an Offering Price of $10.00
per share (the midpoint of the estimated range of the Offering Price). If the
Underwriters exercise their Over-Allotment Option in full, an additional 225,000
shares of Common Stock will be sold, and purchasers of the Common Stock offered
hereby will experience immediate and substantial dilution in net tangible book
value of Common Stock of $7.39 per share, assuming an Offering price of $10.00
per share (the midpoint of the estimated range of the Offering Price). And if,
as anticipated, the Company uses its stock to make acquisitions, additional
dilution will occur. Dilution represents the difference between the price of the
Common Stock sold hereby and the pro forma net tangible book value per share of
the Company after the Offering. See "Dilution."
BENEFITS OF OFFERING TO EXISTING SHAREHOLDERS
This Offering will provide substantial benefits to Existing Shareholders of
the Company. First, the Existing Shareholders of the Company may benefit from
the creation of a liquid trading market for their shares of Common Stock and
through an increase in the market value of their shares. Following the Offering,
shares are expected to trade in a regular public trading market (the Nasdaq
National Market). Although the Common Stock held by the Existing Shareholders of
the Company is subject to a holdback agreement with the Representative and may
not be sold without the prior written consent of the Representative, upon
expiration of the holdback period, which is 12 months from the date of
Prospectus, the Existing Shareholders will be able to sell their shares into the
public market. Second, the anticipated initial public offering price of $10.00
per share is substantially higher than the $0.51 net tangible book value per
share of the shares held by the Existing Shareholders. At the effective time of
the Offering at the initial public offering price of $10.00 per share, the
aggregate market value of the shares of Common Stock owned by Existing
Shareholders would be $50,000,000. The Company's management beneficially owns
4,825,000 of the outstanding shares of Common Stock, and management's shares
will have an aggregate market value of $48,250,000 based on the Offering Price
of $10.00 per share; an increase of $45,789,250 over such shares aggregate book
value of $2,460,750 at December 31, 1997. See "Dilution" and "Capitalization."
SHARES ELIGIBLE AVAILABLE FOR FUTURE SALE
All of the currently outstanding shares of Common Stock are beneficially
owned or otherwise controlled by the Existing Shareholders, either directly or
indirectly. The 1,500,000 shares of Common Stock sold in the Offering will be
freely tradable by persons other than "affiliates" of the Company, as that
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<PAGE>
term is defined in Rule 144 ("Rule 144") under the Securities Act of 1933, as
amended (the "Securities Act"), without restriction under the Securities Act.
Generally, Rule 144 permits unaffiliated stockholders to resell, after
satisfying a one year holding period, into the public market within any three
month period, a number of shares which does not exceed the greater of 1% of the
shares outstanding or the average weekly trading volume during the four calendar
weeks preceding the sale, and allows affiliates to resell such securities after
satisfying a two-year holding period and subject to the foregoing volume
limitations. After completion of the Offering, the Existing Shareholders will
beneficially own or otherwise control an aggregate of 5,000,000 shares of the
Common Stock and 1,000 shares of Series A Preferred Stock. Each of the Existing
Shareholders has agreed not to sell any shares they beneficially own, and not to
permit any sales of any shares they otherwise control, for 12 months following
completion of the Offering, without the prior written consent of the
Representative. However, upon expiration of these agreements, the Existing
Shareholders will be free to sell any Common Stock held by them, subject to the
rules and regulations promulgated under the Securities Act. Furthermore, the
Company intends to register within 90 days of the date of the Offering
approximately 1,000,000 shares of Common Stock reserved for issuance pursuant to
the Company's stock option plan, including options to purchase 425,000 shares at
the Offering Price to be granted upon commencement of the Offering. The
Representative has permitted the Registering Shareholders to register their sale
of 200,000 shares of Common Stock, which shares may not be sold without the
consent of the Representative until 12 months after the date of this Prospectus.
Any future sales of a substantial number of shares of Common Stock, or the
perception that such sales could occur, could have a material adverse effect on
the prevailing market price of the Common Stock and could impair the Company's
future ability to raise capital through an offering of its equity or convertible
securities. See "Management-Stock Incentive Plan" and "Shares Eligible for
Future Sale."
EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Amended and Restated Articles of
Incorporation and Bylaws and Florida law could delay or frustrate the removal of
incumbent directors and could make difficult a merger, tender offer or proxy
contest involving the Company, even if such events could be viewed as beneficial
by the Company's shareholders. For example, the Amended and Restated Articles of
Incorporation permit cumulative voting for directors, and the 1,000 shares of
outstanding Series A Preferred Stock have the right to elect one less than a
majority of the Board of Directors. In addition, the Board of Directors has the
ability to issue "blank check" preferred stock without shareholder approval.
Although the Board has no present plan to issue additional shares of preferred
stock, the rights of the holders of common stock may be materially limited or
qualified by the issuance of additional preferred stock in the future. See
"Description of Capital Stock" and "Company Risks--Control by Existing
Shareholders." The Amended and Restated Articles of Incorporation require a
66 2/3% vote of shareholders to amend certain provisions of the Amended and
Restated Articles of Incorporation and provide for a staggered Board of
Directors.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including, without
limitation, statements containing the words "believes," "plans," "anticipates,"
"intends," "expects," and words of similar import, constitute "forward-looking
statements." Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or the international long distance
telecommunications industry to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: general economic
and business conditions; prospects for the international long distance
telecommunications industry; competition; changes in business strategy or
development plans; the loss of key personnel; the availability of capital; and
other factors referenced in this Prospectus, including, without limitation,
under the captions "Prospectus Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." Given these uncertainties, prospective investors are cautioned not
to place undue reliance on such
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<PAGE>
forward-looking statements. The Company disclaims any obligation to update any
such factors or to publicly announce the results of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,500,000 shares of
Common Stock offered hereby, based upon an Offering Price of $10.00 per share
(the midpoint of the estimated range for the Offering Price), and after
deducting all underwriting discounts and commissions, and all other estimated
Offering expenses payable by the Company, will be approximately $13.1 million
($15.1 million if the Underwriter's Over-Allotment Option is exercised in full).
The Company anticipates that it will use these net proceeds as follows:
(a) Approximately $5 million for strategic acquisitions, including
competitors and independent agents, to open new and expand existing markets.
(b) Approximately $5 million to (i) acquire equity interests in the
Company's exclusive independent agents in select markets, including South
Africa, Egypt, Lebanon, Argentina and Peru and (ii) to create agents or
subsidiaries in France, Germany and possibly Brazil. The Company has entered
into agreements with its French and South African agents to conclude such
arrangements. See "Business-- Purchase of Equity Interest in South African
Agency" and "Business--Formation of French Subsidiary."
(c) Approximately $2 million for telecommunications infrastructure
facilities, including switches and other equipment.
(d) Approximately $1 million for general working capital purposes.
The Company retains broad discretion in allocating the proceeds of this
Offering, and the estimates given above, in particular, the allocation of the
$10 million between purchasing complementary businesses and investing in the
Company's agents, will likely change in response to opportunities for
investments and acquisitions. Although the Company is holding ongoing
discussions with various parties and agencies regarding possible acquisitions or
investments, the Company does not have at present any firm commitments therefor,
other than the agreements to form a new joint venture with the Company's French
agents and to purchase a minority interest in its South African agent which will
require aggregate investments by the Company of approximately $900,000 of the
net proceeds of this Offering. See "Business--Purchase of Equity Interest in
South African Agent" and "Business--Formation of French Subsidiary."
Pending their use, the Company will invest the net proceeds of this Offering
in short-term, investment grade, interest bearing securities and deposit
accounts. The Company projects that the net proceeds of this Offering will be
adequate to fund its anticipated capital requirements for approximately 12 to 18
months after the consummation of this Offering.
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CAPITALIZATION
The following table shows the capitalization of the Company as of December
31, 1997 and pro forma as adjusted to reflect the Stock Split (See Note 14 of
Notes to Financial Statement) and the sale of the 1,500,000 shares of Common
Stock offered hereby at an Offering Price of $10.00 per share (the midpoint of
the range of the estimated Offering Price), after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company, and the application of the estimated net proceeds of the Offering as
described under "Use of Proceeds." This table should be read in conjunction with
the Company's financial statements and notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
DEBT:
Loans payable............................................................ $ 85 $ 85
Total debt............................................................. 85 85
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 1,000,000 shares authorized; 1,000
shares issued and outstanding, pro forma as adjusted................... -- --
Common Stock, $.01 par value; 20,000,000 shares authorized; 6,500,000
shares issued and outstanding, pro forma as adjusted (1)............... -- 65
Common Stock--Class A: $50 par value; 500 shares authorized, issued and
outstanding............................................................ 25 --
Common Stock--Class B: $50 par value; 15,500 shares authorized, 3,500
issued and outstanding................................................. 175 --
Common Stock--Class C: $50 par value; 4,000 shares authorized, 1,416.67
shares issued and outstanding, net of discount of $2,084............... 69 --
Additional paid-in capital............................................... -- 13,204
Retained earnings........................................................ 2,502 2,502
--------- -----------
Total shareholders' equity............................................. 2,771 15,771
--------- -----------
Total capitalization................................................. $ 2,856 $ 15,856
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Excludes 425,000 shares of Common Stock subject to options to be granted
upon commencement of the Offering. See "Management-Stock Incentive Plan."
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DIVIDEND POLICY
The Company has not paid any cash dividends to its shareholders since
inception and does not anticipate paying any cash dividends in the foreseeable
future. Any determination to pay dividends will depend on the Company's
financial condition, capital requirements, results of operations, contractual
limitations and any other factors deemed relevant by the Board of Directors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DILUTION
The net tangible book value of the Common Stock as of December 31, 1997 was
approximately $2.6 million, or $0.51 per share of Common Stock. "Net tangible
book value" per share represents the amount of the Company's shareholders'
equity, less intangible assets, divided by the number of shares of Common Stock
outstanding. Dilution per share represents the difference between the amount per
share paid by purchasers of shares of Common Stock in the Offering made hereby
and the pro forma net tangible book value per share of Common Stock immediately
after completion of the Offering. After (i) giving effect to the sale of
1,500,000 shares of Common Stock offered hereby at an assumed Offering Price of
$10.00 per share (the midpoint of the estimated range of the Offering Price),
(ii) deducting the underwriting discounts and commissions, non-accountable
expense allowance, and consulting fee and estimated offering expenses payable by
the Company, the pro forma net tangible book value of the Company as of December
31, 1997 would have been approximately $15.6 million, or $2.39 per share. This
represents an immediate increase in pro forma net tangible book value to the
Existing Shareholders of $1.88 and an immediate dilution of $7.61 to new public
investors purchasing Common Stock in the Offering, as illustrated in the
following table:
<TABLE>
<S> <C>
Assumed offering price per share.................................... $ 10.00
Net tangible book value per share at December 31, 1997............ 0.51
Increase in net tangible book value per share attributable to new
public investors................................................ 1.88
---------
Pro forma net tangible book value per share after the Offering...... 2.39
---------
Dilution per share to new public investors.......................... $ 7.61
---------
---------
</TABLE>
The following table sets forth on a pro forma basis giving effect to the
Offering as of December 31, 1997 the difference between Existing Shareholders
and the purchasers of shares in the Offering with respect to the number of
shares purchased from the Company, the total consideration paid and the average
price paid per share at an assumed Offering Price of $10.00 per share (the
midpoint of the estimated range of the Offering Price):
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
----------------------- -------------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ----------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Existing Shareholders.................... 5,000,000(1) 77%(1) $ 268,750(2) 2%(2) $ 0.05
New public investors..................... 1,500,000 23% 15,000,000 98% 10.00
---------- --- ------------- ---
Total.................................. 6,500,000 100% $ 15,268,750 100%
---------- --- ------------- ---
---------- --- ------------- ---
</TABLE>
- ------------------------
(1) Excludes the effect of 425,000 shares of Common Stock subject to options to
be granted upon commencement of the Offering at the Offering Price.
(2) No portion of the initial purchase price is allocated to the 1,000
outstanding shares of Series A Preferred Stock.
26
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain selected financial information for
the Company for (i) the fiscal years ended March 31, 1995, 1996 and 1997, which
have been derived from the Company's audited financial statements and notes
thereto included elsewhere in this Prospectus, (ii) the fiscal year ended March
31, 1994 which has been derived from unaudited financial statements of the
Company which are not included herein, and (iii) the nine months ended December
31, 1996 and 1997, which have been derived from unaudited financial statements
which are included herein. The information presented as "Other Operating Data"
and for EBITDA is not audited. In the opinion of management, the unaudited
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments, which consist only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and the results of operations for these periods. The results of
operations for the nine months ended December 31, 1997 are not necessarily
indicative of the results which may be expected for the full year. The following
financial information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's financial statements and notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------------------ --------------------
1994 1995 1996 1997 1996 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT FOR PER SHARE AND OTHER OPERATING DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Retail.......................................... $ 848 $ 6,291 $ 13,228 $ 20,523 $ 14,988 $ 18,421
Wholesale....................................... -- -- -- 315 -- 2,608
--------- --------- --------- --------- --------- ---------
Total revenues.............................. $ 848 $ 6,291 $ 13,228 $ 20,838 $ 14,988 $ 21,029
Gross profit...................................... $ 344 $ 2,544 $ 5,553 $ 8,643 $ 6,412 $ 7,240
Operating income (loss)........................... $ (814) $ 159 $ 1,369 $ 2,004 $ 1,488 $ 1,414
Net income (loss)................................. $ (813) $ 382 $ 790 $ 1,253 $ 910 $ 890
Pro forma net income (loss) per share--basic and
dilutive (1).................................... $ (.18) $ .08 $ .16 $ .25 $ .18 $ .18
Weighted average shares outstanding (1)........... 4,615 4,869 5,000 5,000 5,000 5,000
OTHER OPERATING DATA (AT END OF PERIOD):
Retail customers(2)............................... 833 4,456 9,791 15,729 14,408 29,048
Wholesale customers (3)........................... -- -- -- 1 -- 3
Number of employees............................... 9 10 12 17 17 21
OTHER FINANCIAL DATA:
EBITDA (4)........................................ $ (771) $ 231 $ 1,463 $ 2,140 $ 1,573 $ 1,558
Net cash provided by (used in) operating
activities...................................... $ (497) $ 229 $ 672 $ 858 $ 680 $ 959
Net cash (used in) investing activities........... $ (338) $ (173) $ (222) $ (439) $ (284) $ (492)
Net cash (used in) provided by financing
activities...................................... $ 995 $ (40) $ (150) $ (155) $ (130) $ (529)
Capital expenditures.............................. $ 330 $ 143 $ 93 $ 352 $ 205 $ 321
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
AS OF MARCH 31 ---------------------------
------------------------------------------ AS ADJUSTED
1994 1995 1996 1997 ACTUAL (5)
--------- --------- --------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Total current assets.................................... $ 381 $ 1,273 $ 2,363 $ 4,578 $ 5,647 $ 18,683
Working capital (deficiency)............................ (129) 150 811 1,658 1,442 14,478
Total assets............................................ 683 1,720 2,797 5,243 7,042 19,907
Total current liabilities............................... 510 1,122 1,552 2,920 4,205 4,205
Long term debt, less current portion.................... 729 730 580 425 -- --
Total shareholders' equity (capital deficiency)......... (563) (162) 609 1,861 2,771 15,771
</TABLE>
- ------------------------
(1) Pro forma net income (loss) per common share--basic and dilutive, is
computed based on the weighted average number of common shares outstanding
during each period, and gives retroactive effect to the Stock Split. See
Note 14 of Notes to Financial Statements.
(2) Consists of active Company subscribers that were billed in the final month
of the respective periods.
(3) Consists of wholesale customers that had active accounts with the Company in
the respective periods.
(4) EBITDA represents net income (loss) plus net interest expense (income),
income taxes, depreciation and amortization. EBITDA is not a measurement of
financial performance under generally accepted accounting principles and
should not be construed as a substitute for net income (loss), as a measure
of performance, or cash flow as a measure of liquidity. It is included
herein because it is a measure commonly used by securities analysts.
(5) As adjusted to give effect to the Offering. See "Use of Proceeds."
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE RELATED NOTES AND OTHER INFORMATION REGARDING THE COMPANY
INCLUDED ELSEWHERE IN THE PROSPECTUS. THIS DISCUSSION CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL EVENTS OR RESULTS COULD
DIFFER MATERIALLY FROM THOSE ANTICIPATED EVENTS OR RESULTS AS A RESULT OF
CERTAIN FACTORS, INCLUDING, BUT NOT LIMITED TO THE "RISK FACTORS" DISCUSSED
ELSEWHERE IN THE PROSPECTUS.
OVERVIEW
The Company is a provider of international telecommunications services. The
Company offers a broad range of discounted international and enhanced
telecommunication services, including U.S. originated long distance service and
direct-dial international service, typically to small and medium-sized
businesses and travelers. The Company's primary service is call reorigination,
which accounted for approximately 76% of its revenues for the nine months ended
December 31, 1997. The Company also sells services to other carriers on a
wholesale basis. The Company's retail customer base, which includes corporations
and individuals, is primarily located in South Africa, Latin America, the Middle
East (Lebanon and Egypt), Russia and France. The Company operates a
switched-based digital telecommunications network. The Company installed its
first switch in Sunrise, Florida, which became fully operational in October
1993. Revenues were first earned in November 1993. The Company has acquired an
additional switch, which was installed in Paris, France during the quarter ended
March 31, 1998 and which became operational on April 1, 1998. From November 1993
until the current time, the Company has grown by marketing its services through
a worldwide network of independent agents which service in the aggregate
approximately 29,000 registered Company subscribers as of December 31, 1997.
Usage of the Company's services has increased from 552,374 minutes in the fiscal
year ended March 31, 1994 to 22,787,792 minutes in the nine months ended
December 31, 1997.
The Company's management believes that the funds raised by the Offering will
allow the Company to expand its customer base and the number of markets it
penetrates by:
a) acquiring competitors using a portion of the proceeds of the
Offering as the equity component of the purchase price for strategic
acquisitions, and using debt as the other component of the purchase price.
The Company believes such leveraged acquisitions would add additional annual
revenues to its business. Deregulation and increased competition in the
telecommunications industry have created a strong motivation to gain market
share rapidly in selective markets through acquisitions.
b) acquiring equity interests in the Company's exclusive agents in
selected markets to further cement the contractual relationships with these
agents and to expand the Company's business in markets offering favorable
opportunities and returns.
c) deploying new technologies such as IP telephony technology to bypass
today's switched telephone network by using cost-effective packet switched
networks and/or the public Internet for the delivery of fax and some voice
communications. The Company intends to deploy a number of fax servers in
selected countries to exploit the opportunities provided by IP telephony
technology. This strategy will allow for more aggressive market penetration
in selected markets, particularly in regulated markets, and a possible
reduction in transmission costs.
d) purchasing telecommunications equipment, including switches, using
financing arrangements in order to expand the Company's wholesale business
and its direct access Network, particularly where demand by existing
customers warrants the capital investment required to migrate such customers
from a call reorigination to a direct access method.
29
<PAGE>
REVENUE
The geographic origin of the Company's revenues is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
--------------------------------- ----------------------
1995 1996 1997 1996 1997
--------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Africa...................... $ 369,087 $1,403,094 $3,899,701 $2,596,455 $6,057,730
Europe...................... 316,903 1,988,030 4,252,104 3,278,474 3,013,155
Latin America............... 4,387,351 6,337,284 7,265,473 5,420,058 5,050,602
Middle East................. 413,796 2,101,864 3,741,890 2,726,301 3,500,512
Other....................... 803,375 1,397,802 1,363,852 966,441 1,395,126
United States............... -- -- 315,407 -- 2,011,988
--------- ---------- ---------- ---------- ----------
$6,290,512 $13,228,074 $20,838,427 $14,987,729 $21,029,113
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
</TABLE>
The Company's subscriber base has grown as follows:
<TABLE>
<CAPTION>
AS OF: NUMBER OF SUBSCRIBERS
- ------------------------------------------------------------------------------------------- ---------------------
<S> <C>
December 31, 1997.......................................................................... 29,048
March 31, 1997............................................................................. 15,729
March 31, 1996............................................................................. 9,791
March 31, 1995............................................................................. 4,456
</TABLE>
The number of the Company's independent agents has varied as follows:
<TABLE>
<CAPTION>
AS OF: NUMBER OF INDEPENDENT AGENCY AGREEMENTS
- ------------------------------------------------------------------------- ---------------------------------------------
<S> <C>
December 31, 1997........................................................ 15
March 31, 1997........................................................... 17
March 31, 1996........................................................... 15
March 31, 1995........................................................... 11
</TABLE>
The percentage of retail (minutes sold to retail end users) and wholesale
(minutes sold to other telecommunication carriers) revenues has been as follows:
<TABLE>
<CAPTION>
PERIOD ENDED RETAIL % WHOLESALE %
- ------------------------------------------------------------------------------------------ ----------- ---------------
<S> <C> <C>
Nine Months Ended December 31, 1997....................................................... 87.6% 12.4%
Year Ended March 31 1997.................................................................. 98.5% 1.5%
Year Ended March 31, 1996................................................................. 100% --
Year Ended March 31, 1995................................................................. 100% --
</TABLE>
The Company expects that wholesale revenues will increase in the near term,
and may become a more significant portion of the Company's total revenue. The
Company generates retail revenues primarily through its independent agents. No
single Company subscriber represents 1% or more of the Company's revenue. Agency
agreements generally are exclusive and typically have an initial term of five
years with two additional three-year renewal periods. The four largest
independent agents account for approximately 64% of the Company's revenue for
the nine months ended December 31, 1997. Any material disruption in or
termination of these agreements could have a material adverse effect on the
Company's operations.
The Company believes its retail services are priced below those of the ITOs
in each country in which the Company offers its services. Prices for
telecommunications services in many of the Company's core markets have declined
as a result of deregulation and increased competition. The Company believes that
worldwide deregulation and increased competition are likely to continue to
reduce the Company's retail revenues per billable minute. The Company believes,
however, that any decrease in retail revenues per
30
<PAGE>
minute will be at least partially offset by an increase in billable minutes by
the Company's customers, and by decreased cost per billable minute as a result
of the deployment of direct access facilities, the application of IP telephony
technology particularly for fax transmissions and the Company's ability to
exploit purchasing discounts based on increased traffic volumes.
COST OF GOOD SOLD AND GROSS MARGIN
The most significant portion of the Company's cost of telecommunications
services are transmission and termination costs, which vary based on the number
of minutes used. The Company purchases switched minutes from other carriers. The
Company has historically purchased a portion of the minutes subject to fixed
volume commitments. Carriers have recently reserved the right to terminate these
agreements upon short notice. The Company has historically been able to arrange
favorable volume purchase arrangements based upon its high usage and excellent
credit history, and these arrangements continue under more recent terminable
agreements.
During the last year, the Company's segment of the international
telecommunications industry has experienced a general tightening of gross
margins due to declining retail and wholesale prices. The Company's own gross
margin results, particularly for the nine months ended December 31, 1997, have
reflected this trend. Factors impacting the Company's lower gross margin
compared to earlier periods include declining retail prices, development of the
wholesale business with lower profit margins (averaging approximately 5% to
10%), and increased incremental costs associated with the Company's call
reorigination customers. The reduction in retail prices reflects increased
competition arising from deregulation as well as the Company's strategic
decision to gain market share and increase revenue through more competitive
pricing. By increasing total minutes purchased through aggressive retail
expansion and development of a wholesale business, the Company expects to reduce
the rates it pays for switched minutes through volume discounts and other
mechanisms. The benefits of such cost reductions have a slower impact on the
Company's operating results compared to the more immediate revenue reductions
resulting from price discounting. The Company expects that deregulation and
increasing competition will continue to reduce revenues per minute thereby
reducing profit margins, particularly for the Company's call reorigination
business, which results in high variable costs, including non-billable access
costs.
The Company's costs of providing telecommunications services to customers
consist largely of: (i) variable costs associated with origination, transmission
and termination of voice and data telecommunications services over other
carriers' facilities, and (ii) costs associated with owning or leasing and
maintaining switching facilities and circuits. Currently, the variable portion
of the Company's cost of revenue predominate, based on the large proportion of
call reorigination customers and the number of minutes of use transmitted and
terminated over other carrier's facilities. Thus, the Company's existing gross
profitability primarily reflects the difference between revenues and the cost of
transmission and termination over other carrier's facilities. Therefore, the
Company seeks to lower the variable portion of its cost of services by
eventually originating, transporting and terminating a higher portion of its
traffic over its own Network or via media such as the Internet and private data
networks, and by increasing its purchasing power and volume discounts through
the increase of the number of minutes it purchases for other carriers.
The Company realizes higher gross margins from its retail services than from
its growing wholesale services. However, wholesale services provide a source of
additional revenues and add significant minutes originating and terminating on
the Company's Network, enhancing the Company's purchasing power for switched
minutes and enabling it to take advantage of volume discounts.
The Company seeks to reduce its cost of revenues by expanding and upgrading
the Network, adding to the Network more owned and leased facilities, and
increasing the traffic volume carried by these facilities, so that the
percentage of the Company's revenues based on variable costs, including higher
access costs from call reorigination, will decline as revenues based on a fixed
cost structure increase, thereby allowing
31
<PAGE>
the Company to spread the fixed costs over increasing traffic volumes;
negotiating lower cost of transmission over the facilities owned and operated by
other carriers, principally through increased purchasing volumes; and expanding
the Company's least cost routing choices and capabilities.
The Company's overall gross margins may, however, fluctuate in the future
based on its mix of wholesale and retail international long distance services
and the percentage of calls using direct access and/ or call-through compared to
call reorigination.
OPERATING EXPENSES
Operating expenses include: commissions, selling expenses, general and
administrative expenses and depreciation and amortization expenses.
The Company pays commission expense to its network of independent agents
pursuant to long-term agency agreements. The Company's decision to use
independent agents has been driven by the low initial fixed costs associated
with this distribution channel, and the agents' familiarity with local business
and marketing practices. The percentage of retail revenue paid for commissions
has been as follows:
<TABLE>
<S> <C>
Nine Months Ended December 31, 1997................................................. 17.4%
Nine Months Ended December 31, 1996................................................. 18.5%
Year Ended March 31, 1997........................................................... 18.4%
Year Ended March 31, 1996........................................................... 18.4%
Year Ended March 31, 1995........................................................... 19.5%
</TABLE>
Because the Company's contracts with its agents generally are long-term, the
Company expects these costs to remain stable as a percentage of revenue. The
Company has not paid commissions to generate wholesale sales. The aggregate
sales commissions paid by the Company have increased over the past three years
as its business has expanded. The Company anticipates that in the future
revenues from direct access (which carries lower commission rates) and
especially wholesale services (which involve minimal or no commissions) will
increase relative to its existing services, and therefore commissions will
decline as a percentage of revenues.
Selling expenses (exclusive of commissions) consist of selling and marketing
costs, including salaries and benefits, associated with attracting and servicing
independent agents. The Company performs standard due diligence prior to signing
agency agreements and then expends significant time training the agents in the
Company's practices and procedures.
The Company's general and administrative expenses consist of salaries and
benefits and corporate overhead. Included in salaries through December 31, 1997
is a bonus of $0.45 million paid to two officers of the Company. See Note to
Financial Statements--Note 9--Commitments. These arrangements have been
terminated and replaced with new employment agreements. See
"Management--Employment Agreements." Bad debt expense has never exceeded 0.5% of
total revenue. In addition, the cost of collecting accounts receivable is
minimal. The Company has achieved these results because of its ability to
attract, train and retain high quality independent agents and because the
independent agents contractually assume the risk of credit loss and the cost of
collection on the underlying sales. The Company's financial results may reflect
higher levels of bad debt losses as its wholesale and other lines of business
expand and as it makes equity investments in its independent agents. The Company
expects that general and administrative expenses may increase as a percentage of
revenues in the near term as the Company incurs additional costs associated with
its development and expansion, expansion of its marketing and sales
organization, and introduction of new telecommunications services.
In addition to the Company's efforts to reduce its cost of goods sold by
migrating customers to direct access by deploying IP telephony technology and
maximizing volume discounts, the Company also actively manages and seeks to
reduce its selling, general and administrative expenses. As part of this focus,
the
32
<PAGE>
Company uses its network of exclusive independent agents to bear much of the
marketing expenses that its competitors may bear directly. Furthermore, the
Company's strategy of using its competitors' infrastructure to carry its
telecommunications traffic also controls the Company's fixed costs. The Company
aggressively manages its back office systems, by developing and implementing
efficient computerized systems in order to maximize selling, general and
administrative expenses ("SG&A") efficiency (e.g., revenue and EBITDA per Dollar
of SG&A) and maximize the Company's existing productivity per employee.
Depreciation and amortization expense consists primarily of the expenses
associated with the Company's investments in equipment, and will continue to
increase substantially as the Company installs additional switches and other
fixed facilities. The Company expects these increased costs will be amortized
over an increased revenue base, resulting in stable percentage costs.
Other income (expense) consists primarily of interest expense on long-term
debt and interest income earned in connection with advances to officers and
consultants and short-term investments.
SUMMARY OF OPERATING RESULTS
(STATED AS A PERCENTAGE OF REVENUES)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED DECEMBER 31,
YEAR ENDED MARCH 31,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues......................................... 59.6 58.0 58.5 57.2 65.6
Gross profit............................................. 40.4 42.0 41.5 42.8 34.4
Operating expenses:
Commission............................................. 19.5 18.4 18.1 18.5 15.2
Selling, general and administrative (exclusive of
bonuses paid to officers)............................ 16.9 10.0 10.8 11.4 9.7
Bonuses paid to officers............................... 0.4 2.5 2.4 2.4 2.1
Depreciation and amortization.......................... 1.1 0.7 0.6 0.6 0.6
Total operating expenses................................. 37.9 31.6 31.9 32.9 27.7
Operating income......................................... 2.5 10.3 9.6 9.9 6.7
Other expense (Income)................................... 1.0 0.4 0.1 0.2 (0.1)
Income before income taxes............................... 1.6 9.9 9.6 9.8 6.8
Income tax expense (benefit)............................. (4.5) 4.0 3.5 3.7 2.5
Net income............................................... 6.1 6.0 6.0 6.1 4.3
</TABLE>
NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1996
REVENUES. Revenues increased $6.0 million (40.3%) from $15.0 million in the
nine months ended December 31, 1996 to $21.0 million in the nine months ended
December 31, 1997. The increase in revenues reflects increased billed retail
customer minutes, particularly in the South African and Middle Eastern markets.
In addition, the Company earned $2.6 million of wholesale revenue in the current
period, with no comparable prior period wholesale revenues.
COST OF REVENUES. Cost of revenues increased by $5.2 million (60.8%) from
$8.6 million in 1996 to $13.8 million in 1997. The increase in cost of revenues
primarily reflects an increase in sales volume, based on number of minutes sold.
Costs of revenues as a percentage of sales increased from 57.2% to 65.6%,
because selling prices per minute decreased faster than costs per minute. This
increase in the Company's costs as a percentage of revenues primarily reflects
declining retail prices, the growth of the less profitable wholesale business,
and increasing incremental non-billable access costs associated with the
Company's call
33
<PAGE>
reorigination business. As discussed in "Costs of Goods Sold and Gross Margin"
above, retail price reductions tend to reduce gross revenues before the benefits
of the negotiated volume-based rate reductions by carriers can be realized. The
Company's margins in the first nine months of the fiscal year ended March 31,
1998 reflected this trend, despite the increased costs of revenues being in part
mitigated by the settlement of a dispute regarding a purchase contract from a
supplying carrier. The effect of such settlement was a one-time savings in cost
of revenues equal to 3.1% of total revenues.
GROSS PROFITS. Gross profit increased $0.8 million (12.9%) from $6.4
million in 1996 to $7.2 million in 1997. As a percentage of revenue, gross
profit decreased 8.4% from 42.8% in 1996 to 34.4% in 1997. Gross profit margin
decreased because sales price per minute decreased faster than cost price per
minute, and the Company began its wholesale carrier business which operates on
much lower gross profit margins. The reduction in prices reflects price
competition from deregulation as well as the Company's strategic decision to
gain market share and increase revenue through more competitive pricing. By
increasing total minutes purchased not only through aggressive retail expansion,
but also through expansion of its wholesale business, the Company eventually
expects to reduce the rates it pays for switched minutes through volume
discounts and other mechanisms.
OPERATING EXPENSES. Operating expenses increased $0.9 million from $4.9
million in 1996 to $5.8 million in 1997. The increase was due to an increase in
commission expense of $0.4 million (reflecting increased gross revenues in spite
of a 1.10% decrease in total commission paid to agents as a percentage of retail
revenues), and increases in salaries and wages of $0.4 million and a general
SG&A expenses increase of $0.1 million. Operating expenses as a percentage of
revenues decreased by 5.2%, primarily because additional selling, general and
administrative expenses were more than offset by increased revenues in the
period and the Company's overhead expenses were absorbed by a larger base of
revenues.
Depreciation and amortization expense increased approximately $47,000 from
approximately $86,000 in 1996 to approximately $133,000 in 1997 as a result of
switch upgrades, the purchase of additional computer equipment and software, and
leasehold improvements.
INTEREST EXPENSE. Interest was approximately $30,000 in 1996 and $20,000 in
1997, reflecting a reduction in the Company's outstanding long-term debt.
OPERATING INCOME. Operating income decreased $0.1 million from $1.5 million
in 1996 to $1.4 million in 1997 primarily as a result of decreased gross margin
rates due to the increase in cost of revenues from 57.2% to 65.6% of revenues,
this despite the fact that SG&A as a percentage of revenues decreased by 2.0%.
Other operating expenses did not change significantly.
NET INCOME. As a result of all of the foregoing factors, and in particular
because of the Company's strategic decision to increase its gross revenues
through price reductions, the Company's net income remained unchanged at $0.9
million.
YEAR ENDED MARCH 31, 1997 COMPARED TO MARCH 31, 1996
REVENUES. Revenues increased $7.6 million (57.6%), from $13.2 in 1996 to
$20.8 million in 1997. The increase in revenues primarily resulted from an
increase in billed customer minutes from retail sales, principally in the
international call reorigination business. This increase reflects the Company's
increased market penetration, especially in the South African, Russian and
Middle Eastern markets. The total number of independent agents increased from 15
to 17. In addition, the Company earned wholesale revenues of $0.3 million in
1997 with no corresponding amount in 1996.
COST OF REVENUES. Cost of revenues increased $4.5 million (58.9%) from $7.7
million in 1996 to $12.2 million in 1997, principally reflecting the increased
amount of traffic being handled by the Company. The slight (0.5%) increase in
cost of revenues as a percentage of revenues reflects the Company's wholesale
34
<PAGE>
revenues in the period (with a lower profit margin than retail revenues) of $0.3
million, with no corresponding amount in the prior period.
GROSS PROFIT. Gross profit increased $3.1 million (55.6%) from $5.5 million
in 1996 to $8.6 million in 1997 reflecting the increase in number of minutes
billed. As a percentage of revenue, gross profit decreased from 42.0% in 1996 to
41.5% in 1997.
OPERATING EXPENSES. Operating expenses increased $2.4 million (58.7%) from
$4.2 million to $6.6 million. This increase was due to an increase in commission
costs of $1.3 million attributable to the increased sales volume generated by
the Company's independent agents. Bonuses paid to officers pursuant to their
employment agreements, additional consulting and travel expenses related to
maintaining and improving agency relations, additional legal and professional
fees and travel expenses related to the attempt by the Company to secure
expansion financing and negotiate strategic alliances resulted in increased
costs of $0.5 million. In addition, the Company increased staffing levels from
12 to 17 and secured additional office facilities at its headquarters in
Sunrise, Florida resulting in increased costs of $0.2 million. The growth in
other categories of operating expenses of $0.4 million related primarily to the
Company's increased level of activity.
Depreciation and amortization expense increased approximately $30,000 as a
result of switch upgrades, the purchase of additional computer equipment and
software, and leasehold improvements incurred in connection with the office
expansion.
As a percentage of revenue, operating expenses increased slightly to 31.9%
in 1997 from 31.6% in 1996, as additional revenue offset the additional costs
and expenses.
OPERATING INCOME. Operating income increased by $0.6 million (46.4%) from
$1.4 million in 1996 to $2.0 million in 1997. As a percentage of revenue,
operating income decreased by 0.7% to 9.6% in 1997 from 10.3% in 1996, primarily
reflecting a 0.5% reduction created by the impact of the commencement of the
lower margin wholesale business in 1997.
INTEREST EXPENSE. Interest expense decreased to approximately $40,000 from
approximately $60,000, reflecting reductions in long-term debt.
NET INCOME. As a result of these factors, and principally reflecting the
growth in the Company's minutes billed to customers, net income increased to
$1.3 million from $0.8 million in 1996.
YEAR ENDED MARCH 31, 1996 COMPARED TO MARCH 31, 1995
REVENUES. Revenues increased $6.9 million (110.3%) from $6.3 million in
1995 to $13.2 million in 1996, primarily from an increase in billed customer
minutes from international call reorigination. The Company also opened new
markets by entering into four new independent agency agreements in the period,
and increased its market penetration within existing markets.
COST OF REVENUES. Cost of revenues increased $4.0 million from $3.7 million
in 1995 to $7.7 million in 1996, primarily as a result of the increase in
traffic volume. Cost of revenues as a percentage of revenues decreased from
59.6% to 58.0%, reflecting the negotiation of volume discounts and other
favorable carrier agreements.
GROSS PROFITS. Gross profits increased $3.0 million (118.3%) from $2.5
million in 1995 to $5.6 million in 1996. As a percentage of revenue, gross
profit increased to 42.0% in 1996 from 40.4% in 1995 due to favorable
negotiations of the cost of switched minutes provided by carriers.
OPERATING EXPENSES. Operating expenses increased $1.8 million (75.4%) from
$2.4 million in 1995 to $4.2 million in 1996. As a percentage of revenues,
overall operating expenses decreased from 37.9% in 1995 to 31.6% in 1996,
primarily because increased selling, general and administrative expenses were
more
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than offset by increased revenues in the period, and the Company's overhead
expenses were absorbed by a larger base of revenues. Commissions increased by
$1.2 million from 1995 to 1996 as a direct result of increased revenues.
Commissions as a percentage of revenue decreased from 19.5% in 1995 to 18.4% in
1996, primarily because of commission adjustments with the agents. Officers'
salaries and bonuses increased $0.2 million from $0.4 million in 1995 to $0.7
million in 1996 primarily as a result of the provisions, in effect until
December 31, 1997, contained in the officers' contracts that provided for bonus
payments as a fraction of the Company's income before taxes. These agreements
have been terminated and replaced by new contracts with these officers effective
January 1, 1998. See "Management-Employment Agreements." Other expenses
increased $0.3 million, primarily as a result of increases in employment and
payments under a consulting agreement.
Depreciation and amortization expense increased approximately $20,000 from
approximately $70,000 in 1995 to approximately $90,000 in 1996, primarily due to
capital expenditures for switch equipment and computer equipment.
INTEREST EXPENSE. Interest expense was approximately $60,000 in 1995 and
1996. Average long-term debt outstanding, and the interest rate charged during
the two periods did not change significantly.
OPERATING INCOME. Operating income increased by $1.2 million, from $0.2
million in 1995 to $1.4 million in 1996, as a result of increased sales and the
resultant increased gross profit. In addition the Company's operating expenses
declined from 37.9% to 31.6% of total revenues from 1995 to 1996 as a result of
a decrease in the commission pay-out to agents and a decrease in SG&A of 6.5% in
relation to total revenues.
NET INCOME. Net income increased $0.4 million (107%) from $0.4 million in
1995 to $0.8 million in 1996 as a result of increased levels of operating income
and the elimination of the Company's deferred tax asset valuation allowance in
1995 resulting in an increased income in 1995 of $0.3 million. Had this tax
benefit not been realized in 1995, net income in 1996 would have increased by
$0.7 million over 1995 amounts.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements consist of capital expenditures in
connection with the acquisition and maintenance of switching capacity and
working capital requirements. Historically, the Company's capital requirements
have been met primarily through funds provided by operations, term loans funded
or guaranteed by its majority shareholder and capital leases.
Subsequent to December 31, 1997, the Company repaid an outstanding term loan
of $85,000 from Citibank-Zurich and terminated its loan agreement. On February
9, 1998, the Company acquired a switch under a capital lease. The switch has a
capitalized cost of $335,280. On March 17, 1998, the Company acquired equipment
under a capital lease. The equipment has a capitalized cost of $33,372. See
"Notes to Financial Statements--Note 14--Subsequent Events (unaudited)."
Following completion of the Offering, the Company may seek to obtain a
stand-by credit facility for working capital needs, capital leasing requirements
and/or other unanticipated financing needs.
Net cash provided by operating activities was $0.2 million in 1995, $0.7
million in 1996 and $0.9 million in 1997. The net cash provided by operating
activities in 1996 and 1997 mainly reflects net earnings offset by an increase
in accounts receivable relative to accounts payable to carriers. For the nine
months ended December 31, 1997 compared to the same period in 1996, net cash
provided by operating activities increased by approximately $0.3 million
reflecting net earnings being offset by an increase in accounts receivable
resulting primarily from longer payment cycles from the Company's agents,
relative to the Company's accounts payable to carriers. In addition, an income
tax receivable which represented an
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overestimation of actual tax payments in prior periods was applied against
estimated tax payments for the current period.
Net cash used in investing activities was $0.2 million in 1995, $0.2 million
in 1996, and $0.4 million in 1997. The net cash used in investing activities in
1995, 1996, and 1997 principally reflects an increase in equipment purchases.
Net cash used in investing activities for the nine months ended December 31,
1997 was $0.5 million principally reflecting an increase in equipment purchases
and a deposit towards the purchase of an equity stake in the South African
agency and partially offset by repayments of loans by related parties.
Net cash used in financing activities was approximately $40,000 in 1995,
$150,000 in 1996, and $155,000 in 1997. The activities consisted of debt
repayment, primarily to the Company's bank for long-term financing obtained in
1993 and 1994. Net cash used in financing activities for the nine months ended
December 31, 1997 was approximately $529,000 reflecting debt repayment and
deferred costs related to the Company's planned Offering.
The Company expects that the net proceeds from the Offering, together with
internally generated funds, will provide sufficient funds for the Company to
expand its business as planned and to fund anticipated growth for the next 12 to
18 months. However, the amount of the Company's future capital requirements will
depend upon many factors, including performance of the Company's business, the
rate and manner in which it expands, staffing levels and customer growth, as
well as other factors not within the Company's control, including competitive
conditions and regulatory or other government actions. If the Company's plans or
assumptions change or prove to be inaccurate or the net proceeds of the
Offering, together with internally generated funds or other financing, prove to
be insufficient to fund the Company's growth and operations, then some or all of
the Company's development and expansion plans could be delayed or abandoned, or
the Company may be required to seek additional funds earlier than anticipated.
In order to provide flexibility for potential acquisition and network expansion
opportunities, the Company may seek in the near future to enter into a financing
arrangement. Other future sources of capital for the Company could include
public and private debt, including a high yield debt offering, and equity
financing. There can be no assurance that any such sources of financing would be
available to the Company in the future or, if available, that they could be
obtained on terms acceptable to the Company. While such a financing may provide
the Company additional capital resources that may be used to implement its
business plan, the incurrence of indebtedness could impose risks, covenants and
restrictions on the Company that may affect the Company in a number of ways,
including the following: (i) a significant portion of the Company's cash flow
from operations may be required for the repayment of interest and principal
payments arising from the financing, with such cash flow not being available for
other purposes; (ii) such a financing could impose covenants and restrictions on
the Company that may limit its flexibility in planning for, or reacting to,
changes in its business or that could restrict its ability to redeem stock,
incur additional indebtedness, sell assets and consummate mergers,
consolidations, investments and acquisitions; and (iii) the Company's degree of
indebtedness and leverage may render it more vulnerable to a downturn in its
business or in the telecommunications industry or the economy generally.
SEASONALITY
The Company has historically experienced, and expects to continue to
experience, a decrease in the use of its services in the months of August and
December due to the closing of many businesses for holidays in Europe and the
United States during those months.
IMPACT OF YEAR 2000
The Company is currently in the process of evaluating whether it will
encounter any problems related to the year 2000. These problems, which have been
widely reported in the media, could cause malfunctions in certain software and
databases with respect to dates on or about 2000. Most of the Company's computer
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systems, software and databases are proprietary to the Company and are year 2000
compliant. The Company is in the process of evaluating if carriers and other
third parties with which it contracts for services anticipate any year 2000
difficulties, and if so whether those problems would be of a nature that could
adversely affect the Company. The Company will request that such third parties
advise the Company as to whether or not they anticipate any difficulties in
addressing year 2000 problems and, if so, whether or not the Company would be
adversely affected by any of such problems. The Company will continue to monitor
the impact on the Company of issues related to the year 2000.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 130, "COMPREHENSIVE INCOME:
FINANCIAL STATEMENT PRESENTATION" which requires that all items that are
required to be recognized under the accounting standards as components of
comprehensive income be reported in a financial statement that is displayed as
prominently as other financial statements. Statement No. 130 is effective for
the Company's fiscal year ending March 31, 1999. The adoption of Statement No.
130 is not expected to materially affect the Company's financial statements.
In June 1997, the FASB issued Statement No. 131, "DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION" which requires a company to disclose
segment profit or loss and segment assets. Statement No. 131 is effective for
the Company's fiscal year ending March 31, 1999. The adoption of Statement No.
131 will require the Company to upgrade its accounting systems in order to
accumulate segment information.
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THE INTERNATIONAL TELECOMMUNICATIONS INDUSTRY
THE MARKET AND TRENDS
The international telecommunications industry provides voice and data
transmission from one national telephone network to another. The industry has
experienced dramatic changes during the past decade resulting in significant
growth in the use of services and enhancements to technology. The industry is
expecting similar growth in revenue and traffic volume in the foreseeable
future. According to the ITU, the international telecommunications industry
accounted for $61.3 billion in revenues and 70 billion minutes of use in 1996,
increasing from $23.9 billion in revenues and 19.1 billion minutes of use in
1987, which represent compound annual growth rates of 11% and 15.5%,
respectively. The ITU projects that revenues will approach $82.2 billion by the
year 2000 with the volume of traffic expanding to 114 billion minutes of use,
representing compound annual growth rates of 7.6% and 13%, respectively, from
1996. The market for telecommunications services is highly concentrated, with
Europe and the United States accounting for approximately 41.4% and 32.3%,
respectively, of the industry's worldwide international minutes of use in 1996,
while Asia represented 17%, Latin America 5.1% and Africa 1.9%. AT&T, Deutsche
Telecom, MCI WorldCom, France Telecom and British Telecom originated
approximately 37.4% of the aggregate international long distance traffic minutes
in 1996.
The industry is being shaped by the following trends: deregulation and
privatization of telecommunications markets worldwide; diversification of
services through technological innovation; globalization of major carriers
though market expansion, consolidation and strategic alliances; greater consumer
demand; increases in international business travel; privatization of ITOs;
growth of computerized transmission of voice and data information; and the
introduction of IP telephony technology. These trends have sharply increased the
use of, and reliance upon, telecommunications services throughout the world. The
Company believes that despite these trends, a high percentage of the world's
businesses and residential consumers continue to be subject to high prices and
poor quality of service. Demand for improved service and lower prices have
spurred deregulation and created opportunities for private industry to compete
in previously closed or restricted sectors of the international market.
Increased competition, in turn, has spurred a broadening of products and
services, and new technologies have contributed to improved quality and
increased transmission capacity and speed.
Significant legislation and agreements adopted since the beginning of 1996
are expected to lead to further liberalization of the majority of the world's
telecommunication markets. These agreements or directives include:
- THE U.S. TELECOMMUNICATIONS ACT, signed in February 1996, establishes
parameters for the implementation of full competition in the U.S. national
long distance market.
- THE EU FULL COMPETITION DIRECTIVE, adopted in March 1996, abolishes
exclusive rights for the provision of Voice Telephony services throughout
the EU and the PSTNs of any member country of the EU by January 1, 1998,
subject to extension by an EU member country.
- THE WORLD TRADE ORGANIZATION AGREEMENT, signed in February 1997 (the "WTO
Agreement"), creates a framework under which 69 countries including the
United States have committed to liberalize their telecommunications laws
in order to permit increased competition and, in most cases, foreign
ownership in their telecommunications markets, beginning in 1998. The WTO
Agreement could provide the Company with significant opportunities to
compete in markets that were not previously accessible. In some countries,
for example, the Company would be allowed under the agreement to own
facilities or to interconnect to the public switched network on reasonable
and non-discriminatory terms. There can be no assurance, however, that the
pro-competitive effects of the WTO Agreement will not have a material
adverse effect on the Company's business, financial condition and results
of operations or that members of the WTO will implement the terms of the
WTO Agreement.
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By eroding the traditional monopolies held by ITOs, many of which are wholly
or partially government owned, deregulation is providing the U.S.-based
providers opportunities to negotiate more favorable agreements with both
traditional ITOs and alternative emerging foreign providers. In addition,
deregulation in certain foreign countries is enabling U.S.-based providers to
establish local switching and transmission facilities in order to terminate
their own traffic and begin to carry international long distance traffic
originated in those countries.
In order to succeed in the changing telecommunications market, small- and
medium-sized carriers (including the Company) must offer their customers a full
range of services. To date, most carriers do not have the critical mass of
customers to receive large volume discounts on international traffic from the
larger facilities-based carriers such at AT&T, MCI WorldCom and Sprint. In
addition, small- and medium-sized carriers have only a limited ability to invest
in international facilities. Alternative international carriers such as the
Company are beginning to capitalize on the demand for less expensive
international transmission facilities by taking advantage of increasing traffic
volumes to obtain volume discounts on international routes (resale traffic)
and/or potentially invest in facilities when volume on particular routes justify
such investments.
ACCESS TO CARRIER SERVICES
International switched long distance services are provided through switching
and transmission facilities that automatically route calls to circuits based
upon a predetermined set of routing criteria. In the U.S., an international long
distance call typically originates on a LEC's network and is switched to a
caller's domestic long distance carrier. The domestic long distance provider
then carries the call to its own or another carrier's international gateway
switch. From there it is carried to a corresponding gateway switch operated in
the country of destination by the ITO of that country and then is routed to the
party being called though that country's domestic telephone network.
International long distance providers can generally be categorized by the
extent, if any, of their ownership and use of their own switches and
transmission facilities. The largest U.S. carriers, AT&T, Sprint, and MCI
WorldCom, primarily utilize owned transmission facilities and generally use
other long distance providers to carry their overflow traffic. Only the largest
U.S. carriers have operating agreements and own transmission facilities that
carry traffic to almost any country. A significantly larger group of
international long distance providers own and operate their own switches but
either rely solely on resale agreements with other long distance carriers to
terminate their traffic or use a combination of resale agreements and leased or
owned facilities in order to terminate their traffic.
SWITCHED RESALE ARRANGEMENTS. A switched resale arrangement typically
involves the wholesale purchase of termination services by one long distance
provider from another on a variable, per minute basis. Such resale, which
was first permitted with the deregulation of the U.S. market, enabled
alternative international providers to rely at least in part on transmission
services acquired on a wholesale basis from other long distance providers. A
single international call may pass through the facilities of multiple long
distance resellers before it reaches the foreign facilities-based carrier
that ultimately terminates the call. Resale arrangements set per minute
prices for different routes, which may be guaranteed for a set time period
or subject to fluctuation following notice to the user.
TRANSIT ARRANGEMENTS. In addition to utilizing an operating agreement to
terminate traffic delivered from one country directly to another, an
international long distance provider may enter into transit arrangements
pursuant to which a long distance provider in an intermediate country
carries the traffic to the country of destination.
ALTERNATIVE TRANSIT/TERMINATION ARRANGEMENTS. As the international long
distance market began to deregulate, long distance providers developed
alternative transit/termination arrangements in an effort to decrease their
costs of terminating international traffic. Some of the more significant of
these arrangements include refiling, ISR and ownership of switching
facilities in foreign countries. Refiling
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of traffic, which takes advantage of disparities in settlement rates between
different countries, allows traffic to a destination country to be treated
as if it originated in another country having lower settlement rates than
the destination country, thereby resulting in a lower overall termination
costs. The difference between transit and refiling is that, with respect to
transit, the long distance provider in the destination country has a direct
relationship with the originating long distance provider and is aware of the
arrangement, while with refiling, it is likely that the long distance
provider in the destination country is not aware of the country in which the
traffic originated or of the identity of the originating carrier.
ISR allows a long distance provider to bypass completely the accounting
rates system by connecting an international leased private line to the PSTN
of a foreign country or directly to premises of a customer or foreign
partner. Applicable regulatory authorities currently only sanction ISR on a
limited number of routes, but it is increasing in use and is expected to
expand significantly as deregulation continues. Deregulation also has made
it possible for U.S. based long distance providers to establish their own
switching facilities in certain foreign countries, enabling them to directly
terminate traffic.
OPERATING AGREEMENTS. Under traditional operating agreements,
international long distance traffic is exchanged under bilateral agreements
between international long distance providers that have rights in facilities
in different countries. Operating agreements provide for the termination of
traffic in, and return traffic from, the international long distance
providers' respective countries at a negotiated "accounting rate." Under a
traditional operating agreement, the international long distance provider
that originates more traffic compensates the long distance provider in the
other country by paying an amount determined by multiplying the net traffic
imbalance by the latter's share of the accounting rate.
By negotiating resale agreements with carriers who have entered into
operating agreements, the Company can take advantage of such carrier's
economic incentive to increase outgoing traffic to a particular country. The
resold call volume increases the market share for that carrier to a
particular country, thereby increasing such carrier's proportionate return
traffic from the correspondent under the accounting rate process.
Under a typical operating agreement each carrier has a right in its
portion of the transmission facilities between two countries. A carrier
acquires ownership rights in a digital fiber-optic cable by purchasing
direct ownership in a particular cable (usually prior to the time the cable
is placed in service), by acquiring an "Indefeasible Right of Use" ("IRU")
in a previously installed cable, or by leasing or obtaining capacity from
another long distance provider that either has direct ownership or IRU
rights in the cable. If a long distance provider has sufficiently high
traffic volume, routing calls across leased or IRU cable capacity is
generally more cost-effective on a per call basis than the use or resale
arrangements with other long distance providers. However, leased capacity
and acquisition of IRU rights require a company to make a substantial
initial investment of its capital based on the amount of the capacity being
acquired.
In deregulated countries such as the United States and most EU member
states, carriers may establish switching facilities, own or lease fiber-optic
cable, enter into operating agreements with foreign carriers and, accordingly,
provide direct access or call-through service. In markets that have not
deregulated or are slow to implement deregulation, such as most emerging markets
countries, international long distance carriers have used advances in technology
to develop innovative alternative access methods, such as call reorigination. As
countries deregulate, the demand for alternative access methods typically
decreases as carriers are permitted to offer a wider range of services.
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COMPETITION
The international telecommunications industry is highly competitive. The
Company's success depends upon its ability to compete with a variety of other
telecommunications providers in each of its markets, including the ITOs in each
country in which the Company operates and global alliances among some of the
world's largest telecommunications carriers. Other potential competitors include
cable television companies, wireless telephone companies, electric and other
utilities with rights of way, railways, microwave carriers and large end users,
which have private networks. The intensity of such competition has recently
increased and the Company believes that such competition will continue to
intensify as the number of new market entrants increases. Many of the Company's
current or potential competitors have substantially greater financial, marketing
and other resources than the Company.
Competition for customers in the telecommunications industry is primarily
based on price and, to a lesser extent, on the type and quality of services
offered. The Company prices its services primarily by offering discounts to the
prices charged by the local ITOs. The Company has no control over the prices set
by the local ITOs or by its competitors, and some of the Company's competitors
may be able to use their financial resources and/or market position to cause
severe price competition in the countries in which the Company operates.
Although the Company does not believe that there is an economic incentive for
its competitors to pursue such a pricing strategy or that its competitors are
likely to engage in such a course of action, there can be no assurance that
severe price competition will not occur. Additionally, intensified competition
in certain of the Company's markets will force the Company to continue to reduce
its prices. For example, the Company on a number of occasions reduced certain
rates which it charges to non-wholesale customers in response to pricing
reductions enacted by certain ITOs. Such price reductions may reduce the
Company's revenue and margins. The Company has experienced, and expects to
continue to experience, declining revenue per billable minute in a number of its
markets, in part as a result of increasing worldwide competition within the
telecommunications industry.
The Company believes that the ITOs generally have certain competitive
advantages due to their control over local connectivity and close ties with
national regulatory authorities. The Company also believes that, in certain
instances, some regulators have shown a reluctance to adopt policies and grant
regulatory approvals that would result in increased competition for the local
ITO. The Company believes that, at least in the short-term, the ITOs will not
concentrate on marketing their services to the Company's small-and medium-sized
business customer base. The Company could, however, be denied regulatory
approval in certain jurisdictions in which its services would otherwise be
permitted, thereby requiring the Company to seek judicial or other legal
enforcement of its right to provide services.
In response to deregulation, additional competitors of various sizes are
beginning to emerge, particularly in the European Union. The Company's services
are currently marketed to small-and medium-sized businesses and thus the Company
generally does not directly compete with mega-carrier alliances, which generally
target larger multinational corporate customers. In addition, many smaller
carriers have emerged, most of which specialize in offering intercontinental
telephone services utilizing dial up access methods. The Company believes that
competition will continue to intensify as the number of new service providers
increases due to the overall growth in the industry and the global trend toward
deregulation. In February 1997, the WTO announced that 69 countries, including
the United States, South Africa and all of the EU member states, entered into
the WTO Agreement, which is expected to result in greater competition from new
market entrants and existing telecommunications service providers in such
markets. See "Business--Government Regulation."
The Company's principal competitors are the local ITOs and a number of other
alternative reorigination or direct access providers such as IDT, Viatel, Access
Authority, Justice, Telegroup, USA Global Link, USFI, Inc., Kallback and RSL
Communications.
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BUSINESS
Ursus is an international telecommunications company that exploits favorable
market niches by providing competitive and technologically advanced
telecommunications services. The Company focuses on small-and medium-sized
businesses located in emerging or deregulating markets, including South Africa,
Latin America, the Middle East (primarily Lebanon and Egypt), Russia and France.
The Company serves these markets through a network of independent exclusive
agents. The Company believes that it derives a significant competitive advantage
from this exclusive agent network. Each agent provides marketing, customer
support, billing and collections, in local language and time, utilizing a
proprietary turn-key agency support system developed and provided by the
Company. Each agent is supplied near real time data for customer management,
usage analysis, and billing from the Company's local and wide area network.
Through its agent network, the Company develops and maintains close
relationships with vendors of telephone systems such as Siemens, Plessey, AT&T,
Northern Telecom and Alcatel in key markets in order to promote the Ursus line
of telecommunications services, allowing the Company to offer competitively
priced and value added services that compare favorably to the pricing and
service offerings of the ITOs.
Ursus has traditionally entered a particular market using call
reorigination, a system that provides the Company's overseas customers the
opportunity to access a U.S.-based switching center by means of a manual or
transparent automated dialing procedure, or other methods that provide a U.S.
dial tone to its foreign customers. Call reorigination provides a customer with
the convenience and rate economies provided by a U.S. dial tone, as opposed to
locally imposed international rates, which may be substantially higher. The
Company derives approximately 76% of its revenues from call reorigination. In
order to remain price competitive and to mitigate the high proportion of
variable costs per minute associated with call reorigination, the Company plans
to expand its direct access services by locating switching platforms at network
centers of major telecommunications providers, such as MCI WorldCom, Cable and
Wireless and France Telecom, and by deploying smaller network access nodes in
less populated service areas. This network topology, which the Company will
first use in France, provides subscribers with direct access service for voice
and fax. Ultimately, where regulatory conditions are favorable and calling
volumes are adequate to cover the associated fixed costs, the Company intends to
migrate some of its customers from call reorigination to direct access service.
Ursus plans to expand by increasing sales to existing customers; by
expanding the business generated by its existing agents; by selling wholesale
services to other carriers; and through selected acquisitions. Except as
disclosed herein, Ursus is not currently engaged in any negotiations to acquire
any business. See "--Purchase of Equity Interest in South African Agent" and
"--Formation of French Subsidiary." The Company believes that its proprietary
enterprise software system provides an efficient infrastructure for back room
processing, thereby giving it a strategic advantage over its competitors. The
Company's computerized back office systems handle traditionally labor intensive
processing tasks such as call rating, customer registration, billing and network
management with a high degree of efficiency and short turn-around time.
Management believes that these efficiencies would facilitate the rapid and
economical consolidation of acquired competitors.
The Company operates the Network from its technical facilities in Sunrise,
Florida, using a hybrid network of Internet, Intranet and circuit based
facilities, and plans to use a portion of the Offering proceeds to expand its
primary digital switching platform and secondary network access nodes, thereby
expanding its services in a reliable, flexible and cost effective manner. The
Company also plans to exploit its market penetration and technological
sophistication through the application of IP telephony technology, particularly
for fax transmissions. Faxing represents a large portion of the overall
international telecommunications business, and IP faxing offers significant cost
savings and favorable regulatory treatment. IP telephony technology creates the
opportunity to bypass the switched telephone network by using cost-effective
packet switched networks such as private Intranets and/or the public Internet
for the delivery of fax and voice communications. To exploit these opportunities
and to further reduce its costs, the
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Company plans to use a portion of the Offering proceeds to establish a hybrid
network for IP fax and voice services. The Company believes that this
application could increase the gross margins of its existing and future retail
business and allow it to accelerate its growth strategy.
The Company expects that call reorigination will continue to serve as a low
cost and profitable method of opening new markets and expects to continue this
method of business development in certain regulated markets in Africa, the
Middle East, Europe and Asia. Reoriginating a U.S. dialtone requires little
investment in equipment and limited capital deployment in a foreign territory,
thus allowing the Company to develop a customer base by effectively exploiting
the difference between the local IDD rate and the generally more favorable rates
the Company enjoys in the U.S. The Company has successfully used this strategy
to develop foreign markets and has thereby created a revenue stream with little
more than marketing and incremental call costs. In addition, using IP telephony
technology, concurrently with call reorigination, could significantly improve
the profitability of this business segment, without requiring the substantial
investments in switches of a direct access network. Accordingly, the Company's
strategy is to deploy IP telephony technology where feasible in order to create
a hybrid network capable of carrying significant amounts of customer traffic on
a low cost platform with a modest initial capital investment. This strategy
mitigates the risk that the Company will not attain, in some of its markets, the
critical mass of business required to amortize the fixed costs of a direct
access network and affords the Company the opportunity to develop a market with
a relatively small financial risk.
In summary, the Company intends to become a significant provider of
international telecommunications services within the emerging and deregulating
markets. The Company intends to maximize its profit potential by leveraging its
existing infrastructure, market penetration, expanding customer base and growing
U.S. wholesale business. By using its independent agent network, efficient back
office systems, and favorable vendor relationships with some of the major U.S.
telecommunications carriers, the Company believes it can gain strategic
advantages while capitalizing on the opportunities presented by deregulation and
technological advances in the global telecommunications industry.
Ursus provides an array of basic and value added services to its customers,
which include:
- long distance international telephone services
- direct dial access for corporate customers
- dedicated access for high volume users
- calling cards
- abbreviated dialing
- international fax store and forward
- switched Internet services
- itemized and multicurrency billing
- follow me calling
- enhanced call management and reporting services
The Company's strategy of profitable growth has increased revenues from
$13.2 million to $20.8 million in the fiscal years ended March 31, 1996 and
March 31, 1997, respectively; and from $15.0 million to $21.0 million in the
nine months ended December 31, 1996 and December 31, 1997, respectively. The
Company's pretax profits have grown from $1.3 million in the fiscal year ended
March 31, 1996 to $2.0 million in the fiscal year ended March 31, 1997, while
remaining relatively flat at $1.4 million for the nine months ended December 31,
1997 compared to the nine months ended December 31, 1996. For the nine months
ended December 31, 1997, approximately 45% was generated in Africa and the
Middle East, 24%
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in Latin America, 14% in Europe and Russia and the remainder derived from the
rest of the world and U.S. wholesale reselling activities.
THE COMPANY'S SERVICES
The Company's principal services include:
- Ursus ComNet - enables virtual private network calling to members of a
closed user group subject only to regulatory limitations.
- Ursus ComPlus Gold - provides dedicated access via a leased line from the
customer to the Ursus Telecom Network, permitting calling without dialing
access or location codes.
- Ursus ComPlus - provides a paid (local) access or toll-free number
programmed to dial an existing phone number or system, generally in
another country, without the need for special circuits or modifications.
This service also provides "anywhere to anywhere" international call
reorigination access through manual, automatic, X.25 or data network call
reorigination. These services are also offered with ITFS access, subject
to pricing considerations.
- Ursus FaxNet - this service allows subscribers to send faxes to a local
fax server which then uses the Internet and other proprietary data
networks to route the fax to the most economical corresponding fax server
for delivery. This technology promises to become a significant part of the
overall Ursus Network and will be deployed in strategic cities throughout
selected markets when trials are completed in the first quarter of the
fiscal year ended March 31, 1999. The Company is currently deploying a
network of Internet Fax Servers in several countries including Lebanon,
Ecuador, Argentina and South Africa. Further deployments are expected by
mid-to late fiscal year 1998 in certain other countries in Latin America,
Africa, the Middle East and Europe, and the Company plans to expand its
network of Internet-based telephony to more than 20 locations by March 31,
1999.
- Ursus ComPlus Travel - provides calling card access from over 56 countries
utilizing the Company's ITFS numbers. In addition, the Company utilizes
the USA DIRECT Home Country Direct numbers of AT&T from over 136 countries
to provide a premium calling card service. By arrangement with AT&T, AT&T
connects its USA DIRECT numbers via a code to the Ursus switch in Sunrise,
Florida where the customer may dial over the Ursus Network while
traveling.
THE NETWORK
The Network uses a high capacity, programmable switching platform designed
to deploy network-based intelligent services quickly and cost effectively. The
switches are modular and scaleable and incorporate advanced technologies such as
hierarchical call control and network management software. This type of switches
can also provide a bridge between various protocols and standards. As the
Network continues to evolve, the installed base of switches could be upgraded
easily to create a cost-effective, scaleable switching point in a software
intelligence-based network. The Network's "intelligent switches" incorporate
proprietary software to achieve least cost routing ("LCR"), the process by which
the Company optimizes the routing of calls over the Network to every directly
dialable country in the world. LCR allows calls that are not routed over the
Network to be routed directly from the Company's switch through the
infrastructure of contracting carriers to their destinations at the lowest
available rates. These switching capabilities also enable the Company to
efficiently perform billing functions and account activation and to provide
value-added services. The Company relies upon Symmetrical Optical Network
("SONET") fiber optic facilities to multiple carriers to provide redundancy in
the event of technical difficulties in the Network. The Company maintains
redundant switching facilities in Sunrise, Florida to provide protection for its
switching operations. The Company's strategy is to monitor its anticipated
traffic volume on a regular basis and to increase carrier trunking capacity
before reaching the capacity limitations of such circuits.
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The Company's customers access its services either through "dial up access"
or "direct access." Dial up access is obtained via: (i) paid access, which
requires the customer to pay the local PTO for the cost of a local call, where
appropriate, in order to access the Company's services (at December 31, 1997,
approximately 8.6% of the Company's revenues); (ii) call reorigination, which
enables the customer to receive a return call providing a dial tone originated
from the Company's Sunrise, Florida switching center by ITFS (at December, 1997,
approximately 76% of the Company's revenues); (iii) Home Country Direct, which
accesses the Sunrise, Florida switching center by direct dial (at December 31,
1997, approximately 5.6% of the Company's revenues); or (iv) NTFS, which
accesses a local switch in the North American Network (at December 31, 1997,
approximately 9.6% of the Company's revenues). Direct access allows accessing a
network by using a permanent point-to-point circuit typically leased from a
facilities-based carrier. The advantages of direct access include simplified
premises-to-anywhere calling, faster call set-up times and potentially lower
access and transmission costs, provided there is an adequate level of traffic
over the circuit to generate economies of scale. Paid access accounted for
approximately 61% of the Company's French and Russian revenue for the nine-month
period ended December 31, 1997 and approximately 8.6% of the Company's overall
revenues for this period. Call reorigination accounted for the remaining 39% of
revenues in France and Russia and 76% of overall Company revenues for this
period.
To reduce the variable telecommunications costs and improve usage, the
Company is, where regulations permit, in the process of changing its customer
base from call reorigination and ITFS access to paid access, and, ultimately to
direct access. Until regulations permit, all customers outside of the Europe/
Russia area are expected to continue to access the Company's services through
call reorigination or ITFS numbers. The exception to this rule is the Bahamas,
where the Company's subscriber base utilizes a Home Country Direct number
provided by Batelco, the local Bahamian PTO, under a bilateral correspondent
agreement. See "Risk Factors--Government Regulation."
Currently, the Company's Network is primarily used to originate and
terminate international long distance traffic for its own subscribed customer
base. The Company intends to further leverage its Network and foreign presence
to take advantage of anticipated settlement agreement obsolescence by offering
other carriers and ITOs an alternative to the traditional settlement process for
origination and termination of long distance traffic. This process is known as
"Refiling." The FCC issued directives in December 1996 encouraging circumvention
of settlements in the historic sense where possible. This change is likely to
create new opportunities with ITO partners in emerging markets. See
"--Government Regulation."
The economic benefits to the Company of owning and operating its own direct
access Network arise from reduced variable transmission costs. Calls not routed
through the Network generate significantly higher variable costs because they
are connected using relatively expensive ITFS numbers or call reorigination. In
contrast, because the Network has significant fixed costs associated with its
operations, consisting primarily of leased line rental charges, local
connectivity and facility/network management costs, calls routed through the
Network have lower variable costs than off-network traffic. However, for the
foreseeable future, Ursus will, for economic reasons, piggyback on the networks
of major global operators. Consequently, it will only install its own fixed
facilities when existing traffic on a carrier route is adequate to offset the
costs of installation.
The Company plans, however, to deploy a network of IP telephony fax servers
in selected countries by the end of 1998. To avoid the high fixed costs of a
switched telephone network the Company plans to develop a hybrid network of IP
telephony technology for the delivery of fax and eventually voice transmissions.
TECHNOLOGY
Deregulation of telecommunications markets throughout the world has
coincided with substantial technological innovation. The proliferation of
digital fiber-optic cable in and between major markets has significantly
increased transmission capacity, speed and flexibility. Improvements in computer
software and
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processing technology have enabled telecommunications providers to offer a broad
range of enhanced voice and data services. Advances in technology also have
created multiple ways for telecommunications carriers to provide customer access
to their networks and services. These include customer-paid local access,
international and national toll-free access, direct digital access through a
dedicated line, equal access through automated routing from the PSTN (as
defined), IP telephony and call reorigination. The type of access offered
depends on the proximity of switching facilities to the customer, customer
needs, and the regulatory environment. Overall, these changes have resulted in a
trend towards bypassing traditional international long distance operating
agreements as international long distance companies seek to operate more
efficiently. As countries deregulate, the demand for alternative access methods
typically decreases because carriers are permitted to offer a wider range of
facilities-based services on a transparent basis. The most common form of
traditional alternative international access, call reorigination, avoids high
international rates offered by the ITO in a particular regulated country by
providing a dial tone from a deregulated country, typically the United States.
Technical innovations, ranging from inexpensive dialers to sophisticated
in-country switching platforms, have enabled telecommunications carriers such as
the Company to offer a "transparent" form of call reorigination, thereby
avoiding complicated end-customer usage procedures. To place a call using
traditional call reorigination, a user dials a unique phone number to an
international carrier's switching center and then hangs up after it rings or
alternatively, if using a transparent processing method, a dialer automatically
performs these dialing functions. The user then receives an automated call
reorigination providing a dial tone from the U.S., which enables the user to
complete the call. For the nine months ended December 31, 1997, the Company
derived approximately 76% of its revenues and operating income from
international call reorigination services.
The Company's research and development efforts have been nominal and have
focused almost exclusively upon refining and upgrading its back office computer
systems. The Company has neither the resources nor the expertise to derive any
significant advantages from research or development into telecommunications
equipment and prefers to use the equipment developed by others. By devoting its
resources to its computer systems and back office procedures, the Company
believes that it has developed an efficient and flexible operating system,
minimized its payroll and maximized the efficiency of its back office
operations. See "--Management Information Systems."
MANAGEMENT INFORMATION SYSTEMS
The Company has made significant investments developing and implementing
sophisticated information systems which enable the Company to: (i) monitor and
respond to customer needs by developing new and customized services; (ii) manage
LCR; (iii) provide customized billing information; (iv) provide high quality
customer service; (v) detect and minimize fraud; (vi) verify payables to
suppliers; and (vii) rapidly integrate new customers. The Company believes that
its network intelligence, billing and financial reporting systems enhances its
ability to competitively meet the increasingly complex and demanding
requirements of the international long distance markets. The Company
continuously provides enhancements and ongoing development to maintain its state
of the art of its switching, billing and information service platforms.
The Company currently has a turnaround time of approximately 24 hours for
new account entry. The Company's billing system provides multi-currency billing,
itemized call detail, city level detail for destination reporting and electronic
output for select accounts. Customers are provided with several payment options,
including automated credit card processing and automated direct debiting.
The Company has developed proprietary software to provide telecommunications
services and render customer support. In contrast to most traditional
telecommunications companies, the software used to support the Company's
enterprise resides outside of the switches and "canned" closed systems and,
therefore, does not currently rely on third party manufacturers for upgrades.
The Company believes its software configuration facilitates the rapid
development and deployment of new services and provides the Company with a
competitive advantage. The Company's Sunrise, Florida central switch has a call
detail
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recording function which enables the Company to: (i) achieve accurate and rapid
collection of call records; (ii) detect fraud and unauthorized usage; and (iii)
permit rapid call detail record analysis and rating.
The Company also uses its proprietary software in analyzing traffic patterns
and determining network usage, busy hour percentage, originating traffic by
switching center, terminating traffic by supplier and originating traffic by
customer. This data is utilized to optimize LCR, which may result in call
traffic being transmitted over the Company's transmission facilities, other
carriers' transmission facilities or a combination of such facilities. If
traffic cannot be handled over the least cost route due to overflow, the LCR
system is designed to transmit the traffic over the next available least cost
route.
The Company develops its software in-house utilizing its own staff of
programmers.
INTERNET PROTOCOL (IP) TELEPHONY
Virtually all of today's voice and fax traffic is carried over the Public
Switched Telephone Network ("PSTN"). Phone switches either owned by the ITOs or
other enterprise common carriers and resellers allow ordinary telephones and fax
machines to reach one another anywhere in the world. The advent of IP telephony
has created the opportunity to bypass today's switched telephone network and use
cost-effective packet switched networks (Intranet) and/or the public Internet
for the delivery of voice and fax communications. Prior to 1995, the market for
IP telephony products was virtually nonexistent. It was commonly believed that
quality voice communications across the Internet/Intranet was impossible. This
situation dramatically changed with the introduction of a new class of products
which significantly enhanced voice transmissions over the Internet/Intranet. As
a class of products, this is referred to as IP telephony. As companies realized
that quality IP telephony communication was possible, they quickly joined the
race to capitalize on the opportunity. Desktop software offering computer-to
computer communication flourished due in part to the explosive growth of the
Internet. The current generation of IP telephony applications allows users to
make calls using a standard telephone and a centralized Internet/Intranet
substituting for the PSTN. This centralized IP connection is accomplished via IP
telephony gateway servers. The principle behind such a system is similar to IP
telephony desktop applications, but rather than using the microphone and
speakers connected to multimedia PCs, users speak into a standard telephone
connected to a PBX (as defined). To place a call, the caller would dial the
number of the party they are calling, just like making a call-through the PSTN.
The PBX would then route the call-through the IP telephony gateway via a
programmed trunk interface and the gateway contacts another gateway at the
called site. Several companies have developed and are currently using this
technology. Furthermore, developments in hardware, software and networks are
expected to continue to improve the quality and viability of IP telephony. In
time, packet-switched networks may become less expensive to operate than
circuit-switched networks, primarily because carriers can compress voice traffic
and thereby can place more calls on a single line.
AGREEMENTS WITH INDEPENDENT AGENTS
From its inception in 1993 to the present, the Company's sales and marketing
efforts have been conducted through exclusive independent agents in each of its
markets. Each of these independent agents operate in accordance with a model of
practices and procedures developed by the Company, and settle all customer
invoices (net of the agency's commission share) directly with the Company within
a prescribed period, generally less than 40 days. Upon consummation of the
Offering, the Company may reduce its reliance upon its existing independent
agents by expanding its business through strategic acquisitions or may make
equity investments in certain independent agents. In addition, the Company may
in the future start to enroll non-exclusive independent agents to cover new
territories.
Each prospective agent is required to submit a business plan and demonstrate
the financial resources and commitment required to carry out its marketing and
customer service plan approved by the Company prior to its appointment. Each
agent is licensed by and required to do business in the name of the
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Company and execute subscriber agreements with end users on behalf of and for
the benefit of the Company.
The Company knows of no competitor that operates in this manner and
attributes this program with its successful market penetration, high degree of
customer satisfaction and rapid collections cycle. Most of the costs of
marketing, sales and customer service are paid from the commissions retained by
each of the agents.
The Company's agreements with its independent exclusive agents typically
provide for a five-year term with an optional renewal for two additional terms
of three years and a two-year non-compete clause effective upon termination of
the agreement. Furthermore, the agreements require the agents to offer the
Company's services at rates prescribed by the Company and to abide by the
Company's marketing and sales policies and rules. Agent compensation is paid
directly by the Company and is based exclusively upon payment for the Company's
services by customer funds the agents obtain for the Company. The commission
paid to agents ranges between 15 to 19% of revenues received by the Company and
varies depending on individual contracts, the exclusivity of the agency and the
type of service sold. Commissions are paid each month based on payments received
during the prior month from receivables collected by the agent. For the nine
months ended December 31, 1997, approximately 64% of the Company's revenues were
attributable to the most significant four independent agents. Agents settle
their accounts with the Company in U.S. Dollars and therefore bear the risk of
fluctuations in the exchange rates between the local currency and the U.S.
Dollar. Agents are held accountable for customer collections and are responsible
for bad debt attributable to customers they enroll. The Company may record
additional bad debt expense, however, based on increases in wholesale business,
consummation of acquisitions and equity investments in the agents.
For the nine months ended December 31, 1997, the Company derived
approximately 87% of its revenues from customers enrolled by agents who are
contractually prohibited from offering competitive telecommunications services
to their customers during the term of their contract.
In mid-1997 the Company initiated discussions with certain of its exclusive
agents with regard to the acquisition of an equity interest in their agencies.
The Company believes that it would be beneficial to have an ownership interest
in its key marketing and customer service organizations while maintaining the
benefits derived from the local expertise of the exclusive agent, as well as the
productivity derived from local ownership and profit making. The Company
believes that this strategy will provide the Company with the benefits derived
from direct ownership of the local sales organization while retaining the
benefits of the existing entrepreneurial structure. Other than with respect to
pending agreements in France and South Africa, the Company has no agreement to
purchase an interest in any of its agents. See "--Purchase of Equity Interest in
South African Agent."
CUSTOMER BASE
The Company's target customers are small and medium-sized businesses with
significant international telephone usage (i.e., generally in excess of $500 in
international phone calls per month). The Company also provides its services to
a growing base of individual retail customers. The corporate market includes
manufacturers, distributors, trading companies, financial institutions, and
import-export companies, for which long distance telecommunications service
represents a significant business expense, and such customers are therefore
focused on value and quality. It is estimated that small and medium-sized
businesses account for the majority of all businesses, and the Company believes
that in most markets they account for a significant percentage of the
international long distance traffic originated in those markets. For example,
the EU estimates that in 1996 there were 15 million small and medium-sized
businesses in the EU and that these businesses accounted for more than one half
of all jobs in the EU in 1996, almost half of all business revenue and about $30
billion per year in total telecommunications revenue.
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The Company believes that small- and medium-sized businesses have generally
been underserved by the major global telecommunications carriers and the ITOs,
which have focused on offering their lowest rates and best services primarily to
higher volume multinational business customers. The Company offers these small-
and medium-sized companies significantly discounted international calling rates
compared to the standard rates charged by the major carriers and ITOs.
The Company also plans to offer international termination services to other
carriers, including resellers, on a wholesale basis, as a "carriers' carrier."
The Company's carrier customers as a group currently provide the Company with a
relatively stable customer base and thereby assist the Company in projecting
potential utilization of its network facilities. In addition, the potentially
significant levels of traffic volume that could be generated by such carrier
customers may enable the Company to obtain larger usage discounts based on
potential volume commitments. The Company believes that revenues from its
carrier customers will represent a growing portion of the Company's overall
revenues in the future.
The Company also targets residential customers with high international
calling patterns such as ethnic communities and plans to increase the marketing
of prepaid calling cards.
Currently, no end retail customer of the Company individually accounts for
more than 1% of the Company's revenue.
The largest wholesale customer accounted for approximately 9.6% of the
Company's revenue as of December 31, 1997.
PRINCIPAL MARKETS FOR THE COMPANY'S SERVICES
The worldwide international long distance public switched telecommunications
market generated an estimated $61.3 billion in revenue and 70 billion minutes in
traffic in 1996 with minutes of use projected to grow at a rate of 13% per annum
through the year 2000. The Company currently has approximately a 0.03% share of
this global market.
GEOGRAPHIC ORIGIN OF REVENUES
The geographic origin of the Company's revenues is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER
YEAR ENDED MARCH 31, 31,
------------------------------------------ ----------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1996 1997
------------ ------------- ------------- ------------- -------------
Africa..................... $ 369,087 $ 1,403,094 $ 3,899,701 $ 2,596,455 $ 6,057,730
Europe..................... 316,903 1,988,030 4,252,104 3,278,474 3,013,155
Latin America.............. 4,387,351 6,337,284 7,265,473 5,420,058 5,050,602
Middle East................ 413,796 2,101,864 3,741,890 2,726,301 3,500,512
Other...................... 803,375 1,397,802 1,363,852 966,441 1,395,126
United States.............. -- -- 315,407 -- 2,011,988
------------ ------------- ------------- ------------- -------------
$ 6,290,512 $ 13,228,074 $ 20,838,427 $ 14,987,729 $ 21,029,113
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
</TABLE>
GEOGRAPHIC MARKETS
LATIN AMERICA. Historically, the Company derived significant portions of
its telecommunications revenue from Latin America, principally from Argentina
and Peru. Since most Latin American countries currently restrict competition to
a limited number of specific services, the Company has developed a two-stage
market penetration strategy to capitalize on current and future opportunities in
Latin America. The first step is to take advantage of current market conditions
and, within the parameters of the Company's product line, i.e., using the call
reorigination access method, to provide the fullest range of services
permissible under local regulations. During the fiscal year ended March 31,
1997, Argentina with sales of
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$3.7 million represented 51% of the Company's total Latin American business
followed by Peru with a 23% share. For the first nine months of fiscal year
ended March 31, 1998, Argentina represented approximately 49% of the Company's
total Latin American business with Peru representing approximately 23%. The
Company enjoys a top 10 market share among call reorigination companies
operating in Argentina and Peru.
MIDDLE EAST AND AFRICA. The Company is currently a significant operator in
certain emerging markets in the Middle East and Africa. The Company is a market
leader for alternative access call reorigination in both Lebanon and South
Africa. It is anticipated that African revenues will more than double over the
next twelve months, not including the high growth markets of Lebanon and Egypt
which together produce up to $20,000 of revenue per day. Lebanon grew from $1.4
million in sales in the fiscal year ended March 31, 1996 to $3.2 million in the
fiscal year ended March 31, 1997 and posted $3.1 million in sales for the nine
months ended December 31, 1997.
The South African territory grew from sales of $2.6 million for the nine
months ended December 31, 1996 to sales of $5.9 million for the nine months
ended December 31, 1997. The Company has expanded its customer base from
Johannesburg, South Africa, to Cape Town and Durban, and other South African
urban centers. This territory is currently generating between $30,000 and
$40,000 per day in revenues. The South African agent currently manufactures its
own proprietary network interface dialer in South Africa. In places such as
South Africa, the Company and its independent agents maintain close
relationships with vendors of internal phone equipment ("PBX") such as Siemens,
Plessey and Alcatel. These vendors are integrating and configuring their
customer's PBX equipment to utilize Ursus as a possible alternative
international telecommunications carrier, and the Company maintains a close
relationship with the vendors for both pre-sale and retrofit applications.
On August 12, 1997, the Company entered into an agreement with its
independent agent in South Africa, by which the Company will acquire a 8.59%
equity interest in the agent for $377,141.
EU AND RUSSIA. The EU and Russian markets will be a major focus as the
Company pursues its strategy of locating switches at the network center of major
switched-based suppliers in Europe.
FRANCE. The Company's current customers in France (centered in the Paris
region) include small and medium-sized businesses and retail individuals. Since
installing the Paris switch in March 1998, the Company began to migrate its
customers in France from the call reorigination access method currrently used to
international long distance services utilizing direct access over leased lines
and restricted dial-in for customers in closed-user groups. The Company will
provide direct access service via a leased line connection between the
customer's phone system and the Company's switch in Paris. Following
deregulation, the Company may offer long distance services, which are presently
restricted to closed user groups, with prefix dialing and value-added services.
The services currently provided by the Company in France do not require a
license. In accordance with the telecommunications laws passed in France in July
1996, the process of liberalizing the telecommunications market is regulated by
a new government authority, and the telecommunications market in France was
liberalized on January 1, 1998 along with the markets of most other EU member
states. In accordance with the standard terms and conditions and price lists for
interconnection with France Telecom, duly approved by the French
Telecommunications Authority on April 9, 1997, new operators can interconnect
with France Telecom's PSTN starting on January 1, 1998.
Recently, the Company entered into a joint venture with Central Call and
Mondial Telecom, its French agents, pursuant to which Ursus Telecom France was
organized. The Company owns a majority interest in Ursus Telecom France, and the
remaining shares being held equally by Central Call and Mondial Telecom. Central
Call and Mondial Telecom have the right to require the Company to purchase their
interests in Ursus Telecom France under certain conditions. The primary
objective of the joint venture is to provide switch-based direct access services
in France, primarily from the Paris-Metropolitan area.
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RUSSIA. The Company has been active in the Russian market (centered in the
Moscow region) for over 24 months, with direct dial up access having replaced
call reorigination for approximately 18 months. Traffic has grown to
approximately $7,000 to $9,000 per business day with the majority of calling
derived from the direct dial up access lines from Moscow. Overall, Russia
generated sales for the Company of approximately $2.5 million in the fiscal year
ended March 31, 1997 from approximately $700,000 in the fiscal year ended March
31, 1996 and posted sales of approximately $1.8 million for the nine months
ended December 31, 1997.
The Company hopes to expand its Russian business by capitalizing upon the
technologically advanced services it offers which compare favorably to the
relatively undeveloped services offered by the Russian ITO. For the nine months
ended December 31, 1997, approximately 14.3% of the Company's telecommunication
revenue originated from Europe, with approximately 60% of that revenue
attributable to calls originating via call through access from Russia.
Minutes of total outgoing international traffic in Russia have dramatically
increased from 287 million minutes in 1995 to 851 million minutes in 1996.
Historically, about 50% of all international traffic and about 40% of long
distance traffic within the Russian Federation originated in Moscow and some 30%
of international traffic and about 25% of long distance traffic originated in
St. Petersburg. Penetration levels for aggregate telecommunications services in
these two cities equal about 46% for Moscow and about 36% for St. Petersburg.
Other Russian urban areas with low penetration are less likely in the near
future to generate any large international traffic, because there is a much
lower business demand and a smaller number of wealthy individuals supporting a
market. The overall growth in long-distance and international traffic over the
past several years in the Russian Federation did not, however, significantly
change the network usage level, which means that Russia still generates one of
the lowest levels of per-line international and long distance traffic in the
world. This is in large part due to the fact that international and long
distance tariffs in Russia have been increasing very rapidly in real terms.
Despite the recent changes in the Russian telecommunications industry, and
recent significant investments in local telecommunications infrastructure, the
level of telecommunications service generally available from most public
operators in Moscow remains below that available in cities of Western Europe and
the United States. Outside Moscow (and, to a lesser extent St. Petersburg), most
standard Russian telecommunications equipment is obsolete. For example, many of
the telephone exchanges are electromechanical and most telephones still use
pulse dialing.
The telecommunications market in Russia currently includes a number of
operators that compete in different offering segments--local, inner-city,
international data and cellular services. Growth in the Russian
telecommunications industry has been principally driven by businesses in Moscow
requiring international and domestic long distance voice and data services and
by consumers using mobile telephony. This growth has been most significant as
multinational corporations have established a presence in Moscow and Russian
businesses have begun to expand. The service sector, which includes operations
in distribution, financial services and professional services and tends to be
the most telecommunications intensive sector of the economy, is growing rapidly
particularly in Moscow. Since moving to a more market-oriented economy, the
economic conditions in the outlying regions in Russia have also generally
improved. The telecommunications industry in the outlying regions has also
experienced recent growth, principally as a result of growth in the industrial
sector as well as the establishment of satellite offices in the regions by
multinational corporations and growing Russian businesses.
EXPANSION PLANS
Pursuant to its formation of a joint venture with its French agents, the
Company recently installed a switch in Paris with inter-connectivity to some of
the major carriers operating in the Paris marketplace. During the next twelve
months, the Company plans to install additional switches in Europe, upgrade its
switch in Sunrise, Florida and open POPs in up to 3-5 cities in Western Europe
in order to expand its
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accessibility outside of the switch locations. Expanding the Network in Europe
to include additional major European business centers should ultimately reduce
transmission costs and increase the addressable market of the European portion
of the Network.
Expansion plans in Russia include the planned installation of a switch to
service larger corporate customers that require direct connections to the
Network via digital dedicated subscriber facilities. The switch will be
integrated with the Company's existing facilities that currently back-haul all
traffic originated on direct dial up access from Moscow to Sunrise, Florida.
The Company expects to use a significant portion of the Offering proceeds to
expand and proliferate its Network and its services on a more rapid basis by
deploying additional switches and POPs and installing fixed facilities to
interconnect POPs and nodes, in addition to deploying its IP telephony based fax
and voice services.
The Company intends to enter additional markets and expand its operations
through acquisitions, joint ventures, strategic alliances and the establishment
of new operations. The Company will consider acquisitions of certain competitors
which have a high quality customer base and which would, upon consolidation with
the Company's operations, become profitable. In addition the Company may acquire
equity interests in its existing agents and may pursue partnership arrangements
in emerging and maturing markets with existing sales organizations and other
non-defined telecommunications entities.
PURCHASE OF EQUITY INTEREST IN SOUTH AFRICAN AGENT
On August 12, 1997, the Company entered into an agreement with its largest
independent agent, located in South Africa, to acquire an equity interest in the
agent. The agreement provides for the Company to make deposits on the purchase
price in an amount equal to 9% of the revenues that this agent generates for the
Company for the period from August 1, 1997 through January 31, 1998. The
percentage ownership in the agent that the Company will acquire will be based on
a formula that values the agent at approximately six times its average monthly
revenues for the months of October, November and December 1997. At December 31,
1997, deposits of $321,059 have been made under this agreement and are included
in other assets on the Company's balance sheet. Based on this valuation formula,
the agent has been valued at $4,390,130. Based on the revenues generated for the
Company by the independent agent for the period from August 1, 1997 through
January 31, 1998, the Company will purchase an equity interest of 8.59% in the
agent for $377,141. However, the South African agent retains an option for a
limited period of time to cancel the arrangement under certain circumstances
provided the Agent reimburses in full the prepaid deposits made to the Agent by
the Company.
FORMATION OF FRENCH SUBSIDIARY
On November 20, 1997, the Company entered into a letter of intent with
respect to a proposed joint venture with Central Call and Mondial Telecom, its
French agents. Pursuant to the letter of intent, as amended, the Company
organized Ursus Telecom France, a limited liability company, capitalized at
FF50,000 or approximately $8,300. The Company holds 50% plus two shares of the
Ursus Telecom France. The remaining shares are held equally by Central Call and
Mondial Telecom. The results of Ursus Telecom France will be consolidated with
those of the Company as a subsidiary.
The letter of intent calls for the Company to pay within six months after
the completion of its initial public offering, a cash sum that equals three and
one-half times the average monthly traffic revenues contributed to the venture
by Central Call and Mondial Telecom over the months of February, March and April
1998. This payment is considered an advance towards the share purchase program
as described below. The letter of intent requires that Ursus Telecom France
commence operations by January 31, 1998. Ursus Telecom France effectively
commenced operations on April 1, 1998.
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Central Call and Mondial Telecom have the right to require that the Company
purchase the shares held in the joint venture by Central Call and Mondial
Telecom in any one of the following three manners: (a) in three installments of
33.3% each on the first, second and third anniversary of this Offering, (b) in
two installments, the first of 66.66% on the second anniversary of this Offering
and the remaining 33.33% on the third anniversary or (c) in one installment on
the third anniversary of this Offering. A purchase of shares by the Company from
Central Call or Mondial Telecom, if any, will be accounted for as a purchase.
The valuation for these subsequent share purchases will depend on whether
the Company pays in cash or issues its stock as payment. The cash purchase price
would value the joint venture at 5.5 times average monthly revenues; and the
stock price would be based on an enterprise value of 8 times average monthly
revenues. These enterprise values would be multiplied by the percentage interest
being acquired to determine the purchase price. The Company reserves the option
to choose among one of the two available payment and valuation methods after
consultation with Central Call and Mondial Telecom.
As of March 26, 1998, the Company has contributed to Ursus Telecom France a
telecommunications switch at its cost of $112,128 and has made capital
contributions and cash advances of approximately $47,000.
GOVERNMENT REGULATION
OVERVIEW
The Company's provision of international and national long distance
telecommunications services is heavily regulated. Also, local laws and
regulations differ significantly among the jurisdictions in which the Company
operates, and, within such jurisdictions, the interpretation and enforcement of
such laws and regulations can be unpredictable. Many of the countries in which
the Company provides, or intends to provide, services prohibit, limit or
otherwise regulate the services which the Company can provide, or intends to
provide, and the transmission methods by which it can provide such services.
The Company provides a substantial portion of its customers with access to
its services through the use of call reorigination. Revenues attributable to
call reorigination represented 76% of the Company's revenues during the nine
months ended December 31, 1997 and are expected to continue to represent a
substantial but decreasing portion of the Company's revenues in the medium to
long-term. A substantial number of countries have prohibited certain forms of
call reorigination as a mechanism to access telecommunications services. This
has caused the Company to cease providing call reorigination services in the
Bahamas and may require it to do so in other jurisdictions in the future. As of
November 20, 1997, reports had been filed with the FCC and/or the ITU that the
laws of 79 countries prohibit call reorigination. While the Company provides
call reorigination services in some of those countries, the only country on such
list that accounts for a material share of the Company's total revenues is South
Africa which accounted for about approximately 28% of the Company's revenues for
the nine months ended December 31, 1997. To the extent that a country that has
expressly prohibited call reorigination using uncompleted call signaling is
unable to enforce its laws against call reorigination using uncompleted call
signaling, it can request that the FCC enforce such laws in the United States,
by e.g., requiring the Company to cease providing call reorigination services to
such country or, in extreme circumstances, by revoking the Company's
authorizations.
A SUMMARY DISCUSSION OF THE REGULATORY FRAMEWORKS IN CERTAIN GEOGRAPHIC
REGIONS IN WHICH THE COMPANY OPERATES OR HAS TARGETED FOR PENETRATION IS SET
FORTH BELOW. THIS DISCUSSION IS INTENDED TO PROVIDE A GENERAL OUTLINE OF THE
MORE RELEVANT REGULATIONS AND CURRENT REGULATORY POSTURE OF THE VARIOUS
JURISDICTIONS AND IS NOT INTENDED AS A COMPREHENSIVE DISCUSSION OF SUCH
REGULATIONS OR REGULATORY POSTURE.
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UNITED STATES
The Company's provision of international service to, from, and through the
United States is subject to regulation by the FCC. Section 214 of the
Communications Act requires a company to obtain authorization from, the FCC to
resell international telecommunications services of other US carriers or to own
or lease and operate international telecommunicating facilities. The FCC has
authorized the Company pursuant to the Section 214 to provide international
telecommunications services, to resell public switched international
telecommunications services of other U.S. carriers and to own or lease
international facilities. The Section 214 authorization requires, among other
things, that services be provided in a manner consistent with the laws of
countries in which the Company operates. As described above, the Company's
regulatory strategy could result in the Company's providing services that
ultimately may be considered to be provided in a manner that is inconsistent
with local law. If the FCC finds that the Company has violated the terms of its
Section 214 authorization, it could impose a variety of sanctions on the
Company, including fines, additional conditions on the Section 214
authorization, cease and desist or show cause orders, or, in extreme
circumstances, the revocation of the Section 214 authorization, the latter of
which is usually imposed only in the case of serious violations.
In particular, if it is demonstrated that the law of a foreign jurisdiction
expressly prohibits call reorigination, i.e. call re-origination, using
uncompleted call signaling, and that the foreign government attempted but failed
to enforce its laws against U.S. service providers, the FCC may require U.S.
carriers to cease providing call reorigination services using uncompleted call
signaling. To date, the FCC has only ordered carriers to cease providing call
reorigination using uncompleted call signaling only to customers in the
Philippines, although it is expected that the FCC will take this action with
respect to carriers providing call reorigination using uncompleted call
signaling to customers in Saudi Arabia. Prior to taking such action, the FCC
permits countries to submit information to the FCC regarding the legal status of
call reorigination services in their respective countries. According to FCC
records, 30 countries thus far have submitted such information to the FCC,
including the Bahamas, Egypt, Lebanon and South Africa. Submission of this
information does not imply that the FCC believes that the country's laws
expressly prohibit call reorigination using uncompleted call signaling.
The Company is required to file with the FCC a tariff containing the rates,
terms and conditions applicable to its international telecommunications
services. The Company is also required to file with the FCC any agreements with
customers containing rates, terms, and conditions for international
telecommunications services, if those rates, terms, or conditions are different
than those contained in the Company's tariff. If the Company charges rates other
than those set forth in, or otherwise violates, its tariff or a customer
agreement filed with the FCC, the FCC or a third party could bring an action
against the Company, which could result in a fine, a judgment or other penalties
against the Company.
EUROPE
In Europe, regulation of the telecommunications industry is governed at a
supra-national level by the EU, which is responsible for creating pan-European
policies and, through legislation, has developed a regulatory framework to
establish an open, competitive telecommunications market. In 1990, the EU issued
the Services Directive requiring each EU member state to abolish existing
monopolies in telecommunications services, with the exception of voice
telephony. The intended effect of the Services Directive was to permit the
competitive provision of all services other than voice telephony, including
value-added services and voice services to CUGs. However, local implementation
of the Services Directive through the adoption of national legislation has
resulted in differing interpretations of the definition of prohibited voice
telephony and permitted value-added and CUG services. Voice services accessed by
customers through leased lines are permissible in all EU member states. The
European Commission has generally taken a narrow view of the services classified
as voice telephony, declaring that voice services may not be reserved to the
ITOs if (i) dedicated customer access is used to provide the service, (ii) the
service confers
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new value-added benefits on users (such as alternative billing methods) or (iii)
calling is limited by a service provider to a group having legal, economic or
professional ties.
In March 1996, the EU adopted the Full Competition Directive containing two
key provisions which required EU member states to allow the creation of
alternative telecommunications infrastructures by July 1, 1996, and which
reaffirmed the obligation of EU member states to abolish the ITOs monopolies in
voice telephony by 1998 and to institute mechanisms to prevent the ITOs from
acting anti-competitively toward new market entrants. To date, Sweden, Finland,
Denmark, the Netherlands and the United Kingdom have liberalized
facilities-based services to all routes. Certain EU countries may delay the
abolition of the voice telephony monopoly based on exemptions established in the
Full Competition Directive. These countries include Spain (December 1998),
Portugal and Ireland (January 1, 2000) and Greece (2003).
FRANCE
The Company currently provides call reorigination services to customers in
France. The Company is permitted to provide call reorigination in France without
a license. Although it does not currently provide such services, under current
law, the Company may lease circuits and provide switched voice services to CUGs
in France without a license. The Company anticipates that it will migrate its
customers to forms of call-through other than call reorigination after March 1,
1998 and has recently entered into a joint venture agreement with Central Call
and Mondial Telecom to provide switch-based direct access services in France.
The Company anticipates providing a range of enhanced telecommunications
services and switched voice services to business users by routing traffic via
the international switched networks of competitors to the ITO.
A new telecommunications law, passed in 1996 to implement the Full
Compensation Directive in France, establishes a licensing regime and an
independent regulator and imposes various interconnection and other requirements
designed to facilitate competition. The Company intends to expand its services
to include, for example, direct access and facilities-based services in France.
If it decides to provide switched voice services to the public, including direct
access and/or call-through services, or to own facilities, the Company will have
to apply for a license from the Minister of Telecommunications.
GERMANY
The regulation of the telecommunications industry in Germany is governed by
the Telekommunikations-Gesetz, the Telecommunications Act of 1996 ("TKG"),
which, with respect to most of its provisions, became effective in August 1996.
Under the TKG, a license ("TKG License") is generally required by any person
that (i) operates transmission facilities for the provision of
telecommunications services to the public; or (ii) offers voice telephony
services to the public through telecommunications networks operated by such
provider. While TKG represents the final phase of the reform of the German
telecommunications industry, the law protected the monopoly rights of Deutsche
Telecom over the provision of the voice telephony until January 1, 1998. The
Company currently does not provide services to customers in Germany, but is
contemplating opportunities in entering this market, which, after the U.S.,
makes up for the largest single telecommunication market in the world.
LATIN AMERICA
The Company currently provides call reorigination to customers in certain
Latin American countries, including Argentina, Peru, Ecuador, Uruguay and
Colombia. The Company is subject to a different regulatory regime in each
country in Latin America in which it conducts business. Local regulations
determine whether the Company can obtain authorization to offer the transmission
of voice and voice band data directly or through call reorigination, or for the
provision of value-added services, such as
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voicemail and data transmission. Regulations governing the latter are generally
more permissible than those covering voice telephony.
Some countries in Latin America oppose the provision of call reorigination.
In Brazil, call reorigination is currently permissible. In Colombia, the
Ministry of Communications has stated that call reorigination access is
prohibited and has so notified the FCC. The Company does not believe that the
Ministry of Communications has the requisite authority to regulate in this area,
which authority is the subject of litigation brought by a third party in the
Colombian courts. At present, regulations appear to permit call reorigination
access in Argentina. However, the regulatory agency in Argentina has changed its
position regarding call reorigination access on several occasions in the past,
and this issue is the subject of an ongoing legal dispute.
Various countries in Latin America have taken initial steps towards
deregulation in the telecommunications market during the last few years. In
addition, various Latin American countries have completely or partially
privatized their national carriers, including Argentina, Chile, Mexico, Peru and
Venezuela. Certain countries have competitive local and/or long distance
sectors, most notably Chile, which has competitive operators in all sectors.
Colombia is scheduled to grant several new concessions for national and
international long distance service providers in addition to its ITO by the end
of 1998. Venezuela has also legalized value-added services such as voicemail and
data transmission and has targeted January 1, 2000 as the date for full
deregulation. Brazil is in the process of opening its telecommunications market
to competition and privatizing its ITO, pursuant to its new law adopted in July
1997. Brazil established an independent regulator in October 1997, and
value-added and private network services, are already open to competition. In
Mexico, the former ITO has been privatized, its exclusive long distance
concession expired in August 1996 and it has been obligated to interconnect with
the networks of competitors since January 1997. Competition in Mexico has been
initiated and an independent regulator has been established. Three countries in
the region, Chile, Mexico and the Dominican Republic, have opened their long
distance telecommunications markets to competition.
SOUTH AFRICA
The telecommunications industry in South Africa is regulated under the Post
Office Act of 1958 (the "SA Post Office Act") and the Telecommunications Act of
1996 (the "SA Telecommunications Act"). Telkom SA Limited ("Telkom"), the
state-owned ITO, has a statutory monopoly on the construction, maintenance and
use of any telecommunications lines, as well as on the provision of public
switched telecommunications services. The government of South Africa has
indicated that this monopoly will be phased out over five to six years.
Notwithstanding this monopoly, the SA Telecommunications Act permits a party to
provide a range of services other than public switched services under, and in
accordance with, a telecommunications license can be issued to that party in
accordance with the SA Telecommunications Act.
The SA Telecommunications Act established a new telecommunications
regulatory authority called SATRA, whose functions include the granting of
telecommunications licenses, applications for which are solicited by the South
African Minister of Telecommunications pursuant to the SA Telecommunications
Act. As an independent regulatory authority, SATRA is subject to common law
provisions and provisions in the SA Telecommunications Act that limit its
ability to act outside of its granted authority and without affording parties
due process. SATRA's members are appointed by the President on the advice of
Parliament's standing committees on communications. Although the SA
Telecommunications Act states that SATRA should be independent and impartial in
the performance of its functions, it must act in accordance with policy
directions issued by the South African Minister of Telecommunications.
The Company seeks to take advantage of gradual deregulation of the South
African telecommunications industry by offering permitted services to customers
in South Africa. Currently, the Company provides call reorigination services to
customers in South Africa and may, in the future, seek any necessary licenses to
provide liberalized services such as value added services. In August 1997, SATRA
issued a ruling
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that call reorigination operations are an offense under the SA
Telecommunications Act. Several entities, including the Company's South African
agent, filed a lawsuit to stay and reverse SATRA's ruling on the basis that
SATRA lacks the authority to issue such a ruling and that the SA
Telecommunications Act does not prohibit the provision of call reorigination
services. SATRA has agreed not to prosecute any person in the call reorigination
industry unless the South African courts rule that it may. It is anticipated
that final adjudication of this lawsuit could take up to four years to occur,
however, the South African courts may rule sooner or the South African
legislature may promulgate an explicit prohibition on call reorigination.
Although the Company believes that South African law does not prohibit the
Company or it's agent from providing call reorigination services to customers in
South Africa without a license, if the Company's agent is determined to be
providing a telecommunications service without a license, it could be subject to
fines, to the termination of its call reorigination service to customers in
South Africa and, potentially, to the denial of license applications to provide
liberalized services.
RUSSIA
The provision of telecommunications services in the Russian Federation falls
within federal jurisdiction. The principal legal act regulating
telecommunications in the Russian Federation is the Federal Law on
Communications (the "Communications Law"), enacted on February 16, 1995, which
establishes the legal basis for all activities in the telecommunications sector
and provides, among other things, for licensing to provide communications
services, the requirement to obtain a radio frequency allocation, certification
of equipment, and fair competition and freedom of pricing.
The Ministry of Communications ("MOC") and the Federal Agency of
Governmental Communications and Information under the President of the Russian
Federation are the federal organizations which have executive power over the
telecommunications industry. The MOC is responsible for allocating federal
budget resources in the telecommunications industry and has supervisory
responsibility for the technical condition and development of all types of
communications.
The Communications Law requires that any person providing telecommunications
services must, in theory, obtain a license prior to commencing such services.
Licenses to provide telecommunications services are issued by the MOC. Under the
applicable Licensing Regulations, licenses for rendering telecommunications
services may be issued and renewed for periods ranging from 3 to 10 years and
several licenses may be issued to one person. Licenses may be revoked or
suspended by the MOC for failure to comply with terms and conditions of the
license.
The Communications Law requires the federal regulatory agencies to encourage
and promote fair competition in the provision of communication services and
prohibits abuse of a dominant position to hinder, limit or distort competition.
The Communications Law also provides that tariffs for communication services may
be established on a contractual basis between the provider and the user of
telecommunications services.
Russian telecommunications companies are subject to the same system of
taxation as Russian companies in general, including profit tax and VAT on
services.
Current Russian legislation governing foreign investment activities does not
prohibit or restrict foreign investment in the telecommunications industry.
However, on February 28, 1997, the State Duma, the lower house of parliament
approved on the first reading draft foreign investment legislation which would
restrict any significant future foreign investment in numerous sectors of the
Russian economy, including telephone and radio communications. It is unlikely
that such restrictive legislation will be enacted, unless the political climate
changes dramatically. More likely is the emergence of limited restrictions on
foreign investment in strategic industries, which could result in foreign
ownership limitations in industries such as telecommunications, which
limitations are not uncommon in many countries. The draft legislation has been
referred to the Russian government for commitment. For such draft legislation to
become Federal Law, it must be passed by a majority vote of the State Duma at
another two
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readings, approved by a majority of the Federation Council, the upper house of
parliament, and signed by the President of the Russian Federation. Rejection of
such legislation by the Federation Council could be overridden by a two-thirds
majority of the State Duma. Rejection of such legislation by the President could
be overridden by a two-thirds majority of each of the Federation Council and the
State Duma.
In addition, a lack of consensus exists over the manner and scope of
government control over the telecommunications industry. Because the
telecommunications industry is widely viewed as strategically important to
Russia, there can be no assurance that recent government policy liberalizing
control over the telecommunications industry will continue. Russia is not a
member of the WTO, but, if it seeks to become a member, it may be required to
take further steps to liberalize the telecommunications market as a condition of
accession.
MIDDLE EAST
The Company's ability to provide services in the Middle East depends on the
regulatory environment in each particular country. In Lebanon, for example, the
telecommunications industry is regulated by the Ministry of Posts and
Telecommunications ("MPT"), which also operates the ITO--the General Directorate
of Telecommunications (the "GDT"). The GDT currently has a monopoly on the
provision of wireline telecommunications services in Lebanon. In Egypt, the
Ministry of Transport, Communications and Civil Aviation regulates the
telecommunications industry and Telecom Egypt, formerly known as the Arab
Republic of Egypt National Telecommunications Organization ("ARENTO"), is the
ITO. Although Telecom Egypt currently has a monopoly on the provision of voice
services, several U.S. carriers are permitted to sell pre-paid phone cards and
calling card services. Egypt has announced that it will permit limited
competition to Telecom Egypt in the near future.
INTERNET TELEPHONY
The introduction of Internet telephony is a recent market development. To
the Company's knowledge, there currently are no domestic and few foreign laws or
regulations that prohibit voice communications over the Internet. The FCC is
currently considering whether or not to impose surcharges or additional
regulation upon providers of Internet telephony. In addition, several efforts
have been made to enact U.S. federal legislation that would either regulate or
exempt from regulation services provided over the Internet. State public utility
commissions also may retain intrastate jurisdiction and could initiate
proceedings to regulate the intrastate aspects of Internet telephony. A number
of countries that currently prohibit voice telephony competition with the ITOs
also have prohibited Internet telephony. Several other countries permit but
regulate Internet telephony. If foreign governments, Congress, the FCC, or state
utility commissions prohibit or regulate Internet telephony, there can be no
assurance that any such regulations will not materially affect the Company's
business, financial condition or results of operation.
VAT
The EU imposes value-added taxes ("VAT") upon the sale of goods and services
within the EU. The rate of VAT varies among EU members, but ranges from 15% to
25% of the sales of goods and services. Under VAT rules, businesses are required
to collect VAT from their customers upon the sale to such customers of goods and
services and remit such amounts to the VAT authorities. In this regard it is
expected that non-EU based telecommunications providers will be required to
appoint a VAT agent and register for VAT in every EU member state in which it
has individual customers.
France and Germany have adopted rules that, as of January 1, 1997, deem
telecommunications services provided by non-EU based companies to be provided
where the customer is located, thereby subjecting the telecommunications
services provided to customers in the EU by non-EU based companies to VAT. The
German and French rules impose VAT on both the residential and business
customers of non-EU based telecommunications companies. In the case of sales to
non-VAT registered customers, German
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and French rules require that the non-EU based telecommunications carrier
collect and remit the VAT. In the case of sales by such providers to German
VAT-registered customers, the German rules generally require that such customers
collect and remit the VAT. Under the so-called "Nullregelung" doctrine, however,
certain business customers that are required to charge VAT on goods and services
provided to their customers (generally, companies other than banks and insurance
companies) are entitled to an exemption from VAT on telecommunications services.
In the case of sales by such providers to French VAT-registered customers, the
French rules require that such business customers collect and remit the VAT.
The EU has adopted a proposed amendment to the Sixth Directive that, if
adopted in present form, would require all EU members to adopt legislation to
impose VAT on non-EU based telecommunications services provided to customers in
the EU by non-EU based companies, beginning as early as December 31, 1998. Under
the proposed amendment, non-EU based telecommunications companies would be
required to collect and remit VAT on telecommunications services provided to EU
businesses as well as to individuals.
The Company's independent agents historically have collected, and will
continue to collect, VAT on services where it is offered in a VAT country. The
Company believes that whatever potential negative impact the amendment will have
on its operations as a result of the imposition of VAT on traditional call
reorigination, such impact will be partially mitigated by the customer migration
towards and the higher gross margins associated with direct access services.
EMPLOYEES
As of December 31, 1997, the Company had 21 full-time employees. None of the
Company's employees are covered by a collective bargaining agreement. Management
believes that the Company's relationship with its employees is satisfactory.
TRADEMARKS
The Company has traditionally relied upon the common law protection of its
trade name afforded under various local laws, including the United States.
However, the Company intends to file for trademark protection of its Ursus name
in the United States. It is possible that prior registration and/or uses of the
mark or a confusingly similar mark may exist in one or more of such countries,
in which case the Company might be precluded from registering and/or using the
Ursus mark and/or logo in such countries.
PROPERTIES
The Company currently occupies approximately 8,087 square feet of office
space in Sunrise, Florida, which serves as the Company's principal executive
office. The lease has an annual rental obligation of approximately $158,000 and
expires on April 30, 2003. The Company believes that such offices are adequate
for its current purposes.
LEGAL PROCEEDINGS
Although the Company is party to litigation in the ordinary course of
business, there are no legal proceedings pending or to the knowledge of the
Company, threatened, that, if determined adversely to the Company, would have a
material adverse effect on the Company.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding those persons
who are currently or will be directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------------- --- ---------------------------------------------------
<S> <C> <C>
Luca M. Giussani................................... 42 President, Chief Executive Officer and Director
Jeffrey R. Chaskin................................. 44 Executive Vice President, Chief Operating Officer
and Director
Johannes S. Seefried............................... 39 Chief Financial and Chief Accounting Officer and
Director
Gregory J. Koutoulas............................... 49 Vice President, Controller and Secretary
Richard C. McEwan.................................. 43 Vice President
William Newport.................................... 63 Director, Chairman of the Board of Directors
Kenneth L. Garrett................................. 55 Director
</TABLE>
Luca M. Giussani, a co-founder of the Company, has served as President,
Chief Executive Officer and Director of the Company since its inception. Prior
to co-founding the Company with Mr. Chaskin, Mr. Giussani served as an advisor
to a number of developing countries for the restructuring of their foreign debt,
as well as a consultant to several public sector Italian contractors
specializing in the construction of power plants. Prior to 1993, Mr. Giussani
was an officer of Orient & China S.P.A., a trading company specializing in
transactions with China, and in the following concerns that provided consulting
services to Italian contractors: Intraco P.E.F., Balzar Trading Ltd. and Ursus
Finance Ltd.
Jeffrey R. Chaskin is a co-founder of the Company and has been its Chief
Operating Officer and a Director since its inception. Mr. Chaskin has had a key
role in the development of various telecommunications companies, and has
consulted to the industry since 1981 including consulting regarding call center
and switched network operations for CIL, Federal Express, CBN, ASCI and others.
Johannes S. Seefried has been Chief Financial Officer of the Company since
February 1997, and its Chief Accounting Officer and a Director since February
1998. Prior to 1994, Mr. Seefried held executive positions in corporate finance
and securities sales with commercial and investment banking organizations, both
in the United States and Europe. From 1990 to 1993, Mr. Seefried was employed by
Banco Santander, a commercial and investment banking group. Mr. Seefried's
primary responsibilities at the Santander Group included serving as a Vice
President of corporate business development, including mergers & acquisitions.
From 1994 to 1996, Mr. Seefried served as Managing Partner of Seefried
Forstverwaltung, a privately-owned forestry and property management company. Mr.
Seefried is a graduate of the Stanford Graduate School of Business, 1994, and
the School of Foreign Service at Georgetown University, 1983.
Gregory J. Koutoulas has been Vice President of Finance and Secretary of the
Company since April 1995 and Controller since November 1994. From 1990 to 1994
Mr. Koutoulas served as Controller of F.A.S.T., INC., a wholesale distributor of
health and beauty aids. Prior to his position with F.A.S.T., INC., from 1987 to
1989, Mr. Koutoulas was employed by Bertram Yacht, a manufacturer of luxury
yachts, as Manager of Financial Analysis and Cost Accounting. Mr. Koutoulas
received a B.S. in Economics with a concentration in Accounting from Purdue
University in 1971 and is a licensed Certified Public Accountant.
Richard C. McEwan has been Vice President of Agency Relations since
September 1, 1997. Prior to joining the Company on a full-time basis, Mr. McEwan
was a consultant to the Company since its inception after leaving Gateway USA
where he served as its Director of International Development since 1990. From
1988 to 1990 Mr. McEwan was co-founder and Executive Vice President of Gateway
Asia-Taiwan, the first
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overseas agency of Gateway USA providing call reorigination services. Mr. McEwan
also provides consulting services to the Company's agent in the Bahamas. Mr.
McEwan received a B.A. from Brigham Young University in 1980 and a Masters of
International Management from the American Graduate School of International
Management (Thunderbird) in 1982.
William M. Newport became a Director and Chairman of the Board of Directors
of the Company in February 1998. Mr. Newport was Chief Executive Officer of
AT&T's cellular business from 1981 to 1983. In 1983, Mr. Newport joined the Bell
Atlantic Corporation when it was formed as a result of the AT&T divestiture and
retired in December 1992 from the Bell Atlantic Group as a Vice President for
Strategic Planning, after a 36-year career in the telecommunications industry.
Mr. Newport served as a director of Integrated Micro Products, a manufacturer of
fault tolerant computers for telecommunications equipment vendors, from 1994 to
1996, and currently serves as a director of the Corporation for National
Research Initiatives, a non-profit information technology research and
development company, Authentix Networks, Inc., a wireless roaming fraud
prevention and detection service provider, Ovum Holdings plc., a
telecommunications consulting firm, and Condor Technology Solutions, a publicly
traded company that provides information technology services, such as
information systems development, networking, desk top computing systems and
design installations. Mr. Newport holds degrees in Electrical Engineering from
Purdue University and in Management from the Sloan School of Management at
M.I.T.
Kenneth L. Garrett will become a director of the Company before the
Offering. From 1994 to 1998, Mr. Garrett was President of KLG Associates, Inc.,
a telecommunications consulting firm specializing in the design and operations
of networks, and was a member of the executive committee of Tri State Investment
Group, a venture capital group based in North Carolina. From 1989 to 1994, Mr.
Garrett was a Senior Vice President in charge of AT&T's Network Services
Division, and from 1964 to 1989, he worked in a number of capacities in
operations, sales and marketing within the AT&T organization. Also, from 1971 to
1973, Mr. Garrett worked as district plant manager at Pacific Bell Telephone
Company in San Francisco. Mr. Garrett holds degrees in Chemical Engineering from
Iowa State University and in Management from the Sloan School of Management at
M.I.T.
Effective immediately before this Offering, the directors will be divided
into three classes, denominated Class I, Class II and Class III, with the terms
of office expiring at the 1999, 2000 and 2001 annual meeting of shareholders,
respectively. The directors have initially been divided into classes as follows:
Class I: Mr. Giussani and Mr. Chaskin, Class II: Mr. Seefried and Mr. Newport
and Class III: Mr. Garrett. At each annual meeting following such initial
classification and election, directors elected to succeed those directors whose
terms expire will be elected for a term to expire at the third succeeding annual
meeting of shareholders after their election. All officers are appointed by and
serve, subject to the terms of their employment agreements, if any, at the
discretion of the Board of Directors.
CERTAIN LEGAL PROCEEDINGS
Mr. Luca Giussani, the Company's president and chief executive officer, was
the subject of a criminal proceeding in Italy under Italian law, which was part
of a series of indictments issued against numerous people. Specifically, about
May 1996 Mr. Giussani was charged with transmitting an invoice in 1991 to a
corporation pursuant to an existing consulting contract for consulting services
which it is alleged he did not perform. It was alleged that the invoice was used
to disguise a political contribution made by that corporation which was unlawful
under Italian law. Mr. Giussani was not charged with making an unlawful
political contribution; but rather it is alleged that through the use of this
invoice, Mr. Giussani facilitated the corporation's falsification of corporate
records to disguise the contribution. Mr. Giussani consistently denied any
improper conduct in connection with this matter and believed that he would
ultimately be vindicated. In October 1997, the trial judge dismissed the claim
against Mr. Giussani for lack of evidence. There is currently no criminal
proceeding pending against Mr. Giussani; although he has been advised that the
investigating magistrates are currently contemplating refiling charges against
him and the other former defendants in this case in order to prevent the running
of the applicable statute of limitations. Mr. Giussani
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is confident that he will prevail on the merits with respect to any charges
brought against him. The Company does not believe that the outcome of the
proceedings, even assuming Mr. Giussani were convicted, would have a material
adverse impact on the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established, or will establish prior to the
Offering, three standing committees: the Executive Committee, the Compensation
Committee and the Audit Committee. Luca Giussani, Jeffrey Chaskin and Johannes
S. Seefried serve on the Executive Committee. The Executive Committee is
authorized to exercise the powers of the Board of Directors between meetings.
However, the Executive Committee may not (i) amend the Articles of Incorporation
or the Bylaws of the Company, (ii) adopt an agreement of merger or
consolidation, (iii) recommend to the shareholders the sale, lease, or exchange
of all or substantially all of the Company's property and assets, (iv) recommend
to the shareholders a dissolution of the Company or revoke a dissolution, (v)
elect a director, or (vi) declare a dividend or authorize the issuance of stock.
William Newport and Kenneth L. Garrett will serve on the Compensation Committee.
The Compensation Committee is responsible for recommending to the Board of
Directors the Company's executive compensation policies for senior officers and
administering the 1998 Stock Incentive Plan (as defined). See "--Stock Incentive
Plan." Johannes S. Seefried, William Newport and Kenneth L. Garrett will serve
on the Audit Committee. The Audit Committee is responsible for recommending
independent auditors, reviewing the audit plan, the adequacy of internal
controls, the audit report and the management letter, and performing such other
duties as the Board of Directors may from time to time prescribe.
COMPENSATION OF DIRECTORS
Following the Offering, the Company intends to pay each non-employee
director compensation of $2,000 for each meeting of the Board of Directors that
he attends and $500 for a conference telephone meeting with members of the
Board. Outside members of the Board will also be granted between 5,000 and
15,000 non-qualified options under the Stock Incentive Plan as described below
for each year of service on the Board. Upon consummation of the Offering, Mr.
Newport will receive 15,000, and Mr. Garrett will receive 10,000, non-qualified
options at the Offering Price. The Company will reimburse each director for
ordinary and necessary travel expenses related to such director's attendance at
Board of Directors and committee meetings.
EXECUTIVE COMPENSATION
The Summary Compensation Table below provides certain summary information
concerning compensation paid or accrued during the fiscal year ended March 31,
1997, 1996 and 1995 by the Company to or on behalf of the Chief Executive
Officer and the three other executive officers of the Company.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------------
<S> <C> <C> <C> <C>
NAME AND OTHER ANNUAL
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- ------------------------------------------------------------------ --------- ---------- ---------- -------------
Luca M. Giussani.................................................. 1997 $ 170,000 $ 251,405 $ 8,200(1)
President and Chief Executive 1996 $ 170,000 $ 164,326 $ 4,704(1)
Officer 1995 $ 128,804 $ 12,300 $ 16,805(3)
Jeffrey R. Chaskin (2)............................................ 1997 $ 170,000 $ 251,405 $ 4,583(1)
Executive Vice President and 1996 $ 170,000 $ 164,326 $ 3,057(1)
Chief Operating Officer 1995 $ 170,000 $ 12,300 --
Johannes S. Seefried (4).......................................... 1997 $ 61,981 -- --
Chief Financial and Accounting
Officer
Richard McEwan (5)................................................ 1997 -- -- $ 50,000 (6)
Vice President of Agency 1996 $ 50,000 (7)
Relations 1995 $ 67,885 (7)
</TABLE>
- ------------------------
(1) Consists of the use of a Company automobile.
(2) Does not include compensation paid to Mr. Chaskin's wife, Joanne M. Canter,
an employee of the Company. Ms. Canter's salary for 1995, 1996 and 1997 was
$18,692, $18,000 and $16,615, respectively.
(3) Consists of moving expenses.
(4) Mr. Seefried joined the Company on July 8, 1996. His base salary at
September 30, 1997 was $125,000.
(5) Mr. McEwan joined the Company on September 1, 1997. His base salary at
December 31, 1997 was $130,000.
(6) Consulting fees paid from April 1, 1997 to August 30, 1997.
(7) Consulting fees.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements, effective on January 1,
1998, with each of Luca Giussani, Jeffrey Chaskin, Johannes S. Seefried and
Richard McEwan for terms ranging from two to five years.
The employment agreements with each of Messrs. Giussani and Chaskin,
respectively, the Company's Chief Executive and Chief Operating Officers,
provide for each to receive:
(i) base annual salary of $225,000 in 1998, $250,000 in 1999, $275,000 in
2000, $300,000 in 2001 and $325,000 in 2002;
(ii) minimum bonuses payable at the beginning of each calendar year,
commencing in January 1998, of $45,000; in addition, each executive will
receive additional bonuses, depending upon the Company's operating
results, of $45,000 for each $1 million of earnings before interest,
taxes, depreciation, amortization and such bonuses ("EBITDAB") up and
including to an "EBITDAB" of $4 million, as generated by the Company
during any fiscal year beginning on April 1, 1998 (such bonuses to be
prorated for EBITDAB of a fraction of $1 million and paid monthly,
subject to continuing adjustment for each quarterly and fiscal year's
EBITDAB);
(iii) bonuses commencing with the Company's fiscal year beginning on April
1, 1998, determined as a percentage of the executive's base annual pay
depending upon the Company's EBITDAB, these
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<PAGE>
bonuses begin to be payable at 20% of base annual pay for EBITDAB of at
least $4 million, and increase in increments of 5% of base annual pay for
each $1 million of additional EBITDAB above an EBITDAB of $4 million
(such bonuses to be prorated for EBITDAB of a fraction of $1 million and
paid quarterly subject to continuing adjustment for each fiscal year's
EBITDAB) provided that aggregate bonuses as described in (ii), above and
this section (iii) shall not exceed 200% of the annual base pay;
(iv) in the event of a termination without cause, or termination by the
executive for good reason, compensation for the balance of the remaining
term of the agreement, but for not less than one year; or in the event of
termination of the executive following a change in control, a payment of
three years' base includible compensation, equal to the maximum tax
deduction that the Company can receive under applicable "golden
parachute" regulations;
(v) confidentiality provisions and a non-compete agreement within the State
of Florida for one year after any termination of employment; and
(vi) 10-year options to purchase 150,000 shares of Common Stock at the
Offering Price, 75,000 of which vest upon consummation of this Offering
and the balance in January 1999 or upon a change in control of the
Company. Mr. Giussani's options will be non-qualified. Options to
purchase $200,000 worth of Common Stock issued to Mr. Chaskin will be
tax-qualified and remainder will be non-qualified.
The agreements provide that the bonuses already paid to Messrs. Giussani and
Chaskin through December 1997 comprise the entire bonus to which each is
entitled in respect of the 1998 fiscal year. Both Mr. Giussani and Mr. Chaskin
have waived any other claims for compensation from the Company accruing prior to
January 1, 1998.
The Company has entered into an employment agreement with Johannes Seefried,
its Chief Financial and Accounting Officer, providing for terms similar to those
in the employment agreements with Messrs. Giussani and Chaskin described above,
except that:
(i) the term of the agreement is for two years from January 1, 1998;
(ii) the base annual salary is $170,000 in 1998 and $200,000 in 1999;
(iii) a guaranteed bonus of $50,000 is payable at the commencement of the
agreement and a bonus of $75,000 is payable upon consummation of this
Offering, in addition to bonuses payable as a percentage of base annual
pay depending on the EBITDAB of $4 million or more realized by the
Company in any fiscal year beginning on or after April 1, 1998 and during
the term of the agreement; all in accordance with the formula set forth
in paragraph (iii), above with respect to Messrs. Giussani and Chaskin;
and
(iv) 10-year options to purchase 100,000 shares of Common Stock at the
Offering Price, 50,000 of which vest upon consummation of this Offering
and the balance in January 1999 or upon a change in control of the
Company. Options to purchase $200,000 worth of Common Stock will be
tax-qualified, the remaining options will be non-qualified.
On September 1, 1997, the Company entered into a two-year employment
agreement with Richard McEwan, its Vice President of Agent Relations. The
agreement automatically renews for successive one-year terms unless either party
provides written notice of non-renewal. Mr. McEwan was paid a starting bonus of
$40,000 upon joining the Company and will receive a base annual salary of
$130,000. Mr. McEwan is also eligible to receive bonuses each December at the
discretion of the Board of Directors. Upon adoption by the Company of a stock
incentive plan, Mr. McEwan is entitled to receive incentive stock options to
purchase a number of shares equal to two percent of the Company's Common Stock
outstanding as of the date of the agreement, at an option price and subject to a
vesting schedule to be determined by the Company and its Board of Directors at
their sole discretion. The agreement permits
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<PAGE>
Mr. McEwan to continue to perform services for the Company's independent agent
in the Bahamas, provided that doing so does not create a conflict of interest or
unreasonably interferes with the performance of his duties under his employment
agreement. Pursuant to that arrangement, Mr. McEwan provides "back office"
support services to that agent in return for consulting fees equal to
approximately 30% of the amount of agency fees that the Bahamas agent collects
from the Company. These fees, which amounted to approximately $30,000 in 1996
and $50,000 in 1997 are paid directly to a trust of which Mr. McEwan is a
trustee, and from which he received a $1,000 monthly trustee's fee through
September 1997, after which that fee ceased being paid. The beneficiaries of the
trust include various charitable endeavors, but also include the children of Mr.
McEwan.
STOCK INCENTIVE PLAN
The Company's Board of Directors and shareholders adopted the "1998 Stock
Incentive Plan" (the "Stock Incentive Plan" or the "Plan") in February 1998. The
Compensation Committee will administer the Plan, except that prior to the
Offering the Plan will be administered by the Board of Directors. All employees
and directors of and consultants to the Company are eligible to receive
"Incentive Awards" under the Stock Incentive Plan. The Stock Incentive Plan
allows the Company to issue Incentive Awards of stock options (including
incentive stock options and non-qualified stock options), restricted stock and
stock appreciation rights.
A total of 1,000,000 shares of Common Stock are authorized for issuance
under the Stock Incentive Plan. Not more than 200,000 shares of Common Stock may
be the subject of incentives granted to any individual during any calendar year
under the Stock Incentive Plan. On the effective date of their respective
employment agreements, the Company will grant its Chief Executive, Chief
Operating and Chief Financial Officers 10-year stock options exercisable at the
Offering Price covering 150,000, 150,000 and 100,000 shares of Common Stock,
respectively. Half of these options vest upon issuance, and the balance vest on
January 1, 1999 or upon a change in control of the Company. In addition,
immediately prior to the Offering, options will be granted at or above the
Offering Price to certain employees of the Company, including Mr. McEwan as
determined by the Compensation Committee.
The exercise price of an incentive stock option and a non-qualified stock
option is fixed by the Compensation Committee at the date of grant; however, the
exercise price under an incentive stock option must be at least equal to the
fair market value of the Common Stock at the date of grant, and 110% of the fair
market value of the Common Stock at the date of grant for any incentive stock
option granted to an optionee that owns more than 10% of the Common Stock of the
Company.
Stock options are exercisable for the duration determined by the
Compensation Committee, but in no event more than ten years after the date of
grant. The Compensation Committee may fix the vesting schedule and duration of
options on the date of grant (in the case of qualified options, the term cannot
exceed ten years from the date of grant or five years for options granted to an
optionee that owns more than 10% of the Common Stock of the Company). The
aggregate fair market value (determined at the time the option is granted) of
the Common Stock with respect to which incentive stock options are exercisable
for the first time by a participant during any calendar year (under all stock
option plans of the Company) shall not exceed $100,000; to the extent this
limitation is exceeded, such excess options shall be treated as non-qualified
stock options for purposes of the Stock Incentive Plan and the Code.
At the time a stock option is granted, the Compensation Committee may, in
its sole discretion, designate whether the stock option is to be considered an
incentive stock option or non-qualified stock option. Stock options with no such
designation shall be deemed non-qualified stock options.
Payment of the purchase price for shares acquired upon the exercise of
options may be made by any one or more of the following methods: in cash, by
check, by delivery to the Company of shares of Common Stock already owned by the
option holder, or by such other method as the Compensation Committee may permit
from time to time. However, a holder may not use previously owned shares of
Common Stock to
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<PAGE>
pay the purchase price under an option, unless the holder has beneficially owned
such shares for at least six months.
Stock options become immediately vested and exercisable in full upon the
occurrence of such special circumstances as in the opinion of the Board of
Directors merit special consideration.
Stock options terminate at the end of the 90th day following the holder's
termination of employment or service. This period is extended to one year in the
case of the disability or death of the holder and, in the case of death, the
stock option is exercisable by the holder's estate. The Board of Directors may
extend the post-termination exercise period for any individual, but not beyond
the expiration of the original term of the option.
An option grant may, in the discretion of the Compensation Committee,
include a reload option right that entitles the holder, upon exercise of the
original option and payment of an exercise price for the option in shares, to
purchase at the fair market value per share at the time of exercise the number
of shares used to pay the option exercise price. A reload option may, in the
Compensation Committee's discretion, permit the holder upon exercise of the
option to purchase the number of shares equal to the number of shares issued
upon exercise of the original option. Any reload option will be subject to the
same expiration date and exercisable at the same time as the original option
with respect to which it is granted.
The Compensation Committee may grant stock appreciation rights, either
independently or in connection with the grant of a stock option. Stock
appreciation rights granted in connection with an option may fall into one of
two categories: "Conjunctive Rights" or "Alternative Rights." Conjunctive Rights
will, upon exercise of the related stock option, entitle the holder to receive
payment of an amount equal to the product obtained by multiplying (a) the spread
between the fair market value per share at the time of exercise and the per
share option exercise price, and (b) the number of shares in respect of which
the related option is exercised. Alternative Rights will, upon surrender of the
related option with respect to the number of shares as to which such rights are
then exercised, entitle the holder to receive payment of an amount equal to the
product obtained by multiplying (i) the spread between the fair market value per
share at the time of exercise and the per share option exercise price, and (ii)
the number of shares in respect of which the rights are exercised. The duration
of stock appreciation rights granted in connection with a stock option will be
coterminous with the duration of the stock option.
Stock appreciation rights granted independently will, upon their exercise,
entitle the holder to receive payment of an amount equal to the product obtained
by multiplying (a) the excess of the fair market value per share on the date of
exercise of the stock appreciation rights over the fair market value per share
on the date of grant of the stock appreciation rights, and (b) the number of
shares in respect of which the stock appreciation rights are exercised. Stock
appreciation rights granted independently of any stock option will be
exercisable for a duration determined by the Compensation Committee, but in no
event more than ten years from the date of grant.
The Compensation Committee may also grant restricted stock awards under the
Plan. Restricted stock awards will not be transferable until the restrictions
are satisfied, removed or expire, and will bear a legend to that effect. The
Compensation Committee may impose such other conditions as it deems advisable on
any restricted shares granted to or purchased pursuant to a restricted stock
award made under the Plan.
Awards granted under the Plan contain anti-dilution provisions which will
automatically adjust the number of shares subject to the award in the event of a
stock dividend, split-up, conversion, exchange, reclassification or
substitution. In the event of any other change in the corporate structure or
outstanding shares of Common Stock, the Compensation Committee may make such
equitable adjustments to the number of shares and the class of shares available
under the Stock Incentive Plan or to any outstanding award as it shall deem
appropriate to prevent dilution or enlargement of rights.
The Company shall obtain such consideration for granting options under the
Stock Incentive Plan as the Compensation Committee in its discretion may
request.
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<PAGE>
Each award may be subject to provisions to assure that any exercise or
disposition of Common Stock will not violate federal and state securities laws.
No award may be granted under the Stock Incentive Plan after the day
preceding the tenth anniversary of the adoption of the Stock Incentive Plan.
The Board of Directors or the Compensation Committee may at any time
withdraw or amend the Stock Incentive Plan and may, with the consent of the
affected holder of an outstanding award, at any time withdraw or amend the terms
and conditions of outstanding awards. Any amendment which would increase the
number of shares issuable pursuant to the Stock Incentive Plan or to any
individual thereunder or change the class of individuals to whom options may be
granted shall be subject to the approval of the shareholders of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Offering, the Company has not had a compensation committee or
any other committee of the Board of Directors performing similar functions.
Prior to the Offering, decisions concerning executive compensation were made by
the Board of Directors, including Messrs. Giussani, Chaskin and Seefried, all of
whom were and continue to be executive officers of the Company and participated
in deliberations of the Board of Directors regarding executive officer
compensation. The Board of Directors of the Company will establish a
Compensation Committee upon consummation of this Offering. See "--Committees of
the Board of Directors."
None of the executive officers of the Company currently serve on the
compensation committee of another entity or any other committee of the board of
directors of another entity performing similar functions.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
LOANS AND ADVANCES TO EXECUTIVE OFFICERS
Between December 26, 1995 and July 15, 1997, the Company loaned an aggregate
of $127,000 to Luca Giussani, its Chief Executive Officer. The loans were
evidenced by unsecured notes bearing interest at 7.65% per annum. In addition,
the Company made cash advances totaling $4,749 on behalf of Mr. Giussani during
this period. At December 31, 1997, Mr. Giussani had an outstanding balance to
the Company of $387.
During fiscal 1995, 416.67 Class C shares were issued to Jeffrey Chaskin,
the Company's Chief Operating Officer, in exchange for a $18,750 promissory note
bearing interest at 7.65% per annum, due March 1, 1997. Mr. Chaskin's 541.67
Class C shares were pledged as security for the note. On February 21, 1997, this
loan was converted to an unsecured note bearing interest at 7.65% per annum,
payable by February 21, 1998. Mr. Chaskin repaid the loan in full on December
19, 1997.
BONUSES PAID TO EXECUTIVE OFFICERS
Pursuant to the employment agreements effective January 1, 1998, all
bonuses, including any advance payments, paid to Messrs. Giussani and Chaskin
through December 1997 comprise the entire bonus to which each is entitled in
respect of the 1998 fiscal year. They also waive any other claims for
compensation from the Company accruing prior to January 1, 1998. Messrs.
Giussani and Chaskin each received $225,779 in bonuses under these agreements
for the nine months ended December 31, 1997. See "Management-- Employment
Agreements."
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TERM LOANS AND GUARANTEE BY CHIEF EXECUTIVE OFFICER
During 1993, the Company entered into two term loan agreements with
Citibank-Zurich providing for an aggregate loan amount of $730,000. The due
dates of the two loans were May 20, 1996 and November 11, 1996, respectively.
During 1995 and through April 1996, the Company repaid a total of $250,000 on
the term loans. In June 1996, the Company replaced the two existing term loans
with a new term loan with the same lender in the amount of $500,000 due August
31, 1998. Subsequent to December 31, 1997 the Company repaid the remaining
balance of $85,000 and terminated the loan agreement.
Luca Giussani, the Company's Chief Executive Officer provided security for
these term loans by pledging money-market accounts equal to 100% of the
outstanding loan balances.
AGREEMENTS WITH RISPOLI
On November 1, 1995, the Company entered into a one-year consulting
agreement with Ben Rispoli, a minority shareholder of the Company. The agreement
automatically renews for successive one-year terms unless either party provides
written notice of non-renewal. Pursuant to the agreement Mr. Rispoli will
provide consulting services to assist the Company's marketing efforts for a
monthly retainer of $11,250, plus reimbursement of reasonable travel expenses.
On January 20, 1998, Messrs. Giussani, Rispoli and the Company entered into
an agreement (the "January Agreement"). The January Agreement resolved the
matter of Mr. Rispoli's beneficial interest in the Company's securities held in
a fiduciary capacity by Fincogest, S.A. ("Fincogest"). Fincogest is a nominee
Swiss entity that holds record title for the Company's securities beneficially
owned by Mr. Giussani as well as Mr. Rispoli. Mr. Rispoli had a beneficial
interest in the securities held by Fincogest since the Company's inception. The
January Agreement resolves that Mr. Rispoli beneficially owns 8.3% of the Common
Stock held by Fincogest, and that Mr. Giussani beneficially owns the remaining
91.7% of the Common Stock and all of the Series A Preferred Stock. The January
Agreement also extends Mr. Rispoli's consulting agreement to December 31, 1998
and provides that the consulting agreement cannot be terminated except for
"cause" and modifies the agreement to include an additional payment of $15,000
upon consummation of an initial public offering of the Company's securities
during the term of the consulting agreement.
Between December 21, 1995 and June 26, 1996, the Company loaned $65,000 in
the aggregate to Ben Rispoli. The notes are unsecured and bear interest at the
rate of 7.65% per annum. Beginning in September of 1997, the consultant's
monthly retainer is being offset by the Company against the consultant's
outstanding loan balance and accrued interest. At December 31, 1997 the
outstanding loan balance and accrued interest was $28,894. At March 31, 1998,
all amounts due to the Company by the consultant have been offset against the
consultant's retainer.
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PRINCIPAL AND REGISTERING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of the date of this Prospectus, and as adjusted
to reflect the sale of the shares of Common Stock in the Offering, of (i) each
person known by the Company to own beneficially five percent or more of the
outstanding Common Stock immediately prior to the Offering; (ii) the Registering
Shareholders; (iii) each of the Company's directors; (iv) each of the executive
officers named in the Summary Compensation Table; and (v) all directors and
executive officers of the Company as a group. The address of each person listed
below is 440 Sawgrass Corporate Parkway, Suite 112, Sunrise, Florida 33325,
unless otherwise indicated.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES SHARES BENEFICIALLY
OWNED TO BE OWNED AFTER THE
BEFORE THE OFFERING(1) SOLD IN OFFERING(1)
----------------------- THE -----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERING(2) NUMBER PERCENT
- ------------------------------------ ---------- ----------- --------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Luca M. Giussani (2)(3)(4)(5)....... 4,200,000(6) 80.6% -- 4,200,000(6) 62.5%
Ben Christian Rispoli (3)........... 375,000 7.2% -- 375,000 5.6%
Jeffrey R. Chaskin (2)(5)........... 575,000(6) 11.0% -- 575,000(6) 8.6%
Johannes S. Seefried (5)............ 50,000(7) (9) -- 50,000(7) (9)
Gregory J. Koutoulas (5)............ -- -- -- -- --
Richard McEwan (5).................. --
William Newport..................... 7,500(8) (9) -- 7,500(8) (9)
Kenneth L. Garrett.................. 5,000 10) (9) -- 5,000(6) (9)
All Executive Officers
and Directors as a Group
(7 Persons)....................... 4,837,500 10) 100.0% -- 4,837,500 10) 72.0%
</TABLE>
- ------------------------
(1) The number of shares beneficially owned before the Offering is based on
5,000,000 shares of Common Stock outstanding prior to the Offering. The
number of shares beneficially owned after the Offering is based on 6,500,000
shares of Common Stock outstanding and gives effect to options exercisable
within the next sixty days. Beneficial ownership is determined in accordance
with the rules of the Commission and generally includes voting or investment
power with respect to securities. Subject to applicable community property
laws, each person named in the table has sole voting and investment power
with respect to all shares of Common Stock beneficially owned.
(2) The shares of Common Stock owned by the Registering Shareholders and
registered in this Offering are subject to a holdback agreement with the
Representative and may not be sold without the Representative's consent
until 12 months after the date of the Prospectus.
(3) Held by Fincogest S.A., a Swiss nominee entity, whose holdings of Common
Stock are beneficially owned by Mr. Giussani (91.7%) and Ben Christian
Rispoli (8.3%). Each of Mr. Giussani and Mr. Rispoli has sole voting and
investment power with respect to his shares of Common Stock.
(4) Fincogest, S.A. also owns 100% of the outstanding shares of Series A
Preferred Stock of the Company, all of which are beneficially owned by Mr.
Giussani, who holds sole voting and investment power with respect to the
Series A Preferred Stock.
(5) Excludes options to purchase 100,000 shares of Common Stock to be granted to
Mr. McEwan pursuant to his employment agreement with the Company after
consummation of the Offering, at an exercise price and under a vesting
schedule to be determined by the Compensation Committee.
(6) Includes 10-year options to purchase 75,000 share of Common Stock that vest
at the time of the Offering.
(7) Includes 10-year options to purchase 50,000 shares of Common Stock that vest
at the time of the Offering.
(8) Includes 10-year options to purchase 7,500 shares of Common Stock that vest
at the time of the Offering.
(9) Less than 1%.
(10) Includes 10-year options to purchase 5,000 shares of Common Stock that vest
at the time of the Offering.
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DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company is subject to
the Florida Business Corporation Act ("FBCA") and to provisions contained in the
Company's Amended and Restated Articles of Incorporation and Bylaws, copies of
which have been filed as exhibits to the Registration Statement of which this
Prospectus forms a part. The Amended and Restated Articles of Incorporation will
be adopted prior to the date of this Prospectus. Reference is made to such
exhibits for a detailed description of the provisions thereof summarized below.
Upon completion of this Offering, the authorized capital stock of the
Company will consist of 1,000,000 shares of Preferred Stock, $.01 par value per
share (the "Preferred Stock"), of which 1,000 shares of Series A Preferred Stock
will be issued and outstanding, and 20,000,000 shares of Common Stock, $.01 par
value per share, 6,500,000 shares of which will be issued and outstanding
(6,725,000 shares if the Underwriters' Over-Allotment Option is exercised in
full).
COMMON STOCK
Subject to prior rights of any Preferred Stock then outstanding and to
contractual limitations, if any, holders of outstanding shares of Common Stock
will be entitled to receive dividends out of assets legally available therefor,
as declared by the Board of Directors and paid by the Company.
In the event of any liquidation, dissolution or winding-up of the Company,
holders of Common Stock will be entitled to share equally and ratably in all
assets available for distribution after payment of creditors, holders of any
series of Preferred Stock outstanding at the time, and any other debts,
liabilities and preferences. Since the Company's Board of Directors has the
authority to fix the rights and preferences of, and to issue, the Company's
authorized but unissued Preferred Stock without approval of the holders of its
Common Stock, the rights of such holders may be materially limited or qualified
by the issuance of the Preferred Stock. See "--Preferred Stock."
The holders of Common Stock will be entitled to vote cumulatively for the
election of those members of the Board of Directors which may be elected by the
holders of such stock.
The Common Stock presently outstanding is, and the shares of Common Stock
offered and sold hereby will be, fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors has the authority to issue Preferred Stock from time
to time in one or more series, without shareholder approval, and with respect to
each series to determine (subject to limitations prescribed by law): (1) the
number of shares constituting such series, (2) the dividend rate on the shares
of each series, whether such dividends shall be cumulative and the relation of
such dividends to the dividends payable on any other class of stock, (3) whether
the shares of each series shall be redeemable and the terms of any redemption
thereof, (4) whether the shares shall be convertible into Common Stock or other
securities and the terms of any conversion privileges, (5) the amount per share
payable on each series or other rights of holders of such shares on liquidation
or dissolution of the Company, (6) the voting rights, if any, for shares of each
series, (7) the provision of a sinking fund, if any, for each series and (8)
generally any other rights and privileges not in conflict with the Amended and
Restated Articles of Incorporation for each series and any qualifications,
limitations or restrictions thereof.
SERIES A PREFERRED STOCK. Upon consummation of the Offering, the Company
will have authorized one class of Series A Preferred Stock, consisting of 1,000
shares, all of which will be issued and outstanding and owned by the Company's
principal shareholder. The Series A Preferred Stock will have the exclusive
right to elect one less than a majority of the members of the Board of
Directors, and is entitled to a $1.00 per share liquidation preference over the
Common Stock. Other than with respect to payment of this liquidation preference,
the Series A Preferred Stock will not share in liquidation payments. The Series
A
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Preferred Stock will not participate in dividends and will not be redeemable or
convertible into Common Stock. The holders of 66 2/3 of the outstanding Series A
Preferred Stock must consent to the creation or issuance of any class or series
of Preferred Stock that has greater or equal voting rights with respect to
election of Directors as the Series A Preferred Stock.
OPTIONS
Prior to the date of this Prospectus, the Company has granted options to
purchase up to 425,000 shares of Common Stock, at exercise prices equal to the
Offering Price, pursuant to the provisions of the Company's Stock Incentive
Plan. See "Management--Stock Incentive Plan." The Compensation Committee of the
Board of Directors may authorize the issuance of additional options under the
Stock Incentive Plan after consummation of this Offering. The Company intends to
file a registration statement on Form S-8 under the Securities Act to register
these shares. See "Shares Eligible for Future Sale."
REPRESENTATIVE'S WARRANTS
At the closing of this Offering, the Company will sell to the Representative
for an aggregate purchase price of $150, the Representative's Warrants to
purchase 150,000 shares of Common Stock at a price equal to 160% of the Offering
Price.
The Representative's Warrants will contain anti-dilution provisions for
stock splits, stock dividends, recombinations and reorganizations, a one-time
demand registration provision (at the Company's expense) and piggyback
registration rights (which registration rights will expire five (5) years from
the date of this Prospectus). See "Underwriting."
VOTING RIGHTS
Shareholders are entitled to one vote for each share of Common Stock held of
record. Holders of Common Stock will vote cumulatively for the election of
Directors. The holders of Series A Preferred Stock, voting as a separate class,
will be entitled to elect two (2) of the five (5) members of the Board of
Directors, and one less than a numerical majority of any expanded Board of
Directors.
CERTAIN PROVISIONS OF THE COMPANY'S AMENDED AND RESTATED ARTICLES OF
INCORPORATION, BYLAWS AND CERTAIN STATUTORY PROVISIONS
Certain provisions in the Amended and Restated Articles of Incorporation,
the Bylaws and the FBCA that will come into effect immediately prior to the
Offering could have the effect of delaying, deferring or preventing changes in
control of the Company.
The Company's Amended and Restated Articles of Incorporation will contain
certain provisions that could discourage potential takeover attempts and impede
attempts by shareholders to change management. The Amended and Restated Articles
of Incorporation will provide for a classified Board of Directors consisting of
three classes as nearly equal in size as practicable. Each class will hold
office until the third annual meeting for election of directors following the
election of such class; provided, however, that the initial terms of the
directors in the first, second and third classes of the Board of Directors will
expire in 1998, 1999 and 2000, respectively. The Company's Amended and Restated
Articles of Incorporation provide that no director may be removed except for
cause and by the vote of not less than 66 2/3% of the total outstanding voting
power of the securities of the Company which are then entitled to vote in the
election of directors. The Amended and Restated Articles of Incorporation will
permit the Board of Directors to create new directorships, and the Company's
Bylaws permit the Board of Directors to elect new directors to serve the full
term of the class of directors in which the new directorship was created. The
Bylaws also provide that the Board of Directors (or its remaining members, even
if less than a quorum) is empowered to fill vacancies on the Board of Directors
occurring for any reason for the remainder of the term of the class of directors
in which the vacancy occurred. A vote of not less than 66 2/3% of the total
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outstanding voting power of the securities of the Company then entitled to vote
in the election of directors is required to amend the foregoing provisions of
the Amended and Restated Articles of Incorporation.
The Company is subject to Sections 607.0901 and 607.0902 of the Florida
Business Corporation Act. In general, Section 607.0901 restricts the ability of
a greater than 10% shareholder of a company to engage in a wide range of
specified transactions (including mergers, asset sales, and other affiliated
transactions) between such company and such shareholder or a person or entity
controlled by or controlling such shareholder. The statute provides that such a
transaction must be approved by the affirmative vote of the holders of
two-thirds of such company's voting shares, unless it is approved by a majority
of the disinterested directors. Section 607.0902 restricts the ability of a
third party to effect an unsolicited change in control of a company. In general,
the statute provides that shares acquired in a transaction which effects a
certain threshold change in the ownership of a company's voting shares (a
"control share acquisition") have the same voting rights as shares held by the
acquiring person prior to the acquisition only to the extent granted by a
resolution adopted by shareholders in a prescribed manner. These statutory
provisions may have an anti-takeover effect by deterring unsolicited offers or
delaying changes in control or management of the Company.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article NINTH of the Company's Amended and Restated Articles of
Incorporation will provide that, to the full extent permitted by the FBCA,
directors shall not be personally liable to the Company or its shareholders for
damages for breach of any duty owed to the Company or its shareholders.
The Company's Amended and Restated Articles of Incorporation and Bylaws will
provide that the Company shall indemnify its directors and officers to the
fullest extent permitted by the FBCA.
The Company maintains directors' and officers' liability insurance which is
intended to provide the Company's Directors and officers protection from
personal liability in addition to the protection provided by the Company's
Amended and Restated Articles of Incorporation and Bylaws as described above.
TRANSFER AGENT
The transfer agent for the Common Stock is Continental Stock Transfer &
Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
DESCRIPTION
Upon completion of the Offering, the Company will have outstanding 6,500,000
shares of Common Stock (assuming no exercise of the Over-Allotment Option). The
1,500,000 shares of Common Stock to be sold in the Offering, and any of the
225,000 shares that may be sold upon exercise of the Underwriters'
Over-Allotment Option, will be freely tradable by persons other than
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act, without restriction or registration under the Securities Act.
The remaining 5,000,000 outstanding shares (all such shares being referred to
herein as the "Existing Shareholders Shares") will be held by the Company's
Existing Shareholders. The Existing Shareholders Shares may not be sold unless
they are registered under the Securities Act or sold pursuant to an applicable
exemption from registration, including an exemption pursuant to Rule 144 under
the Securities Act. The Registering Shareholders are registering 200,000 of the
Existing Shareholders Shares (120,000 shares beneficially owned by Mr. Giussani
and 80,000 shares owned by Mr. Chaskin) pursuant to the registration statement
of which this prospectus forms a part, but such shares are subject to a holdback
agreement with the Representative and may not be sold or otherwise disposed of
without the Representative's consent until after 12 months after the date of the
Prospectus.
As currently in effect, Rule 144 generally permits the public sale in
ordinary trading transactions of "restricted securities" and of securities owned
by "affiliates" beginning 90 days after the date of this Prospectus if the other
restrictions enumerated in Rule 144 are met. Restricted securities are
securities acquired directly or indirectly from an issuer or an affiliate of the
issuer in a transaction not involving a public offering. In general, under Rule
144, if a period of at least one year has elapsed since the date the restricted
securities were acquired from the Company or an affiliate of the Company, as
applicable, then the holder of such restricted securities (including an
affiliate) is entitled, subject to certain conditions, to sell in broker's
transactions or to market makers within any three-month period a number of
shares which does not exceed the greater of (i) 1% of the Company's then
outstanding shares of Common Stock or (ii) the share's average weekly trading
volume during the four calendar weeks preceding the date the Notice of Sale is
filed with the Commission. Sales under Rule 144 are also subject to certain
manner-of-sale provisions and requirements as to notice and the availability of
current public information about the Company. Affiliates may sell shares not
constituting restricted securities in accordance with the foregoing limitations
and requirements but without regard to the one-year period. However, a person
who is not and has not been an affiliate of the Company at any time during the
90 days preceding the sale of the shares, and who has beneficially owned
restricted securities for at least two years, is entitled to sell such shares
without regard to the volume limitation and other conditions of Rule 144.
The Company has reserved 1,000,000 shares of its Common Stock for issuance
under the Stock Incentive Plan. All of the shares issued as the result of any
grants under the foregoing plan shall also be restricted securities unless the
Company files a registration statement on Form S-8 under the Securities Act
relating to the issuance of such shares. The Company currently intends to
register the shares of Common Stock reserved for issuance under the Stock
Incentive Plan. Subject to compliance with Rule 144 by affiliates of the
Company, any shares issued upon exercise of options granted under the Stock
Incentive Plan will become freely tradable at the effective date of the
registration statement on Form S-8. However, such shares will not be
transferable without the consent of the Representative for 12 months after the
date of this Prospectus.
Prior to the Offering, there has been no public market for the Common Stock,
and no prediction can be made as to the effect, if any, that sales of shares or
the availability of shares for sale will have on the market price prevailing
from time to time. Nevertheless, sales of substantial amounts of Common Stock in
the public market following the Offering, or the perception that such sales
could occur, could adversely affect the market prices of the Common Stock
prevailing from time to time and could impair the Company's ability to raise
capital through an offering of its equity securities.
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SALES BY REGISTERING SHAREHOLDERS
The Company has been advised by the Registering Shareholders that such
holders may, from time to time, sell some or all of the shares registered for
such shareholders, following the expiration of the 12 month holdback period to
which their shares are subject. See "Principal and Registering Shareholders."
The Company is not aware of any current intention or agreement, written or oral,
on the part of the Registering Shareholders to sell any of their shares of
Common Stock through underwriters, brokers, dealers or agents.
The Registering Shareholders (after expiration of the holdback period), may
sell the shares of Common Stock to one or more underwriters for public offering
and sale by them, to investors directly or to agents that solicit or receive
offers on behalf of Registering Shareholders, or to dealers or through a
combination of any such method of sale.
The shares of Common Stock may be distributed in one or more transactions
from time to time at a fixed price or prices (which may be changed from time to
time) in market prices prevailing at the time of sale, at prices based upon such
prevailing market prices or at negotiated prices. The Registering Shareholders
also may, from time to time, authorize agents to act on a best efforts or other
basis to solicit or receive offers to purchase shares of Common Stock.
Any underwriting commission paid by the Company or Registering Shareholders
to underwriters or agents in connection with the offering of the shares of
Common Stock, and any discounts, concessions or commissions allowed by
underwriters to participating dealers, will be set forth in a Prospectus.
Underwriters, dealers and agents participating in the distribution of shares of
Common Stock (including agents only soliciting or receiving offers to purchase
shares on behalf of the Company) may be deemed to be underwriters, and any
discounts or commissions received by them and any profit realized by them on
resale of the shares may be deemed to be underwriting discounts and commissions
under the Securities Act.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company has agreed to sell to the Underwriters named below, for whom Joseph
Charles & Associates, Inc. is acting as Representative, and the Underwriters
have agreed, severally, to purchase from the Company the number of shares of
Common Stock set forth opposite their respective names.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS TO BE PURCHASED
- ---------------------------------------------------------------------------- ----------------
<S> <C>
Joseph Charles & Associates, Inc. ..........................................
----------------
Total.....................................................................
----------------
</TABLE>
The shares of Common Stock are being sold on a firm commitment basis. The
Underwriting Agreement provides, however, that the obligations of the
Underwriters are subject to certain conditions precedent. The Underwriters are
committed to purchase all of the shares offered hereby, if any are purchased.
The Representative has informed the Company that it does not expect sales of any
shares to be made to any account over which the Underwriters have discretionary
authority.
The Representative has advised the Company that the Underwriters propose to
offer the shares of Common Stock directly to the public at the Offering Price
set forth on the cover page of this Prospectus, and to selected dealers at that
price, less a concession of not more than $ per share. The Underwriters
may allow a discount of not more than $ per share on sales to certain
other dealers. After the Offering, the price to the public of the shares may be
changed.
The Company has granted the Representative an option, exercisable during the
45-day period following the date of this Prospectus, to purchase up to 225,000
additional shares of Common Stock at the Offering Price, less the underwriting
discounts and commissions. The Representative may exercise such option only for
the purpose of covering any over-allotments incurred in connection with the sale
of the shares offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses, including liabilities under the Securities
Act, or to contribute to payments that the Underwriters may be required to make
in respect thereof.
The Company has agreed to pay the Representative a non-accountable expense
allowance of 3% of the gross proceeds from the sale of the shares of Common
Stock by the Company, against which $50,000 has heretofore been paid. In
addition to the Underwriter's discounts and commissions and the non-accountable
expense allowance, the Company is required to pay the costs of qualifying the
shares of Common Stock under federal and state securities laws, together with
legal and accounting fees, printing, road show and other costs in connection
with the Offering.
The Company has agreed to retain the Representative as a financial
consultant for a period of two years from the date of this Prospectus for a fee
of $3,000 per month which shall be paid in full at the closing of the Offering.
The Company has also agreed, for a period of two (2) years from the date of
this Prospectus, at the option of the Representative, to nominate a designee of
the Representative as a non-voting advisor to the Company's Board of Directors,
this designee will be entitled to 10-year options to purchase 4,000 shares of
Common Stock at its fair market value at the time of grant for each year of
service in such capacity, and to compensation of $2,000 per meeting attended in
person, $500 per meeting attended by conference call and
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reimbursement of expenses for attendance at Board Meetings. The Representative
has not yet exercised its right to designate such a person.
At the closing of this Offering, the Company will sell and deliver to the
Representative for an aggregate purchase price of $150, the Representative's
Warrants to purchase 150,000 shares of Common Stock at a price equal to 160% of
the Offering Price.
The Representative's Warrants will contain anti-dilution provisions for
stock splits, stock dividends, recombinations and reorganizations, a one-time
demand registration provision (at the Company's expense) and piggyback
registration rights (which registration rights will expire five (5) years from
the date of this Prospectus). The Representative's Warrants will be exercisable
during the four (4) year period commencing one (1) year after the date of this
Prospectus. To the extent that the Representative's Warrants are exercised,
dilution of the interests of the Company's shareholders will occur. Further, the
terms on which the Company will be able to obtain additional equity capital may
be adversely affected, since the holders of the Representative's Warrants can be
expected to exercise them at any time when the Company would, in all likelihood,
be able to obtain any needed capital on terms more favorable to the Company than
those provided in the Representative's Warrants. Any profit realized by the
Representative on the sale of the Representative's Warrants or the underlying
shares of Common Stock may be deemed additional underwriting compensation.
Except in connection with acquisitions, a financing agreement related to an
acquisition, or the issuance of up to 1,000,000 shares of Common Stock issuable
under the Stock Incentive Plan, the Company has agreed, for a period of twelve
(12) months from the closing of this Offering, that it will not issue, sell or
purchase any shares of Common Stock or issue warrants or options or other equity
securities of the Company without the prior written consent of the
Representative. In addition, the officers, directors and principal shareholders
of the Company have agreed that they will not offer, sell, contract to sell,
transfer, assign, contract to assign, gift, grant any option or warrant to
purchase, or right to acquire, announce an intention to sell, pledge, exchange,
contract to exchange or otherwise dispose of or contract to dispose of, directly
or indirectly any shares of Common Stock of the Company owned by them for a
period of at least twelve (12) months from the closing of this Offering without
the prior written consent of the Representative. The Representative may, in its
discretion, and without notice to the public, waive such restrictions and permit
holders otherwise agreeing to restrict their shares to sell any or all of their
shares. See "Shares Eligible for Future Sale."
Prior to the Offering there has been no public trading market for the Common
Stock. Consequently, the Offering Price of the shares of Common Stock has been
determined by negotiation between the Company and the Representative. Among the
factors considered in determining the Offering Price of the shares of Common
Stock were the Company's financial condition and prospects, market prices of
similar securities of comparable publicly traded companies, certain financial
and operating information of companies engaged in activities similar to those of
the Company and the general condition of the securities market.
Certain persons participating in the Offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchases, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the
Representatives to reclaim a selling concession from a syndicate member in
connection with the offering when Common Stock sold by the syndicate member are
purchased in syndicate covering transactions. Such transactions may be effected
on the Nasdaq Stock Market, in the over-the-counter market, or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
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LEGAL MATTERS
Stroock & Stroock & Lavan LLP, Miami, Florida, will pass upon the validity
of the Common Stock offered hereby for the Company. De Martino Finkelstein Rosen
& Virga, Washington, D.C., will pass upon certain legal matters in connection
with the Offering for the Representative.
EXPERTS
The financial statements of Ursus Telecom Corporation at March 31, 1997 and
1996 and for each of the three years in the period ended March 31, 1997,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent certified public accountants, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended. The Company has filed with the
Commission a Registration Statement on Form S-1 under the Securities Act, of
which this Prospectus forms a part, with respect to the Common Stock offered
hereby. This Prospectus omits certain information contained in the Registration
Statement, and reference is made to the Registration Statement for further
information with respect to the Company and the Common Stock offered hereby.
Statements contained herein concerning the provisions of documents are
necessarily summaries of such documents and when any such document is an exhibit
to the Registration Statement, each such statement is qualified in its entirety
by reference to the copy of such document filed with the Commission.
The Registration Statement, including exhibits and schedules thereto may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's Regional Offices located at Seven World Trade Center, Suite 1300,
New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials may also be obtained at
prescribed rates from the Public Reference Section of the Commission,
Washington, D.C. 20549. In addition, registration statements and certain other
filings made by the Commission through its Electronic Data Gathering and
Retrieval ("EDGAR") systems are publicly available through the Commission's site
on the Internet's World Wide Web, located at http://www.sec.gov.
REPORTS TO SHAREHOLDERS
After the Offering, the Company intends to furnish its shareholders with
annual reports containing audited financial statements and a report thereon by
independent certified public accountants and with quarterly reports for the
first three quarters of each fiscal year containing unaudited summary financial
information.
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GLOSSARY OF TERMS
ACCOUNTING OR SETTLEMENT RATE--The per minute rate negotiated between
carriers in different countries for termination of international long distance
traffic in, and return traffic to, the carriers' respective countries.
CALL REORIGINATION (ALSO KNOWN AS "CALLBACK")-- A form of dial up access
that allows a user to access a telecommunications company's network by placing a
telephone call, hanging up, and waiting for an automated call reorigination. The
call reorigination then provides the user with a dial tone which enables the
user to initiate and complete a call.
CAGR--Compound Annual Growth Rate.
CALL-THROUGH--The provision of international long distance service through
conventional long distance or "transparent" call reorigination.
CLEC--Competitive Local Exchange Carrier.
CUG (CLOSED USER GROUP)--A group of specified users, such as employees of a
company, permitted by applicable regulations to access a private voice or data
network, which access would otherwise be denied to them as individuals.
DIRECT ACCESS--A means of accessing a network through the use of a permanent
point-to-point circuit typically leased from a facilities-based carrier. The
advantages of direct access include simplified premises-to-anywhere calling,
faster call set-up times and potentially lower access and transmission costs
(provided there is sufficient traffic over the circuit to generate economies of
scale).
DIAL-UP ACCESS--A form of service whereby access to a network is obtained by
dialing an international toll-free number or a local access number.
EUROPEAN UNION OR EU--Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and
the United Kingdom.
FACILITIES-BASED CARRIER--A carrier which transmits a significant portion of
its traffic over owned transmission facilities.
FIBER-OPTIC--A transmission medium consisting of high-grade glass fiber
through which light beams are transmitted carrying a high volume of
telecommunications traffic.
IPLC (INTERNATIONAL PRIVATE LINE CIRCUITS)--Point-to-point permanent
connections which can carry voice and data. IPLCs are owned and maintained by
ITOs or third party resellers.
INTERNET PROTOCOL (IP)--A class of product that uses data and/or voice
transmission over the Internet/ Intranet.
ISDN (INTEGRATED SERVICE DIGITAL NETWORK)--A hybrid digital network capable
of providing transmission speeds of up to 128 kilobits per second for both voice
and data.
ISP--International Settlements Policy. The ISP establishes the permissible
arrangements between facilities-based carriers based in the U.S. and their
foreign counterparts for terminating each other's traffic over their respective
networks.
ISR (INTERNATIONAL SIMPLE RESALE)--The use of international leased lines for
the resale of switched telephony services to the public, by passing the current
system of accounting rates.
ITO (INCUMBENT TELECOMMUNICATIONS OPERATOR)--The dominant carrier or
carriers in each country, often, but not always, government-owned or protected
(alternatively referred to as the Postal, Telephone and Telegraph Company, or
PTT).
ITU--International Telecommunications Union--International
Telecommunications Association headquartered in Geneva, Switzerland.
LEC (LOCAL EXCHANGE CARRIER)--Companies from which the Company and other
long distance providers must purchase "access services" to originate and
terminate calls in the U.S.
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LOCAL CONNECTIVITY--Physical circuits connecting the switching facilities of
a telecommunications services provider to the interexchange and transmission
facilities of a facilities-based carrier.
LOCAL EXCHANGE--A geographic area determined by the appropriate regulatory
authority in which calls generally are transmitted without toll charges to the
calling or called party.
NODE--A specially configured multiplexer which provides the interface
between the local PSTN where the node is located and a switch. A node collects
and concentrates call traffic from its local area and transfers it to a switch
via private line for call processing. Nodes permit a carrier to extend its
network into new geographic locations by accessing the local PSTN without
requiring the deployment of a switch.
OPERATING AGREEMENTS--An agreement that provides for the exchange of
international long distance traffic between correspondent international long
distance providers that own facilities in different countries. These agreements
provide for the termination of traffic in, and return traffic from, the
international long distance providers' respective countries at a negotiated
"accounting rate." Under a traditional operating agreement, the international
long distance provider that originates more traffic compensates the
corresponding long distance provider in the other country by paying an amount
determined by multiplying the net traffic imbalance by the latter's share of the
accounting rate.
PBX (PUBLIC BRANCH EXCHANGE)--Switching equipment that allows connection of
a private extension telephone to the PSTN or to a Private Line.
POPS--Points of Presence. An interlinked group of modems, routers and other
computer equipment, located in a particular city or metropolitan area, that
allows a nearby subscriber to access the Network through a local telephone call.
PRIVATE LINE--A dedicated telecommunications connection between end user
locations.
PSTN (PUBLIC SWITCHED TELEPHONE NETWORK)--A telephone network which is
accessible by the public through private lines, wireless systems and pay phones.
REFILE--Traffic originating from one country (original country) and destined
to another country (receiving country) is routed through a third country without
the knowledge of the receiving country. The receiving country has only
identified the third country and assumes the traffic originated from the third
country only.
RESALE--Resale by a provider of telecommunications services of services sold
to it by other providers or carriers on a wholesale basis.
SWITCHING FACILITY--A device that opens or closes circuits or selects the
paths or circuits to be used for transmission of information. Switching is a
process of interconnecting circuits to form a transmission path between users.
TRANSIT--Traffic originating from one country and destined to another
country is routed through a third country with the full knowledge and consent of
all countries and carriers concerned.
TRANSPARENT CALL REORIGINATION--Technical innovations have enabled
telecommunications carriers to offer a "transparent" form of call reorigination
without the usual "hang up" and "callback" whereby the call is automatically and
swiftly processed by a programmed switch.
VALUE-ADDED TAX (VAT)--A consumption tax levied on end-consumers of goods
and services in applicable jurisdictions.
VOICE TELEPHONY--A term used by the EU, defined as the commercial provision
for the public of the direct transport and switching of speech in real-time
between public switched network termination points, enabling any user to use
equipment connected to such a network termination point in order to communicate
with another termination points.
WTO--World Trade Organization (based in Geneva, Switzerland).
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Certified Public Accountants......................................................... F-2
Balance Sheets as of March 31, 1996 and 1997 and December 31, 1997 (unaudited)............................. F-3
Statements of Income for the fiscal years ended March 31, 1995, 1996 and 1997 and the nine months ended
December 31, 1996 and 1997 (unaudited)................................................................... F-4
Statement of Shareholders' Equity (Capital Deficiency) for the fiscal years ended March 31, 1995, 1996 and
1997 and the nine months ended December 31, 1996 and 1997 (unaudited).................................... F-5
Statements of Cash Flows for the fiscal years ended March 31, 1995, 1996 and 1997 and the nine months ended
December 31, 1996 and 1997 (unaudited)................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Ursus Telecom Corporation
We have audited the accompanying balance sheets of Ursus Telecom Corporation as
of March 31, 1996 and 1997, and the related statements of income, shareholders'
equity (capital deficiency) and cash flows for each of the three years in the
period ended March 31, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ursus Telecom Corporation at
March 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1997 in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Miami, Florida
August 15, 1997
F-2
<PAGE>
URSUS TELECOM CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
EQUITY AT
MARCH 31 DECEMBER 31,
-------------------- DECEMBER 31, 1997
1996 1997 1997 (NOTE 2)
--------- --------- ------------ -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 476,916 $ 740,765 $ 679,148
Accounts receivable, net................................... 1,735,437 3,378,886 4,791,042
Advances and notes receivable--related parties............. 122,668 185,694 33,851
Prepaid expenses........................................... 18,415 51,570 53,768
Other current assets....................................... -- 38,716 41,293
Income taxes receivable.................................... -- 161,430 --
Deferred taxes............................................. 9,652 9,076 47,414
--------- --------- ------------
Total current assets................................... 2,363,088 4,566,137 5,646,516
Equipment, net............................................... 360,733 587,368 786,112
Deferred taxes............................................... 33,328 17,373 7,430
Deposit on acquisition....................................... -- -- 321,059
Deferred costs of public offering............................ -- -- 207,531
Other assets, net............................................ 39,734 72,508 73,751
--------- --------- ------------
Total assets........................................... $2,796,883 $5,243,386 $7,042,399
--------- --------- ------------
--------- --------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $1,446,194 2,714,789 $3,834,940
Accrued expenses........................................... 22,783 38,660 70,991
Current portion of long-term debt.......................... -- -- 85,000
Customer advances.......................................... -- -- 30,000
Income taxes payable....................................... 26,278 74,146 39,782
Commissions payable........................................ 28,654 85,516 75,321
Deferred revenue........................................... 9,314 7,006 68,510
Deferred promotional discounts............................. 18,567 -- --
--------- --------- ------------
Total current liabilities.............................. 1,551,790 2,920,117 4,204,544
Deferred taxes............................................... 56,164 36,834 67,186
Long-term debt............................................... 580,000 425,000 --
Shareholders' equity:
Preferred stock $.01 par value, 1,000,000 shares
authorized;
1,000 shares outstanding on a pro forma basis............ -- -- -- $ 10
Common stock, $.01 par value; 20,000,000 shares authorized;
5,000,000 issued and outstanding on a pro forma basis.... -- -- -- 50,000
Common stock--Class A: $50 par value; 500 shares
authorized, issued and outstanding....................... 25,000 25,000 25,000
Common stock--Class B: $50 par value; 15,500 shares
authorized, 3,500 shares issued and outstanding.......... 175,000 175,000 175,000
Common stock--Class C: $50 par value; 4,000 shares
authorized, 1,416.67 shares issued and outstanding, net
of discount of $2,084.................................... 68,750 68,750 68,750
Stock subscription receivable.............................. (18,750) (18,750) -- --
Additional paid in capital................................. -- -- -- 218,740
Retained earnings.......................................... 358,929 1,611,435 2,501,919 2,501,919
--------- --------- ------------ -------------
Total shareholders' equity............................. 608,929 1,861,435 2,770,669 $ 2,770,669
--------- --------- ------------
Total liabilities and shareholders' equity............. $2,796,883 $5,243,386 $7,042,399
--------- --------- ------------
--------- --------- ------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
URSUS TELECOM CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------------------ ----------------------------
1995 1996 1997 1996 1997
------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues:
Retail.............................. $ 6,290,512 $ 13,228,074 $ 20,523,019 $ 14,987,729 $ 18,420,864
Wholesale........................... -- -- 315,408 -- 2,608,249
------------ ------------- ------------- ------------- -------------
Total revenues.................. 6,290,512 13,228,074 20,838,427 14,987,729 21,029,113
Cost of revenues...................... 3,746,542 7,675,370 12,195,672 8,575,407 13,788,755
------------ ------------- ------------- ------------- -------------
Gross profit.......................... 2,543,970 5,552,704 8,642,755 6,412,322 7,240,358
Operating expenses:
Commissions......................... 1,224,975 2,429,830 3,766,235 2,766,212 3,202,016
Selling, general and administrative
expenses.......................... 1,088,184 1,659,591 2,746,379 2,071,075 2,490,506
Depreciation and amortization....... 72,285 94,415 126,292 86,556 133,429
------------ ------------- ------------- ------------- -------------
Total operating expenses........ 2,385,444 4,183,836 6,638,906 4,923,843 5,825,951
------------ ------------- ------------- ------------- -------------
Operating income...................... 158,526 1,368,868 2,003,849 1,488,479 1,414,407
Other income (expense):
Interest expense.................... (61,221) (59,353) (39,363) (30,164) (19,691)
Interest income..................... 1,099 5,089 16,271 9,136 22,443
Gain (loss) on sale of equipment.... -- -- 9,644 (1,922) 10,584
------------ ------------- ------------- ------------- -------------
(60,122) (54,264) (13,448) (22,950) 13,336
------------ ------------- ------------- ------------- -------------
Income before provision (benefit) for
income taxes........................ 98,404 1,314,604 1,990,401 1,465,529 1,427,743
Provision (benefit) for income
taxes............................. (283,631) 524,553 737,895 555,881 537,259
------------ ------------- ------------- ------------- -------------
Net income............................ $ 382,035 $ 790,051 $ 1,252,506 $ 909,648 $ 890,484
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
Pro Forma net income per common
share-basic and dilutive............ $ .08 $ .16 $ .25 $ .18 $ .18
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
Pro Forma weighted average shares
outstanding......................... 4,869,335 5,000,000 5,000,000 5,000,000 5,000,000
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
URSUS TELECOM CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK STOCK EARNING
-------------------------------- SUBSCRIPTION (ACCUMULATED
CLASS A CLASS B CLASS C RECEIVABLE DEFICIT) TOTAL
--------- ---------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1994...................... $ 25,000 $ 175,000 $ 50,000 $ -- $ (813,157) $ (563,157)
Issuance of common stock.................... -- -- 18,750 (18,750) -- --
Net income.................................. -- -- -- -- 382,035 382,035
--------- ---------- --------- ------------ ------------ ------------
Balance at March 31, 1995..................... 25,000 175,000 68,750 (18,750) (431,122) (181,122)
Net income.................................. -- -- -- -- 790,051 790,051
--------- ---------- --------- ------------ ------------ ------------
Balance at March 31, 1996..................... 25,000 175,000 68,750 (18,750) 358,929 608,929
Net income.................................. -- -- -- -- 1,252,506 1,252,506
--------- ---------- --------- ------------ ------------ ------------
Balance at March 31, 1997..................... 25,000 175,000 68,750 (18,750) 1,611,435 1,861,435
Collection of stock subscription
receivable................................ -- -- -- 18,750 -- 18,750
Net income (unaudited)...................... -- -- -- -- 890,484 890,484
--------- ---------- --------- ------------ ------------ ------------
Balance at December 31, 1997 (unaudited)...... $ 25,000 $ 175,000 $ 68,750 $ -- $2,501,919 $ 2,770,669
--------- ---------- --------- ------------ ------------ ------------
--------- ---------- --------- ------------ ------------ ------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
URSUS TELECOM CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
-------------------------------- ------------------------
1995 1996 1997 1996 1997
--------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
----------- -----------
OPERATING ACTIVITIES
Net income........................................... $ 382,035 $ 790,051 $1,252,506 $ 909,648 $ 890,484
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 72,285 94,415 126,292 86,556 133,429
(Gain) loss on sale of equipment................. -- (9,644) 1,922 (10,584)
Deferred income taxes............................ (283,631) 296,815 (2,799) (3,992) 1,957
Changes in operating assets and liabilities:
Accounts receivable............................ (586,134) (933,681) (1,643,449) (949,263) (1,412,156)
Income taxes receivable........................ -- -- (161,430) (9,663) 161,430
Prepaid expenses............................... (8,859) (4,499) (33,155) (86,685) (2,198)
Other current assets........................... -- -- (38,716) (12,000) (2,577)
Accounts payable............................... 666,554 482,538 1,268,595 631,963 1,120,151
Accrued expenses............................... (34,565) (20,473) 15,877 55,452 32,331
Advances from customers........................ -- -- -- -- 30,000
Income taxes payable........................... 18,053 8,225 47,868 36,076 (34,364)
Commissions payable............................ 22,156 (2,435) 56,862 38,884 (10,195)
Deferred revenue............................... -- 9,314 (2,308) -- 61,504
Deferred discounts............................. (18,635) (47,798) (18,567) (18,567) --
--------- --------- ---------- ----------- -----------
Net cash provided by operating activities............ 229,259 672,472 857,932 680,331 959,212
INVESTING ACTIVITIES
Deposit on acquisition............................... -- -- -- -- (321,059)
Purchase of equipment................................ (143,389) (93,646) (352,081) (204,751) (320,690)
Sale of equipment.................................... -- -- 10,000 10,000 --
Advances to related parties.......................... -- (122,668) (63,026) (65,393) 151,843
Increase in other assets............................. (29,125) (6,152) (33,976) (23,955) (2,142)
--------- --------- ---------- ----------- -----------
Net cash used in investing activities................ (172,514) (222,466) (439,083) (284,099) (492,048)
FINANCING ACTIVITIES
Deferred costs of public offering.................... -- -- -- -- (207,531)
Increase in long-term debt........................... 21,000 -- -- -- --
Repayments of long-term debt......................... (20,000) (150,000) (155,000) (130,000) (340,000)
Collection of stock subscription receivable.......... -- -- -- -- 18,750
Advances repaid to officer........................... (40,832) -- -- -- --
--------- --------- ---------- ----------- -----------
Net cash used in financing activities................ (39,832) (150,000) (155,000) (130,000) (528,781)
--------- --------- ---------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents........................................ 16,913 300,006 263,849 266,232 (61,617)
Cash and cash equivalents at beginning of period..... 159,997 176,910 476,916 476,916 740,765
--------- --------- ---------- ----------- -----------
Cash and cash equivalents at end of period........... $ 176,910 $ 476,916 $ 740,765 $ 743,148 $ 679,148
--------- --------- ---------- ----------- -----------
--------- --------- ---------- ----------- -----------
SUPPLEMENTAL CASH FLOW AND NON-CASH FLOW INFORMATION
Cash paid for interest......................... $ 64,582 $ 58,670 $ 38,838 $ 30,164 $ 22,224
--------- --------- ---------- ----------- -----------
--------- --------- ---------- ----------- -----------
Cash paid for income taxes..................... $ -- $ 201,460 $ 854,256 $ 433,574 $ 408,236
--------- --------- ---------- ----------- -----------
--------- --------- ---------- ----------- -----------
Trade-in allowance for used equipment.......... $ -- $ -- $ 60,000 $ -- $ 67,500
--------- --------- ---------- ----------- -----------
--------- --------- ---------- ----------- -----------
Stock issued for note receivable............... $ 18,750 $ -- $ -- $ -- $ --
--------- --------- ---------- ----------- -----------
--------- --------- ---------- ----------- -----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
1. NATURE OF OPERATIONS
Ursus Telecom Corporation (the "Company") was incorporated in Florida on
March 23, 1993. The Company is a provider of international telecommunications
services. The Company's revenues are derived from the sale of telecommunications
services to retail customers, who are typically small-to medium-sized businesses
and travelers; and to wholesale customers, who are typically telecommunications
carriers. The Company's retail customers are principally located in South
Africa, Latin America, the Middle East (primarily Lebanon and Egypt), Russia and
France, while the wholesale customers are located in the United States. In both
the retail and wholesale aspects of its business, the Company extends credit to
its customers on an unsecured basis with the risk of loss limited to outstanding
amounts.
The Company markets its services through a worldwide network of independent
agents. The Company extends credit to its sales agents on an unsecured basis
with the risk of loss limited to outstanding amounts, less commissions payable
to its agents. The Company has entered into exclusive agency agreements with all
of its current agents. The initial term of the agreements has generally been for
a period of five years. Provided that agents are not in default, agents
generally have the option of renewing their agreements for two additional terms
of three years each by notifying the Company at least six months prior to the
agreement's expiration date. See Note 10 -- Significant Customers, and Note 11
- -- Concentrations of Credit Risk.
The Company has historically experienced and expects to continue to
experience, a decrease in the use of its services in the months of August and
December due to the closing of many businesses for holiday in Europe and the
United States during those months.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim financial statements as of December 31,
1997 and for each of the nine month periods ended December 31, 1996 and 1997
include all adjustments which, in the opinion of management, are necessary for a
fair presentation of the Company's financial position and results of operations
and cash flows for the periods presented. All such adjustments are of a normal
recurring nature. The results of the Company's operations for the nine months
ended December 31, 1996 and 1997 are not necessarily indicative of the results
of operations for a full fiscal year.
PRO FORMA BALANCE SHEET INFORMATION
Pro forma shareholders' equity reflects the stock split and recapitalization
which has been approved by the Company's Board of Directors and was effective
upon the filing of the Amended and Restated Articles of Incorporation on
February 12, 1998 with the appropriate state agency. The filing is expected to
occur on or before the effective date of the proposed initial public offering of
the Company's common stock. See Note 13.
PRO FORMA NET INCOME PER SHARE
After the effectiveness of the stock split and recapitalization described
above, the Company has a single class of common stock with 5 million shares
outstanding and a single class of preferred stock with
F-7
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1,000 shares outstanding. The preferred shares are not convertible into shares
of Common Stock and do not provide for dividends.
Pro forma basic net income per share included on the accompanying statements
of income reflect pro forma weighted average common shares outstanding for all
periods presented assuming the stock split and recapitalization occurred at the
beginning of the earliest year presented.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share" effective
for periods ending after December 15, 1997. SFAS No. 128 requires a dual
presentation, for complex capital structures, of basic and diluted earnings per
share ("EPS") on the face of the income statement, and requires a reconciliation
of basic EPS factors to diluted EPS factors. The Company adopted SFAS No. 128 in
December 1997 with no material impact to the Company's EPS calculation or
disclosure information.
Following is a reconciliation of amounts used in the per share computations:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net income--numerator basic
computation..................... $ 382,035 $ 790,051 $1,252,506 $ 909,648 $ 890,484
Effect of dilutive
securities--None -- -- -- -- --
--------- --------- --------- --------- ---------
Net income as adjusted for assumed
conversion--numerator diluted
computation..................... $ 382,035 $ 790,051 $1,252,506 $ 909,648 $ 890,484
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares--
denominator basic computation... 4,869,335 5,000,000 5,000,000 5,000,000 5,000,000
Effect of dilutive
securities--None -- -- -- -- --
--------- --------- --------- --------- ---------
Weighted average shares,
as adjusted--denominator........ 4,869,335 5,000,000 5,000,000 5,000,000 5,000,000
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings per share:
Basic......................... $ 0.08 $ 0.16 $ 0.25 $ 0.18 $ 0.18
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted....................... $ 0.08 $ 0.16 $ 0.25 $ 0.18 $ 0.18
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Historical per share information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
----------------------------------------------- ------------------------------------
MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1997
--------------- -------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Net Income............... $ 72.42 $ 145.86 $ 231.23 $ 167.93 $ 164.40
Weighted average shares 5,275
outstanding............. 5,417 5,417 5,417 5,417
</TABLE>
F-8
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
EQUIPMENT
Equipment is stated at cost. Depreciation is computed using the
straight-line method for financial reporting purposes over useful lives ranging
from three to seven years. Amortization of leasehold improvements is provided
using the straight-line method over the shorter of the estimated useful lives of
the assets or the lease term.
SOFTWARE DEVELOPMENT COSTS
The internal costs incurred to develop or improve software used in the
Company's telecommunication switching activities and selling and administrative
activities is expensed as incurred. Purchased software is included in equipment
and is depreciated using the straight-line method.
ORGANIZATION COSTS
Organization costs have been capitalized and are being amortized on a
straight-line basis over a five year period.
REVENUE RECOGNITION
Revenues from retail telecommunication services are recognized when customer
calls are completed. Revenues from wholesale telecommunication services are
recognized when the wholesale carrier's customers' calls are completed. Unbilled
revenue represents calls that are completed but not invoiced at the balance
sheet date. Revenue from the sale of calling cards is deferred and recognized
when calling card calls are completed or when the cards expire.
COST OF REVENUES
Cost of revenues is based on the direct costs of fixed facilities and the
variable cost of transmitting and terminating traffic on other carriers'
facilities.
COMMISSIONS
Commissions paid to sales agents are based on the traffic generated in their
respective territories and are expensed in the period when associated call
revenues are recognized.
DEFERRED PROMOTIONAL DISCOUNTS
The Company amortizes the benefits of lump sum promotional incentives
received, on a straight-line basis, over the periods of the associated
contracts. When a contract's annual minimum commitment is reached prior to the
end of the contract year, the remainder of the annual discount is recognized.
F-9
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
During fiscal 1997, the Company adopted the provisions of SFAS No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS. SFAS 121 requires impairment
losses to be recorded on long-lived assets when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. The Company, based on current
circumstances, does not believe that any long-lived assets are impaired at
December 31, 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, accrued expenses and long term debt approximate fair value due
to the short maturity of these items.
NEW ACCOUNTING PRONOUNCEMENTS
COMPREHENSIVE INCOME: FINANCIAL STATEMENT PRESENTATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
COMPREHENSIVE INCOME: FINANCIAL STATEMENT PRESENTATION which requires that all
items that are required to be recognized under the accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed as prominently as other financial statements. Statement No. 130 is
effective for the Company's fiscal year ending March 31, 1999. The adoption of
Statement No. 130 is not expected to have a material effect on the Company's
financial statements.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION which
requires a Company to disclose segment profit or loss and segment assets.
Statement No. 131 is effective for the Company's fiscal year ending March 31,
1998. The adoption of Statement No. 131 will require the Company to upgrade its
accounting system in order to accumulate additional segment information.
3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------- DECEMBER 31,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Billed Services.................................... $ 985,221 $ 2,281,835 $3,320,087
Unbilled Services.................................. 761,597 1,112,051 1,566,801
Allowance for doubtful accounts.................... (11,381) (15,000) (95,846)
------------ ------------ ------------
$ 1,735,437 $ 3,378,886 $4,791,042
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-10
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
4. EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED MARCH 31,
USEFUL ------------------------ DECEMBER 31,
LIVES 1996 1997 1997
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Switch equipment....................... 7 years $ 380,631 $ 459,607 $ 504,645
Furniture and fixtures................. 5 years 55,198 65,519 83,539
Computer equipment..................... 3 years 82,879 187,581 360,834
Computer software...................... 3 years 37,211 66,260 85,384
Office equipment....................... 5 years 11,070 20,862 20,862
Leasehold improvements................. 7 years -- 61,478 100,206
----------- ----------- ------------
566,989 861,307 1,155,470
Less accumulated depreciation and
amortization......................... (206,256) (273,939) (369,358)
----------- ----------- ------------
$ 360,733 $ 587,368 $ 786,112
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------------- DECEMBER 31,
1996 1997 1997
---------- ---------- ------------
<S> <C> <C> <C>
Term loan, originally payable May 20, 1996............. $ 330,000 $ -- $ --
Term loan, originally payable November 11, 1996........ 250,000 -- --
Term loan, payable August 31, 1998..................... -- 425,000 85,000
---------- ---------- ------------
$ 580,000 $ 425,000 $ 85,000
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
During 1993, the Company entered into two term loan agreements with its bank
aggregating $730,000. The due dates of the loans were May 20, 1996 and November
11, 1996, respectively. Subsequent to March 31, 1996, the Company repaid $80,000
on the term loan which was originally due on May 20, 1996 and, at the same time,
replaced the two existing term loans with a new term loan with the same lender
in the amount of $500,000. As a result, the two original term loans have been
shown as long-term debt in the accompanying balance sheet at March 31, 1996. The
due date of the full amount of the new loan, $425,000 at March 31, 1997, is
currently August 31, 1998. The loan is secured by money-market accounts pledged
by an officer. The note provides for selection of interest periods of one, two,
three, six, nine or twelve months at the option of the Company. The Company has
elected to pay interest monthly and is charged at a rate of 1.25% over the
bank's cost of funds subject to a cap of a 1.75% spread between the loan rate
and the rate earned on the money-market account pledged against the loan. The
rate in effect at December 31, 1997 was 8.75% (8.437% and 8.3125% at March 31,
1997 and 1996, respectively). See Note 14 -- Subsequent Events.
F-11
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
6. SHAREHOLDERS' EQUITY
The Company has been authorized to issue three classes of common stock at a
par value of $50. Class A, Class B and Class C shares have the same dividend and
liquidation rights. Class A shares carry the sole right to elect the first three
directors of the Company, Class B shares are identical to Class A shares except
for the right to elect the first three directors, and Class C shares are
nonvoting for all purposes.
The Company has presently authorized one class of Series A Preferred Stock,
consisting of 1,000 shares, all of which are issued and outstanding and owned by
the Company's principal shareholder. The Series A Preferred Stock has the
exclusive right to elect one less than a majority of the members of the Board of
Directors, and is entitled to a $1.00 per share liquidation preference over the
Common Stock. Other than with respect to payment of this liquidation preference,
the Series A Preferred Stock does not share in liquidation payments. The Series
A Preferred Stock does not participate in dividends and it is not redeemable or
convertible into Common Stock. The holders of 66 2/3 of the outstanding shares
of Series A Preferred Stock must consent to the creation or issuance of any
class or series of Preferred Stock that has greater or equal voting right with
respect to the election of Directors as the Series A Preferred Stock.
On October 30, 1996, by unanimous written consent of the Board of Directors,
distribution of the Company's retained earnings was restricted through April 1,
1997.
7. INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, ACCOUNTING FOR
INCOME TAXES. Deferred income tax assets and liabilities are determined based
upon differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED MARCH 31, ENDED DECEMBER 31,
----------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1996 1997
----------- ---------- ---------- ---------- ----------
Current......................... $ -- $ 227,738 $ 740,694 $ 559,873 $ 535,302
Deferred........................ (283,631) 296,815 (2,799) (3,992) 1,957
----------- ---------- ---------- ---------- ----------
Total..................... $ (283,631) $ 524,553 $ 737,895 $ 555,881 $ 537,259
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
</TABLE>
F-12
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
7. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred income taxes are as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------------- DECEMBER 31,
1996 1997 1997
---------- ---------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for bad debts................................. $ 4,552 $ -- $ 38,338
Accrued expenses........................................ 5,100 9,076 9,076
Amortization............................................ 33,328 17,373 7,430
---------- ---------- ------------
Total deferred tax assets......................... 42,980 26,449 54,844
Deferred tax liabilities:
Depreciation............................................ (56,164) (36,834) (67,186)
---------- ---------- ------------
Total deferred tax liabilities.................... (56,164) (36,834) (67,186)
---------- ---------- ------------
Total net deferred tax liabilities................ $ (13,184) $ (10,385) $ (12,342)
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
F-13
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
7. INCOME TAXES (CONTINUED)
The reconciliation of the effective income tax expense (benefit) to federal
statutory rates is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
Tax at federal statutory rate............. 34.00% 34.00% 34.00% 34.00% 34.00%
State taxes, net of federal benefit....... 3.81 5.65 3.66 3.57 3.66
Nondeductible items....................... 1.65 .27 .24 .15 .01
Change in valuation allowance............. (330.13) -- -- -- --
Other..................................... 2.44 (.02) (.83) (.49) (.04)
--------- --------- --------- --------- ---------
(288.23)% 39.90% 37.07% 37.23% 37.63%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
SFAS No. 109, ACCOUNTING FOR INCOME TAXES, requires a valuation allowance to
reduce the deferred tax assets reported if, based on the weight of available
evidence, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. During 1995, the Company's deferred tax asset
valuation allowance was reduced by $324,859 and thereby eliminated.
8. RELATED PARTY TRANSACTIONS
Advances and notes receivable--related parties consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
---------------------- -----------------
1996 1997 1997
---------- ---------- -----------------
<S> <C> <C> <C>
Note receivable--officer, unsecured, due on
demand, bearing interest at 7.65% per annum (see
Note 14)........................................ $ 60,000 $ 117,000 $ --
Notes Receivable--Minority shareholder............ 40,000 65,000 28,895
Cash advances--officer............................ -- -- 387
Advances receivable--affiliate, unsecured,
non-interest bearing............................ 22,668 3,694 4,569
---------- ---------- -------
$ 122,668 $ 185,694 $ 33,851
---------- ---------- -------
---------- ---------- -------
</TABLE>
During fiscal 1995, 416.67 shares of Class C shares were issued to an
officer in exchange for a $18,750 promissory note bearing interest at 7.65%, due
March 1, 1997, and accordingly, this stock subscription receivable is reflected
as a deduction from shareholders' equity at March 31, 1996 and 1997. On December
19, 1997, an officer/minority shareholder repaid a loan of $18,750.
Bonuses payable to executive officers of $24,601 were included in accrued
expenses at March 31, 1995.
Between December 21, 1995 and June 26, 1996 the Company loaned $65,000 in
the aggregate to a minority shareholder. The notes are unsecured and bear
interest at the rate of 7.65% per annum.
On December 23, 1997, the Company's Chief Executive Officer repaid the
Company $138,608. The amount repaid consisted of a note for $127,000 plus
accrued interest and cash advances totaling $11,608.
F-14
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
9. COMMITMENTS
In addition to its facility, the Company leases equipment and vehicles. The
approximate annual minimum lease payments under the non-cancelable operating
leases, including the facility lease, existing as of December 31, 1997 are:
<TABLE>
<S> <C>
1998.............................................. $ 100,012
1999.............................................. 197,000
2000.............................................. 191,019
2001.............................................. 176,131
2002.............................................. 173,327
Thereafter........................................ 102,361
---------
$ 939,850
---------
---------
</TABLE>
On October 27, 1997, the Company amended the terms of its office lease to
extend it through April 30, 2003 at an aggregate monthly base rent of $13,292
per month, subject to a 3% base rent adjustment each year.
The Company has entered into various contracts which require it to purchase
telecommunications services. The approximate minimum purchase commitments under
these contracts as of December 31, 1997 is $978,900 (approximately $481,700 in
fiscal 1998 and $497,200 in fiscal 1999).
On March 1, 1993, the Company entered into a ten-year employment agreement
with a minority shareholder/chief operating officer that provides for an annual
base salary of $170,000 plus a bonus equal to 10% of the Company's pre-tax
profits. On July 1, 1994, the Company entered into a ten-year employment
agreement with its chief executive officer that provides for an annual base
salary of $170,000 plus a bonus equal to 10% of the Company's pre-tax profits.
For the nine months ended December 31, 1997 bonuses of $451,557 ($366,383
nine months ended December 31, 1996, $501,350--year ended March 31, 1997,
$328,651--year ended March 31, 1996, and $24,042--year ended March 31, 1995)
were paid under the employment agreements. See Note 14.
On November 1, 1995, the Company entered into a one-year consulting
agreement with a minority shareholder of the Company. The agreement
automatically renews for successive one year terms unless either party provided
written notice of nonrenewal. The agreement provides for a monthly retainer of
$11,250 plus reimbursement of reasonable travel expenses. See Note 14.
On September 1, 1997, the Company entered into an employment agreement with
its Vice President of Agent Relations for a two-year period providing a base
annual salary of $130,000 and a $40,000 one-time sign-up bonus. The agreement
provides for stock options for the number of shares equal to 2% of the
outstanding common stock of the Company. The exercise price will be equal to or
exceed the fair market value of the common shares at the date granted.
F-15
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
10. SIGNIFICANT CUSTOMERS
The Company has had a number of significant independent agents. Net revenues
from the significant independent agents were in the following percentages of
total net revenues:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED DECEMBER 31,
YEAR ENDED MARCH 31,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Customer 1....................................... 19% -- -- -- --
Customer 2....................................... 21% 12% -- -- --
Customer 3....................................... 12% 16% 11% 18% 12%
Customer 4....................................... 11% -- -- -- --
Customer 5....................................... -- 11% 15% 15% 15%
Customer 6....................................... --....... 11% 19% 17% 28%
Customer 7....................................... -- -- 12% 13% --
Customer 8....................................... -- -- -- -- 10%
</TABLE>
Accounts receivable as a percentage of total accounts receivable due from
the significant independent agents noted above were as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1996 1997 1997
----- ------------- --------- ---------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Customer 1...................................... -- -- -- --
Customer 2...................................... -- 8% -- --
Customer 3...................................... -- 8% 9% --
Customer 4...................................... -- -- -- --
Customer 5...................................... -- 15% 21% 23%
Customer 6...................................... -- 23% 28% 20%
Customer 7...................................... -- -- 10% 10%
Customer 8...................................... -- -- -- 18%
</TABLE>
11. BUSINESS RISKS
RISKS AND UNCERTAINTIES. The Company's operating results and financial
condition may vary in the future depending on a number of factors. The following
factors may have a material adverse effect upon the Company's business, results
of operations and financial condition.
ESTIMATES. 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 certain assets and
liabilities at the date of the financial statements and the reported amounts of
certain revenue and expenses during the reporting period. Accordingly, actual
results could differ from those estimates.
RELIANCE UPON INDEPENDENT AGENTS. The Company provides telecommunications
services to customers obtained by independent sales agents that operate under
exclusive agent agreements. Although the
F-16
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
11. BUSINESS RISKS (CONTINUED)
Company believes that alternate agents could be found, loss of an agent in one
of the Company's primary geographical areas would have a negative effect on the
Company's operating results (see Note 10).
LAWS AND REGULATION. A substantial portion of the Company's customers are
located in emerging markets with various political, economic, regulatory,
customs and other trade factors. The Company is also subject to various laws and
regulations of the U.S. Department of Commerce, the U.S. Federal Communications
Commission (FCC) and various state Public Service Commissions. Changes in
enforcement or interpretation of local laws and regulations are unpredictable
and could lead to the Company's inability to retain the appropriate approvals to
continue operations in certain markets.
SOUTH AFRICA REGULATION. The telecommunications regulatory authority in
South Africa has ruled that the Company's services are illegal in that country.
The Company's agent, as well as agents for certain of the Company's competitors,
have filed a lawsuit to stay and reverse the ruling and the regulatory authority
has agreed not to prosecute any of the agents in the industry pending final
rulings by the South African courts. The Company is unable to predict the
ultimate outcome of that decision. The Company's customers in South Africa
represented approximately 18.7% of the Company's revenues in fiscal 1997.
SERVICES IN THE BAHAMAS. Additionally, during fiscal 1998 the Bahamas
Telephone Company (Batelco), which is owned and operated by the local
governmental authority, has taken certain actions to block the Company's ability
to offer services to customers in that country. The Company is currently working
with the FCC and the U.S. Embassy in the Bahamas to restore the Company's
ability to provide services although the Company is unable to predict the
ultimate outcome of this matter. The Company's customers in the Bahamas
represented approximately 5.8% of the Company's revenues in fiscal 1997.
UNINSURED CASH BALANCES. At December 31, 1997, the Company had $572,152
($632,508--March 31, 1997, $334,060--March 31, 1996 and $475,658--March 31,
1995) in cash and cash equivalents that were not federally insured.
RELIANCE ON SUPPLIERS. A majority of the Company's transmission and
switching facilities are provided by two telecommunications carriers.
Approximately $3,744,000 was owed to these companies at December 31, 1997
($2,590,000--March 31, 1997 and $1,433,000--March 31, 1996). Under the terms of
the supplier agreements, the Company purchases long distance service at certain
per-minute rates, which vary based on the time, distance and type of call.
Although management believes that alternative carriers could be found in a
timely manner, disruption of these services for more than a brief period of time
would have a negative effect on the Company's operating results.
12. BUSINESS SEGMENT INFORMATION
The Company operates in a single industry segment. For the nine months ended
December 31, 1996 and 1997 and for the years ended March 31, 1995, 1996 and
1997, substantially all of the Company's
F-17
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
12. BUSINESS SEGMENT INFORMATION (CONTINUED)
revenues were derived from traffic transmitted through switch facilities located
in Sunrise, Florida. The geographic origin of the traffic is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED MARCH 31, ENDED DECEMBER 31,
------------------------------------------ ----------------------------
1995 1996 1997 1996 1997
------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Africa................................ $ 369,087 $ 1,403,094 $ 3,899,701 $ 2,596,455 $ 6,057,730
Europe................................ 316,903 1,988,030 4,252,104 3,278,474 3,013,155
Latin America......................... 4,387,351 6,337,284 7,265,473 5,420,058 5,050,602
Middle East........................... 413,796 2,101,864 3,741,890 2,726,301 3,500,512
Other................................. 803,375 1,397,802 1,363,852 966,441 1,395,126
United States......................... -- -- 315,407 -- 2,011,988
------------ ------------- ------------- ------------- -------------
Total Revenues.................. $ 6,290,512 $ 13,228,074 $ 20,838,427 $ 14,987,729 $ 21,029,113
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
</TABLE>
All of the Company's physical assets are located in the United States.
Accounts receivable are primarily due from customers in the United States and
independent agents in various geographical areas, as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-------------------------------------- ------------
1995 1996 1997 1997
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Africa..................................................... $ 149,262 $ 382,595 $ 887,774 $1,080,297
Europe..................................................... 100,105 426,294 694,461 896,014
Latin America.............................................. 445,722 572,903 798,428 785,443
Middle East................................................ 38,353 276,433 633,799 1,093,080
Other...................................................... 68,314 88,593 109,481 133,193
United States.............................................. -- -- 269,943 898,861
Less: Allowance for doubtful accounts...................... (11,381) (15,000) (95,846)
---------- ------------ ------------ ------------
Total Accounts Receivable.............................. $ 801,756 $ 1,735,437 $ 3,378,886 $4,791,042
---------- ------------ ------------ ------------
---------- ------------ ------------ ------------
</TABLE>
13. ACQUISITION OF AGENT
On August 12, 1997, the Company entered into an agreement with its largest
independent agent (in South Africa) to acquire an approximate 9% interest in the
agent for approximately $373,000. At December 31, 1997, $321,059 has been paid
and is included in other assets.
14. SUBSEQUENT EVENTS
Subsequent to December 31, 1997, the Company repaid the outstanding balance
of $85,000 on a consolidated term loan originally due on August 31, 1998. This
loan agreement, as set out in full in Note 5, was terminated at that time.
On January 1, 1998, with an additional amendment on February 9, 1998, the
Company entered into a two-year employment agreement with its Chief Financial
and Accounting Officer providing for a base
F-18
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
14. SUBSEQUENT EVENTS (CONTINUED)
salary of $170,000 in calendar year 1998 and $200,000 in calendar year 1999. The
Company paid a $50,000 bonus upon signing of the agreement and will pay a
$75,000 bonus upon the successful completion of an initial public offering of
the Company's Common Stock. The agreement further provides for additional
bonuses based upon the Company's operating results, as defined therein.
On January 6, 1998, the Company entered into a joint venture agreement to
form Ursus Telecom France, a limited liability company incorporated in France.
Under the terms of the joint venture agreement, the Company contributed a switch
at historical net book value of $112,000 and the joint venture partners will
contribute their existing customer base into the venture. Under the terms of the
agreement, the joint venture partners have the option to require the Company to
purchase the outstanding interest at the earliest one year after the closing
date of the initial public offering, based upon a multiple of average monthly
revenues of Ursus Telecom France, as defined therein.
On January 20, 1998, the Company entered into an agreement with a minority
shareholder of the Company, extending his consulting agreement (see Note 9) to
December 31, 1998 and modifying the agreement to include an additional payment
of $15,000 upon consummation of an initial public offering of the Company's
securities during the term of the consulting agreement.
On February 6, 1998, the Board of Directors and shareholders approved (i)
the filing of amended and restated Articles of Incorporation that would provide
for, among other things, the authorization of 20,000,000 shares of Common Stock
and 1,000,000 shares of Preferred Stock, (ii) a 932.08 for 1 stock split of the
issued and outstanding Class C Common Stock, (iii) the reclassification and
split of every four shares of outstanding Class A and Class B common stock into
3,692.32 shares of Common Stock and 1 share of preferred stock, (iv) an option
plan reserving for issuance up to 1,000,000 shares of Common Stock options and
other stock awards, and (v) the granting of 150,000 warrants for the purchase of
Common Stock to the Company's underwriters. The stock split and reclassification
became effective on February 12, 1998. The issuance of the warrants and stock
option plan will become effective upon the effective date of the Company's
proposed initial public offering.
On February 9, 1998, the Company amended its January 1, 1998 employment
agreements with its Chief Executive Officer and Chief Operating Officer whereby
for a term of five calendar years they will each receive a base salary of
$225,000 with increases of $25,000 in each of years 2 through 5 of the
agreements and a guaranteed bonus of $45,000 per calendar year, additionally,
the agreements provide for additional bonuses at a rate of 4.5% of earnings
before interest, taxes, depreciation, amortization and such bonuses ("EBITDAB")
greater than $1 million, as defined, up to $4 million. The agreements provide
for additional bonuses of 20% of base salary for achievement of $4 million
EBITDAB and up to 5% of base for each $1 million of EBITDAB in excess of $4
million on a pro rata basis.
F-19
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
14. SUBSEQUENT EVENTS (CONTINUED)
On February 24, 1998, the Company entered into an agreement to acquire a
switch under a capital lease. The asset has a capitalized cost of $335,280. The
following is an analysis of the minimum future lease payments:
<TABLE>
<S> <C>
1998.............................................................. $ 23,401
1999.............................................................. 79,655
2000.............................................................. 79,655
2001.............................................................. 79,655
2002.............................................................. 79,655
2003.............................................................. 73,017
Imputed interest.................................................. (112,963)
---------
Present Value of Lease Obligation............................... $ 302,075
---------
---------
</TABLE>
On March 17, 1998, the Company entered into an agreement to acquire
equipment under a capital lease. The asset has a capitalized cost of $33,372.
The following is an analysis of the minimum future lease payments:
<TABLE>
<S> <C>
1998............................................................... $ 2,982
1999............................................................... 8,400
2000............................................................... 8,400
2001............................................................... 8,400
2002............................................................... 8,400
2003............................................................... 8,400
Imputed interest................................................... (14,909)
---------
Present Value of Lease Obligation................................ $ 30,073
---------
---------
</TABLE>
F-20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Summary Financial Data.................................................... 7
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 24
Capitalization............................................................ 25
Dividend Policy........................................................... 26
Dilution.................................................................. 26
Selected Financial Data................................................... 27
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 29
The International Telecommunications Industry............................. 39
Business.................................................................. 43
Management................................................................ 61
Certain Relationships and Related Party Transactions...................... 68
Principal and Registering Shareholders.................................... 70
Description of Capital Stock.............................................. 71
Shares Eligible for Future Sale........................................... 74
Underwriting.............................................................. 76
Legal Matters............................................................. 78
Experts................................................................... 78
Additional Information.................................................... 78
Reports to Shareholders................................................... 78
Glossary of Terms......................................................... 79
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
1,500,000 SHARES
[URSUS LOGO]
URSUS TELECOM CORPORATION
COMMON STOCK
---------------------
PROSPECTUS
---------------------
JOSEPH CHARLES &
ASSOCIATES, INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Registrant estimates that expenses payable by it in connection with the
offering described in this Registration Statement (other than the underwriting
discount and commissions) will be approximately as follows:
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 6,831
Legal fees and expenses........................................... *
Accounting fees and expenses...................................... *
Printing and engraving............................................ 50,000
Nasdaq listing application fee.................................... 66,875
Blue sky qualification fees and expenses.......................... *
NASD Fee.......................................................... 2,816
Transfer Agent's Fees............................................. 500
Miscellaneous..................................................... *
---------
Total............................................................. $ 127,021
---------
---------
</TABLE>
- ------------------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Articles of Incorporation indemnifies, to the fullest
extent permitted by the Law of the State of Florida, the directors of the
Registrant.
Every person (and the heirs, executors and administrators of such person)
who is or was a director, officer, employee or agent of the Corporation or of
any other company, including another corporation, partnership, joint venture,
trust or other enterprise on which such person serves or served at the request
of the Corporation shall be indemnified by the Corporation against all
judgments, payments in settlement (whether or not approved by court), fines,
penalties and other reasonable costs and expenses (including attorneys' fees and
costs) imposed upon or incurred by such person in connection with or resulting
from any action, suit, proceeding, investigation or claim, civil, criminal,
administrative, legislative or other (including any criminal action, suit or
proceeding in which such person enters a plea of guilty or NOLO CONTENDERE or
its equivalent), or any appeal relating thereto which is brought or threatened
either by or in the right of the Corporation or such other company (herein
called a "Derivative Action") or by any other person, governmental authority or
instrumentality (herein called a "Third-Party Action") and in which such person
is made a party or is otherwise involved by reason of his being or having been
such director, officer, employee or agent or by reason of any action or omission
or alleged action or omission by such person in his capacity as such director,
officer, employee or agent if either (i) such person is wholly successful, on
the merits or otherwise, in defending such derivative or third-party action or
(ii) in the judgment of a court of competent jurisdiction or, in the absence of
such a determination, in the judgment of a majority of a quorum of the Board of
Directors (which quorum shall not include any director who is a party to or is
otherwise involved in such action), or, in the absence of such a disinterested
quorum, in the opinion of independent legal counsel (iii) in the case of a
Derivative Action, such person acted without negligence or misconduct in the
performance of his duty to the Corporation or such other company or (iv) in the
case of a Third-Party Action, such person acted in good faith in what he
reasonably believed to be the best interests of the Corporation or such other
company, and in addition, in any criminal action, had no reasonable cause to
believe that his action was unlawful; provided that, in the case of a Derivative
II-1
<PAGE>
Action, such indemnification shall not be made in respect of any payment to the
Corporation or such other company or any shareholder thereof in satisfaction of
judgment or in settlement unless either (x) a court of competent jurisdiction
has approved such settlement, if any, and the reimbursement of such payment or
(y) if the court in which such action has been instituted lacks jurisdiction to
grant such approval or such action is settled before the institution of judicial
proceedings, in the opinion of independent legal counsel the applicable standard
of conduct specified hereinbefore has been met, such action was without
substantial merit, such settlement was in the best interests of the Corporation
or such other company and the reimbursement of such payment is permissible under
applicable law. In case such person is successful on the merits or otherwise in
defending part of such action, or in the judgment of such a court or such quorum
of the Board of Directors or in the opinion of such counsel has met the
applicable standard of conduct specified in the preceding sentence with respect
to part of such action, he(she) shall be indemnified by the Corporation against
the judgments, settlements, payments, fines, penalties, and other costs and
expenses attributable to such part of such action.
The foregoing rights of indemnification shall be in addition to any rights
which any such director, officer, employee or agent may otherwise be entitled
any agreement or vote of shareholders or at law or in equity or otherwise.
In any case in which, in the judgment of a majority of such a disinterested
quorum of the Board of Directors, any such director, officer or employee will be
entitled to indemnification under the foregoing provisions of this Article, such
amounts as they deem necessary to cover the reasonable costs and expenses
incurred by such person in connection with the action, suit, proceeding,
investigation or claim prior to final disposition thereof may be advanced to
such person upon receipt of an undertaking by or on behalf of such person to
repay such amounts if it is ultimately determined that he(she) is not so
entitled to indemnification.
The amendment or repeal of, or adoption of any provision inconsistent with,
this Article SIXTH will require the affirmative vote of the holders of at least
66 2/3% of the Common Stock and all series of voting Preferred Stock, voting
together as a single class. Any amendment or repeal of, or adoption of any
provision inconsistent with, this Article SIXTH will not adversely affect any
right or protection existing hereunder prior to such amendment, repeal, or
adoption.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
There have been no recent sales of unregistered securities of the
Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Exhibits:
<TABLE>
<C> <C> <S>
1.1** -- Form of Underwriting Agreement
3.1+ -- Articles of Incorporation of the Registrant
3.2* -- Form of Amended and Restated Articles of Incorporation of the Registrant
3.3+ -- Bylaws of the Registrant
3.4* -- Form of Amended and Restated Bylaws of Registrant
4.1** -- Specimen of Certificate for Common Stock
5.1* -- Opinion of Stroock & Stroock & Lavan LLP
10.1+ -- Employment Agreement between the Registrant and Luca M. Giussani
10.2+ -- Amendment to Employment Agreement with Luca M. Giussani
10.3+ -- Employment Agreement between the Registrant and Jeffrey R. Chaskin
10.4+ -- Amendment to Employment Agreement with Jeffrey R. Chaskin
10.5+ -- Employment Agreement between the Registrant and Johannes S. Seefried
10.6+ -- Amendment to Employment Agreement with Johannes S. Seefried
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <C> <S>
10.7+ -- Employment Agreement between the Registrant and Richard C. McEwan
10.8+ -- Lease Agreement
10.9+ -- Form of 1998 Stock Incentive Plan
10.10** -- Form of Financial Consulting Agreement
10.11+ -- Form of Agency Agreement
10.12+ -- Agreement regarding formation of Ursus Telecom France
10.13+ -- Agreement regarding purchase of interest in South African Agency
10.14+ -- Agreement dated January 20, 1998 among Messrs. Giussani, Rispoli and the
Company
10.15** -- Form of Warrant Agreement between the Company and the Representative
10.16** -- Agreement by and among the Company and (South African Agency
Agreement)
23.1* -- Consent of Ernst & Young LLP
23.2* -- Consent of Stroock & Stroock & Lavan LLP (contained in 5.1)
24.1+ -- Power of Attorney (included on the signature page of this Registration
Statement)
27* -- Financial Data Schedule
99.1* -- Consent of Kenneth L. Garrett
</TABLE>
- ------------------------
+ Previously filed.
* Filed herewith.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offer or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a) (3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-3
<PAGE>
(b) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(d) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act of 1933 shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Sunrise, State of Florida, on the 3rd day of April, 1998.
URSUS TELECOM CORPORATION
BY: /S/ LUCA M. GIUSSANI
-----------------------------------------
Luca M. Giussani
PRESIDENT AND CHIEF EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 2 to this Registration Statement was signed by the following
persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- ------------------------------ --------------------------- -------------------
/s/ LUCA M. GIUSSANI Chief Executive Officer and
- ------------------------------ Director April 3, 1998
Luca M. Giussani
* Principal Executive Officer
- ------------------------------ and Director April 3, 1998
Jeffrey R. Chaskin
* Principal Financial and
- ------------------------------ Accounting Officer and April 3, 1998
Johannes S. Seefried Director
Director
- ------------------------------
William M. Newport
*By: /s/ LUCA M. GIUSSANI
-------------------------
Luca M. Giussani, as
Attorney-in-Fact
and agent pursuant to
Power of Attorney
previously filed.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- --------- -------------------------------------------------------------------------------------- ---------------
<S> <C> <C> <C>
1.1** -- Form of Underwriting Agreement
3.1+ -- Articles of Incorporation of the Registrant
3.2* -- Form of Amended and Restated Articles of Incorporation of the Registrant
3.3+ -- Bylaws of the Registrant
3.4* -- Form of Amended and Restated Bylaws of Registrant
4.1** -- Specimen of Certificate for Common Stock
5.1* -- Opinion of Stroock & Stroock & Lavan LLP
10.1+ -- Employment Agreement between the Registrant and Luca M. Giussani
10.2+ -- Amendment to Employment Agreement with Luca M. Giussani
10.3+ -- Employment Agreement between the Registrant and Jeffrey R. Chaskin
10.4+ -- Amendment to Employment Agreement with Jeffrey R. Chaskin
10.5+ -- Employment Agreement between the Registrant and Johannes S. Seefried
10.6+ -- Amendment to Employment Agreement with Johannes S. Seefried
10.7+ -- Employment Agreement between the Registrant and Richard C. McEwan
10.8+ -- Lease Agreement
10.9+ -- Form of 1998 Stock Incentive Plan
10.10** -- Form of Financial Consulting Agreement
10.11+ -- Form of Agency Agreement
10.12+ -- Agreement regarding formation of Ursus Telecom France
10.13+ -- Agreement regarding purchase of interest in South African Agency
10.14+ -- Agreement dated January 20, 1998 among Messrs. Giussani, Rispoli and the Company
10.15** -- Form of Warrant Agreement between the Company and the Representative
10.16** -- Agreement by and among the Company and (South African Agency Agreement)
23.1* -- Consent of Ernst & Young LLP
23.2* -- Consent of Stroock & Stroock & Lavan LLP (contained in 5.1)
24.1+ -- Power of Attorney (included on the signature page of this Registration Statement)
27* -- Financial Data Schedule
99.1* -- Consent of Kenneth L. Garrett
</TABLE>
- ------------------------
+ Previously filed.
* Filed herewith.
** To be filed by amendment.
<PAGE>
Exhibit 3.2
FORM OF
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
URSUS TELECOM CORPORATION
Pursuant to Section 607.1007 of the Florida Business Corporation Act
("FBCA"), Ursus Telecom Corporation, a Florida corporation ("Corporation"),
certifies that:
1. The original articles of incorporation of the Corporation were filed with the
Florida Department of State on March 23, 1993 and articles of amendment to the
original articles of incorporation were filed with the Florida Department of
State on February 12, 1998 ("Articles of Incorporation");
2. These Amended and Restated Articles of Incorporation were approved by the
Corporation's Board of Directors ("Board of Directors") on February 12, 1998;
3. The Articles of Incorporation of the Corporation are amended in these Amended
and Restated Articles of Incorporation as follows:
Article SECOND is amended to set forth a new address for the
principal office and mailing address of the Corporation.
Article THIRD is amended to clarify the voting rights of the
Corporation's Series A Preferred Stock in connection with the creation
of a staggered Board of Directors in these Amended and Restated
Articles of Incorporation.
Article FOURTH is deleted.
Article FIFTH is renumbered Article FOURTH and is amended to
set forth a new address and registered agent for service of process.
Article SIXTH is renumbered Article FIFTH.
Article SEVENTH is deleted.
A new Article SIXTH, which provides for indemnification of
directors, is added.
A new Article SEVENTH, which sets forth certain requirements
and procedures governing actions taken by shareholders, is added.
A new Article EIGHTH, which provides for a staggered Board of
Directors and governs director voting, vacancies on the Board of
Directors, and removal of directors, and other matters relating to
directors, is added.
<PAGE>
A new Article NINTH, governing amendment of
the Corporation's Bylaws, is added.
4. These amendments to the Articles of Incorporation were approved by
the shareholders of the Corporation on February 12, 1998, and the number of
votes cast in favor of the amendments by the shareholders was sufficient for
their approval.
5. There are no discrepancies between the provisions of the Articles of
Incorporation and the provisions of these Amended and Restated Articles of
Incorporation other than the inclusion of the foregoing amendments, which were
adopted pursuant to Section 607.1003 of the FBCA.
The text of the Articles of Incorporation of the Corporation
is restated with the amendments described above, effective as of the date of
filing with the Florida Department of State, to read as follows:
FIRST: The name of the corporation (hereinafter called the
"Corporation") is Ursus Telecom Corporation.
SECOND: The principal office and mailing address of the Corporation is
440 Sawgrass Corporate Parkway, Suite 112, Sunrise, Florida 33325.
THIRD: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is TWENTY-ONE MILLION (21,000,000)
shares of stock consisting of:
TWENTY MILLION (20,000,000) shares of common stock, par value $.01
per share ("Common Stock"), entitling the holders thereof to one
(1) vote per share, and the holders of shares of Common Stock
shall have the right to cumulate their votes for the election of
the members of the Corporation's Board of Directors ("Board of
Directors") that are subject to election by such holders; and
ONE MILLION (1,000,000) shares of preferred stock, par value $.01
per share ("Preferred Stock"). The rights and preferences of the
Preferred Stock may be designated by the Board of Directors.
The authority of the Board of Directors with respect to each
class or series of Preferred Stock shall include, but not be limited
to, determination of the following:
(a) The number of shares constituting the class or series and the
distinctive designation of the class or series;
2
<PAGE>
(b) The dividend rate on the shares of the class or series, if any,
whether dividends shall be cumulative, and, if so, from which date or
dates, and the relative rights of priority, if any, of payments of
dividends on shares of the class or series;
(c) Whether the class or series will have voting rights, and if so, the
terms of the voting rights including any preferential or superior
voting rights with respect to election of the Board of Directors or any
other matters affecting the Corporation;
(d) Whether the class or series will have conversion privileges, and,
if so, the terms and conditions of the conversion, including provision
for adjustment of the conversion rate in such events as the Board of
Directors determines;
(e) Whether or not the shares of the class or series will be
redeemable, and, if so, the terms and conditions of redemption,
including the date or dates upon or after which they shall be
redeemable, and the amount per share payable in case of redemption,
which amount may vary under different conditions and at different
redemption dates;
(f) Whether the class or series will have a sinking fund for the
redemption or purchase of shares of the class or series, and, if so,
the terms and amount of the sinking fund;
(g) The rights of the shares of the class or series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, and the relative rights of priority, if any, of payment of
shares of the class or series; and
(h) Any other powers, terms, rights, qualifications, preferences,
limitations and restrictions, if any, of the series as the Board of
Directors may lawfully fix under the laws of the State of Florida as in
effect at the time of the creation of such series.
There is hereby authorized a class of ONE THOUSAND (1,000) shares of
Preferred Stock, which shall be designated as Series A Preferred Stock, par
value $.01 per share, and which shall have the following rights,
preferences and limitations:
(a) Series A Preferred Stock, voting as a separate class and
having one (1) vote per share, shall have the exclusive right
to elect all of the Class III directors (as defined below) and
such number of Class II directors (as defined below), if any,
as shall be required for the holders of the Series A Preferred
Stock to have elected one (1) member less than a majority of
the members of the entire Board
3
<PAGE>
of Directors (e.g., assuming a five member Board, with two
directors in Class III, two directors in Class II and one
director in Class I, the Series A Preferred Stock would elect
both Class III directors only; or assuming a seven member
Board, with two directors in Class III, three directors in
Class II and two directors in Class I, the Series A Preferred
Stock would elect both Class III directors and one Class II
director. The holders of the Series A Preferred Stock shall
have no right to participate in the voting for the remaining
members of the Board of Directors, and except as provided in
these Amended and Restated Articles of Incorporation and as
otherwise required by applicable law, the Series A Preferred
Stock shall have no other voting or consensual rights in any
matter presented to a vote of the shareholders of the
Corporation. Notwithstanding the foregoing provision, any
holders of Series A Preferred Stock that are also holders of
Common Stock or other securities of the Corporation, shall
retain and may exercise all of the voting and consensual
powers pertaining to such Common Stock or other securities.
(b) In the event of any dissolution, liquidation or winding up
of the Corporation, each share of Series A Preferred Stock
shall have a liquidation preference over the Common Stock of
the Corporation of $1 per share, and except for the right to
the payment of this liquidation preference, the holders of the
Series A Preferred Stock shall not participate in or receive
any distribution or payment from the Corporation in respect of
such shares of Series A Preferred Stock. Without limiting the
generality of the foregoing, the Series A Preferred Stock
shall not have the right to receive any dividends, regardless
of whether any dividends are declared or paid in respect of
the Common Stock or any other securities of the Corporation.
Notwithstanding the foregoing provision, any holders of Series
A Preferred Stock that are also holders of Common Stock or
other securities of the Corporation, shall retain all dividend
rights pertaining to such Common Stock or other securities.
(c) Series A Preferred Stock shall not be convertible into Common
Stock or any other security of the Corporation.
(d) Series A Preferred Stock shall not be redeemable by the
Corporation.
Notwithstanding any conflicting or inconsistent provisions of these
Articles, the consent of the holders of 66 2/3% of the outstanding Series A
Preferred Stock (in addition to all other consents required by these Articles,
by law, or otherwise) shall be required in order to approve
4
<PAGE>
any amendment to this Article THREE that would authorize or permit the creation
or issuance of any series or class of Preferred Stock that would have any right
with respect to the election of Directors of the Corporation that are superior
to or pari passu with the rights of the Series A Preferred Stock.
FOURTH. The name and address of the registered agent for the
Corporation is Johannes Seefried, 440 Sawgrass Corporate Parkway, Suite 112,
Sunrise, Florida 33325.
FIFTH: The name and address of the incorporator is Arnold D. Shevin,
Esq., 200 South biscayne Boulevard, 33rd Floor, Miami, Florida 33131-2385.
SIXTH: Every person (and the heirs, executors and administrators of
such person) who is or was a director, officer, employee or agent of the
Corporation or of any other company, including another corporation, partnership,
joint venture, trust or other enterprise on which such person serves or served
at the request of the Corporation shall be indemnified by the Corporation
against all judgments, payments in settlement (whether or not approved by
court), fines, penalties and other reasonable costs and expenses (including
attorneys' fees and costs) imposed upon or incurred by such person in connection
with or resulting from any action, suit, proceeding, investigation or claim,
civil, criminal, administrative, legislative or other (including any criminal
action, suit or proceeding in which such person enters a plea of guilty or nolo
contendere or its equivalent), or any appeal relating thereto which is brought
or threatened either by or in the right of the Corporation or such other company
(herein called a "Derivative Action") or by any other person, governmental
authority or instrumentality (herein called a "Third-Party Action") and in which
such person is made a party or is otherwise involved by reason of his being or
having been such director, officer, employee or agent or by reason of any action
or omission or alleged action or omission by such person in his capacity as such
director, officer, employee or agent if either (i) such person is wholly
successful, on the merits or otherwise, in defending such derivative or
third-party action or (ii) in the judgment of a court of competent jurisdiction
or, in the absence of such a determination, in the judgment of a majority of a
quorum of the Board of Directors (which quorum shall not include any director
who is a party to or is otherwise involved in such action), or, in the absence
of such a disinterested quorum, in the opinion of independent legal counsel
(iii) in the case of a Derivative Action, such person acted without negligence
or misconduct in the performance of his duty to the Corporation or such other
company or (iv) in the case of a Third-Party Action, such person acted in good
faith in what he reasonably believed to be the best interests of the Corporation
or such other company, and in addition, in any criminal action, had no
reasonable cause to believe that his action was unlawful; provided that, in the
case of a Derivative Action, such indemnification shall not be made in respect
of any payment to the Corporation or such other company or any shareholder
thereof in satisfaction of judgment or in settlement unless either (x) a court
of competent jurisdiction has approved such settlement, if any, and the
reimbursement of such payment or (y) if the court in which such action has been
instituted lacks jurisdiction to grant such approval or such action is settled
before the institution of judicial proceedings, in the opinion of independent
legal counsel the applicable standard of conduct specified hereinbefore has been
met, such action was without substantial merit, such settlement was in the best
interests of the Corporation or such other company and the
5
<PAGE>
reimbursement of such payment is permissible under applicable law. In case such
person is successful on the merits or otherwise in defending part of such
action, or in the judgment of such a court or such quorum of the Board of
Directors or in the opinion of such counsel has met the applicable standard of
conduct specified in the preceding sentence with respect to part of such action,
he(she) shall be indemnified by the Corporation against the judgments,
settlements, payments, fines, penalties, and other costs and expenses
attributable to such part of such action.
The foregoing rights of indemnification shall be in addition to any
rights which any such director, officer, employee or agent may otherwise be
entitled any agreement or vote of shareholders or at law or in equity or
otherwise.
In any case in which, in the judgment of a majority of such a
disinterested quorum of the Board of Directors, any such director, officer or
employee will be entitled to indemnification under the foregoing provisions of
this Article, such amounts as they deem necessary to cover the reasonable costs
and expenses incurred by such person in connection with the action, suit,
proceeding, investigation or claim prior to final disposition thereof may be
advanced to such person upon receipt of an undertaking by or on behalf of such
person to repay such amounts if it is ultimately determined that he(she) is not
so entitled to indemnification.
The amendment or repeal of, or adoption of any provision inconsistent
with, this Article SIXTH will require the affirmative vote of the holders of at
least 66 2/3% of the Common Stock and all series of voting Preferred Stock,
voting together as a single class. Any amendment or repeal of, or adoption of
any provision inconsistent with, this Article SIXTH will not adversely affect
any right or protection existing hereunder prior to such amendment, repeal, or
adoption.
SEVENTH. Subject to the rights of the holders of any series of
Preferred Stock set forth in these Amended and Restated Articles of
Incorporation or in any amendments hereto:
(a) special meetings of shareholders of the Corporation (i)
may be called by the Chairman of the Board of Directors, (ii) shall be
called by the Chief Executive Officer, Chief Operating Officer or
Secretary of the Corporation not later than 10 days after the
Corporation's receipt of (A) the written request of a majority of the
total number of directors which the Corporation would have if there
were no vacancies on the Board of Directors, or (B) a written demand
for a special meeting of shareholders describing the purpose or
purposes for which such meeting is to be held, from the holders of not
less than 50% of all the votes entitled to be cast on the issue(s) to
be considered at the meeting.
At any annual meeting or special meeting of shareholders of the Corporation,
only such business will be conducted or considered as has been brought before
such meeting in the manner provided in the Bylaws of the Corporation. The
affirmative vote of at least 66 2/3% of the Common Stock and voting Preferred
Stock, voting together as a single class, will be required to amend or repeal,
or adopt any provision inconsistent with, this Article SEVENTH.
6
<PAGE>
EIGHTH.
(a) The number of the directors of the Corporation will not be less
than three nor more than nine, and the number of directors will be fixed from
time to time in the manner described in the Bylaws of the Corporation. The
directors will be classified with respect to the time for which they severally
hold office into three classes, as nearly equal in number as possible,
designated "Class I," "Class II" and "Class III" (each, a "Director Class"). The
directors first appointed to Class I will hold office for a term expiring at the
annual meeting of shareholders to be held in 1998; the directors first appointed
to Class II will hold office for a term expiring at the annual meeting of
shareholders to be held in 1999; and the directors first appointed to Class III
will hold office for a term expiring at the annual meeting of shareholders to be
held in 2000, with the members of each Director Class to hold office until their
successors are elected and qualified. At each succeeding annual meeting of the
shareholders of the Corporation, the successors of the directors in the Director
Class whose terms expire at that meeting will be elected by plurality vote of
all votes cast at such meeting, subject to the rights of holders of Preferred
Stock to elect all or some of the directors in one or more of the Director
Classes. Directors so elected shall hold office for a term expiring at the
annual meeting of shareholders held in the third year following the year of
their election. Election of directors of the Corporation need not be by written
ballot unless requested by the Chairman or by the holders of a majority of the
Common Stock and voting Preferred Stock present in person or represented by
proxy at a meeting of the shareholders at which directors are to be elected.
(b) Advance notice of shareholder nominations for the election of
directors must be given in the manner provided in the Bylaws of the Corporation.
(c) Subject to the rights, if any, of the holders of any series of
Preferred Stock to elect additional directors, newly created directorships
resulting from any increase in the number of directors or any vacancy on the
Board resulting from death, resignation, disqualification, removal or other
cause, may be filled solely by the affirmative vote of a majority of the
remaining directors then in office who are in the same Director Class as that in
which there is a vacancy, even though less than a quorum of the Board, or by the
remaining director in such Director Class (if there is only one). If there is no
director then in office in the Director Class in which there is a vacancy, then
the vacancy may be filled by the affirmative vote of a majority of all of the
directors in the other two classes of directors, or, if there is only one
remaining director on the Board of Directors, by that director. Any director
elected in accordance with the preceding sentences will hold office for the
remainder of the full term of the Director Class in which the new directorship
was created or the vacancy occurred and until such director's successor has been
elected and qualified. No decrease in the number of directors constituting the
Board shall shorten the term of any incumbent director.
(c) Subject to the rights of the holders of any series of Preferred
Stock now existing or hereafter created, any director may be removed from office
only for cause by the shareholders entitled to vote on the class of directors of
which such director is a member and only in the manner provided in this
subsection (c). At any annual meeting or special meeting of the
7
<PAGE>
shareholders, the notice of which states that the removal of a director or
directors is among the purposes of the meeting, the affirmative vote of the
holders of at least 66-2/3% of the shares entitled to vote on the Director Class
of which such director is a member, may remove such director or directors for
cause. Except as may be provided otherwise under applicable law, cause for
removal will be deemed to exist only if the director whose removal is proposed
has been adjudged by a court of competent jurisdiction (which adjudication is no
longer subject to direct appeal) to be liable to the Corporation or its
shareholders for misconduct as a result of (a) a breach of such director's duty
of loyalty to the Corporation, (b) any act or omission by such director not in
good faith or which involves an intentional violation of law, or (c) any
transaction from which such director derived an improper personal benefit.
(d) Notwithstanding anything contained in these Articles of
Incorporation to the contrary, the affirmative vote of at least 66 2/3% of the
Common Stock and voting Preferred Stock, voting together as a single class, is
required to amend or repeal, or adopt any provision inconsistent with, this
Article EIGHTH.
NINTH. The Board may make, amend, and repeal the Bylaws of the
Corporation. Any Bylaw made by the Board under the powers conferred hereby may
be amended or repealed by the Board or by the shareholders in the manner
provided in the Bylaws of the Corporation. The Corporation may in its Bylaws
confer powers upon the Board in addition to the foregoing and in addition to the
powers and authorities expressly conferred upon the Board by applicable law.
Notwithstanding anything contained in these Articles of Incorporation to the
contrary, the affirmative vote of the holders of at least 66 2/3 % of the Common
Stock and voting Preferred Stock, voting together as a single class, is required
to amend or repeal, or to adopt any provisions inconsistent with, this Article
NINTH.
THE UNDERSIGNED has executed, subscribed and acknowledged these Amended
and Restated Articles of Incorporation on _____________, 1998.
URSUS TELECOM CORPORATION
------------------------------
8
<PAGE>
Exhibit 3.4
FORM OF
BY-LAWS
OF
URSUS TELECOM CORPORATION
A FLORIDA CORPORATION
ARTICLE I - OFFICES
The principal office of Ursus Telecom Corporation (the "Corporation")
shall be at 440 Sawgrass Corporate Parkway, Suite 112, Sunrise, Florida, 33325.
The Corporation may also have offices at such places within or without the State
of Florida as the Board of Directors ("Board") may from time to time establish.
ARTICLE II - SHAREHOLDERS
1. PLACE OF MEETINGS
Meetings of shareholders shall be held at the principal office of the
Corporation or at such place within or without the State of Florida as the Board
shall authorize.
2. ANNUAL MEETING
The annual meeting of shareholders shall be held during the month of
August (or in such other month as may be approved by the Board) in each year at
a date and time set by the Board, to elect the class of directors whose term
expires in such year and to transact such other business as may properly come
before the meeting.
3. SPECIAL MEETINGS
Special meetings of the shareholders may be requested and called in
accordance with the procedures set forth in Article SEVENTH of the Corporation's
Articles of Incorporation ("Articles").
4. NOTICE OF MEETINGS
(a) The Corporation shall send each shareholder entitled to vote at a
shareholders' meeting written notice of the time and place of the meeting, not
less than ten (10) nor more than sixty (60) days before the date set for the
meeting. Notice of a meeting shall be sufficient if it is given by delivering it
to the United States postal service in a sealed envelope, addressed to the
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shareholder entitled to such notice, at his address on the corporation's books
as of the record date for the meeting. Notice shall be deemed to have been given
on the day of such mailing.
(b) Notice of a meeting shall be sufficient for the meeting and any
adjournment thereof.
(c) If any shareholder shall transfer his stock after such notice has
been given, it shall not be necessary to notify the transferee.
(d) Any shareholder may waive notice of any meeting either before,
during or after the meeting.
(e) The business that may be conducted at an annual meeting shall
include only (i) the business set forth in the notice of the meeting, and (ii)
such business as may be brought before the meeting by the Chairman of the Board
or other officer presiding over the meeting, in his discretion. The business
that may be conducted at a special meeting shall include only the business set
forth in the notice of the special meeting.
5. RECORD DATE
The Board must set a record date for each meeting of shareholders that
is not more than seventy (70) days prior to the date of such meeting. The
shareholders who are entitled to notice of and to vote at a meeting shall be
those persons whose names appear on the Corporation's books, as of the record
date, as holders of a class or series of stock entitled to vote on the issues to
be presented for a vote at the meeting.
6. VOTING
Except as is otherwise provided in the Articles (including provisions
in the Articles concerning the voting rights of preferred stock and certain
"super-majority" voting requirements): (a) each shareholder shall be entitled,
at each meeting of shareholders and upon each proposal presented at each
meeting, to one vote for each share of voting stock recorded in his name on the
Corporation's books as of the record date; and (b) all elections for directors
shall be decided by plurality vote and all other questions shall be decided by a
majority of the votes cast. Any shareholder entitled to vote upon a matter
presented at a meeting may require, by delivering a written request to the
Secretary or Chairman of the Board, that the vote upon such matter be conducted
by written ballot. The Corporation shall make available at each meeting of
shareholders a list of the shareholders entitled to vote at the meeting.
7. QUORUM
The presence, in person or by proxy, of shareholders holding a majority
of the stock entitled to vote at a meeting shall constitute a quorum for such
meeting. If a quorum is not present at a meeting, a majority in interest of the
shareholders entitled to vote at the meeting, present in person or by proxy, may
adjourn the meeting from time to time without notice other than announcement at
the meeting, until a quorum is present. At any such adjourned meeting at which
the a quorum is present, any business may be transacted which might have been
transacted
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at the meeting as originally noticed; but only those shareholders entitled to
vote at the meeting as originally noticed shall be entitled to vote at the
adjournment(s) thereof. Once a quorum is present at a shareholders' meeting, it
is not broken by the subsequent withdrawal of any shareholder.
8. PROXIES
At any shareholders' meeting or any adjournment thereof, any
shareholder of record entitled to vote thereat may be represented and vote by
proxy appointed in a written instrument. No such proxy shall be voted after
eleven months from the date of the instrument unless the instrument provides for
a longer period. In the event that any such instrument provides for two or more
persons to act as proxies, a majority of such persons present at the meeting, or
if only one is present, that one person, shall have all the powers conferred by
the instrument unless the instrument itself shall otherwise provide. If any such
instrument provides for an even number of persons to act as proxies, or if the
number of persons designated to act as proxies at any meeting is an even number,
and if said persons disagree on their proposed vote and are equally divided, no
vote pursuant to said instrument shall be cast unless the instrument provides a
mechanism to break the deadlock. Unless the instrument provides otherwise, a
proxy is revocable by either (a) attendance by the giver of the proxy at the
meeting for which the proxy was given and the exercise at the meeting of the
privilege of voting by the giver of the proxy; (b) delivery to the Secretary or
Chairman of the Board of an instrument revoking the proxy, which revocation
shall be effective upon delivery; or (c) delivery to the Secretary or Chairman
of the Board of a later-dated instrument granting a proxy.
ARTICLE III - DIRECTORS
1. BOARD OF DIRECTORS
The business of the Corporation shall be managed and its corporate
powers exercised by a Board consisting of at least three and no more than nine
directors. It shall not be necessary for directors to be shareholders. The Board
shall be divided into three classes of directors, each as near in size as
possible, in accordance with the requirements set forth in the Articles. Except
as otherwise provided in the Articles or these Bylaws or required by Florida
law, Board approval of a matter shall be deemed obtained only if the approval of
a majority of the directors in each class of directors is obtained.
2. ELECTION, TERM AND REMOVAL OF DIRECTORS
Election of each class of directors, the term to be served by each
class of directors and the removal of directors, shall be governed by the
Article EIGHTH of the Articles.
3. INCREASES AND DECREASES IN NUMBER OF DIRECTORS; VACANCIES
(a) The number of directors may be increased or decreased by the
affirmative vote of (i) a majority of the directors in each class of directors,
or (ii) a majority in interest of each group
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of shareholders holding a class of stock entitled to elect directors, voting
separately by class of stock, at an annual or special meeting or by written
consent.
(b) Any decrease in the number of directors shall not shorten the term
of any incumbent director.
(c) Vacancies on the Board, including, without limitation, any
vacancies resulting from an increase in the number of directors, shall be filled
as provided in the Article EIGHTH of the Articles.
4. RESIGNATION
A director may resign at any time by giving written notice to the
Chairman of the Board or to the Secretary of the Corporation. Unless otherwise
specified in the notice, the resignation shall take effect upon receipt thereof
by the Board or the Secretary, and the acceptance of the resignation shall not
be necessary to make it effective.
5. BOARD MEETINGS
(a) A regular annual meeting of the Board shall be held immediately
following the annual meeting of shareholders at the place of such annual meeting
of shareholders or at such other time and place as the Board may from time to
time determine and notify all directors. No notice of the annual Board meeting
shall be required.
(b) The Board may hold special meetings at the office of the
Corporation or at such other places, either within or without the State of
Florida, as it may from time to time determine. Special meetings of the Board
may be called by the Chairman of the Board or by a majority of the directors (a
majority of the whole Board and not of each class), by mailing written notice of
the time and place of the meeting to each director at least five days prior to
the meeting, or by sending the notice by courier or facsimile transmission at
least two days prior to the meeting, to the last known address or facsimile
number for each director. Notice shall be deemed given when sent. Notice of a
meeting need not be given to any director who submits a waiver of notice before
or after the meeting or who attends the meeting without protesting the lack of
notice prior to or at the beginning of the meeting. The notice of a Board
meeting need not specify the purpose of the meeting.
(c) A quorum for the transaction of business shall exist if there is
present at a Board meeting a majority of the directors in each class of
directors (whether a majority is present shall be determined with reference to
the number of directors then in office in each class). If at any Board meeting
there shall be less than a quorum present, a majority of those directors present
may adjourn the meeting from time to time until a quorum is obtained, and no
further notice thereof need be given other than by announcement at the meeting
which shall be so adjourned.
6. EXECUTIVE AND OTHER COMMITTEES
The Board may designate three or more directors to one or more
committees. Committees shall include at least one member of each class of
directors. To the extent permitted under the Articles, Florida law and the Board
resolution(s) creating a committee, the Committee may
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exercise the powers of the Board.
7. COMPENSATION
No compensation shall be paid to directors for their services, but the
Board may authorize payment to the directors of a fixed sum and expenses for
actual attendance at each regular or special meeting of the Board. Nothing
herein contained shall be construed to preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
8. MEETINGS CONDUCTED BY TELEPHONE
Members of the Board or any committee of the Board may participate in a
meeting of the Board or such committee by means of telephone conference or
similar communications equipment allowing all persons participating in the
meeting to hear each other at the same time. Such participation shall constitute
presence in person at such meeting.
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ARTICLE IV - OFFICERS
1. ELECTION, TERM AND DUTIES
(a) The Corporation shall have a Chairman of the Board, Chief Executive
Officer, Chief Operating Officer, Chief Financial Officer, Chief Accounting
Officer, Secretary and such other officers as the Board may from time to time
approve. Each such officer shall have those powers and duties designated by the
Board, and the following officers shall have as well the specific powers and
duties set forth below:
(i) The Chairman of the Board shall preside at all meetings of
the Board and Shareholders;
(ii) The Chief Executive Officer and Chief Operating Officer
shall share the supervision, direction, management and control of the
Corporation; and either officer may preside at meetings of the shareholders or
Board if the Chairman of the Board is absent or there is no Chairman of the
Board; and
(iii) The Secretary shall attend all meetings of the Board and
of the shareholders, record or cause to be recorded all votes and minutes of all
proceedings, give or cause to be given notice of meetings of shareholders and of
special meetings of the Board, keep in safe custody the seal of the Corporation
and affix it to any instrument when authorized by the Board, when required
prepare or cause to be prepared and available at each meeting of shareholders a
certified list of the names of shareholders entitled to a vote thereat, and keep
all the documents and records of the Corporation.
(b) Unless otherwise provided in the resolution appointing an officer,
each officer shall hold office until the earlier of (a) the next regular annual
meeting of the Board, provided that his successor has been duly elected and
qualified, or (b) his resignation or removal.
2. REMOVAL, RESIGNATION, SALARY, ETC.
(a) Any officer appointed by the Board may be removed with or without
cause.
(b) In the event of the death, resignation or removal of an officer,
the Board may appoint a successor to fill the unexpired term.
(c) Any two or more offices may be held by the same person.
(d) The salaries of all officers shall be fixed by the Board or a
committee of the Board.
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3. SURETIES AND BONDS
The Board may require any officer or agent of the Corporation to
execute to the Corporation a bond in such sum and with such surety or sureties
as the Board may direct, conditioned upon the faithful performance of such
officer's duties to the Corporation and including responsibility for negligence
and for the accounting for all property, funds or securities of the Corporation
which may come into the officer's hands.
ARTICLE V - CERTIFICATES FOR SHARES
1. CERTIFICATES
The shares of the Corporation shall be represented by certificates,
which certificates shall be numbered and entered in the books of the Corporation
as they are issued. They shall exhibit the holder's name and the number of
shares represented and shall be signed by at least two officers of the
Corporation or a transfer agent as an officer of the Corporation. When such
certificates are signed by a transfer agent or an assistant transfer agent or by
a transfer clerk acting on behalf of the Corporation and a registrar, the
signatures of such officers may be facsimiles.
2. LOST OR DESTROYED CERTIFICATES
The Board may cause to be issued a new certificate in place of any
certificate previously issued by the Corporation and alleged to have been lost
or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate to be lost or destroyed. When authorizing issuance of a
new certificate, the Board may, in its discretion and as a condition precedent
to the issuance of the new certificate, require the owner of such lost or
destroyed certificate to give the Corporation a bond in such sum and with such
surety or sureties as it may direct, in order to indemnify the Corporation
against any claim that may be made against it with respect to the certificate
alleged to have been lost or destroyed.
ARTICLE VI - DIVIDENDS
The Board may, in its discretion, declare dividends upon the capital
stock of the Corporation out of funds legally available for dividends. Before
declaring any dividend there may be set apart out of the funds of the
Corporation available for dividends, such sum or sums as the Board from time to
time in its discretion deem proper for working capital or as a reserve fund to
meet contingencies or for equalizing dividends or for such other purposes as the
Board shall deem in the best interests of the Corporation.
ARTICLE VII - EXECUTION OF INSTRUMENTS
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All corporate instruments and documents shall be signed or
countersigned, executed, verified or acknowledged by such officer or officers or
other person or persons as the Board may from time to time designate.
All checks, drafts or other orders for payment of money, notes or other
evidences of indebtedness issued in the name of the Corporation shall be signed
by such officer(s) or agent(s) of the Corporation and in such manner as shall be
determined from time to time by resolution of the Board.
ARTICLE VIII - FISCAL YEAR
The fiscal year shall end on March 31st of each year.
ARTICLE IX - CONSTRUCTION
Whenever a conflict arises between the language of these Bylaws and the
Articles, the Articles shall govern.
ARTICLE X - INDEMNITY
Every person (and the heirs, executors and administrators of such
person) who is or was a director, officer, employee or agent of the Corporation
or of any other company, including another corporation, partnership, joint
venture, trust or other enterprise on which such person serves or served at the
request of the Corporation, shall be indemnified by the Corporation in
accordance with the provisions of Article SIXTH of the Articles.
ARTICLE XI - AMENDMENT
These Bylaws may be altered, amended or repealed, or new Bylaws may be
adopted, by either the Board or by the holders of 66 2/3% of the common stock
and voting preferred stock of the Corporation, voting together as a single
class; provided, however, that the Board may not alter, amend or repeal any
Bylaw adopted by the shareholders if the shareholders specifically prescribe in
such Bylaw that it shall not be altered, amended or repealed by the Board.
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EXHIBIT 5.1
April 2, 1998
Ursus Telecom Corporation
440 Sawgrass Corporate Parkway
Suite 112
Sunrise, Florida 33325
Re: Ursus Telecom Corporation
Registration Statement on Form S-1 (No. 333-46197)
Gentlemen:
We have acted as counsel to you (the "Corporation") in connection with the
preparation and filing of the above-captioned Registration Statement on Form S-1
(the "Registration Statement") under the Securities Act of 1933, as amended,
covering 1,925,000 shares (the "Shares") of the Corporation's common stock, par
value $.01 per share, 1,500,000 of which will be sold by the Corporation. The
Shares will be sold pursuant to the terms of an underwriting agreement (the
"Underwriting Agreement") to be entered into by the Corporation and Joseph
Charles & Associates, Inc., the representative of the several underwriters named
in the Underwriting Agreement. This opinion letter is Exhibit 5.1 to the
Registration Statement.
We have examined copies of the Amended and Restated Articles of
Incorporation and the Bylaws of the Corporation, each as amended to date, the
Registration Statement (including the exhibits thereto), the minutes of various
meetings of the Board of Directors of the Corporation, and the originals, copies
or certified copies of all such records of the Corporation, and all such
agreements, certificates of public officials, certificates of officers and
representatives of the Corporation or others, and such other documents, papers,
statutes and authorities as we have deemed necessary to form the basis of the
opinion hereinafter expressed. In such examination, we have assumed the
genuineness of signatures and the conformity to original documents of the
documents supplied to us as copies. As to various questions of fact material to
such opinion, we have relied upon statements and certificates of officers of the
Corporation and others.
Attorneys involved in the preparation of this opinion are admitted to
practice law in the State of Florida and we do not purport to be experts on, or
express any opinion herein concerning, any law other than the laws of the State
of Florida and the federal laws of the United States of America.
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Ursus Telecom Corporation
April 2, 1998
Page 2
Based upon and subject to the foregoing, we are of the opinion that all of
the Shares covered by the Registration Statement have been duly authorized and,
when issued and purchased in accordance with the terms of the Underwriting
Agreement, will be validly issued, fully paid and nonassessable.
We hereby consent to the reference to our firm under the caption "Legal
Matters" in the Prospectus. We further consent to your filing a copy of this
opinion as an exhibit to the Registration Statement. In giving such consent, we
do not admit hereby that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the rules
and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ STROOCK & STROOCK & LAVAN LLP
STROOCK & STROOCK & LAVAN LLP
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EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated August 15, 1997 in the Registration Statement (Form
S-1, No. 333-46197) and related Prospectus of Ursus Telecom Corporation for the
registration of 1,925,000 shares of its common stock, 150,000 representative's
warrants and 150,000 shares of common stock underlying the representative's
warrants.
/s/ ERNST & YOUNG LLP
Miami, Florida
April 3, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 679,148
<SECURITIES> 0
<RECEIVABLES> 4,886,888
<ALLOWANCES> (95,846)
<INVENTORY> 0
<CURRENT-ASSETS> 5,646,516
<PP&E> 1,155,470
<DEPRECIATION> (369,358)
<TOTAL-ASSETS> 7,042,399
<CURRENT-LIABILITIES> 4,204,544
<BONDS> 0
0
0
<COMMON> 268,750
<OTHER-SE> 2,501,919
<TOTAL-LIABILITY-AND-EQUITY> 7,042,399
<SALES> 0
<TOTAL-REVENUES> 21,029,113
<CGS> 0
<TOTAL-COSTS> 13,788,755
<OTHER-EXPENSES> 5,733,495
<LOSS-PROVISION> 92,456
<INTEREST-EXPENSE> 19,691
<INCOME-PRETAX> 1,427,743
<INCOME-TAX> 537,259
<INCOME-CONTINUING> 890,484
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 890,484
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
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Exhibit 99.1
The undersigned, Kenneth L. Garret, hereby consents to being named
as a prospective director of Ursus Telecom Corporation (the "Corporation") in
Amendment No. 2 to the Corporation's Registration Statement on Form S-1 (File
No. 333-46197) and in any subsequent amendments thereto.
/s/ Kenneth L. Garret
---------------------------
Kenneth L. Garret
Date: April 2, 1998
