SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER: 333-46197
URSUS TELECOM CORPORATION
(Exact name of registrant as specified in its charter)
Florida 65-0398306
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
440 Sawgrass Corporate Parkway, Suite 112, Sunrise, Florida 33325
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (954-846-7887)
N/A
(Former name, former address and
former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
As of October 31, 1998, the number of the registrant's Common Shares of $.01 par
value outstanding was 6,500,000.
<PAGE>
URSUS TELECOM CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION:
PAGE
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
March 31, 1998 and September 30, 1998 3
Condensed Consolidated Statements of Income for the
Three and Six Month Periods Ended September 30, 1997 and 1998 4
Condensed Consolidated Statements of Cash Flows for
the Six Month Periods Ended September 30, 1997 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 14
Item 2: Changes in Securities and Use of Proceeds 14
Item 6: Exhibits 14
Signatures
<PAGE>
ITEM 1. FINANCIAL STATEMENTS ( UNAUDITED)
<TABLE>
<CAPTION>
URSUS TELECOM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March September
ASSETS 31, 30,
1998 1998
--------------------------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $1,035,149 $4,629,984
Accounts receivable, net 4,183,750 4,616,375
Prepaid expenses 54,980 641,915
Advances and notes receivable--related parties 65,274 229,932
Other current assets 163,215 185,499
-----------------------------------
Total current assets 5,502,368 10,303,705
Equipment, net 1,258,074 2,778,404
Deposit on acquisition 377,141 102,988
Deferred costs of public offering 514,619 -
Intangibles, net - 9,365,982
Other assets, net 80,309 363,546
-----------------------------------
Total assets $7,732,511 $22,914,625
===================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $4,154,232 $6,122,676
Commissions payable 57,085 1,099,946
Current portion of capital lease obligations 48,835 146,486
Other current liabilities 149,970 323,061
-----------------------------------
Total current liabilities 4,410,122 7,692,169
Long term portion of capital lease obligations 296,555 312,288
Other long-term obligations 77,614 77,614
Commitment and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; 1,000 shares issued and outstanding 10 10
Common stock, $.01 par value; 20,000,000 shares authorized,
5,000,000 and 6,500,000 issued and outstanding at
March 31, 1998
and September 30, 1998, respectively 50,000 65,000
Additional paid-in capital 218,740 11,920,314
Accumulated other comprehensive income - foreign
currency translation adjustment (5,873) 9,008
Retained earnings 2,685,343 2,838,222
---------------------------------
Total shareholders' equity 2,948,220 14,832,554
-----------------------------------
Total liabilities and shareholders' equity $7,732,511 $22,914,625
===================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
URSUS TELECOM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
September 30, September 30,
1997 1998 1997 1998
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Retail $6,298,986 $6,177,948 $12,239,253 $11,687,009
Wholesale 471,693 602,994 975,198 1,561,369
--------------------------------------------------------------------
Total revenues 6,770,679 6,780,942 13,214,451 13,248,378
Cost of revenues:
Retail 4,102,766 3,880,278 7,951,341 7,339,275
Wholesale 426,388 462,116 818,423 1,230,988
--------------------------------------------------------------------
Total cost of revenues 4,529,154 4,342,394 8,769,764 8,570,263
--------------------------------------------------------------------
Gross profit 2,241,525 2,438,548 4,444,687 4,678,115
Operating expenses:
Commissions 1,088,343 868,447 2,124,886 1,799,120
Selling, general and administrative expenses 801,582 1,421,087 1,445,668 2,553,369
Depreciation and amortization 46,934 140,615 86,603 228,904
--------------------------------------------------------------------
Total operating expenses 1,936,859 2,430,149 3,657,157 4,581,393
--------------------------------------------------------------------
Operating income 304,666 8,399 787,530 96,722
Other income (expense):
Interest expense (6,484) (10,102) (14,846) (20,452)
Interest income 6,904 143,166 7,700 231,979
Gain on sale of Equipment 10,584 - 10,584 -
--------------------------------------------------------------------
11,004 133,064 3,438 211,527
--------------------------------------------------------------------
Income before provision
for income taxes 315,670 141,463 790,968 308,249
Provision for income taxes 118,787 79,689 297,641 155,370
--------------------------------------------------------------------
Net income $ 196,883 $ 61,774 $ 493,327 $ 152,879
====================================================================
Pro forma net income per common
share-basic and dilutive (historical in 1998) $ .04 $ .01 $ .10 $ .03
====================================================================
Pro forma weighted average shares outstanding 5,000,000 6,500,000 5,000,000 6,110,497
(historical in 1998) ====================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
<TABLE>
<CAPTION>
URSUS TELECOM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
September 30,
1997 1998
------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 493,327 $ 152,879
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 86,603 228,904
Allowance for doubtful accounts 25,000 150,863
Deferred taxes 19,577 -
Gain on sale of equipment 10,584 -
Changes in operating assets and liabilities excluding
the effects of the business acquisition:
Accounts receivable (860,675) 547,991
Prepaid expenses (72,674) (126,891)
Other current assets (89,300) (22,285)
Accounts payable and accrued expenses 464,540 (1,529,562)
Commissions payable (10,758) 29,472
Other current liabilities (32,645) (18,152)
------------------------------------
Net cash provided by (used in) operating activities 33,579 (586,781)
INVESTING ACTIVITIES
Purchase of equipment (221,607) (303,022)
Increase in advances to related parties 49,685 (164,658)
Cash used in the business acquisition, net of cash acquired - (7,484,753)
Increase in other assets 7,888 (84,841)
------------------------------------
Net cash used in investing activities (164,034) (8,037,274)
FINANCING ACTIVITIES
Deferred costs of public offering (83,635) -
Repayments of long-term debt (175,000) -
Net proceeds from the sale of common stock - 12,231,193
Repayments on capital leases - (27,184)
-------------------------------------
Net cash (used in) provided by financing activities (258,635) 12,204,009
Effect of foreign exchange rate changes on - 14,881
cash and cash equivalents ------------------------------------
Net (decrease) increase in cash and cash equivalents (389,090) 3,594,835
Cash and cash equivalents at beginning of period 740,765 1,035,149
------------------------------------
Cash and cash equivalents at end of period $ 351,675 $ 4,629,984
====================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 17,367 $ 20,452
====================================
Cash paid for income taxes $ 408,236 $ 156,000
====================================
Trade-in allowance for used equipment $ 67,500 $ -
-
====================================
Receivable applied as a deposit on acquisition $ - $ 72,988
====================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) GENERAL
The financial statements included herein are unaudited and have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and Securities Exchange Commission ("SEC") regulations. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In management's
opinion, the financial statements reflect all adjustments (of a normal and
recurring nature) which are necessary to present fairly the financial position,
results of operations, stockholders' equity and cash flows for the interim
periods. These financial statements should be read in conjunction with the
audited consolidated financial statements for the year ended March 31, 1998, as
set forth in Form 10-K of Ursus Telecom Corporation the "Company" or ("UTCC").
The results for the six month period ended September 30, 1998, are not
necessarily indicative of the results that may be expected for the year ending
March 31, 1999.
(2) ACQUISITION
On September 17, 1998 the Company purchased all the issued and outstanding
common stock of Access Authority, Inc. ("Access") for $8 million in cash. Access
is a provider of international long distance telecommunication services,
including call reorigination, domestic toll-free access and various value-added
features to small and medium sized businesess and individuals in over 38
countries throughout the world. Access markets its services through an
independent and geographically dispersed sales force consisting of agents and
wholesalers. Access operates a switching facility in Clearwater, Florida.
The Company has accounted for the Access acquisition using the purchase method.
Accordingly, the results of operations of Access are included in the
consolidated results of the Company as of September 17, 1998, the date of
acquisition. Under the purchase method of accounting, the Company has
preliminarily allocated the purchase price to assets and liabilities acquired
based upon their estimated fair values. The purchase price allocation reflected
in the financial statements is therefore tentative and is subject to changes
arising from the receipt of additional valuation and other information.
The Company utilized certain net proceeds of the Company's initial public
offering to pay for the acquisition. After deducting the total expenses of such
offering and the purchase price of $8 million plus an estimated $150,000 in
acquisition costs, approximately $3.45 million of the net proceeds of such
offering remain.( See Use of Proceeds)
Pro forma operating results for the six months ended September 30, 1998 and the
year ended March 31, 1998, as if the acquisition had occurred at the beginning
of the respective periods, is as follows:
Six Months Ended Year Ended
September 30, March 31,
1998 1998
----------------------------------------------
Total revenue $31,814,769 $ 75,652,207
Net income(loss) 67,136 1,985,736
Basic and diluted net income(loss) per
common share $ 0.01 $ 0.39
The pro forma financial information has been compiled by combining the results
of operations of Access for the year ended December 31, 1997 with the Company's
results of operations for the year ended March 31, 1998 and by combining
Access's results of operations for the six months ended June 30, 1998 with the
Company's results of operations for the six months ended September 30, 1998.
This pro forma is presented for informational purposes only and is not
necessarily indicative of future operations. The above pro forma operating
results should be read in conjunction with the Company's Form 8-K Filed on
October 2, 1998 with the Securities and Exchange Commission and all subsequent
filings amending such Form 8-K.
(3) PRO FORMA NET INCOME PER COMMON SHARE
Pro forma basic and dilutive net income per share reflect pro forma weighted
average common shares outstanding for all periods presented assuming the stock
split and recapitalization, described in Note 5, occurred at the beginning of
the earliest year presented.
In December 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128,"EARNINGS PER SHARE." SFAS No. 128 replaced
the calculation of primary and fully diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods are presented to conform to the new
requirements.
Following is a reconciliation of amounts used in the per share computations:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
September 30, September 30,
---------------------------------------------------------
1997 1998 1997 1998
----------------------------------------------------------
<S> <C> <C> <C> <C>
Net income-numerator basic computation $ 196,883 $ 61,774 $ 493,327 $ 152,879
Effect of dilutive securities-None - - - -
----------------------------------------------------------
Net income as adjusted for assumed conversion-numerator
diluted computation $ 196,883 $ 61,774 $ 493,327 $ 152,879
==========================================================
Pro forma weighted average shares-denominator basic
computation (historical in 1998) 5,000,000 6,500,000 5,000,000 6,110,497
Effect of dilutive securities-None - - - -
----------------------------------------------------------
Pro forma weighted average shares as adjusted- denominator
(historical in 1998) 5,000,000 6,500,000 5,000,000 6,110,497
==========================================================
Pro forma net income per share (historical in 1998):
Basic $ 0.04 $ 0.01 $ 0.10 $ 0.03
==========================================================
Diluted $ 0.04 $ 0.01 $ 0.10 $ 0.03
==========================================================
</TABLE>
(4) COMPREHENSIVE INCOME
The Company has adopted the provisions of SFAS 130, "REPORTING COMPREHENSIVE
INCOME" (SFAS 130) in 1998 which is required for fiscal years beginning after
December 15, 1997. The Statement requires the presentation of comprehensive
income and its components in the financial statements and the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid in capital in the equity section of the balance sheet. The
adoption of SFAS 130 has no impact on the Company's net income or stockholders'
equity. The only component of other comprehensive income in the Company's
balance sheet is foreign currency translation adjustments which even prior to
adoption of SFAS 130 would have been separately reported in stockholders'
equity.
The following is a detail of comprehensive income:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
September 30, September 30,
-------------------------------------------------
1997 1998 1997 1998
-------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 196,883 $ 61,774 $ 493,327 $152,879
Other comprehensive income (loss) net of tax
Foreign currency translation - 11,772 - 14,881
--------------------------------------------------------------------
Comprehensive income $ 196,883 $ 73,546 $493,327 $167,760
====================================================================
</TABLE>
(5) SIGNIFICANT EVENTS
Effective May 18, 1998, the Company sold 1,500,000 shares of its common stock in
an initial public offering (the "Offering"). Net proceeds of the Offering, after
deducting underwriting discounts, commissions and professional fees amounted to
approximately $11.6 million.
On February 6, 1998, the Board of Directors and shareholders approved (i) the
filing of amended and restated Articles of Incorporation that provided for,
among other things, the authorization of 20,000,000 shares of Common Stock and
1,000,000 shares of Preferred Stock, (ii) a 923.08 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 up to 1,000,000 shares of Common Stock, 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 18, 1998. The
issuance of the warrants and stock option plan became effective May 18, 1998
(the effective date of the Company's Offering).
(6) COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has disputes with carriers over
billing discrepancies. Although management has historically been successful in
resolving these disputes, there can be no assurance that ongoing disputes will
be resolved as anticipated. In the event that an ongoing dispute results in an
additional liability, the Company believes that such amounts will not have a
material adverse affect on the Company's financial condition or results of
operations.
On October 30, 1998, the Company agreed to purchase two additional switches and
upgrade two existing switches for a total commitment of approximately $610,000.
Management's intention is to lease the equipment over a period of approximately
five years.
(7) RECLASSIFICATIONS
Certain amounts appearing in the financial statements have been reclassified to
conform to the current periods presentation.
(8) SUBSEQUENT EVENTS
ACQUISITION
The Company has agreed to acquire its agent in Uruguay. Consideration for the
agency will be $132,988. The Company has converted a $72,988 accounts receivable
balance from this agent and paid the agent $30,000 as a deposit towards the
purchase price. Upon the closing of the agreement, the acquisition will be
accounted for using the purchase method of accounting, as such, the Agency's
results subsequent to the closing will be included in the consolidated financial
statements of the Company.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward- looking
statements are statements other than historical information or statements of
current condition. Some forward looking statements may be identified by use of
such terms as "believes", "anticipates", "intends", or "expects". These forward-
looking statements relate to the plans, objectives and expectations of the
Company for future operations. In light of the risks and uncertainties inherent
in all such projected operational matters, the inclusion of forward-looking
statements in this report should not be regarded as a representation by the
Company or any other person that the objectives or plans of the Company will be
achieved or that any of the Company's operating expectations will be realized.
The Company's revenues and results of operations are difficult to forecast and
could differ materially from those projected in the forward-looking statements
contained in this report as a result of numerous factors including among others,
the following: (i) changes in customer rates per minute; (ii) foreign currency
fluctuations; (iii) termination of certain service agreements or inability to
enter into additional service agreements; (iv) inaccuracies in the Company's
forecast of traffic growth; (v) changes in or developments under domestic or
foreign laws, regulations, licensing requirements or telecommunications
standards; (vi) foreign political or economic instability; (vii) changes in the
availability of transmission facilities; (viii) loss of the services of key
officers; (ix) loss of a customer which provides significant revenues to the
Company; (x) highly competitive market conditions in the industry; (xi)
obsolescence of and changes in telecommunications switching and access
equipment; and (xii) concentration of credit risk. The foregoing review of the
important factors should not be considered as exhaustive; the Company undertakes
no obligation to release publicly the results of any future revisions it may
make to forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
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
THIS FORM 10-Q.
OVERVIEW
The Company is a provider of international telecommunications services and
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 has expanded its geographic coverage in Europe, Japan,
Central and South America through its September 1998 acquisition of Access. The
Company is capitalizing on the increasing demand for high-quality international
telecommunications services resulting from the globalization of the world's
economies and the worldwide trend toward telecommunications deregulation.
The Company's primary service is call reorigination; however, the Company has
increasingly been migrating calls to direct access. The Company also provides
service to other carriers and resellers. 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, France,
Germany, Japan and New Zealand. The Company operates a switched-based digital
telecommunications network. The Company has domestic switching facilities in
Tampa and Sunrise, Florida and international switching facilities in Paris,
Moscow, Frankfurt and Tokyo.
<PAGE>
OTHER OPERATING DATA
The following information for the three and six months ended September 30, 1998
and 1997 is provided for informational purposes and should be read in
conjunction with the unaudited Consolidated Financial Statements and Notes
provided herein and the Consolidated Financial Statements presented with the
Company's annual report for the year ended March 31, 1998.
The following table sets forth income statement data as a percentage of revenues
for the periods indicated:
Three Months Six Months
ended ended
September 30, September 30,
1997 1998 1997 1998
---- ---- ---- ----
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 66.9 64.0 66.4 64.7
Gross profit 33.1 36.0 33.6 35.3
Operating expenses:
Commission 16.1 12.8 16.1 13.6
Selling, general and administrative 11.8 20.9 10.9 19.3
Depreciation and amortization 0.7 2.1 0.7 1.7
Total operating expenses 28.6 35.8 27.7 34.6
Operating income 4.5 0.2 5.9 0.7
Other (expense) income 0.2 1.9 0.1 1.6
Income before income taxes 4.7 2.1 6.0 2.3
Net income 2.9 0.9 3.7 1.2
EBITDA(1) 5.3 2.2 6.6 2.5
(1) As used herein "EBITDA" consists of earnings before interest, income taxes,
depreciation and amortization. EBITDA is a measure commonly used in the
telecommunications industry to analyze companies on the basis of operating
performance. EBITDA is not a measure of financial performance under generally
accepted accounting principles, is not necessarily comparable to similarly
titled measures of other companies and should not be considered as an
alternative to net income as a measure of performance nor as an alternative to
cash flow as a measure of liquidity.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997:
REVENUES. Revenues remained unchanged at approximately $6.8 million for the
three months ended September 30,1998 as compared to the same period last year.
Revenue during this period remained unchanged despite a 52% increase in minutes
of traffic for the three months ended September 30, 1998 as compared to the same
period last year, which was caused by an average decrease of $0.34 per minute in
rate charges. With the acquisition of Access, the Company believes that both
traffic and revenues will increase significantly. Along with this anticipated
increase in revenue the Company expects revenue per minute to decrease as it
enters into more mature markets such as Germany and Japan which historically
generates lower revenues per minute.
COST OF REVENUES. Cost of revenues decreased $ 0.2 million (4.1%), from $4.5
million for the three months ended September 30, 1997 to $4.3 million for the
three months ended September 30, 1998. Cost of revenues as a percentage of sales
decreased from 66.9% to 64.0%, This decrease in the Company's costs as a
percentage of revenues primarily reflects declining carrier cost per minute as
the result of aggressive negotiation, volume discounts, as well as the use of
advanced least cost routing techniques.
GROSS PROFIT. Gross profit increased $0.2 million (8.8%) from $2.2 million for
the three months ended September 30, 1997 to $2.4 million for the three months
ended September 30, 1998. As a percentage of revenue gross profit increased 2.8%
from 33.1% during the three months ended September 30, 1997 to 36.0% for the
three months ended September 30, 1998. Gross profit increased as a result of a
reduction in carrier costs as a percentage of revenue, despite higher wholesale
sales, which traditionally have lower margins The acquisition of Access has
tripled the number of minutes the Company purchases thereby increasing the
likelihood of further volume-based carrier discounts. For the three months ended
September 30, 1998 as compared to the three months ended September 30, 1997
average cost per minute has decreased 36% or an average of $0.24 per minute.
<PAGE>
OPERATING EXPENSES. Operating expenses increased $0.5 million (25.5%) from $1.9
million for the three months ended September 30, 1997 to $2.4 million for the
three months ended September 30, 1998. The increase was due to increased
selling, general and administrative expenses consisting primarily of salaries
and benefits for executives, additional marketing and accounting personnel and
increased bad debt expenses. As a percentage of revenues operating expenses
increased 7.2% from 28.6% to 35.8%. The Company has aggressively expanded its
personnel and infrastructure in anticipation of increased traffic and revenues
through the implementation of its acquisition program. The Company expects that
operating expenses as a percentage of revenue will decrease with the integration
of the operations of Access and other potential future acquisitions.
Depreciation and amortization expense increased approximately $94,000 (200%)
from approximately $47,000 for the three months ended September 30, 1997 to
approximately $141,000 for the three months ended September 30, 1998 as a result
of expansion of the Company's infrastructure in connection with its acquisition
program. The increase is attributable to a new switch in Paris, upgrades to
existing switches, the purchase of additional computer equipment and software,
and leasehold improvements. In addition amortization of intangibles as a result
of the acquisition of Access was approximately $24,000 as compared to no expense
for the same period last year
OPERATING INCOME. Despite a 8.9% increase in gross profit operating income
decreased from $0.3 million for the three months ended September 30, 1997 to
approximately $8,000 for the three months ended September 30, 1998 primarily as
a result of a 77% increase in selling, general and administrative expenses and a
200% increase in depreciation.
OTHER INCOME (EXPENSE). Other income increased approximately $122,000 from
approximately $11,000 for the three months ended September 30, 1997 to
approximately $133,000 for the three months ended September 30, 1998, primarily
because of investment income derived from the invested proceeds of the Offering.
NET INCOME. As a result of all of the foregoing factors, particularly a 25.5%
increase in operating expenses, and in light of the Company's strategic decision
to increase its gross revenues and market share through price reductions, the
Company's net income decreased approximately $135,000 from approximately
$197,000 for the three months ended September 30, 1997 to approximately $62,000
for the three months ended September 30, 1998. Net income has also been impacted
by start up losses from the Company's subsidiary in France, which amounted to
$65,000 for the three months ended September 30, 1998. Management believes that
the Company's strategy to increase market share through acquisition and
aggressive pricing will result in lower costs per minute and therefore will lead
to greater net income in the future.
EBITDA. EBITDA decreased from approximately $362,000 for the three months ended
September 30, 1998, to approximately $149,000 for the three months ended
September 30, 1998, as a result of the foregoing factors.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED TO
THE SIX MONTHS ENDED SEPTEMBER 30, 1997:
REVENUES. Revenues remained unchanged at approximately $13.2 million for the six
months ended September 30,1998 as compared to the same period last year. Revenue
during this period remained unchanged despite a 38% increase in minutes of
traffic for the six months ended September 30, 1998 as compared to the same
period last year, which was caused by an average decrease of $0.28 per minute in
rate charges. With the acquisition of Access, the Company believes that both
traffic and revenues will increase significantly. Along with this anticipated
increase in revenue the Company expects revenue per minute to decrease as it
enters into more mature markets such as Germany and Japan which historically
generates lower revenues per minute.
COST OF REVENUES. Cost of revenues decreased $ 0.2 million (2.3%), from $8.8
million for the six months ended September 30, 1997 to $8.6 million for the six
months ended September 30, 1998. Cost of revenues as a percentage of sales
decreased from 66.4% to 64.7%, This decrease in the Company's costs as a
percentage of revenues primarily reflects declining carrier cost per minute as
the result of aggressive negotiation, volume discounts, as well as the use of
advanced least cost routing techniques.
GROSS PROFIT. Gross profit increased $0.3 million (5.3%) from $4.4 million for
the six months ended September 30, 1997 to $4.7 million for the six months ended
September 30, 1998. As a percentage of revenue gross profit increased 1.7% from
33.6% during the six months ended September 30, 1997 to 35.3% for the six months
ended September 30, 1998. Gross profit increased as a result of a reduction in
carrier costs as a percentage of revenue, despite higher wholesale sales, which
traditionally have lower margins. The acquisition of Access has tripled the
number of minutes the Company purchases thereby increasing the likelihood of
further volume based carrier discounts. For the six months ended September 30,
1998 as compared to the six months ended September 30, 1997 average cost per
minute has decreased 28% or an average of $0.19 per minute.
OPERATING EXPENSES. Operating expenses increased $1.1 million (25.3%) from $3.7
million for the six months ended September 30, 1997 to $4.5 million for the six
months ended September 30, 1998. The increase was due to increased selling,
general and administrative expenses consisting primarily of salaries, benefits
and bonuses for additional executives, in addition to an increase in marketing
and accounting personnel required as a result of internal expansion and the
Company's Public Offering. As a percentage of revenues operating expenses
increased 6.9% from 27.7% to 34.6%. The Company has aggressively expanded its
personnel and infrastructure in anticipation of increased traffic and revenues
through the implementation of its acquisition program. The Company expects that
operating expenses as a percentage of revenue will decrease with the integration
of the operations of Access and other potential future acquisitions.
Depreciation and amortization expense increased approximately $142,000 (164%)
from approximately $87,000 for the six months ended September 30, 1997 to
approximately $229,000 for the six months ended September 30, 1998 as a result
of the expansion of the Company's infrastructure in connection with its
acquisition program. The increase is attributable to a new switch in Paris,
upgrades to existing switches, the purchase of additional computer equipment and
software, and leasehold improvements. In addition, amortization of the
intangibles as a result of the acquisition of Access was approximately $24,000
as compared to no expense for the same period last year
OPERATING INCOME. Despite a 5.25% increase in gross profit, operating income
decreased from $0.8 million for the six months ended September 30, 1997 to
approximately $0.1 million for the six months ended September 30, 1998 primarily
as a result of a 77% increase in selling, general and administrative expenses
and a 164% increase in depreciation.
OTHER INCOME (EXPENSE). Other income increased approximately $209,000 from
approximately $3,000 for the six months ended September 30, 1997 to
approximately $212,000 for the six months ended September 30, 1998, primarily
because of investment income derived from the invested proceeds of the Offering.
NET INCOME. As a result of all of the foregoing factors, particularly a 25.3%
increase in operating expenses, and in light of the Company's strategic decision
to increase its gross revenues and market share through price reductions, the
Company's net income decreased approximately $340,000 from approximately
$197,000 for the six months ended September 30, 1997 to approximately $153,000
for the six months ended September 30, 1998. Net income has also been impacted
by start up losses from the Company's subsidiary in France, which amounted to
$493,000 for the six months ended September 30, 1998. Management believes that
the Company's strategy to increase market share through acquisition and
aggressive pricing combined with the increased volume in traffic will result in
lower costs per minute and therefore will lead to greater net income in the near
future.
EBITDA. EBITDA decreased from approximately $885,000 for the six months ended
September 30, 1998, to approximately $326,000 for the six months ended September
30, 1998, as a result of the foregoing factors.
<PAGE>
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.
Net cash provided by operating activities was $36,000 for the six months ended
September 30, 1997 and net cash used in operating activities was $0.6 million
for the six months ended September 30, 1998. The net cash used in operating
activities mainly reflects net earnings being offset by an increase in accounts
receivable from customers resulting primarily from longer payment cycles from
the Company's agents relative to the Company's accounts payable to carriers.
Net cash used in investing activities was approximately $164,000 for the six
months ended September 30, 1997 and approximately $8,000,000 for the six months
ended September 30, 1998 reflecting the acquisition of Access and an increase
caused by equipment purchases.
Net cash used in financing activities was approximately $259,000 for the six
months ended September 30, 1997 as compared to net cash provided by financing
activities of $12.2 million for the six months ended September 30, 1998. The
increase was primarily the result of the Company's Offering, which after the
expenses of such Offering accounted for an increase in cash of approximately
$11.6 million.
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
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, equity financing
and capital lease arrangements. 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.
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, as such, costs to correct any such problems will be immaterial. The
Company is in the process of evaluating if carriers and other third parties with
which it contracts for services anticipates any year 2000 difficulties, and if
so whether those problems would be of a nature that could adversely affect the
Company. The Company will begin a process by which it will identify and
prioritize critical suppliers and request that such suppliers 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved as plaintiff and defendant in a legal action, as
described below, which is incident to its business. Management does not
believe that this action will have a material impact on the financial
condition of the Company.
In February 1998, the Company filed an action against Edwin Alley, d/b/a
Phone Anywhere in the United States District Court for the Middle District
of Florida claiming that Edwin Alley, d/b/a Phone Anywhere ("Alley"), a
former sales agent for the Company, breached its agency agreement with the
Company, wrongfully diverted customers and business to the Company's
competitors, misappropriated the Company's trade secrets, breached
fiduciary and other duties owed to the Company and engaged in unfair
competition. The Company seeks compensatory damages, injunctive relief and
a declaratory judgment. Alley counterclaimed for breach of contract and
quantum meruit, seeking damages and injunctive relief to enjoin the Company
from soliciting or providing services to customers located by him.
Discovery is proceeding on the Company's claims. Alley has moved for
summary judgment on jurisdictional grounds and the Company is responding to
the motion.
Subsequent to the filing of the Company's federal action, Alley commenced
an action against the Company in the Circuit Court of the Sixth Judicial
Circuit, Pinellas County, Florida. In that action, Alley asserts
essentially the same claims and seeks the same relief as in his federal
counterclaim. Access Authority has answered the Complaint, denying the
material allegations in the pleading, and has asserted counterclaims
against Alley based largely on the claims it asserted in the federal
proceeding commenced by it. The Pinellas County proceeding has been stayed
pending disposition of the federal action.
<PAGE>
Item 2. Changes in Securities and Use of Proceeds
Effective Date of the Company's Registration Statement: May 12, 1998
Commission File Number: 333-46197
Date the Offering Commenced: May 18, 1998
Name of Managing Underwriter: Joseph Charles & Associates, Inc.
Class of Securities Registered: Common Stock
Amount registered: 1,500,000 shares of Common Stock(1)
Amount sold: 1,500,000 shares of Common Stock
Aggregate price of offering amount registered: $14,250,000
Aggregate offering price of amount sold: $14,250,000
Expenses: The expenses incurred
for the Company's account in
connection with the Offering are
as follows:
Underwriting Discounts and Commissions $1,104,375
Non-accountable expense allowance 427,500
Professional fees 556,350
Consulting fees 72,000
Listing, printing and related fees 298,800
Other Expenses 152,400
------------
Total Expenses $ 2,611,425
============
None of the expenses of the Offering consisted of direct or indirect payments to
(i) directors, officers, general partners or affiliates of the Company, (ii)
persons owning 10 percent or more of any class of equity securities of the
Company, or (iii) affiliates of the Company.
Net proceeds to the Company from the Offering, after deducting the total
expenses described above, were approximately $11.6 million. In connection with
the acquisition of Access, the Company has utilized $8.15 million, representing
the purchase price plus the costs of the transaction. Approximately $3.45
million of the net proceeds of such Offering remain as of September 30, 1998.
- ----------------
(1) Excludes 200,000 shares of Common Stock registered on behalf of certain
shareholders of the Company. The Company will not receive any proceeds upon the
sale of these securities.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits 27.1- Financial Data Schedule
(b) Reports on Form 8-K - Current Report on Form 8-K filed on October 2, 1998
with regards to the consummation of the acquisition of Access Authority, Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
URSUS TELECOM CORPORATION
By: /S/ JOHANNES SEEFRIED
--------------------------
Johannes S. Seefried
Chief Financial Officer
and authorized officer of registrant
Dated: November 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,629,984
<SECURITIES> 0
<RECEIVABLES> 5,289,709
<ALLOWANCES> 6,411,915
<INVENTORY> 0
<CURRENT-ASSETS> 10,303,705
<PP&E> 4,266,094
<DEPRECIATION> 1,487,690
<TOTAL-ASSETS> 22,914,625
<CURRENT-LIABILITIES> 7,572,158
<BONDS> 0
0
0
<COMMON> 65,000
<OTHER-SE> 14,832,554
<TOTAL-LIABILITY-AND-EQUITY> 22,914,625
<SALES> 0
<TOTAL-REVENUES> 13,248,378
<CGS> 0
<TOTAL-COSTS> 8,570,263
<OTHER-EXPENSES> 4,581,393
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 308,249
<INCOME-TAX> 155,370
<INCOME-CONTINUING> 152,879
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 152,879
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
